Matt Simmons Ceo of Simmons and Company Internationaland Author of Twilight in the Desert interviewed by Steve Paikan.
Matt Simmons continues his discussion on the remifications of Peal Oil. He is quick to point out that the Term Peak Oil is a bit of a misnomer as the term actually relates to Peak flow rates from fields. Engineers frequently wish for a gradual Mesa top for oil production from a particular field meaning a very gradual decline from the peak—while sometimes they get production from a field that resembles the Swiss alps. Very steep on both sides.
Would people be mad—hell yes—for a short period then they would get on with their lives. Think about what they are willing to pay for a beer at a sporting event—or for that matter bottled water. They make not a peep about 8 dollar beers yet 22 cent oil per cup is a big deal. Oil is taken for granted even though it is the most consumed commodity in the world. Mathew Simmons puts it very succinctly—people got spoiled on basically free energy.
One fact not widely known is that the US produces over 5 million barrels of oil per day and of that 900,000 barrels come from wells that produce less than 2 barrel’s per day.
I live in Southern Ontario and my father has friends that live about 2 hours Northwest of Toronto who have a few small wells on their property that produce this amount. They were drilled in the 1970’s when oil was climbing in price. Apparently the pump turns on for a short period each day and a truck comes buy every few weeks to collect the oil from a holding tank. That reminds me—maybe I should ask him if they are still producing anything. He mentioned that it was a small annuity for these farmers.
Despite the best efforts of the oil companies and the best technology they are now producing a little over 6 million barrels per day of oil and oil equivalents. The equivalents include liquid natural gas. I believe the oil produced is approximately 5 million barrels per day. Ask yourself how realistic the Saudi reserves are now.
Another example close to home. Cantrall in the Gulf of Mexico allowed the Mexican National Oil company Pemex to export several million barrel of oils per day to the US. The peak was in 2005. They are now producing 900,000 barrels per day from that field with a decline rate of 30% per year. Pemex is a state owned oil company whose revenues supply Mexico with over half of the funds for the countries social programs. You think Mexico has social problems now—just wait when they start coming up short on their social spending!
This video with T. Boone Pickens, Chairman and CEO of BP Capital management, was originally broadcast from Bloomberg Radio (who would have thought that there would have been a market for video for Bloomberg radio!!) discusses the one year anniversary of the Pickens Plan.
The topic du jour was the relentless drop in natural gas prices in the last year and how it will affect implementation of the plan by congress and the public. The ever optimistic and media savvy T. Boone outlined the benefits of the lower natural gas prices–particularly as to how it relates to the rising price of oil. Essentially lower natural gas prices makes the plan even more attractive because it will be used as a transportation fuel and lower prices will drive consumption as an alternative—particularly as it relates to diesel fuel in the trucking fleet.
Two bills will be in debate shortly—HR 1835 in Congress and 1408 in the Senate– apparently have a good chance of passing as long as they are not attached to anything. A highlight of the plans is the 65,000 tax credit for the trucking fleet that will be included.
The latter helps the trucking fleet meet the 2010 EPA mandate that calls for a cleaner trucking fleet. There is major concern in the industry that current diesel technology will not be able to meet the standard—Caterpillar for instance exited the diesel engine manufacturing part of their business entirely due to the anticipated cost of meeting the mandate. it was 10% of their overall business.
The 65,000 credit will apply to new purchases. The natural gas engines apparently require less maintenance and burn cleaner than their diesel counterparts.
The trucks will be the first conversion that needs to go ahead. T. Boone claims that the infrastructure conversion will happen quickly and in some cases is already partially in place. California has had it for several years for instance in their bus fleet—for them it driven by air quality standards but it was implemented several years ago nonetheless. Fort Worth, Texas has had Natural Gas buses for over 20 years.
The host asked Pickens his opinion on why oil prices are still trending higher despite the increasing supply. He mentioned the existing contango that exists in the market partly due to OPEC restricting production. They would like to see oil hold firm at 70 to 90 dollars per barrel and are prepared to cut production to meet these numbers. He says you need to pay attention to the thinking of those who own the oil.
Also remember that besides the financial benefits that will accrue to T. Boone with this plan he does have a strong case when one considers that Natural Gas is primarily a domestic fuel. Dollars spent buying Natural Gas stay within the US and are not exported—which improves the current account deficit.
Dr. Mark Farber discuss the goal of government and keeping interest rates low and how that encourages speculation. He mentions Switzerland as a specific example that even outstrip earnings and cash in order to discourage deposit. This has been government policy since 2001.
Other points to note, he is long Hong Kong REIT’s but expects dividends to be cut. It is his alternative cash. He suggests it because in the end at least have an asset. If governments continue to print money and asset value should rise. You need to compare this investment to cash which is being main undesirably governments who are trying to force you to speculate. Yes you may have a falling dividend that lowers your income however you will probably benefit from rising asset prices. Interest rates are being kept artificially low or fees are being charged essentially make holding cash very undesirable. So if they cut dividends by 50% you are still ahead of the game. Over time that asset will appreciate and given that the worst economy becomes and more money will be printed and hence asset prices will rise.
He went into great detail about how the deflationists are discussing output gaps and how that will be a driver of deflation. He finds it difficult to accept and wrong. He points out that Zimbabwe has an output gap up 99% and yet inflation is the problem and not deflation. Generally low inflation rates in any country reflect fiscally responsible government. The opposite of that or the weakest governments generally have the highest inflation rates.
At what stage will the US reduce their deficits? In his opinion— it will never happen. In two years the liabilities for Medicare etc. will cause them to increase the deficit. This author notes that the current administration projections of economic growth over the next few years will almost be as high as China— and he makes no adjustment for recessions. Very optimistic indeed and not “real life” as my four year old is wont to say.
I found his next statement interesting. He believes that no one has the foggiest idea where the world will be in five years. He himself is on the sidelines and is preparing for multiple scenarios.
I heard another interview of his recently and he proposes to the deflationists that if they believe they are right they should belong 30 year US bonds and long stock market. If they are correct then this will be the place to be. Given his story low 30-year yields and high stock market multiples this could be considered suicidal from an investment perspective.
What I get from this interview is to be prepared for inflation by being long commodities and hard assets and if you’re in paper assets and least have been backed by assets like the REIT’s mentioned above.
I would like to tell you my experiences with natural gas ETF trading.
On September 14, 2009 on two separate trades of Horizon Beta HNU I purchased 400 shares at $2.49 and 400 shares at $2.60 for a total cost of approximately $2000 Canadian. My thoughts at the time were that it was a very short-term bullish scenario for natural gas and I was right. Natural gas for September 2009 code NGV9 was trading around $3.20 when it started to trade in $3.60 when I close the trade on September 18. This is approximately a 10% move.
For your information I read the following from the Horizon Beta Pro ETF website.
“The Horizon Beta Pro Nymex NYMEX natural gas bull ETF and the Horizon Beta Pro Nymex natural gas bear ETF seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the Nymex natural gas futures contract for the next delivery month.”
I chose the Horizon Beta HNU because it is a leveraged ETF at two to one bullish. Theoretically if the underlying moves 10% then this ETF should move 20%. I ended up making an 18% gain. Interesting to know if it sold at the end of the day before on September 17 would’ve made a 25 to 30% gain based on the prices near the end of the day.
Observations:
On September 18 the contract was down about 3% from the previous close yet I was down close to 12%. The leveraged definitely goes both ways but it is faster on the downside if you hold the opposite horizon contract. What made matters more complicated for me was the reverse five for one split that occurred after purchase— yes it was announced but my brokerage firm didn’t update this for a week (apparently very normal) and I had a devil of a time figuring this out in real-time. Was I lost? No—but my anxiety level over such a small crappy tester position was much too high so I got out.
Off the cuff summary, trading vehicle only for short term directional trading. If you have a market going in a stupid direction and fast then dive in and out like you are bathing in a Northern Ontario lake in April.
Meaning of the Story
If you are in northern Ontario in April camping for instance and you need to bathe. Then what you do is grab onto privates jump in and don’t worry too much about the niceties of using too much soap before you get out as you will be getting out faster then you got in! The latter refers to a high school camping trip from my youth in Northern Ontario that was in late April. I was almost sterilized due to our frigid attempts at bathing. Myself and all my fellow campers gave up eventually and sort of swished water on our arms and faces in the morning from that point on.
The bus trip home was an exercise in maintaining personal space to avoid the smell of others.
Thoughts on the Future
I think it is about time I learned to trade commodities. My reasoning for this is that while it may be slightly harder to set up an account and margin you have direct exposure to the directional trade you seek. My biggest concern regarding the above ETF was that the underlying product is a derivative variation of natural gas. I can see a scenario where I could rapidly lose money on a downward spike that was far less than the gains I had on the upward move. These things are repriced every morning before the market opens. Leverage of 2 to 1 with the derivative component is like playing with fire.
Besides I have no intention of trading on 10% margins and will likely use reduced leverage of 50% or to avoid getting taken out on market noise.
I will keep you posted about how I intend to reestablish my virginity!
A real eye opener here given the amount of hoopla and teeth gnashing that has occurred of late.
The numbers came via CNBC and are drawn from the US and the Federal Reserve Bank’s Office of Debt Management.
THE LARGEST HOLDERS OF US TREASURY DEBT:
15. Luxembourg $104.2 billion
14. Depository Institutions 107.4 “
13. Russia 119.9 “
12. Insurance companies 126.4 “
11. Brazil 139.8 “
10. Caribbean Banks 189.7 “
9. OPEC nations 191.0 “
8. The United Kingdom 214.0 “
7. US Pension funds 465.4 “
6. States and localities 522.7 “
5. “Other Investors” 629.7 “
4. Japan 711.8 “
3. China (mainland) 776.4 “
2. US Mutual Funds 769.1 “
The numbers pique interest for a number of reasons as the number 1 holder of treasury securities with a number 6 times as large as China and greater than the total of the Caribbean, Brazil, OPEC, United Kingdom, US Pensions,various states and other local entities as well as Japan, China and US mutual funds is….wait for it….. The Federal Reserve! Ta Da!
Whine away about how wrong this is given that they basically issued it to themselves at the behest of the US Government AND they are getting paid interest.
It makes you realize that a default is probably impossible given the power and influence of the Fed—so we are probably talking inflation or a severe cut in entitlements as a solution to the budget issues. My money is on the former given the history if fiat money over the millennium.
Interesting video from Russia Today with Peter Schiff. Please note that you may need to turn your volume up and the sound quality improves after the opening segway! I have never seen this website and it is interesting for its “strong views” on various matters (read no PC!). After all if you are a fan of Putin with his shirt off you have to go somewhere Huh?
Discussions started around the one year anniversary of the Lehman collapse where Schiff said that allowing the collapse was the one thing that they did right when the crises was occurring. It was a trial balloon of sorts as they were probably starting to realize at the time the moral hazard they were creating. They allowed the company to collapse and where scared at the resulting uproar—so moral hazard be dammed!
It basically showed how weak and indecisive the Treasury and Fed have become—they were allowing proper cleansing to occur and at the first sign of trouble or criticism they reverse course. Everyone blames the AIG collapse on Lehman and they are probably right—what should be noted is that AIG thought they were writing credit default swaps with a huge profit margin and it turns out that they were underpricing them by a HUGE margin. When a crisis hit they should have been/were wiped out. The moral hazard here is that there are will not be a huge number of ex AIG employees sprinkled around wall street for the next 30 years who will remind all the young hotshots in their 20’s about the dangers of mispricing assets. These same battlehardened veterans also won’t probably be in the positions of influence required as well—because they are all still at AIG! Moral hazard problem still NOT solved and probably going to get worse.
My advice on the latter—wait for the next stupidity to build on Wall Street and get ready to practice your shorting skills. George Soros basically talks around this issue (ad nauseum) but he at least addresses it. Remember he made another Billion in the market collapse last year off this crap!
Peter Schiff also addressed the fake unemployment numbers in the US. There own numbers show 16% plus unemployment but their numbers for public consumption is 10%. The 10% number doesn’t include people who want to work but have given up as well as those who are engineers but are working at minimum wage jobs to pay the rent. The latter want a real job—but don’t want to be homeless.
The numbers could be worse actually given that a large number of workers in America are actually independent contractors versus actual employees. Companies have trended toward this because of onerous state and federal regulations.
These contractors actually don’t stop working they just stop earning money! They include insurance brokers, real estate brokers, stock brokers etc. NOT included in unemployment figures.
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Congressional testimony by T Boone Pickens about his plan to make the United States less reliant on imported oil. I was surprised when I saw it because I thought You tube had a 10 minute limit!
I don’t understand his statement that the US is fighting both sides of the Iraq war for oil, and that it is for the benefit of the people who sell oil to the States. Comments anyone? I sense that he thought that the powers that be wanted to bankrupt the US at a quicker pace—but quite frankly the statement was lost on me. Although his statement that since the US now sends 700 Million per year on foreign oil and given the potential for higher prices this matter could increase dramatically.
Lot’s on benefits for the infrastructure in the States including a real boost to the Midwest states. I have heard other commentators stating that the plan makes sense, but T Boone will be positioned to make a lot of money. i guess you can be virtuous and greedy at the same time—sort of like Al Gore positioning Cap and Trade legislation while owning a piece of a carbon trading company with Goldman Sacks. Nothing wrong I guess but nobody should ignore the fact when evaluating the situation.
The latter statement is something I have only learned to do relatively recently. Meaning–respect somebodies actions yet understand that there is some self interest involved as well.
This may be that wisdom thing that is supposed to arrive when you get older—or maybe a toning down of the cynicism of youth.
From the great bastion of socialism, California, we have a great example of what can go wrong in government sometimes. I was quite surprised at her pause after she talked about socializing the oil companies—She seemed surprised that she said it? I am curious if she really believes that government can run an oil company properly—given the examples in the case of Venezuela and to a lesser extent Mexico. The latter reflects rapid depletion of Cantrell that perhaps could have been improved with more drilling but would have still occurred at an accelerated pace—refer to total US production drops since 1970 for reference.
Interesting question and answer session with a commentator. You could tell it actually made Jim Rogers think about his answers a little bit.
The value I got out of the conversation was his comments about oil versus sugar and oil versus cotton etc. He said in a way if you buy sugar or cotton you are actually buying oil (indirectly). For instance if oil goes up in price and stays up then sugar prices go up because people will take sugar cane/turn it into ethanol and burn it in their tanks—effectively increasing the demand for sugar and raising it’s price.
Same for cotton. Oil rises in price and stays there. People plant corn or sugar cane as an oil substitute and that leaves less land available for cotton—hence the price rises on cotton.
He concluded that the best way to be long oil is to by cotton.
Interesting how he focuses on the behavior of the consumers of the actual commodity. When you pull one string it moves something else—When I think about it I would expect to see a lag in some of the movements—oil goes up first and the rest lag.
Pickens speaking in Las Vegas and outlining the US problem with regards to its dependence on foreign oil.
Some highlights:
-The US uses 25% of all the oil in the world everyday with 4% of the population
-there is going to be a point that the US will reach a choke point either because of increasing prices or supply problems
-the US has a good transition resource in Natural Gas which they have a good supply of for a transportation fuel while they work on alternatives for the transportation fleet
His plan to have windfarms in the midwest addresses this “alternatives” problem. Primarily using wind to create the electricity needed for the future transportation fleet. It will be interesting how this plays out but will likely be a combination of electric trains replacing diesel trains and trucks, plug in cars (electric and hybrid).
I realize that some commentators say that T Boone Pickens is always doing what is good for T Boone Pickens—but hey isn’t that the point. He and others can make a profit AND society can benefit with transportation alternatives.