Tag Archives: oil

A Potential New Electricity Market

Thesis: Companies should invest in R&D for household batteries, as inevitable improvements in renewable energy technologies are on the verge of creating a massive market for such products.

It’s somewhat difficult to be advocating for investments in renewable energy right now – oil prices have been in a pit for almost an entire year now, and with the natural gas industry booming, it seems as if alternative electricity sources are still a ways away from becoming economically viable.  But the surplus of cheap energy is bound to end sooner or later, especially since much of it was caused by drillers oversupplying, which has since been corrected.  Oil mogul T. Boone Pickens pointed this out in a Wall Street Journal interview, noting that the US had 1,400 natural gas rigs active seven years ago compared to only 250 today.  In addition to the supply correction, there is a slingshot effect: the current weak market dissuades producers from taking on new projects as they continue to produce from existing fields, and once those reserves expire, prices will surge upwards.  With the inevitable price recovery of fossil fuels, technology and industrial companies should be jumping at the opportunity to beat everyone else to market – the home battery market.

Solar energy technology for household application is rapidly becoming feasible.  While fossil fuel-based grid electricity is still king, sitting at around 12¢ per kWh, solar panels in Los Angeles have produced electricity at 19¢ per kWh, reaching costs as low as 11¢ after subsidies (although that won’t matter, since once solar becomes cheaper, governments will no longer have a reason to subsidize).  And solar prices have fallen 50% in the past five years, according to data from the Institute for Local Self-Reliance, a trend we can expect to continue (albeit at a slower pace).  But the biggest problem facing solar electricity is one of consistency.  The panels cannot produce at a sufficient rate all throughout the day, or some days even at all, which is why fossil fuels will continue to dominate the grid for years to come.

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ILSR graph showing the convergence of solar and grid electricity prices

Current solar panel owners ‘store’ their electricity with net metering, which is when a utility company credits a homeowner for excess electricity that they feed back into the grid.  But recently there has been a movement against net metering, since it essentially provides a subsidy for owners of solar panels and passes on the cost to other non-owners.  Other critics have pointed out that those who benefit from net-metering don’t end up paying for grid maintenance despite using it.  Because of these issues, many states are taking measures to limit the concept – and thus arises the need for household batteries.  Such a product would allow owners of solar panels to minimize their energy expenditure: it would allow them to spend fewer hours feeding from the grid, and avoid peak prices (generally early evening, when solar panels aren’t producing much).  One would imagine that with the high capital costs of producing batteries, there are significant economies of scale associated that would reward an early investor.  As such, we may soon see a bevy of companies like GE, Samsung, and even Tesla fiercely competing in the household battery market.

It is now time to shift away from single commodity dependency.

Thesis: It becomes a problem when countries only rely on their energy resources as a mean for their export as exemplified by Russia, Saudi Arabia, Nigeria and other countries since the amount of natural resources are limited. Now, it is time for them to concentrate on developing new technologies that would help them to survive without natural resources.

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There are many countries that amassed a great amount of wealth by exporting their natural resources. Among resources, oil is the most important natural resource that is being used not only by companies but also by individuals in every country in the world. Unfortunately, not every country has oil and only a few limited numbers of countries have a fortune to produce oils. Top oil producers are Russia, Saudi Arabia, United States, Iran, Kuwait, Iraq, Nigeria and some other countries. Among these top world oil net exporters, economies of all countries except for the United States are heavily dependent only on their energy resources. Of course, we cannot deny that exporting resources is a great driving force of economic growth. However, it becomes a problem when countries only rely on their energy resources as a solely mean for their export as exemplified by Russia, Saudi Arabia, Nigeria and other countries since the amount of natural resources are limited and its price is unpredictable. Now, it is time for them to concentrate on developing new technologies that would help them to survive without relying on natural resources.

Is the price of oil always stable or predictable? No, oil prices changes everyday without certain patterns and we will never be able to fully expect its price unless we can predict the future, which is impossible with our current technologies. Although Russia, Saudi Arabia, and other oil exporters expected that price of oil will decrease, they did not know that oil prices would drop to $50 a barrel. In 2015, Russia’s economy minister said that Russia’s gross domestic product will be lower by 3 % in 2015 due to falling oil prices. In addition, Russian government lowers its budget as much as 15% as a result of the decline in oil prices. Deputy Prime Minister of Russia, Arkady Dvorkovich, said “no one expected prices to go down so sharply”. However, this is not a story that only applies for Russia. Almost all other oil exporters are in a similar situation where their economies are also slowing down because oil and gas revenue make up more than 50 percent of their governments’ total revenues.

Saudi Arabia is not an exception as well since oil accounts for 90 % of the country’s exports and over 50 % of its gross domestic product. Saudi Arabia discovered oil in 1938 and they have amassed a huge amount of wealth since late 1930s. However, many oil experts claim oils in Saudi Arabia will run out by 2030. This implies that Saudi Arabia should focus on other industry such as developing new technologies that does not require any natural resources to compete with other countries. The International Monetary Fund has also informed the Saudi government to spend their budgets for preparing time when oil runs out. Now is time for oil exporters to realize that solely depending on oils is risky because of its limited quantity and unstable prices.

 

Shale-Gas In Europe Not Taking Off

Shales-gas in the United States has been a major boom helping the US economy by finding an alternative supply of energy. The shale-gas boom in America has largely concentrated in places such as Pennsylvania and Texas. This has been controversial as it involves shooting water down into the ground in order to let the gas rise up. This process is costly and harmful to the local environments where this is taking place. A lot of times, this gas finds its way into local water supplies, with water than can light on fire not unheard of http://www.newsweek.com/fracking-wells-tainting-drinking-water-texas-and-pennsylvania-study-finds-270735. However many problems arise with this new found energy supply, it will most likely remain as long as it remains profitable. This is why many companies are seeking shale-gas outlets in Europe.

Cheveron announced recently that it will give up its pursuit of finding shale-gas in Romania. Last month, Cheveron gave up on its explorations in Poland and less than a year ago, did the same in Lithuania and Ukraine. This most recent blow is not positive for the European shale-gas industry. This industry has provided many companies with huge profits in the United States. This recent string of failed explorations raises concerns for the European industry as a whole. The main reason for not continuing is poor exploration results as well as a little backlash from local communities. This is a very expensive process so if the results are not there, it is not a bad idea to quit. Many of these European countries hoped for better results so they would not need to import more expensive energy products. The United States has become an exporter of energy, which no one ever thought was possible. This is largely due to the large increase in our supply energy, not only oil, but no this shale based gas.

The article points to recent regulation allowing fracking to continue, despite backlash. The article states, “In the U.K., which lifted a moratorium on fracking at the end of 2012, companies have to apply for as many as seven permits and go through a lengthy planning application process before they can drill and frack. So far in Britain, only a handful of wells have been drilled and just one fracked in 2011.” http://www.wsj.com/articles/chevron-to-give-up-romanian-shale-gas-interests-1424482388. All of this drilling is expensive so the fact that only one of these wells had been fracked was concerning. Exxon Mobil and a few other large companies have already given up their fracking hopes in Poland. If companies hope to one day frack successfully in Europe, they better start doing a better job of exploration. This pre-drilling stage is by far the cheapest stage of exploration. If these companies hope to make any headwind, they better be more successful in their exploration so they do not continue to drill these wells for no reason.

 

The Argument for State Monopolies

The nationalization of industry is viewed by many nations as a bad thing, favoring capitalism over socialism, especially in the United States. China, however, has been a long proponent of nationalized industries, emphasizing that is better for everyone involved, not just the people in power.

“China’s leadership is exploring ways to consolidate the country’s oil industry, creating new national champions able to take on the likes of Exxon MobilCorp. and operate more efficiently as prices slide” – Lingling Wei and Brian Spegele from the Wall Street Journal.

I think this is a good thing for China, and I am going to make the argument that many nations should do the same. The biggest downside to monopolies is their ability to have complete control of the market, which they can then use to reduce quantity of output in order to drive up prices, creating higher profits from themselves. However, when it is state/nationally controlled the government can regulate output in a way that is best for consumers, virtually getting the best of both worlds. Government-run monopolies do not have to worry about spending a large deal of money on advertising, another plus, as they are not competing with anyone, allowing them to kick back all potential profits to the government, and ultimately the people. Obviously if the government is corrupt those profits may never reach the general public, but that is besides the point that I am arguing. Any nation with a corrupt government faces a great deal of issues. I am focusing on the idea of state-owned and run industries in a nation free of corruption, at least as much as any nation can be free of corruption.

“Combining and then streamlining the operations of the major Chinese oil producers could help reduce waste caused by redundant staff and projects, the officials said” – Lingling Wei and Brian Spegele from the Wall Street Journal.

Another upside to consolidation of an industry is reduced waste and redundancy. Basically, pick and choose the best parts of each firm and then combine them into one firm.

A foreseeable potential downside is reduced efficiency. The idea behind the free market and competition is companies that are not constantly innovating will be forced out of the industry, leaving a more lean and efficient market. This is where, I believe, the role of the government is critical. If the monopoly is privately owned, it is safe to assume that one of their focuses will be establishing barriers to entry to secure them the market in the future. This would allow them to slack off on the innovation part of their business, with no threat of being forced out of the market. However, government involvement, such as routine check ups on the research and development sector of this company could reduce this problem, although it would most likely exist to a certain extent. With the right pressure and monitoring by the government overseeing the monopoly, the positives seem to outweigh the negatives.

Naysayers about Cheaper Oil are Missing the Big Picture

Thursday, a panel of 69 economists surveyed by the Wall Street Journal discussed the economic impact of the weak oil market, noting their concerns that the low price of oil is causing a drag on capital expenditures by energy companies.  The article claimed that cheap oil is “a double-edged sword for the economy given how it might affect the boom in U.S. oil and natural-gas production”.  While there may be some truth to that statement, one edge of the sword is far duller than the other.  Capital investment has not even begun to exhibit the “sharp pullback” that the the economists are predicting: they only cut their forecast for the increase in plant property and equipment by 1.5%, and that is still only an estimate – such forecasts are often off by even more than 1.5% as it is quite difficult to predict how the economic landscape may change over the course of a year.  As demonstrated by this graph from QZ, even though the US oil rig count is down, production is still rapidly climbing.

US Oil Prod

The slide in oil prices began almost nine months ago now, and it’s clear that production shows no signs of slowing down, especially since prices seem to have bottomed out and are now back on the rise.  While it may look like the energy sector is going to take a hit this year, I doubt that will be the case as prices continue to bounce back and growing US oil producers seek to lock in capital investments before interest rates begin to rise, which will likely occur sometime midway through this year, as indicated by the Fed and reported by the New York Times.  On top of that, the US oil production industry is still growing rapidly, and it seems likely that producers would want to ramp up investment now so as to carve up their slice of the market before it fully matures.

So while the Journal’s economists did still admit that cheap oil was a net positive on the economy, they might be overplaying the threat of a drop in capital investment.  The availability of cheap oil will not only continue to drive up consumption and thus overall business growth, but will spur investment from other sectors that benefit from cheaper energy.  As transportation-focused industries take advantage of the low prices by increasing their own investment, demand for oil will grow, strengthening the case for oil producers to keep increasing production.

 

Rebound of Oil Looking Less Sharp

Few weeks ago I wrote about how the price of crude oil may rebound sharply. It’s looking more and more likely that I was wrong. While oil prices will still rebound, it will be a slow one.

As I have stated in an earlier post, the current state of low oil prices is caused by a combination of falling demand from China and India, OPEC refusing to cut production, and increased U.S. production. And since the price drop, many shale drillers in the U.S. have cut production. With those in mind, plus the fact that in 2009 oil prices rebounded sharply, I believed that the same would happen again.

What I forgot to address the high amounts of oil currently in storage. With oil prices in record lows, many investors are jumping onto the oil storage game. According to an article on Reuters, traders are now purchasing oil for storage. The amount of activity in this sector have kept the price of oil futures low, no more than $60 per barrel in fact.

 

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Data on oil futures, taken from barchart.com (As of Feburary 11, 2015)

The chart above shows that futures on crude oil is being traded at as low as $63.68 per barrel, even for January 2017. That means buyers can secure crude for this price to be delivered in January 2017. This also means that traders can purchase oil at the current price of below $50 per barrel, and immediately sell a futures contract for some $60 per barrel. For those who can secure storage facilities or tankers, they can make a lot of money. But of course, this would attract more investors, which should drive up current oil prices while driving down future oil prices.

But what is interesting is that the current price of oil remained low. In fact, oil prices have dropped yet again in the past few days. (Wall Street Journal) This is because the supply of oil in the U.S. has not been cut as we were led to believe. According to the U.S. Energy Information Administration, the daily production of crude oil in the U.S. is currently at 9.2 million barrels, a number not seen since 1973. (1973 was shortly after the production of oil in the U.S. peaked) I will venture to guess that shale drillers claimed to be cutting production hoped to rouse speculators into buying more oil, thus driving up the price. But since oil drilling requires huge amounts of sunk costs, especially true for drilling in shale, these companies are reluctant to cut production after investing so much.

So as it currently is, the glut of oil will continue to grow, at least until existing oil wells are depleted. But even then, we will have huge amounts in storage. Such that the price of oil will remain low for the foreseeable future.

Why Keystone XL Should Be Stopped

The Keystone XL pipeline extension is a 1,664-mile bad idea that would carry almost 1 million barrels of crude oil a day from Canada’s oil sands to Texas. Putting environmental issues aside, the possibility of the Keystone XL pipeline fuels a heated debate. Proponents of the pipeline, namely oil companies, the Canadian government, and many Republicans, argue that the Keystone XL pipeline would generate thousands of jobs. Whereas opponents, namely environmentalists and landowners along the route, argue that the Keystone XL pipeline will make it harder for the U.S. to shift away from fossil fuels in addition to the environmental harm from such a monumental project.

As Paul Krugman explains in an op-ed for The New York Times, the Keystone XL pipeline “is a sick joke coming from people who have done all they can to destroy American jobs.” The Keystone XL pipeline is the first move from the new Republican Senate. Republican support should come as no surprise considering the oil and gas industry gave 87% of its 2014 campaign contributions to the G.O.P. Consider the Keystone XL pipeline support a thank you for the oil and gas industry’s generous contributions. In order to successfully gain support, Republicans decisively choose their slogan of increasing jobs. While there is some truth behind this allegation, the number of jobs mobilized is only for a temporary period. Once the pipeline construction is complete, the number of remaining jobs would be less than one hundred. In addition, the jobs gained from the pipeline would still only be less than 5% of the jobs that were lost from the sequestration. The same amount of government spending could be used for roads, bridges, and schools – not only a more stable form of employment, but less controversial as well.


Employment issues aside, environmental issues continue to fuel the debate. A proponent of a pipeline, Senator Tim Kaine agrees that the Keystone XL pipeline project cannot move forward. Kaine’s argument stems from the difference between tar sands and conventional petroleum. Tar sands, which would be the main oil source for the pipeline, is not only dirtier than conventional petroleum, but also the process of extracting the oil grows more difficult. There is an abundance of safer and cleaner alternatives that resorting to tar sands as a fuel source is not necessary and far from ideal. As NASA climate scientist James E. Hansen said, “if all the oil was extracted from the oil sands it would be ‘game over’ when it came to effort to stabilize the climate.”

Why Cheaper Oil Doesn’t Always Lead to Economic Growth, Should it Does?

There is an interesting article talking about why cheaper oil does not always lead to economic growth in WSJ this week. And the article mainly attributes the reasons to the following reasons: Some governments raise gasoline taxes or cutting fuel subsidies, and the falling oil costs have pumped up deflation fears across Europe and Japan hence drag on growth.

The reasons seems convincing at first. However, after reading the article I just realized that actually there isn’t (or I have not learned) any theory supporting that cheaper oil should boom economic growth. What is more, personally I do not think that cheaper oil could lead to economic growth at all.

First of all, the cheaper oil itself could be the result of an economic recession. If you see the chart below, the biggest drop on oil price in the latest 10 years is around 2008, which is exactly when the financial storm happened and consequently with the economic depression. One could argue that after the decline on oil price, the economic did recover slowly. However this does not necessarily indicate the causality between oil price and economic status. As discussed in our lecture, we need to provide convincing evidence or argument to prove the idea. Causality or inverse causality? We need to test

.Crude Oil Price(Picture from Nasdaq.com)

Secondly, a decline on oil price is simply the direct result of its supply and demand, we cannot forecast its future impact precisely unless we are given more information. For example, the recent decline on oil price is mainly because the increase on oil supply since U.S explore a new gas oil shale. The increasing on supply lower the price hence motivate the consumer to consume more oil-relative products, which may incentive the economy. However, another believe is that the decline on the recent oil price is a signal of energy industry’s structure change. More and more people are going to switch to electronic sector. Thus the demand falls and the price falls. If it is the case, then a cheaper oil does not help to boom the economy at all.

Thirdly, the endurance of low price matters. As said by Ayhan Kose, “If you think that prices are going to stay low, that will dramatically affect your behavior.” Personally speaking, I might buy a car if the oil price stay at the current level or continue lowering ( In this case I contribute to the GDP since I consume a car). Otherwise I wouldn’t do anything.

Finally, Even if the cheaper oil could stimulate the economy, it could only help it complementary product industry, such as car industry or chemistry industry, but it will not do good for its substitute product industry, say electricity sector. Thus its overall impact on the economy is ambiguous.

 

Get Zero Interest Rates Till June!

The Fed held its FOMC meeting this past Tuesday and Wednesday, January 27th to the 28th of 2015, discussing several different aspects of monetary policy to “foster maximum employment and price stability.” Lately, there has been a lot of talk about a rumored interest rate increase that is forecasted to occur sometime this year. Fortunately, the Fed has decided to leave interest rates where they are on account of the falling inflation rates throughout the US, for which they listed several reasons. They spoke on the falling oil prices, the ECB’s decision to buy over a trillion Euros worth of bonds, and the dollar’s appreciating value. Ultimately, interest rates are still expected to increase in June of this year, and many still fear this day.

A USA Today article titled “Fed likely to continue to signal mid-2015 rate hike” states “The Fed typically raises interest rates to keep inflation from spiraling too high as the economy and labor market heat up and lowers rates to spur growth. The unemployment rate has fallen from 6.7% to a near-normal 5.6% over the past year, providing support for adhering to Fed policymakers’ forecast for the first rate hike in June.” Should the Fed increase interest rates, many negative events may occur. The most likely result of this increase would be an immediate shock to the stock market. Investors like conditions where money is cheap, and higher interest rates mean it is effectively more expensive to borrow. The same goes for mortgages, loans, and credit. People would ultimately see a decrease in the purchasing power of their dollars, and a rise in prices everywhere. Historically, higher interest rates have been signs of an economic recession, however the Fed doesn’t have much of a choice.

Some expect that the Fed shall continue printing money and buying securities to keep interest rates artificially low. That is entirely within the realm of possibility, however eventually the Fed has to raise interest rates or inflation will devalue the dollar to a worthless status. It’s going to be a risky decision for the Fed, and had they raised interest rates a long time ago, it may have been a smarter move. Economic crashes have always occurred cyclically. Never for the same exact reason, always the same way. As with the 2008 subprime mortgage bubble, we are now faced with an even greater bubble that must be deflated. What remains to be seen is which needle the Fed chooses to use this time.

Russia hopes to stimulate its economy by lowering interest rates

Since last year, Russia has had territorial disputes with Ukraine in the Crimean Peninsula. Russian aggression in this region are highly disapproved by the West, has been met with numerous Western sanctions against Russia. Such sanctions include restriction to Western finance, oil technology and services, Mark Thompson writes on CNN.

And if that’s not all, plummeting oil prices, in part caused by OPEC’s refusal to cut production despite lower global demand. Has further hit the Russian economy, one that is heavily dependent on oil.

As a result, the Russian ruble has plummeted along with the price of oil.

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Picture taken from xe.com, Ruble to USD exchange rate.

 

In the early stages of the crisis, the governor of the Central Bank of Russia (CBR), Elvira Nabiullina, aiming to prevent loss of reserves, and expecting OPEC to cut oil production, allowed the ruble to fall freely, Frances Coppola writes on Forbes. But it turned out that OPEC decided to maintain its market share and maintained their oil production.

The fall of the ruble, combined with the fall of oil price, served to cripple Russia’s banking sector and oil companies. The CBR began to hand out billions in bailouts to Russian banks, however the cash fails to reach firms.

Anatoly Aksakov, president of Russia’s regional banking association and deputy chairman of parliament’s financial markets committee, said the central bank must cut rates this month to 15% from 17%, then gradually to 10.5%, the level they were at before the current financial crisis. A central bank rate of 17% meant some companies were having to pay as much as 30% to borrow.

The state media has also reported an inflation rate of 11.4% in 2014, cause in part by the collapse of the ruble as well as oil prices.

The Fisher Equation stipulates that real interest rate is nominal interest rate minus expected inflation rate. This means that a 10.5% nominal interest rate, which the CBR can achieve if it chose to, would mean a -0.9% real interest rate. A negative interest rate, which would drastically increase the velocity of money, would serve to stimulate investment activity, which would save many of Russia’s firms.

Currently, however, the CBR’s reserves are being heavily drained. Falling oil prices and sanctions are taking a heavy toll on the Russian economy and at this rate the SBR will not be able to withstand them much longer. But the question remains, how long before Russia withdraw from the Crimean Peninsula to save its economy?