Oil barrels

Fitch Ratings, one of the world’s leading credit ratings agencies, has warned the falling cost of batteries represents major disruption, it says that the oil industry is the most exposed.

“A rapid advance in battery technology could have significant implications for global credit markets, causing disruption across sectors that account for nearly a quarter of all outstanding corporate bonds” says Fitch Ratings.

Now when you think about it, this is a curious statement. Fitch is effectively saying ‘woe, is us, we are about to find the holy grail.’

To explain. Energy storage is known as the holy grail of physics – along with water desalination. Crack either of these problems with a cost effective solution and the world is changed, in a big way. The world would change for the better, but such innovation would also create huge disruption. The oil industry for one, would come close to collapsing. As an aside, Saudi Arabia may know this, which is why it recently invested almost half a trillion dollars in the new tech fund SoftBank.

Here is the core argument. Battery costs have fallen 73% since 2008, they now stand at $268 a kilowatt hour. It is thought that once costs fall to $120 a kilowatt hour, electric cars become cost effective compared to cars using the internal combustion engine. Some reports suggest that Tesla is in fact very close to the $120 a kilowatt hour level.

Right now, sales of electric cars account for around 1% of total car sales – that is still tiny. But ask yourself this question. What will happen once the cost of batteries fall even lower, to say $50 a kilowatt hour? What then? If the story of the iPhone tells us anything, it is that once the technology behind a consumer product is right, sales can explode.

Fitch said: “A leap forward in technology could transform the viability of electric vehicles (EVs) as an alternative to the internal combustion engine. This would be resoundingly credit negative for the oil sector, as transport accounts for 55% of oil consumption. Electric utilities and automotive companies could become polarised between winners and losers. But renewables companies could significantly increase their market share as batteries help solve the problem of intermittent supply.”

It is often said that a disruptive tsunami is heading towards some of the world’s largest old school companies, such as the oil majors and car companies. But there is no mere tsunami, instead they face a great flood, of Biblical proportions.

Fitch itself said that the rise of electric vehicles – EVs– will be quite slow.

It said: “The transition to EVs will be slow due to the need for infrastructure investment and the fact that new vehicles can have a 20-year lifespan. We calculate that with a 32.5% compound annual growth rate in EV sales it would be nearly 20 years before EVs comprised a quarter of the global car fleet. Overall growth in the global fleet due to rising emerging-market sales would also limit the impact on oil demand.”

But it added that “reduced transport fuel demand could tip the oil market from growth to contraction earlier than anticipated.”

Truth is, as has been argued here before, the oil industry is guilty of complacency.