Personal Transport Trifecta
How an innovation avalanche might trigger a tsunami of creative destruction
Even as global energy demand continues to grow, the compounding and multiplying impacts of innovation drive toward low-emitting pathways and away from oil demand. The 2014 supply-driven price drop may have just been a first wave warning of a coming demand-driven tsunami.
Three innovations in the transportation area may in combination outstrip all current projections in terms of impact on the economy and climate. If this happens there will be winners and losers.
Many of each.
Might the International Energy Agency (IEA), the oil industry, and the best of our economic modelers have been grossly understating the transformation we are about to face across many sectors?
Personal transport is just one of those non-linear, indeed potentially near-step-change, areas that we struggle to incorporate into their models. Trying to break the world into component parts to apply a 'scientific method' can sometimes result in overlooking interactions. When a tidal wave is coming, we really want to believe it is just a breaker way off in the distance.
Three elements
In the personal transport space, there are three areas of innovation that are often treated as additive but are more likely to combine in multiplicative ways. Their combined impacts are likely to act like a body slam to gasoline markets, oil demand (of which 51% depends on the gasoline market) and a great kick-start to the battle against greenhouse gas emissions.
None of these is individually stunning.
They have each been all over the news. But we need to consider how they interact with each other to comprehend why this is such a big deal.
Electric vehicles
Battery Electric Vehicles (EVs or BEVs) and plug-in hybrids (PHEVs), with headline grabbers like Tesla and many traditional and non-traditional entrants, are starting to become less of a novelty. We know they are coming.
There is 75% year-on-year growth in EV sales projected this year and 35% of the automobile market share projected by Bloomberg for 2040. The race to the EV market is the race toward battery energy density (range)/charging rate/lowest cost. While R&D continues to address the first two, the third is all about high efficiency, automated volume production.
To that end, Tesla is in the thick of building their famous Gigafactory in Nevada and has incorporated solar PV and stationary energy storage (PowerWall) products into their future-focused family to get to the battery volumes that can keep them at the front of the curve.
Daimler (Mercedes-Benz) is firmly committed to the EV path and has started introducing stationary energy storage for domestic PV installations in a race to achieve critical production volumes and drive down battery costs. In a head-to-head battle with Tesla, they have also invested a half billion dollars into large scale battery production.
Self-driving vehicles
With Tesla rolling out ‘autonomous-ready’ vehicles, equipped with all required hardware and requiring only a software update to make them fully autonomous today, Volvo, Daimler-Benz, BMW, and Toyota are some of the traditional and non-traditional entrants in this race .
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IHS projects 21 million autonomous vehicles on the road by 2035 with annual sales hitting 600,000 units in 2025 and 43% compound annual growth for the next decade.
Transportation-as-service
Though most people in North America own cars, we don’t really want the cars themselves. They want to get where they are going with the stuff and people (kids, dates, friends etc.) they want when they want it. They don’t want to pay to house, clean and maintain a vehicle that, most of the time, isn't the vehicle they want. They want a compact run-about today, a people hauler tomorrow and a cargo truck on Saturday.
Better known as car-sharing, the Transport-as-Service (TaS) sector is an early-stage trend that promises a growing field ranging from drive-yourself approaches such as Car2Go (need I mention this is a Daimler company?), Modo and Evo to ride-hailing apps such as Uber and Lyft. Of course the grandfather of the sector is the taxi.
What has been shown is that vehicles in car-share fleets achieve utilisation factors about ten times as high as typical personal vehicles, which average in the range of 5%.
Although usage today is relatively low, according to McKinsey and company 1/3 of German city-dwellers are potential car-sharing customers. They project that by 2030 up to one in ten cars will be a shared vehicle, and that this will be coupled to purpose-built vehicles (one- or two-passenger car to go to work, larger vehicle to take the family to events, pick-up trucks for weekend projects, etc.), rather than the general purpose ‘family car’.
Stacking innovations is more than addition
This is where things get interesting.
While there will undoubtedly be autonomous gasoline vehicles, the trend will be to combine electric with autonomous capability. Further, the targets for the introduction of these technologies will be in the TaS sector. Today Daimler is manufacturing and selling cars by the minute using their Car2Go platform. They have already declared their intent to combine all three innovations.
With Uber, Lyft and other service-based models, the taxi industry has to be watching closely. This means that introduction of EVs and Autonomous EVs is likely to be on a fleet-by-fleet basis, not on a car-by-car basis. The idea that the market will be moderated by the suburban soccer parent buyer may be based on an incorrect assumption. It may be that during the early days, Autonomous EV growth may be rate limited by battery production volume and cost as they supplant fleets in the TaS sector.
It doesn’t much matter if individual consumers lag in the market with a kick-start from TaS. In fact it is increasingly likely that a trend away from ownership will be driven by convenience, versatility and parking costs as the upcoming generations make choices to live in higher density areas.
The right-sized, clean, silent EV will be where you need it when you need it. Pick up the kids from Aikido class? You may not even need to be there!
Further, most projections of impacts look at the number of EVs as a percentage of the market, then multiply that number times average per-vehicle fuel consumption to figure out the associated fuel demand reduction.
What if that is completely wrong?
These vehicles will be operating with a utilisation factor closer to ten times that of the family car of today (the Rocky Mountain Institute projects 80% utilisation, while I use 50% here). Therefore 6,000,000 vehicles on the road will have the impact of 60,000,000 gasoline driven personal vehicles or the equivalent of 2 million barrels of oil per day.
(Correction: should be 3,000,000 autonomous SaT+EVs equivalent to 30,000,000 gasoline vehicles result in 2 million bbl/day reduction - rechecked sources - compared against several, but similar to Wikipedia. RA-2017-06-25)
Bloomberg, in an excellent, concise analysis puts the threshold where demand drop tips oil prices into the tank (so to speak) at 2 million barrels. This is equivalent to the supply increase that triggered the 2014 price collapse and resulted in an excess inventory situation that is only just beginning to correct today. (Watch their animated video here.) They project this might occur as early as 2022.
Bloomberg arrives here without taking into account the autonomous/TaS/fleet high utilisation factor impacts. Admittedly, autonomous vehicles will only just be entering the market come 2020, so their role will still be pretty small come 2022, but that multiplier effect will drive the S-curve for EV market share into an even steeper, non-linear oil demand drop.
And this is not just true in OECD countries. This model may apply even more in China and India as infrastructure limits tolerance for the inefficiencies of human-driven vehicles.
North America is not “The Market”
The trap we commonly fall into is to assume that the market consists of “folks like us” and that those folks see a world like we do.
Wrong again.
China does not operate like any OECD country. Policy is very top-down driven and transformations of the economy and infrastructure take place amazingly rapidly, often on the basis of very intentional strategies rooted in regularly released five-year Plans (FYPs). The thirteenth FYP has just been released and focuses on Innovation, Mass Entrepreneurship, Internet Plus (focusing on mobile internet) and “Made-in-China 2025”, focused on ten key sectors. The first of these is new energy vehicles.
Every time China’s road system improves the number of personal vehicles expands to overwhelm it. They cannot afford the inefficiency of having people-driven vehicles plugging up the roads. Autonomous vehicles can travel much closer to one another, communicating directly with each other for near-instantaneous collision avoidance.
An explosive market transformation in China will result in explosive growth in demand and production capacity with corresponding drop in costs for batteries. While this may lag behind Tesla, Daimler, Panasonic, Toshiba and others at the front edge, the impact could be similar to the global price collapse seen in solar photovoltaic cells and panels.
Losers and Winners
Even as global energy demand continues to grow, the compounding and multiplying impacts of innovation drive toward low-emitting pathways and away from oil demand. The 2014 supply-driven price drop may have just been a first wave warning of a coming demand-driven tsunami.
Yes, there will be a market for oil products, and low prices will mitigate toward lower efficiency and greater use in the next few years. But gasoline (and diesel for personal vehicles) will be hit hard beginning in the early 2020’s. Not with a single transient drop, but with an accelerating downward curve. For many in the petroleum sector, the past few years is only a pale foreshadowing of the reality they will face in the coming decades.
It will not be good enough for high-cost oil producers to simply tighten their belts and reduce operating costs in line with those in the mid-range. Producers around the world will fight tooth-and-nail to maintain their slice of a shrinking pie, driving high-cost suppliers out of the market and squeezing even those in the mid-range today. The choice facing many in the sector will be deep transformation or death.
There will be other losers: autonomous vehicles will reduce the industries associated with human factors in the current transportation sector. Traffic accidents (ambulance, medical, towing services, civil claims, insurance claims adjusting, repairs, etc.) and traffic law enforcement represent areas of the economy likely to be hard-hit by taking the wheel away from the driver.
There are also whole job categories that will be threatened. That brief wave of the ‘gig economy’ around peer-to-peer transport (drivers for Uber, Lyft etc.) and taxi services will be hit hard and nearly overnight.
Winners?
The EV/Autonomous Vehicle/TaS sectors are betting big on a complete transformation of the way people travel. However, the ultimate result and timeline to get there is anything but a sure thing.
Low-emitting power generation demand will continue to soar. This includes all associated technologies from distributed to large utility scale generation, storage, distribution (including charging stations etc.). With blockchain technologies and peer-to-peer markets, which are just peeking above the horizon, this represents another of these non-linear, multiplicative combinations. This may be a subject for a later blog.
Broad societal benefits abound with a dramatic reduction in traffic accidents will come reduced health care costs, reduced costs of the judicial system, near elimination of issues like drunk driving and many others. Of course, there will be too many investment and entrepreneurial opportunities to mention.
Most importantly, the impact on greenhouse gas emissions may far outstrip even optimistic scenarios for the global personal transportation sector as this personal transport trifecta takes hold over the coming five to ten years.
Are you ready?
