tag:blogger.com,1999:blog-65209481339185935612024-02-20T05:25:08.527-05:00Scarce WhalesA blog by the author of the book Oil 101Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comBlogger157125tag:blogger.com,1999:blog-6520948133918593561.post-13305854090992745082014-11-04T22:01:00.000-05:002014-11-05T00:14:24.782-05:00Saudis Eat American Oil's Lunch<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHv8RELWE_Ff_Zl5pZqJB33vjzxyJvnkphuZT4-BdJdaF3Q_myNKIV0ASwy2REzoszJYnkwkObaZCHpowBSP2XbV1XSl3x9Ol1VVC4FgDv38ga6Mjbe_A62DyPeNTd_FSqMZjcSiP_lCg1/s1600/Mega+Arab+-+KSA-+Morgan+Downey.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHv8RELWE_Ff_Zl5pZqJB33vjzxyJvnkphuZT4-BdJdaF3Q_myNKIV0ASwy2REzoszJYnkwkObaZCHpowBSP2XbV1XSl3x9Ol1VVC4FgDv38ga6Mjbe_A62DyPeNTd_FSqMZjcSiP_lCg1/s1600/Mega+Arab+-+KSA-+Morgan+Downey.PNG" height="320" width="287" /></a></div>
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<i><span style="font-size: x-small;">[ above is a photo I took in Riyadh, Saudi Arabia]</span></i></div>
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The 12 members of OPEC are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Although there are 12 members, only one counts: Saudi Arabia.<br />
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As you will know from Oil 101, there has been an OPEC quota system in place since the 1970's , with each member country restraining supply to keep prices high. OPEC itself modeled itself on US regulators (the TRC) that had controlled global oil prices since the 1930s.<br />
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OPEC thought of itself as the Fed of oil, controlling global prices by making slight increases and decreases in physical supply. This system had always been a little shaky due to individual members cheating by producing above quotas. The quota system became less and less effective (see table below) as global conventional onshore oil production peaked and declined in 2005 and we shifted to high cost oil supplies such as tight oil fracking and oil sands.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyjX_ZL8ZpVKjAY-jSZD2uuh-BjgJoajW2PkQ2vPWec4bQHS0WHPhTTlkPWML8C5OLQHsD33P_LH9Ql8qphB9ngpHuNAzVFKKy1tv4u_0g9H5O39Yz2lMQh9uyJI-Tlwzh8Lo3kfKj3gp-/s1600/OPEC+Cut+Success+-+Morgan+Downey.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyjX_ZL8ZpVKjAY-jSZD2uuh-BjgJoajW2PkQ2vPWec4bQHS0WHPhTTlkPWML8C5OLQHsD33P_LH9Ql8qphB9ngpHuNAzVFKKy1tv4u_0g9H5O39Yz2lMQh9uyJI-Tlwzh8Lo3kfKj3gp-/s1600/OPEC+Cut+Success+-+Morgan+Downey.jpg" height="163" width="400" /></a></div>
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There hasn't been a formal OPEC cut since December 2008. OPEC's individual member quota system was finally scrapped in December 2011.</div>
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In effect, OPEC is dead.</div>
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For many years now, Riyadh, and in particular one individual, <a href="https://en.wikipedia.org/wiki/Ali_Al-Naimi">Ali Al-Naimi</a>, Saudi Arabia's now 79 year old oil minister, has set global oil prices alone (see chart below).</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4Zeqv4zZmkN94qgcEkaRrx2_Fe3HPpeXRYg8Rr9DwsBJqWUS5VmtOHZo-Gri5R5cO2fEwtDM5lWdwwOL-b_V0j4GzXlDTgCpVTCs9F5sKKlJMyydhPl7maqUPcl1Tdy5zk6PfNhnDtRc8/s1600/Saudis+vs+Oil-.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4Zeqv4zZmkN94qgcEkaRrx2_Fe3HPpeXRYg8Rr9DwsBJqWUS5VmtOHZo-Gri5R5cO2fEwtDM5lWdwwOL-b_V0j4GzXlDTgCpVTCs9F5sKKlJMyydhPl7maqUPcl1Tdy5zk6PfNhnDtRc8/s1600/Saudis+vs+Oil-.PNG" height="201" width="400" /></a></div>
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OPEC meets next in Vienna on November 27.</div>
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What the oil market cares about most at this meeting are the words out of the mouth of the Saudi oil minister, <a href="https://en.wikipedia.org/wiki/Ali_Al-Naimi">Ali Al-Naimi</a>, and any Saudi Arabian physical oil market action - hence the intense interest in Saudi OSP (Official Selling Price) oil price changes yesterday. Nothing else matters in relation to OPEC.</div>
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So why meet at all? When the Saudis do cut they use the cover of OPEC to deflect any criticism that may be directed at the global oil price controller.</div>
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What do the Saudis need to do to stop prices from falling further? Until US oil supply growth begins to stall the Saudis need to cut by up to 1.5 million barrels per day. Will this cut happen? Only one man knows for sure.</div>
Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-54640186733414466972014-10-24T13:30:00.000-04:002014-11-05T01:11:33.838-05:00Oil Price War: Crude Oil to $70I just appeared on CNBC TV Halftime Report. Crude oil prices are headed to $70 per barrel. The last time I was on CNBC, oil (basis WTI) was $97 and I mentioned that it was going to $80. Today oil is $80 and I talked about why oil is now heading even lower.<br />
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See the TV segment <a href="http://video.cnbc.com/gallery/?video=3000324138&play=1">here</a>.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDlxW7GldWcCWUSplnPKKM55Pn_YgKkeE3qu8UVBKcfgpDgvl1vp1ua5Wk_GB5fpAJiSw-W_5yxhmulRbm-Y0uJh-cBMsxQI6z33A1rlsk5P5IbaY_yZ4heuwF9w8geOSdqp2LWLq8QFRp/s1600/morgan-screenshot.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDlxW7GldWcCWUSplnPKKM55Pn_YgKkeE3qu8UVBKcfgpDgvl1vp1ua5Wk_GB5fpAJiSw-W_5yxhmulRbm-Y0uJh-cBMsxQI6z33A1rlsk5P5IbaY_yZ4heuwF9w8geOSdqp2LWLq8QFRp/s1600/morgan-screenshot.png" height="221" width="400" /></a></div>
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<br />Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-40774473697051280602014-10-20T00:37:00.001-04:002014-10-20T00:37:14.994-04:00Max Pain in the Oil MarketThere is a saying in the oil market that prices always move to a point of "max pain" before there is a change in direction. In other words, almost like in wrestling, a group of market participants have to tap out of the market due to economic suffering.<br />
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A little pain doesn't stall a trend; it has to be pain to the point where fundamental action by a group of suppliers or consumers takes place. For example, in 2008, when there wasn't sufficient oil supply due to the peak and decline in global conventional onshore oil production, global consumers were forced to a point of max pain at $150 per barrel to force a cut in oil consumption to match limited available supply.<br />
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The decline in conventional oil supply and the post-2009 high oil price environment funded new supply from a new high cost source - US tight oil suppliers (frackers). This group is now in the cross-hairs of market max pain in late 2014. And the process has just begun.<br />
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Oil, currently just above $80 per barrel (basis WTI crude), appears now to have OPEC's blessing to move further into the low $70s and possibly the $60s.<br />
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OPEC (effectively the Saudis) have in the past week rejected discussing a cut in supply to support prices. This is an unusual statement for a group that only a few months ago stated that $100 oil was a target they would support.<br />
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OPEC have a history of only allowing oil prices to free-fall when there has been a specific focused agenda. The agenda in late 2014 has just become very clear: to knock financially fragile US tight oil suppliers (frackers) out of the market. This will reduce oil supply and in the longer term may net much higher oil prices for OPEC.<br />
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<b>Time Slippage</b><br />
Even if discussions of an OPEC cut were to begin today, the oil market has an internal momentum that takes time to turn. Unlike interest rates which can be raised and lowered at the stroke of a pen, the oil market operates in the real physical world where there is inventory in storage, transport issues and other factors that slow down the impact of any OPEC actions.<br />
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The slippage from initial murmurs around a potential OPEC supply cut to a formal announcement and physical supply cut is typically at least 2-3 months and at least $10-15 dollars per barrel (proportionate to current price levels).<br />
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So OPEC members are saying they are OK with lower oil prices and even when they decide prices have become too low, it will take 2-3 months to stall the fall.<br />
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<b>Balancing Budgets</b><br />
A legitimate point that many are raising is: aren't all these OPEC members' government budgets dependent on higher oil prices? How can they tolerate lower oil prices?<br />
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Over a third of global oil supply is now coming from oil producing nations that have in the past few months begun borrowing and running down cash reserves to cover government budget deficits due to lower oil prices. The break-even crude oil price for a few government budgets is roughly:<br />
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Iran $135<br />
Venezuela $120<br />
Nigeria $120<br />
Iraq $115<br />
Libya $110<br />
Russia $100<br />
Saudi Arabia $95<br />
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Fortunately for most of these oil dependent nations, thanks to higher oil prices in recent years, government debt levels are at, or close to, record lows (see chart below). Cash reserves are also high (Saudis have $747bn, or three years of government spending, in reserves). So the capacity is there to borrow. Furthermore, interest rates are at or close to record lows. So, coupled with capacity, there is an economic incentive to borrow, if necessary.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr3Y6hF5JyWJCcPAf-Jc6ivR5wGvdd32DVY99h1fsdmjznez9deMNYAqhSZHCKqE__FcZsNXS2BqG9DgbeA9-iAcqe-cggrfwAZJCW0CLd4K6r4uIUsRk9_YMJvW7JIjQSnHdqtBdIjjH2/s1600/Saudi+Debt.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr3Y6hF5JyWJCcPAf-Jc6ivR5wGvdd32DVY99h1fsdmjznez9deMNYAqhSZHCKqE__FcZsNXS2BqG9DgbeA9-iAcqe-cggrfwAZJCW0CLd4K6r4uIUsRk9_YMJvW7JIjQSnHdqtBdIjjH2/s1600/Saudi+Debt.PNG" height="186" width="400" /></a></div>
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Cheap interest, record low OPEC debt levels and high cash reserves mean that OPEC members have the financial firepower to make this low oil price market rout long and painful for high cost US tight oil suppliers that have taken market share from OPEC over the past four years.</div>
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In summary, the current low interest rate environment, low OPEC debt levels and high cash reserves are enabling and could prolong this oil price collapse. Oil prices are likely to continue lower until OPEC members see US oil producers curtail production.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-25767286393971898722014-10-20T00:34:00.001-04:002014-10-20T00:38:33.592-04:00Oil to $75: OPEC Waits for US Frackers to BlinkA main point of interest for the oil market is the floor for oil prices. As oil slides toward $75, who hurts first and most on the supply side? In other words, who has to cut production first? Here is a simplified cost curve for the marginal global oil barrel of supply today:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAOmnRKhFCSflzmVXdcrOWhs8CEie2j_w2Fzq-tchiaKa7kRYxrAhtATwoMcmmo1aPExWZQwVZh0Q2q83zb7UWC6oxqMgzDlHsVQA0P5fAiCt1BXiBYua3gZnIzVyDfjbqE9DTqlF2etIk/s1600/Marginal1.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAOmnRKhFCSflzmVXdcrOWhs8CEie2j_w2Fzq-tchiaKa7kRYxrAhtATwoMcmmo1aPExWZQwVZh0Q2q83zb7UWC6oxqMgzDlHsVQA0P5fAiCt1BXiBYua3gZnIzVyDfjbqE9DTqlF2etIk/s1600/Marginal1.PNG" height="322" width="400" /></a></div>
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Another view of marginal global oil supply showing the relative scale of each source from lowest cost to highest initial production cost is as follows:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1v3P_38nUxzw1s0jyOCKfTc9xnsU9f5_Pc5exgj-fK96he1TxV9lmqcpUsZ9DAWY3yCRbdBddgM_BWkqapPDC_nfIC6h17_TLPashXS2pe_e_P92vu0lv8wbzI2UkJU4DqHzMoLcyEezi/s1600/Marginal2.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1v3P_38nUxzw1s0jyOCKfTc9xnsU9f5_Pc5exgj-fK96he1TxV9lmqcpUsZ9DAWY3yCRbdBddgM_BWkqapPDC_nfIC6h17_TLPashXS2pe_e_P92vu0lv8wbzI2UkJU4DqHzMoLcyEezi/s1600/Marginal2.PNG" height="228" width="400" /></a></div>
Current marginal barrels are, due to costs, US tight oil (fracked oil) and, due to government spending dependent on oil, OPEC (Saudis in particular). Ultra Deep offshore oil (in places like Brazil) and Polar oil (in places like the Russian Arctic) have not proven to be economical at any scale yet.<br />
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So in the short term, it is a battle between OPEC and US tight oil. OPEC government budgets require close to $100 oil, but interest rates are so low at the moment that Saudis and other members may choose to borrow over the short term in order to stall US supply growth and to raise the price bar for new US tight oil supply.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-17632021768780524882014-09-30T10:58:00.001-04:002014-09-30T11:17:11.268-04:00Still buying premium? The end of high octane gasolineIn most parts of the world, when you pull up to the gasoline pump there are two and sometimes three octane choices: regular (lower octane), midgrade, and premium (higher octane).<br />
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The price difference between regular and premium is roughly 35 cents per gallon in the US at the moment. The current price of regular in the US is $3.35 per gallon and premium is around $3.70 per gallon on average across the country.<br />
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The number of vehicles requiring premium has fallen from 21 percent to 17 percent over the past 10 years, according to Edmunds.com. But the number recommending premium, has risen from 2.5 percent to 12 percent over the same period.<br />
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So in summary, in the most recent 2014 model year, manufacturers require or recommend premium gasoline for 29 percent of US vehicles. Most consumers ignore this and buy regular gasoline. The data proves it - only 12 percent of gasoline sold in the US is premium or midgrade (see chart below).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzizk2tZzIJAlJQbiIsBucHQ-Kpb8VQeJWLOarU07x1uIVH1md_y7WJOBQZzwt-hmvjiqpAElT6DO4vvJKor7frR5C-e9OnwaUd4eEtnPYtY8TeY6x3pTGuG-txylhpBQgUfZV6SAEWdm4/s1600/PremiumMorganDowney----.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzizk2tZzIJAlJQbiIsBucHQ-Kpb8VQeJWLOarU07x1uIVH1md_y7WJOBQZzwt-hmvjiqpAElT6DO4vvJKor7frR5C-e9OnwaUd4eEtnPYtY8TeY6x3pTGuG-txylhpBQgUfZV6SAEWdm4/s1600/PremiumMorganDowney----.PNG" height="252" width="400" /></a></div>
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Why is this happening? Manufacturers and vehicle purchasers are using a 'recommendation' of premium gasoline to play the MPG ratings vs horsepower game.<br />
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It goes something like this: a vehicle manufacturer wants to list the highest possible miles per gallon (MPG) rating as it is a big sticker on the window of a vehicle at a dealership. They get the high MPGs in part by putting smaller lighter engines in vehicles. However, customers also want performance. So manufacturers attach turbochargers and other premium gasoline demanding technologies to these small engines in order to keep horsepower levels up.<br />
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After the horsepower availability ego trip at the car dealer at the time of purchase, most vehicle purchasers go home, choose to go without the power, go with the cost savings, and buy regular.<br />
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See more on oil markets at <a href="http://www.amazon.com/dp/0982039204">Oil 101</a>. See realtime markets at <a href="http://www.money.net/">money.net</a>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-67071797336336003782014-09-23T11:47:00.003-04:002014-09-24T12:10:07.734-04:00What is Driving US Oil Demand?<div style="text-align: justify;">
A few years ago it became popular to say that US oil demand had peaked and would never recover. However, the US DOT <a href="http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm">just released traffic statistics</a> for July 2014. It shows miles driven on all US roads increased by 1.5% in July 2014 as compared with July 2013 (see chart below). If this trend holds, we will see new highs for US miles driven within a couple of years.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpoPDG2RRpBj2DRMdZviiOXFjlw8b9HYNJtlb0t7C0tzHJaBkCyjrRhWzpLF8SGMlMdG__LyREi_fA6r4wCAzv77saRPPt_W5-WSBtEoRFqcJ8FsfkykjqSpZf2AG-K0OkPm3CL-5IwHCT/s1600/US+Miles+Driven-.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpoPDG2RRpBj2DRMdZviiOXFjlw8b9HYNJtlb0t7C0tzHJaBkCyjrRhWzpLF8SGMlMdG__LyREi_fA6r4wCAzv77saRPPt_W5-WSBtEoRFqcJ8FsfkykjqSpZf2AG-K0OkPm3CL-5IwHCT/s1600/US+Miles+Driven-.PNG" height="269" width="320" /></a></div>
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Although miles driven has begun to increase, this does not directly translate into an increase in US oil demand. Since the rally in oil prices in 2005, the increase in miles driven as a potential source of additional oil demand has been offset by efficiency gains occurring in the US vehicle fleet (see charts below).</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihL5pcSsGJa_qMKB8uYAgWYyEoI4AK5PmMRVKhxk-qu7pP0lNqUyUVXv3sN26ALpDq26PThD1Qm9W7dYy8B1WaZaivLFYQXvaX5_tRInFXO0Y-M6dffD5qSfYMfoOBdfE5uLIxMTQCRxTU/s1600/US+Efficiency--.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihL5pcSsGJa_qMKB8uYAgWYyEoI4AK5PmMRVKhxk-qu7pP0lNqUyUVXv3sN26ALpDq26PThD1Qm9W7dYy8B1WaZaivLFYQXvaX5_tRInFXO0Y-M6dffD5qSfYMfoOBdfE5uLIxMTQCRxTU/s1600/US+Efficiency--.PNG" height="253" width="320" /></a></div>
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Vehicle efficiency has been led by the deployment of ten technologies (listed in order in which they have become widespread): fuel injection, transmission lockup/torque converters, multi-valve engines (cylinders with more than 2 valves), variable valve timing, hybrids/regenerative braking, continuously variable transmissions, gasoline direct injection, turbocharging of small bore engines, variable displacement/deactivating cylinders, and start-stop systems.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5P79nOX4IbOwgGOJIKfkUYFEdN9Dyfy9KzMXvItva7pxgxDv0qaT5FejPxq1nNFx0y9wghLy-clD7ZYAM353RR9UIEQjLDFqeAeFWWnpF-8b3hDRbtPdxIj978N2q1InIr8Mx4SJILNi5/s1600/Engine+Efficiency.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5P79nOX4IbOwgGOJIKfkUYFEdN9Dyfy9KzMXvItva7pxgxDv0qaT5FejPxq1nNFx0y9wghLy-clD7ZYAM353RR9UIEQjLDFqeAeFWWnpF-8b3hDRbtPdxIj978N2q1InIr8Mx4SJILNi5/s1600/Engine+Efficiency.PNG" /></a></div>
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The most recent wave of efficiency mechanisms are now, in late 2014, beginning to be overwhelmed by the increase in miles driven such that US oil demand is beginning to increase year on year. Within a few years US oil demand should make new record highs (the highest historical annual US oil consumption year was 2005).</div>
Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-30936542699031909952014-09-18T10:55:00.000-04:002014-10-08T00:06:54.260-04:00Lower oil prices no longer help the US economy<div class="separator" style="clear: both; text-align: center;">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDzRU5QCQeUYqmIbcit9MR05BVt900xljg0qEa74mgYwDj95NtZlqLJQTGR1gwGcQ1U_Wq0NC7pS0ZDfIkBu8f4Th97NNXpAQpCn6orAIDU2T8oDZC1sLXtvYfo2kWe9xVYMnxYJqS092N/s1600/Oil+Price+Sign.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDzRU5QCQeUYqmIbcit9MR05BVt900xljg0qEa74mgYwDj95NtZlqLJQTGR1gwGcQ1U_Wq0NC7pS0ZDfIkBu8f4Th97NNXpAQpCn6orAIDU2T8oDZC1sLXtvYfo2kWe9xVYMnxYJqS092N/s1600/Oil+Price+Sign.jpg" /></a></div>
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The US currently consumes around 19 million barrels of oil per day (5% of the world's population consuming 21% of global oil supply. Global supply is roughly 91.5 million barrels per day).<br />
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A drop in prices of $1 per barrel equates to a $7 billion boost in non-oil US consumer spending when annualized. This is money which US consumers do not have to spend on oil and instead can spend on new mobile phones and other goods.<br />
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However, the US is also increasingly a larger oil producer. Since 2009 there has been an upward trend in US oil supply which had until then been declining steadily since 1973. This has been due to new high cost US tight oil (fracking) supply. With this increase in US oil production there has been a reduction in US oil imports which is expected to continue until around 2020 (see chart below). Whether this US trend can continue beyond 2020 is subject to a high degree of uncertainty at this time.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhMlg84Otwsc1ZFWLgjAMr4Na6PXd6aiRUxDphXdsyoquiz0wzJFMS12Mzx8Y5Jl9dWHnDKFRWLVixPRMVx5WwTI-I6LnH3UfMgnf0XMlMrAI-XluoolDR3HrLIaEMqOfWJijT_zz6owyt/s1600/US+Net+Oil+Imports.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhMlg84Otwsc1ZFWLgjAMr4Na6PXd6aiRUxDphXdsyoquiz0wzJFMS12Mzx8Y5Jl9dWHnDKFRWLVixPRMVx5WwTI-I6LnH3UfMgnf0XMlMrAI-XluoolDR3HrLIaEMqOfWJijT_zz6owyt/s1600/US+Net+Oil+Imports.PNG" height="158" width="320" /></a></div>
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Netting the spending boost from US consumers against the revenue reduction to US oil producers, each $1 drop in oil prices currently provides only a net $2 billion annual boost to the US economy.<br />
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This is a small number given the overall scale of the US economy. For example, Apple Inc's revenue is running at $175 billion per year. So while lower oil prices in the 1990s and 2000s were almost always beneficial to the US economy, today they are neutral.<br />
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There are three caveats:<br />
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<b>*1. Neutral until below $75:</b> The recent increase in US oil supply is due to high prices. Marginal production from high cost tight oil (fracking) requires $75 per barrel (basis WTI crude). As a corollary to this, if prices were to decline below $75 per barrel, production from high cost tight oil (fracking) could decline and prices lower than $75 may, over the short term (1-3 years), hurt the US economy. In summary, lower oil prices are neutral to the US, so long as prices stay above $75 per barrel. Prices below $75 may be negative to the US economy.<br />
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<b>*2. The big sign effect - consumer price psychology:</b> A further caveat is the sentiment effect. Almost everyone in the US is aware of the price of oil due to large government mandated signs at refueling stations. If oil prices move below $3 per gallon at the pump (see chart below) then there may be an boost in consumer spending on non-oil goods due to pricing psychology which overwhelms the decline in revenue for oil companies.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0FC0pKmg0WiGiNppXbZZqeJ_0aetzxuRNjV_1AIcFAqRFsxYMj5nmsbJJYrofooxj_fY9L80zRWp98EFM1FTtkba6p-lcf7qWcu3D0DfiTeTSaXkO7rxXSDmZ6a4Urp01a7yMshIA3SY0/s1600/US+Retail+Gasoline+Prices.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0FC0pKmg0WiGiNppXbZZqeJ_0aetzxuRNjV_1AIcFAqRFsxYMj5nmsbJJYrofooxj_fY9L80zRWp98EFM1FTtkba6p-lcf7qWcu3D0DfiTeTSaXkO7rxXSDmZ6a4Urp01a7yMshIA3SY0/s1600/US+Retail+Gasoline+Prices.JPG" height="133" width="320" /></a></div>
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<b>*3. Shocks are unpredictable - speed of the price move:</b> Consumers react to the speed of price movements in addition to the magnitude of the move. Oil prices halving or doubling in 6 months generates a much different and more unpredictable reaction than oil prices gradually doubling or halving over 5 or 10 years.<br />
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<i>[Summary: Lower oil prices in the 1990s and 2000s were almost always beneficial to the US economy, today they are neutral. Oil prices below $75 may be negative to the US economy.]</i><br />
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<i><span style="font-size: x-small;">[For the sake of brevity and simplicity I am not including economic multiplier effects in the above.]</span></i>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-20959833895224425292014-09-15T13:40:00.003-04:002014-09-15T13:40:53.934-04:00Where is the floor for the price of oil?Oil prices (WTI crude as a proxy) are close to $90 per barrel this morning, down from almost $110 earlier in 2014. $90 is also major trend line support (see chart below).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_J7hjmcGkZpx5SadqWqsALbgV1EEyS_EJW7qfG4R4ttRrpNMf7aobv6bhw7czcQmcz_GH14cC421n4tWPdlAWm9LGHPmSdq72-vsf1kAMbkBP7XvoV_wSsRvqExsWjMrmgZhzwKl5FGVE/s1600/WTI+Crude+Oil+prices.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_J7hjmcGkZpx5SadqWqsALbgV1EEyS_EJW7qfG4R4ttRrpNMf7aobv6bhw7czcQmcz_GH14cC421n4tWPdlAWm9LGHPmSdq72-vsf1kAMbkBP7XvoV_wSsRvqExsWjMrmgZhzwKl5FGVE/s1600/WTI+Crude+Oil+prices.PNG" height="220" width="320" /></a></div>
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This is despite global unrest in Russia, Ukraine, Syria, Iraq and elsewhere. As I have <a href="http://scarcewhales.blogspot.com/2013/08/150-oil-does-war-cause-higher-oil-prices.html">mentioned before</a> (see charts below or <a href="http://scarcewhales.blogspot.com/2013/08/150-oil-does-war-cause-higher-oil-prices.html">click link</a>), wars over the past 30 years have generally been negative for oil prices, even when, and sometimes precisely because, oil producing and exporting nations are involved.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8tjMl0ZZpCi_ssiRCLW4DvrG4q3NKILhvImyJ_KsHKdC_vGnGU1PSYRDdv7eXCua89OmlRTVZLqRhmYtNZfTDxfMwJMKNEU6db5AUVMVUVGEZQCuselpqUiK4mwfScCjr9Dg5d7h5NohK/s1600/WarsOil.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8tjMl0ZZpCi_ssiRCLW4DvrG4q3NKILhvImyJ_KsHKdC_vGnGU1PSYRDdv7eXCua89OmlRTVZLqRhmYtNZfTDxfMwJMKNEU6db5AUVMVUVGEZQCuselpqUiK4mwfScCjr9Dg5d7h5NohK/s1600/WarsOil.JPG" height="320" width="220" /></a></div>
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Over the short term (next 3-6 months) it looks like oil will continue to head even lower due to weakness in Chinese and EU oil demand and there are three levels which have to come into play to define the downside:</div>
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<b>*1. Marginal Producers</b>: At what price do the global marginal high cost oil suppliers, currently US tight oil (fracking) producers, begin to shut in supply and stall exploration activity? The general assumption is that this begins in the mid to low $70s per barrel (basis WTI crude).</div>
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<b>*2. Consumers</b>: At what price do oil consumers increase their consumption? Consumer behavior changes slowly over time with respect to oil - this is why oil demand is called inelastic. Oil prices have to go to extreme levels to change consumption behaviour - hence the rally to $150 in 2008 required to stall demand in the face of insufficient supply growth. So although lower oil prices will likely increase demand above historic patterns, this is likely to occur only over the longer term (3-5 years). So count this factor out for a hard floor level in the short term.</div>
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<b>*3. OPEC</b>: At what level will OPEC (which just means the Saudis these days) act? The Saudis already say they are cutting supply. However, they are still only matching reductions in demand growth and have yet to get ahead of the curve. The Saudi budget break-even is currently in the <a href="http://business.financialpost.com/2014/09/11/saudi-arabia-could-fight-isis-with-oil-if-they-can-bear-the-price/?__lsa=3770-17be">high $70s per barrel</a>. This is the level below which the government there has to start borrowing money to pay for schools, roads, defense and so on.</div>
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So the mid to high $70s may be the first floor to be tested. That is the level at which US tight oil producers and OPEC (Saudis) have to begin reacting by cutting supply to match the lack of robust oil demand growth.</div>
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<br />Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-76945261902818044762014-09-12T13:03:00.001-04:002014-09-15T02:37:42.520-04:00US Energy Stocks Turn Red on Russian SanctionsThere were a slew of <a href="http://www.cbsnews.com/news/u-s-expands-sanctions-against-key-russian-sectors/">new sanctions</a> against the Russian oil industry announced this morning by the US and EU. So why isn't oil rallying? And why are US energy stocks being hit?<br />
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Why isn't oil rallying on sanctions that could cut oil supply? Because the <a href="http://www.thestar.com.my/Business/Business-News/2014/09/11/Oil-demand-growth-slowing-at-remarkable-pace/">International Energy Agency (IEA) on Thursday</a> reduced its forecast for the rise in oil demand this year for the third month in a row. European and Asian demand weakness are the main causes. The IEA expects global oil demand to grow by only 0.9 million barrels a day in 2014, down 65,000 barrels a day compared with last month's forecast and lower by 300,000 barrels a day since July.<br />
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Furthermore, according to the IEA the Saudis (the only OPEC country willing to cut production) reduced oil production by 330,000 barrels a day in August and are now producing at their lowest level since 2011. However, they are merely matching falling demand and so this cut in supply is not bullish for oil prices.<br />
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The Russian story is still very bullish over the longer term and if you look at longer dated oil contracts (December 2018, for example) the oil market is up almost $2 per barrel this week.<br />
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So the short term bearish outlook for oil continues, but longer term (2+ years) these Russian sanctions are fairly bullish for oil prices.<br />
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Why are US energy stocks down today? Because oil is a global industry with many US oil companies investing in Russian oil production. Russian oil companies also use US oil services companies for exploration and production. Sanctions cut both of these revenue sources.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2dNVepYvvW4rV15RKLmdd4CEFak1DAzxG7AwC4reX4SQIxuJoNMCp_32FObND4nWRtNkh96Z-Wv7-ZkzslEQxGy9IDat0A2_Ot0C-kQTKFv_oEBpvEJGXDDS0f3QPcrMO26D2AM9cmnUA/s1600/Energy+Sector+Sep122014.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2dNVepYvvW4rV15RKLmdd4CEFak1DAzxG7AwC4reX4SQIxuJoNMCp_32FObND4nWRtNkh96Z-Wv7-ZkzslEQxGy9IDat0A2_Ot0C-kQTKFv_oEBpvEJGXDDS0f3QPcrMO26D2AM9cmnUA/s1600/Energy+Sector+Sep122014.PNG" height="207" width="320" /></a></div>
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[ Market Cap Changes today of Energy Sector of US S&P 500 ]</div>
<br />Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-72567408356195679182014-09-03T12:18:00.002-04:002014-09-04T22:45:23.804-04:00Oil market calling end to US tight oil (shale fracking)There was an <a href="http://www.businessinsider.com/andrew-john-hall-predicts-150-oil-2014-9">interesting article today on an oil trader</a> betting that the US tight oil (shale fracking) boom will end soon.<br />
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The oil market appears to supports this thesis.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjstKOmOdCmTB96pZPs2tKi-8zCVR3sainBp6vislOCqIA6b7B2SgTsyPilhyy3op0HnuX72m6_0iAcSSptBYc21bAV_u0FicMO-iMrrLI9TzP2Vo6UwB5OZkXswu3a95QmUr-EPL4DNtPb/s1600/WTI+Curve+Shape+Change+2014+YTD-.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjstKOmOdCmTB96pZPs2tKi-8zCVR3sainBp6vislOCqIA6b7B2SgTsyPilhyy3op0HnuX72m6_0iAcSSptBYc21bAV_u0FicMO-iMrrLI9TzP2Vo6UwB5OZkXswu3a95QmUr-EPL4DNtPb/s1600/WTI+Curve+Shape+Change+2014+YTD-.PNG" height="208" width="320" /></a></div>
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The front of the oil curve continues to sell off, while the back end (January 2015 onwards) is rallying.<br />
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Short term weakness in oil futures is likely to continue for balance of this year due to the bump up in US oil supply. However, despite this short term price weakness, longer term the market is saying that this new supply will be insufficient.<br />
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Production of $15 oil began to decline back in 2005. Oil producers since 2005 have shifted up the supply cost curve in order to produce more oil. Fracking, Canadian oil sands and ultra deep offshore are all $50+ per barrel sources that had to be tapped to make up for the decline of $15 oil. These three sources are very difficult to scale quickly due to cost and complexity and the market is telling us that they may not add enough supply to offset the decline in global $15 oil production.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-55819970423311034332014-08-12T19:54:00.001-04:002014-08-19T01:51:02.573-04:00Lower oil prices ahead over short term<span style="background-color: white; color: #333333; font-family: Arial, sans-serif; font-size: 12.800000190734863px; line-height: 17px;">I was on CNBC TV's live Fast Money show this evening talking about the likelihood of lower oil prices ahead in the short term despite geopolitical tension. WTI crude was $97.27 at the time of the show. Watch the segment here </span><span style="color: #333333; font-family: Arial, sans-serif;"><span style="font-size: 12.800000190734863px; line-height: 17px;"><a href="http://cnb.cx/1rod7qB">http://cnb.cx/1rod7qB</a></span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhniYSxETwie9WzrHAkdCtk9f2Ror2TgmNul73Q86qOTKdPjQ19O2QgZY9SwTK8znDze-N9VyIkZKVumgkHSc2tD279e9BLyzE1tagkV2bqSUeI3YK0GY7Q_8hUD4AjM5ODacDePe_u5Jqh/s1600/CNBC.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhniYSxETwie9WzrHAkdCtk9f2Ror2TgmNul73Q86qOTKdPjQ19O2QgZY9SwTK8znDze-N9VyIkZKVumgkHSc2tD279e9BLyzE1tagkV2bqSUeI3YK0GY7Q_8hUD4AjM5ODacDePe_u5Jqh/s1600/CNBC.jpg" height="240" width="320" /></a></div>
Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-47579013907525541732014-08-05T12:29:00.002-04:002014-09-07T00:09:19.327-04:00Financial Chat War<i>[Financial chat systems are an anti-competitive tool?]</i><br />
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Just as John D. Rockefeller locked in customers and shut out competition by controlling the rail network in the early days of the oil industry, closed financial chat networks are used by financial platforms to lock trading floors into overly expensive systems and shut out competition. <br />
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As with consumer chat apps, like WhatsApp and Viber, traders and brokers on trading floors use chat systems to communicate in short bursts – sending transaction inquiries, prices, and interesting news stories to each other.<br />
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These financial chat apps can come bundled with full <a href="https://en.wikipedia.org/wiki/Financial_data_vendor">financial information platforms</a>, like Bloomberg and Thomson Reuters, or can, as in the oil and equity markets, be like Yahoo Messenger – where the same app that is used by consumers is used for trillions of dollars of oil and equities trading each year. All of these chats are recorded and monitored by compliance departments.
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGtDWEhUez9mxUJzG7pPy2o7mBABKPl-ozDwfRIF3uGVU5lD7jkIk8CXrGvSYlVX161th_UQFNWWKi8tXuHHycDZSRGkfsjdgb773aPdwY5NLlBqHvb8bmJB1TOw1Gi6V0hiBexeEoRUVk/s1600/Money.Net+Screengrab.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGtDWEhUez9mxUJzG7pPy2o7mBABKPl-ozDwfRIF3uGVU5lD7jkIk8CXrGvSYlVX161th_UQFNWWKi8tXuHHycDZSRGkfsjdgb773aPdwY5NLlBqHvb8bmJB1TOw1Gi6V0hiBexeEoRUVk/s1600/Money.Net+Screengrab.PNG" height="288" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Money.Net provides a professional platform at a fraction of the cost</td></tr>
</tbody></table>
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<b>Going Viral with a Vector </b><br />
At a time when the cost to deliver financial information platforms is collapsing due to technology advancements, these savings are not passed on. The price of some of these platforms creeps ever higher to around $25,000 per year per individual. The ability to push through price increases and withhold cost savings requires an inability of customers to switch.<br />
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As chat networks are the ultimate ‘stickiness’ factor on desktop or mobile devices, expensive financial information platforms put a lot of effort into using entire market information platforms as a gateway onto a desktop for the Trojan Horse of a chat app.<br />
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Success for financial chat applications is dependent on getting on the desktop, and then getting turned on automatically every day as default components of full platforms.<br />
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Unlike consumer chat apps, it is much more difficult to make financial chat apps go viral. Getting any software onto a financial professional's desktop usually requires passing several gatekeepers. To address this, entire market information platforms sell themselves to traders as a utility for data and news, and then out of convenience traders begin using the chat system. Then after a trader has 5-25 connections on chat, the trader is stuck without the ability to easily change financial information platforms.<br />
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<b>What to do? </b><br />
Several banks are trying to break their usage of chat. However, the challenge of launching a new standalone financial chat product is not the technology, which is somewhat trivial – it is getting on a desktop and getting a user to run it (whether they intended to or not) automatically each morning. Becoming part of a user’s daily routine is key.<br />
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Some banks are investing in a standalone financial chat app. The <a href="http://www.reuters.com/article/2014/08/03/us-goldman-messaging-idUSKBN0G303920140803">purchase of Perzo by Goldman Sachs</a> brought this to the fore this week. There is also an Open Federated Chat initiative led by a few market information systems. However, the hosts of Open Federated are platforms costing also a huge amount per month to have information plus the chat. There are several other chat systems start-ups all plying low cost encryption, and building walls against government snooping as the end goal. Defense against unwarranted and illegal government search is a valid goal, but it doesn't solve the problem at the core of the chat issue.<br />
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These standalone chat apps face the same challenge as every other system in first, getting on a desktop, and secondly, in having the user run the app each morning.<br />
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Maybe instead of using standalone chat apps to break financial chat systems open, entrepreneurs should instead focus on more open and less expensive financial platforms, which also have open chat. We at <a href="http://www.money.net/">Money.Net </a>believe that this is the model for future success.<br />
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In summary, financial platforms have become too expensive and financial markets are looking for alternatives by dancing around the edge with partial solutions, such as chat, to the core problem. Instead, we should address the issue directly by passing on technology advancement savings to deliver lower cost and more innovative financial information platforms. Open chat can be a part of this larger better solution.<br />
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We at Money.Net are the solution. A complete fine platform with open chat integrated with everyone for a trivial cost per month. Get it for everyone.<br />
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<span style="color: #666666;">--------------- </span><br />
<span style="color: #666666;"><b>Morgan Downey</b> is the CEO of <a href="http://www.money.net/">Money.Net</a>. Prior to Money.Net, Morgan was Global Head of commodities at Bloomberg, LP. Morgan managed development of the Bloomberg Professional terminal. At Bloomberg, Morgan used his market experience to build a suite of revolutionary, unique, and innovative products. Before Bloomberg, Morgan spent 15 years running trading desks, as manager and head trader, for banks including Citibank, Bank of America and Standard Chartered, in the US, UK, Australia, and Singapore. Morgan is the author of the book '<a href="http://www.amazon.com/dp/0982039204">Oil 101</a>', a best-seller explaining the oil industry. Contact <a href="mailto:morgan@money.net">morgan@money.net</a></span>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-65910030808334451302014-03-27T15:35:00.000-04:002014-08-08T00:40:17.807-04:00SPR: Oil Subsidy & Weapon<i>[SPR: Industry kickback, political slush fund, & weapon of war?]</i><br />
<br />
The International Energy Agency (<a href="http://www.iea.org/" target="_blank">IEA</a>) was formed by large net oil consuming nations in response to oil supply shocks of the early 1970s. The IEA has required member nations, including the US, to have 90 days oil import coverage stored in a Strategic Petroleum Reserve (<a href="http://energy.gov/fe/services/petroleum-reserves" target="_blank">SPR</a>).<br />
<br />
The original mission of the SPR was to shelter oil consuming economies against unexpected oil supply shocks. However, this mission expanded to become a free insurance policy for the oil industry as well as, most recently, an economic weapon. Releases are also occurring much more frequently just prior to national elections in net oil consuming nations.<br />
<br />
Most countries require their oil industry to fund the 90 days of SPR. The US is different. In the US, taxpayers, via the Department of Energy (DOE), pay to store SPR oil. The taxpayer funded US SPR currently holds 696 million barrels of crude oil (the red line below). <br />
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<b>Free Insurance for the Oil Industry</b><br />
This taxpayer funded storage failed to increase storage per oil consumer. It had the opposite effect. As the US government (funded by taxpayers) began storing more and more oil in order to provide a buffer against supply shocks, it provided the US oil industry encouragement to do exactly the opposite - store less. Storing oil is expensive, and so industry is happy to allow taxpayers to subsidize storage.<br />
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Running inventories so low is risky for private industry. However, if industry runs short, due to a hurricane or storm, it now simply taps taxpayer funded storage without any penalty - effectively free insurance. The frequency of these loans have increased dramatically since 2000.<br />
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<b>New Economic Weapon</b><br />
In addition to being a taxpayer-funded free insurance policy for the oil industry, the SPR has now become an offensive, rather than defensive, economic weapon. The most recent volley from this weapon was a test release of 5 million barrels of oil from the SPR <a href="http://www.reuters.com/article/2014/03/12/us-usa-energy-reserves-idUSBREA2B12V20140312" target="_blank">announced a few weeks ago</a> coinciding with a hugely oil dependent Russia invading Ukraine's Crimea.<br />
<br />
Today, a number of economic commentators are calling for use of this <a href="http://qz.com/192428/how-the-us-might-persuade-the-saudis-to-co-conspire-in-unleashing-an-oil-weapon-against-putin/" target="_blank">new economic weapon</a> to be expanded.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-77096701957266782912013-11-20T13:00:00.000-05:002014-10-03T01:49:45.952-04:00Haymaker: The Origin of Big Natural Gas<i>[Summary: Natural Gas 101]</i><br />
<br />
Natural gas, so called as it is naturally occurring rather than being man-made, has been piped in small volumes over short distances in the US for street lighting since the 1820s. Manufactured gas, produced by processing coal in gas works, was carried out a few years earlier. Both natural and manufactured gas were used on small scale street lighting. <br />
<br />
It took a massive discovery on November 3, 1878 in Murrysville, near Pittsburgh, Pennsylvania to bring natural gas to widespread industrial and home use. The well was drilled by the Haymaker brothers.<br />
<br />
Obediah ("Obe") Haymaker was murdered for the discovery. His brother, Michael, lived to tell the tale. The well is now forgotten, almost. <br />
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<i><span style="font-size: x-small;">(click photo to enlarge - The plaque placed on a boulder at the well site in 1961 incorrectly refers to Michael Haymaker as Matthew. The name Michael is confirmed from multiple published sources, including the 1880s New York Times.)</span></i></div>
<br />
Obe and Michael had been looking for oil. They had seen a neighbor using gas emerging naturally from a creek (usually a good indicator of oil) as a fuel to boil down maple syrup. To the Haymakers' disappointment they stumbled upon natural gas alone, which is more difficult to transport than oil and thus to this day trades at a discount. <br />
<br />
Natural gas emerged uncontrolled from the Haymaker well for three years. As the capital-starved brothers were trying to finance, and later sell the well, it caught fire and burned for a further year.<br />
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Visitors from all over the US, including President Grover Cleveland, came to see the fire. Finally, after four years, the well was tamed. Pipes were constructed to bring natural gas the 18 miles to steel producing city, Pittsburgh, Pennsylvania. Most steel plants at that time used coal. This was the first industrial scale use of natural gas in the US. Air quality in Pittsburgh improved dramatically.<br />
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Apart from a boulder covered by a tree (see the photos above and below I took on a recent visit) in the backyard of a house (the precise location is oddly incorrect on both Google and Bing maps - the correct location is <a href="http://binged.it/1e052SK">here</a>), there is little marking the place: the site of riots; the murder of one of the wells discoverers; and the fuel that to this day powers a large portion of US and global electricity generation as well as cooking stoves, home heating, and a large part of the future of transportation. <br />
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<i><span style="font-size: x-small;">(click photo to enlarge)</span></i></div>
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Below the fold is a detailed recounting of the discovery, published in a 1936 edition of Sun Oil Company's 'Our Oil'. Sun Oil Company later became Sunoco Inc. The article below (after the "read more" link) was written by Michael Haymaker, then 90 years old in 1936.<br />
<a name='more'></a><br />
<br />
<b>Murrysville is Location of Famed Well</b><br />
by Michael Haymaker, Sun Oil Company's 'Our Oil', 1936*<br />
<br />
It all began in 1876 while my brother, Obe, and I were drilling an oil well on contract for Colonel Painter, Dan Shupe, and Jim Wade. They knew oil, having grown up around it. The drilling was in Clarion County, Western Pennsylvania.<br />
<br />
It took a long time to drill a hole in the ground in those days. Tools were crude. Steel was not as good as it is today. We did not have power like today.<br />
<br />
One day I told Colonel Painter that I was sure there was oil at Murrysville, Westmoreland County, not so far away. I was raised in that section and knew all the people for miles around. Gas was seeping from the ground in many places, which I considered a sure sign of oil. I told the Colonel that the gas was coming out so strong all along Turtle Creek that Josh Cooper was using it to boil his maple sugar.<br />
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The Colonel continued with his partners and I was told to go to Murrysville and lease the ground and they would finance the drilling. I got the ground and built a rig. When I reported to Colonel Painter, he was all wrought up and excited. The financial panic which struck the country at that time had reached him.<br />
<br />
Well, the Colonel couldn't raise a cent. But my brother and I weren't discouraged. We knew all the oil men; they were all concentrated in our section of the state for it was there that Drake had brought in the first oil well not twenty years before.<br />
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But we soon learned we hadn't figured on the extent of that panic. Nobody could help us. Among the men we saw was Dr. Hostetter, the millionaire maker of bitters and elixirs. He was short of funds too, though we did business with him some years later.<br />
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Then we met Ham McClintic. Ham had been a poor farmer until oil was discovered on his land. Almost overnight he had become wealthy. I offered him half interest in the well if he would furnish a second hand boiler and 500 feet of 5 5/8 inch casing. Ham said he would but he would have to wait until he had brought in a well he was then drilling in Butler County.<br />
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We waited six months but he finally reconsidered and then decided against the proposition. So Obe and I tried to carry on alone. We managed to raise enough money to buy a second hand boiler and engine, and a string of used tools.<br />
<br />
It was the worst drilling outfit I had ever seen. The tools were light and the steel in the bits was of the poorest grade. The whole outfit was hopelessly worn out.<br />
<br />
Anyhow, we started and got along fairly well until we hit the Big Injun sand, which proved to be 400 feet thick and hard as flint. Up to that point we had used an 8 inch bit but couldn't drive through that flint-like sand. We changed to a 5 5/8 inch bit, intending to ream the hole after we had gotten through the hard sand.<br />
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Even the smaller bit wasn't much better, but it was the smallest we had. We were on the point of giving up many times but we drilled and drilled. It took us one full year to go through that 400 feet!<br />
<br />
We were now ready for the casing but had no money to buy it. Once again we sought aid but all we received for our troubles were turn downs. One last resort was at Greensburg. The result there however, was the same<br />
<br />
Finally in disgust and through with everything, we sat down at the railroad station for the train to take us back to the wreck of our dreams.<br />
<br />
Just then the former sheriff, Mr. Borland, came along and asked us how we made out. When we told him, he thought a minute and then asked us if we had seen Mr. Brunot.<br />
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We had not; we had never heard of him. The sheriff replied that he was a new man in these parts and maybe it would be worthwhile to see him. Obe and I tossed a coin. Depressed we were satisfied to let fate decide whether or not we should see him.<br />
<br />
The coin said we should see him, but I wasn't very enthusiastic about it. I suppose that is why I got reckless. I told Mr. Brunot the worst I could think about the well. I told him that it was a wildcat; it was far from other drillings; it was now more than 500 feet deep without any sign of life; that we needed casing and had no money.<br />
<br />
Mr. Brunot, who was smoking a cigar on his porch, asked us whatever made us dig. So I told him about the escaping gas, about Josh Cooper and his boiling pot.<br />
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He took his cigar from his mouth and said, "Well boys, you both seem right to me, I'll take a chance."<br />
<br />
We went back with $500 and a copy of an agreement to give Mr. Brunot one-eight interest in the well. Within ten days we had the supplies on the ground and were at work again when Mr. Brunot paid us a visit. He asked if we needed any more money. He paid us a lot of visits after that and always asked us the same question.<br />
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I'll never forget the day the well came in. We were down 1400 feet. Without the slightest warning, there was a terrific roar and rumble that was heard fifteen miles away.<br />
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Every piece of rigging went sky high, whirling around like so much paper caught in a gust of wind.<br />
<br />
But, instead of oil, we had struck gas. It was being shot out under such enormous pressure that it continued to shake the ground and roar for months, rattling windows for miles around. You can't imagine the production at such pressure; we figured the production at 30,000,000 cubic feet/day.<br />
<br />
That well was as rich as any drilled. Gas was struck at 1400 feet and came from sand 150 feet thick. When the pressure would weaken a little, all we had to do was drill a bit deeper and the well would be as strong as ever, producing 30,000,000 cubic feet every 24 hours.<br />
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We weren't prepared for gas, so had no way of controlling it. It was something new, in our section of the country at least. Nobody knew how to stop it. But it had to be stopped and we tried all kinds of devices.<br />
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Of course, we were disappointed in not getting oil. Then in my mind's eye, I again saw Josh Cooper and his pot of maple syrup on Turtle Creek, using free gas for his fire. The dream grew and I saw a whole nation, the world, cooking on stoves supplied by pipes coming out of the walls in kitchens; housing and buildings, theaters, and factories lighted by gas lamps suspended from ceilings; city lights brightening streets after nightfall.<br />
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It was a dream but it was not hopeless. Isolated sections of the country had been using manufactured gas, and a few had been using natural gas; it needed something big, the tapping of a great reservoir, to arouse a national enthusiasm and to build a great new industrial structure.<br />
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We worked hard trying to find some way to stop the flow and hundreds, yes thousands, of people came to see the well; hear it roar, and feel its vibration.<br />
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Then it happened.<br />
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One night, a crowd with a few lanterns got too close. I recall a blinding flash. Perhaps there was an explosion. There must have been. My eardrums were ringing. It was a weird moment. Flames it seemed were everywhere. Over all there was one great flare, reaching high into the air. Then my ears cleared and I heard the familiar roar of the well.<br />
<br />
I picked myself up. All over the ground others were picking themselves up. Some remained motionless. After we took stock, we found that there were no very serious injuries.<br />
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Gradually, the flame from the well mouth lowered until it settled to an even 100 feet straight up in the air. The original blast had sent the flame hundreds of feet upward, and it was seen in Pittsburgh, 18 miles away.<br />
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It burned for a year and a half, burning thousands of dollars of potential earnings. All the time we were busy trying to extinguish it. That burning well attracted hundreds of people from all over the country. World travelers told me they had never seen a sight so magnificent. It gave us continuous daylight for miles around.<br />
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After a year and a half we controlled it. We managed to get an old smokestack 45 feet long, and with the aid of many hands, placed it over the well.<br />
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It was a difficult job. We had to soak ourselves wringing wet in the creek in order to get within reaching distance of the burning well. Gradually we eased the smokestack over the hole and pulled it upright. Instantly the fire was out.<br />
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A large number of men were required for the job. Guy wires were stretched in every direction for hundreds if feet. One group holding a guy was stationed about 300 feet away near an oak tree, which had caught fire a short time before and was now smoldering.<br />
<br />
We should have given that tree some consideration. Gas seeping through the ground was ignited by the smoldering tree, which, because of its close proximity to the well, started it blazing again. But we had found a way to extinguish it and soon had the stack over the hole once more.<br />
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Now the problem was to get somebody to buy the well. It took years to do it, and all that time vast quantities of valuable gas were escaping.<br />
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Among the many men, Mr. Brunot, my brother Obe, and I saw in those years was Andrew Carnegie and he turned us down. Later, he told me it was one of the biggest mistakes of his life.<br />
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In 1882, a new situation developed. That year brought a so called "promoter" and the beginning of a real fight. He arrived in town anxious to see the well the country was talking about. He was supposed to be a millionaire.<br />
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We soon made arrangements with him for the purchase of the well and leases of 100 acres around it, for $20,000. He then left for Chicago, stating that he would be back in ten days to close the transaction. At the end of that time, he sent his agent who told us that the promised money was tied up but that the promoter would be willing to close for $1,000 cash, $3,000 in thirty days, and the balance $16,000 in sixty days.<br />
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It was a good sale. We still had plenty of land to lease, and the return from the sale would enable us to drill it.<br />
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We received the first payment from the agent and waited thirty days for the next. However a whole year passed before we heard another word about the matter. During all that time there was not a sign of the promoter or his agent.<br />
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About this time, Mr. Brunot had business in Canada. One his trip back home, he got on a train in Buffalo. It was crowded but he saw one vacant seat along side another man. He was Joseph Newton Pew. Mr. Brunot told him about our well, and Mr. Pew became so interested he came right to Murrysville.<br />
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It didn't take Mr. Pew long to understand the possibilities of the property, but he made a thorough investigation before making an offer. In the meantime we were not forgetting the agreement which had been broken by the promoter, but our lawyers assured us that we could proceed because the promoter had not lived up to the terms of the sale.<br />
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Mr. Brunot was double cautious and told us to delay final action until he could get to Chicago, look up the promoter, tender the deed, and demand the balance due.<br />
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Later we learned that the promoter had an informer in Murrysville who kept him posted. So when Mr. Brunot arrived in Chicago, our "friend" departed. But, Mr. Brunot wasn't in a hurry. He hired a detective to watch the man's office. Ten days later the detective sent a message to Brunot that the promoter was in.<br />
<br />
He appeared surprised when Brunot walked into his office and made his demands. He said he thought the money had been paid long ago and that he had sold the property. Brunot produced the deed and asked him how he could have sold the property without the deed. Brunot then laid a certified check for $1,000 on the promoter's desk. But it was refused. Brunot replied by depositing the check to the promoter's account in the bank and then returning to Murrysville.<br />
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We then completed the transaction with Mr. Pew and his partner, and they started to lay pipe to Pittsburgh.<br />
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Soon after, we heard rumors to the effect that the promoter was planning to make trouble for us. I was laying pipe at the time and paid no attention to the stories. We certainly didn't look for violence.<br />
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November 26, 1883, dawned clear, but in a few hours it became cloudy and by noon it was raining hard, too hard for pipe work. So we told the ditch gang to halt work and get into the shelter of the camp.<br />
<br />
At that minute, a young workman came running up excitedly.<br />
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"They've got the well!" he yelled, gasping for breath.<br />
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"Who's got what?" was my puzzled reply.<br />
<br />
"The men!" he said, waiving his arms in the direction of the well. "Fifty of them with rifles and bayonets!"<br />
<br />
I still did not know what he was talking about, but Obe and I dashed away with our ditch gang trailing after us.<br />
<br />
Some time before we had built a fence around the property; it surrounded the well at a distance of 100 feet. As we came up to it, sure enough, there were about fifty men inside with guns and others with rifles and bayonets.<br />
<br />
They were waving their hands at us to stay away. Over the roar of the well, we heard them yell that they had taken possession for the promoter.<br />
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There were only twelve in our party, along with some people from the neighborhood who had come up to see what the excitement was about. While we were holding a field council, half of the promoter's men went back at building a shelter around the rig. They were using new lumber we had just received a few days before.<br />
<br />
Somebody suggested that we take a chance and make for the lumber pile to save it. Almost all of us had been on disputed ground up in the oil country and never had any serious trouble. So we moved.<br />
<br />
We got through the fence and reached the lumber pile before they did. My brother, Obe, stood at the farthest end and I jumped to the top.<br />
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By that time, the man who commanded the promoter's men came hurrying up. In back of him was half his force. He stood in front of Obe, waiving his arms and talking. I couldn't hear; the roar of the well drowned his voice. Obe stood there and smiled at the leader.<br />
<br />
Suddenly the leader reached around and grabbed a bayoneted rifle from one of his men. He plunged it into Obe four times. At the same instant, another of the gang drew a revolver and shot Obe in the arm, the bullet then passing through his body.<br />
<br />
It was the signal for general firing. Lytle, who was standing next to me on the lumber pile, went down with a bullet in the hip, crippling him for life. Charlie Steager was hit in the back with a charge of buckshot. Gid Ray, as he turned to run, got two buckshot in the back of his head.<br />
<br />
The whole thing happened in a few seconds, and it was over as I was jumping down from the pile of lumber. The leader saw me and took aim as I came down, and he pulled the trigger. Some heard the click as the hammer came down but there was no explosion. The gun had misfired.<br />
<br />
The leader turned and ran back as I went for him. Just then, Harry Taylor, one of our men, shouted to me and pointed to my brother. Obe was swaying, trying to keep his feet. By that time the invaders were back at the well mouth, so I ran over to Obe. Taylor and I helped him toward the fence.<br />
<br />
I asked him if he was seriously injured. He said he didn't think so. But he was. One of the bayonet thrusts had severed an artery and he was bleeding internally.<br />
<br />
As we reached the fence, Obe turned and looked back at the well, and then crumpled. We laid him on a wide board and carried him home, a mile away. He died just as we were entering the door.<br />
<br />
The entire the group and the promoter were finally arrested without difficulty and taken to Greensburg. Feelings ran high against them. Men from all around poured into the town and there was some talk of lynching.<br />
<br />
Although the promoter and his lieutenant had influential friends, they did not succeed in evading trial. After two years, the trial came up in Pittsburgh. The leader was sentenced to ten years on a second degree murder charge, served five years, and was pardoned. A year after that conviction, the Chicago promoter was brought to trial. He got five years, but only served half of that term. The others never came to trial.<br />
<br />
That's the story of the Murrysville gas well, and telling it makes it all come back as if it were yesterday. Shortly after we had completed the pipes to Pittsburgh, Mr. Hostetter, the man we had tried to interest before, again appeared on the scene. He bought the property for a group of Pittsburgh business men.<br />
<br />
Mr. Pew and Mr. Emerson bought more land and drilled more wells, laying another pipe to Pittsburgh and forming a gas company. They sold out later, and thereafter concentrated in the production and transportation of oil for national and world markets.<br />
<br />
<br />
<br />
<i><span style="font-size: x-small;">*Original article was reprinted in the 'Penn-Franklin News', Volume 9, Number 41, November 10, 1955 and subsequently in 'A History of Murrysville Franklin Township And My Family' by Charles A. Hall, August 2003.</span></i></div>
Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-44345943500613642192013-08-29T23:25:00.000-04:002014-08-08T00:41:45.143-04:00Do Wars Cause Higher Oil Prices? Not Generally<i>[Wars are fought over oil. But do wars mean higher oil prices?]</i><br />
<br />
Military intervention by the US in Syria is looking increasingly likely. <a href="http://www.washingtonpost.com/blogs/worldviews/wp/2013/08/29/9-questions-about-syria-you-were-too-embarrassed-to-ask/" target="_blank">Here </a>is a quick cheat sheet. <br />
<br />
<a href="http://www.cnbc.com/id/100994315" target="_blank">Many</a> are calling for a rally in oil prices from its current $107 per barrel to $150 or $200 on the initiation of action. <a href="http://www.cnbc.com/id/100995254" target="_blank">Others</a> are calling for a price spike higher which will quickly reverse.<br />
<br />
Syria is a <a href="http://www.eia.gov/countries/cab.cfm?fips=SY" target="_blank">relatively small oil producer</a>, with trivial production globally. It's the potential disruption from spillover into larger regional oil producing nations, including Iraq and Iran, that concerns oil consumers.<br />
<br />
Predicting the reaction of the oil market in such situations is not straightforward and it's always worth considering a range of scenarios. It is precisely this uncertainty that has caused an abundance of caution historically, and caused supply-side over-reaction, with lower prices after Western forces finally act.<br />
<br />
Over the past 30 years, military interventions involving external, US or UN, forces against Arab nations or Iran have generally resulted in lower oil prices. It is only regionally internal, Arab vs Arab or Arab vs Persian, warfares that resulted in higher prices (charts below, click to enlarge). <br />
<br />
Perhaps this is because by the time Western military operations begin the market has already priced in the event due to a more free press. Traders monitor Western political sentiment, military jet fuel purchase requisitions, and fleet movements, ahead of time. Or maybe it is the actual, or threatened, impact of an IEA <a href="http://www.iea.org/topics/oil/oilstocks/ieacollectiveaction/" target="_blank">global release</a> of strategic petroleum reserves, along with the willingness of US ally Saudi Arabia to increase production from its spare capacity during disruptions.<br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5ldp_3_IDrkZ5KYie-xutNM0lEbwMyZuB22Afnh05xT6IlFTCe_AmUSvjvFsXqM8_JHFFkVjep6IIwlHJdUd6RyuwQw3gOrOdUxlqcETXSJmwPkIybKdqTfRp_ltzkTsFfLFJxpZ1wBTw/s1600/WarvsOil.JPG" imageanchor="1"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5ldp_3_IDrkZ5KYie-xutNM0lEbwMyZuB22Afnh05xT6IlFTCe_AmUSvjvFsXqM8_JHFFkVjep6IIwlHJdUd6RyuwQw3gOrOdUxlqcETXSJmwPkIybKdqTfRp_ltzkTsFfLFJxpZ1wBTw/s640/WarvsOil.JPG" height="640" width="440" /></a>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-58717214504637569642013-06-18T16:02:00.003-04:002013-06-18T16:14:37.520-04:00Coming Soon...Great to be back. So much to discuss...
Follow along on Twitter: <a href="https://twitter.com/CommodityMD">@CommodityMD</a>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-90273266186582937972010-01-31T21:49:00.003-05:002011-04-10T01:48:29.158-04:00Oil 101 Alternative StoreAmazon in the US often <a href="http://www.amazon.com/Oil-101-MORGAN-DOWNEY/dp/0982039204">runs out of inventory of Oil 101</a> (as it appears to have over the past 2 days). As an alternative, one can <a href="http://search.barnesandnoble.com/Oil-101/Morgan-Patrick-Downey/e/9780982039205">order</a> from Barnes & Noble US.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-7404470648773561882010-01-28T08:18:00.004-05:002010-01-28T08:53:53.532-05:00Panama to Reduce US Oil ConsumptionToday when a consumer on the US east coast buys a Chinese manufactured product it is highly likely it was shipped across the Pacific to Long Beach, California and then trucked using diesel fuel via road or rail across the US. <br />
<br />
Bloomberg has an <a href="http://www.bloomberg.com/apps/news?pid=20601109&sid=a3hOuGC_XdsY">interesting story</a> on the effect the expansion of the Panama Canal could have on US railways. The canal expansion may be among the largest fuel savers for US consumers over the next 15 years.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-84159607789567706362010-01-25T08:28:00.038-05:002010-01-28T18:52:47.339-05:00Regular Car, Premium GasolineAn <a href="http://www.usatoday.com/money/autos/2008-04-13-premium-gas_N.htm?loc=interstitialskip#uslPageReturn">increasing number</a> of regular looking vehicles in the US are requiring high octane premium gasoline. These vehicles include the tiny <a href="http://www.smartusa.com/">Smart fortwo</a> and a variation of the <a href="http://www.vw.com/jetta/en/us/">Volkswagen Jetta</a>. <br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEQ5Lwkt5hR87qAIPapCL3hjqnmueF_8kUGnNSIWGSctOn5sVOwEf6-YCw9z7BxqbBBajLhQ0CBndD64pGrKGfucL1PiP9kidyTwSiYtKRBJoEoVCg9UlqfhOdUpmugZVhvpHYc6KCpT23/s1600-h/Vehicles+in+US+Requiring+Premium.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" mt="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEQ5Lwkt5hR87qAIPapCL3hjqnmueF_8kUGnNSIWGSctOn5sVOwEf6-YCw9z7BxqbBBajLhQ0CBndD64pGrKGfucL1PiP9kidyTwSiYtKRBJoEoVCg9UlqfhOdUpmugZVhvpHYc6KCpT23/s320/Vehicles+in+US+Requiring+Premium.PNG" /></a><em><span style="font-size: x-small;"></span></em><br />
</div><div class="separator" style="clear: both; text-align: center;"><em><span style="font-size: x-small;">(source: </span></em><a href="http://www.usatoday.com/money/autos/2008-04-13-premium-gas_N.htm"><em><span style="font-size: x-small;">Kelley Blue Book via USA Today</span></em></a><em><span style="font-size: x-small;">)</span></em><br />
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</div>Is this premium fuel requirement a stealth move for some auto manufacturers to gain market share? Has this increased sales of high octane gasoline relative to regular octane gasoline in the US?<br />
<br />
<strong>Octane Ratings Explained</strong><br />
Octane ratings are the numbers printed on a gasoline pump often labeled regular, midgrade and premium. In the US regular gasoline is greater than 85 and less than 88 octane, midgrade is equal to or greater than 88 and less than 90, and premium is equal to or greater than 90. In Europe and Asia the number on the pump for equivalent fuel is usually 5 points higher. In other words 87 on a pump in the US is equivalent to 92 on a pump in the UK.<br />
<br />
Octane rating has little to do with the energy content of the gasoline. It has all to do with how much volume of the gasoline can be squeezed, or compressed, into an engine cylinder without the gasoline igniting before the spark plug fires. Gases heat up when compressed and gasoline engines are tuned to compress the gasoline as much as possible without compressing it so much the fuel burns without a spark plug. The goal is for the timed and synchronized spark plug to ignite the fuel when a piston reaches the top of the combustion chamber. If ignition due to compression (rather than the spark plug) occurs then an engine can be damaged. <br />
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Many new cars requiring high octane fuel can tolerate slightly lower octane because their computers adjust for the less compression ignition resistant fuel, but there is typically a lower power output and one should only do this if a vehicle manufacturer says it is ok for your engine.<br />
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As gasoline with higher octane ratings resists compression more than regular can be added to the combustion chamber on each stroke of the engine. This higher compression tolerance allows more more gasoline to be burned and more power on each stroke. This is why racing cars use high octane gasoline.<br />
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Why don't all cars use high octane gasoline? There is a substantial incremental cost for a refinery/gasoline blender to raise the octane of gasoline. Higher octane requires expensive gasoline blendstocks and consumers are sensitive to increased gasoline prices. <br />
<br />
The additional fuel cost to a driver for high octane gasoline compared to regular is around US$100-US$200 each year (based on 10,000 miles per year in a 25MPG vehicle).<br />
<br />
Should one fill up with higher octane than a vehicle manual suggests? No. It will likely be a waste of money without any improvement in performance. If your vehicle manual recommends regular octane then just use regular. <br />
<br />
Use high octane gasoline if you have a vehicle with a high compression engine and your vehicle manual recommends it. However, as mentioned above, some vehicle manufacturers say their engine computers can adjust to handle lower octane rated gasoline.<br />
<br />
<strong>High Octane Gasoline No Longer just for Sports Cars</strong><br />
In the past high compression gasoline engines were primarily used in sports cars and luxury high performance vehicles. Now more vehicle manufacturers are putting high compression engines into what would not generally be perceived as being a sports car.<br />
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One reason vehicle makers are doing this because it improves the statistics consumers look at when purchasing a vehicle. A high compression engine running on premium will accelerate a vehicle from 0 to 60 MPH faster than a low compression engine. Consumers rarely ask a car dealer which octane rating of gasoline a vehicle burns. They do ask how quick the vehicle acceleration is from a standing stop and on a test drive will notice the peppiness and responsiveness of a high compression engine. <br />
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<strong>Has Demand for Premium Gasoline Changed?</strong><br />
In summary, the number of vehicles requiring premium (high octane) gasoline (rather than midgrade or regular) has been increasing in the US because vehicle manufacturers have realized that high compression engines can increase vehicle sales by enhancing the statistics consumers look at and the test drive experience. One could surmise, therefore, that the percentage share of premium gasoline being sold in the US has been steadily increasing as these new vehicle owners dutifully follow vehicle manufacturers' recommendations. <br />
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The data shows that most of these high octane requiring vehicles are being filled with lower octane fuels. The percentage of premium relative to total gasoline sales has been steadily falling (see chart below): <br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwpQsP0M0K3KWrQjB3Sczkjnv09B67CkrV9fqhdUjXRuzB24CXDK8SkrfIbB53Kcyfon0Eq9P8SH2IDwoEzU0hOCvBadlrZqtqsBAoqCUwiftlC7BmYOkv9W44ZZJ5q7eT1cSNYc3ZnVxn/s1600-h/Premium+Share.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="323" mt="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwpQsP0M0K3KWrQjB3Sczkjnv09B67CkrV9fqhdUjXRuzB24CXDK8SkrfIbB53Kcyfon0Eq9P8SH2IDwoEzU0hOCvBadlrZqtqsBAoqCUwiftlC7BmYOkv9W44ZZJ5q7eT1cSNYc3ZnVxn/s400/Premium+Share.PNG" width="400" /></a><em><span style="font-size: x-small;">(click chart to enlarge)</span></em><br />
</div><div class="separator" style="clear: both; text-align: center;"><br />
</div>It is likely the nod from some vehicle manufacturers that onboard computers can adjust newer high compression engines to handle lower octane gasoline that gives comfort to some owners. Another way of looking at the data is that these new, often unsuspecting, high compression engine owners are attempting to save at the pump having hastily splurged on a sprightly engine.<br />
<br />
<em>(Why is "octane" the name used for the compression resistance of gasoline? Read </em><a href="http://www.amazon.com/Oil-101-Morgan-Downey/dp/0982039204"><em>Oil 101</em></a><em>, Chpt. 9)</em>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-24345396237062083002010-01-24T22:18:00.023-05:002010-01-28T18:55:39.143-05:00USGS Finds New Saudi Arabia! Oh, wait...The BBC over the weekend had the headline: <a href="http://news.bbc.co.uk/2/hi/americas/8476395.stm">Venezuela oil 'may double Saudi Arabia'</a>. The headline was based on the just released assessment of Venezuela’s hydrocarbon deposits by the US Geological Survey (USGS). Venezuelan oil is described as: "<a href="http://www.usgs.gov/newsroom/article.asp?ID=2386">the largest accumulation ever assessed by the USGS</a>". The USGS mean estimate of recoverable Venezuelan oil is 513 billion barrels.<br />
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The USGS number is over five times 'Oil and Gas Journal's' <a href="http://www.eia.doe.gov/emeu/cabs/Venezuela/Oil.html">estimate of 99 billion</a> barrels for Venezuelan proven oil reserves.<br />
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To put all these billion barrel numbers in perspective, global consumption is currently around 30 billion barrels per year. Saudi Arabia's oddly static (see <a href="http://www.amazon.com/dp/0982039204">Oil 101</a>, Chpt.14) stated proven reserves are around 260 billion barrels. One could almost drive two Saudi Arabias between the 513 billion and 99 billion barrel estimates for Venezuela. Which number is closer to the truth?<br />
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It comes down to the types of reserves being defined. The USGS number refers to hydrocarbons technically recoverable if one completely ignores costs. The 'Oil and Gas Journal' number factors in technical feasibility just like the USGS but <em>additionally</em> the economic cost of extracting heavy Venezuelan oil using similar processes to Canadian oil sands production.<br />
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The USGS has no mention of the fact that the costs to extract much of the hydrocarbons from the Venezuelan accumulation could be over US$200, US$300 or even US$1000 per barrel and would thus be unlikely to ever be produced.<br />
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Only in the <a href="http://pubs.usgs.gov/fs/2009/3028/pdf/FS09-3028.pdf">very last paragraph (pdf)</a> of the USGS report is there any attempt to put some perspective on their headline grabbing number: "No attempt was made in this study to estimate either economically recoverable resources or reserves within the Orinoco Oil Belt AU. Most important, these results do not imply anything about rates of heavy oil production or about the likelihood of heavy oil recovery. Also, no time frame is implied other than the use of reasonably foreseeable recovery technology." <br />
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This sort of key disclaimer would be more appropriate in an opening paragraph. <br />
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The USGS say that their report is "<a href="http://www.usgs.gov/newsroom/article.asp?ID=2386">critical to our understanding of the global petroleum potential and informing policy and decision makers</a>." How many policy and decision makers will read past the headline and opening paragraphs to understand that economics played no part in the analysis?<br />
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<em>(HT/Terry G. for sending related link)</em>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-86161537035600258452010-01-22T09:49:00.016-05:002010-01-26T05:32:39.394-05:00Oil Creates Decennis Horribilis for AirlinesHow long can an entire industry operate at a loss? For the airline industry it is ten years and counting. The primary reason for airline woes has been high oil prices.<br />
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Airlines globally will spend close to US$150 billion on jet fuel this year. The global airline industry is expected to lose <a href="http://www.iata.org/NR/rdonlyres/C03D9D17-5173-4732-A72A-994EBC9B6626/0/IndustryTimes_January2010.pdf">US$5.6 billion</a> during 2010 if oil prices average US$75 per barrel (basis ICE Brent crude). This follows an industry loss of US$11 billion in 2009 capping a decade of losses:<br />
<blockquote>"Between 2000 and 2009, airlines lost US$49.1 billion, which is an average of US$5.0 billion per year,” said Giovanni Bisignani, IATA’s Director General. (<a href="http://www.iata.org/NR/rdonlyres/C03D9D17-5173-4732-A72A-994EBC9B6626/0/IndustryTimes_January2010.pdf">source</a>)<br />
</blockquote>The jet fuel <a href="http://www.iata.org/nr/rdonlyres/d9a9698a-eff5-4277-b9a9-d0c8d8d55105/0/industry_outlook_mar09.pdf">share of total costs</a> spent running global airlines has roughly doubled since the early part of the decade: <br />
<blockquote>2000 14%<br />
2001 13%<br />
2002 13%<br />
2003 14%<br />
2004 17%<br />
2005 22%<br />
2006 24%<br />
2007 28%<br />
2008 32%<br />
2009 26%<br />
2010 26%*<br />
<em><span style="font-size: x-small;">*IATA Forecast</span></em><br />
</blockquote>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-58086062872188757672010-01-22T07:55:00.011-05:002010-01-23T02:22:14.038-05:00US Taxpayers to Increase Backing for Compressed Natural Gas VehiclesThere now appears to be an <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a9_1lAizYyDw&pos=7">increasing chance</a> legislation will be enacted in the US by May 2010 increasing support for natural gas as an alternative to oil in transportation. This could be the most significant energy policy change in the US since the controversial decision a few years ago to provide taxpayer subsidies for crop based fuels.<br />
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In the videos attached to the <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a9_1lAizYyDw&pos=7">Bloomberg news story</a> US oilman Boone Pickens is quite optimistic about the probability legislation will pass very soon.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-89386971577018845402010-01-18T22:16:00.028-05:002010-01-19T04:52:44.543-05:00Oil Efficiency Falls in Importance, PerhapsOil market participants are curious to know whether oil efficiency is becoming more important to consumers buying new vehicles. Consumers say no. In fact, they say its importance is diminishing.<br />
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Consumer Reports' <a href="http://www.consumerreports.org/cro/cars/new-cars/news/2010/01/2010-car-brand-perceptions-survey/overview/brand-perceptions-ov.htm">2010 Car Brand Perception Survey</a> has just been released. The US survey was conducted in December 2009. Safety, quality, value and performance remain the <a href="http://www.consumerreports.org/cro/cars/new-cars/news/2010/01/2010-car-brand-perceptions-survey/most-important-factors/brand-perceptions-most-important-factors.htm">primary factors</a> of interest to consumers according to the 2010 survey. Efficiency, called the 'environmentally friendly/green' factor in the survey, fell 8 percentage points from 40% in 2009 to 32% in 2010. As Consumer Reports says:<br />
<blockquote>"In a troubled economy, with gas prices relatively low, green in the wallet trumps environmental concerns."<br />
</blockquote>In short, the Consumer Reports' Survey indicates that the greater than two year efficiency drive which occurred in the early 1980s is not being repeated at present. Instead, 2008-2009 oil demand destruction may be more like the 1973-1974 efficiency drive which quickly evaporated.<br />
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The oil market is now receiving conflicting data from US oil consumers. The percentage of newly purchased vehicles being cars <a href="http://scarcewhales.blogspot.com/2010/01/car-story.html">is increasing</a> versus SUVs and light trucks, but according to the Consumer Reports' survey consumers are saying that efficiency is less important. Perhaps it is the wording of the Consumer Reports survey which is creating the conflict with actual US vehicle purchase data? Perhaps we should watch <a href="http://scarcewhales.blogspot.com/2010/01/car-story.html">what consumers do</a> rather than what they say?<br />
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<em>(See <a href="http://www.amazon.com/dp/0982039204">Oil 101</a> for more on prior oil demand destruction periods.)</em>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-8007952857836807992010-01-14T06:08:00.002-05:002010-01-20T14:59:10.772-05:00WTI Benchmark Effectiveness StudyOver the past few years some have incorrectly blamed oil price volatility on "broken" oil price benchmarks. <br />
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Oil price volatility has been necessary to match inadequate supply to burgeoning demand since the early 2000s.<br />
<br />
An <a href="http://www.bauer.uh.edu/news-center/ticker/2010/jan/pirrong-oil-market.asp">interesting study</a> by Craig Pirrong of the University of Houston is <a href="http://www.ft.com/cms/s/0/d3be7fac-fb83-11de-93d1-00144feab49a.html?nclick_check=1">reviewed here</a> by Greg Meyer of the FT. The study findings, which I agree with, show that WTI crude futures contracts accurately reflect underlying physical market fundamentals.Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.comtag:blogger.com,1999:blog-6520948133918593561.post-57809538092372417892010-01-11T06:38:00.003-05:002010-01-11T04:30:34.152-05:00A Car StoryWhither the future of oil demand? A major component in forecasting future oil consumption involves analysis of the number of installed devices (cars, trucks, aircraft and ships) capable of burning oil. Following the recession the pace of US auto sales recovery is outpacing many analysts' expectations (chart 1):<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi-0oxdYmG5uliCII3aRi3PZeqNoIED1OLgB6yojhddIg0dSQrda6FYd4YYok75gRpHkzBE4FE7zE5cGqy1TV1Mf4NXVsdHlRfaEvsaXKPjfyce3It_PylRnhqsuYWhs0mZJb5aNPdkEBr/s1600-h/Chart+1-Morgan+Downey-Post+Jan112010.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" ps="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi-0oxdYmG5uliCII3aRi3PZeqNoIED1OLgB6yojhddIg0dSQrda6FYd4YYok75gRpHkzBE4FE7zE5cGqy1TV1Mf4NXVsdHlRfaEvsaXKPjfyce3It_PylRnhqsuYWhs0mZJb5aNPdkEBr/s400/Chart+1-Morgan+Downey-Post+Jan112010.PNG" /></a><em><span style="font-size: x-small;">(click to enlarge)</span></em><br />
</div><br />
US consumers are continuing their trend toward purchasing more efficient vehicles. The percentage of cars sold is increasing instead of light trucks and SUVs (chart 2):<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNkFVtV1ULjyYGuPnxXeMYsgFC5V1kVwtcw20wvt8hSnGZv9kDuOkLJZGES-r1_sJgC6DiwcR4mJ9rQSXdsQj2VgYaczSG24ifxmizUchvNqIFJcYyili3OQSyLhRFocmcgOeIEk72G_dc/s1600-h/Chart+2-Morgan+Downey-Post+Jan112010.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" ps="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNkFVtV1ULjyYGuPnxXeMYsgFC5V1kVwtcw20wvt8hSnGZv9kDuOkLJZGES-r1_sJgC6DiwcR4mJ9rQSXdsQj2VgYaczSG24ifxmizUchvNqIFJcYyili3OQSyLhRFocmcgOeIEk72G_dc/s400/Chart+2-Morgan+Downey-Post+Jan112010.PNG" /></a><em><span style="font-size: x-small;">(click to enlarge)</span></em><br />
</div><br />
US auto makers also seem to be gaining ground in relation to foreign auto makers (chart 3). As <a href="http://scarcewhales.blogspot.com/2009/11/looking-under-hood-of-us-auto-data.html">I mentioned</a> a few months ago, there are firm reports that US consumers perceive there to have been large quality gains from US auto makers.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmY0Lm4M7tYy__V1bCmPCMZt-6y-jeIHwUweNjovwhZPNPyH1c7WS4dzeUTLIKRM9JOQJIT_iGuvzSN-Gf5oxVk8qo2vXAHT2-T99wW_RLUCoowPHFObnXjMWbzD2hAjfonGQZAgQq3QJx/s1600-h/Chart+3-Morgan+Downey-Post+Jan112010.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" ps="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmY0Lm4M7tYy__V1bCmPCMZt-6y-jeIHwUweNjovwhZPNPyH1c7WS4dzeUTLIKRM9JOQJIT_iGuvzSN-Gf5oxVk8qo2vXAHT2-T99wW_RLUCoowPHFObnXjMWbzD2hAjfonGQZAgQq3QJx/s400/Chart+3-Morgan+Downey-Post+Jan112010.PNG" /></a><em><span style="font-size: x-small;">(click to enlarge)</span></em><br />
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The US is not alone in having increased auto sales. Chinese consumers have been purchasing more vehicles than US consumers on a monthly basis since September 2009 (chart 4). <br />
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</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdhlnB0b2VolZbeqril0Abui40GdCNWOPk-VGPBZssmMK28IFrZOzV29ooLpmvRxJNlQjJpPYzYT0JvmvPgjhGyznDikQrefoJJBhkeV2_ioyayNMlHkNTf4bkzmWcTGmi6Ece1RnBQbQC/s1600-h/Chart+4-Morgan+Downey-Post+Jan112010.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" ps="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdhlnB0b2VolZbeqril0Abui40GdCNWOPk-VGPBZssmMK28IFrZOzV29ooLpmvRxJNlQjJpPYzYT0JvmvPgjhGyznDikQrefoJJBhkeV2_ioyayNMlHkNTf4bkzmWcTGmi6Ece1RnBQbQC/s400/Chart+4-Morgan+Downey-Post+Jan112010.PNG" /></a><em><span style="font-size: x-small;">(click to enlarge)</span></em><br />
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The installed base of existing vehicles in the US means that the US still consumes more than twice the amount of oil as China (chart 5). If the Chinese economy sustains an annual compound growth rate of 8% in vehicles sales then it will be 12 years from now in 2021 that China will consume roughly the same amount of oil as the US does today. To put the US and Chinese numbers in perspective, global consumption of oil is currently around 85 million barrels per day.<br />
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</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6OjLx2e2DTVpTbhUL4RLqPfp5Z4orz6hMV4JxLgMy8WVuCfMJG_uNIxE1QJakIXWetF46qOt-q33mGUNR7xpijmR2gUWSpyubm3Rhx-C_-t5DJGLzllYiQgy3hzImM2GTelzEgYp2o-VW/s1600-h/Chart+5-Morgan+Downey-Post+Jan112010.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" ps="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6OjLx2e2DTVpTbhUL4RLqPfp5Z4orz6hMV4JxLgMy8WVuCfMJG_uNIxE1QJakIXWetF46qOt-q33mGUNR7xpijmR2gUWSpyubm3Rhx-C_-t5DJGLzllYiQgy3hzImM2GTelzEgYp2o-VW/s400/Chart+5-Morgan+Downey-Post+Jan112010.PNG" /></a><em><span style="font-size: x-small;">(click to enlarge)</span></em><br />
</div>Morgan Downeyhttp://www.blogger.com/profile/05445833618793187660noreply@blogger.com