The green revolution and its fight with mighty carbon

The green revolution is starting to shape our lives and is shaking markets – especially oil companies – in anticipation of a change in the way the world is powered. What changes are we likely to see?

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  1. Charles Stanley

If Joe Biden is elected President in the looming US election, he will become the leader of the carbon fighters. He will naturally take over the mantle from Ursula Von Der Leyen, the President of the European Commission, and will lock US policy in-step with EU policy.

Together they will make common cause against big oil, dirty coal, profitable gas, traditional vehicles, international jet flying and marine diesel shipping, whilst moving on to transform the heating and cooling systems in every building and persuading the cooks of the world to give up fossil fuels for their ovens and hotplates. It is a huge agenda – and they are both in a hurry. Net zero carbon in 2050 may still be three decades away, but the tough intermediate targets for 2030 are real and require a substantial quickening of the pace of transition.

Big oil has given in before US heft is added to European ideas. Leading oil companies apologise for their main profit-making activities and embark on their own journeys to carbon neutrality. It will mean writing off a lot of their current hard-won reserves, selling some of their oil and gas assets to less carbon-conscious entrepreneurs to reduce their balance sheet commitment, and spending vast fortunes on gaining exposure to the renewable and electrical world which beckons.

They need to consider how and when eventually to phase out most of the petrol and diesel stations they control and bring in fast charger points for electric vehicles. They need to replace their pipe and tanker networks with increased grid capacity to transport the electricity. If they are serious about all this it means several years of expensive transition, with falling profits and much increased capital investment. For a longish period, they need to run two systems in parallel for broadly the same revenues. This week we saw news of an expensive new electric charging station in Essex modelled on a motorway service area. It is more capital to remunerate from largely the same-sized vehicle fleet put in by a competitor to the oil majors.

Build back better

In practice, markets and even the oil companies themselves wonder just how far and how quickly this change is going to take place. ‘Build back better’ is a popular political mantra on both sides of the Atlantic. It usually encompasses the need to speed the Green transition. Yet the global bodies that forecast oil demand and supply think the world in 2021 will return to something close to the 100 million barrels a day of oil demand and supply we saw in 2019 before the big fall in covid 19 blighted 2020. With much of the emerging world still trying to catch up with the diesel and petrol transport revolution, the oil majors reckon that there will be substantial oil and gas demand well into the next decade. In the USA the outlook is for an 11m barrel a day industry next year compared with the peaks of over 12 million b/d in 2019 under Trump's pro oil policies.

The vehicle industry has conceded the petrol and diesel car market. Indeed, it has become a willing driver of change – spending large sums on designing and producing new ranges of electric vehicles before demand for them has taken off sufficiently to make them mass-market items capable of yielding good profits.

Governments in Europe have been busy raising taxes on diesel and petrol cars, imposing and encouraging bans on their use in cities, threatening early withdrawal of these vehicle ranges from the new cars lists. This year, the Covid-19 closures have served as a cover for the extent of the decline in traditional diesel vehicle output and sales, brought on in no small measure by the green policies.

Vehicle slump

In 2020, the world will struggle to make much more than 70 million road vehicles in total, compared to 93 million the year before. Cars will account for around 19 million of the decline. The first three quarters of 2020 saw a decline of 29% in European vehicle production. As late as September, when much of the rest of the European economies were recovering on the back of the then reduced incidence of the virus and lockdown, car sales were still falling in France, Spain and the UK.

Diesel demand fell substantially, whilst fast-growing electric vehicles were from such a small base that the impact on total sales was heavily negative. Customers are still hesitant about electric cars for a variety of reasons. Those who might consider one are often holding out for price cuts and subsidies. If governments are that keen on something, they argue, they will have to make it better value.

In September – the best month ever for electric car sales in the UK – they reached 21, 903 out of total sales of 328,000. Governments have already undermined the position of hybrids, which people have been more willing to buy as they have better range, by saying they will not count as proper green vehicles.

All this means big write offs of diesel and petrol designs, technology and plant. It means accelerated and expensive development of new vehicle designs and technology to make the electric vehicle more user-friendly. The conventional media is full of expensive glossy adverts for electric vehicles, that keep off the sensitive topics of range, refuelling times and price. Meanwhile Tesla hit 140,000 cars in the third quarter of 2020, delighting its stock market fans and reinforcing its leading position. It is now making enough cars to make a profit, with good growth prospects ahead. Volkswagen is working its way through a €30bn investment programme to include its first new all-electric product.

The world coal industry continues to flourish, with its dominant Chinese producer wedded to coal for yet more new coal-burning power stations. China produced 3474 million tonnes of coal in 2018, more than four times the second-largest producer, India. The US was in third place ­­– and the EU, led by Germany, in fourth.

Coal is no longer king

There is general agreement that coal is the worst of the fossil fuels environmentally. Countries such as Spain and the UK have effectively shut down their industries – and written off the value that still rests in the ground. China will face a challenge from a ‘newly-greened west’ to its claims to be an environmental leader and enthusiast, all the time Beijing insists on such a high proportion of its electricity being generated from coal. It will be interesting to see if Mr Biden wins the presidency whether he decides to make an issue of the gap between China's green ambitions and Beijing’s actions.

This background reinforces our investment message that the green revolution is starting to shape our lives and is shaking markets in anticipation. It looks as if it will in practice take many years to kill off the dinosaurs of carbon-based transport, heating and energy. Meanwhile, the costs of an enforced transition on the sectors and companies that today provide us with everything from the diesel car and its fuel to the gas cooker and boiler will be large – whilst suffering from new competitors that simply develop the new products. Investors need to back the new winners and be aware of the costs and structural problems that will haunt the fossil-fuel-based sectors.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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