Shorting Oil, Hedging Tesla

[neroden]

Well, I don't think anyone can prevent it now. OPEC + Russia are sufficiently dependent on oil revenue that they can't cut back on volumes enough to prevent the price drop. Even the well-deserved death of shale oil production isn't going to constrict supply enough to prevent it -- it'll only take 7% out of the supply. Natural decline is more like 9%, so it only accelerates the supply reduction by one year.

Peak demand hits circa 2023. Demand should be contracting faster than 10% within a few years after that. Oil companies will not only have to end new drilling, but also stop "stimulating" existing wells, in order to reduce supply fast enough to keep up with the demand contraction -- and we know they just won't do it, not until they go bankrupt. Because they think of themselves as "oilmen". As long as they keep working on existing fields, decline is only 4.5%, and demand will be dropping faster than that by 2025 at the latest.

----
I'm looking at "TCO reswitching" where people choose gas cars because of lower TCO; how cheap does oil have to be?

Purchase price parity still matters: a Prius can still have a TCO lower than a Model 3 if you get the cheapest model and drive an average or low amount. I assume average US miles driven per year (13476) and an average lifetime for the car (11.6 years), average electricity prices (12.83 cents), and no financing costs (amortize purchase price premium linearly over car lifetime) -- I also use your regression of gasoline vs. oil prices -- I find that for the fuel efficiency of a Prius (50 mpg):
$0 purchase price premium for equivalent BEV => WTI price of $29 (above which it is cheaper to drive a BEV)
$5000 purchase price premium => WTI price of $90

Well, that's quite a difference, isn't it. The key point is of course that not everyone is buying an "average" vehicle. I believe many people will pay $5000 or more for the comfort features of a BEV, which would shift those numbers a lot. We can actually try to guess, based on the current WTI price of $54:
WTI $54 => $2100 purchase price premium right now...
....though I don't think that's an entirely valid methodology. (It would imply that people will spend over $10000 extra for the comfort features of a BEV, which may be correct...)

More importantly, anyone driving a particularly fuel-inefficient car will see the TCO firmly favor batteries even at much lower oil prices. For a 25 mpg car (average in the US!):
$0 purchase price premium for equivalent BEV => WTI price less than zero
$5000 purchase price premium => WTI price of $27
$7500 purchase price premium => WTI price of $43
$10000 purchase price premium => WTI price of $58

This has the interesting result that non-hybrid cars which cost more than $30K (Model 3 SR+ price minus $10K) are no longer commercially viable as of today. The only choices for a manufacturer are hybrid or plug-in.

Also, anyone driving a large number of miles per year will see lower TCO for BEVs. For a Prius driven 25K miles per year:
$5000 purchase price premium => WTI price of $62

Also, of course, in countries with higher gas taxes than the US, the switch will happen at much lower oil prices. So I should really run these numbers for China and Europe, but I don't have Brent to gas price regressions readily available for those areas. I'm going to stupidly assume that the entire difference in gas prices is due to fixed fees.

The difference is $1.35/gallon for China. Then I find for the Prius and (US) average miles driven per year,
$0 purchase price premium => WTI price less than zero
$5000 purchase price premium => WTI price of $38
$6000 purchase price premium => WTI price of $50
$7500 purchase price premium => WTI price of $69
$10000 purchase price premium => WTI price of $99.

Europe drives less than the US; an average of 12000 km/year, or only 7456 mi/year. I'll use UK pricing (cheapest in Western Europe) giving a $3.23/gallon premium over US prices. The low miles per year has the effect of making a much starker change as the upfront purchase price changes. (Again, looking at the 50 mpg Prius.)

$0 purchase price premium => WTI price far, far less than zero
$5000 purchase price premium => WTI price of $16
$6000 purchase price premium => WTI price of $38
$7500 purchase price premium => WTI price of $71
$10000 purchase price premium => WTI price of $126

(Though I think this would really be Brent prices. And I should redo this with better data.)

This may account for the greater popularity of *cheap* electric cars in Europe.

Also, in the premium market, the purchase price premium for buying electric is already quite small -- it's higher in the bottom end of the car market.

Anyway, the result of these phenomena is that switching away from oil will go as fast as EVs can be produced, as long as there are people (a) who drive a lot, including commercial drivers, (b) who are in countries with high gas taxes, (c) who are in a class of cars which is fuel-inefficient, like pickup trucks or semis, (d) who are in a class of cars with a lot of premium features, where purchase price parity is largely achieved.

The interesting thing is that non-hybrids are already non-viable outside the really cheap end of the market. But "non-plugin hybrids" are *already* seeing sales drop as the people who look ahead go directly to BEVs. So I think reswitching is *only* going to happen at the cheap end of the market, in sub-$30K cars. It may be largely satisfied by people switching from new gas cars to used BEVs.

Since it's taking so long to ramp up BEV production, we can probably ignore the "TCO reswitching" effect holding up oil prices until after there are Tesla Pickups and Tesla Semis in mass production. Oil demand will drop globally for some time before reswitching becomes relevant, I think.

I think all the oil companies get bankrupted before then. Many people who seem to know what they're talking about say that shale oil companies blow up around $50 WTI.

Rumors say that the Saudis can't balance their budget below $80/bbl, Abu Dhabi around $60/bbl, Iran not below ~$57/bbl, Russia not below $40/bbl. Bahrain, Oman, and Kuwait are in deficit already but I can't find their budget breakeven prices. All these countries are introducing taxes in order to get their budgets back in order, but I think the Middle East gets hammered around $50 Brent, with Iran in the best condition since it has a real economy unlike the others. Russia gets hit around $40, and they aren't in a position to raise taxes.

So this is interesting. Shale gets knocked out around $50 WTI. I think shale will dry up first, which should eliminate the WTI discount to Brent. The Middle East probably gets its governments restructured around $50 Brent. The interesting thing is that a $6000 purchase price premium is sufficient to knock out any reswitching to gasoline vehicles at oil prices above $50, and therefore these things are going to happen if BEV purchase prices have as low a premium as that. Having a $35,000 car rather than a $40,000 car actually reduces the purchase price premium (not considering any payment for greater comfort) to this level, but I suspect the greater comfort means that we're really already there.

So this reinforces my belief that oil demand is now strictly controlled by BEV production -- oil demand will drop as fast as BEVs can be manufactured. There are no other limitations for a few years. But it would help guarantee that this would continue if purchase price of BEVs dropped, because otherwise we will hit reswitching.

 

[Doggydogworld]

Enjoyed.

I've personally been penciling in $50/Kwh for batteries and $0.5 per Kwh for utility solar for the late 2020s for a while now.

At those prices, absolutely nothing can really compete with solar+ storage.

At those prices, building a 5GW solar bank with 24GWh of storage (enough to put out a average 1GW plus a day of storage) would cost less than $4 billion. A 1.2 GW coal plant costs more than that, and an AP1100 nuke plant costs $8b+, both of those have far higher operational costs as well.

People are going to be seriously surprised how cheap energy gets in the late 2020s

5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude. Above that winter output is insufficient.

Also, we're a loooong way from 50 cents/kWh for long-life storage battery installations. Tesla charges ~10x that and loses money. The competition fares no better.

 

[winfield100]

5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude. Above that winter output is insufficient.

Also, we're a loooong way from 50 cents/kWh for long-life storage battery installations. Tesla charges ~10x that and loses money. The competition fares no better.

@Doggydogworld
"..5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude.."
please explain
what do you mean when you saying are that 5 gigawatts of PV panels produces _only_ 1 gigawatt (average) power

Are you saying, for example, if I had 5 kilowatts PV I would only produce 1 kilowatt power

If I scaled up my 11,655watt PV array by a factor of 490,000 to make it a 5 gigawatt array,
I would be producing around 7.293 gigawatt hours/yr not 1 gigawatt hour(at 26.6 degrees N)

(im making ~17,000kWh/yr)
I would appreciate an explanation thank you

 

[adiggs]

@Doggydogworld
"..5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude.."
please explain
what do you mean when you saying are that 5 gigawatts of PV panels produces _only_ 1 gigawatt (average) power

Are you saying, for example, if I had 5 kilowatts PV I would only produce 1 kilowatt power

If I scaled up my 11,655watt PV array by a factor of 490,000 to make it a 5 gigawatt array,
I would be producing around 7.293 gigawatt hours/yr not 1 gigawatt hour(at 26.6 degrees N)

(im making ~17,000kWh/yr)
I would appreciate an explanation thank you

I'm just above 45 degrees N - our 10kw PV array consistently generates ~13 MWh/year. Being in the Pacific NW and this far north, it's very unbalanced - good days in the summer routinely clear 60 kwh, and bad days in the winter fail to reach 1 kwh.

But the quote is stated in terms of power rather than energy - kw instead of kwh. So maybe that's the point - on the good days, my 10 kw array generates 2-3 kw power averaged out over the 24 hour day (48-72 kwh in the day). Of course, it doesn't arrive that way - it's about 1/2 a day with a lot more than that, and about 8 hours a day of 0 power output (I try to sleep then ).

 

[renim]

the grey line (Nickel sulfate) is the battery grade nickel precursor, it is 22% Ni. (NiSO4∙6H2O)
the Nickel in NCA or NMC cathodes holds about 0.7 kWh per kg (actually 0.68 to 0.69 and it can not be improved, NMC is at the limit)
so a nominal 60kWh battery can hold 42kgs of Nickel. (less if there is Cobalt, less if there is Mn beyond a 1:1 ratio with Nickel)

42 kg nickel is currently about

chinese chart nickel sulphate

so its 27,000 rmb per tonne ($3,900), so 3,900/22% = $17,700 USD per tonne Ni = $750 to the nickel miner/refiner.

 

[renim]

point is, Nickel has spiked in the past to less than 1 days stocks, it can happen again in the future, particularly as Nickel for batteries is exclusively via a high purity, dissolveable route.

It is real possible that unless growth of mine/refinery supply of Nickel sulphate is matched to battery demand, then the hard constraint will not be cobalt, but actually Nickel.

$750 is a lot of money for a mass market car, but not much for a premium car. $750 is probably close to the oem price to buy a complete, bare 3cyl automotive engine for chinese/japanese market.

 

[neroden]

I wouldn't worry about nickel in the long term. Obviously there could be short term supply shortages, but there are PLENTY of known nickel reserves at existing mines. It's common.
---

Interesting thing I came across. Carbon Tracker's analysis says that once oil exploration stops, the major oil producers (OPEC + Russia) can maintain production through minor capex at existing wellfields for $7-$15/bbl -- this is cheap. If we instead assume that the fields will still decline, we would want to use the *decline rate after capital improvements*, which is 2% - 4.5%, rather than the *natural decline rate* or 6%-9%.

The Decline Rate Delusion

Global oil demand will definitely be dropping faster than 2%/year by 2024, and faster than 4.5%/year by 2025 -- possibly substantially earlier. As soon as this happens, we're in a position where we have an oil glut at all prices above the TCO substitution price.

We may already be there. I'm not sure how to calculate the TCO substitution price given that it's different for different people -- truckers will stick to electric until very low oil prices, while someone who drives 1 mile a day might only switch to electric at significantly higher oil prices.

Given their past history, I fully expect the "oilmen" of the "oil companies" to engage in excessive drilling, excessive capex, and lots of commercially unviable attempts to increase oil production. Therefore we are probably already in the oil glut and will probably be in the oil glut from now on. This should mean that oil prices have nowhere to go but down -- though speculation might bring prices up prior to this becoming obvious circa 2023.

 

[TheTalkingMule]

Taking a moment to pause and reflect on the postings of the last few months here and relate them to investment strategy....

To me it looks like global economic activity is being held above water almost entirely by US refusal to enter recession. Wealth and income inequality are still rising with personal/corporate debt, so we should have recessed by now. The only explanation I have is the absurd growth in the US energy sector combined with the dynamics of renewable energy removing the energy cap on economic expansion and relative US energy independence freeing us more so than others.

All that being said....recessions happen. Bubbles burst. And recently they've been trending to larger bubbles with larger bursts.

If we start with the premise that there will definitely be another burst, we certainly have to look to the global fossil industry. The transition(or disruption) @neroden references above has no chance of being rational, or timed well, or coordinated in any fashion. As we inch closer to peak demand(a paltry 3-5 years out now!), alliances will crumble and production will skyrocket as everyone rushes to the last productive teet. This rush will be fueled by a willing financial sector and everything will be overextended, and not just in the US. There's a reason MBS is buying $400M paintings while the Saudi's have a tough time even getting bond funding to continue daily operations.

We're very likely in that "last rush" phase already. US production got the first jump off the starting line, but national operators simply must follow in very short order. Once that happens the fracking pyramid crashes. Once fracking expansion is done, peak demand becomes clearly evident, and all financing dries up instantaneously. That should crash the world economy, no? Remember it's not just supply and demand, these oil nations have no other viable source of revenue so there's massive incentive to accelerate production right through peak demand.

If we have a clear idea on EV adoption, then we should have a clear vision of peak demand, and therefor we know when the next global crash will be happening. So if your investment strategy is SP500 plus a massive weighting of TSLA(as mine is), you should be in Treasuries right now and buy when the bubble bursts. Even TSLA should retest recent lows around $160 after uncoiling the shorting spring back up to ~$300 this summer/fall.

Does anyone else see a scenario where this transition begins with anything other than massive recession? I think we(the global economy and TSLA) run up for another 6-16 months and then crash in a fashion similar to or worse than 2008.

 

[jhm]

Enjoyed.

I've personally been penciling in $50/Kwh for batteries and $0.5 per Kwh for utility solar for the late 2020s for a while now.

At those prices, absolutely nothing can really compete with solar+ storage.

At those prices, building a 5GW solar bank with 24GWh of storage (enough to put out a average 1GW plus a day of storage) would cost less than $4 billion. A 1.2 GW coal plant costs more than that, and an AP1100 nuke plant costs $8b+, both of those have far higher operational costs as well.

People are going to be seriously surprised how cheap energy gets in the late 2020s

Indeed. Moreover, the demand for batteries will grow enormously as prices fall.

 

[ZachF]

I wouldn't worry about nickel in the long term. Obviously there could be short term supply shortages, but there are PLENTY of known nickel reserves at existing mines. It's common.
---

Interesting thing I came across. Carbon Tracker's analysis says that once oil exploration stops, the major oil producers (OPEC + Russia) can maintain production through minor capex at existing wellfields for $7-$15/bbl -- this is cheap. If we instead assume that the fields will still decline, we would want to use the *decline rate after capital improvements*, which is 2% - 4.5%, rather than the *natural decline rate* or 6%-9%.

The Decline Rate Delusion

Global oil demand will definitely be dropping faster than 2%/year by 2024, and faster than 4.5%/year by 2025 -- possibly substantially earlier. As soon as this happens, we're in a position where we have an oil glut at all prices above the TCO substitution price.

We may already be there. I'm not sure how to calculate the TCO substitution price given that it's different for different people -- truckers will stick to electric until very low oil prices, while someone who drives 1 mile a day might only switch to electric at significantly higher oil prices.

Given their past history, I fully expect the "oilmen" of the "oil companies" to engage in excessive drilling, excessive capex, and lots of commercially unviable attempts to increase oil production. Therefore we are probably already in the oil glut and will probably be in the oil glut from now on. This should mean that oil prices have nowhere to go but down -- though speculation might bring prices up prior to this becoming obvious circa 2023.

I personally believe we will see prices seesaw back and forth between $30 and $90 per barrel and swing between glut and shortage as the oil industry makes it's swan song. I think most of the negative supply adjustment will occur not from US shale producers, but from petro states collapsing like dominoes (think Venezuela, Libya) Until it is eventually obvious that oil is dead forever.

Think a pattern like this:

Supply glut > price collapse > weakest current petro state collapses > shortage > price raise > shale producers pump to meet current demand > supply glut....

I think this pattern will just push people even faster to EVs, especially if the petro state that's the current weakest link turns out to be Saudi Arabia, you could see a big spike in prices and that will probably be the straw that breaks the camel's back for many when it come to the whole oil-industrial complex, because unlike in 2008, there will actually be an alternative this time.


Petro States need much higher oil prices than they want to admit to survive.

 

[jhm]

5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude. Above that winter output is insufficient.

Also, we're a loooong way from 50 cents/kWh for long-life storage battery installations. Tesla charges ~10x that and loses money. The competition fares no better.

I think Zach meant $0.50/kW for solar installation.

 

[TheTalkingMule]

* probably $.50/Watt installed for utility solar.

(we need a new name for the kilowatt hour!)

 

[ZachF]

* probably $.50/Watt installed for utility solar.

(we need a new name for the kilowatt hour!)

Yes, this is what I meant.

It's ~$1/watt now.... $0.50 per watt in the late 2020s is probably pretty conservative considering it was ~$4/watt a decade ago.

 

[jhm]

* probably $.50/Watt installed for utility solar.

(we need a new name for the kilowatt hour!)

Yes, W, not kW. Thanks.

 

[Doggydogworld]

@Doggydogworld
"..5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude.."
please explain
what do you mean when you saying are that 5 gigawatts of PV panels produces _only_ 1 gigawatt (average) power

Are you saying, for example, if I had 5 kilowatts PV I would only produce 1 kilowatt power

If I scaled up my 11,655watt PV array by a factor of 490,000 to make it a 5 gigawatt array,
I would be producing around 7.293 gigawatt hours/yr not 1 gigawatt hour(at 26.6 degrees N)

(im making ~17,000kWh/yr)
I would appreciate an explanation thank you

I was replying to @ZachF who mentioned a 5 GW solar array + 24 GWh battery supplying a continuous 1 GW, 24 hours per day.

@jhm - I mistakenly wrote 50 cents/kWh for long-life storage, should have been 50 bucks/kWh. That was the price Zach used. Tesla and other providers charge close to 500 bucks per kWh of storage capacity, so Zach is predicting a 10x improvement.

 

[TheTalkingMule]

I remember when my buddy paid $8k for a 42" plasma HDTV. What's all that long ago. By the end of the 2020's Tesla's pack level costs should be around $.50/kWh, the home battery product itself might be something like double that.

$1k....$2k.....$4k.....who cares? It's gonna be absurdly cheap. Everyone knows this.

 

[neroden]

5 GW of solar produces 1 GW average power almost year round up to about 40 degrees latitude. Above that winter output is insufficient.

Also, we're a loooong way from 50 cents/kWh for long-life storage battery installations. Tesla charges ~10x that and loses money. The competition fares no better.

There's some confusion between cents/kWh delivered and dollars/kWh capacity. To get from one to the other you have to multiply by the cycle life.

Grid "delivery" costs in typical areas approximate 6 cents per kWh delivered (and are rising); batteries have a >5000 cycle life, but let's call it 5000, so disconnecting from the grid using batteries starts to make sense for the average household around $300/kWh of capacity (6 cents times 5000).

Tesla makes money on its Powerwalls (yes it does, all the evidence says it does) at roughly $500/kWh capacity. Note that I don't think they're making much money, but any coherent attempt to disaggregate the storage business from the confusing solar leasing business says they make money. Anyway, this price means that it starts to make sense to go off-grid right now if your grid delivery cost is 10 cents / kwh (again, excluding generation costs). This is only true in exceptional areas like remote rural Australia, but it *is* true in those areas.

I will not hazard a prediction as to when, or whether, battery prices will come down to match average grid delivery prices. But grid delivery prices seem to be rising in most places.

....OK, I will hazard a wild guess. With a typical 21% drop in battery prices each year, it will take three more years (until 2021) before it starts to become financially reasonable for people in average locations to go off the grid. Obviously the need to overbuild for unusual high-usage days will mean that it still won't make sense for most people. More accurately, at that point "an electron from my battery is cheaper than one from the grid" wil be true. If the home solar is also cheaper than the grid generation price (already true in many places but not at all true in the more northern areas), then "grid-assisted" installs which stay off the grid as long as possible and only connect to the grid when necessary will become the preferred deployment methodology. This will probably happen more extensively at commercial or industrial locations with fairly steady hour-to-hour grid demand.

 

[winfield100]

I was replying to @ZachF who mentioned a 5 GW solar array + 24 GWh battery supplying a continuous 1 GW, 24 hours per day.

@jhm - I mistakenly wrote 50 cents/kWh for long-life storage, should have been 50 bucks/kWh. That was the price Zach used. Tesla and other providers charge close to 500 bucks per kWh of storage capacity, so Zach is predicting a 10x improvement.

@Doggydogworld
thank you. i was a bit startled that an aerospace engineer could say that.
my mistake

 

[neroden]

I personally believe we will see prices seesaw back and forth between $30 and $90 per barrel and swing between glut and shortage as the oil industry makes it's swan song. I think most of the negative supply adjustment will occur not from US shale producers, but from petro states collapsing like dominoes (think Venezuela, Libya) Until it is eventually obvious that oil is dead forever.

Think a pattern like this:

Supply glut > price collapse > weakest current petro state collapses > shortage > price raise > shale producers pump to meet current demand > supply glut....

The thing is, the shale guys are *already* unprofitable and have been for ten years. They *have* to be one of the weakest links. The petrostates can mostly produce oil really, really cheaply -- even if there's a temporary disruption due to governmental collapse, it doesn't take much for the rebels to start pumping (think of Nigeria, where the oil is actually stolen by raiders fairly regularly -- it still ends up on the market and affects supply and demand).

I think this pattern will just push people even faster to EVs,

I hope so.

especially if the petro state that's the current weakest link turns out to be Saudi Arabia, you could see a big spike in prices and that will probably be the straw that breaks the camel's back for many when it come to the whole oil-industrial complex, because unlike in 2008, there will actually be an alternative this time.

 

[neroden]

Taking a moment to pause and reflect on the postings of the last few months here and relate them to investment strategy....

To me it looks like global economic activity is being held above water almost entirely by US refusal to enter recession. Wealth and income inequality are still rising with personal/corporate debt, so we should have recessed by now. The only explanation I have is the absurd growth in the US energy sector combined with the dynamics of renewable energy removing the energy cap on economic expansion and relative US energy independence freeing us more so than others.

I would like to remind people that I predicted that we would not get a recession SOLELY because of the renewable energy / solar / wind / batteries / electric cars boom. I think the boom is so big that it prevents recession.

If we start with the premise that there will definitely be another burst, we certainly have to look to the global fossil industry. The transition(or disruption) @neroden references above has no chance of being rational, or timed well, or coordinated in any fashion.

Agree.

As we inch closer to peak demand(a paltry 3-5 years out now!), alliances will crumble and production will skyrocket as everyone rushes to the last productive teet. This rush will be fueled by a willing financial sector and everything will be overextended, and not just in the US.

That said, an entire sector, even a really important sector, can collapse without causing a recession. I can point you to examples in the past.

We're very likely in that "last rush" phase already. US production got the first jump off the starting line, but national operators simply must follow in very short order. Once that happens the fracking pyramid crashes. Once fracking expansion is done, peak demand becomes clearly evident, and all financing dries up instantaneously.

Yes

That should crash the world economy, no?

No. It should cause revolution in all the petrostates... it crashes *their* economies... but it doesn't crash the *world* economy as long as people are being hired in giant sprees to install solar panels and wind turbines and build electric cars and battery factories.

The US is just enough of a petrostate to be worrisome, but China isn't a petrostate at all.

Does anyone else see a scenario where this transition begins with anything other than massive recession?

Me.

I do think it's pretty much guaranteed to cause a lot of bank failures and disappearance of paper wealth, and I am not sure how national governments will react to that. SOME banks have already gotten out of fossil fuels, and they will be OK. Others have not and will not, and that could lead to a major 2008-like financial crisis, yes. Depends on how many banks are still lending to frackers and oil companies when it hits the wall.

I think we(the global economy and TSLA) run up for another 6-16 months and then crash in a fashion similar to or worse than 2008.

I'm not sure it hits the real economy that badly. Banking sector and finance sector, yes, they get hit. If everyone is clear on the fact that it's fossil fuels which busted, a lending program to support renewables could get the real economy going again pretty fast, though.

Renewables are starting to employ a lot more people than oil/gas/coal already now, which really limits the effect of the oil/gas/coal collapse on the real economy. The negative wealth effect from stocks crashing mostly will hit people stupid enough to put money in fossil fuels, and not people who put money in renewables.

So the main channel for recession is the bank failures -- if too many banks fail due to being overextended on bad fossil fuel loans, there may not be the money to finance the new renewables expansions, and that's where a recession *could* hit. I think it won't, though.