Falling oil prices could doom fracking (yay!) and electric vehicle adoption (booo!) leaving the Climate in the lurch

At the just-concluded OPEC meeting, the oil-powers-that-be decided to maintain OPEC’s production level of 30 million barrels per day, despite oil price declines over the last year. For the people who remain stuck on fossil oil as The Transportation Fuel, this is a good thing because it means gasoline prices will decline to match. Probably. High gasoline prices made several things feasible – fracking is an economically viable business only when gasoline prices are high – electric vehicles save money on fuel only when gasoline prices are high.

By maintaining a high production level, OPEC looks to lower the gasoline prices paid in America and elsewhere. That’s going to make it difficult for both fracking and electric vehicles to remain economically viable.

While I’m happy to see the fracking companies die off it’s disturbing to think the same causative factor will damage the project of electric vehicle adoption.

OPEC’s press release has this to say about oil production levels:

The Conference reviewed the oil market outlook, as presented by the Secretary General, in particular supply/demand projections for the first, second, third and fourth quarters of 2015, with emphasis on the first half of the year. The Conference also considered forecasts for the world economic outlook and noted that the global economic recovery was continuing, albeit very slowly and unevenly spread, with growth forecast at 3.2% for 2014 and 3.6% for 2015.

The Conference also noted, importantly, that, although world oil demand is forecast to increase during the year 2015, this will, yet again, be offset by the projected increase of 1.36 mb/d in non-OPEC supply. The increase in oil and product stock levels in OECD countries, where days of forward cover are comfortably above the five-year average, coupled with the on-going rise in non-OECD inventories, are indications of an extremely well-supplied market.

Recording its concern over the rapid decline in oil prices in recent months, the Conference concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing. Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011. As always, in taking this decision, Member Countries confirmed their readiness to respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

Agreeing on the need to be vigilant given the uncertainties and risks associated with future developments in the world economy, the Conference directed the Secretariat to continue its close monitoring of developments in supply and demand, as well as non-fundamental factors such as speculative activity, keeping Member Countries fully briefed on developments.
Since OPEC is one of the major power brokers on the planet, the real purpose of their action is probably different than what the words say. Taking the words at face value, the vision expressed is more like a farmer caring for their land so they may continue harvesting crops from that land. In other words, OPEC claims to be nurturing the economic well-being of the global economy, with the obvious result that OPEC will continue reaping big rewards from selling fossil fuels.

Now – up above I said this will influence both the companies that do fracking, and the electric vehicle market.

A Bloomberg report quotes a Russian Oil Tycoon, Leonid Fedund of Lukoil, saying that today’s price ($70/barrel) is close to unprofitable for some oil companies, and that “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again. The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

The issue is that fracking is expensive – it’s a very machine-resource-energy-intensive way of extracting oil from solid rock. An oil company can only make money from fields requiring fracking when the going price for oil is high enough. Over on The Daily Kos are some figures to support that idea.

According to Reuters, the Saudi Arabia Oil Minister argued that OPEC must declare war upon fracking — rather, declare war on the U.S. Shale Oil Boom — by cutting the price for oil low enough to kill U.S. Oil production. The Shale Oil Bonanza is due to fracking.

OPEC’s poorer members wanted a cut in oil production so that oil prices would remain high, because those countries need the income to prop up their local economies.

The basic economic fact is that current Oil production levels are outstripping demand for Oil. Simple economics says if production is higher than demand, then the price falls. Global oil markets are only partially under OPEC control. The U.S. shale oil boom is one source outside OPEC’s control, as is the Oil boom in Russia and Brazil. According to the NY Times, OPEC has lost control over oil markets and is no longer able to dictate prices. Therefore, OPEC is looking to regain control by driving the frackers out of business.

Another Bloomberg report cites data from the International Energy Agency that only 4% of U.S. Shale Oil production requires prices above $80/barrel to remain profitable. A large chunk of US production remains profitable at prices below $42/barrel. Torbjoern Kjus, an analyst at DNB ASA, Norway’s biggest bank, asked “The question is, what price level will be low enough to slow U.S. production growth? What price will get U.S. growth to slow to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”

The Daily Kos piece linked above suggests that because the frackers are backed by junk bonds, the economic ramifications of those companies failing will be widespread. The economical status of the oil producing states (Texas, North Dakota, etc) should also be gravely hurt. Lower oil prices will benefit other areas of the economy, however. In the news today are several articles suggesting the airline industry stands to benefit greatly.

Following that line of thinking a little further – after the fracking companies fail, can we expect a rapid oil price increase in a few years as the supply drops off? The Russian guy earlier suggested OPEC’s move will “clean up the American marginal market” (drive the frackers out of business) by 2016. What happens after that? Maybe OPEC will have enough leverage to regain control over oil prices and resume manipulating oil prices to keep milking the global economy for all its worth.

Let’s turn now to the effect this may have on electric vehicle adoption.

Electricity is a cheaper fuel than gasoline, making electric cars economically more attractive than gasoline powered cars. I measure this as the cost of fuel to drive a given distance. A 30 MPG gasoline car takes 1 gallon to drive 30 miles. An equivalent electric car might require 7 kilowatt-hours of electricity to drive that distance.

At the US national average of $0.11 per kilowatt-hour the electricity cost is about $0.80. When gasoline was at $4.50 a gallon that $0.80 was a bargain basement price for fuel. But with oil prices falling rapidly, thanks to OPEC, gasoline prices should be falling as well.

Source GasBuddy

Indeed, we see the national average gasoline price has fallen from $3.60 to about $2.70 per gallon since May 2014. I added Dallas and San Francisco prices to provide context on the high and low side of the national average.

That makes the electricity fuel cost price advantage fall quite a bit. At $3.60 per gallon the advantage was about $2.80, and at $2.70 the advantage is about $1.90, for 30 miles of driving.

Since that price advantage has to defray the price premium paid for electric cars, it makes electric vehicles less economically viable than they once were. There’s still a fuel cost advantage but it’s not as significant.

It’s expected that battery pack costs will shift dramatically in 2-3 years – the Tesla Gigafactory simply being the most prominent indicator of falling battery pack prices. As that economic factor kicks in the electric car price premium should fall considerably. Tesla Motors promises to be selling a 200+ mile range electric car in 2017 for a $35,000 MSRP as a result.

But what if falling gasoline prices dries up demand for electric vehicles? In the past the rise and fall of gasoline prices have caused consumer interest in alternatives to rise and fall as well.

Source GasBuddy

Look carefully and you see this covers a different time period – 2005-2012. Notice that gasoline prices rose and rose from 2005 until September 2008 – corresponding with the financial markets collapse at that time.

In the summer of 2008 I saw two news articles discussing how rising oil prices were making people look for alternatives such as fuel efficient motorcycles, or electric scooters. I remember reading in that time period about Texans parking (or selling off) their F150’s because gasoline prices were so high. And my friends who sell electric bicycles and scooters said interest was high at that time.

The massive price drop – $4.40 per gallon to $1.80 per gallon national average gasoline price – was thanks to the economic meltdown in that time frame, and the corresponding decrease in economic activity. When the Republicans blame the Obama Administration on rising gasoline prices (as they’ve done repeatedly the last few years) it’s wise to remember this gasoline price chart.

Gasoline prices fell to $1.80 per gallon because of the economic meltdown triggered by failed policies of the Bush43 Administration. That administration saw oil prices rise pretty quickly and as a response had set in motion the early stages of this project to adopt electric cars.

Source GasBuddy

If we broaden the time horizon we see that over the last 11 years gasoline prices rose, and rose, and that between 2011-2014, the new normal for gasoline prices became $3.30-$4 per gallon.

During the 2011-2014 time period electric cars came into their own and are starting to look inevitable.

But – is this project of electric vehicle adoption at risk because OPEC wants to regain control over the oil market?

And what of the hopes we have for solving climate change and other environmental problems? The primary area for fossil oil consumption is Transportation – cars, trucks, motorcycles, airplanes, etc.

In order to combat climate change we want to electrify the transportation system and otherwise make it more fuel efficient. Less gasoline or diesel burned means lower climate and environmental impact.

But, if electric vehicles become less economically attractive then … will people return to gas guzzlers?

Fortunately enough transportation policy decisions became law during the last few years that the shift to fuel efficient and electrified vehicles now has the weight of Government Policy behind it. Case in point is the 54.5 MPG CAFE Standards for the U.S., enacted during the Obama Administration.

But if fuel efficiency isn’t as economically attractive as it was during 2011-2014, maybe the new CAFE standards will come under fire?

My crystal ball is a bit clouded and it’s always risky predicting the future. Events may well turn out differently than the predictions I just floated.

Those of you who made it this far – congratulations for reading all this. What do you think?

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About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.