An interesting characteristic of disruptive trends is that they often cut across traditional sector and asset class demarcations. Detailed sector knowledge or domain expertise is very valuable, but it is well known that domain experts and industry leaders can become blinkered and embedded in their views. As investors, we need to retain context and try to identify cross-sector disruption, often in the face of opposing expert opinion.
We have spent a lot of time researching and writing about, Electric Vehicles (EVs). As part of a wide-ranging research review, we recently read an interesting report from a large brokerage firm which predicted that ‘peak oil’ demand would occur in 2035. This jumped out at us because we had been searching for just such an estimate. This estimate was produced by the brokerage firm’s energy team with the base case assumption that EVs would be 50% of new vehicle sales in 2050. We were surprised that 50% in 2050 was deemed most likely.
On further investigation, we discovered that the autos team at the same brokerage firm had a very different assumption on EV penetration – about 20-years earlier. As it happens, we think that is also too conservative and decided to stress test some scenarios to see what impact higher and sooner penetration rates would have on oil demand. Our chart is below:
Source: Kames Capital
When assuming an S-curve adoption of pure EVs resulting in 100% of new sales by 2030, it brought forward peak oil by another 11 years. For the sake of the planet, we hope this is right. To be clear, this is not our expectation, but it clearly illustrates the positive impact of EVs and why we should be seeking to adopt them as quickly as possible. If governments, carmakers and consumers fully embrace EVs, we don’t think 100% of new sales by 2030 being EVs is totally impossible.
From an investment perspective, this shows that we must be alert to siloed thinking during times of disruption. Oil prices are very unpredictable in the short term but if EV adoption takes off as we hope, long-term structural demand for oil will fall faster than the market currently expects.
We also recently participated in a cross-asset class discussion on this important topic. One of my colleagues posed the question: ‘Should we own long-duration oil?’ Given the coming adoption and impact of EVs, my personal opinion is no.
Remember, EVs are not just about their ever-improving performance. They’re also about the planet.
NB – Above assumptions do not include public transport converting to electric or improved efficiencies in combustion engines.