The production data for June 2007 will be posted in the next week at the U.S. Department of Energy’s Energy Information Administration (“EIA”). You can count on a summary of the data here by "yours truly" shortly after the release. Unfortunatley, the weekly inventory numbers published by the EIA each Wednesday tell the story long before the production data is released. Despite near record prices, inventories have fallen precipitously. Not coincidentally, the U.S. dollar has been doing its own version of “the dive”, and U.S. market and economic data continue to point to the distinct possibility of a recession. Let me be abundantly clear: If in fact 2005 holds as the peak year for world oil production, economic recession will be the new paradigm. The world economy might be able to wring a couple years, perhaps as much as 3 years, of economic growth from efficiency… but no more. Perhaps that is where we are now. It will not be entirely clear until several years after the fact, but if you do not hedge your bets before that time…
This is what I envision the other side of the “Peak” would look like: Employment, vehicle miles traveled, automobile and home purchases, consumer purchases, etc… all cease to grow. The dollar declines, gold rises, the Yen carry trade is undone, the U.S. equity market wobbles, and commercial oil inventories begin a steep decline (at least until the market realizes that “this is it” and then prices will rise enough to slow or stop the inventory decline), and special interest groups do their best to muddle the picture for the public. Well, let’s see now… Check, check, check, and check.
Look, there is a lot “we” could be doing, but “we” won’t. There is a lot “they” could be doing, but “they” won’t, either. So it is all pretty much up to “you”. What will “you” do?
Yours for a better world,
Mentatt (at) yahoo.com
Friday, September 7, 2007
Monday, September 3, 2007
The Power (Insanity) of Positive Thinking
I ran into a friend of mine, a fellow Wall Street working stiff (actually he manages several sales offices for a major investment bank) I had not seen in a while at the gym today. Of course our conversation went to the markets, the sub-prime issue, and energy.
When you work for a Wall Street “sell side” firm as broker, salesman, economist, M&A banker, etc… your job security requires you to be an optimist, and not just in public. Indeed, one needs to convince themselves of certain things or one is not going to be terribly effective. That said, I was somewhat appalled at the outright dismissal I received from my friend after I communicated my energy concerns. He said he didn't want to hear more, as it interfered with his "positive thinking"! Wall Street, as represented by the people that communicate its collective ideas to the public, is, in my experience, completely unaware of our (the U.S.) energy situation. Worse, although completely unaware they have hardened opinions that they deliver with force and verve.
I have several questions for my Wall Street brethren; and for our purposes here, please answer on the spot, without the benefit of research (after the questions I have an explanation):
1: How many barrels of oil were consumed worldwide in 2006?
2: How many barrels of oil were discovered worldwide in 2006?
3: Can you name the top 10 oil exporting countries in the world, their growth or decline in production, and their growth or decline in domestic consumption?
4: Can you name the top 10 oil importing countries in the world, their growth or decline in domestic production, and their growth or decline in domestic consumption?
5: Can you name the 10 largest oil fields in the world, their date of discovery, and intelligently discuss if production has been increasing or decreasing over the past 5 years at each particular field?
6: Do you know the BTU content of Crude Oil, Ethanol, and Natural Gas Plant Liquids (“NGPL’s) by volume, and what composition of “All Liquids” production each represents? Do you even know the difference between Crude Oil and NGPL’s?
7: If you cannot rattle this rather minor list off of the top of your head… Why the $%##!! do you even have an opinion? Why would any investor in their right mind listen to you (what’s up with the blind leading the blind)?
Let’s face it: Whatever opinions or beliefs you now have are the product of what you have read or watched in the media. Not that the data has not been available to you or to the media, but for reasons unknown to me the data do not seem to find their way into concise reports - with the exception of the web’s Blogsphere, and these seem to be dismissed as some sort of heretical naysayer.
(You don’t have to be a Wall Street Master of the Universe to indulge in this exercise. Anyone running a business that requires the SLIGHTEST strategic planning (like whether or not to by a new fax machine up to determining next year’s human resource requirements) that is making assumptions about their future energy supplies should stand up, take their head out of the sand, and indulge in a little “if/then” forecasting.)
I have been writing on the subject of energy production, and its distribution to its ultimate consumer – you and me – for several years now. I never said the world was running out of oil - just that the OECD countries would not be able to increase their consumption due to supply constraints, that eventually that would cause a permanent decline in their economic output (i.e. their collective GDP would contract in perpetuity) and that this eventuality would begin as an “import crisis” similar to the 1970’s. The problem is that our economic system is predicated on never ending growth in collective GDP (or should I use the out of date GNP, or GGP, since I am speaking globally?), i.e. earnings growth, money supply growth, credit supply growth, etc… and within a year or 2 or 3 of the Peak in world energy production that expected growth isn’t going to happen anymore.
I have received emails from people pointing out that Europe’s consumption of energy has not grown in some years yet Europe’s GDP has continued to grow during this time frame. This argument is specious to my mind, as I believe that the Europeans, much like the U.S., merely exported the energy intensive portions of their economies to Asia, and that the better measure will be world economic production/world energy production. Of course, there is some slack/waste in the system, and that is why it will take several years after peak oil/energy production is reached to see that event manifest itself in economic production.
The data continue to support a May, 2005 peak for world wide crude & condensate production, and August 2005 for “all liquids” production, and I continue to believe that should the trend hold through to May 2008’s data, that we could say that the peak has likely already occurred, and that we could expect to experience a “terminal decline” in production.
Worse, OPEC continues to support those dates. The following piece was on the front page of Bloomberg.com today:
“Sept. 3 (Bloomberg) -- OPEC, the supplier of more than 40 percent of the world's oil, will keep production unchanged next quarter because the crude market is well-supplied, an Algerian minister said. Qatar's oil minister said no change was needed.
``There is no change in the situation of the market,'' Algerian Energy Minister Chakib Khelil said in an interview late yesterday in Algiers, the country's capital. ``OPEC members are likely to keep their current production quotas'' when the Organization of Petroleum Exporting Companies meets in Vienna on Sept. 11.
The International Energy Agency has called on OPEC to increase output in the fourth quarter so oil importers can build stockpiles before winter in the northern hemisphere and prevent further gains in prices. Indonesia, OPEC's second-smallest producer, is alone so far among the 12-member group in calling for an increase in production.
OPEC should leave its quotas unchanged, Qatari Oil Minister Abdullah bin Hamad Al-Attiyah said today. ``We should roll over production,'' Al-Attiyah said in an interview in Doha, Qatar's capital. ``The price is high because of geopolitics and a lack of oil refining capacity.''
Crude oil has almost tripled in four years, rising to a record close of $78.21 a barrel on July 31 in New York. Demand in China and India and supply disruptions in OPEC members Iraq, Nigeria and Venezuela are driving up prices.
Crude oil for October delivery was at $74.35 a barrel, up 31 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:57 a.m. in London.”
The article even BEGINS with a mispresentation... "OPEC, the supplier of more than 40% of the world's oil..." OPEC supplies over 70% of the world's oil exports - what the heck does an oil importer care more about? World production or world exports? Is it even close? JUST LOOK AT THE NAME! The Ogranization of Petroleum EXPORTING Countries! It is not the Organization of Petroleum PRODUCING Countries, is it? Because it is their ability to EXPORT that makes them important, and because of declining oil production and increased domestic oil consumption these guys are going to be exporting less, and less, and less...
Now, I know my Wall Street colleagues might buy the Qatari Minister’s explanation… but, really… what do “geopolitics and refining capacity” have to with the “high price” of oil, in a world where inventories are being drawn down and gross exports (oil available on the world market to importing nations) are in decline? If the problem was “geopolitics” tanker rates would be near their highs to compensate for the risks, and if refining capacity were the problem, the “crack spread” (the margin, or “spread”, that refiners receive between the difference for a barrel of crude and a barrel of refined product) would be huge, yet they are below average. This can be seen in gasoline, as prices are down 30 to 40 cents per gallon retail in the past 90 days, yet the price of a barrel of oil in the spot market today is about the same, or higher, than the average for the month when gasoline hit its high.
In other words the Qatari Minister is completely full of it… and did the Bloomberg reporter call him out on it? HA! Our media can’t wait to out some dopey politician’s sexual Peccadilloes, but call out an OPEC Minister on the most important issue of our time? Nah. We can trust these guys. They wouldn’t mislead us. We’re their friend.
Folks, you don’t have to wait for the September 11 OPEC meeting. The only thing you can believe coming from these guys is this: OPEC will not increase its production quotas this fall. I don’t believe they can, but even if they could – IT IS NOT IN OPEC’S INTERESTS TO DO SO.
Yours for a better world,
Mentatt (at) yahoo (dot) com
I ran into a friend of mine, a fellow Wall Street working stiff (actually he manages several sales offices for a major investment bank) I had not seen in a while at the gym today. Of course our conversation went to the markets, the sub-prime issue, and energy.
When you work for a Wall Street “sell side” firm as broker, salesman, economist, M&A banker, etc… your job security requires you to be an optimist, and not just in public. Indeed, one needs to convince themselves of certain things or one is not going to be terribly effective. That said, I was somewhat appalled at the outright dismissal I received from my friend after I communicated my energy concerns. He said he didn't want to hear more, as it interfered with his "positive thinking"! Wall Street, as represented by the people that communicate its collective ideas to the public, is, in my experience, completely unaware of our (the U.S.) energy situation. Worse, although completely unaware they have hardened opinions that they deliver with force and verve.
I have several questions for my Wall Street brethren; and for our purposes here, please answer on the spot, without the benefit of research (after the questions I have an explanation):
1: How many barrels of oil were consumed worldwide in 2006?
2: How many barrels of oil were discovered worldwide in 2006?
3: Can you name the top 10 oil exporting countries in the world, their growth or decline in production, and their growth or decline in domestic consumption?
4: Can you name the top 10 oil importing countries in the world, their growth or decline in domestic production, and their growth or decline in domestic consumption?
5: Can you name the 10 largest oil fields in the world, their date of discovery, and intelligently discuss if production has been increasing or decreasing over the past 5 years at each particular field?
6: Do you know the BTU content of Crude Oil, Ethanol, and Natural Gas Plant Liquids (“NGPL’s) by volume, and what composition of “All Liquids” production each represents? Do you even know the difference between Crude Oil and NGPL’s?
7: If you cannot rattle this rather minor list off of the top of your head… Why the $%##!! do you even have an opinion? Why would any investor in their right mind listen to you (what’s up with the blind leading the blind)?
Let’s face it: Whatever opinions or beliefs you now have are the product of what you have read or watched in the media. Not that the data has not been available to you or to the media, but for reasons unknown to me the data do not seem to find their way into concise reports - with the exception of the web’s Blogsphere, and these seem to be dismissed as some sort of heretical naysayer.
(You don’t have to be a Wall Street Master of the Universe to indulge in this exercise. Anyone running a business that requires the SLIGHTEST strategic planning (like whether or not to by a new fax machine up to determining next year’s human resource requirements) that is making assumptions about their future energy supplies should stand up, take their head out of the sand, and indulge in a little “if/then” forecasting.)
I have been writing on the subject of energy production, and its distribution to its ultimate consumer – you and me – for several years now. I never said the world was running out of oil - just that the OECD countries would not be able to increase their consumption due to supply constraints, that eventually that would cause a permanent decline in their economic output (i.e. their collective GDP would contract in perpetuity) and that this eventuality would begin as an “import crisis” similar to the 1970’s. The problem is that our economic system is predicated on never ending growth in collective GDP (or should I use the out of date GNP, or GGP, since I am speaking globally?), i.e. earnings growth, money supply growth, credit supply growth, etc… and within a year or 2 or 3 of the Peak in world energy production that expected growth isn’t going to happen anymore.
I have received emails from people pointing out that Europe’s consumption of energy has not grown in some years yet Europe’s GDP has continued to grow during this time frame. This argument is specious to my mind, as I believe that the Europeans, much like the U.S., merely exported the energy intensive portions of their economies to Asia, and that the better measure will be world economic production/world energy production. Of course, there is some slack/waste in the system, and that is why it will take several years after peak oil/energy production is reached to see that event manifest itself in economic production.
The data continue to support a May, 2005 peak for world wide crude & condensate production, and August 2005 for “all liquids” production, and I continue to believe that should the trend hold through to May 2008’s data, that we could say that the peak has likely already occurred, and that we could expect to experience a “terminal decline” in production.
Worse, OPEC continues to support those dates. The following piece was on the front page of Bloomberg.com today:
“Sept. 3 (Bloomberg) -- OPEC, the supplier of more than 40 percent of the world's oil, will keep production unchanged next quarter because the crude market is well-supplied, an Algerian minister said. Qatar's oil minister said no change was needed.
``There is no change in the situation of the market,'' Algerian Energy Minister Chakib Khelil said in an interview late yesterday in Algiers, the country's capital. ``OPEC members are likely to keep their current production quotas'' when the Organization of Petroleum Exporting Companies meets in Vienna on Sept. 11.
The International Energy Agency has called on OPEC to increase output in the fourth quarter so oil importers can build stockpiles before winter in the northern hemisphere and prevent further gains in prices. Indonesia, OPEC's second-smallest producer, is alone so far among the 12-member group in calling for an increase in production.
OPEC should leave its quotas unchanged, Qatari Oil Minister Abdullah bin Hamad Al-Attiyah said today. ``We should roll over production,'' Al-Attiyah said in an interview in Doha, Qatar's capital. ``The price is high because of geopolitics and a lack of oil refining capacity.''
Crude oil has almost tripled in four years, rising to a record close of $78.21 a barrel on July 31 in New York. Demand in China and India and supply disruptions in OPEC members Iraq, Nigeria and Venezuela are driving up prices.
Crude oil for October delivery was at $74.35 a barrel, up 31 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:57 a.m. in London.”
The article even BEGINS with a mispresentation... "OPEC, the supplier of more than 40% of the world's oil..." OPEC supplies over 70% of the world's oil exports - what the heck does an oil importer care more about? World production or world exports? Is it even close? JUST LOOK AT THE NAME! The Ogranization of Petroleum EXPORTING Countries! It is not the Organization of Petroleum PRODUCING Countries, is it? Because it is their ability to EXPORT that makes them important, and because of declining oil production and increased domestic oil consumption these guys are going to be exporting less, and less, and less...
Now, I know my Wall Street colleagues might buy the Qatari Minister’s explanation… but, really… what do “geopolitics and refining capacity” have to with the “high price” of oil, in a world where inventories are being drawn down and gross exports (oil available on the world market to importing nations) are in decline? If the problem was “geopolitics” tanker rates would be near their highs to compensate for the risks, and if refining capacity were the problem, the “crack spread” (the margin, or “spread”, that refiners receive between the difference for a barrel of crude and a barrel of refined product) would be huge, yet they are below average. This can be seen in gasoline, as prices are down 30 to 40 cents per gallon retail in the past 90 days, yet the price of a barrel of oil in the spot market today is about the same, or higher, than the average for the month when gasoline hit its high.
In other words the Qatari Minister is completely full of it… and did the Bloomberg reporter call him out on it? HA! Our media can’t wait to out some dopey politician’s sexual Peccadilloes, but call out an OPEC Minister on the most important issue of our time? Nah. We can trust these guys. They wouldn’t mislead us. We’re their friend.
Folks, you don’t have to wait for the September 11 OPEC meeting. The only thing you can believe coming from these guys is this: OPEC will not increase its production quotas this fall. I don’t believe they can, but even if they could – IT IS NOT IN OPEC’S INTERESTS TO DO SO.
Yours for a better world,
Mentatt (at) yahoo (dot) com
Wednesday, August 29, 2007
The Federal Government of the United States' back door admission of Peak Oil.
Today, August 29, 2007, was the day the Federal Government admitted that they believe peak oil is here. This was on Bloomberg News today:
Aug. 29 (Bloomberg) -- The U.S., the biggest emitter of gases blamed for global warming, said it will contribute to the next round of emissions cuts, a first step to setting limits since rejecting the Kyoto Protocol six years ago.
``We will also come through with what we believe will be our contribution'' to limits that will be set during talks through next year, Harlan Watson, the senior climate negotiator for the U.S. Department of State, said today at a media conference in Vienna. He didn't say by how much the U.S. would curb its emissions.”
You see, the U.S. would never, ever, under any circumstance accept a decrease in their carbon emissions quota – unless it was happening, or already happened, anyway. And if it is going to happen in any event, well we might as well get some political mileage out of it. After all, if Peak Oil production and Peak Oil imports are here for the world, and Peak Natural Gas happened in North America in 2001, and Peak BTU’s of coal happened in the U.S. in 1999, the U.S. has nothing to lose by agreeing to emit fewer carbon atoms into the atmosphere - since we have fewer hydrocarbons to burn, we will emit fewer carbon compounds. Simple like that.
Unless of course you believe that the Bush Administration suddenly found the environmentalist within its soul, and out of the goodness of their heart, and in a new found desire to be a better neighbor decided that they would unilaterally accept that which was an anathema at Kyoto, Japan just 6 years ago.
Why now? Why today? Indeed.
Inventories of total crude, finished motor gasoline, and distillate fuels fell to 656,110,000 barrels from 678,815,000 from 7.20.07 to 8.24.07.
When an oil importing nation as dependent as the U.S. loses 3.5% of its inventories in 5 WEEKS, and at a time of very high prices, which should have increased incentives to produce more and consume less – but did not – it is time to worry about those imports. Because there are only 3 components to the inventory equation:
Domestic production + imports – consumption = inventory change
Since domestic production was nearly unchanged in the past 5 weeks, and consumption was actually down (slightly) the only thing left are imports, which by necessity must have declined by over 22.5 million barrels, during the 35 day period.
All of the above data I found on the U.S. Department of Energy’s website. These are hard data. The conclusions that I draw from the data are this:
Something has to give, RIGHT AWAY. Inventories must stop declining RIGHT NOW, OR ELSE. There is nothing in the data that says that this trend will continue,nor that it will reverse course. That is one of those “unknown unknowns”. Unfortunately, we will know soon enough.
Mentatt (at) yahoo (dot) com
Today, August 29, 2007, was the day the Federal Government admitted that they believe peak oil is here. This was on Bloomberg News today:
Aug. 29 (Bloomberg) -- The U.S., the biggest emitter of gases blamed for global warming, said it will contribute to the next round of emissions cuts, a first step to setting limits since rejecting the Kyoto Protocol six years ago.
``We will also come through with what we believe will be our contribution'' to limits that will be set during talks through next year, Harlan Watson, the senior climate negotiator for the U.S. Department of State, said today at a media conference in Vienna. He didn't say by how much the U.S. would curb its emissions.”
You see, the U.S. would never, ever, under any circumstance accept a decrease in their carbon emissions quota – unless it was happening, or already happened, anyway. And if it is going to happen in any event, well we might as well get some political mileage out of it. After all, if Peak Oil production and Peak Oil imports are here for the world, and Peak Natural Gas happened in North America in 2001, and Peak BTU’s of coal happened in the U.S. in 1999, the U.S. has nothing to lose by agreeing to emit fewer carbon atoms into the atmosphere - since we have fewer hydrocarbons to burn, we will emit fewer carbon compounds. Simple like that.
Unless of course you believe that the Bush Administration suddenly found the environmentalist within its soul, and out of the goodness of their heart, and in a new found desire to be a better neighbor decided that they would unilaterally accept that which was an anathema at Kyoto, Japan just 6 years ago.
Why now? Why today? Indeed.
Inventories of total crude, finished motor gasoline, and distillate fuels fell to 656,110,000 barrels from 678,815,000 from 7.20.07 to 8.24.07.
When an oil importing nation as dependent as the U.S. loses 3.5% of its inventories in 5 WEEKS, and at a time of very high prices, which should have increased incentives to produce more and consume less – but did not – it is time to worry about those imports. Because there are only 3 components to the inventory equation:
Domestic production + imports – consumption = inventory change
Since domestic production was nearly unchanged in the past 5 weeks, and consumption was actually down (slightly) the only thing left are imports, which by necessity must have declined by over 22.5 million barrels, during the 35 day period.
All of the above data I found on the U.S. Department of Energy’s website. These are hard data. The conclusions that I draw from the data are this:
Something has to give, RIGHT AWAY. Inventories must stop declining RIGHT NOW, OR ELSE. There is nothing in the data that says that this trend will continue,nor that it will reverse course. That is one of those “unknown unknowns”. Unfortunately, we will know soon enough.
Mentatt (at) yahoo (dot) com
Sunday, August 26, 2007
Natural Gas in North America
Natural Gas (“NG”) production in North America appears to have peaked in 2001 at 19.616 trillion cubic feet (“tcf”), and despite increasing our drilling efforts by over 120% since then, production has fallen to 18.523 tcf in 2006 (it had fallen to 18.074 in 2005 but rebounded somewhat in 2006.) The predictive powers of the U.S. E.I.A. and (chuckle) Cambridge Energy Research Associates leave something to be desired. In 1995, and as recently as 2002, both organizations were in print saying NG production and supply would be able to grow without constraint until at least 2020 (Gufaw!). Here, in chronological order by year is U.S. NG production in tcf:
2001: 19.616
2002: 18.928
2003: 19.099
2004: 18.591
2005: 18.074
2006: 18.531
In 2006 we imported 4.187 tcf, with the vast majority 3.604 tcf coming by PIPELINE from Canada. Canada exports about HALF of its NG production to the U.S. – and here comes the rub: Canada’s production appears to be in decline, and its internal consumption of NG is rising (sound familiar?). Declining Canadian production and increasing domestic demand is a recipe for DRAMATIC decline in NG exports to the U.S. And just in case you think Mexico is coming to the rescue… the U.S. imported a paltry .013 tcf of NG from its neighbor to the south. Worse, the U.S. will most likely have to export some of its largess to Mexico for political reasons, as Mexico is a major oil EXPORTER to the U.S.
And the hits keep coming… The rate of decline in North American NG production is likely be far, far, far steeper than the decline rate in crude oil production due to the unique geological properties of NG (as a gas it comes out of the ground under pressure, and when that pressure is gone that is the end of the well, and a NG well gives little indication of the when the end is near. One day you show up for work and the pressure gauges pretty much tell you it is time to look for other opportunities.)
The problem for the U.S., and all of North America, is that there are no NG pipelines from Iran, Russia, or Oman coming into North America. NG use is 99% driven by local, or at least local as in your own continent (and forget going over mountain ranges like the continental divide making western and eastern North America 2 separate energy islands for both oil and NG).
So, what are the U.S. EIA and CERA saying now? I found this pearl of wisdom on CERA’s website (Please note the date):
HOUSTON, February 8, 2006 – As North Americans experience their most expensive winter on record in terms of energy consumption, many industry observers and participants—as well as consumers—have concluded that higher natural gas prices are here to stay. Many now believe that high natural gas prices are no longer spurring a supply response, and that the price of natural gas at the Henry Hub—the US benchmark—will never again fall below $5.00 per million British thermal units (MMBtu).
In contrast, Cambridge Energy Research Associates (CERA) expects prices to gradually ease over the coming years, and eventually return to sub-five dollar levels.
Relief Alternatives Limited
“Sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available,” Robert Ineson, CERA Director for North American Natural Gas, told a briefing at the firm’s CERAWeek 2006 here today.
Demand for natural gas in the United States and Canada will exhibit remarkable resilience over the next few years, and will remain strong despite high natural gas prices. “There will be little price elasticity in the residential, commercial, and power sectors. The industrial sector has already been pared back to a toughened core. Natural gas demand for power generation will grow despite ongoing gas price strength,” Ineson said.
CERA believes that consumers will realize substantial price relief only if a significant increase is made in the supply of natural gas available to North America. The source for additional natural gas supply will not be the increasingly mature producing basins of the United States and Canada, despite rising production from unconventional gas resources—including coalbed methane, shale gas, and tight sandstones.
LNG the Only Source
CERA believes the answer is liquefied natural gas (LNG). “Meeting North America’s growing natural gas requirements in the face of stagnant indigenous productive capacity will not be possible without increasing volumes of LNG imports from overseas,” according to Ineson. “Simply put, there is no Plan B. LNG is the only potential natural gas supply source big enough and timely enough to meet the need.”
“Major new LNG regasification projects will begin to come on stream in 2008,” Ineson said. “As the new supplies enter the market, North American natural gas price pressures will begin to ease. CERA expects LNG deliveries to outstrip continental gas demand growth between 2008 and 2010, sending prices below $5.00 per MMBtu.”
Well, there you have it, and since we are going to IMPORT our way out of this problem, we will need to go headlong into the construction of the infrastructure necessary to import all of the NG we are going to need in the form of Liquid Natural Gas (Want to make a bet that whoever benefits from any construction contracts is a client of CERA?).
Once again, we have a blatant attempt to manipulate the public with propaganda; promoting solutions that do not take into account the scale required to have a meaningful impact. How much will the projects underway (expected to be completed 2010) be able to add to U.S. NG consumption? A whopping 1 to 2%, and this is only if the exporters can actually fulfill their part of the transaction. Care to make a bet on the eventual completion date? Now take a good look at the North American NG production decline rate and the U.S. in particular. And why do the major oil companies pay these guys tens of millions of dollars per year even though they have been wrong in every market call and production forecast since 1998? Because CERA says what their customers want the MEDIA to hear (read any story about future energy supplies in ANY major news outlet and you will likely find that CERA is an acknowledged source). Big oil and others can fund these guys by “retaining” them as consultants, and then plant their misinformation in major news outlets giving them great legitimacy – with no liability to the guys who are really pulling the strings. Clearly, they learned something from their mishandling of the climate change public relations fiasco. (Disclosure: I own stock in most of CERA's clients. So what am I complaining about? The interests of the executives at these companies do not always (rarely) intersect with that of their shareholders.)
Assuming the LNG market will actually develop (I sincerely doubt this. I will poke holes in this argument big enough to drive a truck through in a future post) to the point where it was possible to solve our short-term supply problem…Didn’t these guys learn anything from our Oil predicament? Did they skip the “America is addicted to Oil” speech? The U.S. can barely fund its imported oil purchases (and does so through the issue of IOU’s), can you imagine the impacts to our trade imbalances and the value of U.S. dollar if these guys were right?
The bottom line is this: North America is confronted with a NG shortage as well as an oil shortage. Understanding the magnitude of the issue will give you an opportunity. Or you could pull a Jim Hanson. Just ignore the issue and hope it will go away.
Hold on to your wallets.
Yours for a better world.
mentatt (at) yahoo (dot) com
P.S. Jim Hanson was the creator of the muppets. He died of what would have been a very curable "Strep" infection, but decided to ignore the issue and hoped it would go away. It did.
Natural Gas (“NG”) production in North America appears to have peaked in 2001 at 19.616 trillion cubic feet (“tcf”), and despite increasing our drilling efforts by over 120% since then, production has fallen to 18.523 tcf in 2006 (it had fallen to 18.074 in 2005 but rebounded somewhat in 2006.) The predictive powers of the U.S. E.I.A. and (chuckle) Cambridge Energy Research Associates leave something to be desired. In 1995, and as recently as 2002, both organizations were in print saying NG production and supply would be able to grow without constraint until at least 2020 (Gufaw!). Here, in chronological order by year is U.S. NG production in tcf:
2001: 19.616
2002: 18.928
2003: 19.099
2004: 18.591
2005: 18.074
2006: 18.531
In 2006 we imported 4.187 tcf, with the vast majority 3.604 tcf coming by PIPELINE from Canada. Canada exports about HALF of its NG production to the U.S. – and here comes the rub: Canada’s production appears to be in decline, and its internal consumption of NG is rising (sound familiar?). Declining Canadian production and increasing domestic demand is a recipe for DRAMATIC decline in NG exports to the U.S. And just in case you think Mexico is coming to the rescue… the U.S. imported a paltry .013 tcf of NG from its neighbor to the south. Worse, the U.S. will most likely have to export some of its largess to Mexico for political reasons, as Mexico is a major oil EXPORTER to the U.S.
And the hits keep coming… The rate of decline in North American NG production is likely be far, far, far steeper than the decline rate in crude oil production due to the unique geological properties of NG (as a gas it comes out of the ground under pressure, and when that pressure is gone that is the end of the well, and a NG well gives little indication of the when the end is near. One day you show up for work and the pressure gauges pretty much tell you it is time to look for other opportunities.)
The problem for the U.S., and all of North America, is that there are no NG pipelines from Iran, Russia, or Oman coming into North America. NG use is 99% driven by local, or at least local as in your own continent (and forget going over mountain ranges like the continental divide making western and eastern North America 2 separate energy islands for both oil and NG).
So, what are the U.S. EIA and CERA saying now? I found this pearl of wisdom on CERA’s website (Please note the date):
HOUSTON, February 8, 2006 – As North Americans experience their most expensive winter on record in terms of energy consumption, many industry observers and participants—as well as consumers—have concluded that higher natural gas prices are here to stay. Many now believe that high natural gas prices are no longer spurring a supply response, and that the price of natural gas at the Henry Hub—the US benchmark—will never again fall below $5.00 per million British thermal units (MMBtu).
In contrast, Cambridge Energy Research Associates (CERA) expects prices to gradually ease over the coming years, and eventually return to sub-five dollar levels.
Relief Alternatives Limited
“Sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available,” Robert Ineson, CERA Director for North American Natural Gas, told a briefing at the firm’s CERAWeek 2006 here today.
Demand for natural gas in the United States and Canada will exhibit remarkable resilience over the next few years, and will remain strong despite high natural gas prices. “There will be little price elasticity in the residential, commercial, and power sectors. The industrial sector has already been pared back to a toughened core. Natural gas demand for power generation will grow despite ongoing gas price strength,” Ineson said.
CERA believes that consumers will realize substantial price relief only if a significant increase is made in the supply of natural gas available to North America. The source for additional natural gas supply will not be the increasingly mature producing basins of the United States and Canada, despite rising production from unconventional gas resources—including coalbed methane, shale gas, and tight sandstones.
LNG the Only Source
CERA believes the answer is liquefied natural gas (LNG). “Meeting North America’s growing natural gas requirements in the face of stagnant indigenous productive capacity will not be possible without increasing volumes of LNG imports from overseas,” according to Ineson. “Simply put, there is no Plan B. LNG is the only potential natural gas supply source big enough and timely enough to meet the need.”
“Major new LNG regasification projects will begin to come on stream in 2008,” Ineson said. “As the new supplies enter the market, North American natural gas price pressures will begin to ease. CERA expects LNG deliveries to outstrip continental gas demand growth between 2008 and 2010, sending prices below $5.00 per MMBtu.”
Well, there you have it, and since we are going to IMPORT our way out of this problem, we will need to go headlong into the construction of the infrastructure necessary to import all of the NG we are going to need in the form of Liquid Natural Gas (Want to make a bet that whoever benefits from any construction contracts is a client of CERA?).
Once again, we have a blatant attempt to manipulate the public with propaganda; promoting solutions that do not take into account the scale required to have a meaningful impact. How much will the projects underway (expected to be completed 2010) be able to add to U.S. NG consumption? A whopping 1 to 2%, and this is only if the exporters can actually fulfill their part of the transaction. Care to make a bet on the eventual completion date? Now take a good look at the North American NG production decline rate and the U.S. in particular. And why do the major oil companies pay these guys tens of millions of dollars per year even though they have been wrong in every market call and production forecast since 1998? Because CERA says what their customers want the MEDIA to hear (read any story about future energy supplies in ANY major news outlet and you will likely find that CERA is an acknowledged source). Big oil and others can fund these guys by “retaining” them as consultants, and then plant their misinformation in major news outlets giving them great legitimacy – with no liability to the guys who are really pulling the strings. Clearly, they learned something from their mishandling of the climate change public relations fiasco. (Disclosure: I own stock in most of CERA's clients. So what am I complaining about? The interests of the executives at these companies do not always (rarely) intersect with that of their shareholders.)
Assuming the LNG market will actually develop (I sincerely doubt this. I will poke holes in this argument big enough to drive a truck through in a future post) to the point where it was possible to solve our short-term supply problem…Didn’t these guys learn anything from our Oil predicament? Did they skip the “America is addicted to Oil” speech? The U.S. can barely fund its imported oil purchases (and does so through the issue of IOU’s), can you imagine the impacts to our trade imbalances and the value of U.S. dollar if these guys were right?
The bottom line is this: North America is confronted with a NG shortage as well as an oil shortage. Understanding the magnitude of the issue will give you an opportunity. Or you could pull a Jim Hanson. Just ignore the issue and hope it will go away.
Hold on to your wallets.
Yours for a better world.
mentatt (at) yahoo (dot) com
P.S. Jim Hanson was the creator of the muppets. He died of what would have been a very curable "Strep" infection, but decided to ignore the issue and hoped it would go away. It did.
Friday, August 24, 2007
The import crisis explained (and how it likely was the straw that broke the housing camel’s back).
But first our quote of the week:
"Right now, success is judged by how much energy is used. Think about it, the person who is successful has a really big car; they take really expensive vacations; they have a really big house. Now we have got to have another yardstick by which we measure success because success can't continue to be measured by how much energy we use." Congressman Roscoe Bartlett (R - Maryland), the only scientist in the U.S. Congress. (Good thing he is from Maryland. If he represented my district of Boca Raton, Florida, he wouldn't make dog catcher talking like that.) OK, let's get back to the issue...
Net oil imports (we really need these) to the U.S peaked in 2005 at 12,549,000 bpd, declined in 2006 to 12,278,000 bpd, and declined again in the first 4 months of 2007 to 12,039,300 bpd. As a matter of fact 2007 imports are slightly lower than 2004’s imports of 12,097,000. The price increase of oil (in U.S. dollars, no less) from the beginning of 2004 to the present? An increase of over 75% - from $40 to $71 (the close of the front month contract as I write this), so, please, don’t tell me that the "DEMAND" simply was not there. Truth is, there is a great deal of "demand" for $40 per barrel oil, just no "supply" of $40 per barrel oil. That’s the cool thing about neoclassical economics. "Supply" and "Demand" will always come into equilibrium through "Price". Unfortunately, that is a bunch of B.S., because in the very near future, we are going to "Want" a lot more oil then we are going to "Get", because the countries that are selling this oil to the U.S. have seen their domestic production decline, and the number of cars, homes, people, plastic manufacturers… increase dramatically as a result of all that money we are sending them for the oil they sell us. The U.S. will never again see 12,549,000 bpd of imports (unless bird flu or nuclear war breaks out in Asia).
Keep in mind that the world production peak of crude oil and condensate (not NGPL’s, ethanol, XTL, CTL…) occurred in May 2005. Is this a coincidence - peak imports and peak production having occurred in 2005? I think not. Now let us look at the mirror image of this: That the U.S. aggregate Vehicle Miles Traveled peaked in 2004 (yes, the Federal Government tracks how many miles we drive. Source: http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.htm)… makes sense when one considers that we can’t consume that which is not there.
So what’s this have to do with housing? Well, didn’t housing peak in the summer of 2005, too? Peak imports, peak production, peak miles traveled, peak housing… (how far behind can peak stock market be?)
The Federal Reserve stimulated the economy after 9/11 knowing full well that flooding the system with that kind of liquidity would likely cause some kind of asset bubble trouble. What they did not count on, and still do not count on, was the decline in energy availability for soccer moms and commuting dads (decreasing total trips to the mall) to get back and forth to their distant homestead, and the extra $400 per month in fuel costs, while exporting all of that extra money to the oil exporting nations in the form of IOU’s -and all of its concomitant effects on the U.S. dollar (don’t get me going) - while at the same time “Chindia” was busy exporting cheap labor. The U.S. was caught in the vice of monetary inflation and wage deflation – many things cost more, but wages were not rising due to pressures from overseas. (Please spare me the productivity crap that the Department of Commerce spoon-feeds the media, or “How we can all get rich by taking in each other’s laundry for a fee!” The Fed, clever as ever, came up with an ingenious plan. They no longer published the money supply measure M3! After all, if we can’t see it, maybe no one will notice! Ta Da! (round of applause… not)
I know, I know… what about all those unscrupulous mortgage brokers, realtors, and Wall Street investment banks? Yea, they really did take the ball and ran with it (and jammed it down not a few throats) but let me ask you something… If oil supplies were as plentiful versus demand as they were in 1999… and gasoline was a buck a gallon for the past 7 years… Wouldn’t the economy have grown another percent (or 2) each year (compounded) for the past 8 years? Would housing be in the soup in that environment as bad as it is now? Heck, would 9/11 even have occurred in the absence of our ABSOLUTE reliance on the current Saudi regime? (WHOA!! Never mind, that got away from me… politics and diplomacy are not my thing.)
As the saying goes, when it comes to the residential real estate market of American suburbia: “You ain’t seen nothing yet”. If people can't drive to it, or drive to work from it, will it be worth anything? I doubt it.
(Remember, when I speak of these things I mean as they relate to REAL, or constant, dollars. Maybe we should start to price housing versus gold bullion or WTI crude oil – you know, how many ounces of gold or barrels of oil it would take to buy the median home…)
Yours for a better world.
Mentatt (at) yahoo.com
But first our quote of the week:
"Right now, success is judged by how much energy is used. Think about it, the person who is successful has a really big car; they take really expensive vacations; they have a really big house. Now we have got to have another yardstick by which we measure success because success can't continue to be measured by how much energy we use." Congressman Roscoe Bartlett (R - Maryland), the only scientist in the U.S. Congress. (Good thing he is from Maryland. If he represented my district of Boca Raton, Florida, he wouldn't make dog catcher talking like that.) OK, let's get back to the issue...
Net oil imports (we really need these) to the U.S peaked in 2005 at 12,549,000 bpd, declined in 2006 to 12,278,000 bpd, and declined again in the first 4 months of 2007 to 12,039,300 bpd. As a matter of fact 2007 imports are slightly lower than 2004’s imports of 12,097,000. The price increase of oil (in U.S. dollars, no less) from the beginning of 2004 to the present? An increase of over 75% - from $40 to $71 (the close of the front month contract as I write this), so, please, don’t tell me that the "DEMAND" simply was not there. Truth is, there is a great deal of "demand" for $40 per barrel oil, just no "supply" of $40 per barrel oil. That’s the cool thing about neoclassical economics. "Supply" and "Demand" will always come into equilibrium through "Price". Unfortunately, that is a bunch of B.S., because in the very near future, we are going to "Want" a lot more oil then we are going to "Get", because the countries that are selling this oil to the U.S. have seen their domestic production decline, and the number of cars, homes, people, plastic manufacturers… increase dramatically as a result of all that money we are sending them for the oil they sell us. The U.S. will never again see 12,549,000 bpd of imports (unless bird flu or nuclear war breaks out in Asia).
Keep in mind that the world production peak of crude oil and condensate (not NGPL’s, ethanol, XTL, CTL…) occurred in May 2005. Is this a coincidence - peak imports and peak production having occurred in 2005? I think not. Now let us look at the mirror image of this: That the U.S. aggregate Vehicle Miles Traveled peaked in 2004 (yes, the Federal Government tracks how many miles we drive. Source: http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.htm)… makes sense when one considers that we can’t consume that which is not there.
So what’s this have to do with housing? Well, didn’t housing peak in the summer of 2005, too? Peak imports, peak production, peak miles traveled, peak housing… (how far behind can peak stock market be?)
The Federal Reserve stimulated the economy after 9/11 knowing full well that flooding the system with that kind of liquidity would likely cause some kind of asset bubble trouble. What they did not count on, and still do not count on, was the decline in energy availability for soccer moms and commuting dads (decreasing total trips to the mall) to get back and forth to their distant homestead, and the extra $400 per month in fuel costs, while exporting all of that extra money to the oil exporting nations in the form of IOU’s -and all of its concomitant effects on the U.S. dollar (don’t get me going) - while at the same time “Chindia” was busy exporting cheap labor. The U.S. was caught in the vice of monetary inflation and wage deflation – many things cost more, but wages were not rising due to pressures from overseas. (Please spare me the productivity crap that the Department of Commerce spoon-feeds the media, or “How we can all get rich by taking in each other’s laundry for a fee!” The Fed, clever as ever, came up with an ingenious plan. They no longer published the money supply measure M3! After all, if we can’t see it, maybe no one will notice! Ta Da! (round of applause… not)
I know, I know… what about all those unscrupulous mortgage brokers, realtors, and Wall Street investment banks? Yea, they really did take the ball and ran with it (and jammed it down not a few throats) but let me ask you something… If oil supplies were as plentiful versus demand as they were in 1999… and gasoline was a buck a gallon for the past 7 years… Wouldn’t the economy have grown another percent (or 2) each year (compounded) for the past 8 years? Would housing be in the soup in that environment as bad as it is now? Heck, would 9/11 even have occurred in the absence of our ABSOLUTE reliance on the current Saudi regime? (WHOA!! Never mind, that got away from me… politics and diplomacy are not my thing.)
As the saying goes, when it comes to the residential real estate market of American suburbia: “You ain’t seen nothing yet”. If people can't drive to it, or drive to work from it, will it be worth anything? I doubt it.
(Remember, when I speak of these things I mean as they relate to REAL, or constant, dollars. Maybe we should start to price housing versus gold bullion or WTI crude oil – you know, how many ounces of gold or barrels of oil it would take to buy the median home…)
Yours for a better world.
Mentatt (at) yahoo.com
Friday, August 17, 2007
If you only knew
I wonder how many Americans realize just how close we just came to a major bank failure – and what that would mean. Americans have not had a good scare since the early 1990s, and that wasn’t a “holy $##%! I just #%@!! in my boots” scary. This was.
Remember all those talking heads on CNBC commenting about how much “capital is sloshing around the world”? What happened to all that capital? How did we get from there to the current “credit crunch”? Where did all that capital come from, and where did it go? In our system, money is created when it is loaned into existence. It is also destroyed when those loans default (or when a loan is repaid, but that is not the issue here).
The Fed put us here, and is now navigating some tough stuff to get us out without too much harm. The good news is that the Federal Reserve has just telegraphed their intention to abandon the U.S. dollar in favor of the banking system/housing/real estate market. It was the right thing to do, really, as there was no way the Fed could save the value of the dollar, so they might as well save the dollar/economy. Further, a huge amount of liquidity has been pumped into the system, with more surely to follow. In my opinion this will only increase commodity inflation versus the dollar – the dollar will fall against oil, gold, silver (especially at these levels courtesy of the “credit crunch”), corn, wheat, milk, etc… If you are in debt, or hold commodities, inflation is your friend. If you own cash, C.D.’s, etc… inflation is your mortal enemy. The Fed talks tough about inflation, but what the Fed really, really, really fears is DEFLATION (just take a look at Japan for the past 17 years).
Deflation, not inflation, causes bank failures, falling money supply, mortgage defaults, stock market crashes. The Fed just” ain’t gonna” stand by and let that happen. They will print till they can’t turn the crank anymore, and since it is in no one’s interest for the dollar to crash against other currencies; the other central banks will fall quietly into line (my friend FireAngel from theoildrum.com thinks this is the case with the exception of New Zealand and Australia’s central banks). My focus was not on the currency trade opportunity (typical American), but the dollar/commodity exchange rate.
I received many emails from people who think I am a ”goldbug”; I am no such thing. I simply despise the U.S. dollar as a store of value. Gold, silver, land, timber, livestock, oil, etc… are likely to be a better store of value. A diversified portfolio would include some, if not all, of these, in addition to financial assets. I am afraid that the purchasing power of the U.S. dollar will decline which will be exacerbated by the continuing decline in home prices, the proverbial “double whammy”.
Stay tuned, the Fed as well as the markets have more work to do. If the Fed and the other central banks continue to pump money into the system (and I believe that they will) this new liquidity will find a home, and it won’t be homes, and these new dollars will not be good for your existing dollars.
Yours for a better world,
Mentatt (at) yahoo.com
I wonder how many Americans realize just how close we just came to a major bank failure – and what that would mean. Americans have not had a good scare since the early 1990s, and that wasn’t a “holy $##%! I just #%@!! in my boots” scary. This was.
Remember all those talking heads on CNBC commenting about how much “capital is sloshing around the world”? What happened to all that capital? How did we get from there to the current “credit crunch”? Where did all that capital come from, and where did it go? In our system, money is created when it is loaned into existence. It is also destroyed when those loans default (or when a loan is repaid, but that is not the issue here).
The Fed put us here, and is now navigating some tough stuff to get us out without too much harm. The good news is that the Federal Reserve has just telegraphed their intention to abandon the U.S. dollar in favor of the banking system/housing/real estate market. It was the right thing to do, really, as there was no way the Fed could save the value of the dollar, so they might as well save the dollar/economy. Further, a huge amount of liquidity has been pumped into the system, with more surely to follow. In my opinion this will only increase commodity inflation versus the dollar – the dollar will fall against oil, gold, silver (especially at these levels courtesy of the “credit crunch”), corn, wheat, milk, etc… If you are in debt, or hold commodities, inflation is your friend. If you own cash, C.D.’s, etc… inflation is your mortal enemy. The Fed talks tough about inflation, but what the Fed really, really, really fears is DEFLATION (just take a look at Japan for the past 17 years).
Deflation, not inflation, causes bank failures, falling money supply, mortgage defaults, stock market crashes. The Fed just” ain’t gonna” stand by and let that happen. They will print till they can’t turn the crank anymore, and since it is in no one’s interest for the dollar to crash against other currencies; the other central banks will fall quietly into line (my friend FireAngel from theoildrum.com thinks this is the case with the exception of New Zealand and Australia’s central banks). My focus was not on the currency trade opportunity (typical American), but the dollar/commodity exchange rate.
I received many emails from people who think I am a ”goldbug”; I am no such thing. I simply despise the U.S. dollar as a store of value. Gold, silver, land, timber, livestock, oil, etc… are likely to be a better store of value. A diversified portfolio would include some, if not all, of these, in addition to financial assets. I am afraid that the purchasing power of the U.S. dollar will decline which will be exacerbated by the continuing decline in home prices, the proverbial “double whammy”.
Stay tuned, the Fed as well as the markets have more work to do. If the Fed and the other central banks continue to pump money into the system (and I believe that they will) this new liquidity will find a home, and it won’t be homes, and these new dollars will not be good for your existing dollars.
Yours for a better world,
Mentatt (at) yahoo.com
Thursday, August 16, 2007
Credit crunch?
The U.S. equity markets have been hard on the nerves for the past several weeks. I received an email today asking me if I am so smart, how come I did not sell at the top of the market a few weeks back? And why are energy companies underperforming the markets if there is an energy crisis looming? Good question… if you admire unreasonable expectations.
The credit crisis has very, very, very little to do with the looming energy crisis. It has some impact – all else being equal if the economy does not grow, demand for fuels will not grow, taking pressure off oil prices. All things are not equal. Besides demand, we have this pesky problem with supply. At any time in the past 50 years could you have imagined that oil prices would be as high as $71.48 (that was the front month contract as I write this) going into an economic slow down? In the last recession prices fell below $20. Why is the price closer to $100 than $20? Let’s look at some data (please don’t let your eyes glaze over):
Commercial inventories of U.S. crude oil have declined about 4.8% in the last 5 weeks to 335,228,000 barrels of oil. (http://tonto.eia.doe.gov/dnav/pet/hist/wcestus1w.htm)
Now you may think that that is a lot of oil. So let me put this in perspective: In the week of August 20, 1982 the U.S. commercial inventories of crude oil stood at 361,185,000 barrels of oil. We had more oil in inventory in the period shortly after our last oil crisis than we do today, 25 years later to the week. Do you know how much oil the U.S. consumes per day in 2007? About 20,500,000 barrels per day - that means we have 16.35 days of supply (not including the Strategic Petroleum Reserve). We import 60% of that oil. In 1982 the U.S. consumed approximately 15,800,000 barrels per day and imported approximately 25% of that. Houston, we have a problem…
OPEC just told us that they plan on producing over 250,000 bpd per day LESS in 2008 than in 2007 (and they produced less in 2007, than they projected in 2006), while non-OPEC production will, by all accounts, decline in 2008 from 2007.
The oil producing countries are not only producing less, they are consuming more, and will have less and less and less oil available to importing countries, the largest of which is the U.S.
The credit crisis has created some great bargains within the energy complex. I have laid out the case for much higher oil prices. The average multiple in the group is substantially lower than the market’s average. We are one headline, one hurricane, one terrorist attack, one pipeline shutdown, one import crisis, etc… from MUCH higher oil prices. In that environment, would you rather own U.S. dollars (treasuries, C.D.’s.etc…) or energy (equity or commodity)?
It is true that Natural Gas (“NG”) is dragging down the energy indexes, but I would not count on that for too much longer. In my next blog I will cover NG, where the future, as far as North America is concerned, is at least as dire as that for oil.
If you try to time this you run the risk of being shaken out at precisely the wrong time. The markets do not operate at our convenience. If you think the credit crunch came unexpectedly, wait till you see the energy crunch. The credit crunch was just a warm up.
Yours for a better world,
Mentatt (at) yahoo.com
The U.S. equity markets have been hard on the nerves for the past several weeks. I received an email today asking me if I am so smart, how come I did not sell at the top of the market a few weeks back? And why are energy companies underperforming the markets if there is an energy crisis looming? Good question… if you admire unreasonable expectations.
The credit crisis has very, very, very little to do with the looming energy crisis. It has some impact – all else being equal if the economy does not grow, demand for fuels will not grow, taking pressure off oil prices. All things are not equal. Besides demand, we have this pesky problem with supply. At any time in the past 50 years could you have imagined that oil prices would be as high as $71.48 (that was the front month contract as I write this) going into an economic slow down? In the last recession prices fell below $20. Why is the price closer to $100 than $20? Let’s look at some data (please don’t let your eyes glaze over):
Commercial inventories of U.S. crude oil have declined about 4.8% in the last 5 weeks to 335,228,000 barrels of oil. (http://tonto.eia.doe.gov/dnav/pet/hist/wcestus1w.htm)
Now you may think that that is a lot of oil. So let me put this in perspective: In the week of August 20, 1982 the U.S. commercial inventories of crude oil stood at 361,185,000 barrels of oil. We had more oil in inventory in the period shortly after our last oil crisis than we do today, 25 years later to the week. Do you know how much oil the U.S. consumes per day in 2007? About 20,500,000 barrels per day - that means we have 16.35 days of supply (not including the Strategic Petroleum Reserve). We import 60% of that oil. In 1982 the U.S. consumed approximately 15,800,000 barrels per day and imported approximately 25% of that. Houston, we have a problem…
OPEC just told us that they plan on producing over 250,000 bpd per day LESS in 2008 than in 2007 (and they produced less in 2007, than they projected in 2006), while non-OPEC production will, by all accounts, decline in 2008 from 2007.
The oil producing countries are not only producing less, they are consuming more, and will have less and less and less oil available to importing countries, the largest of which is the U.S.
The credit crisis has created some great bargains within the energy complex. I have laid out the case for much higher oil prices. The average multiple in the group is substantially lower than the market’s average. We are one headline, one hurricane, one terrorist attack, one pipeline shutdown, one import crisis, etc… from MUCH higher oil prices. In that environment, would you rather own U.S. dollars (treasuries, C.D.’s.etc…) or energy (equity or commodity)?
It is true that Natural Gas (“NG”) is dragging down the energy indexes, but I would not count on that for too much longer. In my next blog I will cover NG, where the future, as far as North America is concerned, is at least as dire as that for oil.
If you try to time this you run the risk of being shaken out at precisely the wrong time. The markets do not operate at our convenience. If you think the credit crunch came unexpectedly, wait till you see the energy crunch. The credit crunch was just a warm up.
Yours for a better world,
Mentatt (at) yahoo.com
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