Energy, Energy Service, Natural Gas &amp; Oil Sectors

Top 1338. Nov 30, 2005 12:23 PM

» lcha - Windfall Accounting Tax

Lcha here: We get this from a REPUBLICAN senate!

Windfall Accounting Tax
November 30, 2005; Page A18

Just when you think Congress can't possibly be more destructive, the Members surprise you again. Their latest doozy is a backdoor windfall profits tax on oil companies that was stuffed into the Senate budget reconciliation before Thanksgiving.

The Senators had a chance to declare themselves in public on the windfall levy, but they sensibly voted against it on the floor, 64 to 35. In a democracy, that should have settled the matter for this year. But this is the world's greatest cynical body, where the grasping for tax revenues to dole out to constituents never ends. So a pair of our most dangerous Senators -- New York Democrat Chuck Schumer and Maine Republican Olympia Snowe -- insisted on the addition of a nasty little provision into the tax reconciliation bill.

The last time Congress imposed a form of the windfall tax was the final gloomy days of Jimmy Carter, and the result was: a substantial reduction in domestic oil production (about 5%), thus raising the price of gas at the pump; and a 10% increase in U.S. reliance on foreign oil. A windfall profits tax is the ultimate act of economic masochism because it taxes only domestic production, while imports and foreign oil subsidiaries bear almost none of the cost.

But wait, this time it's worse. The current Senate proposal would actually require oil companies with daily production of 500,000 barrels or more to disregard generally accepted accounting principles, by revaluing their oil inventories. GAAP accounting (and current tax law) allows oil firms to value barrels of oil sold at what it costs to replace that barrel.

The Senate bill would require the companies to revalue their inventories by $18.75 a barrel -- an arbitrary number if there ever was one. In effect, this means that Congress is creating the illusion of higher oil profits, and thus raising the tax liability of oil companies by an estimated $5 billion next year. This would be on top of the 35% tax rate they already pay on their actual profits.

When Andy Fastow tried to create phony profits at Enron, he got 10 years in the slammer. Now Senators want to create phony corporate profits, so they can grab them to spend. Where's Eliot Spitzer when you really need him? What's even more reprehensible about this revenue grab is its retroactive nature. In a sense this is less a tax than it is an ex post facto confiscation of private property.

Because this is a one-time inventory adjustment for taxes paid in 2006, supporters claim the tax will be no disincentive to future production or reserves. Try that one again. If oil companies believe that their profits will be sliced any time there is a spike in oil prices, their incentive to hold reserves in anticipation of higher future prices is vastly diminished. It is precisely when supplies are curtailed and prices are high that we want oil companies to have plentiful reserves. It was the profit motive, so maligned on Capitol Hill, that helped ensure that the "oil crisis" that followed Katrina's blow to Gulf refineries was surprisingly mild and short lived.

Both Republicans and Democrats also say that what troubles them is that the oil companies aren't investing enough of their profits in new refineries, or new oil exploration and production in the U.S. Hello? Explore where? Even with $60 oil and $12 natural gas, Congress refuses to open more of Alaska or the Outer Continental Shelf to new drilling. The Senate recently rejected a House-passed measure that would reduce regulatory hurdles to building new refineries. The oil companies aren't investing more in domestic refineries and exploration for one simple reason: Congress won't let them.

We hope that the citizens of Maine and New York recognize that their distinguished Senators are doing everything in their power to keep gasoline prices high and home heating bills rising this winter. These are also the Senators who are demanding billions of dollars more in taxpayer subsidies so their constituents can afford the higher utility bills that these same Senators have helped to ensure.

The good news is that the House version of reconciliation doesn't include this windfall accounting scam, and the White House is threatening a veto if it isn't removed in conference. Senator Snowe has so consistently undermined the GOP agenda this year that she is the last person who should be rewarded now with a political victory. But it speaks volumes about the policy implosion of this Congress that such destructive legislation has made it this far.

-- posted by lcha

Top 1339. Nov 30, 2005 3:52 PM

» axolotl - Matthew R. Simmons speaks about Canadian oil sands.......

You can Google for this - Simmons recently said that the oil sands are not another Saudi Arabia and are not very energy efficient since the process requires a lot of valuable NG. He repeats that there is no other Saudi Arabia out there and if the Saudi fields are in decline, then the world is in decline.

-- posted by axolotl

Top 1340. Nov 30, 2005 7:07 PM

» Normxxx - Re: Matthew R. Simmons speaks about Canadian oil sands.......

In response to Matthew R. Simmons speaks about Canadian oil sands....... posted by axolotl:

There's always Nuclear Fusion.... Someday!

-- posted by Normxxx

Top 1341. Nov 30, 2005 9:06 PM

» Normxxx - Conserving Energy A Must

Conserving Energy A Must
This Time, Tight Oil Supplies And High Prices Aren’t Temporary

By Charles T. Maxwell | 22 November 2005

Many of you reading this will remember the love affairs this country has had with energy conservation in 1973-’74, 1979-’85, 1990, and 2000. Those were temporary periods when crude supplies abruptly tightened, oil prices lifted, and the confluence of pricing pressures, US Government appeals and, yes, patriotism, produced a widely-felt determination by the public to avoid waste in energy, and to use it in the most efficient way possible. However, the unusual conditions soon passed, and cheap sources of energy presented themselves again. As a nation, we returned to our old habits of consumption. Crisis over. Back to normality.

That was yesterday. Today, we are in a new period of tightened oil supplies along with correspondingly-high prices. Our situation is now seen to have its principal origin in geologic realities that have been only recently recognized. This “energy crisis” may not go away in a year, or even in five years. Perhaps not in my lifetime. Crude oil is more difficult and more costly to find every year because easy-to-access oil has already been exploited. Demand around the world keeps rising some 1½% to 2½% per year. We are using 31 billion barrels annually now, and finding 8-10 billion barrels, at the most. This is the old crisis story… made permanent. We are in a new era, alright, and I project this one will support a continued average WTI crude oil price above $50 per barrel going out in time. And, I anticipate prices will move (generally) higher until we reach Hubbert’s Peak, perhaps in the 2015-2020 period.

Closer to home, what should we expect as a pattern of oil prices over the next five years? It can only be a guess. My rounded WTI numbers are set out below.


2003A 2004A 2005E 2006E 2007E 2008E 2009E 2010E
 $31   $41   $57   $54   $56   $62   $68   $75

No forecaster can be confident about figures as exact as the ones displayed above. But, they are presented, nonetheless, because they constitute what I consider to be a likely trend. I assume that by 2015, WTI oil prices will be in the $130-160 per barrel range. Oil will be too valuable by then to be consumed in many common tasks it is called on to perform today. However, it will still power close to 50% of the work accomplished because efficiencies in its use will be surprisingly effective (90 miles to the gallon in your car, and so on.) This general tightening of the availability of oil will obviously have huge effects on its use, and also on the price and use of other sources of energy, on our economy, on our social system and on our political life. How will we deal with it?

Mainly conservationally. (You may have thought I said conversationally, and at the start of this process, you might be right.)

While conservation is not in itself a “source of energy”, it can easily and suitably be perceived as such. A barrel saved is as useful to society as a barrel gained, or perhaps even more so.

Conservation is also about efficiency and priority so that more work can be done using the same amount or less fuel, and also about not using fuel when it can be saved by forward planning or the substitution of another element of production in its place.

For reasons I will explain, I see energy conservation as not just a way out of our energy dilemma, but, at least for the next 20 years, the main way out. No other “source” of energy is proportionately large enough or flexible enough to handle the size of our problem. No other force can be implemented fast enough to save us from the possibility of systemic collapse. To bring supply and demand for energy into balance, without impairing our economic and political life in the process, will be one of the principal challenges of the next decade. As I see it, conservation can be rapidly implemented. The public understands it and is in favor of it, and the Government can organize and support it on quick notice. The alternative to a massive conservation effort is to allow shortages to occur in a random pattern, thus unleashing unpredictable and potentially disastrous effects on our economic system by reason of energy imbalances that could, under some circumstances, bring activities of industries or regions to an abrupt stop.

What is the basis for suggesting that energy conservation will have such a dominant role? One has to look at competitive sources of energy to perceive why this might be so.

Crude oil is our largest source and about 39% of our country’s energy needs are met through oil products derived from it. Oil is a flexible source, i.e., it does lots of different things. It is particularly useful for transportation purposes (cars, trucks, buses, tractors, locomotives, propeller aircraft, jets, tugboats, cargo vessels, liners and recreational craft). However, it is precisely oil that cannot be produced in larger annual volumes after we go over the top of Hubbert’s Peak. I expect world production of crude to hit a plateau around 2015 and then start down by 2020, at the latest. If we traditionally need about 1½%-2½% more oil to grow our world economy each year, and we can no longer draw that increment from the earth, then we would have to consider substituting another fuel (fuels) for it.

That might logically be natural gas (24% of our consumption). However, new net supplies of gas are now tapped out in North America. Still, we could import more from abroad in the form of LNG. Also, we could find more internationally and bring it onstream. The problem with this is that the infrastructure of processing plants, pipelines, storage facilities and distribution lines yet to be built to handle this growth would be large and costly, and would take many years to develop. Could we handle this in time? And, would we agree to increase our foreign dependence on natural gas supplies after our experience with crude oil? Further, if the world peak in natural gas production arrived in, say, 2030 or 2040 (following Hubbert’s principles), this investment might represent substantial resources expended on a temporary solution.

If needed, extra supplies of natural gas appeared to be caught up in delays based on deficient infrastructure, we might consider turning to coal and uranium (23% and 8% of our energy use, respectively). We have many years of supplies/resources in these fuels. However, coal produces a good deal of unwelcome pollution, (sulfur dioxide, nitrogen oxide, carbon dioxide and particulate), and uranium is not a political option now as the public doesn’t feel secure with its use in power plants, or its storage as a spent, but still radioactive, residuum.

In short, our energy choices are more limited than many perceive. In the next 10-20 years, as I foresee it, the size of increases in energy supplies we will require each year cannot be fully met by traditional fuels (alternative fuels might help over time, but they are too small to count in this calculation). Conservation (including greater energy efficiency) is the most reliable pillar of the next two decades to meet our energy needs and keep our economy growing.

Can conservation accomplish such a major task? Can it rationalize energy use and bring in a new capex wave of machines, equipment, buildings, cars and trucks, along with plans to organize and integrate these factors so that we can effectively do 2% more work each year for the same amount of energy as was expended in the previous year? I believe the answer is: Yes, it can. Why? Because it is an issue of human ingenuity. And, because we have been sufficiently profligate in the past with energy that we have left ourselves a lot of room to tighten up the discipline of using it.

The core element in making conservation work today is the design and engineering skills of people in the US and around the world, discovering new ways to do it, new ways to heat it and cool it, new ways to avoid having to heat it and cool it, and new ways to share that knowledge with other interested people. There is a universe of energy-related technology out there waiting to be discovered and developed. Relatively high energy prices may effectively help to fund an early R&D effort, but once started, I would guess this could gallop along on its own, predicated on the many good things that conservation can do for us. Let me count the ways:
Conservation can save billions in imported oil costs, strengthening the dollar, reducing the trade deficit, and lowering our dependence on foreign energy sources by “producing” the conserved barrel, (generally) right where it is consumed.

It can save large sums in bypassing a certain amount of exploration and production, transport, processing, storage and distribution costs related to incremental output from hydrocarbon sources, through substitution of greater energy efficiency for higher volumes.

It allows us to avoid a certain amount of additional smog and pollution and the output of large amounts of carbon dioxide, through not having to use more barrels to obtain a larger effective energy output.

The least expensive barrel our economic system can consume, on an average, is likely to be the conserved one, since ingenuity and intelligent planning is a large part of its cost.

The country’s (and world’s) hydrocarbon reserve base could last longer if the annual increase in the call on it was reduced by conservation.

In an impending set of conditions where supply cannot equal demand at the normal prices of the past, conservation becomes the cheapest societal adjustment device because it alone can bring us safely past the worst alternative: random economic destruction occasioned by going without.

(It should be noted that conservation is an attractive bridge from this energy era to another. However, as a source of fuel, it “depletes” like any other, that is, it becomes harder to reduce energy demand, as prior innovation is effectively implemented. So, conservation cannot be a final answer to our energy problem. It essentially gives us time to react intelligently and build with a plan.)

The pressure of higher energy costs is expected to be felt in every country of the world. Companies and other organizations that cannot, or will not, utilize the conserved barrel will tend to have higher energy costs and, thus, be less competitive then those who do. This has the effect of forcing every society into the same all-out effort to conserve.

The second Bush Administration has not done much about organizing a national conservation effort, but is now aware that one may be needed as early as this coming winter, if it should turn out to be a particularly cold one. Sam Bodman, the new Secretary of Energy, was a fortuitous selection because he is knowledgeable about limitations of choice in the energy field, and understands how important it is to get an early start on problems. I sense that the US will not be left behind, in the end, on the emerging issue of energy conservation. Further, the Administration perceives that the effort will have to be orchestrated on a worldwide basis, with the US playing a dominant role both organizationally and technologically.

From the above, you may gather that I place energy conservation high on our society’s agenda for the next 20 years, supported by necessity (shortage of energy supplies leading to higher prices) and entrepreneurial opportunism (we have the talent to be out in front on this). I see a technology/engineering-based industry coming to the fore now with new objectives, new consumers, new owners, and new ideas. Though starting in Europe and North America, I would expect the energy conservation effort to soon sweep around the world by virtue of the universal need for it, and universal brainpower required to make it viable. I would guess that there would be an explosion of useful answers. Professionals and amateurs will try their hand at it. Some of the simplest conservation ideas will save the most fuel, from what we have witnessed so far. The arena, however, is likely to migrate fairly quickly into high technology as the easy solutions are exploited. We should soon be deep into bio-fuel reformation, thermionics, nickel metal hydrides, and nanotubes. The possibilities are intriguing, encouraging, and endless. This should, in time, become a tightly disciplined field of high priority for the society, high returns to the investor, and high public interest. Energy conservation, in short, is well on its way to becoming an investable theme in Wall Street, and around the world.

In light of these thoughts, I am planning to spend a sizable part of my time over the next several months researching potential conservation companies with concepts that I think could make a significant contribution to our future efforts to save energy. Unfortunately for institutional investors, many of these companies are still quite small and untested in competitive market terms. They are using business plans that are newly-minted, and winners and losers among them are not yet defined. However, buried deep within their corps of scientists and engineers are a host of revolutionary ideas that could twist the tail of the camel, and turn the energy business upside down. These are too good to miss. Successful companies could be quickly surrounded by analysts’ superlatives along with high double-digit growth, and be raised to substantial size by virtual expansion. The problem of higher sustained energy costs that has become a punishing headwind for most corporate enterprise is a congenial tailwind for them. Investors just have to be there. We will aim to be there too.
-CTM

Charles T. Maxwell, Senior Energy Analyst of Weeden & Co., LP
Maxwell@Weeden, “Conserving Energy”, October 25, 2005.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 1342. Nov 30, 2005 10:14 PM

» Normxxx - Saudi Oil

(No new major fields of any magnitude were suddenly 'discovered.') But, under the OPEC agreements, this enabled it to nearly double the amount of oil it would otherwise have been allowed to sell under the 'quota.' Most other OPEC members pulled the same ploy...

-- posted by Normxxx

http://online.wsj.com/public/resources/d...

Top 1343. Dec 3, 2005 9:37 PM

» Normxxx - Oil, Energy, Food, Proteins, ...

Oil, Energy, Food, Proteins, Water, 'Flation

b>[Normxxx Here: The following is curtesy of greg@whiskeyandgunpowder.com. ]
http://www.howestreet.com/mainartcl.php?...

Greg's note: Here's Dan Denning with a cheery essay on our economic future under Bernanke. Whiskey readers with us from the beginning will remember that we launched this dainty little e-letter off Dan's newsletter, Strategic Investment. In any case, Dan opens with baseball— and how unlikely it is for a pitcher to throw a perfect game— 1 in 15,000. One present Republican senator threw a perfect game in the majors… he's also the only guy who voted against Bernanke. I hope that it wouldn't take 15,000 more Congressmen to grind up another vote against the Chopper Dropper Bernanke…anyhow, Dan goes on to slaughter Bernanke's views on energy prices and the housing market. Please read on and forward any opinions to your hirsute managing editor here: greg@whiskeyandgunpowder.com

Bernanke's Looming Emergencies
by Dan Denning | 30 November 2005
Melbourne, Australia

THE BEST KIND of political career— if you have to have one at all— is a brief and inglorious one. Mine lasted exactly one year, as a 16-year-old Congressional page. As a page, you spend the morning taking classes in the Library of Congress and the afternoon taking orders from all the people who give them. There are a lot of people who like to give orders in Washington.

Jim Bunning wasn't one of them, at least not that I can recall. Bunning is a Republican Senator from Kentucky today. Back then, he was either a first-term or second-term member of the House of Representatives. Just another face in the crowd, or for me, in "the book."

"The book" was actually a little red book whose pages were filled with the names and faces of all— 437 members of the House. Your average Congressperson looks just like your average dentist, insurance salesman, or hairdresser. Without the book, you'd never know that the man who looks just like your local auto dealer is, was in fact, a distinguished member of the House taking bribes from your local auto dealer.

We used "the book" to memorize the faces and match them with names. With that useful skill, we could take phone messages from the cloakroom and deliver them to members on the floor of the House, busy making laws. The messages were what you'd expect, or example: "Call your office," or "Your wife is looking for you." We never saw the important ones, if there were any.

I liked Jim Bunning as soon as I found out he was one of only five pitchers in Major League Baseball history to pitch a no-hitter in both leagues. I'm a big baseball fan. A few years later, I watched Hideo Nomo, pitch a no-hitter for the Boston Red Sox against the Baltimore Orioles on April 4, 2001 from section 10, row TT, seat 4 (I keep the stub in my wallet) Most non-baseball fans think a no-hitter is boring. After all, for one side, there is no offense. But watching a good pitcher dominate a hitting team is a real treat.

Bunning pitched a no hitter in both leagues. But he also pitched that rarest of baseball feats, the perfect game. In fact, I'm willing to bet it is one of the rarest accomplishments in sports. In 130 years of Major League Baseball, there have been only 17 perfect games. That amounts to one perfect game for every 15,000 games played.

Bunning pitched his on June 21, 1964, for the Philadelphia Phillies against the New York Mets. He was 32 years old and threw just 90 pitches over two hours and 19 minutes.

Black Swans, Baseball, Fertilizer, and Exceeding Fundamentals

Perfect games are the black swans of baseball. It's a rare event that you can't predict. Yet you know it happens with a small degree of statistical regularity. In baseball, it takes a combination of luck and a pitcher with really nasty stuff to pitch a perfect game. Jim Bunning had nasty stuff. He still does. Just ask Ben Bernanke.

Bunning is the only member of the Senate Banking Committee who voted "nay" on the nomination of Ben Bernanke to be the chairman of the Federal Reserve. Bernanke was recommended by the committee anyway. His nomination will easily be confirmed by the full Senate. But Bunning's rejection of Helicopter Ben is worth a second look.

In a statement issued explaining his vote, Bunning wrote:

"When I met with Dr. Bernanke when he was a nominee to the Board of Governors of the Federal Reserve, he promised me that he would not be a rubber stamp for Chairman Greenspan but an independent voice who would stand up to the chairman when he believed he was wrong. Sadly, Dr. Bernanke never once cast a dissenting vote. The chairman of the Federal Reserve must be an independent voice. Dr. Bernanke had the chance to prove he was an independent voice, he failed to do so. The position of Federal Reserve chairman is probably the most important economic choice the president has to make. He has chosen poorly."

It's true that Bernanke did spend time as the Chairman of the White House Council of Economic Advisors. It's true this raises questions about his independence from the executive branch. And it's true that Bernanke moved in lock step with Alan Greenspan on the Fed's rate cutting and raising decisions.

But there must be other reasons Senator Bunning voted no. It turns out there are. A lot of them. Bunning submitted written questions to Bernanke during the confirmation process in front of the Banking Committee. Bernanke answered, in written form. You can find the complete list of questions and answers here:

There are two aspects of the future Chairman's remarks I want to skewer into today's Whiskey. The first is Bernanke's all-too-common belief that the current energy, ahem, crisis, is strictly economic and that it will be regulated by market forces, not geopolitical ones. The second aspect is housing. And even though new home sales were up 13% in September to a record annual pace, anyone reading Ben Bernanke's words realizes the Fed is a lot more worried about a bust than a bigger bubble.

Let's take the simplest question first.

"Q.3. What is currently the most significant threat our economic expansion?

"A.3.[Bernanke] Energy prices have risen steeply in the past three years, and although the economy has accommodated these rises remarkably well thus far, continuing increases in the price of energy would pose difficult challenges for households and businesses. The proximate cause of the energy price increases is a rapidly growing global demand for energy, coupled with insufficient investment in new energy supplies to meet this growth. In the long run, high prices will curb energy demand and call forth new energy supplies. In the near term, however, energy price increases have the potential to spill over into general inflation, sap consumer spending power, and damp overall activity. A further jump in energy prices or a more pronounced reaction to those increases in prices that have already occurred could test the strength of the expansion. With respect to inflation, the Fed, thus far, has been largely successful in limiting the effects of higher energy prices on t! he broader rate of price inflation. But further energy price increases would also pose upside risks to the outlook for inflation."

Bernanke's assumption here is that high energy prices will come down for two reasons. First, when a thing gets more expensive, people use less of it, because they can't afford it. The high price leads to falling demand. Second, the high price attracts additional competitors, who bring new supply on the market, thus bringing the price down.

Both of those are fine in theory. You'll find them in any respectable economics textbook. But oil is not just any commodity. Why? There is no simple, effective, abundant, and cheap alternative to using oil in today's economy. We will not have a nation full of hydrogen cars and stations this time next year. We will not replace our synthetic clothes and plastic doodads, including packaging for almost everything, in a year. And we will not replace the fertilizer we use to grow our food anytime soon!

Let's take that last example: agriculture. It was petroleum— and natural gas-based fertilizers, among other technologies, that led to the "Green Revolution" of the 1960s and 1970s. Without oil and gas-based fertilizers leading to a huge increase in crop yields around the world, it would be impossible for the earth to support its current population. As Jim Kunstler writes in "The Long Emergency," "Ninety-five percent of the nitrogenous fertilizers used in America are made out of natural gas, and so it has become indispensable to U.S. agriculture."

What happens when natural gas pipelines get close to running on empty, as they did in 2003? Or when gas prices get so high, because of depletion, that companies can't afford the market price? Fertilizer doesn't get produced. Crop yields go down. There is less food. But for who?

"A world of 6.4 billion people, on the way to 9 billion or more, needs more protein than the planet's croplands can generate from biologically provided nitrogen. Our species has become as physically dependent on industrially produced nitrogen fertilizer as it is on soil, sunshine, and water," writes Stan Cox, a scientist at the Land Institute in Salina, Kansas.

"Vaclav Smil, distinguished professor at the University of Manitoba and author of the 2004 book

<img align="left" src="http://images.amazon.com/images/P/0262693135.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production
by Vaclav Smil

has demonstrated the global food system's startling degree of dependence in nitrogen fertilization. Using simple math, the kind you can do in your head if there's no calculator handy— Smil showed that 40 percent of the protein in human bodies, planet-wide, would not exist without the application of synthetic nitrogen to crops during most of the 20th century."

"That means that without the use of industrially produced nitrogen fertilizer, about 2.5 billion people out of today's world population of 6.2 billion simply could never have existed."

Just two additional points on this issue of food and natural gas before we move back to future Chairman Bernanke's energy worries. Energy is clearly a worry, but so too is the worry that natural gas shortages in America could lead to soy bean shortages in China, which could lead to pressure of China's massive poultry industry, which could lead to bird flu and the death of us all, or at least most of us.

First, let's talk about protein.

"Proteins are made up of smaller units called amino acids. There are about 20 different amino acids, eight of which must be present in the diet. These are the essential amino acids. Unlike animal proteins, plant proteins may not contain all the essential amino acids in the necessary proportions." Thus says the Vegetarian Society at http://www.vegsoc.org.

The vegetarians continue, "Protein quality is usually defined according to the amino acid pattern of egg protein, which is regarded as the ideal. As such, it is not surprising that animal proteins, such as meat, milk and cheese tend to be of a higher protein quality than plant proteins. This is why plant proteins are sometimes referred to as low quality proteins. Many plant proteins are low in one of the essential amino acids. For instance, grains tend to be short of lysine whilst pulses are short of methionine."

I am not a nutritionist, or a doctor, or a dietician. But I am curious about things. It's clear human beings need protein. We can get it from plants or we can get in from animals. Most of us get it from both.

China, lately, has been getting an awful lot of protein from soybeans, many of which are grown in North and South America. You might say, as Jim Kunstler implies, that China's rise, strictly in terms of increased protein consumption, would have been impossible without the oil boom of the 20th century. No natural gas, no soybeans. No soybeans, no extra protein boost for factory workers working longer hours. Think I'm making this up? Check out the chart of China's soybean imports versus population growth over the 20th century (from the United States Department of Agriculture).

This chart, by the way, is one of the reasons I recommended soybean and fertilizer producer Bunge (BG) in the pages of the The Bull Hunter and Strategic investment. The world needs more calories and protein as much as it needs more oil.

The USDA reports that:

"China's soybean imports for 2004/05 are revised higher at 24 MMT, up 800,000 tons from the July estimate. For the first 9 months (October-June), China's soybean imports from the world totaled 18.3 MMT, exceeding last year's total annual imports of 16.9 MMT. Strong import demand for soybeans is attributed to rising use of soybean meal as a protein source for swine, poultry, and aquaculture production… China's 2004/05 protein meal consumption (converted to soybean meal equivalent) is estimated at 37 MMT. This reflects an annual growth rate of 13 percent, compared to 11 percent based on the July estimate. Strong protein meal demand is also reflected in China's fish meal imports. China's 2005/06 protein meal consumption is forecast at 40 MMT, up nearly 8 percent from the 2004/05 estimate as sustained economic growth should generate greater demand for protein meal in animal production. China's 2005/06 soybean imports are forecast at 27 MMT."

Assuming that the soybeans are there to import, this is good news for soybean producers and exporters, the biggest of whom are in the United States and Latin America. The charts from the USDA show just how huge China's appetite for soybeans (and the protein they provide) is.

But notice the USDA text I highlighted above. It's all well and good for China to get its protein from soybeans and other plants. But soybean meal (along with fishmeal) is in strong demand for China's huge poultry, swine, and aquaculture industries.

I know you've heard a lot about hoof-and-mouth disease and bird flu lately. So let us take a moment to focus on pigs. In it's latest report on world pork, poultry, and beef markets, the USDA has this to say about pork and China:

"Accounting for 76 percent of the major producers' increase forecast in 2006, China will drive pork production for those countries 3 percent higher in 2006 to just over 95 million tons. China will continue to dominate as the world leader with nearly 51 million tons of pork production…

"Pork production continues to benefit from its role as a substitute for animal protein when trade in beef and poultry declines due to disease-related bans. Growth in pork production and consumption in some regions is due to substitution.

"Despite various obstacles, China's swine production has benefited from efficiency gains due to improved breeds and feed. This is reflected by increased imports of breeding swine. Increasing percentages of sow stocks compared to total inventory will translate into continued strong swine production in 2005 and 2006. Investment in hog slaughter and pork processing has also risen. Increased foreign investment through joint ventures will continue to boost efficiency and production."

I hope the USDA is right, of course. It would be good for China to have a larger swine breeding industry and the ability to feed itself. Even Chuck Schumer couldn't say no to that. But Chinese consumption AND production of pork ought to concern history students at least a little bit.

Though it is debated, it is also widely accepted that the 1918 Spanish Flu originated in pigs, not birds. It was brought to Europe by GIs from Kansas, not by birds from China. But like all other pandemics, the key mutation in the virus was the one that allowed it to be transmitted between humans rather than between an animal (in this case pigs) and a human.

Of course, there was a mini-hysteria in 1978 about another swine flu pandemic that never played out. It's not just China we have to worry about (although I'll have more on China in a moment.) There was this gem earlier this week from UPI about the unique ability of pigs to act as genetic mixing bowls for all sorts of viruses:

Nov. 28, 2005 (UPI delivered by Newstex)— A federally funded study suggests U.S. farmers, veterinarians and meat processors have a markedly high risk of infection from flu viruses spread by pigs. Scientists conducting the study, funded in part by the National Institute of Allergy and Infectious Diseases, said the fact pigs can be infected by swine viruses, bird viruses and human flu viruses means they act as virtual virus "mixing bowls." "The worry is if a pig were to become simultaneously infected with both a human and an avian influenza virus, genes from these viruses could reassemble into a new virus that could be transmitted to, and cause disease in, people," said NIAID Director Anthony Fauci. The U.S. swine industry has shifted during the last 60 years from small herds on primarily family farms to large herds maintained in large, confined facilities. The crowded conditions make swine flu infections among pigs a year-round occurrence, rather than the seasonal event they once were. The study appears this week at the Web site of the journal Clinical Infectious Diseases.

You must understand, it's not that I want these things to happen. But like black swans, LTCMs, and Jim Bunning's perfect game, rare things do happen. It just so happens with the earth's ecology they tend to happen when you crowd teeming masses of humanity in with the animals they slaughter and kill for protein. Those conditions exist all over the world, of course. But they are most pronounced in Asia and especially China.

Yet this is not all bad news for investors. Here in Australia and next door in New Zealand exporters are champing at the bit. Australia has the largest reserves of natural gas in the Asia Pacific reason, with 90 trillion cubic feet in the ground. With natural gas only 17% of domestic energy use, this makes Australia a natural gas exporter to China and Japan.

Liquified natural gas (LNG) appears to have a bright future here as well, at least as long as the gas lasts. Australia is the world's sixth largest LNG exporter. And when it comes to beef, lamb, and dairy products, New Zealand is sure to benefit from the bi-lateral trade deal it hopes to seal with China in 2006.

China, if left to its own devices, would probably consume all the mutton in New Zealand, all the timber (and tar sands) of Canada, and all the LNG and iron ore Australia can squeeze out of itself. In fact, thanks to the wonders of the internet, I can tell you that China's bid to buy $21 billion worth of LNG from Australia's Gorgon project is not dead yet.

You may remember the Chinese National Offshore Oil Corporation (CNOOC). CNOOC's money, all $18.5 billion of it, was no good at UNOCAL or in the U.S. Senate. But it may be good enough to secure China $21 billion in Australian LNG. The gas would be shipped from Australia's Greater Gorgon field of the coast of Western Australia to China's LNG terminal in Guangdong (or perhaps any of it's three other LNG terminals slated to come on line in the next three years.)

Yet even if this deal doesn't go through— Chevron, which owns 50% of the Gorgon filed signed a deal with Japan's Chubu electric last week to begin exporting 1.5 million tons of Gorgon LNG to Japan for the next twenty-five years— there are others already in place and surely others that will come along. As long as the gas lasts, that is.

The Chairman's Cryptic Warning?

You might recall the market's strange reaction to Alan Greenspan's decision on June 10th, 2003 to sit down in front of the House subcommittee on Energy and Commerce and give a speech about natural gas. After all, you'd think managing the nations money supply and interest rates would be job enough for the Chairman. But he's a talented man. And back then he was a worried man. Here are the Chairman's closing remarks from that day:

"…the long-term equilibrium price for natural gas in the United States has risen persistently during the past six years from approximately $2 per million Btu to more than $4.50. The perceived tightening of long-term demand-supply balances is beginning to price some industrial demand out of the market. It is not clear whether these losses are temporary, pending a fall in price, or permanent.

"If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required. Markets need to be able to effectively adjust to unexpected shortfalls in domestic supply. Access to world natural gas supplies will require a major expansion of LNG terminal import capacity. Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility.

"As the technology of LNG liquefaction and shipping has improved, and as safety considerations have lessened, a major expansion of U.S. import capability appears to be under way. These movements bode well for widespread natural gas availability in North America in the years ahead."

"Perceived tightening," driving "industrial demand" out of the market. Was Greenspan concerned then, among other things, about what the loss of domestic gas production and high gas prices would do to American agriculture? Was he further concerned that a drop-off in American crop yields would have a domino effect across the world, especially China— where poultry, beef, and swine herds get much of their protein from soybeans? Or was he just worried, like any good politician would be, that rising gas prices and a cold winter spell a political disaster for northeast politicians— not to mention real suffering for Americans who have no idea just how thin our nation's gas tether is.

Should Ben Bernanke be worried about these things too?

Alan Greenspan gives a speech on natural gas and all but proclaims that future American demand for natural gas can only be met through LNG. The Canadians, he pointed out earlier in the speech, don't have any extra gas to send our way. We're already consuming 85% of it.

Perhaps Greenspan wouldn't have gone on to tie in the results of falling industrial demand for gas to what happens in the world's food markets, or to China. But that is what we're here for.

And before I move on to Mr. Bernanke's other fears, let me put a fine point on the dangerous combination of high natural gas prices resulting from peak gas production, a fall off in global fertilizer production and crop yields, coupled with a newly created demand for protein in China— a nation which had a worse week geopolitically than even George Bush could have imagined.

What I'm getting at is one of two possibilities: a massive famine in China, sparking even more political violence and collapse of the [present] communist government. Or, in the attempt to avoid a massive famine, the outbreak of either swine, avian, or some new and even deadlier flu the world hasn't seen yet.

[Normxxx Here: There are still other, some worse, possibilities. ]

The Technology Fallacy and the Energy Emergency

Now that we've taken a very speculative look at what some of the consequences could be to rising natural gas prices in a peak oil world— namely a massive global famine/and or pandemic, returning the earth to a pre-peak oil and 'naturally' sustainable carrying capacity— let's tackle one of the great myths of cornucopian economics, that technology will bail us out.

For this section I'm indebted to the excellent book,

<img align="left" src="http://images.amazon.com/images/P/0871138883.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> The Long Emergency: Surviving the End of the Oil Age, Climate Change, and Other Converging Catastrophes of the Twenty-first Century
by James Howard Kunstler

It belongs on any serious investor's bed side table, marked up with notes and questions. But let me first remind you of what Dr. Bernanke said regarding the risk of high energy prices. He said, "In the long run, high prices will curb energy demand and call forth new energy supplies."

There are two major mistakes here in Bernanke's thinking, and Kunstler nails both of them in his book. First, there are no easy, cheap, and abundant replacements for the things oil brings to modern life. There is no curbing the appetite for food, short of death. In the long run, with no viable replacement for natural gas and oil to feed, cloth, and house humanity on its current scale, we will be either freezing or starving (or both).

There are no replacements for oil and gas that allow Asia's three billion new capitalists to live at the energy density of the average American. Demand will not fall. But, it will cease to exist in countries that don't have the cash to buy depleting resources, or the military force to seize them.

It is one of the great curses of mainstream economists to be obsessed with equilibrium, the idea that supply and demand are always in harmony at just the right price. But, to borrow a phrase from economics, there is no diminishing marginal benefit or utility for oil at higher prices. The demand is inelastic.

That is, it either stays the same and grows (more trips to the grocery store, air travel, food imported from all over the world fresh on your shelves daily) or it snaps altogether. The price of oil gets so high that it simply precludes the kind of behavior we're used to in our oil-abundant economy.

So if high prices fail to discourage energy demand without destroying it altogether (and throwing the world into a long period of zero or negative growth) then what are the alternatives? Well, for one you have resource wars. Some people think we're in one already and have been for the last few years. But can't technology bail us out? In The Long Emergency, Jim Kunstler says no, and then some:

"What is known, therefore, about the geology of oil suggests there are no inexhaustible reserves— and that it is very unlikely that known oil fields or basins can be 'replenished' from some mysterious source far deep beneath the earth's crust, as some wishful commentators would like to believe. In fact, most credible authorities agree that these special and precious pockets of fossil hydrocarbons will all be gone by the end of the 21st century even if the rate at which we use them doesn't increase. The complacency over this rather startling fact is due to the presumption that technology and markets will, naturally, rescue us… As it always has in the past (a mere few hundred years)…

The belief that "market economics" will automatically deliver us a replacement for fossil fuels [the 'new energy supplies Dr. Bernanke alludes to] is a type of magical thinking…

This age old tendency of humans to believe in magical deliverance and wish for happy outcomes has been aggravated by the very technological triumphs that the oil age brought into existence. Technology itself has become a kind of supernatural force, one that has demonstrably delivered all kinds of miracles within the memory of many people now living— everything from airplane travel to moving pictures to heart transplants.

I myself admit to being spoiled by abundant oil and technology. I can travel to Australia and live and work here with relative ease, thanks to the internet.

Kunstler continues:

"There's no question technology has prolonged life spans, relieved misery, and made everyday life luxurious for a substantial, lucky minority. A hopeful public, including leaders in business and politics, views the growing problem of oil depletion as a very straightforward engineering problem of exactly the same kind that technology and human ingenuity have so successfully solved before, and it therefore seems reasonable that the combination will prevail again.

"There are, however, several defects in this belief.

"It does bother some people, in an almost instinctive way, when you suggest that there are physical limits to what human ingenuity can overcome. We are always encouraged, especially in America, to reach for the stars. If we really believed in fixed limits to our future, we might not want to get out of bed in the morning. But sometimes this belief in the ability of technology to solve any problem is overdone. Today is one of those times.

"We tend to confuse and conflate energy and technology. They go hand in hand but they are not the same thing. The oil endowment was an extraordinary and singular occurrence of geology, allowing us to use the stored energy (and chemicals) of millions of years of sunlight. Once it's gone, it will be gone forever. Technology is just the hardware and programming for exploiting that resource, but it is not the resource itself. Moreover, technology is still bound by the laws of physics and thermodynamics, which say you can't get something for nothing. And without the "petroleum platform" to work off, we may lack the wherewithall to reach beyond the current level of fossil-fuel based technology.

"In the meantime, the rate at which we use oil IS increasing. This tends to have a destabilizing effect. It forces long-term planners like nation-states to confront the possibility that if cooperation doesn't work, conflict might. So stabilization is urged, as it was this week in Asia. 'Stabilizing energy demand and supply among Asian countries is vital if a scramble for resources is to be avoided, analysts from across the region agreed in Tokyo last week,' reports the Singapore Business Times. The story goes on to repeat the facts energy bulls are well aware of: Asian oil consumption will double over the next 20 years."

This growth will require huge investment in energy infrastructure, as I mentioned earlier. And there's opportunity in that, as discussed in The Bull Hunter. For example, just this week, BHP Billiton took its case to the Australian public over its acquisition of WMC Resources, giving BHP a dominant position in the global uranium market.

Environmental groups are worried about the huge amount of water expanding BHP's Olympic Dam project will take (a legitimate worry.) And other groups are concerned that Australian uranium might not just go into Chinese fuel reactors, but will lead to increased nuclear proliferation and nuclear terrorism.

Perhaps those concerns are valid. But I don't expect it will stop BHP from producing uranium or China from buying it. China has already spent over US$6.3 billion this year on acquisition of real assets overseas, especially in Australia. Australia is resource rich. China is cash rich. Business will get done.

Australia may, for now, have natural gas. But it does not have oil. And for oil consumption in Asia to increase, there will have to be strategic cooperation among Asian nations in the pursuit of increasingly scarce resources, not competition. And with no "swing producer" like Saudi Arabia to simply increase production to meet the new demand, the entire market mechanism that allows nations to conduct somewhat rational (or at least non-belligerent) energy policies suddenly fails. While Dr. Bernanke waits for the market to magically fix things, desperate governments across the globe will likly do some non-market fixing of their own, or at least try to.

As Kunstler writes:

"Rising demand among still-growing populations will bid up the [oil] price. The lack of a moderating market mechanism, such as surplus supply, to influence price will, by default, lead to allocation-by-politics… The economic stress among virtually all nations, the rich and the poor, the advanced and the "developing," will be considerable and is certain to lead to an increasingly desperate competition for diminishing supplies of oil."

Dr. Bernanke is right to see rising energy prices as a threat to the American economy. But being an economist, he fails to appreciate the political and sociological aspect of rising energy prices. The Chinese won't be content settling for less oil any more than Americans will get used to paying well in excess of $6 for a gallon of gas. The market mechanism for peacefully adjusting the demand for oil (by increasing supply) simply doesn't exist, because the oil no longer exists in the abundant and easy-to-reach quantities it used to.

[Normxxx Here: Nor does there exist any readily available substitute— try driving your car using a windmill! ]

"Further inflation" because of higher energy prices is not just a risk, then, but a near certainty. There is a point, of course, at which oil becomes so expensive that it throws the global economy into a devastating depression.

It's not what anyone wants to hear. But until you appreciate the magical powers of cheap oil and low interest rates to grow an economy artificially fast, you cannot appreciate the seriousness and the degree of the slowdown when those interest rates rise and that oil is no longer cheap. Dr. Bernanke is either bluffing or he naively believes that the nation-states of the world will play nice in the competition for scarce oil, or that someone will come up with a just-in-time technological solution to the very real problem of physical scarcity (at least for the energy uses of oil).

You don't have to have a Malthusian view to recognize that there are some physical limitations on economic growth. You don't even have to be an economist from Princeton. An economy needs energy every bit as much as it needs capital. And when energy is scarce, it becomes its own kind of capital.

In human terms, a man can do a lot with his hands in the desert, including building shelter and growing things. But he can't do it without water. And when water is scarce, access to it is a kind of power. It's a strange accident of history that a place with so few resources like the desert of Arabia should have in abundance the one resource without which the industrial West would not exist.

[Normxxx Here: I should add, that in a very few years, we will have a water shortage which will dwarf everything else— and which can only be solved by cheap energy! ]

Maybe when Peak Oil has done its work in bringing on global depression, the oil in the desert will become less important. Thus, the huge petrodollar profits that fund anti-Western madrassas all over the world will disappear. And the tribal rivalries of humanity will go back to being more local than global. That's one aspect of globalization— the clash of civilizations— I can live without.

Helicopter Ben on Housing

The section above on oil and energy and protein and soybeans (and even water) is long, but I think it's absolutely crucial that you— as an investor and as someone who wants to live through what Kunstler calls the long emergency— think about the very real possibility that peak oil is going to radically change the way people live. And at the extreme end, it will kill a lot of people, which is a radical change to your living condition.

If you're in a position to prepare, however, there is still time. And of the things you can also do to prepare is take note that the next Chairman of the Federal Reserve has recognized that a burst housing bubble could do severe damage to the American economy.

In reply to Senator Bunning's question, Dr. Bernanke wrote that the housing market posed certain risks to the economy. Specifically, he wrote:

"Developments in housing markets also bear close monitoring. Housing prices have risen rapidly in recent years, and concerns have been expressed in many quarters about whether the current high level of prices will be sustained. It is intrinsically very difficult to assess whether the value the market assigns to any asset is fundamentally justified, and housing is no exception to this rule."

It is refreshing to hear a Fed official tacitly admit that the market value of an asset may not be fundamentally justified. It would have been more refreshing for Bernanke to admit the Fed's role in creating the disparity between market value and fundamental value. He continues:

"Certainly, some powerful fundamental forces have contributed to the run-up in housing prices, including growth in jobs and incomes, demographic trends, low mortgage rates, and limited supplies of buildable land in some areas. However, it is also true that exceptionally rapid price appreciation and what appears to be speculative buying have been observed in some local markets, suggesting that prices may exceed fundamental values in some areas."

Fair enough. So there may be some tiny bubbles somewhere. Bernanke does go on to acknowledge that the tentacles of the bubble have found their way into consumer spending, the labor market, and the very financial system of the country:

"Whatever the sources, house price increases will surely moderate at some point, if they have not begun to do so already. If that moderation is not too sharp, then the slowing of consumption and residential investment that might result should be consistent with the modest cooling of growth that many forecasters expect over the next year or so. A sharper slowdown, less likely but possible, would have a larger effect on the growth of real output, particularly if it were to occur in the context of continued adverse developments in energy markets."

So, a sharp slowdown in house prices, coupled with a sharp increase in energy price would have a "larger effect on the growth of real output" in America. You can say that again. And you can also say that both scenarios are far more likely than the future Fed chairman would care to admit.

This is why I continue to look for attractively priced long-term put options on TLT, IEF, and any other proxy of U.S. government bonds. In response to last week's Whiskey & Gunpowder essay that the United States might just eventually default on its official obligations, a reader wrote in telling us to give up on the doom and gloom. He did not, however, offer to buy me a beer...

Sorry, folks. I'm not trying to be uncheerful. But I am trying to let you know that the thing which most economists, including Dr. Bernanke, consider improbable is lining up like the perfect proverbial storm: geopolitical energy conflict, energy inflation and the collapse of the dollar, and ultimately, the collapse of the Empire of Debt.

<img align="left" src="http://images.amazon.com/images/P/0471739022.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> Empire of Debt : The Rise Of An Epic Financial Crisis
by Bill Bonner and Addison Wiggin

That does not mean the collapse of America, although I see from Drudge that network television is hard at work on just those themes for the spring season. They must be reading The Daily Reckoning. But don't look for "grand solutions" to these problems. Look for simple, safe ones. I believe the investments I've recommended and continue to pursue will help see you through the storm, and perhaps even with a smile.

But let's not forget there's a storm.

Which brings me to my last quote from Dr. Bernanke's written testimony. Note that the Bernanke is loud and clear that the Fed does not want to be on the hook for a default on GSE bonds. Whether the Fed will take any of the unconventional measures Dr. Bernanke was famous for exploring in his "zero bound" policy paper is another matter. For now, the Fed is worried about the size of GSE balance sheets and wants the market to know it:

"Q.8. The Fed has been on the record with their fears of Fannie Mae and Freddie Mac being systemic risks to our financial system. Are you worried about other large financial institutions with portfolios similar to the GSEs being systemic risks?

"A.8. Market discipline is typically the governing mechanism that constrains leverage and ensures that firms do not undertake excessive risks. The market system generally relies on the vigilance of creditors and investors in financial transactions to assure themselves of their counterparties' current condition and the soundness of their risk-management practices.

"Because of the availability of deposit insurance, market discipline is not by itself sufficient to control risk-taking in the banking system; for this reason, the Federal Reserve and the other banking agencies supervise and regulate banks."

[Normxxx Here: Except for the last few years! ]

"I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process, are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too big to fail, so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well managed and well controlled.

"In the case of the GSEs, market discipline is problematic. Market participants recognize that the GSEs are closely tied to the federal government and such ties create a view among market participants that the GSEs are implicitly backed by the federal government, thereby weakening market discipline. Consequently, strong regulatory authority and controls on GSE risk-taking are needed to ensure that they do not create systemic risks."

Expect the Bernanke Fed to advocate larger regulatory control of the GSEs. Expect politicians who talk about the right of every American to a McMansion to resist. Expect the meltdown at Fannie Mae to continue in the back pages of The Wall Street Journal. Until one day next year!?!, as interest rates rise, it burns its way to the front pages. And expect the stock markets, which have lately shown a rally, to get much, much worse.

On the other hand, it is never to late to buy some barbaric insurance. With gold cresting $500, can $1,000 be far behind? Not too far.

If the wait is short, markets have gone mad and something horrible has happened geopolitically, perhaps in Iran.

[Normxxx Here: If the wait is long, I may have escaped "to a better place…" Who knows? ]

The global division of labor has meant that we don't have the time to remember many of the important skills that led to the comfortable standard of living we now enjoy. With the help of technology (the internet) I'm going to introduce you to those skills and show you how to perform them, or at least show you how people who really know how to do them do them. Coming soon…Until Then,

Regards, Dan

Greg's endnote: Original Whiskey readers— patient fellows— know Dan Denning very well. After all, your fine e-letter spun off of Dan's Strategic Investment newsletter just over a year ago. Today, I'd like to introduce newer Whiskey readers to Dan's newsletter...

Dan's main forte is translating macro trends into safe and powerful portfolio gains. Over the past year, he's recommended direct, simple plays on the 3 of the things he details above: Australia's resource wealth, Housing's boiling bubble, and oil's rampant rise.

Luckily for his readers, he's up in all 3 areas…

Even though Dan just moved Down Under, he realized the continent's cornucopia of resource riches long ago…and delivered gains from them accordingly. BHP Billiton, detailed above, has slammed 72.47% gains into his reader's pockets since his original recommendation. And it continues to rise…

The Australia Fund also gave his readers a swift 22.83%. And, turning to Housing, his readers had a chance to swipe 60% as Fannie Mae tanked. As far as oil… Dan first recommended refineries when they were selling at about a third what they are selling for today.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 1344. Dec 7, 2005 12:06 PM

» Normxxx - SHORT-TERM ENERGY OUTLOOK

SHORT-TERM ENERGY OUTLOOK

By U.S. Department of Energy | 7 December 2005
Energy Information Administration http://www.eia.doe.gov

Overview

(December 6, 2005) Sharp increases in energy prices and hurricane-related supply losses in oil and natural gas dominated the news in U.S. energy markets in 2005. While demand generally drove 2004 energy prices higher, in 2005 the price increases were more the result of supply concerns because of the hurricane losses, as well as the reduction in world oil spare capacity, which fell to its lowest level in over three decades. Indeed, as U.S. spot prices of crude oil and natural gas increased an average of 36 and 47 percent, respectively, total U.S. energy demand remained flat this year, despite a relatively healthy economic growth rate of more than 3 percent. Similarly, world oil prices climbed throughout the year despite slower demand growth in both China and the United States.

In 2006, total domestic energy demand is projected to increase at an annual rate of about 2.0 percent, despite continued concerns about tight supplies and projected high prices for oil and natural gas. Recent declines in petroleum product prices (especially gasoline and diesel) due to mild weather and ongoing hurricane recovery efforts have caused us to lower our petroleum price forecasts for the next few months. However, prices for crude oil, petroleum products, and natural gas are projected to remain high through 2006 because of continuing tight international supplies and hurricane-induced supply losses. For example, the price of West Texas Intermediate (WTI) crude oil is projected to average $57 per barrel in 2005 and $63 per barrel in 2006). Retail regular gasoline prices are projected to average $2.27 per gallon in 2005 and $2.41 in 2006). Henry Hub natural gas prices are estimated to average $8.88 per thousand cubic feet (mcf) in 2005 and $9.30 per mcf in 2006.

Hurricane Recovery

As of the beginning of December, some 36 percent of normal daily Federal Gulf of Mexico oil production and approximately 29 percent of Federal Gulf of Mexico natural gas production remain shut-in due to Hurricanes Katrina and Rita. In Louisiana, shut-in on-shore oil and natural gas production is down to about 40 percent of pre-hurricane capacity and is projected to be fully restored by the end of March 2006. In the Gulf of Mexico region, refinery shutdowns at the beginning of December totaled 804,000 barrels per day. While two refineries in New Orleans and one in Houston remain out of service today, all three are projected to be operating by the end of February 2006.

The supply of natural gas has been disrupted because of hurricane damage to production platforms, sub-sea pipelines, and natural gas processing plants. However, the inter-connectivity of the natural gas gathering system has helped speed the recovery of shut-in production as suppliers reroute gas flow around damaged pipelines to active processing plants. Consequently, in this Outlook we have accelerated the recovery of the natural gas supply system from our November Outlook prediction. We now expect shut-in Federal Gulf of Mexico natural gas production to fall to 0.66 billion cubic feet (bcf) per day (6.5 percent of pre-hurricane Gulf production) by March 2006.

Gulf crude oil production has also improved, albeit at a slower pace than natural gas. The majority of platform repairs are projected to be completed by the end of 2005, although some of the largest oil platforms damaged by the hurricanes are projected to remain out of service through the second quarter of 2006. Crude oil production is projected to continue to recover at a slightly faster pace than previously predicted. We forecast a gradual increase in Federal Gulf of Mexico crude oil production as shut-in production declines from about 504,000 barrels per day (bbl/d) in December to about 297,000 bbl/d by March 2006 (19 percent of its pre-Katrina and Rita level).

Winter Heating Expenditures

Relatively warmer October and November weather across most of the United States has led us to reduce slightly the winter heating expenditures we projected in the November Outlook. This slight reduction applies to all fuels and most regions. However, 2005/2006 winter residential space-heating expenditures are still projected to be higher relative to the winter of 2004-05 because of higher energy prices. On average, households heating primarily with natural gas likely will spend $281 (38 percent) more for fuel this winter than last winter. Households heating primarily with heating oil can expect to pay, on average, $255 (21 percent) more this winter than last. Households heating primarily with propane can expect to pay, on average, $167 (15 percent) more this winter than last. Households heating primarily with electricity can expect to pay, on average, $46 (7 percent) more. Should colder weather prevail, expenditures could be significantly higher. These averages provide a broad guide to changes from last winter, but fuel expenditures for individual households are highly dependent on local weather conditions, the size and efficiency of individual homes and their heating equipment, and thermostat settings.

Global Petroleum Markets

Many of the same factors that drove world oil markets in 2005, such as low Organization of Petroleum Exporting Countries (OPEC) spare oil production capacity and rapid world oil demand growth, will continue to affect markets in 2006. Other factors are less certain, such as the frequency and intensity of hurricanes, other extreme weather, and geopolitical instability. Worldwide petroleum demand growth in 2005 is projected to slow from 2004 levels, due largely to slower growth in China and the United States. However, world oil demand is estimated to increase by about 1.7 million bbl/d in 2006, up from 1.2 million bbl/d in 2005, led by an oil demand recovery in the United States.

Non-OPEC supply outside of the United States is estimated to grow by a net of some 800,000 bbl/d in 2006. New production of around 400,000 bbl/d is estimated to come online from the Caspian region (Azerbaijan and Kazakhstan), with additional projected increases of 450,000 bbl/d from the Western Hemisphere (particularly Canada and Brazil) and 150,000 bbl/d from West Africa. Conversely, natural production declines at mature fields in the North Sea, Mexico, and the Middle East will dampen this supply growth. Additional capacity increases are projected in OPEC members such as Nigeria, Saudi Arabia, and the United Arab Emirates.

As non-OPEC and OPEC supplies increase, world spare oil production capacity will likely increase during 2006, despite a growth in world oil demand. Overall, 2006 will likely see a 1-million-bbl/d increase in spare oil production capacity (to 2.0-2.5 million bbl/d).

U.S. Petroleum Markets

Total U.S. petroleum demand in 2005 is projected to average 20.6 million bbl/d (0.5 percent less than the 2004 level) because of hurricane-related disruptions and higher prices. Petroleum demand in 2006 is estimated to average 21.1 million bbl/d, 2.3 percent more than in 2005.

Total U.S. refinery output this year is projected to decline by about 0.3 percent compared with 2004 because of hurricane outages. A warmer-than-normal October and an increase in product imports continue to keep total product inventories at levels close to the average of the last few years. Current distillate fuel and jet fuel inventories remain above last year's levels, but motor gasoline and residual fuel oil inventories continue to lag behind.

U.S. Natural Gas Markets

Because prices remain high, 2005 total natural gas demand will likely remain at about 2004 levels, then increase by 1.0 percent in 2006, assuming a return to normal weather and expected reactivation of damaged industrial plants in the Gulf of Mexico region. Residential demand is projected to decline by about 1.7 percent in 2005 mostly in response to relatively weak heating-related demand during the latter part of last winter, while industrial demand is estimated to decline by 7.5 percent in 2005 due to the much higher prices for natural gas as a fuel or feedstock. By 2006, both end-use sectors are expected to recover somewhat, with residential demand projected to increase 2.4 percent from 2005 levels and industrial demand to increase by 4.6 percent.

Domestic dry natural gas production in 2005 is estimated to decline by 3.8 percent, due mainly to the hurricane-induced infrastructure disruptions in the Gulf of Mexico, then increase by 4.8 percent in 2006. Total liquefied natural gas (LNG) net imports for 2005 are estimated to remain at their 2004 level of approximately 650 bcf, then increase in 2006 to an average of about 1,000 bcf.

On November 30, working gas in storage stood at an estimated 3,170 bcf, a level 74 bcf below 1 year ago but 6.3 percent above the 5-year average and about 150 bcf above the level projected in last month's Outlook. End-of-year storage levels are estimated to be 8.9 percent lower at end-2005 than they were at end 2004. Natural gas storage levels at the end of 2006 will likely match the 2005 level. Hurricane-related natural gas production losses have reduced the amount of natural gas available for the market, which increases the projected requirement for withdrawals of gas from underground storage this winter.

Electricity Demand

Weather conditions and continuing economic growth are estimated to increase electricity demand by 3.5 percent in 2005 and an additional 1.2 percent in 2006. Year-over-year electricity demand growth rates are estimated to be particularly strong, as cooling and heating demands likely will be higher than in the mild third and fourth quarters of 2004. When compared to 2004 figures, regional residential demand in 2005 rose in nine of the ten regions (Alaska and Hawaii, treated as one region, is the exception). Commercial demands increased across all ten regions, but industrial demands fell in the three regions along the East Coast. Estimated 2005 prices for delivered electricity across all end uses range from 6.2 cents per kilowatt hour (kwh) in the East South Central region to 11.8 cents per kwh in New England. In response to higher utility fuel prices, average electricity prices for all end uses are projected to rise by 10.8 percent in New England and 8.7 percent in West South Central, but by 6.4 percent or less in all other regions in 2005 compared with 2004.

Power Sector Demand For Coal

In 2005, electric power sector demand for coal is projected to increase by 2.4 percent and by 1.7 percent in 2006. Power sector demand for coal continues to increase in response to higher oil and particularly natural gas prices. U.S. coal production is projected to grow by 0.8 percent in 2005 and by an additional 3.9 percent in 2006. Coal prices to the electric power sector increased significantly in the first half of this year, growing by 15.3 percent compared with the first half of 2004. These price increases are attributed to low coal inventories (caused by high demand and transportation problems) and increased transportation costs. The price of coal to the power sector is projected to rise throughout the forecast period, although at a lower rate than in the first half of 2005. More specifically, coal prices are projected to rise by an average 13.2 percent in 2005 and by an additional 5.0 percent in 2006, increasing from $1.35 per million Btu in 2004 to $1.61 per million Btu in 2006.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 1345. Dec 10, 2005 4:22 AM

» SteveT - A Question of Trust

By VITO J. RACANELLI

IN THE PAST FEW YEARS, Canadian oil and gas trusts have become hot investment plays on both sides of the border. Like real-estate investment trusts, they are exempt from corporate taxation, so long as they pay out most of their cash flow in the form of distributions to unit holders. Most yield between 8% and 15% -- hence, their allure -- and most have rallied sharply, along with the price of oil.

Among the breed, Calgary-based Enterra Energy Trust stands out for a number of reasons. Over the past four years, its Nasdaq-traded units (ticker: EENC) have soared more than 20-fold to 26.75, and now trade around 20. This compares with a far more modest gain of 73% in an index of such trusts. The units, which yield 10%, trade for two-to-four times the valuations accorded other trusts, based on the discounted present value of their reserves. Yet, Enterra's reserve life generally is shorter than its peers'.

It is possible that investors have paid top dollar for Enterra because they see minimal downside. Like many Canadian oil and gas trusts, the company farms out the heavy lifting to others, relying on contractors to drill its properties at their own expense, in exchange for a share of any crude found. On a recent conference call, the company's amiable-sounding chairman, Reg Greenslade, 41, assured listeners that "[we] isolate the trust from drilling risk."

Risk, however, comes in many forms, as holders of Enterra and two closely affiliated drillers, JED Oil (JDO) and JMG Exploration (JMG), one day may discover. An examination of the regulatory filings of all three, and interviews with investors and Canadian oil-industry experts, indicate Enterra has used its richly valued units to buy land in western Canada on which it has doled out drilling contracts to JED and JMG, which were created by certain current and former managers of Enterra. JED was sold to the public in April 2004, and trades on the American Stock Exchange; JMG was taken public in August, and trades on the Pacific Stock Exchange.

The companies share certain officers and directors, whose dual commitments raise questions as to whether Enterra can negotiate with the drillers at arm's length, securing the most advantageous contracts. Greenslade, for example, is chairman of all three. The CEO of JED is a director of JMG, and the part-time CEO of JMG is a director of Enterra. Greenslade notes that two other directors with dual responsibilities have recently resigned, however.

This year's spike in oil prices has been good news for Enterra. In the nine months ended Sept. 30, the trust's profits rose 41%, to $11.4 million, though earning per unit edged up just three cents, to 41 cents, on a 33% increase in units outstanding. One fan, Glickenhaus & Co.'s Seth Glickenhaus, praised Enterra in an interview in Barron's two months ago ("What the World Needs Now1," Sept. 12). Glickenhaus, who owns 7.5% of Enterra, called the units "preposterously cheap" and predicted they would double in a year and a half.

Enterra's public investors might wonder, however, what earnings would have been if the company had hired drillers with no connection to the trust. Its regulatory filings state that procedures are in place to prevent conflicts of interest by company managers and directors who are also managers of JED and JMG. But these filings also state that "no assurance can be given" that drilling opportunities identified by such managers will be provided to Enterra.

Moreover, Enterra's critics say the ties that bind the three companies' executives and directors have led to particularly favorable deals for JED and JMG, though both are too new to have turned a profit yet. For example, JED drills what's called developed property, or Enterra's mature prospects, typically poking between other wells, where there is a 95% chance of hitting oil. (JMG has been assigned to drill more exploratory, or riskier prospects.) Both drillers get 70% of well production, compared with the 50% to 60% common in most so-called farm-in deals in western Canada.

In the typical 60/40 deal, Greenslade says, the driller first recoups its capital costs before the split kicks in. But Enterra seems to be giving away excessive upside, given that JED's risk of a dry hole is so low. Greenslade defends the company's arrangement, explaining, "You get the revenue right away, no matter what, giving up a percentage in exchange for not having to put up any money."

Most trusts don't like to farm out drilling on developed properties because it gives away too much value, says one veteran oil-industry executive.

A KEY PLAYER IN THE DEVELOPMENT of Enterra and its drillers is John P. McGrain, 60, the trust's former chairman, who described himself to Barron's as a long-time shareholder of, and sometime financial consultant to, all three companies. Though his name has not appeared in recent public filings, a former colleague, who also was interviewed by Barron's, says McGrain was instrumental in arranging financing for JED and JMG. "I do help [to sell shares], but I'm not responsible for it," McGrain says.

McGrain's name likely would be familiar to anyone who has studied the history of Conversion Industries, a one-time merchant bank that began its days as a cogeneration company listed on the Vancouver Stock Exchange. Under his stewardship during the company's heyday, from 1992 to 1994, Conversion spun out, via an Englewood, Colo., penny-stock broker called Tamaron Investments, shares in privately held companies in which it had stakes. It typically offered those shares to Conversion holders. (According to "Family Values," a story published in the April 25, 1994 edition of Barron's, McGrain lent Tamaron $1 million in July 1992 so the brokerage would have enough capital to underwrite an offering of Conversion shares.)

The shares of many of the Conversion-affiliated firms underwritten by Tamaron eventually collapsed, as did Conversion, whose stock peaked at 32.50 in mid-1993. McGrain resigned in October 1994, just days before the company was delisted from the American Stock Exchange for failing to comply with Exchange disclosure rules. Though he and Conversion were never charged with wrongdoing, the company was the subject of a formal investigation by the Securities and Exchange Commission, and subsequently declared bankruptcy.

McGrain now says reports of that time were full of "half-truths," and notes that the SEC informed him in a letter in 1997 that the investigations were terminated without action.

Among the Conversion affiliates whose shares were underwritten by Tamaron in the early 1990s was International Colin Energy. McGrain served variously as its chairman, CEO or a director from the early 1990s until March '94, and was succeeded by Thomas Jacobsen, who had served International Colin for a number of years. He resigned in September 1994. The company's shares peaked around 26 in 1993, but were trading below 10 some 12 months later.

In 1999 Jacobsen signed on as a director of Westlinks Resources (Enterra's predecessor company), and a person familiar with the situation say he brought in McGrain, who was part of a consortium that loaned Westlinks $1.5 million in June 2000. Greenslade joined Westlinks via its 2001 acquisition of Big Horn Resources, in which McGrain also held a stake.

That same year McGrain became chairman of Westlinks, and changed its name to Enterra. He resigned a year later, and at that time held 5.7% of the stock, though he declines to reveal his current stake.

In late 2003 Enterra converted to a trust, and the driller offerings followed, with McGrain and Jacobsen getting stakes in JED and JMG preferred. Today Jacobsen controls about 3% of JED, and 1.4% of JMG. Greenslade owns less than 1% of Enterra, about 2% of JED and a small stake in JMG.

JED was formed in late 2003 through a preferred offering of 7.6 million shares. The shares were offered at $2.75 apiece, and were convertible into common on a 1-for-1 basis. Roughly 20% of the preferred was purchased by McGrain, Jacobsen and Greenslade, and members of their families or entities affiliated with them, and individuals who are now directors of Enterra, JED or JMG. McGrain held 8.3%, which dropped to 6.9% after JED came public just a few months later at $5.50 a share, representing a quick 100% return for preferred holders. Adjusted for a 3-for-2 split in October, the stock now fetches 12.50, down from a high of 22 in August.

In addition, McGrain is a partner in JED Funding, which loaned JED $20 million in August in exchange for a 10% coupon note, convertible into about one million shares, or 6.4% of JED, at a split-adjusted $20 per share. This represented a premium of 3.3% over the stock's price at the time it was granted.

With JED shares pumped up by the market's excitement over higher oil prices and the company's exclusive agreements to drill on Enterra property, Enterra next spun out JMG. As with JED, the public offering was combined with a conversion of preferred stock into common and, in this case, warrants, which netted preferred holders north of 25% when the shares came public at $5.10 apiece. They subsequently traded up to 16, but now sell for 8.

Roughly 11% of JMG's preferred shares were purchased by McGrain, Jacobsen and Greenslade, and members of their families or affiliated entities, as well as various directors of Enterra, JED and JMG. These shares subsequently were converted into about 18% of the common stock. After the offering, McGrain held about 11% of JMG.

The connections among Enterra and the drillers don't stop there. Under the terms of a so-called technical-services agreement, JED supplies nearly all of Enterra's and JMG's employees. In addition, JED has loaned Enterra about C$19 million.

One hedge-fund manager who is short Enterra's stock questions why JED is loaning money to Enterra, and why Enterra is paying a distribution when it needs to borrow. Greenslade tells Barron's the money was needed for acquisitions. Jacobsen, noting the funds were "sitting in the bank" and earning just 1%, says he saw "a revenue source for JED."

IN AUGUST, ENTERRA CLOSED on the acquisition of High Point Resources, which it purchased for approximately $250 million in stock and assumed debt. The deal more than doubled the company's acreage in western Canada, and the size of its reserves, to about 21 million barrels of oil-equivalent, or BOE. Yet, the size of those reserves is another potential cause for concern, particularly in light of the trust's relatively rich valuation.

Including the High Point acquisition on a pro forma basis, and applying a 10% discount typical of such calculations, the net present value of the company's proven and probable reserves at the end of last year was about $238 million.

Some observers increase that amount by 20% to account for much higher oil prices this year. Assuming such an increase and subtracting $13 million owned JED, about $101 million in net debt and $20 million in retirement obligations, the oil in the ground is worth about $152 million. That's less than $5 of oil per unit. With the units priced at around 20 apiece, the company trades for about 4.5 times its asset value, while peers trade for 1-to-2 times the value of their reserves.

Ben Cubitt, a hedge-fund manager at MMCAP Asset Management, puts it another way. "If you look at Enterra, JED and JMG as a single entity -- which is really the best way to look at them, as they are all run by the same people -- their total enterprise value [market value plus net debt] is about $1.15 billion," he says.

That is equivalent to an enterprise value of $55 per barrel, versus less than $20 per barrel for other trusts, he notes, adding "that's off the charts."

Meanwhile, Enterra has a lower-than-average reserve life, says Robert Mullin, senior portfolio manager at Marathon Resource Investments, in San Francisco, which has sold Enterra's shares short. With daily production of about 10,000 BOE, the company will deplete its assets in just over five years -- if no other oil is found. Other trusts, on average, have a reserve life of 7.5 to 10 years, according to Peters & Co., a Canadian investment bank specializing in energy.

Last week Enterra announced it is pursuing a $246 million acquisition of oil and gas assets in Oklahoma that produce about 5,500 BOE per day, though it said nothing about the size of the properties' reserves, making it difficult to gauge the deal's full benefit to the trust. The deal was proposed to Enterra by Petroflow Energy as a result of the latter's relationship with Macon Resources, which provides management services to the trust. Enterra didn't note, however, that E. Keith Conrad, president and CEO of the trust, is also the sole owner of Macon and chairman of Petroflow, of which he controls 25%.

Greenslade said he did not see a conflict: "It is quite commonplace. You get deals through people you know."

Because Enterra, as a trust, pays out most of its income, it can buy new oil fields only so long as it can borrow or sell additional shares. Moreover, it needs to find fields that are atypically productive, to compensate for its relatively low reserve life and scant 30% production participation.

As long as Enterra's units remain richly valued, the company likely won't have a problem buying acreage. If its valuation sinks to the industry average, however, it could have a much tougher time building reserves and maintaining its monthly distribution of 17 cents per unit.

Contrary to investors' perceptions, the trust is no more isolated from risk than any other prospector in the oil patch.

The Bottom Line
At around 20, Enterra sells for 4.5 times the value of its reserves. If its units fall sharply, however, it could have a tough time replenishing reserves and paying its monthly distribution.

E-mail comments to editors@barrons.com
URL for this article:
http://online.barrons.com/article/SB1134...

-- posted by SteveT

Top 1346. Dec 18, 2005 7:23 AM

» Normxxx - ME Gets Serious About Energy

IEG leads Mid East towards hydrogen age

by United Arab Emirates | 17 December 2005

International Energy Group (IEG), the region's first international energy alliance to promote advanced energy technologies, announced a new strategic alliance with Hydrogenics Corporation, a leading global developer of clean energy solutions, advancing the Hydrogen Economy by commercializing hydrogen and fuel cell products.

[Normxxx Here: That's more than we've done so far! ]

Click here for link to full article: http://www.ameinfo.com/74285.html

-- posted by Normxxx