Random thoughts from the news

Venezuela

When I first visited Caracas in 1994, I was struck by how one could see that a once prosperous city had lapsed into decline. Goodness knows what it is like now.  The levels of deprivation are unparalleled in countries of a similar standing. Meanwhile by some miracle Venezuela manages to continue producing some 2.4mmbbls/day of oil. The country is split – as witnessed by last weeks phoney-war; government loyalists queued to test the voting infrastructure – as a dry run for the real elections for the new Constituent Assembly on July 30th, whilst opposition supporters queued to vote in an unofficial referendum. This referendum provided a 98% rejection of the current adminsitration, with reportedly 7.2m votes cast. An unsurprising result given that only opposition supporters voted. Whilst this is a big number it is only about 30% of the eligable voters, so the country remains deeply divided.

Prior to this referendum, the news from Venezuela was largely burried in all the First-World fluff, but it is reported that over 100 people have been killed in protests this year – this is a tragedy in the making for (many) of the people of Venezuela. But at what point is this not geo-political risk for the oil price? Looks to me like the single biggest “wild-card” out there at the moment.

French Elections

On the subject of elections, the non-news part of the Macron win was the massive abstension / spoiled ballot rates. Macron got 20.8m votes, Abstentions/Spoiled got 16m and LePen got 10.6m. Whilst it is a fun-fact that Marine Le Pen actually came third in a two-horse race, the implication is more sobering.  A huge swathe of the French population felt that they were not represented by either the centrist Macron or the far-right LePen. These disenfranchised voters are mainly from the left; those who voted for Mélenchon and diverse other candidates.

Marcon has achieved an incredible rise to power, not just in the Presidential election but also in the legislatives – all with a party that did not exist 18 months earlier (maybe an idea for the scleoric UK political scene ??), and I wish him “bon vent”.  Boy is he going to need it; in France the planned reforms will be fought hard, and fought in the streets, not in the corridors of power.  Could be a long cold winter.

Efficiency vs EVs vs R&D

According to the BP Energy Outlook, almost all of the “demand reduction” between now and 2035 will be due to “Gains in fuel efficiency” (of internal combustion engine vehicles “ICE” ).  Makes sense. There is an inevitable improvement as the “fleet” turns over and more modern, more efficient, vehicles replace the older generation. This can’t account for all of the 17mmbbls/day, surely some will come from improved technology ?

What is odd, is that when you read the press, all reports show that the traditional manufacturers are shunning R&D spending on ICEs and focusing on EVs (as per Volvo’s announcement this week).

Spending on R&D for ICE fuel-efficiency is being cut to almost zero, and yet 17mmbbls/d of demand reduction is predicted. Not quite sure how you square this particular circle, even taking into account modernization of the global fleet.

Fuel Tax

Currently, it is claimed that EVs are 10x cheaper to run that normal cars. Quite possible – given the low cost of electricity and the superbly simple mechanics (no gearbox, clutch, tranmission etc). But what of the future? The headline grabbing report by Professor Tony Seba of Stanford predicts that within 8 years no more ICE cars will be sold anywhere on the planet. We will all be in shared (Transport as a Service “TaaS”) autonomous  EVs. Quite where that leaves the individuality we all love in our cars – whether it be in choice of make and model, or in customization, or in my case, all the **** we leave in it “just in case”…

My guess is the cost of running (and buying) EVs will rise. Firstly, there is no such thing as a free lunch, so all the electricity will have to come from somewhere, and with the best will in the world, it is unlikely to be all from renewables in the foreseeable future – so we will need to build more generation capacity – and as Hinkley Point has shown, that isn’t easy or cheap (and the costs will continue to rise above budget…). Secondly, think tax. The government in the UK will be losing c. £26BN/p.a. (4%-5% of total tax receipts) as we stop buying fuel.   So expect a creative solution, which will involve taxing electricity…  In addition, lower tax receipts plus spend on infrastructure projects = less money for subsidies (EVs have massive subsidies currently as “company cars” via super low BIK rates in the UK). If you don’t think that is important – look at Denmark – which admittedly has some quirks, including a 180% import tariff on ICE vehicles… 2015 was the last year that EVs were exempt – so sales were boosted by a ‘rush-to-buy’… but the trend is clear. Tesla Sales…     

 2015: 2738          2016: 176          1Q2017: 4

As an alternate view on this, the transition to EVs might well save over £26bn on health care costs that today could be attributed to air quality (or lack thereof)… but these gains will be seen later, leaving a budgetary hole to fill.

Saudi IPO

Line up, line up, get your IPO prospectus here – as with all major publicly listed natural resource companies there will be the usual reams of boring regulatory data on stuff like financials and resources…. except that, well I wouldn’t hold my breath. I’m guessing that there will be no, or extremely limited, disclosure on resources, let alone reserves.  If I am wrong, then there will be forensic examination of the data – Matt Simmon’s “Twilight in the Desert” was not wrong, just a few / several / many years too early… (circle the choice you prefer).

Which reminds me – I once heard why it is so hard for non-industry people to understand the Oil and Gas industry jargon. In normal parlance, Resources are what you have “in hand” so to speak, Reserves are what you hold in, well.. reserve. We of course invert this and our Reserves are what we expect to recover and our Resources are the back-up potential. ho hum.