Shorting Oil, Hedging Tesla

[neroden]

A while back, I tried calculating the "cap price" on natural gas (similar to the calculations I've done for the "cap price" on oil), based on the price at which it's cheaper to substitute something else. You get one cap price for electricity generation (based largely on wind/solar/battery prices), and a different one for heating (based largely on electricity prices and the efficiency of heat pumps).

I honestly don't remember what the numbers came out to for electricity, but for heating, *in the cold Northeast*, the cap price was between $4.00 and $5.50 depending on assumptions. (And, of course, it's dropping.) I'm not sure how much this helps, but maybe it will be useful.

 

[jhm]

that's pure nonsense. LNG price isn't 25 so all calculations based on that nonsense number is nonsense too. 25$/MMBTU means power plants can burn diesel at $3,5/gal that's when oil above 100 and there are quite a few posts here telling it's not happening (for long periods not some blips)

I agree. There's no reason for LNG prices to remain so high or to be widespread. Below is the article that was arguing a bullish case for LNG on the basis of those prices. I was simply trying to debunk that bullishness.

Are NatGas Prices About To Explode? | OilPrice.com

 

[jhm]

Electric Vehicle Tracker

Carbon Tracker documents that automakers expect to bring cumulative EV production to 22.1M by 2020. This is an important angle. The oil industry expects on 7-8M in this time frame. So these two industries have radically different expectations.

I'm a bit skeptical of the 22M figure, though. I think is may simply be aspirational. OEMs will find that it is much harder to bring a compelling electric product to market. This also implies a 82%/y growth rate from 2016 to 2020. But 2017 is not playing out that fast. So this all feels a bit too optimistic.

Even so, the analysis seems to ignore commercial EVs, and I believe these will move the needle much faster on diesel demand than light EVs.

So combining heavy EV growth and OEM aspirations for light EVs with a huge grain of salt, there is still a strong case for materially sluggish oil demand growth in 2020.

 

[SebastianR]

I found this interesting: Norwegian Pension Fund Set to Divest From Oil Sands and Coal Ventures | OilPrice.com

Essentially, they are kicking out the worst polluting oil and coal extraction companies. I would assume that more and more companies are adjusting their investment criteria. Some maybe more silent about that than others but I assume this is happening more and more.

 

[jhm]

The Secret To Replacing Fossil Fuels | OilPrice.com

This is an interesting perspective. The essential issue is that renewable energy technology is relatively under developed and still has alot of upside, while fossil technologies are more mature and harder to improve upon. This tech race advantage is then accelerated by high power computing technology. Essentially, the pace of technology is made faster than in earlier generation, so immature technologies have an even shorter time to disruption.

This is an important insight. Looking back to how long it took oil to disrupt coal may be a poor historical model for getting the timing of disruption right. Specifically, had ICE technology been advancing as quickly as solar, wind or battery is presently advancing, perhaps oil would have disrupted coal in just a fraction of the time. I'm not particularly interest in debating that history. I only point it out to ask the basic question, is the pace of technology quickening and does that imply faster disruption?

I'd also point out that technology acceleration also impacts fossil fuel markets directly apart from renewables. Gains in efficiency in both extracting fossil fuels and consuming them lead to a bigger supply and lower demand. Hence, market oversupply may be symptomatic of advancing fossil technologies. So even if fossil technologies try to keep pace with renewable, they are still subject to disrupted economics.

For example, Tesla comes out with a Semi with 0.36 drag coefficient. Diesel semi makers could try to match this with similar aerodynamic treatments. This may enable the diesel makers to compete a little longer with electric semis, but this competition would drive up the fuel efficiency of the trucking fleet and thereby slow demand growth for diesel. Thus, diesel can peak even sooner than there is sufficient volume of electric semis to displace demand growth. In the trucking industry all competitors are competing at least in part on cost per mile. So any technology that drives down the cost per mile will induce a competitive response across the industry. So I would not be surprised to see fuel efficiency gains in diesel trucks over the coming years. Such a competitive response could prove more lethal to diesel demand than the token share of electric trucks in the market in the early years.

 

[SebastianR]

This is interesting:

Is U.S. Gasoline Consumption Set To Collapse? | OilPrice.com

So in relative terms we are very close to a gasoline demand collapse.

However this also shows just how big of a problem we are dealing with: Tesla stands at some 5 bn cummulative miles (globally) and we are talking 268 bn miles traveled for October and the US alone...

(5bn miles here: Tesla’s global fleet reaches over 5 billion electric miles driven ahead of Model 3 launch )

 

[winfield100]

The Secret To Replacing Fossil Fuels | OilPrice.com

.......is the pace of technology quickening and does that imply faster disruption?

off topic, yes, but
is the pace of technology quickening and does that imply faster disruption?

That seems to be the important question. Are we in a technological Singularity? who knows. Are we in the midst of a whole lot of distributed singularities, probably. whats the quote read somewhere here. "walking on an exponential curve, it looks flat behind you, and vertical ahead of you"
My knees are presently and soon a hip will be "Borged" i'll get chipped and have faster offline memory storage in a few years. I can give voice commands to ??weak?? AI. I can wave my hands and remote things happen at my command.
"Any sufficiently advanced technology is indistinguishable from magic"
You are so immersed in the singularity, it is just everyday normal
lurker mode back on

 

[jhm]

This is interesting:

Is U.S. Gasoline Consumption Set To Collapse? | OilPrice.com

So in relative terms we are very close to a gasoline demand collapse.

However this also shows just how big of a problem we are dealing with: Tesla stands at some 5 bn cummulative miles (globally) and we are talking 268 bn miles traveled for October and the US alone...

(5bn miles here: Tesla’s global fleet reaches over 5 billion electric miles driven ahead of Model 3 launch )

Moving 12-Month Total Vehicle Miles Traveled
Here is a longer times series for 12-month moving total of VMT. Note the numbers are annualized. Currently about 3.2 trillion miles per year.

 

[TheTalkingMule]

Disruption will obviously be far far quicker this time around since we're not changing fuel types, we're "printing energy". Yes it took quite a while to get the Gigafactory where it is today, but once this design is humming......Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V Ctrl-V

We've progressed far enough in solar and wind that all we need are some batteries for the dam to truely break. Will there be nearly instantaneous societal changes once we have essentially free energy in 2030? I doubt it.

 

[SebastianR]

Disruption will obviously be far far quicker this time around since we're not changing fuel types, we're "printing energy". [...]
We've progressed far enough in solar and wind that all we need are some batteries for the dam to truely break. Will there be nearly instantaneous societal changes once we have essentially free energy in 2030? I doubt it.

The question is what change and where. If the question is, will every single person on this earth experience drastic change immediately, the answer is obviously "no". However, in some communities it will be harsh, quick and tearing the social fabric (see how Trump could rely on those coal miners who experienced the change first hand). Also, both Siemens and GE are slashing many jobs in their power plant making divisions. This is pretty bad for at least some local populations as e.g. Siemens has a plant that is pretty much the only employer in a small German city and now the whole city is "left for dead" after Solar & Wind is killing the steam turbine business... In my mind this change will be disruptive, brutal, fast and economically devastating for many.

Siemens to cut 6,900 jobs amid union resistance | Business | DW | 16.11.2017

"The power generation industry is experiencing disruption of unprecedented scope and speed," managing board member Lisa Davis said in a statement, adding that renewable energy was putting other forms of power generation "under increasing pressure."

Siemens said global demand for large gas turbines (generating more than 100 megawatts) had fallen drastically and was expected to level out at around 110 turbines a year. By contrast, the technical manufacturing capacity of all producers worldwide was estimated at around 400 turbines.

EDIT: Of course the 9600 jobs in this instance are not really that much. But that's only a fraction of the news out of Siemens and GE right now. And as scale and cost of wind/solar is changing rapidly, I assume this will be much worse and much more far reaching in the coming years. And it is a change I would not have thought of until I saw the news. I assume there are many more industries that will be affected that are currently not in our focus.

 

[SebastianR]

Alright, last post from me in this thread for today - sorry for spamming but I found this to be interesting when we are talking displacement of Diesel:

China Electric Bus Industry Report,0

According to that in 2016 we had 115,600 electric buses produced (that's old news).
For 2017 they forecast some 180,000-190,000 "new energy buses" (with most of them being electric)

China Association of Automobile Manufacturers (CAAM) forecasts China's new energy vehicle sales volume will hit 800,000 in 2017, of which, passenger vehicles account for roughly 70% (up from 65% last year). Based on this, new energy commercial vehicle sales volume will reach 240,000 in 2017, including 180,000-190,000 new energy buses. In view of bus market increment from urbanization as well as the penetration in highway bus market after new energy technology maturation and cost reduction, China's new energy bus sales volume is predicted to exceed 250,000 by 2020.

So two things: first, it looks like 2016 was not a one-time fluke, second, the growth rates of electric buses may quite staggering and as @jhm initially forecasted this might lead to peak Diesel in China very very soon.

 

[jhm]

Alright, last post from me in this thread for today - sorry for spamming but I found this to be interesting when we are talking displacement of Diesel:

China Electric Bus Industry Report,0

According to that in 2016 we had 115,600 electric buses produced (that's old news).
For 2017 they forecast some 180,000-190,000 "new energy buses" (with most of them being electric)



So two things: first, it looks like 2016 was not a one-time fluke, second, the growth rates of electric buses may quite staggering and as @jhm initially forecasted this might lead to peak Diesel in China very very soon.

Excellent progress. My forecast of a diesel peak by 2020 was based on just a 40% growth rate in commercial electrics. So this near term forecast above is suggesting a 56% to 64% growth rate in 2017. This faster pace puts the peak in reach by 2019.

When I was doing that modeling before, I had not considered the impact of the maritime sulfur ban that would take effect in 2020. This regulation could shift substantial demand from fuel oil to diesel. So it could create transitional one-time bump that would throw off the timing. So this pretty much precludes a 2019 peak. Even so, a 2020 peak with decline starting in 2021 would be pretty spectacular.

Thanks, @SebastianR

 

[dc_h]

Excellent progress. My forecast of a diesel peak by 2020 was based on just a 40% growth rate in commercial electrics. So this near term forecast above is suggesting a 56% to 64% growth rate in 2017. This faster pace puts the peak in reach by 2019.

When I was doing that modeling before, I had not considered the impact of the maritime sulfur ban that would take effect in 2020. This regulation could shift substantial demand from fuel oil to diesel. So it could create transitional one-time bump that would throw off the timing. So this pretty much precludes a 2019 peak. Even so, a 2020 peak with decline starting in 2021 would be pretty spectacular.

Thanks, @SebastianR

Any estimate of what a car equivalent rating would be for each bus? Does one bus displace 10 cars, 20, 100? Seems like each bus would reduce the equal if at least 20 cars. Assume they are rolling 8-12 hours per day and a city bus would get less than 6 mpg. Stop and start is made for electric. From a fuel and pollution perspective this seems equal to selling at least 2 million electric cars.
Did you have an estimate of fuel displacement for each bus? 50 gallons a day? That would imply over About 300,000 barrels per day displacement per day.

 

[jhm]

Any estimate of what a car equivalent rating would be for each bus? Does one bus displace 10 cars, 20, 100? Seems like each bus would reduce the equal if at least 20 cars. Assume they are rolling 8-12 hours per day and a city bus would get less than 6 mpg. Stop and start is made for electric. From a fuel and pollution perspective this seems equal to selling at least 2 million electric cars.
Did you have an estimate of fuel displacement for each bus? 50 gallons a day? That would imply over About 300,000 barrels per day displacement per day.

Yeah, about 20 cars to 1 bus.

For a bus, about 10k gal/year or 0.65 b/d.

For a car, 12k miles per year at 25mpg, 480 gal/year, 0.0313 b/d.

From a pollution viewpoint, diesel is much worse than gasoline. Moreover, buses are used heavily in the most densely populated areas. So electric buses will make a big difference in urban air quality.

I think the pollution angle is pretty important to rise of electric commercial vehicles. The combination of lower operating costs plus no urban emissions is really compelling.

 

[jhm]

Tesla big battery outsmarts lumbering coal units after Loy Yang trips

The Model S P100D is not the quickest Tesla. The Hornsdale Power Reserve, Tesla's big battery down under is showing just how quickly it can respond to power disruptions. It's the Australia summer and coal plants are showing theor age and tripping under the strain.

HPR was able to respond to a voltage drop due to a coal power plant tripping 1000km away 4 seconds faster than the plant designated to provide frequency regulation. The Tesla battery was not slated to provide such support. But I love how Giles put it that the Tesla battery intervened because it can.

 

[ItsNotAboutTheMoney]

This is interesting:

Is U.S. Gasoline Consumption Set To Collapse? | OilPrice.com

So in relative terms we are very close to a gasoline demand collapse.

However this also shows just how big of a problem we are dealing with: Tesla stands at some 5 bn cumulative miles (globally) and we are talking 268 bn miles traveled for October and the US alone...

(5bn miles here: Tesla’s global fleet reaches over 5 billion electric miles driven ahead of Model 3 launch )

Typical sensationalist headline. Just by Betteridge's Law the answer is no.

The curve seems to be flattening, but that's still at a number near to the all-time highs of the mid-2000s. Doesn't indicate collapse, especially given those are per capita, and the US population is still (gradually) growing. But then there's global demand.

 

[jhm]

Wall Street Returns To U.S. Shale With A Bang | OilPrice.com

You can usually count on Nick to deliver something slightly bearish about oil, if you're looking for that sort of thing. So today it's news that capital keeps flowing into US shale oil. The price of oil is sufficiently high and stable that as Nick concludes, "capital probably won’t be the limiting factor for the growth of U.S. shale, at least for the next year or so."

Typical sensationalist headline. Just by Betteridge's Law the answer is no.

The curve seems to be flattening, but that's still at a number near to the all-time highs of the mid-2000s. Doesn't indicate collapse, especially given those are per capita, and the US population is still (gradually) growing. But then there's global demand.

Here's a chart showing VMT per capita. (» VMT growth continued, slowed in 2016 SSTI) It is not so stable over time a likely depends on the economy. Arguably the recession and recovery drove the dip over the last 10 years.

This next chart of VMT per $1000 real GDP tells an important story.

Notice that VMT/GDP is stable through the 1970 to about 1995, around 240 VMT per $1000 GDP. The secular decline from 1990 to 2016 is quite striking. We may be witnessing a structural shift wherein the US economy is learning how to generate more GDP per mile. I suspect that telecommunication technology and the information economy may be at the root of this structural change. For example, buying products on Amazon may well minimize the number of VMT needed to get a product from factory or port to the customer's home. Many "short" trips to the store are replaced with UPS trucks delivering along optimized routes. Also time spent on social media like TMC may displace trips to socialize face to face. Use of ride sharing for some households may rationalize trips down to those worth paying for. Video conferencing may displace some business travel. And on and on, as there are many ways to use the internet, information and telecommunication to improve logistics and avoid VMT.

Even though the last two years in this series shows a slight uptick, the bigger question is whether VMT/GDP will ever get back to 240 or has something fundamentally changed that may keep it near 190. The slight uptick may simply be a demand response to lower fuel prices. If that is all there is to it, then we could see this declining trend resume in the next few years. And if this is so, then we could see total VMT decline even as the US economy has real GDP growth. The decline rate is about 50 VMT over 25 years, so about 2 VMT/GDP per year. So something like a real GDP growth of 1% minus 1% decline in VMT/GDP would net out 0% growth in VMT. Thus, the question is whether VMT/GDP is declining faster than GDP is growing. If so, then VMT declines.

 

[TheTalkingMule]

Commercial crude inventories dropped again this week. We know that Saudi Arabia is curtailing US shipments, but shale is blasting off like crazy, so does this mean we're truly somewhat "rebalancing"?

Is the impact on domestic commercial inventories any different depending on the source of crude, or is it just the combined total that matters? Refined fuels seem to be building up like crazy, is that a function of the domestic share being so high?

Just trying to rationalize the true global situation since we really only have visibility in our own market. I'd like to see global rates(and the price of storage) go up so we can really measure what's out there.

Edit to add chart: 12 month historical Saudi imports overlaid with the previous 5 years. The gap to average is getting absurd.

 

[SebastianR]

Commercial crude inventories dropped again this week. We know that Saudi Arabia is curtailing US shipments, but shale is blasting off like crazy, so does this mean we're truly somewhat "rebalancing"?

Is the impact on domestic commercial inventories any different depending on the source of crude, or is it just the combined total that matters? Refined fuels seem to be building up like crazy, is that a function of the domestic share being so high?

Just trying to rationalize the true global situation since we really only have visibility in our own market. I'd like to see global rates(and the price of storage) go up so we can really measure what's out there.

I think we have to wait for a day or two to see: there is the usual EIA vs. IEA game at play. Other than that - I do believe the overall situation is everything but transparent: we don't have reliable inventory data for most of the globe, we don't have reliable production / import / export data for key players. And most importantly, we do have a fair bit of seasonality in the consumption, transport, production of crude and the varying derivative oil products. Lastly - and that's the key in my mind - to separate signal from noise is really really hard if we are talking of growth rates around 1% - yet at the volume and magnitude of the oil industry.

Add to this the desire of many market players to have relatively large price swings (that's the way to make money with derivatives) and on the other hand governments with geo-political interests who would like to use oil exports for domestic and international political purposes and you get the mess we are in

Short-term I think this all is a dogs breakfast. But long-term trends, as we have discussed in the form here, are very very interesting to follow.

[/rant over]

What do I mean? If we take China and electric buses only. If we take the 0.65b/d displacement rate vs. diesel buses. If we just take 2016 and 2017 (roughly 300k buses) we arrive at approximately 200.000 b/d diesel demand which is killed. (@neroden, @jhm you correct me if I'm wrong in anything here)

Then we have more than 10% of the expected oil demand growth of the IEA (1.6m b/d for 2017; 1.3m b/d for 2018)* already killed off. So I guess it would be interesting to revisit the chart @jhm used in July and verify if we indeed are approaching #PeakDiesel...

*Source: OMR - OMR Public

PS: I'm aware that any fluctuation in economic activity is easily producing big swings in energy consumption that will be much more than any EV consumption at this time. I'm also conscious that the EV boom in China and elsewhere is ongoing and also kills off oil demand growth; I'm further aware that a slump in the new car market, better fuel economy etc. is all doing its share, too. I just wanted to highlight, that one sector in one country alone is having a key impact on global demand growth forecasts to highlight to shaky these forecasts are and how quickly I see them change if a few things happen in a few places at the same time...

 

[MitchJi]

Headlines for December 20, 2017 | Democracy Now!


New York Gov. Cuomo Moves to Divest Pension Funds from Fossil Fuels

And in a major victory for environmentalists fighting climate change, New York Governor Andrew Cuomo said Tuesday he’ll work with the state comptroller to divest New York’s massive public pension fund from fossil fuel companies. The so-called de-carbonization roadmap seeks to phase out investments in companies that trade in coal, oil and gas, while investing in green technologies like solar and wind. New York’s Common Fund manages over $200 billion in retirement savings for more than a million New Yorkers. It currently holds shares of more than 50 oil and gas companies, with over a billion dollars invested in ExxonMobil alone.