Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Energy Disruption: Why I Won’t Buy Oil Stocks Now

There is a major reason why I would not invest in oil or utility stocks on a long-term basis right now. The energy industry is being completely disrupted by new technologies, and that disruption is going to get far worse in the years ahead.

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We’ve already seen the havoc that new drilling technology and next generation oil extraction processes have wreaked upon the energy industry. Exxon-Mobil (NYSE: XOM), long considered the mightiest and most stable of oil companies, reported a quarterly year to year revenue growth rate of -36.5% on March 31, 2015. On the same day, Chevron (NYSE: CVX) reported a revenue growth rate of -35.12%, BP (NYSE: BP) reported a growth rate of -40.9%, Total (NYSE: TOT) reported a growth rate of -32.62% and ConocoPhillips (NYSE: COP) reported a growth rate of -50.14%.

This is an industry that is almost in freefall when it comes to revenues. Exxon’s revenue fell by $63.44 billion between March 2014 and March 2015. Exxon reported a TTM revenue of $436.22 billion in March 2014 and $372.78 billion in March 2015. As recently as March 2012, Exxon had a TTM revenue of $496.48, billion according to


This havoc has largely been produced by new technology, and it is nothing compared to what’s coming. There are two other fast-progressing technologies out there that will vastly increase the disruption in the energy sector. These super disruptive technologies are:

Battery Storage

Battery technology, particularly lithium-ion batteries, has been advancing by leaps and bounds in recent years. Just a few years ago the idea of a practical battery-powered electric car seemed like a science-fiction pipe dream. Today Tesla Motors (NASDAQ: TSLA) boasts that its bestselling Model S can go up to 270 miles on a charge of electricity.

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If that wasn’t enough, Tesla estimates that it could cost $1.58 a day, or 12¢ an hour, to operate a Model S. One has to wonder how gasoline-powered vehicles can compete. I also have to wonder how long it will be before other vehicles such as trucks, farm equipment, heavy equipment, excavators, etc., start going electric at those rates.


Battery storage is disruptive in two ways. First, it enables people to operate machines and vehicles that were formerly operated on fossil fuels on electricity. That in itself is a threat to big oil because electricity is a far superior fuel to the mineral sludge; its cleaner, easier to store, and easier to move even if it is lacking in energy density.

Second and perhaps more importantly, storage enables people and businesses to generate their own electricity. Solar is the most popular means, as companies like SolarCity (NASDAQ: SCTY) have demonstrated.

The combination of battery storage and solar is a direct threat to both utilities and oil companies. For example, the Blue Ion system, which operates on Sony lithium ion batteries, allows Hawaii resident Henk Rogers to use solar panels to power both his home and two Tesla cars, the Associated Press reported. Rogers’ house is completely energy independent thanks to battery storage and solar.

If just 10% of the population follows Mr. Rogers’ lead, that’s a threat to oil companies. It also threatens some of big oil’s most reliable markets, such as Hawaii, where imported oil is the only means of producing electricity.


Rogers is not the only one thinking that way. Our friend Elon Musk, the man behind both SolarCity and Tesla, is marketing the Powerwall, a lithium-ion battery system that can power a home. The Powerwall comes in 10 kilowatt and seven kilowatt models, some of which can contain enough juice to power a home for up to 10 days. The Powerwall leverages Tesla’s experience in producing battery-powered vehicles and the gigantic Giga factory battery plant the company is constructing in Northern Nevada.

If the prevailing trend continues, we’re likely to see both electric cars and home battery storage become practical realities for the average consumer. When that occurs, we’ll see significant drops in demand for oil. It also becomes a massive threat to utilities with their fixed costs for energy.
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Tesla is also marketing Tesla Energy, which markets turnkey electricity storage systems for businesses. That could help companies like Walmart Stores Inc. (NYSE: WMT), already a Solar City customer, disconnect from the grid.

Fuel Cells

Fuel cells are generators that use an electrochemical reaction to generate electricity. They have two huge advantages over traditional generators: First, they have no moving parts—which means less maintenance—and second, they produce no pollution.

Fuel cell technology is advancing as rapidly as lithium ion battery storage. Toyota Motor Company (NYSE: TM) and Honda Motor (NYSE: HMC) are already marketing fuel cell-powered sedans that can be used as backup power sources for homes. Toyota’s Mirai fuel cell vehicle (FCV) has a range comparable to that of a normal car.

If that wasn’t enough, a company called Redox Power Systems is developing a natural gas-powered fuel cell called the Cube, or Power Serg 2-80, that is smaller, cheaper and more efficient than the current industry leader, Bloom Energy’s Bloom Box. A four foot tall, 750-pound Cube (the same size as a typical refrigerator) could generate up to 25 Watts of electricity—enough to power all the businesses in a mini mall.

What the future of electricity  could look like the Reddox Cube
What the future of electricity could look like the Reddox Cube

The man behind Reddox’s fuel cells, University of Maryland professor Erich Wachsman, thinks that his technology could easily be adapted to power cars. He even thinks vehicles running on it could have a longer range than gasoline-powered cars.

Get the picture: A combination of fuel cells, solar and next generation batteries could greatly reduce the demand for fossil fuels. The disruption in the energy industry is only beginning, and it is going to get worse.

My prediction is that the energy industry is about to go through a process of disruption similar to what the computer industry went through in the 1980s. In 1980 the computer industry consisted of a few companies such as IBM that relied upon giant centralized systems. By 1990 the industry had become decentralized as new competitors like Apple sold smaller, cheaper machines that diffused computing power to everybody.

That means companies like Exxon-Mobil will not disappear. Instead, they’ll simply become niche players in the energy industry, much as IBM is now a niche player in the computer business. It is still large and cutting edge, but it has a much lower profile and a lot of competition. Oil companies will make a lot less money in the years ahead thanks to these disruptive technologies.