Crude oil and other energy products are quoted on the New York Mercantile Exchange, a vast commodities pit with giant, wall-to-wall screens that is also a market for metals like copper and gold. Traders at the Merc buy and sell oil for future delivery, and the price on the Merc serves as the reference price for oil shipments around the world. In other words, when a refinery contracts to buy crude oil from, say, Saudi Arabia, it generally agrees to pay the price on the Merc less a certain differential. (The discount depends on the quality of the oil being shipped.) Approximately 500,000 crude-oil futures contracts, representing 500 million barrels, trade on the Merc each day. By comparison, the world uses only 86 million barrels of oil daily. Though in theory the price on the Merc reflects the underlying supply-and-demand trends, on any given day the futures market often wags the physical market, not the other way around.

{ NY Times | Continue reading }

artwork { Roy Lichtenstein, Crak! Now, Mes Petits… Pour La France!, 1963 }

A humble fungus could help oil companies clean up their fuel to meet tightening emissions standards. The fungus, recently discovered in Iran, grows naturally in crude oil and removes the sulphur and nitrogen compounds that lead to acid rain and air pollution.

Worldwide, government are imposing increasingly severe limits on how much of those compounds fuels can contain. Oil producers are searching for more efficient ways to strip sulphur and nitrogen from their products.

The standard way to “desulphurise” crude oil involves reacting it with hydrogen at temperatures of 455 °C and up to 204 times atmospheric pressure (roughly 21 million pascals or 3000 psi). It achieves less than perfect results.

Micro-organisms able to metabolise sulphur and nitrogen have the potential to achieve the same endpoint under more normal conditions. In recent years a number of researchers have isolated desulphurising bacteria.

But Jalal Shayegan and his team at the Sharif University of Technology in Tehran, Iran, have now discovered and isolated a fungus that appears able to remove sulphur from oil with greater efficiency.

{ NewScientist | Continue reading }

We don’t expect OPEC to aggressively defend oil prices above $60/b, since higher prices slow economic and demand growth, which are not in OPEC’s best interests. (…) The oil market is not a free market, since 55% of world oil supply is controlled by OPEC and Russia.

{ via Naked Capitalism | Continue reading }

The Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal — including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department’s inspector general, Earl E. Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government’s largest sources of revenue other than taxes.

“A culture of ethical failure” pervades the agency, Mr. Devaney wrote in a cover memo.

The reports portray a dysfunctional organization that has been riddled with conflicts of interest, unprofessional behavior and a free-for-all atmosphere for much of the Bush administration’s watch.

{ NY Times | Continue reading }

photo { Alice Dellal, goddaughter of famed fashion photographer Mario Testino. }

At a certain point, the falling dollar and runaway Oil prices are going to have to take precedence over the economy and credit crunch.

Are we getting closer to that point?

This morning, Crude touched $143.67.

{ Barry Ritholtz }

Read any news outlet. They’ll tell you that since all that energy is required to get splinters into my finger, it’s Armageddon and we’re all gonna die in an inflationary tsunami.

It’s true I didn’t enjoy paying $4.07 per gallon to go to the lumber yard. But I need pine to make furniture. And I paid 34% less for it this week than I did exactly one year ago. Same quality. Same vendor. Same everything.

A fluke? Not hardly. I bought the same thing two years ago, too, of course. I paid 32% less than 2006. Same place. Same quality.

By any measure of what goes into the cost of a board foot of pine, I should have paid a lot more now. But like most things economic, you can’t figure out anything by reading the papers. A lot of it is borderline counterintuitive, or obscure, anyway. The demand for lumber to construct housing is down, so the price is not goosed by any boom. Everybody sharpens their pencil a bit. But there are other factors in play.

Any news article you see that outlines inflationary pressures based solely on the price of raw commodities, without discussing productivity or other concurrent economies of cost, is written by, and aimed towards, a fool.

Just like the lumberyard, and the yards that supply them, I’ve had all sorts of pressures put on me that might make what I produce more expensive. But at the same time, I’ve had all sorts of labor and material saving devices come into the picture.

{ Sippican Cottage | Continue reading }

There are those who argue that our energy independence can be found in trash. (…)

What we are about here are the 251 million tons of municipal waste that we as Americans created in 2005, according to the Environmental Protection Agency, and the 5.1 billion barrels of oil we imported that same year, according to the Department of Energy.

Until the late 1960s most American cities burned their trash, which was highly efficient at reducing the trash volume by more than 90 percent, yielding ash that was relatively small and easy to dispose of under the prevalent rules of that time.

Then came the Clean Air Act, which made burning asbestos and DDT and PCBs and various heavy metals a no-no, so we started burying our trash in landfills, which requires a lot more effort and a lot more land — so much land that many large cities are running out of places to stash their trash. Recycling helps reduce the volume of trash, but it requires labor, costs more than it earns, and most of the stuff that could be recycled is missed. We need something better than burying our trash in landfills.

As an aside, many products that were designed in the 1960s for easy incineration are designed today for easier digestion in landfills. Disposable diapers are a good example of such a product.

Eric and Andrew Day propose going back to burning our trash, but instead of using open-air incinerators or even high-temperature Basic Oxygen furnaces, they like the idea of burning our crap in electric plasma furnaces at temperatures in excess of 15,000 degrees Celsius. Take everything that would have gone to the landfill, add to it, if you like, everything that would have been recycled, and even leave in the really bad stuff like medical waste, toxic waste, heavy metals, and radioactive waste. Grind it all up into little chunks, some of which could be in a chemical or water slurry, and pump it into the plasma furnace.

Plasma furnaces have been around for decades and are already used for disposing of medical waste in Japan. Most such furnaces are fairly small, though the Days have found one manufacturer that can make a plasma furnace capable of burning 100 tons of trash per day. (…)

Dividing 251 million tons of municipal trash by 365 days by 100 tons per furnace says we’ll need 7,000 such furnaces to burn all of America’s trash. That doesn’t really sound like a lot of furnaces to me. (…)

Their claimed net production from each ton of municipal solid waste:

112 pounds of hydrogen
55 gallons of biodiesel
a little electricity
926 pounds of oxygen

(…)

Multiply all these numbers by 251 million tons of solid waste and convert them, where possible, into equivalent barrels of oil and it comes down to about 2.6 billion barrels per year if all waste treatment facilities were so converted. That’s half of our current oil import volume.

{ Robert X. Cringely | Continue reading }

Even with record-high oil prices, about two-thirds of the oil in known oil fields is being left in the ground. That’s because existing technologies that could extract far more oil–as much as about 75 percent of the oil in some oil fields–aren’t being widely used, according to experts in the petroleum industry.

Several well-established technologies, including “smart oil fields,” exist that could significantly boost the supply of petroleum from oil reservoirs. But a lack of investment in such technologies, particularly by the national oil companies that control the vast majority of the world’s oil reserves, is holding back implementation. When oil is drawn from a field too quickly, or from a bad location, or with the wrong kind of well, large amounts of oil can be left behind, says Richard Sears, a visiting scientist at MIT who has served as a vice president for exploration at Royal Dutch Shell, based in the Netherlands. But the best technologies for managing an oil field require up-front investment–when an oil field is mapped and characterized and the first wells are drilled–and the payoff can take decades.

{ MIT/Technology Review | Continue reading }

related { With no end in sight for elevated gas prices, G.M. announced drastic cuts in production of SUVs }

image { Will Lorin & Lorin Frank Productions, Music to Drill Oil Wells By, 1963 }

The bandit pulled his truck to the back of a Burger King in Northern California one afternoon last month armed with a hose and a tank. After rummaging around assorted restaurant rubbish, he dunked a tube into a smelly storage bin and, the police said, vacuumed out about 300 gallons of grease.

The man was caught before he could slip away. In his truck, the police found 2,500 gallons of used fryer grease, indicating that the Burger King had not been his first fast-food craving of the day.

Outside Seattle, cooking oil rustling has become such a problem that the owners of the Olympia Pizza and Pasta Restaurant in Arlington, Wash., are considering using a surveillance camera to keep watch on its 50-gallon grease barrel. Nick Damianidis, an owner, said the barrel had been hit seven or eight times since last summer by siphoners who strike in the night.

“Fryer grease has become gold,” Mr. Damianidis said. “And just over a year ago, I had to pay someone to take it away.”

Much to the surprise of Mr. Damianidis and many other people, processed fryer oil, which is called yellow grease, is actually not trash. The grease is traded on the booming commodities market. Its value has increased in recent months to historic highs, driven by the even higher prices of gas and ethanol, making it an ever more popular form of biodiesel to fuel cars and trucks.

In 2000, yellow grease was trading for 7.6 cents per pound. On Thursday, its price was about 33 cents a pound, or almost $2.50 a gallon. (That would make 2,500-gallon worth more than $6,000.)

{ NY Times | Continue reading }

related { Donate blood, get a chance to win $750 gas card }

According to the latest data from the US Department of Energy, the United States is importing 12-14 million barrels of oil per day. At a current price of about $115 per barrel, that’s $1.5 billion per day, or $548 billion per year. This represents the single largest contribution to America’s balance-of-payments deficit, and is a leading cause for the dollar’s ongoing drop in value. (…)

While our economy is being depleted of these funds, at a moment when credit is scarce and economic growth has screeched to a halt, the oil regimes on which we depend for our daily fix are depositing their mountains of accumulating petrodollars in “sovereign wealth funds” (SWFs) - state-controlled investment accounts that buy up prized foreign assets in order to secure non-oil-dependent sources of wealth. At present, these funds are already believed to hold in excess of several trillion dollars; the richest, the Abu Dhabi Investment Authority (ADIA), alone holds $875 billion.

The ADIA first made headlines in November 2007 when it acquired a $7.5 billion stake in Citigroup, America’s largest bank holding company. The fund has also made substantial investments in Advanced Micro Systems, a major chip maker, and the Carlyle Group, the private equity giant. Another big SWF, the Kuwait Investment Authority, also acquired a multibillion-dollar stake in Citigroup, along with a $6.6 billion chunk of Merrill Lynch. And these are but the first of a series of major SWF moves that will be aimed at acquiring stakes in top American banks and corporations. (…)

Foreign ownership of key nodes of our economy is only one sign of fading American superpower status. Oil’s impact on the military is another.

(…) The US Department of Defense is the world’s single-biggest consumer of petroleum, using more of it every day than the entire nation of Sweden. (…)

Every day, the average GI in Iraq uses approximately 27 gallons of petroleum-based fuels. With some 160,000 American troops in Iraq, that amounts to 4.37 million gallons in daily oil usage, including gasoline for vans and light vehicles, diesel for trucks and armored vehicles, and aviation fuel for helicopters, drones, and fixed-wing aircraft. With US forces paying, as of late April, an average of $3.23 per gallon for these fuels, the Pentagon is already spending approximately $14 million per day on oil ($98 million per week, $5.1 billion per year) to stay in Iraq. Meanwhile, our Iraqi allies, who are expected to receive a windfall of $70 billion this year from the rising price of their oil exports, charge their citizens $1.36 per gallon for gasoline.

When questioned about why Iraqis are paying almost a third less for oil than American forces in their country, senior Iraqi government officials scoff at any suggestion of impropriety. “America has hardly even begun to repay its debt to Iraq,” said Abdul Basit, the head of Iraq’s Supreme Board of Audit, an independent body that oversees Iraqi governmental expenditures. (…)

Certainly, however, our allies in the region, especially the Sunni kingdoms of Kuwait, Saudi Arabia, and the United Arab Emirates (UAE) that presumably look to Washington to stabilize Iraq and curb the growing power of Shi’ite Iran, are willing to help the Pentagon out by supplying US troops with free or deeply-discounted petroleum. No such luck. Except for some partially subsidized oil supplied by Kuwait, all oil-producing US allies in the region charge us the market rate for petroleum.

As far as they’re concerned, we’re now just another of those hopeless oil addicts driving a monster gas-guzzler up to the pump - and they’re perfectly happy to collect our cash which they can then use to cherry-pick our prime assets. (…)

President Bush believed that he could convert an impoverished and compliant Russia into a major source of oil and natural gas for the United States - with American energy companies running the show. This was the evident aim of the US-Russian “energy dialogue” announced by Bush and Russian President Vladimir Putin in May 2002. But if Bush thought Russia was prepared to turn into a northern version of Kuwait, Saudi Arabia, or Venezuela prior to the arrival of Hugo Chavez, he was to be sorely disappointed.

Putin never permitted American firms to acquire substantial energy assets in Russia. Instead, he presided over a major recentralization of state control when it came to the country’s most valuable oil and gas reserves, putting most of them in the hands of Gazprom, the state-controlled natural gas behemoth.

Once in control of these assets, moreover, Putin has used his renascent energy power to exert influence over states that were once part of the former Soviet Union, as well as those in Western Europe that rely on Russian oil and gas for a substantial share of their energy needs. In the most extreme case, Moscow turned off the flow of natural gas to Ukraine on January 1, 2006, in the midst of an especially cold winter, in what was said to be a dispute over pricing but was widely viewed as punishment for Ukraine’s political drift westwards. (The gas was turned back on four days later when Ukraine agreed to pay a higher price and offered other concessions.)

Gazprom has threatened similar action in disputes with Armenia, Belarus, and Georgia - in each case forcing those former Soviet SSRs to back down.

{ Michael T Klare/Asia Times | Continue reading }

artwork { Jean-Michel Basquiat, Peruvian Maid, 1985 | acrylic and oil painstick on wood }

There is something puzzling about the price of oil. It is high and rising. I think there are a couple of good reasons why the price is high. First, demand is growing fast (in part because of growing demand from emerging markets), and new discoveries of oil have slowed down. Second, low real interest rates keep the price high. That is standard economic theory. An easy way to understand this is that when the real interest rate is low, producers have less incentive to take oil out of the ground. If they sell the oil today, what will they do with the money they earn? They’ll get a low rate of return, so they might as well keep the oil in the ground and sell it later. This restricts current supply and drives the price up today. Real interest rates have been low for a variety of reasons that have been widely discussed – U.S. monetary policy, a world saving glut, etc.

I can understand why market fundamentals make the price of oil high – but why is it rising? Let me explain this question. Oil is a durable, storable commodity. If the increase in excess demand is expected by the markets, it should be incorporated in the price immediately. That is, if the markets have understood for some time that rising demand from emerging markets was squeezing the market for oil, the price should have jumped immediately to reflect those expectations. If markets expected rising demand four years ago, and could calculate that the price would be $120 today, then the price should have been a lot higher than $40 back then. Anyone who bought a barrel of oil in 2004 would have made a 200% return over those four years. But in anticipation of $120 oil prices in 2008, markets should have bid up the price back in 2004.

Economics is an inexact enough science that we can’t know whether $125, or $60, or $200 is the right price based on fundamentals. I don’t know one way or the other what the right price of oil is, but what I don’t understand is the steady increase in the price of oil.

{ RGE Monitor | Continue reading }

screenshot { Toy Story, 1995 }

Jeffrey Brown is someone you should know. That’s because he can help you understand today’s high energy prices and that, as an investor, can make you a lot of money.

I’ll introduce to you to Jeff Brown in a moment. But first, as it’s relevant to the discussion, I want to touch on an important concept related to investing in challenging times.

You might call it “the Davy Crockett principle” in honor of something that American icon said during the War of 1812: “Be sure you are right and then go ahead.”

Simply, it’s critical to step away from all the noise and clutter that passes for knowledge on the financial talk shows, and take the time to be very sure you are investing in close concert with a powerful unfolding trend. That accomplished, come what may, you’ll come out okay once the dust has settled.

And the earlier you can get on board with a trend, the more money you can make.

In fact, Casey Research chief economist Bud Conrad has shown how, by making just four trades over the last four decades — into exactly the right sector at the beginning of a strong new trend — you could have turned $35 into $150,000. Or $350 into $1,500,000 … or $3,500 into $15 million. And that assumes you don’t use leverage. Toss in some options or futures and the returns run exponentially higher. Here’s the chart.

{ David Galland/Investor’s Insight | Continue reading }

You very likely own stolen goods. The gas in your car, the circuits in your cell phone, the diamond in your ring, the chemicals in your lipstick or shaving cream — even the plastic in your computer may be the product of theft. Americans buy huge quantities of goods every day that are literally stolen from some of the world’s poorest people. These thefts are permitted — indeed encouraged — by an archaic rule of international trade that violates the most fundamental rule of capitalism: to protect property rights.

Tracing these stolen goods back to where the thefts occur lands us in some of the most wretched places on earth. What these countries have in common is an abundance of natural resources and plentiful political violence and corruption. All suffer from what Joseph Stiglitz and Jeffrey Sachs call “the resource curse.” Here dictators and insurgents sell off the country’s resources to foreigners, terrifying the people into submission while keeping the wealth for themselves.

The lavishly tyrannical Teodoro Obiang of Equatorial Guinea has become richer than Queen Elizabeth II by selling off the country’s oil and gas while killing or menacing anyone who might try to stop him. Obiang is the kind of dictator who has not shied from having himself proclaimed “the country’s God” on state-controlled radio, or from having his guards slice the ears of political prisoners and smear their bodies with grease to attract stinging ants. Obiang sells two-thirds of Equatorial Guinea’s oil to American corporations like ExxonMobil and Hess, and has recently spent 55 million of these petro-dollars to add a sixth private jet to his fleet. His playboy son and heir (who earns $5,000 a year as a government minister) prefers Lamborghinis, and recently spent $35 million on a house in Malibu.

Meanwhile raw sewage runs through the streets of the country’s capital, three quarters of the country’s people suffer from malnutrition, and most citizens are forced to exist each day on what you can buy in America with one dollar. Obiang does not need to worry about the health or education of the population: he gets the money he needs to maintain his despotic rule by allowing foreign corporations to set up offshore platforms to extract the country’s oil.

{ CATO | Continue reading }