The U.S. has a long history of mandates in the energy sector. For example, the Energy Policy Act of 2005 imposed a Renewable Fuel Standard (RFS) requiring 7.5 billion gallons of renewable fuel (primarily ethanol) to be blended into the fuel supply by 2012.

That wasn’t such a big deal. Taxpayers had subsidized corn ethanol production for decades, and even though it was only marginally economical, a mandate on top of the existing subsidies led to explosive growth in the industry. (Of course, that didn’t slow oil demand growth at all). 

But then the government expanded the ethanol mandate with the Energy Independence and Security Act (EISA) of 2007. The new Renewable Fuel Standard — the RFS2 — accelerated the quotas for renewable fuel. Notably, it required the blending of escalating volumes of advanced biofuels — something that didn’t commercially exist in 2007. 

The attitude among those pushing for the advanced biofuel mandates was “Mandate it, and production will come.” After all, the mandate had worked with corn ethanol, why not with ethanol produced from biomass (i.e., cellulosic ethanol)?

The problem is that you can’t simply mandate technology breakthroughs. If you could, Congress could just mandate a cure for the common cold. Scientists would jump right on it, take advantage of available subsidies, and get it done. 

But there are often real, unappreciated challenges that prevent timely breakthroughs from being realized. That was the case with advanced biofuels. Congress mandated that 100 million gallons of cellulosic ethanol had to be blended into the fuel supply in 2010, and then rapidly ramped that to 16 billion gallons per year by 2022. 

Despite the mandates, there was no cellulosic biofuel produced until 2012, when a company that subsequently declared bankruptcy produced 20,000 gallons. In 2013 about 230,000 gallons were produced by KiOR (the mandate was one billion gallons), which also subsequently went bankrupt. (On another note, oil refiners were fined for not buying this product that didn’t exist).   

Despite incredibly generous subsidies (upwards of $1/gallon), only a trickle of production exists today. Most of the would-be producers of cellulosic ethanol production have gone bankrupt. This year the mandate called for 5.5 billion gallons, but producers are only making about 0.1% of that amount.  

Now imagine if you will, that the U.S. had outlawed gasoline as a result of the promise of cellulosic ethanol. Where exactly would we be? Such a law would have led to underinvestment in the production of gasoline, and we would be dealing with much higher fuel prices as the government rushed to correct the folly of this action. A ban on gasoline would have been reversed, but there would have been great costs involved for consumers.   

This is similar to what countries are doing when they announce future bans on the sale of vehicles powered by fossil fuels, as both France and the U.K. did this summer. They are making bets that electric vehicles (EVs) will be ready for near universal adoption when these bans go into effect. By making these bets, they are trying to create a self-fulfilling prophecy. 

This week it was reported that China might be getting ready to announce its own ban of fossil fuel vehicles. This is a big deal, considering the number of new drivers that are hitting China’s roads every year.

But consider this.

China is already the world’s largest automobile market, and the world leader in EV sales. Yet, according to the newly released OPEC Monthly Oil Market Report, Chinese oil demand has grown this year at more than double the pace in 2016.

You were probably under the impression that oil demand in China is weakening. I hear that all the time. But gasoline demand is growing as a result of robust sports utility vehicle (SUV) sales, which are around 17% higher than one year ago.

Here’s my point. China may join the ranks of countries banning fossil fuel vehicles. This news helps drive the narrative that the age of oil is nearing its end, and it is making investors hesitant about investing in the oil sector. 

But China is a long way from reining in its oil consumption growth. EVs may lag lofty expectations, as has cellulosic ethanol to date. Even if bans and mandates end up having the desired effect, it’s going to take time. That’s certainly not a knock on EVs. This is not a zero-sum game because the number of drivers is growing. It is possible — and I would argue that it is highly likely — that we will see both explosive growth in EVs for the next decade, and growing oil demand.

That means this is not the last oil cycle. Oil has been down for three of the past four years, but it’s not out. If you hold quality companies, patience will ultimately be rewarded. It’s just a matter of time until the world remembers that it still runs on oil.