How Will Temporary Decline in Oil Prices Impact Energy Sector? 42 comments
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Alternative Energy Storage and Cheap Oil
Oil prices have fallen off a cliff recently and everybody’s breathing a sigh of relief as prices tumble at the gas pump. Late last week I read on Bloomberg that Francisco Blanch, a commodity strategist at Merrill Lynch, is forecasting a market bottom in the $25 range and a 2009 average price in the $50 range. The relief is welcome but I have enough experience in the oil business to know that we’re merely experiencing that pleasant calm that comes when the eye of a hurricane passes overhead. This is no time to go out and buy a gas-guzzler!
The following chart from the Energy Information Administration tracks the spot price of West Texas Intermediate Crude Oil from January 1986 through November 2008.
click to enlarge
What I find most fascinating is how the long-term trend was essentially flat from ’86 until it reached an inflection point in the late ‘90s, a time that roughly coincides with recovery from the ‘97 Asian financial crisis and increased sales of motor scooters and personal cars in developing economies. Those changes permanently altered the global oil consumption landscape and since the late ‘90s oil prices have followed a steady upward trend. I don’t want to join the peak oil debate, but I think the long-term price chart presents compelling evidence that the world passed a “peak cheap oil” inflection point about 10 years ago.
We are currently seeing a sharp correction in the oil market that’s been amplified by financial market restructuring and a global recession, but if my analysis is correct oil prices will revert to their new trend line over the next 12 to 18 months and then resume their relentless upward march until another inflection point is reached. By the time the global economy emerges from the current recession, it looks like $70 to $80 oil is a virtual certainty.
So the real question is how will a temporary decline in oil prices impact the energy storage sector over the next couple of years?
Many observers have suggested that a precipitous decline in the oil markets will have a disastrous impact on alternative energy investments. I disagree because I believe reversion to the established trend line in the oil markets can only take us back to the $70 to $80 level and many alternative energy technologies remain cost effective at that price point. Moreover, electricity prices are not likely to experience the same violent swings as oil. So the fundamental market drivers that favor the use of wind and solar power are different. Sales may decline for a time, but they will almost certainly recover with the overall economy.
I’ve consistently argued that plug-in electric vehicles cannot be cost effective in North America where consumers demand a vehicle that will travel 50 to 150 miles at highway speed and a battery pack to provide the necessary range will add $10,000 to $30,000 to the purchase price of a car. Before the oil price crash, I believed the overwhelming majority of US consumers would reject plug-in electric vehicles for simple budgetary reasons. Low oil prices and a deep recession can only exacerbate that problem by encouraging potential purchasers to defer purchase decisions until the economic picture becomes clearer. New car sales have already fallen by roughly 40%. Simply put, this is a terrible time to be offering scared consumers a new power train alternative that is more expensive on the showroom floor and promises uncertain operating and maintenance cost savings on the road. As I noted in an earlier Seeking Alpha article, “the green in our personal philosophies always takes a back seat to the green in our wallets.” The triumph of economics over philosophy will be even more pronounced during a major recession.
Under conditions that are likely to prevail for the next 12 to 18 months, I believe companies like Ener1 (HEV) and Altair Nanotechnologies (ALTI) that have made big bets on the rapid adoption of plug-in electric vehicles are almost certain to be major disappointments. Altair had about $30 million in working capital at September 30, 2008, which translates to roughly 12 months of operating costs. Ener1, in comparison, only had $16 million in working capital, which translates to roughly 6 months of operating costs. Both companies will need substantial additional capital before the economy turns the corner. While Altair is in a better position than Ener1 when it comes to both liquidity and capital requirements, I question whether either company will have enough liquidity or be able to generate enough revenue to weather a 12 to 18 month recession.
Last week I characterized American style EVs as the epitome of wasteful arrogance. However the situation is very different in Asia where adding small amounts of electric boost to bicycles and motor scooters can provide huge life style benefits and operating cost savings. Since they operate in a different environment, I believe that companies like Advanced Battery Technology (ABAT), China BAK (CBAK) and Hong Kong Highpower (HPJ) that are focused on reasonably priced batteries for mass market applications like bicycles and hybrid scooters are likely to encounter significant end-user demand despite low oil prices. Their revenue from other consumer products may suffer because of the recession, but the long-term potential of personal transportation applications in developing markets is nothing short of spectacular.
Predicting the likely impact of low oil prices on grid-based storage systems is difficult because the market is so new. Historically, the bulk of the batteries used in grid-based applications were lead acid batteries for switch and control systems. All of the recent efforts to use flywheels and Li-ion batteries for frequency regulation, and use sodium-sulphur, lead-carbon and flow batteries for bulk storage, are essentially demonstration projects where the utilities are trying to collect enough hard data from hands-on experience to make a thoroughly studied decision about whether those solutions will be cost-effective in the long-term. The grid-based projects that have been installed to date and are scheduled to be installed over the next couple of years are only the beginning of a process that will ultimately result in rate applications to Federal, state and local utility regulators. So even if all of the current projects are successful, we won’t see utilities making decisions to buy storage systems on a large-scale basis for 3 to 5 years.
I expect the level of utility testing for grid-connected storage systems to grow rapidly over the next couple of years in spite of the recession. These demonstration projects will likely generate something north of a hundred million in revenue for a handful of companies including Beacon Power (BCON), Altair, Axion Power (AXPW.OB), ZBB Energy (ZBB) and A123 Systems (IPO pending). While that number is objectively large, I would be surprised if any company received enough revenue from utility demonstration projects to pay their corporate overhead and generate an operating profit. Companies like Axion, ZBB and A123 that can rely on product sales in non-utility markets have a good opportunity to minimize their losses while continuing the development of grid-based storage solutions. The outlook is far less optimistic for companies like Altair and Beacon that have no real revenue prospects from sources other than electric vehicles and rapid commercial rollout of grid-based storage solutions.
In closing I’d like to draw readers’ attention to an article in the current issue of IEEE Spectrum Online that provides a good summary of the battery-supercapacitor hybrids developed by Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO) and Axion Power International. I’ve been on the receiving end of a lot of hostile comment over the past few months for having the temerity to suggest that a cheaper lead-carbon alternative might be able to reduce the price of an HEV without hurting performance. I’m delighted to see that well-respected thought leaders in the electrical and electronic engineering fields are starting to take notice.
Disclosure: Author holds a large long position in Axion Power International, has recently bought small long positions in Exide and Enersys and may make additional storage sector investments in the future.
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This article has 42 comments:
> jack
Good analysis. I much appreciate your storage analysis because I also believe this will be a huge long-term growth area. I also believe we have little chance of picking ultimate technologies at this point, and, therefore, future Microsofts and Intels of energy storage. I have come to the same conclusion about near-term prospects and have taken significant (for me) long positions in ABAT and CBAK. , both significantly under water at present. I will probably buy more.
I also am concerned about battery power v. highway speeds. The vehicles that I have seen, HEV, electric, have the same if not better driving characteristics than a Honda Fit, or a base Toyota Corolla. What vehicles is the author referring to?
Lastly is infrastructure. Very problematic. If the market moves to 7-10% adoption of green cars in the next few years, how long will it take before utility companies move toward adjusting the grid? One good thing about utilities having a government partner is that it should (I said should) be easier to prod the electric companies to upgrade the grid.
The big X factor for all of this is the economy, and how Obama structures incentives to buy new cars. If he can shift pent up demand for economical cars (not econoboxes) to what I see coming in 2010-2012, then I believe we'll see oil and utilities reacting to the consumer
www.autobloggreen.com/.../
There will not, however, big a big changeover to to EVs.
When people are unemployed due to the Peak Oil depression, and the gas guzzler has a zero trade in value, few will buy an EV.
Clifford. J. Wirth, Ph.D.
FOIL 9 in my Alternate Report at website shows New Mexico electric reserve margins falling.
Reserve margin decline in other states appear to follow what PNM forecasts for New Mexico from what we have read on Internet.
Our energy lifesyles may change in the next several years due to energy shortage and increased costs?
New construction, according to PNM forecaster Steve Martin, accounts for the major part of electric load increase. If new construction must be limited in the future for energy shortage reasons, then this might cause unfortunate economic results.
I wrote an article in June xmplary.blogspot.com/2... and found very interesting cars in production. A new car capable of doing 157 miles to the gallon is being developed by a company called Lorimo AG. Hope it will make it to the USA. www.treehugger.com/fil...
I like your article and the following comments - it just quits before the finish line. It doesn't deal with the now. The right now. Everything that is talked about, is in the future. The too distant future. Futuristic technology. Futuristic infrastructure. We should keep developing that futuristic solution, but we should concentrate on the problem at hand. Sort of like operate and remove the cancer tumor right now, while we are developing a cancer vaccine.
Right now, we and the world function and survive on transportation and transportation is diesel. And we can produce and are producing that diesel from a number of sources and one of those sources is coal.
We are going to let the patient die of the cancerous tumor while we try to save him by a cancer vaccine. - We are the patient.
Famos, the last word.
Is it time for some consolidation in thsi industry?
www.oiltradersblog.blo...
1. When the US decides to give up 2 million gallons a day the world will be awash in fuel. And that will continue..... until we are at 6-8 million instead of 21 million a day. The rest of the world will have its fuel if it wants it. The price of crude can do many things; the actual US consumption is going to decline.
2. There is a market for < 50 miles per day electrics. The rich will do what the rich do. The rest will eventually have a cheap legal throwaway PV, probably evolving from the likes of golf cart, instead of Detroit down. Others will enjoy the efficiency of moving people in transit systems - they will come in one form or another.
3. Hybrids will scratch the itch of the <50 mpd and of course satisfy the needs of the >150 mpd crowd.
4. Before we die, there will be an affordable hybrid electric vehicle powered by a no-moving parts injected biofuel combuster encapsulated by solid state waste heat direct to electric converters powering 20-40 hp electric motors with the only on-board storage device being a GRASS TANK refillable everywhere to provide unlimited range; these vehicles will have no transmission, differential, etc, These will satisfy the demands of both automobiles and trucks, not to mention locomotives and other industrial equipment - maybe even these first.
in my opinion, the idea behind the "better place" project fits very well to a novel load management of power systems accelerated by a decentralised energy supply. Actually, I think that, for example swapping stations for EV's accumulators as well as the accumulator of an EV itself, could make an extensive contribution to both fields. the speeds of growth in each seem to depend on each other reciprocally. thats why in Germany, the automovtive player Daimler recently teamed up with Germany's second largest energy supplier RWE on an electric car project -> www.ft.com/cms/s/0/ae6...
finally, the solution of the energy storage subject, such as frequency controlling and load management, could be found in the integration of EVs in the power grid.
Where I think people are living in a fantasy world is when they start talking about equipping a PHEV with a 10 to 15 kWh battery or a pure electric vehicle with a 35 to 50 kWh battery.
Substantially all advanced battery technologies cost $700 to $1,500 per kWh of capacity and most of the PHEV and EV contenders have expected battery lives that are far longer than the expected life of a car. Project Better Place is a great way to use night-time energy generation during the day. But frequency regulation and load management are primarily day-time issues and if you take your car to work each morning, it can't be part of a grid solution till you plug it back in at night.
It is economic insanity to suggest that consumers can afford to add $10,000 to $35,000 to the price of a car and expect a reasonable return through gas savings. It arrogant to believe we should take 100 electric bicycles or 40 hybrid scooters off the road in Asia so that we can put one PHEV on the road in North America.
Right now the press, the politicians and assorted snake oil salesmen are pushing electric solutions that do not work for the common man. Lots of very smart people are looking for solutions to energy storage problems and I believe a variety of solutions will eventually be found. But when I see unproven proposals touted as solutions in the investment market, I'll be the first to jump in and point out that the Emperor has no clothes.
I'm very bullish on storage, but I cringe at some of the bull---- stories.
In general I think the lead-acid group of companies including Exide, Enersys, C&D and Axion have far greater upside potential than the advanced chemistry group because they are starting from much lower market valuation levels. You might want to read some of my earlier articles to get a better idea of where I'm coming from and why.
plans don't get "traction". They'll kill it at a loss for a year to protect their future.
Sure, some rich can afford it, maybe they'll get a tax refund loophole, but those
blue-collar WAGE-earners aren't buying this pie-in-the-sky. Utilities already are
in crisis, trying to raise rates to clean up coal-burning mandates, this grid is
flat-out not happening, neither is Boone Picken's.
That electricity doesn't appear by magic! Let's see: no nukes, no coal, that leaves natural gas, oil, and fantasies of wind power. Well maybe they can capture all the hot air in Washington....
The problem with companies such as ABAT, ALTI, AXPW.OB, BCON, CBAK, ENS, HEV, HPJ, XIDE, and ZBB is that they need financing to survive the collapse in sales. Unfortunately, banks are in no mood to supply credits to help these companies.
Thus, if the price of oil is not skyrocketing soon, most of the alternative energy technology companies will be out of business by mid next year.
This "green bubble" would have burst if it had had a chance to gain momentum and evolve. This recession nipped it in the bud. That saved a lot of us from making stupid momentum investments.
I don't know any more than anyone else on the severity of the recession, but in my 65 years I have never seen the economy heading down hill so fast. From that I suspect we are in for a long bear market. "Think the unthinkable." (El Arian of Pimco). We could see a multi-year recession that kills green companies and severely retards hydro carbon companies. I think betting on consolidation in the energy sector (APA, APC, DVN, MRO, OXY, etc.) is a resonable bet and that it will occur, but it could be years before you get a buy-out gain. I also believe oil and gas prices will rise, but in a world wide and severe recession (maybe a depression) it could be years before that rise occurs and translates to profits. What plausible scenario is there that would increase the demand for oil and gas in the near to medium term?
There is no where to safely invest. Capital preservation should be every investor's concerns. Good times are unlikely to return anytime soon. Investing in alternative energy solutions is a fool's game.
On Dec 07 11:57 AM auto 44 wrote:
> I worked in the home heating and air conditioning industry all my
> adult life with the exception of four years working on supersonic
> aircraft in the air force during the vietnam war. It is my understanding
> that that converting hydrocarbon fuel to electicity and pushing it
> all the way from the source to the point where it is used is an extremly
> in efficient process. It doesn't work for something as simple as
> creating heat. I find it hard to understand how this is at all green
> technology. My guess is that not only do hybrid cars cost more to
> run but that over all they are actually bigger poluters.
Why is everything always focused on the automobile? There are other areas that these companies (HEV incluced, I am sure) are trying to enter the market in. You always seem to never mention that and only focus on one small part of these companies businesses.
Dieuwer, this is not an all or none issue. We have to begin work with the tools we own and add new tools as they become cost-effective. Most companies in the storage space are both well funded and profitable and there are only a few instances where survival cash is an issue. The whole purpose of this series is to help investors who don't know the sector separate the reality from the hype.
Secmaven, if the hydrogen wasn't produced by processing natural gas into a less powerful fuel I might be impressed. Hydrogen is a wonderful concept that hasn't been implemented yet on a cost-effective basis. When it is I'll be happy to talk about it.
Mal, there is a world of difference between "let's spend $1 million to try this idea and see if it works" and "let's roll this technology out at a rate that will justify a $120 million (or $900 million) market capitalization for the vendor." Beyond EV's, everything ALTI and HEV are doing is in the "lets give it a try and evaluate the results class." Their bloated market capitalizations are unsustainable.
On Dec 07 09:17 PM secmaven wrote:
> It is passing strange that nobody wants to talk about using hydrogen
> as fuel. We are seeing successful use of hydrogen powered vehicles
> in several US cities by the USPO and local transit companies. This
> is proven technology but its widespread use would bust the oil companies
> who, collectively, have more political clout than any other industry
> on the face of the earth.
Where does the hydrogen come from? Refining oil! Hydrogen is not a --primary-- fuel, it is not a substitute. Besides, distribution is a major problem. We already have distribution systems for gas and electric. Building a new one with the infrastructure to get hydrogen to your local refilling station (and building the millions of refilling stations) would could astronomical amounts. Sure, it works good when it's small scale and gov't subsidized.
--from Bobco23--
"Being green feels good, but it is inefficient, ineffective, and costly. The btu inputs relative to the btu outputs to these alternative energy solutions are greater than the current solutions. "
You hit the nail on the head. Just like the ethanol scam.
Surely you are not saying people are gullible to think since gas prices are coming down it is a god sign to go back to our big, bloated cars? Nah. That would be short sightedness and lack of memory. Wait a second, that sounds familiar...
And...now I'm even considering scooping up a little Axiom! (However, I still believe that lithium battery assisted cars are still going to fly; it seems others agree in what I've seen HEV do this past week--the trading volume has been very heavy recently. I would love to know who is buying up HEV.)
Still going with my prediction that it will be comodities--especially precious metals--and financials that lead the market out of this funk, though I believe what's going on this and last week is a short term investing mirage; the term being through the end of the first quarter next year. What I do believe in is that the Energy Storage sector from here forward will be less affected by any downturn than most all other sectors.
One company that hasn't appeared much in your articles is Interstate Batteries. How do you think Interstate will be affected by Barrack Obama's infrastucture play?
I'm also interested if you know anything about what natural gas companies are using to get the gas out of the ground, in that I'm hearing/reading the extraction process of Marcelles Shale in western PA is possibly tainting the water table.
Maybe this is why Obama is not saying much about Nat gas as an alternative fuel for cars? If so, then this would even further add to the advantage of battery assisted cars.
One more thing, since Axiom is headquartered in New Castle, PA, I'll give a shout out for the Steelers! I bleed black and gold!
Interstate is a privately held retail battery distributor that focuses almost exclusively on the automotive starting, lighting and ignition market. Wiki says most of their products are manufactured by JCI. In any event, if you can't buy their stock, there's no sense in me talking about them.
Oil has to be pumped but natural gas flows on its own because of geological pressure that typically ranges from 2,000 to 15,000 PSI. If somebody is having pollution problems in gas wells it's because they have not done a good job of cementing the casing into the well-bore and isolating the gas strata from the water strata. Either that or you have natural percolation through faults.
I think Aptera is going to prove you wrong, however, with the first successful battery powered American car. By using lighter materials, less materials, recycled materials and advanced aerodynamics, they have created a vehicle that has the power requirements of your Chinese bicyclist (their drag coefficient is less than Lance Armstrong's). They are selling the initial units at $30,000--a huge premium over economy commuter cars. But when they ramp up production, they have suggested that they could be profitable selling for around $15,000. That would be a game changer. They have also totally reinvented how a car is assembled. When the factory gets going, it will probably look like a desktop PC assembly line with plug-in components being added to a basic shell. And their three-wheel design allows them to skirt archaic govt. requirements, qualifying the vehicle as a motorcycle. It's a shame they are rolling out the first units during the worst possible scenario--a recession and low fuel prices. Any reader who hasn't been to aptera.com owes themselves a peak at the future. I know it's all pie in the sky sales brochure stuff now, but it sure looks and sounds plausible.
The US needs major investments in lithium-ion battery manufacturing capacity on a scale of billions, because energy storage is the lynch pin of both the evolving electric drive vehicle market, and renewable energy. For more companies involved in this field see
EVtransPortal.com/Batr... and
EVtransPortal.com/batt...
"Maybe this is why Obama is not saying much about Nat gas as an alternative fuel for cars? If so, then this would even further add to the advantage of battery assisted cars."
I had the same thought when I first heard of Pickens' plan. NG PHEVs even cleaner than gasoline PHEVs. Then I read the article below at climate progress which basically says:
The problem with using natural gas for cars instead of in power plants as T Boone Pickens suggests, is that it isn't a very efficient use of the gas, compared with using it in power plants. It is more efficient to make electricity which is then used in the cars. And if we are trying to eliminate carbon emissions, it's coal plants that should be phased out, since they're much dirtier. And how will wind which is intermittant take the place of gas fired peaker plants? Not that I want to discourage wind development or HVDC tranmission, but this is maybe a case of the right ideas for the wrong reason.
climateprogress.org/20.../
In regard to PHEVs or EVs, what about the idea of power companies buying the batteries for grid modulation and storage after they no longer will power the car. I've read that the batteries would still have quite a useful life left after they no longer will work in cars. The way the idea was presented, was that the price of the battery would be discounted when you buy a car to account for it's future use in the grid. How much that discount may be I don't know.
Another question I've had is in regard to Tesla.
If Tesla can build a luxury roadster on a small scale, that competes in price and performance with an equivalant conventional Lotus or Porche, and has decent range, why can't this be done with a less performance oriented car that is mass produced on the scale that Detroit has, at a reasonable price?
Wouldn't the range increase with the lower performance expectations? We don't all need cars that go 0 to 60mph in under 4 seconds, nor do we need 130mph top end.
John- when you say PHEVs will cost $10,000 to $30,000 more, is that based on future mass production, or is it based on current costs at current production rates? And why is the spread so big between these estimates?
I am often skeptical when high cost are mentioned as game stoppers for technologies that don't yet enjoy economies of scale.
I'm not saying that's the case here, but I often hear this kind of argument, and it can be misleading.
Any thoughts on Phoenix Motorcars?
Sport Utility Truck and small SUV
35kWh Altair lithium titanate battery pack
torque = 590 ft pounds
range 130 miles - they are working on an expansion pack that will extend the range to 250 miles by 2009
charging - on board 6.6kw 220 volt plug in
for 5-6 hour charging. Also has a connector for 10 minute rapid charge which requires 480 volt, 3phase, 500 amp charging system.
It's the quick charge that I find interesting.
If there were 480 volt charging stations along freeways, it would be like stopping for gas.
They are aiming their marketing at fleet sales, farm and ranch job trucks, delivery vehicles etc, where range isn't a big concern.
How big is the market for city vehicles, delivery, taxis, job trucks for agriculture and industries, mining etc? Seems like these are the best applications for pure EVs at present, given the range limitations.
Li-ion is a 20 year old technology and a hand-full of companies are selling billions in product annually. The bulk of the possible performance gains and cost savings have been made and the weight advantage declines with each new generation of product as producers search for a chemistry that won't explode.
I can get behind Li-ion for vehicles like busses and perhaps taxis that run all day every day and can actually use most of the battery cycle life, but putting a 25,000 cycle battery in a vehicle that will cycle 500 times in a very busy year is wasteful.