Agora Financial’s Rude Awakening

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Dubai, UAE

• A big picture perspective of the world’s depleting energy supply,
• The “slow volcano” that could power every light in San Fran,
• Is oil half price at a hundred bucks? All that and no bag of chips…

Joel Bowman, coughing and spluttering, reports from the Dubai Air Show…

You’re not likely to see Maurice Flanagan parading out front of any global
warming rallies in the near future…unless he’s there to throw tomatoes at
them.

“Don’t talk to me about global warming… I just do not buy it whatsoever,”
Flanagan, Executive Vice Chairman of Emirates Airline, told a conference at
the recent Singapore Air Show.

“Al Gore’s Inconvenient Truth is absolute rubbish,” he said, adding, somewhat
strangely, that he had seen the film three times.

Fast forward to this week’s air show in Dubai and Emirates have again stolen
the headlines with the largest ever purchase in aviation history; a $34
billion quiver of Airbus A380s, Boeing 777s and sundry smaller planes.

But rival Qatar Airways has used the comments made by Flanagan to steal a
little of the spotlight for themselves.

Yesterday, Qatar Airways Chief Executive Officer Akbar Al Baker announced his
company had entered into a landmark agreement with key players across the
aviation, fuel and educational sectors to power its aircraft with natural
gas. The move will make QA the first commercial airline operator in the world
flights using gas-to-liquids kerosene fuel – a move that will no doubt
appease some of the angry global warming mob.

Speaking at a press conference yesterday afternoon, Al Baker told reports,
“There is a huge movement lobbying for the reduction in carbon emissions to
make for a cleaner and safer environment.”

“The aviation industry has been at the centre of this highly topical debate.
We as industry leaders gathered here at this press conference are committed
to this cause and today’s move highlights how serious we take this important
issue.

“Together with our partners,” crooned Al Baker, “we will all work in close
collaboration to study the use of synthetic jet fuels, or GTL kerosene in our
drive towards a cleaner and safer world. And we at Qatar Airways look onward
to becoming the first airline in the world to power commercial aircraft with
natural gas.”

So what’s behind Qatar’s switch? Forgive our cynical nature here, but
corporate execs are not typically the role models for aspiring young Rainbow
Warriors.

We can only guess as to his motives, but one thing’s for sure, corporate
execs don’t simply go green to appease a few hippies in the audience. They do
it for the cash. Could Mr. Al Akbar have simply been scared into action by
what he sees on the horizon for oil prices?

Doug Casey has a few words from on the subject…

The depletion of the world’s cheap hydrocarbons is now a foregone conclusion.

The timing of when this goes from being a nuisance to a problem to a full-
blown crisis is difficult to gauge, but peak oil, as an argument, is the
correct argument. The U.S. reached its peak oil production in 1971, and I
have no doubt that the world will do so within a generation, more than likely
encouraged by more blunders in the Middle East.

Speaking as an investor, the question at this point is not ‘will there be
another energy crisis?’ The question is ‘how can I profit from it?’ Below,
Chris Gilpin from our Casey Energy Speculator research team gives you a
better idea of why oil prices and energy stocks are headed higher, and how
you might profit.

This is an important time to stop and check your premises on oil, because
getting it right can be extraordinarily profitable.

You’ll catch Chris’ full column below…

—– Byron King’s Energy & Scarcity Investor —-

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————————————————–

Is $100 Oil Cheap?
By Chris Gilpin

Remember when most professional investors griped that $40 per barrel crude
was “overpriced,” and then that $60 crude was “unsustainable,” and then that
$80 crude would “never happen.” But here we sit with oil soaring past $90 and
looking like it wants to take out $100.

We think crude oil will take out $100, and then continue higher from there.
Sure, crude may decline in the short term, but the destination is clear: much
higher prices. That may be bad news for the U.S. economy, but need not be bad
news for you, assuming your money is in the right place. So what’s the right
place? Let’s start with the big picture…

Simply put, the Earth is running out of that magic combination of oil that is
both high quality and cheap to extract.

Twenty years ago, a dozen fields produced a million or more barrels of oil
per day. Now there are four, and one of them, Mexico’s Cantarell in the Bay
of Campeche, is collapsing. Mexico’s state-owned oil company, PEMEX, projects
Cantarell’s output will decline 14% per year from now on. That’s the best-
case scenario. 2006 actual production from the aging field actually fell 27%!
If PEMEX’s worst-case forecast comes true, Cantarell will soon break below
one million barrels a day, leaving the world with just three million-barrel-
a-day fields by the end of this year.

Taking the place of these former big producing fields are deposits that are
complicated and capital intensive: the tar sands of Alberta, oil shale in
America, heavy oil in Venezuela and resources in the Arctic. These non-
conventional resources are very expensive to operate.

For perspective, North Africa’s conventional oil reserves can be pumped out
of the ground for only $4 per barrel. But the average cost in the tar sands
is estimated at $28 per barrel, and oil shale costs can be upward of $40 per
barrel. It doesn’t take a genius to see that the more we are forced to rely
upon non-conventional oil, the higher the prices will have to be.

And you know already that competition to buy that barrel is only going up.
China and India are elbowing their way onto the global stage, and bidding for
their share of Middle Eastern oil. A supertanker of crude is as popular as a
New York taxi at rush hour; everyone is trying to wave it over their way.

We’ve reached a turning point in terms of the supply-demand fundamentals of
crude. Even Chevron’s CEO David O’Reilly recently announced, “One thing is
clear: the era of easy oil is over.”

Your average economist will tell you that once you correct for inflation,
crude prices reached their actual peak in 1980 during the energy crisis
spurred by the Iran-Iraq war. From April to July of that year, a barrel of
oil sold for US$39.50. Using the government consumer price index (CPI)
numbers, that record-high price per barrel is estimated at between US$90 –
US$102 in today’s dollars.

But those CPI numbers are highly suspect.

John Williams of Shadow Government Statistics (www.shadowstats.com) is one of
several specialists who independently tracks financial data in an attempt to
provide a more honest picture of the economy. Williams recalculates the CPI
so that it is more of a continuum with its earlier versions – unlike the
government, which fiddles the formula whenever it decides it needs to. If
nothing else, undoing the many changes in the CPI formula over the years
allows us to compare apples to apples on price inflation, rather than apples
to genetically modified pumpkins.

Track the current CPI the way it was calculated in 1980, and today’s
inflation rate is about 7% higher than the current “official” CPI statistics.
So, rather than inflation running at less than 3% as the government would
like us to think, based on Williams’ calculations it is really closer to 10%.

Casey Research’s chief economist, Bud Conrad, has confirmed with his own
calculations that indeed this figure is a much more truthful estimate of
where inflation actually is. Using shadow stats, Bud has calculated the oil
price history using the 1980 CPI method. It turns out that 1980 barrel of
$39.50 crude is the equivalent of over $200 per barrel in today’s anemic
dollars.

In that context, crude prices are nowhere near their all-time high, and $100
oil still looks to be quite cheap.  With all that is going on in the Middle
East today, where the world still gets much of its oil, and combined with
increasingly proof – as per Cantarell – that peak oil is upon us, the odds
are better each day that oil is going much, much higher.

There are other potential shocks to the energy market lurking in the wings.
For instance, faced with the depletion of Cantarell, how long do you think
the Mexican government will continue to allow the unrestricted export of
their country’s oil to the U.S.? We could wake up as early as tomorrow to
find a quota in place.

Another way to view the big picture is to examine the weighting of different
sectors within the S&P500 over time. With his background in advanced
mathematics, Casey Energy Speculator’s chief investment strategist, Marin
Katusa, has used this method successfully to assess market dislocations. By
looking at the relative size of the various components of the S&P 500 vis a
vis each other in modern times, you can readily see when certain sectors are
significantly out of step with historical norms.

Viewing Marin’s chart below, you can see the weighting of the energy sector
grew most during the 1979-80 energy crisis, reaching a relative peak of
almost 30% of the value of the S&P 500. Since that time, energy’s share
dropped for two decades since. Only recently, as oil prices have surged,
energy stocks have also surged – becoming an even larger portion of the S&P
500. However, even though energy stocks represent a larger proportion of the
S&P 500 than they did in 1999, they are still far from their former
prominence.

Interestingly, the biggest run has been experienced by the financial sector,
which has expanded from 5% to 20% in the last 30 years, catalyzed by the
expansion of credit and lax governmental monetary policies. That trend now
appears to be reversing.

It’s also easy to see how the Internet bubble distorted the stock market. At
that time, tech stocks rose to occupy over one third of the worth of the S&P.
During the last energy crisis, the energy sector grew to a similar size. The
current weighting of 9.3% demonstrates that energy stocks have yet to make
their big run. The bull market has been good to all sectors, with only
financials starting to take a hit, but, as the burgeoning energy crisis gains
momentum, energy companies could very well regain the status that they held
in 1979-80.

It’s also worth noting that there is a significant negative correlation
between the energy and the financial services sectors. They move in opposite
directions 79% of the time: that is, as one increases, the other decreases
very nearly four out of five times. Mathematically speaking, that’s one
robust relationship. With financials reeling from the credit crunch, this
technical indicator shows that energy stocks are poised to advance.

As the petroleum age reaches a tipping point, the United States, as the
world’s largest oil importer, is in an unenviable position. Individual
investors need not be similarly disadvantaged, however. The first step to
protect your wealth is to see the prices of crude oil and energy stocks in
their proper historical context. Ninety dollars per barrel is not a peak
price; it is only a precursor of peak oil’s influence.

The significant gains we’ve witnessed in certain energy stocks are nothing
compared to the gains we will witness as the next energy crisis comes into
full effect.

[Joel's Note: Chris Gilpin is a member of the Casey Research, LLC. energy
research team and a contributing editor to the Casey Energy Speculator, a
monthly newsletter dedicated to unbiased reporting on rational speculations
in the shares of small-cap companies targeting oil, gas, uranium and other
energy sources… companies with the very real potential to offer 100% or
better returns over a short time horizon.
 
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Rude Endnote: What? You don’t hear that? Man, there’s nothing like an air
show to get your ears ringing. Better write your comments down and mail them
in, we can’t take calls in this state. Send emails to the address below.

We’re off to the show again today. Look out for your 5, arriving shortly.

Cheers,

Joel Bowman
Rude Awakening