Bret Boteler on Oil & Gas

Tax Dodge: Cap-and-Trade Would Harm Consumers – and the Oil Industry

2009-04-30T18:19:00Z

Last week former Vice-President Al Gore trekked to Capital Hill – presumably in a fossil-fueled private jet – to express his support for a cap-and-trade energy bill that would penalize companies and individuals who use fossil fuels like oil, natural gas, and coal.

You’ve got to hand it to Mr. Gore – he’s turned a $2 million income after he left Washington to a $100 million windfall through his business interests.

Like an oilman who hits a sweet spot, Mr. Gore has found his capitalist niche and fully exploited it. I don’t agree with his particularly aggressive brand of climate alarmism but it’s a free country and he’s out to make money and, in his mind, make the world a better place. Nothing wrong with that.

That said, I do have a major problem with his new energy proposal, backed by President Obama and many Congressional Democrats, that would create the “cap and trade” law. Quite simply, it would both trigger an onerous tax on businesses and individuals at the worst possible time, with the economy in legitimate peril. Plus, there’s no evidence that a cap-and-trade law would cut greenhouse gases. It certainly hasn’t in Europe – similar laws there have not decreased carbon emissions but they have proved costly to business and consumers in terms of energy bills and bureaucratic red tape for companies looking to grow their businesses.

Interestingly, one key Congressional Democrat who has a lot to say about the passage of any cap-and-trade bill - Rep. John Dingell (D-Mich.), the former chairman of the Energy and Commerce Committee –called out Mr. Gore during his testimony. “Nobody in this country realizes that cap and trade is a tax and it’s a great big one,” said Rep. Dingell.

Congressional Republicans pounced on the comment, saying essentially if it walks like a duck, talks like a duck, and acts like a duck – it’s a duck. Matt Lloyd, spokesman for House Republican Conference Chairman Mike Pence, said as much: "Chairman Dingell agrees with what Republicans have been saying all along: the Democrat cap and trade bill is a national energy tax on working families.”

Pence estimates that the average American’s energy bill would rise 50% with a cap-and-trade tax. Plus, millions of jobs would be lost – many of them in the already suffering oil and gas industry.

That’s not the only impact a cap-and-trade tax would have on the energy industry. Red Cavaney, senior vice president for government, public affairs at ConocoPhillips, also testified in front of the US House Energy and Commerce Committee. He said, quite accurately, that refineries would have to spend an estimated $68 billion under a $25/ton carbon tax, mostly from collections of end-users' carbon taxes in addition to levies on refiners' greenhouse gases under the measure.

As much as an onerous cap-and-trade bill would hurt the oil industry, it would hurt consumers even more – and not just in higher energy bills. As Cavaney explains, oil companies will have to figure out how to cope with higher taxes and fees, and that could mean passing larger costs along to customers. "It is vital that the mechanisms for allowance allocation to trade-exposed energy-intensive industries are applied fairly and in a way that comprehends the fundamentals of how these markets work,” he told the committee. “We are deeply concerned about our ability to fully pass on these costs of compliance and the potential implications that even a small percentage of unrecoverable costs could have on what is historically a low-margin business," he testified.

All in all, cap-and-trade is a terrible idea, and a Trojan Horse of a tax that will hurt individuals and businesses. As said Rep. Roy Blunt (R-Mo.), the timing alone makes cap-and-trade a big mistake. "Every credible study I've seen tells me that a cap-and-trade program will increase the cost of energy and hurt businesses and consumers throughout the US. I doubt there's ever a good time to burden American consumers with extra costs, but I believe that now is probably the worst time to implement an energy program that will pass the costs directly to the consumer every time we flip on a light switch, turn up the thermostat, fill up our [gasoline] tank or purchase an American-made product.”

It’s time to stop the insanity. The more people know about cap-and-trade, the less they like it. So make your voice heard and tell your families and friends, and contract your Congressional Representatives.

It’s high time that we put a “cap” on cap-and-trade.

Q1 Update: Economy Keeps Taking Toll on Oil and Gas Markets

2009-04-21T01:04:00Z

The business landscape continues to crystallize for the oil industry, although not in the way that many of us in the industry hoped it would.

Of course, all things are dynamic and things could change, and for the better. But right now, we’re getting and storing oil here in the U.S. – that’s not the problem – we’re just still not seeing much demand from customers.

A barrel of oil remains at about $50 apiece, even as commercial US crude inventories rose to the highest level since 1990, according to the Energy Information Administration.

The EIA says that U.S. crude oil inventories jumped to 5.6 million barrels from 366 million barrels during the week ending April 10, 2009. Gasoline inventories did fall slightly – by 900,000 barrels over the same time period, but that’s fairly normal for this time of year.

But even though OPEC has cut supply, U.S. tanks and containers remains awash in oil. "The main US market is receiving more crude oil, not less, than last year,” Olivier Jakob at Petromatrix, Zug, Switzerland, told The Oil and Gas Journal last week. "On the 4-week average, crude imports into the US Gulf Coast are 500,000 b/d higher than last year despite the fact that OPEC production is supposed to have been 3.2 million b/d lower than a year ago in the first quarter.”

So we have the oil but can’t sell it – and that’s a key issue hurting the energy sector right now. The oil and gas industry is like a big eighteen-wheeler stuck in the ditch – engines roaring and tires spinning furiously, but with no traction and no forward momentum.

How tough is it out there right now? According to the American Petroleum Institute, U.S. oil and gas drilling has fallen to its lowest levels in six years.

-- Oil product deliveries slowed by 3.4% - the lowest number since 1998, says the API.

-- The EIA reports that reduced demand from a weaker economy will offset any demand increases resulting from lower product prices this summer driving season, even though consumer demand for gasoline will finally rise again this June – by about 1%. That should pump gas prices up to about $2.25 a gallon – a bit higher than they are this spring.

But it’s the long-term, downward curve that concerns me. Sure, the oil industry is a volatile one, with highs and lows that would match any global business sector. But we continue to be stuck in that ditch, and have been for some time now. Says the API, in agreement with my point, "The substantial, 4-year decline means that the US share of world oil consumption fell from nearly 25% in the first quarter of 2005 to under 23% in early 2009, based on International Energy Agency estimates," API said.

Any regular readers of this weekly column know that I’ve been keeping track of new wells. That’s been a sluggish environment, too. The AAPI is out with some new numbers on wells and dry holes, reporting that about 11,071 oil and gas wells were completed in the US in the first quarter of 2009—22% less than in 2008's first quarter and 35% lower than the in the fourth quarter of 2008. The API also says that the estimated number of new exploratory wells dropped 11% from 2008's first quarter, while the estimated number of deep wells—those 15,000 ft or deeper—and shallow gas wells slipped 13% and 36%, respectively.

Consequently, we’re not going to be seeing great numbers once the oil industry Q1 revenue numbers come out. Oil producers, oil services companies, and natural gas outfits should see profit numbers that will be among the lowest in recent years – maybe the worst in a decade, based on the picture I painted above.

Let’s use ConocoPhillips as an example. The company has already warned investors that lower oil prices have set the stage for a lousy quarter. In an investing brief, Conoco reminded Wall Street that oil was down $54.97 a barrel versus the first quarter a year ago. That sets a pretty low bar for earnings, and Wall Street has already begun the process of chopping expectations down. Analysts surveyed by the financial information company Thomson Reuters expect that ConocoPhillips will post first-quarter earnings of 44 cents a share, 83 percent below results of a year ago. In the very same survey, The Chevron's per-share profit is expected to fall 65 percent, and Exxon's to drop 53 percent.

From Thompson Reuters; “Much depends on the price of oil, but for now analysts' full-year earnings estimates versus 2008 are also pretty dire: Conoco down 70 percent, Chevron down 58 percent, Exxon down 49 percent.”

Hey, I wish I could tell you different, but we’re going to start seeing some significant spending cutbacks and maybe even the first big round of layoffs in the oil industry.

It’s a negative picture, but an honest one. Let’s hope the landscape for Q2 is more favorable.

Milder Hurricane Season is Good News for Oil Markets

2009-04-15T19:01:00Z

I’m not a weatherman and I don’t play one on television.

But as a veteran oil guy, I’m a big believer in the old adage, “safety first”.

Sixteen oil riggers died in a helicopter crash over the North Sea recently. The chopper went down in heavy seas and bad weather, and I don’t think the average American appreciates the bravery of oil riggers who literally put their life on the line to get consumers the oil and gas they need to run their lives.

It’s certainly not a priority of the news media, who can’t or won’t acknowledge the risks that oil riggers take when they go out on a job. Any sympathy from the New York Times or CNN would get in the way of their pre-fab agenda that oil is bad.

But I digress.

There is good news on the oil safety front, and we can thank Mother Nature for it. This after Professors Philip Klotzbach and William Gray of the Department of Atmospheric Science at Colorado State University have come out with a new study saying that this year’s hurricane season will be a mild one. The 2009 hurricane outlook calls for 12 “named” storms for 2009 – that’s down from 14 hurricanes in 2008. Of the 12 storms – the CSU study says only six will generate hurricanes, with two of them categorized as “intense” hurricanes.

Klotzbach and Gray know what they’re doing. Their track record for pegging the severity of bad weather during hurricane seasons has been spot on. In fact, their methodology has correctly predicted above- or below-average tropical storm seasons in 45 out of 58 hindcast years for a 78% accuracy rate.

A milder hurricane season is cause for celebration among oil drillers and by U.S. oil consumers. Think back to 2005’s hurricane season when hurricane Katrina ravaged not only the U.S. Gulf Coast, but also the oil rigs that dot the shoreline along the Gulf of Mexico. According to data released at the time by Cano Petroleum, the damage done by Katrina left the oil market’s reeling. "Worldwide demand and supply for crude oil is now nearly even at 85 million barrels a day,” said Cano, “so the supply 'cushion' that we enjoyed in the past that kept prices low no longer exists. Refining capability to produce more gasoline is at full capacity because America has not built a new refinery since 1976. The U.S. already gets a quarter of its domestic oil production from offshore platforms in the Gulf of Mexico. Because Hurricane Katrina has shut down production there and the current refinery bottleneck, oil/gas prices are going to stay high for a long time."

For another viewpoint, consider how much of an impact a severe hurricane can have on a local economy. Using Katrina and the state of Louisiana as a metric, that impact is huge. According to the Louisiana Mid-Continent Oil and Gas Association, the impact of the oil and gas industry in Louisiana alone exceeds $70 billion. A 2007 study by the LMCOG says that the oil industry supports 320,000 direct and indirect jobs. The study also says that each oil and gas job supports 5.5 other jobs in the state. When broken down, the study shows that each oil and gas extraction job supports 3.9 other jobs in the state, while each refining sector jobs supports another 11.7 jobs. “When you begin to
examine the impact of the industry, you see just how far reaching it actually is and how it is connected to so many other economic sectors in the state,” the study reported.

Consequently, a softer hurricane season translates into a better economy, more oil for consumers, and, above all, a safer environment for those brave oil riggers I’ve been talking about.

That’s a win-win for everyone. Let’s hope Mother Nature co-operates.

Can the Oil Industry Survive Obama?

2009-04-06T16:46:00Z

I’ve been writing extensively about the new administration in Washington, and it’s die-hard opposition to the oil industry. In a word, the political party in power wants to do away with any derivative of fossil fuels by taxing in on both ends – on manufacturing and on consumption.

Nowhere in President Obama’s proposed $3.4 trillion budget is there room for aid to the oil industry. In fact, taxes raised on the energy industry amount to about $80 billion, and an onerous carbon emissions tax will do even more harm to the energy industry and to consumers. In that bill, about $120 billion is earmarked toward the energy industry – and that’s only going to companies that are green enough in the eyes of the energy experts in Washington.

So that begs the question. Can the oil industry survive Barack Obama?

Devon Energy’s chief executive officer J. Larry Nichols thinks so. In an interesting speech Nichols gave to the Petroleum Club of Fort Worth last week, Nichols said that the industry could withstand the $80 billion in energy taxes that the White House and Congress are proposing. In fact, he only gives the chance of all the new taxes at 50%, with Republicans and industry lobbyists furiously trying to knock some of the oil and energy taxes out of the new budget.

But there is no question that the taxes would crimp the ability of oil companies to create more oil and gas for consumer use – thus penalizing everyone. On the tax issue, Nichols told his Texas audience “If you take part of that cash flow, for whatever reason, the only response we can have is to drill less natural gas wells,” he said. Nichols emphasized that higher taxes means less cash and reduced drilling, fewer oil and gas wells provide less supply than demand necessitates, and therefore higher commodity prices ensue.

Nichols is a pragmatist, and that’s a good thing to see in an oilman these days. He welcomes the exploration of alternative energies like wind and solar, and is not afraid to say that public money should indeed go to the search for different kinds of energy.

“It’s a really exciting time in this country because for the first time we’re really getting down to a serious debate about energy,” Nichols said in his speech. “It had to happen sooner or later, and we’re finally getting down to that time. We’ve had a lot of sloganeering for a long time.”

As for so-called “clean” energy, Nichols says that new sources of energy are welcome, but oil remains the linchpin of the U.S. energy economy. “We can harness the incredible technology we have in this country and in the Western world to figure out ways to use our energy in a more efficient manner, and to use it more wisely,” he said. “But while we’re doing that, we also need to recognize the fundamental, underlying, hard, cold fact: we’re going to need more oil and we’re going to need more natural gas. There is no study out there of any reputable source at all that says we’re going to replace oil and natural gas or coal and nuclear with renewable fuels any time in our lifetime.”

Nichols told his audience that he told a prominent Democratic U.S. Senator that, if taxes were raised, be prepared to tell your constituents that their energy costs would rise – and significantly. “The more (profits) you take, the more (prices) are going to skyrocket,” he told the senator.

Tough talk, but Nichols is on to something. Right now, we as an industry have ceded the public relations battle – and it is a battle -- to opponents of oil and gas exploration. We have let oil become a dirty word in the political lexicon and that has to stop. With guys like Nichols – a CEO of a major oil company – standing up for us in Washington, we stand a much better chance of getting our message across.

That message is a simple one. Oil is a critical staple of the U.S. economy. Consumer want it and we want to give it to them. It’s a free country and all viewpoints are welcome. But anyone who gets between consumers and their oil and gas will get the political lesson of a lifetime.

Hard-Up Oil Regions Opening the Pipelines

2009-03-30T18:45:00Z

I noticed this weekend that Helmerich & Payne, a big U.S. oil drilling company, announced that it was slamming the breaks on oil drilling operations in Venezuela.

Why? Because of delayed payments from Venezuela's state oil company.

No need to get into the nitty-gritty – it’s not the first time an oil driller got stiffed by a state-sponsored oil company.

It’s the larger picture that intrigues me. With so many hard-luck oil-producing countries on the skids, opportunities for U.S. oil drillers to strike more favorable deals are abundant. I’m talking about countries like Venezuela, Russia, and some of the sub-Saharan bourses like Libya and Sudan.

Many of these countries are controlled by governments with a strict, socialist hand. There are many problems associated with pseudo-dictators having control over a given country’s oil reserves, but one of the most significant is that such countries, when times are flush, do not plow oil profits back into their oil industries.

Instead, they spend the money on things unrelated to oil management – things like social programs, political war chests, and the odd government palace or two. Eventually, that kind of “eyes-off-the-ball” capital management will catch up to you, and that’s exactly what’s happened to countries like Venezuela (where Hugo Chavez is struggling to retain the controls of power as his economically-ravaged country suffers).

Hey, when oil is selling at $140 a barrel, anyone can act like a banana republic kingpin and spread the money around wide enough so the people get fed and oil fields are run efficiently. But at $40 a barrel, there’s only so much oil lucre to go around.

That’s where Western oil producers can strike a good deal. Now, the Associated Press is reporting that such companies that have kept a lot of cash on hand to weather the tough economic times, have gained significant leverage when negotiating oil-drilling deals with cash-strapped state-controlled oil producers. Don’t get me wrong, negotiating more favorable deals is only sustainable if oil produced remain low – if we climb back into the $90-and-above range for a barrel of oil, all bets are off.

That’s clearly not the case right now, with oil trading at under $50-per-barrel as anxiety about the global economy keeps consumers and businesses on the sidelines. No bar graph or government bailout program I’ve seen is likely to change that perception anytime soon.

That leaves the Libya’s and Venezuela’s of the world in a bind. They have the oil but they need the cash. So, hat in hand, once powerful government leaders are directing their state oil agencies to take the best deal they can get. “(They used to say) what the hell do we need the majors for? We've got gobs of cash,'' said Amy Jaffe, an energy expert at Rice University's James A. Baker III Institute for Public Policy, in an interview with the Associated Press. “As the economy and prices collapsed, it's a different picture,' Jaffe said. She adds that state-run oil companies, facing drilling rigs in disrepair and unable to cope with the management side of the business, also have little recourse than to bring a big, Western oil producer in to spread some cash around and handle the job.

That’s why Chevron Corp., Royal Dutch Shell PLC have come out in recent weeks and said they expect increased access to oil fields in state-run oil countries. Sure, there are some calculated risks – when you climb into bed with a Hugo Chavez or a Moammar Gadhafi (who, like the swallows returning to Capistrano, annually threatens to nationalize Libya’s oil fields, even as Western oil companies have billions invested there). But faced with big cuts in oil production, cash is the real king in nationalized oil countries.

Consequently, good contracts – where they are long term, offer better tax and production-share rates, and where the terms don’t change on a dictator’s whim – are available for Western oil companies. The International Energy Agency says that state-run oil companies are pegged to account for 80% of oil exploration growth by 2030. But without the cash to harness that opportunity, such countries are turning to cash-rich Western oil firms to fill the space.

That’s one potentially big silver lining in an otherwise stagnant U.S. energy landscape.

Oil Price Redux: Economy Holding Industry Hostage

2009-03-23T09:49:00Z

Last week I discussed the economic and political pressures OPEC was facing as it sought to reduce inventory limits.

Now comes news that some OPEC officials are floating a trial balloon about the consortium’s target price for oil by the end of 2009.

The magic number? $60 per barrel, if you believe OPEC officials in Algeria and Libya, who came in way under officials from Saudi Arabia, who earlier in the week set a target price of $75 per barrel of oil.

What’s a reasonable price? With oil currently at around $48 per barrel, and given the continuing weakness of the global economy, it would seem that $60 is more of a realistic target.

To drive its pricing policy, OPEC has decided to keep output targets where they are right now and enforce supply curbs more strictly. I think it’s pretty clear that OPEC believes that output cuts have been successful in alleviating excess oil inventories from global markets.

The move comes amid some evidence that output cuts so far are starting to remove excess oil from the market. OPEC began tightening its oil spigots back in December of 2008, when the price of oil was hovering around $32 per barrel.

That has generated a lot of Monday morning quarterbacking among oil industry insiders – specifically that OPEC is setting a floor for oil prices by reducing excess oil stockpiles.

"One of the reasons why OPEC felt able to roll over quotas was that they do appear to have set a floor for prices," said Mike Wittner of Societe Generale, told the Associated Press. Wittner agrees with the $60 price target by December, 2009, putting him squarely in the camp with Algeria and Libya.

He forecasts Brent crude will average $60 in the last three months of 2009, up from $45 in the current quarter.

"According to a lot of the balances including ours, if you have OPEC holding steady or cutting a bit more, you get a big, counter-seasonal stock draw in the third quarter," he said.

We’ll know a lot more after April 2, when the G20 nations meet once again, this time to figure out ways to come up with specific measures to bolster the flagging global economy. The rumor is that one priority will be targeted at boosting the price of oil (primarily to take economic pressure off embattled oil-producing countries).

I’m also hearing from industry insiders that oil companies – British Petroleum reportedly being one of them – are beginning to withdraw oil from storage facilities. Historically, that has usually been a harbinger of a resurgent oil market. That said, every time we hear from one G20 economist that the global recession – or worse – will hit bottom soon, evidence comes along that the economic problems we face are worse than we thought, and that 2010 will be a tougher year economically than 2009, if that’s possible.

Under that scenario, we would most certainly find continued weak demand for oil in key bourses across the globe. Any growth all should push the price of oil up closer to $60, but I don’t see how we get over the hump if global demand for crude oil continues to recede.

One possible silver lining? The announcement this week from the Federal Reserve that it will dive back into the bond market and buy $750 billion in mortgage securities and another $300 billion in longer-term government Treasuries. Any potential inflationary move from the Fed – and plowing another $1 trillion into the capital markets certainly qualifies – will send the price of oil upward, and that’s exactly what has happened this week, as oil rose by 1.5% immediately after the fed announcement.

As a consumer and an American, I hate to see the rising specter of inflation gathering over the U.S. economic landscape. But, for the short term, it could give the oil industry some much needed breathing room.

OPEC Stands Pat as Rig Activity Declines

2009-03-16T14:07:00Z

Well, we have our answer from OPEC, which decided to keep output numbers at current levels, despite plenty of rumors among oil traders that it would cut supply.

At a meeting yesterday, OEPC officials indicated that higher energy prices would further crimp the global economy, so cutting back on oil supply was a no-go. To me, it sounds like OPEC has been on the receiving end of big lobbying efforts from Washington, London, Hong Kong, and other political ports of call.

Of course, what the pols want is to buy some time, and OPEC was only too happy to come across for beleaguered global governments. Yesterday’s decision to hold supplies steady is a temporary one – OPEC reserves the right, 11 weeks from now at its next meeting, to reduce oil output, which I suspect it will ultimately do. OPEC officials are still distracted by December’s mandate to lower quotes by 800,000 barrels per day (the daily output target cut is 4.2 million barrels per day), so the appetite to cut further was diminished for business, in addition to geopolitical reasons.

Industry observers feel this is the right move – for now. “OPEC has reestablished its credibility with the current cuts, so I think it would have done more harm to announce more cuts and not meet them,” said Jonathan Kornafel, an analyst at Hudson Capital Energy. “As we got closer to the meeting, sentiment on the cut shifted.”

Call me a conspiracy theorist, but it may be no coincidence that the same weekend OPEC officials decide to hold the line on oil production, thus pretty much ensuring lower oil prices, financial leaders from the world’s 20 largest governments were meeting to figure out creative ways to end the horrible global recession. The fact that there might be an orchestrated effort by leading global governments and OPEC to keep energy prices down while the world’s consumers battle hard economic times, is understandable.

It’s just not helping the oil industry all that much. I saw last week that the total amount of active U.S. oil rigs he number of rigs declined by 44 this week to 1,126, due to continuing weak oil and gas demand. According to Baker Hughes out of Houston, 884 U.S. oil rigs are out there drilling for natural gas while 228 rigs were looking for oil. That’s an alarmingly low number. Last year we could count almost 1,800 active oil rigs in the U.S., when oil was trading at $145 per barrel. Today, we’re down to $45 for a barrel of oil.

I don’t know where the bottom is in terms of active oil rigs – we went as low as 488 in 1999 – and we’re way off historic highs of 4,500 active rugs in the early 1980’s, during the boom years. But the industry is clearly hurting, and until the price of oil and gas rises significantly, silent oil rigs will be the order of the day.

Oil Prices Rise; Mexican Collapse

2009-03-09T15:31:00Z

It’s good to see oil prices on the rebound – up over $48 per barrel as of mid-day Monday. That’s an eight-week high and attributable to OPEC’s apparent decision to tighten oil supply by cutting off an additional 800,000 barrels of oil daily, if the rumors I’m hearing are true.

OPEC meets on March 15, and one inkling about what OPEC might do comes in the form of two quotes of note in today’s business journals.

First, the “dramatic drop” in oil prices has been greater than warranted by the decline in global demand, Venezuelan Finance Minister Ali Rodriguez said yesterday. Then, OPEC said it had to cut 800,000 barrels a day to meet its commitment to reduce output by 4.2 million barrels since September; that according to Secretary General Abdalla el- Badri said in Qatar today.

Those comments led to an inevitable round of predictions from oil industry observers, most of them along the lines of this quote from Lawrence Eagles, global head of commodities research at JP Morgan Chase.

“OPEC has stopped the development of large surpluses and is responsible for a tightening of supply. The signs are that they have already decided to announce an additional cut.”

I’ll have more on what OPEC decides to do next week, after the March 15 meeting. For now, I have another, more long-term issue to put on the table.

According to a new report from the U.S. Pentagon, global terrorism, along with powerful, regional drug lords are taking a huge toll on sector-specific oil markets. The Pentagon report goes as far as to say there is a fair likelihood that the weakening economic underpinnings in places like Mexico and Venezuela could pave the way for the breaking up of these countries – with serious ramifications for the global energy sector.

Says the Pentagon; “Expect severe shortages globally. By 2012 surplus oil production capacity could entirely disappear and as early as 2015, the shortfall in output could reach 10 million barrels a day."

"The implications for future conflict are ominous," the report adds. "If the major developed and developing states do not undertake a massive expansion of production and refining capabilities, a severe energy crunch is inevitable."

Mexico, very close to where I am in Texas, is a big producer of oil. In fact, oil is the single most crucial revenue stream for the increasingly beleaguered Mexican government. 40% of total government revenues – that’s not a typo – are tied to the country’s oil production. Mexico is also the third-largest provider of oil and gas to the U.S., so any significant decline in oil production would reverberate well above the Rio Grande.

Mexico’s largest oil field (it provides 60% of the nation’s oil supply), the Canterell off the Gulf of Mexico, has experienced significant declines in oil production every year since 2004. Oil production peaked in 2004 and has fallen about a third through 2008. Mexico is obviously very reliant on Cantarell for its economic health.

Right now, Mexico is stable – although that may not last. Government officials smartly locked in bulk oil sales at $70 a barrel a few months ago. But those contracts expire at the end of 2009, and after that, the picture grows darker for Mexico. Studies show that if Mexico had to sell oil at around $40 or $45, it would lose 20% of its gross domestic product.

It’s not just Mexico. Venezuela, for example, has to have oil selling at above $120 per barrel to carry the cost of all of its social programs.

That’s why I’m worried about the impact of any government collapses in these countries on U.S. and global oil prices. It’s not a good scenario, and fragile governments like Mexico and Venezuela are way too reliant on higher oil prices.

We’ll know more by the end of the year, but this is one issue that we need to keep our eye on.

Obama’s Plan? Tax Big Oil – A Lot

2009-03-02T10:30:00Z

It’s a funny thing.

The oil industry is one of the few industries that doesn’t have its hand out in Washington, looking for a big bailout.

What do we get in return for our good business management? A huge tax increase under the new regime in Washington.

Here is what Washington is planning to do:

In the latest proposal from the White House, the new federal budget would repeal several oil industry tax incentives while imposing new taxes on domestic producers to close "loopholes" that have allowed companies to avoid royalty payments.

Specifically, the new budget would add $31.5 billion in "oil and gas company preferences" over a decade, according to a statement from the White House.

The new federal budget also includes a "new excise tax on offshore oil and gas production in the Gulf of Mexico to close loopholes that have given oil companies excessive royalty relief”, the White House proposal says. The new tax would begin in 2011, which the statement says is "after the economy has had time to recover”.

I adamantly oppose a tax on oil – it will damage exploration and put a damper on innovation. With less money in the till, it’s harder to drill for more oil and more difficult to fund new, creative ways to find new oil.

It’s not good for consumers, either. If President Obama and Congress raise taxes on oil, the price of oil, like any highly taxed product, will inevitably rise.

There’s a third reason. If Washington places an onerous tax on domestic oil – which is the plan right now – then oil companies are going to drill elsewhere, thus increasing our reliance on foreign energy markets at time when that’s the last thing we want to do.

Lastly, higher taxes will also mean fewer jobs here in the U.S. With jobs so valuable right now, is this the message we want to send to the American worker?

At least the U.S. oil industry isn’t taking the new tax proposals lying down.

"New taxes could mean fewer American jobs and less revenue at a time when we desperately need both," American Petroleum Institute President Jack Gerard said in a statement. "More taxes also could reduce our nation's energy security by discouraging new investment in domestic oil and natural gas production and refining capacity and pushing those investments -- and American jobs -- abroad."

It’s pretty obvious, to me at least, what Washington is doing here – they’re looking at the oil industry as its own personal piggy bank. It’s a bank they’ll use to pay for pet “porkulus” projects that have nothing to do with economic recovery and everything to do with buying vote and moving power away from Main Street to both ends of Pennsylvania Avenue.

Of course, it’s not just the oil industry. The tax-and-spend crowd is in power, and the numbers coming out of Congress aren’t encouraging. Overall, Congress and the White House are banding together in proposing $1 trillion in new taxes beginning in 2011. Here’s a list of new taxes, compiled by ABC News

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Total amount of taxes proposed starting in 2011

Amount Explanation

1. Personal Income

$338 billion - Bush tax cuts expire
$179 billion - eliminate itemized deduction
$118 billion - capital gains tax hike

Total: $636 billion/10 years

2) Businesses:

$17 billion - Reinstate Superfund taxes
$24 billion - tax carried-interest as income
$5 billion - codify “economic substance doctrine”
$61 billion - repeal LIFO
$210 billion - international enforcement, reform deferral, other tax reform
$4 billion - information reporting for rental payments
$5.3 billion - excise tax on Gulf of Mexico oil and gas
$3.4 billion - repeal expensing of tangible drilling costs
$62 million - repeal deduction for tertiary injectants
$49 million - repeal passive loss exception for working interests in oil and natural gas properties
$13 billion - repeal manufacturing tax deduction for oil and natural gas companies
$1 billion - increase to 7 years geological and geophysical amortization period for independent producers
$882 million - eliminate advanced earned income tax credit

Total: $353 billion/10 years

Total Amount of New Taxes = $989 billion

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Raising taxes on the oil industry, and on individuals in business in general, is the wrong direction for Washington to take. It will discourage investment, force businesses to layoff employees, and keep the axis of power in the oil world in the Middle East.

The good news is that the taxes haven’t become law yet. We need to contact our elected representatives in Washington and make our voices heard. The fight is just beginning. Let’s get involved and kick these news taxes all the way back to Washington, where they belong.

Inventories Threatening to Stall Oil Rebound

2009-02-23T11:55:00Z

I’ve talked a lot about oil inventories these past few weeks, and with good reason. With refineries worried about deal-breaking issues like tight credit, lousy consumer demand, and a declining oil market, oil refineries are reducing output and taking a nervous, “wait-and-see” attitude about the economy.

The numbers back that up. In a recent industry study, 57 % of chief financial officers at U.S. oil and gas exploration and production companies say that "credit capacity restraints, including access to capital" will be their greatest financial challenge in 2009.

Another 21% think falling oil or natural gas prices will be the biggest challenge they’ll face in 2009, and a whopping 72% expect the economic crisis in the U.S. to impact their ability to borrow money or extend bank debt in 2009.

This could put an alarming number of refineries in trouble, as the economy probably won’t get much better until 2010. Cash-poor refineries may be ripe for takeover by stronger, leaner energy companies that are planning for the good times which will inevitably come again.

It’s not just refineries. The economic landscape has treated other key sectors harshly as well. Oil field services and machinery companies that support drilling activity are hurting, too, as they deal with a sustained lack of demand for oil and natural gas. Both commodities had been in oversupply in the U.S., so it only makes financial – if not survival -- sense for oil companies to sit back and wait for inventories to decrease before they get aggressive about going after more product. Right now, we’re seeing capital spending cuts for refineries somewhere in the 20% to 25% range. But if the oil market doesn’t pick up by summer, you can expect to see companies cut spending deeper, perhaps to as much as 40%. If that occurs, the domino effect will be felt across the energy markets.

But again, it all comes back to inventories. We’re seeing some upward price movement after the Energy Information Administration reported an unanticipated decline in crude oil inventories – something I talked about earlier in February.

It’s a welcome, if entirely understandable, turn of events. Less oil means higher prices. Overall, EIA data revealed U.S. commercial crude oil inventories decreased 138,000 barrels in the week ended Feb. 13. Energy analysts had expected an increase of about three million barrels.

The American Automobile Association says that lower inventories may be having short-term impact on oil prices, helping trigger a rise in per barrel prices from $34 to $39 a barrel by the end of last week.

But what about cuts in oil production by refineries? In my book, that’s having a bigger impact than any slight downward pressure on inventories. AAA reports that refineries just aren’t making a lot of gasoline, and are limiting their use of oil.

"Refineries have taken a look at what the economy is doing and where consumers are spending, and they have responded in tune by cutting the amount of product that they make," confirms Michael Geeser, a spokesperson for AAA. "So that, in turn, has driven up this recent increase in gas prices."

That scenario won’t likely change soon, especially as the economy continues to spiral downward in early 2009. Yes, I expect that demand will rise for the high-volume summer holiday travel season, but not by as much as we’ve seen historically. And certainly not in time to save any refineries that don’t have the financial stability to wait out a historically negative economic environment.

China Stockpiling Oil; OPEC Cuts Forecast

2009-02-16T15:40:00Z

There’s a lot happening in the oil market this week so let’s get straight to it.

China syndrome -- China is the latest government to stockpile oil inventories – buying up millions of barrels of oil at cheaper prices and storing them for a rainy day, and to avoid oversupply in its own market.

That’s the word from sources in the Chinese government, who told China Daily that the plan is to stockpile 10 million metric tons of fuel by 2011. Oil reserves are fairly low right now, although Chinese insiders say that inventories may reach three million tons this year and 6 million tons in 2010.

What would that mean for global oil suppliers and for China, itself? Well, global supplies are building up, too, so oil producers are willing to sell oil at low prices to reduce their own inventories. After all, oil is a market-driven commodity, and producers will see at $35 or $40 if they have to. And China, which reportedly is planning a three-phase stockpiling of 37 million tons of oil, in total, is a big buyer right now. For China, the storage of cheap oil will help calm domestic selling prices, and give it stronger control over its own energy policy heading out (hopefully) of a global recession in a year or two.

Oil prices drop – It’s not just China -- inventories are at the core of the international oil market, too. According to the U.S. Energy Dept., oil demand is in decline due to the prolonged global recession. Consequently, oil supplies have risen in 18 of the past 20 weeks, and now oil stockpiles are at the highest levels since July 2007. Furthermore, the energy consultant group Wood Mackenzie says that oil demand will decline by 1.7 percent to 84.3 million barrels a day for the rest of 2009.

That bearish environment just keeps adding pressure to the price of oil. Crude oil prices continue to languish under $40 per barrel, trading at around $38 per barrel early this week amidst fears that the rest of the world, like China, is experiencing a significant slide in demand. As gross domestic product (GDP) drops in bourses around the globe, oil traders are nervous, at least for the short term. Take Japan. The Land of the Rising Sun is seeing a decline in GDP, falling to the lowest rate since 1974. If Japan, the globe’s biggest economy after the U.S. and China, and its tens of millions of energy consumers fall a few economic notches, that’s going to continue to hurt global oil demand and keep prices down. Maybe that’s one reason why OPEC will once again slice production in March if the oil remains in the $35 to $40 range.

OPEC Cuts Forecast – Speaking of OPEC, and of global energy consumption, it’s latest forecast is out and it’s not a positive one. In the forecast dated February 10, OPEC cut its demand estimates for a sixth straight month. In doing so, the downbeat language that OPEC report writers used was telling, with “a sudden and massive” decline in demand as the overriding reason for the recent rise in inventories. The report cites an oil daily production schedule limit, on the upside, of 24.845 million barrels from Jan. 1 for its 11 members with quotas. That’s down 4.2 million barrels a day since September, 2008. Again, all signs are pointing to further production cuts from OPEC, which supplies 40% of the world’s oil.

As I said, there’s a lot on the board this week for the oil sector, even the news isn’t as rosy as we’d like. Due to the severe economic decline, even prices for West Texas Crude, where I make my living, are at five-year lows. With storage facilities topped off, and demand at historic lows, all we know is that time heals all wounds.

Sooner or later, we’ll get out of this fix. But it will take some time.

Slick Stimulus: How $1 Trillion Bailout Impacts Oil

2009-02-09T20:17:00Z

Comedian W.C. Fields had great respect for the dollar and parted with one reluctantly. A friend once asked Fields for a loan, and he was told: “I’ll see what my lawyer says, and if he says yes, than I’ll get another lawyer.”

We could use a guy like that in Washington today, given the hoopla over the $1 trillion stimulus package being hotly debated in Congress. Yes, the actual numbers being cited are closer to $800 billion from the original $1 trillion, but Washington insiders know that Congress is highly skilled at returning to the scene of the crime and backfilling any money cut out of the stimulus.

When all is said and done, when interest, inflation, and other borrowing costs are factored in, the total cost to the taxpayer will actually be a lot higher than $1 trillion. But we’ll leave that issue to the economists.

What interests me today is how the stimulus package will impact oil prices.

Right now, oil prices are hovering around $40, but I bet that number goes up the closer we get to a stimulus bill, and then after that, watch out. Oil and commodity prices should rise to over $50 per barrel.

In fact, I’ll wager that the actually benchmark needed to figure out whether the stimulus bill is working is the price of oil. If it’s on the rise, the mega-spending bill is making its way into the economy. But if oil prices remain stagnant, then we have a $1 trillion albatross hanging around our neck (and doesn’t that sound appealing?).

It all comes down to historic economic downturns and the path such economies take back to robust growth. Oil prices – all commodity prices, actually – vary greatly from other key economic indicators like employment numbers, gross domestic product, consumer sentiment, and the direction of the stock market. With the slight exception of the stock market, which factors in economic declines ahead of time and stock prices trade accordingly, most economic benchmarks are lagging indicators that signal events that have already occurred, not new ones that might occur.

Oil, like stock prices, are an indicator of the present and future health of the economy. That’s why those investment banks I wrote about a few weeks ago are storing tens of millions of barrels of oil on offshore storage tankers. They know that the economy can’t stay down forever, and they will make a big profit when the economy improves, oil prices rebound (mostly from higher consumer and business demand), and bulging oil inventories can finally be drained.

Another sign of the stimulus package’s impact on oil prices are the positive murmurs emanating from OPEC, which seems to be lining up its oil strategy to coincide with an expected global economic rebound.

Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore, told the Associated Press last week that OPEC was impressed by how solidly oil prices held up in a week where the U.S. economy shed 600,000 jobs. "Considering the staggering magnitude of the jobs data, oil held up quite well," he said "The downward momentum in oil pricing appears to have been broken as the $40 level has proven to be a very strong support level."

With support levels in place, OPEC looks like it’s betting on a stimulus package being passed, and consumers and businesses slowly getting back to the business of spending as credit loosens, toxic assets are dried up at U.S. financial institutions, and happy days are here again. "OPEC's compliance with production cuts has held up well, and they appear prepared to make further cuts if prices drop," Shum adds. If so, then look for OPEC to get bullish on oil prices and cut supplies even further at its next meeting in March.

Even as the pork . . . er . . . stimulus bill is being debated in Congress, oil prices have risen 7% in the past few days, as trader wade in and place their oil bets down that an economic rebound will follow and trigger higher demand for commodities, especially oil.

I’m not saying oil will rise back to $100 per oil anytime soon, but we should finally break out of the $40’s range we’ve been mired in, and that’s a move in the right direction.

As an American, I’m not sure about the long-term effectiveness of the stimulus plan. But as an oilman, the short-term impact should be a positive one.

Where Exxon Goes, So Goes the Oil Market?

2009-02-02T05:45:00Z

I don’t write about oil stocks all that much, but it’s earnings season, and some of the big boys are clocking in with profit numbers.

The impact those numbers have could reverberate onto the profit pictures of oil drilling and oil refining companies, so they’re well worth looking at.

First up, Exxon Mobil Corp (XOM.N) and Chevron Corp (CVX.N).

Both oil behemoths posted better-than-anticipated quarterly earnings, issued last Friday, as refining profits helped offset a steep decline in crude oil prices. Exxon saw its earnings decline by about 30%, but that was more than offset by full-year profits of $45 billion, the company said.

Any Wall Street trader knows that cash is king in a recession, and Exxon is loaded up with the green stuff. Company statements reveal that, at the end of 2008, Exxon had over $31 billion in cash, giving it the financial cushion needed to weather the economic storm and wait for oil prices to rise again, which we all know they will.

Another sign of long-term confidence is Exxon announcing that it will buy back $7 billion in company stock, a move companies usually make when they feel confident the price of the stock will rise significantly. It also helps increase dividend payments, a move that will please shareholders, a lot of whom have spent the last six months grumbling about the company’s stock price.

That doesn’t mean Exxon is out of the woods yet. Profits fell in oil and gas production, down $2.57 billion to $5.63 billion, as oil prices plummeted to under $60 per barrel in the fourth quarter, compared to $90 per barrel for the same period in 2007. Exxon’s oil production also fell, to 45,000 barrels per day to 2.47 million barrels per day, mostly due to OPEC quotas and lower demand. Exxon said its 2008 exploration budget was $26.1 billion, up 25 percent from 2007.

The Exxon picture is a useful one for the rest of the oil industry. Normally, as oil is a lynchpin to the S&P 500 index, any bad news coming from the oil markets means bad news for the entire stock market. And that would certainly trigger a sell-off, if not stampede, among oil investors as the year progresses.

But I’m not so sure.

Historically, oil prices climb in the first quarter of a new year. With slightly above-average temperatures in the northern half of the U.S. in December and early January, this trend looked like it was on life support. But temperatures from Boise to Boston fell significantly in mid-January, helping contain price growth in the last half of the month.

But that’s been the trend for a while. Since 2002, crude oil futures have climbed on average 12% from the previous quarter. So you’d have to say oil price hikes are no surprise in January and February. As the song says, “baby, it’s cold outside”.

Higher oil prices also might come around in a while if OPEC has anything to say about it. Several weeks ago, the Organization of Petroleum Exporting Countries rolled out another round of production cuts, slashing 2.2 million barrels a day from its production lines.

At the Davos economic forum this past weekend, OPEC leaders say that future supply cuts are a given if the price of oil doesn’t bounce back.

My take? With a potential decline of about 100 million barrels over the previous quarter, which is roughly five times the average amount over the last five years, it’s no secret that the price of oil is going to climb - - and take millions of consumers out of the market along with it.

Hence, the squeeze is on, and its grip on oil companies won’t ease until oil climbs back to over $60 a barrel (it’s trading at $42 per barrel this morning), a benchmark that it is giving every indication of reaching in 2009.

Bottom’s Up: Oil Prices Show Signs of Stability, Rebound

2009-01-26T14:15:00Z

I wrote last week how Morgan Stanley had an epiphany of sorts, in buying 2 million barrels of oil at a (seemingly) bargain basement price, and then storing its stash of crude on an oil supertanker off the Gulf of Mexico.

The idea is to buy in bulk while prices are low and then sell when prices rise again, presumably later in 2009.

The storage cost to Morgan Stanley in doing so? $70,000 per day.

It’s not like Morgan Stanley is alone. Other big investment banks have also tapped into the storage gambit – altogether 22 supertankers are in use as floating oil facilities around the globe, instead of delivering it to customers at various ports of call, according to U.K.-based E.A. Gibson Shipbrokers Ltd.

Oil specialists call it the “contango” factor, where oil stored now can be resold later at higher prices.

Will Morgan’s bet pay off? Have oil prices hit bottom? Will contango leave investment banks, already battered enough, dancing in the dark?

Let’s look at the facts. First, most energy experts think that while prices won’t fall as much as they had in late 2008, few are anticipating a significant price spike for the rest of 2009. Obviously, a global recession will reduce demand for oil and there are few signs that the economic slowdown is abating.

If you’re looking for a silver line, though, we might have found one in Monday’s housing sales numbers, which unexpectedly rose off of record lows. Also, a key index of economic indicators (the Conference Board’s economic health index) also came out today and – surprise – showed the first gain in six months. Also, the Reuters/Jefferies CRB index of commodities has spiked upward by 5.5% - another recent high – as investors begin to make what looks like a move back into commodities.

As a result, the price of oil rose to almost $49 a barrel in early Monday trading, the highest level since January 7, and a healthy sign that demand could rise if we begin to see any decent economic news.

As always, OPEC is having its impact on the oil/bottom discussion. Amidst estimates of falling demand for ’09, major oil-producing states will cut oil output by five percent, and they started the wheels moving on that front this month. Once those cuts make their way through the energy industry’s system, markets should constrict somewhat and oil prices should resume their upward climb. Remember, OPEC accounts for 40% of the world’s oil supply, so any limits on supply, coupled with even a modicum of good news from the economy, should trigger an upward tick in prices.

Call me a skeptic, or at least an oil industry observer who needs more evidence of that “perfect storm” of events that will bring oil prices back up again, but it’s becoming apparent that at least the ingredients for a bounce back are beginning to fall into place.

At least that’s what Morgan Stanley and the rest of the contango crowd are betting on: OPEC production cuts, a sign - any sign – of economic growth, and rising consumer demand.

If those ingredients take shape, then indeed a bottom in the price of oil is in sight, if not sooner than we think.

One thing’s for sure, we’ll know a lot more this spring, when the OPEC cuts and the U.S. housing picture crystallize. Until then, don’t bet on a bottom – but don’t bet on a big rebound either.

Slick Move? Morgan Stanley Makes Big Super Tanker Play

2009-01-20T19:49:00Z

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I’ve been meaning to write about the impact of Somali pirates hijacking oil supertankers. From what I’ve seen, the damage to the oil trade is fairly significant.

One piece of news this week: five pirates – hanging on to their share of the $3 million ransom - died when their boat capsized in the Gulf of Aden last week. The five were part of yet another Somali pirate raid on an oil tanker – 100 or more in 2008. It’s interesting how oil companies and supertanker companies pay these ransoms. In the case of the Sirius Star – the hijacked tanker in question – the ransom was dropped by helicopter on to the ships’ deck.

One UK think tank says that the oil industry lost $30 million in ransoms just in the Gulf of Aden alone. The area is off the coast of poverty-stricken Somalia, and is one of the world’s largest shipping lanes, linking the Mediterranean Sea and the Red Sea to the Indian Ocean.

As I said, great stuff, but it’s another supertanker issue I’m writing about today. Morgan Stanley has followed the lead of other investment banks (like Citigroup) in stocking up on cheap oil and storing it on offshore supertankers, until the price of oil goes back up.

Specifically, JP Morgan purchased two million barrels of oil and loaded it onto the tanker Argenta, off the Gulf of Mexico.

The goal is an obvious one. Morgan anticipates higher oil prices later in 2009 and is jockeying for a big profit by buying oil at around $34 a barrel (where it’s trading this week). Morgan Stanley, Citigroup and Royal Dutch Shell, which have all deployed the oil-hoarding gambit, have all lost billions in the global recession. Consequently, they’re taking advantage of what oil traders call the “contango effect”, where oil pricing structures are impacted by excess supply and low demand, but may not rise even after OPEC moves to cut inventory gluts throughout 2009. In other words, the oil gambit is another potential profit center for investment banks that could really use one.

So far, oil analysts estimate that about 80 million barrels of oil are being stored offshore in early ’09. Now, that’s not a heck of a lot – about one day’s worth of oil for the globe’s energy needs.

But it is an interesting trend. The mathematics alone is especially interesting. The laws of supply and demand are pretty clear – buy low when demand is low and sell high when demand is high. It’s not like the cost of carrying the oil is a burden. According to news sources, Morgan Stanley hired its tanker at a cost of $68,000 per day, or about $1 per barrel per month. The outlook for future oil prices is currently fairly bullish, although nothing spectacular. Benchmark oil futures are hovering around $3.70 more this month than last, so Morgan, Citi et al, have a ways to go

Another interesting point. Oil-producing countries are getting hammered. Expecting $75 per barrel oil and getting $30 per barrel oils has caused consternation, if not panic, in such countries. So they’re more than happy to sell millions of barrels at current market prices, just to generate some much-needed income, and speculators are only too happy to buy at a good price and wait for the futures market to bid higher, then sell and deliver the oil.

The risk is that once storage capacity is realized, then prices might go down, as the contango model basically predicts. But as oil analysts point out, quite accurately, that the stored oil is not for sale on the open market, and hence cannot “flood” the oil market, at least in the short term.

So Morgan Stanley, with its “floating supertanker storage” strategy, would appear to be ahead of the curve on this one. Just how far ahead of the curve remains to be seen.

But you certainly have to give them points for originality.