Posted on 07/11/2013 11:00:39 AM PDT by ckilmer
Oil prices have been given a lot of scrutiny and consumers are not seeing relief at the pump. Nobody will argue that price fluctuations do not play games with consumers’ minds and wallets. Elon Musk, the CEO of Tesla Motors, has proposed that electric vehicles are a way to free ourselves from foreign sources of energy, and giant price fluctuations.
To import, or export that is the question
As supply increases, we should see gasoline prices come down, right? Wrong. We are seeing a huge supply glut of oil in the US, but refineries like Phillips 66 (NYSE: PSX) are exporting their final product to profit from higher global gasoline prices.
Hydraulic fracking has unlocked huge amounts of oil and natural gas in this country, but for these operations to be profitable oil prices need to be above $65 per barrel. As the miles driven in the US fall and the efficiency of our vehicles increases, the domestic demand for gasoline will continue to decline. However, just because the US is using less oil does not make up for increasing world demand.
Phillips exports nearly 100,000 barrels of oil per day of refined gasoline and diesel to overseas markets. The company is now looking to at least double that amount by 2014. And it's not just Phillips that is doing this, as the US refining industry expects all fuel exports are likely to double by 2015. The refining business is stable within the US. These companies have thin margins at 2.7%, but make up for this in volume.
Phillips has an extremely low payout ratio at 21%, and this gives the refiner a lot of room to grow with dividend increases.
Variable costs to generate electricity
Exelon (NYSE: EXC), one of the nation’s largest nuclear energy producers, has been a victim of its own success. The glut of cheap natural gas that the nation has seen caused this utility giant to see its profit margin squeezed as competitors were able to generate electricity for less. Exelon was forced to cut its dividend from $0.53 to $0.31 this year to maintain its credit rating.
Exelon has learned the hard way that the variable cost of electricity is the largest single factor in profitability over time. The company brought 404 megawatts (MW) of wind power and 31 MW of solar power online in 2012, and is expecting an addition 200 MW of solar to be added in 2013. Once solar panels are installed and generating electricity, they will be doing so as long as the sun is shining.
MIT professor Don Sadoway is now experimenting with large-scale liquid-metal batteries that solve the problem of intermittency that solar and wind power face. These batteries don’t wear out like traditional batteries, and are made from inexpensive, earth-abundant materials. This will make alternative energy an even more compelling argument.
Increased usage of electricity to power vehicles could be just what this industry needs to maintain a steady supply and demand for power. Exelon is facing mounting competition in its energy-generation business and has been following Duke Energy's lead in acquiring more regulated distribution markets via merger.
Exelon's merger with Constellation Energy gave the company more regulated markets and stable revenue, which now make up 65% of revenue, up from 55% prior to the merger. Going forward, we will see Exelon continue to invest in renewable generation capacity and focus on its regulated markets.
The alternative to gasoline
Tesla Motors (NASDAQ: TSLA) and SolarCity are teaming up to build solar- powered supercharging stations across the US. These stations will charge vehicles and charge idle batteries that are ready to be swapped. When they are done doing that, the electricity will be sold back to the grid. The added benefit of these supercharging stations will keep Tesla customers loyal when they are looking to purchase their next vehicle, as well as generate steady income with the electricity sold back to the grid.
Owners of Tesla vehicles will be able to recharge their vehicle for 30 minutes to gain 200 miles of range, or swap out their cars' battery for a fully charged one in 90 seconds. The cost for the 90-second swap is estimated at $60 to $80, approximately what you would pay for a full tank of gas. This 90-second option may have just opened the market for thousands of people taking trips a few states over to go see relatives.
Tesla's stock is valued as 22 times forward earnings, and the company just started making a profit in the previous quarter. Toyota Motor is the company to beat in this segment, with a market cap of nearly $200 billion, and a forward PE ratio of 15. Tesla does have a lot of growth potential, but there is a lot of competition and billions of dollars at stake in the automotive market. I would wait until Tesla's valuation comes more inline with its business before pulling the trigger.
If this company is able to keep licensing out its technology to competitors, while producing cars with supply that cannot keep up with demand, Tesla will be a great investment going forward. However, its first-mover advantage may be be slipping away as the large automotive companies are researching their own technology and threaten to take Tesla's market share. GM is rolling out its Cadillac ELR this year, which will compete against the same demographic as the Tesla Model S.
Haters be happy
Just the word electric car seems to bring out strong feelings for and against, with people arguing that the batteries are expensive, the cars look funny, and nobody wants them. One way to lower the price of a commodity is to lower demand. For gasoline, you can do this by either purchasing a non-gasoline powered vehicle, or encouraging your neighbors to purchase one.
As a person who does still own a vehicle with an exclusive internal combustion engine, I am stuck buying gasoline whether I like it or not. Owners of electric cars however, are slowly decreasing the demand for gasoline in this country, which should ultimately put downward pressure on the price of the commodity.
Foolish bottom line
As electric and natural-gas vehicles become a larger percentage of the American fleet, we should see continued demand decrease for the gasoline. Tesla has been able to: drum up some of the most loyal customers, license its technology to auto-majors, continually have demand outstrip supply, and maintain a “cool factor” with its cars. However, I will be waiting until this company comes down from the stratosphere and its fundamentals match up more closely to its stock price.
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If and when the 0bamanation regime succeeds in forcing up the price of coal, electric cars will be a even less viable option than they are now.
libs like ev’s because they limit your ability to travel long distances freely. fits the whole agenda21 thing and forcing everyone back into cities, and having tightly controlled, few, corridors between urban areas that you can’t veer much off of.
Supply glut? Is the author smoking crack?
Yes, our domestic production has gone through a significant increase. 5 years ago we only produce 5.15 MMBPD and our consumed 17.96 MMBPD or refined products.
U.S. Field Production of Crude Oil
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M
U.S. Product Supplied of Finished Petroleum Products
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTPUPUS2&f=M
While our production has climbed 42% to 7.35 MMBPD and our consumption has fallen 10% to 16.19 MMBPD, we only produce about half of what we use?
How the heck is about half of what we use a supply glut?
Just had this discussion with a friend who’s running for state house of representatives in my district last night. He was thinking he might be able to attract some low information voters if he campaigned a bit about his new Nissan Leaf.
After an hour of friendly discussion, I think he’s decided against making noise about his car choice. I also saw a hint of buyer remorse when I explained he’s not doing himself any favors by buying a plug-in.
Besides the fallacy that he’s saving himself some cash, it may be true now, but the “green” factor isn’t. Also, watch as soon as the plug-in car market reaches .05% states will freak out and start installing tax by the mile schemes.
What really convinced my friend he had made a mistake buying the Leaf was when I showed him an official guideline driving our state government’s transportation plan called “Vision 2040”. They have been testing and have worked the kinks out of a pay-by-the-mile plan for the past 10 years and are ready to implement the plan as soon as there is political will.
Is this a Tesla ad?
Gasoline will be around long after the article author is pushing up daisies. Bet on it.
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I don’t disagree. But the monopoly prices that gasoline has enjoyed are going to disappear.
Consumers are going to enter into a generational sweet spot as electric cars (and natural gas vehicles)and internal combustion engines compete against each other and push transportation and energy costs down. Lower energy costs mean that there will be an explosion of wealth and consequently a growing demand for more energy.
No its a piece posted on Fool.com.
The pitch at the end is for more Fool.com articles.
I love my Prius, but I just would never do a Tesla (despite how cool I think it is) or the Leaf etc. Not enough return and limited range. I guarantee you these charging stations will completely ignore flyover country for at least a decade.
And yeah, the Prius is expensive, but getting better as more and more buy them, which is why we took the plunge. Frankly, most other vehicles aren’t a lot cheaper and equal out with more gas cost anyway, and the Prius has fewer moving parts to go bad as well.
Nice to fill up for $25 instead of $80 like the old pickup.
Teaming up? They are both owned by Elon Musk, the guy for whom this "reporter" is a stooge.
How the heck is about half of what we use a supply glut?
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I don’t think there is a supply glut right now either. The US is just refining oil and exporting gasoline so extra US supply is just being dumped into the world market. And US prices are set by world wide supply/demand
However, it looks like the USA is going to add another 1 million barrels@day of oil supply this year and early indications are that in each of the next several years the USA will also add another 1 million barrels@ day.
That’s why Citibank earlier this year said that by 2017 the USA will be a net oil exporter.
It isn't US supply when we import more crude than we need and export the relatively small refined surplus. We have refining capacity surplus, not oil production surplus.
That’s why Citibank earlier this year said that by 2017 the USA will be a net oil exporter.
As much as I hate making market predictions, I would bet my horse we won't come close to breaking even by 2017 on oil production and consumption.
From the article:
The refining business is stable within the US. These companies have thin margins at 2.7%
A 2.7% margin is monopoly pricing? Has the author shared his stash with you? Sorry to be rude but do you think 2.7% profits are gouging?
Will the proposed tax-by-the-mile scheme extend to gas-powered cars? This could cause a revolution.
The fact Mr. Wes Patoka is oblivious to the fact America’s transportation fleet runs on gasoline, diesel, and jet fuels is mind boggling. America’s transportation needs are not going to be met by electric vehicles, solar power, wind power, or environmentalists’ bloviating. Pound for pound, there is NO replacement for fossil fuels that offer the same energy for a given amount of fuel. [And no, Mr. Patoka, we are not going to see nuclear or steam powered vehicles either.]
“monopoly prices” does overstate the case currently.
My point was only that if you have two competing power trains and two competing fuels — then neither will be able to enjoy monopolistic power—which includes the power to set prices. Rather they will tend to compete against each other—which tends to put downward pressure on prices.
But it isn’t one company with a monopoly. It is hundreds. The competition exists.
When OPEC produced too much of the world’s oil supply, it had more ability to control market pricing. Even that has diminished.
That is like saying there is no competition for fast food because all the different companies are still making fast food.
I don’t disagree with your point. Further I would add that I like the way TBoone Picken’s plan for natural gas vehicles is coming along. That will further reduce demand for oil.
It is in the interests of consumers to have lower fuel prices. Because lower energy prices are directly causal to wealth production around the world. Lower energy prices and the wealth of the world explodes. That explosion of wealth creates a higher demand for energy.
Energy supply and demand is very very elastic.
As much as I hate making market predictions, I would bet my horse we won’t come close to breaking even by 2017 on oil production and consumption.
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I had my doubts about that until I started reading about the cline shale formation in the permian basin.
Not only is there more oil there than in the baaken and eagle ford combined but they can extract it much more cheaply and they already have the infrastructure in place to get it to market. so the volumes will go up as fast or faster than eagle ford.
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