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What Do Electric Vehicles Mean for MLPs?

10/17/17 | Karyl Patredis

Will widespread use of electric vehicles decrease oil demand in the near future?

Innovation can be a little scary. Do you remember logging onto the internet for the first time? About 30 years ago, the idea that we could order a pizza, do our Christmas shopping, plan a vacation, and take a class via the computer seemed crazy, but technology happens. In a similar way, it might seem a little far-fetched to imagine a day where gas stations don’t exist, and we all just plug in our cars at night, but technology happens.

As far as recent questions we’ve been getting regarding electric vehicles (EVs) causing refined product demand (and thereby oil demand) to drop in the near future, the answer depends on what you consider to be the near future and who you talk to.

CNBC recently posted an article with predictions that EVs could cut global oil demand by about 3.5 million barrels per day by 2025, which represents 3.6% of the current global oil demand of 96 million barrels per day. However, global oil demand is also expected to increase by 7 million barrels per day, or 7.3% by 2040, due to population growth as well as industrial development and this already accounts for the affect EVs will have on the energy mix. Additionally, some say barriers to EV production could slow their adoption. A recent Fortune article highlighted that manufacturing of the new Tesla Model 3, as an example, isn’t ramping up as quickly as planned. Thus, in the immediate future (which I’m calling five to eight years), the impact of EVs on oil demand doesn’t look material.

Everyone seems to have an opinion, but general consensus is that, while we’ll see gradual shifts over the next 20 years, we won’t see electric cars gain a foothold until about 2040. That’s a not-so-close 22 years from now, and even then, researchers estimate that well over half of all cars on the road will still be powered the old-fashioned way. Experts say this will likely be the case because conventional cars will remain the most cost-effective option, and fuel efficiency will continually improve. But on the other hand, as we’ve seen in the energy sector, technology can easily shift the cost-effective equation. It was only a little over a decade ago when natural gas prices were around $7/Mcf and companies were still drilling conventionally (vertically).

On a different note (and likely a future post topic), more EVs on the road could result in an increase in natural gas demand for electricity generation.

I plucked the chart below from Exxon Mobil’s (XOM) 2017 Outlook for Energy presentation because it provides a great snapshot of transportation energy mix projections through 2040. Note that the “other” section is a mix of biofuels and electricity.

Source: Exxon Mobil

The ever rising need for energy is attributed to population increases (according to a 2015 study completed by the United Nations, we’ll have about 2.5 billion more people on the planet by 2050) and increasing wealth around the globe resulting in more people acquiring personal vehicles.

So, what does all this mean for MLPs? Well, likely not that much in the immediate future or the long term. MLPs primarily transport, process, and store energy. Pipelines can be retrofitted to carry natural gas instead of oil or vice versa. This means MLPs can roll with the changing needs of their customers relatively easily. Additionally, while it’s true that EVs will have an impact on the current energy mix, the overall pool is getting larger, meaning there is enough growth for all forms of energy to share. Bottom line: EVs won’t spell the end of MLPs anytime soon.