 | | The Daily Reckoning | Tuesday, December 7, 2010 |
- Two important numbers for commodity investors in the decade ahead,
- Blindfolded bureaucrats and Mexico's wasted energy piñata,
- Plus, Bill Bonner on the smell of central banks and the good life Down Under...
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|  | | | The Gross Mismanagement of Mexico’s Oil Industry | | How politicians have undermined the inherent advantages of Mexican oil | |  | | Joel Bowman |
Reporting from Sayulita, Mexico...
Mexico should be rich. Instead, the country provides a disheartening example of what author P.J. O'Rourke might call "making nothing from everything."
We've been trekking around the Pacific Coast - well, a very small part of it - for the past week or so. The stretch between Puerto Vallarta and Sayulita - about 40 miles - boasts some of the most pristine coastland your Aussie-born editor has ever seen. It is the type that might inspire California's "trustafarian" community to erect multi- million dollar beachfront mansions, around which they would shoot opening credit footage for teen reality shows about the trials and tribulations of the good life. But down here, the towns are tiny, peaceful and conspicuously devoid of L.A.-style bling. Life is simple. Only the occasional fishing or surfing village punctuates enormous swaths of virgin, oceanfront real estate.
The locals, at least from what we've seen, are an especially hard- working bunch. By day, they toil under the red-hot sun...and then, when it goes down, they toil some more. What's more, unlike their depressed, though highly privileged cousins north of the border, they smile like it's a national sport.
But so what? If a tropical clime and a broadly grinning local workforce were the only ingredients necessary to bake a cake of national economic prosperity, Cuba might be the preferred dessert of the Caribbean. Instead, it barely passes for an econo-Twinkie. (The Mexican captain of a fishing boat we took over the weekend made the point for us: "Ok amigos. Today we go to a beautiful island for your pleasure," he told the eager crowd. "Are you ready for this? We go to Cuba! Haha... Just joking! We wouldn't do that to you. You're our amigos!")
The real wealth, of course, is to the east, in the Gulf of Mexico. The Cantarell Field, in particular, should have been a boon to this nation. And for a while, it was. Ironically, however, nothing suffers at the hands of bureaucrats quite like raw, capitalistic opportunity and the success it threatens to visit upon ordinary, voting citizens.
With roughly 18 billion barrels of recoverable oil (35 billion in total), the Cantarell Field is roughly one third larger than Alaska's mighty Prudhoe Bay (with a "measly" 12 billion). What's more, unlike the extreme arctic conditions in Alaska and the sheer remoteness of the project (at 650 miles north of Anchorage), Mexico's black gold sits just 50 miles off the coast...and in Caribbean waters of scuba-friendly temperature.
Such is the richness of the Cantarell Complex, and the luck of Mexico, that it didn't even take a geophysicist or highly paid geologist to discover it. Instead, Rudesindo Cantarell, a fisherman, noticed that his nets were actually clogging up with the black stuff. It seems the natural oil seeps were literally begging to be discovered. Cantarell couldn't have missed it if he tried. But the story gets even more interesting. The holes in the rock - or pores - where the oil is located appears to be - wait for it - part of the rubble formation from the asteroid impact that created the Chicxulub Crater some 65 million years ago. More amazing still, many scientists actually credit this as the (or one of the) "extinction event/s" that eventually wiped out the dinosaurs. Call it a gift from the heavens (unless, that is, you happened to be a God-fearing dinosaur).
With heaven and earth conspiring to deliver such a bounty to the Mexican people, one is tempted, perhaps beyond better judgment, to ask: What could possibly go wrong? Enter Pemex, the nation's state-owned petroleum company. Again, it seems there is no privilege so vast as to render it beyond the destruction of the "people's" government.
Pemex was "created" back in 1917 when, bowing, as politicians seem genetically preprogrammed to do, to public pressure, President Cárdenas embarked on the state-expropriation of all resources and facilities and, in the process, nationalized both United States and Anglo-Dutch companies operating within its borders. Despite international boycotts, Pemex led Mexico to become the world's fifth largest oil-producing nation.
Now, Fellow Reckoner, what do you suppose a wide-eyed group of bureaucrats might do with a plump, oily egg-laying goose? Invest in exploration and development of nearby fields? Farm out some of the work to foreign companies with the necessary expertise and proven track records to bring the stuff to market? Look to secure the future of the voters who put them in office by shoring up the foundation of the nation's largest tax paying company? Ha! Don't make us laugh. Why, they sharpen the cleaver...and sit down to enjoy a one-time-only feast. And after the last feather is plucked and morsel consumed? Hey, this is politics! That's a problem for the next bum to deal with.
Despite annual revenues in excess of $75 billion dollars, Pemex is only able to survive today through its immense borrowing. Pemex pays out over 60% of its revenues in taxes and royalties. Those receipts, in turn, account for around 40% of the federal government's entire budget. As such, the state-owned dinosaur is now over $40 billion in the hole (so to speak) and, to make matters worse, is facing inexorable production decline in many of its fields, including that giant asteroid baby, Cantarell.
"Mexico's oil industry is in crisis," Byron King, the intrepid editor of Energy & Scarcity Investor, recently explained to his readers. "Indeed the grim numbers come from no less a source than the Mexican Energy Ministry. Production statistics make it clear that Mexico's overall oil output is declining rapidly - with the word 'crashing' coming to mind as one views the chart [below].
"After decades of production," continues Byron, "Cantarell is getting long in the tooth. Oil output is declining rapidly. Cantarell is depleting at an astonishing rate. Meanwhile, the yield from new Mexican oil fields is simply not making up the difference."
Cantarell "peaked" around 2003...and only then after a massive nitrogen injection project to boost production. Since then, it's been in steady decline, from a high of 2.9 million barrels per day to just 464,000 per day currently.
"Due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015," concludes Byron. "This looming problem holds dire implications for the national balance sheet of Mexico, as well as - by implication - for US energy and national security."
We can only hope the "next bum" has better ideas about how to maximize Mexico's vast oil potential than all those preceding him. Judging by their track record, that shouldn't take much. Then again, we are talking about politicians here.
[Ed. Note: For his part, Byron spends an inordinate amount of time getting his boots dirty on site in various countries around the world, including visits to Prudhoe Bay, the GOM and around that other "forgotten" continent of natural riches, Africa. If you're interested in learning more about his first class research, especially regarding the explosive potential of the smaller companies he follows, you can check out his latest Energy & Scarcity Investor presentation here.]
Needless to say, not all energy projects end with a bunch of blindfolded bureaucrats swinging sticks in the air with the vain hope they will be showered in riches and/or candy. There exist pockets of very real opportunity for forward-thinking investors...provided they know where to look. In today's column, Chris Mayer offers his thoughts on one such homegrown opportunity worth your consideration. He provides the details below...
| | | | Chris Mayer's Special Situations Presents... |
American experts call this unconventional new natural gas recovery program...
"The Biggest Resource Breakthrough Since the 'Beaumont Miracle' of 1901"
But only one of these cutting-edge companies offers you the "secret wealth advantage" I reveal right here...
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| | The Daily Reckoning Presents | | America’s Next Great Commodity Boom | |  | | Chris Mayer |
If you're interested in making money in energy commodities over the coming decade, I have two important numbers for you...
The first is the price of natural gas in the US - which is less than $4.50 per million British thermal units (mBtu). The second is the price of natural gas in Asia, where people will pay $10 per mBtu for natural gas they import from overseas.
This is a disparity someone can make a lot of money on. The only reason it exists at all is that the natural gas market is mainly a local market. It is not as easy to ship natural gas across the seas as it is to ship oil. You have to supercool it so it liquefies. Then you can put it on a tanker and ship it to a terminal where your buyer can re-gasify it. This is the liquefied natural gas (LNG) trade.
There are problems. US energy companies, before the shale gas boom changed everything, thought the US would need to import natural gas. So the US has about 10 LNG import terminals and two more in the works. Now, with a natural gas glut in the US, these terminals are pretty much useless.
Owners of these terminals want to refit the terminals to turn them into export terminals, where the gas is liquefied and shipped out. They are now petitioning the US government for export licenses.
As The Financial Times reported, "The US could soon be competing with Russia and the Middle East to supply the world with natural gas, a shift in production that would reshape energy markets over the next decade." Even if the US exported just 10% of its natural gas, it would become the largest exporter of LNG in the world. Few countries can match the US in natural gas resources or low costs.
So where will the natural gas go? This is an interesting question, because it yields some surprising answers.
I attended the ASPO conference last month in Washington, DC. (ASPO stands for the Association for the Study of Peak Oil and Gas.) One of the more fascinating presentations was by Jonathan Callahan, founder of Mazama Science.
He looked at natural gas through the lens of the import/export markets. This is a good thing to do for any commodity because it can tip you off to what's happening in that market. When China went from being one of the biggest exporters of soybeans to the biggest importer, the effect on the agricultural markets was huge.
Any time a big exporter becomes a big importer, you can bet it spells opportunity for that commodity. China, for instance, remains a big importer of oil and iron ore, which has been good for investors in those commodities. China will very soon become a big importer of coking coal - which is used to make steel. So will India and Brazil. This is good to know if you're an investor, as it will drive demand for coking coal.
So Callahan looked at natural gas through the same kind of lens. He created these charts that capture the natural gas import trends in some of the world's largest economies.
You can see that the UK was an importer of natural gas through the 1980s and 1990s. Then there was the North Sea boost, matched by a step- up in consumption. Finally, as the North Sea supplies dwindle, the UK has gone deep into the red as an importer. This chart exhibits a pattern we see time and time again. Consumption is sticky and stubborn. It doesn't go down much.
Using this same analysis, Callahan looks at all the big producers and consumers of natural gas. The big buyers here are Japan, South Korea, and Taiwan. All of the gas they import comes from LNG tankers.
But what about, say, China? Note that China is flipping from a net exporter to a net importer - which means China is just becoming a net buyer of natural gas. Per-capita consumption, Callahan points out, is only a fraction of China's neighbors'. He predicts - and I agree - China will become a huge importer of natural gas.
Combine China with Japan, Taiwan, and South Korea and Callahan concludes, "Clearly, East Asian demand for LNG will not be letting up anytime soon."
Callahan's data suggest this trend is present all around the world...from the Middle East to South America to Europe.
The impact on the global market seems clear. "If shale gas doesn't turn out to be as prolific as hoped," Callahan wraps up, "we can expect to see increasingly expensive natural gas in the next decade. Forewarned is forearmed." (I encourage you to check out his website - mazamascience.com, where you can see his presentations and read his blog.)
So put together Callahan's data on exports and imports with the glut in the US and the lack of export terminals. I think it's pretty clear we'll see more export terminals in the US. It's too big of an opportunity to ignore. The US could become the leading exporter of natural gas in the next decade.
It's also pretty clear that worldwide, we'll see the LNG trade grow significantly to make up the shortfalls that are emerging in South America, Asia, Europe, and the Middle East.
It's a great time to buy infrastructure firms that build these plants. It's also a great time to look at companies with lots of North American natural gas reserves. With natural gas in the dumps right now, these assets are cheap...but they won't stay that way for long.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Reckoners interested in learning more about one of Chris' favorite natural gas plays are invited to read his in-depth research report, here. The story around this particular opportunity begins back in 1892...with a one-armed bricklayer. (Seriously)
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The New OIL WAR and Why Iran Threatens Your Money...
According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year.
Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue.
Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead...
Click here to watch Byron's value-packed presentation now.
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| | | | Bill Bonner | | The US Federal Reserve: A Bank that Will Live in Infamy | |  | | Bill Bonner |
Reckoning today from Melbourne, Australia...
"A day that will live in infamy..." - Franklin D. Roosevelt
The Dow ended down 19 points yesterday. Gold up $9.
Thanks to the socialist Senator from Vermont, Bernie Sanders, we get to see what the Fed is up to. He insisted on learning where the Fed's bailout money was going. Turns out, not only did billions go to European banks...billions more went to firms in the US that pretended they needed no help.
Goldman Sachs, for example.
Goldman went to the Fed 212 times between March 2008 and March 2009, according to Fed documents. It collected nearly $600 billion.
Morgan Stanley. GE. Citigroup. They were all in on it.
The Fed put out $3.3 trillion worth of credit, buying up speculators' bad bets. Not surprisingly, the price of the bad credits rose. So that now the Fed can say it hasn't lost a penny.
Ha. Ha. What a sense of humor!
Let's imagine that instead of banking and speculating...Goldman was a cabbage grower. And let's say Goldman overdid it. It planted far too much cabbage. The price dropped...and Goldman was on the verge of bankruptcy. So, in comes the Fed...and buys cabbage by the boatload. And what do you know? The price of cabbage goes up. So, the Fed then looks in its warehouse and it finds it owns tons of cabbage. It multiplies the price of cabbage by what it has in inventory. Wow! It hasn't lost a penny!
(For more on the magic of modern central banking...see below...)
The feds are supposed to pursue corrupt operators. But now the feds are at the center of the racket. Talk about infamy? Now, it's right here at home...
How does the racket work? It's very simple. The Fed hands out money to its powerful cronies. Remember, the Fed is a private bank. It serves what is supposedly a public purpose. But it is neither owned nor controlled by the government. Instead, it's part of the banking industry. Its official role is to give the US a trustworthy currency...and (more recently) to promote full employment. You can see how well it fulfilled the fist part of its mission. Consumer prices are up about 33 times since the Fed was formed in 1913.
Or, to look at it another way, a $20 gold piece from pre-Fed days - a one-ounce US gold coin - is now worth about $1,450. How's that for a stable currency?
As to employment... Before 1913, unemployment was virtually unheard of. Why? There was a free market in labor. If you need to work, you took whatever work you could get at the then-prevailing wage. End of the story. There were no subsidies for people who were unemployed. No minimum wages. No safety nets. It was just supply and demand. When demand for labor increased, so did wages. When it decreased, wages went down. Except for brief periods of adjustment, there was no unemployment.
And now? Well, you know the facts as well as we do.
The Fed's real mission now is to make sure the banks stay in business and make a profit. This it does in the simplest way - by transferring money to the banks. How does it get the money? It just prints it up. Who pays the bill? Eventually, taxpayers and citizens...when this new money reduces the value of their old money.
Neat huh? Who complains? Who has a cause of action? Who even realizes what is going on?
The European Central Bank is duplicating this trick in the other part of the Old World. It is buying up the debt of Ireland and Greece. And what ho! The more you buy...the more the price goes up. Pretty soon, the ECB - with hundreds of billions of this paper in its vault - will be able to announce that it too has made money!
But there's a strange smell coming from the central bank vaults. Maybe that cabbage isn't so good after all.
And more thoughts...
It says here in the Financial Review that Australia is boosting its exports of ore to China. It will export more than one billion tons per year.
Wait a minute. At that rate there soon won't be anything left Down Under....
Elsewhere, the Financial Review's man on the scene in Manhattan tells us that "Jobs data spoils recovery hopes."
"A painful reality check," he calls it.
*** Melbourne is an agreeable place. We see it from the dining room...out across the river... There are polished steel and glass skyscrapers...gracious old buildings...tramways...and there is the Melbourne aquarium...a modernist white building with sails as an architectural motif.
People come and go on their bicycles. And on the river, rowers add a Cambridge-like touch of civilized athleticism.
It is nothing like Beijing or Mumbai. There is no hustle. No bustle. No noise to speak of. You can practically hear the rowers' oars as they break water on the Yarra River. Each person has plenty of space. You could drop a Congressman from a helicopter and not hit a single voter.
It seems like a nice place to live...agreeable...calm...but prosperous.
Melbourne's prosperity probably comes largely from selling off bits of Australia - by the pound - to China. When prices for metals are high, Australia rides hide. When they suddenly turn down, so do the faces of Australia's investors and businessmen.
At present, prices for steel and other metals are high. So Melbourne is a happy place.
Smart people save their money in the fat years, knowing that lean years cannot be far off. Currently, Australians are saving about 10% of disposable income.
That's two to three times more than Americans.
*** Colleague Justice Litle sent us this explanation of the modern, enlightened way to manage an economy:
Mary is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Mary's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Mary's bar. Soon she has the largest sales volume for any bar in Dublin.
By providing her customers freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary's gross sales volume increases massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary's bar. He so informs Mary.
Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks' liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Mary's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary's bar.
Now, do you understand economics in 2010? Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Investing in India: Optimism in the New New World
If you’re an Indian investor, I think you can be generally positive about the financial future. Yes, there are bound to be more crises…more corruption scandals…and more disasters. But there’s a trend going on that is probably too big to stop. It’s regression to the mean. India is catching up with the West.
The Pros and Cons of Investing in India
Thinking the Unthinkable | Danger of Deflation Depends on Your Definition of Deflation
John Mauldin of Frontlinethoughts.com reports that “the number of people on food stamps continues to rise. As of the end of August, a total of 42,389,619 people were receiving food stamps under the SNAP program. This was an increase of 553,379 people over July’s number, or an increase month-over-month of 1.32%.”
The Federal Reserve and Its Secret Set of Books
Economic Ruination in Three Words or Less | Fiat Currency Fever: The Causes
It is part religion, part politics. It is a way to voice a lack of confidence in individual freedom, property rights, and free market capitalism. It comes from a yearning for a new socialistic, centrally controlled world that happens to favor the elite who control large financial institutions and corporations, and who also exert powerful influence over politicians of both major political parties.
The Rising Sea of Debt, Part Two of Two
The Rising Sea of Debt, Part One of Two | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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