Do Electric Vehicles Spell OPEC's Doom?
This summer Elon Musk made good on his promise to introduce a people’s electric wagon, an addition to the $100,000 Tesla S beloved by the virtue-signaling wealthy. In late July, the slick $35,000 Tesla 3 went on sale, joining a crowded field of some three-dozen other electric vehicle (EV) offerings.
The Tesla glow inspired breathless speculation that we’re witnessing the beginning of the end of the internal combustion engine. Last month even venerable VW, the world’s largest automaker, saw its CEO declare the imminence of EV dominance. Volvo made a media-grabbing summer pledge to go all-electric. And the governments of France and England pledged to ban the sale of internal combustion engines by 2040.
Also this summer, OPEC met for a second time, in Dubai on August 7, to strategize about how to “fix” persistent global oversupply and consequent low prices. (In America we’d call that “collusion.”) Should OPEC be worried about policies that help companies like Tesla or unknown companies like Motive Drilling Technologies? In other words, which is more disruptive to the global oil market?
A bet on Tesla and EVs is a bet on displacing oil with hardware. It’s the maturation and industrialization of the electrochemical lithium-based battery that has animated some pundits and policymakers to declare the imminent arrival of “peak oil demand.” No one seems more excited than Silicon Valley itself. Though the irony that the digital cognoscenti are making billion-dollar bets on hardware in the age of the algorithm has gone largely unnoticed.
Meanwhile, and largely off the radar, companies such as Motive Drilling Technologies have developed cognitive software for drilling in shale fields. Making hardware more efficient converts capital into fatter and faster profits. Six-year old Motive, which procured a modest $10 million in venture funding only a year ago, was quietly acquired for $100 million by Helmerich & Payne, a Tulsa-based oil-field contract drilling company.
This should sound familiar to the Technorati. Cheap cloud-based computer services have democratized the kind of supercomputing that until recently could only be accessed by mega-corporations and the Pentagon. Innovators now use domain knowledge to create code to amplify the efficacy of existing hardware to unlock software’s key virtue: a fast, low-cost way to wring value out of assets. The new software-centric upstarts capture market share (think Amazon) or, more often, the big established players swoop in to acquire the “de-risked” technology. Motive is just one company in a silent army of digitally focused startups that will “cloudify” the shale industry with software, making the long-promised digital oilfield a reality.
The arrival of the digital oilfield is what should worry OPEC — not Tesla.
It’s not that EVs don’t matter; they just matter less than most people think. The International Energy Agency predicts today’s 2 million EVs will rise to 100 million in a decade. That’s if all goes really well, including an astounding 50-fold expansion in all the associated hardware over that decade, and assuming all nations go beyond their already prodigious Paris commitments to subsidize EVs, including an impressive expansion of subsidies. Such an outcome would generate amazing revenues for battery makers as well as the miners supplying megatons of materials from lithium and copper to cobalt. But what losses would follow for oil?
The math is easy. One-hundred million EVs would constitute 7 percent of the 1.5 billion cars expected to be on the world’s roads by 2027. Because cars account for less than half of oil demand, that translates into a mere 3 percent reduction from today’s barrels burned. Meanwhile, by 2027 a growing world will see oil demand rise 10 percent, according to the Energy Information Administration (EIA). In short, even realizing EV’s most optimistic dream, we’re still a million miles away from the demise of internal-combustion. OPEC can rest easy — at least when it comes to EVs.
The effect of the cloud on the shale industry is another story.
Automation, the Internet of Things, machine learning, and cognitive computing are impacting every industry, from taxis and hotels to retail, grocery stores, and factories. It’s inconceivable that the multi-trillion-dollar oil and gas infrastructure will be the exception. In fact, as the Boston Consulting Group has pointed out, the hydrocarbon industry is the least ‘digitalized’ sector.
The shale industry, in particular, is ripe for digital transformation. It’s comprised of thousands of companies, not a handful of majors, and involves a complex array of different kinds of machinery and processes — millions of wells and petabytes of unmined data. All this is red meat for coders.
And, unlike many traditional industries in recent years, the shale industry has been on a productivity tear. The output per shale rig has risen at better than 20 percent annually, according to EIA’s tracking. Production per rig is thus already doubling every several years — and that’s mainly with mechanical improvements and yesterday’s software.
So when cloud-supported computing starts driving production up and costs down, it will be like throwing gasoline on a fire. A lowball estimate would be that machine learning and automation will boost overall oil-sector efficiencies by 20 percent over the coming decade. Applied to all non-OPEC production — at software, not hardware costs, and without subsidies — such a gain means that five times more oil would be added to world markets than 100 million EVs would take off the markets.
The bottom line? OPEC is on the verge of witnessing a digitally driven hydrocarbon tsunami. What follows is a virtuous circle, in which more software is needed to wring out more profits in a persistently low-price environment.
This is not lost on the major oil players. The “digital oilfield” was the rationale for the Baker-Hughes merger with GE’s oil business, and has become a standard pitch among their competitors. Listen to earnings calls from shale operators these days and you hear the word “bytes” as often as “barrels.” A dozen states are home to hundreds of Motive-like start-ups. What comes next is a land-rush to acquire intellectual property.
Was Mark Zuckerberg’s low-profile visit to an operating shale rig in North Dakota last month another bellwether? It is farfetched to think Facebook has plans to play the shale fields. But odds are good that someone with Zuckerberg-like ambitions is quietly working in the digital oilfields to build a market-dominant and “disruptive” platform.
Tesla hype notwithstanding, summer 2017 is unlikely to mark the beginning of “peak oil demand.” Instead, we may be witnessing the beginning of “peak oil prices.” That will be tough on OPEC, oil traders, aspirational government policies, and green dreamers hoping for $100 per barrel. But it will be a boon for consumers and the economy.
This piece originally appeared on RealClearPolicy
This piece originally appeared in RealClearPolicy