Monday, June 23, 2008

Where Are the Shortages?

I've done quite few posts on the oil market of late. That's because it doesn't make sense. I hate things that don't make sense.

The weekend meeting of oil producers and consumers didn't clarify matters any. Saudi assured everyone that they have plenty of oil to meet demand and are prepared to ramp up production if need be. Brazil threw in that their newly discovered oil patch is probably much bigger than they originally estimated. Canada has a huge reserve of oil sand coming on line as we speak, and here in the US, although Democrats continue to oppose it, the public is now in favor of increased drilling by a huge margin. Yet, oil continues its run.

In short, there doesn't seem to be a supply problem. I don't see "No Gas" signs at gas stations, no rationing, I've heard no stories about orders for crude not being filled. Sure, we're paying through the nose, but the oil and gas are there.

All I can compare it to is the dot-com bubble. People invested in stocks that had already tripled only to watch them triple again. This actually went on for some time before the bottom dropped out, and when it did, it fell hard. I know someone personally who bought a tech fund at exactly the wrong time and saw their 100,000 dollar investment turn into 8,000 dollars in a matter of weeks.

For now, I'll continue to be baffled. If the oil market crashes hard, it will make sense again. Until then, I'll just keep watching and scratching my head.

Saturday, June 21, 2008

Alternative Fuel Watch

There has been a lot of debate recently about whether we should allow more territory offshore and in places like Anwar to be developed for oil drilling. In the heat of the debate, the facts often get lost. Here's a little reality.

There are some promising alternatives to crude on the horizon. However, their short-term potential has been largely over-blown. Sapphire Energy, founded just a year ago, has developed an algae that can produce 91 octane gasoline that can be used in existing infrastructure, doesn't use farmland or feedstocks and is carbon neutral. Problem solved right? Not exactly. The company hopes to be producing 10,000 barrels a day by 2011. A nice start, but hardly enough to offset the 3 million barrels a day we currently consume. Honda has announced production of their first commercially available fuel cell vehicle. They hope to sell around 200 of them in 2009. Again, a nice start, but...

Point being, we can probably replace crude oil within my lifetime, but crude will still be our main source of energy for quite a while. Drilling for more makes sense. Opponents to more drilling argue that it will take 5 to 10 years for new fields to come on line. That was true 5-10 years ago. I think we should get started. Another argument is that it will harm the fragile arctic environment. The acreage under consideration amounts to something the size of a postage stamp on a football field when you compare it to the total size of the wildlife preserve, and the caribou in Alaska really don't seem to mind, in fact they gather near the pipeline because it's nice and warm. Another protest is that the oil companies aren't developing on their currently leased land, they should be forced to do that first. The fact is that they aren't developing those areas because they have determined there's not enough potential there. To develop a field you have to convince investors to put up their cash. How's that call going to go? "We're pretty sure there's no oil here, but we want to drill anyway. How many shares can I put you down for?" The only reason their holding those leases is in the hopes that they can exchange them for more promising territory.

Conservation has been touted as the real answer. Efficiency is great, but the expectation that it will lead to less net energy consumption is just foolish. Just as time saving devices like the micro-wave and the vacuum cleaner did not lead to more free time, more energy efficient devices will not lead to less consumption. We'll find somewhere else to use it. If it takes less energy to heat your house, you'll heat your garage and your shed too. If it costs less to light up you home, you'll light up your back yard.

The real answer to not enough energy is more energy. We can develop ingenious new ways of producing more than we have ever imagined, but we're not there yet. Get out of the market's way and let it go to work.

Tuesday, June 17, 2008

Oil Market Manipulation?

Until recently, I didn't really buy the market manipulation scenario. Rampant speculation? Sure. But when someone buys a futures contract and doesn't actually take delivery, the oil doesn't leave the market. Over time, things would even up. But when I start hearing 40 year veterans of the markets, and even Saudi oil ministers saying things like "I've never seen anything like this", I have to start wondering if something else isn't going on.

I think I may have at least a possibility. What if a company or country or companies or countries that are taking delivery of crude, aren't really taking delivery of crude? What if some producers set up phony transactions? What if they went so far as to deliver the product, only to have it come right back through the back door?

Why? To inflate both production and use numbers. Prices are the result of market perception. If it looks like producers are going full tilt and barely keeping up with the demand, prices rise. Creating this appearance really wouldn't be that difficult, especially if you control the books, the production, the delivery and the inventory. It would be tough for an American company. It would be a piece of cake for a state run oil monopoly....or two.

I'm not saying it's actually going down that way, but if there were a way to manipulate a price surge, that's the only way I can think of to pull it off. The only way to discover it would be to take a good hard look at the specific companies that are taking delivery of crude and see if that crude is actually getting to end users, and actually getting used.

Thursday, June 12, 2008

U.S. Policy toward Iran

There has been a lot of discussion lately about what our policy toward Iran ought to be. What will we do if Iran gets nuclear weapons? Should we have talks with them? Under what conditions?

Well, I'm going to play president for a minute and put forth how I think we should deal with this situation. First, we make it absolutely clear that Iran will NOT have nuclear weapons. It's not a matter of whether or not they have a right to have nuclear weapons. It's more like not allowing your 5 year old to play with lighters. Given the rhetoric out of Iran and their support for terrorist organizations, we simply will not allow them to have such weapons at their disposal.

What do we do if they don't listen? We destroy their weapons if and when they have them as well as their capability to produce them. Do we invade? No. Unlike Iraq, we do not have reports of systematic torture and killing of the civilian population by the government. They may be oppressive, but we don't have rape rooms, torture chambers and entire villages being gassed. The people of Iraq have the capacity to change the regime if they so choose. In the meantime, we will strike targets within Iran that we deem a threat. If they rebuild, we destroy them again.

Any talks on the matter would be Iran trying to assure us that they have ceased progress toward developing nuclear weapons and will not resume the program. The precondition for such talks is the understanding that there are no conditions under which we will allow Iran to obtain nukes.

Tuesday, June 10, 2008

The Myth of Monogamy?

I just watched yet another author explain why monogamy is a myth that we must dispense with for a healthy society. It's unnatural. Everyone has wandering eyes. Everyone fools around at some point. Marriage that requires monogamy is unrealistic, which is why they so often fail. We should be honest about it and find a new way forward. Those who embrace promiscuity are referred to as "sophisticated".

Well, that's right and wrong. Monogamy may well be unnatural. It may be tough. It may be a struggle for many. But it is not impossible, and it's in the contract. When a couple gets together for life, they reach a social contract. Part of the deal is monogamy. It's the price of the relationship. Every time the urge to break the deal strikes you, you have to make the decision: Is my partner worth the price? That's the real dilemma. Many people's actions betray their answer to that question...and they don't like the answer. Rather than face that reality, or the possibility that they are, in fact, weak and/or dishonest, they pragmatize. They come up with reasons that their actions were understandable, unavoidable, justifiable.

If you love your partner and you've cheated, don't blame the universe, society, biology, blame yourself. Recognize your will is weak and needs work or maybe you're in a relationship that's just not going to work. There are only two possibilities: You're a schmuck or your partners not worth the cost. Whichever it is, face it. Deal with it. Quit trying to convince the rest of us that we don't exist. As for me...coming up on 22 years and still living the myth.

Saturday, June 7, 2008

The Bright Side of the Oil Surge

Oil is at all time highs, the housing market is getting worse, unemployment is surging. How can there be a bright side?! There's always a bright side. As long as there's a free market, scarcity breeds invention, and this time is no exception.

New technology has allowed both Canada and Montana to access huge petroleum reserves which will come online over the next few years. At the same time, algae to fuel technology is no longer pie in the sky, it's going to happen.

It may be a few years, but oil is going to tank. I don't mean fall back a bit, I mean it will be closer to $10/barrel than $100. It will have a ripple effect as well.

Wealthy oil barrens and their support staff have become accustomed to lavish lifestyles which they are not likely to give up readily. This means there will be a "fire sale" on US companies, stocks, prime commercial real estate, hard assets like gold and silver, art and gemstones.

For a while, North Korea and the like will benefit as much of this money is spent on weaponry as discontent and paranoia build in countries that are heavily dependent on oil revenue. However, weapons are handy for the battle at hand, but not a good long-term investment. If not properly maintained and frequently updated, they become obsolete and/or inoperable. Even nukes have a shelf life, not so much the radioactive material, but the mechanisms to fire and detonate them. Eventually, North Korea will be left with no customers.

Will this mean a golden age of peace and prosperity. Maybe not. It's likely that the fact that the U.S. will become even less dependent on the rest of the world will cause more anti-American sentiment. The tendency around the globe seems to be to loathe us rather than to emulate us.

This is going to happen regardless of who takes the White House. It's too late to stop it, barring the near-term unilateral flooding of the market with oil by OPEC, which is highly unlikely. The next president will likely be credited with Solving the Energy Crisis, for whatever that will be worth.

Actually, both candidates have said that becoming energy independent within 25 years is not possible. Both are dead wrong. As I've said before, smart entrepreneurs are not going to wait for the blessing and approval of politicians and "experts" to take advantage of this situation.

Friday, June 6, 2008

The Global Capacity to Solve a Crisis

As I was cowering in a corner worrying about global warming, I was heartened by remembering how we came together as a global community, in multi-partisan fashion and solved the great crisis's of days gone by.

In the 1970's we were faced with a number of them. Global cooling was bringing on a new ice age. At the same time we had less than a ten year supply of oil left in the world, as well as a number of other critical commodities. Shortly after that we began running out of landfill space. This culminated with the famous "garbage barge" from New York City. We had finally run out of landfill space (that was the day we stopped using landfills if you'll recall). In the 80's we were faced with extinction due to acid rain; good thing we fixed that in a hurry. All forms of life on the planet were then threatened by the disappearing ozone layer. The global community came together and took action immediately. The ozone layer was promptly repaired thanks to the good works of activists and scientists around the world.

I don't recall a period in my lifetime when our very existence was not threatened by some global phenomenon. The key to solving these problems has been our unflinching faith in the wisdom of our elected officials, pundits and the carefully chosen experts presented on the nightly news. If we are to survive the current crisis we must depend on those same forces to once again engage in careful planning, decisive action and flawless execution, just as they've always done in the past. I've no doubt the powers that be will fix this one as well, but there will be another on its heels. We must be ready, willing and able to impart to them all the authority, tax dollars and resources they request and deserve. There's no time for doubt and second guessing.

I thank my lucky stars every day that there are such wise and wonderful people in Washington DC, at the UN and in Hollywood, selflessly looking after my best interests.

Tuesday, June 3, 2008

McCain's First Volley, June 3rd, Lousiana

John McCain took the opportunity of Barak Obama going over the top in terms of delegates needed to secure the nomination to deal the opening salvo of the general election campaign. Although Bill Crystal was unimpressed, I thought he was right on the money.

McCain clearly spelled out his differences with Obama on key issues: Success in Iraq vs. retreat. Reigning in government spending rather than increasing it. Lower taxes and regulation rather than higher taxes and more regulation. Free market approaches to health care as opposed to another government program. A demonstrated, irrefutable record of going against both parties and the press when he felt he was right and they were all wrong, as well as of working with the opposition party in the face of criticism from his own.

McCain needs to make the choice clear by continuing to illustrate the dichotomy of approaches on major issues. He did just that tonight. He would do well to beat that drum for the next 5 months. If the American voting public chooses the other path, so be it. At least they'll know what they asked for.