Policy support for electric vehicles is waning in key markets around the world, potentially softening EV sales and pushing back forecasts for a peak in global oil demand, according to a new report by Rapidan Energy Group.

The energy consulting firm’s updated Decarbonization Policy Tracker found that the U.S. and China — the world’s two largest EV markets and primary drivers behind consensus expectations of peaking oil demand in transportation — are in the process of ratcheting back policy support for EVs.

In response to these policy shifts, Rapidan expects the U.S. Energy Information Administration and the International Energy Agency to revise their oil demand projections upward.

“We’re aware of the process under EIA and IEA demand forecasts,” said Leslie Hayward, director of business and content development at Rapidan Energy Group. “Once they update their forecasts to reflect the changes in policy support for electric vehicles…we’re expecting the shape of those curves to change and the infection point, where we currently see a peak in transportation oil consumption in the next 10 to 15 years, to shift further into the future.”

The Rapidan report notes that EIA’s monthly gasoline demand forecasts have already shifted to a “peak-and-plateau” from the “peak-and-collapse” forecast that has been issued every year since 2008.

The EIA similarly forecast a peak and collapse in U.S. gasoline demand in the 1980s that failed to materialize after oil prices fell and Washington eased fuel economy standards. “We see history repeating,” the report states.

Transportation electrification is only one of the factors influencing the global oil demand picture, but it stands to move the needle on future projections given the transportation sector’s reliance on liquid fuels. Passenger vehicles represent roughly a quarter of worldwide oil demand and make up the single-largest portion of liquid fuel demand.

In this context, Rapidan Energy Group expects major forecasting agencies to adjust their projections for peak oil demand over the next six to 12 months as a result of EV policy changes occurring primarily in the U.S. and Chinese vehicle markets.

Wood Mackenzie also forecasts higher oil demand in the medium term based on current EV sales trends, particularly in the Asia-Pacific region.

A spotlight on Chinese EV fraud

In China, the central government announced that it plans to cut purchase subsidies for EVs by 50 percent later this year, and intends to phase them out completely after 2020. Local governments have also been urged to reduce EV incentives.

In addition, China is easing licensing restrictions for internal combustion engine (ICE) vehicles, which historically have made EVs more compelling.

Registration policy changes could have an outsize impact on the Chinese market. EV adoption in China has been accelerated by policies exempting EV purchasers from aggressive registration barriers for conventional vehicles, such as a restrictive license plate lottery and waiting lists of up to eight years.

A 2018 study from the Beijing Institute of Technology found that license plate availability is the primary driver of EV demand in China, accounting for 45 to 65 percent of purchases.

The combination of these policy adjustments is likely to slow or even reverse the country’s rapid electric vehicle sales growth, according to Rapidan.

China’s strategic focus on EVs and the success of the country’s burgeoning EV market is well known, but the motivation for China’s policy rollback has been largely under-reported, said Glenn Schwartz, director of Rapidan’s energy policy service.

One concern is that China’s 487 domestic EV makers have become overly reliant on the subsidies, which is propping up money-losing companies and curbing the drive to make new and better vehicles.

Less publicized is the fact that China is also pulling back because of rampant fraud. According to Rapidan, common practices include: mislabeling ICE vehicles as EVs; selling EVs without a battery; and mislabeling an EV’s range to receive the maximum incentive for a lower-performing vehicle.

“In China there’s been a lot of praise for EV sales growth and incentives, but what’s been less reported is that there’s been a lot of fraud under those sales numbers,” said Schwartz.

Meanwhile, China’s decision to loosen license plate restrictions for ICE vehicles, weakening a key incentive to purchase an EV, comes in an effort to stimulate its flagging economy. Overall Chinese auto sales saw their worst-ever monthly decline in June, marking the 11th consecutive month of weakening sales performance and intensifying concerns over the country’s economic slowdown.

“The nominal reason for pulling back on the subsidies was to engage in some economic Darwinism to cull some of the less profitable EV companies,” said Schwartz. “And that’s true.”

“The less-understood and less-reported reason is that China’s GDP is flailing a little bit, and [the country] is now having to choose between its desire, which is genuine, to promote EV market control and penetration, and to goose its GDP,” he added.

“Our view is when [China] has to make that choice, it’s going to choose GDP every time.”

Rollbacks in the U.S.

In the U.S., the Trump administration’s decision to freeze federal fuel economy standards in 2020 and revoke California’s waiver to set more stringent efficiency requirements is expected to have a meaningful impact on the EV market.

In particular, plans to revoke California’s waiver put the future of the Zero-Emission Vehicle program — through which California and nine other states have set sales mandates for electric vehicles — in jeopardy.

Affected states will likely seek other methods of supporting EV adoption, such as exemptions from state registration taxes. California also intends to fight for its right to set independent vehicle standards.

But even then, the industry is looking at two years of policy uncertainty as the case works its way through the courts, said Schwartz. A new president could reverse Trump’s rule change, but would still have to go through the lengthy regulatory process.

Because auto manufacturing is global, pushes toward efficiency in other places, such as Japan and Europe, are expected to buoy American EV sales, “but not quite as strongly as if we had our own policy push,” Schwartz said.

At the same time, a number of U.S. states will run out of funding for EV purchase incentives before the end of the year. California, Maryland and Massachusetts fall within this category, according to Rapidan. Maryland’s subsidy allocation was depleted two weeks after funds became available. 

Enduring oil demand

Not all global markets are expected to see a retraction. South Korea has emerged as a major player in the EV space thanks to generous purchase subsidies. The country is now the world's fifth-largest EV market, with 7 percent global market share.

A federal point-of-sale scheme is expected to drive growth in Canada.

But Rapidan identified policy vulnerabilities in even seemingly strong EV markets. In Mexico, for instance, EV sales fell by over 20 percent in 2018 despite the presence of tax incentives and EV sales targets.

Also, while several countries including Austria, Denmark, Portugal, Norway, Ireland, India, the Netherlands, Canada and Scotland have stated a goal to ban ICE vehicles in the 2030 to 2040 timeframe, they have not codified these goals in law, which throws implementation into doubt.

While we do not disregard depth and policy concern surrounding climate change and pollution, our view is informed by a rich history of societies making sweeping, aspirational goals for energy transitions only to abandon them as their costs and complexities were later recognized," the report states.

A key takeaway from the report is that setting long-term, ambitious policy goals is much easier than meeting them, according to Hayward.

Governments often struggle to close loopholes and mobilize the financial investment needed to achieve a meaningful shift away from oil in transportation. Long-term goals are also vulnerable to interim changes in leadership.

“With the announcement of new goals we often hear, ‘The age of oil is over,’” said Hayward. “We think that the market may be surprised by how enduring oil demand is.”