Shorting Oil, Hedging Tesla

[jhm]

It will be interesting to follow the development in France. The carmakers Citroen, Peugeot and Renault could have problems. If you buy a new ICE car or hybrid today it could be worth just scrap value in 12 years.

Also there will be zero new permits for carbon-based power generation, effective now.
France will ban diesel and petrol cars to be on road after 2040

Is Macron running for Leader of the Free World? He could get my vote, if US votes still count.

But back to the 2040 ban... I think one of the first implications here is that all automakers need to have a full slate of electric vehicles for all segments by 2025. Since the typical design cycle for a ne model is six years, that is a very tall order. Many smaller automakers will have to pick which segments to compete in. Second, with so much R&D to be focused on electrification and with a 2035 or so dead line for the last new ICE vehicles to be sold in most parts of the world, I suspect it is already too late to develop a new ICE model. Automakers may still refine existing ICE models, but I don't see how a new ICE model makes sense. Why spend 6 years developing a new ICE model that will at most have 6 prime years before sales go into terminal decline for all ICE vehicles?

Now even if I'm right in this hunch about new ICE models, we could still see new models come out over the next 6 years. But I think before too long the trust of innovation will be electric, and if a consumer wants an exciting leading edge car, it will be electric.

I also think plug-in hybrids have a short shelf life. About the time no one wants a new ICE car, they won't want a new PHEV either. To see why, just imagine being far enough along that BEVs are just cheaper than ICEVs and charging infrastructure is really well developed. In fact, PHEV are really only most competitive when both gasoline and batteries are expensive. When batteries are cheap, then in fact gasoline also has to remain cheap to compete. So cheap batteries are the end of PHEVs. With that in mind it does not make sense to me to put alot of R&D spending into PHEVs going forward, but I don't lead an automaker.

 

[jhm]

Planta de buses eléctricos y proyecto de cátodos postulan en licitación de litio de Corfo - LA TERCERA

Chile will be developing a plant to make 1000 electric buses per year and another project to make lithium cathodes. Chile is trying to add value to its lithium mining capabilities. They want to be producing batteries and EVs. I hope they succeed wildly in these endeavors.

 

[neroden]

But back to the 2040 ban... I think one of the first implications here is that all automakers need to have a full slate of electric vehicles for all segments by 2025.

While great for the world, this *does* potentially hurt Tesla's competitive position. Come 2025 there should be real, and substantial, competition. Right now there seems a clear path of no competition at all until 2019 or even 2022. So.

 

[jhm]

I think there is a bit of confusion between what was said (no ICE cars) and what is written on the official website (no NEW ICE cars) - but it will be an irrelevant nuance largely: by 2040 this will be done and dealt with regardless.

What I find most dangerous for the incumbent ICE industry is not the immediate switch to BEVs but merely the delay of purchase decisions. Let's keep in mind that the 2008 crash of the car industry was a sales decline of less than 20% (I seem to remember 8% but I can't find my source right now). @jhm has published the decline of diesel car sales in the UK. The situation in Germany is not quite as bad but Diesel decline even there. So I venture to predict that we will see one or two struggling ICE car makers in the next two years: they won't get batteries/BEV cars to volume in time to make up for the decline in sales of ICE vehicles. This will open the field for non-traditional competitors. Right now, I think that BYD & Co. is the most dangerous and immediate competition to Tesla for the next decade. VW and others are too busy to manage their decline - they won't be able to focus on new stuff.

What does this mean for oil? In the short-term I think this is not perfect: we will see older (less efficient) cars still being used. On the other hand the pressure to find BEVs will increase so I see a more sudden "drop" in oil consumption as soon as BEV volumes are going up.

Thoughts?

Traditional automakers have a huge opportunity to lose market share to new EV entrants. This is THE risk they face. As a minimum strategy I believe automakers need to defend their market share. This means that if a maker has say 5% share of all autos in a given country, then they need to secure at least 5% of the EV market in that same country. If they maintain that footing, they will retain 5% market share as consumers transition to EVs. With this strategy, the automaker must firstly make sure that they are bringing competitive EV product to market. Second, they've got to make sure that their sales channel is just as good selling EVs as ICE. Third, they've got to make sure they have suitable infrastructure in place. And finally, they have got to be willing to cannibalize some ICE sales for EV sales. If their EV market share is less than their ICE market share, then they are doing something wrong and sacrificing long term market share for short term inertia.

Is any automaker living up to this strategy? It would be nice to see the stats.

Here's the threat. Total EV sales in 2017 will be about 1.2M and Tesla will have about 10% share of this market with 120k cars. Next year Tesla could stretch into 500k cars, while the rest of the EV makers grow by say 40% to hit 1.5M. Thus, the EV market swells to 2M in 2018, and Tesla takes 25% market share. Just to hold Tesla to 20% market share in 2018, the other EV makers would need to step up sales 85% to 2M. Thus, in this scenario, EV market doubles to 2.5M in 2018 and Tesla is still commanding 20% market share. Either way, Tesla gains 10% to 15% share of the future automaker just by bringing a super compelling Model 3 to market at scale.

So here's the thing about traditional automakers trying to gain and hold share in the new EV market: to do so they will have to accelerate growth of the EV market well above the 40% growth rate. Few oil companies are willing to concede that the EV market at anything faster than 40%, which is enough for EVs to trigger peak oil demand before 2030. For the rest of the industry to catch up with Tesla and win back share, we must see the whole EV market double for a few years. This would be superexponential growth.

So what does this mean for the oil industry. Either the EV market starts to see superexponential growth within the next 5 years or Big Auto loses serious market share permanently. A few years of superexponential EV growth brings peak demand several years earlier than anyone but Tony Seba thought was possible, say before 2023. Or without superexponential growth, Big Auto cedes leadership to Big EV and Big Oil loses its most important ally. Big EV will have no qualms about crushing Big Oil like a smoldering cigarette butt. For the longevity of the oil industry, it is probably best that Big Auto not cede too much market share to Tesla and other committed EV makers.

 

[jhm]

While great for the world, this *does* potentially hurt Tesla's competitive position. Come 2025 there should be real, and substantial, competition. Right now there seems a clear path of no competition at all until 2019 or even 2022. So.

I know. It's our version of the condrum between saving the world versus becoming ridiculously wealthy.

 

[winfield100]

if a consumer wants an exciting leading edge car, it will be electric.
I also think plug-in hybrids have a short shelf life.

as a single penitent data point, my GM Volt (59,600+ miles) was one of the worst vehicle decisions of my life.
adding things up, I have done at least 40, ~1,035 mile (~1,700km) 1-2 day trips on the east coast of the US and the midwest (about $2,600 fuel) On the last trip, we passed a Tesla S60 about 1,000 miles from home at the south Carolina border, headed for Connecticut, 1,000 miles further north..
I'm stuck with a decaying asset, barely worth more than I owe on it (~$10,000USD), so if i sold it i would be left with ZERO dollars, that the Chevy place still calls me to come get some work, any work, please, and I COULD have had a Tesla.
To make it worse, i sold some TSLA stock to partially pay for the Volt, the stock has almost tripled in value since i sold it and I'm DCA'ing my way back to my initial TSLA shares number

 

[renim]

Traditional automakers have a huge opportunity to lose market share to new EV entrants.....

hmmm in regards to France
EV Sales: France May 2017
for the plug in market, Tesla is about 3%,

small - mid size country, Renault Zoe range goes a long distance, ubiquitous 3 phase AC power supply.
there is some very long term implications about France, once battery size is sufficient & onboard charger is optimal sized, AC makes DC irrelevant.

France may not reflect global norms, but it does reflect the transition from enroute charging to destination charging. Renault Nissan built out a lot of higherpower DC/AC architecture in France, but AC 22kW won the day.

 

[jhm]

Oil No Longer Decisive Factor In Emerging Market Performance | OilPrice.com

This is very interesting to ponder. The price of oil is decoupling from the performance of emerging makers across stocks, bonds, and local currencies. Rather the performance of technology is becoming more critical.

Here my simplistic take on it. The price of oil used to be linked to assets in emerging markets based on both supply and demand. As a source of oil and other commodities, emerging economies would depend on the price of oil and the other commodities they would produce. But as technology and other diversification begins to be a larger driver of value creation in those economies, oil loses its relevance. On the demand side, economic growth in emerging economies used to create more demand for oil and other fuels. But as counties like China and India aggressively grow renewables and lean on other technology tha economize the use of fuels, emerging economies cease to be oil demand growth engines driving up the price of oil.

This has been seen in developed economies as well. As all economies decouple from oil, we may expect real economics demand for oil to decline, even if consumption is sustained through low prices.

 

[renim]

I can't see how Renault Nissan doesn't look at these figure monthly, and not feel that EVs were meant to be cheap and lite.

Plus de 20 000 véhicules électriques et hybrides rechargeables immatriculés sur le 1er semestre 2017 !

for EV only (excludes commercial, excludes plugin hybrids)

 

[jhm]

I can't see how Renault Nissan doesn't look at these figure monthly, and not feel that EVs were meant to be cheap and lite.

Plus de 20 000 véhicules électriques et hybrides rechargeables immatriculés sur le 1er semestre 2017 !

for EV only (excludes commercial, excludes plugin hybrids)

Well, that's a nice car for one segment. It's not clear how the success of Zoe can generalize to say SUV, truck or luxury segments. The challenge for all automakers going into 2020s will be to offer compelling EV products in every segment.

 

[renim]

Well, that's a nice car for one segment. It's not clear how the success of Zoe can generalize to say SUV, truck or luxury segments. The challenge for all automakers going into 2020s will be to offer compelling EV products in every segment.

its not about segments, its about location
location France

top 3 selling vehicles in France, Renault Clio, Peugeot 208, Citroen C3
I struggle to find a USA equivalent, perhaps the Nissan Micra in Canada is a good equivalent.

This is where Renault Nissan comes from, all cars are small cars.
Electric vehicles
Renault considers that they have long electrified all majors vehicle categories that they sell/profit in.

 

[GoTslaGo]

its not about segments, its about location
location France

top 3 selling vehicles in France, Renault Clio, Peugeot 208, Citroen C3
I struggle to find a USA equivalent, perhaps the Nissan Micra in Canada is a good equivalent.

This is where Renault Nissan comes from, all cars are small cars.
Electric vehicles
Renault considers that they have long electrified all majors vehicle categories that they sell/profit in.

But it seems that @jhm and @TrendTrader007 have already pointed out that the French only like small cars:

This confirms your observations.

Model 3 may be too big as well!

 

[SwTslaGrl]

But it seems that @jhm and @TrendTrader007 have already pointed out that the French only like small cars:


Model 3 may be too big as well!

For France I think you have to look at the whole fleet of cars in use, larger cars may be replaced less often. For the Model 3 IMHO it's very French in interior/exterior design they like high-tech, techno and avant-garde

An observation from here in Sweden: The parking lot here in the city center has different type of cars depending on the day of the week. Weekdays it's filled with small commuter cars, while on weekends the larger family cars fills the parking lot

 

[jhm]

Renault considers that they have long electrified all majors vehicle categories that they sell/profit in.

Ok, if that is the extent of their aspiration, then they may already be well positioned. They should be fine as other EV makers make advances into segments they don't care to enter. A perfectly fine strategy is to know your niche and electrify that.

 

[neroden]

Traditional automakers have a huge opportunity to lose market share to new EV entrants. This is THE risk they face. As a minimum strategy I believe automakers need to defend their market share. This means that if a maker has say 5% share of all autos in a given country, then they need to secure at least 5% of the EV market in that same country. If they maintain that footing, they will retain 5% market share as consumers transition to EVs. With this strategy, the automaker must firstly make sure that they are bringing competitive EV product to market. Second, they've got to make sure that their sales channel is just as good selling EVs as ICE. Third, they've got to make sure they have suitable infrastructure in place. And finally, they have got to be willing to cannibalize some ICE sales for EV sales. If their EV market share is less than their ICE market share, then they are doing something wrong and sacrificing long term market share for short term inertia.

Is any automaker living up to this strategy? It would be nice to see the stats.

I believe most of the Chinese automakers are.

 

[TheTalkingMule]

We're meandering a bit off topic here, but I do find the US/Europe design dynamic very interesting and crucial for Tesla. Crucial from a European adoption standpoint, not necessarily for global EV marketshare. I spend quite a bit of time in Ireland and can tell you for sure that the Model S/X/3 design isn't going to fly there. Our version of a "full sized car" is almost nonexistent in a lot of European markets.

Considering we're so far Tesla is from a euro-styled car, would it make sense to manufacture a skateboard product for the European market? Or partner with a European car company to build out a battery/drivetrain only gigafactory? Because I think maintaining the full sized premium look and feel will be a huge advantage on the other side of the world. Chinese consumers will love a big fat Model S and emerging middle class can go right down the product line to Model 3 then a future economy option. The premium Tesla brand will go a looooong way in China over the next decade.

Basically, the current models should do fine in China, but European adoption wouldn't take place until something like a Model Y Jr is released. That may give the Germans enough time to catch up. Is there a solution in manufacturing something other than finished cars?

 

[jhm]

Saudi Aramco: Industry Didn’t Invest $1 Trillion Due To Low Oil Prices | OilPrice.com

I'm still trying to make sense of this position from Aramco. They are lamenting that some $1T of oil and gas investments that have not happened since 2014.

While analysts and investors are currently worried that OPEC and Saudi Arabia are not doing “whatever it takes” to balance the oversupplied market, Aramco’s chief executive was speaking of the long-term supply/demand dynamics, reiterating his stance that peak oil demand is nowhere in sight and “the world can’t prematurely disengage from proven and reliable energy sources like oil and gas.”

The US$1 trillion worth of investments that were never made due to the downturn is a “cause for concern to global energy security,” according to Nasser.

“About $1 trillion in investments has been lost in the current downturn, concurrent to growing oil demand and the natural decline of developed fields. Conservative estimates suggest we need about 20 million [additional] barrels per day over the next five years to counter these effects,” he noted.

I'm not sure how to interpret this phrase, "global energy security." They point to a concern about "premature disengagement" of oil and gas. Surely that would be unlikely if the prices for fuel were to remain sufficiently high. But the lack of $1T in investment is clearly understood as stemming from low fuel prices. How exactly is this a threat to global energy security?

A more suspicious reading here is that Aramco wants to make a $700B investment, but is worried that oil demand may fall too quickly. They need continued high investment in global supply to forestall "premature disengament."

We have been coming to see that peak demand first function to suppress oil prices below a level needed to continue supply growth. Later consumption declines as a consequence of declining production. Aramco seems to be lamrnting that the orice of oil may already be to low to sustain supply. Indeed they point to some 20 mb/d needed within the next 5 years. Or else what? Or else consumption may just decline as well?

 

[Lessmog]

We're meandering a bit off topic here, but I do find the US/Europe design dynamic very interesting and crucial for Tesla. Crucial from a European adoption standpoint, not necessarily for global EV marketshare. I spend quite a bit of time in Ireland and can tell you for sure that the Model S/X/3 design isn't going to fly there. Our version of a "full sized car" is almost nonexistent in a lot of European markets.

Considering we're so far Tesla is from a euro-styled car, would it make sense to manufacture a skateboard product for the European market? Or partner with a European car company to build out a battery/drivetrain only gigafactory? Because I think maintaining the full sized premium look and feel will be a huge advantage on the other side of the world. Chinese consumers will love a big fat Model S and emerging middle class can go right down the product line to Model 3 then a future economy option. The premium Tesla brand will go a looooong way in China over the next decade.

Basically, the current models should do fine in China, but European adoption wouldn't take place until something like a Model Y Jr is released. That may give the Germans enough time to catch up. Is there a solution in manufacturing something other than finished cars?

You thinking about an electric Smart? Like the Tesla prototype Mr Toyoda did a wheelie in back in the day? Or maybe the electric M-B B series, powered by Tesla drive line? I like your thinking.

 

[jhm]

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This article examines the Aramco quotes from another angle.

Perhaps Amramco just wants to look relevant when it IPOs. The target seems to be the financial sector which is becoming less inclined to invest in big oil projects. I think they need to focus on selling their own investments and stop badgering the rest if the industry. A $1T investment when oil is just at your break even price is a bad investment. If Aramco has lower breakeven prices they should lead on it rather than withholding supply and engendering a risk of lower prices.

 

[jhm]

The link above is paywall. You might search for "‘Big oil’ dismisses predictions of collapse in demand".