From oil to batteries: a way for the energy capital to keep its clout
We need to start thinking about how Houston can remain the energy capital of the world when oil demand begins to fade.
The collapse of oil prices from above $100 a barrel to less than $50 has already slowed the city’s economy to a standstill. And according to every forecast, people in wealthy countries are using less oil year after year, and poor people in Asia, Africa and the Middle East are the only source of new demand.
Eventually, though, demand for oil will grow slower than the world’s gross domestic product, or even population growth, and take away the industry’s ability to generate high profits or add jobs. But a zombie oil industry does not have to bring stagnation to the Bayou City.
Houston could remain the global energy capital if businesses here capitalize on the city’s competitive advantages to become the world’s center for oil’s replacement: the electric vehicle battery.
Every automaker in the world is rolling out new vehicles that
rely more on electricity than liquid fossil fuels. Volvo, Volkswagen and BMW have promised that most of their vehicles will be hybrids or 100 percent electric by 2025. Porsche is developing technology that can provide 300 miles of charge in 15 minutes. Toyota has announced a new battery technology that will boost range and cut charging times.
All of these automakers will need batteries. Tesla’s Gigafactory in Nevada will be the second-largest manufacturing facility in the world when completed, but last month, Volkswagen’s head of research and development, Ulrich Eichhorn, said the industry will need 40 more Gigafactories to meet the anticipated demand for vehicle batteries in 2025.
And that doesn’t include the expected demand for home battery packs or grid-scale storage projects like Tesla has launched in Australia.
Competition to supply these batteries is already heating up, and the U.S. is already losing.
Japanese and South Korean companies dominate battery manufacturing, with Panasonic and LG Chem the current world leaders. Chinese companies, though, make 55 percent of the world supply and are ramping up quickly after Communist Party leaders earlier this year told manufacturers to double production by 2020, according to research firm Bloomberg New Energy Finance.
Based on current trends, analysts at Goldman Sachs expect China to dominate the electric vehicle battery market in 2025, when it will be worth $40 billion.
So even though Elon Musk started the electric car revolution in the U.S. with Tesla and much of the critical research that created the lithium ion battery was done at the University of Texas at Austin, China is set to dominate battery manufacturing. The U.S. has already lost the competition to build wind turbines and solar panels, and now we are going to cede another transformational industry to our largest, most powerful global competitor.
Admittedly, China’s communist rulers have an easier time dictating industrial policy than U.S. politicians, and they do it with devastating effectiveness. They’ve ordered state-run factories to ignore economics and build batteries to create supply. Then they gave enormous incentives to consumers to purchase electric vehicles to create demand.
The Chinese now plan to manufacture 120 gigawatt-hours of battery capacity a year in 2020, according to Bloomberg Intelligence, a data analysis firm. By comparison, Tesla’s Gigafactory will be America’s largest producer, making 35 gigawatt-hours of capacity a year.
The Communist Party’s ultimate goal is not only to electrify transportation in China but to ensure local companies dominate the global market for batteries when it inevitably picks up.
“We think over the next 10 years, there may only be 10 lithium battery producers left, with the top three taking 60 percent of the market,” Neill Yang, marketing director at China’s largest battery maker, Contemporary Amperex Technology, told the Financial Times.
In the meantime, President Donald Trump is focused on boosting U.S. oil production in the mistaken belief that so-called “global energy dominance” will come from pumping more crude. He seems to have forgotten that while he has withdrawn the U.S. from the Paris climate agreement, the rest of the world still plans to cut oil consumption.
Musk, though, is not giving up without a fight, planning to build at least four more Gigafactories, with the next one planned for Buffalo, N.Y. The next three are expected to be outside the U.S., but that shouldn’t stop Houston from lobbying to bring a major battery production center here.
Electricity and land are cheap, many of the battery’s chemicals are made here, and the Port of Houston provides for easy importation of raw materials and export of finished products. Houston is also full of engineering and manufacturing talent.
The future of energy is electricity, not oil. Houston needs to get on the cutting edge if we want to retain our global energy crown, and batteries are one way to do that.