by Gianni Kovacevic / http://kovacevic.com/ / @RealisticEnviro

In the mid-1930’s, Standard Oil of California had won the right to explore and drill for oil in the Saudi Arabian desert. By paying the hefty sum of $275,000, they out-bid the more Middle East dominant British, who had declined the opportunity citing there was no oil to be found. As it would turn out, a tremendous amount of oil was discovered. So in March of 1939 Harold Ickes, the US Secretary of the Interior, dispatched Everette DeGolyer, America’s foremost geologist to assess the discovery and provide a detailed report as to the potential of the new discovery. It would not be necessary, for the message back to the United States would not need pages of details, rather, DeGolyer and his team would proclaim, “the oil in this region was the single greatest prize in all history.” The "Prize" would be the title of Daniel Yergin's 1990 best selling book.

If the discovery of hundreds of billions of barrels of oil could be the preeminent single thing ever discovered, what then, could ever eclipse it? Rendering a goodly portion of the remaining supply redundant.

In a recent declaration, British Petroleum estimated that there are 2.6 Trillion barrels of recoverable oil using current technology. They went on to suggest that this was more than twice the cumulative global oil demand to 2050 under most scenarios. Scenarios? Perhaps the biggest issue with prognosticators, especially the ones who live in StaticVille, is in their attempt to make guesses about products that have yet to be invented.

The accelerated adoption of electric vehicles (EVs) will increasingly be led by consumers with their natural desire to want to own the best available form of transportation. Yet, most of society, including a gaggle of forecasters, continue to assume that a broad offering when it comes to EVs is something that will occur in the distant future. Just read Exxon's report on energy to 2040.

In a 2016 study, M.I.T. asked a large sample of people if they could, or would, switch to driving a full-electric car. As one might expect, the vast majority of respondents answered “no” applying all the well publicized rationale. “Range anxiety.” “Lack of charging stations.” “Cost.” “Reliability.” “Inconvenience,” and the like. What most people did not realize, is that the same study monitored their movements through the GPS in their smart phone. It turned out that 87% of those questioned could easily navigate their daily activities using today’s EV technology.

There are other big developments to consider for consumers and industry alike. Big Auto is well aware that Big Tech is encroaching on their territory. There are other pressures, such as mandated efficiency standards, and the stark reality that millennials around the world are no longer lining up to obtain their drivers licence. These many factors are collectively working like a pincer to capsize the entire automotive industry. Chrysler’s charismatic former CEO, Lee Iacocca, once said, “lead, follow or get out of the way.”

The fourteen companies that make-up Big Auto control 54 major automobile brands and they have indeed chosen to lead and follow. By the model year 2020, almost all of them will have some offering for consumers in the full-electric category. By 2025, the offering could be a staggering surprise for even the most optimistic EV proponent. Why? The consumer effect.

If we can accept that most of society has yet to actually experience a well made electric car, can we acknowledge that as it accelerates, consumer behaviour should force the direction that the automotive industry will take? Until now, The Tesla brand is widely recognized as the market leader for EVs, and unless someone is in that price segment, or, has a friend who owns one, they would not have witnessed the convenience, comfort and cool factor that EVs provide. We drove 13,500 kms across America in a Tesla Model S to demonstrate this - an experience few drivers have undertaken.

Let us look at the probabilities when, in the not-so-distant future, two suburban neighbours purchase two similar automobiles - a mid-sized EV and a comparable internal combustion engine (ICE). Admittedly, the EV will likely have a larger price tag. However, there is a difference between “price” and “cost” as every Zig Ziglar fan would know. Future maintenance obligations with EVs are negligible as there are few fail points and a limited number of moving parts to service in the electric drive train compared to the hundreds of moving parts in an ICE. I do not have the courage to guess what the resale value will be on an ever increasing fleet of global EVs. I can, however, strongly suggest that basic common sense dictates that there should be robust demand for these technologically advanced car. Especially as they become more available, recognized as more reliable and inevitably more desirable due to the overwhelming long-term ownership economics. Not to mention the savings in fuelling an EV over hundreds of thousands of kilometres. The two neighbours in this example will surely dialogue their experiences.

Incumbent automotive manufacturers that continue to make undesirable products, could literally be subjecting their entire business to hostile activity, not from their peer group, rather from Big Tech. As they strive to remain current, they are already shifting their EV product pipeline into high gear. Volkswagen has suggested that 10% of sales will be full electric by 2025. What happens when they discover that the greatest consumer demand, for new and used vehicles, is coming from their EV offering?

A new greatest prize for mankind.

On November 18, 2016, when Elon Musk demonstrated the solar roof, was the updated version of The Greatest Prize In All History. Tesla’s merger with Solar City had created many negative page-one headlines, yet it was approved by an 85% margin. Pundits dismiss the novelty. Analysts say the economics don’t work. Incumbents, there are more than a few that are profoundly disrupted by the circuit Musk demonstrated, are brushing the whole episode off to the sidelines of science fiction.

It does indeed come down to novelty, economics and science fiction. The future is now. Over five million roofs are constructed or renovated new each year in The United States. The basic idea that Tesla is trying to articulate to consumers and investors alike, is that it is possible for a residence or business to become energy self-sufficient, today. Obviously to install a solar roof, a back-up battery and purchase a brand new Tesla Model S is not for every consumer, today. But, the train of thinking that believes it will never reach the main stream is only for those who wish to remain in StaticVille. Fortunately for all of humanity there is an army of people around the world who live in ProgressVille, and they are the ones blazing this new and exciting trail of energy self-sufficiency.

Six years ago, there was no Tesla Model S. The efficiency of solar panels was just turning the commercially viable corner. The shale oil renaissance had just begun. Back-up battery systems were R&D projects (they still are). Investors thought of green energy projects as white elephants. Islands around the world could never imagine that they could one day be energy self-sufficient.

The tiny French island of St. Barths generates electricity using diesel fuel - most islands do. It is now possible for places like St. Barths to implement medium-term plans where the only place on the island that would consume diesel fuel, would be in the back-up, to the back-up in the local hospital electricity generator. These islands have no interest in importing oil products forever. Out of nowhere, and due to unimaginable technological progress, places all over the world can begin to implement the strategies to wean themselves off of inconvenience (fossil fuels) and towards self-sufficiency (modern electrical systems).

So imagine for just a moment the gravity of what Tesla demonstrated with the solar roof, back-up battery system and electric transportation. Is this not the greatest prize in all history version 2.0? The average consumer does not need to buy oil, what they need is transportation. The average institution or business does not need to buy thermal coal, what they need is electrical energy.

The current state of energy transitions is usually presented in pessimistic or overly optimistic perspectives. This article aims to circumvent both views and focus on common sense. Attempting to adjust an established opinion, especially those who are considered “thought leaders” on the subject, is a challenging exercise. Don Coxe, the brilliant Economic Historian from Chicago, has often said, “those that know it the best, love it the least, because they have been disappointed the most.”

If oil and thermal coil are longer term losers in the energy shift, what is on the winning side of the ledger?

Copper, lithium, nickel, cobalt. Electrical engineering, design & manufacturing. Enterprises that embrace the inevitable pivot and governments and societies that wish to participate. Above all, it will be the consumer that benefits most.

The greener and cleaner that energy is generated, transferred and utilized, the more that is demanded of copper. The old thinking was to understand how much installed copper is required in an advanced economy. The basic answer is between 550 and 650 pounds of copper per capita in advanced economies, like, The US, Japan and South Korea. China, a country that is amazingly still developing, is only at about 150 pounds of copper per capita. That is the old way of simplifying copper usage.

There is a new invisible hand in copper markets. Those that mine, fabricate or invest in this irreplaceable commodity need to realize that they are in the energy business. In the run-up to the so-called commodity super-cycle that took place in the early 2000’s, the invisible hand for demand was the awakening of the Chinese Dragon. Few saw it coming, including the likes of Phelps Dodge who hedged their future away at 0.85 cents and $1.25 per pound of copper - only to see it eclipse $4.00 per pound in 2007. We recall another story where some Senior copper mining executives walked out in disgust during a presentation in early 2005. The speaker was suggesting that China would be their largest customer in the not so distant future. Insider trading data would later show that these same executives would sell their option packages into a rising tide as their companies stock prices started to climb. If they would have only waited they would have become fabulously wealthy, instead, they went into quiet retirement having witnessed too much disappointment during three decades of bulk commodity bear markets. Those that know it best, love it the least...

To fully appreciate the current pivot in energy markets, one needs to be a well versed oil analyst. This provides historical reference. They should also be familiar in big power systems, meaning having knowledge of not only the statistics but also be familiar with what energy systems looks like if they were cut in half. And finally, to comprehend the profundity of the changing energy markets, one needs to know the building blocks that actually make the entire process possible.

The average electric vehicle has 100 kilograms of copper. When a 200 MW wind park is constructed, it requires on average 5 tonnes of copper per MW, whereas conventional power generation - thermal coal, natural gas, nuclear - requires 1 tonne per MW. The average American household has ~400 pounds of copper - that has remained unusually static for decades. So what happens in the house where Musk did his solar roof demonstration. The exact maths have yet to be completed, yet a pencil and paper are not essential for a basic understanding. Between the home, solar roof, batteries and one EV, there would easily be in excess of 1,000 pounds of copper in an energy self-sufficient dwelling. The potential for: copper, lithium, cobalt, nickel, and others, is mind boggling.

The take away from all this storytelling should be, the Consumer is calling the shots. Big Oil and Big Auto are increasingly subordinate to Big Tech. The cognoscenti in the incumbent energy mix are totally disillusioned on the shifts underway. The building blocks of what makes energy possible will have winners and losers, however, it is possible for the colossal shift to occur. And finally, what Elon Musk and Tesla have kick-started for mankind is truly one of the greatest prizes in all history.

Happy Investing,

Gianni Kovacevic

http://kovacevic.com/