Shorting Oil, Hedging Tesla

[jhm]

I've encountered a new idea, to me, that I'm finding helpful for thinking about the energy market in general, and O&G market as a subset.

This Wikipedia page on world energy consumption is close:
World energy consumption - Wikipedia

Sadly it's only updated through 2012 - I'm looking for updates through 2015 or 2016. The idea is to get every energy source into a common unit of measure, and track them on that basis. One immediate ah-hah is how stunningly big our O&G infrastructure is worldwide, and just how much dying there is in this beast

If you know of a site with good (comprehensive) numbers for primary energy production and/or energy consumption, please point me (and the rest of us) in that direction. I think it'll be good reading.

BP Energy Review is a good source for annual primary energy consumption. I believe that the 2016 review will come out in June.

 

[jhm]

The substitutes are the key here. I've been estimating the price of oil based on the limits to substitution. These are driven by, in order of importance:
-- how fast electric cars can be manufactured
-- how fast electric trucks can be manufactured
-- how fast electric airplanes can be manufactured
-- how fast electric ships & locomotives can be manufactured
-- how fast houses can switch off of heating oil
-- how fast plastics & chemicals can switch their feedstocks

A couple thoughts on this list...

Might want to include motorized equipment especially heavy equipment like tractors for construction and agriculture.

I think trains should be a separate item from shipping. There have always been electric train, and batteries open up even more exciting opportunities. Basically a locomotive engine might not even be needed in the future. Imagine what could be done with autonomous battery electric rail cars (ABERC). These units can connect up with or disconnect from a train at will. So in a switch yard there is no need for locomotives to move cars around. ACERCs simply know where they need to go to queue up for the next train going in its direction. Furthermore, these units can drop out and travel spurs without slowing up the rest of the train. So spur duty and switch yard operations is where the battery and autonomy really pay off. When ABERCs travel in a train, they have improved aerodynamics and can get an energy boost from an engine or massive battery pack car. The battery pack cars are themselves ABERCs, but they only carry a massive battery pack. They can drop off at any charging spur, charge up and reconnect with the next train, all without slowing down any train. Battery pack operation might be deployed mostly where a boost is most needed, for example at the base of a mountain range.

I do expect that the spur duty may be biggest boost. This would make it much more economical to have lots of spurs and minimize the need to have semis haul stuff from major switchyards to destination. Integrating autonomous electric semis with rail spurs could take logistics to the next level. Is there really a need for long haul semis if you can improve the travel time with trains?

 

[neroden]

Britain's already trialling battery / catenary hybrid trains. Switchers are frequently remote-controlled already, and I know of battery-electric switchers, though I don't know why they haven't been used more widely. (My guess is that it's because the switcher locomotive fleet lasts a *very* long time -- many were made in the 1940s and are still active.)

 

[neroden]

How much do the world's military vehicles (tanks, planes, ships) factor into this?

Good thought. It's not terribly big as a percentage of world oil use, though bigger than plastics.

I've been mostly looking at the situation as constrained by supply of battery-electric equipment, because in almost every sector people seem to switch as soon as it's possible. From my US perspective, military vehicles are being manufactured faster than they can actually be used (we have one hell of a bloated and wasteful military budget), so they don't actually affect the timeline at all. They manufacture brand new tanks and dump them in the desert to rot; they can eventually switch to manufacturing battery tanks and putting gasoline tanks in the desert to rot, and it makes no significant difference in how fast the transition happens.

It is possible that other countries with less insane military procurement systems might have more of a production constraint.

 

[neroden]

BP Energy Review is a good source for annual primary energy consumption. I believe that the 2016 review will come out in June.

I try to avoid "primary energy" measures because they're completely messed up -- they treat waste as usage. In order to get some degree of comparability, they often add non-existent waste back to solar photovoltaic and wind numbers, which is just bogosity. I haven't found a good final-energy review, but that's what I try to work with.

 

[adiggs]

I try to avoid "primary energy" measures because they're completely messed up -- they treat waste as usage. In order to get some degree of comparability, they often add non-existent waste back to solar photovoltaic and wind numbers, which is just bogosity. I haven't found a good final-energy review, but that's what I try to work with.

I like the 2 numbers / measures used on the previous Wikipedia page, at least initially (I realize you've been looking at these longer than I have - I could easily just be driving the road you've already driven ). Anyway, what I like in the two numbers is they define the outer limit of today's energy system (or at least, it's how I think of it).

Here's the definitions from the page:

World total primary energy supply (TPES), or "primary energy" differs from the world final energy consumption because much of the energy that is acquired by humans is lost as other forms of energy during the process of its refinement into usable forms of energy and its transport from its initial place of supply to consumers. For instance, when oil is extracted from the ground it must be refined into gasoline, so that it can be used in a car, and transported over long distances to gas stations where it can be used by consumers. World final energy consumption refers to the fraction of the world's primary energy that is used in its final form by humanity.

Primary energy is the measure of energy at it's point of initial extraction (oil coming out of a well for example).


Using 2012:
primary energy was 155k TWh
final energy was 104k TWh
(math tells us 51k TWh, or ~1/3rd went to waste, transport of energy, refining from potential to usable energy, etc..)

Of all that, there was 22k TWh of electricity generation.


The way I understand this data, if we were an all-electric society and there were no efficiency gains or losses in the transition from 2012 to all-electric (or any other changes - there would actually be lots of systemic changes), then we have 104k-22k MORE eletricity generation needed to make that all-electric society come into existence. This is a measure of the scale of electric deployment still needed.

The transition to all-electric creates an energy savings of 155k-104k=51k TWh in the form of avoided waste, refinery losses, transport, etc.. of almost exclusively chemical energy.


We really need lots more electricity. One source of the incremental demand is the very large chunk of the human population that has little or no electricity available to them to make like easier / better / more productive. I've seen an energy intensity score somewhere for different countries - it'd be interesting (and pretty straightforward math) to figure out the size of the all-electric energy system that would provide all citizens of the world with a US energy intensity level (and a freaky big number).

Anyway - this is the direction my thoughts are going right now using these measures. That Wikipedia page and it's old information may cause me to attempt to make my first contribution to Wikipedia - that's going to be fun

 

[jhm]

Even final energy consumption is messed up because the engine in most vehicles is producing about 70% waste heat.

Another problem with final energy is that it does not track any of the efficiency gains or loss along the way to final energy. if that 30% or so that was "wasted" could some how be avoided, then decline in primary energy would show that improvement, but not final energy. For example, grid solar faces losses in transmission and distribution, but distributed solar avoids this.

When BP computes primary energy, they make an adjustment for non-fuel renewables. They have some estimate of the average amount of fossil fuel energy need to generate an equivalent amount of renewable electricity. So this embeds the idea of displacement of fuels. As a gross measurement of consumption or production this is fine. As the world learns to use all forms of energy more efficiently, such metrics will decline relative to GDP or other measure of utility. So for example, as EVs displace other vehicles, primary energy consumption will fall, since EV drivetrains are more efficient.

 

[jhm]

Analysts Say Oil Industry Needs $45 Oil Price To Break Even | OilPrice.com

Yet another reason why the price of oil is likely to state between $45 and $55.

Global marginal cost (with reserve replacement): $63/b
Global breakeven cost: $45/b
Global margin cash cost (just production): $28/b

If I understand this correctly, the breakeven cost includes logistics of getting crude to market, while margin cash cost is just the well head cost. Someone correct me, if wrong.

My contention is that marginal cost with replacement is no longer relevant. That is, battery factories replace reserves at around $1/b, and world already has more proven reserves than it may ever need to produce. In essence, there is little to no economic value in replacing reserves. Indeed, the potential for stranded assets may even suggest that there is negative economic value to replacing reserves.

In any case, the numbers here, $63 - $45, suggest that the cost of replacement is $18/b. Perhaps if for $18 you could find a barrel you could produce for less than $10, then you'd be at $28 marginal cash cost. That could be worth something in the short term, but you'd have to be awfully lucky to find such cheap to produce oil!

 

[adiggs]

Even final energy consumption is messed up because the engine in most vehicles is producing about 70% waste heat.

Another problem with final energy is that it does not track any of the efficiency gains or loss along the way to final energy. if that 30% or so that was "wasted" could some how be avoided, then decline in primary energy would show that improvement, but not final energy. For example, grid solar faces losses in transmission and distribution, but distributed solar avoids this.

When BP computes primary energy, they make an adjustment for non-fuel renewables. They have some estimate of the average amount of fossil fuel energy need to generate an equivalent amount of renewable electricity. So this embeds the idea of displacement of fuels. As a gross measurement of consumption or production this is fine. As the world learns to use all forms of energy more efficiently, such metrics will decline relative to GDP or other measure of utility. So for example, as EVs displace other vehicles, primary energy consumption will fall, since EV drivetrains are more efficient.

The way I see it, these are totally valid, and examples of adjustments that we will need to identify and make as we adjust from a fossil fuel dominated energy system to an electric dominated energy system. Or maybe more accurately, the adjustments we make as we try to understand the all-electric final energy consumption energy system, and how it necessarily differs from today's fossil fuel dominated final energy consumption energy system.

Part of what got me into this is I got pointed to a blog I haven't read previously. A central point being made by that author is that the size of this thing is so monstrous, and the contribution today from renewable sources is so small, that thinking fossil fuels just disappears is disastrously wrong.

One point that author makes and repeats, is that today's renewable energy consumption is dominated by biomass. Such a sanitized term for burning dung to cook food and get heat (on the order of 10% of the world's energy system vs. 2-4% for wind/solar/hydro/geothermal/..). It's not too hard to argue that the people burning dung see a dramatic improvement in the quality and productivity of life if they gain regular / cheap access to propane / natural gas to cook their food over, instead of collecting dung / wood / biomass (less smoke, less effort on their part, etc..).

I think there will be a tendency for these countries to skip right over the fossil fuel infrastructure, and go straight to distributed solar with modest battery backup for off-grid and better energy living, but that's my guess, and a technology / expense I see as becoming feasible over the next few years, while being moderately reasonable today.

Anyway - this is all coming out of my head in dribs and drabs - I think there's a first principles view in here that can help make the whole energy system clearer. That's what I'm angling to get clearer, even if it's only in my head


That blog and an initial article:
Wind is an irrelevance to the energy and climate debate

 

[adiggs]

..

Another problem with final energy is that it does not track any of the efficiency gains or loss along the way to final energy. if that 30% or so that was "wasted" could some how be avoided, then decline in primary energy would show that improvement, but not final energy. For example, grid solar faces losses in transmission and distribution, but distributed solar avoids this.

...

To make sure we're thinking the same thing in this context, and I think we are. A 'fer-instance' would be the change in final energy consumption for a consumer that stops burning gasoline in a 30% efficient ICE and starts "burning" kWh in a 90% efficient all-electric motor for transportation (the 30 and 90% numbers are made up by me to be directionally accurate - the electric form of energy -> kinetic energy is lots more efficient than gas -> kinetic energy).

For whatever % of that total final energy consumpion is made up of the burning of gas, then we can reduce the new total final energy consumption for our hypothetical all-electric society given that miles traveled and vehicle size (and other ancillary assumptions) remain constant.

Of course, my personal experience and what I've read from others, is that lots of people put more miles on their EV than they did their gasmobile To the degree that this tendency holds true in the aggregate, then it will offset some of that total final energy consumption improvement.


I'm looking forward to exploring those system properties. But the first priority in my mind (hopefully for this weekend) is to find equivalent numbers for that table for 2013, 2014, 2015, and maybe even 2016. With the growth rates we've been hearing about for solar and wind, having 4 year old data makes it nearly impossible for me to start thinking about the direction and impact of changes.

Hence the comment about a Wikipedia page update

 

[jhm]

@adiggs, yeah, we're in the same page. All these metrics are valid, and measures different things. What would be really nice to know is, how many TWh would the world use today if everything ran on electricity? That is, how much energy would a fully electrified world? This would tell us how much primary and non-electric final energy could be cut.

I've also seen people abuse the idea of primary energy. When anyone claims that a kWh of solar energy is only 3414 Btu of primary energy, I am suspicious. Most primary energy is just waste heat with no economic value. Of course, there are situations where the energy we want is heat, in which case one kWh of electricity provides a little less than 3414 Btu of heat. (I suspect this is why Neroden puts replacement of heat toward the bottom of the list.) But usually we want energy that is much more focused and directed than mere heat, which is why we expend so much heat just to obtain a fraction energy that does useful work.

The key thing is that most primary energy will never need to be replace. So my view is that primary energy will decline even as the global economy grows, as ultimately the economy itself is a measure of useful energy. Indeed, energy intensity, the ratio of real GDP to unit of primary energy, has been falling and will continue to do so. When energy intensity falls faster than an economy grows, we see primary energy fall in aggregate consumption. What drives energy intensity down is technology finding ways to accomplish higher value outcomes with less waste heat along the way. Ultimately it is not EVs that will bring down oil; it is technology that accomplishes more with less oil.

 

[jhm]

Energy intensity level of primary energy (MJ/$2011 PPP GDP) | Data

The World Bank provides energy intensity metrics for most countries. The World has fallen from 7.587 in 1990 to 5.363 in 2014. The units are MJ/$2011 PPP GDP. A MJ is about 948 BTU or 278 Wh, and international GDP is measured in terms of the purchasing power of a US in 2011.

Over this time period the decline is roughly linear, which actually suggests that the relative rate of decline is increasing with time. That is the slope of decline is about 0.09267 per year. That is about -1.22% in 1990, but -1.73% in 2014. This is critical because if the global economy had real growth less than 1.73%, then primary energy consumption would be falling. We don't really want the economy to slow that much. So we need intensity to fall at an even faster rate.

Suppose energy intensity continues to fall lieanearly. Then in 2025, it gets to 4.344 and falls 2.13% that year. So the global real GDP growth rate needs to be higher than that for primary consumption to keep growing. The growth rate of the global economy is about 2.7%. So in 2035 energy could hit 3.417 and decline at 2.7%. This we have a very simple model that expects primary energy consumption to peak in 2035.

But for most of the time from 1990 to 2014, the amount of wind, solar, batteries and EVs have been very small. Even LED lighting has a relatively little impact over these 24 years. Thus, the historical rate of decline in energy intensity may not be so representative as these new technologies gain serious market share. It is plausible that energy intensity could begin to fall at an even faster rate. This would be good news because it would hasten the time when intensity falls faster than 2.7% and primary energy peaks. Of course, so much cheaper new energy could also speed up the global economy, which would push the peak out further.

Another thing to keep in mind is that it is not really necessary for all primary energy to peak. I'd be happy if just the fossil primary energy peaked. So the same sort of analyses above could also be based on just primary fossil energy per GDP. The fossil peak should arrive much sooner. We'll have to do that analysis another day.

 

[adiggs]

...
Another thing to keep in mind is that it is not really necessary for all primary energy to peak. I'd be happy if just the fossil primary energy peaked. So the same sort of analyses above could also be based on just primary fossil energy per GDP. The fossil peak should arrive much sooner. We'll have to do that analysis another day.

This last idea is something I find important and try to keep in mind. I think that a mistake many are making, at least those that write blogs etc.. in this space, is to confuse volume with value. By that, I mean that just because the volume of consumed fossil fuels this year may be nearly the same, slightly more, or slightly less than laster year, that in now way implies that the revenue generated by the suppliers of the fossil fuels is staying the same or growing. More importantly and specifically - the point of view that holds that fossil fuel volume consumption several years from now will largely be the same as today (it won't be double, it won't be half) I agree with, simple because of the sheer size of the current demand and inability to replace it with an alternative... that doesn't mean that the industry's revenue will still be level / comparable then as with today.

Heck - if the price of fuel falls enough, volumes can grow while value realized for the producers drops.

 

[SwTslaGrl]

This is an interesting post on another board The Running of the Oil Bulls..... - Bogleheads.org

 

[neroden]

I've also seen people abuse the idea of primary energy. When anyone claims that a kWh of solar energy is only 3414 Btu of primary energy, I am suspicious. Most primary energy is just waste heat with no economic value. Of course, there are situations where the energy we want is heat, in which case one kWh of electricity provides a little less than 3414 Btu of heat. (I suspect this is why Neroden puts replacement of heat toward the bottom of the list.)

Of course there's a lot of low-hanging energy efficiency gains in the heat arena.
(1) Insulation. Often we want to maintain a temperature, not really generate heat. By insulating we can vastly reduce the amount of added heat needed. In housing, if you start with a leaky uninsulated house, you can often go down to 10% of the original heat demand, and that's in cold Canadiaan climates. So much of the energy used for heat is wasted too.
(2) Heat pumps. These allow better than 100% efficiency in heating. In climates which aren't that cold, you can get COPs over 4, which means 1/4 the energy usage of just burning stuff.

One of the reasons I put replacement of heat low on the list is that much of this tech is old, and cheap, and has been established for a long time; people could have switched in the 1970s. Adoption is not production limited, it's limited strictly by the level of ignorance. Or how cheap the fuel source is. Oil as a heating source has been expensive since the 1970s so anyone using it is just being lazy and ignorant (or is capital-starved).

The key thing is that most primary energy will never need to be replaced.

Yep. Even in space heating. Even in process heating!

Industrial process heat is still subject to the insulation rule (as Tesla discovered) and for some applications heat pumps still work. But some of the industrial heat applications are those where one kWh of electricity really does provide 3414 BTU of heat -- electric arc furnaces, for example. The fact that these, probably the worst category in terms of efficiency, are already in widespread use makes me think that the other industrial process heat applications, with more potential for efficiency improvements, are going to adopt electric quicker.

 

[TheTalkingMule]

OPEC Insiders Reel After Key Minister Is Fired During Their Meeting

Does this mean a reversal of production cuts may be coming?

 

[jhm]

China Teapot Refiners Overflow, Slow Crude Oil Imports | OilPrice.com
It sure looks like the Chinese government wants to manipulate tea pot refineries to limit oil imports. They've got import restrictions, export restrictions and tax policy all lined up to kill crude imports. I also wonder how manipulation of the SPR plays into this.

Could this be an effort to punish OPEC for extending production cuts?

China says to OPEC,

"Nice little production cut you've got here. It'd be a pity if anything were to happen to demand in Asia."

 

[SebastianR]

"Nice little production cut you've got here. It'd be a pity if anything were to happen to demand in Asia."

Well, and the US says "nice little production cut you've got here. It'd be a pity if in addition to ever expanding shale we would also sell off our SPR".

These days I'm just munching pop-corn and enjoy oil going down in flames: From an industry perspective none of this makes sense. But I guess just like in any good prisoner's dilemma and absent a market-wide collaboration all actors are acting rational: the US government needs money => SPR has to go; the shale producers sell what they can and grab market share while they can; China wants to assert market dominance and create a buyers market so they teach OPEC a lesson; and while the pressures on OPEC rise the egoistic interests of its member states get more impatient - all while OPEC loses its match-making master mind.

I really hope this does not end in a big huge crash / massive war or similar. I would love to see a slow and steady unraveling of the oil market, not a huge explosion

 

[adiggs]

..

I'm looking forward to exploring those system properties. But the first priority in my mind (hopefully for this weekend) is to find equivalent numbers for that table for 2013, 2014, 2015, and maybe even 2016. With the growth rates we've been hearing about for solar and wind, having 4 year old data makes it nearly impossible for me to start thinking about the direction and impact of changes.

Hence the comment about a Wikipedia page update

I found the data for 2013 and 2014, and have updated the Wikipedia page on World energy consumption - Wikipedia.

I'm now a 2 time editor of Wikipedia


Anyway, I learned a couple of interesting things along the way. The first is that even in the 2 years I added, there's an interesting pattern in the gross world level data - total primary energy is pretty flat, while total final energy is up 4-5%. With such big numbers, that strikes me as a big shift. What it means is something I'm still thinking about.

The other thing I've learned is two-fold: the IEA data is published using the same format each year in a PDF. The page numbers and the tables are virtually identical year to year, with only the numbers changing. I don't like the format they publish, but it's usable as a free resource.

The more important thing is that as best I can tell, IEA publishes in 2016, data for 2014.

And data for 2015 in 2017, etc.. My best guess is that they have the data much sooner, and this is when it ages enough that they publish it as a free resource. My alternative guess is that the data are hard enough to compile that it really does take them a couple of years to compile, check, and finally publish.


Back to the data - primary energy went from 155k, to 157k, to 155k over '12, '13, '14 (edit: the table normalizes all values to TWh - the conversion for oil to TWh is in the table). That is overwhelmingly made up of oil coming out of the ground, and is an admittedly short window of time to call a top. It at least looks like a local maximum.

In that same period, worldwide generated electricity is ahead about 500-600 TWh per year (22.6k, 23.3k, 23.8k) - looks like pretty steady growth, though I believe these aggregate numbers hide stuff being shut down, and new stuff being added, under a slow but steady growth headline (the details are in the reports, and the links to the reports are on the page).

The really interesting change to me is in final energy. It goes from 104k TWh to 108k and then 109k. For the data in that table, the final energy is marching steadily forward, even as primary energy has plateaued.

 

[adiggs]

Russian Energy Minister: Oil Markets To Rebalance In Q3 2017 | OilPrice.com

There is a pattern of behavior, mental model, and/or psychology around the oil market that I probably won't ever REALLY grok (understand). This article is the first clear hint, though I've been expecting it, of the oil supply colluders being ready to bring a bigger constraint on production in order to support or increase the price of oil.

The part that I don't understand is that I can't think of the last article I read where the author made the point that (using this case as an example) the Russian Energy Minister is talking about what Russia is ready and willing to do to ensure that energy consumers are paying as much as possible for their energy as Russia can get out of them.

If you're part of the ~10% of the world economy that is the oil & gas industry, I totally get why you're in favor of high oil prices. For the other 90% of us though, we want lower and lower energy prices. So we can spend our money (excess economic output) on other stuff than energy. And ultimately I suspect best for society at large, the lower and lower that energy prices go. If nothing else, lower energy prices will bring energy into the reach of a larger and larger proportion of the world's population. And with access to energy comes dramatic increases in productivity and the ability for people to get themselves out of extreme poverty.

I understand why Russia and OPEC are eager for higher oil prices, as well as Exxon / BP / Shell / etc..

I don't understand why finance people and the overall conversation around oil is thinking $50/bbl oil is better than $10/bbl oil (and to be really complete, that a freely moving price of oil with non-colluding suppliers and consumers is in the overall best interest of society and the economy, wherever that price actually settles).

(It's a rhetorical comment - I'm not looking for an explanation of why consumers "like" higher oil prices)