Wednesday, May 28, 2008


Companies that consume more energy than they produce, most companies, will enjoy the massive new oil discovery. The cost of fuel is going to trend down as production from a new 235 billion discovery is rapidly developed. The construction of pipelines to carry the fuel has already started. Some of the contracts to develop the fields have already been let.

Last month, Iraq's listed oil reserves were 115 Billion Barrels. This month, based on updated technology being applied in Iraq, the reserves were raised to 350 Billion Barrels. In the coming months, an all out production assault on Iraqi oil fields, large and small, is going to occur. Up north, a deal is brewing between the Kurds and the Iraqi government. The Kurds will give up on their plan to annex the disputed area of Kirkuk in exchange for being permitted to manage the development of their fields. Get this deal done and a lot of development will move forward. By the first week in November, progress will have been made.


Politicians have long treated Americans as uninformed stooges who can be brainwashed and manipulated. To a large degree the politicians have been correct. Politicians have learned the old psychological trick that if a number of "leaders" repeat the same falsehood time and time again, it becomes truth. The current lie being told is in regard to high oil prices. The congressional leaders are all point one finger toward someone else. They should remember that when you point one finger you point three back at yourself.

Some politicians are pointing a finger at oil companies, others at oil rich countries and others at George Bush. Hillary blames the oil companies and her solution is to tax them more. Econ 101 tells us that if you tax something you get less of it. Mark Perry wrote in the IBD yesterday about how a windfall profits tax in the 1980's resulted in lower US oil production. A "breakout" is occurring in nuclear power. The proposed taxes on CO2 (the cap and trade system), will cause an even faster dash toward nuclear.

The story that grabs my attention is that Chuck Schummer, the other senator from NY, repeats the story that a 1 million barrel per day increase in oil from Saudi Arabia would lower the price of gasoline by 25 cents per gallon. His fellow democratic senators like to say that production from ANWAR would produce a 1 cent per gallon reduction in the price of gasoline. I wish Schummer would explain to us why the Saudi production would save 25 cents while the same amount of Alaskan production would save only 1 cent.


The truth is likely to be somewhere between a penny and 25 cents per million barrels per day and net new production should be over 3 million per day by the end of 2008 and over 6 million by the end of 2009. If the midpoint of 13 cents per gallon is used, the price of gasoline should fall by 39 cents this year and by 78 cents over two years. If Schummer's is correct, the reductions should be 78 cents and $1.56. By 2010, new production would be more than 10 million gallons per day.

No one can forecast market supply, demand or price to much certainty, but the discovery of billions of barrels of oil off the cost of Brazil, billions of barrels in the Gulf of Mexico, billions of barrels in the Bakken, billions of barrels in Iraq, etc. makes it appear that supplies are plentiful.

The drop off in miles auto miles driven in March in the USA was the largest in recorded history. The pressure on centrally planned governments to cut back on fuel subsidies is intense. Many economies have show signs of slowness. The destruction of demand is real. With supplies up and demand down, prices should fall. A fall in prices will be like a powerful tax cut. Where will this money be spent?

When the price declines, the public will not run out to buy SUV's. Consumers almost always spend the bulk of new found dollars. A lot of companies will benefit from the decline in the price of oil. The stock market is set to rise!