Ecocentricity Blog: Supply and Demand

Fun fact – the etymology of the word “economics” is a combination of two Greek words meaning “household” and “to manage.” So basically, it means household management, and I am going to take that meaning very literally for my lede to this blog.

If you take the fundamentals of market-based economics and layer it onto my household, it matches surprisingly well. Regardless of the good or service, my wife and I are the supply and my four-year-old and two-year-old are the demand. That’s true whether we are talking granola bars, winter socks, bedtime stories, or janitorial services. Side note, after cleaning up yet another cup of spilled milk - I feel like the little people in our house have the better end of our market interactions.

Extending the analogy further, there are some goods and services that we supply and our kids consume because they express a preference for them. Right now, those include trips to the Atlanta Zoo, jellybeans (in limited quantities, of course), all things Star Wars and Minnie Mouse, and getting spun around on our platform swing. Conversely, some goods and services are provided and consumed because we, as the parents/suppliers, don’t give our children a choice. Examples include brushing of teeth, clipping of nails, carrots and homeschooling. In other words, some of our “markets” are child/demand-driven and some are parent/supply-driven.

This is true in real economics as well. Most commonly, a good or a service is demand-driven, with suppliers trying to cost-effectively meet the preferences of consumers in the marketplace. Just consider teleconference services during this pandemic. Demand for them spiked in March, and suppliers worked hard to earn the new business through competitive pricing, security improvements, reliability, and fancy features – all things consumers wanted. Consumers said “jump” and suppliers said “how high?”

In some cases though, markets are supply-driven. Often, these markets involve expensive and complex systems that typically require governments to be involved in the market (either as the supplier or the regulator). Examples include public transit, policing, and electricity generation and distribution. With these markets, it’s much more “if we build it, they will come.”

Now, if you had to answer “demand-driven” or “supply-driven,” which phenomenon would you say applies more to the market shift toward electric vehicles? I think a lot of people would argue that EVs are a demand-driven market. When more people start wanting them, companies will build more to meet the demand. In theory, that would correspond to weakening demand for internal combustion engine vehicles as well, signaling to auto-manufacturers that they should ratchet down supply of those vehicles.

Recently though, I happened upon a report from the London-based Carbon Tracker Initiative that got me thinking about how supply-driven this shift is (and will be). Here’s a link, and per usual, I’ll give you some of the highlights.

The report notes that emerging market countries spend a lot of money on oil imports, with 68% used in transport. In China and India, oil imports are 1.5% and 2.6% of GDP respectively. These countries have a natural incentive to limit that foreign dependency – they may not be able to make their own oil, but they likely can make their own electricity.

The report then calculates that switching to electric vehicles in emerging markets could save those countries $250 billion total in avoided oil imports by 2030. Annual savings at that point would top $80 billion and $35 billion in China and India respectively. All told, those savings are estimated to be more than the infrastructure costs associated with electrifying transportation in their countries. And the trend toward EVs is already playing out in some portions of the market – 59% of bus sales in China in 2019 were electric.

I think that emerging market countries are likely to provide supply-side interventions into their auto markets. Whether the issue is energy independence, air quality, or cost savings, transitioning to electric vehicles makes good sense. I bet you’ll see both governments and private sectors proactively invest in EV infrastructure in these markets, hoping to take advantage of these benefits. In other words, these emerging market countries won’t wait for their populations to demand EVs – they’ll tip the market scales in favor of them. If that’s correct, then the already bleak future for oil companies is even more bleak.

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