important consideration is the “venture capital” approach, supporting new technologies via the deployment of “risk capital” through a diversified portfolio.
During the dotcom revolution, it was clear that many new technologies and start-ups would not make it. But the mindset was that “we just need one winner”. It was impossible to “guess” who the winner would be, so investors were diversifying and spreading their bets, reaching to a much larger number of projects.
In the transportation world, several technologies are looking to break the crude oil monopoly. In addition to the more widely known and accepted compressed natural gas (CNG), LNG (for trucks, trains, and ships), electric car vehicles (ECVs), and hybrid vehicles (HVs), during the 2013 Motor Show in Tokyo, Toyota shocked the transportation world wih the announcement of the commercial launch of a fuel cell vehicle (FCV).
Yet, there are powerful forces that can delay change.
In 2009, my analysis “against the box” indicated that the expectations from the EU and US governments for electric vehicle sales were totally unrealistic and simply impossible. Five years later, the electric vehicle has turned out to be a much smaller alternative than these governments had anticipated. But, ironically, the penetration of the electric car was not “killed” by the oil companies or energy lobbies, as many people think. The list of “murder suspects” for the delay in electric cars is quite long, and includes those governments who were seemingly trying to promote the electric car industry in the first place.
Start with the bailouts of the car companies. The industry was deemed “too big to fail” in the United States and Congress worked out a $25 billion loan and by December 2008 the US government became the majority shareholder of General Motors.
In this environment, it is not surprising that the subsidies from EU and US governments to buy a new “conventional combustion engine car” (and help reduce the brutal inventory of unsold vehicles) exceeded by six to one the amount devoted for the development of electric cars. Anecdotally, 2010 turned out to be the year of highest sales of SUVs since 2006,12 as the government subsidies strongly incentivized the absorption of inventory and accelerated the renewal of the fleet, reducing significantly the potential for electric cars for years.
There are other important factors that have slowed down the development of electric cars, which we will discuss in more detail in Chapter 14. One of them is pricing. An electric car, which seeks to replace a combustion engine vehicle, cannot succeed if it sells at an average of 50 % higher than the alternative. This concept of promoting expensive alternatives does not make for a realistic economy. Alternatives will only exist if they are more attractive, cheaper, and efficient. Another factor is taxation. The EU collects €250 billion a year in taxes from petrol and diesel (taxes on petrol range between 40 % and 65 %).13 So, if the electric vehicle took a significant percentage of market share, governments may be forced to “transfer” the gasoline/diesel tax to the power sector. In fact, subsidies to power, including renewables, but also coal and gas, have resulted in a higher average cost of electricity across the EU.
Following an extremely volatile period, the dotcom bubble finally burst in 2001. Equity valuations had collapsed across the board. Many companies went bankrupt. Others were not worth much more than the cash they had raised from investors. There were many winners too, who took advantage of the situation and expanded through acquisitions. Among them was Apple, who in 2000 acquired SoundJam MP and its team of developers. Apple simplified the user interface, added the ability to burn CDs, removed its recording feature and skin support, and renamed it iTunes. In October 2001, Apple launched the first iPod as “one thousand songs in your pocket”.
But for internet and broadband, competition and overcapacity made them available at a fraction of what had been anticipated. Bad news for the telecoms industry. Good news for consumers.
The future of the energy world is highly uncertain, but it is not unthinkable (in fact it is our base case) that the large development of “parallel” infrastructure will lead to a similar situation.
Commodity assets and prices are driven by marginal economics. Large imbalances between supply and demand can result in sharp swings in valuations, as producers know well.
The current energy revolution is relevant. Previous oil crises were largely “just about oil”. This time it is not only oil supply and demand forces competing against each other. This time we have new dimensions as natural gas, renewables, and other fuels become real threats to crude oil's relevance. With more options available, the impact of price spikes and peak pricing is eroded, preventing economic shocks. As such, despite constant global conflicts, the “oil burden” (the amount of money devoted by OECD countries to pay for imported oil) has not surpassed the “tipping point” of 5.5 % of GDP.14
The internet revolution was a game changer. It opened a whole universe of new opportunities that (for most people) were unimaginable, even at the peak of the market in 2001.
The success of the internet, Apple, and Facebook has left a long list of direct and indirect casualties across industries. Look at Blackberry or Nokia for example, once upon a time leaders in their sector, today at risk of disappearing. Or look at music-buying patterns. CD shops are history. Or think about the impact on the advertising industry, increasingly dominated by companies like Google and Facebook. Many newspapers are struggling as their advertising revenues via digital are a fraction of the print. Who would have said that 10 years ago?
The needs of the consumers are being addressed but they are being served and consolidated with superior and new technologies. The old and expensive technologies are dead (even if they don't know it yet).
Thanks to the development and overcapacity in broadband, wireless, and applications like FaceTime or Skype, I am now able to have a live high-definition videoconference (voice and image) with someone across the Atlantic pretty much “for free”. Yet, a telephone call (voice only) would cost me an arm and a leg. “This must go down in history as a major inconsistency”, I keep thinking to myself. “I can eat and smell a cake, cheaper than just smelling it. This is crazy. Something has to give”, and it does not take a genius to figure out who the losers in this battle will be.
In the energy world, the “shale revolution” has already had a major impact in North America across many industries. And the implications do not stop there. They are global and are already feeding through the energy system, flattening the world.
Look for example at US coal. The surge in US natural gas production and cheap prices resulted in a significant displacement of coal demand. Power generation used more natural gas and less coal. The displacement of coal did not only result in lower prices within the United States, but also made more and cheaper coal available for export. Producers outside of North America felt the impact too. In March 2010, in search for new markets and responding to strong incentives and regional premiums, Colombia shipped a cargo of coal over 10,000 miles, all the way to China.15 Some of the switching is very “price sensitive”, and may flip back into coal as and when the economics make sense. But in the long run, the availability of more environmentally friendly natural gas (as a rule of thumb, coal pollutes three times more than natural gas for a given unit of energy produced) may result in the retirement of coal-fired power plants. The impact is therefore more global and more permanent than what the large majority believes today.
Another example is the renaissance in the fertilizers and petrochemical industries in North America. A version of what
European Commission.
Ronald Stoeferle (12 March 2012).
Javier Blas (2010). A market ee-emerges.
