How a Rapid Transition to Electric Vehicles Puts Gulf Coast at Risk

I have been discussing the double climate risk faced by the Texas Gulf Coast over the last year. Physical climate risk due to extreme weather and economic risk because of a decarbonizing economy.  This week, the economic risk became more apparent. In BP’s latest energy report, we see a decarbonizing global economy, with the adoption of electric vehicles (EVs) being one of the areas that may pose the greatest risk.

The EV Transition

Currently, 70% of total crude in the US goes to gasoline and diesel sales. With most of the major auto

Chevy Volts charging under a solar array

companies pledging to have all EV vehicles or at least multiple EV cars available in the next few years, it is expected that demand for crude oil could be peaking more quickly than expected. Some examples of automaker pledges include General Motors having 25 EV models available by 2023; Toyota will offer EV model options for all vehicles in its fleet by 2025; Daimler and BMW anticipate 15% of vehicle sales by 2025 will be EV; Ford is investing $4.5 billion in EV’s; Volkswagen plans on having 30 models by 2025 and anticipate 25% of sales will be EV’s; Volvo announced all vehicles sold after 2019 will be EV’s or hybrids. Everyone knows what Tesla is up to. So, we see now not just high end, luxury segment going EV, we see cars being introduced to the wider public at more acceptable price points.

The automakers are not doing this because they necessarily care about the impact of their vehicle’s emissions on climate change. Much of these announcements are being driven by governments who care about climate change and are trying to meet their Paris Climate Accord agreements. A good way to reach these goals is to decarbonize their domestic fleets. To name a few, India, England, the Netherlands, France, Germany and Scotland have all made announcements to end sales of diesel and gas-fueled vehicles in the next 20 years. China has also made a pledge to decarbonize its fleet, but has yet to set a firm date. Although the United States Federal Government is not taking the climate threat seriously, the rest of the world is and that will have a significant impact on the US economy, particularly the part of the economy that produces the oil and gas.

Oil Projections Largely Slowing for Transportation Fuel Use

Projections vary considerably as to the rate at which EVs will be adopted. ExxonMobil and the DOE’s Energy Information Administration anticipate fairly low and slow EV sales. However, both anticipate that overall growth of consumption will increase at a slower rate, not peak. This is due to significant growth of vehicle purchases in developing countries, such as China and India, combined with increasing fuel efficiency of vehicles.

BP, Statoil, Morgan Stanley, Wood Mackenzie and Bloomberg New Energy Finance all anticipate more robust demand growth for EVs. For example, Wood Mackenzie anticipates a net decrease in oil consumption by up to two million barrels per day by 2035 due to EV sales. BP anticipates significantly slower growth of transport fuels out to 2040.

BP finds that during the last 25 years fuel demand increased by 80%. According to their new report, which assumes an “evolving transition” the next 20+ plus years will see significantly lower growth of 25%. Evolving transition is the assumption that technology, social preferences, and policies continue to evolve at the same rate as the present. In this scenario, the outcome is that due to EVs and efficiency gains, the amount of fuel consumed in 2017 will be about the same in 2040.

BP goes a step further and runs some models that consider a globe that bans internal combustion engines. We have already started seeing this in some countries. In this alternative scenario, we see that by 2040 all car sales will be EV and about 66% of total vehicle miles traveled will be with an EV. This is about double what would be anticipated in the evolving transition scenario.

The fact of the matter is that the oil industry may be at risk with this transition, and more importantly the livelihood and communities of the Upper Gulf Coast. Maybe some of this risk will be mitigated by the increased use of natural gas to fuel the additional power plants needed to charge all of the new EVs.

Barriers and Opportunities

There are major hurdles to significant demand growth in the deployment of EVs. The upfront cost of EVs remains higher than gasoline and diesel powered vehicles. Further, the charging infrastructure is not wide-spread enough to adequately power up a large EV fleet. There is also the problem, that like myself, a good portion of the population holds on to their vehicles for about 10 years.

That being said, the largest cost to EVs, battery prices are coming down very quickly and continue to decrease. The cost in 2010 was $1,000 per kWh. Today the prices is $209 per kWh with an anticipated cost of $100 kWh by 2025. Which according to Bloomberg New Energy Finance could be the tipping point for EVs. Also, there is a very large push to build out a more robust EV charging infrastructure. A lot of this new infrastructure may occur with the Volkswagen Diesel Emissions settlement. There is a discussion of approximately 2,800 stations being installed with the settlement funds.

The likelihood of these dire scenarios coming true is largely driven by the cost of EVs and the availability of charging infrastructure to conveniently recharge these vehicles in and out of town. The growing demand to decarbonize our lives and subsequent policy and market changes will also have a material impact.

Gulf Coast leaders should not take a wait and see approach. It is great that the region is coming out of its latest oil induced hangover. The problem is that you can tell a lot of our leadership is feeling pretty fat and happy again. We are again becoming complacent and less willing to take the steps to diversify the economy. We have a long history of falling back into business as usual as the oil and gas sector booms. After multiple crashes, why else would you still have a regional economy that is still largely fueled by the oil and gas industry?   The region can’t afford to become complacent. It should seize the movement to decarbonize and use our engineering and science expertise to our advantage.  There is no reason the region should not be leading the clean energy economy. Unfortunately, to our detriment, there does not seem to be a lot of desire to lead us in this direction. This is a problem. If the Amazon snub should tell us anything, it is that there may not be a lot of faith from outside business that the Gulf Coast can learn new tricks. Maybe they are right.

 

 

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UPDATE : Climate Change has Put the Tiger in a Corner

UPDATE:

As I mentioned in my earlier post below, ExxonMobil is being much more aggressive than would be expected in its legal activity to clear its name related to climate fraud allegations. The company is fighting back with a much-increased level of intensity. In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them.

This week it appears ExxonMobil’s attempt to play defense against multiple climate fraud lawsuits hit a significant roadblock. The case Exxon Mobil Corp et al v Schneiderman et al was filed with the US District Court and heard by Judge Valerie Camproni. This case argues that the suits filed by the New York AG Schneiderman and Massachusetts AG Healey, which claims ExxonMobil has committed fraud by not disclosing known climate risk, are politically motivated and in bad faith. Judge Camproni disagreed and dismissed the lawsuit with prejudice. This means that ExxonMobil cannot file a similar suit in the future. ExxonMobil is currently considering its next legal options

We will see what ExxonMobil’s next move is, but the findings of this case do allow the AG’s to move forward with their investigation, as well as provides optimism to others who filed similar suits.

ORIGINAL POST:

Back in May of 2017, I wrote a post on the double climate risk for the Gulf Coast region. To quickly summarize, the first risk is the physical risk that is being realized due to a rapidly changing climate. The second risk is that the region’s economy is fossil-fuel driven at a time when much of the world is trying to decarbonize. There is still significant debate as to how quickly this will happen and to what degree, but trends in technology, i.e. electric vehicles; an increasing push for more renewable energy, i.e. China and India;  would make one think a shift is happening more quickly than initially anticipated. This shift to decarbonizing is receiving growing support from the financial and insurance sector. On the financing side, we see a quickly growing green bond sector that is pouring considerable dollars into renewable energy, energy efficiency, and other green infrastructure projects. We also see growing demand from institutional investors for “green” investment opportunities. The insurance industry is also pushing for more decarbonization, as well as climate adaptation, due to the significant and growing risks of insured assets.

Kids Want Climate Justice

The lawyers are also getting involved. A variety of lawsuits have been filed in the last few years across the United States claiming harm to communities due to the burning and consumption of fossil fuels by industry. The oil and gas sector is getting a significant amount of attention from the legal sector, with ExxonMobil being one of the key targets. ExxonMobil is a focus of many due to the research the company conducted in the 1970’s that indicated the burning of fossil fuels contributed significantly to global warming and could result in significant climate change; they found an “emerging consensus that fossil fuel emissions could pose risks for society.” While they were finding these results and continuing to study how climate change would impact business operations, they were leading lobbying efforts to fight the adoption of greenhouse gas regulations. The claim that is being made is that Exxon Mobil knew about the climate risk but did not properly disclose this risk to shareholders. The legal action that appears to be getting the greatest traction is the State of New York Attorney General’s investigation into whether Exxon Mobil the statement the company made to its shareholders was consistent with its research findings on climate change. The California AG is also investigating whether ExxonMobil was implementing business strategies in line with their research findings but not disclosing this risk to shareholders. In all, there are 17 AGs investigating ExxonMobil on this issue.

 

Much of this AG activity has received expected legal pushback from ExxonMobil. The company also tried to limit any reputational damage with media campaigns on the company being a good steward and continued denial of any wrongdoing. Until this week, when it appears the company is fighting back with a much-increased level of intensity.  In what some are saying is unprecedented, ExxonMobil is going directly after the attorney’s that are suing them. ExxonMobil is looking at filing suit and getting depositions from lawyers involved in the climate suits. The company is claiming that the state AG’s and citizen groups are conspiring against ExxonMobil in a public relations and legal campaign. This campaign is believed by ExxonMobil to have started in La Jolla, CA several years ago.

So why is the 10th largest company on the planet, fighting back with such intensity? With the current occupant in the White House and the Republican domination of the legislative branch, there is no short-term regulatory risk to the company, at least in the United States. It is not likely that it is the legal suits they are most concerned about, either.

They are good prognosticators. Based on their research, they knew that climate change could be a business risk and was making business decisions based on this risk. (At least this is what the lawsuits claim.)  ExxonMobil is likely less concerned that the AG suits will prevail in courts; they have the resources to tie these up for years. What they are more likely concerned about is losing in the court of public opinion. Public opinion is driving demand for decarbonization and the market and investors are reacting accordingly. And why not, the costs of decarbonizing are at or soon to be at the same price point as business as usual. So it’s much easier for the public to get on board. Most people don’t care what their car is fueled with. They just want to have easy, inexpensive access to transportation.

The double risk is real for ExxonMobil. They have known for years that the climate change will impact their business operations and have made decisions accordingly. Now it is becoming obvious that there is more than the physical risk. There is the real risk of losing the support of the markets and public opinion. The Gulf Coast region should take heed of this growing double climate risk. ExxonMobil may be the canary in the coal mine.