Hertz is cutting its losses in its adoption of electric vehicles and has decided to sell about 20,000 electric vehicles, one-third of its global fleet, and reinvest a portion of the proceeds in internal combustion engine vehicles. The sale is expected to cost the company about $245 million of net depreciation in addition to the depreciation expense Hertz will report in the fourth quarter 2023. The change is due to the disappointing results that the car rental company reported last quarter. Hertz CEO, Stephen Scherr acknowledged the difficulty — and cost — of maintaining the EV fleet, recognizing that collision repairs to electric vehicles “can often run about twice that of a comparable combustion engine vehicle.” With the remaining electric vehicles available for rental, Hertz will implement initiatives to improve their profitability by making more charging stations available, growing relationships with EV manufacturers, and making it easier for customers to acclimate to an EV rental. The company plans for the EV sales to be completed by 2025.

The sale will include Teslas, Chevrolet Bolts, Volvos, many of which are already up for sale online — some at a steep discount. The car rental company made its EV announcement in 2021, with grand plans to help EVs go mainstream.  It placed a $4.2 billion order for 100,000 Teslas–the largest ever single purchase of electric vehicles. But the auto market has changed dramatically in the years since, as early adopters of electric vehicles dried up, leaving consumers with skyrocketing interest rates and stuck with a few expensive models to choose from and virtually no used market as an alternative. Due to signs of growing EV inventory and slowing sales, auto industry executives have admitted that their ambitious electric vehicle plans are in jeopardy, at least in the near term, and have cut back on their EV investments and rollout timelines.

Electric vehicles sales have slowed as they have an affordability problem, costing more on average than internal combustion engine vehicles. A moderately optioned Ford Mustang Mach-E SUV costs at least $50,000, while an electric F-150 pickup with the larger battery pack costs $70,000. Toyota’s lone electric model, the $42,000 bZ4X SUV, costs some $14,000 more than a RAV4. The average price paid for an electric vehicle in September was $50,683, according to Kelley Blue Book. Further, a large portion of battery-powered models available in the United States are sold by luxury brands like Audi, Porsche, and Mercedes-Benz. Many people cannot justify the extra upfront cost of going fully electric, particularly since they would be taking a gamble on an emerging technology with bugs yet to be worked out.

Variety in electric vehicle models is also lacking as there is not a single full-size electric SUV with three rows on offer from a mainstream brand. On top of that, inflated interest rates are driving monthly loan payments out of reach.

The shift back to more conventional cars marks a reversal of a strategy centered on electric vehicles, which Hertz hoped would provide higher rental prices and hold the vehicles’ value. Tesla’s price cuts over the past year, however, lowered the value of the cars in Hertz’s fleet and with EV sales growth slowing, it is not clear if consumers will even want them in the used-car market. Hertz had initially set a goal to electrify a quarter of its fleet by the end of 2024.

Conclusion

Hertz plans to sell a third of its U.S. electric vehicle fleet and reinvest in gas-powered cars due to weak demand and high repair costs for its battery-powered options. EV sales have slowed sharply over the course of 2023, rising just 1.3 percent in the final quarter. Hertz will use some of the money raised by selling off electric vehicles to buy gas-powered vehicles. This will put a dent in President Biden’s plans of having 50 percent of all new vehicle sales be electric by 2030 and his climate agenda.

Constellation Energy plans to retire a Massachusetts gas power plant at the end of May, which will eliminate the biggest user of the liquefied natural gas (LNG) that is imported through the company’s Everett Marine Terminal. Constellation is trying to line up new gas buyers to keep the terminal running. If it cannot, it will likely close the import facility. New England utilities rely on imported LNG supplies for heating during the winter when demand peaks. National Grid, which has more than two million gas customers in Massachusetts and New York, obtains gas from the Everett terminal that it pipes around Boston and trucks to storage tanks across the region ahead of each winter. Without it, severe cold could leave their customers without gas to heat their homes. Despite the United States being awash with natural gas, Massachusetts relies on imported LNG because the state has opposed pipelines to get natural gas from nearby Pennsylvania production wells—gas that would be significantly cheaper than imported LNG. New England residents paid about 31 percent more for natural gas in the fourth quarter of 2023 than the U.S. average, according to the Energy Information Administration.

Constellation is planning to close the 1.4 gigawatt Mystic Generating Station at the May 31 expiration of a deal with regulators–a two-year agreement intended to bolster the region’s energy supplies. A big issue for keeping the nearby LNG terminal open is how to cover the terminal’s overhead, most of which is currently recouped through New England electricity bills tied to the nearby power plant. It could cost about $60 million a year to cover the terminal’s fixed operating costs, plus the price of the LNG, which could amount to hundreds of millions of dollars annually.

According to regulators, a December 2022 winter storm serves as an example of why utilities need quick access to reserves of natural gas. The winter storm caused demand to surge and gas wells in Appalachia to freeze with pressure dropping dangerously low on the Consolidated Edison’s pipeline system around New York City. The utility was able to tap its own LNG reserves to stave off damage that could have knocked out service and taken months to repair. Everett LNG was and is the insurance against the lights and heat going out during extremely cold stretches.

New England’s Need for Everett

The Everett LNG Terminal is needed because of the difficulty of building energy infrastructure in the Northeast. Pipeline projects have been blocked that would deliver gas from shale-gas fields in Pennsylvania, Ohio and West Virginia. For example, in 2016, Massachusetts and New Hampshire blocked financing for the $3 billion Access Northeast Pipeline, which would have lowered prices and eliminated the reliance on LNG. Since 1971, the Everett Marine Terminal has been providing gas to New England and is one of the few remaining import terminals in the United States. When the shale gas renaissance made the United States the largest producer of natural gas in the world, most of the U.S. import LNG facilities were retooled to become export terminals. Last year the United States became the world’s largest exporter of LNG.

The tankers filled with U.S. LNG, however, are not allowed to deliver the fuel to Everett or anywhere else in the United States due to the Jones Act–a 1920 law that restricts domestic shipping routes to U.S.-built and American-crewed vessels. Despite New England being served by a pair of interstate pipelines and Canadian gas, it has had to obtain additional supplies from more expensive imports from overseas, usually from Trinidad and Tobago, but also from Russia before sanctions stopped those imports due to Russia’s invasion of Ukraine.

New England Faces Challenges to Its Grid Due to Plant Closures

Both the power plant and the LNG facility’s shutdown underscores the challenges facing the American grid as the transition to green energy and Biden’s climate agenda accelerates. While Mystic may ultimately be replaced by intermittent wind farms and solar projects, it is not clear whether those facilities and the expensive battery storage needed to back up their unreliable power will be built quickly enough to prevent power shortfalls.

Renewable-power projects have met resistance in the Northeast. For example, in 2021, Maine voters scotched a transmission line that would carry hydropower from the Canadian border toward Boston. A transmission line being laid along the bottom of the Hudson River to carry hydropower from Quebec’s remote forests to New York City took 15 years to clear permitting and other hurdles before work began last year. Some New York offshore wind projects have been canceled or are in limbo after regulators rejected developers’ requests to charge higher power rates to account for their rising costs. In New Jersey, a European wind-power company canceled plans for two wind farms despite state financial incentives.

“Ensuring reliability and affordability could become challenging in the face of a significant winter event,” FERC Chairman Willie Phillips and NERC Chief Executive Officer James Robb said in a joint statement in November. According to the New England grid operator, it would be prudent to keep Everett operating for now. The number of LNG import facilities in the region is limited, new infrastructure could face delays and there’s uncertainty about how much winter power demand will grow as homes and businesses convert to electricity from gas.

Conclusion

The Mystic Power Plant and the Everett LNG terminal may close at the end of May if regulators do not keep it open and/or if the LNG import terminal cannot find enough customers to cover its costs. This puts the region in jeopardy during cold New England winters with possibly insufficient fuel to keep furnaces going and the lights on. Many see the Everett LNG import terminal as insurance against demand spikes and freezing weather that could make existing infrastructure inoperative. Biden’s rush to push green energy in the form of intermittent and unreliable wind and solar power on Americans is putting the electric grid in jeopardy and New England may be the first to experience the damage. The Biden Administration seems to be ignoring this growing problem, preferring to focus on its “climate change” agenda which includes ending all fossil fuels, including natural gas.

Since October 7th 2023, the Iranian-backed Houthi rebels of Yemen have launched dozens of attacks on merchant and American naval vessels in what they claim to be support for Hamas in the Israel-Hamas war.  The continued attacks, and further escalation, have raised concerns about the long term impacts on the oil market, as well as the threat of the continuation of expanded regional conflict.  On January 11th, the Iranian navy seized the oil tanker St. Nikolas in the Gulf of Oman while en route to Turkey in retaliation for last year’s seizure of the ship by the United States.  Additionally, on January 15th, Houthi rebels struck the American owned container vessel, the Gibraltar Eagle, which sustained significant damage – no lives were lost.  Finally, on January 16th, the Iranian Revolutionary Guard Corps launched ballistic missiles at targets in northern Iraq and Syria.

Given that the Middle East accounts for approximately 31.3 percent of global oil production, continued escalation threatens to not only further destabilize the region and increase the likelihood of wider regional conflict, but also stands to have a negative long term impact on oil prices.  Although the immediate effects of the Houthi attacks have not made a significant impact on the price of oil, the longer trade is disrupted and conflict is allowed to persist, the higher the chance will be that oil and energy prices increase.

The Dangers of an Emboldened Iran

The St. Nikolas is owned and operated by the Greek ship owner Empire Navigation Inc., which is registered in the Marshall Islands, and was recently renamed from Suez Rajan.  The ship was renamed due to last year’s seizure of the ship by the United States after it was caught violating the International Emergency Economic Powers Act (IEEPA) and global sanctions against Iran in an attempt to sell and transport 980,000 barrels of Iranian crude oil on behalf of the Islamic Revolutionary Guard Corps (IRGC).

In United States v. Empire Navigation Inc. and Suez Rajan Limited, Suez Rajan Limited plead guilty to the charges and were sentenced to 3 years corporate probation and a fine of $2.5 million which Empire Navigation Inc. agreed to joint liability for.  The St. Nikolas, which has a cargo of approximately 1 million barrels of Iraqi crude oil, has now been located east of Iran’s Qeshm Island where Iran plans to hold the ship, and its crew, until they are repaid $75 million for the confiscation of their oil last year – they declared that they would retaliate after the Suez Rajan had its cargo taken last year.

Source: AP News

Four days after the Iranian seizure of the St. Nikolas, the Iranian backed Houthis in Yemen launched a ballistic missile at the Gibraltar Eagle, an American owned bulk carrier that was in transit in the southern Red Sea.  Although the ship reportedly did not sustain significant damage, and no lives were lost, the attack demonstrates the deep resolve of the Houthis, who are funded and supplied by Iran, to continue their efforts to disrupt trade in the region in opposition to the Israel-Hamas war.

Taking further advantage of the regional chaos, on January 16th, Iran launched missile attacks in northern Iraq and Syria at what they claimed to be an Israeli intelligence base in northern Iraq and at purported “anti-Iranian” groups in Syria, and the Iranian Revolutionary Guard Corps took credit – this demonstrates an escalation as the dozens of attacks carried out in the region since October, had been led and claimed by Iranian backed militias but not the Iranian’s directly.

Iran and the Houthis’ Impact on the Energy Market

As a result of the continued turmoil in the Red Sea, oil prices have risen over the first two weeks of January with Brent crude reaching a high of $80.53 on January 12th and currently sitting at $78.49 as of January 19th.  With the risk of shipping through the Red Sea increasing, Shell, a major British oil company, announced on January 16th, that they will be suspending their shipments through the Red Sea indefinitely.  Shell joins BP, Equinor, and QatarEnergy, who recently announced that they would cease all shipments of LNG through the Red Sea, all of whom cite the continued actions of the Houthis as their reasoning to find alternative routes to market.  Importantly, QatarEnergy production of LNG will not stop, they will simply be using the route around the Cape of Good Hope to deliver to the European markets – this will add 9 additional days to the already 18 day long voyage from Qatar. However, one thing that has surprised many market observers has been the fact that the rise in the price of oil has not been as immediate or volatile as it has been in the past during conflicts in the Middle East.

Source: EIA

The above chart indicates the 14 largest oil price shocks between 1970 and 2020, the majority of which were caused by global events in the Middle East.  What sets the lack of immediate price shock apart from the historical record has been the extraordinary increase in American domestic production of oil.  In 2023, the United States produced more oil than any other country in the world rising to a record 13.1 million barrels per day (bpd) in August of 2023 alone.  With such impressive production, EIA predicts a continued steady growth in oil production with a possible decrease in demand moving through 2024 and 2025, as shown in the image below.

Source: EIA

Experts indicate that innovation in drilling and the shale revolution have directly contributed to the record production of oil, as well as stand as a strong reason as to why oil prices have not been as heavily impacted by the militant actions of the Houthis and the Iranians.  Advancement in technology in hydraulic fracturing and horizontal drilling, are what have enabled the shale revolution, which allows for the extraction of oil from previously impermeable oil formations and now accounts for 36 percent of all crude oil produced in the United States.  The incredible expansion of domestic production of oil in the United States will continue to play a vital role in keeping the global price of oil steady with heightened tensions in the Middle East.

Conclusion

Since their first attacks in November, 2023, the Houthis have not shown any sign of relenting, even with the recent retaliation by American and British forces.  With the recent seizure of the St. Nikolas by the Iranian navy, tensions in the Middle East show dangerous signs of further escalation and expanded regional instability.  As a significant amount of global oil production takes place throughout the Middle East, as demonstrated by the recent increase in the price of a barrel of oil, until regional stability returns, global energy prices remain at risk of increasing further, which continues to underscore the importance of the rise of U.S. oil production in recent years.