Wednesday, August 29, 2007


In recent weeks, big oil seems to find one excuse after another not to operate at full capacity. Utilization keeps bouncing around 90%. A fire here and a leak there are the stuff refineries are made of. Refining oil is the process of heating flammable liquids to high temperatures in order to separate the various chemical components. The occasional fire or even explosion is something to be dealt with on a relatively routine basis.

Refinery capacity is growing around the world, including in North America. The expansions include refineries in Indiana and in Illinois. New refineries are under construction in at least two Canadian provinces and are on the drawing boards in at least two states. In the US, relatively small corn oil refineries continue to come on line.

Around the world, many projects are underway. The ones that make the news are the ones that are behind schedule. One former Soviet state has discovered a 7 Billion Barrel field that will begin producing oil in 2010. The big find in Ghana is still a long way from production as is the latest of the Newfoundland fields.


Sooner or later, price cures price. A run up in a commodity price and subsequent crash is not a new event. In the days of Jezebel, something like 600 BC, a prophet correctly predicted that soaring wheat prices would collapse overnight. The trade routes of the ancient world were made for the purpose of importing salt! Can you imagine putting your life and total net worth at risk in order to import salt, one of the cheapest and most common commodities?

I know, I am saying the opposite of what the "big boys" are saying. Lehman Brothers put out a report this week that says energy is in a long term secular bull market. The demand will remain strong for the next decade. I was just a young child when my Daddy taught me not to ask the auctioneer how much to bid. Never-the-less, go to an auction sale early and you will always find people asking the auctioneer how much an item is "worth". Like my Daddy always said, "it is worth what you can sell it for".

I am not saying that Lehman is a bunch of crooks. I am saying that they are likely to have a major position in the oil market and as professional traders they are likely to make more money if they can talk novice traders to take positions. In the short run, trading is less than a zero sum game. The brokers take their commissions and spreads to the bank. If you guess wrong and they guess right, their total profits are increased.

Remember that the market is an opinion poll in the short run but a weight machine in the longer run. The current bounces in the oil market say little about the new world of the months ahead, when more and more production projects come on line and when more and more substitutions lead to demand destruction.

I believe the reason oil supplies in the USA are dropping is because the "big boys" are in no rush to buy at today's price. There is no need to keep the tanks full with plenty of available supplies and OPEC pushing on a string. Unlike two years ago, both OPEC and the refineries have excess capacity. Yes, the possibility of detestation from a hurricane is real but the season will be more than half over in two weeks and so far there has been no major event.