Back in 2008, just before the price of oil peaked at $145, I published two columns titled “Investing for the Oil Price Collapse,” arguing that oil was overvalued and in a bubble, and recommended investing in industries that would profit from lower oil prices, like airlines and trucking companies. There were numerous comments posted online (no longer visible, sadly) the gist of which was, ‘you idiot, the price is only going higher.’
Although I would love to say I was a lone voice of reason, the punditosphere was split between those who thought the fundamentals would continue tightening and prices keep rising, and those who like me thought that the price was too high and would come down. The 2008 financial collapse certainly played a role in bringing the price down to $34/barrel in December, but the price had already dropped by about $30/barrel before Lehman Brothers failed.
The primary lesson from that period is one that John Maynard Keynes learned as a result of losing a fortune in the stock market, namely that it is the perceptions of traders that determine prices, at least in the short run. A combination of factors had sent prices up in the early 2000s, including the second Gulf War and the strike and mass dismissals at Petroleos de Venezuela, which both took major amounts of oil off the market. Additionally, the economic boom in China sent oil demand there soaring. Even so, the run-up past $100 seems to be have been driven by irrational exuberance—and the mistaken belief in peak oil.
Are we facing a similar situation now with what could be called ‘Cleantech,’ namely the renewable power sector and electric vehicles’ market? Not that either will fail and collapse as Lehman Brothers did, but rather that they will underperform market expectations and see lower stock market valuations and possibly serious financial losses, as the oil industry did in 2008/09.
The risks in question can be divided into two major categories: irrational exuberance that overrides due diligence as well as overinvestment due to excessively optimistic market expectations. The former typically consists in part of investors embracing long-shot stocks, technologies and/or projects, presumably hoping to strike it rich when a few of them succeed (while most fail). Others simply embrace the idea that climate change is such a serious threat, and governments so committed to addressing it, that the rosiest view of Cleantech is warranted.
But this is not so much of case of either/or as one of how much? The Cleantech industry has already become embedded globally, mainly due to better technology. And the perceived difficulty of developing, for example, a market for a new automobile has been overturned by the success of Tesla MotorsTSLA, which has confounded many naysayers (including me). Still, recent poor results of other EV startups show that Tesla may be the exception that proves the rule, rather than a trailblazer for other EV entrepreneurs.
The contrarian view is that exuberance about the energy transition often leads to both overpricing of equities and insufficient diligence about a company’s (or technology’s) prospects. Ballard Power in the 1990s is a classic example, as investors (and the automobile industry) overlooked the many remaining challenges facing development of a hydrogen fuel cell vehicle. Their stock price soared and crashed when the technology proved to be unready for mass markets, let alone vehicles. Similarly, a decade earlier Canada’s Dome Petroleum rode a wave of enthusiasm for the need for the development of natural gas resources in the Canadian Arctic, fueled in part by the expert consensus that natural gas was a scarce resource and prices would continue to be stratospheric. Again, the market value of the company hit stratospheric levels before plummeting to Earth.
The Cleantech contrarian scenario would come about primarily from a combination of reduced government support in enough places that solar, wind and EVs investment trends would be seriously slowed. Also, public resistance to the voracious land needs of renewables would delay projects and thus demand for workers and materials. Finally, the failure of Cleantech to deliver on its promises is already starting to turn off consumers. As Rowan Atkinson recently said about lithium-ion batteries, “It seems a perverse choice of hardware with which to lead the automobile’s fight against the climate crisis.” (Link below)
On the EV front, there is already some sign of consumers being unwilling to pay extra for automobiles that reduce greenhouse gas emissions somewhat but are otherwise are much less capable than conventional vehicles. The introduction of numerous new EV models in the next few years will provide evidence for just how robust demand is, once first adopters and the environmentally conscious market has largely been satisfied. (Early reports are that somewhere between 20 and 40 percent of EV buyers intend to revert to conventional vehicles, but that is hardly definitive.)
Further, as sales grow, the level of subsidies could prove burdensome enough that governments begin to scale them back. This is occurring in a few places so far but should accelerate in coming years. It’s hard to believe that the U.S. government will give $7500 each to 60% of auto buyers.
Which isn’t to say that the major automakers will fail due to anemic sales of their new EVs. Rather, as in 2008, when demand for small cars wrongfooted the auto industry and then afterwards, when lower oil prices revived demand from size and power, companies would see losses as they have to retool plants intended to flood the market with EVs that didn’t sell as anticipated. Companies that can adjust production rapidly to meet changing consumer demand will prosper, while others will lag. The small startups that only make EVs will face a daunting environment.
But other sectors might not fare as well, especially the mining sector, should massive new mines open to supply the battery needs of a booming Cleantech industry, including lithium-ion batteries but also the materials needed for solar panels, wind turbines and transmission lines. In the contrarian scenario, some mines will be forced to scale back or even close: cheaper prices for lithium, copper and manganese will have minimal impact on EV prices and not raise demand. The ‘mainstream’ metals like nickel and copper should find other markets, especially with lower prices, but producers of specialty metals, such as lithium, which have few other uses, will be hit especially hard. This could resemble the uranium mining industry’s trials in the 1970s/80s, when a short-term price spike and optimism about nuclear power developments left the industry in a severe glut.
The risks are particularly acute where energy policy plays a major role in determining the pace and profitably of the transition. Despite the mantra that ‘solar and wind are cheaper than fossil fuels,’ the vast bulk of energy transition investments require large government subsidies, mandates or both. Historically, some companies have been blindsided when they invested to meet environmental regulations only to see the requirements rescinded or the deadlines relaxed. California’s 1990s-era electric vehicle mandate is one of many examples. Similarly, many American communities opted into the voluntary oxygenated gasoline requirements in the 1990s, only to back out when faced with higher gasoline prices as a result.
Which sectors are most at risk in the contrarian scenario? Arguably, electric vehicles because of growing disenchantment with the technology and the regressive nature of the costs, imposed on lower-income people for the benefit of those who can afford more expensive cars. Next, rooftop solar would seem a target, given the instability it promotes in power supply to the grid, as well as, again, the regressive effect of rewarding home-owners while ‘taxing’ all consumers to pay for the subsidies.
The land needs of windpower and especially utility-level solar installations could also depress those sectors as they grow and public resistance increases. Sectors that service those industries, such as electric charging stations, will be hurt, but those which are multi-purpose, like offshore wind service companies and contractors installing renewables, will be more able to repurpose their activities.
What companies will suffer? Narrowly focused companies are as always most at risk. GM might lose money if it has to reorient towards gasoline-powered cars, but small electric vehicle producers could go the way of earlier ones like Solectrica and Fisker. If your only business is installing charging stations, that is riskier than a contractor who installs solar panels, and could just as easily switch to building new roofs. And obviously, deeper pockets always help when dealing with an uncertain market environment.
Which highlights one of the oldest lessons in the energy field (among others), namely, business that has a good product will usually prosper, but one that requires government support in the form of subsidies, bans and/or mandates carry a higher risk, given the fickle nature of politics. In 1999, I published an article in Applied Energy titled “Oil scarcity, oil crises and alternative energies: don’t get fooled again,” in which I acknowledged more demand for renewables but insisted, “It is vital that the [renewables] industry…recognize that this reflects improvements in the characteristics of the technologies in question. They should not embrace the idea that external developments will guarantee them a market.” Greater concern about climate change suggests more demand for Cleantech than simple economics would provide, but that still leaves substantial policy risk, given the outsized dependence on a favorable fiscal and regulatory policy.
Investing for the oil price collapse – MarketWatch
I love electric vehicles – and was an early adopter. But increasingly I feel duped | Rowan Atkinson | The Guardian
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