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In this article, I want to talk about the Iran war and its effects on the global auto industry.
I encourage you to read this excellent article by Jennifer Sensiba: “The April Oil Crisis Most Don’t Know is Coming.” The Strait of Hormuz has been closed since the start of the war, and recently, Yemen threatened to make the situation worse by closing down the other major trade route in the region, the Bab el-Mandeb Strait. I don’t have a crystal ball, so I can’t predict whether these issues will be resolved quickly or drag on for years like many wars in the Middle East have in the past. According to this article from the Federal Reserve Bank of Dallas, this disruption will impact 20% of the world’s oil supply and is 3 to 5 times larger than previous disruptions in 1973, 1979, 1980, and 1980. It predicts oil prices will rise to about $100 or so while the Strait of Hormuz is closed. If the Bab El-Mandeb Strait is also closed, another 4% of the world’s oil will be stopped. In observing many oil disruptions over the last 50 years, I’ve come to the following conclusions:
- Oil supply is inelastic in the short term but elastic in the longer term. In the short term, there is little oil producers can do to increase the output of their wells, but in the longer term, they can increase drilling substantially in response to higher prices.
- Oil demand has traditionally been inelastic in both the short term and the longer term. Why? Because in the past, there were few alternatives to oil. I think today, demand will still be pretty inelastic in the short term, but elastic in the long term. Around the world, electric cars, buses, and motorcycles have shown they can replace gas and diesel vehicles. Right now the penetration rate is very low, but I think that will change, as I discuss in the rest of the article.
- Consumers overreact to sudden price spikes and availability scares. I remember my father (at my insistence), tried to buy a diesel Volkswagen Rabbit in 1980 and it was difficult to find one since the Iran–Iraq war was causing gas prices to spike. That was resolved pretty quickly, but people remember high prices for a few years after the crises passes, then they forget about it and return to buying big trucks.
I will break down the situation by region as an update to this article I wrote two years ago on the global auto industry.
China
Chinese electric vehicle sales have been a bit soft in 2026 as they recover from the government reducing subsidies by about $5,000 a vehicle on January 1st, 2026. It is no secret that the Chinese auto industry has a great deal of overcapacity in both gas and electric vehicles. Their plan has been to solve this by increasing exports of all types of vehicles and also closing some factories. This has been going pretty well over the past year, and I agree with Michael Barnard that it is gaining momentum. So, Chinese automakers might be in the enviable position of having increased demand for electric vehicles both domestically and internationally due to higher oil prices. But their gas and hybrids will likely also be popular in areas without good charging infrastructure, simply because they offer good value to consumers.
United States
The United States EV market has been a roller coaster ride over the last year. Sales got a huge boost in the 3rd quarter as many rushed to get the $7,500 tax credit before it expired. Sales dropped considerably in the 4th quarter and first two months of this year as most people who had been considering a new electric car in the near term bought one in the 3rd quarter. Tesla announced its $5,000 cheaper Standard Model 3 and Model Y to a very lukewarm reception in the US (although it has been received more favorably in other parts of the world). Nissan introduced its new LEAF and Chevy released its improved Bolt and has offered excellent discounts on its Equinox EV. But even with improved models and big discounts, EV sales have been soft this year. As detailed in this article, search interest in electric vehicles has more than doubled in the last few weeks as the news of the Iran war has sunk in and people have noticed that gas prices have spiked a dollar in a month!
As sales of existing electric vehicles rise, the big question is whether US automakers like GM, Ford, and Stellantis will revive their plans to build improved EVs in the US or continue to bet on big trucks. Of course, the same applies to Toyota (which never had big EV plans), Honda, Nissan, and Subaru. I think Hyundai and Kia have done a better job of steering an even keel. Of course, Tesla continued to make electric cars through all this market chaos. It kept production high because it thought it would have unsupervised FSD ready. That hasn’t happened yet, but those electric cars will be more popular because of the higher gas prices.
Europe & The Rest Of The World
Europe will accelerate its move to electric vehicles. It will be less dependent on regulation and driven by market forces.
This story from Australia shows how many markets may dramatically increase their demand for electric cars. In countries that don’t have a domestic auto industry, people don’t get as much propaganda about how bad electric cars are by forces trying to sell gas cars and gas.
Conclusion
I don’t want to hope for a long war with Iran, because that will have many bad effects, but a small silver lining is it will encourage more sales of electric cars. Even if the conflict is quickly resolved, the big increase in prices and shortages will cause many people around the world to consider the savings and security of electric cars as opposed to being vulnerable to the price volatility of gas prices. Unfortunately, it will also encourage more oil drilling around the world, but if enough people transition to electric vehicles over the next 10 to 20 years, there won’t be much demand for that additional oil.
If you want to take advantage of my Tesla referral link to get up 3 months Full Self Driving, here’s the link: https://ts.la/paul92237 — but if another owner helped you more, please use their link instead of mine.
Disclosure: I am a shareholder in Tesla [TSLA] and XPeng [XPEV]. But I offer no investment advice of any sort here.
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