Exxon Mobil Explores Entry into the Lithium Market

Oil giant Exxon Mobil is looking to defend its position in the changing energy landscape by venturing into the lithium market. However, this move may not be the best strategy for a couple of reasons. Instead, Exxon should consider alternative avenues within the energy transition.

Bloomberg recently reported that Exxon (ticker: XOM) is engaged in discussions with various automakers and battery manufacturers to supply lithium, a critical component in lithium-ion batteries used for electric vehicles. This development follows earlier reports this year that Exxon purchased land in Arkansas, potentially for lithium production. Furthermore, the company's CEO, Darren Woods, expressed optimism regarding their exploration of this opportunity during the second-quarter earnings conference call on July 28.

While Exxon's interest in lithium is understandable due to the growing prominence of electric vehicles and their potential impact on gasoline demand, there are several challenges the company would have to address to establish itself as a major player in the lithium market.

Exxon believes that its expertise in drilling for oil and producing chemicals can be leveraged to successfully manufacture lithium products. However, the focus should be on more than just applying existing knowledge. There are additional considerations that need to be taken into account.

Firstly, the lithium market is highly competitive, with established companies and new entrants already vying for market share. Exxon will need to differentiate itself significantly to gain a foothold.

Secondly, producing lithium is a complex process that involves mining, refining, and manufacturing. This undertaking requires specialized infrastructure and expertise that Exxon would need to develop or acquire.

Lastly, the environmental impact of lithium extraction and battery production is an important concern. As an oil company looking to transition to renewable energy, Exxon must ensure that its lithium operations align with sustainability goals.

While Exxon's foray into the lithium business presents potential opportunities, it is essential to approach this venture with a clear understanding of the challenges and complexities involved. The company should carefully consider its strategies and partnerships to thrive in this evolving industry.

Resource Quality

One key aspect of the mining industry is the quality of the resources being extracted. As demand for a specific commodity increases, higher-cost assets are often brought online to meet that demand. This is evident in the case of iron ore. As the demand for steel grew, the industry started mining ore with lower iron content to keep up. For example, it transitioned from mining ore with 65% iron content to ore with 35% iron content. Although this allowed for continued production, it also meant that more material needed to be moved and extra processing was required. When compared to Albemarle (ALB), SQM (SQM), and Livent (LTHM), three of the largest lithium producers in the world, Exxon would not have access to such low-cost assets if it were to enter the lithium business.

Scale Matters

Another important factor to consider is scale. While lithium may be seen as a potential solution for Exxon, it does not address their problem on a large enough scale. The revenue generated by the entire lithium business amounts to just a few billion dollars per year. To put this into perspective, the combined market capitalization of the three largest lithium producers is only about one-tenth of Exxon's market capitalization.

Comparing lithium to oil further highlights this disparity. An electric vehicle (EV) typically contains around $1,000 worth of lithium, whereas a traditional gasoline-powered car can consume approximately $20,000 worth of gasoline over its lifespan. Unlike oil, lithium is not consumed but rather stays with the car as part of the battery. In an EV, what is actually consumed is electricity. The batteries serve as a storage medium for electrons, making them more akin to a gas tank than to oil.

Exploring Electricity

Considering these factors, Exxon may want to consider entering the electricity market. The increasing adoption of EVs will inevitably lead to a higher demand for electricity, presenting a significant opportunity for growth. Tesla (TSLA) CEO Elon Musk even predicts that U.S. electricity demand will eventually double. Furthermore, Americans already spend hundreds of billions of dollars on electricity each year.

A related opportunity lies in the lack of EV-charging stations in the U.S. Currently, there are far too few compared to traditional gas stations. Expanding Exxon's presence in the charging station market could prove to be more lucrative in terms of revenue than investing in lithium mining.

Impact on the Market

News of a potential competitor entering the lithium market may have had a negative impact on lithium shares, as evidenced by the drops in Albemarle, Livent, and SQM stock prices on Tuesday. The S&P 500 experienced a slight decrease of 0.2%, while the Dow Jones Industrial Average saw a slight increase of 0.2%. Exxon's stock price also dropped by 0.6% on Tuesday.