The Energy Diaries

The Big Fight (re-posted)

2011-12-01T06:40:00.000-08:00

first published April 2010

The Concern:
It is said that a country '[c]annot prevent and prepare for war at the same time'[i]. From this then, the foreign policy actions of the Obama administration vis a vis Iran are positioning the nation on a trajectory either towards or away from conflict.

The case for Obama to delay a military conflict with Iran can be seen as purely temporal; the dearth of remaining hard power capability and the national debt load are unbearable U.S. foreign policy constraints. Another front in the Middle East not feasible, the president will have to manage (desperately) to use his assets, allies and power not only to contain Iran, but Israel, diplomatically.

Broader Challenges:
The more fascinating way to dismantle the conflict is from deep within: the structural perspective. To begin, there is the question of Obama’s statist agenda and how it is fed. Is it more conducive to conflict than one might at first suppose? The reason for this, cuts to how American capitalism and the state historically interact[ii]; and the Alinsky style domestic social shift that the president wills to complete during his term(s).

From Heilbroner’s The Nature and Logic of Capitalism:

"Rather, it is the nature of the regime of capital that it exists in a condition of mixed from and dependence on the older regime of state power, perhaps marked by swings of centralized hegemony and rivalry…The full powers of the state, above all its ability to mobilize the unconscious in support of its parental persona, remain largely in the background, save for periods of overt internal disruption or external war, so that the forces of capital exert the preponderant active influence in normal times. During these periods, the state advances the interests of capital as a natural response to the appeals of capital, as well as in a calculating fashion to promote its own peacetime strength.”

President Obama’s administration has an unparalleled focus in re-weighting the system away from capital and towards the state, through the levers of Keynesian fuelled growth and the domestic economy. “The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present,”[iii] and seems to be occurring at an unprecedented rate under Obama's presidency.

But to pay for this mandate, Americans simply have to make more income abroad and save more at home. This is the job of the Department of Commerce. The goal of the United States of America is to double exports within five years.[iv] This goal must rely on a set of macroeconomic conditions a) protracted weak dollar policy, b) moderate-low Federal Funds Rate and c) open and wide foreign markets to absorb U.S. products and capital.

Here we have the classic case against ongoing conflict and volatility, especially in a petroleum supplying region. Yes, the liberal economic order requires open markets. And, yes, occasionally these markets are jarred open through hard power, but this is not the preferred method. American primacy is based on the idea of peace through strength, and there is little evidence to suggest that Barack Obama can afford to be at structural odds with this tactic.

The Present:
The Obama administration's new national strategy for nuclear weapons under the Nuclear Posture Review, is diplomacy only the mainstream media could find compelling. The U.S. for the ‘first time’ is pledging not to use nuclear weapons against non-nuclear states that are in compliance with the Nuclear Non-Proliferation Treaty. In other words U.S allies are not to be nuked. Even more predictably, the policy leaves open the possibility of a U.S. nuclear strike against Iran and North Korea or any other nation accused of non-compliance.

By extension of this, the nuclear disarmament treaty between the United States and Russia (START[v]) achieves significance not in what the treaty does, but what it will force others to do. If history is a good precursor for the future on the nuclear issue, START III is really about remaining more than sufficiently armed, with the additional internationally sanctioned disclaimer that disallows opponents the same right. "Can our efforts to bring the new START Treaty into force help persuade other nations to support serious sanctions against Iran? I believe they could,"[vi] remarked Hillary Clinton last week.

START III will not realistically hit the floor for ratification until at least 2011, under what's expected to be more conservative Senate. In order to get 67 votes in the Senate, Republicans will want to see a comprehensive plan for upgrading U.S. nuclear laboratories and for modernizing the U.S. nuclear arsenal before the Senate debates the treaty. The most serious point of contention comes with U.S. missile defense plans; bitterly opposed by Russia,

With oil prices likely to surpass OPEC’s stated price range of $75.00-$85.00/barrel, the relationship between volatility, consumer headline inflation, debt and the macroeconomic slowdown will be the chief concern for the G20.

It’s the economy, stupid.

A Hidden or Unexpected Clue:
China reported its first trade deficit in six years for March as imports surged by 66 per cent year on year to $U.S.119.3 billion. Despite the surprise in the trade numbers, the speculation that Beijing is poised to loosen the peg on its currency is persistent.[vii].The issue is more so whether a yuan movement will be acceptable to the Obama administration, and conducive to the “macroeconomic rebalancing” of the global importing-exporting nations, something the president has called for as part of the National Export Initiative.

Here the nuclear issue regionally, comes most directly into play. China, as a major consumer of Iranian oil[viii], has been unwilling to accommodate the U.S. on the U.N. process to date. In fact, had there been a modicum of Chinese cooperation on previous U.N. sanction rounds, the Iran issue might have been a foreign policy adventure for a much later Obama successor.

If President Barack Obama can squeeze President Hu Jintao on the possibility of a serious round of U.N. sanctions it will do something very crucial to the psychology of the conflict. Iran will no longer have the Chinese trump card to play. It would be prudent to watch for phrases like “currency manipulator” to drop from Secretary Geithner’s lexicon, when he reports to Capitol Hill[ix] on exchange rate policy, to get a sense of whether there could be a shift in the status quo later this year.

The Near Future:

President Obama and Secretary Clinton, will deploy all diplomatic levers to pressure Iran through the IGO/UN mechanism. The natural European allies on the Permanent Council (France and the U.K.) can counter the murkier interests of Russia and China, but only to an extent. The intricacies of competing domestic agendas, and how they play into the broader concerns of global economy can oddly get reduced into a single issue: just how far will Russia and China go?

The next round of talks is likely to produce sanctions with more bark than bite. However, psychologically, any progress on the matter could help to placate Israel and temper Iran. The immediate goal for the Obama administration is probably not loftier than purchasing time until Afghanistan and Iraq are further settled and the economy is on track.

The Most Likely Outcome:
Napoleon Bonaparte always aware: “I am sometimes a fox and sometimes a lion. The whole secret of government lies in knowing when to be the one or the other.”[x] If there is a military strike, it will not be initiated through the U.S. military apparatus.[XI] It would involve a direct, but surprise, Israeli air attack on Iranian targets. Should Iran retaliate with Shehab missile launches against Tel Aviv, the Netanyahu government would find it hard not to escalate. Israel would require, U.S. military enlistment against Iran, or the world would have to quickly engineer a truce.

This is precisely the messy, zero-sum scenario President Obama is trying to avoid. The key variable in this equation is that a military attack of this nature will ONLY occur when and if Israel perceives its national survival is materially threatened (Iran is on the verge of nuclear arms). It is at this point which Israel will break from the current U.S. policy of containment and pursue self-interest.

Given China’s inability to decouple economically from the United States, Russia’s orientation westward, and the simmering distaste for the autocratic regime in Iran, there is a delicate balance, of sorts, for Obama to capitalize on. And if not, perhaps the president has already calculated what an increase in high value weapons exports to Israel might do for the Balance of Payments accounts and his National Export Initiative. Just a thought.

My final call: rhetoric rises, but parties recalibrate and wait for foreign exchange and oil trends to materialize this summer. A fragile détente.

________________________________________
[i] Albert Einstein.
[ii] See Robert L. Heilbroner, The Nature and Logic of Capitalism NYC, 1986. Specifically of interest in this book is “The Role of the State,” pp.94-96, and his conclusions in the final chapter “The Limits of Social Analysis” pp. 203-206. This is a brilliant treatise on the emergence and functioning of the capitalist system in the West, although I disagree with Heilbroner that classical liberalism i.e. political economy, which becomes the field of economics, fails to adequately account for some of the inherent social dichotomy that exists under capitalism, and the morality of a profit- driven social system.
[iii] President Eisenhower “Military Industrial Complex Speech,” Public Papers of the Presidents, Dwight D. Eisenhower, 1960, p. 1035- 1040
[iv] The National Export Initiative http://www.whitehouse.gov/the-press-office/executive-order-national-export-initiative
[v] Strategic Arms Reduction Treaty
[vi]http://news.yahoo.com/s/afp/20100409/pl_afp/irannuclearpoliticsusrussiachina_20100409234337
[vii] The Chinese are expected to allow the Remnimbi to appreciate in a slow measured fashion. A stronger yuan would boost Chinese consumer spending power, easing reliance on exports. It also narrows China's politically volatile trade surplus, making capital flows more manageable and predictable.
[viii] China gets about 11% of its oil from Iranian supply. However with high levels of Saudi spare capacity and Iraqi production capacity possibility ranging as high as 8 mb/d, China could diversify petroleum suppliers. In addition, Chinese holdings of American treasuries are vast. The Chinese government might not find it prudent to compromise U.S-Chinese relations for Iranian relations. A nuclear capable Iran would translate into volatility for the USD and thus for the pegged yuan.
[ix] U.S. Treasury Secretary Timothy Geithner made an impromptu visit to Beijing last Thursday, which delayed his April 15th report to Congress on FX policy.
[x] Napoleon was a gifted tactician but also cuttingly gifted at aphorism.
[xi] Much of the work on Iran will be accomplished through the intelligence community. This task could be made easier through a weak link in Tehran's enrichment chain: its expert personell, especially nuclear scientists. In January, Massoud Ali Mohammadi, a scientist was killed by a remote controlled bomb near his home. Iran has blamed the attack on the CIA or the Mossad. Another Iranian physicist, Shahram Amiri, disappeared in June last year. U.S. reports that he willingly defected to the CIA. Iran claims he was kidnapped.

Find someone who's turning, and we will come around...

2011-09-25T19:37:00.000-07:00

An unpublished essay...from March 2010

In Response to @DanielleSavoy "In the Shadow of our Sovereignty"

How do we define the “soma” of today?

Perhaps it is most necessary for us to understand where the current variants of mainstream political thought center around us. Primarily because we need to know where we are in relation to it as conservatives. John Adams: “Our Constitution was made only for a moral and religious people. It is wholly inadequate to govern any other.”

We are fortunate, in that the sources of our philosophic vitality are well defined; for all movements in thought there is a core and periphery that emerges; A certain fluidity of thought that develops over time. The originators are, precisely because of their originality, forced to articulate and defend their positions on each merit, until they are firmly established. For those of us coming later, we are gifted in the theoretical sense, propitious inheritors of a position with a soul. But our soul is housed within a domain, and this domain has become enervated.

It could be that we pay a high price for sticking to our constitutional idiom. As the leftist fads of statism come and go, this time wrapped in the 'high ideals' of civic cosmopolitanism, the modern environmental movement and the cult of personality, we hold steady. Truthfully, it is conservatives who are defined by the capacity for hope, and not a pedestrian newspeak constantly recycled. Our position is of hope in the original, foundational sense. Almost a naive belief structure, in its simplicity: the primacy of the individual, the enduring and integral link between economic and individual freedom, a facile, responsive, and narrow government. We seek a broad, but not limitless set of rights and liberties.

In contrast, there are the values that accompany the present shift towards soft despotism and state-run, quasi-capitalism. Today's liberalism. An employment market filled with bureaucrats: we are becoming a society where government controls most everything. Not only how much families make, but exactly who makes what, at what rate. The extended mission creep of federal and regulatory measures in every key area of the economy is evident today: banking, commerce, trade, energy, student loans. Translated, this devolves into what one can drive, eat, how much energy one can consume, and with whom one associates. These are direct violations of the Constitution, especially the Bill of Rights.

Will it matter whether there is ever an awakening from our collective ‘soma’? To remain there is the point of the socialist state. This is not unique in history. It is no wonder Dostoevsky lamented for his people, when he correctly prognosticated Russia’s fall into statism: “And mark this, dear friend: he who loses his people and his nationality loses also the faith of his fathers and his God.”

A return en mass to the values demarcated in the Constitution, and the acceptance of this document as the authentic and supreme foundational framework of the United States government is the only way to recover the lost faith of our Fathers.

The Oil Blundercrats: President Obama and the IEA

2011-07-25T12:12:00.000-07:00

The Oil Blundercrats: President Obama and the IEA

see full comments on BigGovernment.com
by Katrina Rose Dunkley

[bluhn-der-krat]
-noun
1. An official, who in attempting to appease the left works without exercising intelligent judgment, thereby harming or jeopardizing national interest through the implementation of a series of self-serving policies that ultimately result in gross, stupid, and careless political mistakes .

A great man once declared that “[t]ruth will rise above falsehood as oil above water,” this maxim held for a long time and even penetrated Capitol Hill and Pennsylvania Avenue. But the people wanted ‘change’ simply for the sake of change. And now the declaration reads: “truth will be mixed with falsehood, as oil with ethanol.”

President Obama’s decision to release 30 million barrels of Strategic Petroleum Reserve (SPR) this month qualifies him as one of the great energy blundercrats in modern American history. The administration’s justification for the release of these critical barrels of crude, which are in reserve for emergency and war purposes only, seems simple but is really insidious. According to the administration, the ‘market’ is desperate for the light sweet crude that Libya would have exported. Which market, to be clear? Well, not the United States, because Libyan crude is exported almost exclusively to Europe. But nevertheless, more world crude supply should translate to lower product prices. Unless of course it does not. As one Senior Administration official said, not to worry, because our price-meddling heroes will just tap SPR again:

“At the end of the first 30 days of action by the IEA member, we will review the results…the U.S. stands ready to do more if necessary to address this issue.”

The president now considers himself a one-man market maker armed with 727 million barrels of taxpayer oil and he is not afraid to use them in an election cycle. On a dip, he can draw his bureaucratic paw and say “see what I did to control the price at the pump, p.s. available for hire in 2012”. This of course is supposed to be music to the ears of the uninformed and the unemployed. Gasoline prices had already declined ten percent from the start of the driving season, but only because the economy is a disaster.

Putting aside the moral issue of the president trashing administrative and market precedent like a stack of leftover ribs, it is better to go through the (de)merits of this policy at an economic and geopolitical level. It is likely much worse than you first imagined.
The world requires 88 million barrels of oil each day to function. Approximately 60 million barrels of this demand is for gasoline, diesel, and jet fuel – anything related to transportation. In essence what the total IEA SPR release of 60 million barrels comes down to for the world’s refineries is the equivalent of one day of global transportation demand. Not very prudent.
The rationale given by the IEA is that the MENA disruption has caused a supply shortage that can be made whole by this release. If that were true, then someone at the IEA doesn’t own a calculator. Libya had a total production on average of 1.5 million barrels per day. Libyan production has been off-line since February. This would put the world at a deficit (through May) of 132 million barrels. If the OECD refineries were experiencing serious supply tightness, we would expect stock draws of close to that much. Yet OECD crude and product draws are down only 8.3 million barrels during that timeframe, and are sitting about on par with the five year average. In this Libyan instance of supply disruption, the price mechanism has worked as the regulator. In any case, Libyan supply isn’t coming back anytime soon, to continue to offer to fill this deficit with SPR is not do-able in the long-run.
There’s so much more to be annoyed about. The details of the SPR sale can be pieced together from the “Apparently Successful Offers Report“, released by the Department of Energy (DOE) on June 23^rd. Valero came out as the largest single winner at 6.1 million barrels of crude, which for them amounts to less that one week of throughput. Most importantly, it appears that 25 of the 30.6 million barrels of offers are going to be delivered by vessel rather than by pipeline. Translation: the vast majority of the 25 million barrels of SPR crude are probably not going to be refined into gasoline at home, but shipped overseas as price would naturally dictate. Chinese SPR, anyone?
However, deciphering the SPR purchase price is like playing the ‘Price is Right’ for oil nerds. The SPR report lists prices paid, but they are not quite accurate and must be masterfully rearranged. The deal was that oil was to be sold on a differential basis to a Light Louisiana Sweet (LLS) price, and that price was to be established during a five-day window around the time of delivery. The reason the price of SPR oil is based on LLS and not West Texas Intermediate (WTI) is two-fold. Most of the country’s refining is located in PADD III (Gulf Coast). Refiners work with the LLS price and this price ultimately determines product prices and crack spreads. Secondly, it would have been the LLS-Brent spread that determined the demand from bidders at the sale.
The weighted average price reported by the SPR office was $107.20/bbl, about $1.30/bbl less the closing price of LLS on June 30^th. The five-day average price between June 15th and June 21st (weekends excluded) was $112.78/bbl. The price in the “Apparently Successful Offers Report” is the successful differential, applied to this base price of $112.78/bbl. The weighted average differential versus LLS to be paid for SPR crude is thus $107.20 – $112.78/bbl or -$5.58/bbl. This means the lowest winning bid was $7.80/bbl under LLS, and the highest bid was $3.02/bbl under LLS. To put it simply, if all the oil moved versus the June 30^th LLS price of $108.50/bbl, the weighted average purchase price across all barrels sold would be $102.92/bbl, not the inflated DOE price of $107.20/bbl. By now it should be clear that neither can the IEA or the DOE do math but that they sold 30 million barrels of emergency crude at an average discount of $US5.58/bbl.
Discounted premium crude is the binary opposite result of what one would expect of a market suffering from a drastic emergency. The fact that both the Brent and WTI forward curves are in contango at the front end, only further prove the point.
Furthermore, the timing of this release could not have been more ill-conceived. In theory the IEA effort was supposed to go along side with the Saudi’s planned increase of 1 million barrels a day. The Saudi’s made this decision in the wake of a cantankerous OPEC meeting that resulted in a formal decision to leave production quotas unchanged. As an astute observer of Saudi calculus, this much of a production hike seems unlikely now. Given the IEA’s new found propensity to use taxpayer oil to replenish market deficits, why would the Saudi’s ramp up production to the highest level in over two decades? Not only could this lower total Saudi net revenues but it would also surely ruffle OPEC feathers. The president brilliantly agreed to offer up SPR right before the Saudi’s were about to relieve the market potentially long-term production.
Lastly, it would be interesting to know what the president and DOE economists think will happen to crude and gasoline prices when the government has to buy back the SPR? There was another declaration also written in the 17^th century: “to every action there is always an equal and opposite reaction.”
Blundercrats.

10,000 Kids Charity Event at Sirocco Golf Course

2011-05-16T10:20:00.000-07:00

Here's to Earth Day:

2011-04-22T16:07:00.001-07:00

Pal(ad)in Politics: A retrospective

2011-02-25T11:17:00.000-08:00

An oldie, but a goodie (too controversial for even Biggovernment.com!) Reworked....

In late 2008, Gloria Steinem described then vice-presidential candidate Sarah Palin “[a]s Phyllis Schlafly only younger.” Steinem charged Palin with “divisive” speech, concluding that “Palin shares nothing but a chromosome with Hillary Clinton.”

Ms. Steinem turned out to be right.

While Mrs. Clinton was aided by the rarefied eye of Mr. Clinton and her team of advisors in analyzing every conceivable political scenario through 2016, Palin emerged as a genuine fire-brand politico. Palin single handedly led what Steinem dubbed “the anti-feminist right wing.” To many, she was the highlight of the GOP ticket, juggling the needs of her family, taking little or no time to rest during the campaign.

It is the chasm between the new Palin feminists and the calcified liberal feminists that can be drilled down to one essential element: the unwillingness of conservatives to elevate the female experience above the human experience. This break with liberal dogma, which requires victimization in perpetuity, has caused the apostate status of conservative feminists. And while there exists variations of elitist feminism (liberal, existential, radical, deconstructionist) the core narrative provides little substantive difference to choose from for many women who identify more with Palin than Steinem.

Palin, alternatively has tossed the feminine mystique on its head. She is an atavism; a remarriage of Reaganomics and classic American conservatism. She does not get her oxygen from the women’s movement alone. She has filled a void on the right that was only exposed upon her arrival to the national scene in 2008.

Palin openly champions a worldview that is anathema to the increasingly statist agenda forwarded by the national liberal headliners: Steinem, Pelosi, the Clintons, and Gore. These liberal elites, who have made careers maximizing, “morals for the masses, exceptions for the exceptional,” stand in binary opposition to Palin on every conceivable point: climate change, energy policy, taxes, women’s issues, and the deficit. In predictable fashion Steinem lamented:

“I don't doubt her sincerity. As a lifetime member of the National Rifle Assn., she doesn't just support killing animals from helicopters, she does it herself. She doesn't just talk about increasing the use of fossil fuels but puts a coal-burning power plant in her own small town. She doesn't just echo McCain's pledge to criminalize abortion by overturning Roe vs. Wade, she says that if one of her daughters were impregnated by rape or incest, she should bear the child. She not only opposes reproductive freedom as a human right but implies that it dictates abortion, without saying that it also protects the right to have a child.”

Although Steinem’s hysteria at having to open the floor to conservative feminists is laughable, the socio-economic and moral dialogue that Palin forced on liberals has re-established the discourse at the national level. Palin as a singular political entity has pushed liberal feminists into an uncomfortable structural discussion for the first time in many years. Her presence has gentrified conservative feminist thought.

While Steinem lauded Mrs. Clinton for overcoming years of “misogyny” to win 18 million votes in the Democratic primary in 2008. She failed to credit Palin, the first woman ever to be elected Governor of Alaska, and the youngest woman to be elected to this post nationally, for reigning as the nation’s most popular governor during her term. Ann Coulter, who has a far more cutting gift for political analysis, gets Palin: “[s]he’s too big to be stuck in a governor's office up in Alaska."

Beyond her role as feminist, Palin’s core politics are based on American exceptionalism and a healthy distaste for nihilism - the sinister first step to all modern socialist movements. Nietzsche: "If God …the goal of all reality is dead… then nothing more remains to which man can cling and by which he can orient himself." Here, Palin stands in stark contrast to Obama who is for everything and nothing at once. The president's (mis)statement in April of 2008 embodies his view on as many as 40 percent of constituents who “get bitter… cling to guns or religion or antipathy… as a way to explain their frustrations.”

It is this division between the Obama statists, who would displace the Judeo-Christian moral foundation of the country or rather the ‘roots of American order’ and Palin conservatives, which has emerged as a central front in American politics.

This fastidious blend of spiritualism and politics, even at the expense of conventional political codes, has bolstered Palin’s image as a values-led politician. Her status as a national political figure and a woman of power, with an increasingly defined agenda is at its core - attractive. Not unlike Benazir Bhutto was, she is both religious and fiercely competitive.

Palin understands how to capitalize on her God-given qualities. She interacts using her image, social media and traditional campaigning. Despite the tremendous popularity of her “rogue” political style, she is dismissed by the left and often marginalized by the establishment on the right. While the left is mystified by her ability to maintain political clout nationally, her own party has been tremendously weary of making a full investment in her. However, here, neither side has identified a strategy capable of reorienting her base.

Laura Ingraham, who tends to favor Palin, was chided in October 2009 by Newt Gingrich for supporting Palin’s first-hand picked candidate of the last mid-term election cycle, Doug Hoffman. Seemingly fed up with both Palin and Igraham’s inveterate conviction, the former speaker proposed the GOP strategy for 2010 go heavy on Reagan style pragmatism and light on Reagan style ideology. Yet, Reagan was able to retain the necessary political capital to dominate closed door politics precisely because his actions were ordered on a set of sublime ideas. As Ingraham pointed out the following week to Pat Buchanan, it was Reagan’s rhetorical inspiration that eventually swung the political pendulum. Conservatives have always benefited by elevating the message not by obfuscating it.

The promise to hold steadfast to doctrine, even during low political tides, is a key characteristic of Sarah Palin’s. Palin’s advisors appear cognizant of contemporary American political history. If she can master the fine art of politics, Palin has a shot at writing her own ticket, should that be her plan. Perhaps it will be the female proclivity to stay the ideological course that the GOP will be thankful for in the upcoming election cycle.

Palin’s brand will ultimately define her political equation. As the need for a definitive conservative GOP ideology grows, Palin will continue to serve as a gut check for the Party. For liberals she exemplifies the enduring notion of patriarchal servitude; she is the proverbial Queen, brandishing a double edged sword.

Avon's campaign against the oil sands: all form, no substance.

2010-12-29T09:48:00.000-08:00

http://biggovernment.com/krdunkley/2010/12/29/avons-campaign-against-the-oil-sands-all-form-no-substance/

Avon Products recent announcement that the firm wants to avoid using ‘high-carbon, high-impact fuels’ derived from the oil sands is yet another hit and run on America’s safest and most secure oil supplier. It is a disingenuous publicity stunt that misleads the public with false promises under false premises.

Avon’s latest so-called “environmental” campaign boils down to asking its transportation contractors to eliminate higher-carbon fuels with a special focus on Canada’s oil sands. Given Avon’s sudden distaste for petroleum products one might set the same standard in return for Avon. To speak tangentially, when the dictionary definition of hypocrisy immediately springs to mind there may be a credibility problem; ‘feigning to be what one is not; especially the false assumption of an appearance of virtue or religion’. Yes, we have a credibility problem.
This is a company that nets huge corporate profits from the sales of millions of reps who idle, drive and willingly gas-guzzle their way from neighborhood to neighborhood hocking petroleum based products. Perhaps when Avon rethinks one of their core business models, we can stop laughing in Alberta.
This rash of anti-oilsands actions (we aren’t officially allowed to use the term boycott at present) rely on a set of specious arguments. To begin there are the technicalities that Avon and these nouveaux-environmentally sensitive companies like Gap Inc., Timberland, Levi-Strauss, Lush (operating with the aide of misinformants such as ForestEthics) hope the unwitting public will miss or at least misunderstand.
There is no real or practical way for transporters to avoid using fuel from a refinery from any one particular source of crude oil.

This is because transport fuels (retail gasoline or diesel for large trucks) are not purchased directly from a refinery. Transporters for the most part, purchase fuel like you and me – from gas stations. Crude oil and its products once refined are fungible, tradeable commodities. Once crude is in the pipe, it is very difficult to know which portion of the supply was produced conventionally or unconventionally.
The only sure bet for Avon shippers to avoid oil sands derived products would be to not use petroleum products in transport at all, not to gas up from any company involved in oil sands (almost any oil major) or to not gas up in regions where oil sands products are refined. The latter would translate into Avon bowing out of markets in the Pacific, the Rockies, the Midwest, the East Coast and the Gulf Coast.
The argument that the oil sands are higher-carbon content is another red herring that the environmental lobby loves to overplay. It would be prudent, or at a minimum rational for Avon et al. to think about crude oil suppliers in the global context in which they operate. Behind Canada, the leading oil exporters to the USA are Mexico, Venezuela, Saudi Arabia and Nigeria. None of these producers have greenhouse gas (GHG) emission standards comparable to Alberta’s. Oilsands producers have reduced GHG intensity by almost 40% since 1990. Hugo Chavez cannot make the same claim, nor would I surmise, does he care to.
Anti-oil sands movements fail to acknowledge that the crude oil slate into refineries is continually changing. As the supply mix changes the carbon intensity of the fuel mix also changes. As lighter crude oil from the Middle East becomes scarcer, the imported oil to the United States will become heavier. In addition, as conventional oil fields mature each additional barrel produced becomes more energy intensive. When analyzed on a wells to wheels basis (i.e. full life cycle) the argument that oil sands derived fuels are higher-impact falls apart.
Finally, the notion that oil sands products are somehow less ethically appealing than crude oil from other regions is perhaps the most puzzling inference. Given as true, then the question would become in what way are the social values of other oil producers more in line with Avon’s corporate values? Does Avon support the robust state of democracy in Venezuela? How about Goodluck Jonathan's idea of wealth redistribution in Nigeria? Perhaps the feminist movement in Saudi Arabia has gained a lot of traction of late. I must have been too busy snowshoeing and missed the progression of the movement. Let’s get real. There is no other oil importing region to the United States with a more advanced system of civil liberties than Canada. We are the equivalent of whipping the dodge ball at the portly kid from closerange. We continually take it with the strained smile of an unwanted friend.
Avon and their counterparts concoct self-satisfying public relations spin in order to lull their customers into a false sense of social-consciousness. Saying a lot and doing little is good for profits. This form over substance shtick is a common trick that easily fools the liberal. But while some companies prefer to launch meaningless campaigns others prefer to operate in a dimension called reality. To actually reduce environmental strain and simultaneously create these very often dismissed necessities called – jobs.
Unlike Avon the arguments on our side don’t require any ‘makeup’ to sound right.

Commodity prices rise, squeezing companies and nations

2010-12-22T12:33:00.000-08:00

Dec 21, 2010

http://www.danielstrading.com/resources/news/Futures-Market-News/Commodity-prices-rise--squeezing-companies-and-nations_800304989/

The rising price of key inputs is putting pressure on major entities in both the private and public sector, forcing regulators, officials, logistics managers and company executives to confront the fact that as the world returns to economic health, demand is once again outpacing supply. Important commodities like cotton, wheat, silver and oil have all gained significantly in the past year, and some appear to be gathering momentum for further gains in 2011.

The agricultural giant ConAgra Foods, Inc. said Tuesday that inflation caused by factors like rising grain futures and shortfalls in some harvests would force it to raise prices. In fact, the company is counting on price increases to maintain and grow its profits next year.

"Very importantly, we are increasing net pricing on a number of our products given the ongoing acceleration of cost inflation," ConAgra chief executive officer Gary Rodkin said in the latest earnings report. "Some price increases have recently been implemented, and more are under way. We are confident that the net effect of these pricing increases will be positive, despite some potential modest volume decline."

ConAgra also suffered from a potato crop that was unusually weak and low-quality, raising the overall cost of goods like french fries.

"In aggregate, it was a challenging quarter," according to Rodkin.

Those challenges extend to national governments seeking to maintain as much food price stability as possible, in the interests of social justice and stability. In Canada, for instance, lower-income households are being squeezed by the rising cost of sustenance - particularly in the area of healthier foods. A report from the Institute for Competitiveness and Prosperity in Toronto found that "the percentage of income needed to purchase a healthy basket of food for a single person on social assistance rose by 10 percentage points between 2005 and 2009 alone, highlighting the mounting pressure faced by social assistance recipients to afford a nutritious diet."

On the other side of the world - and the per-capita income scale - China is struggling to deal with the impacts of rising food inflation. The China Reserves Grain Corporation, which helps maintain grain price stability, recently sold 1.5 million metric tons of wheat to China's largest flour supplier, taking no profit. Grain imports may increase by as much as 35 percent in the next year.

"The Chinese wheat sales are a sign of shortage and desperation to control inflation," Jim Gerlach, the president of A/C Trading Inc, told Bloomberg/BusinessWeek. "The fear of food shortage will lead the China government to import more grains to rebuild stocks."

Though Chinese incomes have grown strongly over the past decade, much of the country is still trapped in grinding poverty. Even mild increases in the price of staples like wheat noodles and rice can strongly impact tight household budgets. In addition, the growing Chinese middle class is adopting tastes from around the world that are more resource-intensive, buying family cars and larger quantities of meat.

As emerging markets like Brazil, India and China come into their own, the growing needs of both the poor and the middle class will put pressure on global food suppliers to increase production of wheat, corn, soy and other vital products. Energy futures will also rise, with oil production either at or past its peak and a renewables revolution still on the horizon.

The next decades may well be characterized by another surge in commodity price inflation.

My take: long EM food suppliers, long wheat, corn, soy, oil futures Cal 11 -14, exchange USD into Yen 2011-2015

What James Cameron Can't Tell You About the Oil Sands

2010-11-25T09:11:00.000-08:00

(my article on BigGovernment.com)
by Katrina Rose Dunkley

When movie director James Cameron descended upon the Athabasca oil sands a while back, Albertans were subjected to the predictable but nonetheless aggravating media blitz of misinformation that occurs when a mega-star chooses a cause to elevate.

The elevation came in the form of a supercilious warning to put the brakes on the world’s second largest proved oil reserve. It could, he feared, become a curse if not properly managed. This revelation came upon reflection via a government sponsored helicopter tour and a token chat with a group of not-so disenfranchised First Nations peoples in the area. (In 2009, oil sands companies contracted more than $890 million for goods and services from Aboriginal owned businesses and employed 1600 Aboriginals in permanent jobs).

And with that, Mr. Cameron and the media were able to close the case on the oil sands, as Mr. Cameron purportedly had to jet. It’s not Mr. Cameron’s fault, completely. The oil complex is just that – complex. It’s not the kind of business one just picks up as a hobby horse. Sure, Cameron can regurgitate the technical terminology if he likes. It would be difficult for a techno-geek of titanic proportions to resist a sexy term like steam gravity assisted drainage (SAGD).

Here is where I suggest “putting the brakes on.” Perhaps a moratorium on incendiary statements by celebutantes or politicians a-la-Pelosi who are not able to, because of their lack of training, do the type of deep comprehensive assessment required for these matters.

There are a few facts that cannot be disputed and you will get those out of Mr. Cameron, the enviro-statist and their press sycophants. In this case it can be narrowed down to just two: the area containing the deposit and the size of the estimated reserves in Alberta. Then it’s down the rabbit hole we go.

The oil sands deposit covers an area that would equate to the size of England (54,132 square miles). For Americans without passports, that is the size of the state of New York. Of the total 170.4 billion barrels of remaining established reserves, about 80% is considered recoverable through in-situ (no tailings ponds and contrary to what is stated results in significantly lower GHG and energy intensity) the remaining 20% will be mined. Total estimated reserves are actually 1.7 trillion barrels but at this stage only 10% are recoverable at current technologies and prices.

To put these numbers to reality, to date only 0.3% of the total oil sands area has been disturbed, roughly equal to a small to medium sized city. Even more crucial to understand is that as only 3% of the total surface area could ever be mined (the deposits lie deeper than 75 meters) which leaves 97% of the surface area with some, but not much, industry impact. Mathematically this scales the land disturbance of oil sands development back to about 0.5% the size of England, and all area that are mined need to have a reclamation plan laid out by producers. In respect to Alberta’s boreal forest, in 40 years of oil sands activity, a mere 0.02% of the boreal forest has been disturbed.

In 2007 Alberta became the first jurisdiction in North America to legislate GHG reductions for large emitters. However, industry had already vastly mitigated its footprint and has every incentive to do so. Less energy in for every barrel of oil out means increased cash flows. Strong show of cash flows increases marketability to shareholders and helps shield a company from the inherit volatility of commodity prices. At current rates of production, 2.6 MMbbls/d, about half bitumen (WCS) and half synthetic light (SCO), the oil sands are responsible for 0.1 percent of total world emissions and that number is doubtful to increase much even if production ramps up to 4MMbbls/d as projected by the Canadian Association of Petroleum Producers.

As far as climate change is concerned, the oil sands are not really Alberta’s dirty secret at all. Environmentalists may still choose to call this resource “tar sands” like the brat at school who won’t let a nickname die, but they would be better served to make their mockumentaries where GHG is unregulated such as Saudi Arabia, Nigeria, or Venezuela where Hugo Chavez may believe he can bend time and space. And of course there’s no place like home; the GHG from the oil sands equates to only 1% of the emissions of the U.S. power sector where coal happens to be the “King of the World.”

Just like little bit of meat will never do for a vegan, neither will a little bit of oil development for an environmentalist. Therefore there will always be an entire portion of the story that the enviro-statists will obfuscate. This is the basic social cost/benefit analysis that economists are required to do.

As the leading exporter of crude and petroleum products to the United States, Canada is not only the safest, most secure supplier, but an economic partner. The North American energy complex is one of the most valuable business chains in the world precisely because every aspect from Main Street to Wall Street is linked and integrated. Hundreds of thousands of jobs will depend on the oil sands both directly and indirectly in the coming decades. The input goods, materials, and services for oil sands and in the U.S. oil shale – tires, trucks, gauges, pumps, steel, are produced across North America. It is this understanding of the political economy of North American oil, and how it positively impacts the average person, which the enviro-statist circumvents every time.

As one final example I will let Mr. Cameron’s own words to MSNBC hit the nail on the head. “[T]here’s an opportunity for all of North America to be weaned to some extent off of OPEC oil so that’s why it makes me very nervous… we need more science… we have the capacity for ecological disaster here on an unprecedented scale…”

As standards of living and GDP per capita increases worldwide and millions of individuals are lifted out of poverty, the global demand for energy is expected to increase by as much as 40% over the next two decades. Given even the most ambitious outlook for alternatives, biomass, hydro, and nuclear, unconventional oil remains the integral component of non-OPEC supply. There would be no realistic manner to supplant unconventional production other than increasing the call-on OPEC crude.

In reality, the disaster has been averted. Thankfully, enough people understand the inextricable link between North America’s oil (and gas) resources and economic growth and prosperity for all.

For full article with links by Katrina Rose Dunkley

http://biggovernment.com/krdunkley/2010/11/25/what-james-cameron-cant-tell-you-about-the-oil-sands/

Dislocation Nation

2010-05-30T16:04:00.000-07:00

The Problem with Free Money
The primary reason the country will continue to experience unemployment figures between 9-10%[1] can be traced to the fundamentals of the president’s economic policies. The narrow focus on regulatory at the expense of an economic environment conducive to pro-growth business regeneration, in addition to a lack of meaningful tax incentives for the middle class, has cost job creation.

The Past
When that which is relied upon proves, shallow and unstable, an intervention seems necessary. As the most acute recession in six decades fractured the United States at the close of 2007, Congress reacted, frenetically:

The Economic Stimulus of 2008 coupled with The Emergency Economic Stabilization Act of 2008 led to the infamous Trouble Assets Relief Program. These bailout packages re-acquainted Americans to the idea of state-run capitalism. As the Federal Government became the Grand Daddy to auto companies, the commercial and investment banks, the insurance industry, and a host of other private actors, the idea that only the government could act rationally in times of market chaos, prevailed.

President Obama’s $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), would,

“[p]reserve and create jobs and promote economic recovery.”[i] By November 2009, the Bureau of Economic Analysis, reported two consecutive quarters of previous of GDP growth.[ii] Much of this growth, which has since been revised down, was actually the result of increases in labor productivity, and higher exports due to a weaker USD.

The main story lies beyond GDP; the nation as a collection of economic actors: individuals, small, medium and large firms, together create the comprehensive value chain. There is scarce evidence that the prodigious rescue and liquidity packages have positively impacted the individual, the small and mid-size firms that form the basis of growth. The emphasis was lost on grass roots, organic growth. The stimulus was sucked entirely into fixing broken balance sheets.

This is why in 2009 White House economists, affirmed what critics of the stimulus had feared; there was unlikely to be further significant job growth as a result of the ARRA. This is why joblessness will persist in many states. The mechanics of job growth were not the priority of the ARRA or the Federal Rescue efforts in reality.

How to View the ARRA

The ARRA, can be characterized as a political opportunity seized by Congress and the administration to rectify state budgetary shortfalls and classic mission creep. The government used the funding to save cities and municipalities that were liable to go bankrupt, because of falling receipts and revenue streams. The package also funded a host of long-term “priorities”: bad energy policy, medical research, education, science and technology, some military spending.

The ARRA, was desperately low in the elements that would fund or create the conditions for maximizing job growth. In the decision for large-scale government intervention, the direction should have been effective tax cuts for business, quick and direct infrastructure projects, and effective aide to the manufacturing sector . Most importantly, the explicit guarantee to small business to receive adequate capital to generate growth and recovery was not true. The Recovery Act fell short on the most important aspect of the bill: recovery. To conceive of the ARRA, as a pro-growth, pro-business, shovel-ready package is as likely as to have been hit on the head with one. Biden.

The Job-less Recovery

The basis of today’s jobless recovery is failure not just of the ARRA, but of all the federal rescue efforts[2]. They were not the financial buttress for the citizenry, they were scripted to be. Obama’s economic team used the economic collapse to insert an ideological footprint on the U.S. banking system, in order to rearrange the game. It is a growing movement toward state-guided capitalism - a useless policy for the under and unemployed people, unless your goal is to expand socialism.

While the Keynesian-Krugman types may posit this brand of statist capitalism as a necessary condition in today's zero interest-rate bearing world. The truth is that the emergence of state-directed capitalism, is a disastrous choke-hold, not only the unemployed, but also on the entrepreneur, the mid-size firm. A government is one that should mitigate the low economic tides without compromising the long-term flow and independence of the capitalist system.

Ralph Waldo Emerson was right, in his analysis: “[m]oney often costs too much." I would add, "[free] money, is what costs too much."

[1] http://www.dol.gov/

[2] For a detailed accounting of total federally invested and allocated funds:Troubled Assets Relief Program, the Federal Reserve Rescue Efforts, the Federal Stimulus Programs, AIG, FDIC Bank Take Over, Other Financial Initiatives, Housing Initiatives http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

[i] ARRA-Statement of Purpose (SEC. 3.1 PURPOSES AND PRINCIPLES)

[ii] This is the standard definition of economic recovery.

The Perfect Storm: Cocktails, Katrina, Danielle and Capitol Hill.

2010-05-09T16:44:00.000-07:00

Resisting statism on the Hill in our own unique way. Be back soon.

The Big Fight (re-posted)

2010-04-12T06:48:00.000-07:00

"Rather, it is the nature of the regime of capital that it exists in a condition of mixed from and dependence on the older regime of state power, perhaps marked by swings of centralized hegemony and rivalry…The full powers of the state, above all its ability to mobilize the unconscious in support of its parental persona, remain largely in the background, save for periods of overt internal disruption or external war, so that the forces of capital exert the preponderant active influence in normal times. During these periods, the state advances the interests of capital as a natural response to the appeals of capital, as well as in a calculating fashion to promote its own peacetime strength.”

And Onward Marches the Factious Spirit

2010-03-13T13:19:00.000-08:00

According to James Madison a faction consists of “a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.[1]

Today Americans are being held hostage by a faction bent on ensuring the enactment of Obamacare even in the face of widespread public opposition. This “Obamacare faction” is one of the most dangerous this nation has ever seen, so unwaveringly determined to achieve its end of nationalizing health care that its members are willing to completely disregard the boundaries of the Constitution.

A Republic to Cure the Effects of Faction

The dangers of faction were of paramount concern to the Founders. They were smart enough to realize that controlling the causes of faction would necessitate either “destroying the liberty which is essential to its existence,”[2] which would be repugnant, or “giving to every citizen the same opinions, the same passions, and the same interests,”[3] which would be impracticable.

As a result, the Founders created a republic – a form of “government in which the scheme of representation takes place”[4] – as opposed to pure or direct democracy, in which power is exercised directly by the people. The very design of the republic was meant to protect society from the negative effects of faction.

The Founders, ever concerned with reconciling the common good and the individual self-interest, recognized that a pure democracy would never be able to achieve this balance because a strong faction would always be able to defeat a weaker faction – thus leading to a tyranny of the majority.

Additionally, the Founders knew that the risk that the common good would be sacrificed in favor of the individual interest was far greater in a democracy than in a republic, simply because individuals tend to act primarily in their own self-interest. The Founders realized that true order would prevail only if the individual will and the common good were reconciled; Russell Kirk referred to this balance as “the inner order of the soul and the outer order of the commonwealth.”[5]

One of the major advantages of a republic over a pure democracy is that a republic’s scheme of representation operates “to refine and enlarge the public views, by passing them through the medium of a chosen body of citizens, whose wisdom may best discern the true interest of their country, and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations.”[6]

The Founders thus recognized that an individual may be less-equipped than his elected representatives to reconcile his own self-interest with the common good. However, while the Framers were adamant that the mechanics of representation would protect society from the dangers of faction, they nevertheless acknowledged the fact that such danger, though of a lesser likelihood, still persists in a republic: “Men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests, of the people.”[7]

Unfortunately, this is precisely what is occurring in Congress presently. In fact, in the context of the health care reform debate, the unscrupulous actions of the Obamacare faction are significantly undermining the republic’s ability to protect society from the ills of faction.

Tyranny of the Minority

As Madison pointed out in Federalist No. 10, a faction can consist of either a majority or a minority. All polls, even the most liberal ones, plainly indicate that a majority of America is opposed to Obamacare. Thus, it can be properly asserted that the Obamacare faction consists of less than a majority. According to Madison,

"[i]f a faction consists of less than a majority, relief is supplied by the republican principle, which enables the majority to defeat its sinister views by regular vote. It may clog the administration, it may convulse the society; but it will be unable to execute and mask its violence under the forms of the Constitution."[8]

This principle is one of the most vital safeguards our republican form of government provides, and it is the reason the Republicans are likely to gain a large number of seats in this November’s elections.

Unfortunately, if Obamacare passes, the damage will have already been done. The faction will have indeed “convulse[d] the society,” perhaps beyond repair. What we are faced with presently is a faction intent upon enacting, through dangerously oppressive measures, an unpopular piece of legislation that overhauls one-sixth of our economy, in direct opposition to what a majority of the American people want. Thus, this phenomenon may justly be deemed a tyranny of the minority.

The Common Good?

A common sentiment among the Obamacare faction in response to the notion that a majority of America opposes the bill is that Americans simply don’t realize what’s good for them. This thinly-veiled elitism was apparent, for example, in President Obama’s State of the Union address, in which he blamed public skepticism about his health care reform plan partly on himself for “not explaining [health care reform] more clearly to the American people.”[9] To be sure, there are times when the difficulty inherent in reconciling the public good and individual will can obscure the merits of a particular piece of legislation, particularly with regard to complex or controversial issues. Simply stated, the fact that a majority of voters feel a certain way doesn’t necessarily mean that they’re right.

This is not one of those times, however. Americans are more informed and engaged than ever on this issue, and they realize that this mammoth bureaucratic enterprise will not only accomplish very few, if any, of its stated goals but also will unleash a slew of unintended consequences that will place us, both as individuals and as a collective whole, in a worse position than if we had done nothing at all.

All of this public opposition, or as the Left views it, “misunderstanding,” has been very inconvenient for the Progressives. If only Americans would simply subscribe to Progressives’ enlightened concept of the common good, the Left could go on about its business of governing.

But in spite of the Obamacare faction’s relentless endeavor, including dozens of speeches by the president, Americans’ resistance to Obamacare has only intensified. Not content with accepting its failure to convince Americans that the Left’s vision of the “public good” is the right one, the Obamacare faction has simply imputed its vision of the common good onto all of America. Some are even going so far as to assert that, despite what all the polls show, Americans actually do want Obamacare. This is absurd. The result is that the delicate balance between the individual will and the common good the Founders were so concerned with has been severely upset. Moreover, there are likely very few Obamacare proponents who are pursuing this version of “reform” based on an altruistic belief that it is for the common good.

At the end of the day, the health care debate is fundamentally about power and control, not about the common good, and not about health care. Obamacare is simply a means to the egoistic end of an endlessly powerful and ubiquitous administrative state governing nearly every aspect of individual lives and the private sector. This is a feat Progressives have been trying to accomplish since the days of Woodrow Wilson, and they’ve made it abundantly clear that they’re not going to let a little thing like the Constitution stand in their way.

Self Sacrifice in the Name of Statism

Still, this marching forward with Obamacare against the majority will in the name of blind ideology seems counterintuitive. After all, individuals typically act in their own self-interest, and one would assume that no one wants to get voted out of office. As Madison noted:

"[w]hatever hopes or projects might be entertained by a few aspiring characters, it must generally happen that a great proportion of the men deriving their advancement from their influence with the people, would have more to hope from a preservation of the favor, than from innovations in the government subversive of the authority of the people."[10]

While this principle generally holds true, perhaps one should never underestimate the power of martyrdom. In fact, martyrdom may actually be the most selfish act of all when one considers the desire for glory, recognition, or reward (the jihadist’s “72 virgins” comes to mind) that usually accompanies the martyr’s act of self-sacrifice in the name of the “greater good.”

Tyranny by Procedural Sleight of Hand

And for the so-called “moderate” Democrats not content with sacrificing their political careers for Obama’s crusade, the House leaders have come up with a plan. Despite Nancy Pelosi’s repeated exhortations to the moderate Democrats to martyr themselves for President Obama's cause, she hasn’t been able to amass the votes to pass the Senate version of Obamacare. There are several reasons the House has been resistant to adopt the Senate’s version of health care reform, some of which include its failure to prohibit taxpayer-funded abortions, its excise tax on high-cost health plans, the special treatment extended to some states to fund the required Medicaid expansion, and the lack of a “public option.”

Whether our representatives should vote in accordance with the majority will of their constituents or not, most people would agree that in order to represent (or misrepresent, as the case may be) us at all, they have to actually vote on the measures that affect us.

Not according to the Obamacare faction.

In an alarming turn of events, Congress has indicated its intention to launch an audacious assault on the Constitution that threatens to make a mockery of the legislative process in particular and the republic in general. Rather than actually voting on the Senate bill as is required by Article I, Section 7 of the Constitution, the Rules Committee is simply going to issue a rule deeming the Senate bill passed.[11] So now the moderate Democrats now have cover to “vote” for Obamacare without actually voting on it.

If the House is not actually going to be voting on the Senate bill, these congressmen can go back to their districts and claim to their constituents that they didn’t vote for Obamacare. This smacks of intellectual dishonesty and trickery, but the Obamacare faction is betting that the American public is too stupid to realize it.

Such a blatant disregard for both the strictures of the Constitution and the will of the American people in an attempt to remake one-sixth of our nation’s economy is an utterly unprecedented usurpation, and quite honestly, terrifying.

[1] James Madison, Federalist No. 10.

[2] Id.

[3] Id.

[4] Id.

[5] The Russell Kirk Center for Cultural Renewal, “Ten Conservative Principles”, http://www.kirkcenter.org/kirk/ten-principles.html, adapted from The Politics of Prudence (ISI Books, 1993). Copyright © 1993 by Russell Kirk.

[6] Id.

[7] Id.

[8] James Madison, Federalist No. 10.

[9] The White House Office of the Press Secretary, Remarks by the President in State of the Union Address, January 27, 2010, http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.

[10] James Madison, Federalist No. 57.

[11] Brian Darling at The Heritage Foundation has done a fine job of detailing both the “deem and pass” mechanism and reconciliation (or the “health care nuclear option”) here: http://blog.heritage.org/2010/03/10/obamacare%e2%80%99s-procedural-fraud-on-the-american-people/ and here: http://www.redstate.com/brian_d/2010/03/12/constitution-be-damned-obamacare-vote-next-week/.

Find someone who's turning, and we will come around...

2010-03-10T20:43:00.000-08:00

In Response to @DanielleSavoy "In the Shadow of our Sovereignty"

How do we define the “soma” of today?

In the Shadow of Our Sovereignty

2010-02-28T20:56:00.000-08:00

I asked Danielle Cherie Savoy (@DanielleSavoy) to comment on the recent move towards statism and state-directed capitalism impelled by the Obama administration. How should conservatives interpret this shift in society, and what does the Constitution tell us about this political behavior?

There are numerous implied warnings in the Constitution regarding the risk of falling into a tyrannical or statist form of governance, or what Alexis de Tocqueville termed a “soft despotism,” (essentially the entire structure of our government that the Constitution sets forth is one big warning against too much centralized control) and there are many more specific warnings and insights on this matter in The Federalist Papers. I’ll discuss those later, but for now, one of my favorite novels comes to mind – you’ve read Aldous Huxley’s Brave New World, right?
Huxley’s eerie sense of prescience regarding matters of state control is brilliant. Remember how the State provided all its citizens that happy pill – they called it soma – to keep the masses pacified and to foreclose the possibility of critical thinking? One citizen asks another, “[W]hy you don't take soma when you have these dreadful ideas of yours. You'd forget all about them. And instead of feeling miserable, you'd be jolly. So jolly."

Well, I submit that this phenomenon is going on in the country right now and has been for a while. Many people simply refuse to engage in any manner of critical thinking. You could see it during the presidential campaign of “The One,” during which people were so giddy with the thought of this all-powerful, history-making being actually gracing us mere mortals with his presence that they simply refused to even question what he stood for or to examine his alliances. It’s not just with Obama though; people are more than happy to simply defer to the opinion of the majority on a host of issues of monumental significance, e.g., anthropogenic global warming, to mention only one. Speaking of warnings, here’s what Tocqueville had to say about the danger of this type of despotism occurring:

I see an innumerable crowd of like and equal men who revolve on themselves without repose, procuring the small and vulgar pleasures with which they fill their souls. . . Above these an immense tutelary power is elevated, which alone takes charge of assuring their enjoyments and watching over their fate. It is absolute, detailed, regular, far-seeing, and mild. It would resemble paternal power if, like that, it had for its object to prepare men for manhood; but on the contrary, it seeks only to keep them fixed irrevocably in childhood; it likes citizens to enjoy themselves provided that they think only of enjoying themselves. It willingly works for their happiness; but it wants to be the unique agent and sole arbiter of that; it provides for their security, foresees and secures their needs, facilitates their pleasures, conducts their principal affairs, directs their industry, regulates their estates, divides their inheritances; can it not take away from them entirely the trouble of thinking and the pain of living?

From Democracy In America, Alexis de Tocqueville.

I’m not sure what our “soma” is today, but I suspect the intoxication-inducing ingredients consist in no small part of what Tocqueville outlined above. Is the prospect of a life in which the government fulfills your every need, thus obviating the need for you to make even the most mundane decision, so seductive as to lure fully-functional brains into submission and complacency? Is the promise of that ever-elusive equality – that which seeks to eliminate all distinctions among people and engineer the outcomes – so beguiling as to render true civic engagement and critical thinking obsolete? So jolly, indeed.

People need to sober up, and some of them are beginning to, particularly within the last year. As conservatives, it is imperative that we nurture this sobriety, test, as Tocqueville warned, “this sort of regulated, mild, and peaceful servitude . . . be established in the very shadow of the sovereignty of the people.”

Conservative confabs, and other supreme ideals...

2010-02-14T22:17:00.000-08:00

@katrinadunkley, @daniellesavoy

Katrina Rose Dunkley: "How would you describe your commitment to conservative ideals, and the regeneration of our movement? Summarize or describe your position versus the liberal ideals and worldview of your professors in undergraduate?

Danielle Cherie Savoy: "In response to your question about my conservatism, I would characterize it thus: A state of mind founded upon the belief in an enduring moral order (with a distinctly Burkean vision of "order" as having a dual nature - the order of the soul and the order of the commonwealth - the Founders were brilliant at being able to reconcile both of these types of order in writing the Constitution); the notion that freedom and property are inextricably intertwined; and the recognition that there must be a proper balance of permanence and progression in society - most change should be organic rather than revolutionary. Russell Kirk said it well: 'The conservative, in short, favors reasoned and temperate progress; he is opposed to the cult of Progress, whose votaries believe that everything new necessarily is superior to everything old.'"

KRD: "In my view 'Life, liberty, and the pursuit of happiness' as it was written in the United States Declaration of Independence, is one of the most abused and mischaracterized maxims by liberals. Although it is the mandate of government to secure our unalienable rights at the outset, and to provide an environment conducive to personal growth and freedom. Each individual is guaranteed only the right and freedom to pursue (or not) these individuals goals. There is in no way an explicit designation by government to provide or secure a guarantee of an absolute outcome of equality. Not only because this is unrealistic and unfair, but because as Hayek correctly asserts, this would require a totalitarian or interventionist state. Such a state, would require a level of interference which, in the name of "equality", would result in a highly diminished level of exactly those personal liberties which were once deemed unalienable. To have the right to be different, to succeed, or to fail, to grow tall, to do great things i.e. pursue God's will; These are the fundamentals of the conservative spirit, they form the nexus from which my political and economic view is further translated."

DCS: "I believe in limited government, but nonetheless a strong one. My conservatism differs from libertarianism in that I have a favorable view of governmental power, as long as it's exercised in accordance with those powers delegated to it specifically by the Constitution (as well as those means that are "necessary and proper" to achieve those constitutional ends). With respect to the powers that are granted to the various branches of government by the Constitution, I firmly believe that they are entitled to exercise those rights to the fullest extent, ever mindful, nonetheless, of both the horizontal and vertical constraints upon that power - i.e., separation of powers into 3 separate but coequal branches (horizontal) and federalism - the proper division of authority between the federal and state governments (vertical). I have a distinctly Hamiltonian vision of the federal government, particularly w/ respect to an energetic executive (especially the president's broad authority in foreign affairs)."

KRD: "In addition, the ideal, I see missing in political rhetoric, is the notion of personhood. As a conservative, we accept that each individual has a unique purpose. This implies as Margaret Thatcher stated: 'We want a society where people are free to make choices, to make mistakes, to be generous and compassionate. This is what we mean by a moral society; not a society where the state is responsible for everything, and no one is responsible for the state.' Moreover, this requires a rejection of relativism, or rather the acceptance as Thatcher suggests, of a codified social contract. In an advanced civil society there must be a universal moral and ethical axis on which the world, somehow, revolves."

The beautiful and the damned...

2010-01-10T21:20:00.000-08:00

aka my fellow Oil and Gas Analysts: check out my private group on LinkedIn.

"Environ-mentals" will be promptly exposed.

Pal(ad)in Politics

2009-11-09T18:43:00.000-08:00

In late 2008, Gloria Steinem described then Vice Presidential candidate Sarah Palin “[as] Phyllis Schlafly[1] only younger.” Steinem charged Palin with “divisive” speech, concluding that “Palin shares nothing but a chromosome with Hillary Clinton.”[2]

Ms. Steinem turned out to be right.

While Mrs. Clinton was aided by the rarefied eye of Mr. Clinton and her team of top advisors in analyzing every conceivable political scenario through 2016, Palin emerged as a genuine fire-brand politico. Palin single handedly led what Steinem dubbed “the anti-feminist right wing.” She was heralded as the highlight of the GOP ticket, juggling the needs of her special needs family, taking little or no time to rest during the campaign.

In the political sense, it is the chasm between Palin feminists and liberal feminists that can be drilled down to one essential element: the unwillingness of conservatives to elevate the female experience above the human experience. It is this break with liberal dogma, which requires victimization in perpetuity, that has caused the apostate status of conservative feminists. And while there exists variations of elitist feminism (liberal, existential, radical, deconstructionist) the core narrative provides women with little substantive differences to choose from.

Palin, alternatively, has tossed the feminine mystique on its head. She is an atavism; a remarriage of Austrian economics and nouveaux-Thatcher style politics. She does not get her oxygen from the women’s movement alone. She has filled a void on the right that was only exposed upon her arrival to the national scene in 2008.

Palin openly champions a worldview that is anathema to the increasingly Swedish inspired liberalism headed by the Chicago camp: Steinem, the Clintons, Al Gore. These liberal elites, who have made careers maximizing, “Morals for the masses, exceptions for the exceptional,” stand in binary opposition to Palin at every turn: climate change, energy policy, small business, women’s issues and the optimal tax burden. Steinem lamented:

“I don't doubt her sincerity. As a lifetime member of the National Rifle Assn., she doesn't just support killing animals from helicopters, she does it herself. She doesn't just talk about increasing the use of fossil fuels but puts a coal-burning power plant in her own small town. She doesn't just echo McCain's pledge to criminalize abortion by overturning Roe vs. Wade, she says that if one of her daughters were impregnated by rape or incest, she should bear the child. She not only opposes reproductive freedom as a human right but implies that it dictates abortion, without saying that it also protects the right to have a child.”

Although Steinem’s hyperbole is laughable, the reality is the socio-economic and moral dialogue of Palin’s pro-abstinence and pro-life commitment has re-established these debates at the national level. Palin as a singular political entity has pushed liberal feminists into an uncomfortable structural debate on patriarchy and the role of government for the first time in many years. Her politics have gentrified conservative feminist thought.

That the prominent liberal position sides differently on abortion, no longer condemns the conservative position a priori to the realm of “anti-feminism.” Nor does it categorically define politicians, such as Palin, who represent an alternative position, as antithetical to women’s issues.

While Steinem lauded Mrs. Clinton for overcoming years of “misogyny” to win 18 million votes in the Democratic primary in 2008. She failed to credit Palin, the first woman ever to be elected Governor of Alaska, for reigning as the nation’s most popular Governor during her term. Ann Coulter, who has a more cutting gift for political analysis, “gets” Palin: “[s]he’s too big to be stuck in a governor's office up in Alaska."[3]

Historically speaking, Palin’s politics are based on America’s classic distaste for nihilism, the basis of all modern socialist movements: "If God …the goal of all reality is dead… then nothing more remains to which man can cling and by which he can orient himself."[4] Here, Palin stands in stark contrast to Obama who is for everything and nothing at once. The president's (mis)statement in April of 2008 embodies his view on as many as 40 percent [5] of constituents who “get bitter… cling to guns or religion or antipathy… as a way to explain their frustrations.”[6] It is this division between the Obama neo-nihilists and Palin conservatives, who see the displacement of the Judeo-Christian moral code that undergirds the Constitution as the central front in American politics.

Palin’s fastidious blend of spiritualism and politics, even at the expense of conventional political codes, has bolstered her image as a values-led politician. Her status as a national political figure, a woman of power, with an increasingly defined agenda, is at its core: attractive. Not unlike Benazir Bhutto[7], she is both religious and fiercely competitive.

Beyond the political differences between herself and her adversaries, are her God-given qualities. Palin capitalizes on her ability to interact using image and grass roots campaigning. She employs both conventional and unconventional modes of communication, (Facebook, LinkedIn, and stump speeches.) Despite the popularity of her “rogue” political style, she is dismissed by liberal statists and often marginalized by the right-wing establishment. While liberals remain mystified by her very presence on the national scene, the establishment in her own party is eager to reorient her base to a more palpable candidate.

Right wing talker, Laura Ingraham, who is usually favorable to Palin, was chided by Newt Gingrich[8] for supporting her recent endorsement of Conservative Party candidate Doug Hoffman in New York’s special election for the 23rd congressional district seat. Seemingly fed up with both Palin and Igraham’s inveterate dogmatism, the Speaker proposed the GOP strategy for 2010 go heavy on Reagan style pragmatism and light on Reagan style ideology.

Yet, Reagan was able to retain the necessary political capital to dominate closed door politics precisely because his coalition was built on a set of sublime ideas. The centrists in the GOP have been incapable of freshly translating conservative precepts to newcomers. They are too old to win the essential debates fought in bars around the country. As Ingraham pointed out the following week to old-timer Pat Buchanan[9], it was Reagan’s rhetorical inspiration that swung the political pendulum. Conservatives ultimately benefited by elevating the message, not by obfuscating it. The promise to hold steadfast to doctrine, even during low political tides, is a key characteristic of Palin’s politics.

Palin’s advisors appear to be cognizant of contemporary American political history. If she is willing to learn how to play her role, she has a shot at writing her own ticket. Perhaps it will be the female political proclivity to stay the ideological course, that the GOP will be thankful for, during the next election cycle.

This is not to overstate Palin’s case. Her book sales will ease her monetary burden, but it is her brand that will ultimately define her political equation. As the need for a definitive conservative GOP ideology grows, Palin will serve as a gut check for the Party. For liberals she exemplifies the enduring notion of patriarchal servitude; she is the proverbial Queen, brandishing a double edged sword.

[1] Schlafly is a successful author and political activist. She is well known for supporting U.S. Senator Barry M. Goldwater in his unsuccessful race against President Lyndon B. Johnson. In 1967, she began the Phyllis Schlafly Report, a conservative newsletter.

[2] All of Steinem quotes are found in her OP-ED piece: “Palin: Wrong Woman, Wrong Message,” The Los Angeles Times, Thursday, September 04 2008.

[3] "The Early Show Saturday Edition" July 25, 2009.

[4] Heidegger, "The Word of Nietzsche," 61

[5]Gallup Poll, June 15, 2009

http://www.gallup.com/poll/120857/conservatives-single-largest-ideological-group.aspx

[6] Obama made these remarks at a San Francisco fundraiser during his presidential campaign in early April 2008. They are an attempt to explain some of the resentment in small-town Pennsylvania due to persistent structural and cyclical unemployment.

[7] The Bhutto family practiced the Muslim religion, but Benazir attended Catholic schools in Britain as well.

[8]Laura ingraham.com, October 22, 2009

[9] Lauraingraham.com, October 26, 2009

Anticipating Afghanistan

2009-11-02T21:36:00.000-08:00

"And in the end

We lie awake
And we dream
We’ll make an escape"- Coldplay

There is a kind of balance to indecision. At times when hard power lies in conflict with surrounding forces and the forces of nature, it is just easier to stall.

Press Secretary Robert Gibbs, treaded through this political imbalance with the press last week, working through the development that President Karzai will continue to govern Afghanistan. The need to reform the central government in Afghanistan is glaring. And while the paths to success in Afghanistan are tortuous, Obama's foreign policy team has learned they are not many.

There are two distinct choices for the administration: either more or less government resources. At this point the status quo seems untenable to everybody. And, really, it should be: Pakistan leverages the unruly North-West Frontier Province for a steady supply of U.S. aid, there is a civil war raging in Afghanistan, and Al-Qaeda remains a threat throughout South Asia.

The choice regarding Afghanistan is not purely political, however. It's not a moral dilemma either.

There is a high economic cost, for every American, in waging a war that is lackluster; a war that fails to accomplish the stated national security or economic goals. Through the end of fiscal 2009, $915.1 billion dollars will have been allocated to the wars in Iraq and Afghanistan. Although a portion of this money created jobs in the defense and military sectors, and this money was re-circulated through the domestic economy, most of the allocations were issued as debt. These are policy trade-offs that will bear interest down the line.

The news that President Karzai will serve out another term as Aghanistan's head of state comes as little surprise. Just as the White House maintained a personalized foreign policy with Pakistan's Pervez Musharraf, Obama's administration will rest Afghanistan's development on the rehabilitation of Hamid Karzai.

Obama will unveil his policy prescription for Afghanistan in the coming weeks. The president will carefully weigh and dissect his plan, but he will send more troops. Obama would much rather spend on deficit, than underachieve diplomatically. His choices become circumscribed here.

To accomplish positive movement in Afghanistan, the Americans are unable to circumvent the public notion of a legitimate central government in Afghanistan. A grace period is in order. Foreign policy specialists understand there is only one palpable kind of support in international affairs --it comes in the color green. Military and money, and Afghanistan needs both.

American foreign policy forces are attempting to create the conditions for Obama to decisively turn the page on what they fear could become his war of attrition. Just as the waves of the business cycle dominate the flow of the U.S. economy; the president is the lead architect on matters all things defense related. Obama will realize his primacy in foreign matters, through his military advisors.

To sum, Obama's policies will fall in line with post-World War II patina consistent with the preservation the goals of American primacy. At a time of severe economic downturn in the United States, a victory in Afghanistan will be considered vital.

Retro-thought...Milton Friedman: Tax Man a Cometh

2009-10-12T20:25:00.000-07:00

Brevity is the soul of wit

2009-09-20T23:02:00.000-07:00

Especially on a Sunday night.

I'm going to knock this out with a few basic graphics that encapsulate the fundamental picture at present. Let's get right to it:

I've discussed in previous posts that the price of WTI is affected by currency considerations, especially in relation to the EUR.

In addition, WTI prices have tended to move relative to demand more than supply. We can see from this graph that there was a decoupling from this relationship last year as prices rose well into 2008, despite clear signs of slowing demand across the board. This caused prices to collapse and (over?)correct in 4Q08 and most of 2009. After a W like dip in demand, it appears that we are seeing a reestablishment of a correlated relationship.

In isolation, demand or petroleum supplied on average is up over 6.5% since May 2009.

Naturally, due to the market contango and excess inventories, less foreign imports have been needed during the same period. On average imports are down about 6.5% since May 2009.

The combination of higher demand and lower imports has created the necessary conditions for excess inventories to begin to work through the system. Stocks of crude oil are down 11.3%.

This slowly shifting fundamental picture, is subtly putting pressure on the back portion of what's proved to be a pretty stubborn long-dated WTI curve.

Although elementary, these graphs have something to say if one cares to think about it:

Further solidification of the aforementioned trends should be apparent in the first month of 4Q09. However, from what I can tell, the basic elements of a recovery are probable. The fundamentals are hinting at a predilection for recovery, and this would mean that producers are going to recover costs in 4Q09 (Opec likes $73-75/barrel, but would prefer $80/barrel), take the average.

That is not to say there won't be some torpid, slow periods due to disconcerting economic data, profit taking and the failure of OPEC members to comply with quotas, Russia as a rogue producer etc. I have said in many posts, where inventories go prices seem to follow, and then some.

But the important factor is demand, and it appears from the EIA data, that this side of the equation is strengthening (slowly). Watch the industrial sector, transportations, (duh!) as equities have also been correlated to energy. Once some of the excess inventories are shed for good, import levels should rebound. When this occurs, the scene will be set for more upside pressure on prices to take hold and the WTI-Brent spread to widen. More evidence or confirmation of a recovery will be to watch how the the long-dated forward curve is shifting and at what rate is moves out of contango.

Lastly, all indications remain that the currency markets will continue as a dominant factor in price discovery in 4Q09; the volatility of the USD/EUR will play into the short and medium term forecast heavily.

Obviously, I'm no Polonius.

So much fun, fundamentals!

2009-08-31T13:05:00.000-07:00

We are going straight to the fundamentals today. Forget the geopolitics, and the current events.

Obama's so near to drowning in the healthcare debate, I don't think he could even find the State Department if Sen. Clinton promised to wear that lovely orange monochromatic suit of hers.

I wonder if the ignominious dictators of the world are enjoying mani-pedi days together, watching gleefully as Obama names a Czar-for-this, and a Czar-for-that, prosecutes low-level CIA officers, ratchets up the printing press full tilt, while reveling... "mouwahhh, yes, I think we can find common ground with this man, yes indeed!"

That's enough. I am only kidding.

I watched this video today and started to think about the disparity between perception and fundamentals in the oil markets. Is the disparity as preeminent as Schork seems to imply? I have said in previous posts that 4Q09 fundamentals should lead the market towards a recalibration of sorts. But I am not so convinced it is in the direction he predicts.

If I were to put a bet down on a roulette table right this second I would say prices will continue to increase based on the side effects of quantitative easing, Chinese government led growth, and the regeneration of the equities market in general.

Yet, I almost always leave Vegas broke, and I understand there is a solid argument for shorting oil based on weak demand-high inventory fundamentals this 4q09.

To complain a bit, post-recession analysis is extremely arduous because of the high market volatility, the difficulty in ascertaining the timing of the re-entry of market players i.e. hedge funds, and the pervasive insecurity of the market. When the industrial sector is back on track in the U.S., the fundamentals of oil should reflect strength in prices.

In any case, it is counter to basic economic theory that in a liquid market (yes, let's assume oil markets are liquid) something close to an equilibrium price can be continually subverted other than for short-term periods. If the price increase in WTI that has occurred this year has been based mostly on perception and an inflated equities market, we can agree that 4Q09 should mark a recalibration back to the fundamentals. It remains to be seen whether this new reflection will put significant downside pressure on prices as Schork predicts or whether some other scenario is more likely to play out.

Personally, I see the coming quarter as a kind of economic cage fight between three hypothetical market players (the un-fun,fundamentalists, the money-honeys, and the commitmentphobes):

A) The Bad Bears-weak demand-high inventory scenario, market remains in contango. OPEC tries, but fails to pull enough barrels off the market to counter this pressure. Demand remains the major fundamental factor in price discovery. Prices vacillate in the 60's/barrel but hit a stop loss of around $57-8/barrel, as the market reconciles with the fundamentals.

B)The Red Bulls- further economic recovery (here and in Europe), the Chinese government is able to balance consumer retail product prices as well help refiners manage margins, domestic unemployment eases up, Dollar experiences weakness vs. other majors (too much spending Obama!), capital flows into commodities sector as a hedge, a noticeable shift to backwardization. Prices manage to rise another 15-20% despite on-going volatility.

C) Flight of the Discords-mixed macroeconomic data, fears of a double dip recession, inability of Chinese consumers to deal with higher retail costs, languishing data out of Europe, capital inflows to commodities sector is tepid led by insecure investors, rallies are generally short lived. This continual push and pull on prices leaves oil rangebound between $65-73/barrel.

The precepts of fundamentals analysis as I see it are most easily handled when reduced to a few basic questions. What does supply look like relative to future demand, how much volatility and risk does the market expect, and will producers be able to recover prices at marginal costs?

In an upcoming post I will use the latest EIA figures to compile a few standard graphs that ideally will direct us closer towards the state of the fundamentals as they are today and flesh out a possible demand/supply outlook for the 4Q09. This exercise should lead to a good estimate or rangebound price forecast through Sept-Oct or possibly into the new year, depending on the strength of the trends.

Stay tuned!

Got V-V-Volatility?

2009-08-12T12:09:00.000-07:00

This is an extremely volatile market. This sentence becomes one of those CNBC platitudes, rendered meaningless after constant repetition.

Why repeat then?

Actually, I think today is a good time to revisit the basics of volatility because it is a phenomenon that continues to rear its ugly head and affect oil prices, whether we are sick of the word or not.

The first question is how does one measure volatility?

There are a number of appropriate methods of calculating volatility. Each have vastly different implications, which we need to consider when we think about the oil markets specifically. Moreover, the deeper question to be asked gets beyond volatility to what is the appropriate risk measure?

We'll get to that later.

To answer the first question, there are two standard ways to calculate market volatility.

The first is option implied volatility. Basically, from the price of a traded European option and the 4 known parameters (strike price, interest rate, asset price [either futures or spot] and time to maturity) one can figure out the volatility (the 5th parameter) from a closed form solution like Black-Scholes.

Remember two things at this juncture however, (1) you cannot invert Black Scholes so there is a need to work with the volatility until the right answer (the traded option price) is discovered and (2) this only works for European options. In the case of American option prices, you will need to use something like Cox-Ingersoll and Ross -a binomial model for a volatility model. This will give you the market's forward looking consensus on what volatility level is backed out from the traded option price. I believe, this is the superior way to determine volatility for most traders because by the nature of the calculation it is forward looking.

The second approach (when you have illiquid assets) is to use historical volatility. In this case, simply aggregate a time series of historical data. First, calculate the price relative of the data set you have chosen (the change in the interday price). Next you take the natural log of the price relative. Given this, you now calculate the mean of the LN prices E(x) and then the variance, E[(x)^2 ] -[E(x)]^2. The square root of this will give the volume.

The underlying assumption here is that the random walk of any sample of asset prices converges to the population mean under the weak law of large numbers. The answer we are looking for is how much will previous historical volatility inform reflect the future volatility. Secondly, we need to think about how oil prices will be influenced by the actual levels of market volatility. There are differing theories on this. Also, it can be difficult to understand when and to what degree the past will look like the future. As implied volatility is more forward looking by definition, it is often preferred as a measure for futures traders.

Finally, the deeper question of risk measures. Ahhh. This is a question focused on whether one should use structural risk models (Merton) or reduced form models (Jarrow + Delbaen and Heath). Structural models explicitly value the assets of the firm while reduced form models value the risk of a firm as a put option premium on the assets of the firm that make it riskless.

Given the Fed's announcement to leave the Feds Funds rates unchanged, I would say that's enough to ponder for now.

Curveball Energy Econ

2009-08-06T16:53:00.001-07:00

I've been wanting to do a brief summary of the oil complex for a few weeks now, but there is so much data to go over, especially including the macro variables that should be addressed.

Conceptually, the following graphs are continuation of previous outlooks as I work them into a systemic approach. It's highly likely given the historical pattern of recessions in general, but this one in particular, that a series of curveball's will get thrown our way as the recession winds down; proverbial bumps on the path back to prosperity.

1) "Sense of the market'' :

Overall inventories are plentiful. This will tend to put downward pressure on the spot price of WTI and other North American blends, which in turn can influence the short term futures contracts. Over the past two weeks more than 7 million barrels of oil have gone into storage, rather than being refined into jet fuel, diesel or gasoline. Although this is generally viewed as a negative economic scenario, the market will be fully supplied with refined product when demand does come back, reducing volatility.

Analyzed on a monthly basis, what's occurred can be viewed as a fair market re-balancing. May 2009 stocks are up about 2.5% over May 2007, and prices are down about 6.5%. This suggests that prices not only have a fairly synchronized relationship with inventories (inverse) but are a little on the elastic side. Therefore wherever inventories head in the next quarter prices are sure to follow, and then some:

I noted in this post awhile back that total petroleum product supplied, an overall gauge of demand, can be a helpful variable to graph. It's choppy, and cyclical, but it appears to be slowly strengthening. It would be nice to see demand get higher than 19 million b/d if prices were to be sustained and supported beyond $75/barrel ( assuming the dollar doesn't depreciate radically and demand remains the key market driver).

The contango is another aspect of the market that may be shifting. A shift in the contango or a drop of the long dated futures contract, would signify shifting perceptions. The closer term contracts appear to be getting more expensive, while the long term curve is flattening ever so slightly. It is nearly impossible to tell if this is this is the genesis of the return to normal backwardization, but it may be...

If markets are normalized at any time in 2009, the time to play the futures market would be right as the shift from contango to backwardization occurs. As the extreme levels of volatility and uncertainty fade, a period of sustainability or sustainable increases could materialize.

Calculating the level of market volatility could be one of the most important underlying factors in the determination of prices in the coming weeks. Next post I will discuss the best way to account for volatility in the market and follow by discussing the unexpected macro events that economy gods could conjure up for us through this quarter.

Lastly on the refining side, crack spreads aren't especially compelling at the moment, which explains some of the languishing overall demand figures. The 3-2-1 spread has remained in positive territory, which is good, but it's not at a level that refiners feel compelled to shed inventories. A sustained uptick in this spread and inventories should start to dissipate at greater rates. This is an important variable to watch, I believe, in relation to WTI prices.

In the mean time, I expect continued discord based on dollar volatility. Quick back and forth price spikes and a market highly sensitive to daily data reports. Expect profit taking whenever possible. This will result in the price to remain somewhere around $70ish/barrel for the immediate term, give or take. It would not be surprising if incremental increases are sustained later in the fall as the macro data sorts itself out, and the dollar begins to fall relative to the other majors due the expansionary nature of U.S. monetary policy.

See you next week!

This will make you laugh...at those funny Investment Bankers

2009-07-30T09:55:00.001-07:00

http://epicureandealmaker.blogspot.com/2009/07/wheres-that-goddamn-ringing-coming-from.html

More discussions on price of oil...

2009-07-24T10:06:00.000-07:00

HOUSTON (Dow Jones)--Although the price of crude has seen a significant rebound from its lows at the beginning of the year, it needs to be higher for a sustained period for global exploration activity to undergo a major boost, Schlumberger Ltd. (SLB) Chief Executive Andrew Gould said Friday.

Benchmark crude prices traded at about $66.94 per barrel on Friday morning. In a second-quarter earnings call, Gould said that $60 barrel "is OK, but it's not going to lead to a rush in activity. $70 (per barrel) might be a lot more encouraging," he said.

The reason, Gould said, is that most of the easy oil is gone, and new projects are located in areas that are expensive to produce, such as the deepwater or the Alberta tar sands. In addition, borrowing costs - to finance these major projects - have gone up in the wake of the financial crisis.

The recent volatility in oil prices - which reached record heights above $145 a barrel last summer, only to plummet near $33 per barrel earlier this year - has led to the postponement of some projects by major oil companies as they seek better guidance on what future oil prices will look like. However, "there's been very little actual cancellation" of these projects, Gould said.

Schlumberger, with principal offices in Houston, Paris and The Hague, is the world's largest oilfield services company.

-By Angel Gonzalez, Dow Jones Newswires; 713-547-9214; angel.gonzalez@dowjones.com

You want price predictions? Well, you got it here.

2009-07-23T10:36:00.000-07:00

Just some shameless self promotion for the day.

Do you see a bounce from the current languishing crude oil prices?

July 12, 2009 8:40 AM

Katrina Rose Dunkley said...

Yes, I think the natural equilibrium is still somewhere around marginal cost for new production and capital investments etc for most producers (especially unconventional) between $70-80/barrel. Maybe we are in a bit of a hold pattern, and this could take a little longer than I initially expected.

I really need to look over the two previous weeks of EIA data, the WPSR reports, to see if there have been any material trend changes in supply or demand. I will try summarize the fundamentals in my next post if I can, and see what I find out.

When the unemployment data came out last week, along with some other damaging demand predictions that triggered this kind of mass sell off. The market may have oversold, which happens a lot with currencies, as I'm sure you know, until they find a new equilibrium.

The way I perceive them, macroeconomic data figures like unemployment and GDP are lagged, therefore they are reflection of past economic activity and not necessarily an indication of present or future. It seems unnecessary for the markets to account so dramatically for backward looking data in a sense, since we've already experienced the hardship of that data, and presumably the market already priced it in, at least indirectly.

I think the price discovery of oil and gas markets is better served in a more forward looking fashion, and better analyzed through a combination of the physical fundamentals and the paper markets, in addition to the usual macroeconomic variables.

Just my humble opinion of course!

July 13, 2009 5:57 PM

The Puissant said...

Agree with your statements!Market participants have been looking at Dollar index and trading the commodity prices for quite some time.

And of course, dollar index is a function of flows which are influenced by macro economic indicators. Infact had told investors to buy crude with stop loss of about 58.

July 18, 2009 9:05 AM

My cap and T(i)rade!

2009-06-30T15:02:00.000-07:00

Here's more cap and t(i)rade'

What we need to ask the proponents of cap and trade regimes is: ‘have you listened to yourself speak? By your own words, “trade” is half of the equation. . .and “traders” are part and parcel of this effort, as they will create markets for the trading of carbon allowances. Cap and trade proponents are calling for the most successful economy in the history of the world to create the largest (and likely most complex) single market in the history of the world—all of which will be facilitated by. . .traders. This market will be facilitated in large part by derivatives traders.

So the reality of a cap and trade regime is that we would be turning this program over to the very people who brought you the wonders of AIG. . .Bear. . .Lehman. . .except this market—and its impact—would reach, into every corner of our economy.

Furthermore, the net costs to taxpayers due to the lack of transparency/efficiency inherent the bidding mechanism all boil down to giant energy tax on business and consumers. This means higher prices.

This kind of regulatory interference by the Feds and the EPA should be disconcerting to fair, rationale people of any political persuasion.

A huge problem with the cap and trade mandate is not just that select companies or traders stand to gain due to a rather arbitrary and opaque government policy. It is that this gain comes wholly at the cost of other actors in the industry; a pernicious corporate welfare scheme wrapped up as environmental righteousness.

If adopted, the benefits to climate change, if any are even measurable, will not come close to offsetting the broader costs to the economy.

Of seditions, and certain hollow blasts of wind...

2009-06-21T17:15:00.000-07:00

Let's engage in some classic international political economy. My academic roots.

" the distinction between political and economic causes of war is an unreal one. The political motives at work can only be expressed in terms of the economic. Every conflict is one of power and power depends on resources." (Hawtrey, 1952, p.81)

Segue to energy and Iran. Surprise.

The situation is truly compelling; the exegetic images of beautiful, daring young women in the streets, and the fomenting political turmoil, almost calls for solidarity. But it is too soon to understand, whom these people are and what they really mean long term. The consequences of a severely attenuated Khamenei regime are plausible though, and that is something to note.

The engines that drive international relations, and specifically U.S. foreign policy concerns are far less glamorous and spontaneous than media images would have one believe. At the core of the globalized system, it remains, that the policies of nation-states, calculated and cold, determine how global markets function.

Iran, despite who is in power will not change the root calculus of the international political economy in the region.

No? Go find out how many people, still today, are being killed in the Democratic Republic of the Congo. A failed state (no impact on the markets) with potential wealth (gruesome domestic strife), in a geographic location that is of no imminent policy concern to the international trading order (no meaningful international pleas for intervention, mainstream media coverage).

If the mainstream media and the market follow keenly, it correlates to the level of meaning for the nation-states et al. involved, rarely to the deeper meaning of the event itself.

I can not help but be drawn to what the libertarians have to say on the matter, with variation.

Although it may come to pass in time, conflict is not an agenda item of the U.S. in itself. At this point, Obama's administration would be much wiser to use soft power than squander dwindling reserves of hard power. Israel, Britain and other allies will try to aide in this respect.

Washington will remain essentially agnostic on the Iranian matter for now. What Washington wants is to deal with a more tractable Iran. In the aftermath of these demonstrations, this is exactly what they might find, not in a Mousavi regime, but it an enervated Ayatollah Khamenei regime.

The real dilemma for American leaders past and present has not been the leadership in Iran per se, but that they have not found a way to counter, or co-opt Iran out of aspirations to regional hegemony.

The definition of regional hegemony for Iran up until now, has been tied to a nuclear program. Paradoxically, this potentially lethal political aspiration both detracts from and adds to the ruling elites power base. Under current authority, if Iran could obtain nuclear weapons, the result would be instant gratification. Rapidly advancing the country's geopolitical goals and cementing its status as world power/irritant.

Yet the risk of undertaking the nuclear path is one of international isolation, fraught with imminent and dangerous economic consequences. This path is precisely what is undermining the regime at present.

Regional hegemonies, especially those not based on democratic values should be trading nations. The government must provide economic opportunities to allay dissidence, and enforce status quo. Iranian authority, like most autocratic regimes is mismanaging the economy and paying the price.

According to OPEC in 2007, Iran exported 4 million b/d of crude oil but was only able to generate a GDP of $294.09 billion ($64.90 billion derived from petroleum). In comparison Alberta, a province of only 3.6 million people, exported 1.83 million b/d of crude oil but was able to generate a GDP, nearly equal to that of Iran, $258.9 billion.

This basic macroeconomic comparison screams of what must be the inactivity, and inefficiency of a huge portion of the population in Iran, contributing very little per capita to GDP.

As Francis Bacon wrote "the matter of seditions is of two kinds: much poverty, and much discontentment."

As for U.S. political economy, current U.S. military/financial engagements in the region, and key political alignments will constrain and inform Obama's short-term actions. Any alterations to the mindset that typically prevails among DC's foreign policy/intelligentsia under Obama is likely to occur on a normative, rather than structural basis. Lastly, the notion that peace is ultimately achieved through strength (i.e. trade, military, power and prowess) remains tacit and intact in Washington, DC.

For these reasons, President Obama is certain to continue with a response that is historically consistent; a policy that undergirds American primacy.

Vertiginous, and other such things.

2009-06-15T07:12:00.000-07:00

Vertiginous: inclined to change frequently or suddenly; unstable. The economic data, especially regarding the recovery aspect of this recession, seems such. For a time, the U.S. has a certain economic momentum, then a data set may come to light and the economic picture reverses. I only read the market news at night.

Core analysis avoids jumping too much at any one piece of data in an effort to identify more material trends. Not that the inventory data, or oil demand data is insignificant this week.

For example, today crude oil inventories dropped far below what was predicted by analysts. However, these inventories were essentially transferred to gasoline stocks. Rendering the government data neutral.

Imports were up, again.

The less publicized figures of weekly total crude and petroleum net imports demonstrated strength, climbing from 9.6 mb/d to 10.0 mb/d. The continuation of this trend would eventually show higher levels of market activity.

If production levels remain stable and inventories begin to erode materially even as imports increase, the balance sheet will begin to reflect this as increased consumption in some way.

This kind of changing supply and demand equation often leads to higher prices as well.

One variable to check if this equation holds true, is total petroleum product supplied. This variable is likely to display a trend reversal (it has displayed a steadily from January 2009).

Source: EIA

I wrote last Thursday, that oil and the USD/EUR display a touchy relationship when there is a state of disequilibrium in the markets. This far, when the USD/EUR has appreciated, the basis seems to be due to the attenuation of the other majors.

Strong currencies, like people, grow by means of intrinsic value. Perhaps we will simply stand on the precipice of an anemic U.S. dollar for what seems like a long, long time.

I read with interest that my $100/barrel prediction was in technical company when I stumbled onto this article posted on Bloomberg the other day.

However the market is made of people, perceptions and influences. The technicals are only best guess models. I was more interested to observe how OPEC is utilizing the power of rhetoric and influence in an effort to move the market to continually to more favorable price levels.

For many months, OPEC opined that $75/barrel was the minimum equilibrium needed; the necessary price level suppliers had to recover in order to ensure capital investments and cover production costs. Now that the economic conditions seem favorable enough, the campaign to set a new price point of $80/barrel has begun.

If conditions allow, OPEC will continue to work at this campaign, and sway the oil complex into a more supply-friendly environment.

Dear Below,

2009-06-12T08:31:00.001-07:00

Axiom: The reverse, also therefore true. Referring to inverse relationship and bottom paragraph.

"Life shouldn't be printed on dollar bills"

2009-06-11T16:56:00.000-07:00

Nor should every single one of Obama's policies. Actually I don't believe that the U.S current account deficit is completely detrimental, either to the U.S economy and GDP growth or for the liberal economic trading order. Thanks to Chinese consumption we might be saved after all.

Pick up a copy of my exit exam from Fordham, if you want the elaborate theory on political economy.

I must protest though, that the current Keynesian mindset in DC, which would fabricate economic results should they fail to materialize organically, has proven to be a regime that pervasively undervalues tax dollars. This administration has only inspired me to use my "Hope" t-shirt to clean my bathroom.

Given this thinking, misguided energy policy is potentially highly problematic for the economy down the line.

I think the long-term consequences of monetary policies on the oil markets, are not only interesting, but are actually some of the more predictable relationships to analyze.

It is fair to say that most energy economists haven't found the relationship between the US dollar and oil to be highly correlated historically speaking; the graphical relationship presently seems to present an inverse pattern when USD/EUR is anywhere lower than mid 0.70's.

Source:EIA, Oanda

Another way to think about the relationship between the Dollar and oil is to envision it in constant and current terms. Hypothetically, it is a comparison of the price of front month versus the price of a front month held at an arbitrary point in time.

The point of this exercise is to decipher a) whether there has been a material currency shift (versus the Euro) and b) to quantify this in terms of the price of a barrel. As I've mentioned I think the natural equilibrium price point for the dollar is approximately USD/EUR 0.75ish.

Holding the exchange rate constant as of 9/1/2007 when the USD/EUR was 0.755 graphed over the current rate is below:

Source: EIA, Oanda

At the height of last year's oil run-up the exchange rate price disparity calculates at over $20/barrel.

Today the USD/EUR spot is roughly 0.71 Euro per Dollar. One might assume that if other factors combine to push the price of oil higher, and on top a USD/EUR spot rate that is in decline, an additional currency premium fueling market momentum, could very well be repeated.

Leaving Las Vegas

2009-06-10T22:55:00.000-07:00

I apologize for not posting last week, I was pondering the meaning of my life in Las Vegas. Probably not wise. Believe it or not I came back with slightly more money than I left with. I'm going to write something of significance tomorrow because even though I predicted just a short while back that the price of WTI was going to $75/barrel "Crude, predictions" (and that seems imminent), I'm actually confused by the whole thing. I didn't really expect it to happen so quickly. I've been promising to look at the US dollar, which was probably the primary cause. Even though I have said before it seems the highlight variables like crude inventories first move traders after the WPSR.

Obviously I'm still in a betting mood because I feel there's many reasons to expect the long-term market push to be towards $100/barrel. Just a gut. This should take awhile to reach, more like the end of the year or sometime after. However because I've just been in Vegas for 5 days, I should probably stop here and not make any more psychic predictions. It's like when the pit boss says knowingly, " sweetheart time to take a break".

P.S I reserve the right to take this all back tomorrow upon doing what we refer in the business as "actual analysis". Let's see if I have to.

WTI-Brent spread, divinations

2009-05-31T13:15:00.000-07:00

The WTI-Brent spread is a key factor in determining how international markets flow. As a variable it also has an effect on how inventories move from week to week. This price movement can determine whether the U.S market remains flooded with crude oil or whether we begin to see supplies trending down. I think it's important to look at the spread now rather than later, when the trend is too clear to make any real profit. In fact, I think June could be a pivotal month for the oil complex in general, a month where trends begin to signal their behavior for the remainder of the year.

The rule of thumb for the WTI-Brent differential is that WTI usually trades at a premium, the relationship is volatile, and arbitrage constraints keep both markets in check. The reason for WTI's perpetual historical premium is due to it's superior quality and acceptance among refiners. Sweet crude is more readily refined into distilled and market-ready products and is usually more able meet environmental regulations. There are also economic reasons; the U.S. market has to attract and compete for imports. There is academic debate about whether or not WTI and Brent accurately reflect the true fundamentals of the markets they purportedly represent, but they remain totally accepted in the industry as the two primary markers (U.S., European).

The WTI-Brent differential does not get an exceptional amount of coverage by the mainstream media, but it is an important weekly variable for insiders to know about. Thankfully it really doesn't take much to understand the math or economics of the spread (Price WTI-Price Brent = differential), and a few simple charts can offer insights into what future months may have in store in terms of inventory trends and futures curves. In the present case I'm looking for a reversal of WTI's recent discount and what this could mean. With greater prescience, I might know if we were about to enter a highly volatile, but rapid transition period or maybe just the beginning of slow but sure transition back towards a rebalanced market. Unfortunately the data isn't quite that clear yet, but it does imply enough to make general inferences.

Again, note the historical data is fairly straightforward. WTI, except for rare exceptions (much of this year), has dominated over Brent.

Source: EIA

A reversal in the WTI premium has been re-established for the entire month of May. It is difficult to tell whether this is a pattern, but it does beg the question of whether market forces are finding momentum to return to something closer to equilibrium.

For that we have a lot more work to do.... I think I will check out inventories next time, they have been on my mind for a long time, mind you so has that wonderful thing we call the U.S. Dollar.

Remember if you want to get a start on trading but want a basic all-around, trading platform try Easy-Forex. I did it!

2009-05-31T10:03:00.001-07:00

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Crude predictions

2009-05-27T14:31:00.000-07:00

Energy analysis is tough. Academics rarely venture predictions on short term market behavior because of the tremendous volatility of commodities (ironically, oil options happen to be pretty cheap right now i.e. not so volatile ). The other day I was watching the NewsHour with Jim Lehrer and a piece by Jim Brown. He was interviewing two professors, on the oil markets. In typical fashion both guests evaded price predictions successfully. Here is the entire video segment.

There are a number of global geopolitical topics that I haven't yet touched on, but Dr. Lieber discussed "The import of imports" and the relationship to the price of gasoline which I have been looking into in previous posts.

Dr. Jaffe, threw out the idea that the price of oil and gasoline could be range-bound in the 60's/barrel for some time. Saudi Arabia the major OPEC producer, could use their leverage over chief competitor Russia (if it's possible) to control the the price mechanism through geopolitical strongarming, as it relates to the Iranian issue. This seems like a semi-logical statement given the current news cycle. However, the Saudis have stated since the beginning of the recession that OPEC members would like a minimum price point of $75/barrel and engaging in a price war after a year long recession doesn't seem likely to me.

On the other hand, getting to the $75/barrel does seem like a bit of a task with the news that Russia will seek to expand production while prices are at acceptable levels in an effort to maximize government revenues. Fears that this will destabilize a fragile market seem well warranted. This will put considerable pressure on the Saudis to hold back supplies and force them to pressure less willing members to do show restraint as well. The Saudis assert that data shows that world demand is shifting positively, although a couple of weeks ago the IEA found demand declines would remain pervasive.

As compelling as the story is for the political economy of global demand to dominate the WTI price story, U.S fundamentals still underlie the medium term pull in my mind. The majority of oil exporters to the U.S. both Middle East conventional and unconventional have stated that either their production cost or their target rate is somewhere close to $75/barrel (price = production cost).

Let's say then $75 or $80 is the point below which it becomes uneconomic to bring new oil projects to market. Above the marginal cost of production, product (in this instance oil) can be extracted and sold at a price that will allow a return to investors at an acceptable after tax capital return adjusted for risk.

Although projects are planned years in advance and each firm has its own production curve, producers would logically defer new supply and hold back and produce at lower level if the the perception was that oil market weakness was going to be persistent. Therefore if prices could not meet production costs for more than a few quarters this should be consistent with a supply drop, at least in Canada and the U.S., (Mexico has separate supply issues not treated in this post).

The EIA's Short Term Outlook supply numbers should illustrate what market conditions in the U.S and Canada were and what they may be in Q309 and Q409. Here is supply graphically:

It seems reasonable to assert that producers may have expectations for fair economic return from projects that were at least on par with 2008. Given the condition that there continues to be a slight uptick in supply even in the face of slowing demand in 2009, it is logical to assume that the market expects prices to equate to marginal costs or at least meet average costs i.e $75/barrel.

The mercurial, mysterious water levels of the Great Lakes

2009-05-25T12:04:00.000-07:00

I have started research for an article for The Fraser Institute on the Great Lakes and the controversy on falling water levels over the years. A part of me wonders if the press actually analyzes the data first-hand? It does not seem so cut and dry as many of the articles usually relate to the public. Not that I am at all for the hindrance of the cross border shipment of goods, which pervasive lake levels will cause. It's the coalition of governments, media and environmentalists that seem to result in onerous and increasing new shipping tariffs, that concerns me.

A couple of things struck me today when I was visiting the National Oceanic Atmospheric Administration website 1) this is a behemoth of a site but 2) all five of the Great Lakes are very close to the historical mean (data since 1860) this year.

A few years back when this subject was getting a little more attention, there were featured in glossy magazines lamenting about the situation. National Geographic's 2002 "Down the Drain" postulated that Lake Michigan levels were falling because of on going rapid evaporation (warming). Yet a recent joint U.S.-Canadian study of the Upper Great Lakes did not recommend remedial action to either government based on current climate data ( lower levels for some of the period were attributable to a 1984 ice jam in the St. Clair River).

Source: International Joint Commission ( International Upper Great Lakes Study)

Notice the many shifts deviations mean over the decades attributable to climate shifts for reasons other than C02.

An interesting article in the Chicago Tribune by James Janega entitled "Great Lakes Past May Offer Clues on Climate" points out that Lake levels are in constant flux. A wider lens is not only helpful, but an academic responsibility.

The import of imports

2009-05-20T11:47:00.000-07:00

Now that we've had a policy interlude on fuel efficiency (yesterday's post), I'm going to continue examining the demand side of the equation. I want to look at the often politically maligned foreign oil imports to see if there's anything I can extrapolate about the health of the economy and work toward my price forecast.

So let get's back to our fundamentals analysis. It's no secret that the sixty dollar mark was a big one to surpass for the front month contract, but where the price goes now is even more eminent. There is a lot to think about when it comes to what will be driving prices this summer. Will there be a driving season, will the glut in distillates cause refiners to hold back operations, will inventories continue to build? How will the market react to these conditions.

Inventory numbers tend to cause incremental price changes. However, in my opinion there are other, equally important underlying factors at work that affect prices over the long term. I've already gone over the importance of gasoline demand and briefly mentioned crack spreads, but there's also other metrics such as foreign imports, and domestic production. These figures (when compared to the previous year's levels) demonstrate the current level of economic activity.

I've graphed the period May 16 2008- May 15 2009 for total U.S imports. Notice the year-over difference is 446,000 b/d. It is not a insignificant disparity, but not a drastic one either. Imports rebounded significantly after a dramatic drop in the fall of 2008 and have remained fairly steady until a decline just recently.

To examine imports further I have graphed the same time period only for PADD III which is the Gulf Coast region. The Gulf Coast receives the vast majority of the imports for the country. The year-over disparity is negligible, less than 5000 b/d. I feel it is noteworthy that imports are virtually unchanged since the height of the high demand season last year. Demand in PADD III has rebounded from the recession nicely.

In terms of total imports, my guess was that rather than a drop in demand, we were likely substituting away from foreign oil towards domestic production. This would help to support the steady rise in prices (despite the high inventories). Below is the graph of U.S Domestic Crude Oil Production. The net year-over gain is 307,000 b/d which would account for almost three quarters of the net loss in imports. Although it seems counterintuitive to think of production on the demand side, for simplicity sake domestic supply=demand.

Looking at fundamentals such as imports (and domestic production) is a key variable in assessing the level of demand and economic activity over a given period of time . Large import fluctuations in a Weekly Petroleum Status Report can impact market prices from week to week, but more often than not imports are viewed from a wider lens. These longer term trends help to inform prices.

Interlude, 1600 Pennsylvania has an "idea"

2009-05-18T21:37:00.000-07:00

I'm in British Columbia right now, and today is a holiday for me (Veterans Day). Since brevity is the soul of wit, I'm going to reiterate last's weeks discussion on Obama's energy policy, with this article from Reason Online. This piece touches on a lot of the points I tried to make in my article for the Fraser Institute, with less numbers.

For those of us that still believe in free energy markets I think both of these articles speak to the importance of a sensible energy policy. A policy that recognizes the upside to fossil fuels and admits to the public that there are drawbacks to government led alternative energy markets. I find it disturbing that the line of thinking so often is that the oil and gas industry should pay for the shortfalls of green energy.

President Obama has proven to be committed to implementing his energy plan. Today he announced a nationwide fuel efficiency program that will curb emissions by as much as 30%. Although automakers are supposedly on board with the plan, I think Obama's timing on this one is slighly precipitous. It is an undeniable economic rule that arbitrary government restrictions equate to higher consumer prices. In this case these price increases will occur far in advance of 2016 deadline because auto makers will start to look for ways to pass the anticipated costs off to the consumer immediately. With the recession weighing down households and producers and the President engaging in broad health care and education reforms, this policy seems like too much, too soon. However, with Waxman (D-CA) and Markey (D-MA) pressing hard for something to get done on climate change- they just introduced a new piece of legislation, Obama's announcement is certainly in line with his herd on the Hill.

Here is a good article from Time.com that outlines the basics of Obama's newest policy.

The oil complex...complex, redux

2009-05-15T17:01:00.000-07:00

Yesterday's price pullback is a good illustration of what I discussed last post. For the background on Friday's oil news, you may want to read a quick article in Reuters. Demand appears to be the variable to watch when it comes prices. The inability of the financial markets to recover and ongoing recession suggest that demand will dominate the price equation for some time.

Last post I looked specifically at U.S. refinery demand as well as U.S consumer demand for refined products from the first of this year. In my opinion the data was somewhat nebulous; refinery runs have yet to ramp up for the summer driving season, demand for total petroleum products is weak, but gasoline demand is showing improvement.

There's quite a bit more to the demand picture I want to think about.

A comprehensive analysis (despite the concern regarding global demand) requires us to continue uncovering what is happening on the domestic front. My focus is primarily to do price discovery of NYMEX crude oil futures, on a near term basis. The spot price of West Texas Intermediate (WTI) tends to reflect current U.S. dynamics, which usually influences the futures price. Therefore, for now I am going to assume that domestic variables carry the significant weight for WTI forward prices as well.

Since I have already outlined the importance of refinery demand for crude, as well as highlighting the need for gasoline (and other products) to pick up this summer I'm going to continue looking at relevant data associated with both.

Refinery utilization is a metric worth discussing. Refinery utilization is the total percentage of current operating capacity in a given week. Although this is a generalization, the higher the output the hotter the markets are for gasoline, diesel and other refined products. This also usually implies that crack spreads are favorable.

Below I've graphed refinery utilization from January to May, years 2007-2009. Notice the difference in utilization each year. What does this signify, if anything?

This graph suggests that crack spreads are weak for refiners. This year we can attribute that to lagging demand for gasoline, diesel and heating oil (thereby reducing prices). Refiners are undoubtedly finding it tough to make acceptable margins, so they are hold back on runs. In 2008 refiners were squeezed because oil prices (input) were so high, not because demand for output was low. Nothing about this graph sways me to think that refinery utilization is going to climb very much higher in the short term.

A quick look at the price of gasoline from the end of the driving season in 2007 through present, seems like further proof that refiners are withhold supply, because of a lack of consumer demand. Granted the price of gasoline is informed by many factors (mostly the price of crude) for right now I am thinking of it purely as the maximum price that suppliers are able to seek from consumers. Although price is making a bit of a turn, there is still a large disparity on a year-over basis.

Continuing on the topic of gasoline demand, which I have already graphed it in terms of product supplied (barrels/day), I'm going to look at short term future expectations. This may shed some light on the direction of the future price curve. The NYMEX RBOB short-term price curve is a good indicator how the market is valuing product and regarding future expectations of demand.

If you don't know how short-term curves work, a quick visit to this page on EIA's website will help. Notice the shift of the short-term price curve, appreciating over the months and switching from contango to barckwardation. If this pattern holds, which it should for the summer months, it tells us that suppliers are beginning to value RBOB now more than later. A lasting shift should impact the inventory trend, a metric that the market usually reacts strongly to.

It is important to keep track of the shift in short and long-term forwards curves. They aren't necessarily a tool for determining exact price ranges (they are often biased) , but they do offer some insight into emerging market trends. Additionally, keeping track of refinery runs and gasoline demand is an integral part of price discovery. Although refiners are cautious, It appears we may edging towards a bit of trend near-term reversal, but more data crunching is needed before I can make a determination.

Ifyou want to start making your bets on the market a good place to start is with Easy-Forex.

*All data is EIA.

The oil complex...complex

2009-05-14T16:27:00.001-07:00

I'm going to do some market analysis for the next several posts. Stay with me as I build a hypothesis on summer WTI prices. Let's see how accurate I can get, or where I miss the mark.

I think there's an interesting paradox that has emerged in the oil markets during the current economic recession. Demand for oil has been significantly reduced, leading to la large build up in inventory levels , yet the price for front-month crude has edged up steadily.

There are a number of ways to examine what seems to be a contradictory economic situation. A sense of what has been driving prices is needed at the outset if I'm going to make an educated decision on where prices are going in the weeks and months ahead. There a couple of ways to do this kind of analysis. I think that the only accurate way to predict what is happening is to do to a sweep of the major factors one by one and then identify what the key drivers will be on prices.

Beside the fundamentals I need to look at what traders are doing, because they play a big role in manipulating the long-term price curve. Current prices are very much informed by market expectations/perceptions about the future price of oil. A popular line of thinking is that there are also key macroeconomic variables that drive money into oil and other commodities, and I will need to look at those as well. The most notable example is analyzing the salubrity of dollar, which (recently) has tended to display an inverse relationship to the price of oil. There are other variables that I associate with the financial aspect of the markets like net speculative long positions, volumes, volatility, and others.

More importantly is to begin with the physical fundamentals of the oil complex i.e. supply/demand and proxies for supply/demand because these variables will allow me to derive what I call a structural theory on prices.

Today, I am going to start the fundamentals analysis. Hopefully I can soon decipher an overall market trend or better yet the beginning of a market trend, and make a bet on prices.

I'm going to start with what is being demanded and what is being consumed. There are a couple of different demand variables I think are important. I'm going to look at crude oil refinery inputs to start. Although it's tempting to think of refiners as on the supply side , it's also important to recognize that refineries on the demand side for crude oil . Simply think of crude oil refinery inputs as the sum of what is demanded by refiners for processing in a given week.

Clearly, crude oil inputs are choppy and hard to predict on a weekly basis. The overall linear trend line for the last five months however, shows a slow but steady incline. The slope for this equation can be read as predicting an average increase of 805 barrels or a weekly gain of 5,635 barrels. In reality, we should get more of a ramp up than that for the summer driving season. I view a positive trend line this year as quite likely signifying a general uptick in refinery demand overall. The question of how much refiners ramp up this summer up will depend on the demand for petroleum products i.e gasoline, distillates, residual fuel oil, kerosene and propane.

The following demand variable I am going to look at is product supplied data. Although not a perfect measure of demand, this is one of the best ways to gauge overall demand by consumers.

The overall trend for total petroleum products demand appears to be weak. This means that refiners have probably lost revenues in gasoline and distillates, two of the most important markets. Looking at the weekly trends, the five or six spikes this year have not built any lasting gains and demand has slowly eroded. There is a possibility of a trend reversal, but I will need to assess what's going on with gasoline before I can make that determination.

The outlook for finished motor gasoline does not appear to be as bleak. Product supplied has increased about 1% this year (it's still down about 4.5% over the same week in 2008). It's conceivable however, that if the trend continues demand may gain another percent or so.

What can be made of this initial demand overview? Firstly, refinery demand is essentially flat, demand for overall products is lagging, but gasoline is looking up. At the outset I would venture to say that price movements will heavily depend on how much the demand for gasoline rises in the next few months. With ample supplies, refiners aren't likely to make large incremental demands for crude oil until they are certain there will be a market for their supply.

There is much more analysis to do though before a clearer picture emerges from the data.

In the mean time, if you want to get a start on trading, a simple and intuitive platform to use is Easy-Forex.

Good luck.

Until next time...

Why Obama's alternative energy plan won't work

2009-05-12T16:16:00.000-07:00

Since this is my first blog post I want to cover something that has been on mind for awhile.

Ostensibly President Obama and his energy team are still claiming that the green jobs agenda will create up to 5 million clean jobs. If this is the case, what do really know about the President's plan from a cost-benefit perspective? Where is the quantification of green jobs claims in the press? The answer is that there has been surprisingly little credible economic analysis on whether there is any veracity to green jobs claims or how much the President's plan will cost us.

Recently I wrote an article (click blog title) for The Fraser Institute modeling what the public may have to pay if alternative energy is hand picked to succeed at the expense of more efficient forms of energy. I found that rather than an economic boon, the green jobs agenda could cost taxpayers over $400,000 per job!

Is this something Americans can afford?

Please share your thoughts!

Also visit this link for access to the full issue of The Fraser Forum (march, 2009) entitled "The Truth about Green Energy"

Stay tuned for new research on global warming later this week...