Shorting Oil, Hedging Tesla

[mspohr]

Oil prices and the coming financial 'Ice Age' - Resilience

So, a sluggish economy—made sluggish by excessive debt (Edwards)—combined with widening wealth inequality (Tverberg)—leads to generally lower employment and depressed wages than otherwise would have been the case—which leads to prices that are too low for energy producers, in particular, oil producers to make a profits sufficient to replace oil reserves that have been depleted or, in the case of oil exporting nations, pay for social welfare costs. According to Tverberg, this inability to make much profit among oil producers—shale producers have had negative free cash flow for years—feeds back into the economy, especially in the United States where the previously broadly booming oil and gas industry has been a major source of employment and business activity. (The boom now seems confined to the Permian Basin in Texas.)

Now, here’s how Tverberg’s thinking hooks up most directly with Edwards’. Tverberg writes: “It looks as though growing debt at ever-lower interest rates is becoming a less effective workaround for the economy’s real need, which is a need for a rapidly growing supply of under $40 per barrel oil and other low-priced energy products.” Edwards sees debt creation as becoming a less and less potent way to create economic growth in a debt-saturated economy. Tverberg goes to what she believes is the heart of the matter claiming that added debt cannot seem to provide oil and other energy sources at cheap enough prices for the economy to flourish. The financial Ice Age seems central to the views of both.

And, both Edwards’ and Tverberg’s outlook lead to the same result, a crash in the world economy that will be difficult to turn around. For Edwards there is the possibility that after a long retrenchment period, economic conditions could return to what passes for normal. For Tverberg, however, her thesis suggests a permanent alteration of conditions for modern societies in which energy insufficiency becomes a feature that limits and even stops economic growth.

 

[adiggs]

...

I think this is how demand ought to be measured. It indicated how much money the global economy is willing to throw at the upstream oil industry.
...

Generally speaking, I think that this is the best way to measure most markets. The example that's close for all of us is Tesla's market share - in units its less impressive. As % revenue it's more impressive as it's coming from the top of the market down.

(Sidebar - the units I like to use for Tesla market share is shipped battery capacity; shipping high capacity batteries in high volume really shows the size of the chasm between Tesla and the infrastructure / supply chain that others need to develop to be competitive)

I have a hard time imaging the oil industry getting back to $3.5T in a single year ever again - that's ~50% higher than today and seems like an awfully big bite out of the world economy when there is a cheaper supply of energy available.

Then again, maybe what we need is one more big run up to that $3.5T level to really goose all of those consumers into finding somewhere else to spend their collective $3.5T

 

[adiggs]

Oil prices and the coming financial 'Ice Age' - Resilience

So, a sluggish economy—made sluggish by excessive debt (Edwards)—combined with widening wealth inequality (Tverberg)—leads to generally lower employment and depressed wages than otherwise would have been the case—which leads to prices that are too low for energy producers, in particular, oil producers to make a profits sufficient to replace oil reserves that have been depleted or, in the case of oil exporting nations, pay for social welfare costs. According to Tverberg, this inability to make much profit among oil producers—shale producers have had negative free cash flow for years—feeds back into the economy, especially in the United States where the previously broadly booming oil and gas industry has been a major source of employment and business activity. (The boom now seems confined to the Permian Basin in Texas.)

Now, here’s how Tverberg’s thinking hooks up most directly with Edwards’. Tverberg writes: “It looks as though growing debt at ever-lower interest rates is becoming a less effective workaround for the economy’s real need, which is a need for a rapidly growing supply of under $40 per barrel oil and other low-priced energy products.” Edwards sees debt creation as becoming a less and less potent way to create economic growth in a debt-saturated economy. Tverberg goes to what she believes is the heart of the matter claiming that added debt cannot seem to provide oil and other energy sources at cheap enough prices for the economy to flourish. The financial Ice Age seems central to the views of both.

And, both Edwards’ and Tverberg’s outlook lead to the same result, a crash in the world economy that will be difficult to turn around. For Edwards there is the possibility that after a long retrenchment period, economic conditions could return to what passes for normal. For Tverberg, however, her thesis suggests a permanent alteration of conditions for modern societies in which energy insufficiency becomes a feature that limits and even stops economic growth.

I've only read your subset, but it sure looks like both are missing out on the obvious counter to the "coming financial 'Ice Age'" - renewable and dispatch able energy that is cheaper than mine and burn sourced energy.

And how that new energy source is going to make the oil & gas industry a lousy investment (until it gets worse, and finally goes away - much further down the road), but is great for the overall economy - lowering the fraction of the economy that gets consumed by energy and creating GOOD deflation until the economy gets itself wrapped around the new energy source and the idea of approximately zero marginal cost energy.

So much goodness coming once that capital investment and investors start sending their money to renewable energy investment, consumers that can make use of renewable energy (i.e. - electric commercial and LDV), and whatever else we dream up to make use of what I expect will be a greatly expanded energy supply and consumption.


I don't see a world in which energy insufficiency is a thing - I see a world arriving during my lifetime (next 2 or 3 decades) where energy is something that exists in such abundance (relative to today), that we see new businesses and use for energy being created to make use of it all.

(By analogy, the Internet is the expression of approximately zero marginal cost communication, and has resulted in ludicrous business models - in the context of '70s, '80s, and even the '90's and early '00s communications businesses like Netflix where the business is dependent on a communications infrastructure over which we stream high def movies today, and then stream them AGAIN tomorrow if we decide to watch the same movie again tomorrow).

All that we're missing in the historical holy trinity of human progress (communication, energy supply, transportation), is approximately zero marginal cost transportation. Free energy will lower the cost of transportation, but even with autonomous vehicles and free energy, transportation still achieve approximately zero marginal cost. Maybe Star Trek style transporters with stupendous quantities of approximately zero marginal cost energy will get us to approximately zero marginal cost transportation.

 

[jhm]

Oil prices and the coming financial 'Ice Age' - Resilience

So, a sluggish economy—made sluggish by excessive debt (Edwards)—combined with widening wealth inequality (Tverberg)—leads to generally lower employment and depressed wages than otherwise would have been the case—which leads to prices that are too low for energy producers, in particular, oil producers to make a profits sufficient to replace oil reserves that have been depleted or, in the case of oil exporting nations, pay for social welfare costs. According to Tverberg, this inability to make much profit among oil producers—shale producers have had negative free cash flow for years—feeds back into the economy, especially in the United States where the previously broadly booming oil and gas industry has been a major source of employment and business activity. (The boom now seems confined to the Permian Basin in Texas.)

Now, here’s how Tverberg’s thinking hooks up most directly with Edwards’. Tverberg writes: “It looks as though growing debt at ever-lower interest rates is becoming a less effective workaround for the economy’s real need, which is a need for a rapidly growing supply of under $40 per barrel oil and other low-priced energy products.” Edwards sees debt creation as becoming a less and less potent way to create economic growth in a debt-saturated economy. Tverberg goes to what she believes is the heart of the matter claiming that added debt cannot seem to provide oil and other energy sources at cheap enough prices for the economy to flourish. The financial Ice Age seems central to the views of both.

And, both Edwards’ and Tverberg’s outlook lead to the same result, a crash in the world economy that will be difficult to turn around. For Edwards there is the possibility that after a long retrenchment period, economic conditions could return to what passes for normal. For Tverberg, however, her thesis suggests a permanent alteration of conditions for modern societies in which energy insufficiency becomes a feature that limits and even stops economic growth.

Tverberg is a hack. Inspite of being an actuary, she has very unsound reasoning. She refuses to accept that renewable energy is cheap and scalable. She seems to have a deep need for the world to end with the fossil age.

 

[mspohr]

Tverberg is a hack. Inspite of being an actuary, she has very unsound reasoning. She refuses to accept that renewable energy is cheap and scalable. She seems to have a deep need for the world to end with the fossil age.

Tverberg doesn't seem to know anything about renewables. Thinks fossil fuels are the entire market.
Edwards seems equally clueless in the realm of economics.

 

[jhm]

Generally speaking, I think that this is the best way to measure most markets. The example that's close for all of us is Tesla's market share - in units its less impressive. As % revenue it's more impressive as it's coming from the top of the market down.

(Sidebar - the units I like to use for Tesla market share is shipped battery capacity; shipping high capacity batteries in high volume really shows the size of the chasm between Tesla and the infrastructure / supply chain that others need to develop to be competitive)

I have a hard time imaging the oil industry getting back to $3.5T in a single year ever again - that's ~50% higher than today and seems like an awfully big bite out of the world economy when there is a cheaper supply of energy available.

Then again, maybe what we need is one more big run up to that $3.5T level to really goose all of those consumers into finding somewhere else to spend their collective $3.5T

$3.5T is about 4.3% of global just for crude oil, not the refined products. It is a serious drag on the economy.

One reason why I feel this is a better metric for demand is that it shows how the total earnings on crude is capped. I've gotten tired of organizations putting these 2040 or demand peaks out there. What these amount to is a very long plateau. But even that is a silly thing for the oil industry to get excited about if the price of oil keeps going down and profitability is in the toilet for decades. Clearly as EVs and renewables advance oil and really all fossil fuels become more price elastic. So if you're going to retain some nominal volume growth, your probably going to be moving to lower and lower prices.

Second OPEC really should be managing prices so as to maximize total OPEC revenue. They are quite willing to reduce production to boost the price. But this chart show how limiting that game is. That game worked when price elasticity was low. But now I think holding out for higher prices, even to hold out for just $70, is risking killing off consumption. Oil needs to be priced low enough that consumption grows faster than non-OPEC production. That is, OPEC may need to price oil low enough that net demand for OPEC oil grows. In the short run that would likely mean lower OPEC revenue, but longer term they might be able to capitalize on consumption growth.

I find it curious that most of the high revenue years have been in the last 10 or so years. Mostly the market value has been around $1T. So it is shocking that this peak has proven so rewarding for the oil industry. I think most of that is scarcity pricing. Imagine the benefit of holding crude near $1.5T rather than $3.5. That's a 2.5% savings to the global economy that can go into diversifying the economy. But more cynically, think about how many $T delaying EVs is worth to the oil industry. That can buy a crapton of FUD and politicians. Game is just about over.

 

[mblakele]

This chart is a little dated, but it might fit into the discussion of oil price over time.

 

[ABCTG]

I just signed this petition to ask TD Bank of Canada to stop funding fossil fuel companies.

It might be a good economic choice for them anyway...

Who's funding climate chaos?

 

[jhm]

Rystad: Low Prices To Send Oil Services Market Into Recession | OilPrice.com

This is fairly bleak. What difference $70 and $60 Brent make!

 

[Oil4AsphaultOnly]

Rystad: Low Prices To Send Oil Services Market Into Recession | OilPrice.com

This is fairly bleak. What difference $70 and $60 Brent make!

Isn't this great news?

 

[jhm]

Isn't this great news?

While I am eager to see oil production decline, I am also not without sympathy for people losing jobs. Obviously you can't have one without the other. And this is part of why we need to avoid a big asset bubble in the first place. The bigger the bubble, them more people get hurt when it pops.

On the karmic scale, US shale has been growing production 2 barrels for every barrel OPEC must cut to try to uphold prices. So if OPEC were to lose heart with this deal, who could blame them?

 

[jhm]

Oil Demand Growth Weakest In Nearly A Decade | OilPrice.com
Wow this headline says it. Everybody is dialing back their demand estimate for this year and the next.

OPEC has managed to keep oil prices high enough to hurt shrink total demand and expand non-OPEC supply. The net result is less demand for OPEC oil.

The Saudis are expediting the Aramco IPO. Do they now see that time is not on their side?

 

[TheTalkingMule]

I don't think "expediting the IPO" is the right term. They're floating 1% chunks of Aramco on their domestic exchange and forcing wealthy Saudis to buy in. That's more like a tax than an IPO.

 

[Doggydogworld]

Imagine the benefit of holding crude near $1.5T rather than $3.5. That's a 2.5% savings to the global economy that can go into diversifying the economy.

That's not how it works. The people selling oil are part of the global economy, too. A lower oil price creates no short term global "savings". Oil consumers get a bigger slice of the global pie while producers get a smaller one. But the size of the pie does not change.

A sustained low oil price reduces employment in oil drilling, equipment and supplies. This (somewhat brutally) frees up labor to be used for other things. But if we use that same amount of labor to make car batteries and solar panels then once again the pie does not grow. (You can argue the pie 'quality' improves, of course, e.g. less trans fats/CO2. I'm only talking about quantity).

If it takes more labor to make batteries and PV the size of the pie shrinks. This is what the WattsUp/ZeroHedge crowd keeps saying, using cherrry-picked examples. Greens also use cherry-picked examples, sometimes to show green energy is cheaper and sometimes to contradict themselves by showing green energy employs more people!

Oil is uniquely expensive, so wind/solar look devastatingly cheap if you exclude battery cost. With battery cost included it's a toss-up for consumer cars. Cheap, high cycle life batteries can trounce oil for high mileage vehicles such as buses, trucks and taxis, though. That's the place to look for pie growth.

Even without pie growth, I'm all in favor of giving oil exporters like Saudi Arabia, Russia and Iran smaller slices. With apologies to Norway and Canada. But that's a geo-political angle, not a global growth angle.

 

[ABCTG]

While I am eager to see oil production decline, I am also not without sympathy for people losing jobs. Obviously you can't have one without the other. And this is part of why we need to avoid a big asset bubble in the first place. The bigger the bubble, them more people get hurt when it pops.

On the karmic scale, US shale has been growing production 2 barrels for every barrel OPEC must cut to try to uphold prices. So if OPEC were to lose heart with this deal, who could blame them?

Well, let's hope people are setting some of their income aside this time...


Bloomberg - Are you a robot?

“Lord, just give me one more boom, and this time I promise I won’t piss it away.”

As the shale drillers moved on to richer fields, the South Texas landscape became pockmarked with abandoned structures. This nimbleness—the ability to just pack up and leave at a moment’s notice—may give U.S. oil companies a competitive advantage against their more rigid state-run OPEC rivals, but there is a human cost to it all.



Lives are turned upside down. Plans are crushed. Savings are drained. As three Eagle Ford veterans—Jill Potts, George Garcia and Randy Katzmark—can attest.


They cut out some of their more conspicuous spending—like Skip’s new-truck-a-year habit—

 

[jhm]

That's not how it works. The people selling oil are part of the global economy, too. A lower oil price creates no short term global "savings". Oil consumers get a bigger slice of the global pie while producers get a smaller one. But the size of the pie does not change.

A sustained low oil price reduces employment in oil drilling, equipment and supplies. This (somewhat brutally) frees up labor to be used for other things. But if we use that same amount of labor to make car batteries and solar panels then once again the pie does not grow. (You can argue the pie 'quality' improves, of course, e.g. less trans fats/CO2. I'm only talking about quantity).

If it takes more labor to make batteries and PV the size of the pie shrinks. This is what the WattsUp/ZeroHedge crowd keeps saying, using cherrry-picked examples. Greens also use cherry-picked examples, sometimes to show green energy is cheaper and sometimes to contradict themselves by showing green energy employs more people!

Oil is uniquely expensive, so wind/solar look devastatingly cheap if you exclude battery cost. With battery cost included it's a toss-up for consumer cars. Cheap, high cycle life batteries can trounce oil for high mileage vehicles such as buses, trucks and taxis, though. That's the place to look for pie growth.

Even without pie growth, I'm all in favor of giving oil exporters like Saudi Arabia, Russia and Iran smaller slices. With apologies to Norway and Canada. But that's a geo-political angle, not a global growth angle.

I understand your argument and anticipated it as I wrote. You missed crucial language in my second sentence,

"That's a 2.5% savings to the global economy that can go into diversifying the economy."

It is not about the size of the "pie." Rather, it is a question about where consumers would be spending there income if they weren't putting about 2.5% of it into crude oil. Yes, they might spend it on EVs, eating out more often, or marijuana. It could be spread out over the millions of different things people buy. And allows the economy to be more diversified, dynamic, and perhaps satisfying than so much income concentrated on crude oil. Energy is just a means to an end. It is the means to creating the varied products, services and experience that enrich people's lives. But if collectively consumers have to spend more on energy, that cuts into being able to enjoy the things we really want.

One of the ways fuel or energy poverty has been defined is in terms of the fraction of family income spent on energy. Imagine living in a situation where more than 25% of your income went to buying fuel and electricity. How well would you be able to live on the other 75%? Would you have enough food, nice clothing, or pleasant housing for your family? Maybe not. You'd probably be living in an underdeveloped country, and the growth of that economy would be stymied by lack of modern energy and modern transportation. So this is one extreme. At the other extreme you have well developed economies large affluent populations. Here families spend just a few percent of their income on energy even though they consumer an oder of magnitude more energy than their neighbors in less developed countries. So which would you prefer to live in? So when spending on crude takes an extra 2.5% of global GDP, this means a large chunk of the global population finds themselves moving toward greater fuel poverty. Maybe you and I are affluent enough not to even notice this, but in some parts of the world it has dire consequences for food, health and employment opportunities.

The cost of energy is a factor specifically in labor markets. Energy is a factor in productivity. As the price of oil goes up, labor loses productivity. This reduces the value of labor causing job loss and slowed job creation. This is how high oil prices can trigger a rise in global unemployment and even spark a recession. Indeed, 2008 saw very high oil prices, which contracted the global labor market, imperiled home prices, triggered a mortgage crisis, and resulted in a global recession. This is also called demand destruction, the situation where energy prices are high enough to cause demand for all else to contract, which in turn destroys demand for energy too. It is all about higher energy prices killing productivity.

The thing that is most worrisome about peak oil (supply) is that it can drive energy prices up to levels that destroy growth in the global economy. It can cause the whole economy to shirk down to a level that declining oil supply can satisfy, but this level keep shrinking year after year. This is a much more devastating scenario than the peak oil demand scenario. Indeed, the peak demand scenario is the only economic escape from the consequences finite fossil supplies. That is, we find alternatives to fossils that are so economically competitive with fossils that demand for fossils dries up faster than the fossil supply. Even if climate change were a non-issue at this time, I believe we'd still have to go all in on renewables, batteries, EVs and the like just to avoid global economic collapse due to natural decline in oil resources. I tend not to indulge in this form of doomerism because I am much more optimistic about EVs and the like. But these matters do sit in the background. Even if, the politics of climate change could be evaporated in favor of fossil wealth, we'd be faced with a huge economic burden causing frequent and protracted recessions until we'd build out EVs and renewables. So we may as well get on with it.

Energy poverty sucks. We really cannot afford to toss an extra 2.5% of GDP into crude.

 

[jhm]

Rystad: US Shale Production To Peak At 14.5 Million Bpd | OilPrice.com

Rystad sees a peak for US shale in 2030. If WTI stays close to $55/b, this peak is projected to be 14.5 mb/d. If WTI is just $45/b going forward, the peak is 11.5 mb/d. Other institutions see other peaks.

If I am correct that peak oil demand comes around 2025, then that could eclipse this production scenario.

But I do think these Rystad scenarios are disturbing to the market. What if US shale really can't grow much beyond 2030? Does this mean WTI goes well above $55/b? How high? Could it go high enough to limit global GDP growth?

Likely, had it no been for the "miracle" of US shale growth, we'd be wrestling with a post oil peak world already. Can we expect another miracle? Or is the US shale peak, the actual global peak so dreaded? I sure hope that by 2030, EVs dominate the auto market. We would need that sort of scale to head off a 4mb/d decline from 2030 to 2040.

Of course, if the scenarios of the IEA and OPEC are to prove prescient, we'll want EVs to scale up much sooner!

 

[adiggs]

Some updated insight into how IMO 2020 is affecting the fuel markets for ships, and indirectly affecting commercial trucking (and other diesel consumers):
IEA: Trucks, ships may face less IMO 2020 risk than feared - FreightWaves

My takeaway being that lower demand is taking most of the edge off of the shift in fuel types. One of the possible outcomes was that ships switching to MGO and very low sulphur fuel oil would consume fuel that would otherwise turn into diesel, causing a big increase in prices for diesel.

But that isn't happening, and estimates for demand growth have been turning into demand neutrality or demand decrease.

 

[jhm]

Some updated insight into how IMO 2020 is affecting the fuel markets for ships, and indirectly affecting commercial trucking (and other diesel consumers):
IEA: Trucks, ships may face less IMO 2020 risk than feared - FreightWaves

My takeaway being that lower demand is taking most of the edge off of the shift in fuel types. One of the possible outcomes was that ships switching to MGO and very low sulphur fuel oil would consume fuel that would otherwise turn into diesel, causing a big increase in prices for diesel.

But that isn't happening, and estimates for demand growth have been turning into demand neutrality or demand decrease.

Hmm, so not a good year for diesel demand.

 

[adiggs]

Hmm, so not a good year for diesel demand.

It's economics - bad for one is good for another (up until the bad pushes somebody out of business). People doing trucking are happy with the lack of a bad price move in diesel against them!

But not so good for refiners and sellers of diesel Or at least not as good as some were thinking it might turn into (at least so far).