Saudi Prince Identifies America's Real Answer To Energy Independent

Aug. 02, 2013 7:29 PM ET7 Comments
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Portfolio Strategy, Gold

Contributor Since 2013

Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions of economics, finance, writing, and education, and are intended mostly as educational material. I attempt to write the articles in an easy to understand down to earth style in an effort to help others with their research. This is my effort to bring understandable and educational professional quality research to the public at large free of charge. General Disclaimer for my Articles: 

Unfortunately in life, sometimes politics involves itself in issues and it is hard to filter out the facts from the fiction. Factions on both sides make their arguments, some more valid than others, and the result is mostly confusion. Investors are then left to flipping a coin when they decide which side has the better argument and should get their investment dollars. When faced with those confusing issues where one side will say one thing and the other side will say just the opposite, I turn to what I call the "smoking gun" theory of investments. I look for those events that are simply so obvious that they pretty much expose the truth without any additional commentary. I also call this investment approach "seeing the forest through the trees" because the smoking guns are often right in front of our eyes.

I spent a lot of time writing about gold which fits this mold. I like to point our that gold peaked 2 years ago, and there has been plenty of money printing since that time. This instablog I wrote points out how silver is trading below its pre-QE peak, something that is totally inconsistent with the theory that printing money causes inflation and why gold and silver are destined to go higher. People can argue that point, but the truth is gold is substantially off its peak, the markets aren't signaling inflation, and gold and silver are trending down. Investing isn't about riding bubbles up only to lose everything on the way down, investing is about managing risk, knowing when to take on risk, and when to avoid it.

Alternative energy is another sector that fits this mold, and the subject of this article. Both sides are in a heated battle to win the hearts and minds of the American people so they can control the path she takes towards energy independence. Right now the wind, solar and renewables (WSR) faction is in the driver seat and fortunes are being poured into those industries...but with very limited results. If energy independence is the goal; taking the WSR path is about as long, difficult and expensive a route as one can take to get to that destination. People may not like that comment, but much of the technology and infrastructure needed to accomplish the current administration's goal of energy independence through WSR simply doesn't exist and is year's away at best.

To identify what is America's most likely path to energy independence, one only needs to listen to those who stand to lose the most if she ever reaches that goal. By far the people most likely to have studied this issue and handicapped all the possibilities are the people with skin in the game, people that actually have a vested interest beyond getting elected or continued grant funding. To identify them, investors simply need to follow the money, and the money leads right to where you would expect it to lead, the OPEC nations and especially Saudi Arabia.

Ask Saudi Arabia what she fears, and it won't be WSR, Saudi Arabia fears fracking. Saudi's fear fracking so much, they don't even try to hide it. Just this week Saudi Billionaire Prince Alwaleed bin Talal made headlines admitting it.

Prince Alwaleed bin Talal, the country's best-known global investor, said the business model of Middle East oil exporters risks unravelling rich industrial states find ways of cutting demand. "Our country is facing a threat with the continuation of its near-complete reliance on oil: 92pc of the budget for this year depends on oil," he said in a letter to Saudi oil minister Ali Al-Naimi.

The oil minister and OPEC of course downplay the threat of fracking, but WSR never even get mentioned. America's focus on WSR is a dream come true to OPEC and Saudi Arabia.

Mr Al-Naimi and Opec leaders have taken a relaxed view of growing US shale output. "This is not the first time new sources of oil are discovered. There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now?" he said last month.

But even OPEC admits there is a threat:

Opec admits that new output from hydraulic "fracking" could chip away its dominant position in the market but secretary general Abdalla El Badri still insists that Opec "will be around after shale oil finishes". The group is more worried about recession in Europe and a hard landing in China.

OPEC's smiles however may be hiding itys true fear if Harvard University is correct with their estimates.

A report last month by Leonardo Maugeri at Harvard University said US shale oil output could triple to 5m bpd by 2017, turning America into the world's top producer once again.

Even if the US chooses not to take a lead in the next energy revolution, the rest of the world may simply pass her by.

The great unknown is how quickly the US technological feat can be replicated in Argentina, Britain, Poland, Russia, and above all China, where there is a chronic shortage of water needed for fracking. France, Germany and several European states have cut themselves off for ecological reasons but this may become untenable if others succeed.

So with or without US leadership, OPEC and Saudi Arabia have something to worry about.

If shale does deliver on its promise and keeps prices low for decades, it will be a mortal threat to OPEC states that rely on oil revenue to cover social spending and placate fast-growing populations. The "break-even cost" for their budgets has doubled over the last decade, reaching $140 (£91) in Iran, $115 in Bahrain, $100 in Iraq, $80 in Saudi Arabia, and $75 even in the lightly-settled Emirates. Russia too has topped $100.

One additional note is that Saudi Arabia needs to be concerned with its long-term viability. Saudi Arabia is a huge sun baked desert. If wind and solar would work anywhere in the world, it would work in Saudi Arabia. If wind a solar were comercially viable, Saudi Arabia would be using wind and solar and exporting more of their oil. They aren't doing that, and they have the most ideal geography in the world for wind and solar. That should tell wind and solar investors a lot about the true prospects of wind and solar when there is no government support. It simply doesn't exist even in the most ideal conditions.

While the Saudi Prince may be more overt, OPEC, or at least Abu Dhabi has expressed their anxiety in another more cynical, deceitful and underhanded manner. In a manner right out of radical progressive activist Saul Alinsky's rule book, Abu Dhabi funded a masterful piece of anti-fracking propaganda which highlights the deceitful and deceptive tactics developed and practiced by the radical left...only with a twist. In the movie Promised Land, "Big Oil" is the one that follows the preachings of Saul Alinski and "blames others for what you are guilty."

However, it appears that anti-fracking politics makes for strange bedfellows. Heritage Foundation blogger Lachlan Markay noticed that one of the film's backers is Image Media Abu Dhabi, owned by Abu Dhabi Media, which in turn is wholly owned by the United Arab Emirates, which, it just so happens, is the world's fourth largest oil exporter.

I think it is worth nothing that the New York Magazine had to quote a conservative blogger for this information, and it was not exposed from its own research. Investors simply can not rely on the media to give a fair and balanced account on issues such as energy and global warming/climate change. As I've pointed out in past articles, I doubt that most people know that global warming ended over a decade ago, or that thousands of cold temperature records are being set this summer. Over 1,000 were set in a single week. The media simply isn't reporting the counter arguments, so investors must rely on their own research and do their homework on these issues.

While I wouldn't recommend Promised Land for its anti-fracking message, I would recommend it for its propaganda insight. The movie highlights just how deceitful, deceptive, dishonest and despicable some of the tactics people and organizations use to forward their agendas. As I mentioned above, all the tactics used in the movie are codified in the book Rules for Radicals, and celebrated and practiced by the progressive left today. The intention isn't to expose the truth, or to get people to make the right decisions, the whole purpose is to deceive people, and confuse them to the point they can be manipulated into making the wrong decision. In this case Abu Dhabi wants to confuse people to be anti-fracking, which benefits Abu Dhabi, but harms America, the main market in which Abu Dhabi played Promised Land.

Another example of propaganda is Josh Fox's Gas Land that asks on its promotional poster, "can you light your water on fire?" The very premise of the film is that fracking pollutes the water table, and results in natural gas being released into the water table. The video clip of the flaming faucet has been widely rebuked, and Josh Fox even admits that the flames were due to naturally occurring "biogenic gas." Even the New York Times refutes the claims.

The Pennsylvania experience with water contamination is also instructive. In Pennsylvania, shale gas is accessed at depths of thousands of feet while drinking water is extracted from depths of only hundreds of feet. Nowhere in the state have fracking compounds injected at depth been shown to contaminate drinking water.

In one study of 200 private water wells in the fracking regions of Pennsylvania, water quality was the same before and soon after drilling in all wells except one. The only surprise from that study was that many of the wells failed drinking water regulations before drilling started.

The facts are pretty clear if one does their research, but because of the politics, the issue gets very murky if you listen to the press and anti-fracking activists. One only needs to look north of America to get real case studies removed from the political bias that is distorting the argument in America. Eco-friendly Canada has been fracking for decades and they love it. They have a long term track record and have produced real results with limited environmental damage. In this video the Canadian Natural Resource Minister Joe Oliver highlights just how much misinformation there is about this topic.

1) Mr Oliver refutes President Obama's claim that "the Keystone Pipeline will only create 2,000 construction jobs and 50 to 100 permanent jobs." What makes this angle so interesting is that President Obama and the unions are currently pushing for more infrastructure spending. The Keystone Pipeline is the perfect kind of infrastructure spending; the type that creates real jobs, a positive ROR on the tax payer's investment and solves a major energy problem. On this issue however President Obama seems to favor the environmentalists over the unions. What makes Joe Oliver's argument so convincing is that he uses the US State Department's estimates of 40,000 jobs to refute President Obama. He uses the US' own estimates to refute its president.

Not only does the Canadian Resource Minister refute the claims of President Obama, so does the AP. The AP supports that claim and uses many other estimates as well, all being larger than the one used by President Obama.

The State Department report goes further. It estimates that the project could help create - directly and indirectly - as many as 42,000 jobs, including jobs for suppliers and subcontractors that provide equipment and materials, as well as lodging, food services and other jobs related to construction. The figure includes part-time jobs.

The Keystone Pipeline is 1,700 miles long and will cost over $7 billion. One needs to ask themselves, could the President really think that a project that large would only take 2,000 people to construct and create 50 to 100 permanent jobs? I doubt it, clearly politics is distorting his position.

THE FACTS: It's not clear where Obama came up with the 2,000-jobs figure.

The project's developer, Calgary-based TransCanada, has said the pipeline could create as many as 13,000 construction jobs - 6,500 a year over two years.

In its March report, the State Department put the number of construction jobs at 3,900 on an annual basis. That figure doesn't include an estimated 4,000 workers that TransCanada says it has hired for a 485-mile southern segment of the pipeline that already is under construction and nearing completion.

Nor do the figures include the peripheral jobs that would be created as a result of a major infrastructure project.

TransCanada says about 7,000 manufacturing jobs will be needed to support the overall project, which will stretch from Canada to the Gulf of Mexico.

The Canadian Resource Minister also refutes the claims that oil coming in from the Canadian Oil Sands would simply be refined and then exported. He points out that oil that comes in from Venezuela isn't refined and then exported, why would the US treat Canadian oil any differently? That's a great point considering oil is stored in vast tankers that often mix oil from different sources as long as they are the same quality. I would imagine the Canadian oil would mix with some of the oil from the Bakken and other regions of the US, and no one is claiming the US will export North and South Dakota refined product. If we are exporting the refined product it is because of the ethanol madate, not its source of origin. Those kinds or illogical and baseless claims are used to confuse the public, and investors must learn to see through them.

Why would it be if Venezuela oil coming in, refined in the huge refineries in the gulf coast, are not exported, why would Canadian oil, which displaces it, be exported? I don't follow the logic.

Yeah, this is such a he said/she said. If the president's state department -- this is his state department, and you're saying the state department said it's 40,000 jobs and then the president tells the New York Times so something's got to give here. it makes no sense.

Ironically, because the pipeline doesn't exist, the current oil must be transported by rail. Rail, while safe, is more risky than pipeline, so the environmentalists approach of blocking the pipeline isn't stopping the oil from being produced or transported, it is just being transported in a less environomentally friendly manner.

In fact, that's what the state department said. Right. In making the point that there was going to be no incremental increase in greenhouse emissions, they're saying if we can't export to the United States, we're going to export the oil elsewhere.

The track record of fracking both in the US and Canada is pretty clear. The very fact that fracking is so politically unpopular with the President's main political base, and the EPA hasn't banned or significantly restricted it, pretty much proves at least to me, there is a lot more smoke than fire backing the anti-fracking movement. If the environmentalists can't convince President Obama, I doubt they can convince the rest of America on the need to ban fracking. Ironically the same groups claiming to be experts in science when it comes to climate change, appear more like Luddites when it comes to fracking.

The United States, like Canada, is extremely fortunate to have discovered a vast amount of oil and natural gas, nonconventional, shale oil and natural gas, and it's clear this will make an enormous difference to the economy and to the economic well-being of North Americans. Fracking has been going on in British Columbia and in Alberta for well over 30 years, and there hasn't been a single instance of water contamination during that period. So we consider it pretty safe. On the other hand, Canadians who are not as familiar with the process in the East Coast -- right. -- you know, want to do environmental studies to make sure that it is safe, and we're not going to go ahead with any projects that are not safe for Canadians or safe for the environment.

In conclusion, long-term investors must learn to see through the political smoke when seeking information on which to base a retirement investment portfolio. Right now there is a war on conventional energy raging in America that is harming coal, oil, nuclear and natural gas while benefiting WSR. The same groups waging that war are the same groups promoting climate change as the reason to support their war on conventional energy sources. All wars however need political support, and are difficult to fund, supply and maintain the offensive. This article attempted to highlight the irregularities, oddities, politics and inconsistencies of the anti-fracking/climate change movement. I do this so long-term investors can evaluate whether or not the industries that have emerged to fight climate change are likely to be long-term investments or will they go the way of the companies that emerged to fight the coming ice age on the 1970s. If America truly wants to become energy independent it won't be able to reach that goal using WSRs, at least not in my or my children or grandchildren's lifetime. The solution to energy independence is through domestic energy production, fracking, gas-to-liquids, coal-to-liquids and other conventional means. That may not be a popular opinion in today's political climate, but it will ultimately prove to be the solution as it did in the 1980, and investors should review that history when making long-term investment decisions. History tends to repeat itself, and investors that study history can profit from it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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