Tuesday, January 31, 2006

Economy - Oil Discovery in Shabwah


New discoveries of oil are happening. Many are just drops in a big bucket but drip by drip the bucket is starting to fill up. January 20, 2006, Shabwah discovered oil in the Al-Kala Block 52. It will only produce 5,000 barrels per day in 2006 and will peak at about 32,000 barrels per day in 2009 but this represents another significant drop in the bucket.

When sanity reigns in the US Congress, 1 or 2 million barrels per day will be developed in ANWAR. The discoveries last month in the Gulf of Mexico and in Brazil were significant but, together, not as big as ANWAR.

One of the many substitution effects that is gathering steam is the movement of suburbanites to "down-town". This effect is happening all around the world. In Winston-Salem NC, with 800 new residences planned in the down-town area, plans are being made for building a grocery store down-town. I worked at the A&P down-town in 1967 when it was on its last legs.

Drip by drip, oil is being saved or found. A new company in NC will start production on LED home lighting this year. The head is the former head of CREE. These new semi conductor lights put out the same light as a 60 watt bulb and use only one third the electricity.

In the early going, new homes and new businesses will be the targets for the new lights. One should not plan to throw away old fixtures. However, in 10 years, the new lights will be very common and the energy savings will be very large.

Canada has announced the expenditure of $150 million to increase capacity at one refinery. Duke Power is one of many firms busy selecting sites for nuclear plants.

Velero Energy looks to be a good short. Velero Energy depends on demand for sour crude but the world is currently awash in plenty of sweet crude. Current fundamentals suggest that oil should be trading below $50 per barrel. The premium in the price is related to the Iran "risk". This problem with Iran will not go away quickly but, before the problem is over, storage facilities are going to hit their maximum capacity.

The next move in crude is back to the $55 range. My personal bet is still on the airlines. CAL and AMR have traded up in recent days. My family added more shares while the price was down. We are encouraged to know that AMR, United and CAL are all increasing business and luxury seats and decreasing the number of coach seats. United is having great success with it luxury flights from NY to LA. The planes only hold 110 passengers in luxury seats but the tickets range as high as $4,500.

Drip by Drip oil is being found or saved. Business demand for travel is growing steadily. Seats are no longer being sold to the high consumer bidder on the on line auction. Those cheap coach seats are being replaced with high dollar business and first class seating. If you want a "free" meal, you need to book your business or first class seat well in advance because demand is pushing supply very hard.