Archive for June 14, 2008

An Oil Bubble Ready to Burst?

Paul Walker, of GFMS metals and mining consultancy, believes so. He says we are seeing a “last hurrah” in commodity markets – a final surge upwards in prices as the credit crisis lurches towards its conclusion – and that we will see a severe retrenchment of prices as financial markets recover.

The US Commodities Futures Trading Commission suspects so too. It has been probing how agricultural commodities are traded and pondering moves that could curb financial speculation in grains, soy beans and other foodstuffs. It has also launched inquiries into the recent heavy speculative activity in oil futures.

So why hasn’t the bubble burst before now? There are two problems with the ‘bubble’ thesis. One is that there has always been speculative activity in these markets and that warnings of a bust have been around for a long time.

The second is that matters have been exacerbated by the behaviour of central banks. The oil boom, buoyed by recent confident predictions that the price is heading towards $150 a barrel, if not $200 over the next few months, has to a significant degree been driven by a weak dollar for most of this year – a policy tacitly agreed by the US authorities as an antidote to the credit crunch. More recently the oil price rose sharply on warnings from Jean Claude Trichet, head of the European Central Bank, that it may soon raise interest rates – a warning that backfired as it pushed down the dollar and drove up the oil price by almost $10 to $138. The price has now pulled back to $134.60 a barrel, but a sustained fall is needed before we can be sure of a speculative exhaustion.

How long can the oil price stay above $130? The supply-demand fundamentals do not explain the sharpness of the ascent this year – 60% since January. Nor does it make any allowance for the reaction of the end consumer. Stockbrokers Charles Stanley estimate that oil speculators have amassed 1.1 billion barrels of oil, more than eight times the amount added by the US to its strategic reserve, making them the largest single influence on oil-related commodity futures trading. William Enghadi, research associate at the Centre for Research on Globalisation, conservatively estimates that “at least 60% of today’s crude oil price comes from unregulated futures speculation by hedge funds, banks and financial groups”.

It would be wholly wrong to suggest that speculative activity in the futures market is solely or even mainly to blame for the spectacular rise in oil. But it has certainly exaggerated the price trend in recent months. One characteristic of a pending bust is when the price of a share or commodity becomes a national – or supra national – obsession. That is certainly the case now, with riots across Europe and Asia and haulier protests and blockades in the UK.

It doesn’t necessarily follow that prices then automatically behave in the manner that presidents and finance ministers would like. But a growing determination to see a firmer dollar would certainly help drive the oil price down. And the key factor most likely to make speculators switch positions is already evident: an adverse market response to an ever higher price.

There are signs that the commodities bubble may already be bursting in some areas. Prices for wheat and rice have come off the boil. Nickel prices have fallen by 25% since mid March.

The economies of the oil consumers are now slowing and oil demand falling as businesses and households cut back.

At the same time, governments in developing countries that have been operating price subsidies to shield consumers from the full impact of fuel price rises have been forced to lower or withdraw these subsidies in a move that will hit demand hard. Longer term, oil demand will be further hit by the accelerated push towards alternative energy sources.

Source: Scotland on Sunday

I’ve long thought that the speculative oil bubble price was going to burst, and the companies left holding the bag are going to be ruined. The evil part of me that knows that I’m paying an overly inflated price due to speculators when I fill up the tank hopes that all those bastards go out of business. I hope that state pension funds aren’t among the gamblers, but I fear that they are.

I remember the last time this happened, and it wasn’t pretty.

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Mexicans Want to Know Where the Oil Money Went

MEXICO CITY — Where did all the oil money go?

Mexico, many here believed, would be swimming in petrodollars by now thanks to record global oil prices that are nearly double what they were a year ago. Some experts pegged the potential windfall for Mexico at more than $20 billion this year if prices stay high.

But the Mexican government announced last month that not only was there no surplus oil money, but that Pemex, Mexico’s nationalized oil company, had actually lost nearly $1 billion in the year’s first three months.

It didn’t take long for conspiracy theories to fly.

Opposition politicians accuse President Felipe Calderón of playing politics with petrodollars to advance his proposal to allow firms from the United States and other countries to have a stake in the national oil concern.

In a country long accustomed to public corruption, few in Mexico have expressed surprise that billions of dollars have apparently slipped into the ether.

“Through some magic trick, all that money disappeared, and I’m sure that in a couple years it will appear in the Swiss bank accounts of our leaders,” said Juan Torres, 38, a Mexico City telephone company technician. “The money gets stolen term after term, and that’s why they say being a politician in Mexico is better than having your own company.”

But the truth might not be that simple.

Most economists in Mexico agree that the government had solid accounting behind its startling announcement. But they also say the government did a poor job explaining it to the people.

Mexico’s federal budget is closely linked to world oil prices. Pemex revenues contribute 40 percent to the budget, which is set based on what officials expect worldwide oil prices to be: about $50 a barrel for Mexican crude this year. Instead, the price of Mexican crude has reached $113 a barrel, leading some analysts to predict that Pemex could take in at least $20 billion more than projected by budget writers.

But the Mexican government says the excess oil profits were eaten up by a complex combination of factors. For example, despite being the world’s sixth-largest oil producer, Mexico imports much of its refined gasoline (the nation hasn’t built a new refinery in decades) and spent much more than it expected to buy gas from the United States.

In addition, the declining value of the dollar also ate into oil profits, which are measured in dollars. And Mexico produced 12 percent less oil than expected because of sharply declining oil reserves, principally in its massive Cantarell field in the Bay of Campeche.

The government also claimed a category of miscellaneous expenses, saying those helped do away with a surplus of more than $3 billion in the year’s first three months.

“It’s probably true, but the way they presented it doesn’t buy much credibility,” said Duncan Wood, an international relations professor at Mexico City’s Autonomous Technological Institute. “It made it look like they were fiddling with the numbers.”

The perception comes at a politically sensitive time. Calderón is seeking to modernize Pemex after decades of mismanagement and corruption. He says he wants the state-run company to be able to enter into joint ventures with foreign firms, something Mexico’s leftist leaders say is the first step toward privatizing Pemex and handing over Mexico’s oil wealth to multinational corporations.

A legion of Mexican legislators and governors, led by opposition lawmaker Jorge Estefan Chidiac, called for a more detailed breakdown of Pemex’s accounting.

After the Mexican Congress conducted its own audit this week, Chidiac concluded the government numbers were correct. But he criticized Pemex for its declining production, calling it a “huge error.”

Some of Calderón’s opponents suggest that the government is intentionally slowing production to provoke a crisis.

Others say they see an even more nefarious plan at work.

Several political analysts floated a theory that the federal government has embarked on an effort to withhold excess oil revenues, which by law must be shared with individual states, until governors begin supporting energy reform.

This week, the Mexican media began to question the government’s reasoning, arguing that it had exaggerated the amount of money it was spending to subsidize low gasoline prices (Mexican gas prices are set by law and are currently at less than $3 a gallon).

The Reforma, one of Mexico City’s leading newspapers, analyzed Mexico’s $5 billion gas subsidy for the year’s first three months, and in a front page story reported that the subsidies should have cost only about $400 million.

Gabriel Perez de Peral, director of the economics department at Mexico’s Panamerican University, said the story was misleading and failed to take into account Pemex’s complicated tax responsibilities.

Yet such news stories have fueled the cynicism of a Mexican public accustomed to robberies of the public till. In the past few years, a slew of politicians, including former State of Mexico Gov. Arturo Montiel and former President Vicente Fox, have been accused of enriching themselves through their public posts.

Alejandra Garcia, a 26-year-old Mexico City Wal-Mart employee, said the incident only confirmed her suspicions about her leaders.

“I’m pretty sure that maybe 40 percent of the oil money was used for something worthwhile,” she said. “But the rest of the money surely went into the pockets of all the politicians.”

Additional material from Mexico City Bureau assistant Julieta G. Pelcastre.

Source: Austin Statesman.com

I knew PEMEX was having problems because their oil fields were not getting the investment/expertise needed to keep production up, but I didn’t know they were losing money at THAT rate.

I guess the old saying has a grain of truth to it: When something belongs to everybody, nobody takes care of it.

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More Than A Million Acres of Corn Lost in Iowa…..

Right now the estimated damage in Cedar Rapids, Iowa is well over the $700 million mark. It’s also thought that more than a million acres of corn have been lost around the state. The governor has declared emergencies in 83 of the state’s 99 counties

Source: News4Jax.com

More than a million acres of corn lost just in Iowa? THAT’s gonna leave a mark at the feed store, and at the ethanol plants as well.

I don’t mean to sound insensitive to the losses of houses and businesses by the good people of Iowa and surrounding states. I mourn those along with them. I just don’t think that what is so apparent to me, who grew up on a farm and didn’t know that milk came in containers at a grocery store, is as apparent to others without an agricultural background.

More from Fox News:

In Iowa, the country’s top corn producer, about 9 percent of the anticipated crop either hasn’t been planted because farmers can’t get into their fields, or it needs to be replanted because it’s waterlogged, said Roger Elmore, a corn expert at Iowa State.

That’s about 1.2 million acres of corn — almost 1.5 percent of the country’s anticipated harvest — that may produce only a fraction of its potential yield. Rain continued falling in much of Iowa on Friday, and it’s already late to be planting corn.

“It’s Noah’s Ark-like conditions out there … and if you replant now you’re going to get much lower yields,” said Vic Lespinasse of grainanalyst.com in Chicago.

Corn prices have shot up more than 80 percent in the last year because of rising energy prices and surging global demand for biofuel and livestock feed. But excessive rainfall in the Midwest has pushed prices up nearly 20 percent in the last month alone.

Climbing commodity prices worldwide have hit Americans in their wallets and touched off riots in Haiti, Senegal, Egypt and other poor countries.

A weak corn crop could only make things worse. Livestock owners will probably have to slaughter more cattle, hogs and chickens to offset the rising cost of corn-based animal feed, leading to more expensive beef, pork, chicken, eggs and dairy products.

Other livestock owners may switch to cheaper feed made from barely or wheat, adding to already high demand for those grains.

“In some cases, hog and cattle farmers are seeing feed prices double,” said Iowa corn farmer Russell Meade, who also sells hay for livestock. “Those guys are going to be put in a financial squeeze.”

It’s the same gloomy story for U.S. ethanol producers, who are already being threatened by high corn prices and political pressure to roll back or eliminate federal subsidies.

Besides, corn in the ground now will have to be dried out in special bins or naturally under the sun before it can be sold to make the alternative fuel. Most ethanol producers require the corn they use to have no more than 15 percent moisture content.

Citigroup analyst David Driscoll this week advised investors to sell shares of publicly traded ethanol producers such as VeraSun Energy Corp. and BioFuel Energy Corp., driving their shares sharply down.

Many smaller ethanol producers might have to idle plants until corn prices fall, said Michael Swanson, an economist for Wells Fargo & Company.

Ethanol makers are spending almost as much for their raw material as they’re getting for their finished product.

“If you’re going to lose more money by actually doing your thing, you’re better off not doing your thing,” Swanson said. “The question is, do you have enough cash to tide you over? A lot of these guys don’t.”

Farmers were expected to plant 86 million acres of corn in 2008 — an 8 percent drop from last year. After the flooding began, the Department of Agriculture reduced its projected corn harvest to 11.7 billion bushels, a 10 percent drop from last year.

On June 30, the USDA will release an updated estimate on the size of the 2008 corn crop, and many expect it to be significantly smaller than the initial numbers.

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Tents for Baker County Prisoners

BAKER COUNTY, FL — New military style tents are up and ready for use inside the Baker Correctional Institution Work Camp.

Three tents that could house 66 inmates were constructed in March. They all have lighting, heat, and ceiling fans. “They are not filled yet and they may not be utilized. If they become necessary to utilize them they will be available,” said Warden Melody Flores.

Like many facilities around the state, the Baker site is nearing capacity. So instead of releasing inmates before their sentences are up, the Department of Corrections added the 3 tents at $20,000 each.

“We are reaching 99% of our beds being filled. The court mandates if you reach 99% that some inmates may be released,” said Flores.

The Department of Corrections says the tents are not a long term solution, but will help keep facilities like Baker under 99% capacity.

The Baker facility is the only one of eight correctional facilities in the state using the tents. Over the next 18 months, more than 108 tents will be added around the state.

Source: First Coast News

These worked really well in Arizona; don’t see why they wouldn’t work in Florida.

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