How bad is the energy situation in America? We all are aware of the increases in the price of oil in the past couple of years. In fact there has been a massive amount of attention to every rise and fall of the price per barrel. That attention has of course translated into greater speculation fueling great price fluctuations, happier members of OPEC, richer brokers, and tighter margins for virtually every type of business in America.

But how bad is it? Does this compare to say the 1970’s and that oil disaster? Actually very well. In fact there is virtually no comparison. From 1970 to 1980 the price of oil went up 1566%. Again that was an increase of 15x in 10 years or 1.5x every year for that decade. In the past 10 years oil has increased a mere 300% or 3x counting today’s high.

So what other factors have been involved in the run up between then and now? Considering the fact that oil consumption in America has increased 21% since 1980 alone (I couldn’t find data since 1970). Of course that is 28 years or .75% a year. So that does not explain the price increase, especially when you consider that the price of oil only increased 33% from 1980 to 1990. So there must be another reason.

Perhaps it’s the fact that there is a limited supply of oil in the world. Knowing this, and the fact that the Middle East has no other major exportable good, it makes sense that as demand continues to be steady or increase the price will rise. But that still does not explain the recent dramatic (moreso due to media influence) increase.

Until you look at speculation. In the 1970’s perhaps 15%, maybe 20%, of the nation was involved actively with the stock market. In the 1980’s there was a huge increase in trading of everything, backed up with a healthy helping of movies from Hollywood fueling interest (recall Trading Places, Wall Street, Other People’s Money). As a result the investing populace doubled. Then with the tech bubble we saw the numbers swell to around 60-70%.

As these numbers swelled, more and more people became aware of alternative investment vehicles. Commodity trading along with spot trading became the new penny stocks. With an upfront cap of only 5% of the total investment oil was primed to run as the housing market had its bubble burst. And here we are today.

The only other major factor has been the fact that since the 1970’s neither Republicans or Democrats have done anything about America’s energy needs beyond polispeak. Every administration has talked about alternative energy sources, and funded no research. Each decade has passed without increases in domestic drilling while OPEC made more money. As the years passed the number of oil refineries has dropped to roughly half as many in operation today as in 1970. And speculators made money.

Why is America in an oil shock, and complaining about gasoline prices (which have had a fractional increase in price as compared to oil) – not to mention soon to be reeling from home heating oil prices? Because we have politicians that have been more concerned with fueling special interest groups (eco fanatics and oil companies alike) rather than the average American.

So what is our answer? What are we the people going to do? We can either sit back and accept yet more polispeak about creating advances while ethanol kills the Gulf of Mexico and sits unused in the 5 states that actually have it available to the public or we can get real change. We can either leave domestic oil sources untapped and penalize our economy or use oil and fund research for other sources. We can either do something or suffer the consequences of inaction and polispeak promises.

That is the choice in front of us. Every other option is just a stopgap answer that will placate anyone with a short memory and nothing else. Because the energy situation in America is hardly bad…yet. But soon it will be a real crisis, and one that will give this generation and the next an understanding of the 1970’s that will make them pray for alternative day fuel lines.

Labels: commodity markets, Crude oil prices, ethanol production, Hollywood, Middle East, OPEC, penny stocks, Polispeak, stock market

On the best day, in the best markets, investing is difficult and stressful. But the current market environment is far from the best of anything. Even so there are a few things we can definitely say about this current cycle. Most notable is that this may well be the year of raw resources, commodities, and the mining and energy companies that find them.

As many of the stockbrokers I have worked with are wont to say,

“You don’t need to be a rocket scientist to figure this out.”

[Something I stopped saying after having said that to a rocket scientist who still disagreed with my analysis of a stock position.]

Energy is a critical issue in every world market right now. Whether it comes from oil, ethanol, coal, geothermal or any other source. Considering the constant demand in the U.S., the increasing demand in China and India, and the growing desire to have cleaner energy (for whatever reason) this is not a short-term issue. Yet oil and energy companies are under political attack. And thus there is an opportunity. If you know where to look.

There are far too many speculating in the commodities markets, particularly oil, right now. The rise in oil is attributed by many to be directly tied to that speculation. Given the current political environment and election I would not be surprised to see legislation enacted to raise the margin requirements in commodity trading up to 50%. Even if it is not raised (or to that level) the mere action of talks occurring in D.C. will hit that market hard. So I suggest another old broker ideal, look where the market isn’t hottest.

Coal. It’s one area that isn’t getting a lot of conversation on cable news channels at this time. It’s a fuel that is available, abundant in the U.S., and with current and future technology cleaner than ever before. It’s also easier to improve technology to make it even more clean, and last I checked no environmentalists were seeking to block its mining to save any owls.

Gold. When economies are shaky, or perceived to be, everyone wants their hands on at least some of this yellow metal. With Lehman Brothers reporting a $6 billion bailout similar to other financials earlier this year, the economy is in question still. While gold has retreated in recent months from its run at the start of the year its way off the lows. And it would take little to spark another run, like maybe a weak dollar. Sound familiar?

The other precious metals. If gold is good, platinum is sweet. And silver is their poor cousin.

Uranium. If we aren’t using oil, and coal hasn’t been looked at, the only immediate answer left is nuclear. Short term it solves many questions, and it’s very clean. As pressure builds for politicians to investigate all energy alternatives nuclear will hit the table again. Add just one or 2 new power plants and there will be a spike in this mined resource on expectation of a growth spurt in the industry not seen since the 70’s.

Now there are other reasons to be in mining stocks for the near, mid and long term. I don’t think most need more though. No one knows which of these mined materials will be the first to run. The political environment hinges on the person elected President. The economic forecast is in shadows currently.

But probability says at least one if not all of these will have their value increase. And the best hedge may be owning the mining stocks as opposed to the particular individual material. Yet another old saying is

“don’t mine the gold, sell the picks and axes”.

The turmoil in the stock market is hardly over. The price of oil may even out. At least till winter hits. But I will guarantee that talk about energy, and therefore mined materials will not end before the Presidential election at it’s soonest. Any rocket scientists want to speak up?

Labels: economic forecast, energy alternatives, ethanol production, Lehman Brothers, mining stocks, nuclear energy, political environment, precious metals, presidential election, rocket scientists

Oil at $100+ per barrel. Corn at $5 per bushel. Neither is a positive depending on who you ask and what their primary concern is. Neither of them is going to go down in the near-term either.

Why is that important? Because the high cost of oil, and the fact that it will run out in the foreseeable future, requires alternative fuels development and implementation. Those are facts that everyone agrees upon. Equally, because the primary alternative fuel in use now is ethanol, derived mainly from corn kernels, the cost per bushel is increasing. That arguably is increasing the cost of food prices throughout the world, hurting the poor. Not quite a fact, but a possible outcome.

So what is the result? In the U.S. markets ethanol manufacturers are falling, some dramatically by 50%. That’s because there is, or was, a glut of ethanol. I say was because in December 2007 law was enacted to increase ethanol production dramatically.

“Bob Dinneen, president of the Renewable Fuels Association, said the requirement in the bill that calls for 9 billion gallons of ethanol this year "obliterates anybody's notion that there is a glut of ethanol out there." Current ethanol usage is about 6.5 billion gallons per year.”

The goal of the law is to increase ethanol use in the United States to 10% of every gallon of gas. That ultimate goal is no small task.

As I mentioned previously,

“Another fact is that ethanol, regardless of blend or if used 100%, is less fuel efficient than gasoline. It takes more ethanol to go as far as with gasoline. Estimates range but roughly ethanol is 2/3 as effective as gasoline. Thus more needs to be used.”

Add to that the even bigger issue of

“…the fact that ethanol is virtually unavailable anywhere outside of 2 states in the nation. Outside of Illinois and Minnesota there are almost no stations offering ethanol to the public. In 4 of the most populous states across the nation (New York, Texas, California, and Florida) there are only 2 stations selling ethanol to the public combined.”

Still the use of blends of ethanol over the recommended levels stated by the Government did increase by 50% in 2007. And claims by Dinneen state that federal farm subsidies for corn decreased by $8 billion and the subsidy for ethanol only cost $3 billion, thus creating a surplus of $5 billion.

It seems that no matter where you stand on the issues there are virtually as many positives as negatives. I will say that no matter what the Government mandate, the actual extent of the current surplus, the fact that 80 additional ethanol plants are planned to be created as of this date, or the cost of oil and corn – none of it will matter if a majority of the nation does not have access to ethonaol fuel.

I previously mentioned [in prior posts on this blog] that such fuel will cost the average American more, no matter what, because of the loss of efficiancy. I already know of a few people that go out of their way (into a neighboring state) just to get non-additive fuel because the difference in efficiency is worth the trip and cost.

But no matter the issues, there is always a positive to any industry where the major players are publicly traded stocks. As I mentioned above there are many ethanol stocks that are suffering. The alternative fuel market is mired in sentiment of a current oversupply, future oversupply, and an unknown path to the enactment of the federal mandate. Yet over at TheStreet.com there are thouse with a positive outlook.

Chuck Marvin feels that beyond the short-term of 2008 there is opportunity in the inevitability of increased ethanol use. To that end he picked 5 ethanol based alternative fuels stocks that he sees surviving this murky period. Those stocks include industry production leaders VeraSun, Archer Daniels Midland, and lesser names like Green Plains Renewable Energy.

Pick your path, save your cash and realize that this is not the end of the story. Ethanol is beginning its part in the path to renewable energy and an end of oil dependency. Like most uncharted paths, the road is bumpy and pioneers sometimes are unsure of their way, but eventually you will finds what you are looking for. To that end, so will we.

Labels: alternative fuel, Archer Daniels Midland, Bob Dinneen, Chuck Marvin, ethanol, ethanol production, federal farm subsidies, Green Plains Renewable Energy, Renewable Fuels Association, TheStreet.com, VeraSun