War and peace and xEVs

How will mobility look, post US-Iran war?

AN AGREEMENT to end the war between the United States and Iran has been signed. Oil futures dropped 7% to 9% in the immediate aftermath, seeing prices fall to pre-war levels or lower by December 2026. Free and safe passage of oil shipments through the Strait of Hormuz is assured.

I thought it was strange but, apparently, it is not. To my knowledge, the settlement of the war between the United States and Iran by a Memorandum of Understanding (MoU) — albeit interim — was a first. In my mind, a peace treaty was the necessary instrument to implement any cessation of conflicts. In fact, however, an MoU was also used 30 years ago between the Secretariat of the United Nations and the Government of Iraq on the Implementation of United Nations Security Council Resolution 986 to settle the conflict with Iraq in 1996 — otherwise known as the “oil for food” agreement.

Thankfully, the signing of the MoU between the USA and Iran will see oil — and local fuel pump prices — continue in their downward trend. Last week, big cuts of P11 per liter for diesel and almost P6 per liter for gasoline were implemented. Will the hype for electrified vehicles (xEVs) revert to more rational levels? Maybe. Will calm and level-headedness likely return to the purchase consideration of car buyers? Likely. Will FOMO (fear of missing out) concerns fade? Probably.

Anecdotally, to some in the auto industry, the rush for xEVs could have rivalled the mad rush for toilet paper during the COVID-19 pandemic. This is not to trivialize what happened. Surely, it was all for good reason. Range anxiety was overcome by fuel price anxiety. But unlike the stock market, people were buying the “high” than the low, buying against the speculation of sustained high petrol prices than out of a real need or commitment to transition to electrified mobility. The surge in demand was triggered by an anomaly than a synchronous series of events.

Interest in xEVs, though? Surely, I think this will remain high, at least higher than it was before the war. The curiosity of car buyers was piqued, and this cannot be undone — to put the genie back in the bottle, so to speak.

Let us go back to the war for a while, though, because well, let us just say it is complicated. The MoU between the USA and Iran stipulates that military action against each other will cease, the USA blockade of the Strait of Hormuz will be lifted, safe and free passage of commercial ships through Hormuz (for 60 days) is assured by Iran, a reconstruction and economic development plan for Iran worth US$300 billion will be created by the USA and regional partners, Iran affirms that it will not procure or develop nuclear weapons, the USA will allow Iran access to all frozen or restricted funds and assets, and the USA will issue waivers on the export of Iranian crude oil. It seems all good.

But.

Strictly speaking, the MoU is only a framework for fully settling the war. The final terms of a peace agreement will need to be negotiated in the next 60 days. I find this to be a really tall order, though. Reportedly, it took the Obama administration around 20 months of intensive formal and back-channel negotiations to reach the 2015 Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). That was a straightforward negotiation to cap Iran’s nuclear arms program. The recently signed MoU, on the other hand, is multi-faceted and involves reversals of earlier sanctions and safeguards. It also stipulates commitments of reconstruction and a determination of new international trade and shipping protocols. This latter construct will potentially affect the flow of oil and gas through the Strait of Hormuz in significant ways.

Then there is a wild card in the whole peace deal: Israel. One of the key points in the MoU is the declaration of the immediate and permanent termination of military operations on all fronts, including the one in Lebanon. Since the start of the war, it is a well-known fact, though, that it is Israel that has been making attacks on Lebanon, supposedly aimed at neutralizing the Hezbollah threat.

As a non-signatory, Israel continued its attacks, peaking two days after the USA-Iran MoU was signed. This necessitated the United States to negotiate a localized secondary ceasefire. Unfortunately, it was broken within an hour of its implementation. Last June 21, President Donald Trump also posted on social media that the United States would launch harder military strikes if Tehran did not rein in its “highly paid proxies” in Lebanon, referring to Hezbollah. This resulted in the Iran delegation walking out of peace talks in Switzerland and consequently declaring that the Strait of Hormuz is closed yet again. In short time, though, Iran reversed track and confirmed safe passage of shipping vessels during the 60-day peace negotiation period.

As the world waits with bated breath, it is betting that oil production, supply, and prices will all return to normal sooner than later. Like the transition to electrified mobility, however, it will not be a light-switch moment. To begin with, there are a lot of details to iron out in the peace deal. Then, just getting oil production capabilities restored — in Saudi Arabia, Iran, the United Arab Emirates (UAE) — will take time, money, and huge reconstruction efforts. LNG production facilities were severely damaged, too, especially in Qatar which is the largest exporter in the world. It is estimated that 17% to 19% of its capacity was impaired and needs to be restored.

The biggest impairment, however, comes from the disruption of shipments through the Strait of Hormuz. Major oil producers in the Middle East region had to suspend production because the inability to safely export oil resulted to the filling-up of storage facilities. With nowhere to contain oil production, pumping had to be ceased. It will take time to regularize these oil flows.

So, yes, fuel pump prices are likely to keep heading south. Given all the complexities, though, it is said that it might take around six months to unwind all the entanglements. Even so, some quarters say oil prices may settle at new normals — that is, higher than pre-war — given the recently exposed vulnerabilities in supply chains.

Will this expected drop in gas prices reverse the “unintended acceleration” of demand for xEVs? I think not. Rather, the regularization of pump prices for gas and diesel will most likely activate deferred demand for ICE vehicles. At the advent of the war in Iran, the steep spike in fuel prices caused motor vehicle buyers to put off purchases, especially the ICE kind. Businesses put off capital expenditures while private individuals sought to preserve their liquidity position. A slack in economic activity also merited a heightened attention to running costs for fleets.

Frankly, I do not believe that the surge in demand for xEVs resulted in a unilateral destruction of demand for ICE vehicles. I think sales for xEVs were pulled forward while those for ICE were pushed back. With the restoration of fuel prices, the new vehicle market will likely see its equilibrium restored as well. The practicability and conventional appeal of ICE vehicles will reemerge while the seeming urgency in the procurement of xEVs due to steep operating costs will fade.

It is very encouraging to see that there is a significant latent interest for electrified vehicles in the Philippines. With the proper motivation, that interest can clearly transform from latent to kinetic demand very quickly, especially for battery electric vehicles that saw their share of sales rise dramatically from around 1% pre-war to over 10% post-war. Also, the rise in demand for all types of hybrid electric vehicles — strong, plug-in, range extended — reflects a willingness of car buyers to transition to electrified mobility with the right economic proposition.

However, the rise in fuel prices alone is not enough to sustain the transition to xEVs. Ultimately, the availability of a fully functioning support ecosystem is essential. Likewise, a more deliberate and considered decision by buyers is needed to realize a truly sustainable transition to electrified mobility. After all, it involves a lifestyle change of sorts.

At some point, government incentives may also cease, so the true cost of migration to new energy vehicles might be higher than it seemed when the war started or might even be in the midterm. The United States, China, Japan, Thailand, Indonesia, Malaysia, and some other countries have ended consumer subsidies in one form or another for the purchase of xEVs. They have shifted instead to incentivizing local production. Sales were seen to fall in the aftermath. Hopefully, the Philippines will succeed in realizing pure EV adoption — sans subsidies — because we are considered one of the most vulnerable countries to the adverse impacts of climate change. Much is at stake for us.