The Single Biggest Threat To Big Oil
About a week ago, alternative energy plays scored crucial wins seemingly at the expense of the oil and gas sector after President Biden ramped-up his radical climate agenda by announcing plans to halt new oil and gas leasing on federal territory in a bid to become carbon-neutral by 2050.
Some of the biggest oil companies, including ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX), are actively drilling on federal lands in New Mexico. Biden has also touted a $2 trillion clean energy pledge, easily the biggest investment by the federal government into the sector.
As you might expect, the fossil fuel sector has been up in arms against the president’s latest pledge.
Mike Sommers, chief executive of the American Petroleum Institute, has quipped:
“Energy abundance or foreign dependence. American jobs or overseas jobs. Economic revival or small-town decline. Progress or retreat,’’ while adding that, “Thus far, President Biden is on the wrong side of a number of these consequential choices.”
But maybe Mike Sommers and the oil sector are pointing fingers at the wrong guy.
Whereas many oil and gas investors view the renewables sector as its biggest rival, the truth is a bit more nuanced.
In fact, the oil industry has a lot more to fear from the likes of Tesla Inc. (NASDAQ:TSLA) and NIO Ltd (NYSE:NIO) than it does the solar and wind sectors.
The EV Reckoning
President Biden has paused drilling on federal lands for 60 days, though most shale oil and gas drilling happened in privately owned lands. The oil and gas sector has countered by pointing at the high unemployment rate mainly due to Covid-19 and declared that now is not the time to carry out such a policy.
For instance, Sommers points at New Mexico, where the ban on federal leasing could eliminate $1 billion from the state’s budget and cost 62,000 jobs. Shutting down the construction of the Keystone Pipeline is likely to immediately cost 1,000 temporary jobs.
But that ignores the fact that only 9% of fracking is currently done on federal lands, and also the fact that the ban does not affect existing permits. After all, such drilling netted the federal government just $6 billion in revenues last year.
The brutal truth is the biggest threat to the oil and gas sectors does not come from climate regulation but rather from the natural progression of the EV megatrend.
Exponential Growth Path
Biden has specifically reiterated his earlier plans to build 500,000 new EV charging stations and also replace the federal government’s auto fleet with EVs.
But the fact of the matter is that the EV sector has been recording exponential growth over the past few years despite a lack of support from the federal government.
A recent report by clean energy watchdog Bloomberg New Energy Finance (BNEF) proves that the renewable energy sector has remained largely immune to the ravages of Covid-19, with global energy transition investments in 2020 clocking in at a record $501.3 billion, good for 9% Y/Y growth.
Yet, digging deeper into that report reveals that the clean energy boom is heavily lopsided in favor of a single segment: Electric vehicles or EVs.
BNEF analysis shows that both public and private investments in renewable energy capacity came to $303.5 billion, up 2% on the year, thanks mainly to the biggest-ever build-out of solar projects as well as a $50 billion surge for offshore wind.
he EV sector, however, performed much better, with investments in the burgeoning sector, including charging infrastructure buildout clocking in at $139 billion, good for a 28% Y/Y increase. Meanwhile, the passenger EV market reached an estimated $118 billion representing a four-fold growth compared to 2016 levels.
But here’s the gist in the two numbers: Renewable energy investments have been mostly flat, managing a meager 0.15% CAGR growth over the past five years compared to 20.74% CAGR for electrified transport over the timeframe.
In fact, at this rate, investment in the global electrified transport sector is set to overtake the entire renewable energy sector by 2025.
The biggest catalyst for the global EV sector is this: The sector is close to a “tipping point” of mass adoption thanks to falling costs.
Indeed, EV sales increased at a torrid 43% clip globally last year, with price parity with ICE on an unsubsidized basis expected to be achieved as early as 2023.
Batteries and the EV powertrain make up 70% of the cost of an EV. Luckily, the cost of lithium-ion batteries has dropped dramatically since 2010 and is expected to continue to do so in the coming years. To illustrate the point, consider that back in 2010, the price of an EV battery pack was $1,160/kWh (USD) compared to the 2018 average price of $176/kWh.
BloombergNEF has forecast the cost will be nearly cut in half to $94/kWh by 2024, and then to just $62/kWh by 2030.
BNEF has predicted that EVs will account for 10% of new car sales by 2025 from 2.7% in 2020 and 28% by 2030.
That’s a very big deal considering that the transport sector consumed more than 40% of global oil production in 2019 and has accounted for more than half of total oil demand growth since 2000.
In other words, President Biden’s executive orders are the least of Big Oil’s worries.
Oilprice.com by Alex Kimani, February 26, 2021