Only These Three Things Can Halt Oil's Advance

An Open Letter to Congress:

First there was the trillion-dollar pork fest for energy.

Then there was the decision to go with corn-based ethanol.

Now, Congress has voted to stop adding oil to the national Strategic Petroleum Reserve (which was created in the 1970s to smooth out pricing disruptions and supply problems).

Talk about missing the point!

Sure you could argue that by putting less into the strategic reserves we could take some of the pressure off price… and by implication help bring it down from its record level at more than $130 a barrel.

I mean it sure sounds good in theory, especially in an election year. But in reality the strategic petroleum reserves would last only 2 months, even if we cut off all imports tomorrow. So there’s simply not enough volume to make a dent in recent price hikes.

Nor can we drill or refine our way out of this mess, as President George Bush seems to favor. In a recent interview with Yahoo! News, the President suggested both as alternatives when in reality we can do neither.

For one thing, refiners are the ultimate middlemen and they’re pinched at these prices. They simply can’t make money as they try to refine an increasingly expensive product and sell it to users who are chaffing at $4 a gallon. That’s why stocks like Western Refining Inc. (WNR), Tesoro Corp. (TSO), and Valero Energy Corp. (VLO), for example, have fallen by nearly 30-40% in recent months. Their margins get worse with each up-tick in oil prices from here on out now that we’ve reached a point where high prices are beginning to dampen demand.

For another, drilling and refining our way out of this assumes we have oil to begin with… we don’t. And even if we turn the Alaskan Tundra into Swiss cheese, the demand reduction we’re seeing here in the United States is being dramatically offset by developing countries that are guzzling gasoline at unprecedented rates.

In fact, those are precisely the reasons that I’ve been predicting for years that oil prices were headed skyward and why I’ve just recently boosted my target price for crude oil to $225 a barrel.

For what it’s worth, here’s my simple three-step plan.

1. Encourage people to use less. This is not rocket science, guys, and I have no idea why our leadership can’t understand this but apparently logic doesn’t apply inside the Beltway. Our current fuel standards literally date to the 1970s and pre-date the emergence of both mini-vans and gas guzzling SUVs. They average 25 mpg when we all know damn well that manufacturers around the world are fully capable of building 40-50 mpg cars and are doing so for other markets like Europe and Asia where…taa daa…they sell a ton of small, zippy, gas-efficient vehicles.
2. Create incentives for this to happen. Instead of providing pork laden tax breaks to the oil industry and stimulus packages that are simply nothing more than a glorified handout, why not shift the money to the consumers who need it? Seems to me that once people figure out they have a meaningful and lasting way of saving money, they’ll not only make it happen, but line up immediately to get started.
3. Reward those that develop alternatives. We have some of the best brains in the world in places like Silicon Valley and our University System. The fact that they’re not working overtime on this issue suggests to me that they’re not being prodded in the right place. We would easily jump start this process and conservation by rewarding alternative development and usage.

Call me crazy, but there’s a reason why they call it "supply and demand."

The bottom line is that if we demand less, prices will come down.

Comments

[Eclectic In...:]

Simplistic plan. The first thing you chaps in the US need to do is to stop voting for Presidents who own Haliburton, Carlyle etc. Bush has too much at stake here. These oil profits go straight in to Republican coffers. BTW, I am from India, so have the least interest on who you elect. Thus, my view is unbiased.

2008 May 22 08:48 AM

[steveross:]

I know the following ideas might not be popular, but neither will $200 a barrel oil.

A SIMPLE SOLUTION FOR PEAK OIL CRISES

This is a 2 part solution to the runaway price of oil. It’s goal is to change driving habits, increase the mpg of cars, increase the use of alternative energy, and reduce the speculative pressures on the price of oil.

Part 1. $5 Consumption Adjustment

A $5 consumption adjustment will be added to the price of each gallon of gas sold. This money will be put in a pool and at the end of each month, divided by the number of drivers and rebated, preferably by direct deposit, to each driver. The average driver will say pay $500 extra for their gas and then will be rebated $500. The person who drives less than average will get rebated more than the extra cost and therefore will end up paying less than market for their gas. The person who uses above the average will pay more then the money rebated. For the average person, there would be no cost and they will save because of a lower market price for gas. For the person who is having trouble buying groceries and gas now can make ends meet by buying less gas therefore reducing the cost of gas both by using less and by ending up paying less than market for the gas they use. Of course, the person who uses more than the average will have to pay for this which is exactly how things should be.

Of course there will have to be some considerations made for people who use their cars for business. There will also be a cost to manage the system, though most of this will be done by computer, and in any event, the cost will be for less than say a war in Iraq.

While part 1 will lead to voluntary conservation, it also will make alternative fuels much more competitive with gas since they would not have a consumption adjustment. (85/15 blends would have 85% of the consumption adjustment).

Part 2. MPG Price Adjustments

Automakers will no longer have to comply with any mpg standards. Each year the average mpg of all the cars sold will be calculated. The next year, those that are sold with less than the average will have a $ 1,000 per mpg less than the average added to the cost of the car. Those cars sold with a higher mpg than the average will get a rebate of $1,000 per mpg above the average.


The results of these 2 plans taken together should 1. Have drivers doing everything possible to be below the average gas consumption. 2. Especially with Part 1 in place, auto sales will be extremely mpg driven giving automakers all the incentive they need to increase the mpg of their cars. 3. Increase the use of alternative fuels and 4. The moment these plans are announced with an implementation date, speculators should stop bidding up oil futures.

2008 May 22 08:57 AM

[Pent up demand:]

Right, steveross. Except you forgot the part where some of the rebate money gets siphoned off to go to the usual causes.

Speculators would laugh at your castles in the sky and go right on betting on the futures.


Oil at these prices causes pain, no doubt. But it's the Saudis that should be worried, because these prices are making alternatives of any sort much more attractive.

2008 May 22 09:39 AM

[tofurky:]

Simple two step process:

1. Prices rise.
2. Everyone reacts out of self interest. Consumers consume less and look for existing efficient technologies. Efficient technology providers are motivated by new capitol. Innovators develop alternate technologies made feasible at the higher prices etc.

Step one finally aligns the solutions with America's core values: selfishness and greed. We're on the righteous path now. Lets just hope the high prices hold. Go free market go!

In a perfect universe where the voting public was slightly less selfish, ignorant, and short sighted, we would see our government create price floors to keep this new activity moving.

2008 May 22 10:09 AM

[bearfund:]

How to go from painfully short oil to happily long oil in 3 easy steps:

Step 1. Sell your car.
Step 2. Buy a bus pass (most places in the US, these go for $40-100 a month).
Step 3. Buy STO.

Not too sure about step 3 these days but it sure was a great move in January. The others work well all the time, though.

2008 May 22 10:14 AM

[LJ:]

There is plenty of evidence that oil exploration or mining activities can induce man-made earthquakes. The most recent example was the little known earthquake in Germany caused by coal mining (see the following link). The mainstream scientists may argue against this. Whether they agree or not, it is unwise to risk our lives and our future in favor of the economy.

www.planetark.org/dail...

2008 May 22 11:56 AM

[Gob:]

"These oil profits go straight in to Republican coffers."

How stupid. You know nothing about U.S. politics. Shut the f$#k up and grow a brain.

2008 May 22 03:25 PM

[blackbody:]

One thing that seems to have gotten lost in last couple years is the trillion barrels of OIL in Colorado mountains that are buried within the rocks. As I recall, CVX was given the rights to extract those OIL. The estimates were the extraction process would become profitable at $100/barrel. So, as it stands, without killing off nature in Prudho bay, US has the largest known reserve in the world.

2008 May 22 04:52 PM

[Graqnt Hudlow:]

ALLIED SCIENCE, INCORPORATED
P.O. Box 2629, 4161 Mary Lou Street, Pahrump, Nevada 89041
alliedscience.org Telephone: [phone] E-mail: [e-mail]


Form Project Summary

Project Name:


General Introduction:
Grant Hudlow FOUNDER,CEO
One person can make a difference, has been the driving philosophy for the life of Grant Hudlow. It was this mind set that led to the birth of Allied Science, Incorporated in 1989. Now, nearly two decades later, with a financial commitments base exceeding $7.5 billion, Allied Science, Incorporated carries it’s message of wholesome, values- oriented products across the United States, Canada, and Europe.
“When we reach people, if we can sell a product, great, but we are first and foremost about spreading our message, “ says Mr. Hudlow. “We want people to know that their is an alternative to the sex, violence and profanity that is in so many homes today.”
Mr. Hudlow attended California Institute of Technology and the University of Nevada at Reno
Before spending 13 months on the Korean DMZ, then an industrial turn around expert with Procter & Gamble, Stewart Warner, Fuller Paint and Fairchild Semiconductor.
Mr. Hudlow left big business to create Allied Science, Incorporated after realizing the need for uplifting, wholesome discussions that carry a positive messages. “I knew this was something I had to do,” Mr. Hudlow says. Creating Allied Science, Incorporated was more of an important work decision than a business one.”
Mr. Hudlow has since named the chemistry to make this new industry possible, led the design engineering, sold $7,500,000,000 in orders for factories and sold $7,000,000 in orders for the products from the factories around the world. Armed with the belief of his convictions, he has grown Allied Science, Incorporated from a dream to a major international corporation with more than 200 alliances.
Mr. Hudlow enjoys assisting young people in ther entrepreneurial aspirations as well as working with and training school teachers and other professionals. His professional accomplishments and community service have been recognized by local churches and local civic organizations.
Mr. Hudlow has two children and one grandchild.
A little know fact about Mr. Hudlow is his love numbers and statistics. Retired CEO S.B. Devlin says, “No one sees through a problem faster than Grant. He’s a true statistical genius.”

Terry Ellis, Sr.
has valuable engineering and construction contacts. He has hands on management and business experience with Fluor Daniels, Brown & Root and others

Dr. Chuck Baroch,PhD Chemical Engineering, is a retired CEO with Babcock and Wilcox.

Dr. Davis Clements, PhD, is a Chemical engineering Professor at the University of Nebraska in Lincoln, Nebraska.

Gary Smith is a highly regarded Chemical and Petrochemical Engineer with quality contacts and broad work experience. His experience ranges from blending his own gasoline for resale to employment with major chemical companies such as Dow, Dupont and Union Carbide. Mr. Smith has a BS and MS in Chemical Engineering from the Georgia Institute of Technology. Mr. Smith assists with the engineering and construction of the total project and with the management of the complex.

Lawrence G. Erskine, President Bionomics International,Inc., enjoys a solid management and marketing reputation in the USA, China, Japan, Singapore, New Zealand and Australia. Mr. Erskine owns and operates a Hazelnut business in the state of Oregon and ships finished (value added) Hazelnut products around the world. He imports and exports equipment. Mr. Erskine spent 10 years in management with General Foods Corp. He attended the University of Oregon, obtained a BA in marketing from Northeastern University and attended an accelerated MBA (equivalent) course from Harvard University, via General Foods Corp.

Al Avolicino coupled his education in art with his management and leadership skills to become marketing and advertising manager for some of the largest companies in the U.S. Mr. Avolicino will devote his time to establishing contracts with waste generators and creating the necessary educational campaigns. He will hire and train the marketing and sales people. Mr. Avolicino has enjoyed management positions with such companies as General Foods Corp., Servatron,Inc. and Farmer Brothers,Inc.

Frank Lopez CPA, Lopez and Company,Inc. will be handling the tax and accounting responsibilities for the projects. (Background an resumé available on request)
The Allied Sciences, Incorporated team’s strategic alliances include work with the following:
Elko City Council, Phenol brokers all around the world, Economic developers all around the world, BISNIS, USDOC, USDA, US EX-IM Bank, University of Nebraska, Lincoln, UNLV, UNR

3. Funding Request:
$70,000,000 to buy $100,000,000,000 of coal on the surface (that can be mined for $.85 a ton) plus $100,000,000 to build, debug and operate a factory that makes $2,000,000 a day by converting coal to 100,000 barrels a day of gasoline and diesel that sells for $.55 a gallon wholesale.

Term:
First tranche: $170,000,000 (to buy the coal $70,000,000; to get environmental permits $7,000,000 engineering fee: to buy the equipment $32,500,000; to build the plant $25,000,000 labor and $15,000,000 contractors fee; to debug $8,200,000; operating cost to profitability $12,300,000.

Community Impact:
Allied Science will bring 1000 new jobs initially; A $50,000,000 annual payroll; A chemical engineering lab to the local community college; Computers to local children; And money for local infrastructure as needed. In a nutshell, Allied Science, Inc. serves the community by contributing a significant portion ( which has been factored into the base product cost and does not affect returns) of the revenues generated from the factory going to support local charities, help fund community City and State Public Services, as well as supporting biotech and medical research organizations.

Environmental:
With the allied Science,Inc. facilities, there is NO burning, therefore NO smoke stacks. NO smoke stack means No air pollution. The residuals are distilled water, which is evaporated, and an ash which is stored and conditioned for one year and is used as a non-toxic powder to strengthen roads, make 19,000 lbs. concrete, and for strengthening wallboard.

Specific Performance:
From funding, Three months to buy the coal ; Two months to get environmental permits ; Three months to buy the equipment ; Six months to build the plant; Two months to debug ; Three months to profitability.

Exit Strategy:
At end of nineteen months after funding, Allied Science, Incorporated will contractually begin to return 150% of the amount funded for each project. Allied Science, Inc. expects to complete this process within two years of receiving funding.

Supporting Documents:
15 pages of supporting documents are available on request as an attachment as needed.

10. Letter of Introduction from Bank available at later date.

2008 May 22 05:17 PM

[Kunst:]

Mr. Hudlow: This is somewhere between boring and annoying. Next time will simply be stupid.

2008 May 22 08:03 PM

[Kunst:]

STO is up 53% since mid-March and is 28% above its 50-day average. I'll pass, thanks.

2008 May 22 08:04 PM

[Bergius:]

There is something else that could throw an instant reverse into the price of oil: Information, and somebody acting on the information. Here's the first part:

Did you know that wood waste (slash, pine beatle kill, mill waste, etc) can be turned into commercial quality liquid fuel (gasoline, avgas, diesel, heating fuel, etc) through a fairly simple refining processs known as Bergius Hydrogenation? Germany developed the process in WW2 and it was later advanced in the USA (using German scientists) in the late 1940's. In 1949 the head of one of the U.S. test plants said he could produce all the commercial grade unleaded 87 octane gasoline America wanted for 1.5 cents per gallon before taxes and profit.

Oil was cheap and plentiful then. The technology was incorporated into the modern day cracking process where 4 barrels of gasoline plus many other related products are produced from 1 barrel of oil. Actually you don't need oil. Any compound containing carbon can be hydrogenated into gasoline, heating or diesel fuel. The Bergius process will convert 99% of carbon into fuel. This means that not only wood waste but things like used tires, plastic bags and household trash could also be converted. Note that this process does not produce an alternate fuel. It produces exactly the same fuel as that refined from oil.

I know this process works. I had a forest company and a mill in the 70's. I built a stage-1 wood-waste converter and ran a stationary 4-cylinder datsun gas engine directly from the output. This engine powered all the hydraulics at the mill.

2008 May 22 10:11 PM

[Donald Johnson:]

Remember when the left wanted to slow oil consumption by imposing a 50-cent tax on gasoline? When was that , a couple of years ago? Now we have $4 gas and rising, the equivalent of a $1.50 to $2 tax.

And, wonder of wonder, the markets are working. Americans and Europeans are cutting consumption, and according to today's Financial Times, Asian countries finally are cutting the subsidies that have made their consumers so price insensitive. For years Russia, Iran and Opec have been manipulating the markets to get higher prices.

Now the Asian, American and European governments are counter manipulating prices with the help of their consumers. Guess who will win.

It won't be the bulls.

2008 May 22 10:44 PM

[Chubbs:]

Donald, it is not about "the bulls." The give and take of traders are ultimately insignificant blips. World reserve are running dry. Soon enough we will wish for $125 oil. Resource nationalism is right around the corner.
I'm not Mr. Predicto and it seems I'm talking about near certainty as reality. Certainly, we could all be killed by Bird Flu which according to the soberly scary pronouncements would drastically cut oil demand.

2008 May 22 11:58 PM

[Bergius:]

It's a bubble. All bubbles break. Sooner or later, they break. This one is no exception.

2008 May 23 01:08 AM

[silver-bullet:]

Bergius - I think your head is a bubble. Where are your facts that there are more newer and larger source of oil supply?

This is what I think should happen. It is painful, but necessary:

First shut down the following companies:
- Ford
- GM
- Chrysler

Because:
- They don't have the right product: Emphasis on smaller fuel efficient cars.
- A big chunk of their expenses goes toward NON-VALUE-ADDED union worker fees and expenses.
- Another big chunk of their expenses goes toward pension plans
- Even if they can build a car running at 100 mpg, it would probably cost upwards of $50,000 due to the above costs.

Second, we need to lock up all the environmentalist in an asylum, and start deregulating oil drilling in USA. What a SHAME to go begging from the Saudis (folks who don't particularly like us) for more oil. And the fact that there is an abundant oil reserve here in US make this just insane.

Third, and this is probably going to be the most unpopular of the three, we should slap a 100% tax on gas and put all of it to work building mass transport and develop alternative energy. Compared to the rest of the world, gas is relatively cheap here in the US even at $5/gallon.

There, you have it. A 'simple' 3-step-plan.

2008 May 23 01:40 AM

[fxtrader07:]

@silver-bullet: before calling other people names and fast firing silver-bullets, you may want to first examine facts next time. There is a must-read article here on sa dealing with the magnitude and impact of index speculators in the current run-up of commodities prices (no, not just evil hedgies and traders, but, very much your very own pension fund, for example).

seekingalpha.com/artic...

@ Keith Fitz-Gerald: you may also look at the link above as it is the most urgent and simple measure that Congress and Senate can do: essentially shut down commodity futures markets for pension funds, big banks, large funds, hedgefunds etc.
The very telling presentation before the Senate committee from Tuesday can be directly read here:
hsgac.senate.gov/publi...

So while oil is certainly in a continuing long-term uptrend, this years 35% run (it may well extend to a 50 or 60% price increase before falling sharply) is a speculative short-term blow-off top imho., especially if confgress really closed the speculants' loopholes and the crooks and morons at the CFTC actually started doing what they are paid for by taxpayers. Instead, these selfish crooks even advertise on their homepage for pension funds to diversify into commodities futures and propose to abolish position limits alltogether! yeah, right. a 100 bn pension fund just thworing 2% of assets into the crude oil futures will easily make for the next $5 jump in prices. But of course, it's all due to chindia and evil opec. what a joke.

2008 May 23 03:18 AM

[sodajerk:]

Blackbody has a great idea: Instead of poking holes all over the arctic tundra, let's grind up the Colorado Rockies in search of shale oil. Great idea!

The solution lies in developing and implementing alternatives - not looking for every last drop,

2008 May 23 07:22 AM

[seeksome:]

sodajerk is a jerk we need to use our own reserves I do not care where they drill, in my backyard if you need to.We are not running out of oil we are just to stupid to drll for it.Oil runs the engine of capitalism do you all want to start riding your bike to work give me a break.This market can not bear oil at $225 a barrel.Save money and gas go here:seeksomething.com

2008 May 23 07:46 AM

[ArtfulDodger:]

Mr. Fitzgerald:

Nuts!

I don't blame speculators; they're simply taking advantage of a situation that can make them some money. I don't blame the oil companies either. And I definitely don't blame Bush as all leftists do.

However, I do blame those manipulating the supply figures. Here is where Congress should do its work and stop this thievery.

A very important article reporting the scam going on regarding oil supply and demand was written on SA by Philip Davis, who is a scam exposer extraordinaire.

His is a great and badly needed article! It is a must read for those of you who're able to objectively go over the massive pro-high oil price propaganda put out by the big houses and their touts.

Perma-oil bulls need not apply, for just as nothing would convince Saddam Hussein haters that he was a Toy Tiger, and there was no way to convince the public that the wrong date on a computer had nothing to do with running power grids, and there was no way to convince people that the hundreds of dotcom companies the big houses and their touts were touting had no real income, no cash on hand, and no business plan and thus were really dotbombs waiting to explode, there's no way to convince today's suckers who're convinced the planet is heating up to a boiling point (caused by, of course, burning oil) and that the earth is quickly running out of natural resources such as oil that both are huge shams created respectively by the eco-maniacs and greedy New York shysters who have a huge amount of control over the business news and investing touts.

See here: seekingalpha.com/artic...

Rebeldog

2008 May 23 01:05 PM