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Opinion: $25 oil is coming, and along with it, a new world order

CNBC logo CNBC 5/24/2017 Oriel Morrison

This article is part of a "Reporter's Notebook" series, wherein CNBC journalists submit tales and observations from the field.

The world as we know it, will be no longer. The balance of power on a global scale will shift. All in the next decade.

Sounds dramatic right? But independent think tank RethinkX believes it to be true, because of rapid advances in technology, and specifically the advent of self-drive or autonomous cars.

First and foremost, RethinkX co-founder and Stanford University economist and professor Tony Seba told CNBC's Street Signs that the rise of self-drive cars will see oil demand plummet, the price of oil drop to $25 a barrel, and oil producers left without the political or financial capital they have today.

"Oil demand will peak 2021-2020 and will go down 100 million barrels, to 70 million barrels within 10 years. And what that means, the new equilibrium price is going to be $25, and if you produce oil and you can't compete at $25, essentially you are holding stranded assets," Seba said.

"At $25 a barrel, that means deep-water, sands, shell oil, fields, most are going to be stranded, and also all the refineries and pipelines associated with these expensive oils are also going to be stranded. And that is going to reshape worldwide oil, geopolitics and so on."

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It's a big call, right? But if you look at what's behind Seba's premise, surprise, surprise, it comes down to money.

He says we are not going to stop driving altogether, just switch to self-drive electric vehicles, which will become a much larger part of the sharing economy. And these electric vehicles are going to cost less to both buy and run.

"The day that autonomous vehicles are approved, the combination of ride hailing, electric and autonomous means that it's going to be ten times cheaper, up to ten times cheaper, to use a robot taxi, transport as a service car, than it is to own a car. Ten times."

Investment Case

Interestingly enough, if you believe this thesis, you may want to look at selling out of any exposure you have to car parks. "In fact what is going to happen, in 80 per cent or maybe more, parking spaces are going to be vacant. Because we are going to have, fewer cars on the road" Seba says.

And given that $25 forecast for oil, you certainly want to look at selling oil, and expensive oil producers. Oh, and sell the car makers that are slow to adapt too, given there will be no more petrol or diesel cars, buses and trucks sold anywhere in the world within 8 years. Which also means no more car dealers by 2024.

And wait, you can sell insurers too, as the cost of car insurance will drop dramatically when you take human error out of the equation, and a much lower direct ownership of vehicles in general.

But, according to Seba, it is time to look at buying into anything that will help to produce and manufacture the next generation of cars, which are "computers on wheels."

He says to look at companies that make the operating system, the computer platform, the batteries, mapping software, and those that adapt to the new environment.

"Imagine a Starbucks (SBUX) on wheels. Essentially transportation is going to be so cheap, it's going to be essentially cheaper for Starbucks to run around and take me to work, which is, you know, 60 kilometers away, and give that transportation for free, in exchange for going to buy coffee in that hour of commute."

There is some good news for economic growth too. The savings households make on cars, will drive higher consumer spending in the U.S., which in turn will drive business and job growth. Seba forecasts that productivity gains will boost GDP by an additional $1 trillion.

But on the other hand, outstanding auto loan debt in the U.S. stands at more than $1 trillion. And there are those who see the U.S. subprime-auto market as a big problem already.

Josh Jalinski, president of Jalinski Advisory Group told CNBC's Street Signs that it's a huge risk. "We have a potential auto subprime crisis looming in America, the likes we haven't seen since 2008. … I see the car subprime loan debacle as something that could be the catalyst of upending the Trump train."

Oil and Cars

Seba is not alone in his predictions, although others believe the shift will take longer, and will not be so dramatic.

China and India are accelerating the adoption of electric vehicles. China wants to get electric, plug-in hybrids and fuel cell cars to account for 20 per cent of all auto sales by 2025, while India aims to electrify all vehicles in the country by 2032.

But as always with any thesis, there are those who argue for the other side. Oil majors are the obvious ones, with recent reports from both ExxonMobil (XOM) and BP (BP.-GB)'s suggesting electric cars will comprise less than 10 per cent of the global car fleet by 2035.

As for the auto industry itself, in the latest moves, Ford (F) announced a new CEO, James Hackett, the head of its self-driving subsidiary Ford Smart Mobility LLC. That moves speaks for itself.

Also Monday, Toyota Research Institute ramped up their investment, teaming up with MIT Media lab and five other companies to explore blockchain technology for the development of driverless cars.

And of course, there is the market interest in Tesla (TSLA). The Elon Musk-backed electric automaker now has a bigger market cap than both Ford and GM (GM).

Trip Chowdhry, managing director and senior analyst at Global Equities Research, points out that while some people think Tesla is an Auto company, it is not.

"It is a cloud computing company, it's a machine and an artificial intelligence company, it is an app company, it is an energy company, and just an automobile is nothing more than a laptop on four wheels."

One point that is agreed, is that the auto industry will look vastly different in the future. The question is, just how long will that change take, and who is going to successfully adapt.

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