In today’s Money Morning…the impact of the electric car trend…is this risk overplayed?…bullish indicators for oil…a major ‘one off’ opportunity in energy markets…and more…
I was walking through Melbourne Central shopping centre over the weekend, and noticed a throng of people gathered around two display cars next to the iconic R.M. Williams building.
A sizeable crowd had gathered. Kids opened doors and hopped in. People got their mobile phones out to take selfies. There was a general buzz of excitement all around.
Can you guess what make of cars these were?
No, not Ferraris or Lamborghinis. Nor formula one cars. Not even good old Aussie muscle cars.
The two cars were of course, Teslas.
The buzz around Elon Musk’s company Tesla [NASDAQ:TSLA] is reaching fever pitch. I’ll be honest, I didn’t think the cars were anything special to look at. But I’m not a ‘car nut’, so that doesn’t mean a lot.
But as an ‘investing nut’ I am interested in the electric car trend.
It’s throwing up a whole lot of interesting ideas. From a lithium boom out west, through to energy storage solutions in South Australia. As well as the impact on the global car industry.
Oil is another big industry in the electric car spotlight.
There’s plenty of commentary around right now that thinks the electric car revolution will spell the death of oil.
With oil prices already hovering around the low US$50s, this is clearly worrying for the sector. Remember oil prices were at US$145 in 2008, and the accepted market opinion back then was that the only way was up!
In Australia, shares in Woodside Petroleum [ASX:WPL], Santos [ASX:STO] and a host of oil juniors are at pretty depressed prices already.
So as the Tesla Model 3 rolls off the production line soon, is it set to get worse? Or is this negative sentiment an opportunity for oil investors?
An overstated risk?
The electric car market is driven by two powerful forces: innovation and policy support.
The former remains in full force. It’s not just Tesla. Traditional car manufacturers from Volvo to Volkswagen have electric car models due to be released in 2018.
However, the second driver, policy support, is questionable in the Trump era. And it’s worth pointing out that 34% of the global electric vehicle (EV) car fleet is in the US.
The now-shaky Paris climate deal aims to have 100 million electric cars on the road by 2030. That’s roughly 6.6% of the expected car fleet in the world by then. That target equates to a 100-fold increase in the number of electric cars in the world.
These numbers sound impressive. But they would have a negligible impact on global oil demand.
According to BP’s long-term energy outlook, the introduction of 100m electric cars on the road by 2035 will only reduce global oil demand growth by 1.2 million barrels.
This is a miniscule number when applied over the entire forecast period.
Not to mention achieving the 100 million EV cars goal by the 2030s is highly uncertain. Both the US and China are reducing and eliminating EV subsidies. The former due to policy changes, and the latter due to rampant green subsidy fraud.
It’s worth noting that the Obama administration invested heavily since 2009 to achieve a goal of 1 million electric cars on US roads by 2015. They ended up meeting only 40% of this target (and this is if we include 200,000 Plug in Hybrids).
Though, admittedly, technology doesn’t move up in a straight line. It tends to accelerate as things progress. The same goes for consumer demand in the tech industry.
Oil barons sleep can sleep easy…for now
This is not a bullish case for oil by any means. But it’s worth considering the fact that EVs alone are unlikely to be the ‘oil killer’ some people are portraying.
Oil demand is driven by a whole host of factors. Most of which are tied to industrialisation, global commerce, improving living standards and marine, air and truck transport.
These forces are not subject to speculation on EV penetration.
Statoil, by far the most conservative forecaster of future oil demand, and the oil major most bullish on EV penetration (they estimate 17% of the global car fleet by 2030) still expects oil demand to reach 106 million barrels per day (BPD) by 2030. For context, in 2016 world demand was around 95 million BPD, according to Bloomberg.
And oil is a political commodity as much as anything. OPEC, Middle Eastern politics and economic security issues all play their part. The current situation in Venezuela highlights other, shorter term issues that could increase the oil price.
These things are hard to predict at the best of times. So I’m not even going to try.
But I don’t think the case for ‘the death of oil’ is compelling, yet.
My colleague Greg Canavan has just completed some very interesting research in a ‘one-off’ opportunity in the oil space. It’s definitely worth a read if you like investing in powerful global moves. Money Morning subscribers should keep an eye on their inboxes for that, later today.
And I would definitely keep my eye on the oil space. Its effects run through the entire economy. Which means every investor has to be aware of it.
Editor, Money Morning