The One Equation that Describes the EV Revolution – that No-one Uses

Note – on the basis that each equation loses 50% of readers, I’ll assume only the hard-core readership remain.

EVs and other new energy technologies such as PV solar are disruptive.

But incumbent auto and oil companies, and industry analysts assume they will follow non-disruptive, simple growth curves. 

They won’t.

It’s time to model disruption, and confront reality.

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The Mathematics of Disruption

Electric Vehicles (EVs*), like their gasoline predecessors, are a disruptive technology.

By 2020 or thereabouts, they are forecast to become cheaper than conventional internal combustion engines (ICE), and offer running and maintenance costs 90% lower. At this point, there could be a mass exodus from gasoline cars to electrified ones.

All disruptive technologies, in nature and economics, follow a prescribed pattern of growth. It’s commonly called the S curve due to the shape of expansion: slow incubation, sudden lift-off and break-neck growth, and a final mature plateau phase.

The examples are numerous:

S curves are based on two governing principles: rates of growth change quickly over time as demand or resources develop, but there is an upper limit to expansion as the resources get eaten up. So, disruptive populations or products start out small, explode in size, then level off as resources or demand are depleted.

The fearsome equation above – a Logistic Function – contains all these moving parts and so generates an S curve, with take-off point, dynamic rate change and upper limit; a disruptive piece of mathematics in its own right.

You would therefore expect forecasters of EV demand (or PV solar) to use S curve mathematics to try and pinpoint the time of lift-off, and the duration of the explosive, volatile phase of growth.

Not so.

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OPEC’s Terrible Choice:  Its Next Cut Could be a Permanent One.

OPEC seems in control of the oil world, but in fact it is terribly constrained.

A review of OPEC’s previous production cuts reveals that:

–  it cannot sustain a market share strategy
–  it takes the lead in output cuts when demand declines, but it cannot assume non-OPEC will follow
–  it is unable to influence demand, only respond to it

OPEC’s cuts have typically worked when underlying consumption has been strong, and non-OPEC production slow to respond.

But things change; as global demand enters structural decline, and non-OPEC production grows, diversifies and quickens, this leads to a stark conclusion: OPEC’s  latest cut may need to be permanent; a long-term production cap, with all of the consequences for its economies and assets.

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Exxon’s Dangerous Energy Vision

 “Forecasts are not always wrong; more often than not, they can be reasonably accurate. And that is what makes them so dangerous…
They often work because the world does not always change. But sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete.” Pierre Wack, leader of Shell’s initial Scenario Team, 1971

Exxon’s energy vision assumes the immortality and long-term growth of the classic thermal-based system.

But Exxon’s energy output cannot grow if it only offers more (expensive) thermal fuels to fill fully built-out existing pipelines and energy channels. Too many alternative technologies are now competitive to allow the current energy system to survive peacefully into old age.

That is why Exxon’s rigid backward-looking vision is so dangerous – mainly to itself, and its investors.

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Scale and Scalability: A One-Chart Guide to the Global Energy Transition

An era of unbalanced, unproductive energy supply is coming to an end – and a new age of scalable, efficient energy is rapidly emerging.

In previous posts (eg here and here) we outlined the main features of the current energy transition: the move from the dominance of extracted oil and gas, toward manufactured energy via shale, solar and wind.

In this short piece we try to capture the transition in a single chart.

The main organizing principle is the idea of scale and scalability: energy leadership stems from having both large energy resources (scale) and the ability to provide them efficiently, quickly and flexibly (scalability).

Shale, solar and wind have an abundance of both scale and scalability, which is why they are growing so rapidly, and absorbing most of the globe’s incremental energy demand growth.

At the same time, the incumbent energy industry is split between two extremes: OPEC and Russia have vast scale and production scalability, capable of  adjusting supply to demand. However, their high–cost twin, the international energy industry, has limited scale, and low scalability. Rigid and inflexible it has only one strategy: growth via complex, longer-term investments and projects.

The 21st century energy dynamic will be the story of how the tension between the two-paced incumbent industry, and the high speed new entrants, gets resolved. How the use of energy changes when it’s available at various scales, and how a deeply-entrenched industry attempts to reconfigure itself.

As a start-point, the chart below attempts to put a number of these key issues together in one place, using scale and scalability as a frame. The main sources are highlighted below it, and a summary of the key issues follows.

But for those happy enough with just the picture, the post ends here.

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The Surprising Dual Winners of the Energy Transition – OPEC and the New Technologies: Shale, Solar And Wind

  

There are a lot of new arrivals at the low-end of the energy cost-curve – but OPEC may yet adapt.

Summary

US shale and global solar / wind energy technologies are now competing strongly with the traditional oil and gas industry: these new technologies continue to grow in size and their costs are declining quickly due to scalability and learning effects.

The new players are also dispersed, decentralized and respond to market forces and pricing rather than any coordinated policies

This intense competition will force OPEC and other major national oil companies to rapidly change to compete on price rather than cost-plus market control.

A surprising outcome of this may be that OPEC along with the new energy technologies emerge as the dual winners of the energy transition.

Polar opposites in many respects, these two blocs have similarities in terms of self-organised decision-making, technological scalability and vast reservoirs of energy to rely on.

These are qualities that international energy companies, for all their financial and engineering heft, chronically lack – as likely losers, they will need to quickly develop exit and harvesting strategies.

Although unwelcome news inside the offices of many international oil firms, this is likely a good result for global energy consumers, and potentially a stable political outcome as both winners adjust to the new energy reality.

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