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Is Tesla Really The Emerging ‘Energy King’?

About 22 months ago, Tesla Inc. (NASDAQ:TSLA) CEO Elon Musk fired an ominous warning that the shorts were about to experience ‘the short burn of the century.’ The heads-up came at a time of intense short interest in the company, with the CEO even threatening to take Tesla private. As usual, the bears quickly dismissed it as idle bluster and just another round of Musk’s marijuana-infused trolling. 

Fast forward to the present and TSLA shares have nearly tripled since the cautionary note and rallied 115% in only the first two months of the year. 

The foreboding [for the bears] came after Tesla posted a surprise second quarter profit that pushed the shares to an eight-month high. The second wave came after Beijing gave Tesla the go-ahead to build a $5bn gigafactory in Shanghai, the first facility outside the U.S.

The third act could come when Tesla converts its hordes of customers, investors and admirers into buyers of products from its sidekick business, SolarCity. That’s according to Piper Sandler who recently assigned a Wall Street high price target of $928 (from $729) for TSLA saying the company has managed to turn its customers into ‘unwitting climate warriors’ that could become big buyers of its clean energy products.

The latest upgrade has propelled the stock into record territory. Can’t say the bears were not warned.

Source: CNN Money

The Clean Energy Revolutionary

For a company that was once given an outside chance against deep-pocketed ICE heavyweights, Tesla is suddenly being hailed as a clean energy revolutionary and Wall Street cannot seem to get enough of the EV maker. 

The latest bullish thesis coming from Wall Street based on renewable energy does not seem too far-fetched either.

Piper Sandler’s Alexander Potter and Winnie Dong say that Tesla’s next challenge will be to convince its EV customers that charging their vehicles using coal-based electricity isn’t very green and urge them to generate and store their own solar power. The analysts say that their experiment to install a solar system to charge a Model X has already yielded "illuminating" results and “shows significant promise” for Tesla's future in the energy-generation industry.

Tesla’s acquisition of SolarCity for close to $5bn in 2016 left many observers scratching their heads given that it came at a time when Tesla needed large amounts of capital to expand production and solar companies were out of favor. But that purchase could turn into one of the company’s best decisions in hindsight. 

Currently, it’s easy to overlook Tesla’s solar business considering that the solar-panel and battery segment brought in just six percent of the company’s revenue in 2019. But with meteoric rise in ESG investing over the past couple of years, many companies, including traditional fossil fuel companies, have been investing in clean energy projects including solar and wind energy at an unprecedented rate.

At the center of our green energy drive are solar and wind power, both of which are expected to contribute nearly half of the global power mix by 2050 as per Bloomberg New Energy Finance. Global supplies of renewable power are expected to grow 50% over the next five years led by a resurgence in solar energy.

Here in the United States, utilities are trying to cut down on emissions by implementing utility-scale solar projects coupled with battery storage units (one megawatt (MW) or greater power capacity).

In March 2019, NextEra Energy (NYSE:NEE) announced plans to build a 409-MW energy storage project in Florida that will be powered by utility-scale solar.

Xcel Energy (NASDAQ:XEL) plans to replace its Comanche coal units with a $2.5-billion investment in renewables and battery storage, including 707 MW of solar PV, 1,131 megawatts (MW) of wind and 275 MW of battery storage in the State of Colorado.

In October, Duke Energy (NYSE:DUK) announced plans to build an energy storage project at the Anderson Civic Center, Carolina, including investments to the tune of $500 million in battery storage projects for electricity generation capacity of 300 MW.

It’s this ongoing clean energy revolution that has infused renewed enthusiasm into Tesla’s management which sees the energy generation and storage business competing with the core automotive business someday.

Vertical Integration

Tesla’s insistence on having a complete clean energy ecosystem and trying to make almost everything in-house has been criticized in the past by veteran automakers like Jaguar and Mercedes-Benz. But this kind of extreme vertical integration is beginning to yield dividends with the leading EV company with its EV consistently coming at or near the top in quality tests. Teardown specialist Sandy Munro has hailed Tesla’s electronics as superior to off-the-shelf components and compared them to the electronics of a fighter jet.

A lot of Tesla’s resources are currently dedicated to battery improvements. Tesla’s batteries stand out among its rivals in the EV marketplace primarily due to their superior efficiency and range. To this end, the company has made strategic acquisitions including Maxwell Technologies and Hibar Systems and partnered with CATL to produce batteries for its China gigafactory.

And this in-house model and dedication to quality is paying off in spades. Companies that were once viewed as Tesla rivals are simply unable to keep up due to supply shortages of critical components. For instance, the Mercedes-Benz EQC--once dubbed a Tesla Killer--has seen its 2020 production cut in half to 30,000 units because Daimler is unable to secure enough batteries. Meanwhile, another premium EV model--the Jaguar I-PACE--has had to halt production for weeks for the same reason.

Tesla already has a big head-start on its competitors on many critical aspects of production as the success of its gigafactories and extreme vertical integration model have demonstrated. The company has been winning the trust of even staunch critics by proving that it can consistently deliver. 

Don’t be too surprised if it becomes a major supplier of some of these components—and give Elon Musk another opportunity to gloat.

By Anes Alic for Oilprice.com

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  • Mamdouh Salameh on February 24 2020 said:
    All this rigmarole is just to tell us that Tesla’s shares have tripled and that the company has posted a second quarter profit particularly after China gave it the go-ahead to build a $5 bn factory in Shanghai.

    However, the litmus test is how many electric vehicles (EVs) is Tesla selling worldwide. The simple answer is not much. EV sales remain so minuscule that they don’t register on the global transport system. Moreover, market realities are not encouraging either.

    The first reality is that despite huge government subsidies, sale of EVs accounted for only 2.2% of all cars sold in the United States in 2019. Globally, the number of EVs and hybrid vehicles is estimated at 4 million out of 1.5 billion internal combustion engines (ICEs) or 0.27%. EVs could never replace oil in global transport throughout the 21st century and far beyond.

    The second reality is that range, charging time and price are only temporary teething problems for EVs. Technology will sooner or later resolve them. However, the real challenge facing a deeper penetration of EVs into the global transport system is the realization that oil is irreplaceable now or ever.

    The third reality is that while EVs are benefiting from evolving technologies, ICEs are equally benefiting from the evolving motor technology. As a result, ICEs are not only getting more environmentally-friendlier but they are also able to outperform EVs in range, price, reliability and efficiency.

    Moreover, Tesla’s selling point about the charging of EVs is very economical with the truth. It says buyers of EVs need not charge their vehicles using coal-based electricity as this isn’t very green and urge them to install a solar system to charge their EVs. However, coal only accounts for 37% of global electricity generation. Electricity generation in countries where EVs would most probably be sold such as the United States, the EU, Japan, South Korea and China is overwhelming sourced from natural gas, nuclear energy, solar power and other renewables.

    Therefore, DON’T BANK ON Tesla emerging the energy king during this century.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Kent Le on February 24 2020 said:
    Mamdouh,
    I understand that your career is based on the Oil industry so you are very resistant to change. I work for a supplier of Rocket companies and customers like ULA, Boeing, Aerojet laughed at SpaceX. Look at where they are now. I am far from an early adopter but my next purchase will be a Model Y. My brother Model 3 costs him $60 to "fill" up each month compared to $250 previously with an ICE car. A loaded Camry costs $35k. My brother's Model 3 was only $43k. After savings in energy cost and less maintenance cost it came out the same as a loaded Camry. A Tesla is just way more cool and fun to drive.
    Many countries have passed legislations to have at least 50% EV or totally ban the sales of ICE vehicles in 10 to 15 years. EVs will become cheaper as battery technology improves and price goes down. I foresee 40% to 50% EV market share in 10 years.
  • Chris Wood on February 24 2020 said:
    Not saying Tesla will be the energy king but I can't say it won't be king either. As far as the other comment goes my only statement would be that when it comes to subsidies I don't see why people focus so hard on them when it comes to EV's and Tesla specifically while oil & gas, and Brands like GM and Ford recieve and have received so much subsidized funding and bail outs to make Tesla's share look like nothing.
  • Simon Cheung on February 25 2020 said:
    Dear Dr. Mandouh,

    Many of your point are well reasoned. Here are some of my thought:

    ICE has a huge limiting factor in the long run: the amount of energy per litre of gasoline. Since the option of the composition of materials to build battery is almost unlimited, every year battery density will be getting better and better as the science improve. The same cannot be said about ICE. In 3 or 4 years battery car will hit parity with ICE in price. And EV will only get cheaper after that.

    Second, no doubt range is an issue with current EV, but the barrier is getting smaller and smaller. A Tesla model S can go 390 miles, which as way better than my GM car. As that tech moving downward to the entry models of EV, range will no longer be an issue.

    Third, charging is still a problem, but that problem is also getting smaller. You can charge a Porsche Taycan or Tesla model 3 in 20 minutes or so. As you don’t need to stay with the car while charging, after buying a cup of coffee it is basically done. No doubt such technology is not in every EV yet, it will be soon enough.

    Above all, many government are banning new ICE car by 2040 or 2035. As we learn from Norway (banning new ICE by 2025) the country is already selling more EV last year than ICE cars in 2019, 6 years before the deadline.

    EV is coming, as sure as the sun is rising, just base on efficiency alone (90% vs. 20% for ICE) not counting the above reasons.

    Oil business will still be strong, as we need oil for many things else, just be a bit smaller than it is today.

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