3
Tata Nano Revolution (Part 2): Straining a squeezed global oil market
With a sticker price half of the world’s cheapest cars (like India’s Maruti and China’s Chery brands), the $2,500 Nano will probably accelerate growth in auto sales, and thus fuel consumption, throughout the world.
The Nano may not change the automotive landscape in the US, Europe, or Japan since it doesn’t conform to their safety standards. But these regions aren’t the growth drivers of the automotive world anyway, with saturated markets of more than 700 vehicles per thousand people and slowly growing populations. However, it may ignite an auto revolution in India, where their twenty cars per thousand market could grow more than thirty times its current size.
The bulk of future Nano consumers currently ride motorcycles -- which lack a car’s carriage capacity and weather resiliency. While the Nano boasts respectable fuel economy ~50 miles per gallon, these bikes often get 80-110 miles per gallon. So, a Nano driver would demand roughly double the fuel.
In India, the 1.5 million vehicle sales annual market is already growing at a breathtaking clip of 15% per year. China is growing even faster at 20% annually and has recently become the 2nd biggest vehicle market at almost 9 million. These numbers are still significantly smaller than the 16 million US sales and a fraction of the 75 million vehicles sold worldwide that add up to one billion vehicles on the road currently. If a billion people can afford a vehicle starting at $5,000, those billion consumers had an income at least high enough to pay for a car and its fuel, let’s say ~$10,000 annually. The question now is how many people have an income of between ~$6,000 and $10,000? My guess is that in our unequal world we may be talking about another billion people or a doubling of the auto market by 2030. If that is the case, Nanos seem capable of dramatically increasing oil demand. With transportation making up half of global oil consumption, a doubling of the number of four-wheel vehicles could raise oil demand more than 25%.
Meanwhile, oil producers seem unable to significantly increase supply due to production declines in Mexico, Norway, the UK and elsewhere. Without sufficient oil supply, a bidding war will likely emerge between US motorists trying to maintain a gas-guzzling lifestyle and a growing percentage of the developing world joining the world mobility elite in a Nano. This appears to almost guarantee increasing oil prices as a long-term reality.
While biofuels may play a role – an increase of conventional corn ethanol threatens to make world grain prices climb higher than current records and magnify malnutrition in the hundreds of millions plagued by extreme poverty.
I’m rooting for strong developments in renewable energy technologies that can transition us to a plug-in hybrid electric vehicle fleet for a sustainable future. Without such advances in the near-term (along with improved transit services and bike/ped friendliness), current tensions over energy resources worldwide could flare-up into full-scale conflicts and prevent us from stopping climate change.
Jim,
Great comment. I'm with you on the ink/printer analogy for fuel/vehicles.
Allen, I'm incorporating dynamic realities in my estimates of future oil prices. For instance, population will continue to rise. And hundreds of millions of people are moving from the incomes of a low energy lifestyle to higher incomes that drive a higher energy lifestyle (above $5,000/yr). So, huge demand is coming online during the industrialization of the two biggest countries of the world, India and China, (and some other emerging economies like Brazil and Russia). I think this demand is not just a typical boom time for oil that will be followed by a big bust back to $15/barrel oil.
You say oil has been low for 20 years, but that leaves out the spike around the Gulf War and the fact that the price of oil has been climbing steadily for six years now. So either there will be a huge new showing of supply this year and next to regain balance, or we are indeed entering a new energy order for the world, as IEA head Fatih Birol has alluded to. Yes, there will be some demand reductions from higher prices, but our demand for oil is very inelastic (independent of price changes). We made the easy switches in the early 80s away from fuel oil for electricity generation and now would have to drive less or more efficient vehicles to lower demand significantly. It would take ~10 years for us to shift a big majority of our vehicle fleet to hybrids so much of the demand has inertia behind it. Extraction costs have recently been increasing about as quickly as the price of oil, so large new supplies may be elusive. I hope to help usher in an efficiency revolution (that includes bikes and electric bikes), and do not think that the invisible hand will solve this one easily for our society to handle. We'll see what we can do.
Dennis brings up an interesting point regarding the cost of ownership. I suspect the primary barrier to entry for those in the developing world that don't currently have an automobile has probably been the purchase price.
With the dramatically reduced cost of entry the Nano provides, it will be interesting to see what happens due to the inevitable increased demand for fuel that will result. Will this accelerate the <a href="http://www.peakoil.com/">peak oil</a> situation many contend is already well underway?
I can imagine the rising cost of ownership (fuel) dramatically eclipsing the cost of entry (vehicle sticker price), making higher fuel prices the new barrier to entry that will control demand. Cars could become more like the 'free' ink jet printers where the cost is in the print cartridges, not the printer!
"Without sufficient oil supply, a bidding war will likely emerge between US motorists trying to maintain a gas-guzzling lifestyle and a growing percentage of the developing world joining the world mobility elite in a Nano. This appears to almost guarantee increasing oil prices as a long-term reality."
The problem with that is it assumes no change; things stay static. Everything is dynamic. For every action there is an equal or greater reaction. 20 years of low oil prices gave little incentive to do anything to worry about oil supplies, improving extraction technologies, etc. When gas was a dollar a gallon, why worry about how much you drive or what MPG your vehicle gets?
The longer gas prices stay at there present levels the more people will change what they do. The more gas costs, the more economic it makes buying a hybrid. That in turn lessens demand for fuel. The more money there is to be made from extracting oil, the more incentive there is to develop and use technologies to better extract existing supplies and find new ones.
