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The Prince and the Martian: An Energy Fable

The Prince and the Martian: An Energy Fable thumbnail

At first glance, Mohammed bin Salman, Deputy Crown Prince of Saudi Arabia, and Elon Musk, clean-tech mogul and budding red-planet pioneer, couldn’t be more different.

Prince Mohammed is an aristocrat in a country where women can’t drive, but which relies for its wealth on many women, and men, driving everywhere else. Musk, meanwhile, runs a California company posing a direct threat to oil, Tesla Motors Inc. Believe it or not, the royal is a millennial, while the CEO was born before the first oil shock.

Yet they also have something in common: Both are attempting the seemingly impossible.

The prince aims to transform Saudi Arabia from a relatively closed society lubricated by redistributed oil rents to something approximating a modern, diversified economy within 14 years. Musk, meanwhile, plans to end the dominance of the internal combustion engine while also taking on utilities and Uber (and, yeah, he also wants to go to Mars). Both have an eye on global oil demand peaking at some point; one wary and the other welcoming.

Either or neither may succeed. But their antagonistic relationship provides essential context for energy in the 21st century.

Back in April, in a wide-ranging interview for Bloomberg Businessweek, the prince declared:

We don’t care about oil prices — $30 or $70, they are all the same to us. … This battle is not my battle.

Saudi Arabia’s sudden rediscovery of the joys of OPEC production cuts in November suggests a radical rethink on that front. Reform is fine, but more pressing issues — such as the possibility of recession in a country full of young, underemployed people that is fighting or funding multiple wars — must be acknowledged.

Kingdom Comedown
Saudi Arabia’s GDP is expected to rise by just 1 percent this year and next as austerity measures bite
Source: Bloomberg, International Monetary Fund
Note: Data for 2016 and 2017 are IMF estimates.

Transforming Saudi Arabia’s economy (and thereby its society) isn’t the same as retooling a corporation. It’s a risky proposition that must ultimately be funded by the country’s current main earner, oil exports.

This doesn’t mean reform is necessarily dead. Certain ones remain very likely, such as selling off a small stake in Saudi Aramco. But the big bang with which the prince began the year has given way to pragmatism. Certainly, oil revenue retained its starring role in the budget presented last week The real test could come in 2017: If OPEC’s policy succeeds in raising oil prices materially, watch closely to see if Riyadh’s zeal for reform matches them.

It should. I have my doubts about the Muskplex of businesses, with this year’s bail-out acquisition of SolarCity Corp. resplendent with red flags (see this, this, this, this, and this). Yet Tesla’s ability to keep tapping investors despite everything should make any country, or company, depending on oil revenue uneasy. It represents the thin end of the wedge.

General Motors Co. just began deliveries of its long-range, mass-market electric vehicle, the Chevrolet Bolt. Is it a small car that isn’t for everyone, in a country that has rediscovered its love affair with trucks since gasoline prices fell? Yes. But it’s also part of a wider strategic shift by global automakers.

About 621,000 electric models, representing roughly 1 percent of the global vehicle market, were sold in the 12 months through September, according to Bloomberg New Energy Finance. That’s what you call “niche.”

Yet, as Harry Benham of Carbury Consulting points out in this recent blog post, auto executives wouldn’t necessarily see things that way.

About 75 to 80 million new light vehicles are sold each year, and annual growth has averaged about 1.8 million over the past decade, according to Bloomberg Intelligence data. Once electric vehicle sales surpass 2 million a year (and if they keep rising), they would still be only a small part of the market — but they would then be where the growth lies.

Size Matters … But Growth Matters More
The market for regular vehicles will remain huge but stop growing by the early 2020s, with electric vehicles making up all the growth in total sales, according to BNEF projections
Source: Bloomberg New Energy Finance
Note: “Traditional vehicles” includes those using internal combustion and hybrid engines. “Electric vehicles” includes plug-in hybrids and battery-electric vehicles.

Growth attracts investment and, as more electric vehicles are sold, costs will keep dropping. As with any technology, once costs fall low enough, and performance is good enough, a tipping point can be reached, leading to rapid gains in market share. In a recent speech, BP PLC chief economist Spencer Dale laid out a detailed argument for why electric vehicles might not seriously cut oil demand this side of 2035. It is well worth reading. He did acknowledge, however, that other forces may trump his analysis:

Economists don’t do cool, but it can be a huge factor in how quickly some new technologies are adopted.

We’ve already seen this sort of thing happen in a different part of the global energy market: shale. Like Tesla, the U.S. shale boom is no stranger to hype. It certainly isn’t cool. But fracking technology has surprised everyone with its performance and resilience (aided in part by the industry’s Tesla-like knack for raising money off the back of growth plans). That resilience is a big reason why Saudi Arabia reversed course.

OPEC & Co.’s resorting to supply cuts shows power in the oil business — like some giant game of Risk — still resides largely in sovereignty. It’s an approach that is at once immensely powerful but also vulnerable to technologies that tend to fall in price and don’t acknowledge borders. Discover a giant new oil reservoir beneath Saudi Arabia, and that country gets a leg-up on Russia and others. Cut the cost of fracking by 20 percent or push the price of a battery below $100 per kilowatt hour, and it threatens to throw the board in the air.

To put it another way, the couple-dozen countries now trying to juice oil prices in a decidedly 20th-century fashion are facing off against something that looks much more 21st century: a growing network of thousands of companies — ranging across oil, autos, utilities, chemicals, and software — competing with and learning from each other.

The Prince can take comfort in Saudi Arabia’s low cost of oil production, which will keep it relatively competitive however slowly or quickly these trends play out. The Martian, meanwhile, has clearly pushed his automotive rivals to get serious about electric vehicles overall, yet in doing so has thereby piled up further challenges for his own company.

In 2017, it’s likely oil prices will rise and Tesla will be out seeking more funds. Just don’t mistake that for the end of this tale.

Bloomberg



16 Comments on "The Prince and the Martian: An Energy Fable"

  1. Davy on Thu, 29th Dec 2016 9:21 am 

    Elon is a con artist living a pseudo ponzi government subsidized fairytale. That said his electric car is cool especially when a hottie is driving. What more could exemplify modern life as an absurdity?

  2. Cloggie on Thu, 29th Dec 2016 9:25 am 

    Prince Mohammed is an aristocrat in a country where women can’t drive

    Name me a country… ah well.

    😉

  3. onlooker on Thu, 29th Dec 2016 9:31 am 

    Haha, fantasies abound. Neither can or will do what they are purporting to attempt to do. Electric vehicle will stay as a marginal luxury for a relatively short time before being consigned to the dustbin of history. As for going to Mars well, it does not merit any comment. Now the goals of the Sheik are just as ludicrous. Really your going to modernize your country which is the bastion of entrenched Muslim Orthodoxy and to boot your going to modernize and diversity your Economy. Yeah with what money. Oil money nope the Royals love to see their bank accounts overflowing. Besides with what infrastructure and what workforce waiting in the wings. A massive welfare population is what you have who do not have the skills or disposition to become entrepreneurs. As they say Dream on.

  4. jjhman on Thu, 29th Dec 2016 11:29 am 

    I wouldn’t try to out-guess the guy who can land a spent rocket booster on a floating barge.

  5. Outcast_Searcher on Thu, 29th Dec 2016 12:05 pm 

    Seems like a surprisingly balanced, rational piece, looking at data, trends, and economic realities. Rather surprising for a Bloomberg piece, actually.

    Meanwhile the naysayers like Onlooker spew denial without any meaningful facts about why EV’s are doomed to fail, even as costs come down and battery production soars.

    And the PHEV wasn’t even mentioned. That transitional vehicle can make a BIG dent in local driving in the short term (next 3 to 5 years), since established car companies like Toyota, Kia, Ford, BMW, Mercedes, Porche etc. etc. are getting on that bandwagon in a meaningful way.

    But let’s pretend none of that matters ’cause doomers gotta doom.

    Meanwhile, I’ll be enjoying burning under ten gallons of gas a year in my Toyota Prius Prime as this car looks likely to supplant the 10,000 per month sales of the traditional Prius, given it’s low relative cost.

  6. Davy on Thu, 29th Dec 2016 12:33 pm 

    Outcast, don’t make the argument so extreme and you might get more respect. It is not like you have proven much yet. You guys are primarily talk with some incremental successes.

  7. Apneaman on Thu, 29th Dec 2016 12:39 pm 

    “I wouldn’t try to out-guess the guy who can land a spent rocket booster on a floating barge.”

    SpaceX Finally Knows What Caused its Falcon 9 Rocket to Explode – 2016

    http://www.popsci.com/spacex-falcon-9-explosion-reason

    SpaceX rocket explodes after launch – 2015

    http://money.cnn.com/2015/06/28/technology/spacex-rocket/

  8. Anonymous on Thu, 29th Dec 2016 12:59 pm 

    LoL. Elon is an overhyped fraud, and the prince, might be characterized as one as well, albeit of a different sort than musk. Musk has been involved in exactly one, profitable, successful venture to date.

    Selling his stake in Paypal was a good deal (for him). Everything else since then, has been either a failure, or relies on taxpayer subsidies for its continued operation(or both).His grandiose ‘visions’, are just that, visions.

    The prince? hardly merits a mention. You’ve seen one uS\tel aviv pupplet, you pretty much seen them all.

    Of course, jewberg never met a vulture capitalist, or oily oligarch it didn’t like…

  9. onlooker on Thu, 29th Dec 2016 1:48 pm 

    Outcast, I am not going to flood this board with a slew of links and writing. The Internet abounds with refutation of the rosy scenarios. Plus some here have already done a masterful job of striking down the rosy scenarios. My biggest argument though is not how useful renewable/alternative will or can be to society that is an argument that resolution as too many variables and variation is possible. Rather we waited too long and our economic/energy matrix no longer has the capacity to achieve this transition and still attend to other needs of society

  10. onlooker on Thu, 29th Dec 2016 1:49 pm 

    Defies resolution

  11. Dredd on Thu, 29th Dec 2016 2:48 pm 

    We now know where the new White House is going to be built (The Flat Earth Society).

  12. Mark on Thu, 29th Dec 2016 4:21 pm 

    Basic delusion about saving the driving age with electric cars. The laws of thermodynamics won’t be ignored very easily.

  13. Cloggie on Fri, 30th Dec 2016 4:02 am 

    From an energetic point of view it makes no sense to buy an electric car in 2017 as all the required electricity needs to be generated with extra fossil fuel. Europe is still a decade away from replacing fossil fuel based electricity with renewable power, before it can begin building capacity for private transport.

  14. Davy on Fri, 30th Dec 2016 5:27 am 

    From a social resilience point of view EV’s and PHEV’s are vitally important as is the increasing penetration of alternatives to the grid and other end user applications. I am not seeing valid numbers for a transition paradigm yet only a status quo extension period. I am not seeing a guarantee of economic numbers that allow for growth and stability needed to grow out all these alternatives sources and vehicles to a paradigm of transition. I am not seeing the “right stuff” and it is not because I don’t want to see it.

    I am behind this transition and hope it will go far but I feel it will sputter out in an economic decline period just ahead. I would say in 2017 but I have done that before. I just don’t know any more where that shift period is and where economic thresholds are breached. We are in a stagflationary decline as depletion and overpopulation increase. Technology and efficiency are in broad based diminishing returns. This diminishing returns is not that noticeable but it is clearly a factor with the progress needed from where we are currently. That can’t end well. The important point also is that time is ticking away and the process is speeding up with collapse force multipliers like climate change, nationalism, and systematic decay.

  15. joe on Fri, 30th Dec 2016 8:22 am 

    Interesting that the writer simply assumes that their head-chopper society will change if the economy does. Hmmm. More likely peak oil will cause us to diversify our energy mix and Saudi will backslide into warring factions. In a country where Saudi assendency is based on nothing but handouts in the biggest social welfare state in history then loyalty is a problem if the money dries up, how loyal is a hungry dog?
    Saudi is propped up by America from its bases in the ME, Israel also has an interest in the status quo, because stability of the regime means they cant do much except pretend to be very muslim. They instead hire out their jihadis and pay for extremism in Europe by paying for setting up of wahabbi mosques and imams. A reckoning is coming for humanity, with its relationship with oil, and Americas foreign policy relationship with extremist Islam. In the next generation Europe will get its first Muslim leaders, some European countries have nukes, America dropped 2 nukes on Japan, so humans can do it, I hope there is never a third nuke dropped on anyone.

  16. Kenz300 on Sun, 1st Jan 2017 9:03 am 

    Electric vehicles, biking, walking and mass transit are all part of making cities livable and enjoyable.

    Bike to work day should be everyday. Employers need to provide places to park and lock bicycles and encourage employees to ride a bicycle to work.

    Every school should encourage children to walk to school or ride a bicycle by providing safe places to lock and store bicycles and by supporting safe walking and biking paths that connect schools, homes and businesses. Kids would be healthier and get more exercise if parents stop driving them to school and bought them a bicycle.

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