Battered oil markets face threat from electric vehicles

Matthew Green and Simon Jessop have a great story at Reuters about the future of the global oil market:

Oil companies may be facing uncertainty as the coronavirus pandemic triggers a collapse in demand for their products, but auto makers are betting the crisis will help accelerate an electric future.

Reuters

This is a little bit counter-intuitive since you would think low gas prices reduce potential fuel savings from going electric. But I agree with Reuters: Looking ahead, it seems increasingly likely that these shakeups will accelerate the transition to electric vehicles.

Looking ahead, cuts in capital spending forced upon energy companies as their revenues crumble could tighten supply enough to cause a spike in oil prices, making electric vehicles more attractive just as automakers ramp up production, analysts say. 

Reuters

Tons of oil is being produced at a time when nobody wants any. In the short term that means low, low prices. But what happens to those oil companies when there’s no more money coming in the door?

They’ll be forced to cut capex. They’ll be forced to slow or stop production. Long term projects with a time horizon of 30 years or longer will not look as attractive to investors with the same cost structure.

If demand spikes faster than suppliers can react, expect to see prices rising very fast. Even though gas prices are starting off lower, consumers who see them rising higher and higher every time they visit the pump will be left with a bad taste in their mouth. When they complain about it, they’ll notice how it doesn’t bother their friends with EVs.

“We think this will lead to a tipping point, accelerating the switch to electric vehicles in many more countries around 2023-24,” Per Magnus Nysveen, senior partner at Rystad Energy, a consultancy in Oslo, told Reuters.

“We will start to see that this starts to dig into global oil demand in a very significant way,” he said. 

Reuters

2024? Did you not hear about Tesla’s $80 / kWh battery pack that you reported? By 2024, autonomous electric Robotaxis will be available in most countries. By then, there will be no excuse not to be traveling emissions free.

All the growth in transportation is being eaten by electricity,” said Harry Benham, chairman of Ember-Climate, a British energy transition think-tank. “Oil and gas companies have got no ability to defeat electricity as a transport fuel.”

Reuters

Electric vehicles may still have a small market share, but they have a large share of the growth in the auto industry. Investors love growth, and they hate a business in decline.

With fuel for road transport accounting for about half of all oil demand, the possibility of a faster-than-expected switch to EVs in the wake of the pandemic is one of the main reasons some forecasts for a peak have been brought forward. 

Reuters

In other words people are looking at declining oil demand, and they’re not sure if it’s ever going to come back to the levels we saw in 2019.

Although the oil industry has defied numerous attempts to call “peak oil” in the past, the fact that the International Energy Agency projects that demand will plunge by a record 8.6 million bpd this year has reignited the debate. 

Though as yet a minority view, some believe the pandemic is reshaping patterns of work, aviation and commuting so profoundly that oil demand might never return to 2019 levels – a potential boost to hopes of avoiding the worst impacts of climate change.

Reuters

To find out when we’ll hit peak oil demand, I would just look at battery prices and production worldwide. Once a cleaner, better, affordable substitute is available demand will move quickly from one product to the other.

“It’s inconceivable that all that demand for oil comes back in one go, so the real question is how much of that is lost permanently,” said Mark Lewis, head of sustainability research at BNP Paribas Asset Management. 

Underscoring the changing economics of transport, Reuters revealed last week that Tesla plans to introduce a new low-cost, long-life battery in its Model 3 sedan in China that it expects to bring the cost of EVs in line with gasoline models.

Reuters

Ah, so they did remember the battery story. The eyes of the energy world are all turned to Tesla Battery Day.

In April, Ben van Beurden, chief executive of Anglo-Dutch oil major Royal Dutch Shell (RDSa.L), said the company did not expect oil demand to recover in the medium term, saying the industry was living in a “crisis of uncertainty”. 

Reuters

Oil companies don’t know what to do. They don’t know how long shutdowns are going to last, or how consumer behavior will change long term. If they did, it might be easier to plan for the right levels of production. But they don’t, so more intense price volatility ahead for crude oil markets seems likely.

Bernard Looney, chief executive of BP (BP.L), was later quoted in the Financial Times as saying he would not “write off” the possibility the world had reached peak oil. 

Reuters

Who said there’s no good news these days?

Now see if you can figure this one out: If you’re the CEO of an oil company, and you’re not “writing off” the possibility that the world has reached peak oil demand… do you expand production, or reduce capacity?

With many European politicians calling for green recoveries, the French government signalled on Monday that the country wants to boost sales of low-emission cars. China has extended backing for EVs as part of its recovery package, and U.S. Democrats are exploring ways to boost demand for clean vehicles. 

With various European countries planning to ultimately ban sales of new petrol and diesel cars, some see increasingly ambitious EV commitments by automakers as another sign of the beginning of the end of the fossil fuel era. 

Reuters

Economies large and small all around the world have completely shit their pants as economic activity grinds to a halt. If we’re going to spend a bunch of money to stimulate the economy, shouldn’t some of that go into transitioning the world to renewable energy?

“One of the primary factors holding back the transition has been resistance by the fossil fuel incumbents,” said Kingsmill Bond, senior strategist at financial think-tank Carbon Tracker. “Now those incumbents are significantly weakened.” 

Reuters

With revenue streams running dry, the oil companies have had to cut their FUD budgets. Now is the time for the electric vehicle to shine.

Read the full story at Reuters

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