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Shorting Oil, Hedging Tesla

Discussion in 'TSLA Investor Discussions' started by jhm, Mar 15, 2016.

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  1. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Top 10 Largest Stock Exchanges In The World By Market Capitalization

    Tokyo, maybe? Japan seems weirdly resistant to the renewables revolution. Euronext? Toronto? I'd still bet on London.
     
  2. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Snort. Has he looked at Shell's stock price, down from $85.49 in 2008 to $64.59 now? Admittedly, Shell has been issuing dividends; when you figure that in against the capital loss, the stock returned roughly 3.6%. (*I used a sloppy way of figuring this, so it's going to be slightly off.) High returns? No. I get a better rate of return from putting solar panels on my own *house*, and that rate was too low for me to actually do it.

    At this point, the optimal move for Shell is a planned, slow-moving liquidation of the business. Clean up all of the real estate and sell it. But they won't consider it.
     
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  3. adiggs

    adiggs Active Member

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    Only one quibble, since I agree with the point. Outside of personal transport, in the rest of transportation, we've either got technology demonstrated but not scaled, or we don't even have the technology demonstrated.

    Commercial trucking - at least in the US, we've got at least two companies I know of that have demonstrated the technology for the market, but neither are making efforts today to sell that technology, much less sell it at scale (Tesla, DTNA). That's class 3-8 commercial trucking. The technology exists, but the battery and rest of the elements that need scaling aren't scaled (annual sales in the US I think can still be counted on one hand - target market is 300k class 8 semis / year).

    Electric airplanes are being demonstrated, but the closest I know of to commercially viable variations are 2 seater trainers for people that want to get a pilots license. The technology / capability for shorter range feeder lines to carry passengers may arrive fast, but I don't yet know of anybody that has demonstrated teh capability, much less is building and selling it at scale.

    After that, it just gets worse and worse. Ag machinery is still in the undemonstrated category - I expect this and other heavy machinery to follow the commercial trucking category (scale in commercial trucking will improve the technology and get it in range of ag / heavy machinery).

    Ocean going shipping is even further to be electrified (far enough out, that many / most that read this post will have their first reaction that it can't be done :D)

    Long distance air travel is about the same as ocean going shipping - undemonstrated, and at least today, mostly unimaginable technology.


    And all of these industries are BIG - they've got a lot of scaling up to do, even if the technology existed today and was economical to use. And if there wasn't inertia and a desire on people's part to keep doing things the way they've always been done. Better economics is a pretty powerful antidote to keeping on doing the same thing, so it'll come. My point is it's not here yet, and until it's here, we've got O&G to satisfy the existing markets so they can keep running.
     
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  4. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Air and shipping together is less than half of current oil use for fuel, and it is all diesel or kerosene. As are large trucks. Gasoline is only used for one thing: cars. Gasoline is currently the marginal product, the highest demand, the most profitable. Changing the marginal product to jet fuel means half the refineries need to retool or go bankrupt. The overall drop in demand from switching cars and short range trcuks off of oil, which will happen in the nezt 10 years, leaves such a vast oversupply of oil that it will be just like coal: even with 1/3 of the market still intact, all the companies will go bankrupt.
     
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  5. adiggs

    adiggs Active Member

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    I agree with the general assessment. I'm curious what you see when you follow this logic to the next step.

    If gas "disappears" (it's an overstatement, but wraps up the idea in a nutshell), then there will be a new marginal / most profitable product coming out of the barrel. Presumably diesel because many industries will still need it. Presumably the price of diesel will need to go up a lot to take over profit / revenue generation for refineries. As you say, half the refineries will need to retool or go bankrupt.

    That'll also create high motivation for diesel consumers to switch. It's not like international shipping, or in-country shipping is going to shutdown. But their inputs may become what today would be considered prohibitively expensive. So maybe less manufacturing in Asia and shipping to Europe / US.

    And maybe less air travel when the cost of jet fuel rockets up enough to motivate refineries to still process barrels to get jet fuel. I guess more virtual meetings, as traveling to meet in person gets more expensive :)

    That's my point - not just that the refineries are going to be in trouble - when the barrel economics changes a lot, it's not just O&G and the refineries that are going to get hit.

    I bet the refineries get a lot better at tilting the output of their refining efforts to jet fuel / diesel, and I bet the markets that can't electrify figure out a way to run on natural gas. It's going to get very interesting.
     
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  6. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    Why would diesel demand not shrink with gasoline? It's possibly already peaked. It's a toss up which will hit 80% EV sales first small passenger vehicles or heavy machinery. One is much more cost driven than the other.
     
  7. adiggs

    adiggs Active Member

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    My guess, and it's only a guess - what I see in the world is a pretty good start on the EV technology and scaling to tackle the gasoline market. I see signs of life on the EV technology that can tackle commercial trucking and possibly other significant diesel markets, but I don't see even a start on scaling to replace those markets.

    I do see city buses scaled and switching to EV's, so that's one significant source of diesel demand that's shifting. I just don't see it as being big enough to maintain the current ratio between gasoline and diesel, as gasoline demand shrinks with increasingly EV personal transportation market.


    Gas and diesel mostly serve different transportation markets / segments, and it's the gas segment that is most under attack by EV / replacement technology.

    I could be wrong of course - I haven't done the research to put numbers to these different markets. Even restricting to a geography such as Norway, California, or the US.
     
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  8. Doggydogworld

    Doggydogworld Member

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    BEV trucking may be years behind consumer car BEVs, but the trucking market can transition much faster. Unlike consumer cars which sell on monthly payments, style and convenience, truck fleet operators focus completely on TCO. BEV economics are much more favorable for trucking because high annual mileage tilts the scales to favor lower per-mile cost over lower upfront cost. Replacement cycles are also much faster in the trucking space (~8 years vs. ~20) and competitive pressures drive rapid adoption.

    Finally, trucking is much more amenable to regulation. US voters would freak out if forced into BEVs over 10 years, but truckers don't really care as long as it's an even playing field.
     
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  9. ZachF

    ZachF Active Member

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    #5329 ZachF, Jul 6, 2019
    Last edited: Jul 6, 2019
    Good response, here is a flow chart of global energy (note, some things aren't counted here, like oil industry self-consumption, and that for electricity generation, and you need to switch to the "balance" window to see it)... Oil is used primarily for transportation, and oil's expensive nature has caused it to be driven out of other uses for decades now:

    IEA Sankey Diagram

    Here is where oil is used, highest to lowest (Includes those from balance page):

    80,679pj Road Transportation
    25,267pj Non-Energy Industry
    12,780pj Domestic & International Aviation
    10,998pj Domestic & International Navigation
    8,763pj Residential
    8,709pj Oil Industry Self-Use*
    8,687pj Electricity Generation*
    5,077pj Non-specified Industry
    4,363pj Agriculture & Forestry
    3,589pj Commericial/Public
    3,395pj Refinery Losses*
    2,428pj Chemical & Petrochemical
    1,336pj Non-Energy Other
    1,252pj Construction
    1,201pj Rail Transportation
    920pj Mining & Quarrying
    765pj Other, unspecified
    427pj Food & Tobacco
    409pj Non-Energy Transport
    396pj Non-specified transport
    278pj Iron and Steel
    254pj Machinery
    238pj Fishing
    210pj Non-ferrous metals
    166pj Paper pulp & Print
    130pj Textile & Leather
    91pj Wood & wood products
    84pj Transport Equipment
    15pj Pipeline Transport

    *= from balance window
     
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  10. ZachF

    ZachF Active Member

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    "Non-Energy Industry" IIRC means feedstocks for plastics and stuff
    "Residential" is heating oil, Lawnmower gas, small generators, etc.
    "Commericial/Public" Is basically the same as above, but for commercial and public entities.

    Ultimately, almost all of the oil is to power ICE engines for some use or other... Construction equipment, Mining equipment, tractors, etc, etc... A lot is also self-uses and refinery losses.
     
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  11. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Jhm and I settled on the consensus that it would be jet fuel (kerosene). Diesel demand drops as trucks are replaced with electric trucks (and as train lines are electrified, and as diesel emergency generators are replaced with batteries, and as ferries are electrified, etc.) The only countering factor, which is very short-term, is ships switching from bunker fuel to diesel, but that's a one-time event.

    Jet fuel demand will continue to rise because air travel keeps increasing, and most of the efficiency gains have already been wrung out of the engines. While electric airplanes are starting to arrive, they're starting at the small-plane end of the market, which mostly uses gasoline, and doesn't use that much fuel total; it'll be a while before the jet fuel demand is impacted.

    I'm not 100% sure how they're going to adjust the pricing. This is a complicated question.

    Some refineries will close -- the one in Phildelphia which just exploded, which is so old it's from the 19th century, is being closed permanently after the explosion. That will reduce gasoline and diesel production.

    Some refineries will retool to make more jet fuel and less diesel. They'll end up having to crack excess gasoline to lighter gases, so in the short run the prices of butane, propane, ethylene, and methane might drop.

    But back to pricing. There are basically three possibilities for refineries dealing with retooling costs:
    (1) Refineries raise the price of finished products. This is only possible if the gasoline distributors don't have alternative refineries to buy from -- local monopoly situation. In some localities probably there is a monopoly and this will happen.
    (2) Refineries force down the price of crude oil. This is only possible if there's a glut of crude oil, which I think there will be. So this one is likely.
    (3) Refineries eat the retooling costs by losing their own profit margins, which results in a bunch of them declaring bankruptcy or closing down rather than retooling.

    The air travel prediction is an interesting and difficult one. It is possible that there will be more virtual meetings, more driving, more train travel. Probably not more oceangoing ship travel. :) But air travel seems to have surprisingly inelastic demand.

    I bet your bets are right. :)
     
  12. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Sooooo, I looked a little further into the refinery situation using Wikipedia. There are a lot of refineries, but a lot of them do seem to amount to local oligopolies / cartels.

    That Philadelphia Refinery which is closing? It's HUGE. It looks like there are only 6 larger refineries in the US (though I may have missed some).

    There were only 137 refineries in the US in 2015, and several have closed, and few have opened.

    What I figure will happen is that refineries will close until the remaining refinery in the area has local monopoly or duopoly status (either on an oil field or on a distribution network). The local monopoly on a distribution network will then raise prices as needed to maintain profits. A local monopoly on an oil field will force oil prices in that field down as needed to maintain profits; if it has corporate integration with the oil field, the shakeout will have to go until the distribution network has a local monopoly. Forcing prices down in the oil field may result in wells being shut in until a local distribution monopoly is achieved.

    It appears that refineries are often integrated with distributors.

    So we should see a refinery shakeout with closures of the least efficient / least profitable refineries until a local monopoly is achieved, at which point gasoline prices will stay high (monopoly pricing) no matter what oil prices do.
     
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  13. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Just to add to that, the TOTAL for "final consumption" of oil products is 163,003pj. So road transportation is roughly half of all oil usage. Cutting the industry in half is brutal, especially since "refinery losses", "oil industry self-use", and "pipeline trasport" will shrink proportionally, and "electricity production", "residential", and "commercial/public" are the heating oil sector which is also being driven out of existence by pricing pressure. "Mining" is also switching to electricity. "Agriculture and forestry", "construction", and "fishing" will follow; the tech is there, those sectors are just slow at adopting any changes. A fair amount of "non-specified" will probably disappear too.

    This leaves plastics as the largest use for oil, and that's a mere *15%* of the current industry, with ships & planes being another 15%. Sure, that's still a big industry, but shrinking an industry to somewhere between 30% and 50% of its current size is financially brutal; very few companies will survive the shakeout.
     
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  14. mspohr

    mspohr Well-Known Member

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    There is a lot of discretionary air travel. Vacations, visiting relatives, etc. That would be price sensitive. A carbon tax on air travel could cut this down.
     
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  15. Off Shore

    Off Shore Off Topic Member

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    There's no question that we're in a small minority, but we haven't been on a domestic flight since we bought our first Tesla in mid-2015. We have made six cross-country-equivalent trips in that time. Part of the reason is that I loathe commercial flying but mostly Tesla makes car trips, even long ones, enjoyable.
     
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  16. mspohr

    mspohr Well-Known Member

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    The Netherlands' national airline is encouraging people not to fly

    KLM Royal Dutch Airlines has an unusual message for its customers: Maybe don’t take that flight.

    In a June 29 open letter from its CEO, Pieter Elbers, the airline invited air travelers to make “responsible decisions about flying,” and encouraged customers to invest in the airline’s carbon offsetting scheme, CO2ZERO.
     
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  17. Fred42

    Fred42 Member

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    Absent government funding, I don't anticipate that freight railroads will switch to electric because the capital cost is too high.
     
  18. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    Well, this is a worldwide analysis, and in the 90% of the world where tracks are owned by governments, the freight railroads are electrifying. Sure, the US may remain a backwater with antiquated freight rail networks. :sigh:
     
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  19. jhm

    jhm Well-Known Member

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    Hi folks.

    I'm not too worried about the relative demand of gasoline to diesel. I think consumers will sort that out. Increasingly displacement would be the driver for loss of demand for both fuels. But if one fuel is substantially more expensive than the other, then that will impact where displacement by batteries has the bigger economic impact. So I think robust battery growth will keep the ratio gasoline consumption to diesel within a reasonable range. Likewise some forms of kerosene consumption can also switch to other fuels, for example, kerosene for heating, cooking and lighting largely in developing countries can switch to renewables and other fuels. Sure there can be short term imbalances, but over a moderate term like 3 to 6 years demand fuel switching especially to batteries and renewables can sort things out.
     
  20. jhm

    jhm Well-Known Member

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    A Red Flag For Oil? China’s Crude Consumption Is Faltering | OilPrice.com

    Seems like only yesterday...
    You don't say. Tell me more...
    Oh, that is low. But what about diesel?
    Hmm, any misleading rationale you'd like to distract us with?
    Oh sure, that would make sense if China's economy on the brink of recession. How bad is it?
    Oh, 6%. And diesel demand is the lowest it's been in the last ten years? Maybe the economy just doesn't need much diesel consumption growth to keep growing at 6%?

     
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