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Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

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The True Cost of Oil

I received some questions last week on my recent solar pieces as to whether I minded paying more money for “green” power. My answer is “hell no,” and I’ll tell you why. My annual electric bill comes to $1,500 a year. Since the California power authorities have set a goal of 33% alternative energy sources by 2020, PG&E (PGE) has the most aggressive green energy program in the country. More expensive solar, wind, geothermal, and biodiesel power sources mean that my electric bill may rise by $150-$300 a year.

Now let’s combine my electricity and gasoline bills. Driving 15,000 miles a year, my current gasoline engine powered car uses 750 gallons a year, which at $3/gallon for gas costs me $2,250/year. So my annual power/gasoline bill is $3,750. My new Nissan Leaf (NSANY) will cost me $180/year to cover the same distance. Even if my power bill goes up 20%, as it eventually will, thanks to the Leaf, my power/gasoline bill plunges to $1,980, down 47%.

There is an additional sweetener which I’m not even counting. I also spend $1,000/year on maintenance on my old car, including tune ups and oil changes. The Nissan Leaf will cost me next to nothing, as there are no oil changes or tune ups, and my engine drops from using 250 parts to just five. We’re basically talking tires, bearing repacks, and occasional new brushes on my rotors.

There is a further enormous pay off down the road. We are currently spending $100 billion a year in cash up front fighting our wars in the Middle East, or $273 million a day! Add to that another $200 billion in back end costs, including wear and tear on capital equipment, and lifetime medical care for 3 million veterans, some of whom are severely messed up.

We import 9.1 million barrels of oil each day, or 3.3 billion barrels a year, worth $270 billion at $82/barrel. Some 2 million b/d, or 730 million barrels/year worth $60 billion comes from the Middle East. That means we are paying a de facto tax which amounts to $136/barrel, taking the true price for Saudi crude up to a staggering $219/barrel!

We are literally spending $100 billion extra to buy $60 billion worth of oil, and that’s not counting the lives lost. Even worse, all of the new growth in Middle Eastern oil exports is to China, so we are now spending this money to assure their supplies more than ours. Only a government could come up with such an idiotic plan.

There is another factor to count in. Anyone in the oil industry will tell you that, of the current $82 price for crude, $30 is a risk premium driven by fears of instability in the Middle East. The Strategic Petroleum Reserve, every available tanker, and thousands of rail cars are all chocked full with unwanted oil. This is why oil prices remain high.

The International Energy Agency says the world is now using 87 million b/d, or 32 billion barrels a year worth $2.6 trillion. This means that the risk premium is costing global consumers $950 billion/year. If we abandon that oil source, the risk premium should fall substantially, or disappear completely. What instability there is becomes China’s headache, not ours.

If enough of the country converts to alternatives and adopts major conservation measures, then we can quit importing oil from that violent part of the world.  No more sending our president to bow and shake hands with King Abdullah. Oil prices would fall, our military budget would drop, the federal budget deficit would shrink, and our taxes would likely get cut.

One Leaf shrinks demand for 750 gallons of gasoline, or 1,500 barrels of oil per year. That means that we need 486,000 Leafs on the road to eliminate the need for the 2 million barrels/day we are importing from the Middle East. The Department of Energy has provided a $1.6 billion loan to build a Nissan plant in Smyrna, Tennessee that will pump out 150,000 Leafs a year by end 2012. Add that to the hundreds of thousands of Volts, Tesla S-1’s, is Mitsubishi iMiEV’s hitting the market in the next few years, and that goal is not far off.

Yes, these are simplistic, back of the envelop calculations that don’t take into account other national security considerations, or our presence on the global stage. But these numbers show that even a modest conversion to alternatives can have an outsized impact on the bigger picture.

By the way, please don’t tell ExxonMobile or BP I told you this. They get 80% of their earnings from importing oil to the US. I don’t want to get a knock on the door in the middle of the night.

By. Mad Hedge Fund Trader




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Leave a comment
  • Anonymous on October 21 2010 said:
    Excellent article. Filled with important information. I 'think' that I disagree on several points however, but know that I disagree on one. OPEC calls the tune. As a result, in THEIR ideal world, oil in storage doesn't matter. Assuming that cartel discipline continues to function, they can have have a price of _____ virtually as long as they choose.Frankly I admire them. The climb of the Middle East countries to positions of power and prosperity is exactly what I once thought could happen in any Third World country that was ready to get down to business.
  • Anonymous on October 21 2010 said:
    WOW, it would be nice if simple math could be done by journalists. A barrel of oil will produce on average 20 gallons of gas (plus heating oil and other valuable items). So one LEAF at 750 gallons only saves 37.5 barrels of oil a YEAR. So if we import 2M barrels a day, it would take 19.5 MILLION Leafs on the road to eliminate the gasoline requirement of that much oil.
  • Anonymous on October 21 2010 said:
    Some Good points I still don't know how we are going to handle food production and the current scale without liquid fuels.I can't see running a giant tractor on batteries nor can I see Americans in vast numbers out in the fields with Scythes.This person thinks food production is the 800 pound gorilla in the room when you start tightening energy supplies.Remember food does not come from the grocery store.RED
  • Anonymous on October 21 2010 said:
    John, the key message is well taken. The math of gas gallon -> crude bbl is wrong by 40 times though.
  • Anonymous on October 22 2010 said:
    That $30/bbl risk premia is mostly due to US meddling in the region. Ironic, no? And to think the CIA gets paid for this...

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