Oil Behemoths Are Underestimating The Electric, Driverless Car Revolution

From Nick Cunningham: Companies like Tesla, Uber and Google have sparked a lot of interest in the roll out of autonomous vehicles (AVs), or driverless cars, and while it is still early days, the transition to AVs could have enormous implications for the oil industry.

There is a great deal of logic in AVs. For instance, an estimated 4 percent of total household vehicles are in use at any one time. AVs promise to make the transportation system much more efficient by allowing for the shared use of vehicles. Instead of every single person needing their own car, which they use only a fraction of their day, a single AV could service multiple households. Or, more specifically, a pool of AVs could provide enough transit service for a much larger number of people.

This will cut down on fuel consumption, traffic, air pollution, and potentially provide an economic jolt from the savings.

AVs are also billed as a much safer option, although this still needs to be proven on a large scale. The software in the AVs are expected to be more reliable, eliminating human error. One study pegged the annual car crashes due to distracted drivers at between 4 and 11 million. If AVs prove to be less error-prone, thousands of lives could be saved. Moreover, people who cannot drive – the elderly, people with disabilities, those without drivers’ licenses – would be able to move around with much greater ease.

Crucially for the oil market is the fact that AVs can be built lighter, more efficient and on an electrified platform. In other words, not only will AVs cut down on oil consumption because we will need fewer cars, but many of the driverless cars are expected to be electric as well.

A lot of fuel today is also wasted by drivers needlessly accelerating and slamming on the breaks. The National Renewable Energy Laboratory estimated in a 2014 report that vehicles could save 15 percent if they maintained optimal speed. AVs promised to do just that, cruising around at steady speeds.

The oil industry has not expressed a lot of worry just yet. “It’s not something we’ve had a deep dive on,” a spokesman for Exxon Mobil told the Houston Chronicle last year. Not only does the oil industry wave off AVs, but many are not even concerned about electric vehicles, a competitor already making inroads. “Electric cars, they can grow, but I don’t think that is a problem (for us),” Claudio Descalzi, CEO of Italian oil giant Eni, told Reuters in November.

BP has gone the furthest, incorporating the hypothetical adoption of AVs into its oil demand forecasts. But even BP seems unimpressed about the threat. The oil giant offers a scenario in which 100 million AVs are on the roads by 2035, a vision that would only displace 400,000 bpd of oil demand. Hardly something to worry about. Except that assumes the AVs are not electric, which is not a safe assumption.

In other words, the oil industry is ill-prepared for a dramatic change in the transportation sector and the markets are not baking in such trends into the valuations of these oil companies.

Ultimately, oil producers could find themselves in a bind in a few years if fully-electric driverless cars really catch on. Electric vehicles are already on the roads with many more models to be introduced before 2020. Beyond that, many of the big automakers are planning on rolling out AV models in the 2020s. Driverless cars may seem like a futuristic sci-fi movie, but adoption could be abrupt once it gets going.

As for cost, AVs will be more expensive than conventional gasoline-powered vehicles for years to come, but they have lower operating costs and fewer maintenance requirements. And the typical cost comparison might not be the best metric since many will be used in fleets that are shared among many people.

Adoption, or at least the pace of adoption, is still uncertain. There are still some large hurdles that need to be overcome. First and foremost is the regulatory environment. Vehicles are regulated by a web of federal, state and local laws. More importantly, the federal government has not laid out the regulatory framework within which AVs can be widely adopted. Not yet at least. But its importance in Washington is growing as car companies press lawmakers to establish rules. Another risk is public acceptance. A few high-profile accidents involving driverless cars have made headlines, and people are still wary of the unfamiliar technology.

But like any technology, it feels foreign until it doesn’t. Smart phones didn’t exist a little more than a decade ago; now they are ubiquitous. The future of AVs could come before we know it.

The SPDR S&P Oil & Gas Explore & Prod. ETF (NYSE:XOP) closed at $39.32 on Friday, down $-0.20 (-0.51%). Year-to-date, XOP has declined -5.07%, versus a 5.17% rise in the benchmark S&P 500 index during the same period.

XOP currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #32 of 38 ETFs in the Energy Equities ETFs category.

This article is brought to you courtesy of OilPrice.com.

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