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In this deep dive, we will analyze the Q423 commentary from Goehring&Rozencwajg, an American investment firm specializing in commodities, which always offers a very interesting and groundbreaking perspective. In this case, they delve into the thesis of the substitution of internal combustion vehicles and its implications for the terminal value of oil & gas companies, in the natural gas market, as well as in the copper and uranium markets.
The Norwegian illusion
Hertz announced on Thursday that it plans to cut 33% of its global fleet of electric vehicles.
—Bloomberg, 01/11/2024
What we are sensing is that there are people who still want some electrification for driving around the city for five, ten, or fifteen miles, but who still want to retain the smell, feel, and sound of a sports car when they are cruising on highways.
— Lawrence Stroll, Chairman of Aston Martin
It is increasingly common to come across headlines pointing in this direction: major automobile producers are clear that the future, at least in the immediate term, will not be 100% electric, contrary to the dominant narrative of the last decade, which predicted rapid growth and dominance of this technology. The idea derived from this premise is that the penetration of EVs would be so high that fossil fuel consumption would quickly reach its peak (in fact, 2019 was referenced as the exact date of this peak). In hindsight, these assumptions were clearly erroneous: despite the disruption caused by COVID, demand is expected to reach 103 Mb/d in 2024, 2.3 Mb more than in 2019. G&R's research analysis concludes that EVs will not achieve widespread adoption, despite massive subsidies and threats to internal combustion engine (ICE) vehicles.
If one studies the history of energy, there has never been a transition (voluntary and lasting) to a less efficient source than the one replaced, and their models show how, contrary to consensus, ICE vehicles are more efficient than electric ones. If the costs (not just economic, but also energy) of battery, manufacturing, and recharging are included, the result of the comparison is completely reversed. If their models are correct, the adoption of EVs will fail on two fronts:
They are less efficient.
They do not reduce emissions.
Norway's ambitious drive towards electric vehicles has garnered worldwide attention, achieving remarkable success in increasing EV adoption. Through a combination of substantial subsidies, tax incentives, and a robust charging infrastructure, EVs have become the dominant choice for new car buyers in Norway, representing an impressive 80% of new car sales in 2022 and constituting 20% of the total car fleet.
The Norwegian government's incentives for EV buyers are significant, totaling nearly $4 billion annually, incentivizing the purchase of EVs and effectively reducing the initial cost for consumers. In addition to these subsidies, EV owners enjoy a series of benefits, including toll exemptions on roads, access to bus lanes, free parking, and charging facilities in municipal areas. However, despite Norway's success in promoting EV adoption, there are concerns about the sustainability and replicability of its model. While incentives have driven rapid EV adoption within Norway, it is still unclear if similar measures can be effectively implemented in other countries. Furthermore, the environmental impact of EV adoption in Norway has been mixed. Despite the significant increase in EVs on the road, fossil fuel demand and carbon emissions have not decreased as expected. This discrepancy suggests that EVs alone may not be sufficient to address environmental challenges, and a more comprehensive approach to sustainability is needed. Additionally, there are concerns about the energy-intensive nature of EV manufacturing, as many EV batteries are produced in countries with coal-dominated energy networks, such as China, resulting in significant carbon emissions during the manufacturing process. This aspect of EV production raises questions about the true environmental benefits of widespread EV adoption.
In conclusion, while Norway's success in promoting EV adoption is commendable, it serves as a warning about the limitations and challenges of relying solely on EVs to address environmental concerns. A holistic approach, including investment in renewable energy sources, improvements in public transportation, and sustainable urban planning, may be necessary to make significant progress toward a greener future.
When it is claimed that an EV is up to three times more efficient, the inefficiency of electricity generation (40%-50%, if natural gas is used) prior to the drivetrain transmission is overlooked, making for an incomplete comparison. While a new technological breakthrough in batteries would help make EVs more efficient, they do not see any reality advanced enough to suggest this revolution yet, so they expect internal combustion engine vehicles to continue dominating the market and EV penetration to disappoint.
As highlighted at the beginning, there has never been a transition to a less efficient energy source in history, and this time will be no different: policies and prohibitions aimed at mass EV adoption are doomed to fail.
Oil
Oil investors turned very bearish in Q4, as high production figures in the USA and fears of a potential recession clouded the outlook for the market balance; to these effects, it didn't help that the EIA forecasted an additional growth in US production of 1 Mb/d for 2024.
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