Another Oil Crash Is Coming, and There May Be No Recovery

[marmar]

(Bloomberg) It’s time for oil investors to start taking electric cars seriously.

In the next two years, Tesla and Chevy plan to start selling electric cars with a range of more than 200 miles priced in the $30,000 range. Ford is investing billions, Volkswagen is investing billions, and Nissan and BMW are investing billions. Nearly every major carmaker—as well as Apple and Google—is working on the next generation of plug-in cars.

This is a problem for oil markets. OPEC still contends that electric vehicles will make up just 1 percent of global car sales in 2040. Exxon's forecast is similarly dismissive.

The oil price crash that started in 2014 was caused by a glut of unwanted oil, as producers started cranking out about 2 million barrels a day more than the market supported. Nobody saw it coming, despite the massively expanding oil fields across North America. The question is: How soon could electric vehicles trigger a similar oil glut by reducing demand by the same 2 million barrels?

That's the subject of the first installment of Bloomberg’s new animated web series Sooner Than You Think, which examines some of the biggest transformations in human history that haven’t happened quite yet. Tomorrow, analysts at Bloomberg New Energy Finance will weigh in with a comprehensive analysis of where the electric car industry is headed. ..............(more)

http://www.bloomberg.com/news/articles/2016-02-24/another-oil-crash-is-coming-and-there-may-be-no-recovery

[global1]

1. Help Me Understand Something About What's Going On In Oil....

I know it's probably more complicated than I'm going to say here but why is oil impacting on the stock market.

Just from a price standpoint I'm thinking that low oil prices are good for the economy. Consumers have more money in their pockets because of low gas prices. That money that they now have can be used to purchase other things that they normallly wouldn't have. These other items that they purchase need to be replenished - so more production of these items occurs. With more production potentially more people are needed in jobs to produce these items. So more people working - making money - that they in turn can spend now that they have it. And so on and so forth. That seems to me to fuel the economy and make it churn. If that is happening - why would Wall St react negatively to a churning economy?

To take this a little further - let's talk airplanes. Doesn't fuel get cheaper for the airlines to buy? If so - if they keep their pricing as is - wouldn't they make a bigger profit? Isn't that good for Wall St.? If they drop their prices - wouldn't more people travel - spending more money on trips, vacation, restaurants, car rental, hotels, etc. Doesn't that fuel the economy?

And I believe oil is used in the making of some plastics and other materials that are used to manufacture products that consumerrs use. Wouldn't those items benefit by cheaper oil prices as well making them cheaper to produce and hence more profit? Or cheaper and more affordable to consumers so that they are stimulated to buy more? Again - from a supply and demand standpoint - more demand - the need for more supply - again - putting people to work making more of these products. More jobs being produced. People having money to spend. Spending it and again churning the economy in a good way.

If my simple understanding of what I just said above is seemingly correct - then why is the stock market reacting adversely and tanking? I just don't get it.

A few years ago - all you read here on DU was 'peak oil'. Prices going up. Cost of everything going up. Bad for the economy.

Now we are seeing just the opposite and Wall St is reacting like this is bad for the economy as well.

How can it be bad both ways? What am I missing here? What don't I understand?

Please someone - explain this to me.

[Kelvin Mace]

3. I'll do my best

Oil companies are upset that they are now only making ridiculous amounts of money as opposed to the obscene amounts they were making before. Wall Street bases it investment strategies on earnings, and since earnings are down, everybody is unhappy. A LOT of investment funds have oil stocks in their portfolio, so now that they are "underperforming" funds aren't making their numbers, which means lower bonuses for fund managers.

Peak oil is still a problem, we just have a temporary glut which obscures it. When the oil industry went all out with fracking they did produce a LOT of oil just as the world was coming off the Great Recession that depressed demand. So, a lot of Bakken fracking oil and Canadian tar sands oil hit the market while demand was still soft, but oil prices were high. A BIG oil customer was China, and now China is moving toward an economic implosion and oil consumption is falling there as well, just as more oil was coming on the market.

Depending on who you ask, fracking oil is profitable only when oil is $50-$75 a barrel, and it is currently in the low 30s (actually, that is for high quality oil. Crap like tar sands oil is below $20).

So, fracking operations are bleeding cash, and many are "over-leveraged" (i.e. they live totally on borrowed cash) and in danger of collapsing and defaulting on their loans.

The other issue is Saudi Arabia production. Usually, the Saudis would scale back production to support prices, but they have two other goals lately. Destroy American fracking operations (their competition) and hurt Russia economically since 50% of its revenues were coming from oil. Add to this that Iran is about to legally sell oil for the first time in decades, and you can see the price falling further.

Other countries like Venezuela and Mexico depend on oil for a large part of their revenue, and with oil prices collapsing, they are suddenly in dire financial straights.

Now there are upsides to low oil, but you will notice that they are not translating much to the consumer. Yes, aviation fuel is cheaper, but I still had a "fuel surcharge" on my ticket when I flew to Toronto in December. I still see the same surcharge on my UPS/FedEx bill. Basically, every one helped by low fuel prices are simply keeping prices the same, and banking the extra profit. The only way consumers are directly seeing a difference is at the gas pump.

The situation is happening when EVs are just starting to become viable, and people are looking at them as cheaper to run, maintain, and better for the environment, but that is a whole other dicussion.

Hope that helps. Just my amatuer economist's take on the issue.

Update: Oh, and people heating with natural gas are seeing lower bills as NG prices have also fallen dramatically. Electric utilities, however, don't seem to be passing on their savings to customers.

[elleng]

4. Not an economist here, just a lawyer,

but seems much of the world economy is based on oil, so when it's prospects decrease, the world economy takes hits. We all have to adjust to 'another than oil' economy, which will take a while, but will help the world in many ways.

SOME understand this, and are/were prepared to address it, but most not so much.

1. A COMPLETE TRANSITION TO RENEWABLE ENERGY—AND AN END TO OUR RELIANCE ON FOSSIL FUELS BY 2050
We can’t address our climate challenge without ending our reliance on fossil fuels — full stop. I would take aggressive executive action and fight for legislation to slash emissions and put our nation on track to be powered by 100% renewable energy within 35 years.

As President, I would fight for federal legislation for a cap on carbon emissions from all sources, with proceeds from permits returned to lower- and middle-class families, and invested in job transition assistance and the new Clean Energy Jobs Corps.

On Day One, I would reject projects like Keystone XL, deny new permits for drilling in Alaska, the arctic, and off our coasts, and increase royalties and emissions fees for fossil fuel companies currently drilling on federal lands, investing the proceeds in jobs and skills training.

I would also make sure we keep domestically produced oil and gas in the U.S., instead of selling it abroad – unless there is a clear strategic security rationale.

I would increase royalties and emissions fees for fossil fuel companies currently drilling on federal lands, and invest the proceeds in jobs and skills training.

I would root out subsidies for fossil fuels, while extending production and investment tax credits for renewable energy for the long term. Taxpayer subsidies for fossil fuel companies total $4 billion a year, even as the biggest oil companies reap $90 billion in annual profits.

And I would make sure federal agencies do all they can to protect public health and the environment by:

Requiring the federal fleet to be subject to low- or zero-emissions purchasing agreements. Our federal fleet of 250,000 vehicles consumes more than $450 million gallons of gasoline and diesel fuel every year.
Fuel costs saved should be reinvested in clean energy deployment and jobs.

Directing the Environmental Protection Agency to take aggressive action to limit greenhouse gases, expanding rules to other large sources of emissions beyond power plants.

Directing the Environmental Protection Agency to adopt a zero-tolerance policy for methane leaks from current oil and gas production, which waste $1.8 billion annually, while exacerbating greenhouse gas pollution.

2. AN AGGRESSIVE AGENDA TO DOUBLE ENERGY EFFICIENCY WITHIN 15 YEARS TO WASTE LESS ENERGY AND CREATE MORE JOBS
If we waste less energy, we can create more jobs — while saving Americans real money on energy costs and protecting our environment. Maximizing energy efficiency in buildings alone could eliminate the need to increase our national electricity generation capacity.

That’s why I would set a national goal of doubling our energy efficiency within 15 years.

https://martinomalley.com/climate/agenda/

[Raster]

6. You falsely assume Wall Street is in it for the benefice and common good of all.

They aren't. You also assume there is an element of unassailable logic and a degree of fairness in financial markets. There isn't.

Large, multinational corporations are all designed to feed into each other and bolster each other's profits. The corporations have their own systems and levels of symbiosis, and they all are based on one thing: their bottom lines. Something else to consider is any corporation's long-term vision, which is practically non-existent. Corporate entities are, in essence, enslaved by their shareholders that now demand quarter-to-quarter performance. Corporate leaders are recruited, compensated, retained OR RELEASED per their ability to affect positive share price and value on a quarter-to-quarter basis. And please don't assume those shareholders actually calling the shots are investors like you and me. NO. The investors and shareholders calling the shots are large, institutional investors, who are also corporations, who are also slaves to the quarter-by-quarter edicts and expectations.

When Peak Oil was going up, it was bad for the little guy, but GREAT for the large corporations. Peak Oil fattened their bottom lines and yielded large payouts for the high-placed lackeys at the corporate helms. NOT figured into the Peak Oil profit equation was the long-term action of high oil prices and affect on the common man and woman - you and me - Joe and Jane Consumer. Corporations did not care. Again, quarter-to-quarter bottom line.

Ultimately you ask why doesn't the benefits of declining oil prices for the average consumer influence the financial markets in more of a positive fashion? Because declining oil prices do not positively affect the corporate bottom line on a short-term quarter-by-quarter basis, and that is all the financial markets really care about.

Sorry, I rambled.

[Punx]

7. If I may add one other thing?

Consumers may not be seeing much benefit from low oil prices because of consolidation and near monopolies among many sectors of the economy, food and transportation come to me first. So as “Kelvin” mentions, “they are banking the profit" as there is little competition to force them to lower prices.

Remember that the game is rigged.

[Warpy]

9. What's going on? Billionaires are manipulating the market

so whichever way it goes, some billionaire is going to yank the chains of his pundits for hire to write articles about how it signals the end of life as we know it.

You didn't really believe there was any such thing as a free market, did you? Oil is the most manipulated commodity out there, even more than gold.

[global1]

10. Thanks To All Of You That Responded To My Post.....

Each of you explained things understandably and each of you added info to the question.

[Kelvin Mace]

2. The Koch brothers are already on this

with a $10 million lobbying group to attack EVs.

http://insideevs.com/koch-brothers-ready-multi-million-dollar-attack-on-electric-cars-elon-musk-tweets-sigh/

[Conium]

5. Serves them right.

I hope they drown in their filthy oil. Oil state politicians should be boiled in it.

[Warpy]

8. This article ignores history

The fact is that there was an oil glut all during Stupid's years in office, yet the price was manipulated by commodities speculators (most notably but not exclusively the Koch boys in the US) to stay above $100/bbl so that things like fracking, tar sand reclamation and deep sea drilling would be economically feasible. The oil glut has been a permanent fixture for over 15 years but the price crash is very recent.

The "free market," that fantasy of so many economics pundits, did nothing to pull the price of oil down as OPEC producers pumped all they could into the system to make as much big money as they could. Electric cars are also not affecting the market because of all the millions of vehicles world wide, only a tiny fraction of a percent are non petroleum powered and will likely continue to be.

And that only addresses high octane fuel. Petroleum distillates other than octane are used throughout agriculture and industry. Yes, bio oils like hemp oil can be used for a lot of things, but not all of them. I'm afraid people will always buy the stuff unless we all want to go hungry, agriculture being the biggest customer after the military.

So it's a bit premature to predict the demise of the awl bidness. I do welcome renewable fuel transportation, the air will smell a lot better with the gradual phase out of the internal combustion engine. I think we are going to have to be a lot smarter about how we use this glut of petroleum in order to tackle runaway global warming. I just know oil is not going to go away in the near future, just like I never bought the "peak oil" nonsense.

[Hotler]

11. This thread is a great read. Thanks to all for contributing. n/t