Shorting Oil, Hedging Tesla

[RobStark]

We had a discussion of electric busmakers a while back on this thread.

Here in the US it is mostly BYD and Proterra but legacy busmaker New Flyer made the news with their electric bus.

Electric bus rolls over and crashes – rooftop battery pack design potentially to blame

 

[SebastianR]

Saudi Officials Worried About Oil’s Future | OilPrice.com

tl;dr: Internally SA seems quite worried that the oil bonanza is coming to an end. Their economic reforms are lagging behind and folks fear political instability in SA and the region if the price of crude goes further down.

PS: Oil is not doing sooo well these days, is it? If the current trend continues we may see the 50s again soon.

 

[ValueAnalyst]

ValueAnalyst on Twitter

$TSLA bulls who believe @Tesla will kill #oil demand any time soon need to see this graph. Note that India isn't even on the list. #OOTT

 

[ggr]

Neither is any country in Europe or Africa. What's your point?

 

[RobStark]

Unlike the US,EU,China,Japan, and South Korea India wants to be dependent on OPEC and Russia for energy forever.

I mean they get along so well with Saudi Arabia's collaborator Pakistan.

 

[dc_h]

ValueAnalyst on Twitter

$TSLA bulls who believe @Tesla will kill #oil demand any time soon need to see this graph. Note that India isn't even on the list. #OOTT

View attachment 292483

I think TAAS will be big in developing markets. The cost savings are too high. Parking alone is too expensive. TAAS is likely to be more EV than ICE. For me, understanding that 5 billion people were in line to join the middle class in the 1990’s highlighted the need to move to more efficient and cleaner technologies. Growth of middle class will keep oil demand up longer, but the processs to a middle class world can’t be completed with dirty inefficient technology. EV is a key to enabling a globally affluent society. There’ll still be poverty, but we can have a world of developed nations with cleaner, reliable and distributed renewable energy and clean transport. Of course reckless policy decisions can end that process any time. Entropy is not ordained, but avoiding it requires some occasionally enlightened leadership.

 

[ValueAnalyst]

Neither is any country in Europe or Africa. What's your point?

Oil demand in China and India, the two most populous countries that are crossing critical per-capital income levels, will multiply.

I think TAAS will be big in developing markets. The cost savings are too high. Parking alone is too expensive. TAAS is likely to be more EV than ICE. For me, understanding that 5 billion people were in line to join the middle class in the 1990’s highlighted the need to move to more efficient and cleaner technologies. Growth of middle class will keep oil demand up longer, but the processs to a middle class world can’t be completed with dirty inefficient technology. EV is a key to enabling a globally affluent society. There’ll still be poverty, but we can have a world of developed nations with cleaner, reliable and distributed renewable energy and clean transport. Of course reckless policy decisions can end that process any time. Entropy is not ordained, but avoiding it requires some occasionally enlightened leadership.

I agree with your points, but the future you laid out will require Level 5 autonomy and 30+ million annual EV production... likely after 2025.

 

[jhm]

ValueAnalyst on Twitter

$TSLA bulls who believe @Tesla will kill #oil demand any time soon need to see this graph. Note that India isn't even on the list. #OOTT

View attachment 292483

This is a non sequitur regarding Tesla and peak oil.

However, it is important to understand that countries with low motorization rates have fleets that are dominated by commercial vehicles, definitely not private passenger cars. This is why I've be so focused on commercial EVs, both buses and trucks. Tesla is, of course, looking to get into the semi truck market.

Motorization has little to do with how quickly EVs can erode oil demand, but focusing on commercial EVs will have a much bigger impact sooner than focusing on private EVs.

 

[jhm]

We had a discussion of electric busmakers a while back on this thread.

Here in the US it is mostly BYD and Proterra but legacy busmaker New Flyer made the news with their electric bus.

Electric bus rolls over and crashes – rooftop battery pack design potentially to blame

Wow, that's a pretty lame design choice.

 

[ValueAnalyst]

This is a non sequitur regarding Tesla and peak oil.

However, it is important to understand that countries with low motorization rates have fleets that are dominated by commercial vehicles, definitely not private passenger cars. This is why I've be so focused on commercial EVs, both buses and trucks. Tesla is, of course, looking to get into the semi truck market.

Motorization has little to do with how quickly EVs can erode oil demand, but focusing on commercial EVs will have a much bigger impact sooner than focusing on private EVs.

Yes, discussed that here. Thanks for pointing that out.

Tesla will, however, need to ramp annual Semi production to tens of thousands of units before it can impact oil demand... so 2021/22+

 

[jhm]

Has The World Started To Kick Its Oil Addiction? | OilPrice.com

It is really nice to see demand elasticity finally enter the discussion. We've discussed it here for quite sometime, but oil investors pretty much still assume oil demand will always be inelastic. Long before vehicle electrification and other clean technologies can displace oil in large volume, these technologies can change demand elasticity. As elasticity increases, it will become increasingly hard for supply reductions to maintain high prices for oil. Linking back to the article on Saudi Arabia, this is the more immediate and fundamental problem they face. They don't have a demand volume problem; they have a demand price problem.

 

[DurandalAI]

Yes, discussed that here. Thanks for pointing that out.

Tesla will, however, need to ramp annual Semi production to tens of thousands of units before it can impact oil demand... so 2021/22+

Right now all the savings that companies will get from electrifying their trucking fleet are theoretical. Once electrification actually starts saving these companies money not only from fuel and maintenance but from insurance thanks to the AEP features, expect orders to boom and demand to stop growing and shrink some. Traditional diesel manufacturers will have to develop improvements in MPG on their rigs, sell electric versions, or face extinction.

Honestly it will be just like how solar plus storage is now, it’s reached the price point where it is economically unwise to build any additional coal/gas power plants. Some coal plants are being converted to gas, but almost nobody is building coal plants any more. The same will happen with diesel transport in the next 5 years, where nobody will buy diesel trucks unless they have no other choice because economically it makes little sense.

 

[ValueAnalyst]

Saudi Arabia Signals Ambition for $80 Oil Price

 

[dc_h]

Saudi Arabia Signals Ambition for $80 Oil Price

I don't see how this could be sustainable, but it would raise a few questions. One, if sustained, how much higher would US production go over the next 18 months? Would this increase Tesla pricing flexibility or drive more demand? They can't really make them any faster, so not sure this matters to Tesla. The biggest question is if they get $80 a barrel, how much could that speed up peak demand? Any pricing over $60 for the next 18 months is going to create more production investment in the US and anything over $70 is going to fund a lot of new production.

 

[ggies07]

Saudi Arabia Signals Ambition for $80 Oil Price

Riyadh, which initially targeted the second half of 2018 for the listing, is now aiming for next year.

Pushed off again....

 

[ValueAnalyst]

I don't see how this could be sustainable, but it would raise a few questions.

Let me try to answer your questions.

One, if sustained, how much higher would US production go over the next 18 months?

I expect US oil production to increase by 1.2 mb/d in 2018. Combined with increases in certain other NOPEC countries, this could be enough to offset the increase in global oil demand, but there's a timing difference: Majority of US oil production increase will happen in 4Q18, while majority of global oil demand increase will happen in July. In any case, just offsetting demand jump in July will not be enough to balance the market, which is already deeply undersupplied. Expect oil prices to continue to increase throughout 2018.

Would this increase Tesla pricing flexibility or drive more demand?

Yes to both. I expect an acceleration of demand for all things Tesla throughout 2018. Model 3 will remain supply-constrained for some time, not only at $60,000 ASP in 2H18, but also throughout 2019, even after the full expiration of the Federal Tax Credit.

They can't really make them any faster, so not sure this matters to Tesla.

It does, because it allows Tesla to keep ASP at $60,000 in 2H18 and $52,000 beyond even as Standard Range enters production. Each $1/gallon increase in gasoline prices translates to additional $500 per year savings to the buyer, AND higher gasoline prices mean stronger residual values for all Tesla vehicles, AND reservations for Model Y and Semi will snowball, AND higher energy prices in general mean higher demand for solar panels, Powerwalls, solar roof, and so on. All of this is crucial for revenue growth and profitability, and therefore, valuation multiples.

The biggest question is if they get $80 a barrel, how much could that speed up peak demand?

Higher energy prices accelerate the world's transition to renewable energy, so sustained $100 per barrel would pull peak demand forward, but I do not expect oil prices to remain above $100 per barrel for long. Surging energy prices will lead to a recession, possibly by the end of 2018.

Any pricing over $60 for the next 18 months is going to create more production investment in the US and anything over $70 is going to fund a lot of new production.

Production is not just a function of price, as oil market participants found out when prices plunged from $100 to $30. Once a well is drilled and completed, it doesn't take much to pump out the oil, so it's pump at will. This led to gross misunderstanding of oil markets: It was only nine months ago when the vast majority of pundits predicted oil prices would be "capped" at $50.

 

[jhm]

I don't see how this could be sustainable, but it would raise a few questions. One, if sustained, how much higher would US production go over the next 18 months? Would this increase Tesla pricing flexibility or drive more demand? They can't really make them any faster, so not sure this matters to Tesla. The biggest question is if they get $80 a barrel, how much could that speed up peak demand? Any pricing over $60 for the next 18 months is going to create more production investment in the US and anything over $70 is going to fund a lot of new production.

Agreed. Let's review the pricing theory of peak oil.

• There is a critical demand price above which oil consumption fails to grow.
• There is a critical supply price below which oil production fails to grow.
• Growth is only sustainable at prices above the critical supply price and below the critical demand price.
• When the critical demand price falls below the critical supply price, that's the peak. Oil can only sustainably decline thereafter.

The Saudis are signaling that their critical supply price is north of $70. Perhaps only for prices above $80 would they consider increasing their production. IEA and OPEC claim that at $70 there is not sufficient deep investment to continue to increase supply for the next 3 or 4 years. So we can bracket the critical supply price in a range of $70 to $80.

The role of Tesla and other EV and hybrid makers is to increase the price elasticity of demand for oil. Translation, bringing EVs to market lowers the critical demand price. Tesla is nicely production constrained for the foreseeable future, so the impact is more aspirational. That is, Tesla is helping to change consumer perceptions and expectations in a way that will make us more willing to buy electric vehicles than to suffer high oil prices. The demand for and production of EVs from other OEMs, such as the Chevy Bolt, could easily surge if oil prices were to rise significantly. In the meantime, Tesla is certainly planting the idea of buying a BEV in the minds of consumers. So what is the critical demand price for oil? For OEDC, I believe it is under $80 as evidenced by the fact that OECD demand was actually falling in recent years while the price was over $80. The big question is non-OECD, especially China and India. Here demand growth is still largely determined by economic growth as commercial fleets dominate fuel consumption in these economies. So the rise of commercial EVs is most critical to curbing demand growth in non-OECD economies. A lot has developed in this space since oil was last in the $80 to $110 range. China alone is producing and putting into service over 100k BE Buses each year and did not have that capability just 4 years ago. No doubt if oil shot up above $80, China could bring all sorts of commercial EVs to market in very short order. China can double production annually if the incentive is there. So I'm inclined to believe that the critical demand price for China is near $80. Consequently, I think the critical price for global demand is already near $80.

Thus, on a global basis the critical demand and supply prices are just about at the crossover point, so long as Saudi Arabia and a few other producers really do need to hold out for $80. Purely as a market observer, I'd love to see Brent to stay above $80 for a few years. That way we'd be able to test demand growth at the $80 level. My hypothesis is that China's demand would fall within 2 years of oil rising above and remaining above $80. OECD demand, too, would fall. We're going to need to test such prices to really know the limits of demand growth. Also we would discover how producers respond to such high prices. If we see production wax at above $80 while consumption wanes, then we'll be headed into a brand new supply glut! The Saudis need to be careful what they wish for.

 

[jhm]

Blue Bird takes its new all-electric buses on the road to convince schools to go electric
Yay, battery electric school buses in the US! I like that these include vehicle-to-grid capability. School districts should be able to charge mid-day (while the sun shines) and provide battery services to grid while not in use (think summer peaking).

I figure that about 3 or 4 BE school buses will offset 1 barrel of diesel per day. (200 service days, 160 kWh pack, 2 daily cycles at 50% to 70% depth, 9 kWh to displace 1 gallon diesel.) Put another way, one BEB will save the school district about 4266 gallons of diesel per year, about $7k annual savings in fuel net of charging ($2.5/gal vs $0.10/kWh), not counting any benefit from selling services back to grid.

 

[justvisiting]

I have to agree with VA that any potential drops in demand from electric cars or busses are years, if not decades away. 1% of new cars does not matter for the big picture, and it will take a lot of time before that changes.
There have been nearly no investments in oil production for quite some time, and as demand keeps on rising, prices will go higher. Would not be suprised to see WTI at 80$ in June/july and stay there

 

[GleanerC]

Put another way, one BEB will save the school district about 4266 gallons of diesel per year, about $7k annual savings in fuel net of charging ($2.5/gal vs $0.10/kWh), not counting any benefit from selling services back to gr

For our local school district these fuel savings are a bit high. We’re running route busses about 60 to 90 miles per day burning 7 to 10 gallons a day average. So average annual consumption is going to be less than 2000 gallons. On the other hand commercial electric rates are just over $0.05/kWh. We have very high demand charges but these only occur between noon and 8 pm so could be entirely avoided in this situation. Some of our shorter activity trips could also be covered while longer trips would still need to use our diesel fleet at this point.

The vehicle to grid capability could be very interesting as an additional revenue stream for a school district. These busses are parked for the vast majority of the summer when they could be helping with peak loads.