A couple of weeks ago my Adventurous Investor column in the Financial Times focused on battery technology and more unusual routes to play the obvious big theme.
You can see the article here — https://www.ft.com/content/07de4b3e-244c-11e7-a34a-538b4cb30025?mhq5j=e2.
Consulting firm McKinsey’s have just weighed into the debate with a big new report — available here at http://bit.ly/2sTo6Ah. I’m still not entirely convinced that we’re just a few short steps away from an electric nirvana. But I do think that the odds or a major shift in energy are increasing by the day.
Head of Investment Strategy at Barclays Wealth & Investments, Will Hobbs put out a short note last week which I think summed up the possibilities very well. He observed that “
Between 1905 and 1915, the ownership of horses per thousand people in the US fell by around 30%. In the following fifteen years, horse ownership fell by a further 90% (Reda Cherif, 2017). If, starting in 2017, car displacement follows the same pattern, 90% of the US market could be electric vehicles (EV) in little over 20 years. This is obviously way in excess of current consensus expectations, which tend to be based on extrapolations of current trends in EV adoption and battery cost reduction. In their 2016 outlook, OPEC themselves predicted only 22% alternative fuel cars worldwide by 2040. Much of this scepticism of EV’s potential is eerily reminiscent of the early days of the cell phone market. In the early 1980s, McKinsey produced a report for AT&T on the market’s potential. The report identified major hurdles to cell phone adoption, citing the bulkiness of the handsets, short duration of the battery charge, high cost per minute and lack of coverage. The report predicted a market of 900,000 cell phones by 2000 (The Economist, 1999). The actual number turned out to be 120 times larger than forecast at 109 million phones (Seba, 2016).
The central idea here is what’s called ‘peak demand’ for oil. Or as former Saudi Arabian oil minister, Sheikh Zaki Yamani puts it: “the Stone Age came to an end not for a lack of stones, and the Oil Age will end, but not for a lack of oil.” Hobbs from Barclays observes that a demand-driven abandonment of oil would not be unprecedented.
“The US energy and fuel mix went through two dramatic changes, unrelated to supply scarcity, in the century from 1850, as coal toppled wood and then oil and gas did for coal in reasonably rapid succession. This rise of oil in the early 20th century came largely as a result of a transportation revolution as horses were swapped for cars. Many argue that it will again be a transportation revolution, in the form of the move to electric cars, that will help speed an eventual transition away from oil. “
In my humble opinion we are still at least ten years away from such a seismic structural shift but we about to enter a new game of perceptions. In particular investors are going to start to ask whether the long term deployment of countless tens of billions of capex makes sense for energy markets and especially oil. Allied to this is the growing boycott movement which started as a fringe movement but has been gaining momentum over the last few years. I still think this boycott movement is misguided, largely because it might discourage a short-term shift towards natural gas which is desperately needed as a short term fix to carbon emissions. We need any and all energy resources deployed now to lower coal output — for coal is the great killer of the human race.
But I sense a slow but steady movement in sentiment. Trump may have walked away from climate change agreements, but most big corporations understand the change that’s needed. We need over the next 30 years to kick the addiction to hydro carbons. Whether the solution is the electric battery, I have no idea. But long term investors such as pension funds are now beginning to understand that we need a new energy infrastructure, one that will incorporate green energy sources. That’ll subtly undermine confidence in long term capital financing of oil infrastructure and will act as a cap on capital spending. Paradoxically this might actually help increase oil prices gently over the next two decades as the shift gets under way. If I’m right the big losers won’t be in America. By then the frackers will probably have moved on to the next big thing. It’ll hit those nations who’ve sunk all their future hopes into traditional oil.