Quora Question: What's the Impact of Electric Cars on Oil-Rich Nations?

An all-electric battery concept car called LeSEE is shown during the Auto China 2016 show in Beijing, China on April 25. The author writes that the proliferation of electric vehicles will have devastating effects on many nations. Kim Kyung-Hoon/Reuters

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Answer from Nick Gorbikoff​, CIO at AJR International:

If electric vehicles become cheaper with time, what impact will it have on economies of oil-rich countries of the Middle East? Devastating, if they don't adapt fast enough and invest in their future. However, the decline will be fairly gradual before plateauing and will take a decade, maybe even longer.

Not so fast...

A lot of people think of this change as happening overnight, but there are several factors that people need to take into consideration. Transition to electric transport won't happen immediately and will take several years. The electric car industry as a whole is in it's toddlership right now.

And it is important to understand the time frame of the change in order to understand how it will affect oil producers.

  • Even if all the car manufacturers were to switch to making electric cars only by the end of 2016, there are still lots of cars on the road that run on gas and diesel. Since oil will be getting cheaper, it will be cheaper to run these older cars, as well.
  • No capable industrial electric engine, yet. There are currently no electric cars/engines that can replace the fleet of trucks, earth-moving equipment, military equipment, trains and ships. This situation will change as the development continues, but it won't be in the next five years. Elon Musk says a Tesla truck is 'quite likely' in the future.
  • The only electric infrastructure that being built to handle cars is Tesla's network. It is to be seen how long it will take for other manufacturers to join. But even Tesla's electric station network is being built to handle Tesla's fleet. If there is an explosion of electric cars—who is going to handle charging them? I mean, there is an opportunity here—but it takes time.
  • The only mass-produced fully electric car manufacturer that is worth it is Tesla. The other manufacturers are gearing up to join the competition, but (Nissan Leaf is not very popular, aside for a few enthusiasts, and Prius is a hybrid) it will still be a few years for them to start mass producing electric cars.
Men work at the Al-Sheiba oil refinery in the southern Iraq city of Basra, April 17. Essam Al-Sudani/Reuters
  • Oil is used for many things other than powering cars. Chemical, cosmetics, medical, packaging, plastics industries are not going away—so there is still going to be a demand for oil.
  • Oil is used for heat. There are many heating plants that use oil byproducts for heat generation.
  • Oil is used for electricity. There are many electric plants that use oil byproducts.

Effects on oil-producing countries

The effects on oil-producing countries actually already can be seen now in places like Venezuela and Saudi Arabia. The most important result of the switch to electric cars will be the fall of demand, which will lead to the fall of prices.

The current downturn in prices is mostly dictated by the proliferation of fracking in the USA, which is about to start exporting oil for the first time in many decades; an attempt by Saudis and OPEC to corner the market (from non-OPEC countries like Canada and Russia) and reverse the demand for efficient cars in Europe and the U.S. ( the main driving force behind widespread adaptation of hybrids and smaller cars was the skyrocketing price of gas fr0m 2005 to 2013).

The switch to electric cars would only exacerbate the fall in demand for oil, which will cause the following problems:

  • Downturn in the economies of countries that are dependent on oil as the driving engine. The will affect all oil producers, without exception, but to various degrees. Which will lead to five possible outcomes, as can be seen with these 5 examples. Most of other countries fall into one of these categories.
  1. Venezuela—causes major depression, food lines and supplies shortages, huge inflation, protests, government change.
  2. Saudi Arabia—countries that were smart to create a slush fund will try to outspend problems, to keep social unrest low
  3. Russia—keep internal economic problems away from public eye by tightening controls, strengthening the propaganda machine, getting involved in "short, victorious war." In fact, Russia's minister of the interior in 1905, Vyacheslav von Phleve, stated before starting the Russo-Japanese war: "What this country needs is a short, victorious war to stem the tide of revolution."
  4. Canada—while a major exporter of oil, Canada's economy is long established and diversified and can weather the storm.
  5. UAE—an example of a country with foresight. They used their "fat oil years" to diversify their economy and turn it into the financial and real estate center of Persian Gulf and the world. They are also investing heavily into air transportation, desalinization and the high-tech energy (solar) industry. (In fact, making Dubai, a town in the middle of the sand desert, to be one of the most expensive pieces of the real estate in the world, is one of the biggest swindles of modern times!)
A general view of the Jumeirah neighbourhood in Dubai, UAE in December 2015. Reuters
  • The downturn in the economies will in turn cause social unrest ( covered mostly in the examples above) to various degree.
  • Focus on oil processing. I think that some of the oil-producing countries may use this as an opportunity to invest in oil processing, and build up the chemical sector—there is still wide use for oil in medical, plastics, and other industries, and there is no good substitutes yet.
  • Environment problems. Right now, because oil is profitable, and there is a market for it, there are controls in place to keep dirty oil production in check. Once there is no demand, and expensive oil-producing facilities are abandoned without being properly closed off, it will cause major environmental problems in the region. As many countries won't have the financial resources to deal with the problems, it will only make them worse.
  • Make some conflicts worse. As the profits from oil production will dwindle there is going to be more competition for control and other resources, causing more fighting. Sudan springs to mind.
  • Make some conflicts more manageable. Illegal oil sales are some of the most profitable sources of income for the likes of the Islamic State militant group. If they were to become obsolete, it will diminish the ability to recruit new people, and finance various terror actions around the world.

What to do

As this change is getting closer, some of the people in power in those places need to figure out if they want to take the hard way out or the easy way. The easy way out is to ignore the problem, steal as much money as possible and disappear when shit hits the fan. Dubai was one of the Emirates in UAE that had the foresight to prep for the hard way out.

Here is the hard way out:

  • Institute political reform where applicable. The economic reforms without political reform are often doomed to failure. I'm not saying that everybody needs to become a copy of Denmark, but even China had to relax some of it's attitudes toward business and personal freedom.
  • Economic reform. Make it easier for people to start businesses not connected with oil production—tech, medical, trade, transportation, etc.
  • Subsidies and tax free centers to encourage new company growth.
  • Foreign investment—involve foreign capital. Yours won't be enough.
  • Education reform—make it easier for people to get better higher education. In the last 100 years countries that succeeded the most were the ones that had better people resources, not material resources: Singapore, South Korea, Japan, most of Western Europe. I mean having access to material resources does help, but if you don't have people to use them smartly, you are just one giant commodity market for those who can.
  • Religious reform. A lot of countries that are exporters of oil, especially members of OPEC and those in the Middle East, have religious people dictating the actions of the government. If it was up to some fundamentalists, there wouldn't be any westerners or Asians in Dubai, and Dubai wouldn't be the global center it is right now. It's ok to keep your traditions and religion, but if you want to attract foreign investment, you also need to be welcoming of people that will bring that investment. And often people who have theological education didn't have time to study economics. So keep them away from the economy.
  • Women rights. Most of Middle Eastern countries are closed, traditional societies. Women are often restricted as to what they can do economically: professions they can go into, education they can get, even driving. But freeing up women to able to do more can be a great economic driving force. After World War II, the U.S. saw a surge in economy, partly because after 11 million soldiers returned home, a lot of women didn't go back into the kitchen, but rather stayed as part of the work force—increasing production and spending.

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