Fitch Ratings-London-18 October 2016: A rapid advance in battery technology could have significant implications for global credit markets, causing disruption across sectors that account for nearly a quarter of all outstanding corporate bonds, Fitch Ratings says.
A leap forward in technology could transform the viability of electric vehicles (EVs) as an alternative to the internal combustion engine. This would be resoundingly credit negative for the oil sector, as transport accounts for 55% of oil consumption. Electric utilities and automotive companies could become polarised between winners and losers. But renewables companies could significantly increase their market share as batteries help solve the problem of intermittent supply.
These findings are the conclusions of the first in a series of Fitch reports looking at the potential consequences of a dramatic acceleration in various disruptive technologies. They therefore do not represent our base case assumptions.
Assessing the chances of a rapid decline in oil demand due to EV growth is key to understanding the oil sector's prospects. Even if there were swift advances in battery technology, barriers to rapid shifts in demand would remain high. The transition to EVs will be slow due to the need for infrastructure investment and the fact that new vehicles can have a 20-year lifespan. We calculate that with a 32.5% compound annual growth rate in EV sales it would be nearly 20 years before EVs comprised a quarter of the global car fleet. Overall growth in the global fleet due to rising emerging-market sales would also limit the impact on oil demand.
But reduced transport fuel demand could tip the oil market from growth to contraction earlier than anticipated. A market with structurally falling demand will be a lot more risky for all oil companies, with long periods of low prices and investment uncertainty, as demonstrated by the current slump in oil prices.
We believe it will be important for oil companies to react early, and we will continue to evaluate their strategies for doing so even though the changes discussed here would occur well beyond our rating horizon. Many are already taking initial steps such as diversifying into batteries or renewables or focusing more on natural gas, and many are actively participating in the debate around future energy sources.
If nothing else, this diversification will help guard against the risk that the markets turn against them. The narrative of oil's decline is well rehearsed - and if it starts to play out there is a risk that capital will act long before any transition occurs. This could reduce oil companies' access to equity and debt capital, increasing funding costs during a crucial period.
For more information on the potential challenges for the oil, auto, utilities and renewables sectors, see the report "Disruptive Technology: Batteries" published today at www.fitchratings.com, or by clicking the link above.
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Fitch Ratings Limited
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Simon Kennedy
Senior Analyst
Fitch Wire
+44 20 3530 1387
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected].
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
