This is a sampler of the increasingly confused and borderline panicky reactions around the world to the plunging price of oil. Intensely interesting puzzle emerging, as temporary price drops tease consumers, but more thoughtful observers see grave danger for producers, and the economies that are too reliant on them.
Setup: OPEC (the Organization of Petroleum Exporting Countries) had a meeting this week to consider the consequences of rapidly dropping oil prices. The conventional wisdom was that Saudi Arabia, in concert with others, would cut production, thereby constricting supply, and pushing price back up.
In a twist, OPEC decided to do nothing, and prices responded by plunging even further – see graph above. Savvy observers take that as a sign that OPEC wants to wait it out, and strangle the production of exotic oil in the US and Canada – “exotic” because they require advanced and very expensive techniques to frack, cook, and process the flood of new oil coming on to the market. Without the high prices we’ve gotten used to, that production begins to collapse. The stage is set for classic boom and bust.
In Vienna Thursday, the Organization of Petroleum Exporting Countries voted to maintain production of 30 million barrels a day, about four times that of the United States. The news came as a shock to markets following predictions that governments in Saudi Arabia and Iran, which are heavily dependent on oil for public spending, would maneuver to try to raise the price of oil.
“We will produce 30 million barrels a day for the next six months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting, according to Bloomberg News. “We are not sending any signals to anybody. We just try to have a fair price.”
The fallout from OPEC’s decision is likely to mean more bad news for oil companies operating in the United States. Shale plays like the Eagle Ford in Texas and Bakken in North Dakota, which have boomed in recent years, are dependent on cost-intensive drilling techniques that analysts say are already uneconomic for some companies at current prices.
A report by Moody’s Investors Service earlier this week projected that capital spending by oil producers will decline 20 percent next year with “room for deeper cuts if weak oil prices persist.”
The financial press is reacting. Barrons, below, not known as a starry eyed promoter of sustainable futures, asks if oil may be accelerating its own decline.
Key phrase: “Volatility sells Teslas“.
The price of oil is plunging–and the shares of producers with it–after Opec decided not to cut production yesterday. Wolfe Research’s Paul Sankey and team think this is the beginning of the end for oil:
This is going to be volatile, and we can’t understand how that helps the Saudis. Volatility sells Teslas (TSLA). There seemed to be a clear degree of irritation in Saudi oil minister Al-Naimi’s comments to the crush of journalists; as ever, he had front run his position: no real cut because as he said, he expects the market “to stabilise itself eventually“. He is wrong…
We don’t think that global oil demand will significantly react to lower oil prices, and thus we think the market will clear at the point of US supply growth destruction. That will take six months to work through, at which point we will likely hit a significant slowdown in US oil production growth, falling Russian production, deteriorating OPEC member stability – notably in Venezuela, Nigeria, and of course Libya – and rising global demand. So we go low, to storage economics (likely $50/bbl WTI) in Q1 2015 and then squeeze supply. And then we squeeze radically higher. As a result, the world accelerates its move away from oil. The conclusion will be, OPEC, like Rockefeller, ultimately damned itself.
The New York Times mentions “winners” and “losers” in this development. Losers include oil state economies, Vladimer Putin, and – with a big questionmark – the climate.
Winner: Global consumers. Anybody who drives a car or flies on airplanes is a winner, as lower oil prices are already translating into lower prices for gasoline and jet fuel. Lower transportation costs will also give manufacturers and retailers less urgency to raise prices, as their costs fall.
This is, in effect, a global supply shock, the reverse of what happened with energy in the 1970s (or, to a smaller degree, the mid-2000s) when petroleum shortages and embargoes led to a sharp rise in prices. It may not last forever, but for now consumers in the United States and beyond will be winners.
Loser: American oil producers. One of the big open questions is just how many of the small, independent producers in the American heartland have cost structures that make them viable with oil prices in the $60s rather than the $100s. Many have relied on borrowed money, and bankruptcies are possible. But because the companies tend to be privately held (their financial details not publicly released), analysts are doing guesswork in projecting how severe the pain will be.
Potential Loser: The environment. As a general rule, the cheaper fossil fuels become, the more challenging it will be for cleaner forms of energy like solar and wind power to be competitive on price. That said, the picture is a bit more complicated with this particular sell-off. Solar and wind power are sources for electricity, whereas fluctuations in oil prices most directly affect the price of transportation fuels like gasoline and jet fuel.
Unless or until more Americans use electric cars, they are largely separate markets, so there’s no reason that cheaper oil should cause a major reduction in investment in renewables. But to the degree cheaper oil means people drive more miles and take more airplane flights, the falling prices will mean more carbon emissions.
But not so fast. While there are stories of increased sales for SUVs and trucks, oil prices on a roller coaster are not long term good news for the fossil fuel industry.
Fox News cheers for good ol’ American drill baby drilling, then worries about the frackers – who need relatively high oil prices to support their production of exotic oils.
But the next question could be whether the fracking industry can survive the low prices it brought.
“The shale boom is on a par with the dot-com boom,” Russian oil baron Leonid Fedun of OAO Lukoil told Bloomberg. “The strong players will remain, the weak ones will vanish.”
OPEC, the cartel of oil-producing nations that has historically been able to calibrate the price of oil – and ultimately gasoline – by increasing or decreasing supply, announced Thursday that it won’t fight the price skid by cutting production this time. That likely means prices will continue to fall, and the more costly production technique of fracking could become cost-prohibitive, say experts.
OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.
The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields.
American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil (LKOD), said in an interview in London.
“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,”
Al Jazeera asks how OPEC fares in the age of climate change:
On the face of it, shutting down some of the extreme oil, which adds to the world’s excess of reserves, could be seen as good news for the climate. Venezuela’s Minister Ramirez told Al Jazeera that expanded US production was “a disaster for climate change”. (However, he did not comment on how OPEC’s reserves square with climate limits.)
The trouble is that any such reprieve from a fracking cutback will be temporary, as those reserves will not disappear. Whenever the oil price increases again, companies will come back to extract them.
A reduction in US production could only become more permanent if there were active government regulation to restrict demand for fossil fuels. Ironically then, OPEC and Saudi Arabia – generally seen as obstructive in international climate negotiations – might best be able to protect their market share with a meaningful global deal on climate.
As oil prices sagged again on Monday to a four-year low, the Carbon Tracker Initiative said the recent downward spiral “changes the whole dynamic” for Canada’s tar sands production.
The “vast majority” of potential capital expenditures on tar sands projects that are still in the earliest phases of development would require such high oil prices that they are “particularly risky,” the group said.
Hundreds of billions of dollars could be spent on projects that are underway or in development, Carbon Tracker said. At least two-thirds of the tar sands enterprise is at risk if current prices persist, or if they drop even lower.
“We believe shareholders should be concerned at this potential level of expenditure and should consider whether it is prudent to risk such large amounts of capital on high cost projects that need high oil prices to be commercial,” the report said.
Some 92 percent of this prospective tar sands production would need a price of at least $95 per barrel to make sense, given the risks. And “virtually all” of it needs at least $75 per barrel. These calculations include a $15 margin of safety above the estimated break-even cost of production, since it would not be prudent to invest in a project that would only break even.
The Toronto Star underlines the point that continued investment in Alberta Tar Sands presumes a continued, and predictable, high price for oil:
Oops. There go the tarsands.
The dramatic slide in oil prices has underscored the fragility of Stephen Harper’s entire resource-based approach to the economy.
For this government, Alberta’s oilsands were the key to Canada’s economic future.
Alberta heavy oil would be sold to the world at premium prices. Spin-offs would provide jobs for Canadians across the country.
It was a coherent vision. But it rested on one thin reed: an oil price high enough to cover the cost of extracting bitumen from the tarsands.
Now, with oil prices expected to remain low for the indefinite future, the entire project looks increasingly iffy.
That became glaringly obvious in the stock markets late this week as investors bailed out of energy companies.
NPR Living on Earth interviews energy investment strategist Joseph Stanislaw, who points out again that uncertainty will ultimately drive more users to curtail oil use or find alternatives :
CURWOOD: Considering the prospects for the price of oil, how crucial is Keystone to making it economically viable to use tar sands oil?
STANISLAW: Does it make a difference right now in the short-term? Probably not a whole lot at all. [LAUGHS] Let’s be realistic. So far, that oil has not been moving through those pipelines. It’s been going east and west through other already existing pipelines. Now, there are other pipelines being built in Canada, one going east, one going west, to the tune of about 2 million barrels a day of oil equivalent flow. So that oil is going to be produced, it’s going to be moved. That’s a fact. When it is actually produced and moved, there’s an issue of pricing and timing, but it’s going to happen over the next five or 10 years. If it is delayed 20 years, if there are enough objections to it on the environmental front, they may pull back on that. But with the current situation and potential alternative routes for exporting, in the next five or ten years, it’ll happen.
CURWOOD: Now, Joe, I know you’re familiar with the argument of this put forth by some that to protect the climate two-thirds at least of present oil and carbon-based fuel reserves need to stay in the ground. How do you reconcile additional infrastructure like Keystone against those kind of concerns?
STANISLAW: In the short-term, we’re not going to get off the stuff as they say, and oil will move. There will be that transition period taking place, and it’ll begin to slow everything in the mid-20s probably, but equally I think more and more people will recognize that it used to be the fear of peak oil supply. That’s now something that’s been discredited. The real issue is, people can find new ways not to use the stuff. People will be using it much more efficiently, alternative sources will be found. Peak oil demand is really…should be the factor people are looking at.
Fossil fools may temporarily celebrate lowered prices, but as the roller coaster bottoms out, and boom times in North Dakota face a shakeout, consumers who were hoping for continued cheap gas in that new SUV will be in for a shock.
Volatility is almost as deadly as continued high prices for the oil industry, and just continues to fuel the long term prospects for more efficiency, more electric cars, and more renewable sources, where the price is predictable, boring, and luxuriously flat, forever.
Now, as much as ever, a climate-realistic carbon price is needed.
Wrong. A carbon tax hits coal really hard. The proposed carbon fee proposed by Senator Whitehouse is $42 per ton. This increases the price of coal by about 100%, increases the price of natural gas by only 35%, and increases the price of crude oil by only 6-10% (about 14 cents per gallon). Yet crude oil is the largest source of carbon emissions in America. And green energy substitution and energy efficiency improvements are needed in all three fossil fuel markets; oil, natural gas, and coal.
A carbon tax hits coal hard, and would cause substitution to natural gas. But what we really need:
1. Substitution of green power for coal power and natural gas fueled power.
2. Substitution of biofuels for gasoline/diesel, and substitution of EVs for conventional vehicles.
There are much better methods to accomplish this than a carbon tax. For example, use a crude oil tax that increases with falling oil price to fund green vehicles and biofuels. A tax of $20 per barrel would fund incentives that could drive green vehicles to over half annual vehicle sales in the US within eight years. As green vehicles penetrate the North American fleet, the demand for oil would decline, causing lower oil prices. Other countries/regiions with major vehicle fleets, like China, EU, Japan, India, etc. would likely copy the US policy to drive green vehicle manufacturing in their economies.
The result: declining global oil demand, and rapidly falling oil prices… to a level below $40 per barrel, and likely to about $30 per barrel. The ultimate stabilized price for crude oil depends on the rate of the oil demand decline, with massive and rapid substitution causing 5-10% drop in demand within ten years. This demand decline would drive oil prices to $30.
Paul – Can you explain why a carbon tax only increases the price of oil so little?
The price of carbon contained in crude oil has recently been much higher than natural gas, with the carbon in coal even cheaper. However, the value of carbon in hydrocarbon liquid is much higher than the carbon contained in solid coal.
A barrel of oil weighs about 250 pounds, with most of the weight due to carbon. So a ton of carbon (2000 pounds) in crude oil is contained in eight barrels of oil. A carbon fee of $42 would raise the cost per barrel about $5. For oil at $70-80 per barrel, this raises the cost about 6%.
Natural gas currently costs about $5 per thousand cubic feet at the delivery point, and this quantity of gas contains about 32 pounds of carbon. So a ton of carbon is contained in 63 thousand cu ft, costing about $315. A $42 carbon fee raises this cost by about 14%. But currently natural gas prices are low compared to historical crude oil and coal prices.
An important metric for analyzing the effectiveness of energy markets
compares the energy price of natural gas compared to the energy price for crude oil; for most of the last fifty years, the energy adjusted price of natural gas sold in the range of 70-90% of the energy adjusted price of crude oil. In the last several years, natural gas at distribution hubs has sold in the range of $2-$4 per million BTU, only 11-26% of the energy adjusted crude oil price of $15-$18 per million BTU. This ratio falls well below the range of historical norms, and shows that either crude oil is priced too high, or natural gas is priced too low; or both. The change in this metric indicates problems in both energy markets.
If natural gas costs increase to $8-10 at the delivery point, a $42 carbon fee raises natural gas prices about 20-28%. Adding an adjustment for fugitive methane emissions would increase the percentage cost increase due to a “carbon fee” to over 35%.
Coal costs about $40 per ton, and most of the weight is carbon, so a $42 carbon fee increases the cost almost 100%.
Carbon fees were preferred by macroeconomists who don’t understand energy markets very well, and adopted by proponents of action on climate change (like Dr. Hansen). Many of these people wanted to target coal first, and discounted actions to reduce crude oil and natural gas carbon emissions; in many cases, like Dr. Hansen, they bought into the hypothesis that petroleum production would soon peak out, and then decline.
This hypothesis (Peak oil hypothesis) turned out to be incorrect, as unconventional and frontier/deepwater crude oil reserves developed. Additionally, shale gas reserves have developed that have significant methane fugitive emissions. Now it is clear that green energy substitution must be used to reduce carbon emissions from all three top fossil fuel sources. And a carbon tax is no longer the best alternative to drive green energy substitution.
Oops, made one arithmetic mistake in the above calculations. If natural gas prices rise, the carbon tax (unadjusted for fugitive methane emissions drops as percentage of natural gas cost below 14%. If natural gas prices fall back to the $2-3 per million BTU range, then the carbon fee increases to 24-35%.
But the critical point I was making remains: a carbon fee sounds great to economists and activists not expert in the operation of the energy markets; but this blanket approach doesn’t work well in all energy markets. To optimize each energy market (crude oil products, natural gas, electricity, and coal), actions tailored to each market work better.
If you want to drive green vehicle and biofuels substitution for crude oil products, the actions required are different than if you want to add green power to substitute for fossil fueled power generation.
In the first case, there is a strong economic case to reduce costs for oil product customers, and redirect hundreds of $B of investment from the oil industry to vehicle manufacturers, biofuel producers, mass transit operations, etc. A crude oil tax that pays for incentives to ramp use of the substitutes works well.
In the second case, green power is best served by investment subsidies, particularly for publicly owned power, distributed green power, energy efficiency projects and storage/transmission projects; coupled with low interest public financing over long project lifetimes for green power.
Fossil fuels should lose all beneficial tax “subsidies” such as investment tax credits, accelerated depreciation, domestic manufacturing allowance, and even reduce the depletion allowance. Getting rid of the subsidies for fossil fuels, coupled with directly funding the actions needed in the vehicle fuels and electricity markets would work much better and faster than a carbon tax, and reduce customer energy costs instead of increasing customer costs due to carbon tax/fee schemes.
Paul – Thanks for the analysis. You have a point. A $5/bl increase in crude won’t do much. It seems like its at least in part due to the fact that the carbon in coal is cheap. Yes. We need a more focused tool that deals with the details of the energy market. While we are at it, we need to examine what the sources of carbon are and look at what we can do about it. We tend to forget the other large GW causes. Land use is a major source of GHG. How do we stop that? We need to make it unprofitable to slash and burn rainforest to grow palm plants.
The Years of living dangerously film makes it clear how damaging that is. Its a travesty to get the meager benefits in exchange for the damage.
http://www.epa.gov/climatechange/ghgemissions/global.html
Christopher – get back in the game: the trolls cometh: http://climatecrocks.com/2015/03/24/why-do-climate-denial-and-racism-go-hand-in-hand-continued/
I’m just a guy (not an insider) who’s spent a lot of time learning about the oil game, but here’s my take, for what it’s worth….
“So we go low, to storage economics (likely $50/bbl WTI) in Q1 2015 and then squeeze supply. And then we squeeze radically higher. As a result, the world accelerates its move away from oil. The conclusion will be, OPEC, like Rockefeller, ultimately damned itself.”
The first part of this is probably right. The bottom is probably $50/barrel. This will both drop unconventional investments radically and raise global demand to some degree. Unconventionals require massive and increasing investment due to both rapid well depletion and diminishing returns on fields (they go after the most promising areas first). Any drop in investment, let alone a large one, will result in declining production.
Unconventionals are the only thing that has kept peak oil (supply) at bay. The Stanislaw stuff above ignores this, and only looks at decreased demand due to the higher prices. As demand rises from temporary lower prices (however much that is), and as unconventionals drop in production, we will hit another panic point (probably 2016), as in 2008:
http://www.reuters.com/article/2008/07/11/us-markets-oil-idUST14048520080711
If a new round of high oil prices hits the economy, growth will again slow to a significant degree. If the high prices remain for several months, we’ll have major credit defaults and another round of bank failures and possible bailouts. Credit supply will shrink, and investment in all areas of the economy will suffer.
However, I’m not really sure OPEC is damning itself. They’ve always known the oil game wouldn’t last forever, and it’s not like we can flick a switch and suddenly we stop using oil. The process will take many decades, and even with switching transport to 100% electricity, there are still plenty of vital uses for oil. Barring a complete global economic collapse, they’ll have a market for their product for a few more generations, and this is how it would have played out with or without their recent decision.
On Teslas, with shrinking credit supply, any high dollar item will become more inaccessible to the majority than before. I personally think we’ll see more migration away from suburbs and more mass transport before we see a major shift to EVs – although that will still happen, first amongst the wealthy, and then to the rest as technological improvements and infrastructural advances continue. (Again, this scenario requires a relatively stable economy over several decades during a period of high volatility in a major energy source).
Politically, any sudden rise in oil prices or drop in economic activity will be partially blamed on the incumbent President and his political party. If this happens in 2016, it sets up a particular scenario in November of that year.
Longer term (again barring a complete breakdown), as oil prices rise again, investment will re-emerge in unconventionals, and politically we’ll have a feverish call for increased drilling. It will likely set up a boom/bust cycle for 1-2 decades at the minimum. There would be increased interest in ramping up alternative energy as the volatility becomes clearer to the majority, however.
jimbills – There are other sources pointing to 2016 as a transition point.
http://www.resilience.org/stories/2014-08-18/iea-report-implies-us-crude-production-may-start-to-peak-2016
All i know is that markets can remain irrational and unpredictable for a lot longer than the average guy can remain solvent. That being said, the oil prices are dragging down the entire energy sector’s equities, and if i see SunPower Corporation hit between 20 and $25/share, I’m going to start buying more; ditto for Guggenheim Solar ETF at low $30’s, high $20’s.
And incidentally, not only are oil stocks suffering, but this also drags down biofuel stocks/companies as well.
I saw one reference in an investing article [which i can’t find presently] that had fracking profitability not at the $75 number we all see on the news, but at different numbers for different operations, and if I recall correctly there was a suite of numbers similar to $[40, 50, 60, 70]; I noted it in the back of my mind, because they were significantly lower than what we are usually told.
“I saw one reference in an investing article [which i can’t find presently] that had fracking profitability not at the $75 number we all see on the news, but at different numbers for different operations, and if I recall correctly there was a suite of numbers similar to $[40, 50, 60, 70]; I noted it in the back of my mind, because they were significantly lower than what we are usually told.”
There’s a ton of BS thrown around about the energy biz, especially when it’s from an investment perspective. Most estimates are @$70-$80, but a key feature of fracked oil is that they go after the easiest/most profitable sites first. Many of these have already been hit, and the best ones in this group might have figures as low as @$40/barrel, but they deplete quickly, and the remaining sites are much higher in cost.
Here’s an article from earlier this year:
http://www.reuters.com/article/2014/04/02/energy-crude-bakken-idUSL1N0MU21Z20140402
Note the key phrase “as low as”. First sentence “New efficient drilling practices –may– drive breakeven rates –in the best areas– of the –Bakken– shale oil play –as low as– $58 per barrel”.
The important point about unconventionals is that they require increasing investment to maintain production levels. The drop in the oil price will signal to both investors and the oil industry itself that they need to curtail investments for future projects and skimp on any per well costs in the immediate future. It won’t happen immediately, but if oil prices remain low for much of 2015, there will be marked drop in unconventional output.
The recent merger of Halliburton and Baker Hughes is an omen of what’s to come as well:
http://money.cnn.com/2014/11/17/news/companies/halliburton-baker-hughes-merger/
They are merging to create efficiencies and combat costs in a less profitable environment.
The Peak Oil hypothesis was completely wrong. Unconventional and frontier oil supply would develop to keep increasing oil supply as long as prices remain high. The Peak Oil guys claimed that supply would decline after the “peak’ and prices increase. Wrong.
The supply of oil has increased from 78 million barrels daily in 2002, to 90 million barrels daily by this summer, as the price rose from $20 per barrel to $100 per barrel. Most oil costs less than $40 to produce, and the bulk of the cost is exploration, drilling and capital recovery costs, considered by the industry as “sunk costs”. In order to shut-in existing production requires prices below $30. The pipeline of development projects will taper off as prices decline, but don’t expect production declines to stop prices from falling… as long as demand stabilizes, and then begins declining.
I have worked the last eight years analyzing the oil market, added to fifteen years working for a major oil in E&P, and another fifteen years analyzing modern management systems for markets like the energy markets. Much of the conventional wisdom has proven incorrect. I recently submitted comments to the DOE on the energy markets. Here is a few clips from the comments I submitted:
Page 19
The problem with the oil market can best be explained by considering the rational actions of a monopsony buyer. A monopsony customer would be a hypothetical single buyer of the entire global output of crude oil, similar but opposite to a monopoly (single supplier). A monopsony buyer would not buy the current global oil daily production volume of 90 million barrels at $100, but rather buy a reduced volume of 85 million barrels at $40; then purchase substitute fuels or use substitute vehicles to replace the last five million barrels of production. The substitutes cost far less than the cost savings on the 85 million barrels of oil purchased, so this buying strategy saves the monopsony buyer from overpaying for the supply of crude oil.
Without a rational buying strategy, individuals compete for the oil supply, pushing demanded volume up against a limited production capacity and driving prices for all the oil supply higher and higher until some buyers are priced out of the market.
Page 30
If we consider the approximate 46 million barrels consumed by all OECD countries, the premium increases to almost $1000 per barrel, and peaked over $1700 in 2008. The cost premium for gasoline refined from this last four million barrels of daily demand is at least $25 per gallon for OECD oil customers.
Page 31
The biggest problem is the irrational global oil market pricing method. Essentially, the oil market treats customers like rats fighting for food. The global oil price is driven higher by a rationing premium, as customers fight over a limited production volume of crude oil. Suppliers of substitutes, and customers who purchase green vehicles, biofuels, or use more energy efficient transportation alternatives, don’t receive benefits commensurate with the value delivered to customers in the global energy markets. The biggest benefits from a decision to buy a green vehicle accrue to remaining oil products customers, not to the green vehicle owner.
https://drive.google.com/folderview?id=0B6HOZyGCkCB9YTVLYWZST1ZKTm8&usp=sharing
I think you have interesting stuff here, but your first sentence is, “The Peak Oil hypothesis was completely wrong.”
No, it isn’t, and using the past tense is revealing here. Every field peaks, every nation peaks, and eventually the world will peak. I’ll grant there’s a chance that the peak might be demand-based rather than supply-based, but we have a LONG way to go before that is realistically possible without dampening demand to the point that economic growth stalls partially or completely.
Peak oilers made serious mistakes in trying to time stamp a global supply peak, as well as seriously underestimating unconventional production. However, global conventional oil HAS either already peaked or is on one seriously long plateau period since 2005-2006. The rise in production since then is due to unconventionals and NGLs. Eventually, these will peak as well.
Your comments – page 19: Okay, but the world doesn’t work as a monopsy buyer, and I don’t see that changing any time soon.
Page 30 – I don’t have context there, and sorry, I can’t read your full report right now.
Page 31 – sure, agree.
err, monopsony
I was an oil industry insider, and know some of the top management people in the industry personally. Your analysis of substitution is wrong.
For every BEV deployed to replace a CV in the fleet, the BEV buyer saves about $10,000 in fuel costs over a 12-year lifetime of the vehicle. This is the direct oil cost savings per BEV deployed, and the owner needs these savings to justify the higher cost of the vehicle.
But for every BEV deployed to replace a CV, up until global oil demand drops by over 5 million barrels daily, the indirect oil cost savings due to a drop in oil price exceeds $90,000 per BEV deployed. Remaining gasoline/diesel customers, along with other crude oil products customers (like jet fuel purchasers), get the cost savings as the price of oil declines.
The extra cost of deploying the EV, usually the price of the battery pack, is overwhelmed by the cost savings to remaining oil products customers. Capturing a portion of the cost savings by a crude oil tax tied to prices falling below trend prices, and redirecting the tax proceeds to EV buyers and biofuel producers, would save everyone huge sums of money.
Please realize the roughly $35 per barrel price decline since July has occurred due to demand leveling off, and Saudi Arabia only pumping about half a million barrels daily extra onto the markets. Can you imagine what would happen to oil prices if the US/EU/China/Japan/India used a crude oil tax to subsidize green vehicles to reduce oil demand by 5 million barrels daily?
Oil substitution incentives are the most cost effective actions to ramp green energy sources, of any energy markets.
still not quite getting what an “oil substitution incentive” is. can you flesh out?
First part – “Your analysis of substitution is wrong.”
I’d be fine with that. I don’t see the real-world data to support the more rapid adoption of EVs that you are suggesting should happen. We have a LONG way to go before EVs make a dent in the transport sector, but time will tell.
“Please realize the roughly $35 per barrel price decline since July has occurred due to demand leveling off, and Saudi Arabia only pumping about half a million barrels daily extra onto the markets. ”
I do realize that, although demand hasn’t “leveled off” globally so much as slowed more than initially projected, mainly due to lower growth in Asia.
You need to realize that the drop in oil prices has also been due to rising production from unconventionals in North America. Cut their production, and oil prices will rise again.
The rest of your comment here is about pitching an agenda for oil substitution incentives, which I’d be completely fine with. We won’t see them in this Congress any time soon, but that’s another matter.
I think we are really looking at peak demand, not peak supply. As oil gets more scarce and more expensive, the cost goes up. Now we are not in a demand driven economy. There is plenty of pent up demand for Humvees and waste, although it has been reduced by newer, more efficient methods. But demand won’t pick up with high prices. OPEC is trying to stimulate demand, but I doubt it can really succeed long term. We won’t return to $30/bl. What we are really talking about is the balance between cheaper conventional oil and more expensive unconventional sources. As long as demand is larger than conventional, the price will remain high.
Peak conventional oil is accepted by the IEA as far back as 2010.
http://earlywarn.blogspot.com/2010/11/iea-acknowledges-peak-oil.html
Demand has softened with high oil costs.
https://www.youtube.com/watch?v=dLCsMRr7hAg
See 37:40, for example on supply cost driven economics.
Its quite possible to say there is still plenty of reserves. There just are not many means left to get them cheaply. Classic economics just says more supply will be stimulated as high prices are caused by shortage and that the costs will balance. That theory says fuel costs come back down. Not anymore. Resource limits make it impossible to both lower costs and increase supply. Thats changing the game.
“With coal on the ropes…”
I’m not getting this part of the headline. What makes you think that coal is on the ropes? Unfortunately, I see no sign of the imminent collapse of the coal industry.
Indeed, some of you folks with your relentless anti-nuclear campaign are doing your little part to help assure a bright future for coal, with considerable long-term costs for the environment.
http://www.businessinsider.com/coal-stocks-are-getting-crushed-october-9-2014-10
Coal in the US is on the ropes. All but dead in this country, as far as any new plants. China has begun a serious war on coal of their own, as will manifest in coming years. They are up against very hard physical, (water) and political(civil unrest on pollution) barriers. And they are about to go balls-to-the-wall into renewables.
As far as nuclear, the industry was dead in the water by 1977, two years before Three Mile island, – before all the rock-concert anti-nuke hoopla – based on economics. It takes a combination of ignorance and wishful thinking to suppose that citizen action brought the industry to a halt. I know because I had a bird’s eye view inside the process.
I also had a bird’s eye view of the process. It’s funny, but my bird’s eye recorded the fact that nuclear power plant construction in the USA ground to a halt due to this:
http://en.wikipedia.org/wiki/Shoreham_Nuclear_Power_Plant
Any hopes of reviving the industry with generation IV nuclear reactors in the USA was dealt a death blow in 1994 by none other than John Kerry (with help from Bill Clinton):
http://en.wikipedia.org/wiki/Integral_fast_reactor
But generation IV reactors will be built…in China, Russia and elsewhere in Asia. The Americans and Europeans some day will have to buy Chinese-made reactors, having lost the ability to do it themselves.
As yet, I am not aware that any Gen 4 reactors are being constructed, but happy to be updated on that.
As to your Shoreham reference, you’ll have to be more specific. It was a mess, but costs blew up at plants all over the country, in largest part due to poorly designed Emergency Core Cooling (ECCS) and other systems, (as TMI demonstrated) – which were only recognized after a whole generation of enormous plants were already well into design and construction.
The ECCS flaw became well known in summer of 1971 due to some test failures at the Idaho facility, and that led to years of cobbling, patches and misfires that never really addressed key issues. (again, TMI)
I see there is some of this addressed in official NRC history here, don’t have time to read this all but it looks useful. I’m out the door, will revisit tonight.
http://www.nrc.gov/about-nrc/short-history.html
scroll to
The Emergency Core Cooling Controversy
Maybe this reference helps. IMO, low demand growth, generation oversupply, high interest rates, and a negative construction learning curve teamed up to reduce profitability. These affect the most capital intensive projects the most.
http://thinkprogress.org/climate/2011/06/25/244122/three-mile-island-accident-nuclear-power/
Much cunning and politics from OPEC and interested partners, so the price plunges, and puts pressure on the frackers. Interestingly the Kingdom of Saudi Arabia has greatly undercut the price of solar roll-outs too. Are they positioning to be the energy champions ? What are those Sheiks up to ?
http://cleantechnica.com/2014/11/29/dubai-shatters-solar-tariff-records-worldwide-lowest-ever/
Interesting piece from Greg Muttitt (the author of Fuel on the Fire: Oil and Politics in Occupied Iraq)
“If OPEC is to make itself relevant again, perhaps it should start helping its members think beyond oil.”
http://www.aljazeera.com/indepth/opinion/2014/11/opec-age-climate-change-201411289461527196.html
Conventional oil has peaked with oil fields from North Sea, Gulf of Mexico, and other areas around the globe declining. Even offshore drilling that started decades ago is a more expensive way to get oil, a little higher up than the “lowest hanging fruit”. Tar Sands, and shale oil are considerably further up the tree. Hubbert made his predictions on conventional oil. In 2010 pundits were pointing to IEAs curves that showed conventional oil was indeed in decline. What extends production is unconventional liquids and gas. They have their own Hubberts peak, and we are seeing all those forms combined and overlapped. So now we see the play between Saudia Arabia conventional and other more expensive unconventional like Bakken and tar sands.
http://earlywarn.blogspot.com/2010/11/iea-acknowledges-peak-oil.html
The roots of todays events come from the rise in oil prices. Demand has flattened as price has risen.
As an example of price suppressing demand, quoting Kopits from 19:00 and right at 19:40:
“What’s suppressing China’s demand … is the lack of affordable oil.”
https://www.youtube.com/watch?v=dLCsMRr7hAg
The cost of oil is now higher due to resource depletion. That has caused the demand to flatten. IMO, As we traverse the transition to more costly unconventional sources, this conflict between conventional and unconventional sources will play out with volatile pricing.
the graph at 33:50 is interesting. like electric use, gas use has decoupled from gnp
This is what OPEC did in the 1970s to kill renewables. Whether it will work again, is a fool me once question.
OPEC didn’t kill renewables in the 1970s.
It’s best to think of energy in two basic sectors: electrical and transport. When we’re talking renewables, it’s really the electrical sector along with coal/natural gas/nuclear. Transport is almost completely oil. That’s changing a bit now with EVs, but in the 1970s EVs weren’t on the map. OPEC carries weight on oil only.
Oil prices dropped dramatically in the 1980s, after spiking dramatically from OPEC moves and U.S. peak oil production in the 1970s, because the North Sea fields and Alaskan oil came online. OPEC helped lower the prices further with their output. We got the age of the SUV as a result.
Jimmy Carter’s administration was a seminal moment in U.S. energy policy. He stressed both conservation and renewables and nuclear, but he also stressed increasing coal production:
http://www.pbs.org/wgbh/americanexperience/features/primary-resources/carter-energy/
“These are the goals we set for 1985:
….-Increase our coal production by about two thirds to more than 1 billion tons a year.
….-Use solar energy in more than two and one-half million houses.”
Then Reagan came along and axed the solar goal, so we got the coal increase only.
Nothing is that address by Carter promotes nuclear – he mentions applying stricter safety standards and that not conserving energy may force a crash program of nuclear overbuilding, stripmining and offshore drilling with eventual disastrous results.
Yes, that’s true.
Carter and nuclear policy:
http://www.presidency.ucsb.edu/ws/?pid=7316
And what did he do after TMI?
Not much:
http://www.pbs.org/wgbh/amex/three/peopleevents/pandeAMEX86.html
Carter served under Admiral Rickover, who was a major early influence on nuclear policy in the U.S.
Carter was also a key figure at the Chalk River meltdown:
http://www.cnn.com/2011/OPINION/04/05/milnes.carter.nuclear/
My take is that he didn’t have anything against nuclear energy, and in fact he worked closely with it prior to becoming President, but he was deeply concerned both about nuclear weaponry and about nuclear energy safety. Happy to hear any contradictory info, though.
the coal increase was always in the plans, from the mid-sixties, when it was thought energy demand would double every 10 years forever.
Thousands of nuclear, and coal, plants were considered indispensable to the economy and planned for the year 2000. That’s what made the lower, more, it turns out, realistic projections of Lovins and the Ford Foundation (1976) all the more heretical.
Even before TMI, utilities had stopped ordering nukes due to the type of snafus that still plague projects today elsewhere in the world. After TMI, it only became more obvious to the public at large.
jimbills wrote: “Oil prices dropped dramatically in the 1980s, after spiking dramatically from OPEC moves and U.S. peak oil production in the 1970s, because the North Sea fields and Alaskan oil came online. OPEC helped lower the prices further with their output.”
Wrong. Oil demand fell from 1979 levels. In the US, gasoline demand peaked in 1979, and didn’t reach the same level of demand until the mid-1990s. Fuel efficiency standards adopted in 1978, eventually collapsed oil prices in 1986.
Increased production from the North Sea did help, but didn’t increase global production as substantially as you suggest. US production, including Alaska was declining from 1980 through the early 2000s. Alaskan oil production did not increase US production levels in the 1980s. It was already online prior to 1979, and didn’t offset declines in conventional oil production.
My comment used very broad strokes. You are correct, though, that the efficiency standards DID add to the drop in prices as well as the North Sea, Alaska, and OPEC outputs. Another factor was conservation measures as a result of the oil shocks.
“Increased production from the North Sea did help, but didn’t increase global production as substantially as you suggest. US production, including Alaska was declining from 1980 through the early 2000s. Alaskan oil production did not increase US production levels in the 1980s. It was already online prior to 1979, and didn’t offset declines in conventional oil production.”
You’re correct in your info here. I wasn’t saying that Alaska increased U.S. production levels in the 1980s- just that the production from Alaska (along with the North Sea and OPEC) added to the decline in prices in the 1980s after the spike in prices in the 1970s.
39:55 summarizes the oil market.
This all suggests, that we are short on oil, that oil remains expensive and that expensive oil is preventing the economy from behaving in the way it is traditionally accustomed to do so.”
Paul – There is a graph of all that in Koptis video. 33:43. Have at. 🙂
Professor Rabett – OPEC was squeezing us in the 70’s until someone realized that the rate of kinetic energy loss from a car moving forward and swirling the air in its way was equal to 1/2 times air density times velocity cubed times the effective area of the front profile of the car. Some rather clever fellow noted that in the equation the velocity was cubed and decided that if we lower our highway and interstate speed limits, we reduce the energy loss by a significant amount. OPEC tried to squeeze us and we squeezed them back with energy use reduction.
Then Reagan…..
Kinetic energy of swirling air: KE = 1/2mv^2
Kinetic energy lost over time from a car swirling air: KE = [1/2mv^2]/t
Mass of a tube of air swirled in time: m=pAvt
KE lost = 1/2pAv^3
p = air density
A = area of car profile times drag coefficient
My concern is that short, repeated boom-and-bust cycles that impact unconventional fossil fuels would be devastating to the environment.
When companies are failing & migrant workers are fleeing to the next regular paycheque, who is there to clean up the mess, plug the leaks and remediate the site?
The oil business will leave a massive rust-belt around the globe given enough of these boom-bust cycles. Lets hope people will clean up the mess in time too, if there is enough energy around to tear it down and melt it.
‘Oil is a diminishing resource with a volatile price’. Still a good quote. http://www.climateoutcome.kiwi.nz/clean-energy-alternatives.html
One thing to keep in mind is that supply and demand may have nothing to do with price of commodities. Derivative securities traded in the middle of the night can force prices down without any regard to supply or demand. And the morons that allegedly “regulate” the commodities markets still believe that commodities price manipulation can’t be done on the “short” side.
A good bet would be to check and see if the CFTC board members have private accounts where they’ve shorted oil in derivative contracts. That’ll go a long way to finding out why they can’t see anything wrong.
I don’t usually follow oil, but I do follow silver, and the price of silver has nothing to do with reality. Tons of paper silver are dumped on the market by money center banks, so much so that silver sells for 1/70th the price of gold, even though the inventories of gold bullion are substantially larger than those of silver.
My guess is that among other things the banks were using silver (a tiny market) as practice for manipulation for other commodities that now include copper and oil.
Thank you, John. Although a lot of publicly traded investment instruments do follow fundamentals in the long term, we must keep in mind the price of each entity at any given discrete moment is just a consensus of what the traders involved think the price should be. They, as a whole, could be right, wrong, following the herd, etc. Some traders aren’t even people, but computer algorithms, programed by people with math and physics PhD’s that Wall St. hires to screw the retail investor. On top of that, some oil derivatives can suffer contango and backwardation.
It should also be noted that there is an ‘extra’ price to pay for gas at the pump which is a function of derivatives volatility. Amory Lovins stated in Reinventing Fire that such could be in the hundreds of billions of dollars for a given time (I’ve forgotten; maybe 5 or 10 years?). That money is wealth we would unlock by moving to an electric car based transport (the money would stay in the hands of the middle class and not trickle up to the billionaires of the world, who are trading oil).
Andrewfez, in principle you’re right. But in the silver market (and maybe in other commodities markets as well) it has nothing to do with any “consensus”. It’s pure fraud. Here’s how it works:
JP Morgan comes in and rigs the price of silver up by buying COMEX contracts on the “long” side (maybe with the help of other banks). When it hits a computer decision point, technical hedge funds automatically buy contracts. This forces the price a lot higher. Morgan then sells and goes “short”, rigging the price down forcing the hedge funds to automatically sell when a decision point is reached. Morgan then unloads their derivative contracts, making a big profit and the process begins again.
JP Morgan regularly makes big profits on this process and the hedge funds (at least until now) regularly lose money on silver, all the while denying that they’re being played for suckers. The key is that contracts rarely require the delivery of the commodity. If they were forced to deliver this nonsense would cease.
If you want a more detailed analysis, google Ted Butler and silver. He’s been calling Morgan and the folks running the COMEX a band of criminals for years, and they have yet to answer him.
John – Do you think OPEC cartel might be like your example? 🙂
OPEC is in the business of extracting and selling oil. They may engage in “manipulation” of prices, but they’re still dealing with barrels of oil that ultimately have to be moved.
Shutting in a well to increase prices is not the same as turning a faucet on and off. Once it gets shut, it takes a great deal of work to get it back on line. This is not the ideal way to push prices around.
On the other hand, JP Morgan, Goldman Sachs and the rest need not bother with the niceties of actually dealing with the real stuff. All they have to do is shuffle paper around in the middle of the night. And as long as they have hedge fund chumps to fool, it’s like taking candy from a toddler.
Now this doesn’t mean that the Saudis don’t like what JP and crew are doing. Slam the price and all these Frackers in the US can be driven into bankruptcy (not to mention screwing over the Russians and the Venezuelans).