Overview
The rapidly decreasing price and increasing quality of electric car batteries are on the brink of reaching a tipping point that will dramatically increase the market share of electric vehicles relative to internal combustion vehicles, and with it will dramatically reduce global demand for oil and oil prices. We may be at or near peak oil prices and demand right now.
Falling oil prices over the next decade or so will dramatically decrease the geopolitical clout of Russia and other authoritarian regimes, and of conservative forces in U.S. politics, although their economic contractions may push them to far right militarism driven by this economic malaise.
These countries will also scramble to find ways to get natural gas to distant markets (oil and natural gas are usually found in nature together). But this will only partially compensate for their lost oil revenue due to shifts to renewable electricity generation and another round of nuclear energy generation development driven by the unwillingness of natural gas importers to rely on authoritarian regimes like Russia and Saudi Arabia for energy security as they were caught doing in the Russian-Ukraine war, and also out of concerns about air pollution and climate change.
Falling oil prices will also easy the process of converting agrarian third-world countries into industrial economies and in strengthening economic growth in the developing world driven by industry. This will tend to strengthen democracy in these countries.
The coal industry is on its death bed in developed nations and is unlikely to rebound.
Oil Is Bad For Democracy
Economies that rely heavily on oil and gas revenues tend to be less democratic. A more than 5-9% of GDP reliance on oil revenues appears to be pretty toxic to the democratic political process.
Oil Revenues as Percentage of GDP (per the World Bank):
Country
Most Recent Year
Most Recent Value
Honestly, even state governments in the U.S. with heavy fossil fuel components to their economies are mostly not paragons of the democratic process.
Even within U.S. states, oil economy driven counties, see, e.g. Weld County, Colorado, are not thriving centers of economic growth.
The Coal Curse And Electricity Generation
Historic Coal Production Slows Economic Development
Coal is also bad news in the long run for economic development. In Europe, "former coal-mining regions are substantially poorer, with (at least) 10% smaller per-capita GDP than comparable regions in the same country that did not mine coal." Similar effects have been observed in India and Australia.
In the U.S., coal centers in West Virginia and Wyoming probably have bleak futures as coal ceases to be economically relevant because it is such an intense source of air pollution and driver of climate change, as have many other regions in Appalachia that are coal rich but where the coal industry doesn't dominate the entire state's economy to the same degree.
The End Of Coal
Coal was already predominantly used to generate electricity, as other "steam age" technologies were replaced with "diesel age" technologies in other applications, when its decline started in earnest.
The final blow has come as utility companies replaced coal, first with natural gas (made cheaper and more abundant with "fracking") and wind power. As production costs have fallen and efficiencies have risen, coal has been replaced with solar power as well.
Tidal power is likely to join the ranks of renewables in the near future and is particularly attractive because it is reliable and predictable enough to be a source of baseline power.
Electricity is also generated in significant quantities with hydroelectric plants that are near maximum capacity and may be threatened by mega droughts in some areas, and by nuclear fission. Some European countries rely mostly on nuclear power, and there is significant room to expand nuclear power generation in a way that benefits from the technological advances since the 1960s when the first nuclear power plants came online.
Nuclear fusion remains in the distant future and may never be cost efficient due to high plant costs despite negligible fuel costs and essentially creating no pollution in the power generation process.
Naturally, coal prices fall when alternatives like renewable electricity gets cheaper, to match the competition, cutting into the profits of coal producers and owners of coal mineral rights and reducing the erosion of coal's market share.
But that can only go so far. Pollution controls drive up the cost of coal fueled power plants, and coal prices can't drop below the cost of mining and delivering the coal in the long run. If renewables and other sources of power can get cheaper to make even at negligible prices for the coal mining rights themselves, coal is doomed and can't lower its price to maintain market share any longer. And, that is pretty close to where we are now.
Incidentally, coal can be converted in an industrial process to liquids and gases that are substitutes for oil and natural gas. But this oil substitute is too expensive to make sense relative to cheaper oil conventional oil wells in places like the Middle East.
Similarly, natural gas is available without the expensive conversion process in many places in the world that currently burn it off or decline to extract it because they can't get it to the consumers inexpensively enough. The transportation and storage problems for natural gas are cheaper to solve than the cost of making natural gas substitutes from coal. So, this too is a dead end for the coal industry.
Some developing nations, most notably China, make heavy use of coal, but are well aware of the extreme price that they are paying for doing so in terms of air pollution.
Also, these developing nations are well positioned to leap frog to post-industrial technologies less reliant on coal for fuel, without the highly polluting intermediate steps that the developed world went though to get to their current environmental and energy balance, without having to invest in developing those cleaner technologies from scratch.
So, a third-world or developing world surge in coal utilization also seems unlikely.
The Global Oil Markets
Oil is fairly easy to transport cheaply by pipeline, by oil tanker over water, by rail, and by truck. Its easy portability has also made it the fuel of choice for motor vehicles, boats, ships, heavy construction and agricultural equipment, military vehicles, and aircraft. Its transportability and non-perishable nature also means that oil trades in a world market.
For example, even though the United States is a slight net oil exporter, its domestic oil prices and the prices of products derived from oil like gasoline and diesel fuel, are impacted by anything that affects the supply or demand for oil worldwide. So, even though the U.S. itself doesn't actually important more than a de minimus amount of oil from Russia (and mostly low grade petroleum products not suitable for gasoline and diesel refining), when sanctions have cut Russia off from global oil markets reducing supply about 10%, this has driven up oil prices everywhere, because countries that used to buy Russian oil are now trying to buy supplies from elsewhere including U.S. suppliers, and because places that used to buy oil from places that countries formerly reliant on Russian oil supplies are buying from are now looking to U.S. suppliers instead.
The flip side of the oil market being global, however, is that cuts in supply can be offset by increases in production and releases oil stockpiles to make up for the shortfall.
So, while sanctions preventing Russia from selling oil deprive Russia of its dominant source of export revenue, the removal of this supply from the global oil market leaves few countries without viable alternatives to meet their oil consumption needs, and the increase in global oil prices only partially reflects the drop in supply that these sanctions cause due to offsets from other oil suppliers.
In other words, sanctions preventing Russia from selling oil hurt Russia more than they hurt the rest of the world that is imposing the sanctions. And, the harm to the world outside Russia due to the sanctions is spread relatively evenly across the globe, rather than too acutely impacting the countries that usually buy their oil from Russia, although those countries are hurt somewhat worse than other countries.
Regional Natural Gas Markets
Natural gas is another story.
Demand
Natural gas is used mostly to generate electricity and for space heating (e.g. to run furnaces in homes and offices). In places where air conditioning is widely used, peak demand is in the summer to meet peak electricity demands. But Europe makes fairly little use of air conditioning due to its climate. In places that get cold in the winter and not too hot in the summer, like most of Northern, Central and Eastern Europe, peak demand for natural gas is in the winter.
Supply and Trade
Natural gas is sold in a regional, rather than a global marketplace. Mostly, it is delivered by pipeline. It isn't impossible to deliver it by ship, by train, or by truck, and rural areas without pipelines get propane deliveries for household and commercial use in lieu of natural gas. It also isn't impossible to store and its perishable. But it is much more cumbersome and expensive to deliver natural gas by means other than pipelines, and it is much more challenging to store than oil. So, little non-pipeline delivery infrastructure and large scale natural gas storage infrastructure is in place.
So, natural gas is predominantly delivered overland, through a small number of big, regional natural gas pipelines that run from production areas (in Europe, many of which are in Russia), to areas where it is consumed (in Europe, especially to urbanized areas without much nuclear power generation).
Germany gets 55% of its natural gas from Russia and is heavily reliant on natural gas for both electrical power generation and space heating. Italy gets 45% of its natural gas from Russia, with less focus on space heating and more on electrical power generation. Other countries in Europe, for example, Poland, are also heavily reliant on Russian natural gas.
In contrast, France, whose power grid is heavily fueled by nuclear power plants, and countries like the United Kingdom and Norway, which produces oil and natural gas in the North Sea, aren't very reliant on Russian natural gas.
Europe's reliance on Russian natural gas pipelines is second only to Russia's nuclear weapons stockpile, in giving Russia leverage to discourage European countries from intervening in Ukraine.
Unlike oil, finding alternative sources of natural gas for the European countries that rely upon it is very challenging.
While oil price hikes from reductions in Russian supplies are global in impact and hurt the U.S. and Canada as well, for example, even though they don't import meaningful amounts of oil to refine into gasoline and diesel from Russia, interruptions in Russian natural gas supplies have almost no impact on the U.S. and Canada.
The U.S. and Canada are net exporters of natural gas, mostly export to other places in the Americas, and import what little they do import (in the form of liquid natural gas or LNG by ship) about 80% from Trinidad and Tobago in Latin America. They import essentially no natural gas from Russia, and since their natural gas isn't easily sold outside of the Americas, their natural gas prices aren't affected by interruptions in Russian natural gas supplies.
The Economics Of Electric Cars
The world is in the process of transitioning to electric motor vehicles as improvements in battery technology have made them economically competitive with internal combustion engine vehicles fueled with oil derived gasoline and diesel fuel.
Environmental Impacts
Electric vehicles are zero emission at the point source, not generating the tailpipe air pollution of gasoline and diesel fueled vehicles. The pollution created by generating electricity to power electric vehicles depends upon how the power grid is fueled. But renewables, nuclear fission plants, and natural gas all generate much less pollution per unit of vehicle moving power than gasoline or diesel, although coal is a closer call between being better or worse. Even electric cars on a coal-fired grid aren't unambiguously worse than gasoline or diesel fueled vehicles, because electric cars are more efficient (especially in city driving) than gasoline or diesel fueled vehicles in terms of miles travelled per unit of energy.
Electric vehicles are also better than internal combustion vehicles even considering the manufacturing related pollution and disposal issues for batteries and electric vehicles themselves compared to conventional internal combustion vehicles.
An Electric v. Internal Combustion Tipping Point
The production costs for electric vehicles relative to internal combustion vehicles is mostly driven by the relative cost of batteries and motors to engines, gas tanks and exhaust systems. The costs of the mature technologies of electric motors, internal combustion engines, gas tanks, and car exhaust systems is more or less fixed in the short to medium run. So, the relative cost of electric vehicles and internal combustion vehicles is functionally, mostly a matter of how much electric car vehicle batteries cost.
Currently, batteries are expensive enough in early stages of low level mass production, that electric vehicles cost more than internal combustion vehicles, with a price differential that considering fuel costs, leaves electric vehicles a bit more expensive than comparable internal combustion vehicles.
But we are very close to the tipping point where electric vehicles will be cheaper on a lifetime of the vehicle including fuel and maintenance basis than internal combustion vehicles (and arguably are already there for vehicles with heavy city driving use like taxis). We could reach that point in two to five years.
And progress is being made in battery technology so fast, after a long logjam of glacial progress, that electric vehicles that are no more expensive, even before considering fuel costs, than internal combustion vehicles, are plausible in the medium term of perhaps five to ten years from now.
So, a surge in electric vehicle market share, and a corresponding plunge in petroleum demand worldwide, may be just around the corner.
A 2018 study from the University of Michigan's Transportation Research Institute found the average cost to operate an EV in the U.S. was $485 per year compared with a gasoline-powered vehicle at $1,117. In round numbers, with current economics, the fuel costs per mile driven for electric vehicles if you use residential chargers at night, rather than high speed commercial chargers, are about a third of the cost of internal combustion vehicles.
In the long run, oil prices have been remarkably steady at about $2.10 a gallon in equivalent gasoline prices in 2022 dollars, even though gasoline prices are currently about $4 a gallon due to the Russo-Ukraine war.
If production costs for electric vehicles can fall with mass production to something close to the cost of internal combustion vehicles, then gasoline prices would have to fall to about 70 cents a gallon to maintain market share, which is equivalent to about $18 per barrel oil prices.
The Geopolitical Impact Of Electric Car Driven Drops In Oil Demand
There are some oil producers out there that can produce oil at that price at a profit. But many more oil producers can't cut their costs enough to make it profitable to produce oil at the $18 a barrel price that a mass shift to electric vehicles could lead to due to falling demand.
Impact On Oil Producers
Oil production costs vary by country and the following analysis is as of 2018: A world oil price in the range of $55 to $60 per barrel is less than the cost of Russian Arctic oil production, European and Brazilian biofuel production, US and Canadian shale and tight oil production [ed. aka "fracking"], and Brazilian presalt oil production.
It doesn't take all that much of a downward shift in prevailing oil prices to make a large share of production from some of the world's biggest oil producers uneconomic.
Production in the U.S., Canada, and Brazil, and European biodiesel and ethanol, falls dramatically at below $55 a barrel. Russian and Angolan production falls dramatically at sustained oil prices below $40 a barrel. Production in the Middle East, Venezuela, Ecuador, Kazakstan, and Nigeria (onshore only), in contrast, can remain economic down to only a little more than $20 a barrel.
But some of the high cost oil producers still account for a large share of the global oil market as shown below from the same source:
Also, while it will continue to be economic for the Middle East and a few other countries to continue producing oil even if there are massive reductions in the price per barrel as electric vehicles with cheaper and better batteries contract global demand, the impact on these countries will still be immense, because their profits from selling their oil with decline precipitously.
All countries that rely heavily on oil revenues will see their economies contract permanently, in the cases of the countries most reliant upon oil revenues, on scales comparable to that of the Great Depression or post-WWI Germany as electric vehicles cross the tipping point.
Countries like Saudi Arabia, UAE, Oman, and Kuwait will suddenly find themselves with economies that look more like Yemen's, unless they can transition away from fossil fuels, or can find a way to shift to natural gas production to meet increased electricity generation demand from electric vehicles in a way that they can get that to market, like LNG shipping or new pipelines.
As their economies shift from relying on economic rents from oil and gas production to more diversified commercial economies, their authoritarian regimes will be undermined.
Russia, due to its higher cost of oil production, which effectively leverages the relationship between oil prices and its oil industry profits, faces the collapse of the clout of its primary and predominant export industry much more quickly, which could imperil Vladimir Putin's regime, even without the woes Russia is facing due to its ill advised invasion of Ukraine.
Also, European countries reliant on Russia for their oil and gas needs are now acutely aware of the national security risks they face by doing so and will be transitioning away from reliance on oil and natural gas from Russia by all means possible as soon as they possibly can, by adopting extreme conservation measures such as heavily subsidizing transitions to electric vehicles, by boosting investments in renewable and nuclear energy generation, and by developing pipelines and LNG and natural gas storage facilities that make them more independent from a Russian energy supply partner which has proven unreliable.
So, even if Russia extricates itself from its current war in Ukraine and unwinds many current sanctions, European countries and big businesses will be loath to invest more in reliance on Russian oil and gas supplies than they have already, thus permanently reducing Russia's oil and gas revenues.
Similarly, in the U.S., which will take the hit from lower oil prices and return to being an oil importer if electric vehicle sales don't grow fast enough, even sooner, the power of fossil fuel lobbies in Washington and in state legislatures across the nation will ebb greatly in the next decade or so.
Impact On Developing Countries
On the other hand, cheap oil prices can help fuel economic development, especially in oil-poor countries that are trying to transition to industrial economies, including many of the world's poorest countries in Africa.
These countries may get a boost from reduced developed country oil demand from electric vehicles and in these countries, a shift from a pre-industrial agrarian economy to an industrial economy, may advance the cause of democracy and human rights, rather than impeding it, and this may also hasten the demographic transition that comes with industrialization.
