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Comment by hughw | Hacker News Reader

The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the economy and is their bulwark of social stability. Some estimate that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price regime is happening as we speak. The years of $100/bbl oil developed expensive innovations, and now we are seeing those prices reduced to their marginal costs. 3) Almost no other country can use these new technologies as profitably as the US and Canada can. The US and Canada have a private mineral ownership regime, as well as a production and refinement infrastructure no other country will be able to match soon.

The US has a LOT of small- and intermediate-sized oil companies competing actively right now, on all these dimensions, to lower their costs so they can continue to operate profitably even in the current price environment. Most are succeeding.

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The break even price is estimated at current pumping rate vs gross profit; but Saudi Arabia can relatively easily increase their pumping rate. The cash cost for the Saudis per barrel is sub $5. So they can up their production rate to handle the difference; they are incentivised to do so if they truly believe that their reserves will become a stranded asset.

In contrast after running and royalties cash costs in the US are up towards $30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using these technologies are smaller. And, those wells cost more to discover, and tap. This means US / Canadian oil is more affected by marginal cost, both in terms of price flexibility and liquidity (both cash and oil).

And the biggest threat, in the medium term, to oil prices is some of the range of alternative energy sources. Solar costs are coming down quite rapidly. Wind is coming down but more slowly (a chunk of this is in real rather than nominal terms; depending on currency). And nuclear in time will probably come down if increasing investment leads to predicted efficiency gains.

Oil isn't going to disappear overnight, but it does have a bordering on existential threat in the medium term. The only largely protected part of this market I can see here is large scale transportation, i.e. sea and air transport.

Qatar did have a gas to aircraft fuel conversion process, but not really cost effective.

Oil, even at current prices, is significantly more expensive than natural gas and coal for generating electricity. Apart from remote communities oil isn't really used to generate electricity. Oil is valuable because of gasoline. Solar/Wind/Nuclear are competing in a completely different market.

The real threat to the medium/long term value of oil is a good battery.

It's a problem to consider these separate. All energy and certainly all carbon fuels are fungible to a degree. Oil is easier to transport and bottle. Gas is more location and infrastructure dependant.

If Gas prices rise or oil prices drop, we'll use oil for electricity generation too.

Solar, wind, and nuclear don't provide a threat to fuel used for transportation, which is a major percentage of how it's used.

Until battery tech gets within a decent percentage of a gas tank. Commercial batteries are currently worse than gas tanks, but catching up fast. If they get to 20% volume/weight/price of a gas tank I would predict a switch is going to happen very very fast.

Currently commercial batteries are price limited (about the price of a gas tank + filling up the gas tank 400 times, which would keep a normal car moving for 5-10 years), and weight limited at about 5% of the energy/weight of a gas tank. Given how it's evolving, I'd expect another 2-3 years before the necessary technology becomes available.

I think 20% will be about the turning point because while gas tanks provide a 1000km range, if you can charge at home, then what's the problem with 200km range, decreasing to 160km over 2-3 years ? Especially if you can solar charge (and combined with a house battery ... watch out)

And Teslas don't count. Anything over 20000$ starting price just isn't going to start the migration.

Its not just the batteries and cars. Can the grid really handle the huge increase in demand ? How much investment needs to be done to upgrade it? How long will that take?

And not just the main grid, which is not that hard to upgrade, but we're talking about also upgrading the grid and transformers on every street in the western world.

The grid should be fine with a few upgrades and implementation of charging strategies:

"The short-term impacts for most utilities should be minimal and localized. There is a possibility, however, of isolated impacts on some distribution transformers and secondary drops, particularly in neighborhoods with older distribution systems including underground systems."

http://et.epri.com/Communications_Potential_Impacts_of_Vehic...

Edit: added quote.

That won't cut it for industrial use (trucking, airlines, shipping, etc). For these things where fuel is a major cost, a swap to batteries is untenable until they are cheaper or equal either via heavy carbon taxes or an improvement in battery tech well beyond the 20% number you have in mind.

Electricity is already way cheaper than gasoline per mile. All that's required for it to be an existential threat to gasoline is a drop in the price of battery tech (much like what happened to solar).

That's been true for a really, really long time. Battery tech being the limiting factor has been the issue since the first battery powered vehicle was invented in the late 1800s.

That's not their marginal cost though. They may need $90/bbl to balance their budget, but they don't need $90 to pump the next barrel.

Agree, that was my point. It's not relevant to talk about their marginal cost as if you could ignore their need to balance their budget eventually.

True. But let's play this out. If they can't balance their budgets, their government collapses (like Bankruptcy) and is replaced by a new Government that doesn't offer the same panem et circenses. New Government outsources oil production (like House Saud did some 70 years ago) and then the true marginal becomes the needed cost.

Then we have civil war and big chunk of Saudi oil is off the market and prices rise again.

That's pretty interesting about the new technologies and how small businesses can still operate profitably in the current price range. Where did you read about this?

I work in the drilling data industry and have access to data as well as anecdotal observations. But there are lots of published articles e.g. [1], [2]

[1] http://www.nytimes.com/2015/05/12/business/energy-environmen...

[2] http://www.worldoil.com/news/2015/8/12/oil-at-30-is-no-probl...

Look in that data and tell me how many companies are hiring. These companies are treading water. They are furlough-ing people, laying people off, getting bought by bigger companies looking for a bargain, etc, etc, etc.

Oh, absolutely. They are adapting.

Huge numbers of US oil companies are filing for bankruptcy right now, and many are not profitable even at zero debt. I am not sure where your "most are succeeding" figure comes from.

Thirty-six [1] is not "huge numbers". There are literally thousands of oil and gas companies in the US. I repeat, most are succeeding.

[1] http://www.slideshare.net/MarcellusDN/haynes-and-boone-llp-o...

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