Archive for January, 2007

January 23, 2007

Cheap Oil and the Promise of Ethanol

Thomas G. Brown |

Headline of article in my local paper (Center Daily Times) reads “Cheaper Oil on Tap in ’07, Experts Say.” This article list a number of reasons such as increased supply, and a mild winter and hurricane season as some of the contributers to cheap oil. It also goes on to state that with lower fuel prices will result in lower transportation cost. Most airlines lock in a price for fuel in contracts for future delivery of jet fuel. Basically transports will have little incentive to drop prices since they will not see a decrease in costs if fuel stays low.
Anyway I just don’t see oil prices staying low or dropping to $30 a barrel as Phillip Verleger an oil economist states in the article. I guess the fact that 62% of the worlds proven oil reserves are in the unstable Middle East doesn’t factor into the cost of oil. With the war in Iraq dragging on day by day and a conflict with Iran looming. Oil supplies at some point will tighten as the region falls apart faster then a Britney Spears marriage!!!
The lack of new refiners alone will prevent fuel cost from dropping. The U.S. has not seen a new oil refinery come online in my lifetime (29 years). A couple have been proposed in New Mexico but have been met with resistance. Even it these refiners get approval they will not go online for several years. This being the case more and more refined oil products are imported into the U.S. and are not included in the oil import statistics.

Corn Ethanol

Ethanol according to many is our savior when it comes to reducing our dependency on foreign oil. The old saying “if it looks to good it probably is” applies here. Let’s look at the energy output of ethanol versus gasoline. A gallon of ethanol provides 59.5% the energy that a gallon of gasoline will produce. This alone should make us question the viablity of this plan. But if your not convinced maybe the fact that the rise in corn prices will set off a whole new set of problems for the US economy. This first that comes to mine…higher prices will entice farmers to grow more corn. This will increase the use of petroleum products such as fuel for tractors and fertilizer production. Also, food products that use corn and corn derivatives will increase in cost for consumers marginalizing any cost benefit if any from ethanol use. Ethanol maybe a good part of an overall plan but it should not be a cornerstone of a plan for energy independence. In addition a better product to use for ethanol production would be switch grass which grows wild and on marginal land that is not suitable for other crops.

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January 9, 2007

The Effects the Real Estate bubble is having on the Economy

Thomas G. Brown |

It is interesting to see the residential housing market take on some of the characteristics of the tech bubble of the 1990’s. Everyone and their cousin jumped in head first to get rich through the act of flipping houses with “shaky” financing. Adjustable Rate Mortgages (ARMS), Interest only Mortgages and a host of other creative ways to buy homes for next to nothing up front. It all seemed like a viable way to finance home that would be owned short term. But as this pool dries up not only will these folks break there preverbal necks but the damage will and is being felt throughout the economy.

Let’s look at the numbers from the National Association of Realtors to see the signs housing is slowing down by comparing October numbers from 2005 to this year are as follows, inventory in the market shot up 26% from 2,846,000 to 3,854,000. This indicates that homes are harder to unload onto the market then they where just a year ago. So those folks who purchased homes in a mad dash to millionaire status are stuck holding the bag i.e. mortgages that are only going to increase in cost while the property itself will most likely lose value. This inability to sell quickly requires owners to pay mortgages longer than anticipated for homes they have no intention of living in, eroding any potential profits day by day.

In addition the median sales price of existing homes has decreased 3.5% during the same time period of October 2005 to October 2006. The median price dropped from $229,000 to $221,000 nationally. This looks like it will only get worse in the coming months ahead as an additional $1 trillion in loans are set to readjust in 2007.

As I stated at the beginning this will effect more than just the home owners. We will see it in unemployment numbers starting with construction and in related jobs. With all this money being lost their will be less for the American Consumer to spend on goods and services. Today the number of US unemployment claims where released by the Labor Department. At 357,000 they are highest in over a year.

Let’s look at two national home builders to see what they can tell us about this situation. The nation’s largest luxury home builder Toll Brothers chart shows the RSU is trending bearish as it hovers just below 70 at 68.59 as of 11:59 am today. In addition the stock is rising but on decreasing trading volume. Leading me to believe that we are seeing a slow down in the building of new homes and the housing market in general.

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We can also look at the seventh largest builder of home in Beazer Homes USA, Inc shown below. The volume of this stock is low and the Relative Strength Index seems to be pointing to a bearish reading that continues above 50. The price as I look at it at !:14 pm is increasing but at a relatively low volume 2.5 million.

In addition to the charts we have the CEO of Toll Brothers, Robert Toll stating on a conference call on November 7, 2006 (Bloomberg Caroline Blaum) that buyers have lost confidence in the home market.

This will also reduce spending by consumers creating a fun little cycle…….like the circular motion of water down the toilet bowl. Well the next couple of months and years shall be interesting to watch (if your into horror shows). Have a cocktail and a good Thursday.

January 8, 2007

NIMBY and Environmentalist role in energy independence

Thomas G. Brown |

NIMY (Not In My BACKYARD)……….this is probably the most destructive acronym to the U.S. in terms of becoming more energy dependent. Everyone wants wind power but no one wants to have the windmills in their back yard. Take an out of country example ……Donald “Don’t say I went bankrupt” Trump late last year. He purchased a golf course in Scotland and threw a fit when the talk of windmill Construction of it’s shore came about. There is also, Ted Kennedy the senator from Massachusetts whom fought to stop windmills from corrupting the the view from the Cape.
Natural supplies are also effected by this attitude of anywhere but near my house. Re gasification plants are in short supply and with more natural gas coming from abroad these plants are needed on our coasts. This is due to natural gases need for liquidation before shipping can occur. Our re gasification plants are at or near capacity.
Oil is another problem in that we do import a majority of are oil but the statistics only paint part of the picture. We are increasingly importing refined petroleum products such as diesel and gasoline. This is due to the last new refinery coming on line when I was just born. I may not have a genius IQ but I can figure out that production needs to keep up with demand. In addition the new discoveries of oil are increasingly high sulfur crude which takes more time and energy to refine. Another blockage to weaning ourselves of oil from unstable parts of the world is the government impairment of drilling of the coasts, particularly the Gulf of Mexico. This despite the Chinese drilling just 50 miles away of the shores of Cuba. Also, the Alaska National Wildlife Reserve (ANWAR).
Nuclear energy has been taboo in the United States for several decades and unfairly so. I will expand on nuclear energy at a later date. Nobody wants one in their backyard but I we got the majority of our electrical energy from nuclear power this would not only reduce oil consumption but stop the production of green house gases…..preventing what environmentalist are working for (at least I think so most days) cleaner air. This all I have for this week as I am in the hospital for abdominal problems. Hopefully out this week……yummy beef broth and jello for dinner!!!! Have a good week.