The Tesla Effect: Oil companies could face 'Investor Death Spiral' from electric vehicle surge

With a dramatic lead photo featuring a red Tesla Model S, the Financial Times* (FT) just sounded the alarm that, "Oil groups threatened by electric cars" need to act quickly to defend against a sea change likely to occur within the automotive sector. It's no wonder they chose a Model S as the face of this important story — the Tesla Model S is outselling the Mercedes S-Class and BMW 7-Series combined in the US market. And, the broader electric vehicle (EV) market is growing as well. EV penetration worldwide just reached the two million milestone.

Above: Tesla Model S (Source: Autoblog)

According to FT, "Oil companies face a 'resoundingly negative' threat from a sharp growth of electric cars, one of the leading credit rating agencies [Fitch Ratings] has warned." Fitch Ratings is urging energy companies to plan for "radical change" and says in it's report, "Widespread adoption of battery-powered vehicles is a serious threat to the oil industry." Furthermore, Fitch's lead author for the report, Alex Griffiths, told the Financial Times, "If they stick their heads in the sand and try and pretend it will all go away, we think they will ultimately have issues... they need to have a plan."

Above: Tesla Superchargers may soon start to compete with gas pumps (Instagram: @archduke97)

FT writes, "Although the report accepts it could take a long time for electric cars to become a disruptive force through mass adoption, Fitch outlines a grim scenario for global oil companies, such as Chevron, ExxonMobil and Royal Dutch Shell. The agency says that the threat of electric cars could create an 'investor death spiral' as nervous asset holders sell out of oil companies."


Above: How electric cars are threatening oil groups (Source: Financial Times*)

The report from Fitch states: "An acceleration of the electrification of transport infrastructure would be resoundingly negative for the oil sector’s credit profile. In an extreme scenario where electric cars gained a 50 per cent market share over 10 years about a quarter of European gasoline demand could disappear."

Above: Tesla vehicles charging up at a Supercharger station (Image: InsideEvs)

FT goes on to report that, "battery costs have fallen by 73 per cent since 2008 to $268 per kilowatt hour, says Fitch, and $100/kWh is generally considered the point at which electric cars become cost competitive: a figure some automobile makers think is achievable by the early 2020s." And, Tesla CEO Elon Musk sees the cost of batteries falling below $100/kWh by 2020.

Above: Panasonic's 18650 lithium-ion battery used in Tesla Model S and Model X (Instagram: @yancki87)

However, a few fossil fuel players are taking action, FT reports: "Some oil companies appear to be addressing the potential for disruption. France’s Total bought the Saft battery group earlier this year and is looking at making its first big renewables investment for five years as it weighs a move to expand its US wind-power business. Fatih Birol, executive director of the International Energy Agency, the energy think-tank backed by industrialised countries, said there was 'no escaping' the impact of climate change policies and green technologies for oil and gas companies."

Above: Tesla vehicle charging on "sunshine" via solar panels (Source: Tesla)

In the meantime, Tesla Motors [NASDAQ: TSLA] is already transitioning itself into a complete clean energy company with it's move into battery storage products and proposed merger with SolarCity. In Wired, Matt Roberts explains that Tesla is, “building the model of the energy company of the future. There’s a clear business case here: [Elon] Musk says he can expand the market for solar panels by offering them to people who are already considering buying an electric car, and vice versa... In other words, Tesla wants to offer the whole fossil fuel-free frittata." If a Big Oil 'investor death spiral' is imminent, Tesla appears poised for surefire growth.


*Source: Financial Times