Another day, another new low for oil prices. Predictions are being proffered as to whether OPEC —the world’s oil cartel—will scale back supply in search of a price floor. Questions abound about Saudi Arabia’s grand strategy, U.S. shale oil producers’ profitability, and the impact low oil prices may have on global economic growth.
Burning questions, no doubt. But there is a bigger story lost in cacophony of speculation and prognostication over the oil rollercoaster. A number of societies are doing what they can to dismount the rollercoaster and embark on the road beyond oil, driven by concerns over long-term economic, environmental, and energy security. Increasingly, these ambitions are materializing as efforts to electrify the transport sector. But such efforts are constrained by their high cost. Only the most innovative, efficient, and fiscally sustainable electric vehicle policies will survive in a low oil-price environment. It is time for policymakers to stress-test their strategies, or the market will soon do so for them.
It is no wonder that oil captures the world’s imagination; it also captures its pocketbook. According to the IMF, just under $1 trillion is spent every year subsidizing petroleum products such as transport fuels. Of the $2.4 billion that American consumers spend daily on energy, about $1 billion is spent on electricity and another $1.4 billion is spent on fuel for vehicles. The hope of electric vehicle advocates, then, is that in the process of assimilating the latter category into the former, efficiencies will be realized and the country’s overall energy bill will shrink.
However, the road to electrification is a bumpy one, and will require adroit navigation.
The environmental credibility of transport electrification greatly depends upon the carbon intensity of a country’s electric grid. For some, such as coal-dependent Poland, there may be little logic in switching from petroleum to coal-derived electrons. For others powered overwhelmingly by low-carbon sources, however, the case is compelling.
Take Quebec for example. 97 percent of the province’s electricity is generated from virtually carbon-free hydropower. Here, the state-owned utility—HydroQuebec—is working with over 70 private and institutional partners to deploy a dense network of charging infrastructure throughout the province’s strategic transport corridors. The question of where and how to deploy charging stations is crucial, as is the question of who should own and pay for this crucial 21st century infrastructure. Industry and policy leaders in other areas would do well to learn from Quebec’s experience, and vice-versa.
Other governments, such as those in Norway and the Netherlands, are pursuing a strategy of direct electric vehicle sales subsidies, up to as much as three-fourths of a vehicle’s sales price. Between 2012 and 2013, the market penetration of pure electric vehicles in Norway nearly doubled, while that of hybrid electric vehicles in the Netherlands increased by 20-fold. While this growth is promising and the budgetary impact may be small at today’s sales volumes, a more sustainable and efficient support model will be needed in the long run.
The presumption underpinning these subsidies is that increasing production volumes will quickly move key components such as batteries down the cost curve, eventually hitting a price-point where electric vehicles become competitive with their conventional competitors. According to recent research by Carnegie Mellon University, however, the cost savings associated with high-volume battery manufacturing have already been harvested, and significant future savings are unlikely. As battery cost is the single largest impediment to greater electric vehicle penetration, this insight merits attention.
Far better would be for policymakers to re-direct most of this financial support into a smaller but predictable stream of funding for applied research and development, so that more fundamental technological improvements – when they come - would be large enough to make a commercial impact. Given the increasingly aggressive vehicle efficiency standards being imposed on automakers, electric vehicles will have to run – not walk – to outpace their fossil fuel-based brethren.
Transport electrification lacks what the fossil fuels sector has in spades: a business model. Not a single American utility is partnering with electric vehicle manufacturers to finance the installation of residential charging infrastructure, and less than 10 percent of utilities have designed new tariff structures for electric vehicle owners. This is a lost opportunity, as electric vehicles represent perhaps the most significant prospect for sales growth in a sector otherwise suffering as customers embrace energy efficiency and residential solar.
The crusade to electrify transport is worth waging. Today’s low oil prices could quickly push beyond $100 a barrel with only a single announcement by OPEC. In any case, it appears likely the volatile oil price rollercoaster is here to stay. But governments cannot shoulder this burden alone; smarter spending and private-public partnerships will be necessary. Those that address these challenges early will be rewarded with quality jobs, cleaner skies, and healthy budgets.