Why America's Oil Boom Just Might Go Bust

Thanks to the oil boom, and as a result of the fracking of oil shale, America is now on track to be the largest oil producer in the world within the next year. 

However, our overzealous production may possibly cause that "largest" title to quickly slip through our fingers.  Right now there is simply too much oil in the world and the price for Brent oil (the world benchmark traded worldwide) has fallen from over $110 a a barrel to well below $70 in just a few months; with some experts predicting $40 within the next year.   It is this glut of oil that may cause many of our oil shale fracking operations to be shutdown because it will be too expensive -- relative to the going price for Brent oil -- for those operations to continue.  And, for some of our oil shale operations, the current price may already be too low to continue as shown in this breakeven chart of our major oil shale fields:

But, what this chart also shows is that, if oil does hit $40/barrel, it would make all but two fields unprofitable.  Additionally, oil below $70 is probably killing off any possible new fracking operations in this country. Further, these low prices may also make many of our deep-water off-shore drilling operations unprofitable.

The simple fact is that much of the growth in the economy and the increase in jobs has resulted from the oil boom.  If it comes to an end, our economy could contract (slip into recession) and unemployment would necessarily rise.  Fears of this came yesterday when the stock market fell 268 points as oil hit 5-year lows on a 3% drop.

References:

U.S. to Be Top Oil Producer by 2015 on Shale: http://www.bloomberg.com/news/2013-11-12/u-s-nears-energy-independence-by-2035-on-shale-boom-iea-says.html

Brent Crude - Wikipedia, the free encyclopedia:  http://en.wikipedia.org/wiki/Brent_Crude

Economist Jeff Rubin: Oil Might Fall to $40 a Barrel: http://www.newsmax.com/Finance/Rubin-oil-40-supply/2014/09/25/id/596895/

Here Are The Breakeven Oil Prices For Every Drilling Project In The World: http://www.businessinsider.com/citi-breakeven-oil-production-prices-2014-11

Oil & Gas Boom 2014: Jobs, Economic Growth And Security: http://www.forbes.com/sites/davidblackmon/2014/02/20/oil-gas-boom-2014-jobs-economic-growth-and-security/

Bad Timing? Chevron Christens New $8B Deepwater Oil Platform: http://www.forbes.com/sites/christopherhelman/2014/12/02/bad-timing-chevron-christens-new-8b-deepwater-oil-platform/

Five Regions Where Big Oil Is Foolishly Chasing Profits: http://oilprice.com/Energy/Crude-Oil/Five-Regions-Where-Big-Oil-Is-Foolishly-Chasing-Profits.html

Dow drops 268 points after oil finds 5-year low: http://www.cnbc.com/id/102256233

On The Minimum Wage Hike: Timing Is Everything

On the very day that the Senate Democrats are planning to make a show of voting for a $10.10 minimum wage,  it was reported that the economy in the first quarter only grew by one-tenth of one percent.  Just a tenth of a percent above dead stalled.
   
Yet, the Democrats feel obliged to further damage this already-fragile situation by hiking the minimum wage and, in so doing, force higher prices for a consumer base that has already seen its income decline for 5 straight years.
   
This, so 1/2 of one percent of our population or 1.6 million workers, can see their salary kicked up 41%. With this, the Democrats think they can stir up their political base as they approach the Fall elections.  And the economy be damned as they ignore how complicit the last minimum wage increase was in making this the worst recovery ever.
   
Now, ask yourself this. Are you going to get a 41% wage hike so you can afford the inflationary prices caused by this latest increase?  Are the working poor, those on welfare assistance, and those on fixed incomes going to benefit from it?  No.  This will only create further income inequality by weighing down those already at the bottom.

References:

April 30: $10.10 Wage Bill Set To Die In The Senate: http://thehill.com/homenews/senate/204766-1010-wage-bill-set-to-die

April 30: US economy slowed to 0.1 percent growth rate in Q1: 
http://apnews.myway.com//article/20140430/us-economy-gdp-09b1567225.html

Median Income Falls For 5th Year, Inequality At Record High: http://www.huffingtonpost.com/2013/09/17/median-income-falls-inequality_n_3941514.html

Characteristics of a minimum wage worker: http://www.bls.gov/cps/minwage2012.htm

The Truth About Buying Gold And Silver

Every day, the radio airways and cable news broadcasts are filled with advertising from "gold bug" companies who are trying to convince you to buy both gold and silver.  There are dozens of them: Goldline, Lear Capital, Rosland, Merit, and so on.  All of whom claim that, by holding these precious metals, you are being protected against inflation as a result of massive government spending and the devaluation of the dollar, or, protected against another recession, depression, or stock market crash. 

The problem is that all of those claims are bogus. The proof of that is in the chart below, which shows the combined price of gold and silver which has been adjusted for inflation in today's dollars:

Click on Chart to Zoom

As you can see, these two metals have a history of spiking in price, but once that price hits some "tipping point", there is a long and painful slide downwards.  This happened in 1980 when gold hit a high of $850 an ounce or nearly $2,000 when adjusted backwards in today's dollars. By 2001, just before the next spike upwards, gold hit a 20-year low at $250 (unadjusted); or about $325 (adjusted).  During that 20-year slide, holders were paid no dividends; probably weren't savvy enough to hedge against their losses; and, most likely got stuck with relatively high storage and insurance costs to protect their investment. Worse, if you did buy gold in 1980 at its high, you are still underwater (see graph) when adjusted for inflation.  Just the opposite of what buying gold was supposed to do.

What none of the gold bugs are willing to tell you is that, in 2011, gold and silver both hit respective nominal (unadjusted) highs of $1,904 and $49.50 an ounce.  Today, gold is trading around $1,300 or down $600 from 2011.  Silver is even worse off  with today's price near $20; and, that's a loss of more than 60% since its 2011 high. All indications are that these prices will continue to slide; just as they had done in the 20-year period after the 1980 spike.

I guess what really bothers me about the gold bug ads is that they make all kinds of unproven claims and predictions.  For example, Lear Capital is running a current ad that features Eric Sprott; a billionaire Canadian hedge fund manager.  In that ad, Lear offers any callers a report by Sprott that predicts that gold will exceed $2000 an ounce sometime this year and that silver will be at least $50 an ounce by the end of the year.  Well, that's the same claim Sprott has made every year since 2011.  In fact, in 2011 he predicted $2155 (Canadian) for gold and $64 for silver before the beginning of 2012.  While close in 2011, none of Sprott's predictions since, have been anywhere near being true.  My guess is Sprott is holding a lot of gold at a loss, and by hyping its price potential he can cover those losses and find an escape hatch.  While Sprott's claims seem outrageous, there are a bunch of people predicting that gold will hit $5000.  Just Google it and you won't believe how many, and for how long they've been making that prediction.

Lastly, these metals have big liquidity problems. There's a lot of dealers out there who will sell you this stuff.  Try selling it back to them; especially when the prices are falling.  Try finding buyers on your own.  In either case, you will have the cost of shipping to the buyer, and the additional  cost of hefty shipping insurance.


References:

Chart Perspective – Gold: 100 Year Historical Prices: http://www.gcasset.com/chart-perspective-gold-100-year-historical-prices/

What Happened to the Gold Price in 1980?: http://buying-gold.goldprice.org/2008/01/what-happened-to-gold-price-in-1980.html

Sprott On Gold In 2012: http://katchum.blogspot.com/2012/05/eric-sprott-on-cnbc.html

Sprott On Gold In 2011: http://www.jaggards.com.au/news/medusa/article_75.asp

Spain's Current And Future Hikes In Electricity Rates Should Be A Wake Up Call On Obama's Going-Green Initiate

When it comes to going green, Spain is a world leader.  Subsequently, the environmental left just loves them for their "greenness".  In fact, if you view many of the eco websites around the Internet, you will see Spain referred to quite often.

Take, for example, this article, Wind Energy Output Hit Record High in Spain (Kept Electricity Prices Lower than Neighbors’), from the website CleanTechnica.com.  In it, there is nothing but glowing praises on how clean energy has helped Spain keep electricity costs down and created jobs. But, that article was written at the end of February.  By March and based on a prior-year Supreme Court ruling, the Spanish government announced that it must allow electricity rates to rise in order to reflect the "true" cost of energy production.  As a result, Spaniards were hit with a 7 percent rate increase in April.  At the time that the rate increase was announced, their energy minister also indicated that rates should have gone up by 40% to meet the Supreme Court mandate; but, didn't because of the hardship it would impose.  (Click here to see the official announcement)  So, you see, Spain's "lower than neighbors" energy costs just was just a lie; hidden by government subsidies. They are a perfect example of how expensive going green can be.

In the U.S., the average electricity bill is just under $1500 a year. In places like the desert Southwest and deep South, that amount can be twice as high. If President Obama is allowed to proceed with his green agenda for the U.S. by installing wind turbines and solar panels and by killing the coal industry, our rates, too, could easily go up by 40%. For an average family, that's $600 more per year that will have to go to pay the electric bill; hurting the poor and low income families the hardest. And let's also not forget that Spain's debt problems are partly a result of going green. Do we really want to become another Spain? I think it should be a true wake up call for all of us.