Spoke Fund® Boards

From my latest letter to investors, which can be downloaded here.

Thoughts on EVs and Oil Demand

The most common question I’ve gotten the last few months has been about the impact of the new U.S. Administration on the oil and gas sector.

I addressed that in more detail during the annual meeting videos (first is here, second is here), but as a quick rehash: anything that restricts or hinders the production of oil and/or natural gas in the U.S. will, by definition, lead to higher prices in those commodities – and for the assets that produce them, too. That paradox has no doubt played a role in our recent returns, too.

The second most common question I get is with regards to EVs or electric vehicles - specifically on their impact on our companies – or, more broadly, the demand for oil.

First, know that I come to neither praise nor bury EVs. Teslas are amazing vehicles. The stock, however, appears extremely overvalued to me.

I also feel pretty strongly that we are witnessing a speculative bubble when it comes to the stocks of many EV and renewables companies. But that’s an issue of valuation, not politics. I am keenly interested in the former and have zero interest in the latter.

I suppose my own bias is that I look forward to one day driving around the Florida Keys in an electric pick-up truck.

But (a) that day is going to be a long way off, and (b) that’s probably just my irrational fondness for pick-ups.

Shoot, I’m 6’3”. Unless you’re a chiropractor, get outta here with that coupe.

Also, the main reason I look forward to one day having an electric truck is that Ludicrous Mode will help me put all these tourists in my rearview a whole lot faster.

Hahaha kidding. Tourists are always welcome in Islamorada - of course!

Except for the ones that feed seagulls.

Anyway, I say all that to say this:

EVs are being over-hyped. They’re not likely to significantly disrupt oil demand for at least another decade - and probably even further out. And though their growth rates sound impressive, those numbers you often see quoted are off of a tiny base.

For instance: it is true that in 2019, 40% more electric vehicles were sold than in the year prior.

But in raw numbers, that was 2.1 million EVs. Which should be compared to the 80.7 million ICE (internal combustion engine) vehicles sold that same year.

And while that 40% jump in EV sale meant there were then 7.2 million total EVs on the road, they were also sharing those roads with 900 million ICE automobiles already driving around.

And it’s estimated that those electric vehicles driving avoided the consumption of just 600,000 barrels of oil products per day in 2019.

Versus the 101 million barrels of oil used every day that year – the highest in history.

Which means that in 2019, EVs displaced just 0.6% of total oil demand.

EVs aren’t just competing against today’s ICE cars, either, though. They will be competing against tomorrow’s ICE cars, too. And it is going to be a long, brutal fight.

The World Bank believes approximately two billion people in emerging market economies will likely be lifted out of poverty by 2035. That coming increase in prosperity and living standards - in some of the most populous countries on the planet - is only going to drive further increases in the global demand for oil.

For instance, S&P Global Platts Analytics sees global oil demand peaking in 2040 at around 115 million barrels of oil per day (bopd). That’s 15 million barrels a day higher than the historical peak in 2019. And in spite of the rapid growth of EVs over that same period of time.

BP’s Energy Outlook 2035 forecasts growth in electric cars over the next two decades from 1.2 million vehicles to around 70 million in 2035 – nearly a 60-fold increase. Which sounds bullish for EVs and bearish for oil…until you realize that - due to those increased living standards in poor countries - the total number of autos with internal combustion engines around the globe is expected to double over that same time.

In which case, we would see another 900 million ICE cars on the world’s roads by then, in addition to the current global fleet - of the same size.

And while fuel efficiency standards will no doubt get stricter over time, unless those 70 million EVs can somehow completely displace the oil needed every day to fuel 1.8 billion ICE cars…the total oil demanded by automobiles every day will still increase. Even if the number of EVs grows 60x between now and then.

I will leave it to you to determine how realistic that may be.

The adoption rate of EVs will depend ultimately on consumer demand – but from all consumers, all around the world - not just high income earners in the West currently buying them in small quantities. That demand will in turn be dependent on affordability, charging times, charger locations, and perhaps most importantly, advances in battery technology – as well as avoiding some extremely challenging bottlenecks in the supply of commodities like lithium and cobalt that are critical in the supply chains for those batteries.

My point is this:

The path for EVs to reach critical mass around the globe is going to be more difficult – and take much longer - than the headlines might lead you to believe. Even with significant shifts in government policies.

And as relates to the Tarpon Folio, we don’t need to worry about EVs materially impacting oil demand anytime soon. It’s unlikely to happen until well after the next peak in this oil cycle.

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Investing may cause capital loss. The publication of this note is in no way a solicitation or offer to sell securities or investment advisory services.

The ship appears to be unstuck.

Ah, I'm really gonna miss those memes.

Next OPEC+ meeting on Thursday. Appears Russia supports OPEC+ oil output rollover to May...while angling for another bump up in volumes for itself, natch.

WTI has reversed earlier losses this morning and is now up 0.4%, and nat gas is up 0.7%. POTUS has a speech in Pittsburgh on Wednesday that should also provide more clarity on what he wants in the wider infrastructure proposal. Expected to be well north of a trillion dollars and will likely have some significant clean energy provisions.

Meanwhile, Street is a bit obsessed this morning with the latest hedge fund to blow itself up. Hard to believe how big some of those positions were. And standby for some prime brokerage "risk reduction" trades in some of those same tech stocks, you would think.

Monday assorted links

1. WSJ: New Mideast Crude Contract May Test OPEC’s Grip on Oil

Abu Dhabi plans to relinquish control over prices of Murban to investors and traders, a major step in efforts to fortify its position in the international oil market. The goal is to make Murban more attractive to refiners in Asia, where oil producers are battling for customers as Western governments seek to phase out fossil fuels.

By allowing crude to trade more freely, the emirate could ultimately undermine the sway of the Organization of the Petroleum Exporting Countries over prices. The changes that Abu Dhabi is making will erode the influence of cartel leader Saudi Arabia over time, Philip Verleger, an energy economist and president of PKVerleger LLC, said.

“Oil will flow more freely around the world where it is needed, and that will make it more difficult for OPEC to maintain control on prices,” Mr. Verleger said.

2. WSJ: Iran, China Sign Economic, Security Agreement, Challenging U.S. Pressure

...In return for investments, China would receive steady supplies of Iranian oil, Iran’s semiofficial Tasnim news agency said Saturday, adding that the two countries also agreed to establish an Iranian-Chinese bank. Such a bank could help Tehran evade U.S. sanctions that have effectively barred it from global banking systems.

“This cooperation is a basis for Iran and China to participate in major projects and infrastructure development,” including Beijing’s Belt and Road initiative, said Iranian President Hassan Rouhani on Friday ahead of the signing, referring to China’s vast global investment and development strategy.

The deal deepens cooperation between Tehran and Beijing at a time when China is seeking more influence in the Middle East and when Iran is looking for ways to support an economy that has been battered by U.S. sanctions.

3. American Airlines with a positive read-thru for jet fuel demand:

As of March 26, the Company’s seven day moving average of its net bookings is approximately 90% of the level experienced in 2019, with a domestic load factor of approximately 80% during that same period. The Company presently expects this strength in bookings to continue through the end of the first quarter and into the second quarter.

4. How mRNA Technology Could Change the World

5. Miami Heat arena to be renamed after cryptocurrency exchange FTX. Anyone else have a flashback to PSINet Stadium?

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Investing may cause capital loss. The publication of this note is in no way a solicitation or offer to sell securities or investment advisory services.