Shorting Oil, Hedging Tesla

[jhm]

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I really think BNEF is misleading people with this sort of analysis. This frames the discussion as being about how long we must wait for sticker price parity. But in my view, that is a lagging indicator of EV adoption. It may be critical to converting the last 5% to 10% who hold a stubborn emotional attachment to gasmobiles, but it is not critical EVs being able to capture over half of the new vehicle market. Consumers are quite willing to pay a premium for EVs, and any profit to be had in making cars depends on consumers being willing to pay a premium. Sticker price parity happens when EVs are so dominant in the market that all opportunities to earn premium on EVs have been thoroughly satisfied. So price parity is the end of the game, not the beginning or the middle of the game.

But BNEF seems to act like sticker price parity is some barrier to EVs going mainstream. It would be much better for BNEF to frame this as estimating when EVs will capture say 10% share of each of these markets. You can only get to 10% penetration once you have truly competitive products in the market. Whether these are at sticker price parity or not is a much less important question.

 

[jhm]

Oh man, this thread is from 2016. There is no way I can keep up with the Market thread and catch up with this one.
Therefore apologies in advance.
I have a question for you- what is your preferred short position? Do you short straight OIL, or certain oil related companies?

With the recent price drop and the gradual Iran restrictions, did you adjust your original positions?

I stopped shorting oil about a year ago. My original motivation was to hedge my Tesla position. So it was never about speculating on the price of oil. But I no longer think that the price of Tesla is at substantial risk from a decline in oil prices.

The discussion has become more about understanding how EVs and renewables play a role in the oil market. This is mostly a long-term role to be sure.

 

[TheTalkingMule]

Indeed. To try and predict the price of OIL as a whole is quite a tricky task.

This is the problem I've always had with conventional thought in this thread. It's shouldn't be impossible to short this peak fossil demand, or oil as a standalone industry, across a window of a few years. Coal hit a very predictable turning point in demand and all coal companies immediate went to zero. Obviously the transition from coal to gas is a LOT more fluid than fossil fuels to Tesla world, but it's clearly happening.

Do we not have faith in the market taking all these companies to zero once they realize literally every asset is stranded after 2022-26? Why should XOM or Chevron(!) be worth anything once peak oil demand is 3 years out? The Russians, Saudis and other low cost producers will pump like mad to the finish line and almost certainly undercut everyone else. So what's the confusion? The only alternative I see is these corporations purposely destabilizing oil nations to take over global production, and if that happens we're all f'ed anyway.

We've talked about "S&P minus fossil" as an investment strategy, but IMO we really need to dive into a more specific strategy. Can an investor simply remain heavy on low cost SP500 funds while using a hyper-leveraged medium horizon fossil shorting instrument as a hedge? What might that instrument be? Time's a wastin!

Also....why doesn't Elon have a hedge fund?

 

[shlokavica22]

This is the problem I've always had with conventional thought in this thread. It's shouldn't be impossible to short this peak fossil demand, or oil as a standalone industry, across a window of a few years. Coal hit a very predictable turning point in demand and all coal companies immediate went to zero. Obviously the transition from coal to gas is a LOT more fluid than fossil fuels to Tesla world, but it's clearly happening.

Do we not have faith in the market taking all these companies to zero once they realize literally every asset is stranded after 2022-26? Why should XOM or Chevron(!) be worth anything once peak oil demand is 3 years out? The Russians, Saudis and other low cost producers will pump like mad to the finish line and almost certainly undercut everyone else. So what's the confusion? The only alternative I see is these corporations purposely destabilizing oil nations to take over global production, and if that happens we're all f'ed anyway.

We've talked about "S&P minus fossil" as an investment strategy, but IMO we really need to dive into a more specific strategy. Can an investor simply remain heavy on low cost SP500 funds while using a hyper-leveraged medium horizon fossil shorting instrument as a hedge? What might that instrument be? Time's a wastin!

Also....why doesn't Elon have a hedge fund?

Obviously the demand for oil will decrease significantly, but it won't disappear completely. There are enough products based on it that will ensure some of the companies will survive. The Saudis for example already went in this direction by building big factory, ensuring they will still have demand for at least some of the oil they produce.
Some of the energy companies might be flexible enough to restructure on time and survive by shifting to green energy related activities.

My hedge for TSLA (and generally downturn in the economy) is F. I think big Automotive companies will drop before some of the big oil related companies.

 

[TheTalkingMule]

There seems to be no bottom for WTI/Brent today. At $56/$66 we're seeing the unraveling of all the Aramco IPO nonsense of the last two years.

Prices have been artificially inflated to support the idea of future Saudi production being worth something, or an IPO even being possible. US frackers piggybacked on that bullshit and now we have waaaaaay too much oil.

 

[replicant]

The discussion has become more about understanding how EVs and renewables play a role in the oil market. This is mostly a long-term role to be sure.

In a nutshell (and in my opinion), Tesla's future has finally decoupled from oil prices because EV technology and renewable energy have proven to be better propositions than their fossil fuel alternatives – not only in terms of projected costs but for many other reasons including performance, maintenance work, health & climate impact, etc.

The WTI & Brent prices can go up or down while EVs are taking over the world: it just depend on the stubbornness of the fossil fuel industry (including the investors who back them up). These guys are walking dead dinosaurs.

 

[Silent Ludicrosy]

https://m.mysanantonio.com/news/local/crime/article/Where-SAPD-found-39-skimmers-in-October-13375307.php

Another reason why gas stations are the worst.

 

[RobStark]

California is just starting up the curve. YTD, 10% of all new car sales are BEV (7%) or PHEV (3%).
A good start.

BEV(3.3%) + PHEV (2.9%) + HEV (4.0%)= 10.2%

 

[mspohr]

BEV(3.3%) + PHEV (2.9%) + HEV (4.0%)= 10.2%

Sorry, should have link to my source
EV Sales Grow to 6.2% in California, as Hybrid Sales Decline

 

[RobStark]

Sorry, should have link to my source
EV Sales Grow to 6.2% in California, as Hybrid Sales Decline

They are quoting California New Car Dealer Association.

That is where I got the screen grab.

BEV 3.3 plus PHEV 2.9 = 6.2% they are quoting. Not 10%.

Plus HEV( Hybrid Electric Vehicle) 4% = 10.2%

News – California New Car Dealers Association

 

[mspohr]

They are quoting California New Car Dealer Association.

That is where I got the screen grab.

BEV 3.3 plus PHEV 2.9 = 6.2% they are quoting. Not 10%.

Plus HEV( Hybrid Electric Vehicle) 4% = 10.2%

News – California New Car Dealers Association

Confused me. They say EV 6.2% and PHEV 2.9% which I added together. Later they say "pure EV" 3.3%.
Oh well it's still good.

 

[jhm]

However you count it, the HEV sales suck. I think compliance gamers have figured out that if they sell PHEVs and BEVs, they can get more credit per vehicle. So the number of compliance cars is shrinking. Very disappointing performance in general.

 

[jhm]

One Ecuadorian City Is Converting Its Entire Bus Fleet To Electric By March 2019 | CleanTechnica

What is striking about this story is just how fast the entire fleet is converting to electric. Their diesel fuel cost has been $8M for 2.9M gallons per year to be replaced by 20 electric buses. This works out to about 400 gallons per day per bus, or 9.5 bpd per bus. To put this into perspective Ecuador consumed 237,151 bpd oil in 2017. So this one 20-bus makeover will reduce national oil consumption by 0.08%.

Is suspect that the economics of this fleet conversion are pretty compelling. If there was not much a a cash savings to be had, I think a bus district would opt for a slower transitions, replacing buses when needed. That approach would take about 12 years to complete. One potential downside to a fast conversion is having to sell a bunch of buses all at once and facing fetching low prices on resale. It would not take very many bus districts doing a rapid fleet conversion like this to saturate the regional market for municipal diesel buses. So while a few fleets can do this, if all municipal fleets in Ecuador were to do this, there would be surplus used buses. The point that I am making is that there is an added economic cost to rapid conversion. So the savings elsewhere need to be great enough to compensate.

With the cost of diesel going up internationally and the threat of IMO maritime fuel standard looming, it actually may make sense for many countries to do rapid conversions of municipal bus fleets. Chinese bus makers have demonstrated that they can double output annually. So supplying the global market for electric buses can be done at scale.

I think things are setting up for the next few years to see a rapid transition to electric buses. I think the production capacity and economic products are there. If the price of diesel continues to climb, the transition can be swift.

 

[mspohr]

Here's an interesting take on the oil price crash. It posits that Trump fooled the Saudis into increasing production before Iran sanctions but then pulled back on the sanctions leading to the glut.
'Duped,' 'tricked' and 'snookered': Oil analysts say Trump fooled Saudis into tanking crude prices

 

[replicant]

Does anyone know what happened on May 2018?
https://trends.google.com/trends/explore?date=all&geo=US&q=cheap gas near me

I trying to find some "non-conventional" (aka dumb) indicators on people's changing of interest in oil/ICE. Help wanted

Things that are close to people's mind might provide some good extra insights in addition/compared to OPEC/IEA/Wall Street figures.

 

[renim]

I really think BNEF is misleading people with this sort of analysis. ....

i don't see that misleading is the intent, I would describe the intent is to show that differing markets and differing vehicle classes will have differing time-frames.

Japan mini car is kei car, the cost premium of an iMiEV over an i or eK, is really difficult, particularly if the iMiEV is to have a decent range.

basically 3 million vs 1.5 million

i really think the segments/market that BMW and Mercedes operate in will be far sooner disrupted by EVs than the segment/market that Suzuki and Daihatsu operate in

(Actually, I would say that in the USA, its past tense, the premium market of the 3 series/A4/C class is already changed)

 

[shlokavica22]

(Actually, I would say that in the USA, its past tense, the premium market of the 3 series/A4/C class is already changed)

That's absolutely it. The clock is ticking loudly.
TSLA are eating the high margin share, which will have a devastating effect, first on the luxury automakers, and then on the rest.
BMW's latest financial results show the impact already.
Companies trying to out-compete TSLA will not succeed. Simply because they have a lot of catching up to do and the fact that TSLA/Elon innovates with faster pace than any of them.
Companies with solid government backing and market protection (Japan?) have a better chance, along with companies working on products supplementing TSLA's line up (as the examples you pointed already).

The funny thing is that Elon is quite open about his plans. The industry people simply don't believe (or don't want to believe) him. Combination of arrogance and stupidity, considering Elon's track record.

 

[jhm]

Question, how do we know when a vehicle segment is disrupted by BEVs? What sort of marker would we like to use?

My own view is that when BEVs capture 10% of a segment, that segment is disrupted. This would typically require several compelling models to grab that much share. Plus it is significant loss of share to all other competitors in that segment.

This criterion is also independent of the question of price parity. It really depends on how BEVs are recieved by consumers in that segment. If consumers are willing to pay a premium on BEVs and buy that above 10% market share, then this just shows that segment has always been willing to pay more for compelling product, but the non-BEV offerings were just not tapping that potential to tap demand for premium products. So the segment is disrupted by BEVs priced above parity. Of course, other segments could place such a premium of ICE that BEVs must be priced well below parity to capture 10% share of that segment. It all depends on what that segment really values.

Alternative criteria?

 

[shlokavica22]

Question, how do we know when a vehicle segment is disrupted by BEVs? What sort of marker would we like to use?

I think the Model 3 showed that segments becomes blurry when the demand for EVs is much bigger than the available supply.
The sedan segment was considered "dead", but suddenly it came back to life simply because Model 3 was available in that segment.
In addition, TSLA messes the marketing strategies done by the Big Auto in the last 10 years or so. Sedan < CUV < SUV becomes Sedan < CUV < SUV < EV Sedan < EV CUV < EV SUV. When EV = Tesla as a rule of thumb.
So in reality Model 3 might capture 15% of the Sedan market, but in addition it "steals" customers, potentially going for CUV/SUV.

In addition, the units sold are less relevant, because the more desperate the ICE manufacturers become, the cheaper they are going to sell. On paper they might hold the ground in particular segment with 91% share, but it can be at the cost of 50% less gross margin. That's what really matter at that time- the bottom line.

 

[replicant]

Have you guys heard about the recent French "gilets jaunes" movement?

It's a political collective that plan to protest Macron's politics on environmental taxes with many road blockades tomorrow. The government's policy is increasingly perceived as socially unfair. It all started with the recent rise in gas prices, caused by both oil price inflation and extra taxes (said to be for the environment but little of the collected taxes will actually be used to protect the environment so many claim it's just a tax on the poor and rural poeple). Prominent figures from both sides are supporting the movement: ecologists and anti-ecolo, far-left and far-right, so it's quite a mess.

This might be a big test for the energy transition, because so far, the transition was promoted as a positive things for all ("make the planet great again", etc). With the recent political and social troubles (some would describe that as mere populism), it's more and more important make sure that the population keep supporting the policies. Just like it's important to follow what's going on in Saudi Arabia to understand how oil producers will react to the EV/renewable age (e.g gradually switching to renewables or leading scorched earth policies?), it's critical to adjust the strategy so that people don't feel left behind.

C'est pas gagné.

Edit:

- Auto translation of the French wiki article: Google Translate
- Interview of Matthieu Auzanneau, French export on oil history: Increasing taxes on gasoline without proposing a coherent alternative is to make the bed of fascism
- BrunoLatour on Twitter: "With the revolt of the French drivers against eco taxes on diesel gas, it is probably the first time the public and politicians realize that questions of ecology and questions of social justice are totally linked. After years of denying the link, the State is taken by surprise."

Edit 2:
I think it's far more important to secure Western populations' support for the transition to renewable energy, than to get oil producers to stop investing in fossil fuels. Now that the technological solution is ready (solar, batteries and EV everywhere), the main things to win is people's hearts and make sure they have the resources requires to do the switch.