It has been a bad couple of years for those hoping for the death of driving. A decade ago in America, where cars are an important part of the national psyche, people had suddenly started to drive less, which had not happened since the oil shocks of the 1970s. Academics started to talk excitedly about “peak driving,” offering explanations such as urbanization, aging baby-boomers, car-shy millennials, ride-sharing apps such as Uber and even the distraction of Facebook.
The causes may have been more prosaic, however: a combination of higher gasoline prices and lower incomes in the wake of the 2008-2009 financial crisis. Since the drop in oil prices in 2014, and a recovery in employment, the number of vehicle-miles traveled has rebounded and sales of trucks and SUVs, which are less fuel-efficient than cars, have hit record highs.
This sensitivity to prices and incomes is important for global oil demand. More than half the world’s oil is used for transportation and, of that, 46% goes into passenger cars. The response to lower prices has been partially offset, however, by dramatic improvements in fuel efficiency in America and elsewhere, thanks to standards such as America’s Corporate Average Fuel Economy, the European Union’s rules on CO2 emissions and those in place in China since 2012.
The International Energy Agency says that such measures cut oil consumption in 2015 by a whopping 2.3 million barrels a day. This is particularly impressive because interest in fuel efficiency usually wanes when prices are low. If best practices were applied to all the world’s vehicles, the savings would be 4.3 million barrels a day, roughly equivalent to the crude output of Canada. This helps explain why some forecasters think that demand for gasoline may peak within the next 10 to 15 years even if the world’s vehicle fleet keeps growing.
Occo Roelofsen of McKinsey, a consultancy, goes further. He reckons that, thanks to the decline in the use of oil in light vehicles, total consumption of liquid fuels will begin to fall within a decade, and that in the next few decades driving will be shaken up by electric vehicles (E.V.s), self-driving cars and car-sharing.
Officials at America’s Department of Energy underline the importance of such a shift, given the need for “deep decarbonization” enshrined in the Paris climate agreement.
“We can’t decarbonize by mid-century if we don’t electrify the transportation sector,” a senior official said.
In a recent paper, “Will We Ever Stop Using Fossil Fuels?,” Thomas Covert and Michael Greenstone of the University of Chicago, and Christopher Knittel of the Massachusetts Institute of Technology in Cambridge, argue that several technological advances are needed to displace oil in the car industry. Even with oil at $100 a barrel, the price of E.V. batteries would need to fall by a factor of three, and they would need to charge much faster. Moreover, the electricity used to power the cars would need to become far less carbon-intensive. For now, emissions from an E.V. powered by America’s electricity grid is higher than those from a highly efficient gasoline engine, the authors write.
They calculate that, at a battery’s current price of around $325 per kilowatt hour, oil prices would need to be above $350 a barrel for an E.V. to be cost-competitive in 2020. Even if they were to fall to the Department of Energy’s target of $125 per kilowatt hour, they still would need an oil price of $115 a barrel to break even. If battery prices fell that much, however, oil probably also would become much cheaper, making gasoline engines more attractive. Even with a carbon tax, the break-even oil price falls only to $90 a barrel.
Those estimates may be too conservative, but the high cost of batteries and their short range help explain why E.V.s still make up only 0.1% of the global car fleet, though getting to 1 million of them in 2015 was a milestone. They still are too expensive for all but wealthy clean-energy pioneers.
© 2016 Economist Newspaper Ltd., London (November 26). All rights reserved. Reprinted with permission.
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