Navarik Market Update
July 27, 2017
Paradoxically, global climate change abatement efforts appear to have increased following the Trump administration’s withdrawal of the Paris Agreement. For instance, this month France and the United Kingdom announced bans on sales of internal combustion engine (ICE) vehicles from 2040, and Volvo declared they plan to produce no purely ICE vehicles from as early as 2019. No matter how well-intentioned these decisions are, the real risk of the tail wagging the dog leaves these decisions open to failure should true market conditions that comply with and support the regulation-driven shift to zero-tail pipe commuting fail to emerge.
There are two well publicized criticisms of these policies. First, the supply chain of the minerals in electric vehicle (EV) batteries lags considerably their expected demand growth. Whereas oil and gas have had a century plus of legal precedents set in various jurisdictions that facilitate the extraction, transmission, storage, and sale of these resources as their own product classes, lithium has to date been just a sub-category of the wider global commodities market. With no clear or well-known rules on what constitutes recoverable vs. unviable reserves (such as those of the Securities and Exchange Commission) or what recourses producer countries have to exert their own sovereignty (à la OPEC), longer-term estimates of the true availability of these key inputs and hence their costs are likely to be highly volatile. Second, the economic costs of the load shifted to domestic utility-scale electricity generation is massive, and the net effect on emissions depends on the generation at source.
But a potentially more fundamental problem is the question of by-products and production complements in ICEs vs EVs; whereas oil extracted to refine into gasoline and diesel also creates asphalt that paves roads or heating oil that warms homes, lithium directed towards car batteries necessarily reduces the amounts available to go towards things like lubricants, glass, and ceramics. A bubble in lithium prices would therefore lead to shortages rather than surpluses of other crucial goods. Likewise, although the technology to support fossil-fuel-free on-road cars is widely available thanks to pioneering companies like Toyota, Chevrolet, and Tesla, the same cannot (yet) be said for planes or cargo ships. So long as these methods of transportation remain consumers of oil and gas products, they are likely to keep down the price of gasoline and diesel, contributing to consumer backlash and perverse incentives as pre-2040 ICEs could be cheaper to operate than post-2040 EVs. One policy reversal to play to the pocketbooks of voters and commuters and the entire endeavor would be off the rails.
Admittedly, the minerals used to produce EV batteries are different than oil products as they are manufacturing inputs rather than operating fuels, but this changes the scope of the problem rather than obliviates it considering the consistent growth in EV sales that would be needed to meet current targets. The global push for environmental sustainability is crucial – but it may be hampered rather than helped by policies which distort the longer-term prospects for shifts towards alternative fuels. For fossil fuels to truly be “sunsetted” in on-road vehicles, there needs to be not only a corresponding technological shift for other means of transport and products which use oil products, but there also needs to be shifts in social habits and the regulatory regime that addresses the full supply chain rather than just the last link. If 2040 is now the target, this should make for an interesting two decades or so.
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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