Lithium and the next fossil fuel crisis

Lithium and the next fossil fuel crisis

Marcello Vallese
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According to a study by Fitch Ratings, the lithium batteries powering electric cars have the potential to throw the petroleum industry into crisis. An interview with Alex Griffiths of Fitch Ratings
@FitchRatings: by 2030 electric cars will be competitive with conventional ones. #zeroemission

Shenzhen and Hong Kong are two of China’s most important megalopolises and share a lot in common: high population, some of the busiest commercial ports in the world and the headquarters of major financial and technology institutions. What makes them very different are the hundreds of electric buses that have changed the face of Shenzhen’s public transport. It is here that the winds of revolution blow hardest, incidentally threatening to bring unprecedented consequences to the global oil market.
It’s no coincidence that Shenzhen is the most sensational example of China’s new green wave, the city being home to BYD, the world’s largest manufacturer of zero-emissions vehicles. The company counts Warren Buffet among its investors, and Samsung recently acquired a large stake. There are now 100,000 electric buses in China, one fifth of the nation’s entire fleet, and that figure is growing. At the current rate, by 2025 the entire Chinese population will enjoy a form of mobility still bogged down in feasibility studies and modest trials in many western countries.

Toward a new mobility model

Public transport is only the tip of the iceberg that is the wider market of electric vehicles, in which private cars still take the lion’s share. In 2015 alone, over 331,000 zero-emissions vehicles were sold in China, enabling the country to overtake the United States as global leader. The most recent five year plan issued by Beijing calls for doubling this figure by 2025, offering consumers a package of incentives covering up to 60% of the purchase cost. The numbers are clear on how serious China is about electric mobility, and the country currently has the capital, workforce, political will and – most importantly – energy to move forward on electric-only mobility. According to the People’s Daily, the Chinese Communist Party’s official organ, China currently produces 15 billion kilowatts of energy, an overcapacity of more than 20%. Can "mass electrification" imposed from Beijing be the beat of a butterfly’s wings that starts a hurricane in Houston, Riyadh and Aberdeen?

"If electric cars were to reach a market share of 50% within ten years, one fourth of European fossil fuel demand could basically evaporate."

The crisis is far off, but action is still necessary

Such a scenario is foreseen by Fitch Ratings, which recently published a report that for the first time examines the financial consequences for the oil market in the case of a rapid development of lithium battery technology. The most extreme scenario, but not the most unrealistic, forecasts one fourth of European fossil fuel demand simply evaporating, if electric cars were to reach a market share of 50% within ten years. The consequence for oil companies would be that major investors, anxious about assets considered technologically obsolete, would start gradually but inexorably selling off shares. The threat is all the more serious considering that in 2014 as much as 55% of global oil output was consumed by the transport sector. In order to look more in detail at the analysis provided by the report, we spoke with its author Alex Griffiths, Fitch’s managing director EMEA corporate group and head of natural resources and commodities EMEA.

Alex Griffiths

Alex Griffiths

Fitch Ratings

Alex Griffiths is Head of Natural resources and Commodities for Fitch Ratings' EMEA Corporate group. He is responsible for ratings in the Oil and Gas, Metals and Mining and Chemicals sectors

The policies of China and India are capable of influencing the fossil fuel market

"Currently," Griffiths explains, "1.2 billion automobiles are in circulation, and that number is set to grow to 2 billion by 2035. By that date, we expect that only electric cars will be produced, and compound annual growth of 32.5% could bring the number of electric vehicles in circulation to 500 million. There will still be 300 million more internal combustion engines than there are today."
"The main long-term growth models," he adds, "point to China and India as the major factors capable of affecting the auto market and oil demand. If this growth were not to happen, there would be nothing to counterbalance what could most optimistically be described as a zero-growth scenario in the oil markets of developed economies, triggering a drop in demand. The other possibility is that the growth of the auto market in these countries can be regulated at the political level, forcing the preference for electric models."
"However, the Fitch report predicts that 2030 will be the year in which electric cars will start being competitive with conventional ones. Such a scenario would be favored by highly volatile oil prices. “Thanks to realistic and ongoing improvements in performance," Griffiths explains, "electric vehicles will have no problem competing with conventional cars by 2030. In fact many manufacturers hope to reach competitiveness by the early 2020s. Improved batteries will inevitably precede the moment in which demand for oil will drop."

But it's a long way from efficient batteries to widely accessible recharging infrastructure

Even as battery performance improves, an infrastructure capable of supporting this new form of mobility has to be built. At the current time, the costs look anything but competitive. "In our report," states the Fitch analyst, "we tried to simulate broadly the cost of a recharging infrastructure that more or less duplicates the existing conventional one in the United States. The cost would amount to 70 billion USD, but it’s not a given that the process undertaken will be that one. In any case, small and large distributors will have to pay out anywhere between 100,000 and 175,000 USD for every charging point. At these costs, utilities could fund the new stations jointly with the retailers or open their own brand, but it’s hard to say which business model will end up prevailing."
The report’s conclusion invites oil, energy and auto companies to be warned. Disruptive battery technology could spread havoc on sectors that issue one quarter of global stocks, amounting to 340,000 billion USD. The picture painted by Fitch isn’t here yet, but the price to pay for those who don’t adapt could be dire.