In 2008, just before the price of oil peaked at $145, I published two columns entitled “Investing for the Oil Price Collapse” in which I argued that oil was overvalued and in a bubble and recommended investing in industries that would benefit from lower oil prices. , such as airlines and shipping companies. There were many comments posted on the internet (unfortunately they are no longer visible) the gist of which was: ‘you idiot, the price just keeps going up.’

While I’d like to say I’m the lone voice of reason, the puntosphere was divided between those who thought fundamentals would continue to tighten and prices would continue to rise, and those who, like me, thought the price was too high and will go down. The financial collapse of 2008 certainly played a role in the price falling to $34/bbl in December, but the price had already fallen by around $30/bbl before Lehman Brothers went bankrupt.

The primary lesson of this period is one that John Maynard Keynes learned as a result of losing his fortune in the stock market, namely that prices are determined, at least in the short run, by traders’ perceptions. A combination of factors sent prices soaring in the early 2000s, including the second Gulf War and a strike and mass layoffs at Petroleos de Venezuela, both of which took large amounts of oil off the market. In addition, the economic boom in China sent demand for oil soaring. Even so, the rally above $100 appears to have been driven by irrational exuberance – and a mistaken belief in peak oil.

Are we now facing a similar situation with what could be called “Cleantech”, specifically in the renewable energy sector and the electric vehicle market? Not that one of them will fail and collapse like Lehman Brothers, but rather that they will fall short of market expectations and experience lower stock market valuations and possibly serious financial losses, as happened in the oil industry in 2008/09.

The risks in question can be divided into two main categories: irrational exuberance that outweighs due diligence, and overinvestment due to overly optimistic market expectations. The first usually consists of a section of investors who embrace long-term stocks, technologies and/or projects, presumably hoping to get rich when a few succeed (while most fail). Others have simply embraced the idea that climate change is such a serious threat and governments are so determined to address it that the rosiest view of Cleantech is warranted.

But it’s not so much a case of either/or as how much? The cleantech industry has already gained ground globally, largely due to better technology. And the perceived difficulty of developing, for example, a market for a new car has been overturned by the success of Tesla Motors.
, which confused many naysayers (myself included). However, the recent poor performance of other EV startups shows that Tesla may be the exception that proves the rule rather than a trailblazer for other EV entrepreneurs.

The opposite view is that exuberance about the energy transition often leads to both overvaluation of stocks and lack of due diligence about a company’s (or technology’s) prospects. Ballard Power in the 1990s is a classic example of investors (and the auto industry) overlooking the many remaining challenges facing hydrogen fuel cell vehicle development. Their stock price soared and crashed when it became clear that the technology wasn’t ready for mass markets, let alone vehicles. Similarly, a decade earlier, Canada’s Dome Petroleum rode a wave of enthusiasm for the need to develop natural gas resources in the Canadian Arctic, fueled in part by the expert consensus that natural gas was a scarce resource and prices would continue to be stratospheric. The company’s market value once again hit stratospheric levels before plummeting to Earth.

The opposite Cleantech scenario would arise primarily from a combination of reduced government support in enough places that solar, wind and EV investment trends would be severely slowed. Also, public opposition to renewables’ insatiable need for land would delay projects and thus the demand for workers and materials. Finally, Cleantech’s failure to deliver on its promises is already starting to turn off consumers. As Rowan Atkinson recently said of lithium-ion batteries: “It seems a perverse choice of hardware with which to wage the automotive fight against the climate crisis.” (Link below)

When it comes to electric cars, there are already some signs that consumers are unwilling to pay more for cars that reduce greenhouse gas emissions somewhat but are otherwise far less capable than conventional vehicles. The introduction of many new EV models over the next few years will be a testament to how strong demand is once the early adopters and environmentally conscious market are largely satisfied. (Early reports say that somewhere between 20 and 40 percent of EV buyers intend to return to conventional vehicles, but that’s hardly definitive.)

Moreover, as sales grow, the amount of subsidies could prove burdensome enough for governments to start cutting back. This is happening in a few places so far, but it should accelerate in the coming years. It is hard to believe that the US government will give $7,500 to every 60% of car buyers.

Which is not to say that the big automakers will fail due to anemic sales of their new EVs. Rather like 2008, when demand for small cars hit the auto industry badly, and then when lower oil prices revived demand for size and performance, companies would see losses as they had to rebuild plants to flood the market with EVs that weren’t unsold as expected. Companies that can quickly adjust production to meet changing consumer demand will prosper while others lag behind. Small startups that only produce electric vehicles will face a daunting environment.

But other sectors may not fare well, particularly the mining sector, if massive new mines open to supply the battery needs of the booming clean-tech industry, including lithium-ion batteries, but also materials needed for solar panels, wind turbines and transmission lines. In the opposite scenario, some mines will be forced to retreat or even close: cheaper lithium, copper and manganese prices will have a minimal impact on electric car prices and will not increase demand. “Mainstream” metals like nickel and copper should find other markets, especially at lower prices, but producers of specialty metals like lithium, which have few other uses, will be hit particularly hard. It could be reminiscent of the trials of the uranium mining industry in the 1970s and 1980s, when a short-term price spike and optimism about the development of nuclear power caused the industry to become severely oversaturated.

The risks are particularly acute where energy policy plays a major role in determining the pace and profitability of the transition. Despite the mantra that “solar and wind are cheaper than fossil fuels,” much of the energy transition investment requires large government subsidies, mandates, or both. Historically, some companies have been blindsided by investing in meeting environmental regulations, only to see requirements dropped or deadlines relaxed. California’s electric car mandate from the 1990s is one of many examples. Similarly, many American communities opted for voluntary oxygenated gasoline requirements in the 1990s, only to back down when faced with higher gasoline prices as a result.

Which sectors are most at risk in the opposite scenario? Electric vehicles are likely due to growing disenchantment with the technology and the regressive nature of the costs imposed on lower income people in favor of those who can afford more expensive cars. Furthermore, rooftop solar appears to be a target due to the instability it promotes in the supply of energy to the grid, as well as the regressive effect of rewarding homeowners and “taxing” all consumers to pay subsidies.

Land needs for wind and especially utility-scale solar could also squeeze those industries as they grow and public opposition mounts. Industries that serve these industries, such as electric charging stations, will be affected, but those that are multi-purpose, such as offshore wind companies and contractors installing renewable energy sources, will be able to make better use of their operations.

What companies will suffer? As always, narrowly focused companies are most at risk. GM may lose money if it has to switch to gasoline-powered cars, but small electric vehicle makers could follow the path of earlier manufacturers like Solectrica and Fisker. If your only business is installing charging stations, that’s riskier than a contractor who installs solar panels and could just as easily switch to building new roofs. And obviously, deeper pockets will always help in dealing with an uncertain market environment.

Which underscores one of the oldest lessons in energy (among others), namely that a business with a good product will usually thrive, but one that requires government support in the form of subsidies, bans and/or mandates carries higher risk, given the volatile the nature of politics. In 1999, I published an article in Applied Energy titled “Oil Scarcity, the Oil Crisis, and Alternative Energy: Don’t Get Fooled Again,” in which I acknowledged the greater demand for renewables but insisted, “It is vital that [renewables] industry…recognize that this reflects improvements in the properties of the technologies involved. They shouldn’t accept the idea that external developments will guarantee them a market.” Greater concern about climate change suggests a greater demand for clean technologies than simple economics would provide, but this still leaves significant political risk, given the over-reliance on favorable fiscal and regulatory policies.

Investing for the Oil Price Collapse – MarketWatch

I love electric vehicles – and was an early adopter. But more and more I feel cheated | Rowan Atkinson | Guardian

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