As the move to electric vehicles steadily gains speed, there are implications for oil product markets, including light vehicle lubricants, which could see demand begin to fall in Europe and North America by 2030.

In 2015, there were about 1.1 billion light (passenger) vehicles, of which 0.9% were electric, while the remainder were internal combustion engine (ICE) vehicles. In particular, battery electric vehicles (BEV) were 0.1% of the light vehicles, while 0.8% were hybrid electric vehicles (HEV/PHEV).

Despite the limited penetration of electric vehicles in 2015, the trend towards electrification of road passenger transport looks likely to gain significance over the next decade as more countries and municipalities around the world implement measures to reduce carbon, particulate, and other emissions. The recent signing of the Paris Agreement, along with rising air quality concerns and the diesel emissions scandal, have all helped precipitate diesel or fossil fuel restrictions. France will ban all gasoline and diesel vehicles by 2040, while Athens, Madrid, and Mexico City have announced plans to ban all diesel cars and vans by 2025. China and India are also considering electric vehicle targets.

At the same time, original equipment manufacturers (OEM) are divesting from ICEs, adding momentum to the transition. Volvo, for example, has announced it will no longer develop new diesel engines after 2019, largely because it believes compliance with carbon emission regulations would be difficult to achieve at reasonable cost.

These and other similar moves around the world, combined with technology-driven cost and performance improvements, mean electric vehicles are likely to gain market share from ICE vehicles in the upcoming decade, more quickly than has so far been the case.

In 2015, 52% of world lubricant demand—totalling about 9 million metric tonnes—came from the automotive industry, so any change as we switch to electric vehicles would be significant to the lubricant market as a whole.

Impact varies across lubricant categories

In the light vehicle segment, lubricants demand is dominated by engine oil, which accounts for the majority of automotive lubricants demand and for 21% of total lubricants demand in 2015 (Exhibit 1). It is changed every 3,000–10,000 km.

After engine oil, lubricants demand falls into three smaller categories:

• Wheel bearing and chassis grease, which is mostly sealed and changed every 130,000 km, if at all
• Transmission fluid, which is changed every 150,000 km, if at all
• Gear oil, which is changed every 50,000–60,000 km

Exhibit 1: Almost one-third of lubricants demand comes from light vehicles (mostly engine oil)

SOURCE: Kline

Since they do not have an ICE, BEVs do not use engine oil, and they use only a small amount of greases and other secondary products. HEV/PHEVs (which have both an ICE and powertrain battery) do use engine oil. Compared to conventional ICE vehicles, HEV/PHEVs also require additional higher performance grade lubricants—representing a new and valuable market.

Engine oil demand will be hit hardest, leading to slower growth in overall lubricants demand

By 2030, we expect that the number of light vehicles will have risen to about 1.6 billion (an increase of 500 million from 2015), with an estimated 18% of the fleet (290 million cars) electric. At that point, only around 5% of the vehicle fleet could be HEV/PHEV, while up to 12% of the vehicle fleet could be BEV—up from 0.1% in 2015 and representing growth of 38% p.a. between 2015 and 2030.

This scenario would have a strong impact on the demand for light vehicle lubricants, because penetration of BEVs (which do not use engine oil at all) affects lubricants the most (Exhibit 2). Total lubricants demand in 2030, led by Asia, would still grow 1.5% p.a. to about 11 million metric tonnes. But, despite the overall increase, demand declines by around 1% p.a. in Europe and North America, and overall growth is far lower than it would be without the expected EV growth. After 2030, the impact is likely to be more pronounced.

Exhibit 2: Average consumption of lubricants per light vehicle declines as BEV penetration increases

SOURCE: McKinsey Energy Insights

This slowing of growth, and especially the decline in demand in Europe and North America, has some serious implications for lubes companies. In order to avoid shrinking along with the market, they can attempt to maintain growth by expanding market share in Asia and other developing markets; or by focusing on higher margin products such as synthetic lubes and/or high-grade lubes for the growing HEV/PHEV market. Alternatively, players could consider growth through diversification into new or growing related sectors.

The key uncertainty going forward will be the proportion of the two types of electric vehicles, as well as the general rate of uptake. Lubricants companies need to keep a careful eye on proposed legislation and uptake rates over the next five to ten years to get a clearer picture of the likely trends.

Disclaimer: This research does not consider the impact of other important trends in the light vehicle sector, such autonomous vehicles and car sharing.