Happy Easter Monday!
If you have read update 2, you know that the earth is heating up at a staggering rate, with greenhouse gas emissions as the biggest driver. This topic especially can make me feel bitter and rebellious. But this week I would like to dissociate from those combative feelings and give you an update on rather hopeful developments from a financial perspective.
Who agree(s) with the following statement (multiple answers possible)?
Investments in the fossil fuel industry bring major financial risks and are therefore unwise.
a) Governor of the Bank of England, Mark Carney
b) President of the Central Bank of the Netherlands (DNB), Klaas Knot
c) The Rockefeller family
d) Bloomberg business analysts
e) ICBC, China’s biggest bank
Continue if you are ready to see the correct answer.
Besides political and ethical reasons, the strongest incentive to stop investing in the fossil industry seems to be the prospect of huge financial losses. You may have heard of ‘stranded assets’ and ‘Carbon bubble’ already. Both describe the phenomenon where investments in fossil energy (hence the carbon in Carbon bubble) lose value due to a sudden drop in demand. Some of the risk factors that could result in stranded assets are:
- New government regulations
- Falling clean technology costs (solar, wind)
- Consumer behaviour
- Liability issues
In my opinion, consumer behaviour is the most interesting. We, consumers, have more power than we realise. Let’s take the electric car as an example.
Bloomberg analysts expect that electric cars may trigger the next oil crisis sooner than we think!
If you want to know how, please read on. Otherwise, enjoy the last day of Easter and see you next week!
Tell me more!
So, the biggest three fossil fuels are oil, gas and coal. Oil is burned for transportation, while gas and coal are burned to produce electricity and heat. To understand how electric cars may affect these seemingly rigid markets we have to look at three developments and prognoses.
1. Oil price sensitivity
As you have probably heard, the price of oil has dropped dramatically in recent months.
The question why the oil price has plunged is a difficult one. But it boils down to the simple economics of supply and demand: demand was fairly stable while the supply of oil increased. This imbalance in the oil market creates some sort of sale where oil is sold against bargain prices. Often the selling price is even lower than the cost of production. This drop in oil prices shows that the value of oil is rather sensitive to the balance of demand and supply. This sensitivity is important.
The supply and demand balance works two ways. If the oil price is sensitive to a small increase of supply, then surely the oil price will also be sensitive to a small decrease of demand. In other words, we need a critical amount of electric cars to reduce the oil demand by just enough to tip the balance. Then oil prices will plunge again because of overproduction. However, this time it will be permanent. Bloomberg expects this to happen around 2023.
Have a look at the 3-minute video below.
2. Energy storage capacity
As is explained in the video above, first the price of electric cars must come down, and the range must go up. That means that the critical component of the electric vehicle is the battery.
And luckily the price of a battery is decreasing rapidly. You probably know Moore’s law or you might be familiar with the megapixel race in digital photography. These are examples of so-called experience curves where both scale of production and innovations lower the price of technology.
Later this week Tesla will announce their first mid-range car (of about €35k) and many other brands will follow this year and the next. If your next car is not yet a full electrical vehicle, then probably the one thereafter is.
3. Smart grids
So far I have explained how electric cars could have an effect on the oil industry. But a happy side-effect of electric cars is that they are connected to the electrical grid when idle. Not only can they pull power from the electrical network, technically the cars can also deliver power to the network. That’s exactly what a smart grid allows.
For example a Tesla model S has a 70kWh battery. 70kWh is enough to power an average house for over a week!
A lot of small and big scale experiments are currently running to develop a smart electrical grid. Such a grid is especially desirable when electricity is used from renewable resources that depend on the weather. My guess is that there are enough electric car owners that would like to hire out some of their battery capacity for a good price! That means that we are no longer dependent on gas or coal power plants for consistent power supply.
Have a wonderful week!
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