Oil Price Back to Fundamentals

As I stated in my previous post on oil and gasoline, we are on track to the return to normal as speculators unwind their positions. China has stopped stockpiling commodities and the Oil super tankers are all full. When oil returns to the trading range of $40 to $50 per barrel ( in July I suspect) then gasoline will be back to where the major US and european Oil companies want it. Remember that a missle does not hit its target in a direct line. It gets out of its trajectory and wiggles back and forth until it hits the target. That’s what oil prices have been doing.

July ’09 will be the bottom of the recession and we will lay on the bottom as a submarine waiting for other economic depth charges try to blow us out of the water. These charges will be each closing of a automobile plant and downstream parts producers, China reduced buying, and 11% unemployment.

Only Ronald Reagan faced these unemployment and poor economic conditions and it took Bill Clinton to bring us out of the Great Recession of Ronald Reagan.

Only Christmas 2009 will give us any real hope. In March we will see unemployment reverse and we will start adding jobs as the Democrats economic stimulus plan take hold.

Gasoline Prices for Summer 2009 – Cheap Diesel

The oil speculators are at it again.  The reported supply of oil is being distorted and the high price of oil will not last very long. As certain hedge funds that get their money from OPEC sources sell crude oil to themselves (since they own the commodity), there has been an artificial increase in the price of crude oil and gasoline. Reliable sources have reported to me that millions of barrels of crude oil are now being “stored” in barges and ships steamin to port as slow and round about routes as possible.  These “in transit” barrels are not included in reported storage.

Here’s the rub. At some point the ships and barges have to be off loaded . . all available “in transit storage” will fill up and the oil will have to be dumped onto the market. Best estimates of experts tell us that sometime before June 30, crude oil prices will drop below $50 bringing gasoline to $2.00 on the NYME. 

The refiners are working it from the other end.  They will force down the price of deisel, to help keep gasoline prices up. Prior to 1985, deisel continuosly sold at a discount to gasoline. In the refining process, crude oil must first have the deisel (No. 2 oil) refined out before producing gasoline.  So diesel is much easier and cheaper to produce.  To refine gasoline, the oil “left over” after the deisel is separated out must go through a “cat cracker”, which is very expensive to operate. Platinum is required to refine gasoline. With the increase in the price of platinum, gasoline cost to refine increases so the price of gasoline will be marginally determined by the price of platinum.

So  here is what the rest of 2009 looks like for the gasoline and deisel market.  To increase volume sales of diesel at a lower refining cost and keep gasoline at $2.00 refiners will control the retail price of these products. Refiners will become more profitable.

Invest in refiners and deisel powered vehicles. Truckers will be more profitable as cross country trucking fuel prices will decrease. In 3 months that will transfer to “deflation” in the price of consumer products as the decrease of transporting products to market continues to decrease. Crude oil will “stablize” to a $40 to $50 trading range.

For speculation you will be best served to sell “out of the money” contract short if over $65/bbl., that would be October 2009 contracts. When in the money contracts on oil drops below $50 just buy the October contract back cheaper. There is 85% certainty on this trade, a 15% chance this won’t happen.

Summary

Last 2 quarters of 2009 gasoline prices will return to $2 and deisel fuel will be cheaper. This will drive down costs to transport products to market. Oil product prices downtrend will offer up investment opportunities and result in deflationary prices in retail and manufactured products.

How to save GM, OMG AIG

Here is how you save GM. Bail out is an incorrect approach. 

First let’s realize that if they go belly up the government will have to take over the pension fund thru the pension guarantee fund, so just take over the pension plan now. Take it off the books for GM now, buying the pension guarantee fund taking over the gm pension plan; and increasing the health insurance premium and freezing COLA increases in the pension fund. Also take over the Legacy cost of the health care with the “new” plan proposed health care insurance by Obama for national health care. The GM workers and ex workers will have to accept a higher premium for their health insurance if they want to keep health insurance. Next take the same position the federal gov’t did when we “bailed out” Chrysler. With the gov’t having stock options which can bring the taxpayer profit later. Gm needs to be reorganized as if it were in bankruptcy.

The U.A.W. has supported national health care for generations. It was a primary focus for Walter P. Reuther, one of the union’s founders. He began arguing in favor of universal health care after World War II, and was one of the forces behind the creation of Medicare for older Americans.(NY Times)

In the absence of a national system, the union instead secured generous health care benefits for its members and retirees, which have since added up to a $55 billion liability for G.M. and a nearly $100 billion liability for the industry over all.

At G.M., that liability will now be borne by the VEBA, which G.M. will start with $29.9 billion in funding, once the courts and federal regulators approve it.

Ms. Bunker at G.M. said she could not comment on what would happen to the funds in the VEBA if a national health care plan became available. But over the long term, union officials say, the country needs a master plan for health care, which the new institute will be charged with exploring. (NY Times)

It’s not complicated. When I advised Secretary of Treasury and Senator Lloyd Bentsen we realized not to make it complicated. Some things are just obvious. Only congress at large wants to make it complicated. OBTW . . . We need to get Carl Icahn to give the gov’t a plan on how to break up AIG into 3 or 4 companies and let the weak sister fail. Let Icahn have the spoils. Screw the AIG corporate elite.

$2 Gasoline National Average before Inauguration Day

As I informed you 3 weeks ago the gasoline prices are on their way to $2.00 a gallon national average before Obama takes office in January.  November 4 will put us at $3.00/gallon or a little better as a national average. Multinational oil companies have a target of $2.00/ gallon by Jan 2009 inauguration day. As I mentioned earlier they have made trillions and their cash coffers are full.  The only way to keep us hooked is to make gas “cheap” again (in relative terms) which they hope will make us forget about Wind, Solar. and alternative fuels. It worked in the mid 80′s, when government abandoned research in wind, solar, and alternative fuels after asserting the US was going for independence from foreign oil, because gas was below $.89 a gallon. At that time oil companies took their profits and invested in large land holdings, because home and land prices had plummeted . . . . ..sound familiar. Between 1997 and 2006 they sold most of their land holdings for substantial profits . .and the cycle starts again.

My former colleagues in the oil industry assure me the plan is still in tact.  There will be ups and downs on the way, but that’s the only way to not be so obvious in price control through the futures market.

Since a lot of money is made on heating oil in the winter, they plan on making up any “loss” by charging more for heating oil. Listen to the news. They are already setting the northern states up by “leaking” news that home heating prices may be up 15-20% this winter, even though crude oil prices will be substantially lower than last winter.

Big oil got scared when the Democrats in Congress stopped purchasing oil for the Strategic Reserve and that is when the speculators made their last hurrah seeing oil spike one last time before starting the recent decline. The halting of purchases has had the accumulative affect of adding 2 days of inventory to the United States gasoline reserves. By January 1, it will add 4 days of inventory to the national gasoline reserves. At that time we will start to purchase for our national oil reserves again.

The public outcry for alternative sources of energy must be stopped to preserve the U.S. dependency on oil, which is the plan of Big oil. Gasoline could be manipulated to $1.49 to force out independents and keep us dependent by making alternative sources “too expensive”.

$3 Gasoline by 2008 Election

Just to pass along good news on the economic front here on September 16, 2008.

 

Some of you know that my previous career was in the oil and gas industry for 15 years.  After talking to several of my contacts in the industry, it appears gasoline will be below $3.00 a gallon by election day in November. The O&G industry is concerned that the push for green and renewable energy will continue to drive down demand. It is anticipated that the US Senate and Congress will have gains by the Democratic Party which is “bad” for big oil. If indeed the 2 houses of government see gains by the Democrats, (They don’t care who’s President; they care who runs the US legislative branch.) O&G will use futures contracts to attempt to drive oil to $60/barrel or lower.That could mean gasoline at the retail level will be $2.15/gallon by inauguration day,       (Take the current price of a barrel of oil divide by 38 and you get the approximate wholesale price of gasoline. Then for Texas add 56 cents for transportation, taxes and profit.)

 

Todays crude price is $93 a barrel and gasoline at  2.48 a gallon (+.56) that says retail Texas gasoline should be 3.04 in about 3 weeks. Normally it takes 3 to 4 weeks for inventories to shake out so if todays crude prices hold or continue down it could take about 6 weeks for prices to work their way down. Hurricane IKE has slowed the gasoline fall because 12 refineries have not started back up after shutting down before the hurricane, but they will be back up in 2 to 3 weeks as workers move back to Houston Baytown Texas City area. That will make the election day target still viable.

 

This is the same tactic O&G used when I was there in 1980′s. Prices were driven down after spiking to $40 a barrel to $10 a barrel. Ronald Reagan stripped Solar and Wind power companies of their tax breaks.  As a result US solar technology was sold to Japan and Windpower technology sold to Denmark. One of 3 wind turbines for US are from Denmark (we’re just buying back our own technology)

 

I’m not trying to address politics. I’m just sayin’ this how the O&G industry sees competition in the Energy space.

 

As economists say, this assumes “that all things remain equal”, in other words no climatic or geopolitical catastrophes.

 

It will be interesting as the above conditions mean that gas will probably drop 40 cents a gallon by October 15. One of the political parties will try to make hay on this “phenomenon”. Watch to see Republicans claim  victory on getting prices from $4.00 to $3.00. It’s rally the Democrats threat of new sources of energy that’s causing this reaction.

 

It’ll be interesting as Big O&G is really in control at his time. If gasoline gets to $2 a gallon we’ll consider it a gift, and Big oil will drive out much energy competition and be plenty profitable.

 

Tariff needed on OPEC Oil – Revenue for Tax Credit Incentives on Wind and Solar.

Instead of a “windfall profits tax” on oil, The US needs an import tax of $2.00 per barrel on all oil imported from foreign countries excluding NAFTA partners in North, Central and South America. This will keep domestically produced oil cheaper and encourage independent oil operators to continue their quest to discover new oil fields in the US. It will also help pay for reducing our national debt.

Since I was instrumental in advising Democrats to impose the windfall profits tax in 1980′s, I believe it is important to note that I believe a different type of  tax is now necessary. We now import twice as much oil as we did in 1982. We need a foreign oil import tax to (1) reduce the Iraq war debt that President Bush has imposed on us and (2) to provide an incentive for domestic production.

It is well known that independent oil operators have discovered most of the inland oil fields in the United States. We need the independent “wildcatters” to help us discover more American oil. The oil fields in the Western hemisphere are enormous and inland. Bush helped by rescending the Executive Order on offshore drilling which has started the major oil companies to plan for offshore drilling in offshore leases that are already approved. and we should see results from that in about 18 months. We can raise billions of dollars to reduce the debt (debt-reduction.html) our children are now burdened with because of the Republican party. We will depend less on China and Japan to buy our treasury securities to keep our economy from total collapse.

I have proposed a $2.00 a barrel import tax on this foreign oil that would be reduced $1.00 when foreign imports fall below $100.00/bbl. What we must remember is that Democrats have put a floor of $100.00/bbl on imported oil. That was done when the bill to stop buying oil for the Strategic Reserve had the clause that purchases would resume when oil fall below $100/bbl. When blended with the free trade Nafta oil that would be about 3 cents a gallon. Also we need a 5 cent a gallon tax on imported gasoline to keep foreign sources from circumventing the oil tariff. This revenue will fund tax incentives for alternative sources of energy.

This is an easily imposed tax, and does not have the complicated calculations and oversight that the Windfall Oil Profits Tax of the 1980′s imposed on even the smallest of oil operators.

Along the same line, expect gasoline to be below $3.00 by election day, pending any geopolitical uprising or catastrophic disaster involving crude oil production. The timing of the Russian invasion of Georgia is in part a reaction to falling oil prices. Russia’s main source of government income is from the high price of oil. Crude oil was in a free fall headed to $80.00/bbl when Russia invaded Georgia.  Russia knows the more it stirs the pot higher oil futures contracts will go. Speculators are selling their futures into the current bounce in oil prices. The volume in petroleum futures contracts is decreasing and the NY Merc locals are getting out. When the volume of trades decreases, prices decrease. Fast.

Economic Recovery Act of 2009

Here is the proposed Democrat plan for economic recovery in this election cycle. this was initially intiated by my recommendations starting back in April 2008.

  1. The American Manufacturing Credit – 5% non refundable tax credit on all capital equipment purchases for new manufacturing, refining, and mining facilities built in the US or its possessions. An additional 5% Credit for all purchases of “American made” products for building or refurbishing  closed facilities. ( sunset clause 2015) (this will benefit companies producing vehicles in US and provide jobs in auto industry, so they can convert to new fuels and more fuel efficient vehicles) A 50% write off the first year of “placed in service” equipment. Balance written off over next 2 years. A tax exemption for US based companies that repatriate their profits to the US to benefit from this provision. This will also help stop the purchase of US companies by foreign interests.
  2.     Global Warming Reduction Act.  A 50% write off the first year of “placed in service” pollution control equipment to support clean coal energy. Balance written off over next 2 years. Upper limit subject to $50 million of pollution equipment per facility. Make interest tax exempt for bonds floated by states,municipalities, or the federal governament for funding private companies for pollution control improvements within their jurisdiction with federal guarantee to state and municipalities. (This is in addition to the AMC above, sunset clause 2014.)
  3.  Home Purchase Credit – The up to $5000 Home Buyer Tax Credit is provided as a federal income tax credit to first-time buyers who meet the maximum income limits. (This was made available to Washington DC Home Buyers through the Federal Tax Relief Act of 1997 and should be implemented throughout the nation.) This should have a sunset of December 2011. ( this is same type credit I created in 1974 (Principal Home Tax Credit) to get credit worthy citizens to buy homes.) The one passed recently is simply wrong, it is not a tax credit, its a loan. The housing industry will fall deeper into depression unless the D.C. Type credit is implemented.
  4. Iraq War Debt Reduction Act – 10% surtax on personal and corporate net taxable income over $250,000 and an additional 5% surtax on salary and exercised stock option income and non deferred compensation over 2 million per year. Sunset expiration 10 years after implementation. ( this has to be same for individuals Schedule C and Corporate to be fair to unincorporated business.) (those who benefit the most from a capitalistic system that fights for freedom with soldiers lifes and public funds should pay the most since they benefit the most)
  5. Savings and Investment  Provision – The first $2000 of dividends and $2000 of interest annually will be exempt from federal income tax. For those over 65 it will increase to $4000. (Obviously to increase and sustain the savings rate in America)
  6. Capital Gains and Losses Equity Provision – 1) Capital gains tax would stay the same with a 19% tax on gains exceeding $250,000 annually. 2) Annual capital losses against other income would not be limited to the current $3000, but would be one million dollars. Capital losses on the sale of a principal residence would be allowed, but subject to a $10000 annual write off with carryover provisions. ( to assist those losing money when foreclosed on homes.
  7. Alternative Energy Development Provision – A) 3 year Phase out of the current provisions subsidizing ethanol. Allow purchase of “loss” from alternative Fuel companies, when profitable companies buy them out and continue alternative fuel research for at least 10 years. ( Solar, Fuel Cell, Electric,Wind, Geothermal). Elimination of all Tax credits/subsidies to Oil and Gas Exploration and Production companies but allow Oil companies to buy up these companies with losses. Expires 2025. (B) Foreign Oil Import Tax of $2.00bbl. The oil from North, Central and South America NAFTA partners and Iraq would be exempt. This provides protection for the small oil operators “wildcatters” that find most of the new domestic oil and natural gas fields.
  8. Alternative vehicle fuels provision – Government will convert all vehicles weighing over 8000 pounds to propane. Business and individuals will get a 100% write off of conversion costs, State and municipalities will receive federal grants for 80% of the cost to convert or 10% of cost of new propane  driven buses, garbage trucks, and like vehicles.Restore the expired tax credits relative to alternative fuel driven vehicles, ie hybrids, expires 2020.
  9. Oil and Gas Exploration provision – Allow the drilling on currently restricted offshore federal leases based on the usage of the existing federal leases currently idle. Allow 10 exploratory wells to be drilled on offshore restricted land for each successful completion of a new well (after 1/1/2008) on existing federal leases onshore. All new offshore oil produced must go to US refineries. Expires 2025.

The windfall profits tax should be avoided. It is too complicated, requires too big of an addition to federal government to oversee, and does not provide the tool to keep foreign oil more expensive than oil from the Americas and Iraq. A tariff on foreign oil is the right thing to do at this time with no sunset clause. We import 3 times the oil as we did when I recommended it(windfall profits tax) in the 1980′s. It was made so complicated by the Washington insiders it was only particially effective.

Sunset clauses are important to get capital to move to the targeted markets in a timely fashion, while other provisions provide tax revenue. With an expiration date that requires prompt planning and adequate time to implement moves capital where it is needed.