Opec and the oil barons face a slow death by electrification

Ambrose Evans-Pritchard  July 27, 2017  smh.com.au/business/energy

Opec, Russia and Big Oil thought they had half a century to prepare for the end of the internal combustion engine. At best they have a decade before the threat turns deadly serious.

The twin announcement by France and Britain - within two weeks of each other - to ban sales of petrol and diesel cars by 2040 is an earthquake in the energy world.

The switch to electric vehicles could soon turn into a stampede as prices for electric and fossil cars reach parity. 

Others are moving in parallel. A non-binding resolution of the German Bundesrat [its upper house of parliament] has called for a prohibition by 2030. Norway already has such a target by 2025 and the catalytic effect is spectacular: sales of electric vehicles (EVs) reached 42 per cent of all cars in July.

China's new plan stipulates that zero-emission vehicles must make up 8 per cent of total sales next year, rising to 10 per cent in 2019, and 12 per cent in 2020. This is an even bigger earthquake. Those German and Japanese manufacturers that do not yet produce EVs - or not enough - face being shut out of the world's largest car market.

Once governments reset policy in this fashion, markets rush to take advantage. They accelerate the timetable. The inevitability factor turns against the status quo and shifts with pent-up force in a new direction.

Morgan Stanley expects EVs to capture 70 per cent of the European market by mid-century. On the one hand it costs ever more to develop fossil-fuel cars that meet tightening rules on CO2 emissions and particulates (NOx). On the other, the cost of electric batteries keeps falling.

The scissor-action is remorseless.

In Britain and France we will start to see charging outlets appearing rapidly as they have in Norway, instantly located when we need them on iPhone apps. The utilities are already locked in a battle for mastery of this electric revolution, fighting for control of lucrative plug-in posts expected to jump from 100,000 to 30 million within three decades.

Switch to electric will turn into stampede

My guess is that petrol stations will go into run-off and become scarce in culturally-green hotspots relatively soon. Spare parts for fossil-fuel cars will be less easy to find. As these supply risks seep into public consciousness, the switch to electric vehicles will turn into a stampede. The National Grid estimates that there could be 6 million electric vehicles in Britain by 2030 under its "Gone Green" scenario.

Tesla's mass-market Model 3 will be launched this Friday at a starting price of $US35,000 ($43,725) and a battery range of 215 miles (346 kilometres) , with a target of 1 million sales annually within three years. In China, the Chery eQ already sells for under $US9,000. Even without subsidies it would be less than $US15,000.

Opec and the petro-powers are facing death by electrification.  Photo: pagadesign

There will be 20 models with a 200-mile range in the US market alone by 2020. Sweden's Volvo will by then have stopped producing petrol cars entirely, citing a customer revolt against petrol vehicles.

The argument at the big global banks has shifted from whether peak oil demand will occur to how soon it will occur. Goldman Sachs said this week that it could hit by 2024 in "an extreme case". That is not extreme enough for Tony Seba from Stanford University and RethinkX.

It is what happened to Kodak when digital cameras appeared. The end was swift and brutal.

He says the technology is moving so fast that the British ban will be overtaken long before 2040 by pure market forces. Michael Gove, the Environment Secretary, might just as well ban horse-drawn carriages. There won't be any petrol or diesel cars left on the road anyway.

Price parity in five years

Professor Seba thinks EVs will reach cost parity within five years as prices fall below $US20,000 (versus $US24,000 for the average oil-based car today). Thereafter they will sweep the field on cost alone. With far fewer moving parts and a potential lifespan of half a million miles, they will render the combustion engine obsolete.

It is what happened to Kodak when digital cameras appeared. The end was swift and brutal.

Opec will hear none of this. It allows that renewable energy may be a threat to coal but insists that it cannot seriously menace transport fuel. It says fossil fuels will make up 77 per cent of world energy supply in 2040, exactly the same share as today, and the Paris Agreement be damned.

Its World Oil Outlook estimates that crude demand will rise by a further 16.4 million barrels per day (b/d) to 109 million b/d by then, supposedly driven by economic booms in China and India. The global fleet of passenger cars will rise from 1 billion to 2.1 billion but Opec is adamant that only 6.7 per cent of these will be EVs.

It is still an article of faith that haulage and trucking cannot be electrified at viable cost, but this too is absurd. Of course it can. Nikola Motor Company in the US has already unveiled an 18-wheeler with a Tesla battery that can run for 1,200 miles (1,930 kilometres) with the help of a hydrogen fuel-cell generator.

Dirty bunker fuel for the 700,000 ships afloat is next in line. Scandinavia already uses electric ferries for short trips. Diesel-electric motors driven by liquefied natural gas are expected to capture a chunk of the market.

Electric planes

Boeing is even working on electric aircraft for short-haul commuter flights. One by one, the arguments are crumbling.

My own view is that we now have an unstoppable confluence of market forces, new technology and green policies that are reinforcing each other and cannot be stopped even by Donald Trump.

The latest climate research suggests that ocean acidification is worse than feared and that the world's safe carbon budget is less than supposed in the Paris Accord. It is a near certainty that some form of carbon tax or pricing will become a global fact of life.

For Opec and the petro-powers it has turned into a running three-year disaster.

Window closing very fast

Not only do they face slow death by electrification, they face a nimble US shale industry in the short run that seems able to turn on production almost at the flick of a switch whenever crude pushes back above $US50 a barrel.

Recoveries are quickly capped at half previous price levels, and at levels far below the fiscal break-even cost needed by Saudi Arabia and most Opec states to maintain their cradle-to-grave welfare systems and patronage machines.

Little wonder that Crown Prince Mohammed bin Salman is so determined to sell off the crown jewels of Saudi Aramco and reinvest the proceeds in an industrial and economic reinvention designed for life after oil. The window is suddenly closing very fast.

The British and French announcement that they will not require a single drop of crude must have sent shivers through a lot of mid-East spines.

Which begs a question: why would anybody purchase shares in a company like Aramco that was valued at $US2 trillion in an old energy order that no longer exists?

The Daily Telegraph, London


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How Tesla's Battery Strategy Could Drive Strong Margins On Model 3

Trefis Team , Contributor

Opinions expressed by Forbes Contributors are their own.

Tesla launched its mass market Model 3 sedan in late July, delivering the first few vehicles to its employees. During the company’s second quarter earnings call conducted earlier this month, it indicated that the sedan could garner gross margins of as much as 25% at some point next year. This is impressive, considering that margins on Tesla’s luxury Model S and X stand at similar levels, with most mainstream automakers such as GM and Ford commanding margins of under 15%. So how exactly is Tesla projecting such thick margins on this product? Below we provide a few possible explanations.

We have $205 per share price estimate for Tesla, which is well below the current market price. Read our current stance on Tesla here.

Model 3 Could Have The Lowest Battery Costs In The Industry

The price per kilowatt-hour (kWh) of lithium ion batteries has declined from an average of around $400 in 2012, when the Model S was launched to levels of under $150 currently. For instance, GM, says that it pays about $145 per kWh for batteries it sources from LG Chem for the Chevy Bolt. Battery costs on the Model 3 could be still lower, as Tesla has been working on improving its battery technology as well as the supply chain. Tesla, along with Panasonic, has designed a new variety of battery cells called the “2170” which will replace the smaller “18650” cells which have been in use for decades. The new cells provide higher energy densities (meaning that they can store more energy for a given size) and will also be manufactured using an automated process that will help to cut costs. Moreover, these cells will be manufactured at Tesla’s Gigafactory in Nevada, enabling it to cut logistics costs compared to the cells on the Model X and S, which are imported from Japan. The larger cell sizes will also mean that there will be fewer cells per module and fewer overall modules in each vehicle (only 3 modules in a Model 3 battery pack versus 16 on the Model S).

Focus On The Pricier Extended Range Model Will Help Margins

Tesla is offering the Model 3 in two versions, differentiated by the range, and this strategy could prove crucial to boosting overall margins. The standard model is priced starting at $35,000 and offers a 220-mile range, while the extended range model offers a 310-mile range and is priced at $44,000. If we assume a battery cost of about $130 per kWh, the ~ 50kwh battery on the base model would cost about $6,500. The ~75kWh battery on the extended range model would cost about $9,750, translating into incremental costs of about $3250. As the extended range model sells for an additional $9,000, it could command a healthier dollar gross profit of about $5750 (without accounting for any other incremental non-battery costs). As the long-range model is likely to remain the more popular of the two (it’s also the only option available to early customers) it’s likely to improve margins significantly for Tesla. Tesla is also offering several other add-ons such as the premium package (additional $5,000), enhanced autopilot ($5,000) and full self-driving capacity ($3,000) – which are all likely to be high-margin offerings that could boost average selling prices and profits on the Model 3.

Tesla Is Working On Building Scale, Reducing Complexity

The company has set an aggressive target of producing as many as 10k cars per week next year. While we remain skeptical that it will be able to meet these targets, considering its past track record, there’s no denying that the mass-market nature of the Model 3 should provide the company with significant economies of scale compared to its more niche luxury models. Tesla has also simplified the design of the Model 3 to make production easier, learning from its mistakes with the Model S and X. The company intends to initially offer the car with just 100 permutations, compared to over 1,500 permutations for the Model S in a move that should make production and inventory management easier.

I agree - electric cars are coming and people are going to love driving them - quiet and you don't have to get outside in the rain to pump your own gas. Women will be the biggest buyers in the early years but men will be following.

And ... It seems like Popular Science also predicted flying cars in the 70's! Can you imagine the wrecks and flying debris!!



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