Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Monday, June 26, 2017

World's largest coal company closes 37 mines

The world's largest solar farm in Tamil Nadu, India (source)


The rapid growth in renewable energy continues to put a dent in the demand for coal. 
Coal India, the world's biggest coal mining company and producer of 82 percent of the country's coal, announced the closure of 37 mines that are financially "unviable." 
The sites make up roughly nine percent of the total mines operated by Coal India. The company is expected save Rs 800 crore ($124 million) from the closures.  
India's energy market is undergoing a rapid transformation as it moves away from fossil fuels. Last month, the country cancelled plans to build nearly 14 gigawatts of coal-fired power stations.  [Read more here]

This is because solar in India is now cheaper than coal.  Its costs have nearly halved in 18 months.

The lowest solar power tariff in India currently stands at Rs 2.44/kWh (US$39/MWh) which is cheaper than 92% of the operational coal-based power plants in the country [Read more here]

Meanwhile, in Australia, renewables have got so cheap that the government proposes to subsidise new coal generators.  You couldn't make this stuff up.

If you're listening

Genius.  Another Tom Toles from the Washington Post.

Saturday, June 24, 2017


Cartoon by Jim Morin

Back in the late 1970s when I was at varsity studying economics, the new rising orthodoxy was "rational economics".  The theory behind it was simple and logical.  Any person knows much better what their preferences are than any centralised government authority possibly can, so we should let individuals decide what they want to do.  So far, so good.  But the advocates of rational economics took the whole idea a lot further.  They argued that any collective activity was ipso facto inferior to any individual one, and that therefore government should be scaled back to as small a profile as possible.  Regulation of private enterprises was unnecessary, because “the market” would take care of it.  Privatisation, even of entities such as schools, hospitals, generators and the grid was desirable, even if these entities were monopolies or not in fact profit-seeking organisations, because privately owned and managed enterprises would be “more efficient” than collectively owned ones.  Cutting tariffs and removing quantitative import controls would, it was maintained, lead to higher growth and rising living standards.  Welfare had to be cut back so that taxes could be cut, because taxes on the rich “reduced incentives”.    Prosperity was supposed to "trickle down" from the rich to the poor.  This philosophy is called “neo-liberalism”.

There was a fundamental flaw in the whole thesis.  When markets are “perfect” and supply is “atomistic” (i.e., there are a very large number of suppliers) the self-interest of each of the individual suppliers can potentially lead to positive outcomes, because any attempt to gouge the public is prevented by competition.  For example, in any urban centre there are thousands of cafés.  For all practical purposes supply is “atomistic”.  Each café is a “price taker”, not a “price maker”.  Contrast that with, say, the electricity grid.  It would be completely impractical to build a hundred grids with connections to each house.  The grid is a monopoly.  It could, theoretically, set its own price.  There are no constraints on the self-interest of those who own monopolies except regulation and politics.  As Adam Smith, the great guru of the economic rationalists and neo-liberals said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices

There was a second critical flaw in the whole thesis of neo-liberalism.  The assumption was that economics would happen independently of the political system and political processes, that there would be a level playing field where all players could be potentially equally successful.  But that was wrong.  Neo-liberalism led to vastly increasing inequality, and the people with more money bought the politicians.  Laws and regulations were changed to favour incumbents.  Grumpy billionaires bought control of media outlets, and started pushing far-right agendas, which—quelle surprise!—favoured deregulation, lower taxes, lower wages and free migration. 

There are other fatal flaws to the whole doctrine of neo-liberalism, but I'll talk about them in future posts.

As the years went by I began to wonder whether neo-liberalism was actually as good as its proponents believed.  But what really killed it for me was the GFC.  The neo-liberal system plunged us into deep recession.  Banks were supposed to be capable of self-regulation.  Instead they lent imprudently and foolishly, and failed spectacularly, and had to be rescued--oh, the irony!--by the state.  The result was the  deepest recession since the Great Depression of the 30s.  And since then, trend growth in the OECD has fallen from 2.9% per annum to 1.8%.  It became obvious that austerity policies to try and balance budgets just made things worse.  The major burden of readjustment was everywhere borne by the poor.  The fastest recovery from the GFC lows was in the USA, which also ran the most Keynesian stimulatory policy in developed countries (to the fury of the Republican Party) while dogmatists elsewhere forced tax increases and spending and welfare cuts (Europe being the worst offender) which contrary to the theory simply deepened the downturns, while leaving the deficits unchanged.

I think the high water point of neo-liberalism has passed.  All the interlocking doctrines are under assault.  Just as with Communism, once a political doctrine loses its intellectual authority it is doomed.  Neo-liberalism is dying.  Its supporters just don't know it.

Wednesday, June 21, 2017


Another David Horsey classic from the LA Times

EVs in California and China


I mentioned in a previous post that China has a target of 8% EVs and PHEVs (plug-in hybrid EVs) by 2018 and 12% by 2020.  So how will this work?  It's a kind of cap-and-trade system.  Every manufacturer who achieves the targets gets points/credits, with 100% EVs getting the most points, PHEVs getting less, but more than hybrids without a plug, which in turn get more that petrol-engined cars which get zero points.  If your EV/PHEV sales percentage is less than the target, you have to buy credits from manufacturers who have achieved the target.  This will make your cars more expensive than the cars from producers who have achieved their target.

The Chinese scheme is modelled on California's ZEV (Zero Emissions Vehicle) scheme.  The California scheme has been adopted by nine other states (Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Vermont).

The ZEV program assigns each automaker “ZEV credits,” which represent the company’s sales of electric cars and trucks. Automakers are then required to maintain ZEV credits equal to a set percentage of non-electric sales. The credit requirement is 4.5 percent of sales in 2018, rising to 22 percent in 2025. 
For example, an automaker selling 100,000 cars in California in 2018 will need at least 4,500 ZEV credits, with at least 2,000 coming from battery-electric or fuel cell vehicle sales. However, this does not mean they’ll sell 4,500 electric cars and trucks, as most ZEVs generate more than one credit per vehicle (see below).
Automakers earn credits by selling zero emission cars and trucks. The credit per vehicle varies with drivetrain type and electric range. From 2018 onwards, plug-in hybrids—which only partially drive on electricity—receive between 0.4 and 1.3 credits per vehicle sold. Battery electric and fuel cell vehicles receive between 1 and 4 credits, based on range.
For example: the Tesla Model S, which boasts a range of more than 200 miles, is eligible for 3.3 credits, while the 84-mile range Nissan Leaf is credited at 1.8 ZEV credits per car sold.
Because not all vehicles receive a flat 1 credit per sale, the ZEV credit percentage does not directly reflect the EV sales percentage. CARB’s most recent assessment of the ZEV program estimates automakers will need to reach less than 8 percent ZEV sales by 2025 to meet the 22 percent ZEV credit requirement.    [Read more here]

It seems odd to me that you would give an EV 1.8 or 3.3 ZEV credits but only require 1 credit to cover the EV requirement for producers who make or sell no EVS.  As the article points out, this has led to a build-up of surplus ZEV credits.   Which reduces the pressure on ICE manufacturers to increase their own EV/PHEV sales (because it reduces the price of the credits).

They're doing something similar in China.

Last week, Chinese Premier Li Keqiang met privately with German chancellor Angela Merkel to discuss China’s proposal to require all manufacturers to sell more so-called new energy vehicles. After the meeting, Merkel thought she had an agreement that would allow German companies that manufacture cars in China a little breathing room before complying with the new rules. 
But a notification posted online this week by the Legislative Affairs Office, which reports to the Chinese cabinet, says otherwise. It indicates that all manufacturers will be required to generate EV credits that equal 8% of sales in 2018, 10% by 2019, and 12% by 2020. The rule applies to both foreign and domestic car makers. 
The credits are computed based on the level of electrification of the cars produced. Fully electric cars earn more credits than plug-in hybrid cars, for example. Plug-in cars that go further on battery power alone are rewarded with more credits than cars that have more limited electric range. [Read more here]

So the question is; is China's 12% target also in effect lower because of over-issuance of credits or do they mean 12%?  I looked for clarification but found none.  For what it's worth I reckon China means a real 8% and a real 12%.  But they might not actually achieve it because of supply constraints for components.  All the same, the pressure is on, and those traditional car manufacturers will have to move rapidly if they want to preserve access to the world's largest car market, which makes up 35% of global car sales.

Friday, June 16, 2017

How cheap could electric cars get?

Chevrolet Bolt (Source)

Green Car Reports has found out that the replacement cost of a new Chevrolet Bolt EV battery pack is US$15,700 (at retail).  Battery costs have fallen 75% over the last 4 years, and with numerous battery giga-factories under construction round the world (18 at my last count!) costs are likely to keep on falling extremely rapidly.  Before EVs entered the market for batteries, battery costs were falling by 15% per annum.  Let's assume, conservatively, that battery costs will fall by 20% per annum over the next 5 years.  This will cut the cost of a Bolt's battery pack from $15,700 to just over $5000.  (Remember that's the replacement or retail cost, not the cost of the original equipment, which would be perhaps 20% less.)  The total cost of a Bolt is about $35,000 before tax credits, which is the same as the average cost of a car in the USA.  So, ceteris paribus, the cost of Bolt should drop to $25,000 in 5 years (before tax credits.)

What about the cheapest cars?  In the USA, the cheapest cars currently available cost between $14,000 and $17,000 .  So putting in a 60 kWh 200 mile $5000 battery in them would increase their costs to $19,000-$22,000.  Except you have to consider the cost of the petrol engine. To replace a worn engine with a reconditioned one costs $2,500 to $4,000.  Let's assume that the cost of a new engine and a new automatic transmission, installed during the manufacturing process, totals just $2000.  So if you could get the battery cost down to $2000, the cheapest cars would cost the same as or little more than a cheap EV.

Now, the Nissan Leaf has a 30 kWh battery which gives it a 107 miles/172 km range.  That's not much range by Tesla or GM Bolt standards, but the average daily car commute in the US is just 25 miles (40 kms) one way, or 50 miles per day.  There's no reason why both a family's cars need to have a long range.  You'd keep one car for long trips plus commuting and the other just for commuting.  The Bolt has a 60 kWh battery capacity which will cost $5000 in 5 years.  So a 30 kWh battery pack would be about $2,500 or about the same as the cost of a petrol engine.    In other words, in five years, even the cheapest ICE cars in the US will cost be about the same cost as an electric version.

But EVs are much cheaper to run than ICEs.  They have fewer moving parts (100 times fewer), they require far less maintenance, and the fear that batteries would have to be frequently replaced turns out to be wrong.

Tesloop, a Tesla-centric ride-hailing company has already driven its first Model S for more 200,000 miles, and seen only an 6% loss in battery life. A battery lifetime of 1,000,000 miles may even be in reach.   [Read more here]
And in terms of converting the energy from petrol or electricity into kinetic energy, EVs are five times as efficient as ICEs.

This increased lifetime translates directly to a lower cost of ownership: extending an EVs life by 3–4 X means an EVs capital cost, per mile, is 1/3 or 1/4 that of a gasoline-powered vehicle. Better still, the cost of switching from gasoline to electricity delivers another savings of about 1/3 to 1/4 per mile. And electric vehicles do not need oil changes, air filters, or timing belt replacements; the 200,000 mile Tesloop never even had its brakes replaced. The most significant repair cost on an electric vehicle is from worn tires. 
For emphasis: The total cost of owning an electric vehicle is, over its entire life, roughly 1/4 to 1/3 the cost of a gasoline-powered vehicle. [Read more here]
And that's with current battery costs.  Which will probably be at least 2/3rds lower in 5 years.  If EVs are cheaper to run and they have the same 'sticker price' as ICEs, no one is going to buy ICE car any more.  Especially since EVs are much smoother, much quieter, much more reliable, and more fun to drive.

It's hard to be optimistic about oil demand and the oil price with EVs about to take off in a big way.   When the transition to EVs gathers pace, the switch will be as sharp and as disruptive as the replacement of film with digital in cameras.   The chart below is very instructive.  In just 7 years, sales of film cameras dropped from 100% of the market to nothing.  7 Years!  The risk is very, very high that the same thing will happen over the next 7 years to ICEs.


Bad news for oil, bad news for dinosaur car companies, bad news for garages (service stations), but truly excellent news for global warming and urban air pollution.

Thursday, June 15, 2017

Trump's endorsement by past presidents

After the nauseating sycophancy of his cabinet meeting, Tom Toles at The Washington Post, suggests past presidents will be pressed into service to promote Trump.