EVs and Surging Oil Prices

Energy transition is in the cross hairs of oil prices going parabolic. While some say rising oil prices make energy transition investments economically competitive, there is another school of thought that suggests that surging oil prices present a much bigger threat to ESG and its constant need to justify its relevance with outperformance.

No Country for Oil Men?

There are strong indications in the markets that energy transition is losing its luster as oil gallops on. The wave of energy transition investments has led to chronic under investment in traditional oil and gas. This is leading to higher oil prices as new fossil fuels dry up just as demand for crude continues to grow post pandemic.

ESG investing just a few short months ago was all the rage, and sustainable ETFs were popping up like mushrooms after a rain. Most were shunning oil, without any idea on what the repercussions could be.

Oil companies have been forced to reduce drilling and return excess cash to shareholders, instead of securing supply.

Transition Needs Higher Oil Prices?

Experts have suggested that adoption of cleaner and greener technology would need higher oil prices. It is well known that renewable energy density, or energy produced per unit mass from renewable source is low, this making it an inefficient and expensive form of energy generation. Not surprisingly, according to the Energy Information Administration, renewable energy accounted for just about 13% of total primary energy consumption and about 20% of the domestically produced electricity in the United States.

It is important to note that wind, hydro and solar in total make up a mere 2.7% of the total renewable energy produced. Let's pause for a second and understand that the above figures are strictly power generation figures. Now let's shift our attention to electric vehicles and their future in the wake of surging oil prices.

Accelerated EV Adoption?

Today, plug-in automobiles account for less than one-tenth of 1% of the worldwide car market. They're rare on most roads and yet cost considerably more than comparable gasoline vehicles. Most executives in the oil patch believe that EVs will not have a meaningful influence for a few decades more.

Rising oil prices can hasten climate action by speeding up the transition to electric vehicles.

Tesla, Chevrolet, and Nissan intend to start offering long-range electric vehicles in the $30,000 price range within the next several years. Other automakers and innovative technology firms are investing billions of dollars in dozens of different models. U.S. drivers are now facing record-breaking gasoline prices to fill up their tanks. While this might spur the electrification of the transports industry

Investors have recognized the need to replace internal combustion (IC) engines with electric vehicles (EV). They have rewarded energy companies that have reduced oil and gas capital expenditures and returned cash to shareholders. And this phenomenon has led to a massive supply shortfall and an over-reliance on "foreign" sources of energy just when the post-pandemic demand for energy is soaring.

Our take: Energy transition has been badly botched. Administrations across the globe have put too many resources behind "green" energy at the expense of fossil-based energy. This has happened too fast. They have failed to secure energy supply in an oil-thirsty world and a gradual, neat transition from ICs to EVs is now in full-blown crisis mode.

The Result

We are all paying the price at the pump. Gasoline prices are soaring, inflation is rising and once the consumer starts noticing, the economy is bound to stutter. As they say in the oil patch, the cure for high oil prices is ... high oil prices.

Stay safe, stay nimble, stay humble!