11 Sep China Leads World in Drive to Green Transportation
Has China co-opted Elon Musk’s vision for an emissions-free transportation future? It certainly looks like it. And there are big implications for the global oil industry.
The Musk Trifecta
I’m a great admirer of Elon Musk’s grand scheme to overhaul the transportation sector. It’s a seriously bold move, and he’s making progress on all fronts. His first and most prominent asset is the sexy auto venture that is now building up manufacturing capacity to 500,000 cars/year for his latest design, the Model 3, an electric car for the well-to-do masses (well-to-do in that it’s US$35K to purchase, and you really need a 240v power line to your garage to feed the batteries – perhaps another $5K – or Tesla’s solar shingles at about US$65K for a standard house).
Next is the enormous battery plant being built outside Reno NV that will make the batteries for the vehicles. Batteries are a key element in his formula because it’s the batteries that displace petroleum.
To capture solar energy for the vehicles, he has yet another critical asset in the mix – a solar panel company that makes beautiful roofing tiles that are also solar energy collectors. In the US, roofs get replaced on average every 10 years (and more frequently in those places visited annually by tornadoes, hurricanes, fires, and other violent weather). That’s plenty of time to build up manufacturing capacity to match electric vehicle demand.
Finally, Tesla offers the Powerwall product line, household and commercial batteries that store up solar power generated in the day (or grid power when the sun doesn’t shine), for recharging your electric vehicles and for powering your other needs in the evening.
There are lots of skeptics writing about how the Powerwall doesn’t have enough capacity, or how not enough roofs are oriented properly for maximum solar collection, or how inefficient the tiles are, or how the Tesla doesn’t have enough range. But just 5 big household appliances (fridge, stove, dishwasher, dryer, oven) account for the majority of household energy consumption, and they continue to become very energy efficient. And solar panels have dropped in price while gaining in efficiency, too. Finally, even the Tesla vehicle has tremendous range (1000km on a single charge) with creative energy management.
What the western press doesn’t realize is how China Inc has copied this formula and now sets the pace for adoption of emissions-free transportation.
The IEA reports that the world-wide fleet of electric cars reached 2M in 2016. Some 40% of new car purchases were from car companies whose names we struggle to pronounce and don’t really hear about in the west, because they’re not exported and they don’t advertise on HNiC. While Tesla is just ramping up production, China is already ahead. With vehicle ownership in China much below that of North America, first time car buyers are likely to buy electric cars. Driver expectations and behaviours will be set by the unique features of electric transportation, whereas western expectations for electric vehicles have been set by the incumbents (petroleum cars).
Next, the batteries. China’s central planning team has “encouraged” its industry to get into the battery business. The largest battery firms today may be Japanese (those masters of consumer electronics), but the Chinese are adding capacity as a matter of national strategic importance.
As for renewable energy, China as a nation adds one soccer field of solar panels (75 yards by 115 yards, or 77,625 square feet) every hour. Compare this to the average house roof area in the US of 1500 sq feet, and Tesla needs to convert 51 house roofs every hour to keep pace (that’s about 450,000 roofs per year), a tall order.
China also installs one big wind turbine every hour, or about 8700 per year. For reference, a typical turbine of about 1.5 mWh output and a 30% capacity rating, provides enough power for 330 houses in the west. That’s about 8M houses in total.
So while critics take their shots at Mr Musk, the Chinese seem to have concluded that his vision is spot on, and are now well ahead on all fronts – vehicles, batteries, and renewable energy. And China does not let the market solely make strategic decisions about such important topics as emissions, energy and transportation. As they begin to see the positive impacts, my bet is that they double down, as this news story suggests.
Unfortunately, the west does not fear Chinese efforts in digital yet (the top 5 largest digital companies by market cap are American – Microsoft, Apple, Amazon, Facebook and Google), despite success stories like Alibaba, Tencent and Wechat. The west seems also unfazed by the Chinese on industrial matters, despite the success of companies like Huawei in trouncing the world of telecoms switches, their rise as the world’s largest solar panel producer, and one of the biggest manufacturer of wind turbines.
Implications for Global Oil
What happens to the global oil sector as China transitions to an emissions-free transportation sector?
Demand for oil
China has accounted for the bulk of recent demand growth in oil as both the largest and the fastest growing economy on the planet. With fewer internal combustion engines in their market, growth in oil demand will have to rely on other markets, but which ones? India has also signaled its intent to move away from petroleum engines. Africa is a large untapped market, but highly fragmented and lacking infrastructure.
Demand should plateau and fall as more electric drive trains displace petrol.
As another observation, 13% of global oil demand is used by the oil industry. Reduce demand for oil in transportation and also reduce the demand for oil for oil, compounding the fall in demand.
Supply of oil
Digital advancements are actually unlocking more oil reserves as digital helps improve the low recovery rates of unconventional resources. The US, with its abundant shale deposits and hyper kinetic oil sector, will continue to produce the marginal barrel, at ever declining cost. The risk profile of oil assets may well change from a high risk/high reward asset class to a lower risk, longer life class. Higher cost barrels will be priced out of the market permanently, stranding those reserves.
Oil pricing basis
China and Russia are both keen to trade oil in some currency other than US dollars and rapidly shifting markets create the conditions for change. For example, a number of trials for trading oil using digital technologies, like block chain, create an opening for oil pricing using a non-sovereign crypto currency. Power trading is also experimenting with block chain, as is LNG trading (LNG is a key fuel for power generation). It’s not inconceivable to project how energy markets transition to a neutral currency for trading in energy commodities (power, oil, renewables, gas).
As demand for oil shifts around, long life investments in oil midstream (pipelines, ports, terminals, ships) become harder to derisk. For example as China transitions to an electric transportation network, what is the outlook for expanding Canadian oil pipelines and terminals to satisfy what looks like a capped and possibly declining market?
A number of markets retain strategic petroleum reserves that provide a buffer for supply interruption. IEA guidelines are to have 90 days supply on shore, but with demand for oil looking like it may decline, those petroleum reserves could well be too large. Big long positions may no longer be economically sensible.
The global power grid will need to transform to accommodate renewable power generation, household and commercial batteries, and on-the-move power represented by electric cars. Power assets have historically been the dominant asset class for those seeking long life and low risk, and will now compete more directly for investment dollars with oil.
China’s efforts to build islands on coral reef outcroppings in the South China Seas are unlawful, according to a recent court decision. But one of the reasons for a larger presence has been to secure access to potential oil and gas reserves in the area, which may no longer be needed. The US may not feel the need to militarily oppose Chinese efforts in nation building in the absence of an oil-driven justification.
In the famous movie, China Syndrome, a California nuclear reactor nearly melts down and journalists discover what is possibly a cover up of the true situation. China Syndrome therefore refers to the possibility of a nuclear reactor meltdown penetrating the earth’s core and traveling through the planet to emerge in China.
In my view, it’s the reverse. China’s efforts to transform what will be the world’s largest transportation sector could trigger a meltdown of western efforts to transform the west’s own transportation systems. Instead of criticizing Mr Musk’s efforts, westerners should figure out how to help him and other innovators accelerate the transition.