Shorting Oil, Hedging Tesla

[SebastianR]

Hmm, these numbers don't seem quite right. I'll convert to British units for comparison with other assumptions we've thrown around here.

20k km/year is about 12k miles/year. So this is what I would expect.

5l/100km is 45.6 miles/gallon. This seems rather high. US fleet average is about 25 mpg. However I would expect the Chinese fleet to have smaller, more fuel efficient cars than US. Even so, 46 mpg is rather high up the efficiency scale. Perhaps something in range of 30 to 35 mpg would be more reasonable as replacement comp.

Agree it is quite a good fuel efficiency. I was assuming that since a) vehicles are smaller b) I assumed that that more strict regulation will be in place by then. But I fully and happily concede this point: 30 to 35 is more reasonable as assumption.

50 million cars? I thought China was aiming for 5 million by 2020. Is there a much bigger ambition here?

That's a misunderstanding. I believe the total annual vehicle sales to be 50 mio. And I believe there will be the mandate to have 15.5% of them electric. That would give me 7.75 mio electric cars.

So let's call it about 300 kbpd for 5 million EVs. This is actually in line with the production the crude production the Chinese government is projecting out to 2020. The coincidence here leads me to suspect that the government may actually be basing there EV target on covering their shortfall in production or something close to that. It certainly would be a reasonable anchor point. They should want enough EV production not to have to increase crude imports by a substantial amount.

Gotcha. So if you take the 300kbpd/5 million EVs and use 7.75 million EVs instead, you are at about 465kbpd that could already move the needle a bit.

Now the year before that (2019) "only" approximately 2,5 million EVs will be mandated (assuming slightly less overall vehicle sales and the 6.9% mandate). That would "only" be 150 kbpd.

However, 2019 and 2020 together would already be in excess of 600 kbpd. So this may all happen surprisingly fast if the EV mandate actually comes as advertised. And since the only chance for Chinese car makers is to lead in the EV space, I see a good chance for the EV mandate to come...

(Again, use my numbers with care...)

 

[jhm]

OK, I found another very useful tidbit.

Wood Mackensie estimats that electric vehicles are CURRENTLY displacing 50,000 barrels of oil per day.

World consumption is estimated at 94 million barrels a day (2014, most recent data I could find quickly), forecasted to be 96 million in 2016, roughly a 1% rise per year. At 6% natural decline per year and offsetting the 1% rise per year, we have to hit 6.72 million barrels of displacement. So electric car deployment has to be about 134 times what it is now. To put this in a more interesting way, electric car deployment has to double about 6 times.

That deployment is more-than-doubling yearly in China. Musk's trying to double yearly (on average). So let's say 6 years. 2022. Maybe it will slip to 2023 or 2024.

I'm pleased that this matches the projections I made from different assumptions.

Do you know what assumptions Wood Mac began with to get to 50 kbpd displacement. Perhaps 1.3 million elective vehicles as of end of 2015. Divide 1.3 mm vehicles / 0.05 mmbpd gets to 26 vehicles per 1 bpd.

My rule of thumb has been 25 vehicles per 1 bpd. But your argument around nonfungible products of crude leads to some fraction f of a barrel that displaces the whole barrel of crude. So 25f vehicles per 1 bpd crude. Reasonable values for f may be 0.6 to 0.8. So crude offset may be in range of 15 to 20 vehicles per bpd.

It interesting how we keep circling back to this displacement ratio. I suspect that Wood Mac is using a fairly high ratio of EVs to barrels. They tend to be a cheerleader for investment in the oil and gas.

Anyone know what the EV fleet size is at end of 2016? I've been expecting around 2.1 million.

 

[jhm]

Agree it is quite a good fuel efficiency. I was assuming that since a) vehicles are smaller b) I assumed that that more strict regulation will be in place by then. But I fully and happily concede this point: 30 to 35 is more reasonable as assumption.



That's a misunderstanding. I believe the total annual vehicle sales to be 50 mio. And I believe there will be the mandate to have 15.5% of them electric. That would give me 7.75 mio electric cars.



Gotcha. So if you take the 300kbpd/5 million EVs and use 7.75 million EVs instead, you are at about 465kbpd that could already move the needle a bit.

Now the year before that (2019) "only" approximately 2,5 million EVs will be mandated (assuming slightly less overall vehicle sales and the 6.9% mandate). That would "only" be 150 kbpd.

However, 2019 and 2020 together would already be in excess of 600 kbpd. So this may all happen surprisingly fast if the EV mandate actually comes as advertised. And since the only chance for Chinese car makers is to lead in the EV space, I see a good chance for the EV mandate to come...

(Again, use my numbers with care...)

Oh, this makes sense now. 50 million was the total car market. So 15.5% of that would be a huge number EVs just for China, 7.75 million. So that alone in one year is a 300 to 400 kbpd strike to oil demand. This is well in excess of what is needed to offset declining domestic crude production. Indeed, we should see a reduction in imports to China. That would really through the oil markets into panic.

Let's punch this around some more. I'm thinking that bumps peak oil demand a few years sooner. Oil investors really are not seeing this risk.

Thanks so much.

 

[jhm]

Interesting headline

World needs to invest $25 trillion in new oil capacity over next 25 years, Saudi Aramco CEO says World needs to invest $25 trillion in new oil capacity over next 25 years, Saudi Aramco CEO says

Translation: Please invest in the Aramco IPO, and pay no attention to the all the solar we're setting out.

 

[jhm]

Hmmm. How many Gigafactories are needed to electrify transport, again?

100 Gigafactories @ $5B = $0.5T
100GW/a storage * 100 plants * $67M/GWh (average over 25 years, is likely lower) * 25 years = $16.75T

That leaves $7.75T left over for solar and wind & grid improvements, over the course of 25 years that likely buys 8-10TW of new generation.

Seems like a better deal.

Indeed. This is the way to look at these gigantic 25 year industry wide investments. This is also why I think in terms of a virtual barrel. When it is cheaper to replace a barrel of crude with some combination of batteries and solar (other renewables too), then these massive annual investments in crude will shift to the lower cost virtual barrels. This exposes the basic fallacy of Aramco's $25T number. They argue for it on volume grounds, but in reality the allocation of that investment will depend on the expected returns in crude and its alternatives. And so it all depends on the relative costs of all these alternatives.

We see that already in investments into new power plants. Solar is pressing toward getting more than half of the investment dollars. Wind will hold onto a quarter. So all natural gas is getting squeezed down to less than a quarter, as coal is almost entirely out of the new plant market. (China just cancelled 120 GW of coal plant projects at various stages of development and construction.) This shift in share of investment dollars is based primarily on price, not volume. Volume follows investment, not the other way around. And investment follows price. (Of course, scaling up cumulative production also increases the rate at which prices fall, but this is an advantage for batteries and solar, not so much for oil which fully enjoys its economies of scale.)

 

[jhm]

Renewable Energy Is “Gaining Ground According To Nearly Every Measure,” Says IRENA

Geez, I was wrong about natural gas still having upto a quarter of the market for new power. According to this article already in 2015, wind and solar captured 90% of the new power market. No wonder there have been issues with investment growth slowing up in 2016. The new power market is saturated. It's hard to grow by 30% when you already have 90% of the market.

So what does this mean? As the cost of solar, wind and batteries decline they must enter new markets. So heat and transportation markets are next. This would imply a boost in the EV market. Additionally for that saturated power market, the next step is to push fossil fuel generators into an early retirement. So at this point it becomes relevant to compare an solar PPA to the fuel cost in a gas or coal plant, ignoring capex. That is, we are at a threshold where new solar capacity must be cheaper than burning fuel at an existing plant. This is a very scary threshold for power producers. They are at risk of needing to impair or write off assets. This is essential what we mean by the casual term "stranded asset."

This also makes clearer why China halted 120 GW of coal projects. Essentially, to keep building a half completed plant would only impair more asset value than simply cutting losses on plants in construction.

So another way to manage stranded assets is to find other uses for them. This is how the heat and transportation markets come into play. If you're China, you want to build up an EV fleet to minimize the rate you need to send plants to early retirement. Building up the EV fleet sooner to rather than later smooths out the transition. In terms of carbon emissions, building the EV fleet faster is probably worth extending fossil plant life by a small amount. That is, they're still retiring early, but not just so much earlier.

But again, when renewable PPAs are cheaper than fuel, you stop burning fuel.

So somehow this one snuck up on me. I did not realize we were so close to saturation in 2015!

 

[Bangor Bob]

Perhaps we can discuss when oil and gas imports to China will begin to decline. I think that will be a key moment for the market.

EV sales there are on a vertical-line growth trend, nearly 200% sales growth in 2016 and their plugin fleet is now bigger than the US or Europe's. If that can be sustained for a couple years, it won't be long at all. Well, depends on how fast their total auto market is growing too. Getting older, thirstier ICEs out of the fleet, even if they're replaced with new ICEs, would help reduce petroleum demand too.

In other news, China is also cancelling construction of 120GW of coal plants, some of which were already under construction. Good news from all angles there.

 

[Bangor Bob]

20k km/year is about 12k miles/year. So this is what I would expect.

12k miles/year is a US norm. I'd be shocked if the Chinese were driving that much.

 

[RobStark]

In 2016 Chinese car sales totaled just over 24M

China’s Car Sales Rose Fastest in Three Years in 2016

Sound projections are 50M in 2020?

Do "electric vehicles" include PHEVs that rarely get plugged but are purchased in order to get preferential license registration vs ICEv?

 

[SebastianR]

In 2016 Chinese car sales totaled just over 24M

China’s Car Sales Rose Fastest in Three Years in 2016

Sound projections are 50M in 2020?

Do "electric vehicles" include PHEVs that rarely get plugged but are purchased in order to get preferential license registration vs ICEv?

Nobody knows if 50m is a sound projection. I look at it this way: if it is less than that, you need less EVs to displace enough oil. (My argument that EVs will only move the needle on oil imports if they grow quicker than the vehicle market).

The mandate would be for full EVs. Have a look at the electrek article. I'm also happy to translate the Sueddeutsche.de article where relevant. AFAIK this Chinese EV mandate is not in force just yet. But if it comes it not only kills German car exports but also the oil market.

 

[RobStark]

Nobody knows if 50m is a sound projection.

Let me use a different word.

Is 50M a reasonable projection given Chinese economic growth and limitations on new vehicle registrations?

Is it like saying 1M Teslas sold globally in 2020 or 4M Teslas sold globally in 2020?

 

[dc_h]

He's hopeful Trump will be riding in on a white stead (Arabian) to save the industry. He cites uncertainty as risk to industry, but it could also be certainty that is risk to business and only war or some crazy policy outlawing solar power can save oil.

Oil major CEO warns of world riddled with uncertainties that could hold back investment Oil major CEO warns of world riddled with uncertainties that could hold back investment

 

[renim]

2016纯电动客车格局巨变：宇通比亚迪中通三足鼎立 - OFweek新能源汽车网移动版

FWIW
this seems to confirm that BYD automotive battery sales have overtaken Tesla automotive battery sales in 2016.

2010 it was GS Yuasa who had the sales mantle for automotive Li Ion batteries
then 2011-2012 it was AESC/Nissan who had the sales mantle for automotive Li Ion batteries
then 2014-2015 it was Tesla/Panasonic who had the sales mantle for automotive Li Ion batteries
then 2016-todate it is BYD who has the sales mantle for automotive Li Ion batteries
who next? if history is a guide it will be another Chinese company, the Chinese don't lose manufacturing lead once they attain it.

PS 比亚迪 seems to be BYD, so in December alone they sold 6302 EV buses, at about 300kWH each. None of which is generally captured in passenger car statistics......but they truly are automotive li ion batteries

 

[Oil4AsphaultOnly]

2016纯电动客车格局巨变：宇通比亚迪中通三足鼎立 - OFweek新能源汽车网移动版

FWIW
this seems to confirm that BYD automotive battery sales have overtaken Tesla automotive battery sales in 2016.

2010 it was GS Yuasa who had the sales mantle for automotive Li Ion batteries
then 2011-2012 it was AESC/Nissan who had the sales mantle for automotive Li Ion batteries
then 2014-2015 it was Tesla/Panasonic who had the sales mantle for automotive Li Ion batteries
then 2016-todate it is BYD who has the sales mantle for automotive Li Ion batteries
who next? if history is a guide it will be another Chinese company, the Chinese don't lose manufacturing lead once they attain it.

PS 比亚迪 seems to be BYD, so in December alone they sold 6302 EV buses, at about 300kWH each. None of which is generally captured in passenger car statistics......but they truly are automotive li ion batteries

Doubt it. 6302 EV buses has the same KWh of batteries as 18,906 Tesla P100D's. Plus, your highlighting of Dec sales is disingenuous when the link also shows 14,903 EV buses for all of 2016 - 42% in one month! Panasonic sold 3x's the automotive batteries than BYD in 2015, a doubling of EV sales for BYD will not help them surpass Tesla/Panasonic in 2016. BYD will become a closer second, but will only come up to over 1/2 of Tesla/Panasonic sales.

 

[RobStark]

BYD sells BEV Busses, PHEV passenger vehicles and a handful of BEV passenger vehicles.

Very doubtful they surpassed Panasonic in 2016.

 

[jhm]

In 2016 Chinese car sales totaled just over 24M

China’s Car Sales Rose Fastest in Three Years in 2016

Sound projections are 50M in 2020?

Do "electric vehicles" include PHEVs that rarely get plugged but are purchased in order to get preferential license registration vs ICEv?

Good questions. According to the video in this report (Why Chinese Car Sales Are Surging Faster Than Expected) GM is expecting China's auto sales to hit 30M in 2020. This seems more believable than 50M. Going from 24M in 2016 to 30M in 2020 implies just an annualized growth rate of 5.7%, but hitting 50M requires a 20.1% growth rate.

Also the text in this article speak on incentives for vehicles with engine displacement lower than 1.6l. So PHEV very well could benefit from this small engine incentives and other incentives for EVs. I would expect PHEVs to be included in most stats on EV sales, whether they are frequently plugged in or not. First, PHEVs as small displacement engines decrease demand for gasoline through higher mpg efficiency. Second, plugging them in allows electric to substitute for gasoline. Thus, the EV utilization, the share of miles from electricity, depends on the relative cost of charging versus fueling up at gas stations. A large fleet of PHEVs gives China numerous options for managing the costs of energy and infrastructure. So for instance, if the price of crude jumped up to $100/b, the cost could be passed along to gasoline prices, and the utilization of charging PHEVs would go way up. This sort of demand elasticity puts a cap on the price of crude. On the other side of the energy equation, China's grid appears to be oversupplied with generation capacity and also needs economical ways to integrate intermittent solar and wind power. Thus, building out the right sort of EV charging infrastructure to power a large PHEV fleet can help the grid optimize the value of existing assets and new renewable energy. For example, adaptive charging in public parking lots could absorb surplus solar power in the morning as commuters work while assuring baseload demand 24/7. So just having a large PHEV fleet, even with initially low charging utilization, can help infrastructure planners scale up in an optimal way. A pure BEV fleet, OTOH, imposes immediate demands on infrastructure and does little to put a short-term price cap on crude. BEVs are really important long-term while the flexibility of PHEVs has short-term advantages. Both are vital to the energy transition.

Just to illustrate the price cap on fuel... Suppose the PHEV fleet gets 4 miles per kWh on electricity alone and 50 miles per gallon on gasoline alone. So if the cost to charge is, say 20c/kWh, that's 5c/mile. So gasoline would need to be priced below $2.50/gallon to give the PHEV an economic incentive to decrease charging utilization. Conversely, the higher the price of gasoline goes above $2.50/gallon, they higher the charging utilization will go up. So a sufficiently large PHEV fleet would prevent prices from going much above $2.50. Now if you are contemplating building out charging infrastructure and you see a way to bring the cost of charging down to say 12c/kWh, then you know you compete with gas above $1.50/gallon which in the US would imply of price of crude at about $22/b. So you have a good foundation to bound the market risk of the price of crude or gasoline to your charging infrastructure project. If you were a parking lot operator, you could estimate demand for your charging infrastructure based on how many PHEVs and BEVs park in your lot. With PHEVs you may be competing with gas a $2.50/gal while with BEVs you may be competing with say 20c/kWh in non-residential charging locations and 12c/kWh in residential charging. Both PHEV and BEV represent demand for your charging infrastructure, but not necessarily in equal measure depending on the price of gasoline.

 

[jhm]

Walmart puts a lot of rooftop solar power on their stores. They could easily provide free variable charging to customers. They could promise at least 5 kW charging at anytime and up to 100 kW charging depending on surplus solar power generated at the store. The grid power they buy is likely around 9c/kWh plus demand charges (that's what it would by in Georgia). We can ignore the demand charges because adaptive charging rates plus the store's own batteries can help manage the power peaks. So Walmart can absorb up to $0.45 per hour of shopping as a marketing cost. This is their marginal cost when there is insufficient solar power. Otherwise, when solar is at a surplus to the needs of the store customers reap a bonus in higher speed charging. This induces customers to shop in the morning as thrifty customers discover the best charging times. So this could help fill up the store at times when it is cheapest to operate. Think power cost of AC, refrigeration, and lighting; you want to pack the store when that is cheapest. Walmart also generates a lot of good buzz for offering free solar power to charge the vehicles of customers and employees.

So the point here is that there are opportunities to provide charging that is so cheap that an PHEV fleet would be induced to charge over paying any price for gasoline. If a retailer like Walmart could pull this off without any special arrangement with a utility, imagine what coordination with a utility could accomplish. If the utility were to offer variable rates to induce Walmart to increase the charge rate when the grid is oversupplied, then Walmart could deliver demand response as a service to the grid. So customers would be delighted to get higher speed charging even when the sun is not shining. Also there would tend to be an abundance of charging on the weekend. So I hope to see these sorts of developments soon. I think a large PHEV fleets holds a lot of latent demand for low cost adaptive charging infrastructure. Basically, the PHEV fleet can take it or leave it, but once you make charging cheap enough all sorts of things can emerge.

I think the basic issue is that we need enough renewables to oversupply the grid at certain times with some degree of regularity. The Walmart example is just a microcosm where oversupply of solar could be a regular occurrence. Negative spot prices on the grid are still too infrequent to justify adaptive charging infrastructure to exploit them. But if they were, then Walmart could in theory be paid by the grid for giving out free electricity to customers. So this would offset the cost of developing the infrastructure. As solar gets cheap, the installed base should grow, than that can lead to the surpluses needed to drive adaptive charging infrastructure. So I believe it will happen. When it does, the market for BEVs and PHEVs will get a big boost. And penny pinchers driving PHEVs will squeeze the price of gasoline.

 

[GoTslaGo]

Walmart puts a lot of rooftop solar power on their stores. They could easily provide free variable charging to customers. They could promise at least 5 kW charging at anytime and up to 100 kW charging depending on surplus solar power generated at the store. The grid power they buy is likely around 9c/kWh plus demand charges (that's what it would by in Georgia). We can ignore the demand charges because adaptive charging rates plus the store's own batteries can help manage the power peaks. So Walmart can absorb up to $0.45 per hour of shopping as a marketing cost. This is their marginal cost when there is insufficient solar power. Otherwise, when solar is at a surplus to the needs of the store customers reap a bonus in higher speed charging. This induces customers to shop in the morning as thrifty customers discover the best charging times. So this could help fill up the store at times when it is cheapest to operate. Think power cost of AC, refrigeration, and lighting; you want to pack the store when that is cheapest. Walmart also generates a lot of good buzz for offering free solar power to charge the vehicles of customers and employees.

So the point here is that there are opportunities to provide charging that is so cheap that an PHEV fleet would be induced to charge over paying any price for gasoline. If a retailer like Walmart could pull this off without any special arrangement with a utility, imagine what coordination with a utility could accomplish. If the utility were to offer variable rates to induce Walmart to increase the charge rate when the grid is oversupplied, then Walmart could deliver demand response as a service to the grid. So customers would be delighted to get higher speed charging even when the sun is not shining. Also there would tend to be an abundance of charging on the weekend. So I hope to see these sorts of developments soon. I think a large PHEV fleets holds a lot of latent demand for low cost adaptive charging infrastructure. Basically, the PHEV fleet can take it or leave it, but once you make charging cheap enough all sorts of things can emerge.

I think the basic issue is that we need enough renewables to oversupply the grid at certain times with some degree of regularity. The Walmart example is just a microcosm where oversupply of solar could be a regular occurrence. Negative spot prices on the grid are still too infrequent to justify adaptive charging infrastructure to exploit them. But if they were, then Walmart could in theory be paid by the grid for giving out free electricity to customers. So this would offset the cost of developing the infrastructure. As solar gets cheap, the installed base should grow, than that can lead to the surpluses needed to drive adaptive charging infrastructure. So I believe it will happen. When it does, the market for BEVs and PHEVs will get a big boost. And penny pinchers driving PHEVs will squeeze the price of gasoline.

Do you know if Walmart has battery storage too?

 

[renim]

BYD sells BEV Busses, PHEV passenger vehicles and a handful of BEV passenger vehicles.

Very doubtful they surpassed Panasonic in 2016.

2016 BYD sales (mostly ev sales blogspot, but also some chinese sites and other google)
BYD Tang 31,405 vehicles 18.4kwh 577,852kwh
BYD Qin 21,868 vehilces 13kwh 284,284kwh
BYD e6 20,605 vehicles 82kwh 1,689,610kwh
BYD e5 15,639 vehicles 48kwh 750,672kwh
BYD Qin EV300 10,656 vehicles 48kwh 511,488kwh
BYD bus 14,903 vehicles 324kwh 4,828,572kwh
BYD Denza EV 2,000 vehilces 42-62kwh 110,000kwh
BYD F3DM ? 13kwh
total 2016 automotive li ion batteries for BYD produced vehicles 8,752,478 kWh (nb this excludes non BYD produced vehicles that use BYD batteries)

I don't have clarity to compare pansonic vs byd customers, but i do have clarity on BYD VS Tesla in terms of 2016 sales production for automotive li ion. and unless Tesla sold each and every car last year at about 115kWh each they have ceased leadership in automotive li ion capacity. Tesla only sold 76,230 EVs last year, even if they were all 100kWH, they would still obviously not be enough to match BYD.

Tesla like Nissan before it, like Mitsubishi before that, is no longer the leader in the plugin vehicle battery production stakes.
which is not bad,
Mitsubushi was far more successful without that crown than with it (iMiev vs Outlander PHEV)
Nissan is looking to be far more successful at gen 2 EV, than gen 1 LEAF
Tesla is looking to be far more successful with model 3 than with Tesla S/X

who comes after BYD, I dunno, I guess in approx. 3 years there will a further unpronounceable Chinese name to learn.

 

[RobStark]

unless Tesla sold each and every car last year at about 115kWh each they have ceased leadership in automotive li ion capacity.

Doubt it.

This was ev sales blogspot report from first half.

EV Sales: Batteries

1 Tesla Panasonic 2.484 MWh
2 BYD 1.416 MWh

We shall get whole 2016 report soon enough.