Tuesday, January 30, 2007

"Ethanol, Shmethanol"

CLEARLY, the market does not think much of ethanol. After all, if the President’s proposal on substitutes for gasoline and other transportation fuels had even a small chance of becoming a reality, the price of Oil should be falling precipitously right now.

After all, President Bush wants America to use 20% less gasoline in 10 years, and;

“The European Union on Wednesday announced plans to lower energy consumption, develop renewable sources such as wind power and biofuels and increase research into cutting carbon emissions from fuels already in use, particularly coal. The ambitious proposals seek to deter growing dependence on oil and gas imports and curb the emissions blamed for climate change….

The EU is proposing that 20% of all its energy should come from renewable power by 2020, and a tenth of vehicle fuel from biofuels. It calls for greenhouse gas emissions to be cut by at least 20% below 1990 levels by 2020 to limit global warming and prevent serious damage caused by climate change.”
USA Today 1.10.07

So, here we have the 2 biggest consumers of petroleum on the planet telling the market that they intend to cut their usage of the commodity SIGNIFICANTLY… shouldn’t the price of this commodity be crashing? If the U.S. and the E.U. were successful, all else being equal, wouldn’t petroleum be overflowing the inventory infrastructure at some point in the near future? Wouldn’t the market be terrified of this? Why is the price of oil up 8% since the President’s speech? What gives?

I’ll tell you what gives. The market knows better. Bio fuels simply do not scale. Bio fuels are barely energy positive (when ethanol plants start to run on ethanol instead of oil, and natural gas and electric derived from coal you will know that ethanol is energy positive). Further, we cannot change our car and truck fleet mileage efficiency average in time. For better or worse, when it comes to transportation fuels, petroleum is the only game in town.

The U.S. will be using 20% less gasoline in 2017 (give or take) no matter what we do, no matter who gets blamed, no matter who we invade, no matter who the government indicts.

Mentatt (at) yahoo (dot) com

Monday, January 29, 2007

Let them eat cake”

The 20% reduction in America’s use of gasoline by 2017 is not an option. The proposal to make up that short fall, for the most part with corn ethanol, is an absurdity.

In 2000, roughly 6 % of the U.S. corn harvest was used in the production of 1.6 billion gallons (not barrels, which are 42 gallons). In 2006, the U.S. produced 5 billion gallons, which took 20% of the U.S. corn harvest.

Now corn, along with wheat, is at the base of the American diet, and its price has risen nearly 100% in the past 56 weeks. Americans spend better than 15% of their income on food, and 8 % on energy. Me thinks this to be vaguely important, considering the President is proposing a 7 to 10 fold increase in the amount of ethanol to be produced from corn (10% from switch grass and the like) in the next 10 years. To do so, the ethanol producers would consume the entire 2006 U.S. corn crop.

Only trouble is, corn goes into a lot more than your morning cereal. Corn is the primary feed stock for poultry, hogs, and the finishing feed for beef. Aside from meat, poultry, and eggs, the vast majority of the processed foods American’s consume contain corn.

Inflation is about to rear its ugly head.

Greg Jeffers

Mentatt (at) yahoo (dot) com

Friday, January 26, 2007

Energy Security

Incredibly, the percentage of imported Oil required to run the U.S economy has doubled since the last oil crisis in 1979. DOUBLED. In 1979 the U.S. imported just under 30% of the oil it consumes; today the U.S. imports 60% of the oil it consumes.
Worse, the U.S now has only 2% of the world’s oil reserve, yet we produce (extract) 8% of the world’s oil. It follows that we are pumping our remaining reserves out of the ground 4 times faster than the rest of the world.

The U.S. has 21.4 billion barrels of oil in known reserves (Source: Oil & Gas Journal, Vol. 103, No. 47 (Dec. 19, 2005). The U.S. consumes nearly 8 billion barrels per year. Without imports we would be OUT OF OIL in 4 years, if we were able to extract our domestic reserves to match our current demand. For better or worse, that is not possible. In the absence of oil imports, the U.S. would unable to increase its domestic extraction rates significantly, and even if it could, to do so would be unthinkable.

Total oil available to the U.S. FROM ALL SOURCES, peaked in the spring of 2004. Since that time, nearly 2 years ago, total oil available to the U.S. economy fell by 1 %.

“Total U.S. petroleum deliveries, a measure of demand, fell by roughly 1 percent to 20.6 million barrels per day, according to a report by the American Petroleum Institute. That’s down from 20.8 million barrels a day in 2005 and below the 2004 level of 20.7 million barrels a day. The group said the figures are preliminary and may be adjusted.” – MSNBC January 19, 2007

I assert that this pattern is likely to continue – and then accelerate. I’ll explain:

The world’s total production of all liquids (crude, condensate, natural gas plant liquids, ethanol, bio-diesel, coal to liquid, refinery gains…) is roughly 84.5 million barrels per day. However, in the aggregate, the producing countries consume the majority of the oil produced, leaving only 35 million barrels or so available to the importing nations (the U.S., Japan, China, India…). The exporting nations such as Saudi Arabia, Iran, and the Former Soviet Union have growing populations and economies, and are industrializing rapidly. Therefore they are consuming more oil each year. Yet the domestic production of the exporting nations has been stagnant for the past 2 years. It follows then that if an exporting nation’s consumption of oil increases while their oil production is flat, it will simply have less oil available to export to the importing countries. I assert that this is likely to continue – and that the U.S. will have less and less oil available to run its economy each year, FROM THIS POINT ON, to great effect.

Mentatt at Yahoo (d0t) com

Wednesday, January 24, 2007

“Twenty in Ten”

The President’s State of the Union speech is history. As its centerpiece, the President chose to “challenge America” into using 20 % less gasoline (and jet fuel, diesel, kerosene, electricity) by 2017. By the way, the decline in availability will not stop in 2017. Challenge or no, we will be using less gasoline, like it or not, simply because it will not be there to use.

Can this be seen as anything other than a complete admission of the U.S Federal Government that the peak in world oil production, “Peak Oil” if you will, is either upon us, or fast approaching? There is no other likely explanation.

If the peak in production proves to be anywhere in 2007 or earlier (as of this moment crude and condensate’s 2005 production numbers were greater than 2006, data through October, 2006) the decline in the availability of liquid petroleum products in 2017 might be somewhat greater than the 20% the President speaks of. Let me remind the reader - U.S. population growth is forecast at roughly 1% per year over the next 13 years. (http://www.census.gov/ipc/www/usinterimproj/). It then follows that the decline in fuel availability on a per capita basis would exceed 30%.

The 20% (and it could be worse) decline in total gasoline usage is NOT a goal. Once the “Peak” is reached, the decline will be a foregone conclusion. No amount of political debate is going to change the path of hurricanes, the destruction of earthquakes, or the realities of geology. The President is merely putting the best face on a rather sobering situation.

For the moment, let us forget discussions of the PRICE of oil. What does the U.S. economy look like with 10 %, 20%, 30% less Oil and Natural GAS (“NG”) available for usage? Walk outside your office: What would your metro area look like with 20% less energy? Less total miles will be driven, certainly. Smaller homes? Seems reasonable. Additional road building? Not likely. Real Estate development deeper and further into the countryside? Suicide. The effects on the economy, government agencies, and agriculture are nothing short of profound. If you think your water and electricity bills are high now… did I mention rationing of these services?

The sad fact is the Federal Government still cannot come to grips with the reality that business as usual is no longer possible. Rather than take the bold initiatives that might soften the eventual blow, it appears our government would rather break out the band-aid, toothpicks, and glue kit – trying to keep those commuters humming at all costs. Actually, this is quite understandable. The U.S. $ is in for some pretty tough times, and any American administration, irrespective of party, is going to do everything in its power to push the day of reckoning off onto some future administration. “Not on my watch” does nothing for the American people.

Our system was built on the false premises that hydrocarbon fuels would always be available to us in steadily increasing amounts, and that the effects of the emissions form its combustion were non existent. As these falsehoods continue to reveal themselves, unimaginable changes in the American way of life are inevitable.

Mentatt (at) yahoo (dot) com

Wednesday, January 17, 2007

Is the oil supply problem over?

The price of crude oil fell $13, from $64 to $51 in less than 3 weeks. So why has the price of corn risen 15% since January 9, 2007, after nearly DOUBLING in price during 2006. If crude oil inventories are “high” (not my description) and supplies are plentiful, who in their right mind would bother with ethanol?

Good question, if I say so myself. The answer might be very complicated, or very simple – depending on your attention span.

The supply of crude oil to the U.S. economy has fallen smartly in the past 8 weeks. An industry outsider might assume that, considering the lack of winter weather in the U.S. until recently, the buyers of crude just didn’t need the stuff. Middle East crude oil off loaded in New York harbor on December 15, 2006 left the gulf about a month before, and was contracted for long before that. Therefore, the decline in imports was not related to the weather.

U.S. crude inventories are at their lowest level since October 2005, and gasoline inventories are only 1.5% higher then this time last year at this time. Considering the economy grew by better than 3% last year, we actually have less days of gasoline supply in inventory than during the year ago period. True, distillate inventories are roughly 3.5% higher than the year ago period, but the total of crude, gasoline and diesel is roughly equal to last year’s inventories. So what gives?

Well, if it ain’t supply, its gotta be demand. Part of it is weather related. Trucking tonnage was off in the 4th quarter. And world-wide inventories of corn, wheat, and rice, but especially corn, are at their lowest levels of days of supply in 3 decades. Does anybody besides me see the disconnect here?

Consider this:

Jan. 17 (Bloomberg) -- Corn futures rose in Chicago for a fifth straight session, extending a rally to 10-year highs, on signs that a near-doubling of prices in the past year has yet to slow demand for grain-based fuel and livestock feed.
The amount of corn inspected for export in the week ended Jan. 11 rose 24 percent to 33.4 million bushels, and the total since Sept. 1 is up 18 percent, the U.S. Department of Agriculture said yesterday. The department forecasts global supplies on Oct. 1 will be the lowest since 1978.

``Corn prices are not high enough to slow down demand,'' said Ron Uhe, commodity risk consultant for Mid-Co Commodities Inc. in Bloomington, Illinois. ``Ethanol is profitable, we haven't started to liquidate livestock herds, and there hasn't been a pullback in exports.''

Corn futures for March delivery rose 5 cents, or 1.2 percent, to $4.08 a bushel on the Chicago Board of Trade after earlier reaching $4.205, a record for the March futures and the highest for the most-active contract since July 1996. Prices have risen 15 percent since Jan. 9, the biggest five-day gain since Oct. 17.

The U.S., the world's biggest producer and exporter of corn, harvested its third-largest crop ever last year and that still won't be enough to prevent global supplies from dropping to the lowest in almost three decades, the USDA said Jan. 12.
U.S. corn production was 10.535 billion bushels last year, down from 11.112 billion in 2005, after farmers planted 4.2 percent fewer acres and a drought damaged fields, the USDA said. The crop was 2 percent smaller than the USDA forecast in November and below the 10.704 billion expected by analysts, based on the average of 15 surveyed by Bloomberg.

Falling Supplies

U.S. inventories of corn on Aug. 31, before the next harvest, probably will fall to an 11-year low of 752 million bushels, down 62 percent from a year earlier, the USDA said. Global reserves on Oct. 31 are forecast to drop 31 percent from a year earlier to 86.4 million metric tons, down 55 percent since 2000, the department said.

Reserve supplies of U.S. corn will amount to 6.4 percent of anticipated demand, the lowest by that measure since 1996. Inventories totaling 752 million bushels represent 23 days of consumption, down from 64 days a year earlier and the smallest since 1996 when most-active futures rose to a record $5.135.”

Crude oil inventories are at ther lowest in over 1 year, and grain inventories are at their lowest in 3 decades. Oil is the largest agricultural input. Ethanol is made from Corn in the U.S. Gasoline at the pump is 6% ethanol by volume...

Greg Jeffers

Mentatt (at) yahoo (dot) com

Tuesday, January 9, 2007

“Men are at a disadvantage when we argue with our women cause we have a need to make sense” - Comedian Chris Rock

Argue the sexist nature of that comment all you’d like. It sums up my problem with the inventory report (or “petroleum propaganda report”) we get every Wednesday from our Federal Government.

I am at a disadvantage when assessing the U.S. Department of Energy’s inventory report, because I, too, have a need to make sense.


Crude Oil inventories declined 6.8 million barrels

Gasoline inventories rose 5.22 million barrels

Distillate inventories rose 1.52 million barrels

OK, to John Q. Public it would seem reasonable to conclude inventories went nowhere. The system drew down some crude and built an equivalent amount of finished products. No problem, right?

Wrong. If you take the time to read and analyze the report, something John Q. Public simply will not do, but compulsives like me will happily do so, you will find that, surprise, surprise, our government fudges numbers so that they fit nice-nice in the headlines.

Buried in the text of the “special report” you will find this annoying little statement, paragraph 3:

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 6.8 million barrels compared to the previous week. At 282.8 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 5.3 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories increased by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.2 million barrels last week. Total commercial petroleum inventories decreased by 8.1 million barrels last week, and are in the bottom half of the average range for this time of year." EIA weekly petroleum report, link above


Well, if crude oil was drawn down nearly equally to the build in gasoline and distillates (diesel and heating oil) what’s up with the 8.1 million barrel decline for the week?

And so, I did the absurd, and actually had the temerity to go line by line in the report… What a concept, right? I mean would a reporter at the Wall Street Journal or the New York Times do such a silly thing? Nope, and that is why the U.S. is going to get blindsided by this - For the simple reason that our journalists in the mainstream media are so innumerate that they are intimidated by a little basic arithmetic and a spreadsheet.

So here’s the deal.

3 million of the 8.1 million draw was propane. No big deal (unless you heat with propane like most of rural America) as this is not a transportation fuel.

The other 5 million barrels was spread around in “Other Oil”, “Residual Oil”, and “Unfinished Oil”.

So why not just combine Crude Oil with these other categories and report that as your headline number? I am sure there is a logical explanation, like for the convenience of the folks assembling the data, or for politicians in the middle of a tough primary fight, or for the benefit of professional traders (versus the little guy), and I am sure that is all very reasonable.

It is important to point out that the consumption data do NOT POINT TO RECESSION. I have argued in this forum several weeks ago that we will not enter recession this year if: The Federal Reserve cuts interest rates aggressively, and; the oil import picture does not decline. The data shows an increase in availability of oil and an even greater increase in consumption. Of course, therein lies the rub against my argument. Imports will have to rise to avoid recession. If they do not, all bets are off - no matter what the Fed does.

Lastly, the accuracy of the data in general is questionable at best, but it is the best we have. Unfortunately, that is not good enough. We might trip over a significant shortage in the very near future. There is a minimum volume of oil in the system below which we cannot go without going into spot shortage situations. How soon? Months, not years. This is by no means a certainty, but a significant probability. You heard it hear first (and I am not hoping for any particular outcome. I just call them as I see them and I use a calculator because I have little faith in the claims of others. If you doubt my reports, I have given you the links to the various sites that I used as my sources).

Mentatt (at) yahoo (dot) com

Wednesday, January 3, 2007

“A riddle wrapped in a mystery inside an enigma” - Sir Winston Churchill

The Federal Reserve Meeting minutes show that the FED is quite concerned about the housing market – and well they should be. For all the attempts by the interested parties, such as home builders and realtors, to manipulate the public into believing the housing market is close to bottoming it is becoming increasingly clear that the U.S., and certain regional housing markets in particular, have a long way to go before hitting bottom. "Considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to consumption could become more evident, especially if house prices were to decline significantly," the minutes said.

"Federal Reserve officials said inflation was ``the predominant concern'' last month even as risks to economic growth increased." Bloomberg News, January 3, 2006

So, the FED is still concerned about inflation… but what inflation? Surely the FED is not talking about flat-screened T.V.’s or Chinese textiles. No, the FED is concerned with the price of imported crude oil. The U.S. borrows $1 billion every business day of the year to finance its oil imports. If the price of Oil were to rise, the trade deficit would rise. Any significant expansion in the trade deficit would likely cause an increase in interest rates, perhaps a sharp increase. That is why Inflation is "the predominant concern".

Yes, I know crude oil fell $3 today. Yes, I know that winter has been called off due to global warming… That does not mean the Oil crisis has been called off as well. In order to pull off the “soft landing” in the economy, The FED must walk the tight rope between killing the housing market (too late) and reigning in demand for Oil by slowing the economy via FED policy. This is known technically as being stuck between a rock and a hard place. Worse, it won’t work, if you believe in Jevon’s Paradox (you can google this for a detailed explanation). China, India, Viet Nam… will happily soak up any Oil the U.S. economy no longer needs.

The weather will have no long-term affect on the Oil market. But it may provide an opportunity.

Monday, January 1, 2007

2006 Data points in review

A number of data points are worth mentioning at the end of 2006. Here are some, in nor particular order:

The price of Corn rose 81% during the year, as the costs of fuel to raise corn combined with increased demand for the crop to make ethanol. (Bloomberg)

Wheat prices surged over 60% in 2006. (Bloomberg)

Gold had its best year since 2002, up 23% for the year. The U.S. keeps printing dollars, and its trading partners will match that with their own currency debasement activities in a bid to protect their export markets. (Bloomberg)

West Texas Intermediate actually fell slightly from the beginning of the year, but the average cost for 2006 was higher than 2005. (Source U.S. Department of Energy)

North American Natural Gas prices fell during 2006. An “unusually” warm winter in 2006 was mentioned.

World production of crude oil and natural gas condensates declined in 2006 from 2005 (comparing October 2004 – September 2005 with October 2005 – September 2006) despite record prices. (Source U.S. Department of Energy)

Total liquid petroleum available to the U.S. economy fell in 2005 and again in 2006 from its 2004 peak. (Source U.S. Department of Energy)

U.S. crude oil inventories as of 12/28/06 were slightly lower than the December 2005. (Source U.S. Department of Energy) Remember that in August of 2006 the financial media reported that inventories were surging. What happened?

Food prices are surging, and oil prices are firm while crude inventories are falling. Sound familiar?

The actual peak in world oil production will not be clear until several years after it happens, longer if the peak is shaped as a plateau, but the economy will “know” it far sooner. Several large projects are expected to come on line in 2007-09. Can these projects produce more than the decline rates in the existing fields? At the very least, it is going to be a close call. By the time we get the September data next December, we will have enough data to make that call. You can follow the supply data from the U.S. Department of Energy’s EIA website at:


For the sake of discussion:

Assume peak production of crude and lease condensates remains May 2005 (the most recent data is up to September 2006 with May 2005 the current peak), at 74,056,000 barrels of oil equivalent/day (“bpde”), and that a plateau should last 2 years, and that beginning in May 2007 the rate of decline for bpde was 2% per year. This was the approximate model of the production decline in the lower 48 U.S. Using less than perfect logarithmic function, this would translate into a decline of about 1.5 million bpde per year, or 7.5 million bpde less in 2012 than 2007- 66,500,000 bpde.

10% less crude oil and condensate will be available for the world to use in 2012 than in 2007, while the world’s population will have increased about 7.5%, and energy demand by a likewise amount. That would be a BIG problem. If the decline rate were 3, 4, or 5%... well, that would be a much BIGGER problem.

What is the probability that the May 2005 peak will hold? I do not know, but I am comfortable that it is some number greater than 0.

email me at menatt (at) yahoo (dot) com