Oil market chaos will supercharge the electric car shift

Welcome back.

Donald Trump says talks with Iran to end the war are “going very well”. Oil traders are not convinced, sending the Brent crude price to $110 a barrel this morning, the highest level since the start of the conflict.

The energy market shock has created a new focus on renewable power investment, as I wrote last week. It will also give a push to a global electric car transition that has already been picking up speed, despite the cold feet of some big western carmakers . . . 

A rocky road ahead for the combustion engine

Volkswagen, we learned this week, is in talks to convert a car factory in Lower Saxony to make parts for a missile defence system.

The story is an elegant mash-up of two structural shifts with big implications. One of them — the rush to strengthen military investment in Europe and beyond — is obvious to anyone who’s been paying even faint attention to the news in recent months.

The second might seem less apparent from recent headlines: the inexorable decline of the combustion engine car.

Big established carmakers have been lining up in the past few months to reveal major cutbacks to their electrification strategies. Stellantis last month announced a €25.4bn writedown as it drastically reduced its planned EV production. Ford and General Motors made similar moves as they wrote down $19.5bn and $6bn, respectively. A host of luxury brands from Lamborghini to Bentley have also taken an axe to their EV plans. I could go on.

The main thing behind these writedowns is a harsher medium-term outlook for EV sales in the US — which accounts for nearly a fifth of the global car market — resulting from the elimination of government tax credits, and the Trump administration’s broader pro-fossil fuel stance. EVs made up just 5.8 per cent of US car sales last month, down from 7.7 per cent a year before.

Follow the trend

Outside the US, however, the electric transition keeps rolling on.

True, it has been moving more slowly in many markets than the breakneck pace big carmakers had anticipated a few years ago — another factor behind their revised plans. The EU has watered down an all-out 2035 ban on new sales of fossil fuel-powered cars: instead, 90 per cent of each carmaker’s vehicles will need to be zero-emission from that date.

But if EV growth simply continues at the rate of recent years, sales of new combustion-engine cars will be virtually eliminated from some major markets in about a decade.

In the EU electric car sales reached 17.4 per cent of all passenger car sales last year, up from 13.6 per cent in 2024. That might not sound very impressive. But the logic of compound growth tells us that, if electric cars’ market share keeps expanding at the average annual rate of the past three years, they’ll reach 100 per cent of the EU’s new car sales in 2039.

The UK would reach that landmark a year sooner. Do the same exercise for China — where electric cars were 28 per cent of new car sales last year — and you get to 100 per cent some time in 2035.

These numbers understate the scale of the disruption, because I’m only counting pure electric cars. Include plug-in hybrids — which can rely on a battery for everyday driving and use a combustion engine only for longer journeys — and you’re already at well over a quarter of Europe’s market today, and more than half of China’s.

Moreover, the pace of change can reasonably be expected to accelerate, as technological advances in batteries and charging keep improving EV performance and ownership costs. That already seems to be happening, with last year’s EV growth rate much stronger than the two previous years’ in both China and Europe.

Big developing-nation car markets such as India and Brazil are at a much earlier stage of the electric shift — but it’s catching on fast. Analysts at Bernstein estimate that electric and plug-in hybrid car sales outside China, the US and EU rose by 95 per cent in January from a year earlier.

Ripple effects

At this point I should probably mention the war. The rise in oil prices resulting from blocked Gulf energy shipments — and the likelihood of elevated prices for months or years to come — has further shifted the economics of the car market away from combustion engines. Auto dealers and online platforms are already pointing to signs of spiking consumer interest in EVs as fuel prices surge.

Stock market investors are betting that the beneficiaries will be Chinese electric car and battery makers, which have maintained aggressive investment in these technologies while their western and Japanese peers hesitated. These Chinese companies’ share prices have surged since the war began on February 28, while big incumbent carmakers have sold off hard. This chart shows the scale of the divergence (for context, the FTSE Developed index is down 6.5 per cent over the same period, while China’s CSI 300 index is down 4.4 per cent).

The ongoing energy shock seems almost certain to give fresh momentum to the EV shift. But even before the first bombs dropped on Tehran, the long-term prospects for combustion engine cars were already darkening.

Data visualisation by Martin Stabe

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