Monthly Archives: December 2016

Waymo: Google’s Contribution to Self-Driving Cars – 12/30/16

After seven years in development, Google’s self-driving car project has spun off from parent Alphabet Inc. and become its own entity: Waymo.

With John Krafcik serving as chief executive officer, Waymo won’t be selling cars so much as the brains to make them drive themselves. Waymo’s autonomous technology will be sold commercially for a variety of uses, according to Krafcik, the most prominent example being a ride-sharing service using Fiat Chrysler Automobiles’ minivans. The program is expected to begin around the end of 2017.

Waymo’s partnership with Chrysler is one of many examples of car makers embracing driver-less car technology. Tesla Motors Inc., BMW, Ford Motor Co., and Volvo have all promised fully autonomous cars will arrive within five years. General Motors Co., Daimler AG, Toyota Motor Corp., and Volkswagen AG’s Audi luxury line have also invested billions into developing their own autonomous vehicles. In Pittsburgh, Uber Technologies Inc. has begun a test using autonomous Volvo sport-utility vehicles as robot taxis. Auto supplier Delphi Automotive PLC and startup NuTonomy Inc. have robo-taxi tests started in Singapore.

While there is plenty of debate over what the threshold of “self-driving” actually looks like, there is no doubt that the technology is expected to have a huge impact on the automotive industry and society as a whole.

Boston Consulting Group predicts the value of the autonomous vehicle industry will increase to $42 billion by 2025 and account for a quarter of global sales by 2035. Proponents of the technology suggest that urban congestion and road deaths would be dramatically reduced as robot drivers never get drunk, sleepy, or distracted, and can let you out while they search for a parking spot on their own.

Waymo is only one fish in a sea of companies looking to profit from a self-driving vehicle revolution; however, its spinning off from Alphabet may be a sign that the industry ready to come into the spotlight.

Electric Cars: An Unavoidable Opportunity – 12/29/16

In a decade, give or take a few years, electric cars will likely outsell gas guzzlers… at least that is the impression that Bloomberg and Wall Street Journal are giving off.

Precisely when electric vehicles will leave their niche as a luxury item for the environmentally conscious and become the mainstream mode of transit depends on relative cost. Analysts are agreeing that the future will be electric simply because it will be the cheaper option.

On the price front, electric vehicles have an advantage thanks to the plummeting cost of batteries. Since electric motors are simpler and cheaper to produce than engines, batteries become the main price point setting component of electric cars so declining battery costs mean a more affordable electric car. And, unlike engines, batteries have plenty of room for cost reductions. Mercedes-maker Daimler predicts that production costs for engines versus batteries could reach parity in 2025.

Of course, given subsidies, consumer tastes, and lower maintenance costs, electric car makers will see rising sales ahead of that point. Between tightening environmental standards making internal combustion engines more expensive in Europe and aggressive electric vehicle subsidies in major markets like China, electric cars have built-in advantage in most places.

The inevitable switch to electric cars presents both a threat and an opportunity for car makers.

According to analysis from Morgan Stanley, profits from manufacturing electric cars are expected to stay relatively low for a long period.

Those are the years of costly investment in a technology that is much easier for new competitors to replicate. The lower barriers for entry into electric- versus engine-car manufacturing will mean lower profits for the long run as well. But, the bigger threat comes from the possibility of missing out on the transition and fading into obscurity.

The electric future is already closing in as Tesla has succeeded in exposing existing consumer demand for electric cars, spurring heavy investment from competitors. General Motors is planning to releasing its all-electric Chevrolet Bolt at an after-tax price of roughly $30,000 i.e. less than the average new-car sale price in America. Tesla’s Model 3 is expected late next year at a slightly lower price. VW, Daimler, BMW, and Toyota have all unveiled new electric-centric strategies this year.

U.S. Shale Tempers OPEC Deal Optimism – 12/28/16

After a period of low oil prices devastated its member nations, OPEC will start cutting collective oil output to 32.5 million b/d in January. With 11 non-OPEC producers reducing their own output by an additional 558,000 b/d, one might predict prices to rise fast and high. However, the threat of a revival in shale oil output from the U.S. is keeping a lid on expectations.

The main proponent of the group’s original pump-at-will policy that led to the glut, Saudi Arabia is now facing massive revenue shortfalls. The deal to cut global supply – if involved producers follow through on their promises – would probably give the largest OPEC producer a chance to catch its breath.

Saudi officials have justified their previous strategy using the decline in U.S. shale output, a major win in their fight to maintain market share. Yet, they may soon be faced with the harsh reality that shale is going anywhere. In its Short-Term Energy Outlook for December 2016, the EIA said that “oil production, particularly in the United States, has been more resilient in the current oil price environment than had been expected, as reflected in improving financial conditions at oil companies”.

And now that OPEC is expected to finally push for higher oil prices, the shale patch is benefit as much, if not more so, than OPEC members.

Oil rig counts from the U.S. have been steadily rising since the OPEC deal was announced. In 2016, the Permian basin play has seen acreage prices balloon despite crude oil prices remaining close to 50% of what they were 2014.

In late 2016, companies paid higher than $40,000 an acre for drilling leases, roughly eight times what similar leases sold for in 2014.

Still, there are some variables that could shock markets which are worth noting: Will OPEC stick to promised cuts? (probably not) Will those cuts rebalance the market at some point next year? (most would say yes) How fast will U.S. shale rebound when prices do go up? (almost certainly before the end of 2017)

The promise of production cuts has so far barely moved prices from the $50 per barrel mark, largely because the specter of shale production is keeping expectations in check. Oil price predictions coming from major analyst groups are generally in the $50-$60 range for 2017 and, no matter what spin people try to put on it, those are not good numbers for OPEC.

Oil Market Re-balancing – 12/27/16

No one seems to know when the production cuts announced by OPEC will end the global oil glut. From the IEA and OPEC to Saudi Arabia and the U.S. government, the range of possible times for re-balancing to start is pretty wide.

According to the IEA, an adviser to 29 nations, a substantial reversal in the oversupply could occur within six months. The agency expects oil stockpiles will decline by about 600,000 barrels a day (b/d) in the next six months as curbs take effect and Russia implements the reduction it promised.

“Before the agreement among producers, our demand and supply numbers suggested that the market would re-balance by the end of 2017,” the Paris-based agency said in its monthly market report. “If OPEC promptly and fully sticks to its production target” and other producers cut as agreed, “the market is likely to move into deficit in the first half of 2017.”

That swing from surplus to deficit in the first half of 2017 would depend on OPEC and other producers following through on supply cuts. The stockpile declines will only occur if OPEC reduces supply enough to meet and maintain a target of about 32.7 million barrels a day, the agency said.

OPEC itself is less optimistic, saying its agreement won’t keep supply from exceeding demand until the second half of next year.

The Dec. 10 agreement between OPEC and non-members such as Russia and Kazakhstan “will accelerate the reduction of global inventories and bring forward the re-balancing of the oil market to the second half of 2017,” OPEC said in its monthly report.

The group said its own output climbed 150,800 b/d in November, as Nigeria and Libya restored some output. As a result, other nations will need to make deeper cuts than expected.

Khalid Al-Falih, energy minister of Saudi Arabia, was more vague, saying that he sees supply and demand aligning at some point in 2017 without any concrete prediction.

The EIA’s forecast is the most pessimistic of the lot; its latest market outlook on Dec. 6 projected that inventories will accumulate by an average 420,000 barrels a day next year.

While prices have climbed, traders are beginning to question how closely nations will comply with the deal, how long it will take to burn through the current inventory surplus, and how quickly shale oil will return to the market.

Behind the conflicting views on when the market will re-balance are differing estimates of global oil demand. OPEC sees total consumption averaging 95.6 million barrels a day in 2017, the EIA anticipates 97 million barrels a day, and the IEA predicts 97.6 million. Gaps between those estimates are near the size of the cuts in the deal itself.

Forecasting oil supply and demand on a global scale is difficult so don’t expect a clearer picture anytime soon.

Climate-related Risk Disclosures on the Rise – 12/26/16

Climate-related risk disclosures are on the rise as investors and governments around the world grow more concerned about the possible effects of climate change on business operations.

The Task Force on Climate-related Financial Disclosures, chaired by Michael Bloomberg and by the Financial Stability Board, is pushing more companies to include climate-related risk disclosures as part of their routine financial statements.

Provided input from the IEA, the Task Force has developed recommendations on future scenarios for energy markets during the transition to a low-carbon economy. The Task Force has stated its goal is to provide investors with better information to assess which firms are most vulnerable to shifting weather patterns and related threats.

The panel’s recommendations include broad suggestions applicable to almost any companies’ financial statements. More specific proposals include banks disclosing their exposure to energy and utilities sectors and insurers using models to predict potential losses under climate change scenarios. Actions to meet the recommendations are voluntary, but members of Mr. Bloomberg’s panel included senior executives from companies including J.P. Morgan Chase & Co., Indian conglomerate Tata Sons Ltd. and mining giant BHP Billiton Ltd.

The Task Force’s call to provide more information to investors about climate-related risks is part of a broader effort companies to disclose more climate-related information. More than 300 American companies have signed an open letter to President-elect urging him not to abandon the Paris agreement. And the number of companies incorporating an internal carbon price into their business and investment decisions continues to rise, a recent CDP report shows.

Corporations Respond to Climate Change – 12/23/16

While the political debate on climate change continues, many big corporations are acting as if transition to less carbon-intensive energy is inevitable and doubling down on their commitment to reducing carbon emissions.

Many executives say they are locked into a lower-emissions trajectory driven in part by market forces, such as cheaper prices for natural gas and wind power, as well as pressure from investors, customers, and regulators at the state-level or in other countries. More than 350 companies, including Intel Corp., DuPont Co.and Monsanto Co. signed a pledge shortly after the presidential election expressing support for the Paris climate agreement and U.S. efforts to cut carbon emissions.


“Part of our plan to invest in renewables is to diversify our generation portfolio,” said Melissa McHenry, a spokeswoman for utility American Electric Power Co. “All of those investments don’t change with a change in administration, it’s a long-term strategy.”

AEP Chief Executive Nick Akins has previously cited cheap natural gas and falling prices for renewable power as factors in utility’s plans to reduce its carbon emissions.


Days after the presidential U.S. election, Suzanne McCarron, Exxon’s VP of public and government affairs, said on Twitter that the Paris Climate agreement was “an important step forward by governments in addressing the serious risks of #ClimateChange.”

In 2016, Exxon lobbied other energy companies to support a carbon tax and many  large European oil companies have also pushed for a global price on carbon.


GM set a goal last September to get all its power from renewable sources world-wide by 2050.


Wal-Mart plans by 2025 to power half its operations with renewable energy and cut its greenhouse gases 18%.


Google said recently it would reach its goal of buying enough renewable energy to match 100% of the amount of power that it uses in 2017.


Andrew Mackenzie, chief executive of BHP Billiton Ltd., the world’s largest miner, told shareholders that he too hoped Mr. Trump would stand by the U.S. commitment to the Paris accord.

“More needs to be done” to achieve the agreement’s goal of limiting global temperature increases to 2 degrees Celsius, said BHP sustainability and climate change vice president Fiona Wild.

Energy Efficiency: Hidden Potential – 12/22/16

From energy security to energy access to air quality or climate goals, energy efficiency makes it easier to reach; however, it has rarely gotten the attention it deserves.

According to analysis by the IEA, “energy efficiency would have to provide more than 40% of total GHG emissions reductions” to meet the goal of limiting climate change to 2 degrees, the largest source of reductions in the IEA scenario. So why do renewables get so much more attention.

Clean energy benefits from clear, visible goal: production of electricity at a competitive price. Wind and solar power will see a monumental jump in popularity as they get close to price parity with fossil fuels — after all, there is no reasonable excuse for using fossil fuels if they aren’t at least a relatively cheap energy source. Lacking a cost advantage, however, renewables struggle to find a foothold.

Fortunately, energy efficiency has the potential to provide the same environmental benefits as clean power in areas where renewables aren’t competitive with fossil fuels.

Looking at the cost of solar power generation, clearly states on the left of the graph will benefit far less from a switch to solar than those on the right.

For such states, pursuing energy efficiency policies is much more likely to be cost-effective and politically viable than a push for renewables.

Yet while utilities and other power providers make energy choices between oil and other fuels based on price per kilowatt, energy efficiency lacks a comparable metric. As a result, large-scale efficiency programs rely heavily on government policy for support.

A large solar project can benefit from access to capital markets, economies of scale, potential returns acting as an incentive for developers, and other market forces.

On the other hand, efficiency projects don’t translate well to those market mechanisms. Even with a project on a similar scale, like building weatherization efforts, will generally come down to making sure thousands of household systems add up to large cost savings. The additional steps of making the value proposition to all of those homeowners in that distributed system creates costs and complications that few companies would bother with.

If the costs and benefits of energy efficiency were as easy to account for as renewable energy, efficiency would likely get a lot more attention. For now, only the government has the means to go through the trouble of dealing with such complexity so it may take some time for efficiency projects to come out in force.

Solar Panels: Weighing Energy In Against Energy Out – 12/21/16

As costs continue to fall, solar panels harvesting solar energy stand as an attractive replacement for fossil fuel-fired power plants.

But before jumping aboard the solar train to stop climate change, however, it is a good idea to assess if making more panels will solve the problem or add to it.

Solar power plants do not create air pollution like coal or natural gas ones, however, whether or not the pollution and energy needed to make a solar panel in the first place outweighs its benefits is more debated. Purifying the silicon used in the panels is a particularly energy intensive process.

According to a report in Nature Communications, Wilfried van Sark and his colleagues have calculated the energy and emissions required to make all of the solar panels installed in the past 40 years. Their study is the first to account for increased efficiency in manufacturing over time using data from the International Energy Agency. Pollution from the manufacturing process, as well as the avoided pollution from installing a panel, will also depend on where and when it was made or installed.

Accounting for those factors, the study showed that solar panels made today are responsible, on average, for around 20 grams of carbon dioxide per kilowatt-hour of energy they produce over their lifetime, versus 400-500 grams in 1975.

Similarly, the time needed for energy produced by a solar panel to exceed the amount used to make it has fallen from about 20 years to about 2.

The team found that for every doubling of the world’s solar capacity, the energy required to make a panel fell by around 12% and associated carbon-dioxide emissions by 17-24%. Bloomberg New Energy Finance estimates that the solar industry has doubled in size at least seven times since 2000.

In the model, the global break-even for solar panels could have come as early as 1997, or could come as late as 2018. Beyond that point, each installed panel really would be mean net savings on energy and emissions.

So, with this study at least, we can say that more solar panels will mean fewer overall emissions and a net gain in energy.

Electric Cars: High Hopes on Falling Costs – 12/20/16

A boom in electric vehicles (EVs) is coming.

Battery-powered vehicles account for less than 1% of total vehicle sales today. Between limited driving range and slow recharging times, automakers have struggled to sell their electric cars in the past: BMW sold fewer than 24,100 of its i3 electric city car last year, while Renault-Nissan has sold fewer than 350,000 electric vehicles since 2010.

Yet, the number of EV sales is rising rapidly and most analysts expect a major shift to take place by 2025 as battery costs fall and governments try to curb air pollution.

Analysts from Bloomberg are predicting a tidal wave of EV sales that could make or break many companies.

Fueling the shift is a change in battery technology. The battery is the component of EVs that decides much of their price and driving range, and so far battery technology is getting better by the year.

Thanks to Tesla’s aggressive work in lithium-ion battery development, prices are far below forecasts with further cost reductions expected once its Gigafactory completed.

While their own EV programs are in development, major automakers are building the infrastructure needed to sustain the switch to mass usage of electric cars. Volkswagen AG, BMW AG and Ford Motor Co. are planning to build a charging network in Europe — around 400 sites in 2017 and thousands by 2020.

On the regulatory side, governments across the globe are encouraging adoption of electric vehicles. Eight nations – Canada, China, France, Japan, Norway, Sweden, the UK and the US – have already signed a Government Fleet Declaration, pledging to increase the share of electric vehicles in their government fleets.

The Declaration signals intent to speed up adoption of low-carbon technologies with an aim of 20 million electric vehicles deployed globally by 2020. It also aims at encouraging cities, state governments, companies, and other organizations to accelerate the introduction of clean vehicles in their fleets. Athens, Madrid, Mexico City and Paris have already pledged to phase out diesel vehicles by 2025.

OPEC Deal and U.S. Shale Oil – 12/19/16

Even if crude oil prices rise on the agreement between OPEC and other nations to cut production, a rebound in U.S. shale output could keep prices low.

After OPEC’s largest producer, Saudi Arabia, rejected initial calls for production cuts in the wake of the initial price collapse and decided in November 2014 to let low prices force out high-cost producers — such as U.S. shale drillers — it can be jarring to see how much their tune has changed.

Saudi officials now seem to dedicated to pumping as much optimism into the markets as possible. Responses range from promises of more cuts in a do-whatever-it-takes approach to the Saudi Energy Minister Khalid al-Falih saying he doesn’t expect a big supply response from American shale producers in 2017 despite expecting the opposite in 2014 when the glut began. Unfortunately for OPEC, reality is working to undermine such reasoning.

To stay optimistic, most scenarios for future oil prices have to exclude the U.S. shale producers. The producers, who nearly doubled U.S. oil production in a matter of years according to the EIA, will inevitably make a comeback. A possible quick return during 2017 is debated, but there is a strong case for it coming sooner rather than later, especially if prices rise above $60 a barrel.

Source: EIA

For one thing, Bloomberg data shows that the number of active rigs drilling for crude in America has already begun to climb.

Baker Hughes Inc. has recently observed the largest weekly addition of oil rigs since July 2015 with rigs targeting crude in the U.S. rising by 21 to 498, the most since January.

At the current rate, Goldman Saches analysts projections show shale output on track to achieve 0.8 million barrels a day of annual production growth at a price of $55 a barrel for benchmark West Texas benchmark. The Macquarie Group holds a similar view with crude output in the continental U.S. possibly rising by about 500,000 barrels a day by the end of 2017 if the price of WTI climbs to $60 a barrel.

For comparison, the OPEC cuts to output, with full compliance, are expected to amount to 1.2 million with an additional 0.6 million in cuts from non-OPEC nations.

The cost curve for U.S. shale has fallen dramatically to make such high U.S. output possible.

Despite low prices, U.S. production has largely stabilized over the last six months as production growth in the low-cost Permian Basin has made up for some of the declines in the Bakken and Eagle Ford regions.

So long as U.S. shale oil production can be ramped up to make up for any OPEC cuts, don’t expect the OPEC deal to make a meaningful impact on oil prices

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