25 August 2017
Road ahead closed – time to plan your diversion?
Last year a spokesman for the UK Government said that it was committed to “ensuring almost every car and van is a zero emission vehicle by 2050”. Only a few days ago Environment Secretary Michael Gove stated that he intended that no new petrol or diesel cars should be sold in the UK after 2040. The French government has made a similar commitment and Volvo announced that it would only be selling hybrids or electric vehicles after 2019. So what does this mean for the future of fossil fuels and the motor industry?
For more than a century the internal combustion engine has been the preferred form of propulsion for public and private transport. It has shaped the way we live and work, dictated the design of our cities and been a major catalyst for technological progress. The private car has taken centre stage and will continue to do so for many years. In the UK, for example, 55.2% of people drive to work (and a further 6.3% travel to work as a car passenger). In the USA about 85% of workers drive to work. According to the RAC Foundation, 323.7 billion miles were travelled in the UK in 2016. Although these habits are unlikely to change in the foreseeable future the means of propulsion is on the brink of a revolution, caused by the prospect of dwindling oil reserves and concerns over air quality.
There are few serious contenders to replace petrol and diesel. One alternative is hydrogen. Considerable development has been put into hydrogen-fuelled cars, largely because they are more energy-efficient than fossil-fuelled cars and their emissions are harmless. However, (and here I disagree with my colleagues’ blogs of 7 August and 11 August) taking into account the amount of energy required to produce hydrogen, and the costs (and hazards) of transporting and storing it, such vehicles are far too expensive. In terms of total energy used a BMW Hydrogen 7 consumes 254 kilowatt-hours (kWh) per 100 kilometres (km). A typical petrol or diesel car uses 80 kWh per 100km.
The other contender, the lithium-ion battery, appears therefore to have an unassailable lead. A small electric car will use about 15 kWh per 100km. At the moment however the electric vehicle market is predominantly in hybrid vehicles. But these are only about 30% more efficient than diesel cars and are not zero-emission; they should be regarded as an intermediate step in the progression towards ultra-low emission vehicles (ULEV). Up to now the two main objections to ULEVs have been their cost and their limited range. Few car-owners are prepared to pay a premium of 25% to 30% for a car whose effective range between charges may be less than 100 miles, so only about 1% of the world’s cars are electric. In 2015 28,188 electric cars were sold in the UK and of these about two-thirds were plug-in hybrids. This figure, though very small, nevertheless represents a dramatic increase, being more than the total sold in the previous five years. In 2016, Nissan sold 17,500 of its popular ULEV, the Leaf.
A fundamental change is now under way. The lithium-ion battery, first introduced in the Sony Camcorder a quarter of a century ago, is undergoing rapid development. Tesla’s latest ULEV, the Model S, has a claimed range of 300 kilometres, and Chevrolet’s Volt can almost match that distance. In terms of cost lithium-ion battery packs cost $1,000 per kWh in 2010 but now cost about $130. Battery energy density is also increasing. Measured in Watt-hours per litre it reached 200 in 2015 but is anticipated to exceed 400 by 2022. Given such technological advances UBS now predicts that electric cars will make up 14% of global car sales by 2025.
These developments will have far-reaching consequences both economically and geo-politically. They will affect the hydrocarbons industry, mineral exploitation, power generation and the manufacture of electrical equipment. They will have a serious effect on the economy, political stability and influence of the main oil-exporting countries.
One obvious question concerns the additional electricity required to fuel the new cars. It is estimated that between six and 11 new power stations will be needed in the UK. Given the long lead time in planning and construction, nuclear is unlikely to fill the gap, and fossil-fuelled generating stations will only displace the air quality problem to other locations (although even with the power being generated by traditional fuels there is a 54% saving compared to burning those fuels in the vehicles). Paradoxically the growth in the manufacture of lithium-ion cells might provide the solution to the problem. If vehicles can be charged whilst demand is low but power generation is high (e.g. a windy night or, more unusually, a sunny bank holiday) the car batteries themselves will become a storage facility that would smooth out peaks and troughs. Furthermore the battery manufacturers are currently producing more than the electric car makers need so they are turning their attentions to grid storage systems whose purpose is also to match supply and demand.
Whilst demand for oil will reduce it will by no means disappear. Hydrocarbons will continue to be needed in large quantities for plastics, chemicals and heating. The aviation industry is not likely to be able to convert to electric, and diesel engines will still be needed for heavy goods transport and ocean-going vessels. Royal Dutch Shell estimates that oil production will not reach its peak for another ten years.
So now is not necessarily the right time to sell those oil company shares. Should you buy shares in battery production, lithium exploration, or ULEV manufacture? The main battery manufacturers are Panasonic (working in partnership with Tesla), LG Chem and Samsung – plus a couple of Chinese companies. Lithium is not a scarce resource worldwide, though it is concentrated in some locations, notably Chile. Due to rising demand its value has increased from $4k per tonne in 2011 to $14K today. It could go higher but as more is extracted it could quite easily fall back in value. And it should be noted that, unlike oil, lithium is not consumed during use. It will be recovered and recycled so eventually demand will level off.
The car manufacturers that should be of greatest interest to investors are those that are already well-advanced in ULEV technology: Tesla, Chevrolet, Nissan and Toyota.
Perhaps you should consider investing in the new infrastructure. The UK government aimed to have 11,000 electric vehicle charging points in place by the end of 2016, but fell short of this. It sees the future mainly as vehicle-owners charging their vehicles at home, but only about half of car-owners have off-road parking so there is a future in public charging points. The manufacture of the equipment required has the potential to be a huge windfall for the first companies in the market. These include very large companies such as Siemens, GE and ABB, but you might be able to find smaller niche companies on the brink of rapid expansion. There are also several small companies in the UK that are quietly and unobtrusively carrying out vital and potentially lucrative research into battery technology.
Then there are the losers. Among these are companies involved in petrol and diesel distribution and retailing, car component manufacturers and car repair garages (electric vehicles have fewer moving parts than internal combustion cars and need less servicing). So fundamental is the approaching change that it could wrong-foot some of the large global car manufacturers. It is possible that not all will survive.
There is no doubt that many well-informed and astute investors will profit from the demise of the fossil-fuelled car. Our advice to any potential investor is “do your research, watch and await the right moment”. The content of this blog in no way constitutes formal or regulated investment advice, it is merely an appetiser for a topic which promises to provide both entertainment and opportunities over the next couple of decades.
If you have any views on this subject why not share them with me or any other member of the UHY automotive sector team, or follow us on Twitter?
