Oil Prices and Monetary Inflation

I found this very interesting interview by Paul van Eeden. He mentions the importance of central bank inflationary policies (increase in money supply in other words) and the impact on crude oil.

Video

Chinese car sales

For comparison purposes, China consumes roughly 1.8 barrels per capita per year. The US consumes roughly about 25 barrels per capita per year. In my opinion, even though commodities might be overbought in the short term, long term, we could see oil prices as high as $200-$300 per barrel.

From Casey Research:

"Record oil prices have failed to temper the enthusiasm of Chinese auto buyers. In 2006, 6.2 million cars were sold in China, enough for the Middle Kingdom to surpass Japan for #2 in total vehicle sales (the United States still sells twice as many). In the first five months of 2008, Chinese auto sales show no signs of decelerating, up 17.4% from the same period last year.

The rise in Chinese auto sales has been so dramatic that projections by China’s government for auto sales in 2020 were already exceeded by 2005."

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4 Texas Electric companies failing

As I was talking about a few weeks ago to my peers about this issue, 4 Retail electric providers went bust in a couple of weeks.

Fortunately, it has been small companies so far. However, Texas over-reliance on Natural Gas could prove a big problem in future years (Natural Gas closed at $13.02 on Friday, up from $7.60 a year ago, a whopping 71% increase)

Moreover, I strongly believe Natural Gas is currently under priced (on a Barrel of Oil Equivalent, NG is selling at $78/bbl), and within 2-3 years, we could see NG mirroring today's crude prices (say $15-$20 range per MMBTU).

There is an excellent article in the Chronicle that talks exactly about this:

"The electric market turmoil that brought down four electric retailers with more than 40,000 customers among them stems from a combination of factors: a rise in wholesale power prices, mostly because of a big run-up in the price of natural gas, Texas' main generation fuel; some companies' failure to hedge properly against those increases by entering into long-term wholesale contracts; and sudden price spikes that left them scrambling to meet financial obligations to the state's grid operator."

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Energy Sector: Economic Growth Drives Demand

Excellent article from FinancialSense.com:


















"As the cost of crude oil has soared in recent years, the amount produced hasn't kept pace with demand. Worldwide oil production has barely budged, despite record prices. Since 2004 the price of oil has gone from $33 per barrel to $132 – meanwhile production has risen just 1.8 percent, to 84.6 million barrels per day. "

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Texas Electric rates

As many of you may have seen, Texas electricity rates are going up.

YTD, we have averaged about a 20% increase in rates in a year. This is due mostly to natural gas prices going up significantly. About 59% of power plants in Texas are run on natural gas, while coal's share is about 27%.

Natural gas closed today at $12.96 per MMBTU (roughly 973 cubic feet)















For example, Gexa Energy's fixed plan is offered at $0.17 per kw/h. Last year, Gexa offered the same plan for $0.141 per kw/h, an increase of roughly 20%. Other smaller providers have had bigger increases.

Meanwhile, companies like Dynegy have plans to build coal power plants (coal is the cheapest fuel for power generation) Dynegy's added power capacity would be a welcomed relief to all Texas residents, but not everyone wants these power plants to be built.

Links: www.powertochoose.org
http://tonto.eia.doe.gov/dnav/ng/ng_sum_lsum_dcu_nus_m.htm
http://www.wtrg.com/daily/oilandgasspot.html

Deflation: Making Sure "It" Doesn't Happen Here

One of the biggest reasons for high commodity prices has been monetary inflation in the recent years. All central banks for the past 5-7 years have increased their economies' money supply substantially.

Ben Bernanke was claiming that we were in a deflationary environment back in 2002 (even though money supply was still increasing)

Here's a quote from Mr. Bernanke:
"...Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services..."

Then people complain about high gas prices.

Energy Bull Market Fundamentals Remain Strong

BY Chris Puplava.

This is an excellent article written by Chris Puplava from financialsense.com.

http://www.financialsense.com/Market/cpuplava/2008/0423.html