Shorting Oil, Hedging Tesla

[jhm]

CAISO Battery Storage Trial

Analysis of battery storage systems trialed by PG&E reveal some lessons about how to gain value from such systems. Of interest is the learning on Local Marginal Cost (LMC) and congestion. To my mind it confirms the virtue of locating solar and batteries close to consumption to avoid congestion induced by remote intermittent sources. So batteries are best close to consumption or close to wind or solar production.

 

[adiggs]

2017 Investor Roundtable:General Discussion

This is how Big Oil will die – NewCo Shift

@Starno posted this article elsewhere - I'm cross posting it here. Titled "This is how Big Oil will die" - really good stuff.

I particularly like how well the article makes the point that value destruction precedes quantity destruction. For coal companies, that's about 99.9% value destruction today vs. maybe 20-30% demand reduction. *ouch*

 

[neroden]

Curiously, Tesla is avoiding the EV bus market. Perhaps this is because this is a much smaller market and there are already lots of competitors making serious advances.

Three off-the-shelf sell-as-fast-as-they-make competitors scaling up. Musk doesn't need to go into this market since others are. Remember Tesla started because GM refused to make EVs; they will ignore any sector where other EV makers are moving fast enough.

. The strategy of many of these is to make due with a small battery, under 100kWh, by charging it multiple times per day. This is workable for transit buses with short routes. But Tesla is under no constraint to enter the market from the small battery side. Motorcoaches may be a worthy challenge for Tesla, but then we are still limited to a small market.

A very small market. There are huge numbers of city buses and school buses compared to the miniscule number of over the road motorcoaches,

 

[neroden]

Maybe he's seeing good enough progress, with enough urgency, that he's thinking there isn't much value proposition for Tesla to provide. Sure Tesla COULD make it better, but can Tesla make it enough better to improve the rate of adoption meaningfully, when there are indicators the new build market is all EV in < 10 years (maybe < 5 years)?

Here's an article from Cleantechnica on China's progress:
China 100% Electric Bus Sales Grew To ~115,700 In 2016

I wonder where / when the Chinese bus makers will be looking outside of China for further growth?

BYD already is. In the US, however, they face New Flyer and Proterra competition. When you have three serious competitors already...

 

[neroden]

They are expanding to the global bus market. But I thoroughly expect developments in other commercial vehicle segments. Trash collection trucks are a good opportunity if you've got to stick to short routes.

Chicago & LA are both adopting electric garbage trucks as we speak; I forget who's making them.

 

[neroden]

Proterra, headed by former Tesla Executive Ryan Popple, has 60% US market share for electric buses. I take it BYD has much of the balance. There might be some tiny outfit I have never heard of.

Old-school bus manufacturer New Flyer, maker of trolleybuses since forever, has a competitive battery model. Those three are nearly the entire North American market though there are a couple of sketchy startups which have sold a few.

 

[neroden]

Another recent article on oilprice continuing our recent theme of the utility of hydrocarbons to the modern economy:
The Fourth Industrial Revolution Is Fueled By Oil | OilPrice.com

There are two points being made by this article, both of which I grant and agree with:
1- today's economy uses hydrocarbons as it's energy supply (renewables are too small of a fraction for us to go cold turkey next week)
2- there are important segments of the economy that can only be supplied today by hydrocarbons (the 2 examples used are plastics and high temperature industrial heat).

I went through this. Plastics, lubrucants, rubber, petrochemicals -- it's all miniscule. High temperature heat? Electric arc furnaces are the ultimate, and fossil fuels are inferior.

At least to me, these arguments sound more like the arguments I would expect to start hearing as the death throes of an industry begins to arrive.

Yep.

That doesn't change the central point - the worldwide energy system is almost all hydrocarbons, and the solar/wind that we're so excited about is more like 1 or 2%. History suggests it takes a new energy source decades to go from 5% of world energy to 25%, and we've still got years to go to start that clock for solar / wind.

First of all, it's not true: the coal to oil transition was faster than that. Second, looking at final energy, we're a lot closer than the O&G guys think because they dishonestly look at
"primary energy". Third, as Liebreich points out: manufacturing economics vs resource economics. Previous energy sources were mostly resources (or agriculture if you go back far enough), while solar & wind are mostly manufacturing. Manufacturing economics takes over faster: look at the replacements of homemade goods with manufactured goods, typically a very fast transition.

That said, if "no new wells" happens in 2023, we'll stll be pumping from old wells for many years.

 

[RobStark]

Alcoa smelts aluminum using hydro electricity because coal is not good enough.

 

[jhm]

Another recent article on oilprice continuing our recent theme of the utility of hydrocarbons to the modern economy:
The Fourth Industrial Revolution Is Fueled By Oil | OilPrice.com

There are two points being made by this article, both of which I grant and agree with:
1- today's economy uses hydrocarbons as it's energy supply (renewables are too small of a fraction for us to go cold turkey next week)
2- there are important segments of the economy that can only be supplied today by hydrocarbons (the 2 examples used are plastics and high temperature industrial heat).

The unstated implication is that these are good reasons to believe that the O&G industry we know today will exist long into the future.

At least to me, these arguments sound more like the arguments I would expect to start hearing as the death throes of an industry begins to arrive.

For #1, we've seen from the coal industry how rapidly the value of the industry can decrease while the volume / units of the industry slowly decays. So yes, we'll be burning hydrocarbons for decades to come, and in large quantities. Probably 50+ years, simply due to the scale and the way that lowering cost of energy will both bring in new consumers, new consumption, and increased consumption of energy at the same time (more energy consumption will offset some of the replacement of fossil fuels by renewables, and the current scale of hydrocarbon consumption is stupendous).

For #2, this also is true. And who knows - maybe in the face of all historical evidence, these segments that can't be directly replaced by renewables will never be replaced. They amount to such a narrow sliver of the units of today's industry that if these are the "growth" or even maintenance uses / markets, then O&G is already hosed.


For an in-depth treatment of the scale of the industry, and a different point of view on how fast O&G will disappear from the world, I commend this 90 minute Youtube video:

There are plenty of points the speaker makes that I disagree with, but there are plenty more that are true and was worthwhile for me for getting another perspective on the scale of the industry. There are in particular several places where it seems to me that he's making an apple to oranges comparison. That doesn't change the central point - the worldwide energy system is almost all hydrocarbons, and the solar/wind that we're so excited about is more like 1 or 2%. History suggests it takes a new energy source decades to go from 5% of world energy to 25%, and we've still got years to go to start that clock for solar / wind.

(Then again, my counter to that is that technology changes today happen faster than they did 100 years ago -- LOTS faster).

Meh, these are tired arguments. Big scale, embedded energy and special niches. Let's accept that there are niche uses for fuels, air travel and pig iron. How big are the niches, 5, 10, 20 percent of all primary energy? Let's say 20% is a tough nut to crack. Does that mean that we need to keep using fossil fuels for 85% of energy need for the next decade? No, that's absurd. How about we knock out the 80% least essential use of fossil fuels over the next 2 or 3 decades? The obstacles, I believe, are more economic and political than they are technological. But what abiut all that embedded energy. Well, as the energy market transitions from 85% fossil to 20% fossil, the embedded fossil energy in frickin everything made on the planet gets reduced by some 75%. So, yes, some materials will be holdouts of concentrated embedded fossil energy, but that has been minimized to where it posses the greatest economic value instead of squandered on nonessential uses. For example, imagine the hypocrisy of erecting a wind generator using diesel trucks and tractors. Well, that is non-essential. Electric powered tractors can do the work just as well. It is simply an economic expediency that diesel is cheaper right now.

In sum, the old 80/20 rule says that continued reliance of fossil fuel for 85% of global energy is a load of crap. How fast was whale oil replaced by crude? How fast were oil lamps replaced by the electric light bulb? How quickly is the incandescent light buld being replaced by LED? Big shifts do take a long time, because the innovations often begin in niches. So we begin in these niches, a few percent here and a few percent there, and that shifts the balance. There is now point in throwing our hands up because the world is so large and we are so small.

Proterra, BYD and a few others can electrify 80% of the bus market with about 5 years, and 15 years after that there are virtually no diesel buses left in service. How much does this move the needle on the share of fossils among primary energy? Perhaps a percent. But that is just on niche. They same can happen with semi trucks 20 to 25 years may suffice to take virtually all diesel semi trucks out of service. And what is that, 5% or 10%? But this can happen in parallel with alot of other niche plays. It all adds up. That's how we keep our head. We keep focused on what is moveable now.

Yes, we live in a world based on hydrocarbons, but it need not remain so.

 

[jhm]

2017 Investor Roundtable:General Discussion

This is how Big Oil will die – NewCo Shift

@Starno posted this article elsewhere - I'm cross posting it here. Titled "This is how Big Oil will die" - really good stuff.

I particularly like how well the article makes the point that value destruction precedes quantity destruction. For coal companies, that's about 99.9% value destruction today vs. maybe 20-30% demand reduction. *ouch*

I think this is a really important point to keep in mind. I think I would elaborate the process this way: disruption first causes prices to fall on incumbent products, then the value of incumbents collapse as prices become profitably low, and finally supply falls in quantity.

So lately I've be concerned about the auto industry. It's hard to know when these incumbents will produce EVs in quantity, but that is the tail end of the disruption process. Suppose Tesla and a few others put out enough compelling EV products that ICE makers have to offer discounts of a few thousand on just about anything they sell. Most incumbents have thin margins. That's why they have to sell so many cars to support a small market cap. (Remember those comparisons?) So there is a limit to how much prices can be cut. The incumbents fall into financial distress and lose market cap. Production begins to decline, even before there are enough EVs to replace them. What if ICE sales fall by two units for every EV unit sold? This gets to a place where EVs have twice the demand destruction than anticipated. Ridesharing schemes help to make this so. At some point I'm going to need to translate this into a proper math model. But the thing to watch out for is when EVs start to drive down prices for ICE. Is it happening now?

 

[neroden]

I believe EVs are already driving down prices on ICE cars, yes. The most obvious situation is in China, where EVs are more valuable because you can register them, and in most major cities, you can't register ICE cars without winning a lottery.

But Tesla's domination of its price segment is another sign of the same phenomenon: ICE makers are selling fewer vehicles at that price point.

 

[adiggs]

...

Yes, we live in a world based on hydrocarbons, but it need not remain so.

This is one of the two obvious follow ons to these arguments to me - maybe O&G need them to convince themselves of how valuable their industry still.

1) yes, we live in a world based on hydrocarbons and no, it doesn't need to remain so.
2) yes, unit volumes of hydrocarbons may take decades to fade serious (and maybe not), but the value of the hydrocarbon industry will vanish dramatically faster and sooner than the hydrocarbon consumption will (look at the coal industry).

 

[jhm]

I believe EVs are already driving down prices on ICE cars, yes.
...
But Tesla's domination of its price segment is another sign of the same phenomenon: ICE makers are selling fewer vehicles at that price point.

If the effect is to push ICE into lower prices points, then it makes sense to start near the top and stop in the middle. With minimal number of models, Tesla can confine automakers to a sub $30k price range. Tesla need not go more affordable than the Model 3 still there is massive die off of ICE on that segment.

 

[TheTalkingMule]

When you see cloudy Germany go from 0% to 6% solar in just a handful of years, you have to see the possibilities.

1% is halfway between nothing and 100% when you're doubling every year. We're more than halfway there, it just doesn't feel like it yet.

2022-2026 seems like near certainty for oil decline. Even the Saudis seem to think so.

 

[jhm]

More Than Half of America's Nuclear Reactors Are Losing Money

Wow! Nuclear plants in US make $20 to $30 per MWh, but have an average running cost of $35/MWh.

So now we see what baseload is really worth, $20 to $30. The cry is to get public subsidies in the name of fighting climate change. I would rather see public funds encourage storage capacity to absorb power when spot prices fall below say $20/MWh. This would provide price support for the whole market including renewables. A subsidy that only benefits nuclear is a really bad distortion that would actually harm renewables. But the shared problem that all generators face is a low spot price when the market is over supplied by renewables. Storage is the essential answer.

 

[SebastianR]

Very interesting posting:

Is $100 Oil Possible? Wells Fargo Says No | OilPrice.com

“$100 per barrel oil remains a pipe dream” due to “massive overproduction,” real estate strategist John LaForge said in a note this week. Barrels price will bounce between $30 and $60 in the coming years, according to top bank’s diagnosis.

This sounds pretty much like what we have been discussing here. I don't think the thought process is the same as in our round here, but I think it is interested to follow that reasoning, too.

 

[jhm]

Oil is seriously tanking.

 

[dc_h]

I dumped half my SCO a few weeks ago thinking Venezuela melt down would bump up prices for a while. If oil drops to $30, it is going to speed up their bankruptcy.

Bank Of America: Expect $30 Oil | OilPrice.com

 

[jhm]

U.S. refineries pump record levels as demand drops and stockpiles rise

US refineries are cranking it out like there's no tomorrow.

 

[jhm]

http://ir.eia.gov/wpsr/overview.pdf

The EIA Petroleum Weekly is out, and something smells foul.

Crude stocks are down 2.5 mmb, and total petroleum stocks are down 2.7 mmb. That's the rosy part, and it's giving some support to the price of oil.

But consider this, products supplied (domestic consumption) went up 1553 kb/d to 21,067 kb/d in just one week. This is an 8.0% increase week over week. Moreover, it bucks the annual trend which was down. Consumption is supposedly up 5.3% year over year. This weekly increase of 1553 kb/d amounts to 10.9 mmb in one week pushed out to retail. I'm not sure where so much incremental fuel could be sitting. This increase was spread out across all products.

This looks really fishy to me. We have had other reports that old shipping vessels are being used for floating storage. Now it appears that refiners are doing some channel stuffing, pushing surplus stock out to distribution channels. So while it may look like commercial stocks have declined by 2.7 mmb, distribution channels are taking on 10.9 mmb. It is hard to believe that actual end use consumption has surged an extra 8% in one week.

I'd bet that someone it trying really hard to make the oil market look like it is not massively bloated. If I am right, this market will collapse in just a week or too. I'm definitely holding on to my SCO shares.