Rising Oil and Gas Prices During a Recession

You know over the course of the past few months I’ve not held Wall Street or the banking executives in high regard. I hold them almost – that’s almost – singularly accountable for our current recession (Uncle Sam and private citizens who borrowed too much are to blame as well), but the government is beginning to really stick its nose too far. For example, today’s headlines (those not about whether Nancy Pelosi knew about torture and when she knew it) are consumed with government pushing itself on private industry, most notably with the pressure on Bank of America (NYSE:BAC) to change its board. 

Granted, "regime change" is a necessity for most of the companies receiving TARP money. After all, they’re the ones who got us into this mess. But shouldn’t it be shareholders forcing the issue? You saw how they forced Ken Lewis of Bank of America to give up his role as chairman. This was done at the shareholder level, not by some bureaucrats in a windowless office overlooking the National Mall. 

But for many Beltway insiders this isn’t enough. Someone’s got to pay dearly for the bonuses paid out to Merrill Lynch just before B of A took them over. And since Merrill’s gone, guess who gets to play whipping boy? We’ll see how far this goes and which TARP recipient is next. Unfortunately, this is even more motivation for firms that received TARP money to pay it back as soon as possible, in some case, too soon. 

A couple weeks ago the President and his Car Czar worked out a deal to "save" Chrysler. As part of that deal Chrysler is to come out as stronger, if leaner, automaker. We’ll see (ask Daimler Benz how their dance with Chrysler worked out). 

But read the fine print on the ownership stake: the United Auto Workers (UAW) union will own 55% of the company with rest as U.S taxpayers, Canadian taxpayers, and Fiat somewhere in the mix, though it’s not 100% on board. 

Let me rephrase this: the means of production will be controlled by the workers and the central government planners. They will control the production quotas and development of new products for the masses. 

Does this sound familiar? Didn’t we spend 50 years and untold trillions to avoid this? 

General Motors (NYSE:GM) is in the throes of its own bankruptcy deal. We’ll see how this plays out, but I’ll bet it won’t be too dissimilar from the fate of Chrysler, except Fiat won’t be at the party. 

And this is rich … the UAW has graciously agreed to not strike Chrysler until September 2015. How magnanimous considering that as majority owner they’d be striking against themselves. But isn’t that kind of what they’ve done over the decades anyhow, just one degree removed? 

So only Ford (NYSE:F) is left standing as a real company. In a sense, I’m proud of the management and decisions made at Ford to put them in this enviable position. I can only hope that their eventual fate is not that of Chrysler and GM. 

*****Rising Gas Prices 

While we’re on the subject of cars, I’ve been thinking about gas and oil prices. Have you checked the price at the pump lately? Here at our Washington, D.C. offices we’ve seen a gradual uptick in prices that if it happened overnight, or heck, even during one month, you’d do a double take. 

After the markets collapsed last fall, regular gas was going for about a $1.70 a gallon. It was a nice reprieve just in time for the holiday season. But just yesterday I noticed the price at the local Shell station was $2.38, which also happens to be the local average. 

So, let me get this straight: in the midst of the worst recession in a generation when we’re losing jobs at a pace of 600,000 and more PER MONTH, housing prices are falling, tax revenues are declining, retail sales are abysmal (unless you’re Wal-Mart), and businesses are failing, gas prices have increased by 40%? Something doesn’t jibe here. 

Over the past few months Jason Cimpl and I have been doing a lot research on the oil sector. In fact, he’s been getting in and out of the ETF USO in the TradeMaster service to pick nice quick gains. One disturbing trend that we found was the rapid deceleration of oil field exploration and development. It’s virtually dried up. I’m not surprised given that according to the International Energy Agency current inventories are at all time highs. At current usage rates that equates to a stockpile of 62.4 days of consumption. That’s eight days higher than just one year ago. 

So oil, and by extension, gasoline prices should be going down, right? 

Not so fast, you see oil traders work off not the here and now, but the future (that’s why they buy oil futures). And they’re anticipating greater demand toward the end of this year as the world economies (particularly the U.S. and China) pick up again and they have readily available data suggesting that Big Oil and nationalized oil are not ready to pick up the slack.

There’s no way they can. They’ve cancelled nearly three dozen big projects. And their existing capabilities are looking rather dubious. 

For example, production in the developed world is way off: Alaska’s North Slope is way off, Mexico’s famous Cantarell Field peaked in 2002 at 2.1 million barrels per day and is now on track to produce only 772,000 barrels per day for 2009 (that’s 66% drop off in five years!), Britain became a net importer of oil last June – not from increased consumption but from depletion of its North Sea fields. 

And then there are the other big players: Russia is having a tough time financing continued operations, let alone new projects; Iran, right, they peaked in 1976 at 6.6 million barrels per day and are now around 4 million; Saudi Arabia is well-known to be cooking the books on proven reserves numbers; Nigeria is constantly on the brink of implosion. 

Then there’s Venezuela. What can I say? Chavez has done a great job in turning what was once one of the richest nations in South America into one of the poorest. He’s evicted Big Oil (not without stealing their assets first, just ask Exxon-Mobil and StatOil), used PDVSA as his own piggy bank for keeping the masses at bay, and is now in the process of stiffing little guys like Williams Cos. (NYSE:WMB) and Helmerich & Payne (NYSE:HP) out of what he owes them for development and extraction purposes. 

In 1997 Venezuela produced 3.18 million barrels per day. Today that’s down to 2.24 million, and continues to plummet.

But the real kicker is that Venezuela supplies 1 in 5 barrels of imported oil to the U.S. Talk about a real bind for the U.S. Two of its biggest providers, Mexico and Venezuela,  have oil sectors on the verge of collapse and it’s own oil fields are drying up. 

The only bright spot is Canada. Our friends to the north are our largest provider of imported oil giving us 1.9 million barrels per day. The only problem is that Canada’s got a lot more callers for oil than it used to, particularly the Chinese who are willing to pay top dollar (literally top dollar, as in the dollars from the exports they sell to you and me at Wal-Mart as I mentioned earlier) and at some point Canada might find itself hard pressed to resist China’s offer. 

So, there lies the problem: production is down almost everywhere, new projects put on hold will take years to bring back up, and when the world economy turns around the reserves will be quickly depleted. I don’t want to sound like a pessimist, but perhaps the oil futures traders are seeing something much more clearly than anyone else is. 

For the moment, I’ve been following small oil sector plays like Graham (NYSE:GHM) and a few others. If you want to find out more about oil exploration and services companies that stand to deliver big profits in the coming months check out my new report HERE. 

Have a great weekend. We’ll pick it up again on Monday.