Oil pressure is building

Oil prices began their collapse almost a year ago, yet the impact to the industry and speculators has been light. There have been no major hedge fund failures. Large energy companies have taken advantage of the opportunity to conduct some layoffs, but there have been no high-profile business bankruptcies. Most important of all, the price decline has not yet triggered cascading CDO/CDS calls of the type that brought down the mortgage industry in the ‘aughts.

There is a chance that the industry may avoid a reckoning, but only if producers and traders can navigate an ugly challenge over the next few months. It appears that the US is running out of cheap oil storage. At the current production pace we will run out of capacity at the main “contango” facility at Cushing, Oklahoma in June. Avoiding a price crash will depend on finding new places to store the stuff until production finally declines and demand recovers – whenever that might be.

Energy traders have benefited so far from one of the unique characteristics of oil – it is relatively easy to store. For more than a decade as production has consistently outpaced demand, steadily expanding capacity at the main storage facility in Cushing has allowed traders to cheaply store unsold oil contracts, waiting for better conditions. A lot of people made serious money from this “contango” strategy in the last crash, storing cheap oil until prices recovered.

Get caught in a long position on oil? Monthly storage might cost as little as 33 cents a barrel. At those prices there is no reason to dump oil on the market. Until you run out of places to put the stuff.

Storage at the cheapest location, the Cushing facility, is running out. Having surpassed its previous all-time high last year, Cushing is expected to reach 80% of its overall capacity in April. Unless production slows it could fill by June, trigging much higher storage prices. There is capacity available in Midland, Houston, and Nederland at modestly higher prices, but it is unclear how much storage they have available. New capacity is being added, but owners are waffling, unsure how long this party might continue.

The next cheapest option for oil storage is on tankers at sea, but that capacity is being rented out quickly as well. Prices for seaborne storage have doubled on some providers since last fall.

With the Saudis continuing to pump oil at a fantastic rate while drilling new wells, there is no supply relief in sight. US production is unlikely to drop much until some companies go out of business. Once a well goes online, it costs money to shut it down. Better to bring in some money than no money.

Ultimately it seems that we are in an oil storage race. As long as new storage capacity can be brought online at a somewhat reasonable price, traders will continue to hedge their losses in the hope that demand and prices will recover. This is a game that traders and producers have been playing and winning for well over a decade as the financialization of commodities markets have pushed prices out ahead of market forces. The music hasn’t stopped yet. If storage can be built or found in time, the band might keep playing a bit longer.

Chris Ladd is a Texan living in the Chicago area. He has been involved in grassroots Republican politics for most of his life. He was a Republican precinct committeeman in suburban Chicago until he resigned from the party and his position after the 2016 Republican Convention. He can be reached at gopliferchicago at gmail dot com.

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Posted in Economics, Technology
98 comments on “Oil pressure is building
  1. […] Falling oil prices could trigger a wider crash in commodities derivatives Date: March, 2015 How does it look: Dead […]

  2. […] in the spring I joined a collection of commentators expressing concern about distortions in oil markets. Price declines were being cushioned by a practice sometimes described as “contango,” in which […]

  3. GG says:

    Off topic, and I gotta fly in and out, but I thought of you guys when I read this. I figured y’all could have some fun with it. A kook, Texan unfortunately, says there is no freedom from religion. My, my, what the founding fathers would think about these morons today!

    http://www.rawstory.com/rs/2015/03/gop-lawmaker-air-force-cadets-must-pledge-to-god-because-there-is-no-freedom-from-religion/

    • flypusher says:

      That’s what I find so annoying about so many Christians, that they insist that everything revolve around and reaffirm and endorse their beliefs. How about giving the cadets a choice about whether they invoke God in their pledge? Then everyone will have their freedom.

      As for freedom FROM religion, you absolutely do have it in that no one is supposed to be able to force you to join a religion, or require you to swear on the Bible or invoke God in a pledge if you don’t want to. So this guy is dead wrong. But any atheist with an expectation of never being exposed to others publically expressing religious beliefs is equally wrong. So ignore it/ decline participation if it isn’t truly hurting you.

      • johngalt says:

        “no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States.”

        Article VI, U.S. Constitution.

      • 1mime says:

        GOP bill to force allegiance to God in pledges……

        Are you noticing how many of these wingnuts hail from Texas? So much for one state rule and evangelical sanity.

  4. johngalt says:

    Our friend Mr. Cruz apparently forgot to do some due diligence on the internet before announcing he was going to run for president.
    http://www.tedcruz.com

  5. vikinghou says:

    Chris’ post is also relevant in the context of the Alberta tar sands and the Keystone XL pipeline. The economics are dicey at current oil prices but, given the huge Canadian investment in the area, it’s essentially “too big to fail.”

    • RobA says:

      As a native Canadian, I’m pretty familiar with the oil sands Viking. It was my understandding that due to bottlenecks and transportation restraints, oil sands producers typically sell their oil at a huge discount, something like 20-30% relative to WTI. I believe Keystone is supposed to close that gap, enabling oil sands producers to sell at much closer to WTI.

      That said, there’s a good chance that if they could sell their oil even at todays price of $45ish, they would be doing better then they were.

      • 1mime says:

        And, RobA, why doesn’t Canada pipe their crude oil across theirown land to their own refineries and distribute via their own western ports?

  6. Turtles Run says:

    Ted Cruz is officially running for President

    ~Popping popcorn~

    ~setting up lawn chairs~

    Well guys I am set up for the next GOP Presidential primary cycle, Don’t worry I brought extra barf bags and a big jar of Xanax

    • Houston-stay-at-Homer says:

      Eh…not too best out of shape over Ted running (Ted winning would bend me out of shape).

      Dennis Kucinich and Al Sharpton have run as Democrats, so the other party’s clown car is almost as roomy on the inside.

      I’m a little more concerned that Ted is signaling that maybe he is the long rumored Manchurian candidate.

      When your campaign sign is an upside down burning American flag…

      • objv says:

        Have I mentioned that I LOVE Ted Cruz?

      • 1mime says:

        Love Ted Cruz?

        That speaks volumes, Ob.

      • Turtles Run says:

        Homer

        The left definitely has its own clown car but there is one major difference. The right wing allows its kooks to drive. No one gives two squirts what Sharpton or Kucinich think or say. The far right tends to be more successful at pulling the Republican candidates further from the center. We can see the left wingers now trying to move Hillary to the left but they will not drive her over the cliff like Romney.

      • vikinghou says:

        Let’s face it, America isn’t ready for another President from Texas.

      • texan5142 says:

        objv says:
        March 23, 2015 at 11:33 am
        Have I mentioned that I LOVE Ted Cruz?

        Why? What has he done? Besides obstruct, name some of his accomplishments that have benefited the country as a whole.

      • objv says:

        It saddens me to see such anti-Hispanic sentiment. There can be no other explanation for the vitriol directed toward Cruz.

      • 1mime says:

        Anti-Hispanic? Not on your life. Please justify your love as to what has Cruz accomplished positively.

      • texan5142 says:

        objv says:
        March 23, 2015 at 12:44 pm
        It saddens me to see such anti-Hispanic sentiment. There can be no other explanation for the vitriol directed toward Cruz.

        There are plenty of explanations, you just do not see it. Pulling the race card out early there objv.

      • Turtles Run says:

        “It saddens me to see such anti-Hispanic sentiment. There can be no other explanation for the vitriol directed toward Cruz.”

        At least no explanation you are willing to see with those partisan blinders you are wearing.

      • objv says:

        Sweeties, I was being sarcastic. Republicans are constantly being told that their animosity toward Obama is due to racism. The tables have turned.

        Cruz is extremely intelligent and his forceful personality would do much to repair the reputation of the US among world leaders. Obama is milquetoast in comparison.

      • 1mime says:

        Your ideas of seeing Cruz as an intelligent, personable potential President and world leader leaves me utterly cold. We have such fundamental differences of opinion as to what constitutes character, leadership and intelligence that words are insufficient.

      • johngalt says:

        objv is trolling, trying to make a comparison with those who claim Obama opponents are racists.

      • Houston-stay-at-Homer says:

        I would love Ted Cruz…but he doesn’t seem to want love from a dude:

        “I support traditional marriage…The State Marriage Defense Act helps safeguard the ability of states to preserve traditional marriage for their citizens,”

        It would effectively nullify the marriages of same-sex couples who married in one state and moved to another state where such unions were illegal. Currently, the federal government recognizes, and provides many benefits for, same-sex couples married in a state where gay marriage is legal, no matter where they move.

        You wacky gay folks may be able to get married in liberal Iowa, but you can just forget about getting social security benefits, filing taxes as a married person, or any of that other communist gay stuff here in Texas.

      • objv says:

        Homer, It shouldn’t really matter to you what Ted Cruz thinks about gay marriage since he also believes that it is a matter for the Supreme Court and the states to decide. Remember that “dude” Obama? He was against gay marriage, too. The court – not a politician will eventually make the decision about gay marriage.

        ———————————–

        “I support traditional marriage between one man and one woman,” Cruz said after speaking to the Richardson Chamber of Commerce. “The Constitution leaves it to the states to decide upon marriage and I hope the Supreme Court respects centuries of tradition and doesn’t step into the process of setting aside state laws that make the definition of marriage.”

      • objv says:

        JG, I’m not really trolling to get a reaction. I’m trying to make the others think. Just last night on TV, I saw someone blathering on about Republicans hating Obama because he’s black. You know those kind of attacks have been constant.

        What I don’t understand is why liberals are especially harsh on Republican, minority candidates. Cruz and Carson are in for some brutal attacks. Why is that? Do Democrats feel that they own the minority vote? Do they feel that conservative, minority candidates are some kind of threat?

      • objv says:

        Here’s another example of Democrats blaming the delay confirming Loretta Lynch on racism. What’s rich is that Republicans had no problem with Colin Powell and Condoleezza Rice.

        http://www.thedailybeast.com/articles/2015/03/19/how-dem-race-accusations-on-lynch-could-backfire.html

      • RobA says:

        I don’t think Cruz thinks he can win, which is why he’s doing the unusual move of announcing now. I don’t know the ins and outs of campaign finance, but I believe there is a huge advantage for waiting a few weeks. He would have been able to cash $1 million checks until he announced, but now that he’s official, he’s capped at $1500 or something.

        So as a strategic move, it doesn’t make a lot of sense for a serious contender. I think he just thinks it’ll be great PR for him to be the only one campaigning for a month or so, and I believe he also fancies himself a kkingmaker, and is using that to increase his influence in the party.

      • Houston-stay-at-Homer says:

        Obj…the “state’s rights” people also claimed that Virginia had the right to deny marriage to interracial couples.

      • objv says:

        Homer, So are you telling me this is all about those horrible “states rights people?” Is it a conspiracy passed down through the generations and now targeting gays?

        Legally, it doesn’t matter what you, me, Cruz or the guy down the street mowing his lawn thinks. The courts will decide – not Cruz.

      • 1mime says:

        “the court will decide”

        THIS SCOTUS? Humph. They may rule in favor just so they can balance their defeat of the ACA. I wouldn’t put anything past this “august” group (of men)

      • bubbabobcat says:

        Didn’t all the wingnuts say Obama was a not quite one term senator and had no experience whatsoever and unqualified when he ran for President?

        Well now we have Ted Cruz who has not even served halfway into his first Senate term announcing his candidacy for President.

        Cricket regarding concerns about experience here from the wingnuts. Hmmmm.

        Besides your penchance for abject hypocrisy and admitted pleasure in trolling OV, it is clear cut why such hypocrisy is flagrantly on display. Wingnuts don’t like the Black guy in charge.

        Busted OV.

      • Houston-stay-at-Homer says:

        Obj….I’m not sure why it has to be a conspiracy passed down through generations.

        It is simply bigoted people attempting to deny rights to people they find objectionable.

        I don’t think bigotry has to be a conspiracy.

        To your last point of whether or not it would be up to Cruz:
        Folks who talk about loving Ted seem to focus on his love and following of the Constitution, and here is this Constitutional scholar touting as one of his strong selling points the fact that he supports a law and a constitutional amendment on this specific issue.

      • johngalt says:

        “What I don’t understand is why liberals are especially harsh on Republican, minority candidates.”

        I think there are some idiots who see minority Republicans as “Uncle Toms” and possibly some minorities themselves who see them as “Oreos” or whatever similar slur. I have no more patience for those sorts of attitudes than I do racist attitudes from whites.

        I don’t really even see Cruz as a minority. For right or wrong, Americans of Cuban descent occupy a slightly different spectrum than other Hispanics, largely because they are seen here as political, rather than economic, migrants. His Cuban heritage certainly plays no role in my opposition to his pointlessly destructive demagoguery. I think I could like Marco Rubio. He’s a bit inexperienced yet, but he has potential. Ben Carson, well I’m disappointed that a physician (and, by all accounts, a damn good one), could make some of the comments he makes. But I’m disappointed in at least some of the things that most politicians say.

        As for Obama, it’s pretty undeniable that there has been a vehement and virtually unprecedented antipathy towards him personally and politically and this has played out in what is to me a shameful pattern of obstructionism from the GOP. While there are certainly logical reasons why one might oppose his policies, it’s hard not to see something else at work in at least some people. The “birther” nonsense, which was very popular at one point, was about Obama being a Kenyan-born Muslim. In other words, ***he’s not one of us***. Meanwhile, nary a whisper was uttered on the right that his 2008 opponent actually WAS born outside the United States. Give me another plausible explanation beyond racial bias (whether overt of subconscious) why a Hawaiian-born African-American spawned so many conspiracy theories while a Panamanian-born old white guy did not?

      • 1mime says:

        Good answer, JG. We all know what’s involved here. Me thinks the lady doth protest too much………

      • flypusher says:

        “Sweeties, I was being sarcastic. Republicans are constantly being told that their animosity toward Obama is due to racism. The tables have turned.”

        Objv, when a substantial subset of GOPers/ righties are blathering about the birth certificate, or how Obama is a Muslim, or not a true red-blooded America-loving American, or any similar crap, then yeah, some as us see that as exactly code for the N-word that they dare not speak.

        For those who stick strictly to critiquing policy, I’ll give them the benefit of the doubt as far as racism goes.

      • Turtles Run says:

        Best part of Cruz’s announcement is that attendance was mandatory by students or they would face a $10 fine. A few attendees decided to wear Rand Paul shirts to protest the action by the university.

        http://www.nationaljournal.com/2016-elections/students-stand-with-rand-cruz-20150323.

      • flypusher says:

        I could feel sympathy for those students, but they chose to attend that college. But I totally approve of their protest method.

  7. texan5142 says:

    Happy April fools day everyone, the GOP is gonna need a bigger clown car Chris.

  8. Doug says:

    “For more than a decade as production has consistently outpaced demand, steadily expanding capacity at the main storage facility in Cushing has allowed traders to cheaply store unsold oil contracts, waiting for better conditions.”

    Maybe I’m misreading this, but it seems like you’re saying that production has exceeded demand for a decade and Cushing has been storing the excess. Even with the recent expansion, Cushing’s capacity is only 75 million barrels, well under 1/2 of 1% of US production over that time. Clearly storage is a short term strategy, and production can not exceed demand for long. The vast majority of oil goes straight from the ground to the refinery.

    • Turtles Run says:

      Doug – The increase in storage does negatively impact crude pricing. Refineries are currently under-utilizing their capacity but if the differentials between NYMEX WTI vs ICE Brent continues to spread I do expect them ramp up production to sell to European markets. But I doubt their increase usage will stop the increase in crude supplies.

      A couple of factors to consider

      – Once oil field strike ends an additional 1.3MM barrels a day of extra crude will hit the market
      – Producers often do not want to shut down wells because there is no guarantee they will get to reopen that well (someone else takes crude reserves).

      The next couple of months are going to be interesting and will tell us if we are farked or not.

      • vikinghou says:

        Another factor to consider is the steep production decline curves associated with wells that produce from shale.

    • goplifer says:

      Yes, I am stating that production has been outrunning demand for more than a decade. That strange situation is driven primarily by distortions rising from the financialization of the commodities industry following deregulation in 2000 & 2002.

      This is a difficult thing to measure. We tend to measure oil consumption by measuring oil demand – in other words, by measuring transactions. From an FT article, here’s the problem in a nutshell:

      “Measuring oil in and out of the country doesn’t tell you how much it is actually using.”
      http://blogs.ft.com/beyond-brics/2013/02/13/how-do-you-measure-chinas-oil-demand-the-iea-goes-from-error-to-error/

      That “actually using” bit gets interesting when you look at the parts of the world that are relatively transparent, like US oil production and consumption. At the peak of oil prices in the aughts, storage facilities in the US were simultaneously straining to find places to put the stuff. That 07-09 period was the first time that hedge funds got into the business of oil storage on tankers in any mass way. Prices seem to be more influenced by forces in capital markets than by consumer markets.

      Commodities markets have disconnected supply from demand to a troubling extent, in much the same way as they did in mortgage markets a decade ago. More:

      http://blog.chron.com/goplifer/2011/06/drilling-wont-help/

      • Doug says:

        Using extremely conservative numbers, if overproduction was even 5% over the decade there should be over 10 billion barrels stashed somewhere. US inventories, at record levels due to the recent run up, are less than 5% of that. Where is the rest?

      • goplifer says:

        I’m claiming that you’re looking at the wrong numbers. Oil eventually gets consumed or stored. The reason that capacity at Cushing has been growing steadily since deregulation is that ***the amount of time it takes to complete that cycle has been steadily extending.***

        It used to be an unusual thing for speculators to have to take delivery of an oil contract at all. It was something that happened when you made a bad bet. It has become a standard practice. It means that a 6 month contract cycle often gets extended out to seven or nine months or longer to avoid being forced to dump a contract. Cushing is supposed to be a short term turnaround station, the place where the pipelines end and trucking/rail begins. It wasn’t supposed to be reserve. That’s a new development that has accompanied mass speculation. That mass speculation has distorted oil prices, pushing them above what the supply/demand curve would otherwise dictate.

        We currently produce roughly 250m barrels of crude oil a month (still climbing by the way). At Cushing alone we are warehousing more than 50m. A turnaround station for contract fulfillment has developed into our largest domestic reserve outside the strategic reserve. That’s weird and it’s a product of a new speculative structure for the commodities market, not a supply/demand issue.

      • Doug says:

        What numbers am I to look at? As much as it’s grown, Cushing still represents less than a week of production. As your own post says, storage only takes you so far. Once everything is full, the price is coming down, and nobody can stop it. If storage is keeping the price up when oil goes in, it lowers the price when it comes out. Speculation cannot keep prices consistently high. It can smooth the bumps.

      • johngalt says:

        I’m with Doug here. I don’t dispute that the commodities markets have at least as much to do with prices as supply and demand, but as you say, “Oil eventually gets consumed or stored.” The storage at Cushing is a small fraction of even domestic production, so the oil stored there is only there temporarily. It is eventually being used to replace imports (imports are 25% below the 2005 peak).

        To what degree are oil imports governed by long term contracts (slow to respond to changes in demand or domestic production) versus spot markets (fast responding)? Can that explain some of the excess storage and differences between WTI and Brent?

      • Doug says:

        Speculators always get the blame when prices aren’t what one side or the other wants. Even for onions: http://www.cato.org/blog/onions-oil-speculators

    • goplifer says:

      I should point out also that I thought Phil Gramm’s proposals to deregulate commodities markets were a great idea. Enron was the first nasty hint that I and a lot of other people had been terribly wrong. Been watching this mess unfold with some interest for a long time now. It may sort itself out eventually, but for now commodities markets are a disaster.

      • 1mime says:

        Phil Grahm’s proposals to deregulate commodities. Too bad his wife was on Enron’s board…kind of tainted the process, didn’t it?

  9. Xeranar says:

    The Saudis would rather pump it out now and keep their cartel alive for a bit longer. There in a position where within their children’s lifespan their world-dominating resource will become just another precious commodity. It’s complicated to really understand the Saudi’s issues until you realize that this is more than about their money, it’s about their power. Without having a stranglehold on oil and the power that it brings their regional monopoly begins to fall and that’s the bigger issue.

    On the surface we tend to talk about OPEC and oil in general in this discussion of high-finance and international alliances. It’s really just about Saudi Arabia and how they can keep their fiefdom happy for another generation or two. Nearly everything they’ve done has been to keep that fiefdom safe up to and including paying off homegrown terrorists to play elsewhere. The traders in the oil market know more so that buying now while it’s devastatingly cheap is good because of the reserves that can be held and eventually sold off at $150/bbl again, but they don’t realize that as long as the small frackers are in the game and Saudi Arabia needs to absolutely drive a stake in them to keep from having to do this every 3-5 years over the next 30-40 years it’s going to be a long haul. We’re not going to see oil rise in price for atleast another year or two and that’s going to really hurt the oil industry but be great for consumers in the short-term.

    To sum it up for the TL;DR crowd: Saudi Arabia is playing for keeps, don’t expect cheap storage to outlast them in this game. We could see $1-2 gas for the next year or so.

    • johngalt says:

      This explanation, which has been frequently aired, makes no sense. What you’re arguing is that the Saudis, after being happy to coexist with BP, Exxon, Statoil, and the rest, are now existentially threatened by fracking. The Saudis can’t drive out the frackers, they can only put them on the shelf for a while. Sure, some companies will go out of business, but the expertise, equipment and reserves continue to exist. The price pressure creates incentives to make fracking more efficient (and therefore cheaper) and once it is competitive again, the capital exists to restart. So by driving the price down, the Saudis are incentivizing even fiercer competition. Possibly, they think they’ll keep at this for years or decades, continuing to lower their prices until they hit their production cost floor, but this will cost them a lot of the money they use to placate their population.

      I think geopolitics is a much more likely explanation. The Saudis are no friends of Russia or Iran, the two countries most affected by low oil prices (Venezuela, too, but it’s screwed regardless of oil prices). Those two countries suddenly become much less able to advance their political agendas at $50/barrel. I think the U.S. and Saudi are in cahoots about this.

      • 1mime says:

        Good point about Russia and Iran, JG. Geopolitics is fascinating. All America needs is a President Cruz to restore respect and be the intelligent voice of reason. I can’t wait.

      • RobA says:

        It may not be all about money. Saudi Arabia has benefited enormously from American friendship. And, if we’re honest with ourselves, that friendship is more about the need for America to have allies in the middle east. Oil was and is the absolute lifeblood of the American economy, and it was not acceptable to make enemies with the one country that can bring you to your knees.

        As America needs less and less imported oil, the obsession with the middle east lessens, and American patronage of SA lessens, considerably hurting their international standing.

        It wouldn’t surprise me if THAT”S what the Saudis find so threatening about the American fracking boom.

      • Bobo Amerigo says:

        –I think the U.S. and Saudi are in cahoots about this.–

        I’m with you, J.G.

      • Xeranar says:

        Saudi Arabia makes money on a barrel of oil around $20 still. Sure, prices can rise again but if you can break the back of frackers over the next 2-3 years that equipment you marvel about will be nothing more than rusting junk in a field. The expertise will exist but they’ll be back to driving trucks, maybe wildcatting, move on to construction….see where I’m going? Even if the small investment funds return to get back in the game (and they will) getting that back into the game at the rate they were going will take several years.

        Basically SA is banking on crushing frackers for more than a decade rather than just bleeding them off. It’s the difference between draining the tub and just keeping it from overflowing. It takes much longer to drain the tub to the bottom but once its done you have a fairly long time before it runs the risk of overflowing once more.

        As for SA suddenly caring what Russia or Iran do? You do realize while SA may not LOVE Iran they’re much closer allies than you realize. In general SA uses Iran and to a lesser extent Iraq to keep the public disinterested in their affairs. Russia isn’t even selling in the same markets really and while Russia is an existential threat to SA’s oil dominance the oil coming from Russia can’t compete at the same price point anyways. Sweet crude from SA is pretty much a world standard. If US was involved in geopolitics with SA to drive down the price of oil it wouldn’t be doing it when frackers were so critical to the economies of several states. No, this is all about SA trying to break the back of frackers plain and simple.

  10. vikinghou says:

    This is my 40th year in the “oil bidness,” working as a petroleum engineer. Needless to say this isn’t my first time at the rodeo. This time it’s different because, for the first time, renewable energy is a significant factor in the energy equation.

    Renewables do not complete in the same market as oil (yet). Oil is mainly used for transport, while renewables are used for electricity generation.

    However, natural gas does compete with renewables and, if a natural gas glut appears, solar an wind power development may be slowed. But the pace of technical improvement in the solar arena is remarkable (not unlike Moore’s Law in the realm of semiconductors), and cost parity with fossil fuels may be achievable soon even without tax incentives (which we can expect the GOP Congress to abolish). Bottom line, if I were an engineering student today, I would not choose petroleum engineering as a specialty.

    A good summary may be found in the NYT article linked below.

    http://www.nytimes.com/2014/11/24/business/energy-environment/solar-and-wind-energy-start-to-win-on-price-vs-conventional-fuels.html

    “According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.

    “It is really quite notable, when compared to where we were just five years ago, to see the decline in the cost of these technologies,” said Jonathan Mir, a managing director at Lazard, which has been comparing the economics of power generation technologies since 2008.”

    • Bobo Amerigo says:

      And do you think the investments of the U.S. gov in alternative energies played a role in lowering their costs?

      • RobA says:

        I think it definitely did.

        To lower costs in any technology requires sizeable investment in R & D. To justify those initial costs, a big market needs to exist to sell the finished product too. But the market won’t exist at the initial high costs.

        It’s a classic catch 22: A product needs a market to justify investing in r&d. But without the r&d bringing costs down, there is no market.

        Governments role in such a situation (especially when the tech in question has wide ranging social benefits) is to “artificially” create a market in the tech in question by way of subsidies, which allows companies to justify research costs, which lowers price enough so that subsidies are no longer needed.

        In a perfect world, of course. Many subsidies have unintended consequences or loopholes which render them less then ideally effective.

      • 1mime says:

        Bobo – Gov’t investment in alternative energies…..Of course! But you’d think the fossil fuel industry had never benefited from gov’t investment! Think of the discoveries made by NASA, and the Defense Department to name two more areas of great tax dollar investment return.

      • 1mime says:

        Another point about alternative energy – it will be the fuel of the future because it’s cleaner for the world and will be more competitively priced over time. One thing I have read about is the whole home battery premised on the Tesla car batter research. The future in energy is amazingly interesting. But, I agree, Viking, engineering with a focus on sustainability might be a better career path for the future.

      • Xeranar says:

        Well if we look at the layout of the US Navy’s oil costs they alone consume multiple factors of alternative energy supplements annually. It’s akin to asking if solar got a nickel while oil got the mortgage payment.

    • Bobo Amerigo says:

      So viking, as you’re in the bidness, do you agree with 1 mime and RobA?

      • vikinghou says:

        Bobo,

        Yes, I agree with 1mime and RobA. Throughout our history, the public sector has supported technological and industrial advances that the private sector could not afford to accomplish by itself. Then, the private sector takes over. As 1mime pointed out, one of the most visible examples is NASA. Today, Boeing and SpaceX are stepping in as private entities with the capability of launching people into low-earth orbit.

        It is important to point out that the American fossil fuel industry still receives lavish Federal subsidies in the form of tax breaks and, especially, the allotment of royalty-free licenses to produce oil and gas on Federal lands and offshore holdings. Corporate welfare at its finest.

      • 1mime says:

        “the American fossil fuel industry still receives lavish Federal subsidies in the form of tax breaks and, especially, the allotment of royalty-free licenses to produce oil and gas on Federal lands and offshore holdings. ”

        ….A seldom acknowledged fact by conservatives who love to squeal about any support to alternative energy development, although the broader energy sector (service/supplies) does not benefit similarly. It’s another reason why removing tax loopholes is going to be such a fight. There are all these “stealth” benefits in play in this industry and others. The fossil fuel industry will cede more and more market share to alternative energy sources as its developmen, interest and profitability increase. And, the world will have a cleaner environment for doing so at lower cost. Right now, there is a need for both as America still imports approximately 80% of its gross petroleum supply. Fossil fuel has had a long run.

      • vikinghou says:

        One more thing….

        In the realm of renewables, the US is not the technological leader. The Chinese dominate solar energy—they currently have about 60% of the market. Wind turbine design and production is dominated by the Europeans (Denmark, Germany, Sweden and Spain). There are US companies that produce solar panels and wind turbines. Solar World is the largest US manufacturer, but it’s owned by the Germans. GE makes wind turbines but has a small market share. We basically dropped the ball, as symbolically illustrated when Reagan had Carter’s solar panels removed from the White House.

      • johngalt says:

        A couple of points. First the Chinese are by no means the technological leaders in solar panel design. They are the production leaders, sure, and this scale has reduced manufacturing costs, but this is not the same as leading technically.

        Second, given the cost competitiveness, Congress should pass a long-term (multi-year) plan to gradually phase out subsidies for alternative energy generation. Something that makes the long-term economics predictable. Of course, the various fossil fuel subsidies should also be phased out.

      • Bobo Amerigo says:

        J.G. said:

        –Of course, the various fossil fuel subsidies should also be phased out.–

        Would polluted air be included, phased out? To me, that’s the biggest subsidy fossil fuels get. And the most damaging.

        We, the taxpayers, pay for our own ill health. That’s just crapiola.

      • 1mime says:

        Would polluted air be phased out too?

        How about water contamination? Another spill today in the Galveston shipping channel…How many contaminated rivers, lakes, ponds, ditches, water tables will it take to ruin this fine planet?

      • johngalt says:

        I have previously posted that externalities such as air/water pollution resulting from fossil fuel use (or indeed, any fuel source) should be recouped via appropriate taxes on the fuel. In the case of oil, this could be partly from increased gasoline taxes dedicated to anything from pollution mitigation to relieving traffic congestion.

      • 1mime says:

        “costs could be recouped from gasoline tax”

        I can just hear Grover Norquist starting to growl………..

        While we’re dreaming about rational environment funding, what about a carbon tax, John?

      • Bobo Amerigo says:

        I don’t see how that helps the people who have inhaled the bad stuff. Why not put the ‘tax’ up front, before the product sickens people?

      • johngalt says:

        Up front how? Do you want to tax people’s thoughts about driving? Gas is a “normal good” in economic-speak. Higher prices (achieved through higher taxes) will reduce demand. Consumers will use less and seek alternatives (higher mileage cars, electric/hybrid vehicles). An economy-wide carbon tax would promote renewable/clean fuel sources while recouping some of the costs associated with fossil fuel use that are currently born by society at large (and mostly by poorer members of society).

      • objv says:

        JG, I really do like the idea of solar and would like to eventually buy solar panels for my house. I’ve already replaced almost all of the light fixtures with either LED or fluorescent bulbs. Saving energy is good for the environment. No argument there.

        However, as more people go solar, those that stay connected to the grid bear an increasing cost for electricity. Solar panels cost around $30,000 to install and currently only the well off can afford the conversion. An article I read (can’t remember where-probably the Washington Post), said that areas where solar panels are becoming more prevalent have already seen rates rise for those without panels.

        I do hope that solar will be increasingly used, but as it stands, the poor and middle class will bear a disproportionate burden for the costs and I don’t know the solution other than vast subsidies.

        I recently bought a Yeti generator and a solar panel to go camping in April. I’m hoping to generate enough solar energy to charge the family mobile phones and tablets. 🙂

      • goplifer says:

        You nailed that one. I’ve been mulling a piece about it. Solar is actually destabilizing the economic assumptions that our electrical grid is built on. It’s a fascinating study in unintended consequences.

        It’s not that solar is a bad idea, but it’s a pretty major evolutionary step. We need to adapt.

      • 1mime says:

        “solar upending conventional energy system”

        A friend who lives in NJ, (that bastion of innovation) just installed solar panels on her her in a most affordable way. Seems the local electricity provider is offering the panel installation at very reasonable prices which can be paid out over time, and they handle all the installation process as well. Guess they’ve adopted a “if you can’t lick em, join em philosophy”. In any case, the utility has made it not only easy but spread out the payments so as to make them affordable, with the savings from kilowatt usage offsetting the cost of the solar payments.

        As for the poor not being able to afford solar, the poor manage as they always have. Without. Choices are for others. The rest, make do. We should all experience their world from time to time to ground our sense of reality.

      • johngalt says:

        You don’t actually have to buy them, objv. My neighbor works for a company that installs residential solar systems at no or very little upfront cost, then leases them to the homeowner for a long term, like 20 years. The economics would depend on how much electricity you use currently, how sunny it is (New Mexico ought to be prime territory), and current utility rates versus their lease costs.

        The answer to the grid problem is to charge a fixed fee to anyone wishing to hook up to it, which is pretty much already happening. Very few people would disconnect completely. Alternatively, the grid itself could be maintained as a public utility (under a government contract, say) and paid for by taxes with companies guaranteed a decent return for keeping the peak use generating capacity online.

      • vikinghou says:

        In an earlier thread a posted a link concerning the power utilities’ dilemma with regard to solar. In case you missed it, here it is again.

        http://www.bloomberg.com/bw/articles/2013-08-22/homegrown-green-energy-is-making-power-utilities-irrelevant#p1

      • 1mime says:

        And, RobA, why doesn’t Canada pipe their crude oil across theirown land to their own refineries and distribute via their own western ports?

      • 1mime says:

        My error in domestic oil imports – 20% is the correct figure, not 80%. Sorry all. Fingers and brain not linking here (-: (it happens…..)

  11. way2gosassy says:

    What is your thinking on the games played by oil markets to artificially manipulate prices?

    • RobA says:

      How do you mean?

      I don’t see how a commodity could be manipulated in the same way some stocks can.

      well, that’s not exactly correct, you could probably manipulate a thinly traded commodity with a small market. You could probably manipulate the Non Fat Dry Milk futures market, or Malaysian Palm Oil futures market, but with oil being one of the biggest markets in the world, it’s not really possible. At least, not with money.

      Producers can manipulate by increasing or reducing production, but even OPEC has lost much of their ability to dictate prices. Mostly because the countries that comprise it don’t have a diversified economy and are entirely dependent on oil revenues to fund their government, making it all but impossible to stop cheating on production quotas.

      • 1mime says:

        Rob A, don’t forget the electricity market manipulation not long ago. And, to pursue your question about price manipulation a little further, I have read about investors recently buying up oil and storing wherever possible given its cheap price and potential for profit by simply holding it until market conditions are more favorable. Of course, as Lifer points out, storage capacity will probably nip that in the bud but there has been speculation in that way.

        Another interesting question is the one being considered by Congress now: with domestic supply exceeding demand, is now the time to export crude products? Boy, that’s tantalizing and certain to prompt healthy debate….as it should.

      • RobA says:

        1mime that is true, I remember it was a big part of the brilliant enron doc Smartest Guys in the Room.

        That was, I believe, mostly in California after they deregulated the electricity market.

      • Doug says:

        In very rough numbers, we use 20 million barrels a day, produce 10 and import 10. The US is nowhere near energy independent, and will be a net importer for a while yet, if not forever.

        However, due to the way many refineries are set up, it would make sense to export the abundance of light sweet crude while importing heavy sour that the refineries are set up for. I don’t expect much sense to come from Congress, though.

      • Crogged says:

        Electricity manipulation occurred because electricity can’t be stored (on a ‘wholesale’ level) and is not a fungible, thus you have to completely create a product and the rules by which it is sold–the participants figure out the market, the regulators are always behind. The rules California set up for its market were manipulated, and not only by those terrible energy marketers.

  12. lomamonster says:

    To further complicate the situation, laid off oil workers here in the U.S. are being recruited by the Saudis and are arriving with the latest fracking technologies developed by our country. So maybe we need to say adios to Tesla in the same breath and fill our swimming pools with oil to participate in the final throws of Mother Earth’s climate woes.

    • rightonrush says:

      HOUSTON — Affiliates of terrorist groups may be planning to kidnap Western oil workers in Saudi Arabia, the U.S. embassy in Saudi Arabia warned over the weekend.

      The report from the embassy suggests that U.S. oil workers in the country’s Eastern Province could be at risk but acknowledged U.S. authorities have ”no further information on the timing, target, location or method of any planned attacks.”

      The most recent warnings followed a March 7 announcement that the embassy was aware of terrorists targeting Chevron employees in Saudi Arabia for possible attack.

      The State Department urged American citizens to consider the risks of traveling to Saudi Arabia and limit non-essential travel within the country.
      http://fuelfix.com/blog/2015/03/16/government-warns-of-kidnapping-plot-against-western-oil-workers-in-saudi-arabia/

    • 1mime says:

      fill our swimming pools with oil…………

      (-: Good one!

      Don’t forget salt dome oil storage. America’s strategic reserves are held in these cavernous underground areas. They too may be at capacity (don’t know answer to that) but they do provide the world’s cheapest storage…..until directional drilling makes a errant hole in it!

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