The future of oil, renewables and EVs

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woodgeek

Minister of Fire
Hearth Supporter
Jan 27, 2008
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SE PA
Just came across a long and worthwhile report discussing the future of global energy, by European analysts.

http://www.longfinance.net/images/reports/pdf/kc_toilforoil_2014.pdf

It is written in the style of those big annual reports put out by BP, Exxon and the EIA that try to predict future energy supply, demand and prices.

The first highlight:
The report asks 'If I gave you $100B to spend, and your goal was to make energy to propel cars, would you go drill/frack for tight oil, refine it and put it conventional vehicles, or would you build RE tech and power EVs'? The answer they come up with was that onshore wind+EV blew away current tight oil (on a 20 year simple payback model), PV+EV fell a little short, and offshore wind+EV was somewhere in between. Significantly, extrapolating current costs conservatively (up for tight oil, down for RE), showed all wind and PV beating oil in 2025, and doing so decisively (what the kids would call stupidly) by 2035.

Note: This cost analysis DOES NOT include any subsidies or 'externalities', just costs in the global marketplace as it exists today!

IOW, if you were the leader of an oil importing country, you would clearly choose to spend money TODAY on RE and EV infrastructure/promotion over giving the cash to your state-run oil co to develop your shale resources.

As you might have heard from me before ;em I am a reformed 'Peak Oil' Doomer, and have been basically of the view that the world has had 'peak oil' scares several times before, resulting in a period of higher prices, followed by the development and fielding of new technology (e.g. offshore oil, artic oil, EOR), followed ultimately by a new period of low prices. So, IMO from a historical perspective, there is no reason to 'panic'.

In other words, until more convincing evidence came in than the hysterical ravings of the amateurish Peak Oil (PO) crowd, I assumed the Oil Cos would happily take our money (in whatever amount required) and go make us the oil we all crave, as they have for a century or more. Granted, the costs of new extraction technology (now and in the future) were unknown....we would need to wait and see. Maybe we are getting some glimmers now....

The second highlight:
The report linked above basically brings together a number of confluent topics, and paints a picture where the OIl Cos profits (and ability to develop the resources) are at a significant future risk. Basically, their production costs have gone up significantly in the last decade, seem likely to increase further going forward, further increases in price will lead to significant demand destruction, but not so much as to reduce their production costs so much as their profitability.

It basically analyzes the content of the most recent EIA report on the future of oil, and looks at its assumptions. Those are basically that conventional oil will decline (despite assuming v rosy future production for places like Iraq and Saudi) and unconventional (tar sands and fracked) oil will grow, that oil demand per world GDP $ will fall twice as fast as it has for the last decade, AND the price will be basically flat in real terms.

The EIA basically assumes that demand growth will be small, there will be enough unconventional oil to meet new demand and conventional oil decline and that the entire operation can maintain current profit margins, due basically to the inelasticity of the demand, i.e. there are no alternatives.

In this report, in contrast, the analysts think that the oil cos are between a rock and a hard place.

--On the one hand, there is the possibility of demand destruction occurring because of a global climate accord. This is the 'Carbon Bubble' scenario that lots of folks have discussed...if laws are passed requiring that FF gets left in the ground, the valuation of all existing FF companies drops >50% the next day. The EIA is not worried about the Carbon Bubble.

--On the other hand, no climate laws are passed, but price trends (up for oil, down for RE) eventually lead to large-scale defections to RE-fueled EVs, collapsing oil prices to close to or below production costs and destroying their business model. The EIA does not project more than 1% EVs in the global fleet by 2050, while EVs are currently >0.5% of vehicle sales in the US :rolleyes:.

The upshot....there is likely no middle path between these two scenarios. The price of RE keeps falling, oil production costs keep rising AND the odds of a climate accord also keep rising. Basically, the oil cos are eff'ed.
 
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What I see missing in the conclusion that follows from the economic analysis is the impact of culture in making the switch from fossil fuel to RE. Big oil (business) spend $100's of millions in marketing to change culture (behavior) in favor one product vs another, and people make decisions based on this marketing in ways not necessarily very related at all to price: buy the minivan with the most cup holders!

If and when culture makes a shift, the impact will be huge. In the meanwhile big money will be spent to keep culture where it is and also to cause a cultural change where the future of big money will be.
 
I'll see your cultural traditions and advertising budgets, and raise you a generational change. Millennials are still on the sidelines politically, with almost no connection between the issues they care about and those being debated by our 'leaders'. They will demand and build and buy solutions.
 
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Might generational change be a subset of cultural change? Regardless, I've seen some research indicating that about 1/3 of children of the parent's generation adopt substantially the values of their parents, and that the other 2/3 adopt materially different values. My dad encouraged me, as I aged, to always seek out relationships with younger people. I think he saw the value of staying "young" in thought. This advice I have continually kept in mind and it has made a big difference in how I view the world as opposed to the views of most of the people in the area where I live who are my own age or older.
 
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The report at the top also talks extensively about how the oil cos are scaling back their drilling infrastructure across the board, including with tight oil, i.e. fracked wells.

It also talks about how a lot of independent frackers are going into debt as time progresses, and may croak if interest rates rise even a little bit (and the price of oil doesn't first). This suggests that, reminiscent of the folks that say RE doesn't actually make sense, and is supported by subsidies, and is a bubble that will burst, tight oil could actually not make financial sense, and is supported by low interest rate loans (mal-investment), and is a bubble that will burst.

Wouldn't that be ironic?
 
The report at the top also talks extensively about how the oil cos are scaling back their drilling infrastructure across the board, including with tight oil, i.e. fracked wells.

It also talks about how a lot of independent frackers are going into debt as time progresses, and may croak if interest rates rise even a little bit (and the price of oil doesn't first). This suggests that, reminiscent of the folks that say RE doesn't actually make sense, and is supported by subsidies, and is a bubble that will burst, tight oil could actually not make financial sense, and is supported by low interest rate loans (mal-investment), and is a bubble that will burst.

Wouldn't that be ironic?
opinion here.. when the fed gets out of holding the cost of money down, it is just about every business around the globe that will see it's costs rise. those increases will come from leveraged suppliers or directly from their own leveraged costs. a start up re, even the older of them, are most likely heavily leveraged as well as subsidized. your describing a situation that the fed fears, keeping a weak recovering under utilized economy going with low inflation and avoiding a quick fall to recession.

cnbc article on some scenarios
http://finance.yahoo.com/news/big-oil-ouput-cuts-come-135540965.html;_ylt=AwrBEiRHczJUpjQAMgGTmYlQ
 
My econ opinions are slightly different: given that the Fed has been tapering its efforts down linearly for a year now, and ending them this month, and the sky hasn't fallen, it seems that the US economy is out of the woods (at least at current very low interest rates). Right now I think the odds of US recession are basically nil, and the biggest risk is our trading partners' recession (EU) or slower growth (China).

It appears that a LOT of large corps are making record profits and sitting on piles of cash. At the same time, there are likely a LOT of other companies that have been relying on low interest rates for lo these many years (i.e. making mal-investments and going into debt), and which will go under when (and if) rates recover significantly.

I think we all agree that there are mal-investments out there, but people's expectations as to who will fail depends largely on their politics.

But as with the oil story, we will have to wait and see, after the tide goes out, who (as Buffett says) is wearing shorts and who is skinny dipping.
 
I have to disagree. The odds of a US recession do not seem nil. We are in another bubble with seriously overvalued stock market right now. And the European economy is ill. It doesn't take too many dominoes falling before we are back in the hole again. At the minimum a serious market correction seems likely.
 
If it doesn't turn out to be the normal Sept/Oct downturn that correction is underway the last few weeks.
 
Could be just that, the market needs a correction. The question is whether external events compound the situation. I just don't see the chances of another serious downturn as nil.
 
agree with the thoughts on Europe as that was todays excuse for the market drop. I still think that the fed is still got it's finger in the wind. the exchange rates go back to early 2008, call it corporate welfare, but also are involved everywhere. house construction for one. one fed govna said he'd love to raise rates but can't, no inflation. maybe if the powers that be put food back in the cpi they will have their inflation. interesting times we live in.
 
I'm not so foolish as to predict the future of the stock market (despite being plenty foolish), but the leading indicators that predict US recession ~6 mos in the future are all showing full speed ahead. The odds of the US entering recession in the next 6 mos are about as low as they ever get.

The same analysis for the EU gives even odds they may be in recession now.
 
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