Sunday, July 20, 2008

There is No Energy Shortage—There is a Shortage of Legislative Will

This interesting piece was passed on to CARE by one of our members. A version had been published as an editorial in the local paper. The CARE Member knew it was something that would catch our attention. He was correct.

Not only is this posting insightful, we believe it to be accurate in pointing out where the true shortage is and where the surplus is: special interest groups who are killing energy production.

There are several elements to this commentary that we found to be especially helpful. First, it caused us to identify a new source of information—the author Donald Wolberg, Ph.D., a geologist and an adjunct professor at New Mexico Tech. Another asset in our new association is that he has vast expertise in coal—something that we have been lacking in our panel of experts. We hope you’ll enjoy this new source and we hope to have additional posting from him in the future. Let us know what you think!

Fuzzy Facts and Fuzzier Logic
I frequently enjoy the astute comments of Dr. Charles Krauthammer, whether delivered via the local paper on Sundays or his televised appearances. However, I suggest that some facts may have escaped his research regarding matters of energy pricing and availability, "U.S. Can Tax Itself Off Oil Addiction," Sunday June 8. Of course the U.S. (and all of the industrialized and industrializing world) has an oil addiction. Oil and its refined products offer the most efficient sources of energy available in quantity, safe when used properly, available in the market place, and is an efficient provider of "energy" for certain uses. Petrochemicals are an additional set of products needed by the entire world. The recent spike in cost of fuel and other products is complex, involves much speculation, but can be remedied by increasing, not rationing supply.

There is really no shortage of energy in terms of reserves available for development and production. There is a shortage of legislative will. There is also a surplus of special interest and agenda pleading without concern for the socio-economic impact on the lives of real people.

North American tar sands and oil shales hold somewhere between 800 billion and 1 trillion barrels of oil 1,000 billion barrels), more oil than is present in the entire Middle East, combined. This oil can be recovered. The mid-continent Bakken Formation has another 3-4 billion barrels of recoverable oil, sitting largely untapped. Apart from the overly abused mention of ANWR, where the total footprint of development would be equivalent to a few football sized areas in the state of Indiana, there are untapped mega-reserves on all our continental shelves, the Western Interior and Gulf coast.

The only development of oil platforms and drilling off of Florida by the way, are likely to be operations by China and other nations via permits issued by the Cubans. Most "cartel" oil in the world is now state owned or controlled (at least 80%) and American or other "Big Oil" actually produces a very small share of the oil pumped in the world--size and supply matters in the oil industry. It still costs the Saudis less than $2/barrel to pump oil. It costs American companies the same $30-40/barrel to pump American oil as it did before the oil price spike. The difference is that most American oil is old oil, since it is almost impossible to gain access to new fields because of the bizarre actions of a less than motivated Congress and the pressure of elitist and mostly urban special interest alarmist groups.

The pricing of oil is complex but it is obvious that expansion of production will cause the price to decline greatly, no matter how long it takes to bring the increased production on line. More importantly, oil is a strategic necessity, and I suggest that those who prevent the expansion of a domestic production strategy are guilty of a "fuzzy logic" that threatens our economy and society.

U.S. oil consumption has actually stabilized at about 20.6 million barrels/day. This consumption rate has not changed much since 2000 and actually decreased compared to 2004 and 2005. In truth, we do not "over-consume" given the diversity, geography and needs of our economy and social structure. New England homes tend to use oil for heating and that is not likely to change. Railroads use oil to move trains since there are very few corridors for overhead or third rail power in the U.S. Trucks use oil. One truck with 200-300 gallons of diesel capacity--1500 mile range--may need 3-4 refills on transcontinental runs to haul what we all need.

Interestingly, there is sufficient available known U.S. and North American untapped oil reserves for perhaps the next 500 years or more at present consumption. There is sufficient coal to be used as coal for 500-600 years with enhanced uses as coal or modified products. New Mexico has significant undeveloped coal resources in the San Juan and Raton basins. New Mexico can and should be a major participant in nuclear energy development and together with reactor technology, these resources can provide nuclear power of virtually infinite duration. In the end, significant development of these resources will reduce energy costs to a more reasonable and marketplace driven level.

What is required immediately is an expression of legislative will, especially by Congress to free this nation from the increasing burden of reliance on foreign oil sources and the dangerous transfer of dollars abroad. At stake is our economy and the welfare of Americans, as well as national security. There is nothing magical about an immediate solution, except perhaps the will of elected representative who have forgotten that they serve all of our citizens.

Donald Wolberg, Ph.D.Socorro, NM

Saturday, July 12, 2008

Nuclear Power: An Economic Imperative

With energy in the news as much as it is, you can imagine how busy things are here at CARE. There are new projects to work on and new people to meet everyday. We were thrilled when the following piece on nuclear power came our way. Additionally, it introduced us to a new expert: Bernard L. Weinstein, a professor at North Texas University. We contacted him and he gave us permission to share his insights with you. While the emphasis of his posting is on the state of Texas, we believe the universal application is obvious. As America moves forward, nuclear power becomes an economic imperative.

Nuclear Plants Offer Powerful Energy Alternative
With consumers paying more than $4 a gallon for gasoline, the media and the politicians have been fixated on ways to expand the nation's supply of fossil fuels and other energy sources.

Should we open the outer- continental shelf and the Arctic National Wildlife Refuge for exploration and drilling? Does it now make economic sense to extract oil from shale and tar sands? Should Congress extend or increase the tax breaks for ethanol, solar and wind energy? What are the prospects for clean coal technology?

Absent from the debate has been much serious discussion about the potential contribution of nuclear power plants to the nation's energy needs.

Though opponents of nuclear energy don't harp as much on the safety issue as they once did, they still claim nuclear plants are too expensive to build and operate.

However, $140-a-barrel oil has radically changed the economics of nuclear power. On a nominal basis, it may still appear noncompetitive because of the "cheaper" price of coal.

But the price of coal doesn't reflect the high cost that carbon emissions pose to the environment. Rising natural gas prices are also making nuclear a more competitive power source.

Texas currently relies on natural gas for 72 percent of its electric generating capacity, compared with a national average of 46 percent. Coal accounts for 19 percent of Texas' capacity, while the state's four nuclear plants produce only 6 percent – even though they are among the top-performing in the world, boasting average capacity factors of 92 to 95 percent.

Pursuing the nuclear alternative has become an economic imperative. With natural gas prices up 70 percent this year, power costs in Texas are now among the highest in the nation, a situation that doesn't bode well for the state's energy-intensive industries.

For example, to offset higher energy costs, Dow Chemical has raised prices twice in the past month. Other manufacturers, large and small, are getting hammered by high and rising electricity costs.

And five retail electric providers in Texas have failed this year because of the huge increases in the cost of purchased power from the state's gas-fired generating plants.

Texas, with its trillion-dollar economy, is projected to continue growing at a faster clip than any other large state for the foreseeable future. The Electric Reliability Council of Texas estimates we'll need more than 100,000 megawatts of new power within 10 to 15 years just to keep up with demand.

Because new coal plants are more or less off the table, and because wind and solar energy aren't substitutes for base-load power plants, nuclear is the sensible option for helping to meet the growing power needs.

NRG Energy, based in Princeton, N.J., has filed an application to build a reactor adjacent to its existing plant in Bay City. Exelon, Luminant and Amarillo Power are also evaluating the prospect of new nuclear plants. If all these plans materialize, Texas could have more reactors than any other state a decade from now.

To remain competitive, Texas must offer an attractive economic environment and cost structure on all fronts – including electric power.

Adding more nuclear plants to the fuel mix will diversify Texas' energy sources, ensure reliability and help hold down electric power costs. And because nuclear plants don't pollute or emit greenhouse gases, the Texas environment will benefit, as well.

Bernard L. Weinstein is director of the Center for Economic Development and Research and a professor of applied economics at the University of North Texas. His e-mail address is

Tuesday, July 8, 2008

Speculators: The Scapegoats For Our Energy Concerns

Everyone is looking for someone to blame for the current energy crisis. Surely there is one single entity that is causing all of us to suffer—a mastermind like in an Austin Powers movie. This is at least what some members of our Congress believe. Oil speculators have become the villains in this tragic tale.

It has been awhile since we’ve featured the insights of Byron King from Agora Financial--he is one of the contributors to their Whiskey and Gunpowder Newsletter. (If you enjoy this posting, please check out Byron's previous posting on CARE's Blog.) But we at CARE have been looking for some good commentary on the “speculators.” You can expect some more interesting posting on this topic as we are on the lookout for them. While oil speculation certainly is an important and influential area of our economy, Byron doesn’t think these speculators should not be painted with the brush they have been. Do you think speculation is to blame, or could there be other reasons for the tremendous price-rise?

It’s the Energy, Stupid
With the price of oil doubling in the past year, there are more fingers being pointed than solutions being offered. Unfortunately, one of the biggest “culprits” garnering much of the blame has been the oil speculators. Congress has decided to make them the scapegoat for our energy concerns, and unfortunately many under-educated members of the public are beginning to lap it up.

Speculators are speculating because there is something about which to speculate. (Let me thank my sixth-grade English instructor for teaching me how to compose that sentence.)

Remember when oil ran up back in 1979 and 1980, when the entire Iranian oil industry collapsed in the wake of Ayatollah Khomeini’s Islamic Revolution? About five million barrels of oil per day simply left the world marketplace. It was gone — poof! Not there. No tankers.

Even though five million barrels went away, people could still look to places like the North Sea, Alaska, Angola and elsewhere. And they could feel certain that sooner or later, there would be future oil supplies flowing down the pipelines.

But that’s not the case today. When people look ahead now, they don’t see from where the oil of the future will come. Most of the world’s current large oil fields are in decline.

As for the so-called oil speculators, they are just defending the value of their money. They are looking forward a few years. What do they see? All of the current energy development projects will just barely replace the oil that will NOT be coming from declining oil fields. So peering ahead, there’s no net increase in future oil output. We’re looking at a plateau in output, if not the backside of the Peak Oil curve.

But we are looking at growing energy demand, as well as demand for other resources. So investors have placed hundreds of billions of dollars into energy and other commodity funds during the past two years. They are both hedging against dollar inflation and anticipating future supply shortfalls.

Long term, this is great news for one of my Outstanding Investments recommendations, a Canadian tar sands company. This company is facing higher capital costs, as well as higher costs for inputs like natural gas. And it suffers from a raw political bias (suicidal, in my view) against synthetic crude oil because of the carbon dioxide emissions.

Along those lines, some politicians in the U.S. want to renegotiate the North American Free Trade Agreement (NAFTA) that includes Canada. Word to the wise: Don’t go there!

Really, if the U.S. renegotiates NAFTA with the Canadians, our friends to the north will have some surprises in store. The U.S. will rue the day that it tore up NAFTA with the Canadians, because that will just plain shut off many of the valves on a lot of pipelines.

Seriously, the Canadians have eager buyers for their energy resources, and they don’t need us Yankees. Just keep in mind that downstream, people will demand oil, and companies that have it will make money.

Getting back speculation, those “speculators” are not the problem. Speculators are sending a message that policymakers had better heed. American politicians better get serious about finding pathways through the “energy issue.”

Although I do have political opinions, I try to keep them private, especially careful not to hurt the feelings of any of my readers.

But that does not mean that I don’t have opinions within areas of my own expertise. If you are reading this, you must know that oil prices have doubled in the past year. There are profound supply issues looking forward. (I’ve been writing about Peak Oil and related issues for Agora Financial for four years.) And world demand is still rising, despite the very slight pullback in U.S. oil usage in the first half of 2008.

Whoever wins the race had better be ready to think in terms of energy. And I mean from day one.

Energy is not just “another issue.” It’s not as if a politician could “do energy” and then move onto other important items on the agenda — like appointing your friends federal judges and handing your political donors prestigious ambassadorships.

Energy will be the defining issue of the next president’s term of office. This is already baked into the cake. Nothing will change it, short of a major war. And even fighting a major war will be controlled by the energy issue (as was World War II, by the way — another long story). The U.S. won’t go to war over most things. But we’ll fight over energy. Or where have you been?

Every U.S. president has had something associated with his term of office. It might be good. It might be bad. But it’s the shorthand way in which we remember the guy. When I think of Lyndon Johnson, I think of the Vietnam War. When I think of Richard Nixon, I think of Watergate. When I think of Ronald Reagan, I think of him meeting with Gorbachev and winding down the Cold War.

The next president’s big issue is already on the table. It’s energy. It has been decided. The gods and fates have so dictated. Everything else is window dressing. Everything else is just the White House Easter egg hunt. Nothing else will control the outcome of the next president’s term of office. Energy, that’s it.

Energy. Take it or leave it. Except you can’t leave it. The nation needs to get energy right. We can have energy supplies for the economy. Or we can just decide to wind down the 232-year-old experiment called the United States of America. We can hop, skip and jump into James Howard Kunstler’s The Long Emergency. It’s that stark.

Here is the slogan for the next White House Situation Room: “It’s the energy, stupid.” Practice is over. It’s game day. It’s time to suit up and play. What’s your plan?

And we can’t just do 20 more years of energy research. Really, suppose that nobody ever filed another patent for a new and better invention in the field of energy. We could spend the next century just rewiring the nation based on what we already know how to do. The future is one of systems engineering. The future is all about taking the ideas and technology that’s already out there. Bring them down off the shelf and make them work to run the country.

So if the next president-elect is not ready to tackle the energy issues of this nation, he just ought to stay home on Inauguration Day. Don’t waste our time.

Byron King is editor of Outstanding Investments, a publication of Agora Financial, LLP. He studied geology at Harvard, where he graduated with honors. He also holds advanced degrees from the University of Pittsburgh and the U.S. Naval War College.

Monday, July 7, 2008

Barriers to Oil and Gas Supply

CARE’s primary mandate is to educate the public in energy and energy related issues. True, many of our website and blog visitors are from various segments of the energy industry who understand the intricacies of energy production. But, we hope that we also have readers from the regular population--the citizens for whom we advocate. This posting is for those who know little more about energy than how to put gas in the car or flip the switch on the wall. Here, in a simplistic overview--using an analogy we can all grasp, CARE Member George Sharpe offers an inside look at what is happening in the oil and gas business. If you are in the energy business, we think you’ll want to bookmark this page so you can send your friends and family members who don’t get it.

Killing the Sacred Cow

I'm going to tell you a story... one I hope will tell the whole story. It's a cow story, which is kind of weird, because I'm no cowboy. I'm the Investment Manager for Merrion Oil and Gas. My group puts Merrion's cash flow back in the ground trying to replace our production. In a time when record profits are being reported for the oil and gas industry, that might seem like a cushy position. In fact, it has never been more difficult.

Merrion Oil & Gas is like a mom and pop grocery store selling milk to the thirsty villagers. Because the masses in India and China have recently acquired a taste for milk, prices have shot up worldwide. Suddenly, the milk on our shelves is selling for twice as much as a year ago. Things are good, right?

The problem is, if we want to stay in business, we have to replace the milk the villagers are buying. But competition in the acquisition market is fierce, and the price of used cows has more than doubled. All the costs of a dairy farm have doubled as well, from leasing the land to cow feed to fence posts. And it is becoming extremely difficult to find places to put the cows. As much as people like their milk, darn it, they just don't want a cow in their back yard, or offshore, or even in the vast tundra of Alaska. Some milk drinkers don't want cows anywhere, anytime. I'm not sure where they think their milk comes from.

The regulators have jumped into the south forty with both feet. It now takes a year to get a cow permit. And there are many new rules in place as to how to have cow babies, what to feed them, and how to contain and monitor cow pies, and on and on. All of this drives the cost of producing milk through the roof. The bottom line is, our little grocery store is certainly making more money, but most of it is going back into the cost of keeping our shelves stocked.

Let's talk about the cow pies for a minute. Cows have been churning grass into meadow muffins for millions of years. It is still grass, just more compact, and at certain West Texas county fairs, more aerodynamic. But somewhere in New Mexico, a handful of the thousands and thousands of cow pies dropped in a stream. The answer? Now every cow must wear a diaper. They call it closed-poop milking. And we collect all these dirty diapers, put them into hundreds of air polluting trucks, and haul them off to be forever stored together at one site, where collectively they really might cause a stink. And that helps the environment how? It's udder nonsense.

Anti-cow advocates say that the milk industry is raking in the money, and can certainly afford to pay for whatever measures are asked, regardless of the cost. That may be true for the farmer raising big fat cows, but don't kid yourself, a lot of skinny little cows aren't going to make it. And that reduces the overall milk supply and increases the costs of the milk from the fat cows, which consumers will eventually pay for.

It is time to shift the story over to the mirror. Time to take a good hard look at ourselves... the milk drinkers. Man, we love milk. We like wearing the husky overalls, not some twinky pair of knickers. We Americans drink 3.9 gallons of milk per day each, while the Europeans drink only 1.2 gallons and the world averages less than a half gallon per day. The real environmental threat comes not from the cows, but from the gas we get when we consume all that milk, eh? We can and should start drinking more tea. The problem is, the kind of tea we need costs a lot, is hard to store, only grows when the sun is shining or the wind is blowing, takes up an incredible amount of land, and at this point, isn't an efficient source of nutrition. Nothing is easy.

Okay, my cow story is getting old. Time to moo-ve on. Let me summarize my points:
First, the high oil and gas prices are not set by the oil companies... they are driven by supply and demand. Second, there are more and more barriers to maintaining the supply. Many of the barriers have very little real environmental benefit, and only serve to drive up costs, which have been driven up already by their own supply and demand curve. The headlines are all about Exxon's record profits, not about the billions they are spending annually to keep their Superstore stocked for the masses. Finally, it is time to address the demand side of the equation. Reducing our demand will do far more towards bringing energy prices down (and helping the environment) than anything we can realistically do on the supply side. And as long as we demand it, industry will try to find a way to supply it. So don't kill the cow. It's just there because we want milk.

George Sharpe
Investment Manager - Merrion Oil & Gas

Thursday, July 3, 2008

The Best Cure for High Gas Prices

One of the most frequent internet searches that land people from all over the world here at the CARE Blog includes the words “gas prices.” Everyone wants to understand what is going on with the escalating costs at the pump. If you read through the previous postings, you’ll see that they address the issues from a production perspective. When this short piece landed in CARE’s in box—saying that prices would be going down, it caught our attention. This is from an energy investment newsletter put out by ABQ Energy Group, Ltd. The president, Scott Kominiak, is a CARE Member. Coming from a background of energy trading and risk management, we believe you’ll be interested in his comments.

It is getting tougher and tougher to be an oil and gas producer. I even catch flack when I tell people what I do and I don’t even own the stuff! However, remember that the best cure for high prices is high prices and we are likely headed for some sort of corrective action that should give us all a break from the dirty looks.

On that note, pay attention on the way down and listen for commentary about the “evil speculators” and how they are driving prices lower by exiting their positions. I’m thinking that I already know how much we will hear.

We have not yet reached our bull flag target on CL of $155, but we are getting close. The sustainability of that rally will likely impact the depth of any NG corrections. We have begun buying out of the money puts under the NG market as a hedge. Implied volatility is relatively low which make these contracts a relatively cheap insurance policy.