Will This 1 Thing Short Circuit the EV Industry?

California just banned the sale of gas- and diesel-powered cars beginning in 2035. The California Air Resources Board, which sets emissions levels in the state, adopted new rules that mandate 35% of the new cars sold in California be electric or plug-in hybrids by 2026, rising to 68% by 2030, and then 100% by 2035.

And because states like Massachusetts, Virginia, and Washington previously passed laws saying if California adopted rules banning fossil fuel vehicles they would follow suit, only alt-fuel vehicles will be allowed in those states, too. 

Image source: Getty Images.

It's clear that electric cars are an idea whose time has come. General Motors (GM 0.09%) wants an all-EV fleet by the middle of the next decade, Ford (F -0.24%) is looking for half its fleet to be electric by 2030, and Stellantis (STLA -0.54%) has an ambitious 2028 deadline to be all-EV.

This may seem to be the time to buy into the movement, but let's step on the brakes for a second and consider what an all-electric future really means and who could really benefit from this change.

Coming up short

There are many challenges with the vision of an all-EV future. First, the electric grid, as presently constructed, just won't be able handle all these electric cars plugging in to charge. California has imposed rolling blackouts across the state and is short the power to electrify 3.1 million homes, but wants millions of people to only buy EVs.

The Midwest power grid is also estimated to be short enough electricity to power 3.7 million homes, and the Texas power grid went down last winter leaving millions without electricity.

That also brings up another issue: Cars may be going greener, but they're still relying upon oil, gas, and coal-fired power plants to charge them. When tens of millions of people start plugging in their electric cars and trucks, the situation is going to be exacerbated. Last month, China began shutting down power to its EV charging stations as its own electric grid began to crack under a heatwave, and days after declaring California will be all-EV by the middle of the next decade, the governor asked EV owners to not charge their cars during peak hours because of the heatwave.

It's abundantly clear that, for an all-EV future, it will take incredible amounts of investment in electric grids and power production that hasn't yet come tp pass.

The biggest battle to come

The real problem for EVs, though, comes from the metals needed to make them. Two years ago, Elon Musk made the bold declaration that he wanted Tesla (TSLA 11.33%) to be selling 20 million EVs by 2027. Certainly an ambitious goal for a company that wants to produce about 1.5 million cars and reach an annual capacity of 2 million this year. But has anyone considered what it would take for Tesla to build 20 million EVs?

Battery supply chain consultant Adamas Intelligence did, and found in terms of the price of metals needed for EVs, it would have cost $44.8 billion two years ago to source them -- but the price tag has ballooned to over $100 billion today.

Moreover, mining industry website Mining.com extrapolated the data and combined it with global metals production to discover that for Tesla to produce 20 million EVs, it would fully deplete or use substantial quantities of metals that would not only leave little if any left for other EV manufacturers, but for other industries that rely upon them as well.

Tesla would consume all of the lithium and graphite currently produced, and still need more, and would use considerable amounts of cobalt, rare earth metals, and nickel.

Data source: Mining.com. 

Tesla has signed an agreement with a miner to get 10 kilotons of graphite starting in 2025, but it's also working on new technologies to replace graphite with silicon. But much of the graphite used in making batteries is not mined, but comes from what's called needle coke, and while there is a large supply of that it is also in high demand in the steel industry. Needle coke is also produced as a byproduct of petroleum refining, so the industry is still tethered to fossil fuels.

Moreover, much of the world's needle coke supply coming comes from China, which has about 2 million tons of capacity for either petroleum- or coal tar-pitch based production. The largest producer outside of China is Phillips 66, which has about 400,000 tons of capacity annually. It's estimated that to meet battery demand just by 2025, capacity would need to grow to 4 million tons.

Then there are the rare earth oxides, metals, and magnets needed for EVs, but that also used in smartphones, medical devices, wind turbines, power tools, and even missile defense systems. China also controls much of the world's supply of rare earths and the U.S. is dependent upon China for around 80% of its supply. 

Lithium is used in smartphones, energy storage systems, and consumer electronics. Graphite is also widely used in aviation, steel, and plastics. As EV production grows, the battle for scarce resources will send prices soaring even higher. That could be a monumental catalyst for the companies that mine, extract, process, or refine these materials for much of the next decade or more. 

Powering down

There is obviously a place for EVs in our future, and Tesla is still likely to be a good long-term investment. But as the market and grid is currently constructed, it's not really feasible or practical to believe EVs will fully replace gas-powered vehicles. While new technologies may evolve to minimize the metals requirements -- Stellantis is looking to develop a battery that's nickel and cobalt-free, for example -- that may just shift demand to other metals.

Resource scarcity alone might make electric cars a limited investment, but it actually could help ensure miners and the oil and gas giants have plenty of business for decades to come.