Disruption in the energy and auto markets

The cost of energy and the profits derived from its sale have endlessly fascinated economists, business analysts, journalists, investors and historians. American power, culture and foreign policy are entwined so closely with the rise of oil and gas as the world’s primary source of energy that it is almost impossible to envision what modernity would look like without this driver of industrial might, until now. It seems that we have reached the first stage in the disruption of an industry unrivaled in its impact on the fabric of modern life.

Disruption in the energy market is occurring due to dramatic changes in technology. The first change is within the oil and gas market itself with the rise of shale. The second is external, with the rise of Tesla and the electric automobile. The rise of Shale is well documented. Global oil production is 80 million barrels a year; the US produces 10 million barrels a year of which Shale accounts for 6 million barrels. The same holds in the natural gas market. The US will produce 74 billion cubic feet of natural gas in 2016 60 percent of which will come from shale. These statistics are remarkable. The acceleration of shale as a percentage of US production continues despite lower oil and natural gas prices. Private equity firms invested 57 billion dollars in shale producers in 2016. Oil giant BP is in talks to sell its North Sea assets where they have been production leaders since the 1960s in order to buy Shale assets. Tension among OPEC producers is high with Saudi Arabia and Russia (who is not a member) demanding compliance with
agreed to production cuts.

The rise of natural gas production from 8 billion cubic feet in 2008 to 44 billion cubic feet in 2016 also reflects on the decline of the coal industry. Coal and natural gas compete as fuel for the electrical grid. Utilities are moving at a rapid rate toward natural gas and away from coal and in 2016 natural gas surpassed coal in the mix of fuel used for US power generation. The electric automobile and the rise of Tesla is the second great technological disruption facing the energy industry. The rise of electric and potentially autonomous vehicles is disrupting the automotive and trucking industries as well as energy companies. 30 electric automobiles are now on offer. Less than 2 percent of cars are electric but growth is staggering. Growth in electric vehicles was 37 percent in 2016 and expected to be 70 percent in 2017. These numbers exclude the Tesla Model 3 which will move into mass production later this year and has a waiting list in excess of 400,000. Mercedes is this week allocated 1 billion USD to an Alabama plant to build their first electric SUV while BMW watches as the Model 3 take direct aim at the BMW 3 series.

In conclusion, the rise of the autonomous electric car will, over time, place a tremendous burden on oil manufacturers. The movement of legacy producers into shale is girded by shales dual role in both the oil and natural gas market. Coal, already in decline looks to decline further. The rise of solar power is an additional long term threat to both oil and coal. Environmental concerns over shale production are also a medium to long term consideration investors should be mindful of. Rapid technological change is upon us and the winners and losers are now being determined.

Steven Malin

September 24, 2017