Why GM’s plan to phase out combustion engine cars by 2035 matters

A Chevrolet Equinox Fuel Cell test vehicle is seen in Los Angeles. American auto giant General Motors on January 28, 2021 it aims to eliminate emissions-producing vehicles from its light-duty fleet by 2035. ReutersShow less

Like the Pony Express giving way to the railroad and telegraph in 1861, signs are everywhere of upheaval in transport technologies. Last week’s announcement by GM chief executive Mary Barra, that the biggest US automaker will phase out all combustion engine models by 2035, is a warning to oil producers that their biggest customer may be riding off into the sunset.

GM is not the first or only. Volkswagen, Nissan and Ford have already pledged to be carbon-neutral by 2050. Daimler, owner of Mercedes-Benz, will only sell carbon-neutral models by 2039. Honda intends two-thirds of sales by 2030 to be electric or hydrogen.

And this is not just about competing with Tesla’s personal autos. The Joe Biden administration wants to make the entire federal government fleet, 645 000 vehicles, zero-emission. That includes light cars, postal delivery trucks and a host of other types. Electric bicycles, bulldozers, rickshaws, cranes, military vehicles and other designs will fill special markets worldwide.

National commitments for carbon-neutrality by mid-century, increasingly broad corporate goals, and bans on sales of new combustion engine vehicles in the UK by 2030, France by 2040, will drive the uptake of battery transport.

Oil and automobile executives have historically been sceptical of electric vehicles, pointing to high sales prices even with tax breaks, short ranges, long recharging times and a scarcity of stations, and poor performance in hot or cold weather. As with any fast-growing sector, there have been mis-steps and excessive hype.

For instance, Nikola Motors, a wannabee-Tesla developer of electric and hydrogen-powered trucks, was embarrassed when it had to admit a video of one of its vehicles just showed it rolling down a hill. Intended partnerships with GM and BP collapsed as a result. Yet the firm’s market capitalisation is still a respectable $9 billion.

GM's new EV600 electric van is seen in Detroit, Michigan, U.S, January 12, 2021. Reuters

These complaints are reminiscent of those who scoffed at the internet in the mid-1990s. Of course, it was slow and before Google, near impossible to find useful information. But the potential was evident.

Electric cars already offer a superior driving experience. With many fewer moving parts, maintenance costs are much lower. Noise is reduced and local air pollution eliminated. Ranges are improving, with the option of charging vehicles at home or the workplace and good enough for most daily use. That means fewer trips to highway stations.

Electric cars have been estimated to reach price parity with combustion engines when the cost of batteries falls to $100 per kilowatt-hour. GM aims to hit that in a new plant soon, and eventually reach $70 per kilowatt-hour.

As legacy carmakers turn to electrics, they will cease improving combustion engine models. That in turn will hasten petrol and diesel cars’ obsolescence. They will not be able to meet ever more stringent clean air and fuel economy standards and will increasingly look dated.

That could be an opportunity for oil firms. Saudi Aramco has for at least ten years been developing advanced combustion engine technologies. These include a partnership with Mazda on compression ignition engines that run on gasoline (petrol) instead of the usual diesel, with a potential improvement in fuel economy from 6.9 litres per 100 km falling to 5.2 litres per 100 km.

It is working with two start-ups, Achates Power and INNengine, on opposed pistons for a lorry engine that runs on petrol or diesel with almost twice the mileage of a conventional rig, smaller, lighter and easier to manufacture.

Finally, to cut emissions, Aramco has experimented with on-board capture of carbon dioxide, unveiling in December 2019 a heavy truck, which could capture 40 per cent of its emissions. The market for long-range goods vehicles, which batteries will find harder to conquer, will remain a bastion of oil demand for some time.

However, in order to have an impact, innovative engines will have to appear in commercial vehicles soon. The threat to oil demand is very real. Light vehicles represent about 26 per cent of global oil demand at a pre-pandemic 100 million barrels per day; road freight is another 18 per cent. Of the other leading uses, power generation and home heating, totalling another 12 per cent, are very amenable to replacement by natural gas and renewables.

Of course, growth of transport in south Asia and Africa will partly compensate. But the petroleum industry should take seriously the prospect of half of its market evaporating within a couple of decades. 2030 is not far off when exploring and developing a new oil-field or constructing a greenfield refinery takes a decade or more.

A market that has ceased to grow will face the industry with new dynamics. The natural decline rate of output from existing fields is higher than the likely drop in demand, so continuing investment will be needed. There will still be boom-and-bust cycles, still periods of underinvestment, tight supplies and spikes in prices. But production will be inexorably rationed. The low-cost producers will survive, if they do not cut back output too far in a continuation of Opec+ arrangements.

But the pressure on their competitiveness will be intense. Gulf countries, Nigeria, Russia, Brazil, even new entrants such as Guyana or old-stagers like the US and Norway, can all claim to be low-cost, and often low-carbon, producers in the right circumstances. A shrinking market will test these assertions to the limit.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis