Tesla’s Transition Wake-Up Call

Tesla was, until very recently, a member of the “Magnificent Seven” — a term Bank of America analyst Michael Harnett gave to the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — falling out of the group after its shares plummeted more than 26% over the first three weeks of January. The shares have much further to fall as investors discover that Tesla is essentially an auto company like others. The firm’s decline also warns more widely of developing problems for the energy transition. Contrary to those who say the transition is “irreversible,” recent events across the globe signal that it may be stalling. Indeed, some of the optimists’ statements remind me of assertions by Democrats in early 1979 that “Americans would never elect a former movie actor president.”

Tesla shares declined by more than 26% in the first weeks of 2024. As January ended, the company’s price-earnings (P/E) ratio (stock multiple) had declined to 42.5. The share price could drop more if investors decide that Tesla is an auto manufacturer rather than a tech stock because Ford’s P/E ratio is eight and GM’s is six.

Should investors finally realize that Tesla is an automaker facing many of the same problems as GM and Ford, its shares would lose between 90%-95% of their value from Jan. 1. While such a calamitous decline is unlikely, the current share price drop indicates that the energy transition faces serious obstacles.

Ignoring Alarm Bells

However, this does not seem to have alarmed those pushing for a total shunning of fossil fuels. They continue to produce reports that ignore global political trends, the worsening situation for firms like Tesla and the significant long-standing impediments in many nations that will slow or stop transition progress. In doggedly advocating their idealistic solutions, these groups repeat mistakes made by similar organizations in the past.

For example, the failure of the idealists in former President Jimmy Carter’s administration should be a warning to those who think the global energy transition will come easily or quickly. Carter’s first treasury secretary W. Michael Blumenthal offered a caution to Congress in 1979 that today’s idealists should heed: “To improve our lot, we must see the world without illusions, as it really is, like it or not — and however uncomfortable that may be for timid politicians and mindless poll watchers.” The quote would describe today’s circumstances well if one substituted idealistic environmentalists for “timid politicians” and policymakers for “poll watchers.”

Around the same time as Blumenthal’s statement, the Carter Whitehouse was dismissing Ronald Reagan’s presidential campaign. Again and again, one heard, “Americans will not vote for a movie actor.” The prevalent argument was that citizens would recognize the importance of Carter’s tax reform, energy and foreign policies — especially the Camp David agreements — and not vote to change leaders. But in November 1980, Ronald Reagan defeated Jimmy Carter by almost ten percentage points, receiving 489 electoral votes to Carter’s 49. The latter’s idealistic programs died. Those pushing for rapid change today are repeating the Carter mistakes.

Blind Optimism

An example of blindness to threats to the transition can be seen in a recent study from the Carbon Tracker Initiative, which suggests that “projections for oil and gas consumption present a bleak prospect for the sector.” It also asserts that the energy transition is “well underway” with the global energy system “shifting away from fossil fuels” — noting that the International Energy Agency (IEA) foresees global demand for oil, gas and coal all peaking by the end of this decade.

However, the report's authors expect readers to accept the IEA forecasts as correct when, in fact, errors in the agency’s past projections have equaled those of others, particularly the major oil companies, the US Energy Information Administration and Opec. Critically, Carbon Tracker ignores Opec’s projection that demand will not peak by 2030.

Transition optimists also disregard key relationships that do not support their conclusions. For example, recently released US Department of Commerce data shows no discernible change in the relationship between economic activity and gasoline use in the US. As the chart below illustrates, from 2008-23, the average year-over-year change in GDP was 1.8% — excluding 2020 and 2021 due to the Covid-19 disruption — while the year-over-year rise in gasoline use was 0.2% from 2008-19 and 0.3% from 2022-23. If the transition optimists were correct, I would expect to see the change in spending on gasoline beginning to diverge from GDP growth. There is no such sign.

As Secretary Blumenthal said, “We must see the world without illusions, as it really is, like it or not — and however uncomfortable that may be.” Carbon Tracker prefers illusion in concluding that “one in six passenger vehicles are estimated to be electric by 2030, eroding one of oil’s key sources of demand.”

Signs of Discontent

The Carbon Tracker report is not unique. One reads repeatedly of fossil fuels’ inevitable decline. Yet, just days after Carbon Tracker issued its report, Reuters reported on protests by French farmers that prompted the government to drop plans to gradually reduce agricultural diesel subsidies.

The French protests followed others in Germany against plans to cut diesel subsidies and tax breaks for agricultural vehicles. Although ostensibly part of Berlin’s 2024 austerity measures, the cuts also aim to help reduce greenhouse emissions from agriculture — a move supported by environmental groups.

The French and German protests, and others in the Netherlands, remind one of similar demonstrations during the Carter administration. The New York Times reported the following in December 1977: “Two columns of tractors and trucks rolled into the nation’s capital from Maryland and Virginia today to demonstrate their drivers’ anger over farm conditions that they say are pushing them into bankruptcy.” Truckers conducted another protest in 1979 in which several drivers were killed.

In Europe, the impact of these sentiments is already being felt. In November, Geert Wilder’s far-right Freedom Party topped the polls in a general election in the Netherlands, with support from around one-quarter of voters. As a New Atlanticist headline said: “The shocking Dutch election is done. The political maneuvering is just beginning.” Wilder’s party has been described as “euro-skeptic” and wanting “to undo the green transition” — with a platform that includes exiting the Paris Agreement, dismantling domestic transition legislation, and emission reduction measures.

Uncomfortable Realities

The situation in the Netherlands, France and Germany is not unique. Opposition to proposals that would boost energy costs for consumers is strong elsewhere too. The politicians defending these plans look increasingly like today’s version of President Carter’s supporters. The Tesla share collapse reflects the new skepticism.

Those who follow the issues associated with global energy know that strong measures are needed to avert a climate catastrophe. The Carbon Tracker studies, among others, emphasize this need. However, the lessons from the Carter administration’s failures, the election outcome in the Netherlands and protests in Germany and France all warn that the public may block any significant progress toward a net-zero world at the ballot box.

The Tesla share price decline should be a wake-up call for those who want to rapidly decarbonize the global economy. At the same time, oil producers, refiners and marketers will welcome these developments. The peak of oil consumption is not yet in sight.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is the editorial director of PKVerleger LLC. The views expressed in this article are those of the author.