Earlier last month I opened the 2015 biography of Elon Musk by Ashlee Vance and spent the weekend learning about this visionary and controversial polymath and entrepreneur.
Musk started out as co-founder of one of two companies that merged to form Paypal. It made him a wealthy man. And he used that wealth to create companies dedicated to two principal objectives: First, to make humans an interplanetary species by opening an outpost on Mars and second, by disrupting the energy sector – specifically, displacing fossil fuels through expanded and distributed solar energy production and the electrification of the transportation sector.
As if that wasn't enough, in 2012 he dreamt up the concept of the hyperloop: a ground-based transportation system with levitating trains shooting down a tunnel under vacuum at close to the speed of sound. After getting stuck in Los Angeles gridlock earlier this year, he announced a new tunnel-boring initiative to develop new technology to accelerate tunneling speeds and add the z-coordinate to L.A. traffic patterns through a network of tunnels.
What are you doing in your spare time?
Driving Innovation
Criticisms of Musk abound, particularly in the financial markets where he has proven unable to generate much, if any, profit with his companies. Yet, his skills as a promoter and booster are nearly unparalleled, and the result is that investors continue to pour money into his firms. And, to be fair, that's not unusual in the tech sector.
Profitably or not, he is disrupting established industries. SpaceX, his rocket launch firm, already dominates the commercial space market and is on track to control two-thirds of the commercial launch market by next year. This is the result of a resolute focus on lowering costs and innovating, activities that neither the U.S. government nor large defense contractors – his primary competitors in this sector – are known for.
Musk continually asks his engineers and scientists to take a problem back to first principles as they struggle to overcome a technical challenge. You need to be able to argue a position from the bottom up, he says, not relying on assumptions or prevailing wisdom or standards.
This approach to problem-solving – breaking it down to its component parts and testing everything – is what drives corporate innovation at his companies.
EV Mania
He's taken this same approach to the transportation sector where, last month, Tesla rolled its first Model 3 off the production line. The Model 3 is Tesla's fourth automobile, but its first with a price point that places it outside the luxury market, and Musk's plan is to scale production of this vehicle to 5,000 per week by the end of this year and 10,000 per week by the end of next year.
There were 17.5 million cars and light trucks sold in the United States last year. Producing 500,000 cars per year is a significant manufacturing achievement, but still a pretty small percentage of the total market.
Nevertheless, the oil industry is taking note and considering whether electric vehicles (EVs) could have a significant impact on global oil demand.
A July 14 article on Bloomberg.com, ominously titled "Big Oil Just Woke Up to Threat of Rising Electric Car Demand,” discusses the trends and how the oil and gas industry is looking at EVs in the market place. It points out that ExxonMobil, BP and Statoil, along with the International Energy Agency have all increased the share of EVs they calculate in the global vehicle fleet in coming decades.
Volvo has announced that it will convert all of its cars and light trucks to hybrids by 2019, and France has declared that by 2040 it will phase out vehicle with internal combustion engines, so corporate and political decisions will affect how rapidly a transition to EVs occurs.
All this presupposes that the EV industry can actually deliver the volumes of vehicles needed at a price that people can afford. The projected demand for lithium and rare earth minerals for the battery packs alone is staggering.
Peter Tertzakian of ARC Energy Research Institute blogged on July 11 that all of this EV mania will have an impact on the oil and gas industry, "but it's not because electric cords are going to replace pump hoses anytime soon,” because the transition isn't actually happening yet – people are not shifting in droves to EVs. They might be considering it, but it's not showing up in the sales figures.
The challenge for the oil and gas industry, as Tertzakian explains, is that while demand continues to remain strong, especially at current prices, the public discussion of this energy transition in transportation is raising questions about how much oil is needed over the long-term. And that could affect investor sentiment.
So what does that mean for E&P firms? All other things being equal, this battle will be fought on price: low oil prices will slow EV adoption; high prices will accelerate it. The winning E&P companies, Tertzakian says, will be those who innovate aggressively to keep their costs low, positioning themselves for success in either environment.
It's time to go back to first principles.