EV demand gets a boost from Iran war as countries shift away from oil

The sprawling Middle East crisis is expected to spur drivers to abandon traditional internal combustion engine vehicles in favor of EVs, analysts told CNBC, although early evidence suggests this will be a gradual gearshift.

The Iran war has severely disrupted oil exports through the strategically vital Strait of Hormuz, which typically carries about a fifth of the world’s oil and liquified natural gas (LNG). It has underlined the extent to which the world remains deeply reliant on fragile fossil fuel trade routes, while surging oil and gas prices have jolted energy markets and triggered widespread inflation fears.

Various car-selling platforms in the U.S. and Europe have reported a sharp increase in consumer interest for EVs since the war began in late February. The burgeoning trend comes even as a large chunk of the legacy car industry pivots back to internal combustion engine (ICE) vehicles.

Autotrader, an online vehicles marketplace, reported on March 26 a 28% jump in inquiries about buying a new EV and a 15% increase in inquiries about buying a used one, since the war in Iran started on Feb. 28. EV specialist Octopus Electric Vehicles said on March 25 it had seen EV leasing inquiries rise 36% since the start of the conflict.

But U.S. automakers Ford Motor, General Motors and Jeep owner Stellantis have all reversed course on EV strategies, booking tens of billions of dollars in combined write-offs and restructuring costs, in part due to lackluster consumer demand and shifting political landscapes.

Steffen Michulski, senior consultant at JATO Dynamics, said that while the situation is still evolving, it was already clear that the fallout from the Iran war could influence EV demand.

Owning a battery electric vehicle (BEV) has become more compelling for drivers covering a lot of mileage, Michulski said, given that a sharp rise in oil prices has made conventional gasoline cars much more expensive.

Switching to an EV may also provide households with an extra layer of energy independence, Michulski said, although he cautioned that it would be important not to “oversimplify” the situation. He pointed out that the overall economic environment may soften if inflation and supply chain costs continue to rise, for example, with these broader pressures impacting all powertrains — electric or combustion.

“To shorten and summarize it: Yes, elevated oil prices and the renewed focus on energy security are likely to provide a mid term boost to BEV demand,” Michulski told CNBC by email.

“But this is best understood as an incremental shift rather than a sudden market wide acceleration. Electricity price risks, technological progress on the combustion side, and general economic uncertainty all act as counterweights,” he added.

Consumers may be more likely to consider all-electric vehicles amid higher gas prices but changing buying behaviors from traditional vehicles to EVs can be slow, according to Erin Keating, Cox Automotive’s senior director of economic and industry insights.

Cox expects gas prices will need to be inflated for six months or more for any notable increase in consumer buying habits for EVs, officials said during a call on March 25. Hurdles such as cost, charging infrastructure and range anxiety — the fear that an EV will run out of power before reaching a destination — remain, according to Keating.

Cox reports the average price for a new EV in the U.S. was $55,300 during the first quarter. That’s lower than in recent quarters but still higher than non-EV models at $48,768.

U.S. EV sales remain lower despite higher gas prices. Cox forecasts U.S. EV sales during the first quarter will be down 28% to 212,600 units.

However, electrified vehicle sales, which include EVs and hybrid vehicles, continue to increase as automakers shift their focus from EVs to hybrids, seeking a compromise to meet consumers’ expectations for fuel economy.

Sales of electrified vehicles, led by Toyota hybrids, are expected to account for a record 26% of new vehicles sold during the first quarter, according to Cox.

Early signals from CarMax’s Edmunds.com suggest an uptick in car shoppers considering electrified vehicles amid higher gas prices.

“Fuel prices have long influenced how drivers think about their next vehicle because they are one of the most visible costs of car ownership. But whether the latest spike translates into meaningful shifts toward electrified vehicles may depend less on the price of gasoline itself and more on how long consumers expect fuel costs to remain elevated,” Edmunds said in a statement.

In Europe and Asia, the Iran war energy shock is expected to facilitate a more profound shift towards EVs than in previous fossil fuel crises.

“It is indeed quite frustrating how we again talk about EVs as if we didn’t know that this is the structural measure to wean our transport system off oil,” Julia Poliscanova, senior director for vehicles and e-mobility supply chains at the campaign group Transport & Environment, told CNBC by video call.

“I do think that this crisis might be different. In the past, there would be a crisis and then quite quickly as the crisis is over, we can go back to business as usual, and oil and gas is flowing.”

Some of the reported damage to Middle East energy infrastructure, however, means it may take years for energy supplies to come back online, Poliscanova said.

An analysis published by Transport & Environment earlier this month found that electric cars were already cutting the European Union’s oil imports, noting that the nearly 8 million EVs in the EU will save the bloc around 46 million barrels of oil in 2025. That’s the equivalent of almost 3 billion euros ($3.45 billion) in avoided oil import costs.

In the context of the Middle East conflict, meanwhile, the analysis said that petrol drivers were expected to be five times more exposed to higher oil prices than EV owners.

Poliscanova said EV growth drivers in Asia, notably Vietnam, Thailand and Indonesia, which all benefit from affordable models by Chinese car manufacturers, were all likely to see an accelerated shift away from fossil fuels.

“We’re likely to see an even faster shift in some of these economies away from oil, meaning that we in Europe today, still discussing things like biofuels and hybrids, just look really stupid and detached from the reality,” Poliscanova said.

A spokesperson for the European Commission, the EU’s executive arm, declined to comment.