POLICY Horizons Canada is a foresight organization within the government of Canada, with a mandate to help anticipate emerging policy challenges and opportunities, explore new knowledge and ideas, and experiment with methods and technologies to support resilient policy development. With Canada emerging as a heavyweight in the global energy equation – courtesy the Alberta sandoil, energy is one of the issues, always on the table for the group. Last week, this correspondent was at their offices in Ottawa, close to the sprawling parliament building, giving a talk, presenting his view on the emerging energy scenario. Most analysts agree today, that while new oil and energy frontiers are emerging – all around – the global appetite for oil is slowing down. On the other hand, global economy is not in the best of the shapes – to say the least – impacting the demand side of the global energy equation. And then the rising emphasis on efficiency, especially in the transportation sector also does not point to a strengthening demand pattern. Fundamentals are weakening. This then led to the very important question – why the markets continue to stand firm. This scribe had an interesting time, attempting to explain this rather confounding scenario – yet most agreed that prices are in for a fall. Ultimately, fundamentals would be back in control, dragging the market prices down. A subsequent question then was, how long these soft market conditions would sustain? And the recent PwC report, saying the crude markets are projected to remain somewhere between $33 and $50 low in real terms by 2035, came in handy to handle the question. Policy Horizons too agrees. In its recent paper, “The Next Economy,” it says: “Although liquid fuels are expected to remain the most popular form of fuel for at least the next 10 to 15 years, the global demand for oil is expected to flatten or decline according to ExxonMobil (by 2040), Shell (by 2026) and Deutsche Bank (by 2018). These estimates hinge on expected changes in the availability of alternative energy sources, hybrid cars, higher emissions standards, consumer incentives and the potential electrification of the global vehicle fleet.” Energy analysts all over the world converge on one point – the transportation sector is the prime consumer of crude oil. It consumes more than 70 percent of all the crude that is used in the world today. Yet this could be in for a change – if the emerging technology is to be believed. Internal – combustion engines rule – until now. Cost remains a major concern in transition. Lithium-ion battery packs in electric vehicles today can easily comprise up to 50 percent of the cost of a new electric vehicle. The Tesla Motors Model S 85kWh battery, for example, is worth $12,000. Electric cars hence are far more expensive than their petrol equivalents. But this could be in for a change. Lithium-ion batteries are to be three times cheaper in 2020, analysts are pointing out. McKinsey Quarterly concludes in a report that the price of batteries, and more specifically the lithium-ion variety, will get a considerable reduction in price, within the next 8 years. According to the study, the price could fall from $500-$600 per kWh, to as little as $200 by 2020, and, even lower by 2025, at $160. This should spur on the EV industry. The drop in battery costs will definitely give the industry a much-needed boost. Sustainability & Resource Productivity Practice reports that with the falling battery prices, in the United States, with gasoline prices at or above $3.50 a gallon, automakers that acquire batteries at prices below $250 per kWh could offer electrified vehicles competitively, on a total-cost-of-ownership basis, with vehicles powered by advanced internal-combustion engines. Sam Jaffe, research manager for IDC believes: “This (the emerging technological revolution) will lead to a dramatic reduction in price for Li-ion cells to as low as $400/kWh by 2015.” Investment analysts at Deutsche Bank argue that the electric vehicle is a disruptive technology and its short-term potential is widely underappreciated. “Transportation is likely to change more in the next 10 years than over the last 50,” says Dan Galves, the bank's chief car industry analyst. That's not because of some imminent technological breakthrough, but because the relative costs of electric and petrol cars will soon be transformed. Galves expects the costs of batteries to plummet as mass production ramps up – just as they did for laptops – to less than $7000 by 2015. Then the effect of falling electric vehicle costs will be reinforced by strengthening fuel efficiency and emissions policies in the world's most important car markets. The policies of the world's biggest gas guzzler will soon be among the toughest. In 1975, US president Jimmy Carter passed a law forcing vehicle manufacturers in the US to meet average fuel efficiency standards. For cars, that number has languished at around 27 miles per gallon (11.5 kilometers per liter) since the early 1990s, but recent legislation means average fuel economy must double to 54.5 mpg by 2025. The standard has been rising since 1978, and by 2020 the targets become so demanding, says Galves, that car manufacturers will not be able to meet them without selling a significant number of electric vehicles. Galves expects them to make up a fifth of US car sales and 25 percent of Europe's car sales by 2020, accelerating the decline in demand for petrol. The Chinese government too is strongly committed to electric vehicles as one way of tackling appalling air quality in the cities and the country's dependence on imported oil. Deutsche Bank forecasts that Chinese petrol demand will start to fall from 2025, as electric vehicles become more common. The net effect is that global petrol demand will peak as early as 2015. “From that point forward,” writes Deutsche Bank's lead oil analyst Paul Sankey in a research note. “We believe gasoline demand will be on an inexorable and accelerating decline.” And as a result, he argues, global demand for crude oil will go the same way in about 2020. Not everyone though agrees to this. Fatih Birol continues to underline that there are simply too many cars in the world – about a billion and rising – for electric vehicles to have a meaningful impact in the short term. Yet the revolution is lithium – ion batteries - is on. It would definitely be a different world tomorrow. The only debate remaining now is about the quantum of impact on the energy world of the plummeting prices of lithium-ion batteries. Economists and planners in Riyadh and other oil producing capitals need to keep a close eye on the changing energy horizon!
