Sustainability & CSR
Green transport facing headwinds
Cheap oil and Covid-19 could slow down EV roll-out and airline upgrades
By Duncan Levine
On 5 March, the 14 members of the Organization of the Petroleum Exporting Countries (OPEC) announced plans for additional production cuts of 1.5 million barrels of oil per day for the following three months in response to collapsing global demand because of the coronavirus (Covid-19) outbreak. But just hours later, the proposal was in jeopardy. Russia, OPEC’s partner in a three-year alliance, appeared to be unwilling to cut its own production levels. The next day emergency mediation talks between OPEC and Russia were hastily arranged by OPEC’s main player, Saudi Arabia. But the talks broke down after less than hour as the two sides failed to reach an agreement. In response, Saudi Arabia immediately decided to reverse course and ramp up production.
The reaction in oil markets was swift and brutal. The price of benchmark WTI and Brent crude dropped by more than 30% almost immediately. This was on top of sharp price declines over the previous month thanks to the drop in demand by heavy users due to Covid-19. Oil prices have since stabilised from their lowest levels but are still more than 40% below levels of just a year ago.
While the price war seems to be playing out between Russia and Saudi Arabia, both sides also have another target, US shale oil producers, which have much higher production costs than both Russia and Saudi Arabia. Therefore, while the price war will hurt both Russia and OPEC producers, it poses an existential threat to US shale oil producers.
The price war comes at the worst possible time for oil producers as global demand for the black stuff has fallen off a cliff. On 9 March the International Energy Agency (IEA) predicted that global demand for oil in 2020 will fall for the first time since the global financial crisis. Based on its assessment following the spread of Covid-19 beyond China, the IEA cut its 2020 base case global oil demand forecast by 1.1 million barrels per day, representing a year-on-year (y-o-y) drop of 90,000 barrels per day. In the first quarter of 2020, the IEA expects China’s demand will fall by 1.8 million barrels per day y-o-y with global demand down 2.5 million barrels per day. The base case assumes that oil demand will return to close to normal in the second half of 2020. Based on the IEA’s most pessimistic scenario, if global measures fail to contain the virus, global demand could fall by 730,000 barrels a day in 2020. In a more optimistic high case, the virus is contained quickly around the world, and global demand will grow by 480,000 barrels a day.
Looking beyond an oil price war, a prolonged supply glut of cheap oil could have much wider implications than a struggle for market share among the main oil producers. It also risks pausing or at least slowing down the transition from fossil fuel-driven to zero emissions transport globally.
While European policy mandates incremental reductions in fossil fuel vehicle fleets over the next few years and some European countries have succeeded in spurring consumers to switch to electric vehicles (EVs) by offering generous EV subsidies, without incentives, it is not easy to persuade consumers to switch. According to Petr Dolejsi, Director of Mobility and Sustainable Transport for the Automobile Manufacture’s Association (ACEA), even though the industry is investing €50 billion in R&D to develop the technologies needed to meet the regulatory targets, this does not guarantee that consumers will purchase them.
Speaking in the ECCT’s International New Energy Vehicle Forum, held last year, Dolejsi said that the shift to EVs will not happen until EV charging infrastructure is in place and without sustainable and predictable subsidies and support from central and local governments. When we met with Dolejsi in Brussels in December, he noted that there is a disconnect between public demands and consumer behaviour. A case in point is that while there is strong public pressure on authorities to improve air quality, 2019 vehicle sales data in Europe reveal that there is much stronger demand preference in the EU for gas-guzzling SUVs than for EVs or other fuel-efficient new energy vehicles.
According to the IEA, the global stock of electric passenger cars exceeded five million in 2018, an increase of 63% from the previous year. Around 45% of electric cars on the road in 2018 were in China - a total of 2.3 million - compared to 39% in 2017. In comparison, Europe accounted for 24% of the global fleet, and the United States 22%. However, the overall portion of EVs is still tiny compared to regular internal combustion engine (ICE) vehicles. EVs accounted for just 4.7% of overall vehicle sales in China (the largest EV market) and only 3.8% in Europe.
The slow transition to zero emission vehicles was already creating a real headache for automakers when fuel prices were high. With petrol prices falling 50%, consumers will have even less incentive to purchase EVs. If this is the situation in Europe, which has strong policy commitments to decarbonise the transport sector, the outlook is even bleaker for the rest of the world, where commitments are much weaker or non-existent.
The impact on Taiwan’s EV sales could also be significant. Looking at sales of electric scooters over the past five years is revealing. According to figures provided by the Ministry of Transportation and Communications (MOTC), sales of electric scooters shot up over 117% in 2015 when both national ministries and municipal governments began to offer generous subsidies to consumers to purchase electric scooters. At the time, the Ministry of Economic Affairs (MOEA), the Environmental Protection Administration (EPA) and local municipalities were each offering subsidies. Taoyuan city, for example was offering the highest subsidy of NT$15,000 to all local citizens who purchased an electric scooter (foreigner residents were excluded from the plan). Coupled with generous subsidies, the roll-out of Gogoro’s battery-swapping network, which addressed the range anxiety and convenience issues, consumers could purchase an electric scooter for a similar or even cheaper price than some equivalent ICE motor scooters. However, the phased annual decrease in subsidy levels from both central and local authorities, starting in 2019, reduced the growth rate of electric scooters to 73% in the first nine months of 2019. While 73% may sound like a good number, given the low base effect, the sales of electric scooters were still only 22% of total motorcycle sales in Taiwan in the first nine months of 2019.
And it is not just the cost of purchasing a scooter that needs to be considered. The monthly battery swapping rental plans offered by Gogoro, Taiwan’s top electric scooter maker, start at NT$299 per month for just 100 kilometres (km) and NT$399 for 150 kilometres, although there are slightly cheaper packages per km for higher mileages. By comparison, at NT$25 per litre of petrol, an average 125cc scooter will run for 25-30 kilometres, meaning that the price per kilometre is somewhere between 50% and two thirds cheaper than a Gogoro, depending on the monthly package. Running a petrol motorcycle is about to become even cheaper as, on 15 March, both of Taiwan’s main petrol retailers, CPC Corporation and Formosa Petrochemical announced price cuts of around 20%, bringing prices to their lowest levels in four years.
With EV subsidies falling further in 2020 combined with ever-cheaper petrol prices, buying and running an electric scooter starts to look a lot more expensive. Stripping out the high end market and eco-conscious consumers, average consumers in Taiwan, who make up the bulk of scooter riders, tend to be price sensitive. If you add in the prospect of reduced consumer spending if the economy takes a hit from Covid-19, there is a real risk of a slow-down or even drop in electric vehicle sales in Taiwan this year.
Then there is the impact from lower oil prices on the aerospace industry. Airlines are already reeling from a sharp drop in demand for air travel in the wake of Covid-19. They will be praying that oil prices will stay low for as long as the pandemic lasts and beyond since fuel costs make up the lion’s share of their operating costs. Prior to the outbreak, all airlines had been paying lip service to the need for their industry to cut carbon emissions. Many of them had already taken action to upgrade their fleets to more fuel-efficient models. There was even talk of electrifying short-haul flights in Europe. But with plummeting flight and passenger numbers, emissions from the sector are no longer a pressing issue. Moreover, at a time when many airlines are struggling to merely survive, investing in carbon reduction technologies is definitely something that will be relegated to the back burner for most of them, at least as long as the pandemic lasts.
Another potential casualty of Covid-19 is public transport. Many cities across the world have been investing heavily in improving public transport systems over the past few years as a way to improve liveability as well as reduce the environmental impact of private transport. Taiwan is an excellent example of this with new metro lines being rolled out almost on a yearly basis in recent years and more planned for the next few years. This has led to a large increase in the use of public transport, especially in Taipei, New Taipei and Taoyuan, reducing the use of scooters and cars for commuting and the associated pollution and emissions. While Covid-19 has not yet led to a dramatic reduction in the use of MRTs and buses, this could change if there are cases or even unsubstantiated rumours of cases of people contracting the virus while using public transport.
Like everyone else, public transport and environmental authorities will be hoping that the pandemic ends soon and that everything will once again return to normal. If they don’t, the implications could be serious.