Monday, April 29, 2013


Up Dated 1/3/2015


Namazu , Giant Japanese Catfish And Former Demigod Turned Analyst

 Bipeds, lend me your ears. I wish to expand a bit on some observations and opinions and advice I offered in my series "NAMAZU FULLY LOADED,  THE FUTURE OF AMERICA. In the final portions of that series I predicted that 'Tight Formations" or "Tight Sands" discoveries of oil and natural gas were poised to make the United States a net exporter of first natural gas, and later refined oil products. I still believe that, but never intended to imply that the price of gasoline at the pump in America was ever going to decline. But in fact in the winter of 2014-15 it has. I would caution however that the price situation is temporary for many of the same reasons I cited in disclaiming that rising U.S. Oil production necessarily signaled a decrease in price at the pump. The problem is that all of the new oil being discovered not only in the United States but around the world is expensive to produce. Drilling and production methods for "DEEP WATER" areas and on shore "Tight Formations" are technologically complex and expensive. The oil companies can't sell their product for less than the cost of production. There is very little production of cheap oil going on out there.  U.S. shale oil production has wellhead  costs that require a minimum break even price of $55 to $80 a barrel. Russia, another oil producer coming on line stronger every year, has a break even cost at the well head of about $120 a barrel. Saudi oil is running about $90 a barrel break even price at the well head. Together Saudi Arabia, The United States and Russia account for about 35% of the world's production. Oil prices are set by the highest priced producers. Everyone with cheaper oil pegs their price with the abundant but far from cheap oil of the big producers. This is generally true, but the recent glut of oil has caused a serious drop in price at the pump. OPEC has responded not by cutting production but by maintaining production contributing to the glut. Just as OPEC intended, U.S. producers are starting to choke off some production and delay some exploration. When backlogs are reduced gas prices at the pump will rise. The U.S., having relatively cheap to produce oil and an abundance of it, will tend to be a stabilizing influence when pump prices reach serious U.S. Consumer resistance levels again. The likely hood is that gas prices at the pump will tend to cycle but the constant pressure is on at all times to keep gas prices at the pump consistent with making a profit out of the most expensive to produce crude oil. We advise all consumers to continue to favor fuel efficient vehicles and practice fuel economy. 

 Enhanced International Cooperation by oil producers, if it ever happens, will tend to stabilize prices at the highest levels to assure profits for every producer. Continued competition will drive continued periodic fluctuation in prices always cycling back up. Ultimately both the producers of $80 a barrel oil and the producers of $120 barrel oil benefit from prices that support the production of the most expensive oil. With competition there will be some cycling, With cooperation there may be stability but at very high price at the pump levels. The consumer's best protection is still fuel efficiency including gasoline elimination as in the electric vehicle, and alternative fuels vehicles.  

 If ever some vast new source of cheap to produce oil were to be discovered in sufficient quantity to drive the price of oil below the well head break even price of the present big producers they would simply cap the wells until the cheap oil was expended. (This is now happening)  They are finding oil off of Greenland, but that won't be cheap to produce, and Alaska's North slope will be even more expensive. If there is any area on earth where large amounts of cheap to recover oil might be found it is in the China Seas. Unfortunately since China demands ownership of all of it even at the expense of her neighbors , even at the demand that neighbors cede lawfully held territory to China, the unrest in the area effectively blocks any large scale exploration or production. Off shore oil companies need stable leasing authorities in peaceful seas, not potential war zone and litigation over royalties. If there is any cheap oil in the China Seas the Dragon's greed will keep it off the market for years if not decades.

 Another factor upholding well head prices is the growing list of non producing nations with growing oil consumption. These nations pay a premium for oil to insure that they get enough. In 2012 Phillips 66, Valero, and Marathon oil exported over 531,000 barrels of refined American product from America to these premium paying nations. Despite Republican promises associated with the "Drill Baby Drill" campaign you will probably never see $2.50 a gallon gasoline again. (OK, we missed that one) But keep in mind the personal investment advice that I gave you in NAMAZU FULLY LOADED, THE FUTURE OF AMERICA. Don't invest in oil drilling and production companies. Their fortunes are linked to the rise and fall in crude oil stocks, impossible to predict or control and subject to constant government meddling.  Invest instead in the stocks of petroleum refiners and transporters. These will be around regardless of prices at the well head and charge what the market will bear over their costs. But you must examine these in the same way that you would examine any corporate stock. You want the tanker operators, pipeline owners, and refiners who have savvy management, and sound financials. Use caution, seek professional advice and invest in oil and gas transportation and refining; they are going to be moving a lot of oil and gas around the planet in the coming decades. Improve your personal wealth. Waiting around for gas prices to fall at the pump is a pipe dream. Invest , make more money then pay what you have to at the pump, you're going to have to pay the elevated prices periodically anyway.

 I hope I didn't burst too many bubbles, but based on some of your e-mails ,a few of you tend to grab onto some of my pronouncements and run with them in strange and dangerous directions. Get that catfish perspective, look at things in depth, before you gulp!

Peace and prosperity biped friends, and thanks for reading my stuff.


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