The Politics of Energy

My Dearest Moo Moo Cow,

Jim Puplava has published his latest highly rated perspectives series on oil, money & war: Part 2 Eyes Wide Shut: The Politics of Energy

Extremely interesting. Give it a read for he warns of the crisis approaching!

• A Crisis Approaches
  Time is running out and we are drawing closer to our next energy crisis. It is a crisis brought on by the conflict between rising global demand for energy and our growing inability to supply that demand. Despite the ominous signs all around us, our nation’s leaders and experts remain in denial concerning it. We have gone from a Republican to a Democrat-dominated Congress. In the transition nothing has changed. The U.S. has no real energy plan that focuses on domestic energy production of oil or gas, renewables or the expansion of our energy grid. For the past 30 years the United States has been losing control over its energy supply and thereby making its economy ever more vulnerable to external political and economic factors. If our economy is to grow, then we must have access to energy. If we are unwilling to explore, refine or build new sources of energy, then what country can we rely on to supply it?
  
  Our leaders have made several errors in judgment in assuming oil will remain plentiful, no alternatives are worth pursuing, and that somehow OPEC will be able to meet the world’s increasing demand for energy. They ignore the fact that despite hundreds of billions in investment, Saudi Arabia has been unable to increase its production capacity over the last two decades. As Matt Simmons writes in Twilight in the Desert, at some point, large oil prospects will vanish completely and reserves will dwindle. Oil products will become much scarcer and less affordable. When oil supply peaks, the world will be forced to ration its use in one way or another.[17] Competition for oil will escalate.
  
  The question remains whether that competition is orderly and peaceful or strewn with conflict. Securing adequate oil supplies was an important element in all of the major wars of the last century and dominates conflicts in this new century. The United States—and the rest of the world by extension—is facing the biggest energy crisis in history. It is a crisis that we are completely unprepared for and one our leaders or the media are unwilling to acknowledge. From politician to citizen, our eyes remain wide shut.

Ok, what about them White Cow With Gray Tattoos??

So I have been asked why must that poor Moo-Moo Cow be Brown? Are all cows brown? And what about them White Cow with them cute little Gray Blackish tattooo all over their body? Yeah, what about them? Too sexy? :D

Anyway , yesterday I wrote about this:

• Most worthwhile reading of course is the section where they talk about the market: Stock Market Sell off: What It's Telling Us

Did you get to read it? No? Really no?

Let me paste it over here.

------------------

JIM: Okay, lets take a look at the stock market sell off. The first thing you have to understand which is there was no immediate economic impact on the economy, other than probably shaking up investor confidence, and I would suspect, John, we're going to see that show up in the consumer confidence polls.

And the other thing that it did – remember, was volatility was virtually nonexistent here if you looked at the volatility indexes (either in the bond market or the stock market) – and I mean this week the VIX went from almost 10 to closing out Friday at almost 19. So you almost had a doubling of the VIX in a single weak. It went straight up like a NASA space launch. So with volatility up, the traders kind of like that and Wall Street does because with no volatility, it's very hard to make money in the market.

The other thing that's happening is you're starting to see this ocean of liquidity some of which is beginning to dry up, although I was reading – we follow global money flows – and you take a look at Europe, M3 is up 9.8% year-over-year. The money supply here is up somewhere over 11%. But there's something that I think is rather different this time. And this is a concept that I don't think anybody in the market gets yet. Unlike previous crises as we saw in the 90s – remember the Peso, derivative crisis in 94, we had the Asian crisis in '97, and then '98 it was Long Term Capital Management and Russia, then it was Y2K and then it was 9/11. Unlike previous crises, capital may not flow this time into the United States as a safe haven because the US itself may be what is unnerving investors; and especially when you consider, John, that foreigners own about 25% or more – I think I've seen that figure – of our mortgages, and they own over 50% of our Treasury debt, and about 25% of our corporate debt. So if they do not contain the stock market swoon within 10%, this could turn into something more serious: seeing a major asset decline leaning to widening credit spreads – and then, as they say in the movies, Houston, we’ve got a problem. [3:07]

JOHN: Yeah. It's important to recognize that the crises that we saw at the beginning of the 90s, they were happening elsewhere and people could look over here as more of a safe haven, I guess you'd call it, but now we are going to be the center of this crisis. Everything has changed here.

JIM: Yeah. And a lot of people are saying that there really isn't a problem. I mean there isn't an immediate impact when you see something like this happen, John. It's the after effects that come afterwards. It's like when the Fed stops raising interest rates, there's usually a 12- to 18-month lag period before you start seeing the full effect of that which is now unfolding. The Fed stopped raising rates in June of last year. Now you're seeing the problem surface in the subprime market in the mortgage market which will be the topic of our next segment here. But if you look at what happened in the 90s, profits peaked in 1997, and it wasn't until 2001 that the recession followed. Many things have to happen before profitability peaks and we see a recession – so it's sort of a slow unwinding process. And one of the things you want to see is increased corporate borrowing; you want to start seeing higher interest rates. So it's worth considering that what we're seeing here could be the beginning stages of what I call this final end game of the dollar that's going to begin here in stages because really, the epicenter of this whole problem area is the United States itself; and what they are going to do I suspect (and that's why I see another reinflation effort coming in this market) is try to contain it because they do not have a safety valve completely put in place. In other words, China doesn't have its safety valve put in place yet, nor does Russia, nor does India, nor does OPEC, and that's what they are scurrying around the globe trying to put in place and resurrect this system that will hold up for them when basically our financial system collapses here in the United States. [5:20]

JOHN: Well, you know, if we look at the whole situation, at least where it stands right now, it's not really in anybody’s interest to have this whole thing collapse. There were no capital inflows to speak of, but nevertheless the bond market did well but gold did horribly, and people have been scratching their heads on this little conundrum, so I think that needs some elucidation here.

JIM: What they are trying to do, John, is I call this concept herding. And a typical response would be the stock market goes down, you flip out of your stock trades and you go over into Treasuries. Okay, it's a flight to quality as they say; there's a crisis. And that's exactly what they want done at this point. They want the dollar still to be viewed as a safe haven. So this whole kind chimera that is taking place here is they are herding people into bonds, trying to keep them into the dollar, into dollars even as the Dollar Index itself has been breaking down. And that's happened where we're now looking at interest rates that are almost all of the way back to the very low that they reached in December of last year. We're not quite there – we’d have to get another, let's say, go from 4.5 down to 4.4. But they are also herding. We saw that this week we had figures that were announced that inflation is still running high. What you don't want is people going into the gold market because that threatens the structure of dollar credibility and faith in the dollar. So as Nick Barisheff was commenting on how the PM fix was much higher and by the time they got to the United States, they hammered the gold markets here. That's what they are trying to do. And if they can hammer the gold markets, that forces liquidation. There were comments made that a lot of people were liquidating their gold stocks, their bullion holdings on margin calls if you were leveraged. So you saw a lot of that action take place in the hedge fund market as a lot of these guys that were leveraged, you know, where did they have profits? They had profits in energy, gold and precious metals. And so, that's what they were liquidating as they were covering margin calls that were presented against them. So that explained part of the movement, but it was also a herding movement that was done – I can remember I was being interviewed, I think it was Tuesday, by the Wall Street Transcript and he asked the comment (at the time of the interview, the Dow was down 524 points), “how bad do you think this is going to get?” And I said I would bet you we're going to see a miracle take place here very shortly. And that's exactly what happened. They came in. And Bernanke even mentioned this in his testimony this week that he's working very closely on the capital markets committee (or the Plunge Protection committee) in monitoring the situation. That’s because you could just see it take place; and sure enough in the middle of this interview as I was talking to the gentleman that was interviewing me, we went from being down 524 points to being down only 350 points – and that was where they managed to keep it contained. And I made another comment and I said I bet you it spikes in the morning and that would be a good time if you're short the market to go in and cover your shorts.

That's the thing. They’ve got to prevent this contagion from taking place, and they’ve got to keep the sheep contained and corralled. And that’s exactly what they are doing – they are trying to keep the sheep contained in the corral; they don't want them getting out of the corral and going across the road into the precious metals market. That’s because when that happens, it's a confidence and what they don't want to do is lose confidence in the dollar, so it's very important that they hammer the gold market. [9:12]

JOHN: Well, obviously, there's going to be an opening bell on Monday, and there's a lot of speculation as to where this is all going, so where do you see it all going? Obviously you're a big believer in metals, what did you do during this time when everybody else was saying, “well, see the metals aren't doing anything.”

JIM: Let's talk about where we're going. We're still seeing turmoil in the mortgage-backed markets, and so I would not be surprised in the weeks ahead if you're going to see somebody else in trouble whether it's a hedge fund, another subprime lender, or even a major lender. You're even starting to see the breakdown in stocks such as Countrywide. And all of this is going to spook investors and that's going to cause the markets to freeze up and everyone takes stock of the risks. And now people are paying attention to that risk, and you could see if this continues much longer that capital would begin to flow out of the United States, or at least not come in at the same rate. And once again, I go back to the month of December where we had interest rates spike – we had interest rates of 4.4% the first week of December – and during the month of December (remember, the United States needs to raise about 70 to 80 billion dollars a month just to pay its bills) we only had $15 billion in net foreign buying come into our treasury markets, and the dollar got in trouble. We also began to see interest rates rise, and that's when the Fed had to come out and start talking tough about interest rates – what they were trying to do was protect the dollar from collapsing even though what was happening is interest rates were going up. So they really need to be careful here that they keep this contagion contained, and it doesn't get out of control. That’s because one of the things they learned about the stock market crash in 87 when they went back and studied it, is you can't allow this thing to gather momentum as a snow ball running down a mountain because then they just lose control. So it was very important – you heard Bernanke talking wonderful things about the economy; the real estate market is self contained, it's not spilling over – we'll address that here in just a moment; and then also the turn around in the stock market the day it dropped 5 ¼ where you saw it in the futures pit, and they just turned it around intervening at the same time they had to hammer gold - you couldn't have gold spiking over 700 or we would have a real full-blown crisis on our hands. [11:46]

JOHN: So I'm going to gather from all of this, you're not panicked. You're enjoying this actually.

JIM: No. We were actually backing up the trucks on Friday, both in client accounts and myself personally, I bought silver bullion, bought a lot of it on Friday; and also my four favorite juniors, I loaded up to the gills; and I've got another semi-truck I'm sending down next week. [12:09]

JOHN: And I'm assuming it runs on ethanol, am I correct?

JIM: Yes. It's a green truck.

JOHN: It's a green truck. I'm assuming as well that when they do this type of thing, they hammer the energy markets, it's really a good opportunity is what it is.

JIM: It's an incredible opportunity. We're looking at revamping some of the things we have in energy because I expect more energy take overs. I've got one company I'm looking at now, John, that I'm going to buy at 25% of its enterprise value, so I don't expect this company to be around in the next 12 to 18 months. Same thing with late-stage juniors – we saw it with ago Agnico-Eagle; and you're going to see more and more of that as you take a look at these companies that are going to try to grow their resources, you're going to see more and more take overs. So you're absolutely right. I love it. The best time to buy is when there is blood in the street, when people are panicky and the sense of fear takes over, that's when we like to be buyers.

Jim Puplava's Storm Watch Series

I first became a huge fan of Jim Puplavae after reading his Storm Watch series. His latest update is titled Forecast 2007:Disinflation then ReinflationPart 1.

Give it a read!

rgds

Dr. Marc Faber's Interview with Jim Puplava

Dr.Marc Faber appeared as a guest on Jim Puplava's Financial Sense Newshour.

It's extremely interesting.

Give it a click. You might pick-up an extremely good tip in there!

http://www.financialsense.com/Experts/roundtable/2006/1202.html

Some crude oil views

Last week's FSO Big Picture dialogue was rather interesting in my opinion. Here is the trasncript.

Oil Facts Wall Street Doesn't Want You to Know

• Ok, we’ve seen oil prices fall over 24% since they reached a high in August. Now the analysts are predicting 40 to $50 oil because of an economic slowdown in the US. Boy, that’s hard to swallow.
  
  JIM: Yeah, I think a lot of these guys are in la-la land, John. That’s a lot of the spin, but you know, those aren’t the facts. Let me begin with the oil service sector. In the second quarter, drilling activity was up 7.3% quarter to quarter – that’s the strongest sequential increase that we’ve seen since Q2 of 2003, when the rig count expanded by over 14%. Now, worldwide, drilling demand is high, and we’ve got tight availability which is driving up day rates. For example, in the Gulf of Mexico, day rates on super drill ships have risen from 190,000 a day, to over $500,000 a day; backlogs at drillers are at record levels. [10:22]
  
  JOHN: Before you go on, give us an example of that.
  
  JIM: Well, for example, one company Pride International, their backlog has risen to 3.1 billion. That’s probably the highest in the company’s history. Their daily rig rate, reflecting what I just said earlier about rig day rates rising, have risen from $43,000 last year to almost $110,000 this year. Now, does that sound like a contracting market to you?
  
  JOHN: Is this a trick question?
  
  Then why hasn’t this translated into higher PE’s for drillers in the oil sector.
  
  JIM: I really believe Wall Street doesn’t get it, they’re still operating with models that were based on large, global production surpluses – you know, going back to the 80s when we had 10 million barrels a day of surplus excess capacity. That surplus has virtually disappeared, we’re down to 1 maybe 2 million barrels. So, in my opinion, those models are no longer valid today. You also have earnings for the drilling sector that is up anywhere from 3800% this year, to 100% in the sector; and then you still have backlogs that are still growing, and the majors are really struggling to keep up with production. [11:36]
  
  JOHN: What about the phenomenon called demand destruction?
  
  JIM: I don’t know about where you live, but I don’t see it anywhere. The economy may slow down here in the US, but you know you have to take a look at the global economy where you have China and India that are now growing at growth rates between 9 and 11%. Their growth rates are red hot. And also when you take a look at the next 5 years, China is going to become the largest consumer and manufacturer of automobiles – the Chinese aren’t going back to bicycles. Car sales continue to expand in China, and once you own a car you become an oil consumer. [12:12]
  
  JOHN: Yes, that society isn’t just going to turn around and go back, so what we really have is a situation where the demand is going to keep growing. And the real question is the supply going to be able to struggle hard enough to keep up. That’s the real issue.
  
  JIM: Well, what you have right now, when you really think about it is production for light sweet crude has already peaked. And I think in non-Western countries you’re seeing a lot of peaking in production. Not only just in the United States, but in other countries: the North Sea; you’re hearing a peak in production in Mexico and Kuwait. So what is enabling us to keep up with rising depletion rates at this time is really an increase in non-conventional oil, which is coming from heavy oil sands, shale, and what we’re seeing now in deep-water.[13:01]
  
  JOHN: And we hear about new oil discoveries such as Jack #2.
  
  JIM: We heard that last November, with PEMEX making a discovery, and then more recently, and of course everybody says, “look, look, there’s plenty of oil out there.” What’s really missing from the news of this discovery is really a realistic appraisal, and quite honestly, whehter the economics of commercial development are favorable. Last week we had Zapata George who said we don’t even have some of the technology to make this stuff work.
  
  And the estimates of this discovery, I’ve seen figures everywhere from 3 to 15 billion barrels – a 15 billion barrel discovery would put it on par with Prudhoe Bay. But you really need to pull the oil out of the sea, over 275 miles of ocean, which would take up at least 35 contiguous lease blocks in the Gulf of Mexico. Furthermore, you’ve got like, for example, the head of Devon stating each new test well – just talking about expense here – that they’re going to drill is going to cost the companies between 80 and $120 million a well. In addition, even if you could discover oil there and make it economically viable, your capital development costs are now approaching close to 1 ½ to maybe as high as 2 billion.
  
  And then you also have a logistical problem in the sense that deep water rigs are very scarce right now, they’re very expensive, and since this oil deposit lies roughly about 275 miles offshore from the coast of Louisiana, you don’t have any pipelines to carry the hydrocarbons back on shore. So what they’re going to have to use and develop is floating storage facilities and offloading vessels instead of pipelines.
  
  And of course, putting that stuff in place making it strong enough to withstand hurricanes – we saw what happened with Katrina and Rita, what they did to the regions oil facilities – imagine what this is going to be like because in sea conditions the further away you get from land the longer the swells can become. We call it fetch in the sailing world. And so you can get bigger waves. And a lot of those platforms that were built close to land in the Gulf of Mexico were designed for 50 to 60 mph winds, they weren’t designed for 100 to 150 mph winds, and 50 to 60 foot seas as we saw during the hurricane season in 2005. [15:32]
  
  JOHN: So I guess this translates into the fact that we aren’t going to see this oil for quite sometime, for years to come.
  
  JIM: No, absolutely. We’re a long ways off. In fact, more testing and drilling needs to be done out there. We need to develop new technology. They’re going to have to build new kinds of structures, as I talked about – offloading platforms and storage facilities. So the best estimates you’re not going to see production until somewhere around 2014. And even then, the most optimistic forecasts are daily production will range anywhere from 300,000 to 500,000 barrels a day. So at that point, we’re probably replacing declining production, we’re not increasing it. And according to the US Energy Information Agency, the supply of oil coming from the Gulf peaked in 2002 at 1.7 million barrels; since then production has declined; and since peaking in 1971, US oil production has fallen, on average, roughly about almost 6% a year. [16:33]
  
  JOHN: Well, that would seem to indicate that we really need to look elsewhere.
  
  JIM: Well, it’s not just us, it’s a problem that all Western governments are going to have. 85% of the world’s oil is controlled by people that don’t necessarily like us. Of that 85%, 75 of the 85% is OPEC, 10% is Russia, so you’ve got countries scrambling to secure supplies. For example, recently Japan, which imports all of its energy, just lost out on securing oil and natural gas from Russia’s Sakhalin Island. Instead of that oil going to Japan – making up to about a fifth of the country’s current natural gas imports – that gas is now going to go to China. And even worse, for Japan’s case, is Iran is now canceling the rights held by Impex holdings as Japan’s largest oil company to participate in a development of a new oil field. [17:28]
  
  JOHN: So what you have here is all the major Western countries competing against each other to secure oil supplies as the demand goes up, and the supplies still remains relatively constant despite the effort to make everything go up. This does not sound like a bubble or what’s being touted as this glut in energy.
  
  JIM: Hardly, in fact as many knowledgeable experts – and I’m talking about real experts, guys like Charlie Maxwell, Matt Simmons – a lot of these guys believe that peak oil is at our front door step. Some as early as 2010, some as late as 2015, but the bottom line here is energy is in a bull market. And what has happened here and what we’ve seen in the month of September is froth has been taken out of the market, and at least now, in my opinion, the correction is over. With the global economy cruising, the oil markets should stay firm, and I think the real opportunity is going to be in oil stocks, both on the international and domestic producers, the drillers and refiners. I just think that it’s going to be one of the key places to be in the next 10 years.
  

Commentaries from The Big Picture.

Read some interesting comments from the transcripts of The Big Picture program. ( link )

Regarding oil:

Ok, as Joe Friday said, “Just the facts, Ma’am.” Let’s start out with a few simple facts. And one thing that people have to understand is in the last 3 years, where we’ve seen oil prices go up from the mid-20s to today’s price somewhere in the 73 to $74 range, demand worldwide has grown unabated for the last 3 years, unaffected in any way by rising prices. If we look at the United States, in the first half of 2006, we reached a 20 year high in US drilling activity. So it’s not like the oil companies are standing by saying, “look, we’re making lots of money, but, you know, hey, tough, that’s the way it is.” No, with their drilling activity, their amount of capital expenditures is at near records.

But here’s the thing that I think these news people do not put in perspective. This is it in a nutshell. In 1985, the world consumed 60 million barrels a day of production; we also had 70 million barrels of capacity for production. In other words, John, we had a spare capacity of 10 million barrels a day between what we could produce and what was demanded by the world.
Also, in 1985, capacity at our nation’s refineries was running at 78%, so if there was more demand our refineries could crank up and produce more gasoline; if there was a problem in the Middle East, if a refinery went down, we had 10 million barrels of spare capacity. They could handle anything like a war in Lebanon, rebels in Nigeria, a refinery catching fire in Venezuela. Today, oil demand is running at 85 million barrels a day; refinery capacity is at over 92%
today; and spare capacity has dwindled to somewhere between 1 and 2 million barrels a day. And that is the main picture in a nutshell.

And on the issue of 'Soft landing' (is it ever possible to have a manufactured 'soft landing'?)

Soft Landing or Has the car gone off the cliff?

• SEN. CLINTON: A lot of Americans can’t work any harder, borrow
  any more, or save any less. And those same costs of health care, retirement,
  transportation, energy are impacting our businesses as well. It’s time for a new
  direction: 5 years we have lived with deficits, this agenda will help bring back
  fiscal responsibility.

JOHN: That was Senator Hillary Clinton from New York, Jim, speaking this week at a private speech, and she’s keyed the first part correctly – I’m not sure the second part is a realistic appraisal given how bad the deficit is, but she does reflect the problem that the Fed has. We seem to be stuck between – well, an old sailing term, Scylla and Charybdis. Remember that?
The Straits of Messina between Sicily and Italy. They can’t go one way, they can’t go the other, and everyone is beginning to feel the pinch as the Fed has been tightening everything up. So the real big question, right now, are we experiencing a soft landing or have we just yelled, “Geronimo,” and gone off the cliff.

JIM: You know, John, it is amazing what a difference a quarter makes. I mean if you take a look at the GDP numbers reported on Friday, growth has gone from 5.6% in the first quarter to just barely below 2 ½%. And one of the reasons for that slowdown is a dramatic shift in consumer spending. The downturn in consumer spending is accelerating. And why is that? Number one, the savings rate has been negative, so there is no cushion for consumers to offset what it is they’re receiving in income; wages have not kept pace with inflation. And that was Ok, as long as the price of the family castle was going up, and you can extract equity out of the family castle, and then refinance at a lower payment. So, that was the fuel that was sort of feeding this consumption, or increase in consumption, that we’ve seen in the last 3 years. That’s because one of the unusual characteristics about this economic recovery from the 2001 recession is that the consumer accounted for 80% of GDP growth the last 3 years.

Today’s dramatic slowdown is showing the accelerating impact of all those 17 rate hikes, meaning that anybody that got an adjustable rate mortgage in 2003 is seeing their mortgage probably adjust this year; there’ll be even more mortgages adjusted according to the National Association of Mortgage Brokers. The average family has seen their house payment go up by $400. And John, you know we’re dealing with $3.50 gasoline. So gasoline costs have gone
up, interest rate costs have gone up, the cost of food, inflation rates are up, so the cost of living is going up for consumers while labor wages are falling further behind the rate of inflation.

Now that's the BiG picture!