Way back in June of 2015 on MarketWatch, I declared that we were at "The beginning of the end for the oil age." That article went viral gaining over 100,000 views and hundreds of comments, many of which were not flattering.
Tony Seba, a Stanford economics professor and author of Clean Disruption of Energy and Transportation, postulates massive and fast disruption of the transportation and energy spaces over the next 12 years. His ideas have gained popularity with an overly ideological group that wants him to be right.
For the record, I want Seba to be right, but rational analysis tells me that he is early to the party. The problem for investors, as all experienced investors know, is that being early is often the same as being wrong.
Let me make very clear at the beginning of this column, I do believe Seba's arguments lead us to about the right spot, however, his time frame and some key details are wrong. In my opinion, he has sensationalized his argument to gain attention and made two very critical errors. At least one part of his equation is completely upside down.
Seba's idea that oil prices are about to plunge to $25 per barrel and disrupt the entire energy complex value chain by "as early as 2021" does not take into account the massive responses by OPEC or basic human psychology.
It is my analysis that oil is about to reach what I have termed the "peak oil plateau." On this plateau, oil supply and demand will be in balance for a decade or longer and hold oil prices around $80 per barrel. There is also the horrible possibility of more Middle East war that acts as a catalyst for oil prices to rise significantly past $80 per barrel.
As I see it, investors have two opportunities for asymmetric gains emerging. The first is to position trade, i.e. hold a few years oil investments made now. The second opportunity is to find companies that will thrive in an EV, solar and smart grid future, then accumulate their stocks on any weakness the next few years to hold for the long-term.
Tony Seba's Argument
Tony Seba and his team believe that demand destruction for oil is imminent. The heart of the thesis revolves around the notion that 95% of personal transportation needs will be met by people using electric vehicles via a "transportation as a service" model by 2030.
Seba's thesis is that services such as Uber, Lyft and other emerging competitors will drive the cost of transportation down towards the cost of the transportation via EVs using self-driving technology. He postulates that people will stop buying their own cars and that most vehicles will be owned by corporate fleets.
Seba states that these massive disruptions will be driven by economics. He relies on the idea that most people would save up to $5,600 per year hailing rides via services rather than owning their own car, and thus will make a purely rational financial choice to forego car ownership.
To power an increasing fleet of electric vehicles, Seba believes we will see solar emerge as the dominant form of energy production, also, by 2030. In fact, at the AltCar Expo in 2014, Seba stated that the U.S. would be using 100% solar power by 2030.
Here is an executive summary slide from his Seba's report on RethinkX titled:
Rethinking Transportation 2020-2030: The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries
This report, though flawed, is a must read for anybody serious about investing in the future of energy and transportation.
Seba has been making essentially the same assertions since at least 2014. He's been early to call the coming disruption and that reality affects investors greatly. Just below you will find a presentation from June 2017. He gave a very similar presentation three years prior.
In the presentation, Seba makes analogies to the transition from horse and buggy to car, the progression of cell phone technology and of digital photography's destruction of Kodak. These ideas are meant to impress upon the listener that the coming revolution in transportation and energy will be very fast.
The truth of the comparisons that Seba makes is not so clear cut though. It took decades for most Americans to own a car. Cell phones went from the bricks of the Wall Street movie era back in 1987 to iPhones and Galaxies that didn't permeate until well after 2007. Kodak had years to adjust and simply failed to do so. None of these transitions were nearly as big as what Seba says is coming, if nothing else, due to a more developed economy and bigger population.
Among the key assertions Seba makes is that oil demand peaks in 2020. That is almost certainly untrue, but it is close enough in my opinion. I put peak oil demand at about 2025 and have said it peaks between 100 mbd and 110 mbd. The EIA agrees that demand will hit 100 mbd next year already, so my 110 mbd forecast is obviously more accurate than Seba's projection.
Seba further asserts that transportation as a service (TaaS) will drop oil demand to 70 mbd by 2030. It is with TaaS that Seba makes the most aggressive assumptions. I disagree with the magnitude of what Seba asserts for two key reasons that I will discuss below.
Take some time to watch Seba's presentation. The ideas in this article and what Seba presents require some time to digest. These are monumental changes that are coming. My key disagreement with Seba is time frames and ultimate adoption of TaaS with the resulting impact on oil's inevitable decline.
The "Transportation as a Service" Exaggeration
There is no doubt that "TaaS" is coming to the world. Especially in densely populated urban areas, summoning an Uber, Lyft or something similar via an app on a phone is incredibly convenient. Almost gone are the days of calling a cab company or waving a hand.
There is a major problem with the idea that most people will do away with personal vehicles however: freedom. As identified in a book I recommend to everybody, Beyond Reason by Roger Fisher and Daniel Shapiro, autonomy is one of the five core emotional needs of all people. It is simply implausible to me that most people will give up owning a car.
The idea that potentially saving several thousand dollars per year would convince me or billions of other people to give up the freedom that comes with owning a car is unfathomable to me. I can unequivocally say that I will always own a car, probably two - a sedan and an SUV. Yes, it is a virtual lock that the sedan will be an EV, but the next SUV I believe will be a hybrid.
Much like Socialism makes the mistake of believing that human psychology will allow for those who want more to take less, so too does Seba make the mistake of peddling the notion that the majority of people will give up the personal freedom of owning a way to have transportation anytime.
Try telling a 16-year-old to take an Uber rather than drive. They want the freedom like anybody else, maybe more so. It will be a huge hurdle convincing the young that they don't want to be in charge of where they drive on a whim.
It is also not conspiracy to be afraid of having to rely on a corporation, or government, for anything, much less something as vital as transportation. I am no prepper, but to not have a car of my own will never occur until I am very old.
And that "very old" thought is something to consider too. As the Baby Boomers age, they will use TaaS as a service more. That's good, fewer 80 to 100 year-olds driving the better. But many, and I think the number is most, Boomers will also simply get into their autonomous car and tell it to drive. Again, the psychology of personal freedom is dramatically underplayed by Seba who makes only a passing mention of the idea with some dissatisfaction implied towards people who would keep a car.
We would be remiss to not think about the Millennials' likely habits and development as well. Since 2012, they have been experiencing household formation and starting families. While Millennials might take a TaaS vehicle to go out on the town for date night, bundling 2 kids and stuff into a vehicle that isn't yours is a bigger leap to assume.
Ultimately, TaaS will continue to grow, but as we've seen with increasing demand for oil recently, it's not yet reached the point where it will cause demand destruction. Also, there is a growth rate for drivers to recognize as emerging markets develop. At least the more affluent people will want cars.
Ownership is an aspiration. As is freedom. Do not discount that people will place personal freedom above a few bucks of savings.
The idea that demand destruction will cause oil use to fall to 70 million barrels per day by 2030 is farfetched in my opinion. About a five to ten years after EVs start to outsell internal combustion cars, when the ICE vehicles are retired, is when oil demand falls sharply. That puts the drop off the peak oil plateau into the middle 2030s.
I have suggested that oil demand falls to about 50 million barrels per day around 2040. While this might not seem too distant from Seba, our curves represent essentially full economic cycles. For investors that is very important.
The Speed of Light
A core component of powering the EV future is solar energy. Tesla's (TSLA) Elon Musk has discussed this for years. EVs and solar are tied at the hip because of the electricity demand that EVs will create.
Expanding coal and natural electricity generation in an age of global warming is simply not an option. Here I will take a moment to say that I don't care what your belief is on global warming. If you are a climate change denier, your opinion is irrelevant because virtually all of the governments on the planet take the opposite view.
Governments set policy, such as China and India both stating that they will end internal combustion engines in their nations in the next generation. If you want to fight all of those city halls, then have at it. For me, I see the trend and the trend is alternative energy, particular solar.
We are at the point where it is more efficient in most cases to deploy solar for new power generation than building a new coal or natural gas power plant. As the EIA also notes in its Short-term Energy Outlook - STEO, 100% of net new power generation is now coming from alternative energy, led by solar and wind for the vast majority. That can be understood as this, virtually all net new power generation is coming from solar and wind.
It no longer makes any economic sense to build a coal power plant for any reason and natural gas is essentially only being built to replace coal for base power. We are at a point where the costs of solar and storage are almost where they need to be to start replacing existing coal power that retires.
As the costs for solar and storage come down, and those costs don't need to come down much anymore, coal will become non-existent and all of those assets will be stranded. I believe Seba is about on the mark with a 2030 target for that. I intend to short coal stocks into oblivion at some point. I will share those stocks with members of Margin of Safety Investing exclusively.
When the cost curves of solar and batteries (plus sensors, power electronics, software, and new business models) converge, the central generation model is disrupted. At that point, the architecture of energy flips from central generation to distributed generation. - Tony Seba
As I disclosed in Use Uncertainty To Buy SunPower's Bright Upside, I am a big believer in solar and am scouring the universe with help from friends, assistants and counterparts to find the best companies for the next decade or two. SunPower (SPWR) appears to be an opportunity to buy growth at a value price right now. Its financial backing by Total (TOT) is what sets it apart for me as it can withstand the vicious cycles in solar. Although, I believe the short-term cycles of boom and bust are soon to give way to a long-term secular uptrend.
As investors, we should take Seba, Musk and global governments seriously as we build our portfolios for the future. Solar is a monumental opportunity.
I'd be investing in clean, renewable energy. The big new fortunes of the future are going to be made by those who develop alternatives to burning fossil fuels. - Ted Turner
OPEC Was A Step Ahead
Let's return to Seba's idea that oil is headed to $25 per barrel perhaps as soon as 2021. As I've argued in piece after piece, I believe it is becoming apparent that we are at the start of a new bull market in oil, likely the last bull market in oil - The 'Last Great Secular Oil Bull Market' Has Begun.
Here I think Seba compounds his TaaS magnitude mistake with not recognizing, by not giving credit to or simply ignoring that Saudi Arabia has led a movement to crush deepwater and oil sands development around most of the globe. I have argued long and hard that U.S. oil shale was not OPEC's target in flooding the market with oil a few years ago.
I made it clear in the end of deep-sea oil drilling as we know it on MarketWatch in 2015 and here on Seeking Alpha in Deep Water Drillers Are Doomed Even If Oil Prices Surge that deepwater was sinking fast. I went so far as to recommend people sell and short Transocean (RIG) and Seadrill (SDRL) two years ago. Both have of course crashed, with Seadrill going into bankruptcy. Transocean has survived so far and seen some rebound in share prices, but even it is likely headed for restructuring in the early 2020s in my opinion as projects don't develop and day rates stay low.
The impact of OPEC's actions in November 2014 through early 2016 was to wipe trillions of planned deepwater and oil sands development off the books. The companies and banks that finance such projects are fully aware of Seba's and Musk's ideas about transportation and solar. That future is becoming self-evident to most - timing and magnitude are the only real issues.
Those that would finance oil megaprojects are also aware that it takes a very long time to get payback on expensive megaproject oil development. Because they are not clear on when EVs and solar truly cause demand destruction of oil, they are never going to fund deepwater and oil sands projects en masse again. Never.
Instead of financing massive projects anymore, banks and majors are financing short-cycle, quickly economic projects. Those projects show peak production quickly and then fall off within a few years.
In the case of U.S. shale, we are already seeing signs of peak production as the sweetest spots have already been tapped. Going forward, shale oil will be more difficult to get to. So, while technology and technique improve, with the exception of the Permian so far, fracking production is already hitting ceilings.
The end result of less deepwater development, almost no oil sands development, fast approaching peak shale production and depletion of existing fields is that oil supply will be kept under wraps permanently from here out. With demand a bit over 100 mbd likely to last the better part of a decade or slightly more, oil prices will surely rise.
The big winners for oil in the next decade will be U.S. shale, OPEC and Russia. That is where the oil at the margins is available. That is especially true with Saudi Arabia which has over 2 million barrels per day of excess productive capacity.
It should be interesting to watch the Saudi Aramco IPO next year. I believe that the Saudis sell off more than the 5% of the company they have discussed. It would not surprise me to see them sell 15-20% of the company as oil prices rise. This could be done in more than one offering.
Notes For Investors
Ultimately my arguments with Professor Seba are of timing and magnitude. As I stated to readers of my blog on Thanksgiving, I believe:
The biggest opportunities coming are in smart everything. IoT, AI, AR, VR and alternative energy with a smart grid that powers smart electric vehicles. We're even going to see a tech based solution to methane and CO2 that churns out plastics without using petroleum. What's coming is amazing and it's only a few years away. - Kirk Spano
The position trade I believe that investors can make now is to buy oil stocks. I have talked about that in several posts. I like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which I discussed in-depth in XLE And XOP: Comparing 2 Popular SPDR Oil Stock ETFs and the SPDR S&P Oil & Gas Equipment & Services ETF (XES), which I covered in ETF File: Funds To Buy For Rising Oil And Gas Prices.
The biggest long-term opportunities lie in finding emerging technology that will support the proliferation of EVs, solar and smart grid. My coming work will have a distinct focus on those areas as well as in the referenced technology spaces. I already wrote about SunPower and am actively accumulating shares on dips. Many of you know I picked a ten-bagger recently, and while I am not going to call SunPower a potential ten-bagger in print, I do believe that the stock has huge potential from current prices over the next decade or more.
I will be discussing this column with Cheddar TV in the coming week and will link that interview in a coming article. Please engage me in the comments section and follow me to learn more about companies and investment ideas over time.
Through New Year's Eve, "Margin of Safety Investing" will be available to new subscribers for only $365 per year. On January 1st, the rate rises to $499/year. I use access to multiple top research and analysis services, combined with my "Core 4 Investing Method" and insights of 25+ years of experience to find some of the best asymmetric opportunities with the least risk possible. See my top-ranked history on TipRanks and read archived articles at MarketWatch where I was named "The World's Next Great Investing Columnist."
Disclosure: I am/we are long XOP, XES, SPWR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own a Registered Investment Advisor - BluemoundAssetManagement.com - however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.