Shorting Oil, Hedging Tesla

[ZachF]

Also, for those of you studying energy flow, I've found this website immensely useful:

IEA Sankey Diagram
IEA Sankey Diagram

Almost all the oil that is consumed now goes to road transportation. The second largest source of demand is as a non-energy feedstock for materials.

Final consumption figure for oil is 31,040 petajoules, that doesn't include the 316 petajoules that went to the electricity sector, 1,443 petajoules of oil industry self-use, and approximately 698 petajoules of refinery losses.

Of that 31,040 petajoules, 23,648 goes to the transport sector (20,512 to the road, 2,315 to the Air, 483 on rail, and 338 by water)

4,805 petajoules worth goes to non-energy industry (i.e. materials feedstock)

592 petajoules goes to the residential sector and 557 pj to the commercial (basically all heating where cheaper NG infrastructure is unavailable). 592 petajoules also goes to the agricultural sector.

846 petajoules goes to various industrial uses.

Oil used to be used more widely for more things, but it has generally become too expensive to be much more than transportation fuel and material feedstock. Studying these flow charts shows that 80% of the solution to decarbonizing our economy is decarbonizing electricity production, and switching transportation to electricity.

You can also see how massively inefficient the little ICE engines are. A gallon of gas has 38 kilowatt hours of thermal energy, that means a car that gets 28 mpg (basically an ICE car comparable to a M3) is using 1.36kwh of thermal power per mile. The Model 3 uses about 0.25kwh of electricity per mile, basically more than 5x the energy. Per the final consumption chart, the US uses 20,512 petajoules of oil, so replacing this with electricity would need around ~4,000 petajoules of electricity. Ironically enough, if you were to use oil-powered combined cycle gas turbines (>50% thermodynamic efficiency) to power the EVs, you would cut our road transportation oil consumption by half!

 

[traxila]

Also, for those of you studying energy flow, I've found this website immensely useful:

IEA Sankey Diagram
IEA Sankey Diagram

Almost all the oil that is consumed now goes to road transportation. The second largest source of demand is as a non-energy feedstock for materials.

Final consumption figure for oil is 31,040 petajoules, that doesn't include the 316 petajoules that went to the electricity sector, 1,443 petajoules of oil industry self-use, and approximately 698 petajoules of refinery losses.

Of that 31,040 petajoules, 23,648 goes to the transport sector (20,512 to the road, 2,315 to the Air, 483 on rail, and 338 by water)

4,805 petajoules worth goes to non-energy industry (i.e. materials feedstock)

592 petajoules goes to the residential sector and 557 pj to the commercial (basically all heating where cheaper NG infrastructure is unavailable). 592 petajoules also goes to the agricultural sector.

846 petajoules goes to various industrial uses.

Oil used to be used more widely for more things, but it has generally become too expensive to be much more than transportation fuel and material feedstock. Studying these flow charts shows that 80% of the solution to decarbonizing our economy is decarbonizing electricity production, and switching transportation to electricity.

You can also see how massively inefficient the little ICE engines are. A gallon of gas has 38 kilowatt hours of thermal energy, that means a car that gets 28 mpg (basically an ICE car comparable to a M3) is using 1.36kwh of thermal power per mile. The Model 3 uses about 0.25kwh of electricity per mile, basically more than 5x the energy. Per the final consumption chart, the US uses 20,512 petajoules of oil, so replacing this with electricity would need around ~4,000 petajoules of electricity. Ironically enough, if you were to use oil-powered combined cycle gas turbines (>50% thermodynamic efficiency) to power the EVs, you would cut our oil consumption by half!

Wow that last sentence is a doozy. Interesting stuff.

 

[ZachF]

Also note, that site I provided has energy flows for most countries, and the data goes all the way back to 1973.

 

[ZachF]

Wow that last sentence is a doozy. Interesting stuff.

It really is amazing how inefficient the modern ICE powerplant is. You really only average <20% thermodynamic effiency in terms of heat>forward movement, and of course if you aren't a hybrid you can't recapture any energy from deceleration.

Even if we were just to use NG power plants until we could get renewable capacity up and running, that still reduces carbon emissions by like a factor of 3-4.

 

[Fact Checking]

MODERATOR NOTE: This excellent and potentially quite useful post has been moved from a middle-of-the-night location in the "Market Action" thread to here where it presumably has better visibility, and definitely will be viewed by a more focused audience.

Oil is going down because deflationary pressures are taking hold due to rising interest rates. If the Fed pauses on its rate increase strategy, oil will pop back up and follow normal supply and demand.

I believe it's more nuanced than that. As @Artful Dodger pointed it out too, the price of crude oil also depends on supply and demand, obviously. Here's the universe of major forces setting the price of crude oil:

• Real supply: crude oil storage space (tanks, tankers, mines, etc.) running full or empty causes the price to decreases/increase.
  
• Perceived future supply: oil producing countries announcing quotas and setting future oil production timetables will set the price of oil. This is also why the risk of wars will have a disproportionate effect on crude oil prices, it can impact both the production and the transportation of crude oil.
  
• Real demand: largely a function of economic activity, use of crude oil is higher when the economy does well and lower when it does poorly. There's also seasonal fluctuations: most of the population is on the northern hemisphere and crude oil consumption is higher at the ... end of the summer. A lot of traveling and a lot of construction work going on. Now multiply this to a global picture of a dozen major economies and it gets complex pretty quick.
  
• Perceived future demand: growth/recession expectations will set the price of oil as well.
• The strength of the dollar: only 30% of the world economy functions on an USD basis, but near 100% of commodity trading is priced in the USD. This means that the price of commodities is ~70% coupled to the strength of the dollar. This is why the Fed increasing interest rates and strengthening the dollar will numerically drop the price of oil when measured in USD. When measured in a universally stable currency (which unfortunately doesn't exist) the price of oil would not change nearly as much. Also note that there are indirect price channels: the Fed has the power to cause recessions, and the consensus of major economists is that 6 out of the past 4 recessions were caused by the Fed. Since recessions decrease immediate demand for oil, rising rates are lowering oil price pressure as well.
  
• Speculation: the commodity market of crude oil is financialized to ridiculous degrees due to its value and historic volatility, and it's a (black) gold mine for speculation. The level of speculation is also influenced by general economic conditions: there's less of it in recessions (primarily because most speculators' trading power tanks), and there's a lot of it during boom phases of the U.S. economy - which phase we are in right now. One particularly noteworthy episode was the beginning of 2008: decreasing interest rates weakened the dollar and made treasury bonds drop in prices, a correction in equities made money flow out of equities, and the U.S. housing market started dropping after a historic bubble. By process of elimination there was no other major target for speculative funds to flow but commodities, and we did get a historic oil and commodities bubble in 2008 that was entirely detached from any realistic supply/demand forces. This phenomenon of oil peaking was mostly unrelated to the great financial crisis of 2008 though - it was a correlation not causation.
• (Note that the various long term factors @neroden pointed out in his recent excellent article about the upcoming crash in the ~100 trillion dollar worth of fossil fuel corporate and mineral assets values are comparatively 'long term' processes that take years to realize, with a very visible 'crash' phase that will be short and televised. Today these effects probably don't have immediate effects on the price of oil which is mainly set by the above forces - but very likely there's already a material change in investor sentiment towards future fossil fuel investments and corporate valuations.)

Reality is (much) more complex, but those are some of the major factors.

The current weakness in oil prices is due to the mix of the above forces:

• real supply is healthy, bordering on 'oversupply', which lowers price pressure.
• perceived supply is not troubled right now - no sabre rattling in the Gulf for example. Lowers price pressure.
  
• real demand is healthy, due to good growth in all the major economic regions, but not exceptional. Slight increase to price pressure.
  
• perceived future demand is neutral to pessimistic - there's recession, trade/China and BRExit worries. Lowers future price pressure.
  
• the strength of the dollar is increasing with rate increases - this (unlike in 2008 when rates were dropping) lowers price pressure.
• speculation levels: bonds are increasing due to the fed rate increase, equities are neutral to a bit pessimistic due to tech-correction and recession worries, but the housing marked in the U.S. is still growing and has several years of space to grow before it gets into any 'bubble' territory. This lowers price pressure.

(Disclaimer: this is just a quick summary from memory which might be wrong - do your due diligence before believing me.)

I.e. out of the ~6 major factors that influence oil prices 5 are indicating lower prices - which explains recent drops in the price of oil. (As a comparison in early 2008 all 6 of these factors pointed towards higher oil prices, which drove a truly historic oil bubble.)

[ Of course to successfully trade on this you not only have to be correct about the balance of these forces (which my quick summary might not be), but you have to be on the right side of the trade relative to other speculators' expectations - which is a 7th, decisive force. You can be fully correct yet lose money: if too many bets were already made in favor of the outcome that is going to occur then the bet inverses, or if market expectations are just about right then there's no money to be made on betting on that outcome. This is why shorting shorts who have an over-sized media presence can be very profitable, but I digress. ]

 

[neroden]

2 years of sub $60 oil was enough to drop Saudi Arabia's forex reserves from $750 billion to <$500 billion.

(Chart is in Saudi Riyals, which is tied to the dollar at 3.75 = 1)

Another prolonged bout of <$60 oil would probably force SA to de-peg their currency and undergo austerity measures.

It's really hard to believe just how dependent SA is on oil.

Interesting. So 2 years burned about $250 billion in forex. That means they could theoretically manage four years of low oil prices before they ran out of forex and had to devalue the currency.

The big question is how much of the Saudi government budget is spent on imports. Probably a lot. If the government budget (used to keep the people pacified) is spent primarily local stuff, they can keep paying for it in Saudi riyals after devaluing the currency, but if they're importing everything, they basically have to pay for it in hard currency... which they won't have. Then the government gets overthrown by civil unrest.

 

[neroden]

Also, for those of you studying energy flow, I've found this website immensely useful:

IEA Sankey Diagram
IEA Sankey Diagram

Almost all the oil that is consumed now goes to road transportation. The second largest source of demand is as a non-energy feedstock for materials.

About 637 + 8 = 645 Mtoe per year of oil and "oil products" is used in the entrie world for non-energy feedstock. This amounts to 4607142857 barrels per year or 12,622,309 barrels per day. It's declining as natural gas is a preferred and cheaper chemical feedstock. 12 million barrels per day. With current crude oil demand being about 100 million barrels per day, mostly for road transportation, cutting demand down to a mere 12% of what it is now will bankrupt nearly every oil company out there.

It can't happen fast enough. We need to replace the cars on the road with EVs as fast as we can. That said, Tesla is trying to accelerate the transition. May they ramp up production faster... I'm happy to invest more capital in the cause if they can actually convert it into higher car deliveries.

Per the final consumption chart, the US uses 20,512 petajoules of oil, so replacing this with electricity would need around ~4,000 petajoules of electricity. Ironically enough, if you were to use oil-powered combined cycle gas turbines (>50% thermodynamic efficiency) to power the EVs, you would cut our road transportation oil consumption by half!

Yeah, small gasoline engines are outrageously inefficient.

 

[jhm]

Interesting. So 2 years burned about $250 billion in forex. That means they could theoretically manage four years of low oil prices before they ran out of forex and had to devalue the currency.

The big question is how much of the Saudi government budget is spent on imports. Probably a lot. If the government budget (used to keep the people pacified) is spent primarily local stuff, they can keep paying for it in Saudi riyals after devaluing the currency, but if they're importing everything, they basically have to pay for it in hard currency... which they won't have. Then the government gets overthrown by civil unrest.

Plunging Oil Prices Weigh On Saudi Bonds | OilPrice.com

It seems that Saudi debt ought to factor into this as well.

 

[neroden]

Oh, boy. Most of Saudi Arabia's bonds are riyal-dominated, but I just Googled and found out they've been issuing dollar-denominated bonds since 2016. The quantity of dollar-denominated bonds seems hard to find, but that's poison. Issuing bonds in someone else's currency is a really good way to get in financial trouble...

$17.5 billion in the first (2016) bond series, not clear how much more they've issued in dollar-denominated bonds since then.

Although... all of Saudi Arabia's "bonds" appear to be Shariah-compliant sukuk, so it's not really borrowing, it's equity interests. In a company whose only income is a stream of lease payments. Legally, this makes it easy for them to default.

I wouldn't touch this stuff with a ten-foot pole. People think they're bonds, but they're more like preferred stock. They're actually equity interests in holding companies *with a cap on the profit share*. If the holding company profits drop below the level necessary to pay the sukuk "interest" (more like dividend) payments, the payments are simply suspended, and the sukuk holders have no recourse.

 

[jhm]

Oh, boy. Most of Saudi Arabia's bonds are riyal-dominated, but I just Googled and found out they've been issuing dollar-denominated bonds since 2016. The quantity of dollar-denominated bonds seems hard to find, but that's poison. Issuing bonds in someone else's currency is a really good way to get in financial trouble...

$17.5 billion in the first (2016) bond series, not clear how much more they've issued in dollar-denominated bonds since then.

Although... all of Saudi Arabia's "bonds" appear to be Shariah-compliant sukuk, so it's not really borrowing, it's equity interests. In a company whose only income is a stream of lease payments. Legally, this makes it easy for them to default.

I wouldn't touch this stuff with a ten-foot pole. People think they're bonds, but they're more like preferred stock. They're actually equity interests in holding companies *with a cap on the profit share*. If the holding company profits drop below the level necessary to pay the sukuk "interest" (more like dividend) payments, the payments are simply suspended, and the sukuk holders have no recourse.

I'm not familiar with shariah financing. It seems that even debt denominated in riyal puts pressure on the exchange rate. The risk premia includes the risk that the riyal loses value. So the regime is under pressure to hold a peg to the dollar to stabilize the value of debt. In essence the pegged exchange rate is an assurance more or less that holders of riyal denominated debt will be able to convert payments into predetermined USD. If this assurance breaks down, then they may be forced to issue debt in dollars. So that move may be a sign that the regime cannot sustain the peg for long.

The scary thing about pegged currencies is that they show little sign of movement until things abruptly break down. This would be a seismic event for the global oil market.

 

[TheTalkingMule]

Language in the press was more neutral than negative of course, but the recent effort to have Aramco "buy" the downstream chemicals business off the PIF failed essentially because global banks wouldn't throw in ~$30B.

Think about that for a minute. Banks just shot down a Saudi request for credit for the first time since the Flyers last won the Stanley Cup. That's been a long time.

 

[neroden]

I'm not familiar with shariah financing.

Lending money at interest is prohibited under Shariah law.

(BTW, this is uncontroversial, and agreed by all different branches of Islam. This is unlike a lot of so-called "shariah law" where the Indonesian clerics disagree with the Saudi clerics. The Saudi version of shariah is considered heretical by most Islamic legal scholars. But they agree that there's a prohibition on lending money at interest.)

But joint investments in a business are just fine under shariah law. So "Islamic bonds" (sukuk) *have* to be structured as equity where the sukuk holder takes a risk of loss. They're just really bad equity where the sukuk holder has their profits capped. Which is why I said they're like preferred stock. They are almost exactly like redeemable preferred stock, actually.

It's not so much different from the position of junk bondholders, but the company doesn't have to go through bankruptcy to stop paying them and convert their position to "we pay you if we ever get any money" equity.

It seems that even debt denominated in riyal puts pressure on the exchange rate. The risk premia includes the risk that the riyal loses value. So the regime is under pressure to hold a peg to the dollar to stabilize the value of debt. In essence the pegged exchange rate is an assurance more or less that holders of riyal denominated debt will be able to convert payments into predetermined USD. If this assurance breaks down, then they may be forced to issue debt in dollars. So that move may be a sign that the regime cannot sustain the peg for long.

The scary thing about pegged currencies is that they show little sign of movement until things abruptly break down. This would be a seismic event for the global oil market.

This is very true.

Now consider the risk of sukuk default...

...one threatened default froze the entire Islamic financing market a few years back. I think Saudi Arabia will do whatever it can to avoid a default, but if they get forced into one, it will cause a world financial crisis.

Dropping oil prices put them in a bind: they can
(1) cut subsidies to their residents, risking unrest and rebellion
(2) browbeat rich people to donate money to the government (as the Crown Prince already did)
(3) lever up by borrowing even more money, putting off the crisis and making the problems worse later
(4) default on the sukuk, causing an international financial crisis
(5) devalue the riyal, causing a crash in living standards, anger among foreign sukuk investors, but possibly the safest option actually
(6) raise domestic taxes, risking unrest and rebellion

 

[jhm]

Plunging Oil Prices Weigh On Saudi Bonds | OilPrice.com

It seems that Saudi debt ought to factor into this as well.

The administration’s willingness to overlook human rights abuses—even the murder of a U.S. citizen—seems to be the latest twist in a tacit deal between Washington and Riyadh where the former is expected to eliminate or reduce Iran’s oil export revenue while the latter continues stabilizing prices in its traditional role as a swing producer. Nobody at this point expects oil prices to collapse to 2014 levels, so that provides a nice floor for investors.

The latest development, therefore, offers a good entry point for bargain hunters who are hoping that Saudi bonds will not continue dropping once they build positions.

So here is the basic pitch for buying Saudi bonds. DJT and MbS have some plot that leads to the US sanctioning Iranian oil out of the market while Saudis go back to swing producer role. Ok, sure. But the assumption in bold indicates just how loaded this conjecture is. "Nobody expects oil prices to collapse to 2014 levels..." I think this was true in 2013 as well.

Ultimately the price of oil is the backstop for a Saudi debt crisis. That must be true, but the question is, how shabby is this floor? If you want a peice of that $5B debt due in 2028, you have to reckon with just how low can the price of oil go over the next 9 years. You start to get a feel for the sort of pressure that would lead to the death of a journalist. A loss of confidence in Riyadh could cause this all to unravel very fast.

 

[thx1139]

When does the amount of EV's on the road catch enough attention for business media to mention the effect on Oil prices? If this has already discussed can someone point me in a direction to take a look.

 

[dc_h]

So here is the basic pitch for buying Saudi bonds. DJT and MbS have some plot that leads to the US sanctioning Iranian oil out of the market while Saudis go back to swing producer role. Ok, sure. But the assumption in bold indicates just how loaded this conjecture is. "Nobody expects oil prices to collapse to 2014 levels..." I think this was true in 2013 as well.

Ultimately the price of oil is the backstop for a Saudi debt crisis. That must be true, but the question is, how shabby is this floor? If you want a peice of that $5B debt due in 2028, you have to reckon with just how low can the price of oil go over the next 9 years. You start to get a feel for the sort of pressure that would lead to the death of a journalist. A loss of confidence in Riyadh could cause this all to unravel very fast.

Ironically DJT is talking SA into default on their debt. He should be a fan of lower oil prices, but not LOW prices. If the US is producing much more oil, it will push oil below $50, and if SA loses more than 100 billion a year in their trust fund, they will start presenting default when they go below 300 billion. They will be forced to pull out of their big foreign investments in the west's financial sector and will not be able to afford to fund their proxies. With Iran's more complex economy, they have been better able to withstand sanctions and lower oil prices. If the trust falls much lower, can the regime maintain public support while slashing public subsidies?

 

[jhm]

When does the amount of EV's on the road catch enough attention for business media to mention the effect on Oil prices? If this has already discussed can someone point me in a direction to take a look.

Bloomberg has started to report on this. They are tracking fuel displacement from the EV fleet. Setting up metrics like this is good start. Eventually, they can update this every quarter and generate news about how quickly oil is being displaced. Also I think the IEA is starting to track this too. Eventually there will be milestone reporting like "EV fuel displacement rises as fast as oil demand" (half the market growth) and "EV fuel displacement rises as oil demand falls" (peak demand).

Electric Buses Are Hurting the Oil Industry
Notice here just how substantial the impact of electric buses are relative to private passenger EVs. Of the 279 kbpd displaced, 86% of the displacement was diesel. Thus EVs are displacing 6.14 times as many barrels diesel as barrels gasoline. This was the story, and we had anticipated this about a year before BNEF figured it out.

And this will be the story. Heavy electric vehicles will dominate fuel displacement for quite a while. This is why I am so eager to see Tesla come out with the Semi in quantity. Those puppies can knock out 1 to 4 bpd of diesel demand per truck! So the brewing story is that diesel prices rise imperiling the global economy. Then out of nowhere electric semis are coming save the day. The price of diesel plummets. I think this will be the essential story arc that forces media and analysts to watch carefully the impact of EVs on the fuel markets. BNEF will likely update their EV fuel displacement article by April of 2019. If this coincides with a high diesel fuel price, the article will have a big impact.

 

[jhm]

Ironically DJT is talking SA into default on their debt. He should be a fan of lower oil prices, but not LOW prices. If the US is producing much more oil, it will push oil below $50, and if SA loses more than 100 billion a year in their trust fund, they will start presenting default when they go below 300 billion. They will be forced to pull out of their big foreign investments in the west's financial sector and will not be able to afford to fund their proxies. With Iran's more complex economy, they have been better able to withstand sanctions and lower oil prices. If the trust falls much lower, can the regime maintain public support while slashing public subsidies?

I get the feeling that DJT's tweet about taking prices lower is a misdirection. Prices are going lower in any case, and DJT can take credit for this this if he wants. But his friends in SA and R definitely do not want lower oil prices, nor do they want loss of confidence. So the DJT thing just misdirects from what is really tanking oil prices. They can maintain the illusion that the price of oil is within control as US sanctions Iran and Saudis swing oil. Seemingly, the only thing standing in the way of this are the inscrutable antics of DJT. So you have a set up where oil investors can sustain faith in an oil market that is falling apart; distraction and plausible deniability are key to suspending judgment.

Another puzzlement here is that the US is the largest producer of oil, so there are a lot of domestic supporters who really don't want lower oil prices either. Nothing seems to add up, except really hollow spin.

So I don't think DJT is actually pushing SA into default. He is but a smokescreen for the real driving forces at work.

 

[jhm]

Even for feedstock use of crude oil extracting sulfur has significant process costs.

According to this study that uses pyrolysis (oxygen poor heating) to make bio crude, it's a simple technology that is break even with U.K. crude oil at relatively modest scales already.

The cost structure of bio crude is about 33% electricity and 66% biomass - both of which would further improve with scale and with time. If it drops below $10-20 per barrel it will price out even the cheapest mineral crude oil.

So Tesla's EV revolution might diminish mineral crude oil extraction very significantly.

@Fact Checking @KarenRei I think this discuss belongs more appropriately in this thread.

The point of producing bio-oil in this report seems to be to supply distillates. It may be good to fix kerosene jet fuel in our minds at worthy long-term target. In the process bio-gas and electricity is consumed. The bio-gas is derived from the bio-mass. It may not be optimal to consume this gas in this process.

I think the economics of this process need to reworked from the perspective of making use of surplus renewable electricity. That is, I'd like to see a hybrid system that can generate heat from cheap grid power or from bio-gas. In the large context, we are investigating the use of electrolyzers to produce hydrogen or other gases from electricity. The motivation here is to export surplus renewable power out of the power market and into gas markets. This is critical for seasonal balancing of the grid and for having a renewable source for industrial gases.

So getting back to fast pyrolysis for bio-oil, there seem to be opportunities to trade off cheap electricity for a supply of renewable gas while transforming bio-mass into a valuable fuel like jet. This would be particularly advantageous if the system is designed to switch between sourcing power for heat when power is cheaper than gas and sourcing bio-gas for heat when power is more expensive than gas. This switching ability means that it is always source heat at lowest cost from minute to minute. Moreover, the switching would depend mostly on the electricity market. Whenever the grid is well supplied with solar or wind power, the price of power will drop on the grid. Thus we need industrial processes that can make opportunistic use of low grid prices. This will put a floor on the price that renewables can fetch and so enhance the economic viability of building out more wind and solar than the power market might otherwise be able to consume. Thus switching heat sources can help balance the grid, especially seasonally. But I also suspect that this would also make better use of the bio-mass in the first place and minimize carbon emissions. Simply put, when bio-gas is burn for heat while surplus renewable electricity struggles to find a buyer, this implies a wasteful emission of carbon, even if its source is renewable. By selling this bio-gas, we can see that it gets used for a higher value purpose, like providing a winter supply of heat or as petrochem feed-stock. The bio-char output of this process does create the possibility to produce negative emissions, but to really make this effective I think we need to make sure that all the carbon emissions are serving the highest use possible.

 

[AudubonB]

Moderator: If you're just joining in, there has been placed into this thread a post from another location; given how TMC works it goes into the time slot where it first appears; please refer back to post # 4505; on this same page if your browser acts similarly to mine.

 

[roblab]

Yeah, small gasoline engines are outrageously inefficient.

As compared to what? Large gasoline engines? Electric motors? Windmills? Hydro?

Hondas are a lot better than the '58 Buick, I'll tell you that.