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Uncertainty Drives Investors to Oil Stocks

Uncertainty Drives Investors to Oil Stocks

The reason that investors have…

Peter Tertzakian

Peter Tertzakian

Peter is an economist, investment strategist, author and public speaker on issues vital to the future of energy. He has clocked over 30 years of…

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Why Big Oil Is Unprepared For The Coming Energy War

Oil storage tanks

Recently, I gave a presentation on the future of energy to an audience of about 250 oil and gas professionals. Halfway through, I asked the carbon crowd to, “Raise your hand if you have driven an electric vehicle.”

It took me less than five seconds to squint and visually sift out the elevated hands.

Five adventuresome people, or about 2 percent of the audience acknowledged that they had taken a ride on a lithium horse.

“Isn’t that a bit disconcerting?” I asked. “By now all of you in the room should be aware that new-age electric vehicles represent the first meaningful threat to your monopoly in powering the transportation market.”

I went on to ask, “Don’t you think you should at least go to a Tesla, Nissan or BMW dealership and test drive the looming adversary?”


I wasn’t surprised by the results of my straw poll. Hear-nothing, see-nothing attitudes are common within entrenched industries that have long forgotten how to fight for market share.

Over 150 years ago, early oil companies sold “rock oil” for kerosene lanterns, duking it out in the market to light homes and factories. The incumbent competitors were coal-gas, whale oil and candle companies. It was a full-on market share battle between lighting systems. And by the 20th century, all of them were losing out to Edison’s incandescent bulb (powered by coal-fired electricity).

By the numbers, lighting lanterns was a small market compared to what was emerging: Turning gears and wheels with internal combustion engines. That mega-market kick started in 1908 with Ford’s Model T; since then it’s been an invincible business for the oil industry.

In trying to explain the low results of my audience poll, I wondered about the long-term effects of five or six generations of petroleum workers cycling into, and retiring from a century-long, monopolistic transportation paradigm. Had that evolution softened the industry’s competitive edge?

Whatever the reasons, it’s hard to excuse such competitive apathy, but my dissertation wasn’t finished. Related: $25 Trillion Investment Needed To Meet Future Oil Demand

The funny thing is that I went on to tell the audience that I ask the same type of question to people in the business of renewable energy and electric vehicles. For example, to executives sporting green stripes I ask, “When was the last time you visited a modern oilfield, taking stock of the new automated drilling and completion technologies?”

Predictably, I’ve only met one person in the business of clean-tech who has bothered to get serious intel on the competition they are trying to displace. It seems this group must have a gene that makes them think that their business is going to be a proverbial “slam dunk,” that they will be able to decarbonize the world with no commercial resistance. It’s a dangerous mindset, given that consumption numbers show that rapid demise of fossil fuels is not much more than academic conjecture at this point.

The bounce in the footsteps of the purveyors of new energy is justifiable. Today’s solar panels, for example, generate electrons at about half of the cost of five years ago. Gains in battery technologies – energy density, power density and cost reduction – are even more impressive. Growth rates have been exponential, without much resistance to-date.

Yet, as a color commentator of change, I also know that over the course of the same five years the breakeven cost of an oil well in places like Texas has been cut in half and it’s “rig productivity” has increased by nearly ten-fold. And it’s not just about more horsepower and better drill bits. Big data, optimization, Internet-of-things and machine learning are rejuvenating a hitherto fossilized industry. Business school profs call this competitive response, “raising the barriers to entry.” Experts are consistent in their views: there is much more innovation to come from upstream oil fields all the way to downstream engines. Related: Saudi Arabia To Spend $50 Billion On Massive Solar Push

I think by now we all know the Henry Ford story and how the “horseless carriage” was relegated to museums. But let’s be intellectually honest: The old nag in the stable had about as much chance to compete against a Model T as a slide rule could against a digital calculator. Or a paper map against a GPS chip; or a phone booth against an iPhone. In all these cases, the new product steamrolled over a weak incumbent.


The oil industry and its downstream peers are largely in broad denial about existential competitive threats. But it’s a mistake to believe that the commercial utility of today’s petroleum systems are as competitively weak as a slide rule or a tired-out horse pulling wooden wheels. Business leaders championing new energy systems need to remove their own dark blinders of denial; trillions of dollars of petroleum infrastructure and the peripheral interests of combustion-based mobility are not going to relinquish their markets without fighting back with their own innovation. In fact, they have just begun.

This is one of the most dramatic moments I’ve experienced in my 35-year career studying all energy systems. The technological change is breath-taking; the investment potential is staggering; and on top of it all, the business psychology is intriguing.

“Get to know your competition,” I suggested to my audience. “This is going to be one of the most exciting business duels in history; two giant energy systems will be competing for the hearts and wheels of the people.”

By Peter Tertzakian for Oilprice.com

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  • Bud on January 19 2017 said:
    You don't think cutting costs by 50% for consumers in little more than a year is a serious competitive response? The fact is oil is a geopolitical asset and the Saudis can and did change the market on a dime with one private meeting in NY.

    The fact that crude, various grades of crude, ethane, methane, butane, propane, etc. are all separate markets is another issue. What is fact is that the world added near 5 billion humans in the last century and also pulled about that many out of poverty and into a life that was not thinkable a few 100 years ago. That is the legacy of transportation based on combustion engines.

    Do you really think electric cars will be powered by wind and solar? Maybe if the world sheds those 5 billion. Have you visited a lithium mine? Would tesla even be around if the iPhone didn't bring down the cost of lithium batteries? Has that battery tech peaked? Regarding oil, are the Saudis western fields in decline? These are some questions you should address.

    Electric cars do not represent a value proposition for the U.S. Let alone most of the world with a subpar and unsecured grid.
  • Lee James on January 19 2017 said:
    My take on the question of possible oil industry apathy about energy source competition is that "it's just another business cycle" Under this scenario, what goes up comes down, and vice versa.

    The question is, when do we find ourselves looking at long-term systemic change?

    Bringing in petroleum is at once harder and easier -- easier because we see that it has become harder, so we mobilize. Our U.S. domestic oil looks increasingly "tough." Hard, more expensive oil to bring in includes tight-rock (petroleum source-rock formations) and deep-water. The cost of bringing this oil to market is much higher than for oil naturally held captive in underground reservoirs.

    Meanwhile, the cost of renewable energy is falling, and more efficient energy consumption is becoming mainstream -- a normal part of being cost-competitive.

    I'd like to think that the key for imagining the future is to identify what we, ideally, should do. Maybe we can actually do a good chunk of what's likely needed if we think things through. Energy that we burn is mostly where we are today. The benefits are many. But clean energy is probably what's coming.
  • OilWorker90D on January 19 2017 said:
    Great article.

    This will be an interesting battle to follow for sure.

    Where the electricity comes from to power the EV’s does not really matter.
    What is for sure is that it will not come from oil as oil is not competitive for electricity production. Even the Saudis have concluded on this one.

    If we can get EV’s with a range of 250-300 miles for a cost of less than $30k it will be very difficult for ICE to compete. I think we may see years of exponential EV growth coming to get EVs to a very high market share.
    EU is planning for 100% emission free cars in 2050 and OPEC / Exxon plans for and need this number to be less than 10%... One of them are clearly wrong.
  • JHM on January 19 2017 said:
    I enjoyed this article very much. I would add that the O&G wasn't looking, Tesla made the biggest oil discovery of the year. Just north of Reno the found an oilfield with over 10B barrels in reserve. At first they though they would only recover about 3.3 B barrels over but in developing this field the saw how they could triple the whole thing without adding a single acre. Oh, yeah, and the exploration cost is under $1.50 per proven reserve barrel.

    I am of course speaking of the Gigafactory which will house capacity to produce 150 GWh/year of batteries. Over the next 30 years this is enough to replace 10 B barrels of oil. Do your own math. Initially Tesla and Panasonic thought the Gigafactory would house 50 GWh/year capacity, but they figured out how to triple the manufacturing density. They are on a path to $100/kWh battery packs by 2020 at 150 GWh capacity. 1 kWh can easily replace 2.5 barrels of gasoline and avoid the cost and maintenance of an internal combustion engine. And at $100/kWh this cost can be fully absorbed the cost of health vehicle making an EV no more expensive to buy than a comparable gas car.

    Whether this is enough to compete with advances in drilling technology, consider this. The E&P industry should not waste money replacing reserves with anything that costs more than $1.5/b to find. Why? Because Tesla and other battermakers can replace these reserves with Gigafactories at below that cost. So you need to replace 35B barrels this year. Fine. Let's build out 500 GWh of gigafactory capacity at a cost of $50B. That's a drop in the bucket compared with the $350B the oil industry would spend just looking for oil.

    The industry sits on about 50 years of reserves. What is that 1.75 trillion barrel reserve really worth? $17.5T? It could be replaced fully replaced with about $500B investment in Gigafactories. So you might just want to pump as fast as you can and not waste a dime looking for replacements. Fifty years of reserves, that's a really long time measured in technological change. Lithium ion batteries and silicon solar panels probably won't even exist in 50 years, but will be superceded by even better technologies.
  • Philip Branton on January 20 2017 said:
    What......? Coming oil war....? This writer may be a fine guy but the war is already over. This article reminds me of the info that workers for Southern Bell were getting in the late 80's about cell phones. Any oil worker can just review a map and ask themselves if they are willing to send their son or daughter to protect oil assets in Nigeria or Libya or Somalia or Syria. It's not about being green either..... It's about energy being de-centralized so that citizens can have economic power over a portion of the economic system. Just look at HGTV alone. Does any program tell viewers when purchasing or flipping or renovating a home to first choose a home with energy production...? You tell a group of oil workers this and the informational manipulation light bulb goes off. Their pensions are at stake and they are clueless. Heck, coal miners are no different.... Ask them eye to eye where they think 3D carbon nano-tubes come from and they suddenly realize how they are getting played. John D Rockefeller was not stupid... So... How is a person like that defeated. Stop sending your son and daughter to DIE for him. Lithium and Solar and wind and geo-thermal is way cheaper when compared to the gallons of blood on a battlefield for fossil oil. Elon Musk virtually walked into the Oil Casino and dared consumers to count cards with him. The sport bookies wagering on games should start wagering on how many people in the stands are betting on the sun versus blood on a battlefield. Dare to wonder why they don't.....
  • Matthew Biddick on January 20 2017 said:
    JHM must think those batteries come out of the Gigafactory fully charged and never need to be charged again from the composition of the comment. A battery is used to store energy and that energy must come from some source. Fine, you plug your EV into the wall and, presto-chango, electricity flows into your EV. A BTU is a BTU is a BTU. The world needs about 500 quadrillion BTUs to function, and that figure is estimated to go to 700 quadrillion in the next 25 years.

    To move any object, work must be performed. Energy must be available. Solar/wind, under the present technology, will never supply enough energy to power the world's vehicle fleet to any great degree. The following was taken from Wikipedia. If you want to skip it, at least read the final sentence.

    The work done by a constant force of magnitude F on a point that moves a displacement (not distance) s in the direction of the force is the product


    For example, if a force of 10 newtons (F = 10 N) acts along a point that travels 2 metres (s = 2 m), then it does the work W = (10 N)(2 m) = 20 N m = 20 J. This is approximately the work done lifting a 1 kg weight from ground to over a person's head against the force of gravity. Notice that the work is doubled either by lifting twice the weight the same distance or by lifting the same weight twice the distance.

    Work is closely related to energy. The work-energy principle states that an increase in the kinetic energy of a rigid body is caused by an equal amount of positive work done on the body by the resultant force acting on that body. Conversely, a decrease in kinetic energy is caused by an equal amount of negative work done by the resultant force.

    From Newton's second law, it can be shown that work on a free (no fields), rigid (no internal degrees of freedom) body, is equal to the change in kinetic energy of the velocity and rotation of that body,
    W=Delta KE.

    The work of forces generated by a potential function is known as potential energy and the forces are said to be conservative. Therefore, work on an object that is merely displaced in a conservative force field, without change in velocity or rotation, is equal to minus the change of potential energy of the object,

    W=-Delta PE.

    These formulas demonstrate that work is the energy associated with the action of a force, so work subsequently possesses the physical dimensions, and units, of energy.

    The work/energy principles discussed here are identical to Electric work/energy principles.
  • MattyB on January 21 2017 said:
    Let's not forget the oil industry's vast lobbying expertise and resources. Government intervention is also a key component to macroeconomic changes. Considering the new EPA head's history of climate change denial, this may be part of their strategy.
  • Mulp on January 22 2017 said:
    Electric drive is just such a rush and that alone will sell a small percentage of buyers in a huge market. With just that volume of production, economies of scale kick in to lower costs allowing any Elon Musk or Bezos to cut prices to gain more volume.

    But you do need to drive it to understand it.

    The risk is what 20 years of volume production will enable in price performance.

    And electric drive with a fossil fuel power source on standby is an option that allows a simple engine highly optimized for one speed and load, a strategy BMW is trying. Gone are the traditional complex power train that must overcome the poor low speed torque problems of IC engines.

    This use of electric drive in freight hauling will come and offer improved efficiency which in the high quantities for oil priced at the margin can have outsized impact on profits.
  • gospace on January 22 2017 said:
    Plug in hybrids with a local commuting range on battery alone are certainly part of the future. I've got a Prius now and have my eyes set on a new Prius Prime. But, on those zero degree Fahrenheit days we get here, just how far is a battery only electric car going to get me? How much power is going to go to resistance heat to keep the windshield clear? How much power will go to keep the passenger compartment heated? Or do the developers want us to wear ski gloves and outfits to drive in winter weather? Waste heat from a hybrids engine will do that without draining the battery. Odds are these electric cars with 200 mile range aren't going to get me 30 miles in zero degree weather. I've yet to see a single article extolling the cold weather performance of an all electric vehicle. Because it's not possible to write one.
  • JC on January 25 2017 said:
    The author lined it out and he covered what I am reading in some of the comments. Denial. The EV is here. I own one. I have a full tank of fuel every day and it costs me $1 a day. The Chevrolet Bolt goes on sale in a few weeks with a 238 mile range for $29995 after rebate. The range on these cars is growing. When it gets to 400 and higher the oil field car is finished.History has shown us over and over like the author states tech does replace old proven methods. Let me add if I may everything about driving a EV is superior to a oil powered car...the quiet.....the maintenance....the power. It beats it at every metric. The result to big oil is the damage will be permanent. Some here may not have been in a new car showroom for awhile. They have hybrids of nearly every model and pure plug ins of the smaller ones. The transition to EV is fully underway. These comments on the cold regarding the battery...comical. The EV can operate in the arctic..they have a warmer on the batt that kicks in for sub zero temps. Honestly the excuses.....the denial. Its fun and comical to witness. A war is going to happen here in the next decade. The car companies 100% control it. They made the need for oil.....they will remove the need for oil. Big oil is powerless to stop the change . We the consumers are the big beneficiary.
  • Bob on January 27 2017 said:
    Yes electric car are great for office workers!what about all the trades people! They need something that can work a 12 hour day not stop for hour and recharge

    Just a thought
  • Charles on January 27 2017 said:
    I am not a bit surprised at the response. Until you can travel as far and recharge your vehicle as fast as you can refuel it, electric cars are going to remain a green dream. Oh, and that doesn't even figure in solving the problem of replacing and disposing of the spent batteries. Talk about an economic and ecological disaster in the waiting. This whole thing is a still a pipe dream with the possible exception of densely populated large cities. From where I sit in Dallas...ain't gonna happen here the distances are too great.
  • Null on January 30 2017 said:
    It's amazing how patterned the arguments get.

    A BTU is a BTU, no... That's a fuel burning concept.
    Electricity is available and now cars exist which can meet

    My particular edge case... OH NO IT CAN'T work look at this edge case.
    Guess what, it doesn't have to. It just has to work for enough people to build installed base and production volume. If it supplants just a percent or 2 that's enough to fund improvements. Then even more purchase and on and on...

    It can't work because is hasn't worked, ignoring every case it does work for.
    Well, that should be clear... It is working. It just needs refinement and increased production.

    Some random discourse on Newtons Law's... No attachment to actual issues discussed.
  • Jim on February 08 2017 said:
    In response to "Electric cars do not represent a value proposition for the U.S. Let alone most of the world with a subpar and unsecured grid."

    In 2010 I moved into a new home built to include rooftop solar PV, in Las Vegas, where electric bills average a couple hundred a month, mostly for summer air conditioning. I pay less than $20/mo. for household electric.

    For another $12K I doubled the PV array size, then traded my Mercedes for a Volt, saving $2400 more a year in gasoline, and in the case of the old Mercedfes, another $5K a year in maintenance. Under Volt's three year warranty, my maintainance costs are zero, plus, the car has not needed any. It is very reliable.

    The combination of rooftop solar plus eV ownership has a very strong value proposition and rapid ROI, and my energy costs are shielded against inflation.

  • Mark Bahner on February 13 2017 said:
    This piece does not even mention another 500-pound gorilla technology...autonomous (computer-driven) vehicles. They will likely turn the transportation industry on its head, by promoting:

    1) Transportation as a service, rather than private vehicle ownership, and
    2) Potentially much lower energy demand for transportation.

    Transportation as a service will mean that people who just need a single-seat car can actually ride in a single-car. (How many of those are on the road today?) And it means that instances where car/van pooling are advantageous can be easily recognized. It will also mean that electric vehicle "range anxiety" will be eliminated, because every electric vehicle provided as a service will have enough charge to get the person to his or her destination.
  • John Hilditch on February 13 2017 said:
    Why does the world believe road vehicle transport is the only thing powered by oil. It represents less than 10% of what is manufactured from oil. Oil will still be needed and maybe even more as manufactured change more and more to use plastics, carbon fibres and other light weights. Plus I haven't seen many planes flying round using batteries. Plus electricity generated from oil and gas is also significant. The electric car is not threat to big oil. Stop being lazy, do your research properly and stop misguiding the public.
  • Lawrence Smith on February 18 2017 said:
    the shift to electric transportation would not be so rapid if not for the concurrent shift to autonomous ride-sharing. tesla is driving these changes as fast as possible. look what happened to the luxury car segment where tesla competes with the model s and x and then realize that the demographics for that segment are less favorable to tesla than lower priced demographics that will be targeted by the model 3. the younger consumers who can afford 35K, but not 70K for a car are much more influenced by environmental concerns, much more driven by the latest fad and the rest of the cars in that segment will see sales plunge even more than the luxury segment. of course, the bulk of car sales worldwide is not in jeopardy, but the profits of auto makers is in jeopardy as tesla starts to steal all the most lucrative parts of the business. this transition is also happening with chinese ev makers. and by 2020, ride-sharing networks start to pop up and decimate car ownership. one decade from now we will look back and be amazed at how fast the changes happened. i would not want to be a truck driver, cab driver, gas station owner, mechanic. the dislocation of employment will be very big and very real.

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