(XOM) Archives - Page 10 of 10 - Mad Hedge Fund Trader

The True Cost of Oil

My annual electric bill here in sunny San Francisco comes to $4,800 a year. Since the California power authorities have set a goal of 33% alternative energy sources by 2020, PG&E (PGE) has the most aggressive green energy program in the country (click here for ?The Solar Boom in California?. More expensive solar, wind, geothermal, and biodiesel power sources mean that my electric bill may rise by $300 a year to about $5,100.

Now let?s look at my gasoline bill. Driving 15,000 miles a year, my old Toyota Highlander Hybrid used 600 gallons a year, which at $4/gallon for gas cost me $2,400/year. So my annual combined electric power/gasoline bill was $7,500.

My new Tesla Model S-1 (TSLA) will cost me $180/year in battery charges to cover the same distance. By switching to the Tesla, my total energy cost plunges to $4,980 a year, down 34%. That?s a big saving. Now you know why alternative energy is so popular in the Golden State.

There is an additional sweetener, which I?m not even counting. I also spent $1,000/year on maintenance on my old car, including tune-ups and oil changes. The Tesla will cost me nothing, as there are no oil changes or tune ups, and my engine drops from using 1,000 overcooked parts to just eleven. We?re basically talking tire rotations only for the first 100,000 miles.

There is a further enormous pay off down the road. We are currently spending $100 billion a year in cash up front fighting our wars in the Middle East, or $273 million a day! Add to that another $200 billion in back end costs, including wear and tear on capital equipment, and lifetime medical care for 5 million veterans, some of whom are severely torn up.

We import 7.5 million barrels of oil each day, or 2.7 billion barrels a year, worth $270 billion at $100/barrel (click here for the US Energy Information Agency stats). Some 2 million b/d, or 730 million barrels/year worth $60 billion comes from the Middle East. That means we are paying a de facto tax which amounts to $136/barrel, taking the true price for Saudi crude up to a staggering $219/barrel!

We are literally spending $100 billion a year so we can buy $60 billion worth of oil, and that?s not counting the lives lost. Even worse, 80% of total Persian Gulf exports now go to Asia, so we are now spending this money to assure China?s supplies, not ours. Only a government could come up with such an idiotic plan.

There is another factor to count in. Anyone in the oil industry will tell you that, of the current $100 price for crude, $30 is a risk premium driven by fears of instability in the Middle East. The Strategic Petroleum Reserve, every available tanker, and thousands of rail cars are all chocked full with unwanted oil. This is why prices remain high.

The International Energy Agency says the world is now using 90 million b/d, or 32 billion barrels a year worth $3.2 trillion. This means that the risk premium is costing global consumers $960 billion/year. If we abandon that oil source, the risk premium should fall substantially, or disappear completely. What instability there becomes China?s headache, not ours.

If enough of the country converts to alternatives and adopts major conservation measures, then we can quit importing oil from that violent part of the world.? No more sending our president to bow and shake hands with King Abdullah. Oil prices would fall, our military budget would drop, the federal budget deficit would shrink, and our taxes would likely get cut.

One Tesla shrinks demand for 750 gallons of gasoline, or 1,500 gallons of oil per year. That means that we need?20.4 million?electric vehicles on the road to eliminate the need for the 2 million b/d we are importing from the Middle East. The Department of Energy has provided a $1.6 billion loan to build a Nissan Leaf plant in Smyrna, Tennessee.

Add that to the?million Chevy Volts, Tesla S-1?s, Mitsubishi iMiEV?s, and other electric cars hitting the market in the next few years. Also taking a bite out of our oil consumption are the 2 million hybrids now on the road to be joined by a third million in the next two years. That goal is not so far off.

Yes, these are simplistic, back of the envelope calculations that don?t take into account other national security considerations, or our presence on the global stage. But these numbers show that even a modest conversion to alternatives can have an outsized impact on the bigger picture.

By the way, please don?t tell Exxon Mobil (XOM) or BP (BP) I told you this. They get 80% of their earnings from importing oil to the US. I don?t want to get a knock on the door in the middle of the night.

Is This Worth It?

Why I Love/Hate the Oil Companies

Diary, Newsletter

The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.

You?ve got to love ExxonMobil (XOM), which constantly trades places with Apple (AAPL) for being the world?s largest company. This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.

I recommend (XOM) and other oil majors as part of any long-term portfolio. The price of oil has gone up in my lifetime from $3 a barrel up to $149, and then back down to $107 today. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.

Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long term supply contracts. You can find the prices they hedge at in the back of any annual report.

When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.

Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best managed companies in the world.

They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith based industry from day one, when praying was the principal determinant of where wells were sunk.

Unfortunately, the oil companies are too good at their job of supply us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While social security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.

When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth?

Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep water exploration in the Gulf is far less regulated than California hair dressers.

No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.

It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.

But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.

Love Them, Hate Them or Both?

Why I Love/Hate the Oil Companies

Diary, Newsletter

The first thing I do when I get up every morning is to curse the oil companies as the blood sucking scourges of modern civilization. I then fall down on my knees and thank God that we have oil companies.

This is why petroleum engineers are getting $100,000 straight out of college, while English and political science major are going straight on to food stamps.

I recommend (XOM) and other oil majors as part of any long-term portfolio. In my lifetime, the price of oil has gone up from $3 a barrel up to $149. The reasons for the ascent keep growing, from the entry of China into the global trading system, to the rapid growth of the middle class in emerging nations. They?re just not making the stuff anymore, and we can?t wait around for more dinosaurs to get squashed.

Oil companies aren?t in the oil speculation business. As soon as a new supply comes on stream, they hedge off their risk through the futures markets or through long-term supply contracts. You can find the prices they hedge at in the back of any annual report.

When oil made its big run a few years ago, I discovered to my amazement that that (XOM) had already sold most of their supplies in the $20 range. However, oil companies do make huge killings on what is already in the pipeline.

Working in the oil patch a decade ago pioneering the ?fracking? process for natural gas, I got to know many people in the industry. I found them to be insular, God fearing people not afraid of hard work. Perhaps this is because the black gold they are pursuing can blow up and kill them at any time. They are also great with numbers, which is why the oil majors are the best-managed companies in the world.

They are also huge gamblers. I swallow hard when I see the way these guys through around billions in capital, keeping in mind past disasters, like Dome Petroleum, the Alaskan oil spill, Piper Alpha, and more recently, the ill-fated Macondo well in the Gulf of Mexico. But one failure does not slow them down an iota. The ?wildcatting? origins made this a faith-based industry from day one, when praying was the principal determinant of where wells were sunk.

Unfortunately, the oil companies are too good at their job of supplying us with a steady and reliable source of energy. They have one of the oldest and most powerful lobbies in Washington, and as a result, the tax code is riddled with favorite treatment of the oil industry. While Social Security and Medicare are on the chopping block, the industry basks in the glow of $53 billion a year in tax subsidies.

When I first got into the oil business and sat down with a Houston CPA, the tax breaks were so legion that I couldn?t understand why anyone was not in the oil racket. Every wonder why we have had three presidents from Texas over the last 50 years, and are possibly looking at a fourth (Jeb Bush)?

Three words explain it all: the oil depletion allowance, whereby investors can write off the entire cost of a new well in the first year, while the income is spread over the life of the well. This also explains why deep-water exploration in the Gulf is far less regulated than California hairdressers.

No surprise then that that the industry has emerged in the cross hairs of the debt ceiling negotiations, under the ?loopholes? category. Not only do the country?s most profitable companies pay almost nothing in taxes, they are one of the largest users of private jets.

It is an old Washington nostrum that when things start heading south on the domestic front, you beat up the oil companies. It?s the industry that everyone loves to hate. Cut off the gasoline supply to an environmentalist, and he will be the one who screams the loudest. This has generated recurring cycles of accusatory congressional investigations, windfall profits taxes, and punitive regulations, the most recent flavor we are now seeing.

But imagine what the world would look like if Exxon and its cohorts were German, Saudi, or heaven forbid, Chinese. I bet we wouldn?t have as much oil as we do today, and it wouldn?t be as cheap. Hate them if you will, but at least these are our oil companies. Try jamming a lump of coal into the gas tank of your Prius and tell me what happens.

Love Them, Hate Them or Both?

US Headed Towards Energy Independence

Newsletter

My inbox was clogged with responses to my recent prediction of US energy independence. This will be the most important change to the global economy for the next 20 years. So I shall go into more depth.

The energy research house, Raymond James, put out an estimate that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture. Ten years ago North Dakota was suffering from rampant depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $122 billion a year at current prices (3.5 million X 365 X $96). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a hugely dollar positive development.

These 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further than the coal ETF (KOL), which has been falling relentlessly in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. Public utilities love ditching all the potential liabilities that come with coal. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $95 look a little rich. As with the last oil spike four years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 million barrels. It is concerns about war with Iran, fanned by elections in both countries that have taken prices up from $77 since the fall.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. This is why I have been advising readers to sell short oil price spikes to $110. The current run up isn?t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets in my long-term model portfolio, like Exxon Mobile (XOM) and Occidental Petroleum (OXY).

Energy independence is also making a huge contribution to the US jobs picture. According to energy guru, my old friend, Daniel Yergin (you must read his Pulitzer Prize winning book on oil, The Prize), energy has created 1.7 million jobs in the last 5 years, and will double that in the next three. It has also created $60 billion a year in new revenues from taxes and oil leases for the US Treasury. Ironic as it may seem, the job that pushes the headline unemployment rate down to the Fed?s vaunted and magical 6.5% target could be for a roustabout.