among consumers, only to prove false. In the 1990s and 2000s,
many hailed the progress in both electric and fuel cell vehicles,
predicting early market penetration, only to see them completely fail to win consumer acceptance.
Which doesn’t mean that electric vehicles will never be
ready for market. Battery costs have come down and performance has improved, but with the thin market until recently,
estimates of cost trends are hardly reliable. To date, most sales
appear to be spurred by hefty government incentives.
However, performance is also a major factor in consumer
choice. Engine performance is as good as or better than ICE
vehicles, but inconvenience remains a barrier. Range anxiety
is a very real thing, in part because drivers are advised against
charging the battery more than 80% or discharging it below
20% on a regular basis, meaning an estimated 200-mile range
is actually more like 140 miles. In cold weather, the range drops
further, at least 5%.
And although many BEV advocates deny it, recharging remains significantly more inconvenient than refueling an ICE
vehicle. Use of a Tesla Supercharger cuts the time from as
much as eight hours to as little
as 30 minutes, although other
manufacturers’ vehicles can’t
use them. Still, the difference
between five minutes for 300
miles of range in an ICE and 30
for “up to” 170 is significant.
Consumers are being asked
to spend substantially more
money for a product that delivers much poorer services. The
evidence of consumer preference is particularly clear where subsidies have been reduced
or ended. In Georgia, the state withdrew a $5,000 per vehicle
subsidy and sales dropped by 80%. It would seem that, as with
renewable energy, governments are beginning to regret the
benefits and subsidies offered electric vehicle buyers, especially
as sales have risen and the payouts become more substantial.
Enthusiasm for BEVs looks like irrational exuberance.
PEAK DEMAND AND EQUITY PRICES
The most extreme case for lower oil company equity prices
comes from Carbon Tracker Initiative which states that “…up
to 80% of declared reserves owned by the world’s largest listed
coal, oil and gas companies and their investors would be subject
to impairment as these assets become stranded.” Further, they
believe that “greater than 50% of the value of an oil and gas
company resides in the value of cash flows to be generated in
year 11 onwards.” The implication is that oil company equities
should be discounted by 25% or more.
This does not appear to conform to the general understand-
ing of discounted cash flow in the oil industry. With the usual
industry practice of a discount rate of 10%, about 65% of a
constant cash flow would be received in the first ten years.
And the decline rates of reserves translate into an additional
discount factor: if 10% of proved reserves are produced in a
given year, the depletion or natural decline rate is 10%, which
means that production and cash flow will decline by 10% per
year (assuming constant prices) and the discounted cash flow
would decline by 20% per year. In that case, about 90% of the
value of the reserves would be received in the first ten years.
Table 2 shows recent production rates for a number of
countries and locales, which highlights the importance of
differentiating types of production. The clear lesson is that
synfuels such as tar sands have very low decline rates, while
offshore reserves tend to be highest. (Shale oil generally has
very even higher decline rates, but company data will show a
mix of new, fast-declining well
and older wells with more sta-
ble production.) Table 3 indi-
cates how much of the total
discounted cash flow will be
produced within 10 years, given
different decline rates.
So, only for oil sands production and some conventional
onshore oil should there be any
significant discounting of reserve values due to expectations of weak oil demand, and
even that is problematical. In
most cases, the majority, if not
the bulk of the value, of proved,
developed reserves is recovered
within a decade and events
beyond that period are all but
irrelevant for current reserve and equity values.
PRICES AND DEMAND
And of course, economics could play a role in reducing oil
demand. A reduction in subsidies in oil producing countries
could reduce oil demand slightly, but moves in that direction
have been slow, while large consumers like China and India
have only modest subsidies. So even a complete termination
of product price subsidies would only moderate world demand
trends slightly.
A bigger effect would be from rising crude oil prices, as many
predict (Figure 1). Unfortunately, Lynch (1992) showed that
long-term oil price forecasts have tended to be overly optimistic
or bullish for many years, due to a belief that depletion must
send costs rising over time. But this was countered by Adelman
(1986): “Diminishing returns are opposed by increasing knowledge, both of the earth’s crust and of methods of extraction
and use. The price of oil, like that of any mineral, is the uncertain
fluctuating result of the conflict.” In both the 1970s and 2000s,
T2: 2016 DECLINE RATES
US Europe Bitumen
Shell 21.5% 18.6% 4.0%
BP 10.2% 17.5%
Chevron 13.4% 14.9% 2.9%
COP 11.9% 11.6% 2.3%
EOG 21.2% — —
T3: SHARE OF PRODUCTION AND DISCOUNTED CASH
FLOW IN 1ST 10 YEARS (OUT OF 35 YEARS TOTAL)
Oil Sands Onshore Offshore Offshore
Depletion rate 2.0% 6.0% 12.0% 20.0%
Produced 1st 10 years 36.1% 52.1% 73.0% 89.3%
DCF 1st 10 years 73.0% 82.7% 91.7% 97.2%