Oil Blog

Alternative Energy 5/1/06

US can't afford to ignore alternative fuels
Baltimore Sun - United States
... smarter to develop and use alternatives in an increasingly unstable world, even if it means taxing oil products to finance a transition to alternative fuels. ...

Lawmakers look at bills to boost alternative fuels
WOOD-TV - Grand Rapids,MI,USA
LANSING, Mich. State lawmakers are looking to give motorists an incentive to buy alternative fuels that could lessen the country's dependence on foreign oil. ...

Interesting Market Reactions

The markets had an interesting reaction to Katrina today.  As expected, the price immediately climbed to $70, but backed off when it appeared Katrina was not going to be as catastrophic as originally anticipated.  It appears the market is playing a wait and see game.  As the damages are assesed the market will react accordingly.  The mention of releasing some of the oil reserve by President Bush did have the necessary chilling effect on the market, so this could weigh in on the price throughout the week as well.

High Oil Prices a Good Thing in the Long Run?

Could it be true?  Hard to say. 

The higher prices give impetus to developing alternatives, which is a good thing.  We are seeing increased investment in wind farms, a refocus on nuclear energy, and motivations to develop alternative automobile power plants. (i.e hybrids, and hydrogen) 

The consequences may be too much of a shock to the system in the near term.  Is it possible that the increased drain on capital, and the shift of capital to the oil producing nations, is causing a delay in bringing these technologies to market? 

This may be the case.  Energy policies in the consuming nations should have been focusing on the development of alternatives ever since the oil scare of the 70s.  Incentives and research dollars should have been in place for the last 25 yrs, especially when the consuming nations were able to import oil at a low price.  But, as they say, hindsight is 20/20. 

The capital drain on the consuming nations is a serious consequence, which by last measure $64+ per barrel, is becoming alarming.  This is draining needed capital across the board and straining our resources. 

It is not in the best interest of the nations receiving the capital shift to develop alternatives.  The capital shift is moving more and more of the world’s capital to the oil rich nations.  What are they going to do with the capital?  Well, lets looks at the nations; Iran, Saudi Arabia, Venezuela, Kuwait, Algeria, Libya, Qatar, UAE, Indonesia, Iraq, and Nigeria.  Do you honestly expect any of them to take the increased capital flow and invest it in petrol alternatives?  I don’t think so. 

There in lies the problem.

E&E TV

For everyone's information.  I received an email from Brian Stempeck, the Editorial Director of E&ETV, informing me of the availability of flash based video casts from their OnPoint program.  If you are interested, the link is http://www.eande.tv/main.  The OnPoint interviews are very informative and can help anyone broaden their knowledge in the energy markets.

As with the supply of any raw material, a disruption in its supply can trigger uncontrollable spikes.  This is always an inherent danger, and once again it becomes one of the focal points for the market to correctly interpret those risks into short and long term future pricing. 

Why this boom is going to bust

There are a couple of basic economic factors at play here.  That is why this is symbolic of the Internet Boom in the late 90s.  What are those factors you might ask?

Let me tell you, then you can make your own judgment call.

1) There is excess supply in the near term.  How do we know this?
    * Increases in production have no impact on price; case in point the recent increases by OPEC (link)
    * China and American usage is not rising at the predicted rates
            - This is due to the increase in price and the implementation of other energy techs and higher efficiencies
2) Refineries are at or over capacity with the demand
    * The world's consumption reached a point where it did not outstrip demand of raw product (Crude), but outstripped the available capacity to generate end product (gasoline, diesel, etc)
    * Refineries have not tacked on a surcharge to take advantage of increased demand, they still take their same float, though the market would allow it, and governments may not.
    * Increased capacity is a ways off, a refinery is a huge investment, and in the long run they may create capacity that is not needed because efficiencies and alternatives have dwindled demand . The last thing a refiner wants is to be producing at 50-60% capacity.  That is a money loser.  Hence the slow uptake in creating new capacity. (link)
3) New Rig Orders are still at a low (link)
    * Typically the wildcatters will seek new reserves when oil prices are high.  Look what happened in the late 70s and early 80s.  Rig demand exceeded supply so contractors built one new rig after another.  We don't have that happening right now.  That is because the contractors don't expect this to last, and they don't want to invest the capital. 

Looking into the crystal ball of Rig Orders, Refinery capacity vs. Supply I can't see anyway out but down.  Once the hysteria blows over, the market bubble will burst.  The question is not will it, but when?  I can't honestly tell you.  But I can tell you where there is going to be significant landscape changes.

1) Increased investment in alternative energy resources.  Hybrid cars, GM is betting the bank on hydrogen, nuclear plant building initiatives, wind production, etc, etc. (link)
2) The middle east will get extraordinarily rich over the next 20 years.  The higher prices, $30+ per barrel will add enormous amounts of capital to the already rich oil producing states.  By the way, this includes Russia!
3) In some ways the US will be better off, less reliance on foreign fuels. 
4) In some ways the US will be worse off, the enormous amounts of capital generated by oil producing states can be invested to take advantage of areas other than oil.  Look at Dubai.

Think about it.

Oil Bust?

I happen to agree with an article written by Matein Khalid on MENAFN.COM.  Matein highlights a couple of fundamental problems with the current price escalation. 

• Chinese imports are dropping

• OPEC production is up

• Alternative energy sources are trading at $18/barrel

The two parts I don't agree with are; oil trading below $20, I peg it in the 30s, and Bush making a play for Iran.  We (Americans) just don't have the patience for another Iraq, and Bush would be out on his ear.  Not to mention that the GOP would have a tough time being reelected next time.

But that not withstanding, the current price escalation is taking place at the wrong point in the supply chain.  Refining capacity problems should not drive up the price of crude. As I have stated before the end product price should be affected, and the suppliers of crude should be fighting over each other to get to that refining capacity, therefore driving the price of crude down, not up.

Where do prices go from here?

We are in an interesting place right now.  Borderline overproduction, and undercapacity to consume.  You would expect the price of a barrel of crude to go down with the oversupply, and the price of refined oil to rise, generating enormous profits for refiners.  This in turn would cause refiners to invest more capital in upgrading capacity.  But what is happening is that the speculation on the barrel, has caused a pinch, and actually lowered the available capital. 

Think of retailers like Walmart, etc sucking up extra transportation costs, until they get to the point that they eventually have to raise prices.  This is what may happen for gasoline.  We may have a super-spike, not on the cost of crude, but the cost of refined products.

Agree, or disagree?

Apology

I was traveling yesterday and was unable to post.  I will update the price graph with the current price as of this morning (6/17/05), and once again at close tonight.

Offshore Rig Utilization

Offshore Rig Utilization is a clear indicator of speculation increase.  Since offshore wildcatting and development costs far exceed the costs incurred on land, the utilization rates typically lag behind their onland counterparts.  The following utilization rates were supplied by Rigzone, a great resource for Oil Industry information:

The interesting figure to note is the lack of new rigs coming on the market.  The spike has been quick enough to catch the contractors off guard, and very few rigs remain in cold stacked.  Currently only 5 firm orders exist for semi-submersibles, 0 for drillships, and 4 semi rigs have been delivered in the past 2 years, and no drillships.  This information is courtesy of the Colton Company Site. 

It will be interesting to revisit the order numbers in a month or two.  This may be an indication that the contractors do not believe the current price levels will remain. 

18 - 19 Billion Dollars

As of today (June 3rd), the Strategic Petroleum Reserve stands at 694 million barrels.  The maximum capacity of the SPR is approximately 727 million barrels.  The average cost per barrel for the oil stands at $27.25 per barrel.  By the way, you can find all this information at the DOE.  Given the average market price today stood around $54 per barrel, this is a difference of almost $27 per barrel.  That means that the total valuation of the SPR is almost 37 billion dollars, double the acquisition cost.  Selling off the SPR today would generate a profit of almost 19 billion dollars.

Just food for thought.  No one has ever gone through the trouble of valuing the total sellable asset base of the United States, SPR and land included.