In this week's report: (click this link to access PDF)

Peak Oil is a supply issue, not the end of oil.

The Oil Tax.

Follow-up on the AMR airline miles sale.

Gold or Oil?

BBC video on Spain's high speed trains.

Industry hype is always a risk for consumers.

Bloomberg (Sept. 23^rd) – "Toyota Motor Corp., the biggest seller of hybrid autos, said carmakers risk damaging the long- term reputation of battery-powered vehicles by over-promising on what the technology can deliver." If the industry sells the first generation of electric cars as a straight across replacements for the current automobile the backlash will be huge. This is one case where the marketing guys had better have their feet firmly placed on the ground. Too much hype is a big risk.

Natural gas is the cleanest and for now the cheapest fossil fuel.

Reuters (Sept. 23^rd) – "The industry can cope with $4 gas. The industry can't grow or sustain production with $4 gas," Chesapeake CEO Aubrey McClendon told an IHS Herold energy conference." McClendon then went on to give his thoughts on where price will need to reach for production to be sustainable. "We at Chesapeake think that price has to be three times the finding costs, and that translates to $6 to $9 in the next 12 months."

It is only a few years late.

Upstreamonline (Sept. 24^th) – "The first phase of Kazakhstan's huge Kashagan oilfield in the Caspian Sea will be 72% complete by the end of this year, with first oil due in 2012, the project operator said today." The Kashagan Oil Field covers an area of over 5,500 sq km in the Caspian Sea, with annual temperature extremes ranging from -35°C to 40° (-31°F to 104°F). This is one of the best examples of why just because you find a huge oil resource it doesn't translate into quick, easy and cheap oil.

Disclaimer

This publication is dedicated to the education of readers and is an information service only. While the editor is licensed to offer investments and investment advice, through KMS Financial Services, Inc. the information provided herein is not to be construed as an offer to buy or sell securities of any kind, is the opinion of the author and not endorsed by KMS Financial Services, Inc. It is possible at this or some subsequent date, the editor and/or affiliated parties may own, buy or sell securities discussed in this newsletter, or based upon information provided in the newsletter, or contrary to information provided in this newsletter. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. We make every effort to provide timely information, but cannot guarantee specific delivery times due to factors beyond our control.

In this week's report: (click this link to access PDF)

Response to Michael Lynch's NYT Op-Ed.

More on the economy and oil prices.

Hawaii, an experiment in Peak Oil.

Thai Airlines should try e-Bay.

Isn't this like eating the seed corn?

Wall Street Journal (Sept. 17^th) – "AMR turned to General Electric Co. with a $1.6 billion of aircraft sale-leaseback deal, plus a $280 million loan from the conglomerate. GE which makes aircraft engines and runs the world's second-largest aircraft leasing, has had a central role in bankrolling the airline sector during downturns." An associate of mine reminded me of Pan American World Airways strategy back in the 1980's of selling off its assets in real estate and equipment to keep it afloat. When it finally collapsed in 1991 we found how well that strategy worked out. For that matter consider all the jewels sold by General Motors to keep the automobile business struggling along.

I wonder if anyone at GE has considered the possibility that the leases on those planes may not be very reliable or the residual value of the planes may not be worth much (just ask Thai Airways). The last part of the quote above should rank high when looking at GE, "bankrolling" airlines just doesn't sound like a great long-term business to a Peak Oil aware investor.

"The parent of American Airlines said it had raised $2.9 billion in funding, repairing one of the sector's weakest balance sheets and potentially paving the way to buy a stake in Japan Airlines Corp." This is a great idea; invest the money in another money losing airline so you can accelerate losing the $2.9 billion just raised.

"The International Air Transport Association (IATA) today announced a revised global financial forecast predicting airline losses totaling US$11 billion in 2009. This is US$2 billion worse than the previously projected US$9 billion loss due to rising fuel prices and exceptionally weak yields." What they don't seem to get is that if the world's economies were not in a deep recession the fuel prices would be so high that the tickets prices needed would also have driven passengers away with the same resulting low yields.

So what did AMR do? They sold forward a block of frequent flyer miles to Citigroup which raised $1 billion bringing the total combined with the GE deal to $2.6 billion. Citigroup had better hope that AMR doesn't run into $100+ oil in the future or honoring those miles could be tough if the planes don't leave the ground.

I wonder if the folks at GE, AMR and C read the IATA announcement before they signed their deals???

Brazil's new oil fields will last 50 years.

Latin American Herald Tribune (Sept. 17^th) -- "Edison Lobão said that thanks to the vast potential of its pre-salt region, so-named because the estimated 50-80 billion barrels of oil equivalent it contains are located in the sea bed beneath an unstable salt formation, Brazil could produce some 3.8 million barrels per day within 10 years, or double its current output." Wow, that is great. Now all we need is 41.2 million barrels per day more to balance out just the depletion from existing fields over the next couple of decades according to the IEA's WEO 2008 released last year.

"Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline"

Nobuo Tanaka, IEA Executive Director Nov. 2008

Then there is that other question of how much will be available for net export. Since the U.S. is a net importer that is all that matters. If it isn't exportable it doesn't matter.

Disclaimer

This publication is dedicated to the education of readers and is an information service only. While the editor is licensed to offer investments and investment advice, through KMS Financial Services, Inc. the information provided herein is not to be construed as an offer to buy or sell securities of any kind, is the opinion of the author and not endorsed by KMS Financial Services, Inc. It is possible at this or some subsequent date, the editor and/or affiliated parties may own, buy or sell securities discussed in this newsletter, or based upon information provided in the newsletter, or contrary to information provided in this newsletter. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. We make every effort to provide timely information, but cannot guarantee specific delivery times due to factors beyond our control.

In this week's report: (click this link to access PDF)

ASPO-USA interview with Robert Hirsch.

Can the world scale its nuclear power fast enough?

Was Mexico the biggest oil speculator of them all last year?

A look at the newest and one of the oldest wind turbines for generating electricity.

Water, troubles in the Middle East and India.

Oil imports made up 58% of the July trade deficit announced this week.

Consider for a moment the impact oil imports have on the U.S. trade deficit which for July was $31.96 billion. That is up 16.3% or $4.47 billion from the June level of $27.49 billion. The press is full of hand wringing about cheap foreign goods washing over the American shores, but they made up less than half of the deficit in July. It was the July oil imports that came in at $18.5 billion up $1.9 billion from June that really move the needle on the trade deficit exclusive of auto-related items.

Oil imports therefore constituted approx. 58% of the U.S. trade deficit for July which was actually down from the 60% level in June. The reason is that imports related to autos shot up $2.4 billion as a result of the onetime (or at least we hope onetime) "cash for clunkers" stimulus program. If the $2.4 billion increase resulting from the auto-related imports is excluded from the July deficit oil imports would have climbed to over 62% of the trade deficit.

Maybe it is time that the trade deficit should be rebranded to closer reflect reality, sort of an economics version of truth in advertising. How about the "Oil & Trade Deficit"?

US gasoline consumption is 9.2 million barrels per day.

According to the EIA U.S. gasoline consumption peaked on an annual basis in 2007 at an average of 9.29 million barrels per day. So the news from the EIA this week that both the one week and four-week average were over 9.2 million barrels per day is significant. This flies in the face of the commonly held view that U.S. gasoline consumption is down dramatically. It should be very clear at this point that expecting U.S. gasoline consumption to crack significantly from here is probably wishful thinking unless either the economy tanks or gasoline's price rises substantially.

It is very possible that expectations for liquid fuel consumption going forward may be set for a major adjustment. Over the last few months there have been a number of prognostications about how U.S. gasoline consumption has permanently peaked and will decline from here forward. Instead if consumption levels remain above 9.2 million barrels per day it should bring into question many assumptions about fuel prices in the near future. It will be very entertaining to watch the foot work of those paid to predict (guess!!!) what oil prices will be in the months ahead.

However, it should be remembered going forward from here that the year-over-year data will probably become very misleading due to the extreme volatility experienced during the fall of 2008 with all the financial market troubles. Also don't forget distillate it is still down dramatically from its previous high levels of consumption.

The Chinese are coming, well maybe not.

Upstreamonline (Sept. 10^th) "Angola has blocked the sale of Marathon Oil's 20% stake in Block 32 to China National Offshore Oil Corporation (CNOOC) and Sinopec." This news comes on the heels of a Libyan rejection of another deal this week by a Chinese company. "China National Petroleum Corporation (CNPC) has pulled out of its deal to buy Verenex, with the Canadian player saying the $462 million deal was scuttled after Libya refused to approve it." Maybe this is just "resource nationalism" or maybe the African nations are beginning to question the wisdom of getting too close with Chinese companies/government and are starting to look over their shoulder at the new elephant in the room.

So far CNPC hasn't had much success this week with putting the $30 billion loan it received from the government to work overseas. "China National Petroleum Corp., parent of the world's biggest company by market value, received a $30 billion loan to fund overseas expansion as the country's government stepped up its hunt for energy resources." Except of course for the $12 billion investment in the Canadian Tar Sands earlier which may prove to be a clinker for other reasons.

Disclaimer

This publication is dedicated to the education of readers and is an information service only. While the editor is licensed to offer investments and investment advice, through KMS Financial Services, Inc. the information provided herein is not to be construed as an offer to buy or sell securities of any kind, is the opinion of the author and not endorsed by KMS Financial Services, Inc. It is possible at this or some subsequent date, the editor and/or affiliated parties may own, buy or sell securities discussed in this newsletter, or based upon information provided in the newsletter, or contrary to information provided in this newsletter. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. We make every effort to provide timely information, but cannot guarantee specific delivery times due to factors beyond our control.

In this week's report: (click this link to access PDF)

ASPO-USA response to NYT Op-Ed last week.

How dependent on China is a Toyota Prius?

U.S. gasoline demand, it just isn't going down!

So just how big was BP's "Big" discovery in the Gulf of Mexico?

Norway is the number 11 producer in the world and more importantly the number 4 net exporter (2007 data).

The Norwegian Petroleum Directorate reported this week that it expects production to fall annually through 2013 at a rate 10% faster than expected last year. The new estimate is for production to reach 1.6 million barrels per day in 2013, down nearly 50% from the 2000 peak of 3.1 million barrels per day.

The Directorate went on to indicate that Norway had produced approximately 50% of proven oil and gas reserves. This indicates that recoverable reserves of about 31.5 million BOE remain. Norway is clearly on the back side of Hubbert's Peak.

In a clear contrast to the remarks by Michael Lynch last week in the New York Times Op-Ed the Directorate said, "Much of our oil and gas production comes from discoveries made in the first 20 years, during the period between 1969 and 1989. Resource growth from discoveries made in the last decade is low." This is a careful way of describing Peak Oil.

Biofuels -

"This all boils down to something I have said on many occasions: You can't mandate technology. Just because you mandate that 36 billion gallons of biofuel are to be produced by 2022 doesn't mean that it has a remote chance of happening. This is not a hard concept to understand, but it seems to have eluded our government for many years. The government would probably understand that they couldn't create colonies on the moon in 10 years via mandate. They know they can't cure cancer via mandate. But in the area of biofuels, they seem to feel like they can just conjure up vast amounts of hydrogen, cellulosic ethanol, or algal biodiesel."

The above is from Robert Rapier's - R-Squared Energy Blog. Robert was on a panel with me at last year's conference in Sacramento, California. If you read his bio you will see that he has extensive experience in the petroleum industry relative to the systems and scale needed to allow biofuels to work. After he posted the comments on what he called "The Pretenders" he posted a second on "The Contenders".

Whether you are a critic or a supporter of biofuels his thoughtful writing is worth reading. Ultimately Robert hits it on the head; it simply comes down to scale.

Will people really change without a crisis in energy or climate?

Reuters (Sept. 2^nd) – "People want to save the planet but are unwilling to make radical lifestyle changes like giving up air travel or red meat to reduce the effects of climate change, a straw poll by Reuters showed." This simply illustrates why energy demand will only fall when prices really bite or the climate evidence is overwhelming. The problem with this is that both will be rearview events at that point and all the really bad stuff from Peak Oil and climate will be unfolding before our children and grandchildren.

Disclaimer

This publication is dedicated to the education of readers and is an information service only. While the editor is licensed to offer investments and investment advice, through KMS Financial Services, Inc. the information provided herein is not to be construed as an offer to buy or sell securities of any kind, is the opinion of the author and not endorsed by KMS Financial Services, Inc. It is possible at this or some subsequent date, the editor and/or affiliated parties may own, buy or sell securities discussed in this newsletter, or based upon information provided in the newsletter, or contrary to information provided in this newsletter. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. We make every effort to provide timely information, but cannot guarantee specific delivery times due to factors beyond our control.