In a December 2010 research note on the 2011 outlook for the oil market, Deutsche Bank (DB) analysts have revised their earlier expectations of the pace of near-term transportation electrification trends (slower) and gasoline demand (greater) but note that the developments in the global transportation sector in 2010 have increased their confidence “in the pace and breadth of the long-term shift to a more efficient transportation system.”
Their analysis is in the context of the “surprising [oil] demand strength of 2010“; 2010 saw absolute incremental demand at around 2.2mb/d of growth—the second highest in 30 years, despite oil prices in the $90/bbl region. Key developments in the transportation sector that they note include:
Positive for gasoline demand:
- Strong Chinese car growth in 2010, particularly in the first half of the year, with vehicle sales up 30% year-on-year (YoY) through the first eleven months of 2010. In DB’s Fall 2009 note, they had forecast 12% growth. By mid-2Q, the team had increased its estimate to 25%.
Deutsche Bank’s China Auto analyst, Vincent Ha, continues to see robust light vehicle sales over the next few years, with a slow to about 11% YoY growth in 2011 (due to a high base from the 2010 surge, and reductions in government stimulus), followed by sustainable low double digit growth in 2012. He also believes that sub-1.6L passenger cars will outgrow larger vehicles due to favorable policies.
- Slower than expected sales of hybrids everywhere in the world but Japan in 2010. In the US hybrids fell from about 3% of total sales in 2008-09 to 2.2% in 2010. The DB team attributed the reduction to less concern about gasoline prices, and therefore fuel efficiency, as well as fewer government subsidies for hybrids.
As we’ve said before, it may take another $140/bbl+ oil price surge to truly and finally change US transportation behavior and policy.
- Increasing political animus towards the ethanol tax credit, which was “begrudgingly renewed for one year in the lame-duck tax bill.” The team suggests that this may be the last extension for the credit. ...
- Rapidly falling lithium-ion battery prices, and steepening expected cost reduction curves for both batteries and electric drive components.
Based on discussions with industry experts and several automakers, the DB Auto team has lowered its advanced lithium ion battery cost projection by about 30% for 2012. Current prices have fallen from $650/kWh+ in 2009 to about $450/kWh now, and DB’s forecast is the price to fall at about a 7.5% CAGR from 2012 through 2020 to about $250/kWh.
The consumer economics of a pure electric start to work without subsidy by about 2020 under this battery price decline scenario. The industry rule of thumb suggests that consumers will consider a 3-4 year payback to be an economic choice. With no subsidy, 2012 electric vehicle models will have a 10+ year payback vs. a typical combustion analog, assuming $3.25/gallon gasoline. With a $7,500/vehicle subsidy in 2012, an electric will have about a 5 year payback. Around 2015, assuming a $4,500/vehicle subsidy, the payback period starts to fall into a range at which consumers will view the economics favorably. By 2020, the economics should be able to more or less stand on their own with subsidy, and a small subsidy would clearly nudge the payback below 3 years.
- Strong indications of commitment by the Chinese government to support the rapid development of both domestic demand for electric vehicles and a competitive domestic electric vehicle industry.
- New US fuel efficiency/emissions standards which will not be achievable without significant penetration of electric vehicles, according to the DB analysis.
- Fuel standards in Europe, Japan and Canada that will require widespread adoption of electrics. There is pressure to make European standards even more aggressive.
- More governmental consumer incentives (rebates or tax credits) to encourage the purchase of new electrics and plug-in electrics.
- An explosion of hybrid sales in Japan. The Toyota Prius became the biggest selling car in Japan in 2009, and has remained in that position throughout 2010. Several other hybrid models also made the leaderboard. Hybrids went from about 8% of sales in 2009 to over 11% in 2010. Honda believes that hybrids will account for 23% of the market by the end of 2011.
- Strong pre-sales of electrics in the US by commercial enterprises. In November General Electric put in a pre-order for 12,000 GM electric cars, and said it planned to buy 25,000 EVs from all manufacturers by 2015 for its corporate fleet. At the consumer level, dealers have put in more 2011 orders than can be produced for both GM’s Chevrolet Volt and Nissan’s Leaf. Volt manufacturing capacity will rise from 10K in 2011 to about 65K in 2012. Nissan is building a 150K capacity plant in Tennessee for the Leaf which will come on line in 2012.
- New business models, combined with government incentives and subsidies, that dramatically lower the entry price for consumers.
- A growing number of xEV options around the world. The DB auto team counts at least 130 models in the global pipeline for 2012.
- Aggressive near-term OEM lease pricing.
- Increasingly micro-hybridization, with a majority of ICE’s being micro-hybrids (e.g., equipped with start-stop and/or some regen functionality) by 2020.