So China wants 5 million EVs on the road by 2020. This is an interesting target from the point of view of how long it will take for EVs to seriously disrupt demand for oil.

Bloomberg suggests that 50 million EVs on the road is the turning point. In my analysis I have focused on 25 million EVs in annual sales as the critical event. As of 2015 the plug-in fleet is 1.3 million. If this continues to grow at 50% per year, we hit Bloomberg’s threshold in 2024 and my threshold in 2025. So this is my working scenario. By 2025 oil demand is in structural decline.

So how does China’s plan for 5 million EV by 2020 impact my working scenario. Firstly, my working scenario has the global fleet of EVs at 9.9 million in 2020. So if China hits 5 million, it could mean that half of the world’s EVs are sold and mostly made in China. Will Germany, the US, Japan, Korea and other auto making countries allow China to get that much of a lead on the EV market? If so, China could be positioned to dominate the global EV market going forward. I don’t think that auto making nations or the automakers themselves will want to let China command a 50% market share. So suppose the rest of the world steps up to contain China to 25% market share. Then we are talking about 20 million EVs worldwide by 2020. This accelerates my working scenario by nearly two year, whence oil enters structural decline by 2023.

So China’s ambition could accelerate the EV market and the fall of oil. For anyone contemplating shorting oil longterm, this sort of acceleration is worth contemplating. The oil futures curve has oil at $52/b in 2024, but if China accelerates the EV disruption, the actual price in 2024 could easily prove out below $25/b. Thus, under the China scenario, there is a major collapse of the futures curve sometime before 2020. Hard to know when a collapse in expectations could happen, but when it does, the price of oil can fall by 50% or more. Hypothetically, if the Model 3 unveiling were somehow to depress 2024 oil expectations to $25/b, the spot price of oil would fall below $14/b. Now I don’t seriously believe that the M3 Unveiling will have that sort of devastating impact. It’s only meant as illustration. The only thing proping up the price of oil today is the belief that oil will command a higher price in the future, as this belief motivates traders to buy and store surplus oil. When the futures curve collapses, oil in storage floods into the market depressing prices. The present price floor is all about future expectations, and expectations can change rapidly without warning.