Battery Tech Bringing an End to Oil As We Know it? Not So Fast

Plunging battery prices, paving the way for more efficient and affordable electric vehicles, have some analysts talking about the death of oil and the prospect of American energy independence, but neither concept is as clear cut as it sounds.

Why doesn't the rise of alternative energy vehicles necessarily spell the end of oil, and why on earth wouldn't the United States want to provide all its own oil? Tune in to this energy edition of Industry Focus to learn the complexities underlying what sound like easy answers.

A full transcript follows the video.

Sean O'Reilly: Are we witnessing the death of oil? On this energy edition of Industry Focus.

[INTRO]

Greetings Fools. I am Sean O'Reilly, joining you from beautiful Alexandria, Virginia at Fool Headquarters, joined by the best in the business, Tyler Crowe. How are you?

Tyler Crowe: Oh, really give me a big head. That's a really bad idea if we're going to do this for 12 minutes!

O'Reilly: You are the best in the business, Tyler.

Crowe: No, I'm not. Not even close.

O'Reilly: Fine, fine, fine. All right. Sit over there and sip your tea. Beautiful day here in Alexandria, I was excited to come in here; I want to talk to you about oil.

First and foremost, Bloomberg's New Energy Finance Group just came out with a report, and I found this rather salacious, that battery costs have come down about 60% in the last three years, and that of course raised eyebrows.

We've obviously got Mr. Elon Musk putting out all his Teslas (TSLA -1.92%), trying to make 55,000 cars a year. I thought, "Boy, are we witnessing the end of oil?" The guys over at Bloomberg -- and they're not the first ones to say this -- say that yes, we might be. If we all put batteries in our cars, that's a big chunk of oil demand.

I want to talk to you about the potential myth that exists here, and your thoughts on the matter.

Crowe: Let me first contextualize this.

I am extremely, extremely optimistic about the potential of battery powered, alternative energy powered vehicles capturing a very large market share over the next several years, when it comes to the passenger, light duty gasoline engine; the thing that you and I see every day.

I'm extremely optimistic on the potential of that capturing market share and reducing gasoline demand.

Having said that, I think it is very, very presumptuous to say because of that we would see the end or the death of oil production. Here's why.

Like we just said, when it comes to batteries, it comes to passenger travel that uses gasoline. Well, there is another type of oil that we use out there. It's called distillate and diesel -- basically anything that runs on a long-haul truck, the airline industry, jet fuel; anything like that.

We still haven't quite found a viable technology, as of yet, to really replace that sort of energy demand.

If we look at energy demand globally over the next 20-30 years actually most expectations -- from oil companies, from the International Energy Agency -- just about everybody says that gasoline is expected to be flat and/or decline, but the demand for diesel is expected to double over that time.

O'Reilly: That's a lot of plane flights.

Crowe: That is a lot of plane flights. That is a lot of moving of goods.

O'Reilly: Well, and oil is in all our plastics too, isn't it?

Crowe: Chemical demand is going to be growing.

The biggest reason that they see this massive demand, or this increase in demand, for these products is global demographics. If we look over the next 20-30 years, we're going to add another 2 billion people to the planet.

More importantly, we are going to see the global middle class -- what is considered the global middle class is anybody that makes over $15,000 annually. Doesn't sound like that much in the United States.

O'Reilly: And has a car.

Crowe: And has a vehicle, and is purchasing goods, and those goods need to move from across the world ...

We are going to see a boom in the global middle class, from 1.8 billion today to 4.8 billion by 2040. In that time frame, we have more than doubled the global middle class; people who will be consumers, people who will be demanding goods and actually having disposable income for things like that.

O'Reilly: These guys at Bloomberg, they may very well be right, but we have to do this because otherwise we're going to be in a world of trouble.

Crowe: Absolutely. I totally agree with everything they say along the lines of passenger vehicles and that light duty, removing gasoline off of the table. But when we look at everything else that's going on, I just don't see the end of oil any time soon.

O'Reilly: Have you seen any projections, taking a step back, between how much oil the United States consumes every day -- I think it's 9 million barrels or something?

Crowe: That is production. We produce about 9 million a day.

O'Reilly: Oh, that's right. We consume what?

Crowe: Somewhere between 17 and 18 right now. Our consumption has gone down considerably in the past seven years, in large part due to some of the things we talked about.

We have more efficient vehicles than we did, as much as 16 years ago. We have alternatives that are taking a very small market chunk, but it's happening. Those sorts of things, we are definitely, in the United States, seeing a reduction in our demand.

O'Reilly: How much of that 17 or 18 goes to cars? Do you know?

Crowe: You are asking me a question I do not know the answer to.

O'Reilly: Wrong one? I was just curious, because even if you take away half of that but it goes to one, China, which is still slowing down but growing at 7%, they're going to want cars ...

Crowe: Well, if you want to take that into account too, you also have the fact that the United States is actually exporting about 3 million barrels per day, maybe a little less than that, in total refined petroleum products. You're talking about your gasoline, your diesel, all those things.

So yes, we have that capacity to build that, but at the same time we are actually reducing our demand and sending some of that excess demand overseas

O'Reilly: As we should be.

Crowe: As we should be.

O'Reilly: Very good. This leads us right into the second thing that I want to talk about, which is recently a report came out and was all over the news a couple of days ago, that the U.S. is on pace to be energy independent by I think 2017.

Crowe: That makes such a great headline.

O'Reilly: It does. I clicked on it! It got me.

Crowe: We can put a giant American flag behind an oil derrick and everybody's, "Yeah, America! We can do this! 2017!"

O'Reilly: Have a bald eagle fly in.

Crowe: Can you imagine a Presidential campaign that will run on energy independence by 2017? That just sounds awesome.

O'Reilly: 70% of the vote, guaranteed.

Crowe: Immediately.

O'Reilly: Presidential candidates, I hope you're listening.

(unclear)

Crowe: Don't cite us, please!

O'Reilly: Don't cite us. "These two guys at The Motley Fool said we should do this, Hillary ..."

Not only that we are going to do this, but we should, from a natural security standpoint. Cut off Iran, cut of Saudi Arabia, cut off Venezuela. Don't buy anything from them at all, produce our own oil, consume our own oil, and just shut ourselves off from the world.

You seem to think that could be bad, though.

Crowe: I think from an economic, competitive advantage standpoint the United States has, that sounds like ...

O'Reilly: Econ 101 says the person that's best at doing something should do it.

Crowe: And one of the things that we are best at is refining crude oil. What that means is that we should be doing the exact opposite of what we just said.

O'Reilly: Of what this report said.

Crowe: Let me be clear. When I say "energy independence," I think we can actually get there, but it would be in our best interest to do it from a net production/consumption method, rather than the, "Let's hoard all of our oil, let's only produce what we consume," and all that sort of idea.

Here is the biggest reason why. From 1972 until the boom in shale fracking, which happened 2008-09, we saw a gradual decline in United States oil and we became more and more reliant on global oil.

To do that, to do it in the least expensive way possible, we built a massive refining complex in the United States that was very, very good at taking really, really junk, crap oils; these heavier, lower-quality, cheaper crude oils.

You've seen this stuff coming out of Canadian tar sands, heavier oils coming out of Venezuela, coming out of Saudi Arabia.

O'Reilly: I just found out that Saudi Arabia just had its highest production, just over 10 million barrels a day, recently. But for them to go beyond that, it's really low-quality crude.

Crowe: It is.

O'Reilly: I just found that out.

Crowe: It's a sour crude. It's very hard to refine, and a lot of places around the world don't have the ability to take that oil and convert it into a high percentage of valuable product, such as gasoline or diesel, or anything like that.

Just to give an example of this, there is a way that refineries are measured in terms of complexity; their ability to do that, take bad product and turn it into something better, like a higher yield of high-value product. It's called the Nelson Complexity Index.

The global average for a refinery on this Nelson Complexity Index is 5.7. In the United States, every single U.S. independent oil and gas refiner has a companywide index rating of 8.2, and most of them are above 11.

O'Reilly: Is there any other country in the world ...?

Crowe: Not even close. Not even close, when it comes to that.

It's not a linear relationship. It's not like we're two times more complex than anybody else. It just shows that there is a significant difference between our ability to refine oil and the world's ability to refine oil.

For us to shut off that ability, where we're taking those junk oils ...

O'Reilly: And the hundreds of billions that have been invested in the refineries.

Crowe: And the hundreds of billions that have been invested in that, it seems like it would be losing our competitive advantage because the oil that we produce here in the United States is this wonderful, light sweet crude that is very, very easy to refine.

It turns into a ton of gasoline. The oil that comes out of the Bakken has a gasoline yield of greater than 40%. That is some of the highest-rated oil in the world. It's really, really easy to refine, so it can garner a premium when you sell it as crude.

However, those cheap, junky ones that we're buying form other people are much less expensive.

O'Reilly: So we should be sending the Bakken oil overseas, buying their ...

Crowe: Send Bakken oil overseas, get a nice high price for it. Buy somebody else's really cheap stuff, that we can refine and actually turn into something better, and then we can even turn around and sell a little extra of that gasoline at a higher yield ...

O'Reilly: So what you're saying is, the U.S. energy industry is a hedge fund!

Crowe: Basically.

Yes, from a national security, if we needed to all of a sudden isolate ourselves, we have that ability. We could do that. But why throw away a major competitive advantage that the United States has in the refining industry, just to meet this kind of aspirational goal?

O'Reilly: ... that sounds good only in a presidential campaign.

Crowe: Exactly.

O'Reilly: Long-term, just to bring it back around, it sounds like the investment takeaway here is that we probably don't need to freak out and sell all our oil stocks because these batteries are getting really efficient.

Crowe: I don't see any reason to be selling off your shares of ExxonMobil (XOM 1.15%) or your companies within the space who for repeated years have been able to not only spend a ton of money in this space, but actually generate excess cash from that and return it to shareholders; quite possibly one of the most difficult things to do in the oil and gas industry.

If you can find companies that can do that, you'll be fine.

O'Reilly: Game over. Very good. Thank you for your thoughts, Tyler.

Crowe: Thank you.

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For Tyler Crowe, I am Sean O'Reilly. Thanks for listening, and Fool on!