Shorting Oil, Hedging Tesla

[jhm]

Of course, this means diesel is displacing residual fuel oil. So refineries have to figure out how to get rid of residual fuel oil, which means *all* refineries have to upgrade to recrack/upgrade/process the residual fuel oil (they can't just store it in tanks forever). This means the spread between refinery costs and end-user costs has to increase.


And this increase in diesel demand no good for crude oil producers, because this demand will go straight into refinery capex and opex costs to get rid of the unwanted residual fuel oil. Refineries will probably pad out their margins a bit for safety, too.

I've been predicting for a while that we'll start to get a divergence where the "crack spread" increases; prices at the pump go up while prices at the wellhead go down. For those of us who want to see the end of the petroleum age, this is of course ideal. I can see several different phenomena which would lead to this widening. Is there any good way to track whether it's happening?

Yeah, the ISO conversion puts stress on refiner prices. It is interesting that China is positioning to duck this problem by peaking diesel early. Chinese refiners will be exporting more diesel just as prices goes up. This still leaves open the question of what to do with all the excess residual oil. I have suspect countries like Saudi Arabia that still burn crude oil for power may just switch over to residual oil which would actually be cheaper per BTU. I'd love to see diesel demand fall fast enough that refiners can avoid overbuilding diesel capacity just a year or two before diesel peaks. Regardless, I still see a lot of stress here. Residual fuel oil becomes less valuable than crude while diesel becomes more expensive for end users. Gasoline may also bear more of the profit burden for the refiner. No way ISO conversion is good for growing consumer demand for refiner products.

 

[neroden]

Yeah, the ISO conversion puts stress on refiner prices. It is interesting that China is positioning to duck this problem by peaking diesel early. Chinese refiners will be exporting more diesel just as prices goes up. This still leaves open the question of what to do with all the excess residual oil. I have suspect countries like Saudi Arabia that still burn crude oil for power may just switch over to residual oil which would actually be cheaper per BTU.

You think Saudi Arabia will tolerate the clouds of sulfur dioxide over their cities? I don't think so. Crude's bad enough but bunker fuel's worse IIRC, and the last thing the shaky regime needs is people angry over *air pollution*.

It's still cheaper for Saudi Arabia to switch to solar power and batteries.

I think the residual oil will have to get reprocessed. It's straightforward to crack long chains to short chains, so it just has to be shipped to a refinery specialized in that.

 

[jbih]

Here is an interview with Bethany McLean about her book Saudi America: The Truth About Fracking and How It’s Changing the World.

Quotes:

A big part of my argument in the book is that you have to understand the finances of this as much as you have to understand the geology.

Ultimately, I think it was arrogant of me to believe that I could be able to figure it out and I don’t think I get there in the book. One thing that I learned is that everybody whose attempted to predict the direction of this thing has been wrong.

 

[neroden]

The money-eating machine which is the fracking industry is actually running out of fields to frack unprofitably. I really would have expected financing to disappear before now, but I guess a lot of suckers are ponying up to give away their money. Anyway, since all that's left is the Permian -- there are no other basins in the US where anyone will invest -- there's not much life left in this scam.

 

[mspohr]

The money-eating machine which is the fracking industry is actually running out of fields to frack unprofitably. I really would have expected financing to disappear before now, but I guess a lot of suckers are ponying up to give away their money. Anyway, since all that's left is the Permian -- there are no other basins in the US where anyone will invest -- there's not much life left in this scam.

What will be the fallout when the projects can't pay the loans? How much financial impact? Is this all really private money or are there banks with Federal guarantees?

 

[jhm]

Here is an interview with Bethany McLean about her book Saudi America: The Truth About Fracking and How It’s Changing the World.

Quotes:

Nice!

BM: Right. Maybe I’m cynical, but I also believe that if anything is going to stop fracking, it probably isn’t going to be environmental concerns. It would be because the money dries up. Maybe that’s a cynical view of the world. Not because the environment isn’t important, but as long as there’s a demand for hydrocarbons and somebody’s willing to pay to get them out of the ground, they’ll keep coming out of the ground.

I wish every environmentalist on the planet understood this. The only way to keep carbon in the ground is for fossil fuels to be worth to little to be brought up to the surface. Once you get that straight in your head, it can guide you to better actions and policies.

Regarding the unpredictability of oil markets, it is important that almost all forecasters out there have vested interest. These projections are really just the story we want to project into the world. And I say this to include myself as a forecaster with a vested interest. My hope is that renewables will undermine the value of fossil fuels, so my projections tend to show how this is possible. Understanding what sort of investment must need to be made to achieve this is also very important. What we actually invest in is the biggest determinant of the future. Had no one invested in fracking the Permian, it wouldn't be a thing. Had no one invested in Tesla, global EV sales today would be substantially lower, and we probably would have no idea how awesome a ride an EV could be.

So what are people going to invest in? Well that is influenced by how people are projecting the future. If the oil industry projects that oil prices will be really high, guess what, there's a striking chance the industry will over invest and drive the prices down, and vice versa. So the simple answer why fracking keeps losing money is that investors keep expecting it will do otherwise. The keep thinking that oil is worth more than it really is.

 

[ggies07]

Here is an interview with Bethany McLean about her book Saudi America: The Truth About Fracking and How It’s Changing the World.

Quotes:

Unless we use a WWII style of urgency and move our nation towards renewable energy....

This whole notion of striving for energy independence—which, by the way, has been a goal of every president dating back to the 1970s—is kind of a silly goal in many ways. It’s a false goal when you try to think it through.

 

[transpondster]

The money-eating machine which is the fracking industry is actually running out of fields to frack unprofitably. I really would have expected financing to disappear before now, but I guess a lot of suckers are ponying up to give away their money. Anyway, since all that's left is the Permian -- there are no other basins in the US where anyone will invest -- there's not much life left in this scam.

actually Bakken wells are best in terms of recovered oil amount, dunno about cost of drilling and producing.

 

[neroden]

What will be the fallout when the projects can't pay the loans? How much financial impact? Is this all really private money or are there banks with Federal guarantees?

It really is private money. I haven't been able to really trace it (there are so many fracking companies, looking up their finances seemed like a waste of time). I might expect a few bank failures, but it also looks like the banks have made themselves "middlemen" on most of these projects, so it'll be "investors" in various "funds" who take the big hit. I don't know who these funds have been marketing to -- I've heard they've sold their bill of goods to some pensions, so expect more pension funds to go bust, but I assume it's mostly rich idiots investing...

 

[neroden]

actually Bakken wells are best in terms of recovered oil amount, dunno about cost of drilling and producing.

Yeah, but they're played out already. The boom there is over. Done.

 

[Oil4AsphaultOnly]

California mandates 100 percent clean energy by 2045

This is awesome. I understand this basically requires CA to completely get off fossil fuels in all sectors for all practical purposes, with any residual emissions (flight, etc?) small enough to be absorbed naturally within the forests, etc., in CA.

And this is how fossil fights back (with a prominent FUD piece in Forbes): California's New 100% Green Energy Target May Do More Harm Than Good

She found Ivanpah, but didn't find Mira Loma nor the PG&E battery project.

 

[adiggs]

Had no one invested in Tesla, global EV sales today would be substantially lower, and we probably would have no idea how awesome a ride an EV could be.

I think we would still be at the end of "Who Killed the Electric Car" (I watched that today on Amazon Prime - on Prime now if you haven't seen it yet ). OMG that's a demoralizing thought. I wouldn't have had 4 years of driving the Roadster, and another year driving the X.

I'm gonna be depressed.

 

[jhm]

I think we would still be at the end of "Who Killed the Electric Car" (I watched that today on Amazon Prime - on Prime now if you haven't seen it yet ). OMG that's a demoralizing thought. I wouldn't have had 4 years of driving the Roadster, and another year driving the X.

I'm gonna be depressed.

It wasn't meant to be demoralizing or depressing. Rather our investments really do matter. It matters that Tesla exists, that we are investing in it and that we are enjoying its products. This is why there are angry hoards of devils trying to stop Tesla. They are fighting for a different future, one that remains dependent on fossil fuels. Sorry to devolve into dualism here, but this is what opposition and conflict does. We really are in conflict over what the future will be. So it matters which future we invest in.

 

[winfield100]

I think we would still be at the end of "Who Killed the Electric Car" (I watched that today on Amazon Prime - on Prime now if you haven't seen it yet ). OMG that's a demoralizing thought. I wouldn't have had 4 years of driving the Roadster, and another year driving the X.

I'm gonna be depressed.

or the "Best" EV's would be the 1974 "El Car" 36v lead sled marshmallow cube shape based on a Fiat 500 chassis with mechanical relays to change the voltage to the motor, or the 1976 48v Citi Car "cheese wedge" manufactured by Bob Beaumont both could maybe hit 50 mph,, downhill, and were deathtraps, or the 3 wheeled "Sylph"

 

[jhm]

India’s State Refiners May Hedge Oil Futures Amid Currency Rout | OilPrice.com

Oil importing in India is facing substantial currency risk, as the Indian Rupee falls 12%. Government may force refiners to hedge this risk.

This puts fuel prices at the risk of a declining domestic currency. So oil demand growth is threatened.

This also shows the wisdom of China's strategy to build up reserves and establish an oil futures market in the domestic currency. If India had access to an oil futures market denominated in the Rupee it would protect against both the change oil price denominated in US Dollars and the exchange rate between Dollars and Rupees. This can be a more direct hedge than an Dollar denominated future oil contract plus an FX contract. Also building up physical storage capacity in country is critical to hedging an oil futures markets in the domestic currency. It may be worthwhile for the Indian government to contemplate establishing such a domestic futures market.

 

[mspohr]

India’s State Refiners May Hedge Oil Futures Amid Currency Rout | OilPrice.com

Oil importing in India is facing substantial currency risk, as the Indian Rupee falls 12%. Government may force refiners to hedge this risk.

This puts fuel prices at the risk of a declining domestic currency. So oil demand growth is threatened.

This also shows the wisdom of China's strategy to build up reserves and establish an oil futures market in the domestic currency. If India had access to an oil futures market denominated in the Rupee it would protect against both the change oil price denominated in US Dollars and the exchange rate between Dollars and Rupees. This can be a more direct hedge than an Dollar denominated future oil contract plus an FX contract. Also building up physical storage capacity in country is critical to hedging an oil futures markets in the domestic currency. It may be worthwhile for the Indian government to contemplate establishing such a domestic futures market.

This could stabilize the oil price in India but isn't the point to stop using oil? I'd rather see more expensive oil with subsidies to convert transportation to electric.

 

[jhm]

This could stabilize the oil price in India but isn't the point to stop using oil? I'd rather see more expensive oil with subsidies to convert transportation to electric.

I think of it more as stabilizing the economy in India. I think a stable economy helps the transition to EVs and renewables. I favor a high price for oil too. I think a futures market would help quantify just how costly India's oil dependency is. The future prices would go up as exchange rates and oil prices threaten India. So this would give the country more visibility into just how costly oil is longer term.

 

[jhm]

US spends $81 billion a year to protect global oil supplies, report estimates

Speaking of just how costly oil is...

Factoring in in (sic.) the cost of the Iraq War, the price of protecting oil is closer to $30 per barrel, or 70 cents a gallon, over a 20-year period, a separate analysis found. SAFE said that cost is largely separate from the ongoing cost of $81 billion a year.

This nominal ongoing cost of $81B per year is $222M per day on consumption of 20 mbps crude. That is an ongoing cost of $11.1/barrel or 26.4c/gal paid for by US taxpayers.

Imagine what it could mean to the defense industry if declining demand for oil obviated the need for most of this military spending. Yet another industry for Tesla to disrupt?

 

[mspohr]

I think of it more as stabilizing the economy in India. I think a stable economy helps the transition to EVs and renewables. I favor a high price for oil too. I think a futures market would help quantify just how costly India's oil dependency is. The future prices would go up as exchange rates and oil prices threaten India. So this would give the country more visibility into just how costly oil is longer term.

Does India subsidize transport fossil fuel?

 

[mspohr]

Does India subsidize transport fossil fuel?

To respond to myself... I googled it and came up with this interesting article:
High oil price: India staring at fuel subsidy burden up to Rs 53,000 crore - ET EnergyWorld
Looks like the government does subsidize oil price but limits it to a budgeted amount. The current kerfuffle is because they are now above the budgeted amount and looking to the oil companies to make up the difference.
Of course, would be much better to apply the subsidies to electrification of transport rather than cheap oil but then there is politics of rich oil companies and keeping the peons from rioting.