An agreement to end the war between the United States and Iran has been signed, bringing hope for a more stable region. Oil futures dropped 7% to 9% in the immediate aftermath, with prices falling to pre-war levels or lower by December 2026. The free and safe passage of oil shipments through the Strait of Hormuz is now assured.
The signing of the Memorandum of Understanding (MoU) between the USA and Iran marks a significant first in diplomatic history, with an MoU being used to settle a conflict rather than a traditional peace treaty. This is not unprecedented, however, as a similar MoU was used 30 years ago between the Secretariat of the United Nations and the Government of Iraq to settle the conflict in 1996.
The signing of the MoU between the USA and Iran is expected to see oil prices continue their downward trend, with big cuts in fuel prices already implemented. This could result in a decrease in demand for electrified vehicles (xEVs), potentially reversing the recent surge in demand. However, interest in xEVs is expected to remain high, at least higher than it was before the war.
The MoU stipulates that military action against each other will cease, the USA blockade of the Strait of Hormuz will be lifted, and safe and free passage of commercial ships through Hormuz will be assured by Iran. The USA will also create a reconstruction and economic development plan for Iran worth US$300 billion, and Iran will affirm that it will not procure or develop nuclear weapons.
However, the MoU is only a framework for fully settling the war, and the final terms of a peace agreement will need to be negotiated in the next 60 days. This is a tall order, given the complexity of the negotiations and the need to address the vulnerabilities in supply chains.
The recent peace deal also involves a wild card in the form of Israel, which has been making attacks on Lebanon. The declaration of the immediate and permanent termination of military operations on all fronts, including the one in Lebanon, is a key point in the MoU. However, Israel's continued attacks have necessitated the United States to negotiate a localized secondary ceasefire, which has been broken.
The world is betting that oil production, supply, and prices will all return to normal sooner than later. However, this will not be a light-switch moment, as there are a lot of details to iron out in the peace deal, and getting oil production capabilities restored will take time, money, and huge reconstruction efforts.
The biggest impairment comes from the disruption of shipments through the Strait of Hormuz, which has resulted in the filling-up of storage facilities and the cessation of pumping. It will take time to regularize these oil flows, and some quarters say oil prices may settle at new normals, higher than pre-war.
Will this expected drop in gas prices reverse the "unintended acceleration" of demand for xEVs? I think not. Rather, the regularization of pump prices for gas and diesel will most likely activate deferred demand for ICE vehicles. The surge in demand for xEVs was pulled forward, while sales for ICE vehicles were pushed back.
It is very encouraging to see that there is a significant latent interest for electrified vehicles in the Philippines. With the proper motivation, that interest can clearly transform from latent to kinetic demand very quickly, especially for battery electric vehicles that saw their share of sales rise dramatically from around 1% pre-war to over 10% post-war.
However, the rise in fuel prices alone is not enough to sustain the transition to xEVs. Ultimately, the availability of a fully functioning support ecosystem is essential, and a more deliberate and considered decision by buyers is needed to realize a truly sustainable transition to electrified mobility.
At some point, government incentives may also cease, so the true cost of migration to new energy vehicles might be higher than it seemed when the war started or might even be in the midterm. The Philippines will need to succeed in realizing pure EV adoption - sans subsidies - because we are considered one of the most vulnerable countries to the adverse impacts of climate change.
