Tesla Integrated EV Company Mirrors Standard Oil Integrated Oil

Standard Oil and Rockefeller is known for the massive Monopoly they had in the early decades of the oil era. They were innovators in oil refining technology and reinforced their monopoly with technological innovation. Standard Oil started by creating an oil refining monopoly but then integrated and innovated backward through the oil supply chain. They created and perfected oil pipeline technology and obtained oil fields.

In 1870, when Standard Oil was formed, the price of kerosene was $0.26 / gallon. By 1880, they had driven the price down to $0.09 / gallon. The price was further reduced to ~$0.07 per gallon by 1890. They were highly profitable at these prices but competitors were not profitable or went out of business or sold themselves to SO. They had competitive operating advantages of scale, vertical integration, continued innovation, and M&A.

In 1880, John D. Rockefeller created the Standard Oil trust and by 1882 they owned the forty leading oil refiners. Up until the 1910s, the United States produced between 60 and 70 percent of the world’s oil supply. Standard Oil controlled 90% of US oil. The fear that American oil reserves were nearly exhausted ended abruptly in 1924, with the discovery of enormous new oil fields in Texas, Oklahoma, and California. Through World War 2, the US had 85% of world oil production. 6 Billion of 7 billion barrels of oil used in WW2 by the Allies was produced from by the USA.

Standard Oil was also a leader with technological innovation in the use of oil, refining and pipelines.

* Improving the refining process: Kerosene was extracted from crude oil through fractional distillation and then purified by the addition of sulfuric acid, an expensive chemical compound. Standard Oil developed a kerosene that could be produced with 1/5 the sulfuric acid used by competitors, thus greatly reducing costs of production.

* Waste reduction: Historically, the 40% of crude that was not kerosene was often discarded by kerosene refiners. SO extracted and sold the other byproducts (e.g. paraffin wax and gasoline) to other refiners of those products. Furthermore, some of the gasoline was used to power SO’s plants, thereby reducing waste and expenditures on coal power.

* Raw materials procurement: SO employed its own crude buying agents rather than using independent contractors like its competitors. SO also built an extensive network of warehouses to hold extra oil in case prices unexpectedly spiked. Eventually, SO developed its own sources of crude to ensure constant, cheap supply.

* Raw materials transportation: Crude was traditionally transported in wooden barrels. Given the high cost of barrels, SO purchased forest land and harvested the wood. SO also pioneered the process of treating the wood in a kiln to prevent leaking. SO later lowered costs even further by investing in tanker rail cars, which at the time were a fairly new invention. Eventually, SO built pipelines to transport crude directly from production sites to the refining facilities.

Tesla currently has 70-80% market share of the electric vehicle market in the USA. Tesla’s 2020 Battery Day talked about creating lithium batteries directly from raw materials. Tesla announced a goal of producing over 3 terawatt-hours per year of batteries by 2030. Its legacy car competitors currently have combined goals of making 400 gigawatt hours per year of batteries by 2030. CATL and other pure battery makers have goals of 1.5-2 terawatt hours per year by 2025 and will also likely combine to have production of over 3 terawatt-hours per year.

Currently, Tesla is the most aggressive in scaling its factories for electric cars and batteries.

Tesla is the cost leader with electric batteries and drive train efficiency in its electric cars. The technological and business model innovations give Tesla a price advantage with electric cars and electric batteries.

Sam Jaffe, Cairn Energy Research Advisors, says Tesla’s battery packs are 10% less expensive than GM’s and 24% less than the rest of the auto industry because Musk and his team have aggressively pushed to cut costs over the last decade. Cairn ERA’s research predicts Tesla will remain the cost leader in battery cells and EV battery packs through 2030. Cairn predicts GM will reduce that gap and get close to price parity with Tesla by the end of the decade. However, GM currently only has a goal of making 120 Gigawatt hours per year of battery factories by 2030. GM will have to increase their electric battery ambitions beyond 4% of Tesla’s battery targets.

Remember how Standard Oil achieved a superior cost structure and used technology for lower costs. Take another look at the highlights from Tesla’s Battery Day. Tesla is integrating from raw materials and building at a scale needed to change the world. 10 Terawatt hours per year for all vehicles and 20-25 terawatt-hours per year for the entire world energy grid.

If the entire world goes electric for vehicles and for a battery-enabled electric grid that will be 30-35 terawatt-hours per year through the 2030-2050s. This level could grow if there is a global economic boom for self-driving trucks and robotaxis.

No other company had the scale of Rockefellers ambitions and they did not aim for the same goals. The goals that Rockefellers had were what were needed to create and scale the modern oil industry. Elon Musk has the ambitions to rapidly change the world to a world 100% dominated by electric vehicles and electric batteries for the grid. Only battery suppliers for Tesla are considered similar scale in their battery production targets.

SOURCES – CNBC, Harvard, History Channel
Written By Brian Wang, Nextbigfuture.com (Brian owns shares of Tesla)