By IMFBlog

July 31, 2017

The switch from horses to automobiles in the 20th century paved the way for the rise of oil-based transportation and energy use. Today, electric vehicle ownership is picking up speed. Greater affordability of electric vehicles will likely steer us away from our current sources of energy for transportation, and toward more environmentally friendly technology. And that can happen sooner than you think.

Our Chart of the Week from a recent IMF working paper shows that the transition away from motor vehicles could happen in the next 10 to 25 years, based on parallel shifts in the 20th century. Patterns observed in the early days of the horse-car transition closely resemble present-day electric vehicle adoption rates. Between 2011 and 2015, the average annual growth rate of electric vehicle ownership was 120 percent. This is, in fact, slightly faster growth than that of motor vehicles during a comparable timeframe in the past. Using the horse-car parallel, the paper forecasts that by 2040 motor vehicles could mostly disappear in advanced economies, and could comprise about a third of the fleet of all cars in emerging market and developing economies.

Even as Tesla spearheads the transition to electric vehicles, the auto industry is also focusing greater attention on electric vehicles and rapidly increasing the number of models offered, including SUVs. As recently as last month, Volvo announced that it will produce only electric or plug-in hybrids as early as 2019.

Meanwhile, many countries are running with the idea. Both the UK and France are aiming to phase out diesel and gas vehicles by 2040. China has become the largest market for electric vehicles, and India recently announced ambitious plans to get millions of electric vehicles on the road by 2030. Every month seems to bring news confirming a global shift in transportation technology.

But the switch to electric cars has deep implications for the auto industry, climate change, and the oil market.

The auto industry must shift gears to deal with potential disruption. Electric cars take fewer parts to produce, and require less maintenance than motor vehicles. Therefore, investment in people is critical—whether job training or reskilling programs—to enable workers in both advanced and emerging market economies to work with new technologies, such as self-driving cars and in industries such as battery production.

At the same time, the environmental benefits could be huge, leading to reduced emissions over time, and helping achieve the climate change goals of the Paris accord. What this means is that policymakers and businesses must anticipate the potential consequences of the rise of electric cars and start implementing the right policies for a smooth ride.

Stay tuned for a forthcoming blog on the implications for the oil market.