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Peter Tertzakian

Peter Tertzakian

Peter Tertzakian is Chief Energy Economist and Managing Director at ARC Financial Corp., Canada’s largest energy-focused private equity firm. His career began as a geophysicist…

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Electric Car Industry Faces A Looming Supply Shortage

EV

“Lithium is the new oil,” goes the saying in electric vehicle (EV) circles.

If you haven’t heard the catchy maxim, it means that new-age batteries made from elemental lithium are the energy world’s “in-thing.” By extension, a tank of gasoline containing a cocktail of carbon and hydrogen atoms is passé.

Think back to the early 1900s: It’s like an oilman wearing spats and a fedora walking into a cowboy bar saying, “Oil is the new horse hay.”

Fast forward to today: I’m a believer that lithium-ion batteries are going to power a lot of cars going forward. It’s a nascent trend that’s just getting started.

But my head hurts when running the numbers. The equivalent of 15 thousand cell phone batteries are needed to make one battery for an 80 kWh electric car. So, ramping up raw material inputs to build millions of car batteries a year fills the back of the envelope with scalability issues.

Lithium, like oil, is found in the earth’s crust. So are other raw materials—like cobalt and graphite—that are needed to build a typical rechargeable battery. Supplying these for cars, home storage and other potential high-growth markets will require vast global supply chains of extraction, refining, distribution and recycling, not to mention the financial infrastructure to trade the commodities.

Yet, the many raw material supply chains for larger-scale batteries are immature relative to the potential market pull. Every few weeks the projections for EV sales steepen. Everyone talks about car and battery plants. Amidst the hype few talk about upstream mines and processing facilities. It’s like being bullish on gasoline cars and refineries, but dismissing the importance of scaling up oil to meet the demand. Related: Saudi Arabia Regains Influence Over Oil Markets

We can look back to the history of oil and early cars to understand scalability.

Consider this: By the time Henry Ford’s fledgling auto company launched the mass-market Model T in 1908, John D. Rockefeller’s Standard Oil Company had an estimated market capitalization of $1 trillion (in today’s dollar terms). An equally formidable global supplier of oil at the time was the Royal Dutch Shell Group.

There was no shortage of oil when the gas-powered car came out. Already fueling lamps, ships and trains, the oil industry of the early 20th century was a ready-to-go, rapidly scalable supply chain waiting to fuel the adoption of millions of horseless carriages.

The reverse is the case for the EV business today. Battery powered cars are potentially coming to market far faster than the back-end resource industries needed to supply them. Batteries need many different raw material supply chains to ramp up; petroleum cars only needed oil.

Battery bulls tend to trivialize the issue of resource supply. A common, don’t-worry-be-happy refrain comes with a broad wave of the hand: “There are vast deposits of lithium in the world.”

That factoid doesn’t need debate. But let’s not confuse terms like “deposits” and “resources” with “reserves” and “production.”

Like lithium, the earth holds equally vast resources of crude oil and all sorts of other raw materials too. The human challenge has always been exploring for these resources and recognizing how much of them are technically recoverable reserves. Then comes the difficult part: permitting, financing and building the operational infrastructure to produce the reserves and bring them to market in a responsible, safe, and consistent manner at affordable prices to the consumer.

Anyone in the resource extraction business knows there are significant lags, measured in years, between turning resources into reserves and then into production. Greenfield projects often require billions of dollars to establish operations, roads, loading facilities, power lines, distribution channels and other supply infrastructure.

Then there are the “above ground” problems. Much of the world’s plentiful battery minerals are buried under the same nastiness as oil: State meddling, corruption, civil unrest and opacity to name a few business risks. For example, 60 percent of the world’s current cobalt supply comes from the Democratic Republic of Congo (DRC), a country that is in the same distinguished peer group for business risk as Syria, Iraq and Somalia; Transparency International, a global anti-corruption agency, ranks the DRC as number 156th of 176 in terms of corruption (Canada is ninth if you are wondering).

Yet, the biggest issue of scalability comes from the demand side. There is a double whammy looming. The number of battery units demanded is projected to grow aggressively; and the size of the units is getting bigger too. On this latter point, the historical progression of modern electrical storage goes something like: Watch batteries, cell phones, power tools, lawn mowers, scooters and now cars. Each step up in capacity has been at least an order of magnitude larger (10x) than the last.

So the demand for battery minerals will need to grow even faster than the forecasts for the number of units.

By contrast, oil-powered combustion engines were introduced in a reverse, declining scale progression: Large-scale marine engines, railroad locomotives, farm equipment and then cars. Soon after came smaller lawn mowers and tiny hobby engines.

A 50-year history of building out global supply chains, combined with a downward scale progression in devices, were big reasons why companies like Standard Oil were able to encourage the adoption of cars like the Model T in the early years.

Related: Daily OPEC Oil Prices Now Public For The First Time Ever

Of course not all batteries are made of the same materials, but increasingly the lithium-ion construct is becoming a dominant design standard. Switching out manufacturing processes and supply chains are costly once they are established.

The nascent battery-EV industry must acknowledge their looming upstream resource issues otherwise their aggressive adoption forecasts cannot be taken seriously.

Minerals like lithium and cobalt may indeed be the new oil, especially from an upstream perspective. Ratcheting up the demand for raw materials faster than the earth can deliver leads to skyrocketing commodity prices, geopolitical fighting and environmental dereliction to name a few industrial ills. For an example of that lesson, look back to the oil business in the 1970s.

By Peter Tertzakian for Oilprice.com

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  • Jhm on July 25 2017 said:
    This is why Tesla has locked in long term supply aggreements for the Gigafactory. Competitors to Tesla will need to do the same. As the EV market heats up, automakers that have not cultivated a solid battery supply chain will find themselves quite disadvantaged. The industry as a whole will be supply constrained for quite some time. So planning ahead matters.

    OTOH, the mineral needs of big batteries is a wonderful opportunity of extractive industries to transition away from fossil fuels. This should be seen as the answer to declining coal mining jobs. Don't wait for government handouts; find something of higher value to mine.
  • cyril widdershoven on July 26 2017 said:
    Interesting and good article. OTOH they will be facing another major issue: not enough capacity on the power grids. Reports are already warning that there could be a major blackout if penetration goes beyond dreams and all come online at same periods of time, which will be normally early morning or early afternoon. Investment needs are very high but most governments seem to ignore this situation. Looking forward to reports on this and putting issues on the table.
  • RD on July 26 2017 said:
    "The equivalent of 15 million cell phone batteries are needed to make one battery for an 80 kWh electric car"

    Tell me this is some sort of calculation error..I know it was a lot but...and I was worried what to do with my 1 cell battery.
  • Kevin on July 26 2017 said:
    I agree with your article however batteries have one thing that oil doesn't. I put gas in the tank and consume it and it is gone forever. Lithium batteries with they age out, get in wrecks, or are just go bad they can be recycled over and over. At some point I think the demand for "new" metals into the system will level off.
  • snoopyloopy on July 26 2017 said:
    It's worth pointing out that the goal isn't to just turn all the current cars on the road to be electric, it's to also reduce the number by making them part of shared autonomous fleets. Already, some studies have found that one shared car can replace nine individually-owned vehicles, which implies that up to 85% of cars will disappear. Even if we're extremely conservative and cut that estimate in three, that's still a third fewer cars on the roads. Though still a couple years off, that has a noticeable impact on the estimates above.

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