The need for oil-based fuels to provide the ongoing security of the supply that consumers demand may be greater than industry or policy makers appreciate, even in the era of energy transition. In McKinsey’s energy-transition scenarios, the least-aggressive scenario (Fading Momentum) shows that electric-vehicle (EV) growth could be capped by nickel supply in particular and, in the more aggressive scenarios, the risk extends across all four of the key “active materials” needed for batteries.
EVs drive the oil-demand outlook
Most oil-demand forecasts are driven by the energy transition, with EV penetration playing the lead role in reducing demand for liquid fossil fuels (Exhibit 1). Other drivers include increased usage of alternative fuels in aviation and maritime and increased plastic recycling—but EVs are the heavy hitter in terms of impact on total oil demand.
While current EV sales in the US account for less than 5 percent of sales, McKinsey projects this to rise to between 29 and 59 percent by 2030, depending upon the scenario considered.1 The range in outcomes is driven by CO2-emission reduction targets, EV targets of major OEMs, growing national restrictions on internal-combustion-engine (ICE) sales, consumer preferences in EVs over ICEs, and the ICE versus EV total cost of ownership (TCO) (Exhibit 2).
While some of these EV drivers have trended toward higher EV penetration in the past five years, TCO could be the biggest bottleneck for EV penetration to reach the higher end of the projected range, due to constrained materials’ supply (lithium, nickel, cobalt, and copper). Since July 2022, spot prices for battery-grade lithium grew by over 400 percent year over year, while nickel prices more than doubled in the same period, owing to recent market disruptions following the Russian invasion of Ukraine and years of underinvestment in the mining sector.2
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Materials are material
Four key materials have the potential to stall EV penetration: lithium, nickel, cobalt, and copper.3 These “active materials” are critical to an EV’s operation:
- Lithium is used across cathode chemistries (and potentially next-generation anodes).
- Nickel and cobalt are used in certain cathode chemistries.
- Copper is used for windings and rotors in motors.
Currently, these materials account for about 50 percent of a battery’s total cost.4 Accelerating EV penetration is focused heavily on reducing other battery-making costs. However, success will also need these materials to be available in much higher volumes than they are at present and at a lower cost, which is currently unlikely.
Bottlenecks are starting to emerge
EV projections show demand for these materials ranging from two to 12 times the current levels by 2030, depending on the mineral, with the largest growth rate for lithium (Exhibit 3).5 Minerals supply from open mines and those with a high probability of opening may be able to partly meet this growth. However, the supply falls short of reaching all demand, and harder measures (such as curtailing demand or opening less-economical mines) may be required.
Under the Fading Momentum scenario, the gap between the supply of materials and the demand required to reach 29 percent of new car sales is around 3.7 to 5.2 million metric tons (Mt) by 2030. While lithium, copper, and cobalt have higher-likelihood measures that may help to close the supply-demand gap, nickel faces an approximate 0.6 to 1.1 Mt gap that the industry will be challenged to close. To meet this demand, the industry may have to sacrifice EV performance with lower-nickel-content cathode chemistries with a lower energy density, or quickly move toward opening less-economical mines that will earn a profit if nickel prices remain high.
Under the Current Trajectory scenario, the challenges multiply. The supply-demand gap for nickel and copper remains even after considering likely supply mitigating measures (for example, a possible 3.6 Mt in new copper mining supply based on announced projects).6 New mines also often face ESG constraints that delay new capacity coming online. As a result, meeting the Current Trajectory scenario requires more challenging and less-likely industry measures to come online.
Any scenario that is more aggressive hits very hard limits across all four critical minerals that could make the scenario infeasible from an EV-penetration standpoint. In the Further Acceleration scenario, the supply-demand gap for lithium, nickel, cobalt, and copper exceeds the likely ability of the industry to meet the supply by 2030 and to reach the 59 percent EV penetration assumed. Meeting this target will be challenging, and will require both a large increase in supply (billions of dollars of capital expenditure invested in the next two to four years) and demand substitution (customers accepting lower-range vehicles with less expensive battery chemistries, transitions to using fewer battery-grade minerals in other industries, and shifting uses of materials, such as stainless-steel producers using more class 2 nickel). While these solutions are possible in the long term, they are not guaranteed to be available in time to meet EV demand in 2030.
Building resilient supply chains for the European energy transition
Take demand forecasts with a pinch of salt
Demand forecasts might not be as reliable as previously thought; they should be viewed with a critical eye, as the entire EV supply chain will be affected by the ongoing shortage of critical battery minerals—including oil industry and policy makers, raw-materials producers, and automotive OEMs.
Oil industry and policy makers
The reality is that potential drivers, such as EV penetration, could slow or stall—meaning that the anticipated massive energy transition may not be as inevitable as expected. The demand for oil-based fuels and reliable refining capacity could in theory suddenly exceed supply, particularly if the industry includes assumptions of higher EV penetration into their maintenance and rationalization plans and refining-capacity investment. The conflict in Ukraine that disrupted supply chains so dramatically has shown just how quickly events can change (in this case, energy-supply security and high prices) and overwhelm longer-term climate-change goals.
Raw materials producers
As demand grows, miners will likely need to reconsider their growth portfolios, and pivot toward recycling with a combination of research and selective M&A. Technological innovation could prevent bottlenecking, accelerate growth (such as advanced analytics in mining and processing), and reduce the carbon footprint in operations (for example, fleet electrification and water management). In addition, if miners wish to gain quality and green premiums in the context of tightening supply-demand balances, producers may need to make sure that they understand their customers’ product specifications and requirements, and consider partnering with consumers.
Automotive OEMs and EV-battery makers
When considering technology development and growth plans, raw-materials consumers will need to factor in potential resource constraints. Raw-materials suppliers will require a clear understanding of consumers’ growth, technology mix, and material needs before they commit to large capital investments. This will take place in various ways (and has already in some cases), such as equity ownership of raw-materials production, off-take agreements with producers, and partnerships with raw-materials suppliers. Whichever strategy is used, companies in the supply chain—for instance, battery and cathode-active material producers and EV OEMs—will need to secure raw materials for their aggressive growth plans and decarbonize their own supply chains. These producers and OEMs in turn will also need to make decisions on how to optimize their production to account for potentially constrained resources (for example, by producing batteries with less materials-constrained battery chemistries).
