The shortsightedness of this article (and I guess business analysts in general) is breathtaking. Isolated, it might be positive for consumers, but any increase in the consumption of oil due to low prices should be feared. Celebrating Chinese buying more SUVs, the worst automotive fashion in the last two decades? Yeah, great.
We'll pay for these short term wealth transfers with a further uptick in warming and a huge shock in the future when no one's saving energy any more, renewable energy installations have come to a standstill and oil rapidly becomes more expensive again.
> The shortsightedness of this article [...] is breathtaking. [...] Celebrating Chinese buying more SUVs, the worst automotive fashion in the last two decades? Yeah, great.
Did we read the same article? There are many consequences for the oil crash. The article doesn't claim to rank all consequences - it just reports on a BofA study about the size of the wealth transfer. It also cites an increase in Chinese SUV purchases. Since when is reporting on facts equivalent to "celebrating" them?
You are right and the reporter should not have been the target of my anger. The analyst's statement is for me a symptom of what's wrong in our consumer society, but I cannot blame him personally for doing what he's paid to do: identifying investment opportunities and exploring future economic consequences of today's events.
Here's where my rage came from: (i) we cannot go on like this. We as a western society started with baby steps towards a future with a smaller ecological footprint. This was obviously also triggered by the last oil shock. (ii) we know that we cannot go on like this, yet many of our decisions are made considering only a single proxy of societal well-being, money.
The analyst states correctly "that's where money can be made, BMW will profit!". Yet for global society, it's a disastrous direction.
If you're investing on a longer-term horizon (a year or more), the monthly futures roll where the USO fund sells the current month's oil contracts (because it doesn't want the actual oil to be delivered) and buys the following month's oil futures (normally at a higher price than what it sold the current month's at) will eat into any returns you get from price appreciation.
To put some numbers to the example, let's say the fund has 100 barrels of oil, and the current month's price is $20, and next month is $21. When it rolls the contracts, it sells 100 barrels for $2000, and buys 95 barrels, with $5 left over.
Fast forward a month. Prices have gone up by $1 for all months oil. It will sell 95 barrels for $22 ($2090, plus the prior month's leftover $5) and buy 91 barrels for $23, with $2 left over.
Fast forward another month. Let's say you owned the entire fund and decided to liquidate it. Prices for your contract have gone up another $1, so you sell your 91 barrels for $24, receiving $2184, and adding the extra $2 in cash you had gives you $2186. That's a 9.3% return in two months.
Compare that to the price of oil as reported in the news - it's the front month contract, so on the face of it, oil has gone from $20 to $24 (20% increase) while you've only made 9.3%.
The numbers are somewhat exaggerated here, and it can work the other way (current month more expensive than forward month) but is uncommon. This is why USO has historically been a bad long-term proxy for the price of oil.
Note that this is SUPER RISKY investment fund. If you look at the chart it has major swings up and down. The fund is down 20% for 2016 (yikes!). But if you had held it from 2012 -> 2014 you would have gotten a 40% return on your investment.
I like Vanguard funds since they have a low management cost to them and they tend to be a little more conservative in their selection.
Good luck, remember me when you make your million!
I just exchanged a bunch of other funds for VGENX. These companies are some of the most profitable in history. Even with the recent massive price collapse, this fund has outperformed the market since 1984.
USO is an ETF based off of a basket of futures contracts. The problem with owning USO is that there is basically inefficiency when rolling futures contracts and there is a some decay in the price. If you truly want to play in oil, best to use the futures themselves. Futures are the highest leverage instruments available, so be careful to note their size, but there is nothing more risky about futures than the equivalent notional value of stocks.
Be careful, though, because when oil reaches its end game, the price will fall and never come back up. Are we there yet? Or is this just temporary drop? There's no way to know, now.
Wait, wouldn't the scarcity of oil force a premium on the price? Wouldn't a dwindling resource with lots of legacy uses and equipment requiring it command even higher prices than when it's abundant?
The oil end game isn't that we run out; its we find something better (electric cars) and oil loses its value and becomes a stranded asset in the ground.
Good for humanity, bad for O&G industries.
EDIT: I'm fairly confident this is the start of the end. The US Congress extended the production tax credit for renewables for 5 years, along with Tesla's Gigafactory ramping up production, which means we're going to be awash in renewable-generated power and have the capacity to store it (in cars, and in stationary storage).
Yes, that's what I meant. The oil game as we know it today--financially speaking--ends when future supplies are no longer considered to be the most important constraint on economic growth.
That's very hard to analyze because the issue is not just how oil is sourced and used, it is how people on average expect it to be sourced and used.
On the supply side, while producers like the Saudis are trying to undercut fracking with low prices now, they can't make people forget about fracking. If the Saudis try to raise prices again, then fracking becomes a viable competitor again.
On the demand site, the world is not going to forget about global warming. Population growth will keep slowing. Infrastructure will keep getting built and keep getting smarter.
At some point the supply and demand sides will diverge enough to knock oil from its privileged position as THE key resource for the economy. This is similar to earlier essential resources like food, clothing, water, shelter, mining, etc. We still spend a lot of money on these things, but there is no expectation that they are guaranteed growth industries.
The area I live in was supposed to be headed towards a fracking boom and it mostly fizzled. The combination of dropping prices and lower-than-expected output from test wells kept the drilling far more isolated than it was supposed to.
I suspect if prices rise again, those test wells may have proved to be profitable. However, the oil companies came through and leased tons of acreage already and spent lots of money on the leases. Even if prices come back, many of the leases would have either expired or the gas companies would have to pay for their extension provisions. Given the state of the companies that started leasing (CHK: down 86% since they leased my father-in-laws old farm property), I don't think they have the money to do that. Even if the original leaser sold the leases off, which happened in many cases, the new owner would still have to pony up the extension and then start drilling again, exposing themselves to OPEC under-cutting them again.
> The oil end game isn't that we run out; its we find something better (electric cars) and oil loses its value and becomes a stranded asset in the ground.
I think its about equally likely that the end game is that the price of oil (ultimately driven by energy to extract each unit) goes up until other things that are known are more cost effective for most uses; this doesn't make it "lose its value" -- the use value remains the same and the market clearing cost per unit is high -- but it shrinks the size of the market (there may be some uses for which it is still cost effective, but not as many) and is still bad for the oil & gas industry.
Once industries transition away from tooling that uses gas/oil, there will be significant cost to re-tooling back to using oil or gas. At this point oil/gas losses value because there is a barrier to using it. If all cars on the road are electric cars, then oil refined into gasoline won't see much use and the price will drop (relative to the costs to harvest it). It's not like a rise in the price of electricity will send people with 100% electric cars running to the gas pump.
Well, my point was that the 100% electric cars don't run on gas. They would have to purchase a new car to take advantage of the gas prices, which is a higher barrier than just choosing to fill up with "electric fuel" or "liquid fuel" when your car is running low.
Because the cheapest watt to generate is the one you didn't have to generate in the first place.
On the other hand, Texas has so much wind power locally that they can't ship out of the state yet that some utilities give power away for free at night:
That's an interesting argument, but as the p[rice drops, less companies will be willing to drill it, and that will provide an upward pressure from lack of supply, will it not? At some point I imagine it will stabilize at a new price (based on then demand), I guess the question is do we have models of something like this happening before?
We reached peak oil, it just wasn't supply. It was demand.
Nifty redefinition, but I take this to confirm that the Peak Oil aficionados were kooks, just as they seemed to be. They and Paul Ehrlich will eventually be joined by many others in my "confirmed kook" bucket, but so far my "strongly suspected kook" bucket seems pretty accurate too.
Agreed but I doubt we are anywhere close to this. The majority of the world's critical transportation infrastructure is oil powered and the sunk cost is massive. Electric vehicles are only a blip. Oil has decades left as the "rate limiting reagent" of the industrial world.
This is definitely a buying opportunity for those with the money to make such investments.
We're never going to stop using petroleum (for fertilizer, plastics, other chemicals, etc.), but hopefully we'll stop burning it for fuel. While marginal sources like tar sands could likely never be used, the rest will most likely be used for something. Unless there's some revolution in Genetic engineering that lets us make all of these useful products from microbes.
If you stand for delivery, you pay to store and insure it. If you don't stand for delivery, you pay contango to roll over the contracts. Going long commodities with uncertain date of sale always costs money.
You mean ETFs? If not, what is an "oil share"? Futures contracts have maturity dates. At the end you sell them (at a price you might not like), roll them over (not free or even necessarily cheap) or take delivery on the oil (also usually not cheap, depending on your facilities).
You could buy and hold until a stock went to zero, for example.
Edit: Whoever is downvoting obviously has never seen this happen. There was just an article about it on HN the other day, describing how Dragon lost it all when the company they sold to plummeted to zero stock value.
That's certainly what I'm up to. MLPs are on sale right now -- and they give interesting benefits (large guaranteed dividends and capital deprecation on your income tax forms) if you're willing to buy and hold. I'm aiming for 10 years to financial independence; I might get there in 5, with the way things are going right now.
I don't think there's much risk of bankruptcy for high-cap MLPs, and for low-cap ones the risk is priced into the stock (and then some). The price of oil has to recover sooner or later; the Saudis don't have an economy unless they have high oil prices, and they're the ones behind the current glut. Kuwait is already negotiating with OPEC and non-OPEC producers to raise oil prices again...
Renewable energy will have its time, when it is ready -- and that time is coming. By 'ready', I mean 'when it is cost competitive with other technologies'. I recently read that one Chinese solar manufacturer has achieved < $0.50/watt cost for PV module production, and it hasn't bottomed out yet. At the current rate of declining equipment prices, it doesn't matter how cheap oil is, eventually solar will be cheaper ... and when that happens, we will be living in a solar-first world faster than anyone can imagine.
The next question is how to deal with troughs in production due to the weather, and for that I really do hope we get back in the business of reactor innovation, because nuclear is the only option that provides the reliability of fuel-based power with 0 carbon output.
If the price of oil consumption keeps falling, that indicates high supply, which indicates that the "deadline" for non-fossil fuels is pushed further into the future, where there most-assuredly will be improved technology. One of our patent system's broken assumptions is that without economic incentive, no one will invent new technology. Mr. Jonas Salk would like a word with you, patent system. Breakthroughs in clean energy will continue, with or without economic incentive.
That's true, for the definition of "the environment" being: "the environment that humans and all of humanity's dependencies exist in currently."
That environment may or may not change dramatically(1), and humans and animals and plants as they exist now may not exist in the future, but I would guess that life in some form will survive, and if you define the environment to be "earth and its atmosphere," it will survive as well. It just may not have humans or animals or plants in it. Who knows.
(1) I'm not a climate scientist, but it seems like dramatic changes in our environment may well be guaranteed already. That said, I don't know for sure, so I'm being careful with my language.
I'm just trying to be a pragmatist. I am a staunch advocate of conservation and of the environment. I think those that have downvoted me have mistaken me for someone who is disagreeing with climatologists. However, that's on me for not communicating effectively. I should have made that stuff into a separate post or just not posted at all, lol.
What I'm saying is that it in the long run, humanity may well be doomed for the things we've put into play in the environment. That would be bad. I don't think that we'll kill off ALL living organisms. Earth will definitely survive, and I think that life on Earth will also likely survive. That life may well only be single celled organisms. Who knows.
I also conserve where I can - I heat my home with renewable fuel, for instance, installed a whole-house energy monitor to reduce consumption, upgraded to a 95% efficient backup furnace (most alt fuel heat is not as reliable as lpgas, unfortunately), and I'm going to pull the trigger on solar probably in 4-5 years (waiting a couple more tech generations). So in no way interpret the following to mean that I'm not for conservation where possible.
Having said that, like you, I think that people get extremely hung up on global warming without pragmatically looking at the environmental cost will be if it keeps going for another 50 years. Warming over the last 18 years has been minimal, and if we have similar warming for another 50 years, that would provide enough time for solar to become economical and efficient without pushing the second and third world back into poverty -- because let's face it: at this point in history, limiting carbon generation also limits the productive capacity of an economy, and lowers the standard of living for everyone involved.
Yes, we might have to move our farmland a bit north, lose a bit of coastal land area, and reduce biodiversity a bit. If this is the price to save millions of human lives through better nutrition, better medical care, better transportation, better housing, etc ... then in the short term, I think we need to proceed with any far-reaching carbon regulation with extreme caution.
Right now, I think that the most pragmatic and practical thing to do is research, improve, and build out nuclear power. Unfortunately, many of the same people who are staunchly anti-combustion (I can't say 'anti-fuel', since technically radioactive material is also fuel) are also anti-nuclear. To those people, living in this world, with the primitive energy storage tech that we have today -- without a hard dose of pragmatism you'd be living in the cold and dark during a Michigan winter, and I can tell you that -10f is COLD :( (we don't get a lot of sun and wind here during this time of the year)
After living with nuclear naysayers for decades (and rolling my eyes at them), I hate to be a nuclear naysayer myself; but there's been some use of "pumped hydro" for storing electricity generated by solar power.
The principle is simple: build a hydroelectric dam and run it in reverse. Of course, this can't be done everywhere; you need a lot of peak solar production, a lot of water, and an easily-dammed valley, and you don't often see all three together... But it does get used to store power, and solar plus pumped hydro represent a kinda-sorta alternative to nuclear.
They're also anti-nuke. I've even heard people who are anti-wind (the watchword is "birdchoppers") and anti-solar (since solar panels wreck desert ecologies)... Let's just say it's a good thing they aren't responsible for development.
I know the author of the article says 'upside potential' but I'm not sure if Blanch is quite 'celebrating' the increase in SUV sales but rather just noting it.
I'm tempted to think that the volatility of oil prices may actually push people towards renewables.
They doubled in the years leading to 2008, and since then have plunged three-quarters.
If Saudi Arabia's bet pays off, and they manage to choke all the alternative suppliers of oil, perhaps the price will bounce all the way back up in another 8 years?
Or perhaps they won't. But then if they don't, maybe Saudi Arabia collapses or has to be propped up with US money.
The human race is basically just screwed. Warming is going to happen on a massive scale and there is little anyone can do to stop it. In 50 years, we'll be killing each other over the remaining usable farm land. Until then, we'll keep buying SUVs and burning more oil.
> Actually, the farmland will just move. Northern regions will become more arable. There will be disruption but maybe nothing we can't handle.
Even if we ignore the effects of increased variability (which makes investing in production anywhere less secure) and just consider, as you do, the averages, this is problem for people as long as countries and borders are a thing, because shifting where its possible for humans to support themselves has some pretty drastic consequences.
When we lose the wild species of the plants we eat, we start running a huge risk that any future disease wipes out that whole cultivated species, and our existing ways to manage this (selective breeding, or transferring genes from the wild plant) lose the material they depend upon.
Coffee is one worrying example. It originates from Ethiopia and Sudan, in the mountains, at particular altitudes (temperatures). As temperatures rise, it grows higher — but we soon run out of soil on the mountain, or run out of mountain altogether.
You're not considering the politics. The arable farmland will "just move" into different countries. Russia, Europe and Canada win. Africa, India, most of Central and South America and China lose.
It's not literally a war over food where the winner gets to eat. It's riots because food in North Africa triples in price because it has to be transported from Russia or Europe instead of grown locally and people are angry but the local government has no capacity to fix it.
The thing about food riots is, they are over quickly because, starvation. So a very temporary condition.
And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
> The thing about food riots is, they are over quickly because, starvation.
Food riots usually happen well before mass starvation, and usually are over quickly because one of four things happens:
(a) The government accedes to the demands of the rioters, or
(b) The government distracts the rioters, often with a manufactured external crisis, or
(c) The government convinces the rioters that continuing the riot will lead to more pain than whatever provoked the riot and no positive results (often, by fairly direct demonstration of this),
(d) The riots escalate to outright rebellion, and the government is toppled and replaced (often resulting in [a], but sometimes this becomes a distraction along the lines of [b]; this often follows an attempt by the government at [c].)
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
Even granting that, manifestly people do go hungry, particularly in nations that don't generate enough domestically to feed their people and would have to rely on imports to do so (though, even in the most developed countries that are also net food exporters, some still go hungry.)
Climate change, even before considering increased variability, changes which countries political deficiencies produce major food distribution problems and the accompanying pressures, which, historically, have led to mass violence, both internal and interstate. That its a political and not technical problem might be emotionally satisfying, especially when the problem is mostly in distant countries, but it doesn't actually magically make the problem go away.
> The thing about food riots is, they are over quickly because, starvation. So a very temporary condition.
Your answer to food riots is don't worry, they'll starve to death soon enough?
> And in this modern age of transportation there's really no need for anybody to go hungry. We can feed everybody. If somebody in North Africa is hungry, its their politics at fault.
We can grow enough food for everybody. We can put the food on trucks. We can put the trucks on roads.
Somebody still has to pay for the food and the trucks and the roads. And that's going to be significantly more expensive than locally grown food. For people who have no money to begin with.
> And that's going to be significantly more expensive than locally grown food
Depends on the food and the transportation method. Is growing tomatoes in a green house during winter months in a northern country more or less efficient than shipping them from the southern hemisphere?
> We can also put the people on trucks or planes or boats and move them to where the food is.
We could, but the people where the food (and associated economic security) is may object to that.
Refugees often aren't all that well received, and economic refugees (as opposed to political refugees who are politically aligned with the receiving state, which is opposed to the regime from which they are fleeing) -- external and, often, internal -- often are the worst received.
> Why should I expect that to result in us killing each other over arable farm land, any more than we're killing each other over arable farm land now?
Arable farmland and access to fresh water have been a fairly common thing for people to kill each other over historically, including in the modern era. To the extent we aren't, its because many countries have reached settled states with their neighbors that are stable given a relatively stable distribution of those resources.
Major shifts would leave large existing populations without support and others newly prosperous, giving the former little to lose and the latter something quite valuable to defend.
Yeah, but those without are going to be continents away from those 'with'. Not really in a position to fight, especially as they're starving. Not talking knights in armor fighting over a moor here.
> Yeah, but those without are going to be continents away from those 'with'.
No, they aren't. The US will be one of the losers, Canada one of the winners (again, ignoring effects of variability, etc.) And lots of the relative winning/losing pairs are going to be immediate neighbors.
> Not really in a position to fight, especially as they're starving.
There'll be a whole long period where the losses will be to established economic position rather than mass starvation. Its not going to be "breadbasket today, wasteland tomorrow". There'll be a long period where declining economic position, rising food prices, and less food security (and similar effects with water in place of food) will be evident and starvation visible down the road before mass starvation -- and its in that period that there will be strong pressures on governments to reverse that position by any means at their disposal.
Maybe the average temp/rainfall moves north in some places, but doesn't the variability also increase delivering more frequent swings into extreme conditions, in turn causing more frequent crop failures?
True. But in modern agriculture, the soil is irrelevant. Corn in Iowa grows because of Anhydrous Ammonia applications. That's it. Eroded clay hillsides produce as well as (or even better than) black loam. So no worries there.
Considering that we are still moving out of an ice age I don't really expect are burning oil to be an issue that will have a noticeable effect. Consider also that crops do better as CO2 concentrations rise. If anything the world can easily use and withstand a little warming.
One other interesting thing to consider, we really are not even using a good percentage of land that could grow food. There are many parts of the world that because of conflict do not fully use the lands they have and in many western nations the majority of land is held by government and not open to use.
An oil tax is the obvious policy here. A good oil tax would capture some of that wealth transfer and use it to invest in alternative energy. Of course it will never be implemented because humanity is too stupid to save itself.
I guess when too few people are buying your crack anymore, and there are too many competing sellers, you drop your price until the addicts pick back up.
it's not shortsightedness. it's conscious myopia. you are on "bloomberg BUSINESS" after all. scoped to business concerns. financial business itself is scoped to days, weeks, and quarters.
now, if this tone was struck at an article in US News or Time, then yes, surely you could accuse the writer of "shortsightedness"
We'll pay for these short term wealth transfers with a further uptick in warming and a huge shock in the future when no one's saving energy any more, renewable energy installations have come to a standstill and oil rapidly becomes more expensive again.