OPEC, A Toothless Tiger

Addison Wiggin – June 7, 2011

  • Whither OPEC? Why the oil cartel is a shadow of its former self… and what it means for your portfolio…
  • The new oil and gas power rising in OPEC’s backyard, and the best way to invest among three possibilities…
  • New housing stat reinforces “insolvency warning” for Big Four U.S. banks…
  • The mind of a bureaucrat: Small business owner harassed for trying to give away his services to tornado victims…
  • Trying to solve the national debt by cutting the president’s travel budget… and more sensible reader mail…

   The chairs and nameplates are being lined up, the caviar is being prepped, the world’s finest hookers and blow are standing by. Tomorrow, OPEC gathers for one of their occasional price-fix… er, production quota meetings in Vienna, Austria. As always, the party will ensue.

But for a bunch of people who supposedly hold the world economy by the short and curlies… we can’t help but notice the ministers are looking decidedly feeble these days. As a consequence, the bickering — in Arabic, Farsi, Spanish, Portuguese and English — is liable to be more heated than usual this time around.

   For starters, some of OPEC’s member nations are supporting a military campaign against another member nation. Kuwait, Qatar and the United Arab Emirates back the rebels trying to dislodge Libya’s Col. Gaddafi from power.

True, OPEC has been through this before… with Saddam Hussein 20 years ago. But it’s a lot harder for 12 guys in a room to reach a decision when three of them have bosses who are scheming to overthrow or even kill the boss of another. Just sayin’…

   OPEC’s two key movers, Saudi Arabia and Iran, are also bitter enemies. That said, they appear to be in agreement this time on one essential issue: They think it’s time to bring more oil onto the market by boosting OPEC’s production quotas.

They’ve sat unchanged since they were lowered in December 2008 — when oil prices had crashed to $32 a barrel and it looked as if nuclear winter was descending over the world economy.

“OPEC is trying to compensate part of the shortage of supply of crude and create a balance in the market,” Iran’s OPEC governor Mohammad Ali Khatibi said recently. Usually, the Iranians are in the lead pushing for higher prices.

It’s one thing for OPEC ministers to say they want to boost production. It’s another to actually pull it off. This brings us back to an issue we’ve examined before — “spare capacity.”

   Spare capacity is the ability of oil producers to jump-start new production within one month and keep it going for three months. Right now, there’s not much of it…

  • Libya’s 1.3 million barrels a day of production are out of the picture for the duration of the war there
  • Production in Venezuela, under the stunning mismanagement of our favorite caudillo Hugo Chavez, has been falling for years
  • Oil installations in Iraq have come under attack in recent months
  • Kuwait and the United Arab Emirates are already pumping full-tilt.

That puts the spare capacity burden, as usual, on Saudi Arabia.

   Officially, Saudi “spare capacity” is estimated at 2.5-3 million barrels a day. In a world that burns 89.2 million barrels per day, that’s not much. When you consider most of that spare capacity is heavy crude — the viscous variety that’s a challenge for many refineries to handle, it seems like even less.

Those numbers get all the more alarming in light of a Morgan Stanley estimate of worldwide spare capacity that we shared on March 4.

Trouble is, if spare capacity is all up to the Saudis now, and the most they can do is 3 million barrels a day, the chart is already out of date. Spare capacity could be gone even before Morgan Stanley’s estimate of 2013. Even if the bank’s estimates are right, the world is going to need some energy assistance very soon.

   OPEC is increasingly becoming a toothless tiger, the 1970s stereotype notwithstanding.

The cartel was helpless trying to put a floor under oil prices in the 1980s and 90s. Now they’re helpless trying to put a ceiling on them. Sooner or later, the price — $98.20 a barrel this morning — is bound to head back into the triple digits where it spent most of March and April.

During the 1973 oil shock, the OPEC nations accounted for 52% of world production. Today, that figure is 44%. And OPEC’s power and prestige are due to take another blow any day now, with the rise of what the current issue of BusinessWeek calls “the dream of an energy-independent Israel.”

   That dream came a lot closer to reality in 2009 with the discovery of the massive Leviathan natural gas field off Israel’s coast. “The geology offshore Israel,” says our resident oil field geologist Byron King, “has analogues with other of the world’s best hydrocarbon-rich areas.”

Note from the map that there’s also considerable hydrocarbon potential onshore.

“Israel has one of the largest deposits of oil shale rock in the world, enough to produce 250 billion barrels,” according to geologist Harold Vinegar, a 30-year veteran of Shell. As we mentioned yesterday, that figure is only 10 billion barrels shy of Saudi Arabia’s estimated reserves.

If you’re looking for an easy way to invest in Israel’s oil potential, you’re out of luck. Vinegar’s company, Israel Energy Initiative, is a division of the U.S. telecom firm IDT. Not much of a pure play there. And it’s extremely early: IDT’s latest corporate presentation calls for production of a mere 2,000 barrels a day by 2016.

But the Leviathan gas field? That’s another story…

  • Pure play? Check. Noble Energy is the big operator there, but there’s a tiny Canadian-traded company that also owns some prime Leviathan acreage
  • Immediate time horizon? Check. This company has four blocks where the seismic work is done, and Byron says they’re “drill ready.”

Israeli leaders are looking forward to a day when they can tell OPEC to go jump in the Persian Gulf. With the Leviathan gas discovery, they’re well on their way. And with a Canadian penny stock sitting on some of Leviathan’s most lucrative tracts, you can get a piece of the action — for about $1 a share.

Think of it as grabbing bleacher seats to watch the early innings of OPEC’s downfall… as Byron explains in detail here.

   Stock traders are feeling a little more mellow on this Tuesday morning. As we write, both the Dow and the S&P 500 have recovered all of yesterday’s losses and then some. Still, the S&P remains five points shy of 1,300.

   Precious metals are a snooze this morning. Gold has pulled back from yesterday’s mini-spike and rests at $1,542. Silver is at $36.83.

   The sickly greenback is feeling even more woozy today. At last check, the dollar index has slipped to 73.5. The euro has pumped up to $1.468, still riding on Friday’s blast of hot air from the European Union about the latest Greek bailout plan.

Funny, we still haven’t heard any concrete details of that plan. We’ll probably have to wait until EU finance ministers meet on June 20.

   Here’s a new fun fact about the housing market: 38% of homeowners who took out second mortgages now owe more on their mortgages than the house is worth.

The figure, from CoreLogic, puts a new spin on the underwater-homeowner phenomenon. Among those who did not take out a home equity loan, or HELOC, only 18% are underwater.

Was that an echo we just heard?

“If we do not see a meaningful recovery in home prices by the end of the year,” we reprise comments made by Institutional Risk Analytics’ Chris Whalen last week, “we may need to contemplate impairment charges on first liens owned by banks and wholesale write-downs of second-lien exposures.”

“This implies solvency issues,” he added, “for Bank of America, Wells Fargo, J.P. Morgan Chase and Citigroup, and big losses for the U.S. government and private investors.”

And which four banks carry 40% of second mortgages on their books?

“Requiring big write-downs on those loans could burn through banks’ capital,” says The Wall Street Journal. The WSJ writers have to choose their words a little more carefully than Mr. Whalen… but the point remains the same. We’ll keep an eye on this potential catalyst as the next banking crisis unfolds in slo-mo.

   In the meantime, let’s add this next item to our “man-versus-bureaucracy” file — proof that when it comes to busybodies, no good deed goes unpunished.

The good deed in this case is Mike Haege helping folks in Minneapolis whose trees had been knocked down by a tornado May 22.

As the owner of a tree-trimming business in a town about 40 miles away, Haege figured he could help. The morning after the tornado, he drove to Minneapolis to volunteer with the Urban League. He signed a waiver and headed out with his bucket truck and a wood chipper to get started.

Then a city inspector showed up.

You know where this is going. Haege doesn’t have a license to trim trees in Minneapolis. Never mind that he was volunteering his services.

Neighbors came out to tell the inspector he, indeed, was working for free. Haege showed the waiver he signed.

Nothing doing. He had to go. So he packed up. Passersby who saw his bucket truck begged him to stop and help. He did stop once — to move a tree, an act that, presumably, does not require a permit.

At that point, plainclothes cops who had nothing better to do pulled him over.

Unbeknownst to him, they’d been following him to make sure he left town. And they called in a bunch of uniforms for backup… just to make sure this obvious menace to the community didn’t pose a threat to the officers’ safety.

Haege hit “record” on his cell phone video camera as he was detained for the next two hours…

Can you count the number of uniformed cops in this video?

Finally, he was let go. In his mailbox a couple of days later was a citation from the City of Minneapolis for trimming trees without a license — a $275 offense.

   “The same day you published the comments of the Colorado small business owner,” writes a reader, “I received a formal ‘request’ from OSHA to send an employee to a training school on proper operation of a forklift truck we own.”

“We seldom start it; it gets very occasional use to help our neighbors in our business park. That’s going to stop, as we don’t receive heavy freight anymore.

“I’m not going to fork (pun intended) over for training what I see as a waste of my money. I’m still wondering how they even knew it was in our building.”

The 5 Heh. We can’t wait to hear your follow-up report after you sell it on how OSHA insists you train personnel to use equipment you don’t even own.

   “Maybe,” muses a reader, on the debt ceiling debate, “if there were a ceiling put on the president and first lady’s spending, it would cut the deficit, since they are spending so much more than any other president.

“Let’s cut Congress’ benefits,” another writes: “Pension, health care during and after service, travel, staff, etc.”

The 5: Indeed, the political perks are outrageous, and modern-day presidents travel in a style that would make Caligula blush. One hour of flight time for Air Force One runs $100,219. And it’s at the president’s disposal.

When President Bush vacationed in Crawford, Texas., the flight on Air Force One alone cost nearly a quarter million. And that doesn’t include the costs of the cargo planes that shuttled the president’s limousines and helicopters… or the salaries of hundreds of workers who laid the groundwork and organized the trip.

During President Obama’s recent trip to India, it was rumored that he brought an entourage of 3,000… that he took with him 40 aircraft and six armored cars — one of which was equipped with the goods to launch a nuclear missile… can you imagine what that car cost?

During that excursion, Mr. Obama and his crew rented out all 870 rooms in the five-star Taj Mahal. Rumors, albeit from Republican bitch sites, estimated the trip cost the United States over $200 million per day.

The numbers are staggering.

Having said all that… whatever the total costs are, in the context of a $3.8 trillion annual budget, they amount to a pimple on Uncle Sam’s scraggly hind end.


Addison Wiggin
The 5 Min. Forecast

P.S. “Leviathan,” a reader writes by way of attempting to correct yesterday’s issue, “is a natural gas field, and a significant find. However, there have not been any reports, to my knowledge, of flowing oil at this field.

“Until proven wrong, I believe you are incorrect in calling this field a significant oil discovery. As a geologist, I am sure you know the difference between gas and oil fields. Please do not try to confuse us.”

“It would appear,” adds another, “the Eastern Mediterranean petroleum system is gas-prone, not oil-prone, as there is very little oil production in that system. Published reserve estimates of the Leviathan discovery range from 11 trillion cubic feet (90% certainty) to 21 trillion cubic feet (10% certainty).

“Since the equivalent (SEC rules) in barrels of oil (energy content, not value) is 6 thousand cubic feet equal 1 barrel of oil, the PUBLISHED reserve estimates for Leviathan upside potential would be 2.6 billion barrel of oil equivalent, not 250 billion barrels of oil, as you state. This, of course, is not remotely an equivalent financial value.

“Leviathan is a very big discovery and will provide enormous natural gas reserves for Israel, but is not remotely the next Saudi Arabia, as every new trend or discovery tends to be hyped as by investment newsletters these days.”

The 5: You’re both correct. The offshore gas and the onshore oil shale we discussed today are all part of a geological formation known as the Levantine Basin. So no, Leviathan itself is not the source of an oil reserve nearly as large as Saudi Arabia’s, but both of those phenomena are in the same neighborhood.

The oil potential, however immense, is a long-term thing. It’s the gas at Leviathan that has Byron King atwitter.

“At 16 trillion cubic feet, Leviathan is one of the world’s largest new gas fields of the past 25 years,” Byron tells us. Leviathan “may hold enough gas to support exports to Europe and Asia,” according to a Bloomberg report last Friday.

If the prospect of Israel as an energy exporter doesn’t blow your mind — especially when the political winds in the Arab world are whipping — wait till you see the profit potential for early investors. That’s what we’re excited about.


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