How Many Electric Vehicles Would It Take To Replace 1 Mbd Of Oil Demand? – Seeking Alpha

Posted: Monday, July 10, 2017

Tesla (NASDAQ:TSLA) is on track to reach 50 GWh of annual battery production capacity by 2018 and 150 GWh by 2020. Tesla estimates that this will be enough to produce nearly 500,000 cars in 2018 and 1 million cars in 2020 (with two-thirds of the capacity, or 100 GWh, used for Tesla Automotive, and the rest used for Tesla Energy). In addition, later this year, Tesla will announce locations for its next four Gigafactories bringing its total number of Gigafactories to six (including Gigafactory 2 in Buffalo, New York, that will primarily manufacture solar panels and Solar Roofs)

Assuming that (1) these new Gigafactories will be just as large as the first one, (2) it will take just as long to bring them online as the first one, (3) the company will be able to finance its hyper growth even through a potential recession by 2025, and (4) the company will be able to find buyers for its products, Tesla’s annual battery production capacity dedicated for manufacturing all-electric cars may approximate 500 GWh by 2025.

What is Tesla’s competition up to?

They are getting there, but excruciatingly slowly. As I explored in my most recent Tesla-related publicly available article, Tesla’s competition has severe limitations to how many all-electric cars they can possibly produce by 2025. In summary, they do not have the know-how that Tesla has accumulated in the last ten years focusing solely on building all-electric cars from the ground up, and they neither have the battery production capacity (known as the Gigafactory) nor the financial capacity to build as many Gigafactories as Tesla plans to do so in the next several years as their balance sheets are already debt laden.

Just recently, even when Volvo (OTCPK:VOLVY) dramatically announced “the end of the solely combustion engine-powered car,” it hedged its bets as its R&D chief Henrik Green said that rollover will likely take five to seven years, starting in 2019. In other words, the company will sell internal combustion engine-powered cars until at least 2025.

Even one of the most ambitious players in the all-electric space (likely due to its emissions scandal), Audi (OTCPK:AUDVF), said ~25% of U.S. sales will come from electric vehicles by 2025, or only 1 million.

Therefore, I estimate that Tesla will command more than 50% of global battery production capacity for the foreseeable future. Since I just estimated Tesla will have 500 GWh annual battery production capacity, the overall car industry’s all-electric car capacity will likely not exceed 1 TWh by 2025.

Given that Model S and Model X both have 75 kWh and 100 kWh, and Model 3 is rumored to have 60 kWh and 75 kWh battery options, Tesla will likely not be able to produce more than 10 million all-electric vehicles per year with its projected 500 GWh per year capacity by 2025. Using simple extrapolation, that means a maximum of 20 million all-electric cars for the overall car industry.

What does this mean for oil demand?

Assuming that an average car today drives about 10,000 miles per year with an estimated 25 miles per gallon efficiency, we can estimate that an average car uses ~400 gallons of gasoline, or ~10 barrels of oil per year. 1 million barrels per day (“mbd”) of oil, the very rough estimate of average increase in oil demand year after year, approximates 365 million barrels per year of oil. This means at least 36.5 million cars per year would need to be replaced by all-electric vehicles in order to stump the relatively consistent annual growth in oil demand.

Readers should note that the actual figure is likely a lot higher than 36.5 million cars, because all-electric cars still need energy to work: electricity. Therefore, at least a portion of any gasoline demand reduced by all-electric cars will translate to an increased need for electricity. According to the EIA, two-thirds of electricity used in the US today is generated using fossil fuels (mainly natural gas and coal).

Bottom Line: Even after such exponential growth, 20 million new all-electric cars by 2025 (if everything goes according to plan) will comprise just a fraction of the 2 billion cars that the world is projected to have on the roads by 2035. Given the growth in developing countries, I estimate that more internal combustion engine vehicles, which use diesel and gasoline, will be added to the global fleet than the number of new all-electric cars for many years to come. Therefore, I expect demand for oil to continue to grow at a high rate for at least the next decade.

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Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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