Exponential Growth

Dave Gonigam – May 22, 2012

  • More oil than Alaska? Fivefold production growth? Astounding anecdotes from the new American energy boom, and why oil’s recent price drop hardly matters…
  • Home sales up… but relative to what? Home prices also up… but watch out for this factor to reverse the trend
  • China pulls the “stimulus” cord, while iron ore piles up in parking lots: Marc Faber on the real threat to the global economy
  • More tales of nickel-and-dime bank fees … a critic labels us “closet Fox News sheep” (!)… a powerful statement tantamount to treason… and more!

   Oil sits near a seven-month low this morning at $91.50.

“It’s trading down due to a stronger dollar and expectations of economic weakness in Europe,” says Byron King, skeptical about the staying power of either trend.

“OK, maybe we’ll see a decline from Greece after the wheels fall off,” he concedes.

   “Meanwhile, the large, older fields in the Middle East are in decline,” he says, eyeing the bigger picture.

“That is, the fields in Saudi, Kuwait, Iran and more. While the older fields decline, the production drop-off is faster than the new fields are coming online. The fact is that globally, crude oil output is flat, at best.

“For all the hype of large new discoveries — whether the pre-salt off Brazil, or companies going back into Iraq or whatever — it’ll require many more years and much more capital than most people think to develop.”

Which is what makes developments on the home front so intriguing…

   Oil production in the prolific Eagle Ford shale of Texas is growing faster than statisticians can keep up with.

2010 production totaled less than 12,000 barrels a day. In 2011, it was 83,400.

And the exponential growth isn’t over: CEO Bill Klesse of the refiner Valero is looking at 500,000 barrels a day by the end of this year… and 1 million “in the next few years.”

Meanwhile, researchers at the University of Texas at San Antonio estimated last year that Eagle Ford would deliver 68,000 jobs and add $21.5 billion to the local economy by 2020.

Last week, they updated their research. Turns out Eagle Ford contributed $25 billion to the local economy last year alone.

The forward estimates now? 117,000 jobs and $62.3 billion in economic growth by 2021.

No wonder, says Mario Hernandez, president of the San Antonio Economic Development Foundation, that “We view the Eagle Ford activity as an economic opportunity of a lifetime.”

   Meanwhile, the view is equally lucrative 1,500 miles north: North Dakota just surpassed Alaska as the nation’s No. 2 oil producer, behind Texas.

Drillers in the Peace Garden State pulled up 17.8 million barrels of oil in March — more than Alaska’s 17.5 million. (Texas’ No. 1 status is not in danger, at 32.9 million.)

Credit for the growth goes to the horizontal drilling and hydraulic fracturing in the Bakken formation.

Here again the growth trajectory is staggering…

  • In 2005, North Dakota still ranked No. 9 among the states
  • “In 1999,” says Ron Ness, president of the state’s Petroleum Council, “we had zero rigs working and people left this industry for dead in North Dakota.”

“Technology, geology, price and the business climate changed that,” Ness adds. Now, North Dakota’s unemployment rate is lowest in the nation — 3.0%.

Byron injects a note of caution: “No single shale play is a game changer. No single discovery has the magnitude or ability to drastically alter the face of our nation.”

   “But their combined discovery does,” he then adds.

“The Institute for Energy Research now pegs the total recoverable oil from U.S. shale deposits at as much as 1 trillion barrels — nearly FOUR times the amount of proven oil reserves in Saudi Arabia.”

In 1999, when North Dakota’s oil industry was left for dead, oil was less than $15 a barrel. It simply didn’t pay to employ all the high-tech it requires to get oil out of the Bakken.

But at $91.50, it’s plenty lucrative, indeed.

Only three years, ago the Census Bureau pegged Dimmit County, Texas, as the 19th-poorest county in the nation. Today this spot in the heart of the Eagle Ford is home to 12,600 new jobs paying $512 million in salaries.

Byron has identified seven ways you can tap into this massive and lasting flow of money. Learn all about them right here.

   Major U.S. stock indexes are adding to yesterday’s gains. The Dow has pushed back above 12,500.

One company noticeably not sharing in the good cheer is Facebook. After IPOing on Friday at $38, it’s down this morning to $32. Heh.

Lacking any better explanation, the financial media attribute today’s gains to U.S. housing numbers. OK, let’s see…

   Existing home sales rose 10% year over year in April, according to the National Association of Realtors.

What the NAR did not care to trumpet is that total sales remain lower than they were two years ago.

True, that was the peak of the homebuyer tax-credit frenzy… but since Uncle Sam and the NAR were so keen to trumpet the great numbers two years ago, we won’t hesitate to point out how anemic today’s look by comparison.

The NAR is also quick to point out the median home price is likewise up 10% year over year, to $177,000. And we’ll be just as quick to point out that’s because there are far fewer distressed sales in the pipeline.

Recall that foreclosures were on hold for months while the Justice Department, the state attorneys general and the banks worked out their sweetheart deal to sweep the robo-signing/fraudclosure scandal under the rug.

Foreclosure and short sales made up 37% of total sales in April 2011. In April of this year, that was down to 28%. No wonder the median home price went up.

“Now that those legal issues are behind the banks,” says Fusion IQ chief Barry Ritholtz, “we should expect mortgage loan servicers to begin once again the foreclosure process — and that means more distressed sales to come.”

   Precious metals are in retreat again. Gold is down to $1,580. The bid on silver is $28.42.

[For collectors only: Our friends at First Federal have jumped through many hoops to secure a supply of 2012 Chinese Silver Pandas. If you missed their announcement in your inbox this morning, by all means check it out.]

   The Chinese government is promising to amp up spending on roads, bridges and other public works.

Leaders are in a mild panic after numbers showed infrastructure growth slowing for six straight quarters. Worse, stories are emerging in the Western media about metals warehouses “so full that workers start stockpiling iron ore in granaries and copper in car parks,” in the words of a Reuters dispatch.

“I think the biggest risk [to the global economy] is actually China, because if you look at Greece, it’s an insignificant economy,” Dr. Marc Faber tells CNBC Asia. “Yes, they owe money, but the market knows that it’s bankrupt.”

China, in contrast, “has a huge impact on the economies of countries like Brazil, the Middle East, Central Asia, Africa and Australasia, so these countries could slow down meaningfully.”

Dr. Faber will join us only two months from now in Vancouver for the Agora Financial Investment Symposium. So will the aforementioned Barry Ritholtz. And the Harvard historian Niall Ferguson, whose latest PBS documentary series debuts tonight.

Registration can still be had for a handsome discount… but we can’t keep it going much longer. Especially when seats are going so fast. For dates, the speaker lineup and all the essential details, please review this invitation.

   “I read that the U.S. debt is around 100% of GDP,” a reader writes on the wall at Addison’s Facebook page. “My home country, Belgium, has been there before (and even up to 120%).”

“How did we get out? It took us 20 years of austerity: more taxes and fewer expenses. And the bad news is that AFTER 20 years, we still have to pay high taxes (about 43% of GDP go to taxes and Social Security) as our government is now addicted to it. Good luck.”

   “Just reading about the BofA fees on a small savings account,” reads an email in The 5’s inbox, proving we never know what topics will get under the skin of our readership.

“Had the same type of problem with my handicapped granddaughter. I oversee her financial affairs. She works in a shelter workshop and makes around $25 a week for spending money. I was trying to put $5 a month in a savings account for her.”

“Wells Fargo came up with fees on checking and savings that take almost a whole week’s work to pay. The savings would have been losing ground. I found another bank, USAA (extremely hard to do), and now she has no fees at all, and if she uses her debit card and there is a fee, it is refunded.”

“I remember when I was small that the banks came to the school and had us sign up for savings accounts, and we tried to put in 10 cents a week. This was a lot then, but they came by and picked it up and listed it in our bankbooks. This was to encourage savings habits. Nowadays, the banks want us to do everything on line so they don’t have to do it, and then charge us for doing it.”

“My bank is now charging $2.50 to receive a monthly statement while paying no interest on the account. Didn’t want to stop the hard copy, as my husband does not like to deal with the computer. I do most of the banking online, but if something happens to me, he needs something to see himself. We keep a balance of $2,500 or more at all times and no longer get anything for doing this.”

   “I had to smile when I read the BofA vacuum story,” writes another. “In my book, BofA is a den of thieves.”

“I took out a refinancing loan on the house years ago to buy GLD shares. When I was up sufficiently, I cashed out and repaid the loan balance given me in dollars and cents by the loan department. Much to my surprise, another department of the bank came back asking for thousands of dollars more before they would close the file. I had no choice and paid.”

“That money was repaid eventually, but now they charged me $560 through an escrow fund that popped up all of a sudden from still another BofA subsidiary. It never was mentioned in my original loan contract, as I took care of house insurance, property taxes, etc., separately.”

“I repeatedly protested the clear case of theft, backing up my claim with facts and documents. Never heard again from these highway robbers. They apparently are too big to be straight. Wonder how many other victims have thus contributed handsomely to their bottom line?”

   “Now you are quoting the Drudge Report?” spews an indignant reader. “Maybe it is time to cancel everything I subscribe to that is offered by Agora.”

“Matt Drudge has even less credibility than Rush Limbaugh. I always figured you were closet Fox News sheep; quoting Drudge goes a long way toward proving it.”

The 5: Are you just looking for reasons to be outraged? We notice you don’t write in to thank us when we cite left-leaning bloggers like Glenn Greenwald and Marcy Wheeler.

Fact is, we draw upon a host of sources from all over the spectrum as we assemble these daily 5 Mins… and we vet their sources carefully. The Drudge item about federal salaries — if you care — came from a thorough review of government data by WUSA-TV in Washington.

But hey, if you’re determined to not only put a chip on your shoulder, but then knock it off and blame someone else, there’s not much we can do about that, is there?

   “Sorry guys,” writes a reader with a correction. “Apple didn’t invent laser printing, nor did they have the first laser printer. Those titles belong to Xerox and IBM.”

The 5: When we screw up, we own up. In our haste, we neglected to say Apple’s first laser printer.

   “Many thanks,” a reader writes, “for the daily 5 Min. Forecast! I read each issue top to bottom…definitely more than I can say for my local newspaper!”

The 5: Thank you… and thanks to that reader for the link to the China metals story. We always welcome your tips, along with your chance to vent.


Dave Gonigam
The 5 Min. Forecast

P.S. The year was 1948. The phrase “big government” hadn’t come into common use… but government’s footprint was everywhere.

Truman had reimposed the draft as the Cold War geared up. By year’s end, the economy was sinking back into recession — prompting still more demands for government to “do something.”

After all, government always “did something,” right? That was what Americans had been conditioned to expect after the 12 years of Franklin Roosevelt’s presidency, the New Deal and World War II.

Which makes a book published that year all the more remarkable. Its story is told in the video below. It takes only two minutes of your time. It’s worth it.


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