The Coming Blow to the Oil Industry

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Alternative Energy

The oil industry has just come through two massive changes: the rise of unconventional oil production from shale and Saudi Arabia’s failed attempt to regain market share.

But those changes are nothing compared with the changes that electric vehicle adoption is going to have on the oil industry. EVs’ rate of acceptance has huge implications, from global warming to road tax revenues to U.S. electrical grid expansion and reliability.

More importantly, it’s an opportunity for investors who position themselves to capitalize on it. (More on how to do that in a moment.)

Remember Dave’s Laws of Technology:

  1. Technology marches on.
  2. When it comes to technology, changes happen much faster than you’d expect.
  3. Initially, new technology can be uncomfortably disruptive.

We’re already seeing No. 2 at work.

The rapid adoption of EVs represents the beginning signs of “competition” in the oil industry.

That’s because more than 70% of the crude oil we use here in the U.S. is for transportation. That includes planes, ships, trucks and cars.

In other parts of the world, that percentage is slightly lower (64%). But for more than a century, oil has been the engine of transportation.

Upending Personal Transportation

However, we are now on the cusp of EVs being as disruptive to the oil industry’s future as OPEC and Saudi Arabia’s market share grab was in 2014. You may remember that in November 2014, Saudi Arabia decided not to cut production like it always had when oil prices dropped due to an oversupply.

It was an attempt to drive some of the U.S. oil producers out of business. Saudi Arabia and OPEC thought that this would reduce the amount of shale oil coming from the U.S. onto the global market.

It did displace about 2 million barrels of production. It also put dozens of U.S. exploration and production (E&P) companies out of business.

And right now, EVs pose a similar threat. They could easily displace 2 million barrels of demand for crude by 2025 or sooner. And that’s a conservative estimate…

This coming disruption is not lost on major oil companies. Incredibly (for them and their shareholders), they aren’t currently doing anything to plan for it.

BP (NYSE: BP) thinks EVs could evaporate 5 million barrels a day of crude demand over the next two decades.

Data analytics firm Wood Mackenzie thinks EVs could drop demand for crude by 10% (roughly 8.5 million barrels per day at current levels) over that same time frame.

And – as a result of EV adoption – Royal Dutch Shell (NYSE: RDS.A) thinks world demand for crude could peak just five years from now.

The Grantham study predicts EVs could be one-third of all vehicles sold by 2035, more than 50% by 2040 and more than 66% by 2050. Just imagine what would happen to crude demand.

I have talked about stranded oil for some time. Under the above scenario, we are looking at even more stranded oil.

Oil demand could level out from 2020 through 2030 and then fall steadily after that. Any expensive oil production (offshore, etc.) would immediately stop.

Companies will severely cut back on exploration. E&P companies will produce only the cheapest oil (Permian Basin, anyone?).

Even if real EV penetration is somewhere between the conservative and the aggressive forecasts, fossil fuel-fired vehicles could easily lose 10% of market share to EVs. That would be enough to displace 2 million barrels of oil demand per day by 2025.

Crude prices would plummet. And even though the oil majors are aware of this potential scenario, according to the Grantham study, none of them “are taking this possibility seriously or planning for it.”

So what should the average investor do?

In the short term, owning dividend-paying pick-and-shovel fossil fuel MLPs is certainly okay. However, you should also think about owning EV pick-and-shovel plays.

EVs are coming, and they will be a disruptive force in the crude oil sector. And that will happen much faster than anyone thinks it will.

Good investing,

Dave