Thursday, July 17, 2008

Double Up to Catch Up!

The Bush administration is pulling out all stops. The interior department just released 2.5 million acres of Alaska for drilling. This land is a small piece of the old Naval Petroleum Reserve. There is much more land and oil reserves available. The area released is estimated to contain 8 billion barrels of oil. It will cost much more to develop this area than it would to develop ANWR but it is politically available.

CAL was up 38% yesterday and 8% more today. AMR was up 14% around 3:30. Using the game of black jack as an analogy, the deck is "rich". It is time to double your bets. We are getting into the phase where good news is great for the market and even bad news will not stop the "surge". Airlines have not bleed nearly as badly as the price of the stocks or the price of oil would indicate. Red ink will turn black long before oil prices get back to last years profitable levels.

The democratic congress and Obama are on record that "we cannot drill our way out of this energy mess". They are also on record in support of massive government expenditures on expensive and unproven energy programs, such as ethanol, solar and wind. I wish I had one thousandth of the money that has been wasted on windmills. Today, Al Gore made the ridiculous proposal to "go green" in just 10 years while we waste billions more on windmills, solar and bio-fuels. Oops, I often forget that the waste is not in millions or billion but in trillions! The proposals to replace just the natural gas portion of our electricity production with windmills would cost 41 Trillion Dollars. The production cost of the oil in ANWR is probably less than $30 per barrel. Our country can save a trillion dollars by drilling in ANWR or waste about 25% of 41 Trillion or about 10 Trillion Dollars building ugly, noisy bird killing windmills that would drive up the cost of concrete and steel to who knows what levels. If the tax payers were not being forced to support building wind mills, there would be very few windmills under construction.

Voters will soon see the results of the drilling that has taking place in recent years. The net increase in production in 2008 and again in 2009, even after assuming a high depletion rate, will be more than 3 million barrels of new production each year. The increase in June, July and August is over 1.4 million barrels per day. The Mega Projects Site at Wikipedia shows 14 million barrels per day of new production without giving much credit for Brazil or any credit for a number of potential increases such as from the area just released by the Department of the Interior. Of course, with much of Europe moving quickly toward an economic recession, demand destruction is part of the reason for falling oil prices. As a result there is a huge market rotation underway.

Keep in mind that while margin is very expensive on the way down, it can turn 100% gains into almost 500% gains on the way up. The person who was wise enough to buy CAL two days ago and who used his 38% gains yesterday to buy more shares this morning has made about 87% return in two days! The deck is stacked. The potential for big wins is high. Remember that the 2.5 million acres could have been released a week ago, a month ago, a year ago or 15 years ago. It was released just at the point in time where many will give the release the credit for the drop in prices. If a deal is in the works in Iran, prices are going to fall, finalizing a "done deal" might take 6 weeks or even two months, so the big decline in oil will easily be credited to the new drilling area in the short run. The market is smelling something, such as a major deal. It is not smelling the 2.5 million acres because it was there for the taking at any time. It is not even smelling the new oil from Thunder Horse or from Saudi Arabia because those production increases have been a long time coming. The public will connect the decline in prices to the new drilling proposals, this will put all the more pressure on Congress to pass an OCS bill.

The same political trick is being played by both sides. Bush is making announcements to increase domestic drilling just before a deal in Iran is signed. Obama has been trying to convert his mistake of calling for surrender in Iraq last year into a well timed withdrawal of troops proposal, consistent with a victory. He continues to push for action in Afghanistan because any person who has followed the war knows that Afghanistan still must be "finished". Obama is totally wrong in suggesting that the war in Afghanistan is strategically more important than the war in Iraq but those who have a democratic mind set will hear his words, see the coming shift to Afghanistan and give him credit for good international judgment.

One thing often lost in the discussions about Afghanistan is that there are 3 million or so combatants in the high mountains of Pakistan. Does Obama or McCain propose starting a third war? The war in Afghanistan cannot be won easily and it cannot be won without fighting in Pakistan. Pakistan is an ally but the mountains of Pakistan is like multiple hornets nests in high trees The strategic importance of this isolated,resource poor region is no where near as great as Iran or Iraq. Besides, the successful conclusion of the "deal with Iran" would help pull the rug of support out from under some of these combatants. All signors to the "master" 123 nuclear agreement must pledge to help end terrorism. After Iran is settled, it will be appropriate for world leaders to work more earnestly for a political settlement in Pakistan.

One does not have to win every battle to win a war. Wars typically end when one side realizes it is whipped. Despite a massive insurgency from dozens of nations, the US and Iraqi Army are "mopping up" in Iraq. The majority of the provinces have been turned over to Iraqi forces, with back up support and air support available from the US. It is important for the insurgents who have largely departed for the mountains of Pakistan to know that there will be a continued US presence in Iraq for at least another couple of years. We certainly do not want to leave Iraq to the three million insurgents ready to swoop down from Pakistan.

The Jihadist are well aware that Iran is now talking directly to the USA. The psychological pressure of this action is intense. When a soldier is on the battlefield, he does not want to stick around after he learns his leaders are negotiating a "surrender". Of course the deal with Iran will not be couched in terms of defeat or surrender but you can appreciate the effect on moral. Once Cornwallis and Lee surrendered, a few combatants in each war continued to fight for a time, but most soldiers were glad to lay down arms. Iran is the "bully" on the block but the leadership is tired of living under 29 years of tightening sanctions.

Twenty years ago, Columbia was the home of drug lords. Today, Columbia is a solid US ally. Democrats have shamefully refused to sign a free trade deal with Columbia. The only reason is to avoid angering union supporters. The trade deal should be signed because it would provide significant benefits to the citizens of USA and Columbia. We should fully embrace the countries that embrace us.

Today, Afghanistan is the home of drug lords. An international coalition of nations will support doing much more to solve the problem in Afghanistan as soon as a deal is done with Iran. In the mean time, it would be wise for voters and investors to note that a deal with Iran has been the prime objective of the US supported war between Iraq and Iran and the more recent wars in Iraq and in Afghanistan. We are getting close to reaching this long sought objective.

Double your bets because the deck is rich. The Bush administration waited to just the right moment to announce the release of 2.5 million acres of rich oil lands. Again, the price of oil has not fallen $16 per barrel in three days because Bush lifted the executive OCS drilling ban or because of this release. The change in OCS would not help at all if congress does not go along. At the time of the release, I said that it put a lot of pressure on congress and it does. In fact, the announcement of the 2.5 million acres adds to the pressure. The voters and the congress sees the price of oil falling despite the inaction of congress! It is time to double your bets! If you have no money to bet, you should consider selling defensive shares, mutual funds and other low beta securities in order to own the high risk, high reward shares.