CHICAGO — With the global economy decelerating from the COVID-19 pandemic, fuel demand—and, with it, oil prices—are dropping. As of March 19, the price for West Texas Intermediate (WTI) crude was trading at around $23 per barrel, and Brent at less than $27. The U.S. Energy Information Administration is predicting the national retail average for regular-grade gasoline to fall below $2 per gallon in April. So what does this mean for the future of electric vehicles (EVs), which see greater consumer interest when gasoline prices are high? According to a recent report in Bloomberg, the short term will be ugly; but longer term, the electrification trend will continue.
“People aren’t shopping for cars right now,” Ram Chandrasekaran, global lead for transportation and mobility for Wood Mackenzie, told Bloomberg Energy. “Who is going to go out and make a big jump to say they’ll buy a new electric car when they’ve never owned an electric car before?”
According to an analysis by BloombergNEF (BNEF), global auto sales will suffer greatly during the economic downturn, which will affect EV sales and battery manufacturing capacity. In January and February 2020, overall vehicle sales fell 44% in China and 18% in South Korea—which have seen the highest numbers of COVID-19 cases—compared to the same period in 2019, according to BNEF. China has had more than 80,000 confirmed cases of COVID-19, and South Korea has had more than 8,500.
BNEF expects EV sales in China, which has made electrification of its vehicle fleet a key focus, to be flat or decline in 2020, depending on how long the economic downturn persists. However, BNEF expect EV sales to grow in Europe by 50% from the year prior. Bloomberg cited billions of dollars in investments in EVs from automakers such as Volkswagen and General Motors and the many new models expected to debut in 2020.
Michael Jost, head of product strategy for Volkswagen, told reporters in early March that his company’s own commitment to produce net-zero carbon emissions by 2050 leaves it with no alternative other than to pursue electrification. The company would produce its last internal combustion engine vehicle around 2040, according to Automotive News Europe. The fall in oil prices is “one of those dips that last a month, or some months or maybe a year,” Jost said, but Volkswagen does not expect prices to continue to decline over the long term.
Meanwhile, regulatory forces in Europe and China will keep the EV market growing, Bloomberg reported. Several countries, including Great Britain, France, Denmark and Norway, have pledged to ban sales of new internal combustion engine vehicles within the next 10 to 20 years, and the European Union is considering its own ban.
Meanwhile, in the United States, where gasoline prices fell in early March to their lowest point since 2005, EV sales could face strong headwinds. According to GasBuddy, the national average for regular-grade gasoline had fallen to $2.22 per gallon as of March 16, and the Boston-based company has revised its price forecast for the next few months downward to account for lower demand from COVID-19 and the oil price war between the Saudis and Russia.
“It’s certainly bad news for any electric vehicle launch if a drop in gas prices stays around for several months,” said Mark Wakefield, head of automotive practice for AlixPartners. If the gas price drop “gets to a level where consumers can start to trust it, they will shift out of fuel-efficient cars into less fuel-efficient cars.” EVs make up less than 2% of new vehicle sales in the United States.
Colin McKerracher, a transportation analyst for BNEF, said the greatest headwind for EVs isn’t oil or gasoline prices, but instead the higher average ticket price of an EV compared to a conventional vehicle. Most of that additional cost is due to the EV’s battery.
“For most consumers, high upfront prices are the biggest thing that’s holding EVs back,” McKerracher said. “Battery prices matter more than oil prices, and if those keep falling, EV adoption will keep going up in the medium to long term, but the next 12 months could still be really ugly for the market.”