What To Make of Tesla’s Rise and Big Oil’s Woes

Tesla’s stock price has been soaring. Its market capitalization now exceeds that of Ford and GM combined. Meanwhile, the shares of virtually every oil and gas producer are down sharply to start the year. Shares of ExxonMobil, once the world’s biggest publicly traded company, hover near a 10-year low. What’s going on? Are electric cars about to take over the auto industry and banish the need for oil?

The short answer: No. The slightly longer answer: It’s complicated, but still no.

The reason for Tesla’s meteoric share price increase this year is hotly debated among financial analysts. Some attribute it to Tesla’s production ramp-up that points to a profitable future for a company that, to date, has never turned an annual profit. Others point to short covering, in which investors who had bet that Tesla’s stock would fall are now scrambling to close out those bets by buying shares. I don’t claim to know more than the folks on Wall Street do. I’m more interested in the larger market forces that will rule the fate of Tesla and its rivals.

There’s no question that the market for electric vehicles is growing, as I wrote last fall. And Tesla specifically is growing its sales. In 2019, it delivered 367,000 cars worldwide, a 50% jump from the year before. It opened a plant in China in record time, and aims to build another in Germany to serve the European market.

That’s all well and good, but does it justify the stock price rising from less than $200 last summer to nearly $800 today? Remember, this is a company that lost $862 million last year.

To believe that Tesla’s share price is justified and destined to keep rising, as many Tesla bulls do, you need to believe that electric vehicles are going to rapidly gain market share, and that Tesla is going to dominate that market. There are reasons to question both of those assumptions.

First, EVs aren’t exactly threatening to displace the internal combustion engine just yet. Website InsideEVs reports that in 2019, U.S. sales of all plug-in vehicles (not just Teslas, and including plug-in hybrids that still use gas) came in a bit under 330,000, versus total U.S. auto sales of about 17 million. That was actually down from 2018’s sales figure for plug-ins. It appears that EVs are still a tough sell for the typical American car buyer, especially when gas is relatively cheap.

Second, it’s not like Tesla’s competitors are standing still. Both legacy automakers such as Ford and GM, and startups such as Rivian, are readying new EVs of their own. Notably, all of those companies are planning electric SUVs or pickup trucks, the most popular – and lucrative – segments of the U.S. market. Meanwhile, Porsche has unveiled an electric sedan that has drawn rave reviews for its sporty performance. It’s pricier than the comparable Model S from Tesla, but in a recent comparison, the editors of Car and Driver magazine found the Porsche more entertaining to drive.

My take: Tesla’s recent successes are real, but it’s premature to declare it the unquestioned king of the EV market, or even to assume that EVs are destined to displace conventional gas-powered vehicles anytime soon.

Oil: The New Tobacco?

What about the companies that depend heavily on the continued success of the internal combustion engine? The stocks of oil companies are off to a miserable start this year, and have lagged behind the broader market for roughly a decade. CNBC commentator Jim Cramer last week declared that oil stocks are in the “death knell phase” and compared them with tobacco companies. He said that money managers are getting out of the sector in response to pressure from environmental activists, which makes the stocks too dangerous to recommend.

He’s certainly right about the pressure on money managers to divest from fossil fuel investments. But is the comparison of smoking to burning fossil fuels apt?

The number of smokers in the U.S. has plunged over the past half century or so. Cigarettes are highly addictive, but they’re not strictly speaking necessary, as proven by the number of people who have quit. Meanwhile, it’s pretty tough to “quit” fossil fuels such as oil and natural gas. For most people, that would mean giving up heating their home in the winter; traveling beyond the range of a bicycle trip; or buying anything made or shipped with petroleum (which is pretty much everything). The vast majority of cars on the road, and pretty much every truck, train, plane or ship, runs on some form of petroleum (with some corn-based ethanol mixed in to the gasoline). Tesla could sell 10 times as many electric cars this year as it did last year, and oil demand wouldn’t fall much. (In the U.S., natural gas demand would actually rise to generate the additional electricity needed to charge them.)

There’s something to Cramer’s thesis, but again, I think the point is a bit overblown. Electric cars aren’t ready to displace the hundreds of millions of gas-powered cars on the road globally, and batteries are nowhere near ready to power planes or freight trains or other heavy-duty vehicles. In the long term, renewable energy and EVs are certain to proliferate, but the world’s also going to consume huge quantities of oil and gas for a long time to come.

I’m certainly not saying to sell Tesla or buy oil stocks. Just keep in mind that the narrative the stock market is telling about these companies may have gotten a little bit ahead of the reality.