The energy industry is often defined by big, sweeping trends that shape all of the companies in it. In the early 20th century, the biggest trends were the growth of oil as a transportation fuel, and coal as a fuel for electricity consumption.
In the past two decades, coal has been shoved aside for natural gas and renewable energy power plants that are more cost-effective and cleaner. Transportation markets are likely next, with electric vehicles (EVs) offered by nearly every manufacturer in the industry.
The success of Tesla has shown that demand for EVs is strong, but the market is still very young and hasn't disrupted oil stocks much yet. But big moves like General Motors' (GM 5.55%) commitment to build nothing but electric vehicles by 2035 will help push the world beyond oil. Investors should prepare themselves and their portfolios now!
The writing is on the wall
EVs have been slowly gaining ground for years, but it's their current scale that makes them so troubling for oil markets. According to the U.S. Department of Energy, there were 17,763 plug-in EVs sold in 2011, barely enough to have an effect on the auto market. But that number increased to 326,644 in 2019. That's an annual growth rate of 44% and a market share increase from 0.1% to about 1.9% of the approximately 17 million vehicles sold each year.
If that 44% growth continues in the U.S., EVs will replace all gasoline-powered vehicles in just over a decade. The transition away from gasoline-powered vehicles won't likely happen that quickly, but GM's commitment shows that it doesn't see a future in internal-combustion vehicles. And with upstarts like Fisker, Rivian, Nikola, and many others hitting the market in the next few years with extremely compelling offerings, the future of gasoline-powered vehicles doesn't look good.
Oil markets struggled even before EVs
If EVs take market share in the auto industry, it would make sense that oil consumption will slowly fall. And that's not good news given the trends taking shape in oil markets.
The chart below shows that we've seen a slowdown, if not decline in oil consumption growth. The chart below shows a decline in oil demand over the past decade, although the trend toward fuel efficiency vehicles from 2005 to 2015 when oil prices were high has been replaced by a surge in truck and SUV sales on the back of a strong economy and low oil prices. But we can see that over the course of 15 years, U.S. demand is already showing signs of declining even before much of an impact of electric vehicles.
None of this points to a strong demand environment for oil companies over the next decade in the U.S. The data above is for the U.S., but in the world's second largest oil consuming country, China, the shift to EVs may happen more quickly. The China Association of Automobile Manufacturers estimates that 1.8 million of the estimated 26 million, or 6.9%, of vehicles sold in 2021 could be EVs. If the two biggest oil consuming countries in the world are shifting quickly to EVs, it could spell trouble for oil businesses that are already starting to struggle.
Oil stocks are in trouble
The next two charts show the kind of financial position some of the biggest companies in the world are in. Over the past decade, ExxonMobil (XOM 1.98%), Chevron (CVX 1.64%), Total (TTE 4.35%), and Royal Dutch Shell (RDS.A) have all seen net income drop and stock prices flounder.
I think if EV sales continue to grow at the rate they are, there's a lot pointing to the financial condition of oil stocks getting much worse.
I've highlighted big oil companies here, but up and down the oil industry, we will see financial performance struggle as EVs take market share. Producers will continue to see price pressure, midstream companies will have less oil to transport, and marketers will see volumes go down.
Stay away from oil stocks
The megatrend over the next decade will be a transition away from gasoline vehicles to EVs, and it's happening faster than most people think. A decade from now, the oil industry could be in dire straights, just like coal is today.
Remember: A decade ago, the narrative was that renewable energy was too expensive and "clean coal" was the future of energy. That turned out to be wrong because renewable energy cut costs rapidly, and now coal is all but dead in the U.S.
Oil markets could be the next to fall, and with so many auto companies putting their focus on EVs, investors should stay far away from oil stocks.