Please ensure Javascript is enabled for purposes of website accessibility

Can Big Oil Survive the Threat of Electric Vehicles?

By Taylor Muckerman - Dec 17, 2017 at 8:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Electric vehicles are gaining greater traction every day, and investors in the oil industry need to take notice.

As you may have heard, electric vehicles are catching on. It's to the point where several of the world's largest countries have announced tentative dates for when the last gas-powered vehicles will be sold on their respective turfs.

If you ask me, the writing is already on the wall for oil producers. It may just take another five to 10 years to dry.

Drivers, start your batteries!

Among others, Britain and France have drawn a line in the sand for 2040, while India has bested them by a decade, setting 2030 as its own deadline. Several other nations have targets set for how many EVs must be sold each year without announcing an outright ban on petroleum-fueled autos -- yet.

In an alternate universe, this might not matter all that much to oil producers. Unfortunately, the reality is that road transportation accounted for 45% of global oil demand in 2016.

Just don't try telling this to Chevron Corp. (CVX -1.32%) or ExxonMobil Corp. (XOM -1.80%), both of which appear to be in a state of denial, at least publicly.

A woman pumps gas at a station

Image source: Getty Images.

Just the other day, Chevron's senior economist, Adam Karson, emphasized the fact that only around 1% of global vehicle sales are currently of the electric variety. Of course, that'd be all well and good if EV sales weren't growing as quickly as they are today -- nearly 40% year over year in the U.S.

By 2040, suggests a forecast from Bloomberg New Energy Finance, around one-third of all cars on the road could be electric, while Exxon only believes around 6% will be. By BNEF's math, that proportion would eliminate the need to produce 8 million barrels of oil per day; in September 2017, that was 84% of U.S. oil production.

But this doesn't mean that oil companies have until 2040 to figure it out.

Gasoline consumption will begin to shrink on a year-over-year basis in 2026, says energy consultancy Woods Mackenzie (a subsidiary of Verisk Analytics). That gives the oil industry nine years to find an alternative to fill the looming void.

Picking up the slack

So where are oil producers to turn?

One area of focus for companies like Chevron and ExxonMobil has been petrochemical production, due to growing global demand for high-quality plastics.

A key ingredient in these plastics -- used by industries such as automotive, packaging, and various consumer goods -- is polyethylene. And a critical feedstock for polyethylene is (you may have guessed it) ethylene. Thankfully for U.S. energy producers, ethane cracked from natural gas is a primary source of ethylene.

Total global polyethylene production for 2018 is expected to fall just shy of 100 million tons. However, some believe demand could eclipse 120 million tons per year by 2026.

To help bridge that gap, big oil and gas companies will need to spend heavily now.

Chevron has partnered with Phillips 66 (PSX -1.07%) on a $6 billion expansion project in the Houston area. The project includes two polyethylene plants and one ethane cracker that's been delayed by a few months due to Hurricane Harvey. Together, the plants will be capable of producing 1 million tons per year of polyethylene.

Not to be outdone by its smaller peer, Exxon has expanded its polyethylene production capacity down the road in Mont Belvieu, part of its $20 billion in regional expansion plans. With one line already running as of Oct. 17, the two new lines will expand existing plant capacity from 1.2 million to 2.5 million tons per year.

The Foolish bottom line

As much as big oil wants to remain big oil, times are changing. It'll be a fine example of how, at first, things change slowly before they change dramatically in the blink of an eye.

For Fools who are already investing in oil producers, or are considering it, it's critical to consider how their management teams are addressing this very real threat. At the moment, these integrated behemoths have the advantage of producing both oil and gas, along with their downstream byproducts. In a decade or two, however, I'm willing to bet we'll be looking at dramatically different businesses. Don't get caught off guard.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$83.28 (-1.80%) $-1.53
Chevron Corporation Stock Quote
Chevron Corporation
$140.78 (-1.32%) $-1.88
Phillips 66 Stock Quote
Phillips 66
$79.53 (-1.07%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.