Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

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Friday, February 24, 2017

Only 1.2%?

At the beginning of major technological or market shifts, most people struggle to see that the nascent changes are going to cause massive disruption.  EV sales are only 1.2% of total car sales, they say.  How can 1.2% influence anything?

Take US EV (electric vehicle) and PHEV (Plug-In hybrid electric vehicles, i.e., those with a hybrid petrol/electric drive but with the capacity to also charge up their batteries from the grid).  Now as at December 2016, EV & PHEV sales made up 1.2% (seasonally adjusted: there is always a December spike in car sales, and weakness in January and February,  which you have to remove via seasonal adjustment) of total car and light truck sales.  The top chart shows EV sales (& PHEV, but I won’t keep on adding that; just remember that it includes both when I say ‘EV’ below) as a percentage of total car sales, and the second chart shows them in absolute terms.  (Source of basic data: Inside EVs)

Now notice a couple of things.

  1. 6 years ago, EV sales were negligible.  (Incredibly, Tesla was still only selling the Roadster.)
  2. From mid-2014 to mid-2015, sales fell—partly because the oil price collapsed, partly because the market was waiting for new EV models
  3. During 2016, EV sales rose by 80%!  

In its Q4 2016 results presentation, Tesla announced that it was planning to produce 1,000 Model 3s a week in July 2017, 2,000 a week in August and 4,000 in September, rising to a peak of 10,000 in 2018.  Total EV sales in 2016 were about 160,000. If we add the likely Tesla Model 3 production in 2018, assuming no increase from any other manufacturer, total EV sales will increase to about 660,000 (a 4-fold increase) which will take EV sales to 5% of the total market.

But, wait, you say—what if Tesla doesn’t manage to sell 10,000 Model 3s a month?  Well, they have nearly 400,000 paid reservations.  OK, but what about Tesla’s production for overseas markets?  I don't know what percentage of Model 3 production Tesla has reserved for foreign markets.  But I suspect that most of the initial deposits were from US customers, and they will get priority.  And, remember, I’m assuming that sales by other manufacturers won’t rise.  But in fact there’ll be a new Nissan Leaf, a new VW e-golf and of course GM’s Bolt, all at around $30-$35K sticker price. It seems that every man and his dog will be offering one (or more) EV/PHEVs.  So I'm pretty comfortable with forecasting EV sales from all manufacturers will equal or exceed 5% of total car sales in the US in 2018.  By 2020, battery costs will be below $100/kW, and the cost of EVs will have fallen another 10 or 15%.  They will have the same or better sticker price as ICEs (cars with an internal combustion engine). So sales as a percent of total car sales will go on rising after 2018.

The key question is: what will this do to petrol (gasoline) sales?  Assuming EV sales rise as a percentage of total car sales by 5% a year, this is roughly what the collapse in demand for petrol sales will be, shown in the table below.  For convenience, I'm treating all sales as if they were of EVs with no PHEVs, but in effect, the expansion in battery sizes will move PHEVs to being EVs for every day and only hybrids on long trips.  I'm assuming a linear not an exponential transition.  Also, this is just for cars, but presumably sales of light and heavy trucks and busses will be affected similarly.  And, it's just for the US, but again, the global trends will be similar.  Electric bus sales are already 20% of total Chinese bus sales, for example.  I'm assuming that the average age of cars and light trucks remains unchanged at 11 years.

In the first year, petrol sales fall just 0.5%.  In 2019, another 1%.  By 2025, sales will be down a cumulative 15%.  By 2030 they will have halved.  But the oil crash will come before that.  As Bloomberg says (in this interesting piece):

We found that electric vehicles could displace oil demand of 2 million barrels a day as early as 2023. That would create a glut of oil equivalent to what triggered the 2014 oil crisis.
That's just 5 years away.  Actually, it's potentially worse than that.  Saudi Arabia has the world's largest reserves and the lowest cost of production.  Once it becomes clear to them (and the others in a similar position, such as Iraq and Iran) that it's a case of sell your oil now, or never, they will expand production to its maximum.  Why restrain production to keep the market "orderly" when high price competitors, (like fracking in the US, for example) will gain, and you one day won't be able to sell your oil at all?

I don't know when the oil crash will start, but once it does it will avalanche.  Each year the annual decline in demand will accelerate.  But wait : will falling petrol prices stop EV sales?  Maybe, but I suspect not, because EVs are just so cheap to run and so much more fun too, and they will just keep on getting cheaper.  Anyway, to reduce air pollution and CO2 emissions, some European countries and India plan to ban new ICE sales from 2025 on.

By 2025 or soon after, petrol service stations will start to close, unless they transition to EV charge stations.    By 2030, it will probly become hard to find an old-fashioned service station that still sells fuel.  That's just 13 years away.

In the year that Elon Musk's SpaceX will start the colonisation of Mars, Musk's other business will have shifted the world half way towards zero carbon emissions.  Interesting times.  I hope I live to see it all happen.

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