Climate Now

Climate News Weekly: Tesla Price Drop, Exxon Buys Pioneer, New Hydrogen Hubs, and more

October 16, 2023 James Lawler Season 1 Episode 120
Climate Now
Climate News Weekly: Tesla Price Drop, Exxon Buys Pioneer, New Hydrogen Hubs, and more
Show Notes Transcript

On today’s Climate News Weekly episode, James Lawler, Julio Friedmann, and Dina Cappiello discuss Tesla's new prices for their electric vehicles, Exxon's massive purchase of rival Pioneer Natural Resources for $60 billion, the announcement of 7 new hydrogen hubs by the White House, and the latest on the EU's progress towards their climate goals.

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James Lawler: [00:00:00] Welcome to Climate News Weekly. I am here with Dina Capiello and Julio Friedmann. Welcome, guys. 

Dina Capiello: Great to be here. 

Julio Friedmann: Always a treat. 

James Lawler: So, good lineup of stories this week. Let us start with the report from Bloomberg on Tesla car prices, now rivaling average U.S. cars after significant cuts by that auto manufacturer.

Julio Friedmann: First of all, this is, of course, good news. One of the challenges with electric vehicles has been that they have been higher priced and that the resale value has also been high priced. Lowering prices is a good thing. It will get more adoption in the market. Tesla's already the clear industrial leader.

Doing so will position them strongly for growth, which is their thing. It's worth pointing out, of course, that they are doing so at a substantial loss. This is not going to be a profitmaking exercise for them. This is a growth-making exercise for them. Still, I can only greet this with sort of positive news.

It's a good thing all around. 

James Lawler: Interestingly, just to quote the [00:01:00] article, “the base Model 3 sedan”, it's a Tesla Model 3, “now costs $8,700 less than the average amount paid for a car or truck in the United States”. So that's pretty significant. 

The starting point for a Model Y SUV Tesla, is about $4,000 below the average auto price according to a Bloomberg analysis. 

Julio Friedmann: The last thing I'd want to point out on this is, it is that sticker price with substantial subsidies. There are big incentives at the state level, at the federal level that help make that. And that's, again, money well spent. The whole point is you want to destroy demand for oil and gas.

You want to get more of these things deployed. But this is not the free market at work. This is a company taking a massive loss with massive subsidies. It's still good, I'm a fan. 

Dina Capiello: So connected sort of to the Tesla story, because it's about demand for gasoline shifting based on the electric car fleet, is another story this week about Exxon [00:02:00] securing the lead as the top U.S. oil field producer because it bought Shell rival Pioneer in a $60 billion deal. Obviously, Exxon is already a large oil company. This will make them even bigger. And obviously, you know, with what we're experiencing globally with record temperatures, increasing events, I think the million dollar question, which the- actually the New York Times tried to tackle was, you know, what this means for climate. 

We've been grappling this with- grappling with this a lot at RMI because there's so many positive indicators and exponential growth in certain areas like renewable energy, which is taking off, EVs, which are taking off. 

But it seems that we know globally that oil and natural gas continue to grow and expand because of increasing demand for the products, whether that's gasoline or the building blocks of plastics, fertilizers, et cetera. And this runs counter to what [00:03:00] we think these companies should be doing, which is investing $60 billion in renewable technologies and not an expansion of their oil and gas business. 

James Lawler: So I'm curious to hear your perspectives on the type of deal that this is.

They bought Pioneer, right? Which is the largest operator in the Permian, in an all-stock deal, $60 billion worth, largest since their acquisition of Mobile in 1998, so a huge deal in the space. And they bought them ostensibly for their lower cost of operations, and by virtue of that combination, they expect to unlock additional production. 

So one plus one being more than two as these two companies come together to produce more oil than would otherwise be produced. Curious, Julio, what's your take on this? Like what's going on here? 

Julio Friedmann: So first the tough news and then the good news. The tough news is, like Dina said, global demand for oil grows. Global [00:04:00] demand for gas grows. You can have rapid and even exponential growth of EVs and still have oil demand growing, right?

And so it makes sense if you're a company like Exxon to do a deal like this to meet that growth. That's the tough news. But haven't we talked about how it's peaked? People predict the peak, but it has not happened yet.

And even if it does, what does that mean? And this is the, the positive aspect of this story. What it means is that a company like Exxon is pivoting away from, like, 30 to 50-year payback projects to much shorter payback projects. What this deal represents to me is the uncertainty of the future of demand.

And it could very well be that demand plateaus for the next 30 years, but it could also be that it drops very quickly. If that's the case, you don't want to be holding big offshore assets. You don't want to be holding super giant fields in Central Asia. You want to be working domestically and you want to be getting short [00:05:00] paybacks, which is what the shale play is.

The capital discipline that's gone into that field means that shale plays typically pay back after two years. You can also shut off a well when prices are low and turn it back on when prices are high. So, what it is, is it's actually, I think, a hedge against the future of demand. Since we don't know what demand is, they want more of these kinds of assets, so that if demand tanks, they can still make money or they can still hold an asset with much lower overall risk.

I think we're going to actually see more of these kinds of plays coming forward for that reason. It is similar to the reason why Shell left the Arctic 10 years ago. They just said, “demand future is uncertain. We can't believe we'll make money in 30 years doing this. We're pulling out”. 

And I think we're going to see more plays towards unconventional and shorter paybacks and smaller fields and all these sorts of things. As the demand signal pinches, a company like Exxon's got to be better than its competition. 

James Lawler: What a [00:06:00] giant like Exxon is doing as they approach this, this future is, is pretty fascinating. And rolling the dice as they have to, and to the tune of tens of billions of dollars with these acquisitions is like, it's quite something.

Okay, so the Biden administration has announced seven hydrogen hubs. We know that RMI was party to a couple of these. Dina, do you want to start on that one? 

Dina Capiello: Yeah, sure. I mean, this is huge news, $7 billion for about half a dozen hydrogen hubs across the country. A variety of regions, California, Louisiana, West Virginia.

We have been working both in California and on the Gulf Coast, but, you know, the Biden administration, and we would agree, sees this as a critical step forward in developing hydrogen. All but one- our green hydrogen- that will be produced by renewable energy. Two will be, uh, blue hydrogen, which is based on natural gas and to be carbon-free would have to require carbon capture and [00:07:00] sequestration, including the one in West Virginia, which was backed by Senator Joe Manchin.

So listen, I mean, this is critical. Why do we care about this? Because it's part of, you know, a broader strategy to clean up our energy sources. Hydrogen is critical in terms of getting heavy industry clean; that requires a lot of energy. So think of steel, cement, shipping, all of those are looking for clean hydrogen.

And the projects differ. This is not easy sell on the community level because it is, in some cases, creating an industrial hub, right? In areas that already have industry, but again, a huge investment to get this started. 

And I think one of the challenges that Julio is probably much better at talking about than I am is, you know, getting this going so the price comes down and the market is created for hydrogen as a fuel. 

James Lawler: I wonder if you guys could speak to sort of the, the theory behind these awards, you know. When the DOE is making [00:08:00] these multi-billion dollar awards, what is the mechanism by which that unlocks actual project development?

Because it's just one piece of the capital required to do this, right? So how, how does all of that work? 

Julio Friedmann: Sure. So, first of all, this is from the Bipartisan Infrastructure Law. Part of the thesis here is we need infrastructure for clean fuels. That's part of what the hub delivers. In terms of unlocking future investment and building additional infrastructure and training workforce and all that stuff, part of the theory is if you invest in the infrastructure, it makes it easier to bring those things forward.

And that's true. We've seen that in many other contexts. It is also the case, like Dina mentioned, the hubs are oriented towards clean supply, whether it's blue or green or biohydrogen or nuclear is the function of the hub, but also future demand. They want to become magnets for industry that require clean hydrogen inputs like steel or like chemicals.

And in that [00:09:00] context, they also want to anchor the industrial base for production of things like electrolyzers and fuel cell vehicles and so forth. So this is sort of the basis on which this is moving forward. It's a lot of money and it's a lot of attention. 

The geography of these is pretty widespread: mid Atlantic coast, Northeast Appalachia, Gulf Coast, Pacific Northwest, heartland, like all of these areas are looking good. And, the law required a decision on a hub that would be a heavy industry hub, one that would be a transportation hub, one that would be a power hub, one that would be blue, one that would be green. So the DOE is completing the mission of the law through this selection process.

I think also, it shouldn't be lost on anybody, Joe Biden flew to Pennsylvania to do this, right? This is a swing state, this is a state that is purple, this is a state that [00:10:00] likes heavy manufacturing and likes industry, and also is the biggest producer of natural gas in the United States. Pennsylvania and the Marcellus Shale produce a huge amount of gas, and that production is the cleanest in the United States.

Less- on average, a 0. 75 percent leakage rate. So, it's, uh, very interesting to see, in terms of the technology, in terms of the realpolitik, in terms of the jobs, in terms of the industry, all of these things are driving this particular decision, as well. I do want to say though, again, to Dina's point, we need zero-carbon fuels.

It's a requirement for a clean economy and hydrogen will either be a zero-carbon fuel or contribute to zero-carbon fuels like sustainable aviation fuels or ammonia or methanol. So, this is just one of those things we need. 

Something that people may have missed was, in fact, the European Commission have finally legislated all parts of the Fit for 55 platform. For those of you who are not familiar with it, Fit for 55 is an [00:11:00] economy-wide set of measures set to bring very deep reductions across the entire Eurozone. It's an ambitious plan and it covers everything from renewable power and solar to heavy industry to transportation. It covers the whole thing. Over the past couple of years, they have been slowly legislating different pieces of this.

And what happened is that the last two pieces were legislated: the revised Renewable Energy Directive and the ReFuel EU Aviation Regulation. Those now have legally binding climate targets. So this is going from hypothetical planning, timetables, and targets kind of sensibility to now it's legally binding, we all gotta get on the stick.

It is moving away from voluntary measures and moving towards compliance measures. And that's a good signal. Sometimes it's not about the total amount of money, sometimes it's about the [00:12:00] strength of the sticks. And the EU has always liked sticks, they do some incentives and stuff, but for them regulation is the heavy, uh, hammer that they use to fix these things.

And by putting this economy-wide, it actually does two things. One, it really is walking the walk on climate, even in the middle of Russia, Ukraine, even in the middle of the other challenges they have, they're still doing this. The second thing it does, it gives them teeth for their carbon border adjustment.

And so, by having all these pieces together, it's really a comprehensive sensibility around climate that covers every corner of the economy, including all global trade partners. So buckle up. It's going to be fun to watch, but this last legislative piece is exciting for those of us who've been watching a long time.

James Lawler: Well, thanks, Julio. And thank you, Dina, again, for the recap this week. That's it for this week's episode of Climate News Weekly. We hope you'll join us [00:13:00] next week. 

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