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Oil Needs to Fall Below $20 to Compete With Green Alternatives (bloomberg.com)
71 points by pseudolus 70 days ago | hide | past | web | favorite | 75 comments



The worry is that oil companies are making investments now for 10, 20 or 30 years into the future and not taking into account the realities of making a return. There are all sorts of long term capital costs for setting up oil fields, refineries, pipelines and so on, and then marginal costs for each barrel thereafter. Under a scenario of total road transport electrification, demand would be drastically reduced, meaning the capital costs would have to be substantially written off. Investors would lose their shirts, which would cause a lot of financial problems, not least that pension funds still seem to be thinking these are safe stocks, that the oil industry is in the same position as it was 50 years ago. It would also be catastrophic for the environment, because you’d have a glut of supply which producers would then be trying to sell below the actual cost of production, but anywhere above the marginal cost. It’s vital these investments are properly priced, and that any investor who can’t take the hit doesn’t get involved.


Maybe this will come to pass but the market currently does not believe so, at least in the 10 year time frame. A 2030 Oil Futures Contract is priced right around $54 this morning. If we end up in a world where oil is no longer needed, yes some people will lose a bunch of money. But capital is also going to be freed up to invest in new things.

I don't think that anyone thinks the oil industry is the same as 50 years ago. I also don't think there is anyone (on the professional side at least) who does not know that oil companies, specifically the majors, trade with the price of oil. If these are actually unsafe stocks then there is a huge amount of money to be made by betting against them in a variety of ways. I actually don't think it will be as catastrophic as you think since in an such an environment a lot of oil companies in the US would go out of business, or be substantially reorganized. The prices of certain things would increase and maybe alternatives would arise.

If in 30 years we are going to need substantially less oil than we do today, in 10 years we should be starting to see that reflected in the price. So if you really believe that you should be selling long dated futures contracts, or shorting major oil company stocks, or shorting companies specializing in oil transportation, or probably a variety of other things.


>The worry is that oil companies are making investments now for 10, 20 or 30 years into the future and not taking into account the realities of making a return.

Do you really believe that hundred-year-old companies aren't planning their future? Sure, some companies will fail (they always do), but others adapt. Every oil company is well aware of the effects and politics of climate change, and most have massive renewable investment in the works. What gives you the slightest idea that you see something that "they" don't?


You could say that about any incumbent industry player faced with a disruptive challenger, it’s surprising to see this sentiment on Hacker News of all places.

My comment was about the investments, not the companies. Some oil companies have significant investments in electricity grids, electric vehicle charging, renewable generation etc, and some do not. Even if they do, it’s not obvious they are best placed to be competitive in those industries or sustain the same profits, although hopefully they can do well. BP made a big investment in solar which it gave up on, now they are investing in charging infrastructure, hopefully that will turn out better.


> Under a scenario of total road transport electrification [...]

I think 30-year oil investments are relatively safe if this is their threat. I can’t see this happening in less than 30 years.


I’d say personally total electrification won’t happen for a long time, if ever, but there will be major markets, notably China and the EU, which are substantially electrified over a 30 year timescale.

You also have to bear in mind that electrification is most attractive for vehicles which travel the most distance, and consume the most fuel. Even 20% electrification of the fleet will have a massively outsized impact on oil consumption if it represents all taxis, buses, long distance commuters, road freight, etc. See Bloomberg’s previous research about displacement of fuel from buses:

https://www.bloomberg.com/news/articles/2019-03-19/forget-te...


Taxis and buses will be electrified quickly because it makes a lot of sense

As long as OTR trucking's primary regulatory irritants are weight and working hours it will resist electrification (unless electric somehow magically becomes so dirt cheap to run that it makes up for the limitations).


> irritants are weight and working hours

Working hours could actually be beneficial in Europe. Drivers require regular breaks over here. If batteries and chargers can sync with the required break cycle, then there's no reason not to go electric.

However, I do think that charging infrastructure will be the main issue, seeing as often tens of trucks will be at the same stop, they'll need a lot of power to get all of them charged within their breaks. Because existing rest stops don't seem located near power lines, that might be a challenge.


Are you sure? The total road transport electrification scenario means falling demand for a long time, probably with a relatively steep part somewhere. I would certainly not want to bet on something requiring a thirty-year horizon to be profitable in that kind of market.


only if current levels of subsidies last


Yeah. For starters you need some serious grid improvements just about everywhere. That's not a 10yr or 20yr effort because the replacement cycle on most of that equipment is far more than ten or twenty years.


The grid is built to handle peak demand, and electric vehicles will mostly be charged off-peak and in particular overnight when there is substantial surplus capacity on the grid, so the need to increase grid capacity will not be as significant as you might think.


An old NREL report from about 5-10 years ago is floating around somewhere that shows that ~77% of light vehicles (ie cars) in the US can be transitioned to electric without any additional grid generation capacity.


People tend to assume that 100MWh less energy from oil means 100MWh more electricity for the same transport need, but ICE is horribly inefficient so that's not how it works. Most of the energy in that oil is just wasted, an efficient conversion would be too heavy and expensive for a motor vehicle, and oil is so energy rich you get plenty of performance without bothering.


investors would not lose their shirt. typically taxpayer picks up bills like these. already taxpayers are subsidising the current competitiveness of oil


> new wind and solar energy projects combined with battery-powered electric vehicles

Less than 0.3% of electricity in the US is generated by oil (in 2018). The proper comparison for wind/solar for grid energy would be against natural gas/nuclear/hydropower.


The report is comparing petrol/diesel against solar/wind plus batteries specifically in the context of road transport.


See my reply to gnode. But clearly solar/wind should not have been mentioned at all. They are talking about competing with grid electricity in that case, and making a very unlikely argument.


Your argument is about today, but the analysis is about 25 years time, i.e. the scale of long term oil investments.


My argument was about electric cars displacing gas. I'm curious why you think I'm talking about today, when they are 2% of the current market.

As far as the long-term prospect goes, it's very hard to say yet whether electric cars will replace enough of the gas infrastructure to drive down total oil demand.

On balance, I think not. If users were especially price conscious about their fuel usage, high-efficiency vehicles would be a bigger share of the market. They aren't. And beyond fuel efficiency, electric vehicles offer consumers very little that gas vehicles do not, and have very serious drawbacks that are unlikely to go away.

Given the current state of electric vehicle performance, vanishing tax incentives, and incomplete infrastructure. I think that the American consumer is going to pull back from this 2% dalliance with electric vehicles with its hands badly burned. It might be another generation before they make another attempt at a comeback.


> But gas vehicles remain very competitive against electric vehicles on total cost of ownership, even with oil prices far higher than $20/barrel.

This is mostly true but irrelevant, because as I say the linked analysis is about 25 years.

> If electric vehicles do fully displace gas vehicles, the article is still wrong, because oil will not be competitive with grid energy even at $20/barrel.

That is close to analysis they have done, if anticipated cost reductions for EVs continue over that 25 year period, oil will have to be priced at $9 a barrel to undercut it for that market segment.

> Given the current state of electric vehicle performance, vanishing tax incentives, and incomplete infrastructure. I think that the American consumer is going to pull back from this 2% dalliance with electric vehicles with its hands badly burned.

Sounds like motivated reasoning, to be honest. People will almost certainly drive what is cheaper, all the more so in America where consumption is high. The mechanisms driving reductions in cost are assisted but not driven by the US market, the transition is happening in the EU and in China, which gives scale, which reduces cost. As that happens, whole classes of vehicles will fall below the equivalent gasoline TCO.


> People will almost certainly drive what is cheaper, all the more so in America where consumption is high.

Which is why hybrids and small cars dominate the American market? Fuel consciousness is only one thing driving purchasing decisions, and not the most important.

Americans could well decide to continue buying cars that can go on long journeys, don't have costly battery replacement issues, and don't take an hour to refuel at a special station.


They will go for the cheaper option all else being the same.

Battery replacement actually isn’t an issue for EVs with good thermal management. There’s already plenty of data out there for Teslas which indicate very few battery problems, no more than the kind of occasional drivetrain failures you get with internal combustion cars. The idea that owners will have to replace batteries as a matter or course was valid for some early and basic cars, but is clearly not an issue any more for most vehicles, and no vehicle at the premium end.

Short range and charging is an issue depending on what segment of the market you’re talking about. The current state of the art, which will likely be normal in 5-10 years, is 6 hours of driving for 35 minutes of charging. And, of course, the car starts the day full. That will be a restriction for a part of the market, but you’re claiming 2% is an overextension, which seems manifestly unlikely to me.

EV’s have other benefits as well, not least the immediate torque and acceleration, which has previously been a differentiator.


As more and more electric vehicles hit the road, the price of oil will start to compete with the price of electricity. While you're correct that in the past oil and renewable cost comparisons weren't very relevant, electrifying transportation is changing that paradigm.


The argument is that oil via combustion engine vehicles compete against renewables/gas/hydro/nuclear via battery-powered electric vehicles in a single transportation energy economy.


If electric vehicles were to displace gas vehicles, then oil would be displaced by grid electricity.

But gas vehicles remain very competitive against electric vehicles on total cost of ownership, even with oil prices far higher than $20/barrel. And since gas is so much easier to transport, gas vehicles have numerous technical advantages.

If electric vehicles do not fully displace gas vehicles, then this article is wrong. Oil prices can stay high.

If electric vehicles do fully displace gas vehicles, the article is still wrong, because oil will not be competitive with grid energy even at $20/barrel.


The total cost of ownership trend for electric vehicle declining. Not only in energy costs, but most drastically on manufacturing costs. Estimates like BNEF’s show that manufacturing costs will reach parity with internal combustion vehicles within the next decade.


> And since gas is so much easier to transport, gas vehicles have numerous technical advantages.

Typically one needs to drive to a gas station to refuel a gas vehicle, whereas an electric vehicle can be recharged at any mains power outlet.


Sure, but the comparison is also gas cars vs electric cars + green grid, not just electric cars + green grid vs electric cars + gas/nuclear/hydro grid.


In the UK we have large taxes on oil as fuel (57.95 p duty + ~ 20p VAT on a litre), large subsidies for renewables, oil prices up to $80/barrel and still most people drive petrol or diesel vehicles.


Sure, and whilst this is _slowly_ changing, a large part is the high up-front cost.

A Kia e-Niro is £32,995 (including the recently cut Government subsidy) whilst a similar size+spec petrol car (The Kia Rio 3) is £17,285.

The Nissan Leaf is from £27,995 whilst the larger Qashqai is from £19,995.

I know that the up-front cost issue is similar in many countries, but that's where Government subsidies usually kick in. America has the $7,500 federal tax credit on EVs (to a point), plus state subsidies sometimes top it up to $10k. This compares to the UK which has recently cut the £4,500 subsidy down to £3,500 for EVs.


I don't care about the cost of the vehicle, I care about not having a place where I can load it. Parking is next to the road, and no electrical outlets exist there. Parking at the job is a new parking garage - again without electrical outlets.

An electric car would be useful to me for about 400 km before it runs dry - that's about four days of driving for me.


Oil will be priced according to supply and demand. There may still be use cases which require oil. And however cheap the competition can produce oil it will be priced. This is non-news.


OPEC are much less powerful than the decades of past - thankfully - but it'll be a while before oil will be _truly_ priced by supply and demand and nothing else.


Their back was broken when they tried to kill shale oil in 2016 and failed.


Members of opec don't have power because they all cheat.


It can't be priced below the cost of extraction (not without subsidies anyway).


> It can't be priced below the cost of extraction

"Cost of extraction" is a fuzzy term. If it costs $100 to set up a well that lasts 10 years and $1 to pump 1 barrel of oil a year, then is the economic cost is around $11 per barrel (loosely estimated) and the marginal cost $1 per barrel.

This is how an existing well can price below the economic cost of extraction but above the marginal cost. It doesn't make sense to compete with them by setting up new pumps. But pumps last a long time, and there are a lot of pumps out there.


For oil the cost of extraction isnt as simple as you seem to imply. The diversity of what oil can be used for and the value of those things, far exceed to the cost of extracting it. No other material is as valuable and diverse as oil.


> The diversity of what oil can be used for and the value of those things, far exceed to the cost of extracting it

This is a statement about demand, not cost.

Nobody is saying oil is going to zero. And the cost curve for oil production varies greatly from well to well. Many wells are already extracting at total costs above price.


The cost needs to be divided out on other things than just for energy, thats the point.


> The cost needs to be divided out on other things than just for energy

A barrel which costs $50 to produce will cost $50 to produce regardless of its use. There is no "dividing out" costs.


Of course there is as the cost goes to other things than for energy which is the comparison. Its not $20 per area oil can be used, its $20 divided out on all the things its used for.


Oil will be priced according to supply and demand.

Supply, demand, and subsidies.


> Supply, demand, and subsidies.

Supply, demand, subsidies and political stability of the country that produces it.

In short: oil prices are affected by many factors.


Isn't that the case for everything, including green energy tech?


I think the distinction is that many people are familiar with green energy being subsidised and surprised that oil & gas (often large, established, wealthy, and profitable companies) are too (at least in terms of tax breaks).


There's going to be a minimum cost though and it's higher than 20$ per barrel. At best, producing oil at those price levels is going to be not very lucrative. A lot of the remaining oil out there is getting quite hard to produce meaning the cost is high. E.g. Shale oil becomes a loss leading venture when the prices drop that low. This wikipedia article suggests that 25$ is sort of the lower boundary here: https://en.wikipedia.org/wiki/Oil_shale_economics. I have no idea if those numbers are correct but they are probably much higher than 20$ per barrel.

There is of course plenty of oil left but it is not the same cheap oil that we were used to last century where you basically stuck a pipe in a ground in a place like Texas and cheap oil would come out. Most of that oil is gone. Also, not all oil is created equally and some oil is a lot nicer to work with than other oil when it comes to refining it. Which is why the US still imports oil from the middle east. Refining is not free either obviously and actually uses lots of energy. Ironically, a lot of wind/solar is being used for that.

This is indeed not news. Oil investors have known this for some time and have been voting with their feet. Also, most EV owners are well familiar with the fact that the cost of recharging is peanuts compared to filling up a car with petrol/diesel. I'd say that 20$ is going to come down by 2-4x over the next 20 years.


Not quite. Oil and its derivatives are also subject to heavy subsidies and taxation. These "corrections" are supposed to take into account external costs and benefits that wouldn't be otherwise in the price but, unfortunately, it is also susceptible to corruption. In the case of oil the external costs are so large that taxation can completely take its competitive edge.


Claiming that oil is subsidized is a tired trope. Yes you can argue that the Iraq War was done for oil, it's just not a strong argument. Many oil producing nations use oil revenue to subsidize everything else they (the government) wants, so the subsidy argument stands on weak footing for both consuming and producing nations.

Oil has unpaid for economic externalities, specifically climate change. This is not the same as a subsidy.


Here is an article with a long list of literal fossil fuel subsidies that are largely ignored when discussing the economic environment for fossil fuels vs. non-CO2 energy sources.

(The article also discusses some of the indirect subsidies that you're describing as a 'tired trope', but the main theme is economic stimulus that directly supports extraction, exploration, distribution, transport and consumption of fossil fuels).

https://www.vox.com/energy-and-environment/2017/10/6/1642845...


Why do they compare absolute figures? Is it surprising to you that fossil fuel subsidies are greater than renewable subsidies by such a measure? How much does each industry earn in taxes?

>Yet this fact, so inconvenient to the conservative worldview

Can you explain what "the conservative worldview" is for the readers? Sounds like the author has an obvious political leaning.


>Claiming that oil is subsidized is a tired trope.

Precisely. Energy of all types receive subsidies, and oil receives fewer subsidies per unit of energy produced than other types of energy. And, in most advanced nations, it's taxed at extremely high levels on the consumer side.

We need to reduce our fossil fuel use, we get it. But this idea that we only burn oil because it's subsidized is bunk. Oil (and coal) is cheap, regardless.


>> Yes you can argue that the Iraq War was done for oil, it's just not a strong argument.

If it wasn't for oil, then for what? Those chemical weapons that were never found? All wars that US starts (and 80 percent of all wars in the world are started by US) are either for oil, or other economic interests. "Spreading democracy" is just an excuse used by government's public relations division, but it is not even remotely true. There are many non-democratic countries, which US leave alone, because they have not enough natural resources or other wealth to be taken from them to pay the bill for war - Cuba is one such example.


>If it wasn't for oil, then for what? Those chemical weapons that were never found?

You have a pretty simplified political view, my friend.

Iraq sells oil into a market; how did invading them "get us the oil"?


Before the war US had to buy that oil at market price and all profits belonged to local companies (or to Russian ones, which also operated there). Since war American companies (Exxon Mobil) were granted licenses to extract oil from Iraq oil fields, and now the profits go to them. Not to mention that after Americans pretty much ruined the country, American companies make ton of money on re-building it from ruins. Pretty smart business model: bomb the country, and then charge it money for re-building it :)


Have you ever heard of Saddam Hussein? There were many reasons to invade.


> however cheap the competition can produce oil it will be priced

This assumes a perfectly competitive market, which is far from reality. Oil production is dominated by a cartel.

As a cartel can increase prices to maximise profitability, to a large extent, the price of oil is controlled by the price elasticity of demand.


The moment renewables are cheaper than oil extraction they have won. The issue is just that oil extraction costs, while exant, are quite low for some types of oil. As a long term trend though I guess we'll see energy become cheaper and cheaper in a competitive race, driven by the wish for the market to adopt renewables. So hopefully we'll soon live in a world where energy is cheap and green :).


Well renewable plastic and generally speaking polymers are far off. A lot of oil will still be used. Hydrocarbons have way more uses.


Which green alternatives gives us:

A multitude of materials (ex plastic in multiple shapes forms and solidness & nylon), energy (not just electricity), pesticides (no matter what you think of them they still make sure we are fed) lubricants.

I could go on. When we extract oil we don't just extract gasoline for our cars and houses we use it for so many things that simply doesn't have any alternatives.


Does this take the higher cost of EVs into account?


It’s looking at the cost of EVs over a 25 year time period, so I presume for a new vehicle which is bought in 2045. EVs are expensive now because of battery costs, but battery costs have consistently fallen by 20-30% over the last ten years, and the trend is expected to continue.


It would be nice to see the long term expected prices of EV's vs gasoline powered vehicles. Currently you can buy a cheap gasoline vehicle and years of gas for the cost of an equvilent EV.

Also i read all this gloom and doom about lithum reserves and how long they will last and how sustainable it is to the point i dont know what to believe. So are the batteries going to get more expensive as countries with lithium reserves realize what they have and start charging more?

I wish i could afford an EV or a hybrid, but they are out of my price range.


Thanks, but if it's over a 25-year time period, shouldn't we consider the price of an EV bought at the beginning of the time period, not the end?


Oil primary use is as motor fuel for cars, trucks, planes and ships, and it's also used a a feedstock for the chemical industry. Renewables haven't been successful in either yet. This article assumes that electric cars are going to take off and replace internal combustion engines, which may not happen after all.


The report is assuming that road transport will go to whichever technology is cheaper, and that current learning rates for batteries and wind/solar will continue for the next 25 years.


Yeah, it's kind of like assuming that all religions will die in 25 years, because everyone will be 'rational'.


It does not matter, per billion invested in fossils you produce millions of kwh during decades.

Per billion invested in Renovables you can produce at most 10% of the kwh and for just a few years even months, till it's necessary costly maintenance


What people need to have in mind is that oil, when compared with solar/wind power, acts both as a storage for energy(battery) and also the power/energy itself.

So that means, you need a battery. The price of the battery, its decay and so on, has to be taken into account in that price. Does that aforementioned price for the barrel of oil includes that? I think not.

If everybody would go electric Today, the price of a battery would go to infinity, as there is not enough supply for that demand. If the changes happens too fast, the price for the battery and it's longtime cost would be higher than oil, even with oil at $100. Which for me makes all this argumentation that oil will die useless and pointless.

And to those prophets of "Oil will disappear": Oil will still exist, but won't have a monopoly in cars, some machinery etc anymore. I believe consumers will still buy cars powered by oil as long as it is worth it.

It's an industry that generates a lot of jobs, has a huge effect on GDP and I'm very sure countries will change very gradually to electric vehicles.


> So that means, you need a battery. The price of the battery, its decay and so on, has to be taken into account

That is the analysis they have done.

> If everybody would go electric Today, the price of a battery would go to infinity, as there is not enough supply for that demand.

I don’t understand why this is relevant, they are talking about a comparison for projected costs in 25 years, there’s plenty of time for battery production to increase, it would be 15% a year over that timeframe even for a total transition, and the industry is currently sustaining 75% a year growth.

25 years seems like a long time, but it’s a relevant timescale for oil investments made today and in the next years.


Maybe there isn't even enough lithium to power cars for the next 25 years. They either flop the market completely with new technology, or this will fail badly.

It is possible to create electric cars nowadays, but as we live in a capitalistic society we forget easily that we don't have unlimited resources on this planet. Lithium is still more rare than oil. I don't see how this is sustainable at all.


> I believe consumers will still buy cars powered by oil as long as it is worth it.

As long as it is legal

https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehic...


I hope that countries follow through but I fear that these commitments will be ignored. For democracies any plans past the next election should be seen as aspirations rather than plans.


While that's true but not every application of green energy required a battery to operate.




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