Friday, September 30, 2005

Who knew?

Well, unfortunately not GM's chief market analyst.

USAToday: Many reduce gasoline usage.

Americans have cut their gasoline use notably, an apparent response to the high prices that pre-dated Hurricanes Katrina and Rita and shortages that followed.

Small, fuel-efficient cars were 15.7% of new vehicle sales last month, according to Power Information Network, up from their typical level of about 14%. More important, owners of every type of vehicle - even SUVs and minivans - traded for small cars more often last month than they did a year ago, according to the PIN data. PIN is a unit of J.D. Power and Associates.

"People say, 'I used to go out and eat, go out to the movies. I don't do that now. I stay home and watch DVDs or HBO.' Soccer moms tell me they're no longer using their SUVs. They're in VWs," says Bill Douglass, CEO of Douglass Distributing, based near Dallas.

He operates 14 large convenience-store gas stations and supplies brand-name gasoline to 165 others in Texas.

The drop in gasoline use was noted in the U.S. Energy Information Administration's weekly petroleum report Wednesday. It says gasoline consumption the past four weeks averaged 8.8 million barrels a day, down from 9.1 million a year ago. That's a 3.3% drop.

Adding credibility to that, EIA also reported that gasoline inventories rose 4.4 million barrels last week, rather than declining, even though energy operations in the Gulf of Mexico were not running because of leftover damage from Katrina Aug. 29 and new disruptions from Rita, which hit Saturday. In fact, 100% of Gulf oil production was down Wednesday, the U.S. Minerals Management Service reported in a daily update.

Douglass says gasoline demand in his area has dropped 10% below last year's, starting in August. It's "a huge change" that he previously thought would take years.

Factoring out the few days of panic buying after Katrina, demand for gasoline has "been down 6% to 15%, depending on the store," says Jay Ricker, president of Rickers, a chain of 33 convenience-store stations in Indiana. "When we crossed the $3 threshold, that was a defining moment, getting people to think more about their driving."

Washington Post: Smaller Cars Enjoy New Chic.

John Mathews of Universal Toyota in San Antonio has witnessed the day that auto industry executives in Detroit said would never come.

"We are seeing people who are driving $40,000 Suburbans trading them in on $15,000 Corollas," said Mathews, who manages a dealership in a state where big trucks and sport-utility vehicles rule the roads. "The last 30 days have been unlike anything I've ever seen in the automotive industry."

Nationally, Toyota Motor Corp. officials say the Corolla, one of the Japanese company's smallest and most fuel-efficient passenger cars, had 8.7 days' supply of inventory at the end of last week. In the industry, inventory of 50 to 60 days' supply is seen as adequate. Honda Motor Co. officials are struggling to keep up with demand for the Civic, of which there is nine days' supply. "Inventories are as low or lower than they've ever been for the Civic," said Sage Marie, a Honda spokesman. "They're basically being bought right off the truck."

Paul Ballew, GM's chief market analyst, said the level of consumer interest in small cars is being overplayed. He said Japanese automakers are benefiting most because of their experience in the segment, particularly in their home market.

FoxNews: High Gas Prices Changing Auto Market.

"The (large) SUV segment, I predict, will be 25 percent of what it once was in the next 24 months," said Peter DeLorenzo, publisher of the closely watched industry Web site (

"People are going to abandon (large) SUVs in droves," he added. "We are a faddish nation, from hula hoops to pet rocks and absolutely (large) SUVs were fad and fashion."

"Right now a full-size SUV that gets ... 16 miles per gallon doesn't look very good," said David Cole, chairman of the Center for Automotive Research.

To address that, Japan's Mitsubishi Motors Corp. (search) on Wednesday said it would offer U.S. consumers one year's worth of gasoline with its vehicles in a new incentive program.

Bloomberg: Oil, Gasoline Rebound on Concern Refineries May Be Shut Longer.

After Hurricanes Katrina and Rita, American consumers are facing sticker shock over gasoline prices, said James Cordier, president of Liberty Trading Group in Tampa. ``The talk is truly conservation right now,'' he said. ``The radio stations here -- you call in to win gasoline. That's how bad it is.''

Bloomberg: Volkswagen U.S. Sales Soar as Oil Prices Shift Demand.

Volkswagen AG's U.S. sales of its namesake brand rose 72 percent in the first 10 days of September as record gasoline prices prompted buyers to trade in sport-utility vehicles for small cars and demand more diesel models, the brand's top U.S. executive said.

The U.S. unit is seeking more diesel engines for the new Jetta car than planned because gasoline price increases and scattered fuel shortages caused by hurricane Katrina are prompting buyers to ask for diesel cars, Len Hunt, the top U.S. executive for the Volkswagen brand, said in an interview. Diesel engines can get 40 percent better fuel economy than gasoline motors.

``There has definitely been a shift moving away from SUVs,'' said Rebecca Lindland, an analyst for Lexington, Massachusetts- based Global Insight Inc. ``People are also more motivated to learn about the new diesels now. There hasn't been a real reason before in the U.S.''

``There has been a massive interest in demand for the Jetta diesel,'' Hunt, 49, said. ``Initially we thought diesel demand might be 15 percent of the Jetta sales in the U.S. and it's more than 20 percent already and rising. It was under way before, but Katrina has accelerated it.''

Buying trends indicate that people who don't normally consider diesel are switching, Hunt said. Volkswagen was caught short of diesel Jettas with automatic transmissions because traditional diesel buyers prefer a manual gearbox, he said. Many of the new buyers are first-time diesel owners, Hunt said.

In Texas, the state with among the largest U.S. concentration of pickup truck buyers, the percentage of Jettas sold with diesel engines has more than doubled in the last several months, to about 30 percent, Hunt said.

DaimlerChrysler AG's Dieter Zetsche, who will take over as chief executive in January when Juergen Schrempp retires, has said U.S. demand for Jeep Liberty SUV and Mercedes E-Class sedan with diesels was already exceeding initial expectations before the hurricane as gasoline prices rose. Zetsche was head of Chrysler and now leads the Mercedes Car Group.

Mercedes sold 470 diesel versions of the E-Class in August, a ``significant'' increase from the 250 to 300 diesel models it normally sells, U.S. Mercedes chief Paul Halata said in an interview today. He credits the oil shock of the 1980s with helping attracting U.S. buyers to Mercedes in the first place and at one point driving diesels to 70 percent of U.S. sales.

``Diesel has to be part of the answer and this will speed it up,'' he said, adding that he also plans to speed up plans to get more diesel engines in U.S. models. He didn't provide a timetable.

Wednesday, September 28, 2005

This trend is not your friend.

AP: Gas Prices Blamed for Late Credit Payments.


The American Bankers Association reported Wednesday that the seasonally adjusted percentage of credit card accounts 30 or more days past due rose in the April-to-June quarter to 4.81 percent. That followed a delinquency rate of 4.76 percent in the first quarter and was the highest since the association began collecting this information in 1973.

The association's survey also showed that the delinquency rate on a composite of other types of consumers loans, including auto loans and home equity loans, climbed to 2.22 percent in the second quarter, up from 2.03 percent in the first quarter.

The moral weather equivalent of war: The Bush Years.

Reuters: Bush urges gas conservation.


Bush, a former Texas oilman, also said that the back-to-back hurricanes show the need for more U.S. refining capacity to meet gasoline demand.

"The storms have shown how fragile the balance is of supply and demand in America," he said.

In the meantime, American consumers should try to conserve fuel when possible. Federal employees will be encouraged to carpool or use mass transit, Bush said.

"We can all pitch in by being better conservers of energy -- people need to recognize the storm has caused disruption," he said.

Next stop: the natural gas problem, the sweater, and the rooftop solar panels..

Fortune on Operation Alberta Freedom.

Fortune: CRUDE REALITIES: MINING THE FUTURE The Dark Magic of Oil Sands.


"The oil-sands potential is huge," says Frederick Lawrence, a vice president of the Independent Petroleum Association of America. Oil & Gas Journal estimates that Alberta has 174.5 billion barrels of recoverable reserves in its oil sands, enough to meet Canada's needs for 250 years. That figure is second only to Saudi Arabia's estimated reserves of 264 billion barrels. All told, including deposits beyond the reach of today's technology, there could be 1.6 trillion barrels of oil embedded in Alberta.

The race to lock up those riches has begun in earnest. "The oil sands is the most significant development in crude oil in North America and one of the most significant worldwide," says Richard Kinder, CEO of the American pipeline company Kinder Morgan, which last month agreed to pay $5.6 billion for Canadian tar-sands player Terasen. "We've been looking for the right way in for a year." The day after that deal was announced, French oil giant Total put down $1.1 billion for Deer Creek Energy, another Canadian company. Those buys follow a string of new Chinese stakes: Sinopec acquired 40% of Synenco in May, and CNOOC invested in MEG Energy as well as in a pipeline project.

As Robert Esser, director of global oil and gas resources at Cambridge Energy Research Associates, puts it, Canada is the only U.S.-friendly country on earth where lots more oil is expected to come online. The White House's 2001 report on national energy policy, spearheaded by Cheney, called Canada's oil sands "a pillar of sustained North American energy and economic security."

Since the mid-1980s, though, incremental improvements have driven down the cost of production from $30 a barrel to $20, according to Neil Camarta, senior vice president of oil sands for Shell Canada, the lead partner in Albian Sands, along with Chevron Canada and Western Oil Sands, a Canadian company. That's still a lot compared with the $3 it takes to produce a barrel in parts of the Middle East. But with costs coming down, technology improving, and the price of oil rising, the oil sands are becoming downright mainstream. More than a dozen companies are planning to spend $60 billion on new projects and expansions over the next decade.

Bowling pins are to bowling ball as..

Jeff Matthews Is Not Making This Up: “The Rig Devastation is Quite Significant”.


Rowan has its own planes and were thus one of the first on the scene to witness the impact. They say that the rig devastation is quite significant and the pilots reported that in an area where they previously would see about 15 jack-ups there were none visible.

Meanwhile, Rowan sees a more significant impact on their business besides the loss of a few of their own rigs, thanks to the apparent disappearance of so many other rigs in that region: drilling rates in the Gulf should “sky rocket,” according to the Petrie Parkman note.

CNBC: Director spots XTO Energy, Hornbeck Offshore.

[..Gulf of Mexico rigs are to hurricanes?]

Tuesday, September 27, 2005

al-Naimi goes all in.

Hell of a poker game going on here. Can't wait to see the hands..

Bloomberg: Saudi Arabia, Exxon Say Oil Will Last for Decades.

Saudi Arabia, the world's largest oil producer, will ``soon'' almost double its proven reserve base, adding 200 billion barrels to the current estimate of 264 billion, said the nation's oil minister, Ali al-Naimi. Exxon Mobil President Rex Tillerson said the world may still have more than 3 trillion barrels from conventional oil fields, oil sands deposits and other sources.

``There will be plenty of oil available to meet future demand,'' al-Naimi said today in Johannesburg. Prices are high now because ``the petroleum industry faces infrastructure constraints and bottlenecks that are causing market volatility and restricting its ability to bring oil from the ground to the consumer.''

Saturday, September 24, 2005

Items of interest. Oil sands players eye nuclear option.


"The companies that are talking about it are talking very quietly," one person in Calgary said yesterday.

But with the soaring price of natural gas, key to some oil sands operations, such as the kind run by EnCana Corp., the nuclear option is looking increasingly inevitable, industry players say. As gas remains at record highs, everybody in Calgary is scrambling to figure out ways to ease their dependence.

Calgary-based EnCana has most of its focus today on reducing the amount of steam it needs to extract viscous bitumen from the oil sands, trying to inject other solvents into the ground to aid recovery and ease natural gas needs. But nuclear is among the other options.

"We monitor what the nuclear potential could be but it's not something we're actively pursuing," said Alan Boras, an EnCana spokesman.

Alberta Premier Ralph Klein said yesterday he wants all other options explored first, including coal-fired power.

Companies such as Nexen Inc. and OPTI Canada Inc., both of Calgary, are using new technology that is something like a perpetual motion machine, with some of their oil sands production used to power the whole process. The two companies recently announced a massive expansion of their project.

MarketWatch: Refiners rule?


Blue Chip Emerging Growth letter is among the most successful of those followed by Hulbert. (See my July 4, 2005 column)

Blue Chip's technique is a variant of the Modern Portfolio Theory -- or, to put it another way, a form of relative strength approach. This means it supposedly picks its stocks based on a purely technical assessment of their performance.

But I've said before, Blue Chip makes a surprising number of fundamentalist noises.

In a recent promotional pitch, Navellier was positively evangelical about oil -- albeit first tantalizing his readers with the specter of a short-term correction. He wrote:

"Investors who are selling their oil stocks -- or worse, selling them short-in anticipation of a collapse are going to be in for the shock of their lives!

"Shocked as oil prices correct slightly and skyrocket higher... Shocked as they see oil profits explode again... And, perhaps worst of all, shocked as they miss out on the next-and most profitable-phase of the oil boom, as visionary investors make a decade's worth of profits over the next two to three years...

"For the past 18 months, as I've been telling my readers how oil stocks would continue to rise higher, my readers have grown significantly richer in a handful of select oil companies.

"However, even these great gains pale in comparison to what lies ahead as the next phase of the oil boom shifts to reward a new set of companies."

I'm surprised to see the scholarly and even geek-like Navellier pounding the pulpit like this.

The Boston Globe: Care to place a bet on oil?


Mutual funds specializing in energy and natural resources are spouting huge gains for a third consecutive year, and few managers in Boston have done better in that field than Dan Rice of BlackRock Global Natural Resources fund. That $1.1 billion fund, which earned 60 percent in 2003 and 47.6 percent last year, is up more than 53 percent so far this year.

Rice's message about energy stocks: Don't get scared off. There's still plenty of room to climb. ''People remember the dot-coms and think the energy market will be no different," he says. ''There's a huge difference."

His calculations don't depend on today's price for a barrel of oil. He looks at what the prices of energy stocks imply about the long-range cost of energy itself, then compares them to his own expectations and those of people buying futures contracts for delivery of oil and other energy resources years into the future.

The stock prices suggest a long-term oil price in the low to mid-$40s per barrel, according to Rice and brokerage analysts. Crude oil for November delivery cost $66.90 yesterday. Long-term futures contract price oil in the low $60s as far as six years out.

Though Rice thinks prices won't remain as high as current levels, he believes a long-term price of a barrel of oil will probably be in the $50s. Energy company stocks currently trading at prices implying an oil price in the $40s could appreciate by about 40 percent if oil climbs to his longer term forecast, Rice says.

The same kind of price gap exists for stocks working with natural gas and coal as well, he says.

The Christian Science Monitor: Driving 55 m.p.h. is looking pretty good.


But Mr. Bush has shown weak leadership on a more lasting step: Using the White House pulpit to urge Americans to turn down their thermostats this winter, save gasoline by buying high-gas-mileage vehicles and, most of all, to drive smarter.

One energy analyst, John Dowd of Sanford C. Bernstein & Co, told a Senate panel this month that "if, as a country, we were to obey speed limits for the next two months, we would probably conserve more fuel than will be lost by the refinery outages. Reducing speeds from 70 m.p.h. to 60 m.p.h., for example, improves fuel efficiency by 15 percent. If Americans want to know what they can do to limit gasoline price inflation, the answer is simple: slow down."

Consuming oil is so integrated into daily lives that it can be difficult to alter individual habits for a collective benefit. Since the 1970s, the nation has achieved much in energy conservation. But wisely taking such steps as avoiding many car trips, using air conditioning less frequently, and not accelerating a car so quickly are actions that still need to become habits.

As a former oil man, Bush must be more forceful on energy conservation, both to ease the current price crisis and to place energy efficiency at the forefront of energy policy. The era of staking the nation's future on a massive dependency upon one energy source needs to end - long before the oil runs out.

These latest disruptions in oil and natural-gas supplies should serve as a wake-up call that energy policy can't be business as usual.

World Energy Monthly Review: Why Simmons Is Wrong about Saudi Oil.

MarketWatch: Fuel to the fire - Alternative energy is risky play on hot sector.


A couple of days ago on CNBC:

CNBC: "Well, oil has been around $68 a barrel in the futures markets on the disruption concerns about Hurricane Rita, natural gas hit record highs, 9 Texas refineries have been shut as a precaution, as the category 5 storm continues to head toward the Texas coast here. Joining us to talk about how all of this will play out in the energy markets, what we're learning more as Rita heads towards the coast, Dan Yergin is chairman of Cambridge Energy Research and CNBC's Global Energy Expert and you've been attending a conference in New York today, Dan, at Goldman Sachs on, what was it called? The Top 10 Global Risks To The Economy?"

Yergin: "Exactly, and I was really surprised to see actually, oil was right up at the top, 81% of the 300 economists who were surveyed put oil as the number one both short and medium term risk, followed by global terrorism and the twin deficits and geopolitics."

"Really surprised"?

Friday, September 23, 2005

Dude, You're Getting a Recession.

Looks like the odds are starting to tilt towards recession rather than away. Not the way the stock market is behaving though. We'll see. Note that things were shifting before these storms - no surprise, given how long gas prices have been high-ish and rising.

Cash is king? You make the call..

WSJ: Leading Indicators Fell Last Month.

A closely watched indicator of future economic activity declined for the second consecutive month, suggesting that economic growth in the U.S. could slow somewhat in the months ahead, and jobless claims surged in the aftermath of Hurricane Katrina.

The Conference Board said yesterday that the index of leading economic indicators fell to 137.6 in August, down 0.2% from July. That followed a 0.1% decline in July from June. Although the declines in August and July were relatively small, they are significant.

The data for the index were collected before Katrina hit. So the declines reflect an erosion of consumer confidence even before Hurricane Katrina devastated New Orleans and parts of Mississippi. The declining confidence reflected high energy prices and consumers' feeling that the job market isn't as strong as it should be, said Ken Goldstein, an economist with the Conference Board, a private research group in New York.

Steven Wood at Insight Economics said the declines in the leading-indicators index "suggests that the pace of economic growth should gradually slow during the next three to six to nine months." Moreover, he added, "the effects of Hurricane Katrina are likely to push the leading indicators even lower for September because initial claims are soaring and consumer expectations have plunged during the month."

Thursday, September 22, 2005

The moral weather equivalent of war.

I'm sort of at a loss for words, so first, I'll point out that The Oil Drum is doing a great job of discussing Rita.

Secondly, I think we all have to ponder the reality that global warming may well be involved here, and the further implications of that [and there are several..]. One theory on global warming is that the world's weather events will become more intense; I'm sure as time goes on we'll hear more about this from the mainstream media. Or at least we should..

Finally, I'm sure everybody is aware of how potentially dangerous this storm is at this moment. Under the absolute worst case scenario, we could simulate both peak oil and peak natural gas in the US over the next few months.

CNNMoney: Rita could equal $5 gas.

Katrina damage was focused on offshore oil platforms and ports. Now the greater risk is to oil-refinery capacity, especially if Rita slams into Houston, Galveston and Port Arthur, Texas.

"We could be looking at gasoline lines and $4 gas, maybe even $5 gas, if this thing does the worst it could do," said energy analyst Peter Beutel of Cameron Hanover. "This storm is in the wrong place. And it's absolutely at the wrong time," said Beutel.

The Dallas Morning News: Refineries slow down preparing for Rita.


"It's almost like, what Katrina didn't get, this one's going to," said long-time Dallas oil investor and head of BP Capital, T. Boone Pickens, in a speech Wednesday. Pickens said he expects oil, natural gas and gasoline prices to settle once the storm passes, but to remain high because supply is tight.

CNBC: Stocks Slump on Rita Fears; Dow off 103.


Given than four oil refineries are already down, Rita "really is a national disaster," Valero Energy (VLO, news, msgs) CEO Bill Greehey told Reuters. "If it hits the refineries, and we're short refining capacity, you're going to see gasoline prices well over $3 a gallon at the pump," Greehey told Reuters.

Even if Rita ends up causing less damage than some fear, the U.S. will go into winter with a lot less natural gas in storage than last year, and a colder-than-normal winter could really send prices spiking, Robert Morris, analyst at Banc of America Securities told CNBC's "Squawk Box."

Bloomberg: Oil, Gasoline Rise for 2nd Day as Hurricane Heads to Refineries.


``The Houston area is ground zero of the refining industry,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Tilburg, the Netherlands. ``If it suffers the scope of damage caused to refineries in Louisiana by Katrina, we could see rationing and queues at the gas pump.''

``Rita is developing into our worst-case scenario,'' said John Kilduff, vice president of risk management at Fimat USA in New York. ``This is headed right into our other major refining center just after all the damage done to facilities in Louisiana. From an energy perspective it doesn't get any worse.''

``Hurricane paths are like spinning the bottle, you don't know where they're going to hit until about three hours from landfall,'' said Matthew Simmons, chief executive of Simmons & Co., a private investment bank in Houston for the oil and gas industry. ``Anything south of Corpus Christi and we're fine. It could be Pearl Harbor.''

Bloomberg: Oil, Gasoline Jump; Rita Disrupts U.S. Output, Imports in Gulf.

``This basically represents a heart attack to U.S. energy infrastructure and production,'' said John Kilduff, vice president of risk management at Fimat USA in New York. ``This country has two main refining centers, two energy alleys. One was hit last month with Katrina. The other one is going to get hit.''

``The potential consequences don't even bear thinking about,'' said Paul Horsnell, head of energy research at Barclays Capital in London. ``There's such a concentration of refineries and chemical plants in a relatively small area that anything of that kind of intensity would be extremely nasty.''

WSJ: With Refineries in Rita's Path, Sector Braces for Second Punch.


The energy industry has never seen anything like the 2005 hurricane season. The potential for two major storms of this strength hitting the offshore industry in one year "is unprecedented in modern memory," said Troy Frame, chief meteorologist for Alert Weather Services Inc., a Lafayette, La., company that provides offshore weather forecasts to the oil-and-gas industry.

As the energy industry rushed to evacuate 40,000 workers from offshore facilities and to begin the painstaking process of shutting down refineries, energy markets grew worried about the supply of gasoline for the next few days and the availability of natural gas for the winter, when the fuel is used to heat homes across the country. About one-quarter of the oil and natural gas produced in the U.S. comes from the Gulf of Mexico, and the coastal communities from Corpus Christi, Texas, to Pascagoula, Miss., host fully one-third of U.S. refining capacity. "The supreme concerns are refining capacity and natural-gas supply," said Raymond Carbone, president of Paramount Options Inc., an energy brokerage in New York City.

The storms have drawn the attention of lawmakers, prompting new discussions of additional energy legislation to expedite permits for new refineries and to open new offshore areas for exploration. At the same time, there is the stirring of political will to find ways to encourage more automobile fuel efficiency, said Robin West, chairman of consulting firm PFC Energy. "The hurricanes are causing the political winds to change in Washington," he said. "And the only way change comes about is pain, and, frankly, the American consumer is starting to feel pain in energy in ways they haven't felt in 20 years."

The potential for a double whammy to the Gulf Coast energy industry has underscored the risk of putting much of the nation's energy infrastructure in a natural-disaster corridor. The refining industry already is so vulnerable in the aftermath of Katrina, "You don't need a worst-case scenario to get a worst-case outcome" with Rita, said Larry Goldstein, president of the Petroleum Industry Research Foundation.

OPEC's decision "is not going to help put gasoline in our car," said Kim Pacanovsky, oil and natural-gas analyst for KeyBanc Capital Markets, a division of Cleveland-based KeyCorp. "This is a huge wake-up call for the American people and the government to add refineries and look at conservation."

Let's hope/pray for the best.

Tuesday, September 20, 2005

Matthew Simmons in Time Magazine.

Time: The Real Oil Shock.

Thankfully, it doesn't appear to be the cover story. Read the article for his very sensible ideas on how we cope with a potential peak in oil production.


After spending more than two years researching my book Twilight in the Desert, I am convinced that it is highly improbable that Middle Eastern oil--and particularly Saudi Arabian oil--can grow to those far higher levels. Instead there is a risk that Saudi Arabia's oil output and the rest of the Middle East's oil supply may start to decline.

Saudi Arabia's specific production risk stems from the fact that almost 90% of its supply comes from only five key but aging giant oil fields. Each of those aging fields is exposed to a potential production decline. The implications of this risk are enormous, since 35 years of intense exploration in the kingdom has unearthed only one significant new oil field, Shaybah. Its peak production is less than 3% of Saudi Arabia's oil output.

The likelihood that Saudi Arabia can increase its output to even 15 million bbl. a day is remote. Even maintaining its current production rate for an indefinite period of time is hardly a certainty. The Ghawar, Abqaiq and Berri fields (which still make up about 90% of Saudi Arabia's light crude) now pump oil from water-injection wells--essentially the low-hanging fruit. Once that ends, oil production in those key fields will decline, and the declines could be steep. The two other giant fields producing lesser-quality oil are subject to this same risk. Quantifying the timing and the magnitude of the pending drop is impossible based on the skimpy data Saudi Arabia now discloses. But the risk is real, and the drop could happen soon.

The bottom line: the global oil supply has probably peaked. While the world expects to consume 120 million bbl. a day two decades from now, actual supply may be half that rate. This conclusion aptly portrays the potential magnitude of the energy ditch we are now in. It is impossible to calculate the odds of this supply-demand imbalance happening, but prudent planning argues that the world should assume the bleaker scenario. Then it follows that a global plan to use oil more rationally must be urgently developed and implemented.

Monday, September 19, 2005

The good news, the bad news and the really bad news.

The good news:

We think the energy rally is advanced. We have trimmed our positions in a couple of holdings, but we still view energy as a strategic area long term. What is going on in the energy sector is a multiyear phenomenon, not a two- or three-year occurrence. It's going to be a five- to 10-year phenomenon.

I'd say that energy is ahead of its fundamentals on a short-term basis, but on a longer-term basis there is quite a ways to go.

[Quote from's interview with Robert Rodriguez, manager of FPA Capital Fund.]

The bad news:

Five to ten years of bad jokes on LOBG.

The really bad news (for index fund holders):

When you survey the investing landscape, what do you see as potentially being undervalued?

Right now the most aggressive thing that we've been acquiring has been Treasury bills. We select our stocks one stock at a time from the bottom up. We have only added a single new name in the last 18 months. And that occurred at the end of June. It was a 144 deal called Rosetta Resources that is in the process of getting registered. It's in the energy area. The company was set up to acquire assets out of Calpine (CPN:NYSE - news - research - Cramer's Take). It was a forced sale because Calpine needed the cash.

So you just don't see anything out there?

We just don't see anything out there. Three areas are showing up on our screens right now: financial services, which we talked about; housing, which we wouldn't touch with a 10-foot pole; and retail. A larger number of retailers are appearing.

You're starting to scare me. Is there any credence at all to the bull case?

Hey, we could be wrong. A value manager and a contrarian ask whether they are getting adequately compensated sufficiently through a low enough valuation or a high enough yield to compensate them for the uncertainty of the future. We've come to the conclusion that the compensation is not sufficiently high enough either in equities in general or bonds in particular.

So cash is king?

Yep, cash is king. You can look at it this way: the opportunity cost of holding cash is very low. The S&P is up around 2% year to date, which is almost identical to the yield on the three-month Treasury bill. So for all the risk that people have taken holding equities this year, they have not been adequately compensated.

The Emperor's Clothes Will Be Here In a Few Hours.

WSJ: OPEC Ministers Consider Ways To Calm Jittery Energy Market.


Oil prices surged as a new storm, Rita, headed toward Texas and OPEC ministers meeting here all but admitted that they have no additional means to cool red-hot petroleum markets.

The looming new threat to oil facilities in the Gulf of Mexico eclipsed efforts by ministers of the Organization of Petroleum Exporting Countries to craft a reassuring message reiterating that they would produce more oil if needed. The market moves underscore how much the U.S., by far the world's largest oil consumer, depends on the gulf region, which is home to significant offshore oil and natural-gas pumping assets as well as key refineries along the coast.

The price of U.S. benchmark crude-oil futures for October delivery shot up $4.39 a barrel, or 7%, on the New York Mercantile Exchange, settling at $67.39. In London, benchmark Brent futures for November rose $3.80 to $65.61 a barrel.

Also on the Nymex, October heating oil climbed 19.80 cents, or 11%, to $2.0425 a gallon, while October gasoline surged 24.95 cents, or 14%, to close at $2.0490. October natural gas jumped $1.52, or 14%, to a record $12.66 per million British thermal units.

Saudi Arabia's oil minister, Ali Naimi, repeated once again his pledge to produce as much as 1.5 million barrels a day of extra oil if it is needed. Along with other OPEC ministers, Mr. Naimi also sought to find new ways to dress up this year-old message, which is intended to reassure consuming nations that OPEC was willing to produce more oil if buyers could be found.

One of the options being discussed was for the cartel to state that it has two million barrels a day of spare petroleum-pumping capacity, citing projects that OPEC officials say will come online later this year in the United Arab Emirates and Libya. The statement would say that this was immediately available on demand, regardless of the cartel's formal output ceiling of 28 million barrels a day. "The crude is available," Mr. Naimi told reporters. "If you want it, there it is."

Friday, September 16, 2005

Charles Maxwell on Bloomberg 09-16-2005.

Charles Maxwell is Senior Energy Analyst at Weeden & Co.

His observations:

- He believes we've seen the peak for energy prices for the time being.

- Hurricane Katrina did quite a lot of damage to the oil industry in the Gulf of Mexico, more than is publicly recognized. There is 15% of production off-line, he expects 10% to still be off-line in 2 months, and 5% still to be off-line in 6 months, meaning quite a drop in production.

- Now that they are looking below water, they are finding more damage than they thought, but a huge flotilla of gas and oil is coming from Europe to help.

- The question is: will people drive less and make up for the shortfall? Over Labor Day, he said there was an 8-9% drop in driving.

- He believes oil prices will stay in the mid 60s for a while, and though they might move higher, he doesn't believe they will spike much higher.

- Drivers will have to cut down and conserve; combining trips, errands, switching to small cars, there are a thousand ways to conserve, and it's a necessity we do.

- When asked where the responsibility lies, he answered that the government needs to take the lead, while this administration has so far focused mostly on supply.

- "We have to pay more and more attention to conserving."

- "If we don't conserve, we will pay a terrible price."

Thursday, September 15, 2005

WSJ on Operation Alberta Freedom.

It's FREE (the article), and they include a handy map in case you want to load your pickup and your shotgun(s). Notice the city in the middle called Fort McMurray? Obviously the Canadians knew it was going to come to this sooner or later.

WSJ: A Black Gold Rush in Alberta.


By briefly blasting oil prices above $70 a barrel, Hurricane Katrina may have blown away any lingering doubts among oil producers about the long-term profitability of multibillion-dollar projects in the vast oil sands of this western Canadian province.

The supply disruptions caused by the hurricane also may stoke further U.S. interest in the oil sands as a stable, long-term supply source.

The U.S. Department of Energy estimates that Canada's oil sands contain 174 billion barrels of recoverable reserves -- the world's second-largest oil resource behind Saudi Arabia. But soaring construction costs and high prices for natural gas, which is used in producing petroleum from the sticky sands, are driving up the break-even point for new developments under way or planned for the northern Alberta region.

Even so, the wave of development engulfing the forested oil-sands region has gathered so much momentum that some say it is unstoppable. "Really, there is no price scenario that could derail the oil sands, be it oil prices or natural-gas prices," says Greg Stringham, vice president of the Canadian Association of Petroleum Producers. Recent lofty natural-gas prices aren't sustainable long term, he argues.

Some producers are testing new oil-sands extraction technology that would burn bitumen instead of natural gas to generate steam.

I don't quite agree with Mr. Stringham's optimism on natural gas prices, but I believe alternatives will be developed. Among the producers that are looking at burning bitumen instead of natural gas are Nexen and Opti Canada, which have been moving nicely of late.

Tuesday, September 13, 2005


I believe CIBC's Jeff Rubin called for oil to go to $50 when it was trading around $30 a coupla' years back. Here's his latest:

Bloomberg: Commodity Strategists: Oil May Average $93 in 2007.

Oil may average $84 a barrel next year, $93 in 2007, and $100 in the fourth quarter of 2007, as demand outpaces supply, Canadian Imperial Bank of Commerce's chief economist said, jumping ahead of other analysts who are trying to catch up with surging prices.

Rising consumption in China is straining supplies, and damage from Hurricane Katrina to Gulf of Mexico facilities will delay new oil projects in addition to cutting output now, Canadian Imperial's Jeffrey Rubin wrote in a Sept. 7 report. Global supply will be as much as 2.4 million barrels below projected demand by 2007, and the gap will only be closed as rising prices slow demand growth, Rubin wrote.

``We estimate that 1.8 million barrels per day of consumption must be squeezed out next year through the impacts of higher prices,'' Rubin wrote. The gap between supply and demand grows as much as 3 million barrels a day by 2008. Global oil needs are almost 84 million barrels a day now.

``About 42 percent of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. ``There's a huge relationship to income growth there, but a very uncertain relationship to price at all.''

Instead of adding nearly 600,000 barrels of oil a day by 2007, new fields in the Gulf may contribute just 300,000, according to Rubin's report.

``When you juxtapose that with the apparent insensitivity of the demand curve, then what happens is that even though it's a relatively small reduction in supply, you need huge price increases to rein in demand,'' Rubin said during the interview.

``You have had a very significant reduction in the growth of demand, something in the neighborhood of a 40 percent reduction in the growth of demand already,'' he said. ``Unfortunately it's taken huge prices to achieve that.''

God Save the Queen.

Make of this what you will. You probably want to read it all. There are rumors around that the Saudis are experiencing some issues with Ghawar production, and I assume that has something to do with Simmons' more urgent tone here. But you never know where the rumors come from and who benefits.

Petroleum News: Saudi Oil Shock Ahead.


Simmons also suggests that Saudi production is very near its peak. But the feedback he has received from technical people who have read the book, leads him now to believe that Saudi Arabia has “actually exceeded sustainable peak production already.”

“And I think at the current rates they are producing these old fields, each of the fields risks entering into a rapid production collapse,” he said.

Saudi oil shock is imminent

Meanwhile, as the world’s thirst for oil grows, Saudi Arabia and other oil-producing countries will be unable to keep pace. Some analysts say Saudi Arabia is capable of producing 20 million to 25 million bpd, but Simmons says that level of production is “impossible.”

“And I also believe that — Ghawar, for instance, which is really the whole nine yards, because that is 60 percent of their production — that North Ghawar, which is the top 20 percent of the field, has a productivity index that is about 25 times the productivity index of the rest of Ghawar, and that’s the area that is almost depleted now,” Simmons observed. “And when that drops, you could basically see Ghawar go from 5 million down to 2 million bpd in a very short period of time.”

ANWR may hold ‘queen’

America needs more oil sources and Alaska is a good place to look, Simmons said. As for ANWR, he said it’s ludicrous for people, whether geologists or environmentalists, to make definitive statements about the quantity of oil reserves in the refuge.

Found on The Oil Drum.

Monday, September 12, 2005

Let them eat rice cakes.

Man, oh man, Clinton and Bush Sr. have clearly been hanging out together too much.

He must not need the speech fees so much anymore, 'cause I'm not sure they're having have him back after this.

ABCNews: Clinton to China: Find New Energy Sources.


Former President Clinton urged China on Saturday to recognize the urgency of the environmental threats to its growth, and to use the Internet as a tool to surmount them. But he remained silent on the risks faced by those who use the Internet as a forum for dissent.

"You will have to come to grips with significant challenges to your growth," Clinton said at an Internet conference in this eastern resort city. He warned that the energy consumption required to keep China's economy growing at its recent rate of more than 9 percent is "unsustainable."

China's oil imports have soared as it struggles to keep booming industries growing. Its continued strong growth, and that of the rest of the world, will depend on its ability to find alternative energy sources and make better use of the resources it has, Clinton said.

"If we don't do it, it will eventually impose severe restraints on economic growth and make future conflicts far more likely," Clinton said. "It's not clear to me that there will be enough oil to produce that growth according to traditional energy use patterns," he said.

Saturday, September 10, 2005

Mind if we dance with your dates?

"Why, yes. We do." Frenchie said, as his arm tightened around his young hottie.

Sorry, missed this. Kind of busy lately.

Bloomberg: Total Raises Bid for Deer Creek to C$1.67 Billion.


Total SA, the world's fourth-largest oil company, raised its bid for Canada's Deer Creek Energy Ltd., an oil-sands producer, to C$1.67 billion ($1.41 billion) to match a competing offer.

Total, based in a Paris suburb, raised its offer by 24 percent to C$31 per share from C$25 a share on Aug. 2, the company said in a statement.

High oil prices are encouraging companies including Exxon Mobil Corp and Royal Dutch Shell Plc to spend billions to boost output from deposits of oil-soaked sand buried under northern Alberta, the largest source of oil outside of the Middle East. Increased oil demand from the U.S., India and China have contributed to oil prices climbing to a record $70.85 a barrel on Aug. 30.

``There are very attractive features about oil-sands projects,'' Mark Friesen, an analyst with Calgary brokerage FirstEnergy Capital Corp., said today in a telephone interview. ``These are great projects. There's no decline in production, no geological risk in a politically stable area in a world that questions where the next barrel of supply is going to come from.''

The competing bid may have come from a Chinese company as the Asian nation with the fastest-growing economy in the world is scouring the globe to lock up oil supply, said Friesen, who does rates Deer Creek as `underperform' and doesn't own any.

PS. Yeah, yeah, the quote is from Animal House and Frenchie is from Grease, and was a woman. Oh well..

Trend or anomaly?

It will take a few weeks of data to see.

WSJ: U.S. Gasoline Use Fell 4% Last Week. [$]


Americans used 4% less gasoline amid skyrocketing pump prices last week than they did the week before Hurricane Katrina hit, the federal government reported. But whether that indicates consumers have decided to conserve or merely that they couldn't find all the gasoline they wanted isn't clear.

The figures didn't include data from the Labor Day weekend or from this week. It's also unclear whether the weather simply reduced driving in the affected states, though government analysts doubted that explained the full drop. Tom Kloza, chief oil analyst with the Oil Price Information Service, a Wall, N.J., industry-research firm, said fuel retailers he has talked to have reported a particularly large drop-off in demand since Saturday. "It dropped off the table," he said -- a shift that, if true, wouldn't be reflected until the next government report, due out next week.

Yesterday's EIA numbers were the second indication in as many days that Americans might be tempering their consumptive ways in response to sharply higher gasoline prices. On Wednesday, the EIA slashed its prediction for U.S. oil-demand growth for the full year, "largely due to higher prices."

Wednesday, September 07, 2005

Three is the magic number.

Three is a magic number,
Yes it is, it's a magic number.
Somewhere in the ancient, mystic trinity
You get three as a magic number.

The past and the present and the future.
Faith and Hope and Charity,
The heart and the brain and the body
Give you three as a magic number.

It takes three legs to make a tri-pod
Or to make a table stand.
It takes three wheels to make a ve-hicle
Called a tricycle.

[and hey, we may be riding a lot more of those soon..]

Lyrics: Schoolhouse Rock

I've always thought that $3 was the number that would put a little religion in people and cause some amount of demand destruction by getting them to cut that portion of their usage that is pure waste as well as take some marginal steps to conserve. [I'm talking average income person here.]

So I'll be interested to see how long we stay around here and what happens to gasoline consumption as a sort of peak oil test.

One of the reasons I don't subscribe to the worst case scenarios is that I believe we are wasting a lot of gasoline, and thus have a lot of room for improvement if things get really tight. (Assuming market prices are allowed to reflect reality.)


USA Today: Gas shock echoes across USA.


Consumers are flocking to the Internet for help. They've besieged, the best-known site for finding cheap gas. The site's message board shut down on Thursday. Co-founder Jason Toews says the Minnesota-based Web site averages 300,000 hits daily but was on pace to get more than 4 million Thursday.

"We've just been overwhelmed," Toews says. "Our server couldn't handle it."

Here and there are stories of flat-out craziness, such as when the T-Bird Mini Mart in Springfield, Vt., decided NOT to raise its gas prices.

T-Bird stopped raising its prices midday Wednesday at $2.60 a gallon while all the other gas stations around kept pushing their prices higher - until T-Bird was charging 30 cents a gallon less.

People started showing up from as far away as New Hampshire. Lines snaked through town. Neighboring businesses summoned police, who directed traffic for hours. So overwhelming was the traffic, says clerk Jason LaValley, "We had to raise (the price) to keep people away." The store was selling gasoline for $3.19 Wednesday night, more in line with the competition.

In Chandler, Ariz., Nezar Alsai, owner of the independent Blue Diamond Fuel, says customers were screaming at him Thursday about the $3.09 price of regular.

"They say, 'Shame on you! You're taking advantage of the situation,' but I'm not," Alsai says, whipping out the latest fuel bill from his supplier, which shows he is paying $3 a gallon for regular.

Alsai expects the wholesaler wants $3.10 a gallon for the next load, but he's holding out. "I am waiting for the price to drop. I expect I will run out of gas and don't know what to do," he adds.

AP: Katrina's Wrath Hits Holiday Drivers.

When the station did get a shipment of gas on Saturday, a day after running out, it asked only for regular gasoline because not many people were buying mid-grade and premium blends, Neuhart said. The station, which was charging $3.09 a gallon for regular, also was limiting drivers to 10 gallons per vehicle.

One driver, Phillip Craig, said he had had been trying to hold off until prices fell. "The only reason I came here today was because my wife noticed it was $2.89 on her way home and told me to stop and fill up," he said.

At a Marathon gas station near downtown Orlando, Fla., the pumps were vacant Saturday. Plastic bags covered all but a few, $3.19-a-gallon premium pumps at the station, where owner Bibi Razak usually sells 1,200 gallons daily.

"It's definitely hurting business," she said, pointing to her food and drink displays. "No one's coming here to buy the gas, so they don't come here for anything else."

Friday, September 02, 2005

Ask not what your country can do for you..

Ask: "How many shares of Canadian Natural Resources can I afford?"

There's definitely a case to be made here for buying Canadian energy stocks of all sorts [aka Operation Alberta Freedom], certainly before the Chinese get a hold of them, maybe even before the Canadians figure out what happened. [Canadian readers: I'm kidding. Chinese readers: I'm not kidding.] I'm not buying them right now, I've actually got a good bit already, but at some point if they fall in price, I may end up buying even more.

EIA: Hurricane Katrina's Impact on the U.S. Oil and Natural Gas Markets

According to the Minerals Management Service (MMS), as of 11:30 Central Time September 1, Gulf of Mexico oil production was reduced by over 1.356 million barrels per day as a result of Hurricane Katrina, equivalent to 90.43 percent of daily Gulf of Mexico oil production (which is 1.5 million barrels per day). The MMS also reported that 7.866 billion cubic feet per day of natural gas production was shut in, equivalent to 78.66 percent of daily Gulf of Mexico natural gas production (which is 10 billion cubic feet per day).

MarketWatch: Gulf oil sector makes scant headway. Shattered infrastructure spells lengthy recovery


Four days after Hurricane Katrina tore through the heart of the Gulf Coast oil industry, most of the region's refineries remain shut and its offshore platforms unmanned, raising fears of fuel shortages and keeping energy prices at record levels.

Shockwaves from the outages are rattling commodities markets, manufacturers, airlines and consumers, with many motorists facing $3-a-gallon gasoline for the first time. See full story.

The threat of gas lines prompted President Bush to waive a ban on foreign vessels carrying cargoes between U.S. ports. He said the move would allow foreign-flag ships to join an overstretched U.S. tanker fleet rushing gasoline to regional markets running low on supplies, due to pipeline outages in the South.

At the same time, Bush asked Americans to avoid unnecessary gasoline purchases until the country gets through what he called a "temporary disruption" to the nation's fuel supply.

How long the disruption lasts hinges on how quickly oil companies can bring back the thousands of offshore wells shut by Katrina.

You know you're ^&^#%# when Micheal Lynch gets negative. Some sort of good news at the end.

Bloomberg: Gasoline Rises for a Fourth Day as Katrina Shuts Refineries.


``Gasoline supplies are going to be real tight for a long time,'' said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts. ``All you need is a little hoarding to cause regional shortages. This is what we went through in the 1970s when motorists rushed to filling stations and filled tanks because they feared supplies would run out.''

``Nothing can stop the average pump price from passing $3 a gallon in the next few days,'' Lynch said. ``At some point you will see a big drop in demand.''

Waiting for Refineries

``We have to wait for the refineries to come back on line, which will take a couple weeks,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte. ``We're hearing a lot about the importance of getting the power going, but that isn't the only problem we will have reopening the refineries. Homes throughout the region are destroyed and workers need someplace to live.''

September typically is the most active month in the June- through-November Atlantic Basin hurricane season.

The U.S. is vulnerable to hurricanes because so many of ``our refineries are in one geographical area,'' said Matthew Simmons, chief executive of Simmons & Co., a private investment bank in Houston for the oil and gas industry. ``We shoved it all into Texas and Louisiana. We put the heart of the industry in the middle of hurricane alley.''

Last year prices rose after Hurricane Ivan destroyed platforms and closed refineries when it struck the Gulf coast on Sept. 16.

``Even another tropical storm could set the reconstruction back for months,'' Simmons said.

Profit Margin

The profit margin for turning a barrel of crude oil into heating oil and gasoline is $28.761, based on futures prices in New York. That has more than doubled from Aug. 26 and is five times higher than a year ago.

``U.S. prices are sending a signal to every refinery in the world,'' said Bill O'Grady, assistant director of market analysis at A.G. Edwards & Sons in St. Louis. ``Gasoline imports are going to surge in the weeks ahead.''

BP Plc and Morgan Stanley are among companies planning to ship European gasoline to the U.S. As many as 10 tankers were booked this week to transport 363,000 metric tons from Europe to the U.S., according to five shipbrokers. The total would equal about 130 million gallons, enough to fill 5 million Chevrolet Tahoe trucks. Other companies hiring ships include Chevron Corp. and ConocoPhillips, the brokers said.

PS. Ask also: "How much can I afford to give to people who have suffered a devasting blow?" That's the nice thing about making money, you can be generous.

All this, and a great beer too.

Tim Guinness of Guinness Atkinson Global Energy Fund on Bloomberg TV this morning.

His comments:

- On any basis, $60 oil, $70 oil, or $80 oil, he believes oil stocks are still cheap as oil stocks are priced as if the long run price of oil will be $42.

- If oil prices were to stay in the range of $50 - $60, he sees 30-50% upside in oil stocks over the next 18 to 24 months.

- He believes there is a possibility oil prices could go to $80 - $85 and stay there for a long time, in which case he believes oil stocks have an upside of 200% if investors are convinced this is the long run price. This will take longer.

- He likes the integrated oils now, particularly Chevron, which he believes is the best value, with a 9x pe. Exxon, for comparison, is at 12x.

- He also like oil sands stocks, particularly Canadian Natural Resources and Opti Canada. If prices stay at these levels, he believes these stocks will be 'cash waterfalls' for 50-70 years.

[Note: CNQ and Opti Canada are getting highlighted all over the place. Opti has been mentioned by Peter Thiel, Boone Pickens, Donald Coxe and now Tim Guinness.]

Thursday, September 01, 2005

Peter Thiel Endorsing Operation Alberta Freedom.

Looks like a young Rumsfeld, doesn't he? Peter Thiel's fund at Clarium Capital is up 53% year to date and now at $1 billion. (I believe it was $250 million early in the year, then $400 million a few months ago. Ah, it's good to be the king..)

MarketWatch: Google, $100 oil, and housing bubbles. Video too.

Warning: Don't read this if you've just bought a home.