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Bring on the Controversy About BP’s Pivot

InvestorPlace contributor David Moadel recently suggested that BP’s (NYSE:BP) move away from fossil fuels to renewable energy was controversial. Well, if that’s controversial, I say back the truck up and buy all the BP stock you can muster.

the BP (BP) logo on a sign against a blue sky with clouds
Source: JuliusKielaitis / Shutterstock.com

Why?

Because traditional energy investors are going to continue to get their hats handed to them over the next 10 to 20 years if they continue stubbornly pouring good money after bad into companies that can’t see the forest through the trees.

The fact is that BP can give it half a chance for another 111 years. The same can’t be said for Exxon Mobil (NYSE:XOM) and the rest of the deniers. 

Here’s why.

How Many Vehicles Use Internal Combustion Engines?

A 2020 report from automotive industry expert Lang Marketing Resources suggests that the oil industry doesn’t have anything to worry about. 

Cancel the obituary of the Internal Combustion Vehicle. [T]hey will grow in number in the U.S. throughout the decade,” Lang’s President Jim Lang said in February. 

“Peak ICE, the year when Internal Combustion Engine vehicles reach their maximum number, could arrive as late as 2035.”

I’m sure Exxon CEO Darren Woods breathed a sigh of relief when he read Lang’s prognostication. Fifteen more years of killing the planet. What’s not to like?

Lang’s rationale has everything to do with the fact ICE (internal combustion engine) vehicles generate far more aftermarket parts and repair volume per vehicle than electric vehicles.

I can think of two reasons why this is a reality.

First, the International Energy Agency’s Global EV Outlook 2020 report indicated a total of 7.2 million EVs worldwide in 2019, representing 1% of the global car stock. That’s 720 million for those who don’t want to do the math. 

Naturally, the aftermarket parts business is far more mature for ICE-powered vehicles than it is for EVs. I mean, they’ve only had a 120-year head start. I don’t even know if there is such a thing as a do-it-yourself electric vehicle repair person.

More About Repairs

I googled “DIY electric auto repair,” and that search led to a Wired.com article about Rich Benoit, who lives in Massachusetts. Benoit is an IT manager who repairs electric vehicles in his spare time. He even has a YouTube site with 880,000 subscribers. I’ll have to check it out once I’m done writing this bad boy. 

I fully expect that more people like Benoit to come out of the woodwork in the next decade. And that will certainly speed up the death of vehicles powered by fossil fuels. 

The second thing to consider is that EVs tend to require fewer repairs

“New research from Consumer Reports shows that pure electric vehicles – which have fewer moving parts – need less maintenance, and generally cost less to repair than the average gas-powered vehicle,” Consumer Reports contributor Benjamin Preston wrote in September. 

“Although many buyers are put off by the higher purchase price of EVs, switching from a traditional gasoline-powered car to an electric one can be a great way to save money over the life of the vehicle.”

As the consumer becomes more educated on these two realities, the speed at which ICE vehicles disappear from our roads will increase exponentially.

Back to BP Stock

Let’s assume that the typical ICE vehicle requires 1 fill-up per week. That’s 52 fill-ups per year. Using a RAM 1500 and a 23-gallon tank as my case study, that’s 1,196 gallons. It’s probably a lot more. 

Let’s assume that all 713 million ICE vehicles (720 less 7.2) on the planet are a RAM 1500 and require 1,196 gallons per year. That’s 853 billion gallons of gas. According to Google, a barrel of oil is equivalent to 42 gallons, which translates to 20.3 billion barrels of oil. 

According to the IEA, the 2020 forecasted demand for oil is 91.7 million barrels of oil per day. That works out to 33.5 billion barrels over a 365-day year with the 13.2-billion gap for plastic-based products, home fuel, etc.  

Now, let’s assume that EVs account for 10% of the global car stock instead of 1%. Based on the same 720 million, the consumption by the RAM 1500 falls to 18.5 billion barrels of oil. Daily, that’s a reduction of 5 million barrels per day. That’s $200 million per day in reduced revenue ($40 barrel of oil) and $73 billion annually. 

That’s 35% of BP’s $207 billion in trailing 12-month revenue. 

I know what you’re thinking: Yeah, but that’s spread over millions of companies. The hit to Exxon would be negligible. Maybe. But it doesn’t mean BP CEO Bernard Looney is wrong to be moving the company to a carbon-neutral, clean energy enterprise.

The 80/20 Principle

Malcolm Gladwell, in his book The Tipping Point, discusses the idea of the 80/20 principle.

“Economists often talk about the 80/20 Principle, which is the idea that in any situation, roughly 80 percent of the ‘work’ will be done by 20 percent of the participants.” 

So, apply that to the ICE vehicle. 

If 20% of ICE vehicles accounted for 80% of the gas demand, what would happen to oil output if that 20% switched to EVs? The oil market would collapse. 

Don’t you think it can happen? Bernard Looney’s not so sure. 

It might be a controversial move, but it’s a wise one, in my opinion. That’s why I’ve recently begun to recommend BP stock after being a big detractor for many years. 

For me, BP’s a far better choice than XOM ever could be.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/bring-on-the-controversy-about-bps-pivot-bp-stock/.

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