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dc_h
Active Member
Neroden\Jhm,
Thank you for the excellent dialog.
One note on cycles, the futures market can have a smoothing effect. During price spikes, frackers and other financially well run producers can sell forward. This is especially true for frackers, due to the short life cycle of their wells. Every time oil goes over various price points, producers can forward sell product and cap prices. In a truly efficient market this price discovery process would already working years out, but producers don't act entirely rationally and the market does not understand the reality of or the timing of the energy transition.
Thank you for the excellent dialog.
One note on cycles, the futures market can have a smoothing effect. During price spikes, frackers and other financially well run producers can sell forward. This is especially true for frackers, due to the short life cycle of their wells. Every time oil goes over various price points, producers can forward sell product and cap prices. In a truly efficient market this price discovery process would already working years out, but producers don't act entirely rationally and the market does not understand the reality of or the timing of the energy transition.
This is an interesting thing to think about. The futures market can have a smoothing effect, but it can also have a destabilizing effect.
I'll have to look at it more. Gasoline stations don't generally do futures contracts. So if we consider a price spike in oil followed by a crash in gasoline demand:
The producers locking in high sales prices simply passes the buck for losses to the refineries.
The refineries may be able to pass the buck to airlines or wholesalers or speculators.
But if I'm not mistaken, gasoline stations don't do futures contracts, generally, so refineries or wholesalers or speculators will take the losses.
If a big gas station chain does do futures contracts, they'll take the losses because the gas stations which buy at spot prices will cut prices.
adiggs
Well-Known Member
This has been an ongoing dynamic that is very interesting to me. It's crystal clear to me, the value to an oil producer why they should purchase options contracts that allow them to deliver oil at a future time at a guaranteed (high) price. Not just a single contract, but as many / much as they can get, all the way up to selling all of a year's production ahead of time if the cost of the contracts is low enough, and the delivered price is high enough. I realize the contracts will typically settle in cash instead of product - I see that as immaterial to the dynamic.
(And a producer that purchases more contracts than they can physically deliver has stopped hedging their production and business, and begun speculating, and that's different).
The part that isn't clear to me, in the market that I see today, is who wants to take the other side of those options? There are of course speculators who provide the bulk of the volume in the market. But do speculators really want to sell contracts that need volatility to decrease and/or the price of oil to increase even further, to make money? Again - not talking onesy/twosy contracts - talking the kind of volume that would enable multiple shale producers to sell out a a year or 3 of production.
The best idea people have cited in the past are the airlines - that they can lock in their cost of energy while oil is in the $50's and ensure that they don't have to pay for energy when oil is in the $60's or higher. I can see that to some degree, but it seems like these energy users would want to be locking in as many contracts back when oil was in the $30's and $40's over the $50s/$60s.
And as @neroden has been talking about earlier, the volume of kerosene / jet fuel is a big #3 and small potatoes next to the gasoline and diesel consumption. I suppose big freight haulers might use options contracts in bulk to offset price changes in fuel that they pay out on the road - are there futures for gasoline and/or diesel, or only oil? I'd think the refineries would be interested in oil futures as oil consumers, and the others we've been thinking of as energy consumers would be more interested in gasoline / diesel futures as it's directly the commodity they are consuming.
All of this wondering has me thinking - is there an equilibrium price today that both producers and consumers would be happy to transact at if they could get it? Are producers making money at $50/barrel oil, and consumers paying little enough that they can be profitable consuming the oil's products at $50/barrel? If there is such an equilibrium, then I'd expect that to show up in the futures market with some really large volume, as both sides of the trade have motivation to lock in lots of volume at that level.
My own view of things - energy consumers should be looking to lock in prices when oil is more like 30s or 40s, but not 50s (modest hedging in the 50s against even higher prices). (It being my view, that doesn't make me right of course
)So, the key thing to remember is backwardation and contango. In a falling market, speculators offer to buy oil years out in the future at *above* the spot price -- creating strong contango. In a rising market, hedgers offer to sell oil years out in the future at *below* the spot price -- creating backwardation.
Some of the people who take the other side of the contract are actually trading the spot price against the future price At the top end, at the worst, they're delivering oil now and buying it back in the future, and they are hoping to pay less in interest for *borrowing* the oil (yes, this is an actual thing) than the gains they make from the difference. If interest rates go up, they'e hosed.
Some of the people who take the other side of the contract are actually trading the spot price against the future price At the top end, at the worst, they're delivering oil now and buying it back in the future, and they are hoping to pay less in interest for *borrowing* the oil (yes, this is an actual thing) than the gains they make from the difference. If interest rates go up, they'e hosed.
adiggs
Well-Known Member
I think what you're describing is the motivation for speculators to help out the producers when prices are higher (by taking the other side of the producer's transaction to lock in the higher prices in the future), and consumers when prices are lower (by taking the other side of the transaction so consumers can lock in lower prices). This all presupposes that people have a strong belief about which direction the market is going, or the ability to put on a trade that results in no net change in possession of the commodity, while leaving them some money left over (speculators won't want to end up being net positive or negative physical possession of the commodity, because they don't want physical possession at all).
I found this site:
Normal backwardation - Wikipedia
Here's some more reading for others that are interested:
Contango Vs. Normal Backwardation
It appears there's a lot more knowledge of commodity markets I need to acquire
adiggs
Well-Known Member
This is interesting - clicking around on Investopedia, I found this article on how to invest around Peak Oil:
Peak Oil: What To Do When The Wells Run Dry
My takeaway from this article is that this is a reasonably traditional view of Peak Oil, where Peak Oil represents the peak of our ability to successfully extract oil from the earth, with every year after Peak Oil representing further increasing demand for oil, and further increasing inability to find and pump enough oil to satisfy that demand (oil prices are going up and up in this view).
There's nothing in the article talking about the idea that alternative energy sources might expand sufficiently to start decreasing demand for oil, to the point that oil is readily available and companies that want to bring it up and sell it no longer want to do so (as we've been discussing in this thread), because oil prices are going down and down.
Article is from July of '16 - reasonably current - and the absence of this dynamic from a reasonably mainstream thought process is interesting to me.
This article was also useful to me:
Introduction To Trading In Oil Futures
The central point here, is that as big as the oil market is, there is relatively little volume in the market transacted in the spot market. It's just not useful, while the futures market is inherently useful to all of the participants (producers, consumers, speculators). One thing this point of view reinforces, at least for me, is that a single number for the price of oil is decidedly one dimensional - oil is really a range of prices at different points in time, and the collection of them is much more helpful than the spot price, as well as the anticipated future range of those prices.
It also reinforces for me, the idea that futures contracts are going to smooth out the market and it's reactions to inputs into the system.
Peak Oil: What To Do When The Wells Run Dry
My takeaway from this article is that this is a reasonably traditional view of Peak Oil, where Peak Oil represents the peak of our ability to successfully extract oil from the earth, with every year after Peak Oil representing further increasing demand for oil, and further increasing inability to find and pump enough oil to satisfy that demand (oil prices are going up and up in this view).
There's nothing in the article talking about the idea that alternative energy sources might expand sufficiently to start decreasing demand for oil, to the point that oil is readily available and companies that want to bring it up and sell it no longer want to do so (as we've been discussing in this thread), because oil prices are going down and down.
Article is from July of '16 - reasonably current - and the absence of this dynamic from a reasonably mainstream thought process is interesting to me.
This article was also useful to me:
Introduction To Trading In Oil Futures
The central point here, is that as big as the oil market is, there is relatively little volume in the market transacted in the spot market. It's just not useful, while the futures market is inherently useful to all of the participants (producers, consumers, speculators). One thing this point of view reinforces, at least for me, is that a single number for the price of oil is decidedly one dimensional - oil is really a range of prices at different points in time, and the collection of them is much more helpful than the spot price, as well as the anticipated future range of those prices.
It also reinforces for me, the idea that futures contracts are going to smooth out the market and it's reactions to inputs into the system.
dc_h
Active Member
Agreed. Retail distribution channels are unlikely to hedge, unless it were a major chain. As you say, they are more likely to just pass costs on. Southwest used to be a big forward hedger, which may be less attractive now than a decade ago. Generally major users have some hedging to avoid spike impact.
adiggs
Well-Known Member
I found this page for quoting oil futures contracts:
Crude Oil Futures - CME Group
If you look at the contracts, each one represents a higher and higher price to around $56/bbl about a year from now. From what I've been reading about contango and normal backwardation, the oil market is in contango right now, with a built in presumption of steadily increasing prices for future oil (for consumers of oil, they will want the future oil for consumption purposes, but it's valuable to them to not have it today by at least the cost to possess and store it).
I wonder if coal market futures are in contango or normal backwardation (I would expect the latter - now for a hunt..).
Ah hah!
Coal (API2) CIF ARA (ARGUS-McCloskey) Futures Quotes - CME Group
Here's a coal market in backwardation - as you go out in time, each contract is for a steadily lower price.
Now I'm interested in watching the oil market differently - when will it change from contango to backwardation? And what event will be necessary to trigger that kind of a change. Which looks a lot like the conversation @jhm and @neroden have been having
Crude Oil Futures - CME Group
If you look at the contracts, each one represents a higher and higher price to around $56/bbl about a year from now. From what I've been reading about contango and normal backwardation, the oil market is in contango right now, with a built in presumption of steadily increasing prices for future oil (for consumers of oil, they will want the future oil for consumption purposes, but it's valuable to them to not have it today by at least the cost to possess and store it).
I wonder if coal market futures are in contango or normal backwardation (I would expect the latter - now for a hunt..).
Ah hah!
Coal (API2) CIF ARA (ARGUS-McCloskey) Futures Quotes - CME Group
Here's a coal market in backwardation - as you go out in time, each contract is for a steadily lower price.
Now I'm interested in watching the oil market differently - when will it change from contango to backwardation? And what event will be necessary to trigger that kind of a change. Which looks a lot like the conversation @jhm and @neroden have been having
Hey, Neroden, lots of good stuff above. I've been having a hard time keeping up with TMC lately, so a little slow to respond.
I think anticipating all that will happen when oil declines is a bit like trying to figure out what climate change will look like. The big trends are solid and devastating, but then there are a ton of knock on effects, feedback loops, nonlinear effects, and just plain weirdness.
I think you are absolutely right to focus on the high value products that drive the economics of crude. Undermine gasoline and diesel and whats left may not be worth pulling out of the ground. Synthetic chemistry has figured out how to make virtually any petroleum products starting with natural gas. This also applies to renewable organic feedstock. Certainly there are biofuels for jets. So as the oil industry scales back anD no longer cheap co-produces kerosene and plasticizers we may get to a place where renewable feedstocks and synthetic chemistry can care the day. So I'm not to worried about the last 20 Mbpd of crude demand, we've got to slay the first most profitable 75 Mbpd first. Electric vehicles and hyperloop will pretty much get us there.
Regarding gas station closures, I point out that the US and OECD countries as a whole are already post demand peak. The peak was around 2005. In a few places there was a small up tick in consumption owing to the price of oil falling by 50% but this is still down from a decade ago. So in a way we already have experience living in a post oil peak. Developed countries have low enough economic growth that gains in energy efficiency are sufficient for economic growth. This is one of the ways we know that demand for oil above $100/b is likely not sustainable (in a narrow economic sense). So what is at stake is how to support developing economies with renewable energy. Once the developing world can grow without incremental fossil fuel consumption, we will be firmly post peak. I think that had the price of oil not collapsed a few years ago global consumption of crude could have begun to decline. However, it would have come about with economic malaise even not recession. The key thing is the cost of renewables and advanced batteries must continue to decline. As this happens, the economic return will be high enough for fast growing economies like China and India to grow at full speed. In fact, as developing countries are able to cut their energy imports, that should support even more robust growth.
Cheers!
I think anticipating all that will happen when oil declines is a bit like trying to figure out what climate change will look like. The big trends are solid and devastating, but then there are a ton of knock on effects, feedback loops, nonlinear effects, and just plain weirdness.
I think you are absolutely right to focus on the high value products that drive the economics of crude. Undermine gasoline and diesel and whats left may not be worth pulling out of the ground. Synthetic chemistry has figured out how to make virtually any petroleum products starting with natural gas. This also applies to renewable organic feedstock. Certainly there are biofuels for jets. So as the oil industry scales back anD no longer cheap co-produces kerosene and plasticizers we may get to a place where renewable feedstocks and synthetic chemistry can care the day. So I'm not to worried about the last 20 Mbpd of crude demand, we've got to slay the first most profitable 75 Mbpd first. Electric vehicles and hyperloop will pretty much get us there.
Regarding gas station closures, I point out that the US and OECD countries as a whole are already post demand peak. The peak was around 2005. In a few places there was a small up tick in consumption owing to the price of oil falling by 50% but this is still down from a decade ago. So in a way we already have experience living in a post oil peak. Developed countries have low enough economic growth that gains in energy efficiency are sufficient for economic growth. This is one of the ways we know that demand for oil above $100/b is likely not sustainable (in a narrow economic sense). So what is at stake is how to support developing economies with renewable energy. Once the developing world can grow without incremental fossil fuel consumption, we will be firmly post peak. I think that had the price of oil not collapsed a few years ago global consumption of crude could have begun to decline. However, it would have come about with economic malaise even not recession. The key thing is the cost of renewables and advanced batteries must continue to decline. As this happens, the economic return will be high enough for fast growing economies like China and India to grow at full speed. In fact, as developing countries are able to cut their energy imports, that should support even more robust growth.
Cheers!
Last week oil was in backwardation. It rose to about $58 12 months out and then fell all the way out to 2023. Not that the spot price has fallen back to $51, the near term bump has been flattened out.I found this page for quoting oil futures contracts:
Crude Oil Futures - CME Group
If you look at the contracts, each one represents a higher and higher price to around $56/bbl about a year from now. From what I've been reading about contango and normal backwardation, the oil market is in contango right now, with a built in presumption of steadily increasing prices for future oil (for consumers of oil, they will want the future oil for consumption purposes, but it's valuable to them to not have it today by at least the cost to possess and store it).
I wonder if coal market futures are in contango or normal backwardation (I would expect the latter - now for a hunt..).
Ah hah!
Coal (API2) CIF ARA (ARGUS-McCloskey) Futures Quotes - CME Group
Here's a coal market in backwardation - as you go out in time, each contract is for a steadily lower price.
Now I'm interested in watching the oil market differently - when will it change from contango to backwardation? And what event will be necessary to trigger that kind of a change. Which looks a lot like the conversation @jhm and @neroden have been having
One thing to keep in mind is that the spread of 2 months out over 1 month basically pays investors holding crude to hold it in storage another month. So long as crude stock levels are way above seasonal historic levels the close end of the futures curve must in steep contango. This is essentially the price paid to keep surplus barrels off the market.
It will be fascinating when the market realizes that oil will be worth well below $50 in 2025. That's when we'll know that the market truly takes EVs seriously.
If I could call that moment, I could short oil stocks right before it and make a fortune.
Unfortunately, I cannot call that moment -- the timing is very tricky.
China Launches A $361 Billion Secret Takeover... In Renewable Energy | OilPrice.com
China is moving aggressively into renewables, both domestically and internationally. No wonder they started that climate change hoax.
I expect they will move just as aggressively with EVs. I wonder this is part of the international strategy. First, build up renewable power in developing countries. Second, sell electric vehicles in those countries. Third, keep selling both renewable energy hardware and EVs into those countries.
It's about time for me to update the virtual barrel theory. Essentially about .3 kWh storage plus .3 MWh of renewable energy is virtual replacement for a barrel of oil. China is behind $30/MWh PPAs internationally. Let's suppose they can get auto battery costs down to $120/kWh. So their virtual barrel has a cost of $45 = .3×$120 + .3×$30. This is very competitive with crude, especially in developing countries that need to expand oil infrastructure to import, refine and distribute oil. Renewable energy minimizes stress on national currencies and virtually eliminates energy price volatility. (I'll save the details behind this virtual barrel for later.)
Basically China has the opportunity to undercut the whole fossil fuel industry through its manufacturing prowess and aggressive financing. They can electrify countries and power vehicles for less than oil at $45/b. The infrastructure advantage is critical here.
China is moving aggressively into renewables, both domestically and internationally. No wonder they started that climate change hoax.
I expect they will move just as aggressively with EVs. I wonder this is part of the international strategy. First, build up renewable power in developing countries. Second, sell electric vehicles in those countries. Third, keep selling both renewable energy hardware and EVs into those countries.
It's about time for me to update the virtual barrel theory. Essentially about .3 kWh storage plus .3 MWh of renewable energy is virtual replacement for a barrel of oil. China is behind $30/MWh PPAs internationally. Let's suppose they can get auto battery costs down to $120/kWh. So their virtual barrel has a cost of $45 = .3×$120 + .3×$30. This is very competitive with crude, especially in developing countries that need to expand oil infrastructure to import, refine and distribute oil. Renewable energy minimizes stress on national currencies and virtually eliminates energy price volatility. (I'll save the details behind this virtual barrel for later.)
Basically China has the opportunity to undercut the whole fossil fuel industry through its manufacturing prowess and aggressive financing. They can electrify countries and power vehicles for less than oil at $45/b. The infrastructure advantage is critical here.
adiggs
Well-Known Member
China Launches A $361 Billion Secret Takeover... In Renewable Energy | OilPrice.com
China is moving aggressively into renewables, both domestically and internationally. No wonder they started that climate change hoax.
I expect they will move just as aggressively with EVs. I wonder this is part of the international strategy. First, build up renewable power in developing countries. Second, sell electric vehicles in those countries. Third, keep selling both renewable energy hardware and EVs into those countries.
It's about time for me to update the virtual barrel theory. Essentially about .3 kWh storage plus .3 MWh of renewable energy is virtual replacement for a barrel of oil. China is behind $30/MWh PPAs internationally. Let's suppose they can get auto battery costs down to $120/kWh. So their virtual barrel has a cost of $45 = .3×$120 + .3×$30. This is very competitive with crude, especially in developing countries that need to expand oil infrastructure to import, refine and distribute oil. Renewable energy minimizes stress on national currencies and virtually eliminates energy price volatility. (I'll save the details behind this virtual barrel for later.)
Basically China has the opportunity to undercut the whole fossil fuel industry through its manufacturing prowess and aggressive financing. They can electrify countries and power vehicles for less than oil at $45/b. The infrastructure advantage is critical here.
Stronger @jhm (taking your #s as givens) - a $45 barrel of oil is the marginal cost of a barrel of oil in a developed economy that already has the infrastructure built to make use of it. The gas stations, refineries, gas distribution, etc.. Any country that still needs to build that infrastructure to fully make use of the oil has a higher marginal cost, by the cost of that infrastructure.
Your virtual barrel, based on renewables plus energy storage, gets to compete with a much higher number in any country that hasn't already built the infrastructure.
Wow, this is pretty impressive. The 11c/kWh PPA is down 24% for the SolarCity PPA oder 14.5c/kWh just two years earlier. That's a 13% annualized decline, which seems right on schedule.
Note that Kauai has a solar glut midday. So the only way to continue to displace diesel with more solar is to store it all.
This is an application of the virtual barrel idea. When you couple batteries and solar together you get an energy supply that competes with liquid fuels. In this case the 11c/kWh competes with 12 to 18 c/kWh just for diesel.
Now if you strap these batteries onto a car instead, you need about 300 kWh to travel 1000 miles. And 1 barrel is also enough to travel about 1000 miles. So at 11c/kWh, this works out to $33 per virtual barrel. In this case the batteries are getting much more efficiently cycled than in an EV. Large diesel generators generate about 591 kWh from 1 barrel, 42 gallons of diesel. This works out to $65 per barrel but ought be compared with refined diesel, not crude before the cost of refining, which is currently about $70 at the NY hub value $52 WTI crude. Kauai must have been spending between $72 and $106 per barrel of crude.
It stands to reason that if solar and batteries can deliver a virtual barrel for $33 to $45, then crude cannot command a price over $45 or more for much longer.
Imagine if the oil price were to survey to $100. Every island and other places that use diesel for more than just backup power would be scrambling to get solar-battery plants. Competing with crude in sub $50 prices may not seem so market moving now, but what this really does is truncate the market on the upper end.
Exactly. We could probably sort these countries out by motorization (number of motor vehicles per 1000 inhabitants). Countries with low climbing motorization are prime targets for this strategy. If there is enough economic growth for people to start buying cars, then they could just as well buy EVs. The oil infrastructure will be thin and costly. All countries must have electrical infrastructure. If this can be leveraged to avoid infrastructure for crude, coal and gas, then the growing country avoids having to make massive investments.
So the idea that the developing countries may be the last market for gas powered vehicles may be entirely wrong. The last holdouts may be in the developed countries with abundant legacy infrastructure.
Ah.... problem with your virtual barrel calculation for transport. One barrel of crude produces about 19 gallons of gasoline and 12 gallons of "middle distillates" (including diesel); the rest is not used for land transportation. So you'd need cars & trucks getting 32 mpg to get 1000 miles out of a barrel of crude oil. That's substantially higher than the fleet average of 25 mpg.
Also, the EPA rate for Model S is as high as 380 kwh / 1000 miles.
Let's try again. 1 barrel gets you 31 gallons of gas and/or diesel, and at 25 mpg this will move you 775 miles; in a Model S this requires 294.5 kwh, and at 11 cents, that's $32.395. Huh -- it works out quite close to your result, coincidentally. Except that the electricity doesn't require refining or transportation, and the crude oil does, so....
Incidentally, at 18 cents/kwh -- a price I can get with solar and storage at my home right now in a fairly cloudy area -- the "barrel equivalent" price is $53, again forgetting about the large refining and transportation costs of gasoline.
I think, fundamentally, oil can't compete. NOW. The very best fracking companies were claiming breakevens around $35 but apparently that was done by squeezing the oilfield services companies to operate at a loss; they are now raising prices and Irina Slav at oilprice.com thinks their breakevens will go up by $10 pretty much immediately.
High-mpg cars do throw a bit of a spanner into these calculations. If we use a 50 mpg Prius as the Last Great Hope of the oil companies, we get breakevens below $64.79 (for 11 cent electricity), which is still terrifying for the oil companies.
But we really have left something out here. It would be better to calculate this using the refining and transportation costs. A while back you did a regression from average US gasoline prices to oil prices:
GasolinePricePerGallon = $0.922 + 0.0261*WTICrudePricePerBarrel + error
So for the average location in the US with average gas prices, take 11 cent electricity (also the average from the grid), use the Model S efficiency, and you find that the electric car goes at $0.0418 / mile. Comparing to the Last Great Hope For Oil, the 50 mpg Prius, this would be $2.09 / gallon, or $44.75/barrel.
Ramp it down to a better efficiency of .333 wh/mile and the equivalency is $34.85. Down to .300 wh/mile and it's $27.89.
(Use the pessimistic 18 cent electricity and the Model S efficiency and a Prius and you get $95.70. We really shouldn't see oil over $100 again. But if you use the 18 cent electricty and the fleet average of 25, you get $30.19.)
Note that US gas prices are cheaper than in most of the world. So although there will be some spots in the US with extra-cheap gas, most of the world will see gas more expensive than this.
If electricity prices drop even more, as they will...
Anyway, my conclusion from this:
(1) the only two things preventing *all* cars from going electric are the upfront purchase price and the number of cars manufactured. That's *it*. It's hardly even worth calculating fuel-price-equivalency any more, the difference is just too extreme. Electric cars are superior in every qualitative way and they're cheaper to operate no matter what, so they'll sell as fast as they can be manufactured until total market saturation.
(2) Oil prices cannot stay above $45, or indeed $25, for very long (only as long as electric cars are production constrained)
(3) Basically no new oil drilling can be profitable. Possibly some new wells in existing "conventional" oilfields, which Rystad said had an average cost of $29. No new fields, certainly; they all have costs above $40. The only way to make money from oil wells is to pump from existing wells.
I think any good model of the future oil market must be viewed entirely in terms of how fast the electric cars can be manufactured. So the question is, at what point are they manufactured fast enough to displace enough oil to keep up with the decline rate of the existing fields? I think that's a pretty hard question. Given that they'll sell as fast as they can be manufactured, we should see companies falling all over themselves to manufacture electric cars -- and I think we are seeing that (witness Faraday Future). But how fast can they actually get them manufactured?
Tesla is trying to have a huge advantage here, with "factory as a product". And they may well manage to do exactly that.
Also, the EPA rate for Model S is as high as 380 kwh / 1000 miles.
Let's try again. 1 barrel gets you 31 gallons of gas and/or diesel, and at 25 mpg this will move you 775 miles; in a Model S this requires 294.5 kwh, and at 11 cents, that's $32.395. Huh -- it works out quite close to your result, coincidentally. Except that the electricity doesn't require refining or transportation, and the crude oil does, so....
Incidentally, at 18 cents/kwh -- a price I can get with solar and storage at my home right now in a fairly cloudy area -- the "barrel equivalent" price is $53, again forgetting about the large refining and transportation costs of gasoline.
I think, fundamentally, oil can't compete. NOW. The very best fracking companies were claiming breakevens around $35 but apparently that was done by squeezing the oilfield services companies to operate at a loss; they are now raising prices and Irina Slav at oilprice.com thinks their breakevens will go up by $10 pretty much immediately.
High-mpg cars do throw a bit of a spanner into these calculations. If we use a 50 mpg Prius as the Last Great Hope of the oil companies, we get breakevens below $64.79 (for 11 cent electricity), which is still terrifying for the oil companies.
But we really have left something out here. It would be better to calculate this using the refining and transportation costs. A while back you did a regression from average US gasoline prices to oil prices:
GasolinePricePerGallon = $0.922 + 0.0261*WTICrudePricePerBarrel + error
So for the average location in the US with average gas prices, take 11 cent electricity (also the average from the grid), use the Model S efficiency, and you find that the electric car goes at $0.0418 / mile. Comparing to the Last Great Hope For Oil, the 50 mpg Prius, this would be $2.09 / gallon, or $44.75/barrel.
Ramp it down to a better efficiency of .333 wh/mile and the equivalency is $34.85. Down to .300 wh/mile and it's $27.89.
(Use the pessimistic 18 cent electricity and the Model S efficiency and a Prius and you get $95.70. We really shouldn't see oil over $100 again. But if you use the 18 cent electricty and the fleet average of 25, you get $30.19.)
Note that US gas prices are cheaper than in most of the world. So although there will be some spots in the US with extra-cheap gas, most of the world will see gas more expensive than this.
If electricity prices drop even more, as they will...
Anyway, my conclusion from this:
(1) the only two things preventing *all* cars from going electric are the upfront purchase price and the number of cars manufactured. That's *it*. It's hardly even worth calculating fuel-price-equivalency any more, the difference is just too extreme. Electric cars are superior in every qualitative way and they're cheaper to operate no matter what, so they'll sell as fast as they can be manufactured until total market saturation.
(2) Oil prices cannot stay above $45, or indeed $25, for very long (only as long as electric cars are production constrained)
(3) Basically no new oil drilling can be profitable. Possibly some new wells in existing "conventional" oilfields, which Rystad said had an average cost of $29. No new fields, certainly; they all have costs above $40. The only way to make money from oil wells is to pump from existing wells.
I think any good model of the future oil market must be viewed entirely in terms of how fast the electric cars can be manufactured. So the question is, at what point are they manufactured fast enough to displace enough oil to keep up with the decline rate of the existing fields? I think that's a pretty hard question. Given that they'll sell as fast as they can be manufactured, we should see companies falling all over themselves to manufacture electric cars -- and I think we are seeing that (witness Faraday Future). But how fast can they actually get them manufactured?
Tesla is trying to have a huge advantage here, with "factory as a product". And they may well manage to do exactly that.
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