Saft@ (James Saft is a Reuters columnist. The opinions expressed are his own.)
NEW YORK, July 13 (Reuters) - Investors may be entering the age of "stranded assets," and it very likely could be driven as much by technological change as by climate change.
The concept that energy firms and their investors will take big hits as carbon-generating forms of energy face regulation to cap climate change has had much attention, notably via warnings to long-term investors and others by Bank of England Governor Mark Carney.
The idea is that energy reserves, be it coal, oil or gas, now valued by energy companies as exploitable will in the end be made uneconomic by regulation, or allied technological change. These so-called stranded assets would then be a loss to investors, whove previously assigned a large value to them.
That, obviously, is an analysis which depends in substantial part on the doubtful prospect of successful coordinated official intervention to assist in a move away from fossil fuels.
A May report from think tank RethinkX, founded by Stanford economist Tony Seba, lays out a more radical case, in which the convergence of the use of autonomous and electric vehicles absolutely eviscerates huge swaths of the sunk costs of industries from energy to automobiles.
By 2030, within 10 years of regulatory approval of fully autonomous vehicles, 95 percent of all U.S. passenger miles will be served by transport-as-a-service (TaaS) providers who will own and operate fleets of autonomous electric vehicles providing passengers with higher levels of service, faster rides and vastly increased safety at a cost up to 10 times cheaper than todays individually owned (IO) vehicles, according to the report. ( https://www.rethinkx.com/ )
If true, a big if, this implies U.S. oil demand will peak at 100 million barrels a day in 2020, but drop by 30 percent over the next decade, taking the per barrel cost down to $25.
Because those cars in use will be used ten times more, rather than sitting idly in garages, demand for vehicles will tumble even as miles traveled rises. Car manufacturing revenue will fall to less than 20 percent of 2015 levels by 2030. The value of oil burned by cars will fall to about 7.0 percent of todays levels, according to the study.
To be sure, the RethinkX report reaches optimistic conclusions about the rate of adaptation, though it says its base case is derived solely from existing technology.
NOT A LOW VOLATILITY SCENARIO
In the RethinkX scenario, the overall economic impact will be positive. Cheaper transport will put $1 trillion a year more into consumer pockets, and presuming we do useful stuff in the time not driving, productivity gains will add another $1 trillion.
As someone who has spent too much time in cars, ferrying children and commuting, this all sounds great, if optimistic, but from the point of view of investment portfolio construction it would represent a seemingly unprecedented risk.
Not only is this transformation supposed to happen on a much tighter timeline than the one from buggy and rail to automobile, but the sunk costs of the existing infrastructure, supply chains and jobs is a much bigger part of the economy. Many of those people who used to grow our food have seen their labor absorbed in the transport industry, broadly defined, which represents a staggering investment in existing capital.
In the U.S., an estimated 65 percent of shale oil and tight oil which under a business as usual scenario could make up over 70 percent of the U.S. supply in 2030 would no longer be commercially viable, according to the report.
Car manufacturing revenue will fall to less than 20 percent of 2015 levels by 2030, as those cars which are bought do more service thus leading to a need for fewer units. The impact on supply chains, natural resource use and commodity markets may make the crisis faced by the auto industry during the Great Recession look tame.
The insurance industry will be in the line of fire both as a provider of services and as a long-term investor in industries hurt by the changes. Automated cars will have far fewer accidents, the study argues, leading revenue to insurance companies from car travel to fall by more than 70 percent in the 15 years to 2030. Those same insurance companies also own a lot of the debt and equity of companies which will be hurt by this transformation.
Used car sales are forecast to fall from $111 billion a year in 2015 to nothing in 2030, which will certainly hurt the value of some asset-backed debt, to put it mildly.
Think too about the entire travel hospitality ecosystem; fewer nights in roadside hotels, fewer nights perhaps in city-center hotels if travelers choose to return home via overnight trips.
Many of these assumptions will doubtless prove far off the mark, or even possibly wrong, but it strikes me that with the exception of some pie-in-sky valuations for companies like Tesla, the overall market is a long way from discounting the potential price and volatility effects of a positive, but hugely disruptive set of changes.
Winners there will be, but it looks as if the next couple of decades will not see the same downturn in volatility weve recently enjoyed.
( At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaftzjamessaft.com and find more columns at http://blogs.reuters.com/james-saft ) (James Saft)