Why Gasoline Cars Won’t Go Away by 2035?
2035 is around the corner and the countdown has started. In case you haven’t heard, the European Union has banned sales of internal combustion engine (ICE) cars after 2035. In other words, no more sales of gasoline/diesel cars. Do you say you can’t believe it? Here you have it on the European Parliament news portal.
In this post, I will try to articulate why that won’t happen and why this law has negative consequences for the average citizen.
Banning Combustion Engines Is a Centrally Planned Measure
In last month’s post, we learned Why Centrally Planned Economies Fail. I also established that a centrally planned measure will always introduce economic inefficiencies. The bigger the part of the economy affected by that measure, the bigger the inefficiency.
In the European Union’s case, the Automotive industry generates, directly and indirectly, 7% of the GDP. Think of all the services that require a car. On top of that consider the number of people that go to work using their vehicle. All those people reflect the car prices in their demanded salary. And producers reflect those salaries in the final cost of every product. So car prices shape the economic structure of the whole society.
We can conclude then, that banning ICE is a major centrally planned measure. And according to our framework, that will introduce an equally big inefficiency in the economy.
To justify this point, we need first to understand the EU’s position.
European Union Aims to Reduce Carbon Emissions by 2050
The EU has committed to reaching carbon net zero by 2050. On average cars have a lifespan of 15 years. So if the goal is to get rid of ICEs by 2050, then they have to stop ICE sales by 2035 (2050 -15)
The EU is aligning the car companies’ incentives with theirs, expecting the car companies will do the same with their suppliers. And that those suppliers will extend this ripple effect throughout the whole supply chain (top-down approach).
But this ripple effect loses strength at some point. Just as it happens when you throw a stone in a lake, it creates waves that disturb the nearby water but eventually disappear. Let’s see where it will break in our case.
The Mining Industry Is the Bottleneck
One of the differences between combustion (ICE) and electric engine (EVs) cars is the amount of minerals used. According to the International Energy Agency, an EV requires 6 times more minerals than a conventional ICE. 207 Kg vs 34 Kg. See below:
But where will those minerals come from? Benchmark Sources estimates that more than 300 NEW mines will be required to satisfy the battery mineral demand.
How many of those 300 mines would Europe need? Let’s run some estimation so we can make sense of the number.
Europe Represents 45% of the Western Population
Let’s assume that only Western countries are interested in adopting EVs. China, Russia, and India are currently concerned about developing their economies further. At this point, they are not looking at abandoning ICE soon.
As I see it, Western countries are Canada, USA, Europe (including UK and Switzerland), Australia, Japan, and New Zealand. The total population is around 970 million people, with Europe 447 million which is approximately 45%. See Worldbank data here.
We could estimate then that 135 (45%) out of those 300 estimated new mines are meant to meet Europe’s demand.
And here it is when things start to get interesting.
It Can Take Up to 15 Years to Build a Mine
The process of getting a new mine can take between 10 to 15 years. From the moment you start the exploration to find the mineral to the moment it starts producing. We have only 12 years to get all those new mines running. And probably, the resources are not even known yet or are in countries outside the EU, out of their control.
In summary, we are already almost late delivering those materials.
Additionally, the EU is betting on the fact that technological development will bring EV prices down. Yet, I don’t think they are counting on the following market dynamics.
Materials Prices to Rise in the Future
If we want people to choose EVs over ICEs, one of the best things that would favor that, is the scenario where EVs would be cheaper than ICEs.
Nowadays, it is not the case, EVs are more expensive. Some argue that in the long run, considering all costs EVs are cheaper because they save money on fuel and maintenance. But that is artificially made, EVs are subsidized and get lower taxes (AKA economic inefficiencies).
At current conditions, we have managed to sell 1 EV out of 7 cars in 2022. To increase that number we should further reduce the difference between EVs and ICE.
We established in this post that 300+ new mines are needed before 2035. That equals to saying that the future demand for minerals will be higher than the future supply (less availability). That translates into higher prices for materials. If materials have a higher price, the EVs will necessarily have higher prices too. That would increase the price gap between EVs and ICEs, reducing EV demand.
On top of that, forcing the market to go away from ICEs, means that we will consume less oil. If we are going to consume less oil, we should expect that oil companies will invest less in new oil projects. They will have fewer customers to sell to. Basically, oil investment gets disincentivized by banning ICEs.
It would not be unreasonable to expect oil prices to go higher while we do the transition. There will be less oil in the future at the same time we will need more oil to dig those new minerals from the ground.
Diesel is one of the main input costs in mining since all machinery runs on diesel. An increment in diesel will translate into an even higher cost of materials, increasing the gap between the price of EVs and ICEs. Resulting, ultimately in the consumer going away even further from EVs.
The Economy Cannot Be Planned
An economy cannot be planned. The EU is almost already late delivering the materials needed. They are trying to get people to choose EVs over ICEs. But in the process, they create conditions where the opposite will happen.
When we get closer to 2035, we might see that people are not adopting EVs yet or that car manufacturers don’t have enough materials. If that is the case, what will be the political reaction? Changing the deadline or going through with the mandate?
I believe that changing the deadline is the easiest and politically cheapest option. But I might be wrong and the EU might enforce buying of an EV in the end. Either way, we will waste resources in failing to reach the EU’s goal, or we will waste money having to choose a more expensive car. And that money will come out of the pocket of the citizen in one way or another (taxes or inflation)
I personally think that the EU should stay away from the industry. Leave the sector to develop the EV technology so it can get cheaper. And, allow the consumer to choose what is best for them. Let the free market find a smooth and organic transition between both technologies.
How Can This Post Improve Your Finance?
This situation is actionable. If you believe the EU will succeed, you should look at copper, lithium, or cobalt stocks. There are 300+ mines to be built in the next 12 years so there is a lot of opportunity there.
If you think they will try it but will fail, well, oil stocks will be a good option. The oil production will be underinvested (it already is) and the price should be higher in the future. If the oil price gets higher, it would be reasonable to think that oil stock will also be higher.
Either way, whatever you decide to do, research it first and get an informed opinion. Education is the key to financial success. I leave you here a peek into the copper sector, by Sven Carlin so you have a starting point.
Thank you for reading this far. Like it and share if this was valuable to you so others can benefit as well. Also let me know in the comments why you agree or disagree, so we can continue the discussion and learn from each other’s reasoning flaws.
