Don't ask the 'experts'
Commentary: The simple truths in the energy spike
By Kevin Kerr, MarketWatch
I've been trading commodities for nearly 17 years, worked on numerous exchanges -- here and abroad -- and have toiled in the energy pits of the New York Mercantile Exchange. I've traded over the counter energy derivatives for prestigious trading firms and thousands of futures contracts. Even I wouldn't call myself an "expert."
Rest assured, there is a wealth of disinformation and sound byte nuggets out there, and investors need to wade carefully when venturing into the deep end of the information pool.
Quite frankly, as crude oil reaches new highs, which seems to be a weekly occurrence lately, this is uncharted territory for everyone.
There are no experts at these levels. What I can offer you is some basic information that honestly assesses the current oil situation.
Back to basics: Oil 101
The most common question I get at cocktail parties is, "where will crude oil go?"
After a long pause, and another sip of my drink, my usual answer is "higher," then I spot a pig in a blanket on a passing tray and make a hasty retreat. It's been more or less my same answer for the last five years.
Bottom line, crude oil, like almost all resources is finite in supply. Demand is growing exponentially. That's it. Now you're an expert. It's really that simple in the macro view.
Now comes the inevitable question: How long until we run out of oil? (Where are those pigs in a blanket when you need them?)
'70 Days to Empty'
70 Days to Empty by Sean Brodrick, editorial director at the Sovereign Society, is one of the best and most well thought out articles that I've read lately. It really it made me stop and think.
In the article, Brodrick gave some very disturbing and compelling reasons why oil running out may be sooner than we think.
Take Venezuela, for instance.
"Let's not mince words Chavez hates the U.S. He believes the Bush administration tried to organize a coup against him. He says he wants to take his business elsewhere. Can you guess where? China!" Brodrick asserted.
Venezuela, our closest OPEC neighbor, is a major flashpoint in the energy world right now. Reports are coming out that Chavez has actually reversed the direction of pumping on some of his pipelines to further facilitate shipping those oil supplies to China and not the U.S. But Chinese demand and the potential loss of Venezuelan oil is just the tip of this iceberg.
To MTBE or not to MTBE
Metryl Tetryl Butyl Ether, or MTBE, is a blending ingredient used in refining gasoline. It helps to reduce emissions and keep the environment cleaner -- unfortunately, it can kill people.
MTBE has in many instances gotten into ground water, which resulted in numerous lawsuits. In a new energy bill, to be signed into law by President George Bush on Monday, key House Republicans agreed to eliminate language that would have provided product-defect liability protection to refiners that produce MTBE. See related story.
Result? Say adios to MTBE -- much like lead from gasoline in the 70s. What does that mean for the consumer? Plenty!
Officials at Valero (VLO: news, chart, profile) energy estimate a loss of 60,000 barrels a day of gasoline by next spring. That adds up to about 258,000 barrels a day if other refineries follow suit -- that's the equivalent of four major refineries shutting down completely. Disastrous!
Environmental groups are rallying around ethanol, the corn-based fuel. The problem with ethanol is that once blended in gasoline, it's difficult to ship through pipeline and over long distances in tanker trucks. Ethanol is attracted to water and can come out of solution, throwing gasoline specifications off when it arrives at the gas station. Most of us in the industry know that, while well intentioned, it will take years to develop a nationwide ethanol distribution system.
Don't look to the SPR for a solution
I can't offer all the reasons oil is heading higher and faster in this brief commentary -- but I can tell you plainly that the Strategic Petroleum Reserve is not the answer to this problem.
The SPR is about 700 million barrels of oil hidden in caverns along the Louisiana coast. The U.S. presently imports more than 10 million barrels a day. The most that can be removed from the SPR is 4.3 million barrels a day. Now I got Ds in algebra, but even I know that doesn't add up to a solution.
The simple math says, turn off the international spigot and rely solely on SPR, at 10 million barrels a day (if they could ramp up to that rate), the reserve would be depleted in 70 days -- thus the title of Broderick's book.
Trader beware
So it's important to filter out the disinformation. If someone says they're an "expert" trader, beware. See what they have to back it up -- and that comes from, well an expert who at least knows enough to know he doesn't know everything.
So the next time I'm asked at a party if oil is going higher, I know my answer:
"The 1970s oil shocks occurred when U.S. oil imports were far lower than today. America now imports well over half its oil compared with about 35% in 1973. This level of dependence on imports, nearly 60%, is the highest in this nation's history, and will continue to increase as we use up domestic resources.
"The vast majority of the world's oil reserves are concentrated in the Middle East, 65% to 75%, and controlled by the members of OPEC.
"The United States accounts for about 25% of global oil consumption but has only 3% of proven global oil reserves. So you tell me!
"Hey, are those pigs in a blanket over there? Time to deplete another reserve."
Over the last five years, commodities have significantly outpaced the S&P500
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