The New Energy Scramble

Dave Gonigam – June 23, 2011

  • New Middle East energy scramble under way… The 5 handicaps a winner and spots an opportunity
  • “Bernanke effect,” rotten jobs numbers sink stocks, commodities… Barry Ritholtz on a “savage tragedy”
  • U.S., 27 other nations tap oil reserves… Byron King on why the stated reason makes little sense
  • Quest for perfect shave yields $100,000 razor… and a little-known metals play

   A mad scramble for energy in the Middle East, foreshadowed in this space on April 4, began in earnest within the last 24 hours.

And hardly anyone is noticing it this morning, outside some remote outposts of the energy trade press.

That means for the moment, few people are aware of the immense wealth-building potential resulting from this energy scramble. Once the mainstream catches on, it’s set to explode.

   The catalyst is a decision yesterday by a heretofore obscure body in Israel — the Public Utilities Authority.

It granted permission to Israel Electric Corp. to lease a liquefied natural gas (LNG) tanker. The tanker will sit a few miles off the coast and anchor to a permanent station onshore, supplying the nation with electricity.

Without this step, Israel faces a choice within less than two years:

  • Blackouts
  • Costly imports of coal or diesel fuel.

Understandably, Israel finds neither choice acceptable.

   Israel is in this pickle because its natural gas usage has tripled since 2004… and right now it gets 40% of its natural gas from Egypt. Twice this year, saboteurs have blown up the pipeline between the two countries, disrupting supplies.

The second time, Egypt’s government took its sweet time restoring service after repairs were complete.

That might be because the military junta that took over after the forced departure of Hosni Mubarak wants desperately to distance itself from the deal Mubarak cut with the Israelis to sell them the gas.

Terms of the deal have never been made public, but most Egyptians believe the Israelis are buying at below-market prices, with the proceeds going straight to the pockets of Mubarak’s cronies.

After a delay of nearly a month, Egypt resumed the flow of gas about 10 days ago. If the terms of the Israeli-Egyptian agreement had been changed, no one was saying.

All appeared well, until…

   Two days ago, someone leaked an Egyptian government document to Al Jazeera — confirming what many Egyptians suspected:

It’s printed on letterhead of the Egyptian petroleum ministry, dated Jan. 26, 2004, and signed by the former oil minister — who now sits in jail, while prosecutors build a corruption case against him.

It spells out how the Egyptian gas is sold through a firm called East Mediterranean Gas —headed by a Mubarak confidant. He was arrested in Spain last week. He too faces corruption charges.

Will the price of the deal end up being disclosed at trial? How will ordinary Egyptians react? Will Egypt’s post-Mubarak rulers cut off the gas to Israel just to keep the peace at home?

Israel isn’t waiting to find out. Hence, the authorization yesterday for the LNG tanker lease.

Of course, that’s just a short-term fix. Israeli leaders also have their eye on a long-term solution — one that will allow them to thumb their noses at the Egyptians.

   Enter a natural gas discovery so massive the Israelis have given it the name Leviathan. “At 16 trillion cubic feet,” says our resident energy geologist Byron King, “Leviathan is one of the world’s largest new gas fields of the past 25 years.”

Indeed, “the geology off the coast of Israel,” Byron continues, “has every indication of meeting criteria for a major petroleum system. It has analogues with other of the world’s best hydrocarbon-rich areas.”

He’s thinking specifically of offshore Brazil — home to the massive Tupi oil field. And off Africa’s Atlantic coast — the scene of an oil find that’s already delivered 514% gains to readers of his premium service, Energy & Scarcity Investor.

Two companies are working Leviathan. One is Noble Energy, a big player in the energy space. The other is a tiny Canadian-traded firm that’s very nearly a pure play on Leviathan’s potential. No wonder Byron’s excited… and after you see this presentation, you will be too.

   It’s one of those “risk off” days, in the parlance of the Street. Stocks and commodities are down, the dollar and Treasuries are up.

The trouble started yesterday after the Federal Reserve wrapped up its two-day meeting in Washington. The written statement it issued was a snooze:

  • Interest rates would remain “exceptionally low” for an “extended period”
  • The Fed would stick to its guns for the post-QE2 era starting July 1: keep buying Treasuries with the proceeds from maturing securities, thus maintaining its balance sheet more or less at current levels.

   But then at 2:15 p.m., Fed chief Ben Bernanke opened his yap for his second news conference. Why, asked the assembled reporters, is the economy slowing down? And how long will it last?

“Part of the slowdown is temporary, part of it may be longer lasting,” he said, with conviction. Then he followed up with another firm declaration: “We don’t have a precise reading on why this slower pace of growth is persisting.”

With Bernanke inadvertently piercing the myth of Fed omniscience, the Dow promptly tanked.

“This is the savage tragedy of giving a group of economists this much influence and authority,” writes blogger and Bailout Nation author Barry Ritholtz this morning of what the Fed has wrought in the U.S. economy.

“Beyond the institutional habit of being excessively optimistic,” he continues, “the Fed’s economic forecasts have been working off the wrong data set, stubbornly refusing to recognize that this is a credit driven crisis, and not your run-of-the-mill business cycle contraction. They have either been unwilling or unable to recognize this.

“I am not sure which I find more galling: The lack of acumen or missing sense of humility for the failures.”

Barry is a crowd favorite each year at the Agora Financial Investment Symposium. Familiar faces like Barry and Doug Casey will be joined this year by newcomers like Eric Sprott and Gary Shapiro.

We’re now accepting early sign-up for the audio recordings we issue for the benefit of folks who can’t make it in person. It comes with a written report outlining every investment recommendation made during the conference. And if you move on it now, you get the best available price.

   First-time unemployment claims rose last week — again — to 429,000. True to its form of late, the Bureau of Labor Statistics revised the previous week’s figure upward.

It’s now 11 weeks in a row the number has topped 400,000.

   At the moment that report was released, precious metals began a swan dive. As of this writing, gold is down 2% on the day, to $1,517. Silver hangs by a thread to $35.

   Once the stock market opened, the “sell” cries rang long and hard — again. A Dow that was 12,200 for a time yesterday is below 11,900 at last check.

The volatility index is up big, to 21.2. High by recent standards, but not as high as 22.7 only a week ago today.

   Oil took a drubbing along with gold early this morning, and took another one later when the International Energy Agency announced a coordinated release of its member nations’ oil stockpiles. 60 million barrels will hit the market over the next 30 days.

The IEA is made up of the United States and 27 other developed countries. It is only the third time the agency has made this move: the first when the Persian Gulf War put a hurt on Middle East oil shipments in 1991, the second after Hurricane Katrina shut down Gulf of Mexico production in 2005.

The occasion this time is, well, rather less dramatic… though no less colorful.

Muammar and his amazing Technicolor getup

Col. Gaddafi, no doubt to the surprise of the Western leaders who launched a war against him more than three months ago, is still in power. And Libya’s 1.5 million barrels of daily production are still off the market.

Now that the “limited engagement” we were promised in March is turning into something more drawn out — history repeating itself as farce — those barrels probably won’t be coming back on the market anytime soon.

The market seems to have adjusted to this reality just fine, but something must still irk the IEA — or its key member government.

About half of the reserves being tapped will come from the U.S. Strategic Petroleum Reserve in Texas and Louisiana. So like the Libya operation, it appears to be a coalition operation, but with the U.S. in the driver’s seat.

   “What are those people thinking?” reacts Byron King in an email dashed off at the Munich airport. “Stunning, in a stupid-policy sort of way.”

Libya? “Old news,” Byron says. Meanwhile, “Saudi Arabia is ripping the pumps open, even spreading rumors of driving prices down to choke Iran’s oil export income accounts.

“Maybe since the Fed can’t cut interest rates any more, they want to kick-start consumption by dropping oil prices. Save their friends at Goldman Sachs from imprudent speculation along the way.”

Whatever the motivation, one thing is clear, Byron says: “Much cheaper oil is more of a gift to China than a boon to the U.S. economy.”

At last check, a barrel of West Texas Intermediate goes for $91.

   With the safety trade on, the dollar index is up nearly 1%, to 75.6. The yield on a 10-year Treasury note is down to 2.9%.

   Man’s quest for the perfect shave has come to this — a $100,000 razor.

The Zafirro Iridium razor is, as you might guess, made of iridium. Well, the handle anyway — the blades are white sapphire.

Mistakenly described on NPR this morning as “rare earth,” iridium is one of the platinum group metals – but 10 times more scarce than platinum. Incredibly strong too — which is why it ends up in rockets.

Guaranteed to never corrode, only 99 of these babies are being made… and for your $100,000, Zafirro gives you 10 years’ worth of service, professional cleaning and sharpening.

Presumably, the loaner model is something a little more bare-bones.

   We had little of interest in the mailbag today. Got something to get off your chest? Shoot us a line.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. Our friends at EverBank continue to offer their MarketSafe Timeless Metals CD — giving you exposure to three precious metals (gold, silver, platinum) and two industrial metals (copper, nickel).

Like every MarketSafe CD, your principal is protected: The CD can never go down in value, it’s FDIC insured and you can put it in an IRA. This will be the final MarketSafe CD offering EverBank has this year, so check it out now.

rspertzel

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