Musings from the Oil Patch – September 15, 2009

• What Glut? Oops, Maybe There Is A Glut After All
• The Strange Case of Oil Prices And Tankers
• Is Resolution Of Natural Gas Conundrum About To Emerge?
• Is There Something Wrong With The Crude Oil Market?
• Thoughts From The Road To Rhode Island
• An Inconvenient Truth: Global Cooling Age Developing?
• And You Thought Watermelons Were Only For Eating

Musings From the Oil Patch
September 15, 2009

Allen Brooks
Managing Director

Note: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies.  The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations.   Allen Brooks

For weeks the talk in the investment world and the energy business was what would happen when the glut of natural gas rendered winter storage no longer an option.  The debate focused on what would happen to the surge in natural gas production if we completely filled the nation’s available storage capacity before the start of the heating season.  How would producers handle involuntary well shut-ins?  What would happen to the price of natural gas – would it be like some periods in recent memory in which Rocky Mountain gas sold for pennies? 

But then an amazing thing happened.  The Energy Information Administration’s (EIA) weekly gas storage report for the week ending September 4th came out showing that producers had injected only 69 billion cubic feet (Bcf).  The gas futures market took off.  Gas injection volumes for the week were below the average expected by analysts and traders on Wall Street.  The problem was that no one was exactly sure how much better the injection number really was.  We saw three reports comparing the 69 Bcf injection figure with the supposed estimate.  Those estimates were 71 Bcf, 72 Bcf and 73-75 Bcf.  So why did the market react to this particular shortfall surprise when it hadn’t reacted to some previous ones?  We have to think it had to do somewhat with what was happening to crude oil prices, the positive mood coming from the Barclays’ energy conference and investors clamoring to get in on the “trade of the year” – the record wide disparity in the oil/natural gas price. 

As the chart from the NYMEX on Friday afternoon shows, natural gas futures prices were recovering slowly during the first two and a half days of last week’s trading before the EIA inventory numbers were released.  Then, gas futures prices soared through the $3 per thousand cubic feet (Mcf) level and up close to $3.30.  For the day, gas prices surged 15%, the largest rise in nearly five years.  We suspect that when gas prices couldn’t break through a technical price level on Friday, just as happened to oil prices, the profit-taking mantra for traders came into play. 

Exhibit 1.  Gas Prices Soared After Inventory Data

Source:  NYMEX

Suddenly the more important considerations in the trading pits became the growing volume of gas in storage and the lack of gas demand.  We are still weeks away from the start of the heating season.  So far the hurricane outlook for the Gulf of Mexico has been benign.  And lastly, the economy may have stopped going down, but it is not showing many signs of growth.  Lurking in the background is concern that we might experience a warm winter.

Exhibit 2.  Winter Gas Pricing Still Encourages More Drilling

Source:  NYMEX, PPHB

As the accompanying chart taken from the closing data on the NYMEX web site last Friday shows, the outlook for winter natural gas prices remains very healthy compared to the current (Oct-09) futures price.  With gas prices over $5 per Mcf in the early months of 2010, the incentive for producers to cut back their gas drilling doesn’t exist as long as they can continue to tap these higher future prices through hedging contracts and that they can deliver the gas when it is needed. 

Producers continue to demonstrate how good they are at growing their gas production, something that Wall Street continues to reward with higher stock prices.  The nearby chart from the recent investor

Exhibit 3.  Large Gas Producers Continue To Grow Production

Source:  Chesapeake Energy

presentation by Chesapeake Energy (CHK-NYSE) shows the top 20 domestic gas producers and their 2009 1st and 2nd quarter gas production volumes along with their 2008 2nd quarter volumes.  An interesting observation is that of the 12 largest producers, only five showed sequential gas production growth in the recent 2nd quarter.  However, if one includes those companies with less than a 1% decline, you add two more to the count, and one could argue that the 1.1% decline of ConocoPhillips (COP-NYSE) is immaterial, adding one more to the total.  Some 2/3rds of the dozen largest producers would have either flat or higher gas production after more than half a year of a dramatic cutback in gas-oriented drilling. 

The bottom line is that conditions are still not ripe for a significant retrenchment in natural gas supplies and until either a severe cold snap hits the nation or our economy demonstrates a “V” recovery pattern, natural gas will be bogged down in a disappointing pricing environment.

Since last spring, crude oil prices have exhibited a healthy recovery, moving from the mid $30s a barrel in February to the low $70s now.  The oil price recovery has been driven by the early signs of a global economic recovery suggesting increased economic activity on the horizon that will boost consumption of petroleum products.  While energy markets are reflecting this increased optimism, one of the principal beneficiaries of the improved oil market – tankers – doesn’t appear to have gotten the message, at least if one believes the Baltic Dirty Tanker Index, a measure of crude oil tanker day rates. 

Exhibit 4.  Baltic Dirty Rates Don’t Reflect Oil Price Rise

Source:  Baltic Exchange, PPHB

The tanker industry had experienced a boom in the mid 2000s as global oil demand was climbing, new and longer trading routes emerged as consumers scrambled to secure oil supplies from wherever they could, and governments and the shipping industry agreed to the phase-out of single-hull tankers to minimize the risk of oil spills from shipping accidents.  With tanker day rates soaring and cheap capital readily available, tanker owners and shipyards went on a new ship construction binge.  The drop in oil demand in recent years coupled with the delivery of many of these new, more efficient ships have created an oversupply of tankers.

Exhibit 5.  Tanker Newbuilds Continue To Swell Fleet Size

Source:  Frontline Ltd.

Recently, many of the largest tankers have been able to secure profitable contracts as floating storage facilities.  Very large crude carriers (VLCCs) usually carry about 2-million barrels of crude at a time.  This volume of crude, given the strong contango (abnormally higher future month oil price relative to the current month price), encouraged oil companies, investors and speculators to buy oil, have it delivered for loading on one of these ships and then park the ship offshore waiting for oil prices to rise further or until the futures contract dictated delivery of the oil.  The price differential between the near-month contract and the future-month provided sufficient profit to not only cover the cost of storing the oil (paying the day rate to charter the tanker) and the interest on financing the oil, but also provided a healthy return for the investor.

Exhibit 6.  Oil Volumes Stored In VLCCs Declining

Source:  Frontline, Ltd.

Those days seem to be ending.  The drawdown of crude oil inventories in recent weeks suggests that the contango trade is diminishing.  While week-to-week oil import volumes are down, the recent chart of the history of the number of VLCCs being used for floating oil storage shows early signs of decline due to the ending of the strong contango.  Based on comments from traders and tanker operators, it appears more of these tankers will become available for conventional work.  Unfortunately, as the chart showing the trend in oil prices and the Baltic Dirty Tanker Index above, there are too many ships for the oil volumes needed to be transported, which has depressed and will depress tanker rates.  Either additional ships need to be scraped, oil demand needs to rise or oil transportation distances need to increase.  Most likely it will be a combination of these three factors that help the tanker industry to recover.

For most of this year, natural gas prices have moved counter to almost everyone’s expectations – falling while crude oil prices have risen dramatically.  The conventional explanation has been that natural gas production coming from the newly completed wells in the prolific gas-shale formations around the country is much greater than from traditionally located and drilled wells.  The unanswered questions are when will this phenomenon of more productive wells coming on stream end and why are producers continuing to drill ANY gas wells in a sub-$3 per thousand cubic feet (Mcf) world? 

Some producers have claimed that they have been scaling back their gas drilling activity lately, despite the recent uptick in gas drilling rigs, but the backlog of drilled-but-yet-to-be-completed wells is being worked down and that accounts for many of the prolific new wells coming on stream.  The answer to why producers are willing to drill and complete wells in today’s low gas price world is answered by the strong contango that has prices for natural gas one year into the future selling at nearly $2 per Mcf higher than current fiscal spot prices.  The two charts below demonstrate this phenomenon.

Exhibit 7.  Gas One Year Out Is At A Healthy Premium

Source:  Seeking Alpha

Probably the more important chart is the one showing the relationship between the current futures price and the one-year forward futures price.  In that chart, the one-year forward natural gas price is divided by the one-month forward price.  Over the period since 1990, the mean of that calculation has been about 6%.  On the chart are also plotted lines showing +/- 2 standard deviations in the ratio.  As the chart shows, the ratio between the two forward prices now stands at more than 4 standard deviations above the mean. 

The conventional wisdom, as reflected by recent revisions of natural gas price forecasts for 2010 by several Wall Street firms, is that the one-year forward gas prices are more representative of the market than the current futures price.  In fact, some of these firms suggest they expect a significant fall-off in natural gas production later this year due to the cutback in gas drilling and coupled with an expected uptick in gas demand, the market will be short of supply causing gas prices to soar in order to trigger a stepped-up drilling effort to avoid a permanent swing to a gas-shortage environment. 

Exhibit 8.  Current To Future Gas Price Ratio…A Record

Source:  Seeking Alpha

As we have shown is previous articles, the drop-off in gas-oriented drilling has not yet produced the supply response anticipated.  In fact, there has been virtually no fall-off in gas production as measured by the average daily volumes reported on the EIA’s Form 914 survey of production data through June.  That scenario has proven to be a major disappointment for natural gas price bulls.  But as one price-bull wrote recently, we are seeing the fall-off in production; it just isn’t being noticed.  This Wall Streeter suggests that if one plots the change in gross monthly natural gas withdrawals, the chart will demonstrate that a supply response to the lack of drilling is occurring. 

He further went on to say that if one examined the slope of the monthly change data, it would become even clearer how the supply response is developing and will shortly become a stimulus for rising natural gas prices.  His point is that for investing success, it is the rate of change (the first derivative) that drives stock prices.  This has proven true with respect to oilfield service and energy producer share prices in the past, but this is called “momentum” investing.  There will always be a point in time when the rate of change slows, which then becomes a signal of slowing earnings growth, although the reported growth rate may remain well ahead of historical company and industry rates and even greater than other industry sectors.  But as the earnings growth rate slows, “hot money” will be heading for the exit. 

We thought we would examine this thesis, which is displayed in the next several charts.  The first one shows the absolute monthly volume of gross natural gas withdrawals.  What becomes clear from this chart is the shape of the monthly gas production data curve initially reflects the peak in drilling activity in the early 1980s and the eventual collapse in the energy business in the mid-part of that decade.  One can see the slow recovery in monthly gas volumes as natural gas prices were deregulated, but the restrictions on the use of natural gas as a boiler fuel and the surge in gas production created a supply glut depressing prices through most of the 1990s.  Slowly gas production volumes grew and then exploded in the past two years as demonstrated by the recent upturn. 

Exhibit 9.  Monthly Gas Production Shows Slowing Growth

Source:  EIA, PPHB

The monthly pattern is shown more clearly and more dramatically when one translates the monthly figures into daily totals for each month.  While proving the point that free markets and free prices act to stimulate supply if demand is present, the Wall Streeter relying on this data would point to the sharply downward sloping data for recent months (marked by arrows) as a sign of the downturn in the gas industry’s supply response to lower gas prices.  His point is that the steeper the slope (angle of the arrows) is a reflection of the speed at which the industry response is happening.

Exhibit 10.  Daily Gas Production Shows Faster Response

Source:  EIA, PPHB

While the visual presentation of the monthly natural gas withdrawal data over the past 30 years clearly shows the downturn in monthly and the daily gas production figures, we thought we would see what the actual monthly and daily volume change figures showed.  Here, the data presented a more challenging picture.  In both the monthly and the daily percentage change charts we plotted a linear trendline to see what pattern might be obvious.  While it is very difficult to see, the gross monthly data showed an ever so slight upward trend line above the zero line as production growth for the last 18 months has increased due to successful gas-shale drilling efforts.

Exhibit 11.  Monthly Gas Production Change Has Slight Trend

Source:  EIA, PPHB

The monthly daily production change chart shows no long-term trend or at least one that our eye-glass-challenged eyes could discern.  But does it matter? 

Exhibit 12.  Daily Gas Production Change Has No Trend

Source:  EIA, PPHB

If the gas-oriented drilling rig count continues to rise, and the non-vertical count grows, then we are likely looking at continued healthy gas production volumes, albeit the month to month growth rate may slow.  Until the production growth rate turns decidedly negative, it is likely that gas prices will remain under pressure from the growing gas storage situation.  Even though the EIA has indicated that gas storage capacity has expanded by 100 Bcf this year, or about 2 ½ percent, the weekly storage injections remain very healthy and show no signs of slowing until they are forced to stop growing by the lack of storage space for the gas. 

Exhibit 13.  Gas Production Shows No Response Drilling Fall

Source:  EIA, Baker Hughes, PPHB

The $64-question is whether the natural gas market has actually stepped off the edge of a cliff and when that realization sets in, it will be as if the industry is in a supply free-fall.  While that scenario is one natural gas price bulls would like everyone to believe might happen, there is substantial gas in storage, a growing number of shut-in wells and low-cost liquefied natural gas (LNG) supplies around the world to meet any supply shortfall.  We could experience a supply and price shock, but the probability is small in our estimation.  The greater energy industry risk now is the possibility of another downleg in the drilling rig count.  Once again we show the chart showing how similar the current rig count upturn appears to the 1981-1987 period.  This is not a forecast of what might happen.  It is a reminder of what has happened and how similar today’s pattern appears to that past.

Exhibit 14.  Is History About To Repeat For Drilling?

Source:  Baker Hughes, PPHB

As long as the government continues to be actively involved in the energy business it is impossible to be totally certain as to how current trends might change.  As people involved in the domestic natural gas business know, government regulation in response to then current perceptions of the health of the market at any point in time shapes the future of the gas business.  At one point gas was considered too valuable to burn as a fuel because we would need it for our petrochemical and pharmaceutical industries.  Government regulations restricting gas as a boiler fuel contributed to more than a decade of flat and weak gas prices.  While proponents of the view that the country has huge untapped yet economically available gas supplies that can play a key role in helping to solve the nation’s environmental and oil import problems seem to be making some headway in convincing politicians of the validity of their case, the legislation to achieve it doesn’t appear to be moving forward.  Maybe that will happen, but it seems it will likely take a major change in attitude by the Obama administration or some external oil market event that highlights the security advantage of domestic natural gas.  Creating a larger market for natural gas, especially in the transportation sector, is proving much more difficult to accomplish than initially believed.  We believe natural gas should play a larger role in our domestic energy picture, but getting there may come in baby steps rather than giant strides.

With the official end to summer, the Labor Day weekend, behind us and the nation’s largest energy company investor conference underway, the oil market received several shot-in-the-arm positives last week.  Wall Street talking-heads had a difficult time understanding what was going on with the price of gold and crude oil futures soaring on the first trading day following last Monday’s holiday.  Gold futures traded over $1,000 an ounce and crude oil prices jumped by $3 a barrel.  The inability of the talking-heads to explain the phenomenon left us wondering if we were seeing a global investor reaction to Washington politicians returning to work.  Those of us living in Texas have a reaction when our legislature goes into session in Austin.  We hold onto our wallets during those few months of the legislative session every two years since that is our peak exposure to politicians inflicting serious financial damage on our wellbeing.  Our thought last Monday was that global traders may have been adopting the “Texas-view” of the risk to the U.S. economy and the dollar’s value from the actions of politicians in Washington.  That view seemed to be reinforced by the Labor Day announcement of President Obama addressing a joint session of the Congress later in the week on the issue of health care reform.

Currency traders, seeing Washington about to go back into session with health care reform and cap and trade legislation on the agenda and a pressing need to raise the government’s debt ceiling, combined with serious international trade and diplomacy issues, could only conclude that government actions would increase the nation’s deficit and to deal with that problem would resort to the printing press to meet our financial shortfall.  That scenario heightens investor fear over a possible acceleration in future inflation and a correspondingly lower value for the U.S. dollar. 

That fear was almost immediately reflected in a declining U.S. dollar index.  In turn, a falling dollar value makes commodities worth more as a hedge against further deflation in the currency’s value.  One can see in the accompanying chart the roller coaster ride the U.S. dollar index has experienced over the past year, but more importantly it reflects the sharp drop in the index’s value in the last few days.  Some traders might argue that this precipitous drop might be overdone and the dollar is poised for a sharp recovery, but the growing economic data is demonstrating that while the economic recession may be ending, other countries around the world may be poised for sharply faster economic recoveries than the U.S.  As the risk premium associated with possible future financial and economic calamities diminishes, the need for investors to pile into the U.S. dollar for safety is reduced, and relative economic growth rates become more important. 

Exhibit 15.  Falling Value Of U.S. Dollar Boosting Oil Prices

Source:  BigCharts.com

The comments by UN officials last week that the world should consider looking toward another global currency standard, coupled with the recent sale of Chinese Yuan-denominated bonds designed to enhance its role in the global currency market, suggest that more investors are beginning to consider alternatives to holding growing piles of U.S. currency.  These concerns were amplified by questions of the oil ministers representing the various members of OPEC at their meeting last week in Vienna, about whether they would like to see oil denominated in a currency other than the U.S. dollar.  In the past these oil ministers have talked about the possibility of denominating oil in a basket of currencies, or some other arrangement such as special drawing rights created by the International Monetary Fund.  OPEC members delicately sidestepped the question this time because, with oil prices in the $70s a barrel range, they can afford to absorb some erosion in the value of the currency they are paid in.  Starting a battle over currencies would do little but make OPEC look more like “price-gougers” at a time when the organization is enjoying being out of the media limelight.  That is probably even more important as the topic of how to restrict the role and power of “speculators” in commodity markets raises its head bringing oil prices back into citizens’ and the media’s focus.

The chart of the U.S. dollar index for the past month shows clearly the sharp drop experienced last week.  Although the index has a ways to go to reach its historic bottom below 72 established during the first half of 2008, the contrary move of the dollar index and oil prices in the last few days was clear.  For the first four days of September, before the Labor Day weekend, oil traded in a very tight range of $67.96 to $68.05 per barrel.  Some observers suggested this tight range was due to it being the last week of summer and before all of Wall Street came back to work, and that oil was waiting to see what OPEC did at its upcoming meeting and what the International Energy Agency (IEA) would say about global oil demand.  But from Tuesday to Friday of last week, oil prices rose from $68.02 to an intraday high on Friday of $72.90.  At the same time, the dollar index fell about 3.5% from just under 78.50 to 76.55, a new low for the year, providing additional impetus for the rise in oil prices.

Exhibit 16.  Dollar Index Move Explains Oil Price Jump

Source:  BigCharts.com

The inability of the oil futures price to breech the $73 mark Friday morning set the stage for significant profit-taking in the last few trading hours of the week.  The NYMEX chart of the near-month crude oil futures prices by time of the day for last week clearly shows Friday’s attempt to breech the $73 price mark and the subsequent sell-off.  The nominal excuse for the retreat in crude oil futures was that it couldn’t establish a new high, so the market’s technical factors turned negative.  Traders grabbed on to emerging concerns about weak oil demand as the prior day’s EIA’s inventory data showed a weekly build in gasoline and heating oil stocks, despite a huge drawdown in crude oil supplies.  Coupled with this data was concern about global oil demand as China’s national statistical agency said the country’s August oil demand fell 6% from July.  When given any reason to take a profit, especially hours before a weekend, traders usually do.  Oil futures prices dropped slightly over $3 a barrel from Thursday’s close to Friday’s close, but from the intraday high, the price retreat was $3.79 a barrel. 

Exhibit 17.  Oil Price Jump Hit By Profit-taking

Source:  NYMEX

Admittedly it didn’t hurt oil prices that last week the IEA raised its global oil demand forecasts for both 2009 and 2010 by about 500,000 barrels a day.  Improved economic statistics out of the United States (lower initial unemployment claims, increased consumer confidence) and China further helped the oil demand outlook.  The IEA now says that global oil demand will average 84.4 million barrels a day (mmb/d) in 2009 and increase to 85.7 mmb/d in 2010.  Those new demand estimates mark the second consecutive month the agency has increased its forecasts.  Despite the recovery in demand, 2010’s projection still puts total demand 0.8 mmb/d below the 2007 peak of 86.5 mmb/d.  If consumption growth continues, it is likely that 2011 will mark the first year in which oil demand exceeds that historic peak, but only four years later in contrast to the nine-year time period needed during the 1980s to surpass the prior demand peak in 1979.

The one concern reflected in the IEA forecast is its heavy dependence on China’s oil demand continuing to grow.  The IEA acknowledges that some of the implied energy demand in China is due to the country filling its strategic storage facilities that will come to an end at some point.  Could August mark that point?  Additionally, as China continues to expand its alternative energy supplies oil demand growth could slow, although the latest car sales figures might mitigate any fear of a near-term oil demand slowdown. 

In China in August, 858,300 passenger cars were sold compared to 451,300 cars sold a year earlier and 832,600 sold in July.  For the first eight months, there have been 6.23 million passenger cars sold in the country, nearly equal to the 6.76 million sold during all of 2008.  Total vehicles sold for the first eight months were 8.33 million putting China on track to sell an estimated 12 million units in 2009. 

An interesting question will be whether China, with its increased control over growing overseas oil supplies, will switch its focus from domestic storage capacities to merely making sure that its ability to transport oil supplies from abroad is not interrupted.  That may be partly behind the increased government spending on China’s navy.  In the end, however, a growing population and economy will necessitate larger storage volumes, but maybe not as much if the government becomes less concerned about long-term interruptions in supplies.

At the end of the day, however, the dependence of the IEA’s forecast on continued rapid growth in China’s oil consumption is a hidden risk.  Friday’s oil demand release by China confirms that possibility.  China is known for its opaque economic statistics, creating a cottage industry of “China economy watchers.”  So far, China’s aggressive economic stimulus plan in response to the global financial and economic crisis has succeeded, at least as measured by the reported statistics, but some of the economic measures of this success reflect money allocated but not actually spent.  Also, China still has to deal with its structural economic issues – the lack of strong domestic consumption growth and the conflicts among regional, local and national government agency investment objectives. 

At the 30,000-ft. level, the sheer size of China’s population and economy should dictate growing energy demand.  In earlier periods the pace of China’s demand growth would not have been a major concern since oil consumption all across the world was growing.  But now the growth of oil consumption in the developed economies in the world is no longer assured, and with global warming and aging demographic issues confronting these economies, we may actually be experiencing the start of a new era to be marked by lower oil consumption for a significant portion of the world’s economies. 

If a new oil consumption era is dawning, then the rate of oil consumption growth in the future may be lower than we have experienced in the past.  As the accompanying chart shows, for the period 1966-1979, the world’s oil demand growth averaged 2.4 mmb/d annually.  If we exclude the recessionary period of the early 1980s when global oil demand was negative, world oil demand grew at about a 1.06 mmb/d rate through 2008.  On the other hand, if we include those weak demand years, consumption grew at only 0.69 mmb/d a year.  It is interesting to note that if we include the revised IEA annual demand growth projections for 2009 and 2010, the 1984-2010 rate becomes 0.964 mmb/d, some 96,000 b/d lower than the rate experienced through 2008.  The 1980-2010 growth rate of 0.63 mmb/d, however, is only 60,000 b/d lower than the 1980-2008 rate. 

Exhibit 18.  Annual Oil Demand Growth Slowing

Source:  EIA, PPHB

Will we be looking at an even lower demand growth rate in the future?  Only time will tell.  For the world’s oil market, slower demand growth may be perceived as a relief valve from pending peak oil concerns.  While slower demand growth will take some pressure off the supply challenge, aging oil fields and accelerating depletion rates remain a relentless cancer in the industry.  The recent media flap over comments by Fatih Birol, chief economist at the IEA, about a peak in global oil production coming much sooner in time than the agency has publicly acknowledged may be the tip of the iceberg highlighting that depletion has displaced growth as the principal driver for the global oil business.  While finding new fields will remain important, the oil industry’s focus increasingly will be on the critical issue of how to get more from existing reservoirs and how best to extract the lower quality unconventional oil resources around the world.  This sounds like a good environment for the oilfield service industry.

In the few days before Labor Day we drove from Houston to our second home in Rhode Island.  We noticed much heavier traffic on certain portions of the route – the Gulf Coast I-10/I-12 corridor and the stretch from Knoxville, Tennessee to the I-84 interchange in Pennsylvania.  The Connecticut stretch is always heavy, but that Saturday it was surprisingly light.  On those road sections with heavier traffic, they seemed to have heavier truck traffic than we experienced in our previous two trips.  But we did notice again that there were very few RVs and fifth-wheel trailers on the roads.  Maybe it was because we were at the end of summer and those vacationers had already gone home because schools had started back into session, or grandparents weren’t ready to head south yet.  That later point is significant since early fall often experiences some of the best weather of the year, if you can avoid hurricanes. 

We did observe heavier police coverage than in previous trips.  We are not sure whether that was due to the start of the holiday weekend, or whether the police have become a more important revenue source for municipalities.  Just before leaving on our trip we read a news story about the increased use of red-light cameras in various locales across the country and how much revenue governments were earning from them.  In today’s tight financial times, governments at all levels are seeking additional revenues to offset their income declines inflicted by the economic downturn.  Interestingly, there were six motorcycle police working a downtown stretch of I-75 in Birmingham, Alabama, yet their work was about to change as we watched a car being sideswiped and flipping off the highway.  There also were a large number of police working the Knoxville area and throughout Pennsylvania. 

The impact of the earlier government stimulus spending was evident up north.  In fact, we drove on roads being resurfaced under money provided to the states by the American Recovery and Reinvestment Act of 2009.  The new signs trumpeting these expenditures alone must have put some people to work, unless prison workers are able to make signs besides license plates.  We did find it interesting that the projects we encountered were located in West Virginia (Robert Byrd), Maryland (Martin O’Malley) and Pennsylvania (Ed Rendell), all prominent Democratic strongholds. 

The most interesting economic observations came on our first night in Bessemer, Alabama.  We arrived about 11pm at the hotel, after having called earlier to make a reservation.  The desk clerk commented that we were the last reservation to arrive.  Since almost all the parking spaces in front of the hotel were full we commented, “I guess you’re pretty full tonight.”  She responded, “Not really.  We are probably about half full, if that.”  We were taken aback since we expected with the upcoming holiday weekend and the AAA predicting more Americans taking to the roads this holiday than on the July 4th holiday there would have been more people at the hotel. 

In the morning, when we walked out to our parked car, we discovered we were overlooking a Ford dealership.  The parking lot in front of us was almost barren of new cars.  There were a handful of pickups and a scattering of matching silver and blue small Ford vehicles (since I don’t know one small Ford from another I cannot offer insight as to which models they were).  Thinking this Ford dealer must have had a good run during the Cash for Clunkers program we drove out musing on the impact on Ford’s upcoming manufacturing requirements and the implication for our economy.  After driving around the hotel and backtracking to the I-59 on/off ramp, we saw another side of the Ford dealership.  It was chock-a-block with pickups and new vehicles – as much as my eye could take in before turning onto the on-ramp.  That view dealt a blow to my earlier thoughts about the economic stimulus plan.

We are now ensconced in Rhode Island where my brother-in-law tells me the construction business is dead.  My wife’s cousin tells us real estate sales were good in August (“in this environment”) but were slowing down.  They said they tried to do a Cash for Clunker deal but couldn’t find the vehicle they wanted so they are waiting until early next year when they anticipate more deals.  Our painter called to see if we would be painting our porch – something we had discussed earlier this summer – but was disappointed when we said we were going to wait until next year.  It sounded like he didn’t have any work.  We are going to update two of our bathrooms, and have already purchased the materials, but even the Lowe’s and Home Depot were not particularly busy when we were shopping.  We continue to read about the economic recovery, but wherever we look in Rhode Island it is hard to see.

The week before Labor Day, more than 1,500 of the world’s top climate scientists gathered in Geneva at the UN’s World Climate Conference.  Many in attendance may have been shocked to hear Mojib Latif of the Leibniz Institute of Marine Scientists at Kiel University in Germany express the view that the world may be entering a one to two decade global cooling period.  Dr. Latif was an author of the last UN Intergovernmental Panel on Climate Change report.  In his comments he has gone further in proclaiming this climate change than other climate scientists.  More and more, climate scientists are beginning to agree that the short-term prognosis for climate change is much less certain than once thought.  Of course they still remain adamant about the perils of global warming in the long-term.

The timing of this revelation is unfortunate. The UN’s World Meteorological Organization called the conference in order to draft a global plan for providing “climate services” to the world.  The idea is they would be able to deliver climate predictions that would be of value to everyone from farmers, trying to deal with crop planting decisions, to doctors, struggling with possible disease outbreaks.  It was also thought that these climate services would be of value to builders of dams, roads and other infrastructure needing to assess the risk of floods and droughts 30 years into the future.

Many of the scientists assembled in Geneva admitted that on these various timescales, natural climate variability is at least as important as the long-term climate changes arising from global warming.  As Vicky Pope of the UK Met Office, a weather forecasting organization, put it, “In many ways we know more about what will happen in the 2050s than next year.”  Of course, given the current global cooling trend, those long-term conclusions may not come to pass either.

It was interesting that The Wall Street Journal carried an article in its Science Journal column on Friday, discussing four studies that focus on the impact of melting ice sheets on rising sea levels globally.  The thrust of the column was to focus on how New York City will deal with storm flooding due to the higher seas. 

Dr. Latif predicted that the natural cooling trend would dominate over warming caused by humans, at least for the immediate future.  The reason for this trend change is the cyclical change in ocean currents and temperatures in the North Atlantic, a feature known as the North Atlantic Oscillation (NAO).  Dr. Latif then broke with the climate-change orthodoxy by claiming that NAO cycles were probably responsible for some of the strong global warming seen in the past three decades.  The question he raised with the convention about his conclusion was, “But how much?  The jury is still out.” 

The challenge the global warming promoters are having is that contrary evidence to their views is building.  At the UN conference another favorite climate change drumbeat was dealt a blow when Ms. Pope warned that the dramatic Arctic ice loss in recent summers was partly a product of natural climate cycles rather than global warming.  Preliminary reports are that there has been much less melting this year than in 2007 or 2008.  At the same time, Dr. Latif reported that NAO cycles explained the recent recovery of the Sahel region of Africa, the semi-desert region bordering the Sahara desert to the south, from the droughts of the 1970s and 1980s. 

The recovery of the Sahel between1982 and 2002 was reported in a new study in the journal Biogeosciences.  The study based on satellite images of African regions including the Sahel show extensive re-greening.  The study suggests huge increases in vegetation in areas including central Chad and western Sudan.  The improved climatic conditions are attributed to hotter air that has more capacity to hold moisture, which in turn creates more rain.

Satellite images cannot distinguish temporary plants like grasses that come and go after rainfall, but ground surveys suggest recent vegetation is firmly established.  Stefan Kröpelin, a climate scientist at the University of Cologne’s Africa Research Unit in Germany, who has studied the eastern Sahara region of southwestern Egypt and northern Sudan, reports that new trees, such as acacias, are

Exhibit 19.  The Sahara And Sahel Are Greening

Source:  WIKIPEDIA, PPHB

flourishing.  “Shrubs are coming up and growing into big shrubs.  This is completely different from having a bit more tiny grass.”  He went on to say that after visiting Western Sahara in 2008, “The nomads there told me there was never as much rainfall as in the past few years.  They have never seen so much grazing land.  Before, there was not a single scorpion, not a single blade of grass.  Now you have people grazing their camels in areas which may not have been used for hundreds or even thousands of years.  You see birds, ostriches, gazelles coming back, even sorts of amphibians coming back.  The trend has continued for more than 20 years.  It is indisputable.”

It is interesting that the observations coming from the UN conference can only be found on obscure websites, and even then the writers have been tipped off by conference attendees on Facebook.  In other words, these revelations have not made the main stream media – and likely won’t with any degree of legitimacy.  But we have to think that these comments, even as we anticipate being subject to marginalization, will have an impact on the tone of discussions in Copenhagen in December.  These inconvenient truths will add support to the “go-slow” movement beginning to build among a number of governments who are just now quantifying the potential economic and financial costs to their economies from regulatory efforts to curb global warming.  If the debate about global warming was over, it is being reopened, and this time by leading global warming proponents – an interesting development.

A new study by researchers at the U.S. Department of Agriculture published in the journal Biotechnology for Biofuels shows that watermelons can be an excellent source of biofuel.  The researchers report that retailers reject 360,000 tons of “substandard” watermelons annually in the U.S. alone.  These watermelons could produce nearly two million gallons of biofuels a year.  The sugar in the watermelon juice is seen as a potential source of biofuel. 

Exhibit 20.  A New Source Of Sugar To Make Biofuel

Source:  AP

“Cull” watermelons are those not sold due to cosmetic imperfections and are currently ploughed back under the ground.  About 20% of the annual crop is left in the field due to blemishes or because the fruit is misshapen.  Some 50% of these left-behind watermelons can be turned into biofuel.  The estimate is that 20 gallons of ethanol can come from the waste fruit left on each acre. 

We are left wondering, however, what happens over time to the productivity of the soil if all these “culled” watermelons are scooped up for biofuel rather than being ploughed back under.  Might we be faced with having to use more fertilizer in the future to keep the watermelon crop yield up?  Counter-productive?

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Parks Paton Hoepfl & Brown is an independent investment banking firm providing financial advisory services, including merger and acquisition and capital raising assistance, exclusively to clients in the energy service industry.