Exxon Mobil Corporation (NYSE:XOM) stock is down 9.65% year to date; the company has had a rough start to 2017. First, a $2 billion asset impairment charge on gas assets in the Rocky Mountains clouded XOM’s fourth-quarter earnings call on Jan. 31.
Then, on Feb. 22, XOM announced that it had to write off 3.3 billion barrels of oil in reserves at the end of 2016. With oil prices in the mid $50s, getting oil from some of XOM’s Canadian oil sands is no longer profitable.
This represents a massive destruction of value for holders of Exxon stock. A decade ago, XOM invested approximately $20 billion in these Canadian oil sands amid concern over peak oil. Unless oil prices rise, those billions will have been wasted.
There could be more such downside surprises in store for Exxon as well. Further developments in clean energy could wipe billions more off the balance sheets of oil companies like XOM.
XOM’s Rosy View of Oil’s Future
McKinsey & Co. expects oil demand to peak by 2030, with electric vehicles representing 30% of new vehicles sold that year. XOM, on the other hand, doesn’t see electric vehicles passing 10% of new vehicles sold in the U.S. until 2040.
Could XOM be underestimating the threat of electric cars and alternative energy? A new study by the Carbon Tracker Initiative and Imperial College London suggests that the answer could be yes. This study found that the adoption of electric vehicles could displace 2 million barrels of oil per day in demand by 2025.
Oil companies like XOM may be doing straight line extrapolations when the adoption of new technologies actually follows an S-curve. Initially, progress is slow for many years, as only a few adopt a new technology. Eventually, however, usage of the technology jumps and it goes mainstream before growth tapers off.
Advancements in battery technology may be reducing use of gasoline, another form of energy storage. Recently, gasoline consumption in the U.S. plummeted and the country experienced the worst gasoline glut since 1990.
Is this temporary, or could this be a sign of oil demand peaking?
Tesla’s Threat to Oil Companies Like XOM
With its recent acquisition of SolarCity, Tesla Inc (NASDAQ:TSLA) is on its way to becoming an alternative energy powerhouse. Tesla brings solar, electric vehicles and energy storage together under one roof (pun intended). TSLA wants to begin solar roof installations later this year.
Renewable energy depends on energy storage technology in order to compete with fossil fuels. Fossil fuels can be burned day and night, while the sun doesn’t shine at night. Some of the energy captured during the day must be stored for nighttime use.
For renewables to replace fossil fuels in transportation (28% of energy use in the U.S.), batteries must replace gasoline as the method of storing energy in a car. With cheaper batteries, we can expect greater investments in renewable energy.
Further, global energy storage is set to take off. Bloomberg New Energy Finance expects global energy storage capacity to increase by a factor of 15 by 2024. Developing countries can expect even larger increases; the World Bank Group predicted a 40-fold growth in energy storage capacity by 2025.
Battery costs have declined 40% since 2014, and this will continue. In January, Tesla opened its $5 billion gigafactory, which will double the world’s production capacity of lithium-ion batteries. Costs are sure to come down as TSLA scales up.
And, Tesla isn’t finished, yet; CEO Elon Musk wants to open up three more such gigafactories.
Tesla’s new Powerpack battery, revealed in October, packs twice the power capacity of the original, and Musk thinks TSLA can meet its goal of selling 500,000 electric cars per year as early as 2018.
Clean energy could be nearing an inflection point, with dire implications for oil companies like XOM.
Low energy prices, like we are seeing now, could have a silver lining for oil companies — and for XOM stock. While low oil prices will reduce XOM’s profitability, they also will ensure steady demand growth and slow the adoption of new energy-saving technologies. Musk said last year that cheap oil would be bad for EV makers like Tesla.
Also, oil companies may now have a friend in the White House. President Donald Trump seems skeptical of climate change and more comfortable with smokestack industries than Barack Obama. And, Trump picked Exxon CEO Rex Tillerson as his secretary of state, which could benefit XOM stock as well.
As of this writing, Lucas Hahn did not hold a position in any of the aforementioned securities.