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Shorting Oil, Hedging Tesla

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Another interesting piece on Electrek: UPS is converting ‘up to 1,500 delivery trucks’ to battery-electric in New York

Details from UPS are here: Fuels & Fleets | UPS Sustainability

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If we take the 3 billion miles and take the EIA's number of 17.4 mpg number we get some 174m gallons of fuel annually. That's already measurable in the grand scheme of things. Of course UPS is not switching in one go and that's the global fleet, so the impact will not hit the US alone. And yet...

I know we are all preaching to the converted (ha!) over here - but I see evidence for more and more fleet operators to look into electrification. And this will have a huge impact as these vehicles drive a lot.
This is why I'd like to see a Sprinter style truck. UPS never others with urban shipping needs can save a ton of money and have a big impact on diesel. 50,000 sprinters would have more impact than 1,000,000 cars and if cool, are great marketing. They are constantly on the road or in shopping mall / grocery store lots.
 
I never imagined when I was driving my little Zap Xebra that within so few years The Economist would be predicting that the future is electric.

As for BEVs powered by "dirty coal," I have no links to cite, but I've read that the dirtiest coal-fired plants are cleaner than even the cleanest gasoline-powered cars. The ICE is just so inefficient. But even if that were not the case, the grid is getting cleaner every year, and more and more people are powering their BEVs (and their homes) from rooftop solar panels. You can't do that with a stinker.

As for hedging Tesla, I know next to nothing about investing, but I don't think Tesla needs hedging. If the Model 3 is as good a car as I expect it to be, there'll be no stopping Tesla.
@daniel, you comment that ICE is extremely inefficient.
look at the following chart, in hte lower right corner, look at transportation.
Note the tremendous amounts of energy that flow into it, and the ~79% wasted a nice graphical
27.9 Quadrillion BTUs used, 22Quadrillion BTU's wasted as heat and noise

Energy_US_2016.png


https://flowcharts.llnl.gov/content/assets/images/energy/us/Energy_US_2016.png
 
@daniel, you comment that ICE is extremely inefficient.
look at the following chart, in hte lower right corner, look at transportation.
Note the tremendous amounts of energy that flow into it, and the ~79% wasted a nice graphical
27.9 Quadrillion BTUs used, 22Quadrillion BTU's wasted as heat and noise

Energy_US_2016.png


https://flowcharts.llnl.gov/content/assets/images/energy/us/Energy_US_2016.png

Is the rejected electricity generation an opportunity? I’m betting much of this is nighttime loss when EVs charge.
 
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Is the rejected electricity generation an opportunity? I’m betting much of this is nighttime loss when EVs charge.
this is for everything in the US. look at tiny yellow box upper right, Solar. been growing a few years. solar EV is contributing 0.03 quadrillion BTU to transportation.
the rejected energy seems to mean, 79% of the energy going into moving ICE vehicles, from here to there is wasted as heat and noise, not used to turn wheels
 
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@daniel, you comment that ICE is extremely inefficient.
look at the following chart, in hte lower right corner, look at transportation.
Note the tremendous amounts of energy that flow into it, and the ~79% wasted a nice graphical
27.9 Quadrillion BTUs used, 22Quadrillion BTU's wasted as heat and noise

It is a great graphic. "Rejected energy" means waste: gasoline converted to heat and dumped out the tailpipe.

Most of that rejected energy in transportation disappears when we switch to electric cars.

The rejected energy in electricity generation is also entirely from thermal power plants: half of the energy in coal goes up the smokestack, a lot more than half of the energy in nuclear has to be removed using "cooling towers", etc. So this disappears with solar, wind, and hydro.

You'll see the third piece of low-hanging fruit in the industrial sector, where the rejected energy is mostly heat loss due to poor insulation practices. Tesla has aggressively insulated all of their process chambers at the Gigafactory for temperature-based processes to remove this loss, and were quite proud of that. Now, you often can't insulate them when they need "exhaust" from the burning of natural gas or oil... so again, this can only be done when you switch the heating to electricity.

Most of the rejected energy in residential and commercial is also heating loss which can be addressed with insulation.

 
So let me update my EV displacement estimate for 2016. I'm getting EV counts fro ev-volumes.com.

Passenger EVs
775k × 0.0313 b/d = 24 kb/d

Commercial EVs
China only data, assume 92% of global
193k × 0.6 b/d ÷ 92% = 126 kb/d

Total EV Displacement
2016 150 kb/d
2017 216 kb/d f
2018 320 kb/d f


This is the sort of calculation that no oil analyst wants to make. They would rather assume that the commercial EV fleet is neglible when in actuality it could be more than 80% of the fuel displacement.

We have to ask if 150 to 216 kb/d is material to the oil market today. Well, IEA estimates the market is balanced this year with the OECD oil inventory falling 0.3 mb/d. So if the world were purchasing conventional vehicles instead EV, we would see inventories falling closer to 0.5 mb/d instead. I have to conclude that this is a material impact. Without EVs the market would have balanced sooner.

And 2018 will face even stronger headwinds from EVs, about 0.3 mb/d. I think it will become uncomfortable for energy analysts to simply ignore EVs, especially the commercial EVs.
Maybe the IEA saw this post. They are now downgrading their 2018 oil demand forecast by 190 kb/d.

IEA’s Shocking Revelation About U.S. Shale | OilPrice.com

One more tidbit, IEA uses a crude price elasticity of demand of -0.04. So a price increase from $50 to $60 is 20%, which would reduce quantity demanded by 0.8% or about 800 kb/d. The IEA may be reminding the market that their are limits to the price consumers are willing to pay.

Hmm, what would happen if prices soared from $60 to $80? That could knock an extra 1mb/d off of demand. Meanwhile, shale led supply is expected to increase 1.4 mb/d at prices in $50 to $60 range. So 2018 could see an over supplied market even if prices stay at $60. If price go well above $60, the surplus explodes.

What do you call that situation where prices can't go much higher for lack of demand at higher prices?
 
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A quick follow-up on an old topic: remember the ferry between Sweden and Denmark which was changed from Diesel to battery power? I went over to see for myself today and got lucky: one of the two ferries which was scheduled to be converted is in use and was docking as I came to the harbour. The robot in its little glas cage is locking pretty awesome. Now, frankly I have no idea if the system now works as intended but the ferry came in gliding silently, no vibrations, no noise, no smoke - truly majestic.

Pics or it didn't happen?

Here you go: (sorry, robot is behind the ferry, didn't manage to get a shot of that in action).

IMG_6349.jpg

(You can actually see the batteries in the modified 40 foot containers on the top of the ferry)

Here is a quick clip from the Danish equivalent to NPR about the project. Sorry for the language...
 
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This is an angle and economic risk to the fossil fuel industry in general, and coal in particular first, that I haven't previously considered:
Insurance industry must act on the coal sector

Besides financing for projects, I'm wonder:
a) what insurance do companies take out on fossil fuel projects?
b) do the projects stop if they can't get insurance, or do companies self-insure?
 
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A quick follow-up on an old topic: remember the ferry between Sweden and Denmark which was changed from Diesel to battery power? I went over to see for myself today and got lucky: one of the two ferries which was scheduled to be converted is in use and was docking as I came to the harbour. The robot in its little glas cage is locking pretty awesome. Now, frankly I have no idea if the system now works as intended but the ferry came in gliding silently, no vibrations, no noise, no smoke - truly majestic.

Pics or it didn't happen?

Here you go: (sorry, robot is behind the ferry, didn't manage to get a shot of that in action).

View attachment 260455

(You can actually see the batteries in the modified 40 foot containers on the top of the ferry)

Here is a quick clip from the Danish equivalent to NPR about the project. Sorry for the language...
Love the finishing line in the filmed report: "I think it will be like sailing with a Tesla!"

Also pointing out the great local benefit of reduced (or nullified) emissions of CO2, SOx and NOx. Didn't hear mention of particles, but that's also of benefit to lose, especially locally.
 
H'mm... I think I'd call that peak demand.
I was a bit vague on the timeframe, short term vs long. To be sure, demand elasticity is about short term equilibria, but think there is a way to relate it to growth. Here is a super simple model.

Suppose at $50 oil demand grows 1.4% annually or 1.4mb/d. If the price increase to $60, then the growth is adjusted to 0.6% = 1.4% - 0.04×20%. At $70, -0.2% = 1.4% -0.04×40%. This sensitivity seems a bit high to me. Propper use of logarithm would soften it a bit. But either way you get to zero growth at about $70.

Precision aside, the qualitative idea is clear enough. If the price of oil goes high enough, demand growth will halt. We may have uncertainty about that critical price, bit consider that most OECD countries had declining demand while oil was in range of $100. Growth was only happening in developing countries and some of them had to subside fuel. Recall that when OPEC triggered the glut with drill at will, Chinese demand growth was in serious question. One basic interpretation of the strategy shift is that OPEC was coming to see that $100 oil was too high and threatening to stall global demand growth. Unfortunately the action was over done and the glut proved severe. The rhetoric was all about market share, but no one wanted to talk about peak demand. The industry cannot afford to let demand stall out with high prices. In 2015 $100 was too much. Now I'm thinking that $80 is too much. As EVs scale up and diversify into different segments, I think this critical price will continue to decline. So IEA seems to play a role to help the market not price too high.
 
I think you're right. And I like your numbers: $70 is where growth in crude demand ends *currently*. Can we guess how much it'll drop over the course of the next year?

I can't guess. More and more and more places are converting away from oil, with Tesla of course being the big name here. I will use naive extrapolation to guess about 1.5 million EV cars sold in 2018 (worldwide including hybrids), and probably 150,000 buses -- these numbers might be low. I think JHM has a method for guessing how much this reduces oil demand? Of course, conversion of diesel generators to solar + batteries, and conversion of heating oil to electric heat pumps, is happening very fast since both are financial no-brainers, and I have no estimate for how much that's affecting things.
 
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Love the finishing line in the filmed report: "I think it will be like sailing with a Tesla!"

Also pointing out the great local benefit of reduced (or nullified) emissions of CO2, SOx and NOx. Didn't hear mention of particles, but that's also of benefit to lose, especially locally.

Yes. Best of all will be that as of now, no new ferries with Diesel will be approved: all local residents would insist on electric ferries to keep their air clean and fresh. It is not even about emissions out at sea but in the harbour. I know that is a bit of a topic down in Copenhagen where the cruise ships are docking...

I think you're right. And I like your numbers: $70 is where growth in crude demand ends *currently*. Can we guess how much it'll drop over the course of the next year?

I can't guess.

It's hard to quantify indeed. A simple straight line extrapolation from 2015 / $100 to 2017 / $70 would indicate a $15 drop per year but I think that is too simplistic and most certainly incorrect.

However, I think in our modelling we should be aware of not making the same mistake that IEA and EIA are making: from dropping cost curves for batteries, to inner-city bans on diesel cars, to shifting perceptions about "what is cool", to aggressive EV mandates for China as of 1.1.19 we seem to have a bit of a perfect storm brewing. In short: timing this is impossible. But I venture to guess that in the coming 5 years we will see in oil what we see in coal today (i.e. bankruptcies, declining markets, desperate moves to convince people that "oil is life!" etc.)
 
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Interesting article in Bloomberg on Norway's sovereign wealth fund's desire to divest itself of its $35B in oil and gas stocks. This is supposedly for diversification purposes but I suspect they also realize this is just a bad long-term investment.

Subject to government approval and not expected to take place before autumn 2018 but this seems like a wise move on their part. Pulling those kinds of dollars/krone from the market can't be good news for oil and gas share prices.

World’s Biggest Wealth Fund Wants Out of Oil and Gas
 
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I think you're right. And I like your numbers: $70 is where growth in crude demand ends *currently*. Can we guess how much it'll drop over the course of the next year?

I can't guess. More and more and more places are converting away from oil, with Tesla of course being the big name here. I will use naive extrapolation to guess about 1.5 million EV cars sold in 2018 (worldwide including hybrids), and probably 150,000 buses -- these numbers might be low. I think JHM has a method for guessing how much this reduces oil demand? Of course, conversion of diesel generators to solar + batteries, and conversion of heating oil to electric heat pumps, is happening very fast since both are financial no-brainers, and I have no estimate for how much that's affecting things.
Commercial EVs will be closer to 400k in 2018. I'm looking at some 320 kb/d of demand displacement in 2018.

Shorting Oil, Hedging Tesla

This EV displacement is quickly getting to a scale that compromises balancing of the oil market, even though some growth is still left. IEA had to cut their demand forecast by 50 kb/d in 2017 while EV displacement in 2016 was 150 kb/d. And they are cutting 2018 forecast by 190 kb/d while EV displacemen't in 2017 is about 216 kb/d. So there is a lag between a year's worth of EVs being added to the fleet and a year's worth of impact on oil demand. I strongly suspect that IEA analysts are simply not estimating the EV displacement, so the impact comes as an error in their model, which they then need to correct. So if the displacement is 310 kb/d in 2018, IEA may need to make about a 300 kb/d adjustment to their 2019 forecast. Having to do a downward revision of this magnitude could easily imply that producers are oversupplying by as much or more.

In this scenario, producers gear up to add 1.3 mb/d supply thinking demand will match this. Then it comes in that demand growth is less than 1 mb/d. Now we've got 100 Mb in annual inventory build happening, and the price of oil plummets. In fact, demand elasticity suggests that to stimulate enough demand to absorb a 400 kb/d surplus, the price would need to fall about 10% below $50, that is $45. But the fall could be deeper than that because on the supply side the following year growth will need to be limited 0.7 mb/d to accommodate 600 kb/d of EV displacement, and this level would still only balance the market and not reduce the excess 100 Mb in inventory from prior year. To draw that down, supply growth would need to be no more than 0.4 mb/d. I think this scenario would be fairly bleak because there will be an awakening. It will be clearer then that EVs are taking a huge bite out of demand growth. Prices will have to be low to mop up oversupply. By 2020 virtually any growth in supply will be punished with lower oil prices. So even if demand has not yet peaked, profitable oil production has peaked. I'm qualifying this as "profitable" production. The idea is that if production climes to yet higher volumes, the price will collapse.

There is this uncertainty about whether supply will peak before demand peaks. Ideally, the industry would want the market to be balanced wherein both peaks happen at the same time. But I think there is a very strong chance that producers will continue to overestimate demand and as a consequence risk oversupply. Resolving a glut can take several years. If demand peak is within a few years, production may need to start falling early to work off a glut. Just as the price recovers, demand hits its peak. It could go the other way, but if the price of oil goes sufficiently high, it will induce producers to oversupply at which point the price drops to some clearly price that gives a slight boost to consumption. This boost may are may not be enough to form a new demand peak. But even if it does it comes at such a low price that producers will regret it. So I think the most profitable course is for production to peak prior to the demand peak. Moreover, I think OPEC should structure production aggreements around price targets. If over $60, drill at will. They cannot afford to let the price get high enough that overproduction happens and demand growth stalls.

In any case, we are watching these dynamics play out right now. Will the price keep going up to discover the breaking point? Speculators can be a real problem if they drive the price up to this breaking point. This is why producers need to hedge with futures. Note that 2020 futures were climbing for the last few weeks but fell sharply two days ago. Perhaps producers locked in some $52 WTI prices.
 
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