Oil Prices

On the day we launched, oil hit its all time (non-adjusted) high - $92.5 a barrel. I got asked to speak at Fox, right after a panel of oil “price experts” finished a very heated dialog. The guy shouting the hardest was the anti-green guy. He made a very bold claim that the price point of $92 is over inflated by speculation in the market and that there is at least $20 of speculation in the price of the barrel. The reason for that projection – national reserves data for all countries around the world, and in particular US showed higher reserves than past numbers. That meant the US had 57 days or so of crude oil reserves in its disposal and wasn’t using them – in other words the federal governments were behind some of the inflation since they were “over-buying oil”.

I couldn’t interrupt him, as they wouldn’t let me sit in the same studio with the panel (I was pushed to a side room camera – not enough room next to the panelists). What I would have reminded him, had I had the chance is that going back $20 is merely one or two months in calendar terms. The interesting thing was the fervor with which he spoke, as if to say that oil at $70 a barrel is a cheap commodity that makes everyone happy.

Sure enough I wake up on Wednesday morning in Washington DC, to find the next headline – “Oil prices tumble to $90 a barrel”. Just the thought of the combination of $90 and the descriptor “tumble” threw me into a long laugh the entire day. Oh, by the way, by the time I took my flight out of DC on the same afternoon, the price of the barrel un-tumbled (I just can’t find a better descriptor) to $96, as we all learned that reserves in the US hit a low not seen since the post-Katrina shut down of the Louisiana refinery belt. Mind you, that $96 a barrel price, still does not factor in a single potential disaster like a Hurricane turning North-west instead of North in the Gulf of Mexico, let’s see, within the next 48 hours?

Continuing on the strong “weak signals” theme from Sunday

• China had the first gasoline direct casualty – a person in line for gasoline in a town gets beaten by people who are constrained by Diesel shortages. This is not a China problem - it is going to become a very ubiquitous problem around the world - so take the image of a man beaten for Gasoline and scale it out by 6 Billion people…you see the point.

• As result of the shortage of gasoline, China raised the price of Gasoline at the pump by 10%. This is really big news, and if the trend of oil crude continues at the same pace, more increases are on the way soon.

• The CEO of Total, the French upstream and downstream company, breaks rank from the rest of the industry and tells FT that “while reserves are still found in the ground, reaching production capacity of over 100 million barrels a day is difficult”. The reason is fairly simple, new reserves are going to the national oil companies (NOCs) and not to the major global companies any more. Countries are asking the majors who want to come into their country to focus on the “heavy oil sources” those are not only harder to get, they also have a higher carbon impact on the world. By not letting the oil majors tap into the easy oil the countries are hoping to keep those reserves for themselves for a rainy day.

If you were wondering what the oil majors were predicting on the future production targets, well check the following data out:

• We are producing 85m barrels a day (b/d) right now (that’s the great sucking sound you hear in your sleep as we gulp our planet’s scarce natural resources that took us 300 million years to convert from living matter into carbon based energy
• Oil companies predict 118 m b/d by 2030.
• We are already at virtually $100 per barrel, today at 85m. What happens as we approach 100 m b/d to the price  of oil and gasoline. This is queue theory at its best. The clog that comes as result of the last buyer for a barrel of oil is just the same as the slow down of cars on a highway – the last 10% slow down the road by 50%. Yet just like on the road, the last 10% set the price higher not just for themselves but for everyone in the market.

What does it all mean – we are $4 from the inevitability of $100 per barrel of oil. There is 0% short-term market elasticity in the price of oil. We consume it the same at $1 a gallon and $3 or $7 a gallon. Why? Because our short-term decision is always one for $100 or so – should I fill up my car or stop driving from now on. When the decision for car energy is less than 1% of the cost of the car, you can never wean away from the addiction to oil. It will be interesting to see what happens in Europe, when Gasoline prices hit $8 per gallon across the entire continent (not just London) as result of this recent crude oil increase.

To illustrate, an average clunker across Europe, and there should be 100M or so cars in Europe over the age of 8, is probably worth less than $5,000 to buy. Refueling it for a year at 20 mpg, which is where the European fleet was on performance 10 years ago requires an average of 600+ gallons. As a result the average used car owner will pay more than $5,000 for car energy supply for one year – more than the car is worth. As Europe urbanization and salary diversity pushes more people into suburban and beltway living, at least 30% of the population drives 30,000 km a year. Those people, who are the ones that cannot afford the expensive living in the city, now need to either stop driving private cars or pay upwards of  $7,000 for gasoline every year. Only we never make that decision ahead of time, we take the hit 50 times a year at the pump – death by a thousand credit card cuts…

The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year– talk about razor and blades businesses. Big oil still can’t supply the global demand for this concentrated energy liquid, yet the US prices gasoline less than its other concentrated energy liquid – Red Bull – when we compare on a gallon-to-gallon basis. [If you are like me you now wandered into the "how much is a gallon of Red-Bull" part of your brain...at $2 for a can of 8.3 ounces it costs $30 for a gallon...if you buy it at a club for $6 a can you are looking roughly at $100 a gallon - or 30x more than Gasoline...but then again, where do you find a gasoline that would give you the buzz-worth 15 cans of Red Bull?]

The oil companies are not evil, they merely supply our craving for freedom of drive. The bigger the population growth, the farther we are from our centers of work and culture, simply because we cannot afford the houses that require no driving in the middle of our big cities. If the oil companies would not exist, we will all run for cover as our economy would stall and our markets truly tumble. They are not a magic liquid industry – they are in reality transportation energy companies. We need to find a better transportation energy platform for them to jump to, bridge to this future, one that does not depend on magic liquids bubbling up from the bottom of our oceans and spews the carbon so neatly stored in the ground back into the atmosphere.

check out our white paper at  Project Better Place

shai

Comments

[notimportant]

I provided some info yesterday regarding a extruded battery process that I was involved in some years ago(about 30). Just out of curiosity I made a few phone calls to my non-retired friends still working in the industry. Turns out they have since dusted off the idea and came up with a new twist. Apparently, there are several projects out their in various firms looking at a similiar idea.
Here's what I've been told. Rather then building a customized battery geometry the manufacturers have been looking at something that has the look and feel of a "machine gun belt". Rather then having munitions in each belt slot it has a Lithium ion battery in each slot(standard cyclindrically form factor; actually 3.6Volt/650mAh to be specific); . A dispenser unravels a belt of several hundred lithium-ion batteries and replaces individual batteries in the belt with new charged batteries leaving charged ones to be replaced at a future point in time.
Onboard the consumption device(presumeably a car) is has a "Front head" and "rear head" that makes contact with each of the batteries in the wound belt and draws electricity from the cell array and drives the device/car.
Quite an elegant piece of engineering if I do say myself. At $5.00/battery x 500 batteries that 2500.00 per real. Two reels $5000.00 and you have just about enough juice to get 300 +/- 50 miles range if you loose the gas engine and transmission and go pure electric. Now that certainly is more expensive from purely an upfront perspective then the cooresponding gasoline engine but not if you go with a "service model" where the initial cost is distributed over a subscription. It works for cellphones after all none of us pay the entire cost all up front. The phone price is always accrued over the cost of the subscription.
The most elegant thing about it is that the batteries are a pure commodity item. They have little to do with either the dispenser or the consumption device. In fact batteries can be replaced in the future with other chemstries as they becomes available. The "gas pump" is replaced with a machine that has an arm that swings over to the reel feeder on the 'car' offloads the belt, checks each battery, pushes each battery that requires charging out of the belt inserts a new one in each slot and feeds the belt back into the 'car'. From there I gather the plan would be to collect a bin of used lithium batteries and load them into large scale charging arrays or to send them offsite for charging depending upon the dispenser location. Interestingly enough my understanding is that a few of my battery buddies are in fact one step ahead of your "subscription" business. The onboard array of batteries and its supporting control equipment is apparently intended to support "plugin-electric" charge mode as well as the "on the fly replace" process described earlier.
Their plans are to be the subscription service and lease guys like you the batteries, and lease you the equipment and let folks like you run the "collection and dispensing" operations. I'm afraid this puts any one "company" in a pretty bad competitive position since you can sell equipment like this to any gas station. Mix a plan like this with plugin-electric hybrids and you have a manageable transition from gas to pure electric over a decade or so. As the chemistries of the batteries improve and or the distribution chain for the dispensers grow the demands put upon the gas engine would drop off. Definitely big changes going on. Looks like we aren't too far from the 'back-yard' mechanics competing with better capitalized ventures. Standardize on the belt geometry and your done.
One last problem to solve (chicken or the egg: Vehicles lack distribution network, no distribution network means not economical to build vehicles) and the answer is: Lease 2nd cars to commuters or 2 car families and begin geographically along commuter routes and Offer franchises to "anyone who is willing" to offer a footprint. Hmm...Sounds like the old photomat booth format. Perhaps you can put an ATM in the other side of the booth to help subsidize the footprint. :)

Best of Luck from "not important"

[Ben Bakhshi]

As far as price elasticity goes, don't you think China's new gasoline tax is motivated to reduce demand, even if it is slightly? Also, you didn't factor that when gas/oil prices are high, people begin buying (or trading in for) cars that get higher MPG. "I want my MPG!" That implies that there is price elasticity with oil, far from 0%.

I would recommend reading Alan Greenspan's new book The Age of Turbulence. You basically paraphrased his opinion about the supply of oil; that oil rich countries are more likely than ever to stockpile oil for future use, and thus they reduce competition by int'l oil companies, thus keeping oil prices high, probably up to 2030.

[Jacob]

And your point is ...? We knew all this, it's old news. A few decades old. So what was the point of this post ?

[Silviu Trebuian]

Greetings Shai! I'd like to congratulate you for the efforts you put in, trying to solve one of the difficult problems of our time, pollution. Not only that the Arabs destroy our planet by selling more and more oil but they also invest money in stupid enterprises like palm island building etc. Congratulations again! I hope you materialize the concept of thinking out of the box.

[Dr Asher Idan]

Long Tail + Flat World (Thomas Friedman) = The Long Tail World.

The Green-Tech Revolution should be the Poor-Tech Revolution of Micro-Lending and Micro-Business.

TopTier 2.0 will extend beyond Ranana and Ramat Aviv, to India and Shederot

[scott]

To "not important": You are not thinking the consumer will purchase the reel -- just the power, inside, right?

One note on the US dollar: Changing business practices and new leaders are undoing the "easy" lending process. Home prices are lower. In other words, despite Fed easing, there is a strong, internal support for the dollar. You really need employers begging for labor to get the type of inflation that would justify the current spikes in gold and oil -- and that's not here! Hmmmm.

[Florian]

First of all, I have to say that I appreciate your efforts to push the discussion about alternative energies on a higher level. I am not so deep in the topic but the first thing I thought has been – why haven’t we changed the extent we use oil. For example: my father told me that he read about hybrid cars the first time in a Micky Mouse magazine about 35 years ago and nothing happened for a long time.

People always think at gas in the first place, but we also do use oil to produce all kind of plastic material. If you look at the cracking process in refineries you will see that only around 50% ends up in gas or kerosene. So I think whatever your “energy strategy” will be at the end your main focus should be on how you will be able to push it into the market and run over the power of the pressure groups such as oil-magnates.

All the best to you and your project!

Kind regards

Florian

[David Weiss]

Shai, I like what you're saying. One thing, though, depending on where you live you might not know this, but here in the midwest, we have individuals making absurd decisions about where to live. You mention that people can't afford to live in the central areas. Not so here or other midwestern cities. People decide where to live here based on racial prejudice and selfishness. "You can't get a new house unless you go out to (name the distant suburb)" As if living in a brand new house is some kind of requirement for happiness.
Our newest suburbs, vast cornfields now turned into subdivisions and retail stores, are literally 30-40 miles from our center city, and yet there are thousands of centrally located properties that go wanting for a buyer. The city of St. Louis alone owns over 10,000 reidential properties that have been abandoned.
Not to mention that living in these far flung suburbs must be miserable - the roads are crowded and you can't walk anywhere. Just taking children to school is probably a 5-10 mile drive in either direction.
Finally, every time the price of gasoline spikes, reporters go out to these places and interview the poor souls who've chosen to live there - and they always find someone to blame other than themselves for their predicament.
I think people should be able to live wherever they want, but our government, instead of supporting this waste by sending our soldiers to the Middle East to keep gasoline prices down, should just let gasoline prices fall where they may.

[Concerned]

As someone who group up in a city with 40% unemployment, 60% hispanic 40% white demographic population I think your characterization of those living in the suburbs as "poor" souls is at best uninformed. People began moving out of the cities to get away from the problems that they themselves could not solve and choose not to live with. I like them left the city to avoid its problems, not to go to a place without problems but to go to a place with fewer of them and those problems that existed were more easily dealt with. People just want to live their lives and take care of their families and they don't want to do that in a place with high crime rates, problem stricken inner city schools, as well as a host of other problems that always exist in high density living environments. I've lived in six large cities in two countries in twenty years and they are all the same to one degree or another. A 5-10 mile drive is a small price to pay to lower the statistical probability of your child living next to a drug dealer. If you don't think these things exist in your city then God bless you your either very lucky or very blind to what goes on down on the strip. Sure the surburbs aren't perfect but the crimes rates are statistically lower, the schools get statistically higher marks on average and you have the opportunity to address your own problems rather then having to also address everone elses problems. I'm sorry, this world is a harsh place we all can't step up and save the world, some of us are busy raising our own children rather then hoping someone else does it for us. If you want to fix it then your a good person and I wish you well but most of us are just trying to make a living and raise our own children and its easier to do in the burbs...I've done both...I raised five children. Two in NY city and three in up state NY and I can tell it it was a hell of lot easier in up state NY. Was that worth spending an extra 300.00/gas per year for gas? Yes, It was. People are not miserable in the burbs no more or less then people are miserable in the inner city. It's a trade off of one set of problems for another. In the inner city the cops wouldn't arrest the drug dealer down the street even though everyone knew what he was doing because the courts just kept letting him free. In the burbs it cost some of my time to drive my kids to school.
My time vs. a drug lord neighbor.
I've had my house broken into while my children sleep in at least two cities. That will change your mind pretty quick about cities. Sure that can happen in the burbs as well but statistically it doesn't occur nearly as often so my chances are better and my family IS SAFER.
hmmm....
You should join the peace corp.(You'll be disappointed I did a hitch in the peace corp. Built wells in Africa for folks that needed water back in the 60's. Their own militia's poisoned the well we dug as soon as we left. You can't solve other people's problems my friend. People have to solve their own the rest of us do our best to stay clear.) Past city dweller: Chicago, Boston, New York, St. Paul, Seattle.....

[Alberto Tapia]

First of all congratulations for your initiative and my best wishes for it.

I absolutely agree with Florian. Why is everybody pointing to the cars? Ok there are lots of cars, and specially in USA where the F 150 was the most poplar car for years with its 20 liters / km (sorry for that but i cannot translate it into galons)

What about plastics. Car manufacturers are spending billion in R&D to improve their results but plastic use is increasing day by day. What will we do without plastic?

It might be stupid but my grandfather (civil engineer) told me that 100 years ago we didn´t have plastic and probably we will do the way backwards and use again metal or wood.

What dou you think about this issue. I would like to know your opinions.

Regards

[Alex Segal]

Hey!
You reffered in your previous post to several books which influenced and improved your perception and sharpened your point of view... I, myself, don't have the habbit of reading "Business books", though I have to say that now I'm very intrigued and will try. But as I was reading your post about oil prices I remembered a book called "In the Country of Last Things" (Paul Auster), which influenced me a great deal and made me think a lot about environmental awareness.
Have you read it? I guess that the biggest advanage of the western world is also what has the potencial to end it, and it is comfort. We lead such comfortable lives that we become more and more reluctant to act on behalf of our views and thoughts ... We have to be very carefull...

[JayWarner]

I saw the report in the Wall Street Journal 10/29, and I'm afraid too many people will listen to the large company commentators, and thus miss the mark totally.

I go back to Clayton Christensen - The Innovator's Solution. Battery power may be (probably is) a disruptive technology - it certainly is for oil companies. Large established companies _cannot_ handle disruptive technologies - they simply don't 'think right.' They need something that will entirely replace their established product across their entire market(s). The investment, performance and support network (infrastructure?) simply aren't there for battery power. The strictures (boundary conditions) - legal and otherwise - prevent any quick change.

What happens if you need to make a small twist in the execution of your distributed battery concept? A full market structure simply can't. An earlier post shows that battery people are ahead of Detroit. You need to be able to 'experiment' with different designs, and try them out for real.

Instead, build your batteries and cars for them, in the time honored manner that other disruptive technologies have done. Mainly, you pick a small market niche that needs the obvious & up front benefits you offer. I suggest that there are many parents who would be ecstatic to buy a 30 mile range, 40 mph max automobile for their high school age kids. The kids could get used to the idea of no gasoline costs. Look at the people who liked the EV-1, even with all its 'faults' that GM spent so much time emphasizing. They traded those faults for the benefits - low fuel costs, and GM had to pry them out of the would-be customers' hands.

The disruptive tech company gets started, with real cash flow and all that 'stuff,' gets real customer experience so they can adapt the tech to more closely suit the users, and uses the experience to expand as fast as the buyers let them. At some stage a 'tipping point' is reached and firms like GM, Ford, Chrysler, Toyota, etc. find themselves playing catch-up.

Now, what niche market can you fill nicely? I'd suggest the obvious - one city area, where current, visible air pollution is an issue and gasoline prices are rising. My local area (SE Wisconsin, part of the Chicago area non-attainment zone) just saw gasoline go back over $3.00. A commercial or government fleet that frequently goes past a refueling/renewed battery station is a clear possibility. Say, the Post Office, UPS or FedEx. Let anyone who is willing to keep good records and doesn't need to take long trips with it buy a similar vehicle and participate. We're talking 2nd cars here, basically. I'm almost in the market for a sound 2nd, local travel car. What can you offer around here?

When you start showing that data on fuel costs around the country, there should be a clamoring for more. Surely some gasoline station/ battery station entrepreneurs will smell a good investment in other concentrated areas, based on the clamoring.

Mind you, you are NOT competing with GM, etc. They make cars for lengthy trips, and specialized vehicles. You are fitting into a small niche.

Until the trend becomes obvious on the 12th floor of downtown Detroit.

Best of results to you, and when can I buy one for my area?

[Uriel Friedman]

Good luck with your efforts shai,

It's important not only because of the benefit for the environment, but also as a measure to reduce the influence of several fanatic and unstable states in our world.
I truly hope you'll succeed.

Best regards,

Uriel

[CB]

Hello Shai,

thanks for the book recommendations, that will be good reading for long winter nights.

The idea of google`izing the car industry is very intriguing indeed. You could subsidize the Car price with advertising, with a simular Business Model as Google.

I envision myself driving thru town, while I get advertisements served to me depending on my GPS coordinates and my personal profile settings.

I would sign up for a 24-60 month energy contract with you and get the Car for nearly free. The perspectives and opportunity´s are vast, simply enormous potential in there.

While you are at it, you should create a new kind of Car reference Model, get the requirements from the Customers. The technical-Geeks are not getting the design right for a User-friendly Car!

I for example like Cars the way they used to be in the fifties, with very wide and reclining bench seats, NO Gearshit-Consoles in the middle, spacious and comfortable where the whole family can sit upfront.

[Jacob]

I will take, enthusiastically, any car you can offer me at $500 a month. It doesn't matter to me if it's electric or not.

[Brian H]

Speaking of related "disruptive technologies", Shai, you might like to lean a bit of your capital in the direction of Focusfusion.org. It's an effort to advance the proving and production of corner-store sized fusion power plants, cost about $300,000 each. They need about $2M to get through the "proving" stage, an amount too small for the big boys to deign to cover. But read the site.

This could be the real thing, and make cheap electric power universally accessible.

[CB]

Hello Shai,

we can start thinking about Cars in a new way, I guess.

Every Car is essentially also a piece of mobile Realestate. If you retain control over its usage (in the lease contract) then there are many usages for that electric Car Fleet, addtional to hosting your mobile power-storage-Grid.

You could integrate mobile Wireless-Lan Hotspots into the Cars. So whenever they are parked somewhere they can be connected to as a Wireless Lan Hotspot. You can create your own Telco/Wifi Network on Wheels. Protocolls and Prototypes of such Mesh-Networks have already been done, albeit not on Wheels.

These "new" usages open up more space for additional applications and services that can be used to generate addtitional Profits and/or subsidize the price of the Cars.

I think moving that venture to Silicon Valley and letting the Internet-Software Guys have a go at the problem will open a Pandoras Box of innovation and a generation of wealth never before thought possible.

[Yuanping Zhao]

Before most of the cars are powered by battery, the energy that drives our vehicles is still sourced from fossil fuel. The problem is how do we conserve the limited fossil fuel resource while reducing engine CO2 emission? The answer is increasing engine efficiency. Based on the current 25% engine efficiency, the whole world lacks feasible solution and technology until now ---

High Efficiency Integrated Heat Engine (HEIHE) is just invented and patented recently. This innovative engine structure has been posted at wfeast.com for comments and funding supports. The inventor of this green engine is expecting to see double fuel convention efficiency, thus double gas mileage, once it is implemented. Based on HEIHE architecture, 21st Century engine revolution is waving to us. I believe any investment will definitely trig this engine revolution, making this innovative green engine a reality.

HEIHE will benefit all the earth dwellers as you deserve:
1) Green Jobs ---- Ten thousand jobs needed to retrofit
millions of existing dirty engines;
2) Energy Conservation ---- By higher fuel efficiency;
3) Emissions Cuts ---- Reduced CO2 GHG discharge from engine;
4) 35 MPG in the near future, 60 MPG in 5 to 8 years.

HEIHE ---- Welcome to our energy hungry world!

[Scott Potter]

Shai,

I think this quote is approipriate given your current project and past history:

"Until one is committed, there is hesitancy, the chance to draw back-- Concerning all acts of initiative (and creation), there is one elementary truth that ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way. Whatever you can do, or dream you can do, begin it. Boldness has genius, power, and magic in it. Begin it now"
Johann Goethe

How can we get involved in your project?
-Scott Potter

[Tzvi Rozenman]

Shai, Regarding your calculation of Electricity cost. You say that 1kW of solar power will be sufficient to drive the Car. Average cars are about 200 Horse power which is about 150kW so you should multiply all your numbers by 150

[Shoshi]

Hi Shai
How's this for an idea? Developing a network of treadmills for people to come jog on and generate energy (or rather recycle it)? People would be paid a certain sum for this, and that way people would have an economic incentive for exercising, less people would be overweight/obese, and it would be a totally green energy source! I would love to read your opinion on the matter. I also realise I'm probably not the first to think of this idea. Are there projects along this line in process somewhere?

[straziota m.m.]

i am a president of italian project studio and i am very interested to contact personally mr. shai agassi for presentation of revolutionary electric-solar car. please informe me just method for comunication. wait the answeer at soon
m. m. straziota

[seechdog]

Now that the Supreme Court decided that the Exxon Valdez 5 billion dollar judgement to the fishermen of Alaska should be cut all the way down to 504 million, shouldn't oil prices go way, way down considering big oil companies can cancel their insurance and just pay these people out of 4 days of profits? Why do the prices of oil go up so much when a terrorist leader says something about blowing up a pipeline (that never happens), but now that Exxon saved 4.5 BILLION dollars at Valdez the price of oil won't change for Jack!