Will Saudi-Russia Oil Price War Kill the Electric Car?
Auto analysts expect consumers to start avoiding car dealerships, be it for electric vehicles or traditional cars, but executives in the industry say the COVID-19 pandemic has not yet affected new-vehicle demand or factory production, Reuters reported on March 19. Keep in mind that industry executives’ cheerleading abilities tend to rival that of dealership salespeople, and anyway production levels have been roiled for a couple of years now thanks to the Trump administration’s trade war rhetoric.
General Motors, Ford Motor Co., and Fiat Chrysler have all ordered most of their salaried employees to work from home, and Fiat Chrysler has closed most of its European factories through March 27. What the coronavirus pandemic has additionally affected is auto-industry stock values, along with everything else. General Motors appears especially hard-hit the week after it rolled out 10 future electric vehicles before Wall Street analysts. The best thing you can say about GM and its stock is that at least it’s not Boeing. I’m no Wall Street analyst, but I think there’s a bit more to the story than the horrific human effects of COVID-19 and all of the public-event cancelations that have been necessary as a result.
Many Wall Street analysts already expected some sort of economic recession in 2020, after 11 straight years of growth, which included four straight years of 17- to 17.5-million U.S. auto sales. Before the coronavirus hit the U.S. hard, the Treasury bond yield fell below 1 percent, an unprecedented drop recently, and of course there’s the oil-price war that has set the Organization of Petroleum Export Countries’ leader, Saudi Arabia, against Russia.
To recap, Saudi Arabia had planned an OPEC production cut earlier in March, but with Russian oligarchs not willing to lower revenues, Russia balked and then pushed back, saying it would not cooperate. The Saudis instead announced an increase in oil production, immediately sending price per barrel into a tailspin. Oil’s value dropped by 30 percent almost instantly, then stabilized in the low-$30s-per-barrel range, and regular unleaded gasoline falling below $2 per gallon in parts of the U.S., which has been the world’s biggest oil producer for several years now.
It’s that loss of control over oil prices as the U.S. has outproduced OPEC that led Saudi Arabia and OPEC to try in vain to limit production. As the coronavirus began to cut travel, first in China, later in Italy and now pretty much worldwide, climate change—the driver of electric vehicles—may ironically get a moment of relief. Passenger jets are one of the major sources of CO2 emissions, after all, along with the cars and trucks we’re not going to drive to work the next few weeks, and the factory smokestacks that have slowed or stopped wherever a COVID-19 case is discovered.
The expected global recession will extend this CO2 emissions reduction. Economists believe this global recession will be nothing like the financial crisis of 2008, but there’s always going to be that ironically positive effect on emissions. The big difference, from the auto and airplane perspective, is that as financial storm clouds formed in June 2008, oil prices spiked to a high of $126.33 per barrel ($148.93, adjusted for inflation), according to InflationData.com’s Historical Oil Prices Chart. By June 2009, InflationData continues, oil was $61.46 per barrel, and then by April 2011, when the Obama Administration’s stimulus package helped pickup truck sales recover from 11 percent of the market on its way back to 14 percent of the market, oil was $102.15 per barrel.
Because the U.S. is now an oil exporter, and the world’s biggest producer of crude, there seems little chance the market will see price spikes of that magnitude soon, even after President Trump announced the federal government would fill up its Strategic Petroleum Reserve (established in 1973 in reaction to the first OPEC embargo) in the wake of the coronavirus pandemic. Small oil producers are likely to suffer and face bankruptcy, as oil rig workers are laid off, but large producers like ExxonMobil, BP and the like will thrive.
Big Oil has indicated so far that it is not interested in any sort of bailout yet, and it’s easy to see why. The OPEC-Russia oil price war, on top of present levels of U.S. production, would seem ready to adversely affect those small oil drillers, at the benefit of the large producers who could squeeze them out.
More importantly, sustained low oil prices come as automakers, especially GM and Volkswagen Group, prepare large shifts from internal-combustion powertrains to battery-electric motors in electric vehicles despite lack of consumer interest in the latter. Sub-$2 per gallon gasoline will be hard to give up for a lot of people in favor of the cleaner—but more expensive—new alternative, especially if the sudden dip in air travel creates a temporary dip in CO2 emissions.
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