Oil giant Exxon Mobil is considering a new venture in the lithium industry, and while the idea may seem enticing, it may not be the best move for the company. Instead, Exxon should explore other options within the energy transition.
The reasoning behind Exxon's interest in lithium is clear. With the rapid growth of electric vehicles (EVs), the demand for gasoline is expected to decline. The International Energy Agency predicts that there will be approximately 350 million EVs globally by the end of the decade, a significant increase compared to the current number. This surge means that EVs could make up around 15% of all light vehicles on the roads worldwide, a substantial shift from the current less than 2%.
During Exxon's recent earnings conference call, the company addressed inquiries about its potential involvement in the lithium market. Exxon CEO Darren Woods stated that their interest in lithium presents a promising opportunity. He mentioned that it aligns with their capabilities, has positive environmental impacts, and enables them to supply a crucial component for electrification and EVs. Woods emphasized that they are actively exploring this opportunity and are pleased with their progress thus far.
The discussion arose from inquiries made by TD Cowen analyst Jason Gabelman regarding media reports about Exxon's plans. Bloomberg recently reported that Exxon was in talks with multiple auto and battery manufacturers to provide lithium, a vital component used in lithium-ion batteries for storing energy in EVs. This news follows previous reports earlier this year that Exxon purchased land in Arkansas for potential lithium production.
Although Exxon believes its expertise in drilling for oil and manufacturing chemicals could benefit its lithium production, there are several aspects the company needs to consider before venturing into this new territory.
The Potential Challenges for Exxon in the Lithium Market
In the mining industry, the quality of resources plays a crucial role. As the demand for a particular commodity increases, higher-cost assets are usually brought online to meet the demand. A prime example is iron ore. With the growth in steel demand, the industry shifted to mining ore with lower iron content, reducing it from 65% to 35%. This change meant additional material to handle and extra processing requirements. If Exxon decides to enter the lithium business, it will not have the advantage of low-cost assets that Albemarle (ALB), SQM (SQM), and Livent (LTHM), three of the largest lithium producers, possess.
The Scaling Issue
Another challenge lies in the scale of the lithium market. It may not provide a significant solution to Exxon's problems. The entire revenue generated by the lithium business amounts to only a few billion dollars annually. Comparatively, the combined market capitalization of the three major lithium producers is roughly one-tenth the size of Exxon's. Therefore, while lithium is undoubtedly expected to grow, it will never attain the same status as oil. For instance, an electric vehicle (EV) may contain about $1,000 worth of lithium, whereas a traditional car can consume up to $20,000 worth of gasoline throughout its lifespan.
The Distinction between Lithium and Oil
It is essential to understand the fundamental differences between lithium and oil. Unlike oil, lithium is not consumed; it remains within the EV's battery. The actual consumption in an EV comes from electricity. The batteries effectively serve as a storage medium for electrons, making them similar to a gasoline tank rather than oil itself.
The Potential of Electricity
Considering the future increase in EV adoption, Exxon might want to consider venturing into the electricity sector. As EVs become more prevalent, there will inevitably be a surge in electricity demand, presenting a significant business opportunity. Tesla (TSLA) CEO Elon Musk predicts that U.S. electricity demand will eventually double. Furthermore, Americans already spend hundreds of billions of dollars annually on electricity.
In addition to electricity, Americans also spend massive amounts on gasoline at gas stations. However, the insufficient number of EV-charging stations in the U.S. presents another promising avenue for Exxon. Investing in EV-charging infrastructure could prove to be a more lucrative revenue stream compared to lithium mining.
Today has been challenging for stocks in the lithium mining industry, with Albemarle dropping 2.2%, Livent falling 3.3%, and SQM experiencing a decline of 1.5%. In comparison, the S&P 500 has seen a decline of 1.3%, and the Dow Jones Industrial Average has slipped 0.7%.
Exxon's stock experienced a drop of 0.6% on Tuesday.