Whence the economy, the markets and the dollar?

This is easy. The dollar is strong because the economy is viewed as strengthening. This strengthening is viewed as the basis for the markets rebounding.

Who’s on first? Yes, the appeal to Abbot & Costello is apt. As long as confusion reigns, as long as no master hand is seen to be at work, pulling the puppets’ strings, as long as Magister Ludi and Adam Smith’s pin maker are invisible, all is well.

Which is how it should be, in this writer’s humble opinion. The danger always arises when one point of view or another  (make your choice, it is of no consequence) holds sway. Keynes or Hayek – both are represented today by economic extremists. Read the WSJ or the NYT editorial pages at your peril. The ideology is scatological.

The economy, the markets, the dollar, each is, and all together are, incredibly complex systems. Don’t let the word ‘system’ confuse. It is neither systemic nor systematic. There is no rationale to the flight of a flock of birds or the direction of a school of fish. Each is self generating, without leadership, yet each works rather well. Some say they are harmonious.

I would call it Complex. The action of each bird, fish or human is largely caused by and causes the action of the neighbor in flight, in the water or across the street. The results are economies, markets – and groups of fish and birds.

This is hard for virtually everyone to understand. this is non-rational behavior. When it works poorly, we get lemmings rushing over the cliff and market crashes. When it works well, we get prosperity and bigger flocks and schools. We are taught to use logic, or rational analysis, to predict the future from the past. Oology is what the Ancients called it: the study of the entrails of sacrificial animals. We call it Financial Analysis. People who study it for years become Certified. So do crazy folks…

My point is this. Leadership is absent. It is nonsensical, almost illogical!

Rely upon the direction of others, the opinion of others and the actions of others at your own peril. Not one CFA on the planet knows what direction the markets are going to take tomorrow, next week or over the next decade. This is all “Umbrellas of Cherbourg”, a lovely Belgian film about what happens to a town when the inhabitants all leave (the war) and leave the gates of the insane asylum open by mistake. Netflix it and watch it, with the markets, the dollar and the economy in mind.

Expect the unexpected. Assume rational discourse is false. Design portfolios to your situation, experience, perspective and stage of life. You are warriors. Act as such. Take risk. Hunt for yield. Be cautious. Expect to fail more often than you succeed. Survive the attack. Be a hero, not a goat herder.

The great error we all make is to assume

                That the guy next to us knows what he is doing

                That the gal over there has her ear to a knowledgeable source

                That just thinking (or talking) hard enough will get us to the ‘answer’.

The Economist ran an article (4/27/13, Buttonwood: ‘Don’t Just Do Something, Sit There’. It argued persuasively (to this reader) that long periods of “not trading” are extraordinarily beneficial to the health of portfolios, individually and globally. Worldwide, virtually all fund managers over trade their accounts, resulting in poor performance. Trading costs, management fees, tax results, performance bias, style drift – call it what you will, the hobby of managing money rarely becomes more than just that. Few investors are aware of costs. Fewer still move to the low cost alternative – despite the many studies inversely correlating expenses to performance.

Coming back to the first question, what matters is:

                Are enough people working, or gainfully retired?

                Are enough people spending for more than their necessities?

                Are taxes, regulations and laws sufficient to meet the current ‘social prejudices’ of the body politic, while still doing less harm than good?

If two out of three of these answer in the affirmative, enjoy your day. Fagedabodit!

Me? I’m taking my girl to the movies.

“One of the worst things about natural gas fracking is how helpless it can make someone feel when drilling threatens their water or besieges their home. It’s easy for one person, one family, or even one community to believe they’re outmatched by a wealthy industry with powerful friends in government.

The natural gas industry is powerful. What regulations do exist for fracking are poorly enforced. Fracking and other phases of natural gas production are exempt from many of the safeguards provided by the Clean Water Act, the Clean Air Act, the Safe Drinking Water Act, and other fundamental environmental protections. The predictable result: dirty water, dirty air, and water you’d think twice before drinking.

Together, though, we can change that. No industry, no matter how wealthy or powerful, can withstand the righteous indignation of the American public. The out-of-control rush to drill has put oil and gas industry profits ahead of our health, our families, our property, our communities, and our futures. Special industry exemptions from basic environmental protections make no sense — let’s get them removed.

Everyone wants to see a clean energy future, but…” (1)

                        Michael Brune, Sierra Club, Executive Director

Read it over again. This is the new face of The Sierra Club. Brune began his activist days at Greenpeace.  He then moved on to The Coastal Rainforest Coalition and The Rainforest Action Network. He is cast in the same mold as the President. He was born and bred on community action. He is Jagger’s “Street Fighting Man’.

“Coming Clean: Breaking America’s Addiction to Oil and Coal” is his book. Read it. He claims responsibility for shuttering 142 coal fired plants, with 340 (the rest) yet to be gated. He now has taken aim at natural gas. Specifically LNG exports. Stop Fracking Now” is the command. The troops are filing in; the battle is enjoined.

On March 15, 2013, The Sierra Club announced, through it ‘trade representative’ Ilana Solomon, opposition to the Trans-Pacific Partnership and its inclusion of Japan. Why? ‘It poses a threat to the health of our families and the future of our planet’. How does a trade group cause such repellent evil? ‘Countries in the (trade) bloc will most likely get automatic access to U. S. natural gas’. Let’s listen to her words:

This means that the United States could be forever ceding our ability to manage our own natural gas resources. It also means that even if U.S. exports are found to harm our economy and the environment — as there is every indication exports would — the U.S. would still be forced to send natural gas overseas to our trading partners without any review or delay. As the world’s largest natural gas importer, Japan will fundamentally change U.S. energy policy as we know it by joining the TPP.

Increased exports would require us to produce more natural gas, which means more fracking across the United States – in our backyards, near our schools, and next to our hospitals. Fracking contaminates drinking water and pollutes our air, exposing communities to serious health risks. Moreover, the highly energy-intensive process of cooling, liquefying, and transporting gas across the world has tremendous effects on our climate. The emissions associated with exporting natural gas, in fact, are said to be even larger than emissions from burning coal. The risk to public health and the future of our planet is too important to overlook.

Japan’s entry into the trade pact may have other serious implications for the environment. A leaked version of the pact’s controversial chapter on investment reveals that — like NAFTA and more recent trade pacts — the TPP would give broad rights to foreign corporations. The pact goes so far as to allow foreign corporations to sue a government in a private trade tribunal for unlimited cash compensation over new laws, policies, or regulations that hurt the corporation’s bottom line. (2)

You are all engineers, toolpushers, managers and capitalists. You can easily discover a dozen errors in Brune’s and Solomon’s reasoning.

That is your first mistake. Reasoning carries no water. The argument goes to the emotional banter.

“Health of our families’; ‘forever ceding’; ‘forced’; ‘Japan will fundamentally change’; dirty water, dirty air’; ‘profits ahead of our health’; righteous indignation’; ‘unlimited cash’; ‘our backyards, our schools our hospitals’. If the Japan quote sounds like the yellow fear of California at the turn of the 20^th century, you are beginning to understand.

What does all this harem-scarem have to do with the export of LNG?

There is no more denying that burning dirty fossil fuels like natural gas is to blame for our superstorms, droughts, and wildfires. We have no time to spare. Only by moving to renewables as quickly as possible can we hope to avoid even worse climate disruption. Yet energy companies are still denying it and continuing to manipulate our government leaders into thinking we have time to reverse the damage that is already done, just by switching to another fossil fuel such as natural gas. Natural gas is not a bridge fuel—it is a gangplank. We must not allow our country to lock into long-term natural gas use when around the globe the potential to develop renewable energy is limitless.

It’s clear that the regulations across the country—at the local, state, and federal level—are dangerously inadequate to protect our communities and regulate the natural gas industry. Meanwhile, the president is considering exporting up to 45 percent of natural gas production as liquefied natural gas (LNG). This is one of the largest decisions that will transform the energy landscape, as it would require more fracking to meet foreign and domestic demand. More fracking, more pollution, more communities destroyed—all while the 1 percent reaps the benefits.

But all is not lost—far from it. We are at a critical moment in our energy evolution, where we can leapfrog over natural gas and meet our future energy needs with clean energy sources such as solar and wind. We can demand that President Obama prevent the export of LNG. (3)

They are at least honest in their claims. They do tell you exactly what they want. They want you to stop, now. Put down the tools, the computers, stop the rigs, close down the pipelines, dismantle Sabine Pass, deny power plants the methane poison that destroys the planet. You will walk the gangplank, certainly.

Having scared you into reading this far, what solutions are present? While you may be tempted to follow the Chicago rules, as espoused in DC these days, there are in fact a variety of tools at your disposal.

Begin with their tactics. Employ visuals. Stir emotions. Speak simply. Meet locals. Offer to listen more than speak. Hire from the community. Train the populace. Share profits. Engage regulators and politicians openly and honestly. Meet at the burger joint not the country club. Repair roads, crops, wells. Do it before you are asked. Teach. Share. Learn.

E&P guys always tell me that every hole is different; every hole has a lesson to teach. So too with communities, regulators and landowners. Each has a story to tell. Listen, for your own good, for the good of the community, for the good of the shareholders.

Second, fight fear with facts. Be simple, clear and concise. Avoid the industry jargon. Save it for the conferences and analysts calls. “More fracking, more pollution’ is their comment. Take it apart.

‘The feds today announced that America’s greenhouse gas emissions have dropped for the fifth year in a row and for 11 of the past 12 years. Our emissions are at the lowest point since 1994. Why? The substitution of natural gas for coal. Today, 1/3 of your electricity comes from natural gas. Your computer is gas driven, your washer and dryer. Your refrigerator. Your heating and cooling. Your TV. Sending an email to support the Sierra Club? Yep – it went via methane. The check you wrote for them? Electronically processed via methane gas. Yes, that EV car is running on a mixture of coal and natural gas. Your bicycle was produced with power from methane emissions. Your water bottle is a direct result of ethane – we call them NGLs. Enjoy that organic, vegan meal – cooked with natural gas? Ate it raw – which truck brought it to you from which local farm? Like your SUV?

Facts have a nasty habit of interfering with beliefs…

Third, engage. Sierra Club has grassroots organizing down cold. (4)  The energy industry has done a fine job of ignoring the streets. Get back there. Leave the tower of power and work the street. Begin by paying more attention to your roots. Your workers, staff and management men and women are your core. The population of the industry is turning over as women and younger professionals rise up the ranks and Boomers retire. Shout this from the rooftops. Opportunities abound in Fracworld. 1.7M new jobs, half created during the recession –virtually all of the new jobs created over the past five years have been in the energy industry. As many as 2M more to come over the next 20 years in the world of energy. Another 5M manufacturing jobs are coming. (5)

These opportunities apply to skilled and unskilled, college educated and warriors just returned from Afghanistan. These opportunities are excellent paying, hardworking, clean and enriching jobs. Every one of you rose through the ranks. Tell this story – not yours but today’s young worker story. Engage the young woman environmental scientist in your labs, the sergeant on the rig, the driver, the welder, the operator. Put their story on the front page of your website. Ask them to tell the story in their words – and ignore any protests from within.

Fourth, do the legal. Work to your strengths. Just as the gym is your ally in the struggle against encroaching age, so too is your legal staff in this struggle against encroaching ignorance. The Sierra Club website is replete with stories of the legal challenges they wage against evil corporations. They have a staff of 500 and an annual budget of nearly $100M. a very significant majority of these sums are directed in legal and regulatory battle. They often engage the feds in court simply to get a more favorable ruling than currently exists. (6) Quid pro quo is taken to new depths. Ignore this at your peril. Note their ‘mission statement’:

To explore, enjoy, and protect the wild places of the earth; To practice and promote the responsible use of the earth’s ecosystems and resources; To educate and enlist humanity to protect and restore the quality of the natural and human environment; and to use all lawful means to carry out these objectives. (7)

Your legal department can drive a frac rig through ‘to use all lawful means…’.

Your power and connections and wealth are your greatest strength. Brune has the ear of Barrack. You have many ears. Do what you do best in the corridors of power. You know far better than this humble editor how to manage your workout…

George Smith USGS geologist said a few years ago, “We need the moral support of the American people”. LNG exports will geometrically increase the wealth of every citizen of the nation. It will help virtually every citizen of the nations to which we ship this precious cargo. Reduce energy costs and you increase income. Increase income and you create demand – for education, health, and yes, things. Increase demand and you increase wealth – by a multiplier far more powerful than any governmental ‘device’. Increase wealth and you increase the environmental awareness and thus health of the region, the nation and the planet.

The previous Sierra Club XO understood this – Carl Pope. He was excommunicated for his false idols. John Muir understood this. He has been countermanded by the new commandantes of the revolution that have taken over the Sierra Club. So be it.

The invisible hand of the market is far more powerful than any ideology yet devised. The Wealth of Nations was written in the seminal year of 1776. Adam Smith’s tale of the pin maker is ever true today. You simply have to remind the world constantly that work makes right…

This is not difficult. Speak out clearly. Listen thoughtfully. Engage your youngest and brightest. Tell the truth, repeatedly. Fight in the trenches with your legal infantry.

If you don’t demonstrate how your workers earned their wealth, you will lose.

If you don’t listen carefully and respond to communities, you will lose.

If you don’t take action with facts and images, you will lose.

If you remain in your towers of power, Barrack and Brune will take you down.

John Graves

Author of Fracking, America’s Alternative Energy Revolution

www.frackusa.com.

jgraves@west.net

1. http://sierraclub.typepad.com/michaelbrune/natural-gas/.
2. http://content.sierraclub.org/press-releases/2013/03/sierra-club-statement-japan-joining-trans-pacific-partnership.

3. http://www.sierraclub.org/naturalgas/downloads/LOOK-BEFORE-YOU-LEAP.pdf.

4. http://content.sierraclub.org/sites/content.sierraclub.org.naturalgas/files/documents/natural-gas-campaign-factsheet.pdf.

5. Huffington Post: 9/12/12, as quoted by Reuters.

6. http://www.sierraclub.org/naturalgas/downloads/LOOK-BEFORE-YOU-LEAP.pdf.

7. http://www.sierraclub.org/policy/.

As the ides of April approach, we may be reminded of college literature and of reading Chaucer in class aloud, with the full Middle English twang:

Translated: April showers bring May flowers.

Springtime for the American economy appears to be ‘comin round the bend’. The winter of our discontent even seems to be leaving the DC swamps, as Congress would seem to be trying to get along with itself and the Administration. Compromise and clarity are in the air (well, clarity may be a stretch…).

What supports this wretched of the earth, this American economic disaster?

            1. it is not a disaster. Despite the magnitude of the present and future deficit, as long as the Fed keeps buying its own paper, ‘don’t fight the Fed’. Follow in its footsteps. As long as it consumes bonds, they will not self destruct under the weight of debt.

            2. retirees are hitting the streets at 3-4M each year. The workforce is shrinking as a result. Participation is reduced. Earnings are changing, as high income folks are replaced with lower wage   earners. This is a fiscal fact.

            3. these retirees seek income. They will do so with bonds, dividend stocks, annuities and other forms of income producing assets. Growth has become secondary. Wall St. is always the last to figure out what Main St. already knows.

            4. The American Revolution is happening in Minot, ND, Midlands, TX, Texarkana, AK and Waynesburg, PA. Gas and oil and being extracted and delivered in massively increasing quantities each year. Just in PA, natural gas production has increased 65% in one year. The Eagle Ford oil production has jumped by 45%. The Bakken oils and NGLs by 26%.

The vast majority of the new jobs created since 2008 have been in the oil and gas fields. 2M more jobs will flow over the next decade, just in these fields and labs. Manufacturers expect to create another 5M new jobs. Chemicals, steel, metals, plastics, fertilizers, finished goods: all these industries are building or considering building new plants across the Midwest. New pipelines will bring cheap fuel and feedstock. New jobs will encourage new purchases, which will spur further jobs growth.

The global picture has just a sunny a forecast. Russia will lose 50MM bbls/d of export to the US by 2020. Europe will demand a repricing of its gas production, as U S exports of LNG hit the markets in 2016. Demand from the rest of the world will have to take up the slack in demand from the growing U S economy. As much as 8Mbbls/d will have to be shipped elsewhere, as we move closer to an energy independent possible future. OPEC will have less input on price via their production control valves. As Australia and other Indian Ocean nations increase their LNG exports, pricing pressure will continue.

This will bleed across all energy markets. Alternative energy sources, already in ICU with their tax subsidies lifeline, may have to be sent to hospice care. They cannot survive the price storm coming. Even as demand increases with a recovering global economy, energy production may outpace demand for a decade or more. The deflationary macro challenge this brings is less important than the massive increase in individual buying power for every consumer on planet Earth.

As the 2B of us who are less than well off but more than destitute strive for more for their children, families and communities, they will find new careers, new education, new homes, new tools, new health. The vast middle class of the planet will achieve much for themselves and their children. Most importantly, the poorest 1B will have the opportunity to move on, beyond starvation to a brave new world of opportunity.

All because a guy in Texas figured out how to get beneath the shale, to drill horizontally and to use the high tech from the city in the deep earth of the desert. Thank you George Mitchell.

Oil and gas companies in the US would face higher taxes on multiple fronts if Congress enacted the federal budget proposed Apr. 10 by the administration of President Barack Obama.

In its treatment of energy in general, the proposal strongly resembles its predecessors.

While denying oil and gas companies the use of industry-specific tax deferrals and deductions available to other industries, raising royalty rates and fees on federal leases, restricting use of the foreign tax credit, and raising or reinstating other fees, the new budget proposal would sharply increase federal spending on nonfossil energy.

The main new feature of the administration’s proposal for fiscal 2014 is a previously announced plan to dedicate $2 billion from federal oil and gas royalties over 10 years to the new Energy Security Trust, which would fund research of alternative transportation fuels. In fiscal 2012, the government collected about $9 billion in fees, royalties, and other payments from oil and gas activity on federal acreage.

In prior years, Congress hasn’t approved the proposals targeting the oil and gas industry.

Clean-energy spending

The budget requests $7.9 billion in spending across the government in fiscal 2014 on programs “to accelerate the transition to a low-carbon economy and position the United States as the world leader in clean energy,” according to documents accompanying the proposal.

The Department of Energy would spend $1.8 billion, 43% more than in 2012, “to advance the state of the art in clean energy technologies such as advanced vehicles and biofuels, industrial and building energy efficiency, and renewable electricity generation from solar, wind, water, and geothermal resources.”

Of the agencies most important to the oil and gas industry, the DOE would receive the largest budget increase from the level enacted in 2012: 8% to $28.4 billion in discretionary spending. The Department of the Interior’s budget would increase 4% to $11.7 billion. The Environmental Protection Agency’s budget would decline by 3.5% to $8.2 billion.

Tax measures

Meanwhile, the proposed elimination of tax preferences would cost the oil and gas industry an estimated $3.9 billion in 2014 and $40.7 billion during 2014-23.

The largest items targeted for repeal in that category are expensing of intangible drilling costs, percentage depletion, and the domestic manufacturing deduction for oil and gas production. Smaller preferences in dollar terms are extension to 7 years for independent producers of the amortization period for geological and geophysical expenses, the deduction for tertiary injectants, and passive loss limitations on working interests in oil and gas properties.

Oil and gas royalty reforms proposed in the budget would cost producers an estimated $2.5 billion over 10 years. They include the setting of minimum rates, increasing the standard onshore rate, testing a price-based sliding scale rate, and repealing legislatively mandated relief for deep gas wells.

The budget proposes to shorten primary lease terms, toughen enforcement of lease terms, and impose a per-acre fee on nonproducing leases. It also would simplify royalty valuation, eliminate interest accruals on company overpayments of royalties, and permanently repeal the Department of Interior’s authority to accept in-kind royalty payments.

Among measures in the budget important to the oil and gas industry but not specifically targeting it is a change, proposed in earlier budgets, in rules for dual-capacity taxpayers related to the foreign tax credit. The move would restrict amounts companies could claim for certain payments to non-US governments.

Also potentially costly oil and gas companies, especially refiners, would be the proposed repeal of the last-in, first-out method of accounting for inventories, which the government estimates would cost US industry in general $80.8 billion over 10 years.

The budget proposes to increase the Oil Spill Liability Trust Fund financing rate by 1% and expand its scope in a move estimated to cost industry $64 million in 2014 and $1 billion through 2023. It also would reinstate Superfund taxation, costing affected companies a total of $1.37 billion in 2014 and $20.2 billion over 10 years.

Among other moves, the budget would repeal research on ultradeeper oil and gas, authorize implementation of the US-Mexico agreement on oil and gas fields straddling the countries’ maritime border, and impose new Bureau of Land Management inspection fees costing producers on federal land an estimated $48 million in 2014.

As U S energy production transitions from gas to oil, frac rigs move across the Midwest. Now that spring is arriving in North Dakota, expect more new wells tp be fraced there. The ability to change from gas to oil drilling in less than a year’s time is yet another aspect of the American Energy Revolution. What used to take 2 years or more now happens over the course of a year – or less. Operators are able to respond to market demand far more efficiently today.

Imports are responding as well. Venezuelan crude imports are declining, as are those from Nigeria and Saudi Arabia. Canadian crude has grown to more than 3M bbl/d and could top 5M in less than a decade. The price is volatile today. Canadian producers have one market, the U S. hey shipped 2.4M of their 3M in production to us, using the remainder for their own needs. As our production ramps up in conjunction with theirs (we are both exploiting the deep shale), the distance to refinery hampers their pricing power. Canadian crude trades at a significant discount to U S crude, as much as a $16 – $40 spread. Rail is taking up the slack until more pipelines can be laid or current ones reversed or re-engineered. The Keystone XL pipeline is but one of several that Keystone currently runs to America. There are half a dozen over pipeline projects in progress, with completion during the next five years. Until then, train tank cars are absorbing the transportation strain. Firms that manufacture tank cars have a two year backlog. GE is moving its locomotive production facility from PA to TX to reduce labor overhead (non-union state). Tankage has been brought in on the Canadian rails.

We are just beginning to create the pathways for this new energy revolution.

The opportunities are enormous and growing.

Which MLPs will build and maintain which pipelines from what fields to which refinery and when?

How will the oil and gas supply be priced and regulated?

Where are the thousands of jobs across the nation?

They are yours for the taking.

Ah, to be a 20 year old seeking adventure! I’d go to the oil fields and be a roustabout, to the pipelines as a welder, to the barges as a ship’s mate!

The EIA – Energy Information Agency of the U S Dept. of Energy – announced on Friday that national greenhouse gas emissions (GGEs) had declined to 1994 levels. This marks the fifth year in a row for decline and 11th out of the past twelve years. The 5.4% drop was far in excess of that expected from the Kyoto Protocol brought back by Vice President Gore in 1996.
In an interview with Frank Nieto of Hart Publications last week, Mr. Gore admitted that natural gas might play a substantive role in the transition from hydrocarbons to an ‘alternative energy future’. While he refused to endorse its extraction and use, he allowed that it could serve a useful function as an intermediary energy source.
The Economist reported in its 3/31/13 edition of the intellectually robust journal that ‘ the planet’s temperature has not risen in 15 years, despite the continued onslaught of GGEs from its erstwhile species, homo sapiens’. The authors went to great length to explain why facts were less impressive than ‘important people’s impressions’. Try to read the article with a straight face and follow their tortured logic, if only for a few pages, here. The comments from her readers tell a rather different story – hounding the journalists for pandering to their squalid eco-masters.

Meanwhile, in the great green State of California, regulation takes precedence over science.
1. 33% of energy must come from state based renewables, excluding hydroelectric (could of sworn it was a renewable) by 2020. No Wyoming wind nor Arizona solar, thank you very much.
2. The Division of Ratepayer Advocates reports that the PUC has approved ‘nearly every renewable contract filed, even the most costly’.
3. We pay 25% to 60% more for power (electricity) than the U S national average. No power, no jobs, no worries.
4. While solar accounts for .6% of our power supply, and 3% of our renewables, more than 65% of new projects are for – solar. The state (home to the shuttered Solyndra) expects current solar power generation to grow from 800 megawatts in 2011 to 13,600 in six and a half years.
5. Cap and trade (Capt. Raid?) is forcing 12,000 megawatts of power plants to shutter or refurbish – at impossible cost (recall the President’s comments in SF a few years ago: ‘no utility will be able to afford hydrocarbon based energy under my administration’?).
6. The state’s Little Hoover Commission reports that, should energy costs unexpectedly escalate, it could jeopardize renewable support nationwide’.

At last there is light at the end of this particular tunnel. We simply need a little darkness before the dawn in the form of ‘greenouts’ across the state empowered by regulations gone mad.

“Carbon based life forms’ are at risk of their own demise at their own hands on their own planet.

Beam me up, Scotty!