Big Oil: Boom or Bubble?

May 21, 2008

Today, the Senate Judiciary Committee called a meeting with executives from the biggest oil companies – Exxon Mobil (XOM), ConocoPhilips (COP), Shell (RDSA.L), Chevron (CVX), and BP America (BP) – demanding to know why gas prices are so high. Most of the executives cited the laws of supply and demand. As long as people continue to consume oil faster than it is being produced and bought in the US, prices will continue to rise.

Furthermore, oil prices set a new record above $134 today when the Energy Department’s Energy Information Administration reported that crude inventories fell by more than 5 million barrels last week, even though analysts had expected a modest increase.

The Boom

The five largest US and British oil companies together only account for 11% of worldwide output. The bulk of the world’s current and future production comes from the Middle East, and possibly recent discoveries such as those in Brazil. The American oil companies are not dictating the price of oil; the global market is. It just happens to be their turn to profit.

Global Supply and Demand

China is the world’s second-biggest oil consumer after the U.S., and is the world’s fastest-growing oil consumer. However, whether or not China is really consuming all the oil it is buying and producing is anyone’s guess. China does not report consumption, thus analysts guess this number from production, trade, and inventory data that may not have been accurately reported.

In terms of supply, the 13 nations in OPEC are unreliable in their output reports and may be producing above their quotas in hopes of being allowed bigger quotas.

The Bubble

Because worldwide supply and demand numbers are so vague, much of oil price direction is controlled by speculation. Every time the Energy Department reports a drop in crude inventory, the oil market rallies, driving crude oil prices up to a new record. In a very disproportionate way, oil prices are still following the laws of supply and demand.

The Reality

According to Larry Chorn, chief economist of the energy information unit of The McGraw-Hill Companies [1], even the most expensive wells in the world today can produce oil for $70 to $80 a barrel, which includes the cost of finding and developing the oil fields and a 12-15% profit margin. However, the big oil companies (outside of OPEC) are already producing oil at their maximum rate.

Two decades ago, when oil prices were low and profit margins were slim, big oil companies merged, cut capital spending, and sold off thousands of wells. These large companies seemed to still be stuck in this mindset even as oil prices rose in the last few years, and until recently were hoarding their profits instead of increasing spending to invest in new exploration and drilling.

The Future

It can take over a decade to bring a new oil field online, and the big oil companies are behind. Last year, oil production from the top five oil companies fell 3%. As long as supply and demand numbers remain unknowns, the market will have to rely on speculators to bring oil prices back down. This will likely only happen if local inventories increase. With Big Oil output steadily falling, smaller companies will need to step up to account for the deficit. Last year, the publicly traded energy companies excluding the big five increased their oil production by 16%.

To put numbers in perspective, crude oil imports have averaged 9.86 million barrels a day this year. US crude oil production has averaged 5.10 million barrels a day. Average crude oil consumption in the US has been 20.69 million barrels a day. [2]

While the big oil companies will continue to enjoy inflated profits for some time, the true winners in the next few monhts will be the smaller companies that have invested heavily in production and are just beginning to ramp up their output.

Some of my favorite small oil companies include:

W&T Offshore, Inc. (WTI)

Occidental Petroleum Corporation (OXY)

Anadarko Petroleum Corporation (APC)

Noble Energy, Inc. (NBL)



Technology in Texas

May 21, 2008

While on my week long trip in Texas, I noticed a few examples of advances in technology. Just 8 years ago, I barely knew anybody who had a cell phone; now your mother, little sister, and nephew have cell phones. Ten years from now, kids will be unaware that CD players, corded telephones, and pagers even existed. Who knows what new innovations will be coming our way; but you never know. Switchgrass may very well be the primary source for producing ethanol instead of corn but only time will tell. The technological advancements I saw are as follows:

  1. Sensors in the frozen food aisle at Wal Mart
    Now the normal overhead lights are always on while the store is in operation, but the lights inside where the frozen food sits only lights up as you walk through the given aisle. Wireless sensors placed throughout the entire aisle detect when people are present and preserve energy during the non-busy hours of the day. Such a simple idea saves a lot of energy and saves Wal Mart a bunch of money over the long run.

  2. Cell phone/Ipod chraging station at the Houston Hobby Airport
    As I exiting out of one of the terminals at Houston Hobby, I noticed The Charge Cart kiosk near the restrooms that acted as a standalone charger for cell phones and Ipods. For only $3, you could get a 30-minute charge to charge your devices that you forgot to bring a charger for. Instead of desperately trying to find that Ipod charger in a place you are unfamiliar with, just pay $3 by credit card for a 50% “quick charge.” Various cell phone selections included Motorola, Kyocera, Samsung, Iphone, LG, Treo, Blackberry, and Nextel. This is good for convenience and for those forgetful people who go to the airport without everything they should be taking with them while traveling.

  3. I noticed two solar panels on the Copano Bay Fishing Pier as I was fishing for hardhead catfish, croakers, and pin fish. While two panels are not going to generate enough energy to power the lights for the pier at night, these panels were geared for research for a local Texas university. Solar has been generating a lot of interest as of late, especially with the increase cell efficiency in the panels, government subsidies, and oil at all an time high.

Kudos to Texas!!!

Book Review: The Little Book That Beats the Market

May 16, 2008

When you buy a book that is entitled “The Little Book That Beats the Market,” you have to be a bit skeptical that being able to beat the stock market can be told in 136 pages (155 if you count the appendix) with each page only being 7″x5″ in size. Author Joel Greenblatt attempts to explain in very simple terms, that even junior high kids could understand, how a magic formula can beat the average returns in the stock market. Now I’ve got to agree with him to a certain extent because the book is explained in very simple terms. Even younger kids can understand what he’s trying to explain because he seems to repeat the same thing over and over and over.

Basically the only two things he’s really trying to get through to the reader is that you should invest in “good companies at bargain prices” (high return on capital coupled with high earnings yield). He then goes on to talk about the tooth fairy, sailing, and a redundant story about selling sticks of gum in efforts to explain this theory about buying good quality companies at bargain prices the market has yet to realize. Then he refers you to his Magic Formula Investing website that will spit out a list of stocks (note that he claims you need 20-30 stocks in your portfolio for the magic formula to work) that meets his magic formula criteria of buying good companies at bargain prices.

He summarizes each of his chapters in a single page at the end of each chapter, and details in six pages at the end of the book step by step instructions on how to utilize the magic formula if you somehow managed to forget along the way. I don’t want to disregard that his form of investing is smart because simply choosing companies with high return on capital won’t necessarily work because most times, investors will have already priced the stock accordingly. The ones he’s looking to recommend you to are the companies that the market has yet to realize that are good companies, hence making them a good deal compared to their counterparts. The $19.95 cover price doesn’t seem to be worth the limited amount of content presented in 155 small pages even though he presents a solid investment style. On a side note, I would recommend going to his website and using the magic formula as a good way to learn about new quality stocks (while access to his magic formula stocks are still free).

Pages: 155
Release Date: November, 2005
Target Audience: Everyone (but focused on long-term investors)
Overall Grade: C

Bottom Line: While Greenblatt does have a good concept to work on, it doesn’t work for everyone because most of us are unable to have enough money to create a 20-30 stock portfolio. On top of that, a lot of us are unwilling to set an investment time frame of 3-5 years to these stocks (what Greenblatt claims it’ll take to recognize the benefits of the magic formula). Since the magic formula works on average, simply picking a few of the stocks filtered from the magic formula screen won’t work according to Greenblatt’s explanations. He would really butt heads with Jim Cramer’s investment style of obtaining short-term capital gains on speculative stocks or stocks that have upward momentum in the near future.

Time to Buy a Portable GPS System

May 14, 2008

By now, you have probably driven with someone who owns a portable GPS unit and odds are they own a model from Garmin (GRMN), Magellan, or Tom Tom (TOM2.AS). The prices of these GPS units have gotten so affordable that average families can now purchase one without breaking the bank. I even broke down recently and bought a Garmin Nuvi 200. While you can get a brand new one for $203 on Amazon, I opted with a refurbished version for $155 on Ebay. These units have gotten so affordable that it doesn’t make sense to not have one. You can get a basic system without all the bells and whistles for less than $225. Forget the bluetooth options, mp3 playing capability, and maps of Mexico/Canada/other parts of the world. GPS functionality should be your primary concern when shopping around for a GPS system.

What Should You Be Looking For In a GPS System?

On top of basic GPS functionality, the only two options I considered were a widescreen 4.3″ GPS unit and text-to-speech functionality.

  1. Widescreen GPS Units
    You can see a good comparison of the Garmin Nuvi systems on the GPSTracklog site. The Nuvi 200W is the most budget affordable 4.3″ widescreen GPS system by Garmin. The next most affordable 4.3″ model is the 250W which is the same as the 200W but includes maps of Canada (which most of us will never utilize). While driving, you don’t want things to be cluttered in a smaller screen. Giving a little more room to navigate will be worthwhile so you don’t focus all your attention on pushing different options on your Nuvi instead of watching the road.
  2. Text-to-Speech Capability
    This function enables the GPS system to pronounce the names of the streets as you’re driving. It will say “right on Cassanova St.” or “left on 44th St.” whereas the non text-to-speech systems will just say “left in .5 miles” or “right in .3 miles.” While the text-to-speech functionality is the next most important function in a GPS system after the widescreen option, it should not be a requirement when buying a unit. It would come in handy as you can concentrate more on driving, but you have to discern whether the price difference is worth adding this function. The Nuvi 260 and Nuvi 260W are both the next Nuvi systems that offer text-to-speech capabilities while the latter being the one that also has a 4.3″ screen. Based on the Amazon price, you’re paying an extra $70 for the additional feature of text-to-speech.

What Are the Primary Benefits of a portable GPS System?

  1. Save Gas!!!
    Okay so what it really does is give you accurate directions so that you don’t spend time backtracking and getting lost which requires more miles to drive. Extra miles being driven equates to more gas used, and more gas used equates to wasting your money.
  2. Convenience
    Sure you can just type in the address through Google Maps beforehand and print out the directions before departing on your journey. Although if you don’t take the exact route you printed out, you may not be able to easily navigate to your destination. With a portable GPS unit, it will recalculate your route based on your final destination and give updated step by step directions.
  3. Can’t Be Truly Substituted With Cell Phone GPS
    Everyday, GPS on cell phones are becoming more common but at least for now, they don’t suffice as a substitute for these portable GPS systems due to the size of the cell phone screen. It is much too difficult to navigate on your cell phone screen while attempting to drive.

Even though I have yet to try out my Garmin Nuvi 200W, my friends have said very positive things about their Magellan or Garmin units. In general, it’s hard to go wrong with either one of the big three GPS companies. I don’t see them getting a whole lot cheaper (the Garmin Nuvi 350 has dropped from a retail price of $970 in February of 2006 to a current price of $235), and people will get many benefits of owning one.

Teck Cominco

May 13, 2008

I’ve been wanting to get into some materials for some time, but they have been rather expensive since people have been moving away from the dollar to gold. Recently the price of gold has gone down, so it might be the time to take another look. I wanted to find a company that mined Indium since it is used as a transparent conductor in LCDs and solar panels. It’s also a very expensive and rare metal. My search brought me to Teck Cominco (TCK), which also mines Cu, Zn, Mo, Pb, and Ge. Copper is in high demand and Germanium might seen an increased in demand as silicon germanium computer chips become mainstream. To top it off, Teck Cominco is also an Canadian company, which also satisfies my need to reach into international markets. The only thing is the price. It hit its low of around 27.06 in January, but is back up to 47.08 now. Hindsight is always 20/20, so will the price still go up or am I out of luck?  The future prospects look very good, but I’m not sure it is the best deal out there.

Interview: Elijah, Average Oklahoman

May 8, 2008

While on a recent trip in Rockport (Texas), I was able to sit down while fishing in the Aransas Bay with a friend and interview him on various economic questions and get a perspective from an Oklahoman (Oklahoma City to be exact).   With rising gas prices, home foreclosures still increasing, and an unstable outlook for at least the rest of the year, I think it’s interesting to note that people in all parts of the country are affected differently due to the economic conditions of their location and career.

The following is a simple twelve question interview with Elijah, salesman at US Cellular:

Haystackfarmer: Recently you just purchased a home I understand.  How much did it roughly cost and what were some of the details of the purchase?
Elijah: Two years ago, I purchased a $76k, 1150 square foot home made in 1965 with a backyard and outdoor shack in Oklahoma City.  I had to put down $500 deposit, and my monthly mortgage cost about $700-$800.  Although with two roommates who pay me monthly rent, my share of the mortgage is decreased at least 60%.  As part of the deal, I had the owner put in new carpets.

Haystackfarmer: What other options were you considering during your housing search and what were the primary reasons for your housing purchase?
Elijah: One of the primary reasons I chose to purchase this particular house was the close proximity to US Cellular, within one mile, and close proximity to my family, within three miles.  I also thought this location was in an area with low crime rate and is close to suburban school systems, both good reasons to attract home buyers in the future when I decide to sell it.  I also took into consideration the actual condition of the house: roof, foundation, heating units, insulation.  Being a corner lot with a front lawn was also very important to me.

Haystackfarmer: Any improvements you’ve made to the house since you’ve bought it?
Elijah: I’ve changed the tiles to new ceramic ones, painted the walls (with modern colors), installed modern light fixtures, added ceiling fans, and redid the old shower.

Haystackfarmer: With the $600 rebate check coming soon, what will you be doing with it?
Elijah: Buying a Dell computer and/or paying down my $900 credit card debt

Haystackfarmer: Does $120 oil or $3.50-$4.00/gallon gasoline change how you operate your daily routine?
Elijah: These high gasoline prices don’t affect my lifestyle because I’m planned my living situation and housing purchase such that I’m within five miles of everything I need to do.  I am so close to both work and family while haircuts, grocery shopping, the mall, and school (2 miles away) are all within five miles.  Even if oil really high, I could take public transporation, but I would rate our public transportation system a 4 on a scale from 1-10.

Haystackfarmer: At what price per gallon woudl it make you drastically change your lifestyle and driving habits?
Elijah: $6-$8 per gallon.  At that price, I’d look for a more fuel efficient car because it’d help the environment and reduce my cost of driving.

Haystackfarmer: What do you think you can do as an individual to reduce oil prices?  What can we do as a country?
Elijah: Research more alternative fuels, purchase more fuel efficient cars, and be more active in recycling.  As a country, I think educating ourselves would be the best thing we can do.  Including lessons in the school systems about our energy problem and what options we have will go a long way to educate the young to make them aware.

Haystackfarmer: Does technology make your life more enjoyable or do you think we’re getting too dependent on technology?  And what would be the three pieces of technology you could not live without?
Elijah: Technology is such an important tool for us but it is scary to realize how dependent we are on technology.  For us to have access to so much information at such ease is refreshing to know.  Any average American has the opportunity to be educated through the information resources provided to us compared to previous generations.   Three pieces of technology I couldn’t live without are cell phone, computer, and microwave (75% of my food consumption cooked with this).

Haystackfarmer: What presidential candidate are you leaning toward?  Why?
Elijah: Obama.  I like his views on Iraq, the earth, health care, and environment.  I also like the way he is reaching to the young generation.

Haystackfarmer: Why not McCain or Clinton?
Elijah: I do like Clinton but I believe Obama is more into the positive aspects of politics.  Clinton seems a little hard to trust.  McCain, I don’t agree with his view in Iraq and keeping the troops there.

Are you more concerned about a long US recession or inflationary problems?
Elijah: I’m probably going to say a recession though I don’t really have a good grasp of the true meaning of the two.

Haystackfarmer: You’ve mentioned that you want to travel and live in California for an extended amount of time (probably a month or so).  What are the reasons for doing that and what do you need to do beforehand in terms of finances?
Elijah: Eliminate 90% of my debt and savings of at least $3k before going.  Being able to rent out my room while I’m gone would be a nice factor as well.