Wednesday, March 2, 2022

Electric Vehicle Transition Slower than Expected

Great article in Bloomberg today:

With oil costing more than $100 a barrel, and Russia’s war in Ukraine underscoring the risk of relying on fossil fuel, it would seem like a great time to speed up the transition away from the polluting fuel. The reality isn’t so simple.

Public support for climate action is higher than ever in most countries, but that doesn’t ease the economic pain when everything from food to transport gets more costly. “This is an unfortunate downside of the economy we’ve got that runs on fossil fuels,” said Charlie Donovan, a visiting professor of finance at University of Washington. [...]

The same applies to policy makers. “When the oil price gets very high, governments put in policies to move away from oil,” said Amy Myers Jaffe, head of the Climate Policy Lab at Tufts University. And that’s easier today than during previous price spikes. The last time oil stood at more than $100 a barrel was a decade ago, when clean energy was still quite expensive, affordable electric cars weren’t in sight and the Paris Agreement hadn’t been signed.

Yet clean energy has merely slowed down the growth of fossil fuel demand, and hasn’t yet led to substantial decrease in oil consumption in most countries. That’s because replacing fossil fuel-consuming infrastructure takes time. Consider what’s happening in Norway, where 65% of all vehicles sold in 2021 were electric and yet oil demand has fallen less than 10% since 2013. Plus, there’s rising demand from developing countries that need more energy to fuel growing economies. [...]

In the U.S., even ardent climate supporters have called for the country to increase fracking to counter the rise in gasoline prices. President Joe Biden, who ran on a platform of aggressive green action, called on the Organization of Petroleum Exporting Countries to pump more oil even as he advocated for more action at the COP26 climate summit.

Expensive oil also drives up inflation, potentially prompting central banks to raise interest rates. That raises the cost of capital for everyone —including renewable companies, which have to pay more to borrow to cover the high upfront costs of building wind and solar plants. It should hurt oil companies too, but high returns mean they have less need to raise money through debt markets.

The data from Norway is impressive for the bullish oil case. We first mentioned this in the Links almost a year ago. Note that Norway subsidizes electric vehicles lavishly, more than any other country is going to be able to afford, so they have had much higher uptake. Still the reduction in oil demand is so low that even if you assume that rich nations continue with the subsidized EV boondoggle, the growth in petroleum demand from poorer nations (and aviation, and diesel, and petrochemicals in rich nations) should cause oil demand to stay steady.

That was the big threat to oil. The other, smaller threat was some kind of carbon tax or prohibition of fossil fuel use for "climate" related reasons. It is great to watch politicians cry uncle so early in the oil rally. How are they going to implement a carbon tax that "strands" our oil if they can't stomach $5 gasoline and $110 crude? It would appear that ESG is going to go in the discard pile pretty soon.


CP said...

This past weekend, we took a five-hour road trip with our brother and sister-in-law. We each drove our own cars, both EVs. We drove our eight-year-old original Tesla Model S. They drove a Volvo XC40. We ran into a number of challenges that led us to call this road trip our “range anxiety weekend.”

CP said...

This is exactly what we theorized with renewables - the bear market commodity prices were unsustainably low and making the EV batteries, PV solar cells, and wind turbines look artificially cheap.

Something like 100 lbs of nickel in an EV battery so this move, if sustained, adds $3,000 to the price. And that’s just the nickel, there’s also the copper, lithium, plus other metals (e.g. steel) for the non-battery components.

It may not be true of all renewables, but I think there are some renewables that are negative EROEI but where that was obscured by commodity inputs that were selling for less than full cycle “sustainable cost,” which should ultimately reflect their embodied energy.

Price of nickel is up 5x year over year and the price of lithium is up 7x.

CP said...

This is holding up well:

Most investors are under the impression that much higher energy prices will push renewables “into the money”--- that is renewables will become competitive for the first time versus higher priced hydrocarbons. This completely ignores the fact that energy itself makes up the single largest cost component for both wind and solar. Instead of making renewable energy more cost competitive, higher energy prices will simply drive up the costs. Renewables today remain “out of the money” and higher energy prices will never be able to push renewables “into the money.”