What relationship exists between oil prices, lithium prices and electric vehicle Growth : Is lithium really becoming a substitute for oil?

Abstract

The world is continuously shifting from fossil fuel to more environmental friendly sources of energy. Many articles and recognized newspapers have questioned the prevalence of oil as the main source of energy, particularly for transportation purposes. In this sense the growth of electric vehicle (hereafter EV) consumption has increased and the demand for lithium as the main component of batteries has also been in the spotlight. Newspapers, such as the Financial Times, argue that lithium would be the future substitute for oil. In this thesis, we examine the link between EV sale, oil prices and lithium prices, with the intention of detecting if there is a relationship between these three variables and whether lithium is a possible substitute for oil. We apply a VECM to all three target variables. We found fairly good models to explain oil prices and lithium prices when treating them as endogenous variables. However, when choosing EV sale as target equation the obtained results were not satisfying. The most robust model was found when the target equation was the lithium prices. Our results from this model show that there is a long run relationship between the variables; which confirm our believes. The causality is mostly from EV sale and oil prices towards lithium prices. Additionally, we have detected the impulse response and variance decomposition to see the reaction of the variables when introduces to shocks. Our results shows no evidence of oil being a substitute for lithium. According to our causality tests, we conclude the opposite. Both EV sale and lithium prices are influenced by the fluctuations in the oil price, meaning that shocks such as increased demand or price would not have a noteworthy effect on the oil prices.