Black Swans & Dragon Kings: Challenges for the electric vehicle sector in Latin America

Summary: The electric vehicle market is growing globally at rates that will likely have a disruptive effect on the oil & gas industry. But in Latin America, oil is a national resource and reserves are seen as a national patrimony; national oil companies also serve as politically useful cash cows. Unless redirected, they’re headed for collision.

About the Author: Carlos St. James is a leading advisor to energy investors and developers in emerging markets since 2005 through Santiago & Sinclair, LLC. He co-founded and presided over the Argentine Renewable Energies Chamber from 2005-2011; is a board member of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); and publishes the Latin American Energy Review in his free time to help generate debate on the industry’s issues.

He will speak at the LAC-CORE Clean Energy Finance Summit to be held June 13-15, 2017 in Miami, Florida.


There are signs that the growth of the electric vehicle (EV) and renewable power sectors is being ignored by the entities that will be most affected by it – primarily in the fossil fuel industry. Their own forecasting of future EV market penetration is noticeably lower than the figures being published by independents. Latin America’s situation is even more complex: the oil & gas sector is largely controlled by government and a valuable political tool. This could keep them from seeing objectively the changes taking place on the global stage – with potentially adverse results for their country.

Imperial College London’s Grantham Institute recently published a study entitled, Expect the Unexpected: The Disruptive Power of Low-carbon Technology, that seems to have hit a nerve and is getting a lot of attention. It gives further credence to some of Bloomberg New Energy Finance’s projections about the rapid growth of solar energy and EVs in the coming decades — and takes it even further with new data.

It makes the case that solar photovoltaic (PV) market penetration — more than wind or any other technology — as well as EV market penetration will be far greater than most forecasts are predicting. The common denominator to both is the accelerating drop in energy storage costs, which is where the true revolution is taking place.

In the case of batteries for EVs, for example, there is general consensus that they’ll become cost-competitive with internal combustion engines (ICEs) when battery costs reach $150-300 per kilowatt-hour (kWh). Yet Tesla has announced their cost will drop to $100/kWh by 2020, while General Motors recently announced they have already achieved $150/kWh.

On the power side, the study shows scenarios whereby PV alone could supply 23% of global power generation in 2040 and 29% by 2050 – entirely phasing out coal and leaving natural gas with barely a presence in the power market. And it sees EVs accounting for about 35% of road transportation by 2035 and over 50% by 2050 – accelerating peak oil demand as early as 2020 and with significant declining demand thereafter. Meanwhile, the oil & gas industry expects oil demand to not peak until 2030 and remain consistent thereafter: it refuses to see EVs as a threat. Since almost half of every barrel of oil becomes gasoline, the stakes are high.

So who will prove to be right, and what tools do we have at hand to improve our odds?

New vocabulary for our century
“Black swans” and “dragon kings” are terms used to understand and help predict events and crises. You are likely to hear these increasingly in the coming years.

A black swan event is a metaphor describing something that (a) comes as a surprise, (b) has a major effect, and (c) is rationalized after the fact with the benefit of hindsight. The name comes from the ancient belief that black swans didn’t exist until they were first spotted in Australia in the 18th century. Black swans help explain the psychological biases that make people individually and/or collectively blind to uncertainty. Examples of black swans include the rise of the internet and personal computers; the Chernobyl nuclear disaster; the September 11 attacks in New York; and the terrorist attack during the 1972 summer Olympics.

A dragon king event is a double metaphor for an event that is (a) extremely large in size (a “king”) and (b) borne of unique origins: a “dragon”. Its theory was developed by Prof. Didier Sornette, who hypothesizes that many of the crises and events we face are in fact predictable – they are dragon kings rather than black swans. Examples of dragon kings include earthquakes; stock market crashes; forest fires; even runaway hit blockbuster movies.

Technological change is admittedly very hard to predict – hence the popularity of assuming they are always black swans: discernable only when looking back. Notorious examples of wrong predictions abound: in 1980 venerable McKinsey & Co. projected that there would be less than one million mobile phone users by year 2000; in fact, the number was over 100 million. More examples of disruptive technologies as black swans:

  • “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” – Western Union internal memo, 1876
  • “I think there is a world market for maybe five computers.” – Thomas Watson, chairman of IBM, 1943
  • “Television won’t last because people will soon get tired of staring at a plywood box every night.” – Darryl Zanuck, movie producer, 20th Century Fox, 1946

But this inability to clearly see the future can be costly: as the Imperial College study points out, the European Union’s five largest utilities lost over €100 billion in value from 2008 to 2013 largely because of a failure to predict the growth of renewables due to their rapidly falling cost.

Similarly, oil & gas companies’ forecasts typically minimize the possible effect of EVs. With few exceptions, many are simply variations of “business as usual” that do not consider significant market disruptions. So is the Imperial College study pointing out a dragon king? And how will this affect our region?

The Latin American context
Energy policies in Latin America pursue not just energy security but have a unique component called resource nationalism. This is the belief that underground natural resources are a “national patrimony” and should be used for the benefit of the nation rather than for private gain. Additionally, the commodities themselves – typically oil, shale or natural gas – have intrinsic value not determined by the market, and this value belongs to the nation.

This belief is relevant here because Latin America holds one fifth of the world’s oil reserves, and the stubborn perception of its future value (as different from the market’s assessment) could make or break a country. Venezuela may be an early example. Not only that, national oil companies (NOCs: in our region than means Petrobras, PdVSA, YPF, Ecopetrol, Pemex, etc.) have been accumulating reserves at a far greater pace than independent oil companies (IOCs: ExxonMobil, BP, Chevron, Shell, etc.).

In the 1970s NOCs controlled less than 10% of the world’s oil and gas reserves; today they control over 90%. These underground assets have allowed them to borrow money and generally raise capital that is used not just for development of their energy assets but to accumulate political power.

They have in effect bet the farm on the future value of oil reserves, and because of that EVs are likely to encounter pushback from Latin American governments that have large NOCs since their market entrance (and related necessary infrastructure such as charging stations) will reduce oil consumption significantly, decrease jobs held by traditional ICE manufacturers – and reduce the liquidity of their NOC’s cash cow. (Chile, with little oil of its own, should mark the pace for the region and embrace EVs.)

But there is one outlier in the region: billionaire Carlos Slim of Mexico recently announced establishment of Giant Motors, a $215 million joint venture with Chinese automaker Jianghai Automobile Company to assemble EVs in Hidalgo state. Their first vehicles will come to market in 2018. (I bet the Chinese got to pick the company name.)

Above: Long Term Debt/Equity Ratios for the major National Oil Companies (NOCs), 2011-13. Sources: Center for Energy Economics, University of Texas at Austin; Pemex and YPF annual reports.

The situation is made worse by the fact that NOCs are more leveraged than their private sector counterparts, the IOCs. And as seen in this chart, Latin American NOCs have even greater debt ratios than most NOCs.

Some of the more clear-minded governments may want to begin to find ways to merge the enormous access to capital of their NOCs with their national utilities to facilitate upgrades of power infrastructure as well as distributed energy. But the majority are more likely to find ways to delay EVs into their country in a short-sighted maneuver to uphold their cash cows. They could, like Cuba, become old car museums.

Giant Motors is our canary in the coal mine. If Mexico’s Slim, with his business prowess and financial muscle, cannot pull it off with the added inducement of job creation from the EV factory, we’ll have an indication of what might happen in the rest of the region.

© Latin American Energy Review 2017

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