WASHINGTON – Joseph Schumpeter famously called it “creative destruction”. This was and still is the best way to describe how in a free market, capitalistic economy technological advances, (this is the “creative” part), inevitably cause the death of pre-existing technologies, systems and modalities (and here you have the “destruction” part). The problem with truly disruptive innovation (the outcome of very good creation) is that incredibly positive technological developments in many cases spell disaster for established industries, especially capital-intensive industries.
Oil sector, always a winner?
Take energy, for instance. I applaud American ingenuity that pushed the development of technologies –hydraulic fracturing and horizontal drilling– that now allow the successful economic exploitation of domestic shale oil and shale gas. Considering America’s (seemingly) never-ending need for oil in order to produce the rivers of gasoline needed to power our hundreds of millions of vehicles, more oil discovered and produced here at home is good news.
Indeed, the more oil we get at home, the less we need to buy from other producers, some of them troubled Middle Eastern OPEC countries. Therefore, investing in additional domestic oil production should be looked at as a very smart move. It is good for our balance of payments, (more of our money stays at home), and definitely good for our energy security. Finally, it is very good business for the oil industry.
EVs, Electric Vehicles, may change everything
All true –until yesterday. Today, we do not know for sure anymore, on account of possible technological advances that can make most, if not all, of the oil industry obsolete. What? Oil obsolete?
Yes, this seemingly outrageous prediction may be true. The fact is that right now –and even more so going forward– the oil industry has to deal with the potentially catastrophic consequences of disruptive breakthroughs occurring in the relatively new electric vehicles, EV, sector. Indeed, if and when technologically viable and truly cost competitive EVs come to market, this will be the end of the oil industry as we know it. This will be capitalism’s “creative destruction” on a gigantic scale.
Let’s look at this in perspective. Until a few years ago, the world knew only the internal combustion engine. And this engine required oil-derived gasoline. There were no alternatives.
Technological breakthroughs?
But now it is different. Now we know that there can be alternatives. Granted, EV technology is still in its infancy. However, looking at the global offerings of electric vehicles (totally electric, as well as hybrids) I see well over 20 models. In other words, we begin to see a real effort, on the part of newcomers as well as established auto manufacturers, in the USA, Europe and Asia to make and sell more advanced electric cars.
We all know that the still unsolved technological challenge faced by this new industry is to create cheap batteries that will allow you to drive your vehicle for longer distances before you have to stop and recharge.
This is still a real problem holding back EVs. But we also know that lots of smart people across the globe, from Japan, to China, to Germany, France and the US are busy working on it.
Invest in oil?
Now, if I were in the shoes of a major oil company CEO, knowing all this would make me nervous, very nervous. I know that, in order to stay in business, I need to identify, secure the drilling rights and then put into production more and more oil fields. This requires committing a huge percentage of my profits, billions and billions of dollars for the likes of Exxon and Chevron, into developing new resources. All this will done on the basis of some key assumption about demand for oil products and therefore prices.
Cheap EVs coming tomorrow?
However, how do I prepare for an announcement coming, say, a year from now in which Tesla Motors declares that it has come up with a brand new battery that costs 1/3 of its cheapest model, while it allows you to drive 400 miles before recharging? This is unlikely; but not impossible.
If and when electric vehicles become affordable and viable, given the lower cost of electric power, gasoline demand will dwindle and then vanish. Indeed. And this will spell the end of the oil industry as we know it today. (We shall still need oil for jet fuel and other uses. But they would amount to a small fraction of today’s demand).
Given all this, and the rather uncertain future created by R&D in EVs, is it really smart to invest massive amounts of capital in oil?
Who knows really. Real breakthroughs in EV technology may be around the corner, or they may happen 20 years from now. It is impossible to make believable predictions when it comes to rapidly evolving technologies.
Risk
Capitalism is about taking risks. Sometimes huge risks. And this is difficult, as so many predictions (based on incorrect assumptions, we find out later) turn out to be wrong. It is really hard to be in a capital-intensive, mature industry threatened by potentially viable newcomers.