Exxon Wants to Get Into the Lithium Business. It Shouldn’t Bother.

And on its recent earnings conference call, Exxon answered questions about its interest in lithium. “So this, to us, feels like a potential win-win-win opportunity, a win using our capabilities, a win from an environmental impact standpoint, and a win in terms of supplying markets with a crucial component to electrification and EV,” said CEO Darren Woods on the company’s second-quarter earnings conference call on July 28. “So I think that’s kind of how we’re thinking about it. And we’re I’d say actively exploring that opportunity set and like what we’re seeing so far.”

The question came from TD Cowen analyst Jason Gabelman, who asked about recent media reports of Exxon’s plans. Bloomberg reported this week that Exxon (ticker: XOM) was in talks with several auto makers and battery makers to supply lithium, a key component in lithium-ion batteries that store energy for electric vehicles. This week’s news follows reports from earlier this year that Exxon bought land in Arkansas that could be developed for lithium production and comments made by the company over the past week.

Exxon believes that its knowledge of drilling for oil and producing chemicals will help it produce lithium products. It might, but that isn’t really the point. There are a few other issues Exxon faces if it wants to become a lithium giant.

The first is resource quality. In mining, higher-cost assets tend to come online as demand for a commodity grows. Take iron ore. As steel demand grew over time, the industry started mining ore with 35% iron content, down from 65% iron content. That meant more material to move and extra processing. Exxon—if and when it gets into the lithium business—just won’t have the low-cost assets of

Albemarle

(ALB),

SQM

(SQM), and

Livent

(LTHM), three of the world’s largest lithium producers.

The second is why bother? It’s a problem of scale.

Lithium

really doesn’t solve Exxon’s problem. The revenue of the entire lithium business is a few billion dollars a year. The market capitalization of the three large lithium producers combined is roughly one-tenth the size of Exxon’s.

Lithium will grow but it won’t ever be like oil. An EV might have roughly $1,000 of lithium in it. A traditional car can burn some $20,000 of gasoline over its life.

Lithium isn’t consumed like oil. It stays with the car. What’s consumed in an EV is electricity. The batteries are the storage medium for electrons. In that way, EV batteries are more like a gas take than oil.

Exxon might want to consider getting into electricity. More EVs will eventually mean more demand for electricity and that is a big business.

Tesla

(TSLA) CEO Elon Musk predicts U.S. electricity demand eventually will double. What’s more, Americans already spend hundreds of billions of dollars on electricity each year.

They also spend hundreds of billions of dollars on gasoline dispensed at gas stations. The U.S. has far too few EV-charging stations. That’s another option for Exxon that will be a bigger business in terms of revenue than lithium mining.

Wednesday has been tough for lithium mining stocks. Albemarle has dropped 2.2%, while Livent has fallen 3.3%, and SQM is off 1.5%. The

S&P 500
has declined 1.3%, while the

Dow Jones Industrial Average
has slipped 0.7%.

Exxon stock dropped 0.6% Tuesday.

Write to Al Root at allen.root@dowjones.com