Why The Price Of Oil Has Risen From About $75 To About $100 Over The Past Six Weeks
Guild Investment Management
November 17, 2011
1. The lack of productive diplomacy between the U.S. and Middle Eastern nations has frightened some former “friends” in the oil-producing world, and turned them at best neutral, and at worst, cold to America. They have watched fellow Arab regimes tumble in Tunisia, Egypt, and Libya and witnessed the uncertain role of the U.S. against Qaddafi as a peripheral – and not a leading – effort. Should their regimes come under attack, they wonder whether Washington will stand with them or against them. In recent months, Saudi Arabia has quietly reduced its crude output, even as prices have risen. Perhaps this has something to do with the belief that the U.S. will not step forward in case of trouble, even though the Saudis are major oil suppliers.
2. Iran’s aggressive behavior in the region has made the practice of stockpiling some oil a wise bet.
3. Global investors read weather reports. Now that the season of revolt-discouraging 130 degree temperatures have passed, investors wonder about a possible resumption of the “Arab Spring” and further instability in the region.
4. Canada is America’s largest supplier of oil. Yet, plans for Canadian pipelines to carry more oil south through U.S. territory are running afoul of Yankee politics and environmentalist objections. President Obama recently delayed the start of the Keystone Pipeline from Canada's oil sands, at least until after the 2012 election. The project would have created 100,000 direct and indirect jobs in the U.S. Although pipeline operators boast of a remarkably safe and clean history, they have still not squelched the fears or ideology of environmental groups. Environmentalists, along with NIMBY (“Not In My Back Yard”) protestors, have effectively delayed the job-creating, economy-stimulating, and national security-enhancing effects that more domestic oil and gas production would create in the U.S. and Canada.
5. Failure to effectively exploit existing alternative resources. Here’s one glaring example of what we consider to be fuel failure folly. Why isn’t the U.S. substituting clean-burning natural gas instead of oil in the transportation sector? The country could easily utilize the natural gas surplus to power trucks and superbly save on gasoline and oil consumption. Oil prices will continue to rise as long as we fail to use available natural gas in this way. Here’s a missing opportunity for U.S. and Canada oil companies to export production and make much more money than they do by selling into the domestic markets.
6. An oil glut is about to become history. Readers may recall this past summer, we discussed that there was a glut of oil in the U.S. midcontinent. Because of this glut, U.S. West Texas Intermediate (WTI) oil futures which are based on light oil at Cushing Oklahoma traded at prices 20 to 25 percent less than light crude around the globe. On November 16th, Enbridge Energy purchased Conoco Oil’s 50 percent interest in the large crude oil pipeline, Seaway, which currently transports oil from the Gulf of Mexico fields to the Cushing, Oklahoma storage facilities. Enbridge and their new partner, Enterprise Products (who owns the other 50 percent of the pipeline) have agreed to reverse direction of the oil. This means that by the end of the 2nd quarter of 2012 hundreds of thousands of barrels per day will be heading towards the coastal region’s higher prices. Accordingly, on November 17th, Oklahoma prices are only 9 percent lower than light crude around the globe.
The Bottom Line
Many veteran observers, including us, seriously question the intelligence of ongoing policies that ignore domestic resources and keep the U.S. sending billions of dollars a year to countries that dislike the U.S. and actively seek America’s decline.
After it's recent rise, we recommend investors take profits in oil. It can go higher but we like taking profits after a rapid rise.
Rx For Slow Economic Growth
Last week we explained our slow growth prognosis for developed world economies resulting from sick and shrinking banking systems. We’d like to follow up with a few ideas about how these economies – notably Japan, Europe, and the U.S. – can move forward to alleviate some of the roadblocks and red tape standing in the way of revitalized growth.
The news from Italy describes growth as only about three percent over the last decade. When companies in Italy, or throughout Europe for that matter, are asked why growth is so slow, they often say they don’t want to grow bigger, that slow is their policy. On the continent, as well as in Japan, there appears to be a slow growth mentality, even among business leaders. Obstacles to growth are all over the place in the form of complex regulations, restrictive labor laws, powerful labor unions, high operating costs and taxes, an unresponsive legal system, and entrenched corporate competitors with political contacts and contracts that strongly resist the appearance of any new competition. Add it all up and you have s-t-a-g-n-a-t-i-o-n!
If we were doctors treating economic malaise we would quickly develop finger fatigue writing prescriptions to remedy the epidemic of growth inhibition. Here are some of them:
· Revision of labor laws that make it very hard to hire and fire people. In Italy, for example, labor unions have vowed to shut down the country with a general strike before they make any concessions in labor practices. We can very well imagine the same thing happening in many other countries.
· Scaling down of costly, long-term unemployment checks. While such payments help many jobless people in financial peril, in many cases they also incentivize an unemployment entitlement mentality and discourage an earnest search for re-employment.
· Fix the education system. There are over three million jobs in the U.S. currently going unfilled, many of which are high-paying, high-tech positions. The modern world of technology requires the brightest math, engineering, medical, and science minds. While liberal arts majors obviously have their place and importance in society, many graduates find little employment opportunities to put their liberal arts college training to work. The big demand today is for technology skills, and the failure of the education system to keep pace with the realities and challenges of a changing world is contributing to a loss of U.S. technological and creative leadership.
We have much to learn by examining the educational ethics, standards, and performance of Asian countries such as South Korea and China. They are showing us that if students are thoroughly educated in math and science, they develop into engineers, computer programmers, scientists, doctors and many other skill sets that the U.S. and Europe need. They become instant job fillers! For more on this important subject, you may like to read this recent article in the Wall Street Journal.
· Create – and enforce – high barriers between politicians and special interests. Entrepreneurs who want to pursue new ideas and put people to work are thoroughly stymied because of influence-peddling in the halls of power everywhere. See the article below that describes the level of corruption in Washington DC.
Such remedies are, of course, easy for us to put forward, but unfortunately we have little faith in the operating system to undergo a serious process of self-overhaul. All we hear is empty blather about change and transparency. For that reason, slow growth and stagnation are looming for many years ahead.
Political Corruption – American Style
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”
– Alexis de Tocqueville
The words of the great French historian and social commentator, written more than 150 years ago, give us cause to ponder the way American politics operate these days and in which direction we are headed. If de Tocqueville’s words are prophetic, and Jack Abramoff’s admissions are true, the American Republic as an unprecedented and noble global experiment is in serious danger.
Mr. Abramoff, in case the name escapes you, is a former lobbyist convicted in 2006 of mail fraud and conspiracy. His activities were at the core of a highly-publicized corruption investigation that led also to the conviction of White House officials, a Congressman, Congressional aides, and other lobbyists. He was released from prison in 2010 and has written a revealing book – Capitol Punishment: The Hard Truth About Washington Corruption From America's Most Notorious Lobbyist – about the rotten and pervasive relationship between lobbyists and government.
Mr. Abramoff was recently interviewed by CBS 60 Minutes reporter Leslie Stahl. Click here for a link to the interview. It is well worth watching. It will purge any notions from your mind that the U.S. Congress is less corrupt than government bodies elsewhere in the world. We have made this interview required watching for our entire staff. Corruption is flourishing and is more devastating to the U.S. ideal and longevity than most of us would even imagine.
Here is a brief excerpt from the interview:
Abramoff: “I think people are under the impression that the corruption only involves somebody handing over a check and getting a favor. And that's not the case. The corruption, the bribery, call it, because ultimately that's what it is. That is what the whole system is.”
Stahl: “The whole system's bribery?”
Abramoff: “In my view. I’m talking about giving a gift to somebody who makes a decision on behalf of the public. At the end of the day, that's really what bribery is. But it’s done every day and it is still being done. The truth is there were very few members (of Congress) who I could even name or could think of who didn’t at some level participate in that.”
The European Unity Saga Drags On
A few days ago, the theme of a Euro breakup was addressed by Chancellor Merkel’s Christian Democratic Union (CDU). It voted to allow countries using the Euro currency to stop doing so if they wish. In other words, if you can’t comply with the common currency rules you can leave the Euro without losing membership in the European Union. According to Norbert Barthle, the ranking CDU member of the German parliament budget committee, “any country that wants to leave the Euro on its own should not be prevented from doing so.”
The motion will require agreement from the other parties in Mrs. Merkel’s coalition, the Christian Social Union (CSU) and the Social Democratic Party of Germany (SPD), as well as the support of the opposition in a full parliamentary vote. After that happens, the next step will be for the European Union to take up the ruling.
The bottom line here is that a mechanism is being put in place that will allow financially-responsible Eurozone countries to force irresponsible members to either make necessary changes in their approach to government spending or to leave the Euro currency. In the case of any European banking crisis before or after such an arrangement is finalized, large amounts of money will be electronically printed and issued to buy the sovereign bonds of the weak nations in order to support the debt-holding banks of Europe. For this reason we do not share the current general bearishness on stocks or commodities.
Worried About The Future Of India?
Many are and it’s not surprising given the hodgepodge of data available on the Indian economy.
● mining or manufacturing production are contracting but electricity usage is expanding.
● four-wheel auto sales are falling and two-wheel motorcycle sales are rising rapidly.
● imports are up forty percent year over year while inflation is strong.
The picture is confusing for those who do not look at credit statistics. Indian credit is available and accelerating. There is plenty of available credit in India, both domestic and corporate. Because we see no impediments to credit availability and because demand is strong, we believe that economic growth will continue.
Our experience is that when credit is strong, stock markets rise in price – especially in an inflationary environment such as India. People use the credit to invest in hopes of keeping ahead of inflation. In short, we are bullish on India. Consumer spending and leverage are combining to continue the fast growth that India has enjoyed. The only real issue is the continuing problem with inflation. This is one reason why we recommend Indian companies that can grow, and why Indians will continue to buy gold. In our opinion, gold purchases will not be restricted to the fall – the traditional gold-buying season of holidays and weddings.
India's Sensex Index- Last 10 Years
Courtesy of Bloomberg
MSCI Emerging Markets Index Fund- Last 10 Years
Courtesy of Bloomberg
(c) Guild Investment Management