Revenge of old economy – Exxon market cap crosses Tesla
In 2020, when the market cap of Tesla overtook the market cap of Exxon, most new energy enthusiasts called it the new energy shift. After all, Exxon represented old energy with those massive oil rigs and refineries spewing oil and gases that were horribly depleting the ozone layer. On the other hand, Tesla made sleek green cars that ran on batteries and did not care about the price of gasoline. Between 2019 and November 2021, the price of Tesla had risen more than 200% to become a trillion dollar green automobile company. At that point, the market cap of Tesla was higher than the market cap of the entire global auto industry. Obviously, as much as it sounded seductive, things were just not adding up.
In a sense, the year 2022 has been a return to reality. Between November 2021 and December 2022, the stock price of Tesla has fallen from $405 to $135, losing more than 70% in the process. Since the start of 2022, the stock price of Tesla has fallen more than 60% while during the same period, the stock price of Exxon is up nearly 75%. The net result is that as of December 2022, the market cap of Exxon has once again overtaken the market cap of Tesla. How do we read this development. Is it a signal that the big rush to green energy is done and dusted and it is back to fossil fuels. That would be an ambitious assumption. The inferences from this shift are actually a lot more prosaic.
What this shift back to old energy means
It may be premature to call this a shift back to old energy, but we will call it that for want of a better term. Here are some classic inferences that flow from this trend.
a) The stock markets and the analysts are veering around to the view that fossil fuels are not going away in a hurry. They are going to be around for much longer, even as they learn to operate and function in a more environment neutral manner. The Internal Combustion (IC) engine was perfected over decades, and it is unlikely that it would go out of sync so fast. Yes there is a gradual growth that is happening in favour of green cars and that would accentuate. But the whole idea of a massive shift may have been overdone.
b) What does this say about old energy stocks like Exxon? Clearly, the longer perspective is giving the oil companies more reasons to cheer. Most of the big oil companies are back to investing in prospecting and also into refineries. There is a lot more confidence in the street that things are not going to change in a hurry. Yes, the shift to green fuels is inevitable, but for a long time it will be a combination of green cars, green fuels and old energy operating in a much more responsible manner.
c) When it comes to new energy, it is not juts about grand plans but also about execution. Of late, the markets have been extremely unhappy about the way Elon Musk has conducted himself. His tendence to shoot from the hip, sink billions of dollars into very iffy projects and paying top dollars for unrelated assets like Twitter have not gone down well with the analyst community. To an extent, Musk has done more to damage the Tesla stock than all the other fossil fuel companies put together.
d) The big question that people are asking about new energy is where is the mass market. You need scale to grow and that only comes from low costs. The recent spike in input costs has spoilt the party for new energy. Unless costs come down drastically and unless there is volume aggression, the shift is going to take a long time. After all, new energy is not just about cars but also about batteries, cost and about charging infrastructure. That is yet to really pick up in a meaningful way.
e) The one factor that most of us are ignoring is China. In the entire shift to new energy, China was one of the key links in the supply chain ecosystem. With China under a lot of pandemic pressure, unlimited lockdowns and its own financial problems, the global new energy industry is going to suffer a great deal.
So, what is the moral of the story. Yes, the shift has been slowed and it is a wake up call to both. It is wake up call to the new energy players that the focus must be on costs and scale. Of course, the growth of new energy is still not possible with the China role. For the old energy companies, the call is for a more responsible path ahead. The good news for old energy is that the party may last longer than they envisaged.
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