Efficient Cars Cut Demand and Oil Prices may Fall

...there is also an emerging issue of exports. There are lobby groups pushing to restrict exports of nat gas, crude to keep prices low in the USA. This puts some disincentive on oil and gas development. It will take some years to see how it shakes out. But Bob, you gotta admit the bottom certainly did fall out of nat gas prices, when everyone thought USA nat gas prices would sky-rocket ad infinitum. In hindsight USA nat gas price was in a bubble because high cost expectations kept everyone from using nat gas.

 

Regionally - the Washington DC Metro Area is using more fossil fuel (gas, coal, oil) than ever before to beat the record heat wave - everyone is cranking up the air conditioners which in powered by electricity mainly generated from coal, natural gas and oil generators. The Earth maybe warming up - but the fat cats of the Nation's Capitol are staying cool...

Most economist and historian will advocate against restrict energy exports (or imports) because it will cause other nations to impose similar restrictions and lead the world back into the same mercantile system that caused World War I and World War II. In addition, Wall Street will lobby against restricting oil imports and export because for Wall Street's system of oil future contracts to work - there cannot be any quota restrictions on the amount of energy exports/imports.

What is possible is that...
1) the government could impose domestic import or export taxes on energy to lessen demand and production.
2) ban commercial leasing program of oil shale and tar sands resources on public lands
3) eliminate the 2005 Energy Policy Act exemption of fluids used in hydraulic fracturing from protections under the Clean Air Act, Clean Water Act, Safe Drinking Water Act, and CERCLA.
4) the government could eliminate or reduce domestic oil and gas exploration and production tax credits and tax breaks.

 

Gasoline and diesel prices have been rising steadily for the past few weeks. I guess that's to make some money before the big drop at the end of the year.

 

All areas undergoing high heat us more grid energy, it isn't isolated to DC.
As for gas prices, it is a global commodity and the gas savings in more efficient vehicles does not yet offset the growing demand world wide.

 

Oil prices can indeed dip greatly like they did in 2009, but this is almost always caused by OPEC not managing well for demand. Oil futures have gone up for the last 4 weeks, meaning investors are betting against this scenario. In the long run 5-10 years the world wide economy will recover and opec will get its production quotas to manage the oil prices. If there was no opec, its likely oil prices would fall, but no analysis about prices should ignore the reality of a cartel and the long term rise of oil demand in China and India. The only way to cut demand bellow opec's control is to move a fairly large percentage of cars to other energy (electricity, biofuels, natural gas/(cng, lng, h2, methanol),etc)

 

Technology moves slowly. Congress put laws in place to stop people from using natural gas, making it illegal to build base load power plants, caping demand. They also put in price controls making it hard for gas companies to invest. These laws were reversed in the 90s (some in the 80s, I can't remember), and demand and prices were allowed to rise with the market. This allowed demand to go up, which got prices up, which stimulated investment.

Oil got deregulated in 1981, the price rises and trough already happened, so we already have had all those market dynamics. There is plenty of exploration and investment. The only way to break the price with technology is car technology to switch away from oil use. Deutsche Bank in 2010, thought this was likely to happen around 2016, capping oil prices. It likely will take more pain before oil demand is reduced enough to drop prices.

 

Walter those things as a package would raise the cost of oil not lower it.

Oil taxes would help lower demand, but the cost to consumer would likely increase slightly lower than the new tax.

Merchantile restrictions would raise the trade deficit, which would likely reduce taxes (oil companies would profit in other countries instead of us, and pay taxes there instead of here), increasing the budget deficit.

Environmental protection would likely not change the price of oil or gas, only reduce profits for those getting the fluids.

 

We are pretty much full speed ahead on alternatives. As I mentioned in another post, ethanol radio ads here in DC suggest someone is making a push for more ethanol soon, my guess is someone wants to use corn ethanol to make up for the deficit in advanced biofuels that Congress was hoping would be available for blending by now.

 

+1
Well . . . . no need to scare the public . . . . have them pull out of the stock market thinking things are going south. that's what's really important now ... keeping the market afloat - at all costs ... and both parties are doing a bang up job.
.

 

There is no doubt that the combination of improved efficiency and greater production can lower oil prices.
This is precisely what happened in the early 80's, due to the first generation of CAFE regulations as well as Prudhoe Bay, the North Sea and Mexico's Cantarell coming online.

However, the assertion that the price will "drop 50% in a year" is just ridiculous......supply/demand changes take many years to play out in the price signal.

I would say that "this time is different" in both the global supply and demand situation.

Supply - Yes, shale oil is increasing production, but is it enough to offset declines in mature fields, such as the ones mentioned above? Most of these shale oils and tar sands have very high production costs....so if the oil price crashed, they would be forced to cease output since the going price would be below their marginal cost....less supply, price goes right back up (or OPEC would cut production - same result). It is no coincidence that OPEC nations need $100+ oil to balance their domestic budgets. They simply benchmarked that price to the highest-price marginal barrel coming from Canada tar or N. Dakota tight oil. Contrary to conventional wisdom, N. American and OPEC oil producers work symbiotically, not competitively.

Demand - China and India (and others) .....adding a car fleet equal to America's, by 2025. More efficient, to be sure, but the sheer volume will stress global supplies.

So, we should be more worried about what happens 10-15 years from now, not "in 1 year".
Having said that, it is true that too much short-term supply and too much efficiency too soon could cause $50 oil, and this would do 2 things:
(1) OPEC nations would go bankrupt, resulting in mass civil unrest, revolutions or even war
(2) Hybrids, EVs, alt. energy.....Tesla, the Volt, you name it.....all bankrupt. Obviously we here at PC would like to see that not happen!

The only way to ensure we continue on the hybrid/ev path is by decoupling it from the vagaries of the global oil market. That means either
(a) a price floor on oil, say $100. Removes risk to Tesla, Volt, other alt-energy cars and carmakers
(b) a carbon tax.....raises gasoline price, ensuring people will move towards efficient cars......no matter the price of oil

Both would require govt. intervention, something that is anathema to the right-wing. Instead -incredible as it may sound given our oil imports of 10 mbpd @ $100- they want the government to do this:

Lift the Ban on U.S. Oil Exports - Bloomberg

 

I disagree that low oil prices would bankrupt Tesla.
People don't buy Teslas to save on gas, at least not primarily.
They buy it because most will lower their GHG emmissions.
They buy it for the incredible experience and performance of the car.
They buy it for the convenience of charging at home over the inconvenience of fueling while out and about.
They buy it for the technology of the car.
But they certainly don't buy it because of the price of gas.

 

That's the case right now. But people at Tesla's price point are what you might call trend-setters or trend-followers. They could obviously afford a Cadillac Escalade or BMW M5, but those cars have fallen out of "fashion".

Why? Well, yes concern for GHG is one. Having the latest technology is another. But so is being seen as 'socially responsible'.......especially when $100 oil is putting the squeeze on most Americans (the 1%r's don't care what the price gas is)

Look, the car industry goes through phases that closely follow demographics and culture.
In the 80's we had minivans, just as baby-boomers were having kids.
In the early 90's, we had a 'sports car phase' that gave us the 300zx, Supra, Miata, NSX and Viper (boomers having a 'mid-life crisis')
In the late 90's/early 00's low gas prices made the boomers ditch their minivans for 'cooler' SUVs.

Well today, extreme weather events and $100 oil have made green cars the 'in' thing.
I agree with you that there are plenty of reasons to drive a Tesla regardless of oil prices, but I guarantee you they will lose a lot of their cache at $50 oil or less............they will no longer be seen as 'driving the future'. But yes, bankruptcy might be a remote prospect for them.

Also need to consider industry knock-on effects. High oil prices led to battery research, which lowered prices and made Tesla what it is. That won't go away, but -
if EVs in general fall out of favor, it is likely component prices will go up across the board, so it will be that much harder for there to ever be a "Tesla for the common man"

 

They are seen as rich boys toys, often more than socially responsible. But they do reduce oil use, which is a great thing. Having an M bmw or an Escalade speaks of conspicous consumption which is a negative now a days. The price of the gas doesn't really matter, but it is quite different than in the past. You are seen as wasting resources. The only way $50/bbl oil would change that is if we had plenty of conventional oil, and no one with any knowledge is predicting that.

 

chicken & the egg ... Economic sputtering causes less fuel to be used, so prices drop .... Too much economic growth strains limited fuel reserves & prices shoot up and thus economy falters

 

Its more than that. We have the futures market, which in theory should make things more efficient, but speculation wagged the dog. People saw prices going up and wildly speculated that they would continue to go up. This sent futures prices higher than an efficient market would set. As the highly leveraged positions started to fall, people were forced to sell to cover margins, dropping the price beyond its natural level. Then rebound happened.

Opec did not cut supply as fast as demand dropped, which is part of a natural monopolistic behavior.

Looking forward, opec likely will again miss demand changes, and this will cause short term spikes and discounts. Short term is the key. The futures markets still have not been reformed, so we should expect speculation. Current prices are within OPEC targets. A big crisis in the middle east could again send futures screaming upward, and a drop in prices following the spike. It's key to remember that these price drops are speculative in nature and will remain short term (less than a year) unless real demand drops a great deal, or OPEC stops being a cartel.

 

This is one of the biggest reasons for getting off gasoline. The more people that spend less, or no money on transportation oil the less impact such spikes will have on the national economy.