Nobody would have predicted ten years ago, back when everyone was talking about Who Killed the Electric Car, that oil would someday have to fear the future of General Motor’s EV1. Practically none of the 1,117 units were still in commission in 2006 when the movie first aired, but today there’s a whole new fleet. In fact, oil majors are worried that electric powered cars could soon replace traditional combustion engines.
Electric cars are becoming more numerous every day. Despite rapidly growing sales, this past October, EVs represented only about 0.17% of energy consumption in the transportation sector. A recent study shows that EV prices are declining faster than anticipated and that oil demand could peak by 2020. This would be brought on by EVs reaching price parity with ICEs. Carbon Tracker and the Imperial College of London were quoted saying “This growth trajectory sees EVs displace approximately two million barrels of oil per day in 2025.” Such a captivation of the oil market reminds oil traders of the OPEC price war in 2014 that has lead to the recent need for supply cuts, three years later.
The report published earlier this month seems quite optimistic, especially to oil majors. Shell doesn’t think demand with peak for another 5 to 15 years and Exxon gives oil till 2040. Saudi Arabia estimates they have enough oil reserves to last another 70 years. The alternative to these forecasts is grim. It could pose a serious issue for oil companies if demand were to slow.
If there’s any chance for survival, firms will need to change with the times. Shell has potential for a future, having already begun diversifying into natural gas and biofuels. Renewable energy must become a priority for these oil empires. Saudi Arabia, the world’s leading exporter of crude, could soon be known for solar panels production. Other companies will need to follow suit.
To some, such an impending shift would be beneficial. There are 194 countries that have signed the Paris Accords, aiming to reduce climate change. Further development of EVs would be extremely advantageous to participating governments. To meet these reduced carbon emission levels, the EPA has required all cars must achieve a fuel efficiency of 54 miles per gallon by 2025. President Trump has expressed an interest in potentially withdrawing from the agreement. Investors should prepare for such a decision because, if pursued, there would likely be a price jump in oil and automobile companies.
Long-term investors should consider stocks such as Tesla and General Motors, both excelling in the EV industry. Tesla’s ambitious Elon Musk ultimately plans to integrate solar panels into the roofs of cars. The advances are unending as are these company’s growth, evident in their stocks. It would be quite plausible for investors to finance these shares by shorting oil companies or the commodity itself. In the short term, oil prices are expected to rise with the ongoing supply cuts. Companies like Suncor and TransCanada have favorable conditions with their expected growth. A long-term spread using derivatives on any major oil company would be a viable option as well, capitalizing on short-term returns.
By Michael McDonald of Oilprice.com
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