Shorting Oil, Hedging Tesla

[justvisiting]

I think the entire body of "organic food" falls into this category. Food marketed as "organic" is more environmentally friendly, cleaner and most of the time more expensive than industrial chemically farmed food. The fact that millions of people choose to buy organic food is a good example of people choosing to spend more for a more environmentally friendly product.
Also my purchase of a Tesla was my choosing to spend more for a more environmentally friendly product. I (and many others) have made this decision. I never would have considered spending this amount of money on an ICE car but was happy to give Tesla my money.

I don't think your "sense of the matter" makes sense.

thats a great example, thank you for that.
Also we have seen a huge improvement in environmental quality in the rich and developed countries since the industrial revolution, If people would not care, why did we spend so much time and money to improve the environment? And its not just because of regulations, people simply get fed up with pollution after a certain time and prioritize it more.

Same can be seen in China at the moment. The premium for 65% iron ore, compared to 62% and 58% ore has risen cosiderably in the last years. Right now its about 85$ for 65% and 65$ for 62%. Why? Because the higher the grade, the less the pollution when you make steel. This has no economic sense, but people in China have enough food and a somewhat decent life, and now they get angry about the smog and the government has to do something against it if they dont want to lose control.

So no matter if its over price or through the government, people care about the environment. And again, Im not against certain subsidies per se, i just thought that the statement "a 7500$ incentive does not disturb the free market" is wrong.

 

[jhm]

So the typical car emits about 4.6t of CO2 per year. In about 16 years, this is 75t. So the $7500 EV tax credit is like a $100/t subsidy for emissions avoidance.

This is one way to look at it, but I don't think that it is as through going as a a carbon tax. For example the carbon tax would not only make an ICEV more expensive to operate relative to an EV, but it would also renewable electricity a more cost competitive way to change the EV relative to fossil generated power. Likewise the whole supply chain that builds the EV in the first place would give preference to processes and materials that avoid emissions. So the total lifecycle emissions of an EV could be reduced wherever it is most cost effective to do so.

So while the EV tax credit may help sell EVs, a consistently applied carbon tax would reduce the total lifecycle emissions of every car. In this way a carbon tax can be more economically efficient than the EV tax credit.

On the other hand, I think the point of the tax credit was simply to spur the development of EVs. This would trigger a process of coar reductions in the manucture of EVs and hopefully arrive at co.petitive products that no longer would need any subsidization. So with this sort of objective, the benefit is not merely the emissions reduction of say the first 2 million EVs, but the viability of EV to continue competing in a 17M US auto market for decades to follow. By contrast, the evolution of EVs would likely come much more slowly under a carbon tax alone. So I view the EV tax credit merely as a transitory intervention, while carbon tax is much more suitable for long-term routing out of excess emissions. At this point in the development of clean tech of all sorts, I think a carbon tax is the more economically efficient way to go and would have that replace schemes like the EV tax credits, solar ITC or wind PCT.

Also I think it would be interesting to index a carbon tax to a timetable for reductions aggregate emissions. So if emissions are falling slower than the time table, the tax increases at a faster rate than if emissions fall faster. The idea here is to try to find the minimum price for carbon that is needed to achieve the time table. This assures that whatever economic drag a carbon tax places on the economic is kept to a minimum.

 

[jhm]

Elon Musk Harpooned Baseload Power | CleanTechnica

This article makes an interesting point about how baseload power is dependent on peak prices. As batteries cut peak price, it forces baseload generators to lock in more long term sales contracts. Ultimately this will undermine the profitability of these generators. Meanwhile, batteries will strengthen the value of wind and solar as they cut into the market share of baaeload.

 

[durkie]

thats a great example, thank you for that.
Also we have seen a huge improvement in environmental quality in the rich and developed countries since the industrial revolution, If people would not care, why did we spend so much time and money to improve the environment? And its not just because of regulations, people simply get fed up with pollution after a certain time and prioritize it more.

Same can be seen in China at the moment. The premium for 65% iron ore, compared to 62% and 58% ore has risen cosiderably in the last years. Right now its about 85$ for 65% and 65$ for 62%. Why? Because the higher the grade, the less the pollution when you make steel. This has no economic sense, but people in China have enough food and a somewhat decent life, and now they get angry about the smog and the government has to do something against it if they dont want to lose control.

So no matter if its over price or through the government, people care about the environment. And again, Im not against certain subsidies per se, i just thought that the statement "a 7500$ incentive does not disturb the free market" is wrong.

I agree with you on the sentiment of $7500 incentive disturbing a free market (which I think is great), but I find the organic food example a little murky. I had always seen the reason many people eat organic as largely fear/uncertainty-based: primarily concerned about what you're putting in your body. Especially since there are compelling environmental arguments against growing organic. Of course, people have many reasons for doing things, so it's probably not super clear-cut either way.

I don't understand the Chinese iron ore example though. You explicitly refer to the government doing something, and consumers aren't going to know which steel was made from high-grade ore or not, so they can't factor that in when choosing what to buy. If you had more information on it I'd be interested, but the link I found (from 2014) is this: Iron ore price: It's all about grade now | MINING.com -- it refers both to Beijing's war on pollution and their shutting down of excess steel production capacity.

It seems like if you were a steel producer worried about your capacity being considered "excess", you'd try your best to please the government on the pollution front. Not a $7500 EV govt incentive, but definitely a "pollute less and we'll let you keep operating" govt incentive.

 

[jhm]

Hydrogen From Renewables Could Make Emissions-Free Steel Possible | CleanTechnica

Since were talking about steel, emissions and government meddling, this article is interesting. So Sweden has a demonstration steel plant to test out ways to make steel carbon free. Critically there is a need for emissions-free hydrogen, so advancing electrolyzer cost efficiency at scale and the continued decline in the cost of wind and solar will eventually solve this piece of the puzzle. Currently, they estimate that emission-free steel can be made at just a 20% to 30% premium to conventional steel making. I think this is very promising. Refinement of their processes, scale and further cost reductions in emissions-free hydrogen can reduces this premium and take the cost of steel even lower. But it is also obvious here that a carbon tax would also tip the scale to emissions-free steel sooner, which would increase the rate of investment in R&D and scale up of these new processes. So not only would this cut these emissions sooner, but it would also potentially bring a lower cost technology for steel make to scale sooner. Thus, both the climate and the economy can ultimately benefit.

But let's go back to the Tesla battery as a harpoon against baseload generators. Suppose this is correct that the batteries enable wind and solar to kill off more peak prices and force baseload generator to offer more and lower priced long-term supply contracts. This is actually quite favorable for electrolyzers generating hydrogen. The electrolyzers can buy these cheap baseload supply contracts and operate 24/7 through 50% to 70% of the year. In peak demand months in the summer and winter, these contracts would be too expensive for generating hydrogen. But that is okay, the electrolyzers shut down while the power plants are free to supply seasonal demand for power. Where the baseload in question is nuclear, this avoids the need for long-term electricity storage to satisfy seasonal balancing needs in an emissions-free energy market. The electrolyzer needs stable power at a price well below the full cost of baseload power; however, renewables and batteries can force baseload to accept super low prices for 6 to 9 months per year, so long as the power prices are high enough in the remaining 6 to 3 months to cover all annual operating costs and future capex. This is still a pretty thin needle for nuclear to thread, but it should be clear that hydrogen demand stemming from emissions-free steel can only help make those narrow economics work. Nuclear power needs a carbon tax, not just to advantage it over coal in competition for a shrinking baseload market, but also in the creation of new demand for seasonally low baseload prices. Without a carbon price, the harpoon will be even more lethal to nuclear.

 

[jhm]

Shenzhen: BYD lands large order for electric dump trucks - electrive.com

BYD is getting into electric dump trucks and concrete mixer trucks.

The dump truck offsets the carbon emissions of 70 car. I wish I knew how much fuel that represents. Let's see, in the US a car emits about 4.6t/y, so dump truck 322t/y. Diesel emission are about 10.17kg gal, so diesel consumption is 31,693gal/y or 2.067 b/d.

Damn, 2 b/d diesel displacement per dump truck is pretty serious. That is comparable to an electric semi doing 500 miles per day.

 

[mspohr]

Morgan Stanley Says a Shipping Revolution Has Oil Headed for $90

 

[dc_h]

Cant say that i disagree with any of your points.

but still: that "planning policy", reasoned with what you think is good and right, is disturbing the free market. And that was what you were complaining about in the first place.

That planning policy is interfering with entrenched oligopolies who have immense media pull and political influence. If some motivated guy with 200 million can leverage his money, talent, drive and some subsidies, well below 1% the cost of protecting Middle East oil, and a smaller fraction of environmental or health costs, to disrupt a 100 year old energy and transportation ecosystem that has dominated our economic, political and even foreign policy agenda, I’d say that is a system needing disruption. I’m complaining about our planning processes that are not self interested, from a national security and general well being perspective, but parochial or just contrarian to the elitism of science.

 

[dc_h]

Shenzhen: BYD lands large order for electric dump trucks - electrive.com

BYD is getting into electric dump trucks and concrete mixer trucks.

The dump truck offsets the carbon emissions of 70 car. I wish I knew how much fuel that represents. Let's see, in the US a car emits about 4.6t/y, so dump truck 322t/y. Diesel emission are about 10.17kg gal, so diesel consumption is 31,693gal/y or 2.067 b/d.

Damn, 2 b/d diesel displacement per dump truck is pretty serious. That is comparable to an electric semi doing 500 miles per day.

In your spare time, could you put together a spread sheet of vehicle types and car equivalent fuel consumption and we can track annual sales of each. That would allow capture of trends in each category to start building a reliable estimation tool.

I think a crowd sourced google doc with vehicle types, production and planned production would start building a real model of peak oil, and more important the timing of the transportation disruption. This really has important geopolitical, economic, military as well as environmental consequences.

I think a nice Hans Rosling data visualization of the wholistic transportation system move to electric would be pretty cool.

 

[ValueAnalyst]

Brent crude oil today broke $80 per barrel, and this is just the second inning.

Generally speaking, and this timeline will change, I think each month will roughly approximate one inning.

A baseball game has nine innings, but a game may be rained out early, or extend into extra innings. Stay tuned.

 

[jhm]

IEA: High Oil Prices “Taking A Toll” On Demand | OilPrice.com

Even as Brent breaks $80, IEA is now recognizing that high oil prices are "taking a toll on demand." They are revising demand forecast downward by 400kb/d.

It will be interesting to see how OPEC reacts to this. Net demand for OPEC is Global Consumption minus Non-OPEC Production. So these high prices are cutting into consumptions while boosting non-OPEC production. So OPEC gets a double whammy from high oil prices.

The Regulations That Could Push Oil Up To $90 | OilPrice.com

To make matters worse, the IMO low sulfur maritime fuel rule will dislocate some refiners and some grades of crude. Both can drive up the cost of all fuels in demand, not just crude but the added cost to refine it and offset lower prices on residual fuel oil. Driving up the cost to the end consumer will only intensify the toll on demand.

In unrelated news, China continues to electrify commercial vehicles of all sorts.

 

[ValueAnalyst]

IEA: High Oil Prices “Taking A Toll” On Demand | OilPrice.com

Even as Brent breaks $80, IEA is now recognizing that high oil prices are "taking a toll on demand." They are revising demand forecast downward by 400kb/d.

It will be interesting to see how OPEC reacts to this. Net demand for OPEC is Global Consumption minus Non-OPEC Production. So these high prices are cutting into consumptions while boosting non-OPEC production. So OPEC gets a double whammy from high oil prices.

The Regulations That Could Push Oil Up To $90 | OilPrice.com

To make matters worse, the IMO low sulfur maritime fuel rule will dislocate some refiners and some grades of crude. Both can drive up the cost of all fuels in demand, not just crude but the added cost to refine it and offset lower prices on residual fuel oil. Driving up the cost to the end consumer will only intensify the toll on demand.

In unrelated news, China continues to electrify commercial vehicles of all sorts.

IEA has consistently underestimated demand, curiously: Why Oil Demand May Be Higher Than Expected

Having said that, IEA's estimate, revised down from 1.5 mb/d to 1.4 mb/d, is above what I laid out on Jan 2, but I assume surging oil prices:

Bottom Line
I expect oil demand growth to clock in at 1.3 to 1.4 mb/d in 2018, primarily due to higher oil prices, partly offset by the positive impact of quicker global growth projected for the upcoming year. I expect oil demand growth to remain strong in the early part of 2018, but for the growth rate to decelerate towards the end of the year. I expect a more severe impact on oil demand in 2019.

 

[jhm]

IEA has consistently underestimated demand, curiously: Why Oil Demand May Be Higher Than Expected

Having said that, IEA's estimate, revised down from 1.5 mb/d to 1.4 mb/d, is above what I laid out on Jan 2, but I assume surging oil prices:

Bottom Line
I expect oil demand growth to clock in at 1.3 to 1.4 mb/d in 2018, primarily due to higher oil prices, partly offset by the positive impact of quicker global growth projected for the upcoming year. I expect oil demand growth to remain strong in the early part of 2018, but for the growth rate to decelerate towards the end of the year. I expect a more severe impact on oil demand in 2019.

I certainly have no interest in defending IEA estimates. They have all sorts of systemic biases. My observation is simply that the IEA is coming to recognize the at higher oil prices will slow demand growth. This seems to be a change of narrative for the NGO.

 

[neroden]

Oho. The refinery retooling problem is already striking.

 

[jhm]

Oho. The refinery retooling problem is already striking.

Tell us more.

 

[jhm]

IEA Cuts Oil Demand Forecasts As Markets Evolve

Mark Fulton, Senior Fellow at Ceres, Founding Partner at Energy Transition Advisors and co-author of the recent released Clean Trillion report said, ‘Oil demand is likely to peak in the next few years, well ahead of many companies’ expectations.’

Another issue is that many importers of oil are cutting end-user fuel subsidies.

As UAE Minister of Energy Shual Al Mazroui said in January 2018, ‘We are trying to move subsidies from oil and gas to new forms of energy. There’s enough energy potential in our region to export to Europe and Africa too’. It may be that that shift is due to the export potential for oil and the falling price of renewables, but it is indicative of a major shift in global thinking.

The big issue remaining about the future of the energy mix is what the market’s response will be. In 2016 there was roughly $300 billion invested in renewables and $300 billion invested in fossil fuels, causing some to question whether or not the markets have already reached a tipping point. In 2017, according to CERES, this had shifted to where clean energy investment was more than US$ 333 billion, compared to only US$ 144 billion invested in conventional fossil fuels and nuclear.

Following the investments is pretty important. If fossil fuel and nuclear remained at just $144B each year, how long could the current oil production levels be sustained? How low would investments need to drop for oil production to decline?

Another import issue is countries cutting subsidies for fossil fuels. Shift public dollars fro fossils to renewables and EVs could change the demand price sensitivities in ways that have not been seen in historical data. This could really throw energy investors for a loop. The expectation that demand will remain resilient in the face of high oil prices could be flatly wrong.

 

[ValueAnalyst]

Following the investments is pretty important.

I don't quite understand this thinking. Could you please summarize it for me? Why is what oil investors do with their money important? They are wrong. This is oil's final act. Shouldn't we be spending our time and energy in figuring out how to lower the marginal cost of Tesla's products?

 

[ggies07]

The 2017 LLNL Energy flow chart is out. We used less Natural Gas, Coal, and Petroleum than in 2016 and everything else went up.

 

[mspohr]

The 2017 LLNL Energy flow chart is out. We used less Natural Gas, Coal, and Petroleum than in 2016 and everything else went up.

Always impressed (shocked) by the "Rejected Energy" category (about 65% of the total). I assume this is "waste heat". Seems like there should be a lot of room to salvage some of this waste by improving efficiency.
I don't think solar, hydro and wind have any rejected energy unless you count the sun and wind that wasn't captured. As renewables increase, the waste in electricity generation should decrease.

 

[Oil4AsphaultOnly]

The 2017 LLNL Energy flow chart is out. We used less Natural Gas, Coal, and Petroleum than in 2016 and everything else went up.

What falls into the category "Petroleum"? Because that went up too ... by 0.3 Quads it seems. That's less than the decrease in Nat Gas and Coal, but it's an increase nonetheless.