For today's missive, I had intended to update
my comments on the situation in Afghanistan, as it has a direct impact
on the financial and foreign affairs of these United States.
The accelerant for my desire to comment is the
increasing likelihood that the Obama administration is going to cave in
to military demands and boost troop levels by a considerable number.
Demands that may be well intentioned and entirely “goal oriented” –
i.e., kick some Taliban tail – but that nonetheless run contrary to the
one overarching lesson to be gleaned from that country’s sad history.
A lesson so obvious that I suspect even the
average freshman in high school could speak on the topic with nary a
moment’s reflection.
But I think I’ll save that for tomorrow.
Instead, I’ve decided to focus on a topic of
even greater importance to all humanity – the topic of energy.
The Whistleblower’s Case
The following snippet from an article in the
UK's Guardian was sent over yesterday from our always attentive
Mr. Ed Steer. As you’ll read, a whistleblower at the International
Energy Agency, or IEA, claims that that agency has been deliberately
misleading the world as to the amount of oil actually available.
Here's the snippet, followed by a link to the
article...
The world is much closer to running out
of oil than official estimates admit, according to a whistleblower at
the International Energy Agency who claims it has been deliberately
underplaying a looming shortage for fear of triggering panic buying.
The senior official claims the US has played an influential role in
encouraging the watchdog to underplay the rate of decline from
existing oil fields while overplaying the chances of finding new
reserves.
The allegations raise serious questions
about the accuracy of the organization's latest World Energy Outlook
on oil demand and supply to be published tomorrow – which is used by
the British and many other governments to help guide their wider
energy and climate change policies. In particular they question the
prediction in the last World Economic Outlook, believed to be repeated
again this year, that oil production can be raised from its current
level of 83m barrels a day to 105m barrels. External critics have
frequently argued that this cannot be substantiated by firm evidence
and say the world has already passed its peak in oil production.
http://www.guardian.co.uk/environment/2009/nov/09/peak-oil-international-energy-agency
According to the whistleblower, U.S. pressure
on the IEA to jigger the data stems from the fear that the oil-exporting
nations would be far more likely to hoard their remaining supplies if
they knew the real facts of the matter. And that risks leaving the U.S.
high and dry.
Longer-term readers will recognize this
argument as lining up with the views of periodic contributor Jeffrey
Brown, whose Export Land Model theory credibly
demonstrates that oil-producing countries cease exporting shortly after
their production peaks – which is to say, well before they actually run
out of the stuff. It is Jeffrey Brown's contention, for example, that
Mexico – the third largest source of oil to the United States – is now
past peak and so will stop exporting altogether within the next few
years in order to conserve its oil for domestic uses.
Brown underscores his thesis through case
studies that show how a number of formerly robust oil exporters hit
peak, then became net importers almost overnight… a club that includes
Indonesia, Norway, Sweden, England, and, soon, Mexico. (You can read
more about Brown’s work
here.)
Sometimes I wish it were otherwise, but my
personal life experience has resulted in a tendency to cast a skeptical
eye on almost any claim, by anybody, about pretty much anything. Viewed
through that filter, I can’t help wondering if the IEA whistleblower is
nothing more than an opportunistic malcontent making dramatic claims in
order to better position himself for a career in books or on the Peak
Oil lecture circuit.
But then I glance at the graph showing the
decline in new oil discoveries…
Given the clear decline in new discoveries, it
seems foolish to dismiss the whistleblower's claims out of hand.
Especially when you consider the rising demand on flagging reserves
resulting from improving economic conditions in China, India, and other
developing countries. For less obvious support for the whistleblower’s
case, I might also point to the invasion of Iraq, which makes absolutely
no sense, other than in the context of an oil grab.
Does this suggest the imminent emergence of a
dystopian world, a world where Mad Max would feel entirely at home?
Hardly. If for no other reason than that the U.S. has an abundance of
natural gas – and so do many other countries, once they begin applying
the newest gas extraction technologies – and that natural gas can be
efficiently converted to liquids.
(By “efficiently,” I mean being able to
produce more energy than is required by the extraction/conversion
process. With energy, that’s really the only calculation that counts.)
In addition, there are many oil-producing
countries whose leadership are fully aware that their regimes will come
to an unhappy end approximately ten minutes after the oil export
revenues stop flowing in. And so, they’ll keep pumping and exporting
until the last drop is gone, by which time they’ll be sipping Campari in
Capri.
Then there’s the Canadian heavy oil and, if
push comes to punches, the U.S. reserves now inconveniently locked up in
Venezuela. For the next little while – which is to say, until reality
sets in – oil from those sources will be viewed in much the same light
as “blood diamonds” and tobacco investing. But the anti-dirty-oil crowd
won’t be able to get much of a hearing once oil hits $200 per bbl and
the lights begin to dim.
So, all we’re really talking about here is the
availability of sweet, light, and inexpensive oil. And on that front, I
have to believe in the whistleblower’s case: the world is running low,
and the price of oil is going high.
But that will be then, and this is now. So,
what’s going on behind the scenes in today’s energy markets? For that,
we are very fortunate to be able to rely on some of the most brilliant
minds in the business for specific investment opportunities. That
includes our own Marin Katusa, as well as Dr. Marc Bustin, also of our
Energy Research team and one of the world’s top experts on
unconventional oil and gas (he’s no shirk in the conventional stuff
either). To read their view on the future of energy and how you can
profit, check out Casey’s Energy Opportunities
with a risk-free 3-month trial – at just $39 a year,
it is a steal.
On the commodities side, we have Dave
Hightower of
Casey’s Trend Trader. For over 25 years, Dave has
written a daily analysis of all major commodities markets – and no
market is more major than oil. That gives Dave a truly unique and
invaluable sense of the market in both a real-time and a historical
context. Here’s his trader’s take on what’s going to happen.
The Complex Energy Complex
Dave Hightower, November 2009
In the energy complex, a combination of
surging, inelastic global demand, an ineffective global refining
industry, and periodic supply setbacks are setting the table for a move
to $140 per barrel crude oil prices.
While the groundwork for the historic 2008
price spike could be attributed to the double hurricane strike on the
U.S. Gulf Coast’s refinery industry in 2005, the real seed of the rally
probably started in 1995, when Chinese petroleum demand first began to
exceed domestic supply. Now in 2010, Chinese crude oil demand is
expected to be almost twice their domestic supply.
This growth in Chinese demand alone has
required another 4 million barrels per day of world oil production.
While this increase in world demand grew gradually over the course of a
decade, and did so against a background of oil prices not really showing
a significant premium until well into 2004, it was not surprising that
global supply was outstripped by consumption. In other words, low prices
did nothing to encourage exploration or to restrict demand.
Those who think speculation was responsible
for the 2008 spike in oil prices need to realize that the best-case
forecast for the daily world oil surplus fell below 1 million barrels
per day in the months ahead of the peak. Just meeting world demand
required almost flawless oil production, unhindered transportation, and,
perhaps the hardest element of all, a fully functioning refining effort.
While no one expects U.S. refiners to operate
at a loss to ensure the U.S. maintains an adequate supply of fuel
products, the refinery industry can to a certain degree influence its
own profit margins. Simply, the processing of too much crude oil into
end products usually results in a product glut, while processing too
little crude oil into end products results in a shortage.
By our calculations, processing too little was
the source of four major energy bull market moves from 2000 to 2009. At
the end of 2009, the U.S. refinery operating rate dipped down to just
80% of capacity, leaving 20% idled. Poor refinery margins certainly
encouraged and possibly justified the slowdown, but if these facilities
are left idle for too long, the oversupply of gasoline and distillates
will quickly turn into another shortage.
The “Oil Market Manipulation” Argument
Is Flawed
The argument that speculators caused the 2008
rally in oil prices is highly suspect, considering that the peak of
speculative interest in crude oil futures took place four months ahead
of the peak in prices.
Specifically, the Commitments of Traders (COT
) reports show that the net long positions in crude held by speculators
fell from 149,000 net long in March 2008 to 83,945 by July 15th, four
days after the August 2008 contract peaked at 147.27.
Furthermore, the spec long position peak in
2008 was not even as high as the previous spec long record of 152,000,
posted July 31, 2007. If the specs caused the spike in oil prices, why
didn’t oil hit the $140 per barrel level in 2007? Apparently it is an
“inconvenient truth” that the world petroleum rally was the result of
massive annual deficit readings in 2006 and 2007.
Another inconvenient truth is that U.S. EIA
weekly motor gasoline stocks were falling to a modern-day record low in
the lead-up to the peak in prices. And that U.S. heating oil stocks in
early 2008 fell to a modern-day low of just above 20 million barrels!
The subsequent decline in prices, while
welcomed in the short term, is likely only temporary. At the 2009 summer
lows, nearby crude oil futures fell to within $4 of cost of production
for Canadian tar sands oil. This further suggests that it is unrealistic
to pine away for a return to $35 per barrel crude oil. Clearly, the
world now depends on more expensive sources of oil. Cheaper oil prices
will mean less oil supply.
An Important Time for Market Signals
The world is facing an extremely critical
junction. We can attempt to regulate commodity trading, as the
government is now contemplating, and limit the necessary “investment”
required to feed, power, and clothe the world and in turn suffer the
ravages of starvation, conflict, and commodity inflation – or we can
facilitate “investment” and allow the world the ability to cope with the
massive changes wrought by globalization.
(David again. Who’s talking about oil these
days? Answer: Almost no one – even though prices have doubled from the
recent bottom. And it is going far, far higher. If you do nothing
else, do yourself a favor and sign up for a year of Casey’s
Energy Opportunities.
For just $39 a year, you’ll put the entire
Casey Research energy team on your side, alerting you to the latest
important developments in energy and the undervalued companies that
make it easy to profit. Do it now, before oil returns to the
headlines, and it soon will. Everything you need to get started can be
found
by clicking here.
For active traders only, Dave Hightower and
his team offer a full-contact trading service, Casey’s
Trend Trader, that uses a strategic combination of
futures and options to take advantage of fast-moving opportunities in
any and all of the major commodities markets. This service is for
high-net worth, sophisticated investors. If that’s you – then
learn more by clicking here.)
Miscellany
The Mythology of Health Care.
Correspondent Dan Mitchell of the Cato Institute sent across a new video
yesterday on some of the myths currently surrounding the topic of
healthcare reform. While the points he makes will not surprise most of
you, it’s a useful refresher on the difference between political spin
and the more likely outcome should the healthcare legislation pass in
its current form.
Here’s the video…
Update on the 1984 Olympics.
Once again, the UK is demonstrating its prowess in the race to become
the nation most like that envisioned in native son George Orwell's book
1984.
It has done so by adopting regulations that
require UK telecommunications and Internet companies to record and store
for a year every phone call, email, and Internet click. And, of course,
provide access to said data to governmental entities – in this case some
653 different government bodies. No court order is required in order for
your local bureaucrats to paw through your data; a nod from “a senior
police officer or the equivalent of a deputy head of department at a
local authority” will do.
Here’s the story.
And, with that, dear reader, I’ll sign off for
the day, glancing at the screen as I do. I see that the U.S. stock
market is holding on to moderate gains on the day and that gold has just
set another record, tipping the scales at $1,117 an ounce as I write.
So, is this it? The final blowout
phase for gold -- you know, the mania during which everyone, especially
drivers of yellow cabs, clamors to get their own piece of gold?
Well, I can't say for sure -- but I can share
with you a rather interesting and entertaining video that a couple of
correspondents forwarded to me today. In it a gentleman tries to sell a
1-ounce Canadian Gold Maple Leaf coin to passersby for just US$50.
What do you think, did he get any takers?
Here's the video…
Until tomorrow,
David Galland
Managing Director
Casey Research
