I'm not making any explicit assumptions about total vehicle sales here. This year sales are down. They may well bounce back up in 2018, or not. There is a bit of a used car surplus to work off. The long term growth rate is near 3%, but when considering short term prospects there is a lot of variability.
In any case, my focus here is not the peak, the time when displacement starts to overwhelm underlying demand growth. Rather, it is simply on how EV displacement is scaling. Oil analysts are largely overlooking commercial EVs, which may be 4 or 5 times the displacement of passenger EVs. So if oil analysts are blind here, how much does that bias estimates of net demand? When does this get big enough that it causes difficulty in balancing the oil market? I think we may have already crossed that line. If you miss some 100 to 150 kb/d in dislocated demand, that is fairly significant. Now this year is shaping up to be a 300 kb/d deficit. So OPEC seems to be doing enough cutting for now. But how much cutting will they need to do next year. Will OPEC need to cut another 200 kb/d next year just to maintain a mild deficit? Of course, they will adjust to whatever plays out in the market, but it is not clear to me that oil analysts have the right view on EVs to anticipate the challenge that EVs will pose on balancing the market. If the industry underestimates this, then they are at increased risk of returning unexpectedly to surplus. Moreover, does OPEC plan to keep cutting production by whatever is necessary to accommodate EVs? So if OPEC is underestimating EVs, their current strategy may unravel unexpectedly when they realize that this burden is too much for them.
So the next couple of years could be touch and go. OPEC tries to balance a dynamic and volatile market as it always has. But I think that by 2020 this approach breaks down. OPEC may find itself unable to cope with a 600 kb/d cut in 2020, 840 in 2021 and 1200 in 2022. OPEC will come to see that it is losing far too much production volume, while non-OPEC does very little to slow their pace of production growth. Ultimately, OPEC cannot compel non-OPEC to slow growth. So I think we could see OPEC refuse continued production cuts. Once OPEC does an about face on accommodating EV dislocation, the price of oil is allowed to fall. It could fall hard and bring prices below $20/b.
So I don't know when OPEC will do this strategic pivot. I doubt that we will see it before 2019, but I also don't see how OPEC alone can simply accommodate a 1.2 mb/b EV dislocation sometime about 2022. The problem right now is that oil analysts are not measuring the current impact and they do not see this scale of displacement approaching as quickly as it is. This, there is already a strategic miscalibration at play. If OPEC saw clearly that their current strategy is headed to accommodate upwards of 1mb/d of dislocation by 2022, I think they would be plotting a different course already. Oddly enough the non-OPEC oil majors seem to have a much clearer view on the disruption that EVs pose. I think they know that they cannot count on OPEC to pull up the slack indefinitely. That may be because oil majors have a higher breakeven price than key players in OPEC. So OPEC may be relatively over confident in its position. At some point, OPEC may crack.
