Energy Prices Out Of Our Control

The Markets
---Crude oil continued its pattern of setting new records on a daily basis as it traded at an all-time record of $108 per barrel this morning.

---AP is reporting today that "Gas prices at the pump rose overnight to a record national average of $3.2272 a gallon, according to AAA and the Oil Price Information Service."

---Now you can bet on future gasoline prices. UGA (United States Gasoline Fund) is an ETF that just began trading on the Amex.


World Politics
---For the second time this year, OPEC rejected President Bush's request to increase oil output. As the NY Times reported, "OPEC members.....chose to leave their production levels unchanged, saying the market has plenty of oil already. The cartel's president blamed financial speculators and American economic problems, which have helped lower the value of the dollar, for the high oil prices."

---Reiterating this point, Reuters is reporting that "Oil prices will stay at current levels for the rest of this year due to speculation and geopolitical tensions, Algerian state media on Monday reported OPEC President Chakib Khelil as saying."

---Middle Eastern countries are experiencing inflation problems because oil is priced in US dollars and their currencies are pegged to the US dollar. It is very ironic (putting it politely) that former Federal Reserve chairman Alan Greenspan recently told the Saudis that they could control inflation by dropping their peg to the US dollar.


US Politics
---For the fourth time in the past year, House Democrats have submitted a bill which would eliminate a $18 billion tax incentive package that the five largest oil companies currently enjoy. They would use the money to boost incentives for alternative energy programs. The White House has threatened to veto the measure again. Even if it did pass, there would only be a 2% impact to profits, and if the costs were passed on to consumers, it would only raise pump prices by a penny a gallon.

---Despite the criticism regarding oil company profits, in the grand scheme of world affairs, that is not the problem. Going after the US oil companies will not change the price at the pump. Their profits are relatively small on a world scale. As Stansberry & Associates reported, ExxonMobil is the the largest oil company in the world, but its $40 billion in 2007 profits doesn't even place it in the top 50% of OPEC earners:

$194 billion, Saudi Arabia
$63 billion, UAE
$57 billion, Iran
$55 billion, Nigeria
$54 billion, Kuwait
$51 billion, Algeria
$48 billion, Venezuela
$44 billion, Angola
$41 billion, Libya
$38 billion, Iraq (see discussion below)


Supply Problems
---The Financial Times headline yesterday said that "Canada fears US law will hit oil exports." The issue is that "importing oil form Canada's oil sands deposits are at risk because of US legislation to curb greenhouse emissions." These deposits are the largest in the world outside of Saudi Arabia.

---The Financial Times also reported yesterday that new reserves in 2007 in the Gulf of Mexico were the lowest in ten years. This is particularly disappointing for US oil majors as "The deep-water Gulf of Mexico is one of the few areas to which the majors have access without the fear of intervention by state owned oil companies."

---Gazprom, the Russian state-owned oil company that is the world's largest gas producer, is creating fears across Europe. In the short term, it is threatening to cut natural gas supplies to the Ukraine by 50% because of an ongoing political dispute. Gazprom currently supplies about 25% of Europe's needs and about 80% of this flows through the Ukraine. Independent of the politics, there is concern that longer term, Gazprom will be unable to meet European demand for years to come as they have not made the necessary investments to bring on additional supplies.

---The WSJ reported yesterday that "China's use of nuclear power is growing far faster than originally planned." Revised estimates for 2020 have been increased by 50%. "China wants to rapidly increase nuclear power because it offers a cleaner alternative to coal.....the price of coal is soaring."


And Then There Is Iraq
---The NY Times' headline asked "Where's all of Iraq's oil money?" "Two senior members of the Senate Armed Services Committee have requested a full accounting of how Iraq is spending its soaring oil revenues amid starkly conflicting estimates of how much the country has invested in rebuilding infrastructure and providing basic services to its citizens." At today's oil prices, it is believed that 2008 revenues will be $56 billion. But accounting for this revenue is another matter. Bottom-line, the US still is investing in their infrastructure and services remain dismal.