Question

The electric car is an innovation that will be a high disruptive change and that will have an important effect into the global economics and the geopolitical international relations. As you know, petroleum is a key driver for geopolitics and an innovation from the technological point of view can imply different global economics relations and geopolitics relations.

1. What will be the effects of the transition to electric mobility on the oil market (demand, price, supply, …). What will be the economic impacts and consequences in the world’s top oil producers? (400 words)

Answer 1

With the advent of the electric car, the future of mobility will change, The requirement of fuel (petrol, diesel) will go down since more and more people will adapt to electric mobility. This fall in requirement basically indicates a fall in demand. So the demand curve will shift leftwards.

With a fall in demand, the equilibrium price is bound to fall as producers will lower price to sell their stocks.

However, to protect their margins, oil producers across the world usually perform in CARTELS. The most popular one being the OPEC Cartel. So producers across the world would now drop their production. Though this would lead to loss of revenues, it would not hit the profitability of the companies. So in the long run, the demand, supply and price will all fall if electric mobility is adapted.

For the world’s top oil producers like Aramco and the likes, revenue generation will be a problem. With falling demand and lowering outputs, the companies cannot meet the volumes needed to sustain long term. Even though profitability will be protected by cartels cutting outputs, but selling 1million litres of oil at $25 per barrel when the cost is $20 per barrel will give a profit of $5 million on a revenue of $25 million. However, if the demand falls and the companies cut production to let us say 0.6 million litres keeping the price almost constant in the long run, the company will make a profit of $3million on a revenue of $15million. So the profitability is protected but the overall profit and the overall revenues fall. This is only the contribution. Now when overheads are deducted, the net PAT for the firms will fall since previously the contribution was $5million and overheads of $4million would still mean a PBT of $1million. But in the second scenario, the PBT would be a loss of $1 million.

This would make the oil companies lobby for reduction in adaptability of electric vehicles or for them to find out alternate demand of petrol. If oil can be iused more extensively to generate power at a cheaper rate than coal, the demand for oil will shoot up. So for the companies, the consequences will be a hard hit on their finances but they need to find alternate uses and alternate markets to save themselves.

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