Mar 11, 2020

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning. Today's Smart Brevity count: 1,233 words, < 5 minutes.

🎵 Tomorrow will mark the 1991 release date of R.E.M.'s "Out Of Time," which provides today's intro tune...

1 big thing: What oil's collapse means for climate

Illustration: Aïda Amer/Axios

Convulsions in global oil markets are creating new wildcards for efforts to rein in carbon dioxide emissions and boost climate-friendly energy.

Driving the news: Oil prices have collapsed to four-year lows as Saudi Arabia and Russia plan production hikes while the novel coronavirus saps demand.

  • COVID-19's economic fallout is also slashing CO2 emissions over the near-term, but for tragic reasons nobody should want replicated.

What they're saying: The oil price collapse “will definitely put downward pressure on the appetite for a cleaner energy transition,” International Energy Agency head Fatih Birol tells the FT.

The big picture: There are lots of ways that oil and gas prices can affect emissions.

  • In the abstract, cheaper energy makes cutting consumption more difficult, something to watch if low prices outlast the COVID-19 outbreak.
  • Lower revenues could also potentially hinder oil giants' investments in low-carbon tech and startups.
  • This price collapse is coinciding with a public health emergency that's wreaking economic havoc, which could cut nations' bandwidth to focus on the various climate goals set in recent years.

But, but, but: There's also reason to think the price crash could be irrelevant or even supportive of clean energy, in part because it's part of a wider economic shock.

  • Consider that it shrinks oil majors' gap between returns on oil production vs. renewable energy projects, which are less lucrative but more stable.
  • On the "irrelevant" side, consider that the relationship between driving levels and gasoline prices in the U.S. is actually not especially strong.
  • Also, lower prices make it easier to reform fossil fuel subsidies, which are quite large globally and climbed in 2016–2018 after years of declines.

What they're saying: Let's outsource things to Bloomberg columnist David Fickling, who just wrote on this topic (which I also touched on in Monday's newsletter).

  • He calls the effects of the oil crash "nuanced" but adds that overall they're "positive for decarbonization."
  • Fickling doesn't think emissions will be set to bounce back again after this downturn the way they have in the past.
  • That has to due with the combination of clean energy's price competitiveness and lower interest rates (as central banks try to boost economies) that will help curb project costs.
  • And, though electric cars aren't yet at sticker-price parity (but are getting closer), he also argues that drivers typically don't make decisions about EV purchases based on future gasoline costs.
2. White House weighs shale aid options

The White House is weighing options to provide financial assistance to U.S. oil producers getting hammered by the price collapse, but the picture is murky right now.

Why it matters: It's a sign of the rapidly worsening conditions for the sector and the Trump administration's scramble to respond to the effects of the coronavirus and falling prices.

Driving the news: The internal discussions were first reported by the Washington Post, and subsequently confirmed by Axios.

  • I've also learned that independent oil-and-gas producers via the American Exploration and Production Council (AXPC) has been in touch with the White House on the topic.

Where it stands: There's a bunch of ideas flying around. The WashPost reported that low-interest federal loans were the most likely option for the potential aid.

  • Bloomberg reports that some industry lobbyists are pitching the idea of the government buying up some oil to put into the Strategic Petroleum Reserve.
  • That would "enable the government to take at least 78 million barrels off the world market and provide a modest bump in prices," per Bloomberg.
  • The same story also says that administration is considering a separate idea of lowering royalties on oil and natural gas produced on federal lands.

The intrigue: The Washington Examiner reports that there's some pushback from conservatives to the idea of financial aid for producers.

  • Their piece has comments from officials with the Heritage Foundation and the Institute for Energy Research.

What they're saying: AXPC CEO Anne Bradbury said in a statement Tuesday that the group wants "a solution that ensures American companies can continue to invest in and produce low-cost, reliable energy."

  • "We believe in the free market system and will advocate for policies that support a level playing field to address geopolitical manipulation of the market," she said.
3. What's new in the transformed oil market

With the coronavirus hitting demand and the Russia-Saudi split set to unleash new supply, here's the latest on the new oil landscape.

Supply: "Saudi Arabia fired another salvo in its oil-market war with Russia on Wednesday, unveiling plans to boost its oil-production capacity to a record 13 million barrels a day." (WSJ)

Shale pain: The huge independent producer Occidental Petroleum is cutting dividends and sharply reducing spending this year due to the oil price collapse.

  • The company now plans capital spending of $3.5 billion to $3.7 billion, down from the prior target of $5.2 billion to $5.4 billion, and will "implement additional operating and corporate cost reductions."
  • Why it matters: It's a stark sign of the tumult facing oil producers now that prices are almost 50% lower than they were in early January.

Shale pain, part 2: Occidental is just one of a bunch of firms cutting back. Marathon Oil, another big U.S. producer, yesterday said it's slashing planned capital spending this year by at least $500 million. It's now eyeing a budget of $1.9 billion or less.

Intrigue: "Saudi Arabia may soon dispatch its former energy minister, Khalid al-Falih, for talks with Russian counterpart Alexander Novak to de-escalate a ratcheting oil price war between the two major producers." (S&P Global Platts)

  • Meanwhile, Reuters reports that Novak said Russia is "engaging in a lot of phone calls with OPEC and non-OPEC members, but that no partners have agreed to Russia’s proposal for current oil output cuts to remain unchanged."
4. Tesla's expansion plans come into focus (sort of)

Tesla CEO Elon Musk said he's "scouting" central U.S. locations for a factory that would build the upcoming Cybertruck, as well as the Model Y crossover, for deliveries on the East Coast, I reported last night along with Axios' Joann Muller.

Why it matters: The announcements via Twitter Tuesday night add some clarity to expansion plans for the Silicon Valley electric automaker, which has recently found itself on better financial ground ahead of key product launches.

What we're hearing: A source familiar with the planning says one of the locations being considered for the new factory is Nashville, Tennessee.

  • “Incentives play a role, but so do logistics costs, access to a large workforce with a wide range of talents, and quality of life,” Musk told the Wall Street Journal in an email.
  • Tennessee is a hub of auto manufacturing, with GM, Nissan and Volkswagen — along with many auto suppliers — already operating in the state.

Where it stands: All-wheel-drive versions of the futuristic-looking Cybertruck are slated to begin production in 2021, while the less-expensive rear-wheel-drive model will follow a year later.

  • The Model Y, a small crossover utility, recently began production at Tesla's Fremont, California, factory. Tesla also recently opened a factory in China for the Model 3 and Model Y and is building a plant in Germany, too.
  • "Should Tesla build Model Ys in the new factory, the vehicle will be manufactured in four places — China, Germany and Fremont, California, are the others," CNBC notes.

Quick take: Tesla has likely learned a lot about manufacturing efficiency as it muscled through problems encountered in getting Model 3 up and running in Fremont. They won't make the same mistakes again.

5. Chart of the day: The state of EV sales
Reproduced from: Argonne National Laboratory; Chart: Axios Visuals

Now that Joe Biden is firmly in the driver's seat for the Democratic nomination, now's not a bad time to mention that he wants standards "aimed at ensuring 100% of new sales for light- and medium-duty vehicles will be electrified."

Why it matters: There's not a date in his plan, but the chart above, from the DOE's handy transportation "fact of the week" series, shows how much work there is to do around a 100% EV goal.

Where it stands: Sales of fully electric vehicles rose by only about 3,000 units in 2019 after a sharp rise the prior year. And sales of plug-in hybrid vehicles fell.

  • Overall, combined sales of fully electric and plug-in hybrids were only about 2% of total U.S. auto sales.
Ben GemanAmy Harder