Long Term Pictures in Energy and Food Prices
This week Tedbits is focused on the long term pictures in Energy and food prices, both are problematic at best, but solid investment themes. We also take a look at a news item concerning Zimbabwe, an absurd appointment has been bestowed on this economic dynamo. LOL. It highlights the descent into absurdity that the global NGO's (NON governmental organizations) have sunk, drifting far towards their original mandates to pursue political correctness and abusive power. I have also prepared an overview of Tedbits for potential subscribers to review. It details our mission in serving you and a broad description of what's unfolding globally and what you can expect from Tedbits as a regular reader.
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NIMBY is defined as "not in my back yard" and is set to strike at your pocketbook "RIGHT NOW". For decades the Democrats controlled Congress and in return for campaign contributions and support they worked with environmentalist, and trial lawyer constituents, passing laws and regulations which allowed them to manipulate the court system to basically block energy production in the United States, a refinery hasn't been built in over 30 years. Energy discovery and development has been severely restricted in the United States. Internationally, Oil and Natural gas production have been nationalized, and the results are predictable, the more government becomes involved the less we get of whatever they get involved in. As they for the most part suck the life and money out of whatever they touch.
But populations and the world economy has continued to boom and grow and at this point there is no production or refining capacity to feed the energy consumption needs of the United States and the world. US refineries are dilapidated and so overworked that they are now at the point of no return: I predict massive gasoline shortages beginning in the near future. $4 to 5 dollar gas is on the near horizon. I can still remember the democrat's campaign promises in the 2006 elections decrying how the Bush administration was the culprit in soaring energy prices and making promises that they will FIX IT. Well, this summer look for them to propose price controls, a guaranteed way to create even more shortages.
The problem with US energy is self inflicted and political in nature but the blame can be spread to both sides of the aisle. It has been a 30+ year slide into less and less independence from the vagaries of the global oil industry. During this time the only place energy companies have been allowed to explore is next to a dry hole (which conveniently allows environmentalist to claim there is nothing there to drill for, so why allow additional exploration), and the only place they have been allowed to build a refinery is NOWHERE. Very little energy investment or development has been allowed in the United States, whether it is ANWAR (in Alaska), off shore drilling, Nuclear Energy, New Refineries, Clean coal technologies, these things have become verboten.
As Energy development has become captives of the courts, trial lawyers and environmentalists, and politicians once again have betrayed their oath of fiduciary and sound oversight of the US energy policies. Politicians talk about energy independence, but really pay only lip service to the idea of reduced dependence on foreign oil. In fact, their actions say just the opposite, putting the lie to their words. Their talk is all illusion, turn it over in your mind and see through it. Vast US domestic areas of prime oil and natural gas territories remain off limits to environmentally safe energy development. To judge present day oil and natural gas production techniques to those of yesteryears is baloney. When Katrina struck did you hear of huge environmental catastrophes? OIL spills? NO. The only catastrophes were caused by the government's corps of engineers. The techniques used today keep environmental considerations well in mind. Double hulled oil tankers and self capping wells are common today. The current technologies can provide practical solutions to these concerns. Technology works, its time we use it to create practical solutions.
Nobody wants environmentally irresponsible energy development, but the US rules and regulations now in place define that to an impossible standard, so there is no development. Add to that Federal lands are virtually Off limits to energy development. Prime areas for oil drilling off the Florida coast are being developed by China, with the cooperation of the Cuban government. While US companies are sidelined by federal regulation from exploring these same areas. The Chinese and Cubans are pursuing the practical goals of energy development while the United States remains captive to political ones. Once they strike oil who do those field belong to? Possession is 9/10's of the law.
The United States has vast stores of potential energy supplies. Recently a field of natural gas and oil was found in the Gulf of Mexico, holding up to 15 billion barrels of oil and hupe reserves of natural gas, Anwar (Arctic natural wildlife reserve) may hold up to 15 billion barrels of oil as well, its potential is great as it lies near Prudhoe Bay and energy behemoth Canada, which are huge energy production areas. The Rockies hold huge energy production potential as do all the costal areas far off shore (as defined by 15 miles off shore to the 200 mile limit).
But they can't be touched as they are the property of the US government, held hostage to special interest environmentalists and trial lawyers. The US is the Saudi Arabia of Coal, which is continually been developed into cleaner and cleaner forms of energy use. But coal fired plants are politically incorrect. TXU, a Texas electrical utility recently scrapped plans for over 10 coal fired plants under pressure from these powerful special interest politicos. Coal fired, and nuclear plants and their technologies have made unbelievable strides in safer fundamental environmental designs, safety operations and procedures.
This is courtesy of foreign governments who have pursued these goals when developing their own nuclear power industries. Regular readers know I have little good to say about the French, but their nuclear industry in the envy of the world. A shining beacon of environmentally clean and very safe processes from beginning to end. They reprocess the waste, it is phenomenal. I believe all fixed plant electricity should be generated with nuclear or coal fired plants. Properly engineered and with practical regulation for environmentally friendly use.
Oil and natural gas are finite in their supply, and should be husbanded for portable energy production, cars, planes, boats, etc. Peak oil theories are justified, China is now training 40 thousand geologists a year to confront these challenges, the US trains 500 geologists and 40,000 lawyers. What's wrong with this picture?
If these supplies are used for fixed plant energy production they are irresponsibly deployed today to the detriment of future generations. Just like the deficit spending on entitlements destroys the future prospects of their children and grandchildren by sending them the bills for today's extravagant welfare programs, these same selfish people and politicians send the future cost of oil and natural gas production to future generations as well. Global warming advocates push the increased use of natural gas, rejecting nuclear power in an ideological manner. Wasting this beautiful clean portable energy source on fixed plant electrical generation. We need practical solutions to problems, not political or ideologically devised ones. They need to be balanced to consider the broad energy requirements of a modern society (who wants to go back to the Stone Age?) and preservation of the environment. Both needs can be met if the issues are thoughtfully addressed and modern technology is brought to the table.
The noose that these groups have fashioned is now becoming very tight. Europe is in the same boat. Now the train wreck is set to begin. Oh, and what a train wreck it is going to be, the solutions are years to a decade process. The refinery industry was badly damaged during Hurricane Katrina, and they really have NEVER recovered. There are not enough gasoline supplies in storage or production for the summer driving season, and the gasoline won't arrive in time, it won't arrive from the refineries or from importers. Get ready for 4 to 5 dollar gasoline. Are there any plans for increased refinery capacity? NO. And the requirements for doing so are unattainable.
Anyone who can read a chart can see that oil prices have done what the rest of the commodity markets have done over the last year, corrected in time and price, and it is now set to explode higher in the coming weeks and months.
Perfect Fibonacci retracements from the 40 dollar breakout level, on weekly charts can be plainly seen, a head and shoulders bottom is perfectly in place which projects crude to 14 dollars higher from here. The head and shoulder bottom has been activated, and the breakout point is being tested. Fan line break outs. Etc. It's potentially up up and away from here. Bush has now announced that the Strategic oil reserve is returning to the market place with the goal of 500 million more barrels in the Kitty. China has now announced the goal of a 30 day supply to be built in reserves. India is doing the same. Take a look at this chart detailing where new demand has emerged from in the world since 2000. Asia is quickly overtaking the US and Western Europe as the worlds greatest consumer.
Just as the wealth of the world has rotated to Asia (See Sea Change, the wealth of the world is rotating in the Tedbits archives; www.traderview.com), so has the new demand for energy supplies. Building out infrastructure, new highways and feeding all those new cars requires, electricity, OIL and Natural gas. It all adds up to BIDDERS, purchasers looking to build supplies during a time of falling production. And why is production falling?
Maybe it's because populous politicians have seized the oil industry worldwide. And we all know how good politicians are at running oil companies don't we? After the great demonstration they have done in running their respective governments and economies into the ground they now wish to show us their prodigious skills at running the oil industry. OUCH. They are masters at spending today and leaving investment and responsibilities in the future to tomorrows politicians. Let's take a look:
Britain's North Sea, and Norway,
Future development, investment and maintenance of Venezuela's oil and energy production assets were thrown overboard years ago. Chavez has squeezed PDVSA like a lemon, getting every drop of cash flow, to the detriment of the future. This piggy bank is now used to buy influence with Chavez cronies in the region: Evo Morales of Bolivia, Raphael Correa of Ecuador, and Nestor Kirshner in Argentina. And to pay the grocery bills of the poorest people in Venezuela. As equipment and oil and natural gas fields fall farther into disrepair and neglect you can expect constantly declining production. It is amazing to see how quickly Chavez has squandered this great resource. He is now running out of money so you can expect the flogging of these great assets to accelerate, further diminishing their potential future bounty. The major oil companies having now lost tens of billions of dollars of investments through confiscation will not be quick to return. And by the time they do after the Generals demise these assets may not be able to be rehabilitated to reach their potential! Very negative situation.
Russia has some of the greatest reserves of oil and Natural gas in the world, but most of them are undeveloped or remotely situated, still sitting in the ground or under the sea. Production is problematic and the techniques necessary to develop them are the most modern in the world. Previously they could not be developed as the techniques required had never been devised.
Now that these techniques have been developed, why would any Oil company venture into Russia when they know that as soon as the technology has been transferred and the facilities are in production that they will be confiscated under the government facades that have been used previously? It is guaranteed that these projects will be stolen as soon as they are finished. Look at how Putin and company have seized Sahkalin, Yukos, oil pipelines, refineries and all sorts of oil related business. So there is no upside in investing in Oil in Russia. It will not happen. Putin is trying very hard to purchase the power distribution systems and pipelines in Europe, threatening central European governments if they try to protect their domestic distributors, a huge potential flashpoint.
Production may be maintained or rise incrementally. But he tipped his hand too early, and the investors and Oil companies he needs KNOW that the paper any agreement they sign is written in DISAPEARING INK. LOL. Russia is angling for the door of energy priced in dollars, they have made the ruble convertible and their major customers are the Europeans who wish to pay in Euros. Russia has thousands of nukes to face down the US hegemon when they decide to convert to other currencies. This is a dollar story as well, but that is another day. Positive situation that could turn negative.
Saudi Arabia, Qutar, Kuwait, UAE, etc:
Here is a prime example of US overreach, putting political ideology ahead of practical solutions. Why doesn't anyone in Washington understand that nuclear deterrents are essential to regimes that cannot stand up to the might of the US Armed forces? They saw what we did to Saddam and the future flashed before their eyes, so it's been nuclear ever since. If we quit threatening them the nuclear option becomes an option not a necessity. So the nuclear race is on in the Middle East. Most nations have announced nuclear intentions after witnessing the preemptive nature of US foreign policy. Iran has the added danger engendered by their stated intention of pricing their oil in Euros, a declaration of war as far as Washington is concerned. US oil companies have no future with this group. NONE. Negative situation, nowhere to go but down.
Sudan, Angola, Algeria and Africa:
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The big oil companies margins and ROI's are less than Macdonald restaurants, hardly price gouging and profiteering. Politicians hawk the headline numbers for this vital and enormous industry fooling the population into attacking the honey-pot of money. I promise you if they get their way we will have much less gas and oil, and the money they collect will never be used to create new alternatives that are economically viable. Don't tell me corn based ethanol, it is nothing but a drain on EVERYBODY, it has no basis for benefit. Negative situation, on verge of crisis which will deepen the problems when political solutions are sold to a stupid public. Politics are destroying the US energy industry, pure and simple. Disaster is right around the corner, and an oncoming light in a tunnel, that tunnel is a freight train headed this way to crush us.
That concludes the brief overviews of the primary oil and natural gas producing regions. It is not a pretty picture. Far more negatives than positives. It is a picture of dwindling production, poor maintenance and field expertise, inadequate investment in future production coupled with exploding demand. And the demand is coming from around the world as the developing world enters the Global marketplace. These emerging nations have trillions dollars to spend, and are doing so, scouring the globe for joint energy partnerships without the "POLITICAL" strings that come attached with doing business with Washington DC. Adding to the problem of oil prices is the current US budget and trade deficits, 50 trillion dollars of future unfunded obligations and the money printing that implies, constantly putting upward pressure on oil prices as producers wish to protect their income from the printing presses. Another good question you might ask yourself is just how long will Oil producers price their products in dollars? The gunboat diplomacy practiced in previous generations of the US hegemon are quickly becoming ineffective in a global marketplace. These techniques in persuasion are growing very very old. Remember, currencies don't float they just sink at different rates.
To compound the problem refineries have been an afterthought as NIMBY has rotated around the world. In the US refineries are now approaching 30 years in age, metal fatigue and normal aging has limited their ability to get to full capacity. If pushed to capacity they will break down just as an old car will. Refineries in the US are like very old cars, almost antiques. Development of new refineries takes years if not a decade. These are very complex processes, with the road blocks available to adversaries of them it makes them impossible to construct. With the exception of Russia, every major economy in the world is an importer of refined products, including China. There is no place to look to fill these shortages emerging globally, modern transportation cannot substitute if there are no production facilities elsewhere, and there aren't. Hugo Chavez may have confiscated the heavy oil fields from the big multi nationals but now he has to figure out how to convert it to something someone can use. Getting there from here is going to be quite a challenge. His destruction of this vital resource is guaranteed.
So its demand constantly increasing, the dollars purchasing power constantly declining, and less and less new supplies available or being developed for future use. In general, governments have seized the industry and are milking them for all they are worth, sacrificing critical maintenance, technological improvements and future investment requirements. Very few refineries are under development or construction, and very little excess refinery capacity is available anywhere, so modern transportation methods offer no prospect for relief. These problems cannot be addressed overnight, solutions take years and decades. Oil may back and fill lower for a few months or quarters, but longer term there is no where to go but higher, barring a economic depression. Of which the probability is very low. This is inflation in your fuel and electricity bills. This is a recipe for explosively higher energy costs far into the future."CORN BASED" Ethanol, part II the dominoes begin to fall! (page 2)>>>
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May 28th, 2020
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