How Plunging Battery Costs Are Set to Disrupt Oil Markets

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

Oil & Gas

It’s no secret. It’s started…

Solar module costs dropped 50% over the last seven years. And EV and storage battery costs fell 35% last year alone.

And now it’s set to disrupt the oil markets.

Let me explain.

I’ve written at length about what I call the Energy Disruption Triangle. It’s the intersection of solar energy, electric vehicles (EVs) and cheap battery storage.

Together, they are going to completely disrupt the way we generate, use and store energy. But it’s the storage side of the triangle that’s going to be the most disruptive.

Cheap batteries, according to Fitch Ratings, could “tip the oil market from growth to contraction earlier than anticipated.”

Continued improvements in battery technology are threatening utility and auto industry bonds tied to fossil fuel use. Energy storage costs are continuing to drop, and that could significantly disrupt oil markets.

 The biggest threat to the oil industry is the rate of change from fossil fuel vehicles to EVs, and from coal and natural gas power plants to solar.

It all has to do with a faster-than-anticipated migration from fossil fuels to renewables.

I have often commented that I believe EV adoption rates will be much greater than anyone anticipates. And I’m not the only one…

Bloomberg estimates that by 2040, EVs will displace 13 million barrels of oil a day. The worst-case scenario would be what Fitch calls an “investor death spiral.”

t turns out two out of three forecasts developed by the World Energy Council are predicting the same thing as Fitch.

oil-demand-contracts

In the “status quo” scenario, oil use peaks around 2040 and then remains relatively flat for the next 20 years. In the “technological disruption” scenario, cheap battery storage leads to faster EV adoption and a more rapid decline in oil use.

Finally, the “low-carbon policies” scenario has an even more rapid reduction in oil use, leveling off in 2020 and rapidly dropping after 2030. If anything but the “status quo” plays out, capital markets tied to fossil fuels could collapse more quickly than actual fuel demand.

Utilities can easily avoid the death spiral. They just need to invest in renewables and other clean energy technologies.

That lowers their downside risk if markets turn sour on the oil economy. The good news is utilities are already starting to adopt renewables.

Individual investors need to do the same thing. And they need to start now.

Take another look at the above graph. You can see the actual decline in oil starts around 2020 with low-carbon policies.

In my opinion, investors need to plan for that scenario. History tells us that markets will turn long before the actual physical decline in oil.

Once the trend becomes evident, say goodbye to fossil fuel-related investments. This will negatively affect oil companies, oil service companies and utilities.

Just imagine what will happen to business at the 124,374 convenience stores that sell fuel…

The average store pumps 1 million gallons of oil per year. Assuming an average net profit of $0.07 per gallon, that’s a $70,000 profit annually.

That’s two-thirds of the average store’s profits. The other third comes from inside sales.

I can speak from personal experience that my wife and I haven’t been in a convenience store since we started driving EVs. That was nearly four years ago.

Some investors may think this scenario is far-fetched or too far out in time to have any negative effects on their portfolios.

However, as I like to say, “technology marches on.” Nearly every future forecast regarding technology turns out to be conservative.

That’s because when a technological advance turns out to be a good one (take the iPhone for example), humans flock to it in droves. And there’s always a tipping point.

I believe the tipping point for cheap batteries and EVs is underway. Even if one-third of drivers switch to EVs, a significant drop in gasoline and diesel demand will result.

Big Oil sees the writing on the wall. I’ve already written an article about it.

Utilities are starting to come around, too. They are starting to realize the potential new business that will come their way from EV charging. I wrote about that here.

Those kinds of moves get people’s attention. Now, I’m not suggesting you dump your utility and oil and gas stocks now. I still have plenty of them in my personal portfolio – and in the portfolio my paid subscribers see. But you need to keep one eye on EV adoption rates.

I am in the midst of writing a book about the disruption occurring in the energy and automotive world because of increasingly cheap battery storage. I’ll certainly be writing more about it all in the months ahead.

Good investing,

Dave