We've all heard predictions about electric cars eventually decreasing demand for oil, but last week, Bloomberg put out an especially provocative article claiming that by 2023, electric cars will have taken off to such a degree that oil might not be able to recover.
In this video segment, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about whether investors should be worried about this. The team also goes over a few issues the article didn't fully address and some points to think about when investing in a space like oil, with such huge disruption potential lurking in the indefinite future.
A transcript follows the video.
This podcast was recorded on Feb. 25, 2016.
Sean O'Reilly: Moving on, this is a speculative story, but we have to talk about it.
Tyler Crowe: Do we have to?
O'Reilly: We do, because it's a big deal.
Crowe: Aw man, dad! (laughs)
O'Reilly: It's a big deal! This could destroy all of oil forever!
Crowe: Aw, OK, fine. Whatever.
O'Reilly: Basically, how fast could electric cars disrupt the the oil industry? Bloomberg just put out an interesting piece and a companion video under the headline, "Another Oil Crash is Coming, and There May Be No Recovery." It goes on to talk about how peak oil was clearly a myth, we can also talk about that, because I have some thoughts; that once electric cars become increasingly popular via mass adoption, which is not far away, according to them, it could be as early as 2023, oil is screwed, basically, pardon my French, in not so many terms. How seriously should we take this, what are the potential holes in this analysis, and is anybody at this table selling their oil shares because of Tesla (NASDAQ:TSLA) right now?
Taylor Muckerman: (laughs)
O'Reilly: We can leave now. (laughs)
Crowe: We're done.
Muckerman: This is, like, a pause for thought. It's definitely going to be a big deal. I don't think in the next three to five years, which, generally, I'm looking at stocks to invest in for. You want the stocks that are going to be around in 10-15 years, but you have to imagine, with most companies, in five years, you're going to have to reevaluate your investment thesis anyways. But this is definitely something that I think energy investors need to be worried about, because they're projecting decades of cash flows. OPEC and Exxon seem to...
O'Reilly: Well, they had that projection...
Muckerman: ... downplaying it to 1% of overall...
O'Reilly: They had that video, and OPEC is reporting, by 2040, 1% of the vehicles in the world will be electric? That seems really low to me.
Muckerman: Whereas, Bloomberg says 35% will be electric. So, there's a lot more room for error from OPEC's point of view, because it's not going to be less than what they expect, which would be good for them. It's most likely going to be more than they expect, which would be a bad thing for them. The thing here, I think, you look at the increase in electricity needs when you have that many cars on the road...
O'Reilly: Well, and, do we have enough lithium? I wanted to get your guys' thoughts on...
Muckerman: There's plenty of lithium out there. It's one of the most abundant resources in the ground.
O'Reilly: OK, that's good.
Crowe: It's really not an issue.
Muckerman: So, you have that and cobalt. So maybe you look at some of these miners. But right now, because it is so abundant, these miners haven't been doing all that well. And then, maybe some renewable utilities out there, because they're talking about needing 8% of current electricity use, if this Bloomberg projection is correct, in 2040. 8% of current production of electricity will be needed for electric vehicles.
Crowe: So, I thought it was a very interesting thought piece. One of the nice things about this is, it makes you think about your thesis, and anybody who's a long-term investor, it really gets your mind flowing in trying to wrap your mind around some of the things that are going on that could totally transform industries. The points they make certainly have a case. One of the things they talked about mostly is what's called the S-curve, the rate of adoption of a new technology. And what they were saying is that we're going to see a rapid acceleration of the S-curve in the adoption of the electric vehicles, mostly with companies like Tesla Motors, Chevrolet, and I believe Nissan, they're all, within the next couple of years, looking to bring out an electric vehicle, in the $30,000 range, which makes it certainly much more affordable than what we've seen in the past couple years.
And then, they made the comparison of rapid adoption of certain technologies. They mention things like refrigerators, microwaves, cell phones, things like that. So, there was the case to be made. Here are some of my counter points, where I'm looking at it and going, "OK, here's some of the things that I feel like don't quite jive with that idea." Let's start with the purchase and adoption rate. Going to buy a refrigerator, a cell phone, something like that, is a much more discretionary purchase. $500 for a cell phone, it's may be a few weeks' paycheck or something like that, but it's not a $30,000 purchase. You're not going to immediately go turn in your car just because there's a cheap EV to be had out there.
Muckerman: You are if you're Sabine.
Crowe: You are.
Muckerman: You're just cashing it in.
O'Reilly: What about, even, like, they're talking about, there's a billion cars on the road right now, blah blah, we're having a hard time, here in the United States, getting to electric cars, and we have, theoretically, or could pretty easily have, the infrastructure for all the charging stations and everything. That's going to be hard in emerging markets like India, Africa. It's going to be harder than it is here, and we're not doing it super easily.
Crowe: Right, so, the integration of not just the electricity demand itself, but also the grid demands, are going to be huge. And one of the things that I always feel like is slightly underestimated when we talk about these sort of things, they always look at the adoption rates in China, and to a lesser degree, India. But when we look at the developing world, there is a much, much wider swath that really isn't talked about a lot, when we talk about oil demand, petroleum demand, things like that.
And while we can see a decent decline of use from the developed nations such as ourselves, most of Europe, and more and more becoming China, what are considered the OECD nations, but at the same time, those developing markets are growing at such a rapid pace, and the expansion of GDP, population, I feel like the demographics of that are underestimated, and the demand for oil and energy are going to be so great from that that I don't necessarily see how robust that argument can hold up when you have that much demand coming online.
O'Reilly: The other thing that stuck out to me was the peak oil point. That's fine, I agree that peak $20 oil is gone. But I'm not so sure that peak oil always and forever at certain costs is gone.
Crowe: Please clarify, go on.
Muckerman: Do tell.
O'Reilly: Okay, so you guys remember, in 2008, the books for coming out, peak oil and all that and whatever. What they're talking about is, now that is a defunct thesis. My point is, and a lot of the analysis that I've read today is, that was correct for $20-30 oil. Saudi Arabia still produces for $10-20 per barrel. We can't. Shale's what, $50-60?
Crowe: Some people are pushing it down a little lower than that.
O'Reilly: But you see my point.
Crowe: But that's prime time acreage.
O'Reilly: And not only that, but U.S. shale production is projected to peak in 2021, and all of the sudden we're in decline again. So, I'm not so sure that... because the first point the video made was, "Because of advanced technologies and unanticipated things, we have way more oil than we ever thought we would." But really, this seems like more of a pause in a limited resource and our ability to get it out of the ground.
Crowe: Seems like a fair enough assessment. If you look back, historically, there have been these times, a great example is the eighties, where we were awash in oil, and everybody said, "We're going to be fine forever."
O'Reilly: You had the North Sea, you had blah blah blah.
Crowe: Between the cycles of, "Oh my god, we can't find any oil!" All of the sudden, 10 years later, we're like, "Ugh, what are we going to do with all this oil?" So, that's certainly a valid point in terms of trying to take the assessment that we have today and basically projecting it out.
O'Reilly: Well, and it was just in 2008 that oil went up to $130, gave it a high five, and Goldman Sachs was talking about $200 oil. This was just 6 years ago. And all this $20 talk is funny to me.
Muckerman: They can figure out how to extract more out of the ground. I mean, we're leaving a ton of oil and natural gas in the shale. So, if you can figure out how to extract that, then...
O'Reilly: But that's expensive, which lends itself to my point.
Muckerman: It is, and it has been in the past. But it's always gotten cheaper. I'm not saying it's going to continue to get as cheap as it has been percentage-wise as quickly. But...
Crowe: We're going really deep into this one. I like this.
O'Reilly: Today is deep philosophical... Do we need pipes or something to be doing this?
Crowe: No, nu-uh.
Muckerman: Maybe pipelines.
O'Reilly: Maybe pipelines?
Muckerman: But yeah, that's my thought, if we really need to, there's so much more underground that we can get it.
Muckerman: Deep, way deep.
O'Reilly: The human spirit, Taylor.
Muckerman: The American spirit!
O'Reilly: Oh, god. (laughs) 'Murica!
Muckerman: 'Merica, man. We're the ones with shale, that's ours!
O'Reilly: It is ours. Although, what's-his-name, McClendon, he's going to Argentina, doing a little shale drilling.
Muckerman: But that's American technology.
O'Reilly: Oh, here we go.