Shorting Oil, Hedging Tesla

[adiggs]

Glass bottles do not have to be single use

Clearly. And that's a benefit that we all want.

And those 2nd and later uses of glass bottles aren't "free". For the particularly heavyweight milk (etc..) glass bottles, the bottles have to be collected and transported back to their provider, who then washes them, discards (recycles) the ones that have chips etc.. that make them un-reusable, and then reuses them. The return, washing, and inspection is (presumably) much cheaper than buying brand new bottles for each use but it isn't free by any stretch.


Which is orthogonal to the point I'm trying to get at. I can identify two features beyond cost for why plastic is desirable over plastic. This isn't an argument in favor of sticking with plastic - the point is that these other features delta from glass needs to be minimized as well for glass to start substituting in large volumes for plastic.

1) plastic weighs (a lot) less than glass. That's the point above.
2) plastic deforms and breaks in a friendly way compared to glass (glass turns into sharp pieces when it breaks, and doesn't deform in friendly ways).


A washable glass bottle that didn't break (maybe it shatters the way that safety glass shatters, and only with great difficulty at that), that weighed the same as plastic - that'd be an awesome invention if it could be manufactured in something like comparable cost as plastic bottles. Or have a lifetime cost that was something close to all of the plastic bottles that wouldn't be made.

Then the substitution would be easy.

Without that equivalent technology, the alternative is for the stuff we buy to cost a lot more, so that its packaging can be a lot more expensive. Everything else being equal, "more expensive" is not a path to broad adoption.

Changing fossil fuel economics that results in plastic being more expensive - that sound great to me as a vehicle for making glass more competitive.

(For me and my family, we broadly choose glass packaging over plastic as we find that glass packaging is non-reactive compared to plastic. Stuff in glass bottles tastes better than stuff out of plastic bottles. And we pay for that privilege).

 

[ggies07]

I poured myself some orange juice this morning. I finished off the beautiful plastic bottle. Before throwing it into the recycle bin, I thought, why is this bottle plastic, and not glass?

The obvious guess is that plastic must be cheaper than glass. At least, glass and plastic must be near parity in cost if plastic were not substantially cheaper.

But why would plastic be cheaper? Ultimately this is rooted in the price of crude and the price of other products made from crude. As gas and diesel go into decline, they will contribute less to refiners profits. Moreover, refiners will have to upgrade their processing and perhaps incur elevated operating costs to produce a mix of products richer in plasticizers and other petrochem feedstock. So plastic will have to contribute more revenue to cover the cost of crude and elevated refiner costs. Thus, the displacement of demand for motor fuels can lead to higher prices for plastic and petrochem.

This takes us back to the question of glass or plastic for decanting my morning orange juice. I'd be just as happy to use a glass bottle. If plastic weren't so darn cheap, there would be much more glass bottles on market shelves.

So the growth in demand for plastic is partly an illusion of supportive petroleum economics. It would be harder for this demand to grow if plastic became more expensive than glass for something as simple as a bottle of orange juice. So it seems unlikely that plastic can emerge as a reliable growth engine for crude. Take away the favorable economics when demand for motor fuels were high, and it is not so clear that demand for plastic should continue to grow.

Additionally, as the price of plastics and other petrochem goes up, crude as a source of petrochem must compete more with natural gas, recycling and renewable sources. If deriving more plastic per barrel of crude were competitive to these alternatives, refiners would have already moved product mixes in this direction. Instead what we see is natural gas adding to the supply of plasticizers and othe petrochems. So it must be marginally cheaper to supply from natural gas than from shifting the refining mix of crude. Of course, natural gas is ridiculously cheap as byproduct of drilling for oil, so it's complicated. But this just illustrates that as demand for motor fuels declines the cost of plastic will go up, both as derived from crude and natural gas. So ultimately, it becomes a contest between fossil extraction and renewables. In the category of renewable materials, I would include glass and metals which are robust under recycling. All plastics degrade chemically as they recycle, though there certainly is value in doing so. As demand for oil and gas as an energy source declines, I expect the cost of fossil derived plastic to increase. Renewable plastic and renewable alternatives to plastic will increase in value and use.

I just don't see how fossil sourced plastic will continue to grow for more than just a couple years past peak production of crude. I can totally see why oil majors are eager to get into that business, but it does not appear to be a longterm growth opportunity.

I see your reasoning and I like it. Two questions though -

1) will the consumer ever be able to feel the price difference coming from these huge oil companies, meaning they would just absorb the cost?
2) Exxon and some of the other companies are already switching over to renewables for their daily work habits - could they add solar panels and storage to the facilities and still make their long term expenses doable with fossil plastics?

 

[mspohr]

Good article in Forbes. China is world leader in renewables. Renewables will present challenges to oil economies.

China Is Set To Become The World's Renewable Energy Superpower, According To New Report

The report argues that the geopolitical and socio-economic consequences of the rapid growth of renewable energy could be as profound as those which accompanied the shift from biomass to fossil fuels two centuries ago. The changes are likely to include the emergence of new energy leaders around the world, changing patterns of trade and the development of new alliances. It could also spark instability in some countries which have grown dependent on oil and gas revenues.
“The renewables revolution enhances the global leadership of China, reduces the influence of fossil fuel exporters and brings energy independence to countries around the world,” said Grimsson, speaking at the launch of the report. “The transformation of energy brings big power shifts.”

A New World – The Geopolitics of the Energy Transformation

 

[winfield100]

Good article in Forbes. China is world leader in renewables. Renewables will present challenges to oil economies.

China Is Set To Become The World's Renewable Energy Superpower, According To New Report

The report argues that the geopolitical and socio-economic consequences of the rapid growth of renewable energy could be as profound as those which accompanied the shift from biomass to fossil fuels two centuries ago. The changes are likely to include the emergence of new energy leaders around the world, changing patterns of trade and the development of new alliances. It could also spark instability in some countries which have grown dependent on oil and gas revenues.
“The renewables revolution enhances the global leadership of China, reduces the influence of fossil fuel exporters and brings energy independence to countries around the world,” said Grimsson, speaking at the launch of the report. “The transformation of energy brings big power shifts.”

A New World – The Geopolitics of the Energy Transformation

I have posted this before, but
North America 2017 81.7 Terawatt hours PV
Europe 124.1 TWH, but growth seems slowing
China 108.2 TWH
All of Asia, including China 216.1 TWH
Their growth is accelerating

 

[jhm]

I see your reasoning and I like it. Two questions though -

1) will the consumer ever be able to feel the price difference coming from these huge oil companies, meaning they would just absorb the cost?
2) Exxon and some of the other companies are already switching over to renewables for their daily work habits - could they add solar panels and storage to the facilities and still make their long term expenses doable with fossil plastics?

In both questions, it is the market that sets the price, not really the cost to produce. Producers of commodities are essentially price takers.

So in question 1, I don't think that consumers will be able to feel the difference. That is, they won't be able to discriminate the subtle influence on price due to shift in product mix from the much more volatile price swings that the market ordinarily produces. But where this product shift is more keenly felt is by the refiners. The price differentials need to be big enough that it motivates refiners to spend billions on equipment upgrades need to shift the product mix. It also can change which product is the marginal product, which specific product motivates the refiner to increase or decrease the amount of crude they produce. Right now that marginal product seems to be diesel as the inventory is tighter and price higher for diesel than for gasoline. In a market where demand is falling for both diesel and gasoline, petrochems could become the new marginal product. Thus demand for crude is mostly driven by demand for petrochems. This also means that gasoline and diesel will generally become relatively cheap. Consumers may respond to that: cheaper motor fuel could slow uptake of EVs, which is why sticker price parity could eventually become an important issue. But I think EV sticker price parity will come before peak demand, so I don't see this as a big worry. There is a third party to be concerned about: manufacturers who have a choice of plastic versus glass or other alternatives. The company that put my orange juice in a plastic bottle may be subject to high enough volume that they care about saving a fraction of a cent per bottle. Retail consumers may not feel this price difference, but producers and distributers can be moved by it.

Regarding 2, I would certainly hope that the oil industry makes as much use of renewable energy as they can for operating their business. Indeed lots of companies require substantial heat for processing, we need them to transition from fossil generated heat to renewable energy solutions. Refiners will self-consume gases for heat to run the refining process. I'm not sure how economical you get them to switch over renewable energy for heat. I doubt that it would save them anything. There are distribution costs associated with selling the process gas and the market prices are quite low. So self-consumption on site is probably the most economical use anywhere. So it may be that killing demand for refinery products is the only way to route out this self-consumption of process gases. So certainly there are other areas where oil and gas companies can make economical use of renewables, but industrial heat will be a tough nut to crack. I doubt that the saving will be high enough to make much of a difference in the viability of oil-derived plastics.

At some point in this game fossils are competing with biomass as feedstock for petrochem. For example you can take agricultural waste and pyrolyze it to make pretty much anything you might make from crude, natural gas, or coal. The big economic problem here is that demand is much greater then what organic waste streams can produce. Ideally we need to get demand for all petroleum products so low that biomass waste streams can supply what is needed. Can we get to a point where gathering biomass waste is cheaper than extracting fossils?

 

[jhm]

Good article in Forbes. China is world leader in renewables. Renewables will present challenges to oil economies.

China Is Set To Become The World's Renewable Energy Superpower, According To New Report

The report argues that the geopolitical and socio-economic consequences of the rapid growth of renewable energy could be as profound as those which accompanied the shift from biomass to fossil fuels two centuries ago. The changes are likely to include the emergence of new energy leaders around the world, changing patterns of trade and the development of new alliances. It could also spark instability in some countries which have grown dependent on oil and gas revenues.
“The renewables revolution enhances the global leadership of China, reduces the influence of fossil fuel exporters and brings energy independence to countries around the world,” said Grimsson, speaking at the launch of the report. “The transformation of energy brings big power shifts.”

A New World – The Geopolitics of the Energy Transformation

Nice. Obviously, they've been following our thread closely.

 

[Silent Ludicrosy]

Are there any ETFs that track all the S&P 500 companies minus oil & coal?

 

[jhm]

Are there any ETFs that track all the S&P 500 companies minus oil & coal?

SPYX

 

[jhm]

Why the stock market is obsessed with oil prices

Well, to get back to the original topic of this thread, traders are looking to oil futures for a magic ball into macro worries. If a correlation reasserts itself between crude and stocks, this could be worrisome for Tesla longs. The dip around Christmas in Tesla's stock connects with this narrative. Worrisome that the likes of CNBC and Cramer are pushing such a narrative.

 

[Silent Ludicrosy]

Italy to block oil and gas exploration permits | Reuters
Italy is doing them a favor in the long run.

SPYX

Thanks!

 

[jhm]

Chart for the day

It looks to me that for most of the last two years SPY has been more correlated with OIL than TSLA. Actually, TSLA looks negatively correlated with OIL. That is, so long as Brent is over about $60/b. When Brent fell below $60 last month, it may have struck enough fear about the general economy so as to imperil TSLA stock price.

There may be some logic to the idea that when the price of oil is high, TSLA will tend to have negative correlation to it, but when oil is cheap, the correlation flips to positive.

I also suspect that oil market could be reacting to Tesla. That is when Tesla is look strong, positive Tesla sentiment, this can raise worries in the oil market about sustainability of oil demand. Conversely, as TSLA is getting beaten down, this can bolster bullishness in the oil market. For example, look at the bottom of OIL in June 2017. TSLA was exploding going into that, potentially driving oil down. But when TSLA fell back form that peak in late June, the oil market was able to regain confidence for a massive run up. Likewise in March through May of 2018, TSLA is hammered down while OIL moves to new 18+ month highs. But when TSLA jumps up in late May and early June, OIL suffers a pull back. It snaps back up as TSLA tumbles down from a peak. Again TSLA shots up early Aug sending OIL down. TSLA decline in Aug and Sep emboldens OIL to reach its peak in early Oct. At this point, it becomes clear that Tesla is selling a crapton of Model 3. Oil takes huge plunge. Only once oil goes so low that it raise macro worries does TSLA start to move in parallel with OIL.

So the interpretation above is presuming that the oil market is worried enough about Tesla that oil sentiment declines when TSLA does well. I'm not sure I can substantiate that, but it is an interesting interpretive lens. I would also give some insight into what is driving TSLA shorts. Could TSLAQ be a manifestation of hostility about the deep anxiety in the oil markets about the threat of EVs? I'm suggesting that TSLAQ is a kind of bully that can only feel good about it's own oil-based investments if Tesla is under attack. So Tesla gets beaten up and harassed constantly so that oil sentiment can remain strong. Of course, the bullying stops somewhat when oil has bigger problems to worry about like higher interest rates and a slowing global economy, worries that impact Tesla investors too.

What do others see in this chart?

 

[ggies07]

@jhm speaking of different areas regarding petrochems....have you heard of this company and what do you think? I just came across them and wonder, if successful, it would be another way to put a dent into the petrochem business.....

TemperPack

TemperPack is the leader in the design and manufacture of next-generation thermal technologies that delight customers and eliminate dependency on fossil fuels.

Inch per inch, ClimaCell performs as well as expanded polystyrene(EPS) and denim fiber insulation.

Sustainable Packaging Startup TemperPack Raises $22.5 Million To Take On Styrofoam

The Richmond, Virginia-based company developed its patent-pending "ClimaCell" packaging that it claims produces 97% less carbon emissions in the manufacturing process. This is in addition to being completely curbside recyclable

 

[jhm]

The Tesla Model 3's effect on the oil industry gets recognized by Wall St veteran

Wow, Stephen Schork gets it.

“My overarching concern right now is the economic development. Tesla put 150,000 new Model 3s on the market. That’s 150,000 cars that don’t consume gasoline. And it’s not just Tesla. Porsche, Audi, and BMW are all coming out with all-electric vehicles in 2019. So the inelasticities of demand in this market are fundamentally changing,” he said.

In a way, Schork’s statements echo much of the insights of Mizuho Securities analyst Paul Sankey, who previously mentioned that the oil industry is feeling what could only be described as the “Tesla Effect.” While speaking to CNBC, Sankey stated that some of the challenges faced by the oil market have something to do with the public’s shifting perception towards oil itself.

“Essentially, the big issue is the so-called ‘Tesla Effect,’ the general ‘End of the Oil Age’ theme that is a problem for these (oil) stocks. As the oil price goes up, especially to the levels we’re at now and potentially beyond, it’s almost as if the Tesla Effect could be exacerbated by the potential for higher oil prices to accelerate the end of the Oil Age. The Tesla Effect is the overall concept that (while) the 20th century was driven by oil, the 21st century will be driven by electricity. There’s a 30-year transition, and we’re somewhere probably 10 years into that transition. Ultimately, (the) terminal value of oil has been severely affected by the potential for us to change behavior,” Sankey said.

So Schork gets the economic idea that EVs are impacting the elasticity of demand for motor fuels. That is really key to understanding how EVs can have a negative impact on the price of oil long before significant volume displacement can occur. We've argued if here for several years, but it is good to see this get into the minds of analysts.

Paul Sankey comes at this in a cultural, rather than a strictly economic way. It is problematic for the oil industry to be seen as not so essential anymore. In public sphere, this can erode political support for policies favorable to the oil industry. For example, should India keep subsidizing oil consumption? If there are more attractive alternatives like electrifying buses, trucks and trains, policy support for diesel might falter. Likewise within the investment community, if culturally we agree that oil is sunset industry while the sun is just beginning to rise on EVs, that can move capital. Oil bullishness is largely predicated on the idea that oil is economically essential, irreplaceable.

This is said econometrically that oil investment is largely predicated on the inelasticity of oil demand. So it is nice to put a label of the cultural reception of this reality, the Tesla Effect: we're just not that into oil anymore.

 

[jhm]

@jhm speaking of different areas regarding petrochems....have you heard of this company and what do you think? I just came across them and wonder, if successful, it would be another way to put a dent into the petrochem business.....

TemperPack






Sustainable Packaging Startup TemperPack Raises $22.5 Million To Take On Styrofoam

This is great. I am a Hello Fresh customer. I like the service, but the waste involved with keeping food chill through home delivery is ghastly. The use very heavy gel ice packs. The really need to cut the weight and the plastic. Some food shippers use dry ice which pure CO2 emissions wrapped in styrofoam. Ghastly, I say.

 

[Silent Ludicrosy]

The Tesla Model 3's effect on the oil industry gets recognized by Wall St veteran

Wow, Stephen Schork gets it.




So Schork gets the economic idea that EVs are impacting the elasticity of demand for motor fuels. That is really key to understanding how EVs can have a negative impact on the price of oil long before significant volume displacement can occur. We've argued if here for several years, but it is good to see this get into the minds of analysts.

A nice 2nd order effect will be cheap airline tickets. Jet fuel will be around a lot longer than ICE cars and cheap oil is great for airlines. 3rd order effect from cheap travel will be more people seeing the world. Maybe 4th order effect will more trust and cooperation between nations as people are exposed to other cultures. Or maybe I’m dreaming...

 

[Dynastar]

A nice 2nd order effect will be cheap airline tickets. Jet fuel will be around a lot longer than ICE cars and cheap oil is great for airlines. 3rd order effect from cheap travel will be more people seeing the world. Maybe 4th order effect will more trust and cooperation between nations as people are exposed to other cultures. Or maybe I’m dreaming...

I'm afraid the second order effect will be highly profitable airlines and that's about it. There's been a lot of consolidation in the last decade or so.

 

[jhm]

So Brent is back to $59/b, down 1.4% while Tesla is down 3.3%. Coincidence?

 

[TheTalkingMule]

lol.....

Saudi Oil Minister: Aramco Set To Go Public In 2021 | OilPrice.com

 

[replicant]

A nice 2nd order effect will be cheap airline tickets. Jet fuel will be around a lot longer than ICE cars and cheap oil is great for airlines. 3rd order effect from cheap travel will be more people seeing the world. Maybe 4th order effect will more trust and cooperation between nations as people are exposed to other cultures. Or maybe I’m dreaming...

Then I hope we will tax the hell out of airlines tickets, because we're not electrifying cars and trucks to dump the saved CO2 with turbofans.

Jevons paradox - Wikipedia
Despite renewables growth, there has never been an energy transition

Edit: far too many of my yuppie friends/family fly every few weeks to some exotic places, while spending hours trying to recycle the tiniest plastic things, buying hybrids and switching the mansions lights to some environment-friendly LEDs. We also vote for carbon taxes to raise gas prices, hoping to deter the working poor from driving too much (although they don't have any alternative), and we complain about the noise of yellow vests protesters on the Champs-Elysées. This is absurd.

 

[ItsNotAboutTheMoney]

Then I hope we will tax the hell out of airlines tickets, because we're not electrifying cars and trucks to dump the saved CO2 with turbofans.

Jevons paradox - Wikipedia
Despite renewables growth, there has never been an energy transition

Edit: far too many of my yuppie friends/family fly every few weeks to some exotic places, while spending hours trying to recycle the tiniest plastic things, buying hybrids and switching the mansions lights to some environment-friendly LEDs. We also vote for carbon taxes to raise gas prices, hoping to deter the working poor from driving too much (although they don't have any alternative), and we complain about the noise of yellow vests protesters on the Champs-Elysées. This is absurd.

Those taxes on flights like departure taxes are a way to get around the fact that international law prohibits tax on aviation fuel.
But the other way efficiency is being encouraged in aviation (beyond the efficiencies that airlines chase anyway) is trade blocs setting industry targets.
Irony: if aviation were to electrify there would be more flights, because fuel costs would be lower, maintenance would be reduced and the reduced noise would allow greater hours of operation.