Saturday, June 28, 2008

Starting Rumors With Old News

In recent days, rumors have been started right at the peak of oil price moves. The technique being used to start the rumors is to "report old news". If someone ask, "Did you hear that Israel did a practice bombing run?" The next person down the line is given the details about how the Greeks and the Israelis flew practice bombing runs of just the right distance to bomb Iran. Pretty soon, it does not matter that this "practice run" happened three weeks ago or that these joint defense maneuvers had been scheduled two years in advance. It does not matter that Bush is trying to get establish a quasi-embassy in Iran like the one in Cuba. We certainly do not plan to put citizens in the middle of a war zone.

A similar question that went around Friday was in regard to the 172 terrorist who were caught trying to fly airplanes into Saudi Arabian oil facilities. Once the question moved past its original source, the questioner was not able to correct the impression that this attack and arrest happened Thursday. The truth of the matter is that the Saudis made the arrest in April. AP reports say that the Saudis have arrested 701 terrorist in the past 5 months. The problem with knowing this information is that it leads one to think along the lines of "eventually a terrorist will blow up an oil super tanker or an oil pipeline".

If there is success, the response will be similar to what happened after 9-11. For the first several months after the attack, there was a consensus that the "good guys" must do what ever it takes to find the "bad guys". In recent weeks, Obama and other democrats have tried to weaken our ability to listen-in on terrorist telephone conversations. The terrorist who truck bombed the World Trade Center were caught because the US was able to listen-in on cell phone calls they made. The NY Times found out an blabbed. Our ability to monitor Osama bin Ladden was severely curtailed. Democrats have tried to make telephone companies subject to law suits if they allow US intelligence to listen-in on phone calls from terrorist. It is well past time to choose sides.

Our success in keeping a major terrorist event from happening has caused many to take down their guard. I do not advocate allowing a terrorist event to happen and I pray that none will but, if one did, our resolve to win the war on terror would be fortified.

The rumors being started are often made as a way to discredit Bush or the Israelis but in most instances they are really about creating swings in the futures markets. Big money is being made off of amateurs who have become convinced that they know the direction of oil prices in the near term. The shorter the guess the more difficult to be right. The average individual trader gets much of his "news" from sources he is trading against.

One of the interesting little "news twist" of last week was two separate reports on the threat by Libya to cut oil production. One article stated the threat was made in response to the actions of certain congressional members to allow OPEC to be sued. Another article stated that the threat was made in support of Iran. Who can verify either side of the story? Knowing both sides of the story, I have come down on the side I believe to be true, which is that Libya is showing support for Iran. The head of OPEC talked about the threat from Libya and he talked about the possibility of oil going to $200, $300 or $400 per barrel if production is stopped in Iran. It is possible the threat of Libya was for a different purpose but the head of OPEC certainly used the threat to support Iran.

Once again, I find it interesting that new supplies are hitting the market just as the maximum pressure is being applied to Iran. Stories about production in the North Sea being played out were in the news for the past few months. Suddenly, new discoveries are being made and new production is coming on line. North Sea production is expected to be up 8.6% year over year as of the next report. The North Sea is small relative to what is happening in Saudi Arabia but the timing is perfect.

The Saudi timing for some of the new production is also perfect but another .5 million barrels per day will not come on line until December and yet another 1.2 million barrels per day will not come on line until next June. By June, the Saudis will have spent more than 10 billion dollars developing this latest field. According to Business Week, there are currently 28,000 workers in this field. The Saudis are using the latest horizontal drilling techniques to dramatically increase the amount of exposure to oil bearing rocks. These same techniques are being used to dramatically increase production in oil fields in Russia and in the Bakken reserve in North Dakota, Montana and Canada.

If you hear a rumor about oil right now, chances are it is not true. Rumors play on emotion and cause people to totally sell out of the stock market, even though history shows that those who stay in through thick and thin do much better than those who jump in and out. Ninety-nine point nine percent of all great fortunes made in the stock market were made by people who tended to buy and hold for an average of several years or more.

Right now, times seem to be so much tougher than they are. Being fed a constant stream of bad news, investors are seeing little hope. They see democrats talking talk about nationalizing refineries, adding wind fall profit taxes, adding to the payroll tax, adding to the capital gains tax, adding to wasteful subsides and leading in the polls. More than half of the cars leased by the US congress are big gas guzzling SUVs. It is obvious that the congress has not yet caught on to the current state of affairs.

The solutions to our problems are obvious. We can easily and dramatically cut our consumption and increase our supplies. It will take only a couple of weeks for the congress to pass measures which will encourage new energy supplies. Right now, partisan games are still being played. The democrats pushed through mass transit subsidies this past week. These subsidies increase the cost to those who live outside the big cities and they reduce the cost of those who live in the big cities. We know that average people in the big cities spend only 2 to 4% of their income on transportation energy and the poor rural person spends from 10 to 16%. It is unfair to take public money and use it to benefit the few but that has been the mode of congress since the science of gerrymandering has been perfected. About 90% of the congress will be re-elected in most years. As a result, the good of small groups is trumping the good of the many. There is a limit before there will be backlash. The polls show that the majority of Americans are ready for a change but they clearly do not know how to accomplish this change. Gradually, the light will shine brightly on the best of solutions.

Don't let false rumors fool you! There are reasons to be highly optimistic. Markets find the way to climb the most horrible walls of worry. A steep assent will begin very soon.