May 03, 2019
It all came down to moment in physics.
Not "a moment," just "moment." For Professor Liu, it was clear, long ago in 1994, that the internal combustion engine was a goner, and it was due to moment. Moment in an electric motor, he explained to his sophomore engineering students, of which I was one, would simply blow by moment capabilities of the internal combustion engine. Combustion derived moment, or torque, from a chemical conversion, and an electric motor did so by changing a current field. And it wouldn't be close.
Utterly oblivious that his mind was racing a quarter century ahead of both the engineering reality and the American public, Professor Liu happily pontificated on a world based on electric transportation.
I tried to relay his message to others. It was not well received. I turned to the Internet, where early online groups were forming discussing cars. My message went from not well received to very not well received. I found over time a simple analogy worked better. "You don't have a smokestack on your computer," I'd say. "And if you did, you'd find it bizarre. Now map that thinking to your car."
Today, pretty much everyone can see it coming. Bloomberg ran an article in April titled The Twilight of Combustion comes for Germany's Empire of Engines. And it's not just power, it's simplicity. At BMW, the number of parts has dropped from 150 in the engine to 24 in the electric motor, and the motor is light enough that a German presumably not named Thor can lift it. These motors are so powerful that the engineering problem has now become one of transferring the kinetic energy from the tire to the road without burning out the tire.
But we're not going to geek out on tire rubber theory today, we're going to ask why Exxon Mobil is still worth $342 billion. I wrote a newsletter on this topic on July 14, 2017, and since that date through mid-April 2019, Exxon has underperformed the S&P 500 by 16%.
I don't see how this underperformance ends. I've watched large software companies try to change their business models as demand declines, and it rarely works. All they have to do is change their minds and write some code. They don't have to build deep-water rigs and drill holes in the sea floor that have angular bends. I have observed over time that it is exceedingly difficult as a manager to address a world in which your demand evaporates. For example, in Shenzhen, China, the oil demand from its buses just went to zero.
In short, my thesis is that Wall St analysts and investors are underweighting the problem of demand evaporation in their models. They can see it coming but they presume other businesses, such as plastics or natural gas, internal investments in renewables, and other factors, such as overall energy growth, will counteract loss of gasoline demand.
That's why I don't trade on my theory: I assume millions of other people have considered this, and the stock price represents the average outlook in the debate. The index fund then follows along, buying just as much as these firms as everyone else has decided is appropriate.
(1) Moment and Torque are used interchangeably, though they are not exactly the same. Engineering Toolbox has more.
(2) If you are interested in electric transportation, I recommend the Electrek.co blog.
(3) If you think I'm kidding around about acceleration, watch this CGI simulation of the Tesla Roadster.