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Electric car revolution may drive ‘investor death spiral’ for oil industry

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Think Progress

Idle oil well in Texas. CREDIT: AP/Eric Gay

Idle oil well in Texas. Credit: AP/Eric Gay

Advanced batteries could “tip the oil market from growth to contraction earlier than anticipated,” concludes the credit rating agency Fitch in a new study. Bloomberg New Energy Finance (BNEF) has already told investors to expect the ‘big crash’ in oil by 2028 — and as early as 2023.

Fitch Ratings agency warns that if recent technology trends continue, we may see an “investor death spiral” as first the smart money — and then everyone else’s — sell off oil company assets (bonds and stocks). That would in turn increase the industry’s costs for both debt and equity — while oil prices would be stuck at low levels as the world hits peak demand.

This would affect industries whose stocks and bonds are cumulatively valued in the trillions of dollars. In particular, Fitch notes, “an acceleration of the electrification of transport infrastructure would be resoundingly negative for the oil sector’s credit profile.”

Global electric car sales soar.

Global electric car sales soar.

It’s clear the electric vehicle (EV) revolution is accelerating worldwide (see my Wednesday post and the figure above). EV sales have been growing faster than 50 percent a year. Countries from Norway to Germany to India are racing to ban fuel-burning cars and go all electric.

“Global oil demand growth is slowing at a faster pace than initially predicted,” the International Energy Agency (IEA) found in its September oil market report. “We see a slowing down of oil demand growth in China,” explained IEA chief Fatih Birol, and a “major reason” is that cars are rapidly getting more fuel-efficient.

Birol notes the efficiency trend will continue since many growing countries “such as India, such as (countries in) South East Asia, have not yet set the fuel economy standards.” EV adoption speeds up the overall trend.

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BNEF has pointed out that a global glut of 2 million barrels a day is what triggered the 2014 oil price collapse. Their analysis concluded that if electric vehicles continued their recent growth rate, EVs could displace that much oil demand “as early as 2023.”

BNEF, however, believes “compound annual growth rates as high as 60 percent can’t hold up for long.” Their own “more methodical” forecast breaks down EVs “to their component costs to forecast when prices will drop enough to lure the average car buyer.” In BNEF’s model, we see only 30 percent annual growth rate in EVs and cross the oil-crash benchmark five years later in 2028.

Of course, the smart money generally acts sooner, rather than later. Climate hawk Bill McKibben and others have been warning people to divest from fossil fuel investment for years now. Those who listened avoided the big crash in coal company stock prices and the impact of the 2014 oil price crash.

It’s not too late to avoid the next oil shock. While predictions of the exact year it comes are necessarily imperfect, Bloomberg offers this sage advice:

“One thing is certain: Whenever the oil crash comes, it will be only the beginning. Every year that follows will bring more electric cars to the road, and less demand for oil. Someone will be left holding the barrel.”

Source: Think Progress. Reproduced with permission. 

  

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  • trackdaze

    All it takes is for growth prospects to be taken away.

  • john

    In the short term i do not see this happening.
    It is true however the astute investors will be shifting their investments that is why they are called astute.
    The time frame for EV to take over the market is I feel something like 10 years.
    Why do i say this ? Well it is to build up the capacity to get new technology into the market it does not happen over night.
    We have been witness to the very poor offering by vehicle makers.
    Very small battery packs to ensure they do not go very far or the pathetic ICE and Electric drive train offerings.
    Because everyone in the industry knows the basic travel times of a vehicle is very short that EV will be the choice of anyone with half a brain i expect this movement to begin to happen post 2020 then for the next 5 years become very compelling.

    • Miles Harding

      It has been my i-miev experience that the pathetic i-miev drive train is a lot better than its even more pathetic ICE contemporary. As for the range. the trick is to use the vehicle where it is good, in which case, the limited range is rarely an issue.

      • john

        I have no issue with the range of the Miev because it is for short distance travel absolutely no issue here and as i said once people realize they are not going to make a 400 mile trip every weekend this becomes a no brainer.
        In fact they make those trips about 1 or 2 times a year.

    • David Mitchell

      I’m driving around in an Audi A3 etron at the moment. 95% electric kms with a 1.4 petrol engine as a backup. Full electric drive is awesome, I’ll never go back. When the small car market understands the torque you can achieve round town, everything the size of a Golf or below will switch. Oil is cactus

      • john

        As i said ICE and Electric in combination show that it is not exactly a good idea.
        It is a transition situation.

    • Robin_Harrison

      Tony Seba from Stanford predicts EV price and convenience parity with ICEVs by 2025 following the current pattern of battery tech improvement and cost reduction. Given the massive difference in maintenance and running costs, nobody will be buying new ICEVs by then.
      Bloomberg may well be spot on. The major car makers will have to catch up or die. Some of them appear to be getting it.

      • john

        Yes i have listened to Tony Seba presentation.
        I agree Tesla has had the effect of waking up the giants in the industry and that was part of the business plan.

  • Miles Harding

    Of course, the road ahead may be very bumply if some of the assumed oil supply constants turn out not to be. We should be expecting increasing frequency of oil shocks.

    It is likely that decline rates will soon overwhelm new wells in the US shale fields, forcing down production there. It is also likely that the super-giant Saudi Ghawar field will decline precipitously some time soon. There are number of concerning developments there, such as a lot of in-fill drilling a few years back and current indications that it is severely depleted. The end of Ghwar will reduce Saudi exports by up to 5 million barrels per day, more than offsetting the estimated 2 million bpd avoided by EVs.

    • Calamity_Jean

      “The end of Ghwar will reduce Saudi exports by up to 5 million barrels per day, more than offsetting the estimated 2 million bpd avoided by EVs.”

      This will push up oil prices and make electrics more desirable by comparison.

      • Miles Harding

        This is what I would expect. I saw this with EV assocuation meetings, we needed a bigger meeting room in 2007. Then the economy stuttered and and the prices came back down, as did the meeting attendances.

        Shocks are not necessarily very good at forcing change because the consumers quickly forget the pain the shock caused and go back to business as usual. SUV sales are booming again these days.

        In 2012, Steven Kopits observed that the oil market behaves inelastically, so a small supply shortfall causes a huge price fluctuation. We saw the reverse last hear when a small (0.5Mbpd) over-supply halved the oil price.

        While a more towards EVs will undoubtedly help limit oil prices, I feel that authors were making two errors of omission:
        a) by not considering the bulk of oil consumption wil not be affected by EV sales, leaving society in general almost as vulnerable as it would be if there were no EVs.
        b) and by not considering the world liquids supply peaked in 2005 and appears to be on a plateau now, so will soon enter a bumpy decline that will accelerate as it progresses.

  • john
  • john

    I guess that is what we are looking at lets put a time frame in say 2020 2025 as you can see by 2040 nearly 95%

  • john

    Perhaps a better graph to show Disruptive Technology is this. Click on the Graph to enlarge.

    https://uploads.disquscdn.com/images/da0cb971e079d47956f54d50910fe2784459df667dee771a932c1ce649a23611.jpg

    • newnodm

      The switch to EV is not disruptive in that it doesn’t change day to day life. Consider electrification of a home and the telephone. EV is not like these true disruptions.

      • john

        Perhaps not to the end user, but it is for the manufacturers of equipment and their workers, that goes into the ICE vehicle.
        The service side of the industry will be greatly reduced.

      • Tom

        Colour TV didn’t change people lives compared to B+W.
        DVD wasn’t so different to VCR. Yet they both had the same S-curve

  • Chris Fraser

    The EVs sound exciting. Wish we would make them at Fishermans Bend, Broadmeadow, Geelong, Elizabeth, etc …..