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April 10 2017

Commentary by David Fuller

Nuclear Fusion Energy News: Infinite Power by 2030 with Nuclear Fusion Reactor?

Nuclear fusion Energy has often been sarcastically said to be always 30 years away. This scientific inside joke is meant to suggest we will never have the technology to make a working commercial nuclear fusion reactor. But despite the disappointments and failed promises over the last 50 years, the latest news suggests we might have reached a turning point in fusion Energy research.

Many people confuse nuclear fusion reactors with nuclear fission reactors. But fission operates on the principle of placing enough fissionable radioactive material – uranium or plutonium – together that a chain reaction will take place in which particles given off by the fuel smash into other atoms in the material to produce excess Energy.

This reaction has to be carefully managed through various means – including non-fissionable control rods – to avoid a disastrous runaway reaction.

But all of the concerns that people have about fission reactors – and these concerns are definitely justified following the incidents at Chernobyl and Fukushima – don’t apply to a fusion reactor. Nuclear fusion reactors cannot melt down, explode, or otherwise fail catastrophically in a way that threatens the environment.

If a nuclear fusion reactor did have a problem, it would simply stop working. In addition, the nuclear fusion Energy production process produces very little radioactive waste – and what waste is produced has a much shorter half-life than the long-lasting, highly dangerous radioactive byproducts created by fission.

Another advantage that a commercial fusion reactor would have over fission reactors is that fissionable materials are extremely difficult to find and process for use, making them very expensive and essentially a limited resource. A nuclear fusion reactor would likely use deuterium, which can be extracted from ordinary seawater in virtually unlimited quantities.

Energy production via a nuclear fusion reactor has been on the wish list of many governments around the world, which is why an international project known as ITER was established to construct a massive experimental tokamak fusion reactor. As reported by the Manufacturer, the purpose is to confirm the feasibility of large-scale production of fusion Energy.

The ultimate goal of the project is for ITER to be the first fusion reactor to achieve the production of more Energy than it requires to operate. Reaching this breakeven point has been the Holy Grail of fusion research. Thirty-eight nations have joined this effort to construct the experimental ITER reactor in southern France – with the cost being astronomical.

However, the scientists, engineers and bureaucrats running this program admit that it will be many decades – perhaps as far away as 2050 – before an actual commercial reactor based on ITER will be in operation.

It has become virtually a mantra for nuclear fusion Energy researchers that bigger is, in fact, better when it comes to building a nuclear fusion reactor. This is why governments are pouring tens of billions of dollars into the construction of the colossal experimental ITER reactor – that itself will not produce Energy for consumption.

Fortunately, a number of other private organizations and companies around the world are trying to make fusion power a reality much quicker, perhaps even as soon as 2030. In addition, several individual governments have their own private nuclear fusion Energy programs apart from ITER.

David Fuller's view -

Nuclear fusion has long been the holy grail of global Energy, with no Parsifal equivalent in sight.  That may be changing, although it would not make a great opera.  However, more wealthy people, governments and university science departments are investing increasingly large sums of money to achieve nuclear fusion.   

When they succeed, which I would define as generating far more Energy than they use in the process of creating nuclear fusion, it will be the greatest invention of all time. 

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April 05 2017

Commentary by Eoin Treacy

Musings from the Oil Patch April 4th 2017

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section:

As we contemplate the next cycle, we cast our view back on the industry’s history. The last great cycle came out of the explosion in oil prices in the latter half of the 1970s due to geopolitical events, but realistically it resulted from the peaking of U.S. oil output and the transferring of pricing power to the OPEC cartel. What broke the back of that price explosion was new, large sources of oil – offshore basins in the North Sea and West Africa, in particular, along with Alaska. Those were the resources that drove the industry over the subsequent 30 years. Shale is what is driving the industry now, and likely will drive it for the foreseeable future. What could that mean for oil prices? Look at Exhibit 1 where we show the inflation-adjusted oil prices from the late 1960s to 2016. After the bust of the early 1980s, the oil price traded for 18 years without ever going above $45 a barrel in current dollar prices except in response to one-off geopolitical events. 

The recent oil price bust followed a much longer period of super-high oil prices than in the 1970s. To our way of thinking, we are likely to experience another extended period of lower, but stable, oil prices. Will it be 18 years? We don’t know. Will oil prices stabilize around $45 a barrel? We don’t know. Might the price range be $55-$60 a barrel? It could be. Will it be $70 a barrel or more? We doubt it, except for brief periods. This isn’t because we think history always repeats itself, but rather because the oil industry is fighting maturing economies around the world, meaning slower demand growth. Developing economies are where oil demand is growing the fastest, but those countries have the benefit of employing the most recent equipment designs and technologies, suggesting their economies will be much more Energy-efficient than earlier developing economies at the same point in time. Think about how no country now would consider string telephone wires to allow communication – cell towers are the answer. The oil industry is also fighting a global push to de-carbonize economies in order to fight the damage of climate change, which has the potential to significantly lower global oil consumption growth.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This piece rhymes very strongly with our long-held view that shale oil and gas represent game changers for the Energy complex. This has resulted in US onshore shale now representing an important swing producer for the global market. 

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April 04 2017

Commentary by Eoin Treacy

Email of the day on desalination

Dear Eoin, concerning today's posting on the water situation, I recently visited one of Israel's 5 water desalination plants. Over the last 10 years Israel has totally overcome its historic water shortage problem by desalinating sea water. It has done so in collaboration with Veolia. In addition this new technology is being exported worldwide. Once again we have an example of how human genius is applied to important problems and how new technology is overcoming them. Great to be able to be positive when pessimism reigns around the world.

Eoin Treacy's view -

Thank you for this first-hand account and I agree that solving Israel’s water challenges is a significant victory for a country where water security is highly politicised. This article from MIT Technology Review carries more information. Here is a section: 

The Sorek plant incorporates a number of engineering improvements that make it more efficient than previous RO facilities. It is the first large desalination plant to use pressure tubes that are 16 inches in diameter rather than eight inches. The payoff is that it needs only a fourth as much piping and other hardware, slashing costs. The plant also has highly efficient pumps and Energy recovery devices. “This is indeed the cheapest water from seawater desalination produced in the world,” says Raphael Semiat, a chemical engineer and desalination expert at the Israel Institute of Technology, or Technion, in Haifa. “We don’t have to fight over water, like we did in the past.” Australia, Singapore, and several countries in the Persian Gulf are already heavy users of seawater desalination, and California is also starting to embrace the technology (see “Desalination Out of Desperation”). Smaller-scale RO technologies that are Energy-efficient and relatively cheap could also be deployed widely in regions with particularly acute water problems—even far from the sea, where brackish underground water could be tapped.

Earlier in development are advanced membranes made of atom-thick sheets of carbon, which hold the promise of further cutting the Energy needs of desalination plants.


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March 29 2017

Commentary by David Fuller

Britain is the Least of European Problems

The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the Energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

It was always on the cards that the UK would have to extract itself from a venture that spends most of its Energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

David Fuller's view -

This is one of the most realistic and comprehensive assessments of the European Union’s political situation that we are likely to see, in my opinion.  Moreover, it is discussed in the context of the Western world. 

What is not mentioned in this fine article above, is the credit which the European Union has been generously given by other commentators, not least from across the Atlantic, for maintaining post WWII peace throughout much of Europe. 

I will quibble with this because the EU was not actually created before 1993, following the Maastricht Treaty, otherwise known as the Treaty on the European Union.  Considerably earlier, The European Economic Community (EEC) was created in 1957.  It was more familiarly known as the Common Market and also the European Free Trade Association (EFTA).

Peace within Europe or any other global region, I suggest, is more likely maintained by independent, democratic governments with successful economies.  This is what the European Common Market / EEC / EFTA, actually achieved, to their considerable credit. 

Sadly, the Maastricht Treaty’s creation of the EU in 1993 marked the beginning of the end for Continental Europe’s self-governing and mostly economically successful countries, which were being homogenised in what became the biggest bureaucracy ever created. 

The introduction of the Euro in 1999, purely for political reasons, has been nothing short of a tragedy in term of declining economic performance and rising unemployment.  Moreover, this failing system has become fractious, not only among European countries but also within individual nations, leading to populist uprisings.

What about Europe’s financial markets?

This item continues in the Subscriber’s Area, where a PDF of AEP’s article is also posted.

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March 29 2017

Commentary by Eoin Treacy

Email of the day on hydrogen versus electric vehicles

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Eoin Treacy's view -

Thank you for this email raising an important issue regarding Energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced Energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store Energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low Energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.

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March 27 2017

Commentary by Eoin Treacy


Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in Energy producing nations, not least the USA, is less compelling.  

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March 24 2017

Commentary by David Fuller

Time for Trump to Learn From Reagan

It’s crunch time in America. The financial markets surged on Donald Trump’s election, on the assumption that his economic policies would, on balance, be pro-growth. Yes, Wall Street rightly loathes protectionism and the tech industry in particular is opposed to proposed restrictions on immigration – but business as a whole hopes that the President’s policies on tax, healthcare, spending, banking, regulation, Energy, infrastructure and, maybe even in time, monetary policy would be neo-Reaganite.

It’s still too soon to tell how all of this will pan out, but time is running out for the Trump administration on the economic front. It needs to get a lot more done a lot more quickly. There is, of course, healthcare reform. But the first real, tangible piece of good news has come from a very different area: there has now been some genuine movement on Energy, with the Keystone pipeline authorisation. That is good news: the US needs to embrace all kinds of domestic Energy production, and other countries should follow suit. The shale revolution 
has already transformed the US economy, which would be in a far weaker place without it.

But while Trump has delivered on Energy, he will need to turbocharge the rest of his agenda if he wants to keep on side those in business and Wall Street who thought that, despite his many downsides, the new president would end up improving the US economy overall.

Reagan ought to be the Republican role model: a true believer in free market economics, he was a brilliant, lucid and powerful advocate for individual liberty. He cut marginal tax rates and simplified the tax system, while slashing the number of pages in the Federal Register from 70,000 in 1980 to 45,000 in 1986, as a note by Adam Slater from Oxford Economics reminds us.

He did what very few politicians manage: he genuinely took an axe to red tape, deregulated extensively and simplified what rules remained. By contrast, the regulatory burden rocketed under Barack Obama. The Fraser Institute’s index of economic freedom confirms that America became a more free-market and economically liberal economy during the 1980s; in recent years, it has fallen back drastically.

David Fuller's view -

Many of Trump’s economic policies are not that different from Reagan’s.  However, Trump should have prioritised economic policies from the first days of his administration, rather than wasting his initiative on political disputes and repealing Obama’s healthcare programme.  This has been politically divisive, while policies for economic stimulus would have had much more cross-party support.  They may be harder to pass in future.     

Ironically, perhaps today’s realisation by Trump and Paul Ryan that they do not currently have sufficient support to repeal the Affordable Care Act cause them to refocus on policies for increasing GDP.

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March 23 2017

Commentary by Eoin Treacy

Energy Stat: Are Electric and Autonomous Vehicles Heading Down the Road to Peak Oil Demand?

Thanks to a subscriber for this fascinating report by Pavel Mulchanov for Raymond James which may be of interest. Here is a section:

There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

There is no direct historical precedent for worldwide demand for a major Energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 

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March 21 2017

Commentary by David Fuller

Big Oil Plan to Buy Into the Shale Boom

American shale with gusto, planning to spend a combined $10 billion this year, up from next to nothing only a few years ago.

The giants are gaining a foothold in West Texas with such projects as Bongo 76-43, a well which is being drilled 10,000 feet beneath the table-flat, sage-scented desert, and which then extends horizontally for a mile, blasting through rock to capture light crude from the sprawling Permian Basin.

While the first chapter of the U.S. shale revolution belonged to wildcatters such as Harold Hamm and the late Aubrey McClendon, who parlayed borrowed money into billions, Bongo 76-43 is financed by Shell.

If the big boys are successful, they’ll scramble the U.S. Energy business, boost American oil production, keep prices low, and steal influence from big producers, such as Saudi Arabia. And even with their enviable balance sheets, the majors have been as relentless in transforming shale drilling into a more economical operation as the pioneering wildcatters before them.

“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.

Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.

With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.

“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.

Exxon, Shell, and Chevron will be able to spend more than independents can for service contracts and prime drilling acreage. But if the majors pursue acquisition deals, as they’ve done before, the wildcatters stand to reap the benefits.

Exxon invested big in shale in 2010 when it bought XTO Energy Inc. in a deal valued at $41 billion. For years, however, the major companies spent little on shale, instead focusing on their traditional turf: multibillion-dollar engineering marvels in the middle of nowhere that took years to build. The wells that Big Oil drilled were mostly in deep water, where a single hole could cost $100 million, rather than shale wells that can be set up for as little as $5 million each.


Chevron said it estimates its shale output will increase as much as 30 percent per year for the next decade, with production expanding to 500,000 barrels a day by 2020, from about 100,000 now. “We can see production above 700,000 barrels a day within a decade,” Chevron Chief Executive Officer John Watson told investors this month.

Exxon said it plans to spend one-third of its drilling budget this year on shale, with a goal to lift output to nearly 800,000 barrels a day by 2025, up from less than 200,000 barrels now. The company doubled its Permian footprint with a $6.6 billion acquisition of properties from the billionaire Bass family. Darren Woods, Exxon’s new CEO, said shale isn’t “on a discovery mode, it’s in an extraction mode.”

David Fuller's view -

The US is now the swing producer of crude oil, increasing output in the Permian Basin and other sites when prices are attractive relative to production costs, while cutting back domestic supplies and buying in oil when they are much lower. 

Prices of WTI Crude oil have fallen back from $55 this month, mainly because US production has increased sharply and some OPEC producers are quietly abandoning their previously announced ‘cutbacks’.  Russia promised OPEC that it would lower production but that was mainly due to the freezing weather in Siberia during January and February, and they have been increasing production subsequently. 

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March 21 2017

Commentary by David Fuller

IEA Warn $1.3 Trillion of Oil and Gas Could be Left Stranded

The International Energy Agency (IEA) has warned oil and gas companies that failing to adapt to the lower carbon Energy agenda could lead to over a trillion dollars worth of assets being abandoned by 2050.

The IEA estimates that a step-change in climate policy away from fossil fuels and towards cleaner sources of Energy would leave a total of $1 trillion of oil assets and $300bn in natural gas assets stranded.

The report, undertaken in partnership with the International Renewable Energy Agency, said the move to reduce global greenhouse gases could hold “significant consequences for the Energy industry” if companies fail to adapt their portfolios in the wake of the Paris Agreement.

Oil majors including BP and Shell are already adjusting the balance of future investment with a bias towards gas rather oil.

In the past BP’s has focused on oil for 60pc of its portfolio while gas has made by the difference, but last year this ratio flipped in favour of gas. Shell has made moves towards gas production and transport with last year’s £35bn acquisition of BG Group, a leader in producing and shipping cargoes of liquefied natural gas in the global market.

The agency warned that keeping to the Paris deal would require carbon emissions from the Energy sector to peak before 2020 and fall by more than 70pc from today’s levels by 2050.

This would require the share of fossil fuels used to create Energy to halve between 2014 and 2050 while the share of low-carbon sources - such as renewables, nuclear and carbon capture - would more than triple worldwide to make up 70pc of Energy demand in 2050.

David Fuller's view -

The IEA makes a good point although I think its estimates are too low.  There is vastly more oil and natural gas around the globe and most of the potential shale sites have yet to be touched.  Additionally, with technological improvements continuing, consider the adage: If you want to produce more oil, just go back to where you found it before because the supply has not been depleted.    

A PDF of Jillian Ambrose’s article is posted in the Subscriber’s Area.

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March 20 2017

Commentary by Eoin Treacy

Google Might Run the Power Grid More Efficiently

This article by Diego Marquina and Jahn Olsen for Bloomberg may be of interest to subscribers. Here is a section:

The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s Energy usage without any new infrastructure. Step aside, humans.


Eoin Treacy's view -

Artificial Intelligence (AI) is rapidly finding its way into systems which had previously always been managed by humans. You might have heard of the Google Deep Mind team’s victory against the Go world champion. It represented a landmark not so much because it overcame a human; we’ve seen that in chess before. It was the manner in which the victory was achieved that is so important. 

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March 10 2017

Commentary by David Fuller

Race to Bottom on Costs May Cause Oil to Choke on Supplies

Here is the opening of this topical article by Bloomberg:

Houston hosted two events this week: the nation’s largest Energy conference and the town’s famous rodeo. They have more in common than you’d think.

In both cases, the key for top performers is how efficiently they perform. For cowboys, it means tightly controlling every muscle to stick on a bucking bronco. For Energy executives, it means controlling every cost to lower the break-even price and survive what’s been a wild ride on the oil market.

When companies can lower the price at which they break-even, it means they can approve more projects and produce more oil, keeping dividends safe and investors happy. The risk: By drilling up their share price, they can also end up drilling down the price of oil. Welcome to 2017, the year after a two-year market rout made companies more efficient. At the CERAWeek by IHS Markit conference this week, fears of too much supply were palpable.

"Everyone is driving break-even prices down," Deborah Byers, head of U.S. oil and gas at consultants Ernst & Young LLP in Houston, said in an interview at the meeting, the largest annual gathering of industry executives in the world. "It isn’t just shale companies; it’s everyone, from deep-water to conventional."

As the conference was ongoing, those fears took physical form as West Texas Intermediate, the U.S. crude benchmark, plunged 9.1 percent this week, closing below the key $50-a-barrel level for the first time this year. It settled at $48.49 on Friday.

The slump came as Scott Sheffield, chairman of Pioneer Natural Resources Co., said prices could fall to $40 if OPEC doesn’t extend its existing agreement to cut production. Shale billionaire Harold Hamm, the CEO of Continental Resources Inc., warned undisciplined growth could "kill" the oil market.

The buzzword was efficiency. In panel discussions and keynote speeches, executive after executive tried to outdo rivals in announcing their low break-even prices. Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates that break even for his company’s next generation of projects had fallen from $70-plus to "well below" $30 a barrel.

David Fuller's view -

Analysis of the international oil market today is simple, albeit very different from what the industry has experienced in earlier decades.  Thanks to technology, oil companies around the world can now produce more crude at $50 a barrel than the global economy can consume.  Furthermore, the average cost of production is still declining and is likely to be considerably lower ten to twenty years from now. 

The world will never run out of oil, even when the global economy is booming with the help of cheaper Energy prices.  This is not because the supply of oil in the ground is infinite, which it is not.  Instead, the world is approaching peak oil demand within the next decade, because other forms of Energy continue to become more competitive, thanks to technology, and they cause less pollution.

The only way oil prices can move considerably higher than today’s levels for both Brent and WTI crude, is if production is sharply curtailed, for one reason or another.  While theoretically possible, this is unlikely beyond the short term, if at all.  

(See also this week's earlier comments.)

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March 09 2017

Commentary by David Fuller

US Shale Surge Overwhelms Oil Market as OPEC Splits Deepen

Oil prices have plunged to the lowest level this year as US shale producers boost output at an astonishing pace and crude inventories keep rising, triggering a wave of selling by hedge funds with record speculative positions.

The US surge threatens to neutralise cuts agreed by the OPEC cartel and a Russia-led group of producers last November, potentially delaying a full recovery of the market until 2018 or even later. 

Texas light crude fell $48.90 a barrel on Thursday after yet another surprise jump in US stocks. Prices have slid 8pc in three days and have broken through key levels of technical support, dousing enthusiasm for commodities across the board. 

America's shale frackers have slashed cost so far that they can now produce large volumes at a break-even price of $35 or lower in the prolific Permian Basin, the twelve-layered 'crown jewel' of West Texas, where land auctions have reached $60,000 an acre in core zones.

Continental's legendary wild-catter Harold Hamm said drilling is coming back so fast, and on such a large scale, that it threatens to overwhelm the global industry. "We are on something of an equal basis today with OPEC. We need to be careful not to overproduce. It has to be done in a measured way or else we’ll kill the market," he said at the CERAWeek Energy forum of IHS Markit in Houston.

The US rig count has almost doubled to 756 since touching bottom last May. The productivity per rig has soared as longer lateral drills, "geological steering", and precision "clustering" triple extraction rates in some sweet spots.  The decline rate of the wells has dropped from 65pc to 35pc a year since 2013.

“The consequence has now become alarmingly visible. US crude oil production is growing. And it is growing strongly," said Bjarne Schieldrop from SEB.

Raghdaa Hasan from Statoil said US producers have restored almost all the losses of the slump in just four months, lifting production by over 500,000 b/d. "US shale has proved itself really resilient. They are able to pour significant output into the global system," she said at CERAWeek.


The shale rebound has combined with events in the Middle East to seriously rattle the day-to-day oil markets. The Iraq's oil minister, Jabbar Ali Al-Luiebi, stunned traders with predictions at CERAWeek that his country would lift output by almost a million barrels a day (b/d) to 5m in the second half of this year. 

Such an expansion would further flood the global market before it has come close to rebalancing. It is matched by similar rhetoric from Libya, which has already doubled output to 700,000 over recent months and is ultimately eyeing 2.2m b/d.


It had been assumed that the Saudis would do whatever it takes to push oil back up to a band of $60 to $70 in order to smooth the way for a $100bn part-privatisation of the state oil giant Aramco next year, the biggest public offering ever. This is no longer so certain.

Patrick Pouyanné, chairman of the French group Total, said OPEC is going to have to bite the bullet and accept much longer cuts. "The fact is, we still have build-ups in U.S. inventories. If OPEC wants to rebalance the market, then they'll have to extend the agreement. It will take a year to 18 months to really have an impact on inventories," he said in Houston.

David Fuller's view -

OPEC’s fragile agreement to cut supplies has fallen apart well before its official review date in June.  Short covering and some speculative buying pushed the price of Crude Oil (weekly & daily) temporarily into a range either side of $55 for three months. 

However, Russia never delivered its agreed supply cuts.  Now everyone in OPEC will increase supplies while prices remain above $40.  US shale producers in the Permian Basin, which have never been part of OPEC, are in the strongest position.  They can ramp up production very quickly when prices are firm, as we have seen in recent months.  Even more importantly, they can reduce output very quickly, when prices are less attractive, while preparing additional wells for the next price rise.

Most oil producers were overly dependent on $100 plus prices which we may never see again.  Those with large populations face a rough time, burning through reserves and facing huge declines in their standard of living.   

A PDF of AE-P’s article is posted in the Subscriber’s Area.

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March 09 2017

Commentary by David Fuller

Green van Beurden of Shell Warns On Looming Peak Oil Demand

Shell's chief executive Ben van Beurden has warned global Energy leaders to brace for the shock of falling oil use as soon as the 2020s, warning that those who trivialise the threat of climate change will exhaust public tolerance for fossil fuel companies if they are not careful.

"We have to acknowledge that oil demand will peak, and it could already be in the next decade. It could happen. There are people who believe it will grow forever but I don't subscribe to that," he told the CERAWeek Energy forum of IHS Markit.

Mr van Beurden said the industry is skating on thin political ice - notwithstanding the election of Donald Trump in the US - and needs to shore up its flank. "Social acceptance is just disappearing. I do think trust has been eroded to the point that it is becoming a serious issue for our long term future," he said.

"This is the biggest challenge of my career. We're under a lot scrutiny and pressure. It is not a rational discussion any more, it's emotional," he said. Regulators across the world are starting to demand that fossil fuel companies account for 'stranded assets' and financial risks from climate change, leading in turn to a shareholder pressure on the boards.

Claims of peak demand are anathema in the US oil capital of Houston. "Wishful thinking," said Chevron's chief John Watson. Saudi Arabia's Energy minister Khalid al-Falih said talk of peak demand is ridiculous and ultimately dangerous, discouraging vitally-needed investment before alternatives are on offer. "They are compromising the world's Energy security," he said.

Mr van Beurden advised the oil and gas industry to take an activist approach to show that it takes the threat of global warming seriously. Shell is already the biggest provider of renewable Energy in the US through its wind farms. It is planning to invest $1bn a year in green technologies, and carbon capture and storage.

"You can be too early on this, as we discovered to our detriment. You have to get the timing right," he said. This time the stars are finally coming into alignment as renewable costs fall to parity with fossils.

Shell can afford the luxury of this 'moral' position because it has already made the switch to natural gas, the lone fossil fuel winner of the Paris Agreement on climate change. Gas emits roughly half the C02 of coal in power generation. It is also the perfect back-up for intermittent solar and wind.

“The largest contribution Shell can make to reducing emissions globally in the near term is to continue to grow the role of natural gas,” he said. The company has finished integrating BG following the $52bn takeover in 2016, creating a gas giant and $4bn of synergies this year. "We have taken a tremendous amount of cost out," he said.

The BG merger is one prong of the strategy. The recent sale of $8.5bn of oil sands acreage in Canada is another. Shell is today far less exposed to the political risk of climate change.

The group has not abandoned oil, although it has pulled out of Alaska where it wasted $9bn on a "dry well". Mr van Beurden said the regulatory overkill in Arctic waters, married with high costs, made it pointless to continue.

David Fuller's view -

Ben van Beurden is a brave man, having entered the wounded lions’ den at the CERAWeek Energy forum of HIS Markit in Houston, and delivered this message.  I trust he came away unscratched.

I think he is right.  In fact, I said so, more or less, in Monday’s Comment of the day.  I won’t repeat all those points but you can either scroll back to Monday, or use these two links to access Email of the day 2 on crude oil, and also AE-P’s earlier article: Permain Shale Boom in Texas Is Devastating for OPEC.

Oil is obviously an immensely important commodity.  However, its days as a fuel are now in decline, for all the reasons mentioned above.  That will not change.  However, oil is a very useful chemical, both today and in the foreseeable future.  That will be no consolation for oil producers because both the demand for oil and its price will be much lower a decade from now.

These changes are entirely due to our era of accelerating technological innovation.  To appreciate the significance of this, just consider the example of oil over the last decade.  In fact, only a few years ago experienced commentators were still telling us that the world was rapidly running out of crude oil.  Today, I suggest there is far more oil available than the world will ever require.

This item continues in the Subscriber’s Area, where a PDF of AE-P’s article is also posted.

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March 09 2017

Commentary by Eoin Treacy

China Inflation Heads Off in Two Directions

This article from the Wall Street Journal may be of interest to subscribers. Here is a section: 

China's consumer-price index in February was up just 0.8% from a year earlier, Beijing reported Thursday, slowing from January's 2.5% pace, while the producer-price index--which measures production costs at the factory gate--was up 7.8%, its biggest jump since September 2008.

It is the CPI, which eased largely due to food prices, that most economists see as more indicative. The sharp rise in input costs for manufacturers reflects how low commodity prices were a year ago, and should moderate as that factor fades. Both consumer and producer prices will soften if the overnight plunge in global oil prices proves to be the beginning of a longer slide. Oil's biggest one-day drop in more than a year followed news of record U.S. stockpiles, though prices recovered a touch during Asian trading hours Thursday.

Still, going even further down the rabbit hole, it seems unlikely that China's surprisingly weak inflation reading will lead the central bank to relax. CPI inflation may be far short of the government's 3% target, but the People's Bank of China has a more urgent task than goosing prices: preventing financial risk, from ballooning debt to asset bubbles, from wrecking the economy.

"Despite lower-than-expected inflation, the PBOC will continue to raise money-market interest rates because the overarching theme for China this year is deleveraging," said Liu Dongliang, senior economist at China Merchants Bank.


Eoin Treacy's view -

China’s producer prices have been rising because of the weakness of the yuan, higher Energy prices and the trend of higher wages without commensurate improvements in productivity. 

It’s looking increasingly likely that oil has rolled over so that will remove some pressure from both the CPI and PPI figures over the coming months in both absolute and year over year comparisons. However the renminbi is still trending lower and wages are still rising. Against that background the central bank’s attempts to control the shadow banking system while also encouraging the domestic economy highlights just how fine a line it is treading in terms of monetary and fiscal policy. 


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March 08 2017

Commentary by David Fuller

Saudis Lose Patience on OPEC Cheating, Lash Out at Irresponsible Anti-Fossil Campaign

Saudi Oil Minister Khalid al-Falih has lashed at Western leaders for promoting the 'myth' of peak oil demand and scare-mongering over vast stranded resources in the fossil fuel industry, accusing of them committing a grave disservice to mankind.

The defiant minister said the campaign of attacks on the high-carbon sector will deter trillions of dollars of vitally-needed investment, leading to a disastrous Energy crunch once the current glut is cleared.

"They are doing nothing less than compromising the world's Energy security. It will lead to damaging oil price spikes, and more acute poverty for developing countries," he said, speaking at the IHS CERAWeek summit in Houston.

Mr al-Falih said Saudi Arabia welcomes wind, solar, and other renewables but warned that they cannot quench Asia's "insatiable demand" for more oil or meet supply as global Energy demand doubles by 2050.

For now the problem is the opposite one. The oil market is over-supplied and inventories remain near record levels, despite an accord last November by OPEC and a Russia-led group of states to cut output by 1.2m barrels a day (b/d).

Mr al-Falih admitted that the global crude market has not yet tightened enough and complained that some countries are cheating on cuts. "It has been slower quite frankly than I had thought in the first two months of this year," he said.  

"Saudi Arabia will not allow itself to be used by others. The agreement is for the benefit of all, and needs to be addressed by all. We cannot accept free riders," he said.

The minister said his country would back cuts only for "a restricted period of time" and warned speculators with big long positions on crude oil derivatives that they should not expect the Kingdom to back-up their bets by choking supply.

"I would caution not to tempt investors into irrational exuberance, or into wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our expense and long-term interests."

It is a strong hint that the Saudis may not agree to extend the deal when it expires in June. OPEC officials have been meeting oil traders at the CERAWeek forum to probe what is happening in the parallel futures market. They have been told that the funds may close their positions en masse and trigger a fresh price crash if OPEC returns to pumping at will.

Traders say Russia has cut barely half the 300,000 b/d pledged, similar to the late 1990s when Moscow never followed through on promises. The country's oil minister Alexander Novak told the forum that Russia would deliver by end of April, but also said dismissively that there are "more important issues to talk about" than the OPEC deal. He digressed instead into the issue of currency wars.  

David Fuller's view -

So the Russians have only honoured half of their agreed oil production cut – what a surprise.

Meanwhile, OPEC producers may quietly increase their production following today’s downward dynamic Brent Crude (weekly & daily).  It also helps to have the Permian Basin, easily one of the world’s largest deposits of shale oil, in Texas.   

Saudis remain in a state of shock, due to the USA-led accelerated rate of technological innovation which has made US shale so competitive.  I think their forecasts for “damaging oil price spikes” are wishful thinking.  The Saudi riyal remains pegged to the US$ but for how long?  The risk of a massive devaluation before the end of this decade is increasing. 

(See also: Email of the day 2 “On crude oil” posted on Monday, 6th March, and also AE-P’s excellent article: Permain Shale Boom in Texas Is Devastating for OPEC)  

A PDF of AE-P's article is posted in the Subscriber's Area. 

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March 08 2017

Commentary by Eoin Treacy

New Research Could Turn Water Into the Fuel of Tomorrow

This article from caught my attention and I thought it may be of interest to subscribers. Here is a section:

“What is particularly significant about this study, which combines experiment and theory, is that in addition to identifying several new compounds for solar fuel applications, we were also able to learn something new about the underlying electronic structure of the materials themselves,” Neaton said in a Caltech press release.

To discover these new photoanodes, the team combined computational and experimental approaches. A Materials Project database was mined for potentially useful compounds. Hundreds of theoretical calculations were performed using computational resources at the National Energy Research Scientific Computing Center (NERSC), together with software and expertise from the Molecular Foundry. Once the best candidates for photoanode activity were identified, it was time to test those materials in the laboratory.

The materials were simultaneously tested for anode activity under different conditions using high-throughput experimentation. This was the first time these kinds of experiments had been run this way, according to Gregoire.

“The key advance made by the team was to combine the best capabilities enabled by theory and supercomputers with novel high throughput experiments to generate scientific knowledge at an unprecedented rate,” Gregoire said in the press release.


Eoin Treacy's view -

There has been great deal of commentary in the media about the advances in artificial intelligence and how it is represents a threat to employment across a number of fields. A broader perspective to the easy application of massive computing power is the scale that can be brought to experiments through computer simulation and data analysis. Artificial intelligence represents a major facilitator for technological innovation. Coupled with rapid prototyping and CRISPR the potential for unprecedented change in a range of sectors, stretching from materials to healthcare, is looking increasingly like the base case.  

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March 06 2017

Commentary by David Fuller

Let Us Have a Reforming Budget at Last

A number of measures have already been announced to come into effect this year, including a 2 percentage-point increase in the insurance premium tax and a cut in corporation tax. The Chancellor may well modify some of these measures.

He will surely concede some form of compensation for firms severely hit by the resetting of business rates. But, above all, he must keep current government spending under a very tight rein to allow the Government room for manoeuvre later.

Mind you, all this is going to seem pretty thin gruel. Could we please have some more? In particular, as I said last year, it would be good to have, if not a vision (and “Spreadsheet Phil” apparently doesn’t do “the vision thing”) then at least a glimpse of how the tax system is going to develop.

In fact, very few Chancellors find themselves able to embrace radical reform of the tax system. Usually, they are too busy grappling with the Government’s deficit to have either the resources or the time.

This is true now, and whatever Energy is left is fully absorbed in preparing Britain for Brexit. Yet reform is badly needed. In so many ways, our current tax system is both irrational and inimical to economic growth.

Perhaps we can forgive Mr Hammond his first, and last, boring March Budget. But there should not be any more like it. Tax reform and making the most of Brexit are not alternatives. Indeed, as Britain faces its future outside the EU in a turbulent and risky world, one of the best things that a Chancellor can do is to ensure that the tax system does the most to attract and retain businesses in Britain, and encourages new business formation, innovation, investment and work.

Mr Hammond will not make progress towards these objectives by doing next to nothing, whichever month is graced with his inactivity.

David Fuller's view -

Given what we have seen of Theresa May’s government so far, and the uncertainty regarding Brexit and what she will be seeing from the EU during the next year or two, I think she and Philip Hammond will be very prudent with the Budget and economic policy generally, until the UK has effectively left the EU.  That will mark the start of bolder Budgets.

A PDF of Roger Bootle’s column is posted in the Subscriber’s Area.

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March 03 2017

Commentary by David Fuller

If Philip Hammond Cannot Deliver a Radical Conservative Budget Now, When Will He ever be Able to?

To be Chancellor of the Exchequer is, normally, to be the second most important politician Britain. The Blair-Brown years can be seen as a double act, followed by a catastrophic solo act. The Thatcher-Lawson years were an age of Tory radicalism, setting the conditions for the prosperity that followed. But no one speaks about a May/Hammond axis - in fact, not many speak about Philip Hammond at all. Our Chancellor has a gift for invisibility, honed throughout his political career. Unkind souls dismiss him a nodding dog, appointed for loyalty rather than ability.

Being underestimated in this way suits Mr Hammond rather well because over the last few months, he has been perhaps the most consequential member of the Cabinet, vetoing some of Theresa May’s stranger ideas. She has suggested making it harder for foreigners to buy British companies, for example, and capping the pay of chief executives. She raises such ideas in a sub-committee of her Cabinet members where Mr Hammond kills them off. I’m told that he is a sight to be behold in such meetings, speaking more bluntly than anyone else would dare. Outside No10 he’s seen as the dull-but-dutiful “spreadsheet Phil”. Inside, he has been Hammond the Hammer.

So it’s unfair to judge him by his first, rather underwhelming mini-Budget. His achievement so far lies in what he has saved us from: a 1970s-style industrial strategy, or a set of diktats forcing companies to put random workers on their boards. Barely a word of his resistance has leaked to the press, so the Prime Minister still trusts him and is guided by him. To her immense credit she’s serious about the Cabinet committee process, as is he. For mistakes not made, the record (so far) is excellent. But the record in radicalism? This is another matter entirely.

With the Labour Party a danger only to itself, there might never be a better time for Tory boldness. Instead, Mr Hammond seems fearful. He started his Chancellorship in the foetal position, waiting for the Brexit crash that he and other Cabinet Remainers warned about: the 500,000 job losses, the instant recession, the house price crash. Instead, economic growth accelerated and tax revenues have surpassed forecasts made even before the referendum. This hasn’t cheered him one bit. In the Cabinet Brexit committee, he rolls his eyes when Andrea Leadsom tries to suggest that everyone should lighten up because things will be fine. Even now, the Chancellor genuinely believes that they won’t.

To be sure, Britain faces plenty of uncertainty as we untie the knot with the European Union. It’s either thrilling or terrifying, depending on your point of view – calling for either daring or caution. And Mr Hammond is choosing caution: radicalism, he thinks, can wait.

This fits a depressingly familiar theme. Under David Cameron, the Conservatives were haunted by fear of the Labour Party and signed up to its ruinous levels of tax-and-spend. In government, Cameron was hamstrung by coalition with the Liberal Democrats. Even after winning a majority, Osborne somehow felt the need to implement Labour policies such as the minimum wage – almost as an apology for victory. It has been so long since we saw a confident Tory budget that even the Tories seem to have forgotten what one looks like.

The basics are pretty simple. Conservatism is a belief the countries and communities are stronger and fairer if more money and power are left in the hands of the people, rather than by government. That individuals take wiser decisions for themselves than any politician can take on their behalf. This isn’t an ideology, as such, just an observation that lower taxes, regulatory restraint and sound money is a formula that has worked everywhere that it’s been tried.

David Fuller's view -

I am grateful to Philip Hammond for his outspoken comments in cabinet meetings which have squashed some of the daft left-wing suggestions mentioned above. This government does not have to adopt senseless Labour Party policies to attract more Labour voters.  However, it does need to reawaken the aspirational interests of traditional Labour voters, which it can start doing by helping the economy in the manner of Margaret Thatcher.  Today’s equivalent would include more houses, lower taxes and sensible, competitive Energy policies.

A PDF of Fraser Nelson's column is posted in the Subscriber's Area.

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February 24 2017

Commentary by Eoin Treacy

The second stage of disruption

This article by Alex Pollak for Loftus Peak appeared in Australia’s Livewire letter and may be of interest to subscribers. Here is a section:

But it’s what inside that counts. Autos and components are a significant part of consumer discretionary, as are media, retail and staples including food. A major component of Industrials is transport – road, rail, marine, airline, construction material and heavy trucks.

Virtually all the automakers have electric and self-driving models in the works. But, as we have noted before, the more successful they are with these, the more the potential for write-offs in their internal combustion engine business – which is basically the whole business.

Banking disruption has started but hasn’t hit the mainstream – yet.

But fund managers typically invest looking to the existing make-up of the global economy, through the GIC’s sectors, which are composed of the companies in those industries. So the fund manager will have investment in oil, automakers, Energy and transport, at time when those sectors are heading for massive disruption. In essence, the fund manager is investing by looking backwards!
This is a poor long-term strategy, and one which has already begun to cause drag in portfolios which are underweight ‘technology’ shares (because they form a small part of the index, at the expense of sectors like basic materials and utilities, which are large now but are de-weighting as disruption takes hold.)

We are at a particular point in the economic history where disruptive companies are moving into industries which were previously considered inviolable, companies which couldn’t be damaged because demand for the underlying physical good was thought to stretch out to the horizon. In fact, the demand may still be there, but the way it is delivered, because of technological change, is affecting virtually all industries.

It's why we invest in disruption, and the reason our returns have been solid.


Eoin Treacy's view -

Technological innovation is accelerating at an exponential rate and it is having a transformative effect on just about everything. That is why we concentrate so heavily on the sector. Technology is deflationary in many respects but it is perhaps better to think about that influence in terms of lower costs contributing to better margins. That gives a clear advantage to the originators of disruptive technology as well as early adopters. 

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February 23 2017

Commentary by Eoin Treacy

Renewed Love for Gold into Early 2017

Thanks to a subscriber for this report from RBC, dated February 13th, which may be of interest. Here is a section:

Through the first month of 2017, global commodity AUM flows have shifted course as funds have returned to precious metals and out of Energy. This was a reversal in pattern from that seen through Q4/16, which saw total outflows of $20.5B in precious metals holdings and inflows of $8.4B into Energy. This corresponded to a 0.7% increase in TSX weighting for precious metals to 7.3% and a 1.3% decline in Energy in January. However, despite the promising start to the year for precious metals, total commodity AUM still sits 13% below the $123B seen in September 2016 and the current TSX weighting of 7.75% still sits 1.9% below the high of 9.6% seen in July 2016.

This month, we have seen an acceleration of inflows into physical gold ETFs, which we view as a positive sign fundamentally, and believe that we will continue to see inflows due to geopolitical concerns, persistence of low real rates globally, and growing US inflation expectations. We would recommend that investors focus on companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Following an impressive rally in early 2016 Total Known ETF Holdings of Gold followed the trajectory of the gold price and pulled back below the trend mean. A rally back towards 60 million ounces is currently underway and a sustained move above that level would lend credibility to the view that a low of more than temporary significance has been found. 

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February 23 2017

Commentary by Eoin Treacy

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

This article by Javier Blas and Wael Mahdi for Bloomberg may be of interest to subscribers. Here is a section:

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second- biggest worldwide, before the IPO.

Eoin Treacy's view -

When is the best time to IPO your company? When you can get more for it than you think it is worth. Saudi Arabia is one of the only participants in the oil business which has to have a really long-term perspective. Exxon Mobil and BP put out long-term forecasts for the Energy market stretching into the 2030s but Saudi Arabia tends to think in 50-year timeframes. 

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February 22 2017

Commentary by David Fuller

Trump Eyes Easing Obama Rules for Sprawling Pipeline Network

Here is the opening of this article from Bloomberg:

The hints of a pipeline spill are subtle: the hiss of rushing fluid, a streak of rainbow sheen. Tucked far below ground, a ruptured line can escape notice for days or even weeks, especially in the backcountry, where inspectors rarely venture. 

Regulators in the waning hours of the Obama era wrote rules aimed at changing that, and the industry is looking forward to the new administration rolling them back. The Pipeline and Hazardous Materials Safety Administration “has gone overboard,” said Brigham McCown, a former head of the PHMSA who served on President Donald Trump’s infrastructure transition team. “They built a Cadillac instead of the Chevrolet that Congress told them to build.”

The oversight agency, an arm of the U.S. Department of Transportation, is just one of many where Barack Obama’s policies are in the Trump team’s sights. The battle lines are predictable, with companies on one side and safety and environmental activists on the other. What’s particularly worrying the latter is timing, because the rules could be upended as new shipping routes go into service across the country.

The president, a fan of fossil fuels, has revived two controversial pipelines, TransCanada Corp.’s Keystone XL and Energy Transfer Partners LP’s Dakota Access. They would add 2,300 miles (3,700 kilometers) to the U.S. network with room to transport 1.1 million barrels a day. As it is, there are more than 200,000 miles of pipe cutting across the country carrying crude, gasoline and other hazardous liquids -- about 18 billion barrels worth annually. Many other projects are on the map; in Houston alone, planned lines are expected to increase capacity by 550,000 barrels a day in the next few years.

“I’m terrified about what is going to happen under Trump,” said Jane Kleeb, president of the Bold Alliance, a coalition of groups opposing Keystone XL. “My worry is that they will just budget-starve PHMSA.”

Read More: Why Keystone counts

While Obama was president, the PHMSA budget grew by 61 percent. Then, seven days before Trump’s inauguration, the agency finalized a ruletoughening up inspection and repair demands, mandating, for example, that companies have leak-detection systems in populated areas and requiring they examine lines within 72 hours of flooding or another so-called extreme weather event. The American Petroleum Institute, the oil and gas industry’s main trade group, characterized it all as overreaching and unnecessary.

David Fuller's view -

The extraction of industrial resources from the earth has always been a messy business.  Pollution risks remain although they are declining in the 21st Century, thanks to technology, regulation and more sensible management. 

Effective Energy independence is a key aspect of the USA’s long-term GDP growth potential.  It means that the USA can produce more Energy domestically when prices are higher, perhaps even selling some excess capacity, or increase imports of Energy when they are lower.  An effective pipeline system is necessary for Energy efficiency in a large country such as the USA.    

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February 17 2017

Commentary by Eoin Treacy

Beyond The Supercycle How Technology is Reshaping Resources

Thanks to a subscriber for this report from McKinsey which may be of interest. Here is a section:

First came the “fly-up,” the price spike on world markets for oil, gas, and a broad range of natural resources that began in 2003. Then came the abrupt bust, as prices tumbled and global spending on natural resources dropped by half in the course of 2015 alone. Now, even as resource companies and exporting countries pick up the pieces after this commodity “supercycle,” the sector is facing a new wave of disruption.1 Shifts taking place in the way resources are consumed as well as produced—less noticed than the rollercoaster commodity price ride but no less significant—will have major first- and second order effects on both the sector and the global economy. These shifts are the result of technological innovation, including the adoption of robotics, Internet of Things technology, and data analytics, along with macroeconomic trends and changing consumer behavior.

We see three principal effects of this technological revolution:
Consumption of Energy will become less intense as people use Energy more efficiently thanks to smart thermostats and other Energy-saving devices in homes and offices, and the use of analytics and automation to optimize factory usage. Transportation, the largest user of oil, will be especially affected, by more fuel-efficient engines and by the burgeoning use of autonomous and electric vehicles and ride sharing.

Technological advances will continue to bring down the cost of renewable energies such as solar and wind Energy, as well as the cost of storing them. This will hand renewables a greater role in the global economy’s Energy mix, with significant first- and second-order effects on producers and consumers of fossil fuels.

Resource producers will be able to deploy a range of technologies in their operations, putting mines and wells that were once inaccessible within reach, raising the efficiency of extraction techniques, shifting to predictive maintenance, and using sophisticated data analysis to identify, extract, and manage resources.

Scenarios we have modeled suggest that these developments have the potential to unlock $900 billion to $1.6 trillion in incremental cost savings throughout the global economy in 2035, an amount equivalent to the current GDP of Indonesia or, at the top end, Canada. As a result of lower Energy intensity and technological advances that improve efficiency, Energy productivity in the global economy could increase by 40 to 70 percent in 2035. We believe these changes will have profound implications not just for companies in the resource sector and for countries that export resources, but also for businesses and consumers everywhere.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The long-term cycles of supply and demand can be boiled down into the simply maxim that high prices encourage consumers to be efficient and suppliers to invest in expansion. Low prices encourage consumers to use more while suppliers are forced to be more efficient. Following a decade long super cycle producers are now much more efficient while consumers are really only beginning to increase demand as economic growth picks up. 

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February 15 2017

Commentary by David Fuller

U.S. Spy Agencies, FBI Probing Trump Team Russia Calls, Officials Say

Here is the opening of this disturbing article from Bloomberg:

U.S. intelligence agencies and the FBI are conducting multiple investigations to determine the full extent of contacts that President Donald Trump’s advisers and associates had with Russia during and after the 2016 campaign, according to four national security officials with knowledge of the matter.

Several agencies are conducting the inquiries into Russia’s efforts to meddle in the U.S. election and coordinating as needed, said the officials, who requested anonymity to speak about sensitive matters. The investigations predate the dismissal of retired Lieutenant General Michael Flynn as national security adviser on Monday.

Trump associates whose activities the agencies are examining include his former campaign chairman Paul Manafort, Energy consultant Carter Page, longtime Republican operative Roger Stone and Flynn, two of the officials said. Manafort, in a statement to Bloomberg, said he “never had any connection to Putin or the Russian government -- either directly or indirectly -- before during or after the campaign.”

The FBI has two parallel ongoing investigations, one official said. A counterintelligence investigation is looking at Russian espionage activities and to what extent, if any, they involve communications with or collusion by U.S. officials. The second, a cybersecurity investigation, is probing the hacking of U.S. political groups and operatives.

For example, investigators are focusing on a phone call Flynn had in December with Sergey Kislyak, Russia’s ambassador to the U.S., which was intercepted by intelligence agencies and shared with the FBI, the two officials said. The FBI interviewed Flynn about that communication shortly after Trump was inaugurated.

Leading congressional Republicans have joined calls by Democrats for a deeper look at contacts between Trump’s team and Russian intelligence agents Wednesday, indicating a growing sense of political peril within the party as new reports surfaced of extensive contacts between the two.

Senate Intelligence Committee staff started collecting information in January on its broader probe of Russia’s alleged interference in last year’s election, according to Democrat Senator Joe Manchin of West Virginia, who sits on the panel. Manchin said Wednesday he expects the committee to begin calling in witnesses starting later this month. Among those he would like to see testify are Flynn, Manafort and former acting Attorney General Sally Yates, who was fired after she refused to defend Trump’s executive order on immigration.

David Fuller's view -

This beggars belief. 

Worryingly, Trump has made far more enemies than friends since winning the US presidential election. This will both isolate and distract President Trump, to the detriment of his office. 

The smart move by Trump would be to welcome the multiple investigations by US intelligence agencies and the FBI, while promising full cooperation. 

This item continues in the Subscriber’s Area and discusses Wall Street.

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February 13 2017

Commentary by Eoin Treacy

Silicon will blow lithium batteries out of water, says Adelaide firm

Thanks for a subscriber for this article by Benn Potter for the Australian Financial Review. Here is a section:

Chairman Kevin Moriarty says 1414 Degrees' process can store 500 kilowatt hours of Energy in a 70-centimetre cube of molten silicon – about 36 times as much Energy as Tesla's 14KWh Powerwall 2 lithium ion home storage battery in about the same space.

Put another way, he says the company can build a 10MWh storage device for about $700,000. The 714 Tesla Powerwall 2s that would be needed to store the same amount of Energy would cost $7 million before volume discounts.


Eoin Treacy's view -

A race is underway to develop new types of batteries and, for the foreseeable future, there is room for a number of competing technologies. The reason for this is the pace of innovation is slower than in other sectors but also because Energy storage is required for widely differing sectors. Batteries need to be small and light for handheld devices, big and have almost infinite recharging capabilities for utilities and need highly efficient power to weight ratios for transportation. That suggests there is ample potential for a number of different technologies to play roles in all of these sectors. 


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February 09 2017

Commentary by Eoin Treacy

Musings from the Oil Patch February 7th 2017

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest to subscribers. Here is a section:

Prior to OPEC’s Vienna Agreement last November, putting oil in storage because of its higher future value was a strong motivation for growing storage volumes. Now the curve is much flatter, and for oil priced three years in the future, that price is lower than the current one, providing a strong disincentive for putting oil in storage. Backwardation plays a significant role in oil producers’ decisions to hedge their production since they risk the potential of the price moving higher if the more traditional contango environment returns. As Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC put it, "What happens to the curve does depend on how the OPEC cuts will be carried out. The oil futures curve is indicating that the current OPEC cuts are here to stay for a while." U.S. oil producers will be very happy if that proves to be the case. While history would suggest otherwise, the pending (early 2018) initial public offering for Saudi Arabia’s state oil company, Saudi Aramco, an important component of its domestic economic restructuring effort, might force the country to hold its output down much longer than it has indicated. The reality may be that hundreds of small U.S. oil producers may screw up Saudi Arabia’s grand plan while hurting speculating oil traders with their record bullish oil price bet. A lower future oil price after a record bullish oil futures bet would be consistent with our recent history.

Eoin Treacy's view -

A link to link to the full report is posted in the Subscriber's Area.

BP and Exxon Mobil spend a great deal of time and effort producing annual reports on Energy use and issue predictions on how it will evolve over the time. That helps keep investors informed on how the companies plan to mobilise capital to take best advantage of how they see events unfolding. Saudi Arabia, as the world’s largest low cost producer, does not issue public annual reports. However its plans to IPO the company tell us more than any report ever could about the conclusions the Saudi Arabian administration has reached about the future of the oil market.

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February 06 2017

Commentary by Eoin Treacy

Email of the day - on nickel's underperformance

Do you know why Nickel is not joining in the commodity boom and whether eventually it might? Wonderful service

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. Indonesia has historically been the primary supplier of nickel but from 2014 it toyed with banning exports of ore in an effort to stimulate domestic production of refined metal This article from Stratfor, dated October 12th carries some additional detail. Here is a section:  

The decision to delay the ban once again, announced by the acting chief of the Energy and Metals Resources Ministry on Oct. 4, comes as little surprise. Though foreign investors have committed some $12 billion to build 27 smelters nationwide in the past four years, anecdotal reports and trade data indicate that much of that money has yet to generate higher exports of refined metal products. In one example, the value of Indonesian exports of raw nickel ore — of which the country was once the world's largest producer — has collapsed. In 2013, the year before the first ban took effect, it stood at $1.65 billion, but by 2014 that figure had dropped to $85 million; by 2015, it had fallen to zero. Though exports of refined nickel products rose in 2014 from 2013, they, too, plunged in 2015 and continued to decline in value through the first four months of 2016. Nickel is not unique in this respect, either: The value of metal ore exports as a whole has collapsed, and that of most refined metal products has stagnated or declined.

The 2014 ban came on the heels of a slowdown in China's economy and a dip in metals prices, caused in part by the increasing ore supplies of key competitors such as the Philippines. Low prices then undercut investor interest in building smelting facilities, as did uncertainty surrounding the status of Indonesia's regulations. Meanwhile, the lack of even minimal support infrastructure for construction operations meant that the companies that agreed to build smelters often found themselves responsible for building and funding roads, power generators and other basic utilities to support them. Nevertheless, despite these headwinds, many smelting projects are still underway or in the planning stages.


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February 03 2017

Commentary by Eoin Treacy

Australia's record-breaking mining exports hint of new sector boom

This article by Cecilia Jamasmie for may be of interest to subscribers. Here is a section:

The encouraging data sharply contrasts with the record deficit of $4.3 billion the country recorded only 12 months ago.

HSBC chief economist Paul Bloxham told AAP the export boom should considerably boost company profits, dividend payments, share prices and wages in the mining sector.

His comments will be tested beginning next week, as some of Australia's top mining companies including Rio Tinto (ASX, LON:RIO), BHP Billiton (ASX:BHP), Newcrest Mining (ASX:NCM) and South32 (ASX:S32) are set to start reporting their 2016 results.

This is only the second monthly trade surplus Australia has recorded in nearly three years, which evidences once again the country’s continued reliance on and vulnerability to changes in commodities markets.

The news comes on the back of a report from the Department of Industry, Innovation and Science, which predicted that Australia’s mining and Energy export earnings would jump by 30% between 2016 and 2017, hitting a small yet encouraging record of $204 billion.


Eoin Treacy's view -

Australia exported more than a billion tons of iron ore last year for the first time. At the same time prices broke out of a more than yearlong base so higher volumes were greeted with higher prices which has certainly helped to improve the country’s trade balance. The surge in coking coal prices due to temporary shortages will also have acted as a short-term boost. However with coking coal now well off its peak it is less likely to represent the same positive influence on trade this year. 

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January 30 2017

Commentary by Eoin Treacy

Tesla's Battery Revolution Just Reached Critical Mass

This article by Tom Randall for Bloomberg may be of interest to subscribers. Here is a section:

Three massive battery storage plants—built by Tesla, AES Corp., and Altagas Ltd.—are all officially going live in southern California at about the same time. Any one of these projects would have been the largest battery storage facility ever built. Combined, they amount to 15 percent of the battery storage installed planet-wide last year.

Ribbons will be cut and executives will take their bows. But this is a revolution that’s just getting started, Tesla Chief Technology Officer J.B. Straubel said in an interview on Friday. “It’s sort of hard to comprehend sometimes the speed all this is going at,” he said. “Our storage is growing as fast as we can humanly scale it.”

A Fossil-Fuel Disaster
The new battery projects were commissioned in response to a fossil-fuel disaster—the natural gas leak at Aliso Canyon, near the Los Angeles neighborhood of Porter Ranch. It released thousands of tons of methane into the air before it was sealed last February.

In its wake, Southern California Electric (SCE) rushed to deploy Energy storage deals to alleviate the risk of winter blackouts. There wasn’t any time to waste: All of the projects rolling out this week were completed within 6 months, an unprecedented feat. Tesla moved particularly nimbly, completing in just three months a project that in the past would have taken years. 

Eoin Treacy's view -

The Porter Ranch gas leak made headlines in Los Angeles all last summer but it was a blessing for Tesla because it gave the company an opportunity to demonstrate how it can deploy its batteries at scale in a tight timeframe. 

Batteries are an essential piece of the renewable Energy, electric vehicle puzzle. Every innovation that brings down battery costs has an outsized effect on a host of other sectors. Tesla, with its now completed giga-factory, is well placed to benefit from these emerging themes. 


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January 20 2017

Commentary by Eoin Treacy

Donald Trump's Presidency: A Look at His Proposed Policy Shifts

This compendium from the Wall Street Journal of some of the primary issues facing the incoming US administration may be of interest to subscribers. Here is a section on Energy:

At the top of Mr. Trump’s Energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.


Eoin Treacy's view -

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High Energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 

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January 09 2017

Commentary by David Fuller

Some 2017 Impressions

My thanks to a subscriber for this 16-page illustrated report by James W Paulson, Ph.D, Chief Investment Strategist at Wells Capital Management Inc.  Here is the first page:

Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

Here are some specific impressions for the economy and the financial markets in 2017.

Economic growth

The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

recession is still multiple years away.

Synchronized global economic policies

Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced Energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

David Fuller's view -

There is a lot to like in this global report which I commend to subscribers.  After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash. 

Market sentiment has steadily improved since Trump’s surprise presidential election.  This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press.  Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies.  This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.     

In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above.  Is that a record?  He also mentioned “synchronized” or “synchronization” of economic policies eight times. 

This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.

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January 06 2017

Commentary by David Fuller

Icelandic Volcanic Heat May Be the Perfect Solution to UK Energy Crunch

Iceland is the answer to our prayers. The country has a surfeit of cheap electricity from volcanoes and melting glaciers that is either sold for a pittance, or goes to waste.

The Icelanders would dearly love to sell this power to us at global prices to pay down the banking debts of 2008. Britain would dearly love to buy it from them as our coal plants and ageing nuclear reactors are shut down, with little to replace them beyond the variable winds of the North Sea.

Advances in high voltage technology make it possible to transmit Iceland's low-carbon power to the industrial hubs of northern England by underwater cables with an Energy leakage of just 5pc, and probably at lower costs per megawatt hour (MWh) than the nuclear power from Hinkley Point. And unlike nuclear, the electricity is 'dispatchable'.

“We can turn it on and off in fifteen minutes to half an hour. It is the only battery that is really available today for green Energy,” said Hordur Arnarson, head of Iceland’s national utility Landsvirkjun.

It is hard to imagine a more elegant back-up for the UK's vast experiment in off-shore wind, the backbone of British electricity by the late 2020s.

Combined with interconnectors from Holland and France - and soon Norway - it could plug much of the intermittency gap through the dog days of a windless anticyclone. The power can flow both ways: surges in North Sea wind could be stored in Nordic reservoirs.

Roughly 70pc of Iceland's electricity comes from hydropower through glacial run-off. This is mostly sold to aluminium smelters for a derisory price. Water washes over the top of the dams for parts of the year because the island has no way of selling the excess Energy.

Hydro could probably provide the UK with one gigawatt of stable baseload, but then there is the tantalising potential of geothermal power from the island's 350 volcanoes as well.

The advances in drilling are breath-taking. An Icelandic project backed by the US National Science Foundation is currently boring the deepest hole ever attempted into the fluids of the inner earth at Reykjanes on the Mid-Atlantic Ridge. As of late December it had reached a depth of 4.626 kilometres, approaching temperatures of 500C.

The team aims to stop just short of the magma, at 200 times atmospheric pressure, where hot rock mixed with sea water releases ‘supercritical steam’ with enormous Energy. This is the Holy Grail of geothermal power, if it can be extracted safely in a thermal mining cycle.

David Fuller's view -

Drilling to just short of the magma – what could possibly go wrong?  Hollywood has a new topic (Ice-hot?) for next summer’s splat film. 

Seriously, it is another triumph for technological innovation that the capture and transmission of this Energy is even considered feasible.  It may be so but costs in the region of the appallingly expensive and outdated Hinkley Point nuclear project are hardly encouraging.  If lower costs are worth considering, and they certainly should be, fracking for natural gas is a much better idea for the UK and many other countries over the next two decades.

This item continues in the Subscriber’s Area, where a PDF of AEP’s article is also posted.

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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.


Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear Energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled Energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 

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January 04 2017

Commentary by David Fuller

Sir Tim Barrow Appointed as UK Ambassador to the EU

Theresa May has appointed Sir Tim Barrow, a career diplomat, as the new British ambassador to the EU in Brussels, replacing Sir Ivan Rogers, who quit on Tuesday.

Her decision means she has ignored calls from within the Tory party to appoint a wholehearted Brexiter – possibly from outside of the civil service – to the job.

Rogers, the head of UKRep – in effect the UK embassy in Brussels – resigned in frustration on Tuesday urging his fellow civil servants to provide impartial advice, and stand up to muddled thinking. He also made clear he thought that the UK government not only lacked an agreed exit strategy, but also a coherent exit negotiating team.

Barrow was the UK ambassador to Moscow until 2015 and in March 2016 succeeded Sir Simon Gass as political director at the Foreign Office. He has extensive European experience and acted as first secretary at UKRep. His appointment is also a victory for the Foreign Office, which lost the UKRep post to former Treasury officials in 2012.

May is due to trigger article 50, to formally start EU talks, in March, requiring her to urgently recruit someone committed to delivering Brexit, but also knowledgeable about how the labyrinthine EU works.

Barrow said: “I am honoured to be appointed as the UK’s permanent representative to the EU at this crucial time. I look forward to joining the strong leadership team at the Department for Exiting the EU and working with them and the talented staff at UKRep to ensure we get the right outcome for the United Kingdom as we leave the EU.”

A Downing Street spokesperson called Barrow “a seasoned and tough negotiator, with extensive experience of securing UK objectives in Brussels”. They added: “He will bring his trademark Energy and creativity to this job, working alongside other senior officials and ministers to make a success of Brexit.”

David Fuller's view -

Theresa May certainly needs a British ambassador who is committed to delivering a successful Brexit.  Sir Tim Barrow apparently has the presence and credentials for this important task, including being “knowledgeable about how the labyrinthine EU works”.  However, the UK should not be playing the labyrinthine game, designed to deter countries from leaving the EU.  Until EU negotiators fully understand that a quick, hard Brexit is not only a possibility, but would also be preferred by many UK citizens and businesses, negotiations will be a waste of time.   

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January 04 2017

Commentary by Eoin Treacy

Lithium producers can't expand fast enough to meet demand: An interview with Orocobre CEO Richard Seville

This article from may be of interest to subscribers. Here is a section:

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth is being over estimated and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.


Eoin Treacy's view -

The only way to get around the fact many sources of renewable Energy are intermittent is through storage. Right now lithium is the benchmark electrolyte for batteries’ and a great deal of research is going into developing better anodes and cathodes to boost Energy density, safety, recharging speed and cost. That suggests the lithium product cycle still has a long way to run which is benefit for miners of the element not least as new potential demand growth drivers evolve. 

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December 29 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 28th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and Energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable Energy plants, the current backlog of new, cleaner power plants will not change, so our near-term Energy mix will continue to shift toward more renewable fuels. The issue for the Energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, Energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Electricity pricing is a moving target for both Energy companies and environmentalists alike. The challenge is to deliver Energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 

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December 15 2016

Commentary by David Fuller

World Energy Hits a Turning Point: Solar That Is Cheaper Than Wind

Here is the opening of this interesting article from Bloomberg:

A transformation is happening in global Energy markets that’s worth noting as 2016 comes to an end: Solar power, for the first time, is becoming the cheapest form of new electricity. 

This has happened in isolated projects in the past: an especially competitive auction in the Middle East, for example, resulting in record-cheap solar costs. But now unsubsidized solar is beginning to outcompete coal and natural gas on a larger scale, and notably, new solar projects in emerging markets are costing less to build than wind projects, according to fresh data from Bloomberg New Energy Finance

The chart below shows the average cost of new wind and solar from 58 emerging-market economies, including China, India, and Brazil. While solar was bound to fall below wind eventually, given its steeper price declines, few predicted it would happen this soon.

“Solar investment has gone from nothing—literally nothing—like five years ago to quite a lot,” said Ethan Zindler, head of U.S. policy analysis at BNEF. “A huge part of this story is China, which has been rapidly deploying solar” and helping other countries finance their own projects.

This year has seen a remarkable run for solar power. Auctions, where private companies compete for massive contracts to provide electricity, established record after record for cheap solar power. It started with a contract in January to produce electricity for $64 per megawatt-hour in India; then a deal in August pegging $29.10 per megawatt hour in Chile. That’s record-cheap electricity—roughly half the price of competing coal power. 

“Renewables are robustly entering the era of undercutting” fossil fuel prices, BNEF chairman Michael Liebreich said in a note to clients this week.

David Fuller's view -

It is entirely logical that technology will continue to lower the cost of solar power, until it is the cheapest source of Energy by far.  After all, it neither has to be discovered and then extracted, nor does it need refining.  It is free Energy, arriving every day from the largest nuclear reactor within our solar system - by far.  The means of capturing solar Energy are multiplying at a rapid rate, particularly within urban areas where it is most needed.  Storage of solar Energy is limited but this too will change, now that it is a priority.   

This item continues in the Subscriber’s Area and contains an additional article.

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December 14 2016

Commentary by David Fuller

Putin Game Is to Neuter and Divide the West, and He Is Succeeding

And now your goal, as Mr Putin, is nothing less than European impotence. You want to make it impossible for them to pursue hostile actions such as sanctions on your cronies, expanding Nato or refusing to build new gas pipelines. If that can be achieved, your regime will be richer financially, safer politically, and seen at home as the tough and effective leadership that helps the average Russian to ignore the parlous long‑term state of the country. 

With the election of Mr Trump, there is a path to fulfilling this goal, provided it is done with care and cunning. First it involves consolidating the position of Bashar al-Assad in Syria, regardless of how much violence has to be unleashed before Trump’s inauguration. That opens the way to offering the new US administration an end to the war in Syria on Russia’s terms, with Mr Assad in power in most of the country, and the whole world able to see that you can count on Russia as an ally, but never trust the support of the West. 

Having dealt with that early in 2017, the next step is to use it as the basis for a rapprochement with America, but cautiously, so that congressional critics of Mr Trump are not given too much ammunition. A good way to disarm suspicion is to offer to go back into one or two of the international agreements – on arms control and nuclear facilities – recently abrogated by Moscow. There will be some relief and even praise in the Western media, hailing a “new era” in relations and analysing Mr Putin’s good diplomacy and return to responsibility. 

Simultaneously, the extraordinary success and skill being developed by Russia in manipulating Western elections will offer rich pickingsin 2017. The universal assumption for many years that social media and the internet would be agents of freedom has left most people slow to grasp that new technologies can be turned into powerful means of authoritarian power – for the first time reaching deep into other nations and societies. 

Mr Trump has already disavowed the CIA’s findings that Russian hacking was designed to promote his victory. That the president-elect of the USA refuses to believe well-founded research by his own agencies is an unmitigated triumph for Moscow. Such tactics can now be used to promote the election of pliable candidates across Europe, with the scope to fund them as well. 

The French National Front has already borrowed €9 million from a Russian bank. A combination of donations and social media operations can help to push disorientated European voters the right way. Recent months have seen a pro-Russian president elected in Bulgaria, and a new government friendly to Moscow in Moldova. The Netherlands rejected the EU treaty with Ukraine in a referendum, and growing parties like the Five Star Movement in Italy have Russian ties. 

Add a bit of military intimidation and internal agitation in the Baltic States – one third of Latvians are ethnic Russians – and another part of Europe will feel weakened. Then subtly help opposition parties in Germany’s autumn elections to undermine Angela Merkel. Manipulate politics in Montenegro so it doesn’t want to join Nato. Hug Serbia and keep Bosnia paralysed by the same techniques. Keep pushing up the price of oil by deals with the Arabs, so that Russian gas is sought-after. 

Do all these things and soon the EU, particularly without the UK, will lack the will to challenge Russia. In foreign affairs and Energy policy, Europe is only as strong as its weakest link, and soon this strategy will make sanctions impossible, western security weaker and buying Russian Energy impossible to resist. Mr Putin will be able to do as he wishes, with whom he wishes.

Mr Trump is a great advocate of doing deals. The first step in doing a good deal is to have your eyes open to the strategy of the other side. Europeans certainly need to spend more on defence. 

But America needs to see what could be about to unfold: under cover of better relations, the division, weakening and neutering of the West. 

David Fuller's view -

‘Once a KGB operative, always a KGB operative’.  This old adage certainly applies to Putin, who had a rough two years following the collapse of crude oil prices in 2H 2014.  Naturally, Russian citizens did far worse. 

However, Putin is in a somewhat stronger position today.  Brent Crude oil is trading above $50 following the belated decision to reduce supplies somewhat, in line with OPEC.  For Russia, this is probably no more than the reality that it will see another reduction in output due to the harsh Siberian winter.  Having invested heavily in military equipment, Russia has also increased the sale of weapons to Iranians and other regimes which are either unable to buy from the West or disinclined to do so.  At home, Moscow’s constant stream of daily propaganda, along with Putin’s ‘heroic’ ability to see off evil doers, continues to embellish his tough guy patriot image.  So far, this is just enough to keep a lid on protests at home, although this may not always be the case. 

This item continues in the Subscriber’s Area, where a PDF of William Hague’s column is also posted, along with another article.

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December 14 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 13th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section:

From GM’s viewpoint, it needs to generate sufficient ZEV credits to avoid sharp fines or being shut out of the California market entirely. One analysis went as follows: In 2015, GM sold 219,962 vehicles in California. To avoid fines, it needs state-awarded ZEV credits equal to 14% of the units sold, or 30,794. That can be achieved by selling 7,698 Bolts that earn GM four credits each, or 10,082 Chevy Volt plug-in hybrids, or a combination of the two. What GM understands is that ZEVs are compliance vehicles, so pricing the Bolt to both achieve its ZEV credit needs and take market share from other auto manufacturers can be a smart strategy, even if they are losing so much money per unit. If GM can earn more ZEV credits than it needs, those can be sold to other manufacturers who are falling behind their ZEV credit goals. This is all part of the clean air gambit in which companies that are “doing more than they need to” in meeting certain thresholds find that they hold pieces of paper that increase in value over time and can be successfully monetized. Selling $139 million of excess ZEV credits was what enabled Tesla Motors (TSLA-Nasdaq) to achieve third quarter profits on a GAAP basis. 

But what are the economics of electric vehicles for buyers? The Associated Press’ automobile writer recently test drove the GM Bolt and interviewed the executive in charge of marketing it. Virtually everyone acknowledges that the car lacks outstanding design, but the word the GM exec uses to describe the Bolt is “practical.” For tech-savvy Millennials that sounds more like their grandma’s car. However, the Bolt is the first electric vehicle to get over 200 miles per charge (238 miles, exactly). It does have lots of interior space, a near-silent ride and emits no tailpipe emissions. Moreover, the Bolt can go from zero to 60 miles per hour in 6.5 seconds, out-muscling some muscle cars. Even more important, the Bolt is now at showrooms in California and Oregon, while its prime competitor – the Tesla Model 3 – will not be available until the end of 2017.

The problem for the Bolt is its cost. The list price is $37,495 including shipping. After the federal tax credit of $7,500, the purchase price drops to $29,995, to which you need to add roughly $1,200 for a 240-volt home charging station, bringing your out of pocket expense to own a Bolt to $31,195. For comparison, a comparably equipped, gasoline-powered Chevy Cruze compact hatchback with automatic transmission costs $23,670 with shipping, a difference of $7,525. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

For a car GM is losing $9000 on, the price of $37,500 is still steep even if someone is dedicated to the ideal of an emission free future. That cost is going to have to come down if predictions of widespread uptake are to prove credible. The pace at which the Energy density of batteries is doubling (around 5 years) is too slow to suggest the cost is going to come down quickly through technology alone. That is part of the reason Tesla is investing so heavily in economies of scale when building its battery manufacturing capacity. 

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December 07 2016

Commentary by Eoin Treacy

Electric Cars May Take an OPEC-Sized Bite From Oil Use

This article by Jessica Shankleman for Bloomberg may be of interest to subscribers. Here is a section:

Wood Mackenzie’s view echoes the International Energy Agency, which last month forecast global gasoline demand has all but peaked because of more efficient cars and the spread of EVs. The agency expects total oil demand to keep growing for decades, driven by shipping, trucking, aviation and petrochemical industries.

That’s more conservative than Bloomberg New Energy Finance’s forecast for EVs to displace about 8 million barrels a day of demand by 2035. That will rise to 13 million barrels a day by 2040, which amounts of about 14 percent of estimated crude oil demand in 2016, the London-based researcher said. Electric cars are displacing about 50,000 barrels a day of demand now, Wood Mackenzie said.


Eoin Treacy's view -

There is the world of difference between predicting that electric vehicles will account for an increasingly large portion of the global automobile market and predicting that aggregate demand for crude oil will decline meaningfully.  

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December 05 2016

Commentary by David Fuller

Stakes Are High In Showdown for British Future Energy Strategy

Here is the opening of this topical article from The Telegraph:

It is high noon for Britain’s fledgling Energy policy. Years of failed interventions, arbitrary green targets and damaging subsidies will come to a head in this week’s capacity auction, when we will either see investors commit to building desperately needed new power plants or simply walk away. 

The stakes could not be higher, for the Government and for those policymakers who believed they had designed a credible strategy to keep the lights on.

How have we got here and why does so much in this sector now hang on a complicated and little-known auction process? 

The overriding issue remains the urgent need to replace old coal-fired power stations, which have served the UK since the 1960s, with new plants that burn natural gas to generate electricity. At this stage, we can forget Hinkley C, as it will not be ready in time.

These gas-fired power stations,  known as CCGTs, can be built relatively quickly, are much cheaper than new nuclear plants, and are 50pc cleaner than coal; however, they are years behind schedule, because of a failure by government to deliver the right investment landscape.

David Fuller's view -

Very few economies are relatively strong without competitive Energy costs.  The UK has not been in this position since North Sea oil revenues from approximately 1981 through 2003 went into significant decline thereafter, leading to increased Energy import dependency from 2004 onwards (see graph which Telegraph subscribers can access via the link above).  

Thereafter, inadequate long-term planning by successive UK governments, combined with EU group think on leadership in emissions control.  Unfortunately, this was achieved at the cost of future Energy supplies.  Until this problem is adequately addressed by the government, commencing with extensive fracking, UK Energy costs will remain higher than necessary and supplies will be barely adequate. 

A PDF of The Telegraph’s article is posted in the Subscriber’s Area.

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November 30 2016

Commentary by Eoin Treacy

Top Ten Market Themes For 2017: Higher growth, higher risk, slightly higher returns

Thanks to a subscriber for this report from Goldman Sachs which may be of interest. Here is a section:

8. Inflation: Moving higher across DM
‘Reflation’ is the theme du jour following Donald Trump’s unexpected emphasis on infrastructure spending in his acceptance speech on election night. Since then, market participants have been hard at work trying to figure out the policy agenda that Trump the president might pursue (distinct from the rhetoric of Trump the candidate). What seems clear to us, as argued above, is that economic issues, notably tax cuts, infrastructure spending and defense spending, are high on the agenda — a recipe for reflation.

There was a strong case for rising inflation in the US even before Trump’s victory. Our call for higher rates in long bonds this past year was premised more on a repricing of inflation risk and inflation risk premia than on a rise in real rates. And, globally, we expect rising Energy prices to push up headline CPI across the major advanced economies in early 2017. After years of deleveraging and highly accommodative monetary policy, we expect inflation to gain momentum in 2017 just as many countries are shifting their policy focus to fiscal instruments. For example, we are forecasting large boosts to public spending in Japan, China, the US and Europe, which should fuel inflationary pressures in those economies. Moreover, having had to work so hard for so long to get inflation even to the current low levels, the major central banks in developed markets sound increasingly willing to let inflation run above 2% targets

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

As recently as early this month a significant number of investors were betting the discount rate was never going to go up. That has definitely changed with the bond markets rapidly pricing in the potential for inflation to pick up as fiscal stimulus is expected to kick in. 

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November 29 2016

Commentary by David Fuller

Solar-Panel Roads to Be Built on Four Continents Next Year

My thanks to a subscriber for this fascinating article from Bloomberg.  Here is the opening:

Electric avenues that can transmit the sun’s Energy onto power grids may be coming to a city near you.

A subsidiary of Bouygues SA has designed rugged solar panels, capable of withstand the weight of an 18-wheeler truck, that they’re now building into road surfaces. After nearly five years of research and laboratory tests, they’re constructing 100 outdoor test sites and plan to commercialize the technology in early 2018.

“We wanted to find a second life for a road,” said Philippe Harelle, the chief technology officer at Colas SA’s Wattway unit, owned by the French engineering group Bouygues. “Solar farms use land that could otherwise be for agriculture, while the roads are free.”

As solar costs plummet, panels are being increasingly integrated into everyday Materials. Last month Tesla Motors Inc. surprised investors by unveiling roof shingles that double as solar panels. Other companies are integrating photovoltaics into building facades. Wattway joins groups including Sweden’s Scania and Solar Roadways in the U.S. seeking to integrate panels onto pavement.

To resist the weight of traffic, Wattway layers several types of plastics to create a clear and durable casing. The solar panel underneath is an ordinary model, similar to panels on rooftops. The electrical wiring is embedded in the road and the contraption is topped by an anti-slip surface made from crushed glass.

A kilometer-sized testing site began construction last month in the French village of Tourouvre in Normandy. The 2,800 square meters of solar panels are expected to generate 280 kilowatts at peak, with the installation generating enough to power all the public lighting in a town of 5,000 for a year, according to the company.

For now, the cost of the Materials makes only demonstration projects sensible. A square meter of the solar road currently costs 2,000 ($2,126) and 2,500 euros. That includes monitoring, data collection and installation costs. Wattway says it can make the price competitive with traditional solar farms by 2020.

David Fuller's view -

Theoretically, this is an interesting idea and an ambitious challenge.  I hope it can be perfected although the overall cost, safety and susceptibility to damage may be too great for existing technologies.  Nevertheless, it shows the incredible adaptability of solar technology, in terms of projects both great and small.   

The sun is the greatest source of Energy with which we have any personal experience.  The number of manmade products exposed to sunlight, which can be captured and turn into Energy, is practically unlimited.  

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November 29 2016

Commentary by Eoin Treacy

Musings From the Oil Patch November 29th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

You read it here first – tomorrow the members of the Organization of Petroleum Exporting Countries (OPEC) will announce an agreement to limit its output. You will have to wait for the details, and more importantly you will have to wait to see whether OPEC members actually do what they say they will do. For those of us who have seen this show before (often with even greater drama/showmanship), the issues with every OPEC agreement are the details and then its execution. Often the details and the execution are not what the public is led to expect at the time of the announcement. 

OPEC has little choice at this point but to attempt to salvage some degree of respectability, especially following the debacle of the Doha meeting last spring at which a preconceived agreement blew up at the last minute. We are not going to debate the viability of OPEC as a cartel – to us it has always been an excuse to travel to Vienna and Europe for shopping and partying. On the other hand, OPEC does play an important role in helping to corral a number of important crude oil producers into supposedly one voice, although the power of that voice has been diminished by the evolution of Energy markets over the last 25 years, and especially in the last few years. 

The key factor for the oil market that OPEC understands is that it is in a recovery mode. That is not due to a miracle, or can be attributed to the efforts of anyone in particular. Rather, it is the result of economic discipline being restored to the oil market. Fewer uneconomic prospects are being drilled. Assets are moving from weak hands into stronger hands – hands that don’t necessarily have to drill in order to generate revenue to attempt to keep the doors of the companies open. 

Additionally, companies are figuring out how to operate more efficiently – fewer employees, more efficient operations and employing greater technology. Producers at the moment have benefited from destroying the pricing structure of the oilfield service industry, enabling the producers to lower operating costs. The producers have driven oilfield service company prices down to levels that are not sustainable for the long-term. Short-term gains for producers will have to yield to higher oilfield service prices if the producers wish to have the equipment, technology and employees that deliver the field services that they need. The question becomes how quickly oilfield service prices rise and how much of those increases can be offset by further efficiency gains. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This is a logical argument. If OPEC cannot act in unison to fulfil its role as a swing producer then what purpose does the group have as anything more than a talking shop? If they fail to announce a deal it will signal the group’s increasing irrelevance so they have little choice but to announce something. Quite whether they can succeed in implementing anything is another subject entirely. 

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November 28 2016

Commentary by Eoin Treacy

Email of the day on electric cars and overall pollution

With regard to electric cars decreasing the world's need for fossil fuels, how is the electricity going to be generated? I have heard the Netherlands, who are one of the world leaders in using electric cars, have had to build three new generating plants already to meet the demand and these are coal fired. It is true that electric cars will laudably reduce urban pollution, where 85% of CO2 generation is created. But CO2 production will simply be transferred to rural areas, where electricity generating plants are normally situated. Energy consumption not be reduced and, since the Energy production will be a two-step procedure instead of a single stage, it may well be increased.

Eoin Treacy's view -

Thank you for this email which raises important questions and highlights that the Energy sector is not suitable for a one size fits all solution. I agree that an electric vehicle is, on aggregate, only as clean as the fuel used to generate its power. This graphic from is a useful barometer for how successful countries are in that regard. 

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November 24 2016

Commentary by David Fuller

OPEC Last Push for Oil-Cuts Deal Shifts Focus to Iran, Russia

Here is the opening of Bloomberg’s latest report on the attempt at this forced marriage:

OPEC’s final push to implement the Algiers supply accord and boost oil prices shifted focus to Iran and non-members such as Russia as Iraq appeared to reverse its opposition to output cuts.

The extension of shuttle diplomacy -- including a visit to Tehran from an architect of the September agreement and an unusual Vienna breakfast with non-OPEC ministers -- comes after an OPEC committee failed this week to hammer out details of how producers will share the burden of cuts. With less than a week until the crucial Vienna ministerial meeting, the refusal of just one major producer to participate could scuttle the whole deal.

Algeria’s Energy Minister Noureddine Boutarfa will travel to Tehran on Saturday in an effort to bring a deal closer, said a person familiar with the matter, who asked not to be identified because the information isn’t public. Algeria is the ninth-largest producer in OPEC and has limited international clout, but in September played a central role in clinching the preliminary agreement on output cuts that had eluded its more formidable counterparts throughout the two-year oil slump.

Boutarfa will also meet his Iraqi counterpart in Vienna on Nov. 28 or 29, although that country is now less of a problem after positive statements from Baghdad, the person said.

Oil prices rose Wednesday as Iraqi Prime Minister Haider Al-Abadi said his country would shoulder part of the burden of output cuts. That assertion still leaves unresolved the significant issue of exactly how much the country would reduce, and from what level, said a Gulf OPEC delegate. Iraq has been disputing the OPEC supply estimates that would form the basis of cuts, saying they underestimate its production.

David Fuller's view -

What a humiliating experience these negotiations must be for OPEC’s main participants, not that they will receive much sympathy.  Nevertheless, frackers in the USA will regard any success by OPEC plus Russia in cutting oil supplies as an early Christmas present, and with good reason.  Any price rise above $50 will increase their profits and also production.  Additionally, it will enable them to lock in higher prices for the future by hedge shorting more distant contracts in this contango market.  Jan ’17 Brent crude currently sells at $49, with prices rising gradually over the next 12 months.  The most liquid distant contract is Dec ’17, which closed today at $53.71.     

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November 24 2016

Commentary by David Fuller

Uranium: the Unloved Metal Whose Price Is Poised to go Radioactive

The belief is that utilities are becoming “uncovered”; with spot prices so low, they have resisted locking themselves into long-term contracts. This could leave them scrabbling for supply at the end of the decade, giving producers the upper hand on prices.

It’s a view shared by analysts at Cantor Fitzgerald, who predicted this year that a “violent increase” in uranium prices was on the way.

Cantor predicts that up to 80pc of the uranium market could be uncovered by 2025. Moreover, it believes demand will outstrip supply, saying: “The low-price environment has choked off exploration activity for uranium and we are at the point where there are not enough uranium projects in the pipeline that can adequately meet the coming demand.”

Peter Reeve, executive chairman of Aura Energy, describes the spot price as an “irrelevance”.

“I don’t believe the supply side is what’s hitting the spot price. It’s more just speculators playing that part of the market,” he says. 

Aura, which like Berkeley is listed in Australia, joined Aim in September, with a view to progressing uranium projects in Mauritania and Sweden.

Reeve also believes a “demand avalanche” is coming. Uranium is a relatively common metal, found in rocks and even seawater. Locating it in the right concentrations can be difficult, however. 

As Reeve says: “It’s not found near London or Paris. It’s all in very curious locations. That doesn’t make it easy to get at or develop.”

David Fuller's view -

What goes around, comes around. The world needs nuclear power but serious accidents are understandably terrifying, as we know from: 1) Three Mile Island March 28 1979, 2) Chernobyl April 26 1986, and 3) Fukushima Daiichi March 11 2011.  These incidents have left deadly, very long-term contamination in their nearby surrounding regions. 

This item continues in the Subscriber’s Area, where a PDF of the article above is also posted.

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November 23 2016

Commentary by David Fuller

Oil Supply Crunch to Hit in 2019 as Investment in New Projects Dries Up

An oil supply crunch could hit as soon as 2019 as investment in new projects dries up following the price crash, leading analysts have warned.

Delays and cancellations of projects by cash-strapped Energy giants mean the volumes of new crude production coming onstream will not be enough to make up for the decline from existing fields and meet growing demand, Barclays analysts said in a research note.

They forecast that 2019 would see the "the lowest year for new capacity" on their records, which stretch back to the Nineties, with just 1.2m barrels per day (bpd) of new supply.

By contrast, decline from existing fields and growing demand would together equal 4m bpd, resulting in a gap of almost 3m bpd.

"2019 marks a juncture where supply becomes a concern. With current volatility and oil price uncertainty, project sanction approval continues to be difficult," they wrote.

The analysis comes after the International Energy Agency last week warned that the world was headed for another boom and bust cycle in the oil market, with supply shortages likely to cause rapid price increases by the early 2020s.

The IEA said that if project approvals remained at current lows through 2017, it was "increasingly unlikely that supply will be able to meet the rising demand without rapid price increases".

The Barclays analysis is even starker, suggesting that a supply crunch in 2019 may already be unavoidable.

Given long lead times for many projects that it is monitoring "no decision now makes 2019-20 start-up an impossibility", the analysts warned.

"Inventories could help fill the gap, as will the phased ramp-up of onshore developments and shorter development brownfield, but by then we feel it is not a question of the US shale ramping back up, but how much it can produce to fill the gap and how high an oil price is needed," they said.

Oil prices have rallied to near to $50 a barrel for Brent crude in recent days on rising optimism that Opec will agree new production curbs at a meeting in Vienna next week, helping to rebalance the market from the current supply glut. 

But the Barclays analysis suggests that regardless of whether Opec decides to cut next week the fundamentals are tightening and that an increase in production by the cartel may actually be needed within the next couple of years to fill a looming gap.

Ole Hansen, head of commodity strategy at Saxo Bank, said: "Crude oil has rallied strongly, despite headwinds from a rising dollar, in response to increased speculation that Opec will finally succeed in reaching a deal to cut production on November 30. The latest move once again highlights the cartel's role as a major driver of oil market volatility. 

"On the assumption a deal to cut production by a minimum of 800,000 barrels can be struck we could see Brent crude oil once again challenge the ceiling around $54 per barrel."

However, he warned: "The initial move would be driven by short-covering and once that is done the market may pause and retrace in the realisation that Opec's ability to comply with its own production targets have been very poor in recent years."

David Fuller's view -

I do not agree with this forecast.  No disrespect to the International Energy Agency but I cannot think of any commodity agency which does not predict higher prices in most of their forecasts.  If prices are low, they use that as a determinant of higher prices at a future date.  This has sometimes worked given previous inflation and global GDP growth.  What the agency is not factoring in, is the increasing wish to reduce consumption of crude oil because of CO2 emissions. 

Even more importantly, oil has gone from supply tightness to abundance, thanks to technology.  Today, oil is much easier to find and most importantly, onshore oil can be produced far more cheaply thanks to the vast quantities available in shale formations.

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November 22 2016

Commentary by David Fuller

OPEC Oil Cut Nears as Battered Saudis Bow to Indomitable US Shale

Twisting the knife deeper, the US is still drilling extra wells. The latest Baker Hughes rig count rose by two to 452 last week. Frackers have sold forward their production with hedge contracts, guaranteeing future supply whatever now happens.

"They took advantage of the window for a few weeks when oil was higher and locked in hedges of around $52 for 2017, and $55 for 2018," said Mr Hansen.

Esther George, the head of the Kansas Federal Reserve, told an oil forum on Friday that the average price needed by shale drillers to make a profit has fallen from $79 to $53 over the last two years as technology matures. Many are making money at prices well below that.

She had a warning for those who expect a return to business as usual in world oil, predicting that a "large amount" of production would come on stream as soon as prices push through the mid-50s. "I do not see much room for price appreciation," she said.  

Markets have grown cynical about Opec rhetoric on cuts. Yet it is increasingly clear that Saudi Arabia has genuinely reversed course under the new Energy minister, Khaled al-Falih, and this has changed the character of the Vienna meeting entirely.

The Kingdom can no longer afford to fight a grueling war of attrition to force rivals out of the market. While it has succeeded in killing off $200bn of investment in deep-water projects, Canadian tar sands, and other high-cost ventures, this has come at a very high price.

The Saudis have been burning through foreign exchange reserves at a rate of $10bn a month, and contrary to general belief their usable reserve buffer is relatively thin. They face an internal banking and liquidity squeeze, a construction crash, and have had to tap the global bond markets on a large scale to pay their bills.

"The Saudis are the ones that have suffered the biggest hit in revenue and face the most financial pain, and it has gone on a lot longer than they ever anticipated," said Mr Fyfe.

Austerity policies are biting in earnest, threatening the social contract of cradle-to-grave welfare that underpins the Wahhabi regime. Cuts in salaries, perks, and allowances have reduced take-home pay for lower level state employees by as much as 60pc in some cases.

Intelligence analysts say the Saudi-led war in Yemen is proving far more expensive than admitted, suggesting that the budget deficit is significantly higher than the official figure of 13pc of GDP. It recently emerged from Pentagon papers that the Saudis have lost 20 of their state-of-the-art Abrams tanks.

Helima Croft from RBC says the Saudis are now throwing their full diplomatic weight behind the search for a deal, though markets have not yet grasped the significance of this. If the Saudis want a deal, a deal is what will almost certainly happen.

Crucially, they need a much firmer oil price to have any chance of floating a 5pc share of state oil company Saudi Aramco for a very ambitious $100bn. The country is about to release secret details about the true extent of Saudi reserves, frozen at a constant 260bn barrels since the inception of the modern oil age - a patently absurd estimate.

David Fuller's view -

Saudi Arabia’s Tadawul All Share Index has had a good bounce since retesting the January low last month.  If it were to push above 7000 and hold those gains beyond the very short term, it would suggest to me that someone or more likely some group of investors was anticipating higher prices for Brent Crude Oil than current supply/demand figures suggest. 

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November 18 2016

Commentary by David Fuller

The Chancellor Must Return to His Roots With a Swashbuckling Autumn Statement

It will be hard for some to believe but Philip Hammond was once a colourful, buccaneering entrepreneur, the opposite of the grey-suited bean-counter he now purports to be. As a schoolboy in Essex, the man who today serves as our Chancellor of the Exchequer made good money renting out church halls for discos, before graduating to trading cars made at the local Ford factory.

He had a knack for spotting a profit opportunity and struck his first real deal aged just 24, when he bought out his employers’ medical products division for just £1. Over the years, Hammond had his fair share of successes as well as failures, like all entrepreneurs, but ended up making millions from a range of property and construction, manufacturing and Energy businesses.

People don’t really change, which is why I’m hopeful that Hammond may rediscover his risk-taking instincts and ditch the ultra-cautious, lugubrious and bizarrely pessimistic persona he has acquired since entering politics. The world has shifted dramatically in the past five months, and Britain desperately needs a dose of the old, glass half-full Hammond. 

Governments must deal with reality as it is, not as they hoped it would be, and this applies even more to Trump’s triumph – which Downing Street neither predicted nor wanted – than it does to Brexit. Nobody knows, at this stage, whether Trump’s presidency will implode in an orgy of demagoguery, protectionism and corruption, or whether it will confound its critics by governing in a neo-Reaganite manner. 

Realpolitik must thus be the order of the day. Given the inflammatory elements of Trump’s campaign, the Government needs to remain vigilant; but it should also seek to make the most of the new world order and the imminent pro-Brexit and pro-growth shift in Washington. This is where Hammond comes in. Brexit alone would have required a radical response from the Chancellor; Brexit, Trump and the growing likelihood that strains in the eurozone will eventually reach breaking point make this an urgent necessity. 

His first Autumn Statement next week is the first real opportunity for the May Government to regain the initiative and to show that it has an exciting, optimistic plan for our post-Brexit prosperity. Hammond cannot afford to be hemmed in by the pessimistic consensus – the same duff predictions that claimed that the Brexit vote would trigger an immediate collapse in growth and jobs. He needs to break free from the constraints of the Treasury’s models.

The Chancellor should start off by pointing out – diplomatically, of course – that the rise in the deficit is largely the doing of his predecessor: the previous predictions never had any hope of coming true, Brexit or no Brexit. He must then retain an iron grip on almost all areas of current spending, while announcing his own, deliberate but carefully controlled loosening in fiscal policy. 

The first big change is that the Chancellor needs to be much more radical on tax, and unveil at least one flagship measure to improve incentives to work and invest. He should commission a major review of the tax system, with the aim of drastically simplifying and flattening it.

David Fuller's view -

I agree with Allister Heath’s advice.  Brexit is no time for timidity at the Treasury.  Chancellor Hammond should be doing all that he can to help Britain become an even more entrepreneurial, low-tax, free-trading economy.  This would inspire talent across the United Kingdom, while also attracting foreign expertise and investment in our pro-business economy.  

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November 18 2016

Commentary by Eoin Treacy

Collision Course

Thanks to subscriber for this report from RBC which may be of interest. Here is a section: 

While Energy market watchers have highlighted President-Elect Trump’s nod towards drilling and fracking, we believe that a Trump administration will have a larger impact on the US demand side of the ledger. The two key regulations which, if repealed, could drive US gasoline demand materially higher are the Corporate Average Fuel Efficiency Standards (CAFE) and the Renewable Fuel Standard (RFS). The potential impact of a Trump presidency on US gasoline demand is not one that should be underestimated. After all, US gasoline demand comprises of nearly 10% of total global oil demand and has been the sole bright spot in the OECD region, which has otherwise been trending lower on a structural basis since the recession. The potential repeal of aforementioned regulations is unlikely to make a difference in his first 90 days in office, but it is a rather bullish potential catalyst in the quarters and years to come.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

An additional bullish potential outcome for gasoline prices is that the millennial generation is increasingly turning towards car ownership after a delayed start which should at least put a partial floor under demand. 

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November 18 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 15th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

Another issue that has yet to be addressed is a proposed ban on oil tankers operating off British Columbia’s coastline that would effectively shut down the development of an oil export terminal at Kitimat and thus kill the proposed Enbridge (ENB-NYSE) Northern Gateway oil export pipeline. If the tanker ban is put in place, it will force the development of the Trans Mountain pipeline as the primary West Coast oil export pipeline. That would leave the Trudeau government to deal with TransCanada Corp.’s (TRP-NYSE) Energy East oil pipeline project to move Western Canadian oil to the East Coast where it could be exported to the U.S. East Coast or Europe. Despite being the “environmental” prime minister, Mr. Trudeau is recognizing that without more oil and gas export opportunities, his nation’s economy, which depends on a healthy Energy economy, will suffer with many social and financial repercussions.

The Canadian federal government’s decision about Trans Mountain on December 19th will be an important milestone for the nation’s Energy business. There are still numerous other policy decisions that must be addressed before Canada develops a full-scale oil and gas export expansion regime, but the first steps appear to have been taken last week.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Anyone who has ever been to Vancouver will understand how important pristine maritime conditions are when they sit down to taste some of the city’s delectable seafood. Whether it is salmon, sushi or Cantonese style seafood all are on par with what is on offer anywhere else in the world. However despite a deep interest in preserving the province’s wonderful maritime resources there are bigger questions that need to be addressed. 

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November 17 2016

Commentary by Eoin Treacy

Is the EV finally coming of age?

This article by Scott Collie for Gizmag may be of interest to subscribers. Here is a section:

One important breakthrough will be increasing the Energy density of the battery through being able to cram more cells into the same volume of battery packs. The battery density doubled between 2009 and 2016, and this is definitely not the end. Just like with the technological development of the personal computer, there is something similar to a 'Moore's Law' in the battery development: currently, we recognize an annual improvement rate of 14 percent, which is quite immense."

Although 14 percent is significant, it's only just a start when it comes to battery technology. At the moment, electric cars make use of lithium-ion batteries, the type pioneered by the Tesla Roadster back in the mid-2000s. Schenk says there's plenty of improvement to come in lithium-ion tech, but greater leaps forward are in the pipe.

"New technologies, and especially those aimed at material-related improvements, plus ever-increasing production volumes leading to further price decreases, will determine the development stages of the next few years," Schenk says. "Within the next decade a major technological leap is expected with lithium-sulphur systems, and these are set to revolutionize costs and operating range as extraordinarily relevant buying criteria for electric vehicles."

Already, improvements to battery chemistry are starting to pay off, and people are starting to buy electric vehicles in greater numbers. Renault, one of the largest players in the European electric game, sold 23,087 electric cars in 2015 - a 49 percent increase on its 2014 numbers.


Eoin Treacy's view -

Advances in battery technology have been slower to manifest than in microprocessors because of limitations in chemistry but perhaps more importantly because there has just not been enough incentive for companies to spend money on innovation. 

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November 16 2016

Commentary by David Fuller

Global Dollar Shock Threatens Fresh Financial Storm, Warns Watchdog

The soaring US dollar is causing mounting strains for the global financial system and ultimately threatens to set off a full-blown banking crisis in emerging markets, the world’s top’s economic watchdog has warned.

“We have all the symptoms of a dollar shortage,” said Hyun Song Shin, chief economist at the Bank for International Settlements.

The warning came as the closely-watched dollar index (DXY) appeared close to breaking through key resistance levels to a 14-year high, a move likely to trigger a stampede into the US currency as hedge funds and momentum traders join the chase.

The danger is that the powerful and immediate effects of financial tightening will “swamp” any trade benefits for the rest of the world from Donald Trump’s stimulus plans and a stronger dollar, even for countries that export heavily to the US. “It may not be very good news for anyone,” Mr Shin told a specialist forum at the London School of Economics.

The BIS estimates that dollar debt outside US jurisdiction - and therefore lacking a direct lender of last resort - has risen five-fold to $10 trillion over the past 15 years.

It has spiked to $3.3 trillion in emerging markets. This is chiefly due to the leakage of cheap dollar funding from the US while quantitative easing was in full flow. The debts will have to be rolled over in a stronger currency and at a much higher rates.  

What is less understood is that the surging dollar automatically squeezes the balance sheet of banks in Europe and Japan through the complex structure of swap contracts. “The dollar is everywhere,” said Mr Shin.

David Fuller's view -

This service pointed out in 2H 2014 that the Dollar Index (DXY) (monthly historic & weekly) was breaking up out of its base formation and commencing a secular bull market recovery, fuelled by the USA’s Energy independence, increasing technology lead, and its dominant, multinational corporate autonomies. 

We also pointed out that DXY had completed its initial upward leg near the 100 level in 2Q 2015, and that the subsequently loss of upside momentum confirmed the commencement of what was likely to be a lengthy medium-term consolidation before the bull market resumed. 

This item continues in the Subscriber’s Area, where a PDF of AE-P’s article is posted.

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November 16 2016

Commentary by David Fuller

A $900 Billion Oil Treasure Lies Beneath West Texas Desert

In a troubled oil world, the Permian Basin is the gift that keeps on giving.

One portion of the giant field, known as the Wolfcamp formation, was found to hold 20 billion barrels of oil trapped in four layers of shale beneath the desert in West Texas, the U.S. Geological Survey said in a report on Tuesday. That’s almost three times larger than North Dakota’s Bakken play and the single largest U.S. unconventional crude accumulation ever assessed. At current prices, that oil is worth almost $900 billion.

The estimate lends credence to Pioneer Natural Resources Co. Chief Executive Officer Scott Sheffield’s assertion that the Permian’s shale endowment could hold as much as 75 billion barrels, making it second only to Saudi Arabia’s Ghawar field. Pioneer has been increasing its production targets all year as drilling in the Wolfcamp produced bigger gushers than the Irving, Texas-based company’s engineers and geologists forecast.

“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” Walter Guidroz, coordinator for the geological survey’s Energy resources program, said in the statement.

David Fuller's view -

US Energy independence will persist well beyond its need for oil as a fuel.  That is a remarkable advantage because the USA will have the lowest Energy costs of any developed economy, and not just because of its oil and gas, which are now transition fuels until they are no longer required and have been replaced by renewables.

What about other countries? 

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November 15 2016

Commentary by Eoin Treacy

OPEC, Russia Expand Diplomatic Push to Secure Oil-Cuts Deal

This article by Javier Blas, Angelina Rascouet and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

OPEC embarked on a final diplomatic effort to secure an oil-cuts deal, with its top official heading on a tour of member states as Russia scheduled informal talks in Doha this week with nations including Saudi Arabia.

The behind-the-scenes diplomacy follows an unannounced meeting in London between OPEC Secretary-General Mohammed Barkindo and Saudi Minister of Energy and Industry Khalid Al-Falih, said one OPEC delegate. Just two weeks before the group’s Nov. 30 ministerial meeting in Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, said another delegate. 


Eoin Treacy's view -

OPEC and Russia have succeeded in talking oil prices up on two separate occasions over the last few months and the announcement of this meeting would appear to be a fresh attempt to jawbone prices higher. The reality is that agreeing to cut production means each country that agrees to comply risks losing market share to those who don’t. In ordinary times securing broad agreement would be difficult but Saudi Arabia, Iran and Iraq do not have the finances to absorb such a risk right now and additionally are all prosecuting wars, which are not cheap. 

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November 11 2016

Commentary by David Fuller

Trump Victory Bodes Well for Investors, for Now

With benefit of hindsight, what’s extraordinary is how few professional investors saw it coming. Mr. Trump was derided as the candidate of “uncertainty,” which markets typically abhor, and many of his stated policies are vague, incoherent or inconsistent. But there was nothing uncertain about his overall pro-growth, pro-business and America-first tendencies, now backed by the firepower of a Republican House and Senate.

He is, after all, a real estate developer.

“We see tremendous opportunity for economic growth,” said John Engler, a former governor of Michigan who is now president of the Business Roundtable, an influential group of chief executives that was often at odds with Mr. Trump during the campaign, especially over trade and immigration. Now that the results are in, though, Mr. Engler sees a silver lining. “The Republicans understand,” he said, “that they’re on the spot to produce results.”

Simon Lack, founder of SL Advisors, an investment advisory firm and operator of a mutual fund that focuses on Energy, carried the theme further. “Trump’s win is unambiguously positive” for many sectors of the economy, “especially Energy infrastructure,” he said.

The doomsayers also ignored a century of market reactions to presidential elections. “We’ve done extensive research that suggests presidential elections don’t affect markets,” said James Stack, president of InvesTech Research. “The reality is that the market is influenced to the greatest extent by economic factors and monetary policy.”

“In almost all technical and macro aspects, this is still a bull market,” Mr. Stack said, and Mr. Trump’s election does not change that.

Markets generally rally the day after a presidential election, said Jeffrey Hirsch, editor of the Stock Traders Almanac, because elections, whatever their outcome, eliminate a measure of uncertainty. “It doesn’t matter if it’s a Republican or Democrat,” he said. Returns tend to be higher when an incumbent president is replaced or the party in power changes, as happened this week. And previous instances of the election of both a Republican president and Republican Congress have been followed, on average, by a first-year performance of 14 percent.

There are more specific reasons as well that investors applauded Mr. Trump’s victory:

David Fuller's view -

Trump’s immediate projects are likely to be sensible infrastructure spending, personal and corporate tax cuts, and deregulation.  These could transform sentiment and show positive results much more quickly than some commentators have suggested.  They should also be of considerable long-term benefit to the US economy.  

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November 08 2016

Commentary by David Fuller

The Upside of Russian Interference

Figures on both the left, such as journalist Glenn Greenwald, and the pro-Trump right, such as the Republican nominee's friend Roger Stone, have spoken of a "new McCarthyism."

I'm not ready to subscribe to that notion yet, if only because, as a Russian citizen, I am not merely able to work for a mainstream U.S. news organization: I've been welcomed by the many Americans I have interviewed while covering this campaign. These span a political spectrum from fiery progressive Liz Garst in Iowa -- a person that, to me, embodies the best of Russia's old-time influence on the U.S. -- to far-right militia members in northern Florida, who are perhaps the most susceptible to the current brand of Russian propaganda.

Americans are generally nice to visitors -- and uncommonly helpful to journalists -- but they used to be far more suspicious of Russians while the Soviet Union was still around. Despite the best efforts of supposedly progressive Hillary Clinton, that suspicion has not yet returned. It may do so if the Russia-bashing continues after the election; I suspect it will die down somewhat as the electoral battle recedes into history.

In any case, it's worth considering how the U.S. will internalize the real and perceived Russian meddling this year. Americans are hard-headed and used to doing things their own way; they turned the previous Russian influence campaigns, often waged with the worst of intentions, to their advantage. Can Putin's propaganda and perhaps cyber-espionage campaign also serve a useful purpose?

I believe it can. Putin is providing a useful service to the U.S. by holding his malicious mirror to its political establishment. It's a troll's mirror, but it does reflect a nasty reality: A complacent, clannish elite that has written convenient rules for itself but not for the society it governs. Much of this society, both on the right and on the left, doesn't like what it sees.

As with previous Russian attempts to change the U.S., this one should lead to a realization that it's time to clean up U.S. democracy and make it more representative and inclusive, perhaps by stripping away some obsolete voting rules, perhaps by breaking the destructive stranglehold of the ossified two-party system.

The country I have seen this year -- the big cities and small towns I've explored, the progressives and Second Amendment zealots I've met, this whole vast, great land -- deserves far better than what I watched it live through. I'd like to help in my small way, and I think my country will end up helping, too, even though it may be trying to inflict damage.

David Fuller's view -

The two-party system mentioned in the penultimate paragraph above is often criticised on the basis that it is not sufficiently representative and inclusive.  That is a valid point in both the USA and UK.  However, I have always preferred the two-party system because it does produce stronger governments. 

I have seldom been impressed by the multi-party governments that we usually see in continental Europe and some other democratic regimes.  They are weaker and consequently less decisive and effective.  They are also beholden to special interest pressure groups.  The consequences are weaker governments and more frequent elections. 

What I would advocate is term limits.  If the two-term presidential system is good enough for the USA, and I believe it is, I would prefer the same for Prime Ministers. I also think representatives in the Senate, Congress and UK Parliament should have time limits of perhaps three terms.  Yes, it would remove some successful, effective politicians but it would also reduce the number of cliques while introducing new talent and Energy.  Career politicians remain in office well beyond their sell-by date.   

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November 02 2016

Commentary by David Fuller

Energy Giant Shell Says Oil Demand Could Peak in Just Five Years

Royal Dutch Shell Plc, the world’s second-biggest Energy company by market value, thinks demand for oil could peak in as little as five years, a rare statement in an industry that commonly forecasts decades of growth.

“We’ve long been of the opinion that demand will peak before supply,” Chief Financial Officer Simon Henry said on a conference call on Tuesday. “And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Shell’s view puts it at odds with some of its biggest competitors. Exxon Mobil Corp., the largest publicly traded oil company, said in its annual outlook that “global demand for oil and other liquids is projected to rise by about 20 percent from 2014 to 2040.” Saudi Arabia, the biggest producer, with enough reserves to last it 70 years, has said demand will continue to grow, boosted by consumption in emerging markets.

If renewable Energy and other disruptive technologies such as electric cars continue their rapid advance, petroleum use will reach its maximum level in 2030, the World Energy Council has forecast. Michael Liebreich, founder of Bloomberg New Energy Finance, predicts a peak in 2025 and decline in the 2030s.

“For the first time, oil companies have to think seriously about the future,” Alastair Syme, an oil analyst at Citigroup Inc. in London, said by phone. Drillers that even a couple of years ago believed “every molecule of oil we produce will have a market,” have come to realize they “can afford to bring on only the most competitive assets.”

Gas, Biofuels

Shell will be in business for “many decades to come” because it is focusing more on natural gas and expanding its new-Energy businesses including biofuels and hydrogen, Henry said.

“Even if oil demand declines, its replacements will be in products that we are very well placed to supply one way or the other, so we need to be the Energy major of the 2050s,” Henry said. “That underpins our strategic thinking. It’s part of the switch to gas, it’s part of what we do in biofuels, both now and in the future.”

Shell sees “oil and gas as being part of the Energy mix for many decades to come,” it said in a statement Wednesday.


David Fuller's view -

As Yogi Berra said: “It’s tough to make predictions, especially about the future.”

Nevertheless, Shell’s forecast by Chief Financial Officer Simon Henry: “… that peak [for oil demand] may be somewhere between 5 and 15 years hence…” makes sense to me.  It is backed by the continued development of alternative sources of Energy, from renewables to natural gas and nuclear power. 

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November 02 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 1st 2016

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report for PPHB which may be of interest. Here is a section:

It appears to us that everyone in the Energy industry is fixated on whether the OPEC oil ministers meeting in Vienna, Austria on November 30th will produce an agreement to limit the group’s output, and how that production volume will be shared among the group’s 12 members. Also, it will be important to see who among the 12 OPEC members will be exempted from a monthly production quota and what those countries near-term output goals are. Lastly, we need to see some support from Russia for OPEC’s production cap to have much strength. While all these details are important to the outcome of the OPEC meeting and how the Energy world reacts to whatever is agreed to, the lack of executive thinking about what happens to Energy demand if the U.S. enters a recession could be the pothole everyone steps in. The duration and depth on any recession will determine how much oil demand might be lost due to weaker economic activity. We suggest you should pay attention to this hidden elephant in the OPEC meeting room. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

While Allen Brooks is not predicting a recession more than a few analysts have floated the idea. It’s an important consideration that would of course have a significant impact on the Energy markets but also on just about every other asset class. Perhaps it would be timely to review some of the leading indicators for recessions to see where we are in the cycle. 

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November 02 2016

Commentary by Eoin Treacy

The World's $49 Trillion Infrastructure Problem May Not Get Solved Anytime Soon

This article Sid Verma may be of interest to subscribers. Here is a section:

An abundance of global savings. Trillions of dollars of negative-yielding bonds. And a bevy of institutional investors hungry for positive, long-dated yields to match their liabilities.

Conditions are ripe for an avalanche of private-sector capital to flow into unlisted infrastructure, turning an industry facing an estimated $49 trillion shortfall into an asset class which, its sponsors say, offers strong cash flows, uncorrelated returns and positive real yields.

58 percent of active investors surveyed in the second quarter of the year by data provider Preqin will invest more than $100 million in unlisted funds over the next 12 months compared to 42 percent who said that in the corresponding period last year, underscoring the increasing allure of alternative assets amid ultra-low yields from more conventional capital-market instruments.


Eoin Treacy's view -

It’s been a while since there was dynamism in the case for funding infrastructure spending. Part of the reason of course is that the environmental movement is highly active in demonstrating against any Energy infrastructure projects, the case for new roads comes up against similar arguments while water and power suffer more than any from not in my backyard (NIMBY) arguments. Added to that has been the reluctance of governments to commit to big projects when their coffers are empty and unfunded liabilities are a constant bugbear. 

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November 01 2016

Commentary by David Fuller

Shell Back in the Black as BG Takeover Boosts Production

Royal Dutch Shell has cheered investors with a $1.4bn (£1.1bn) profit for the third quarter, as the takeover of BG Group boosted production and it rebounded from a massive $6.1bn loss caused by writedowns in the same period last year.

Underlying profits at the Anglo-Dutch Energy giant - excluding reduced writedowns of $1.3bn - rose by 18pc to $2.8bn, significantly beating analyst expectations, as the extra production and cost-cutting helped offset the impact of lower oil prices.

Shares rose almost 4pc as chief executive Ben van Beurden credited "strong operational and cost performance".

But he warned that "lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain". 

Simon Henry, Shell's chief financial officer, said lower oil and gas prices had reduced its earnings by about $1bn year on year. Despite this, the upstream exploration and production division posted a small $4m profit, confounding expectations of a loss.

Production was up 25pc to 3.6m barrels of oil per day, including an extra 800,000 barrels per day from former BG assets.

"Operating expenses were lower, more than offsetting the impact of the consolidation of BG," Shell said.

Mr Henry said the "most impressive performance" in cost reduction had been in the North Sea, a traditionally high-cost basin, where Shell has made 1,000 job cuts. Production costs had come down by as much as 50pc, he said.

While it was clearly "not the most profitable asset in the portfolio", excluding major ongoing investments the rest of the North Sea was "cash positive". 

"The North Sea's performance is beginning to look considerably better than it was. That however does not mean we hold onto all the assets," he said.

Shell is looking to offload some of its ageing North Sea assets as part of its target to divest $30bn by the end of 2018 to help pay off the debts of the BG takeover. "The question is can we get value for that asset?," he said.

Shell said it was currently working on 16 asset sales across its portfolio but that it was a "value-driven not a time-driven divestment programme".

"We are not planning for asset sales at giveaway prices," he said. However, he insisted there was "no reason today to think the $30bn figure will not be achieved".

Shell also indicated that capital expenditure next year would be at the lower-end of the $25-30bn range.

Analysts at Barclays said strong cashflow, combined with the reduced operating and capital expenditure and divestments, "should prove enough to reassure investors that Shell is well on its way to resetting the business post the BG deal".

David Fuller's view -

Royal Dutch Shell B (est p/e 27.99 & gross yield 6.34%, according to Bloomberg) has sustained its dividend for longer than most analysts expected, rewarding shareholders in the process. 

Can it continue to fund this pay out which is in excess of current Cash Dividend Cover of 0.2?

This item continues in the Subscriber’s Area, where a PDF of the article is also posted.

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November 01 2016

Commentary by Eoin Treacy

Time for an Upgrade

Thanks to a subscriber for this report from Deutsche Bank focusing on the India utilities sector: 

Why retirement? Substantial savings for state utilities, better efficiency
India is planning a retirement policy to dispose of 18% of India’s coal-fired old capacity (36GW) over 5-6 years, starting with 6GW (2.2%) by Mar’17. Stringent new pollution norms and a coal linkage transfer policy have been instigated to hasten the retirement. Retirement will lower coal consumption by ~30% and will also cut pollution and reduce the tariff burden for state utilities.

Replacement is warranted and pressing
The states’ role in power generation is declining and will trigger a new capex cycle, for Energy security. Additionally, with shut-downs we estimate annual requirement of 19-22GW projects to avoid power shortages. Government (CEA) estimates corroborate the requirement of 24GW annually. Rising PLFs should exceed the 2008 peak by FY19-20e, necessitating further investments now – as the power project cycle is six years from concept to commissioning.

Stage-I Capacity utilisation recovery to benefit utilities (Prefer NTPC)
With higher retirement and lower supply addition (just a 2% CAGR over FY17-22E) – we believe capacity utilisation rates are likely to stage a strong recovery. We raise PLF estimates for utilities by 2-3pps beginning FY18E. With 37% volume growth over four years and valuations still at a c20% discount to the historical average, the sector looks attractive.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Revitalising the electricity utility sector to remove outdated coal fired stations and to build new more efficient operations is a very positive development. It is also a testament to the ability of the new government to remove roadblocks to Indian infrastructure development that investors despaired would ever be achieved under the last administration. 

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October 25 2016

Commentary by David Fuller

Metals Jump on Economic Optimism as Rand Strengthens With Miners

Here is the opening of this informative report from Bloomberg:

Metals are regaining their luster, a sign the global economy is becoming more resilient, helping to boost stocks and currencies of commodity-producing nations.

Iron ore surged by the daily limit of 6 percent on the Dalian Commodity Exchange and rising steel prices in China spurred a rally from aluminum to zinc. Currencies of resource-exporting nations, South Africa and Australia, led gains versus the dollar. The Stoxx Europe 600 Index headed for its strongest close in three weeks as earnings reports fueled optimism about the profitability of the region’s companies. Spanish and Italian bonds outperformed top-rated German bunds as the region’s improving political and economic outlook sapped demand for haven assets.

Industrial metals have gained steadily this year with an index of London Metal Exchange contracts poised for the first annual increase since 2012 as a pickup in manufacturing in the U.S. and euro area point to an economy that’s getting more robust. A report Tuesday showing German business sentiment rose to the highest level in more than two years in October added to the sense of optimism. Caterpillar Inc. is among companies scheduled to release earnings that may provide more insight on the sustainability of the recovery in Energy and mining. Apple Inc. is due to announce earnings after markets close Tuesday.

“We’ve had a whole host of better-than-expected manufacturing data,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Hellerup, a Copenhagen suburb. “Strong gains in China, led by steel and iron ore, are supporting the sentiment, which in turn has attracted increased speculative trading across the metals space.”

David Fuller's view -

I think there are several key factors here.  1) Commodity producers are finally wising up and recalling that supply is the most important variable in the price structure, even for industrial resources.  Supply can change quickly, either due to accidents or wars in producer regions but the most significant change is producer cutbacks, preferably publicised.  Producers have gradually increased cutbacks in the production of metals this year. 

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October 24 2016

Commentary by David Fuller

Our Roads Could Hold the Secret To Sucking Carbon Out Of Natural Gas

It’s not easy to capture carbon dioxide. I’ve written before about some of the more ambitious efforts currently underway – be it sucking it directly out of the urban air, or transforming it into rock. But now, researchers from Rice University have found another option – asphalt – and they’ve used it to suck carbon dioxide out of natural gas. Now, it’s important to say at this point that this research was funded by an oil and gas exploration company, so there’s a risk of ‘spin’. However, having read the paper(s), it’s clear to me that the technique itself is interesting, and I suspect it’ll find much wider usage. So let’s look into how it works.

When natural gas emerges from the ground, it’s composed of hydrocarbons, and up to 10% carbon dioxide (CO2). Before the gas can be sold to the market, the CO2 plus any other impurities need to be removed, and this cleanup process is expensive. Generally, the ‘raw’ gas is filtered through a series of liquid compounds called amines, which extract only the CO2, while letting the ‘clean’ gas through. Amines have a limited capacity though – they can absorb around a fifth (between 15 – 20%) of their own weight in CO2 – and recycling them for reuse is incredibly Energy-intensive. So, lots of research groups have been looking into alternative options that could reduce this cost.

Enter Rice University and their asphalt…though, I prefer to call it bitumen, so no doubt I’ll switch between the two terms. Anyway, asphalt/bitumen is the black, sticky, petroleum-based substance that’s used to build roads. There, it holds together the small bits of rock that are known as aggregate, to form a dense, tough surface for road vehicles to drive on. But if it’s to be used for carbon storage, you need to do a bit of chemistry first.

The team, led by Prof James Tour, started with a naturally-occurring form of bitumen called Gilsonite, which is found in various locations across the US, and used in everything from cement to inks. This, they heated to 400°C to remove the volatile (‘evaporate-able’) components. What’s left is then heated to 900°C in the presence of potassium hydroxide, transforming it into a porous form of asphalt. These tiny holes give the asphalt an ultra-high surface area – so high, in fact, that a single gram of it has a surface area equivalent to that of two ice hockey rinks. And in the same way that a bath sponge can hold a lot of water, this asphalt sponge could be used to store gas… albeit temporarily. This sponge relies on high pressures, already present at gas wells, to hold the carbon dioxide within it pores. Once the pressure drops, the CO2 is released – either to be pumped back into the ground, keeping it out of the atmosphere, or stored for use elsewhere.

The paper, published in Advanced Energy Materials (£), isn’t the first from this team – they’ve been working on carbon sequestration for years. In 2014, they wrote about transforming gaseous carbon dioxide into solid polymers (there’s also a video about that work here) and in 2015, they produced the first version of this porous asphalt. In those initial tests, they showed that their sponge could adsorb (store on its surface) 114% of its weight in carbon dioxide. But in this latest paper, thanks to the increase in surface area (i.e. they made more space in which to store the gas), the asphalt could manage 154% of its weight…. that’s ten times more than the amines currently in use.

There are other benefits too. The raw Gilsonite is readily available, and unlike amines, the final porous sponge can also be reused immediately. “[We’ve shown] we can take the least expensive form of asphalt and make it into this very high surface area material to capture carbon dioxide,” Prof Tour said in the press release. I admit that I’m no great fan of the oil and gas industry, and I hope that we move away from it sooner rather than later. But anything that makes it cleaner and more Energy-efficient in the short-term is a positive step, so I’ll be keeping an eye on this area.

David Fuller's view -

I have no idea how close this is to commercial application, and presumably Laurie Winkless of Forbes does either, or it would have been mentioned.  Nevertheless, what impresses me is that we live in an era where the combination of investment capital for privately funded research facilities, or grants for university research, combining highly qualified personnel, plus rapidly developing technologies, are solving problems and producing useful products at a faster rate than ever before.

These are the most important and enduring stories of our era, rather than the current uncertainty caused by low interest rates and slow GDP growth which have temporarily lowered confidence, not least in the developed world.  

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October 21 2016

Commentary by David Fuller

Why Corporate America Debt Is a Major Risk

Here is the opening of this topical article from Bloomberg, and don’t miss their graphs:

Are investors in denial about how dim the outlook is for American businesses?

That’s the question Société Générale’s Andrew Lapthorne, global head of quantitative strategy, posed to his bank’s clients.

“Asset valuations are extreme; returns are poor, the probability of losses is high and the ability to recover any losses quickly is low,” he writes.

In particular, the strategist sounded an alarm over the state of corporate America’s balance sheet. Company spending exceeds cash flow by a near-record amount—a fundamentally unsustainable situation—as net debt continues to increase at a rapid pace.

In many cases, companies have used debt to repurchase their own stock, flattering their bottom-line financial performance. Whilenot all buybacks are financed by debt, Lapthorne did note a correlation between net repurchases and the change in corporate indebtedness.

“U.S. corporate balance sheets are a major risk going forward,” he says. “U.S. corporates are massively overspending.”

To be fair, servicing this debt load isn’t as onerous as it might appear, because of low interest rates. And despite the recent steepening of corporations’ yield curve, companies have continued to extend duration, which offers them more certainty about what their interest payments will be over the long term.

“For corporate credit, there’s very little concern about short-term coverage from the market,” write analysts at Bespoke Investment Group. “We note that maturities continue to creep up slowly; despite higher spread costs, corporates are generally borrowing further out the curve and ‘locking’ low rates.”

But over the long haul, the performance of stock markets will be primarily driven by earnings increases—and the level of corporate indebtedness implies that any latitude to boost earnings per share by shrinking the denominator is limited.

David Fuller's view -

Actually, corporate debt is not a serious concern for me, assuming companies have sensibly used record low debt costs in this era to retire more expensive debt acquired earlier.  Low-cost debt will only be a problem if deflation becomes the long-term norm, which I very much doubt, although it is a widespread extrapolation forecast today. 

Fiscal spending and a gradual normalisation of interest rates should improve GDP growth over the next several years.  Lower Energy costs will help consumers and businesses.  Most corporations are already benefiting from efficiency-enhancing technology and low-cost borrowings will help them to expand their businesses as global economy strengthens.      


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October 21 2016

Commentary by David Fuller

Scientists Just Showed What It Truly Means When a Huge Antarctic Glacier is Unstable

If there is one story that, more than anything else, makes you wonder if global warming could cause very fast changes and hit planetary tipping points in our lifetimes, it was a moment in 2014.

That was when two separate research papers said there was reason to think a frozen sector of West Antarctica, called the Amundsen Sea region, may have been destabilized. West Antarctica as a whole contains enough ice to raise sea levels more than 3 meters (10 feet), and the Amundsen Sea’s ocean-front glaciers themselves account for about 1.2 meters (4 feet). Two of the largest are Pine Island Glacier, about 25 miles wide at its front that faces the ocean, and capable of someday driving about 1.7 feet of sea level rise, and Thwaites glacier, the true monster, which is 75 miles wide where it hits the ocean. It contains about 2 feet of potential sea level rise but also, it is feared, could destabilize the ice in all of West Antarctica if it goes.

On Thursday, the National Science Foundation and the U.K.’s Natural Environment Research Council made a joint announcement signaling how grave this really is — they will fund a multi-million dollar research initiative to the less-studied Thwaites, in order to determine just how much it is capable of contributing to sea level rise during our lifetimes, and by the end of the century.

[This Antarctic glacier is the biggest threat for rising sea levels. The race is on to understand it]

It will take years of preparation for scientists to even get to the glacier, however. And in the meantime, a new study of Pine Island Glacier, just released in Geophysical Research Lettersreaffirms why this region of Antarctica is so worrisome. The study finds that as the ice melts, the glacier that remains has retreated so far backwards in the face of warm ocean temperatures, exposing so much additional thickness to the ocean in the process, that even a recent bout of cooler water temperatures did little to slow the pace of its ice loss. The work was co-authored by 20 separate scientists based at U.S., British, and Korean institutions, and the first author was Knut Christianson, a glaciologist at the University of Washington in Seattle.

The problem is that in this part of West Antarctica, you have everything you don’t want on a warming planet – a changing ocean up against glaciers that are both very wide and very deep. And scientists now know that warm ocean water is reaching these glaciers at depth, and melting them from below – causing them to shrink, leaving the remaining glacier to retreat backwards and inland. And as they retreat, the seafloor gets deeper the further back they go — what researchers refer to as a “retrograde” configuration. The deeper the water gets, the more ice that can be exposed to the ocean, and the more the glaciers are thereby capable of losing. So there is a fear that there is here something that is called a “marine ice sheet instability” in which, once you start this process, you can’t stop it — and that it has already been started.

David Fuller's view -

I think most of us have sufficient personal experience of global warming over the last few decades to be aware that it cannot be dismissed easily.  It is not all bad news and it is contributing to a greener planet.  Also, common sense and an awareness of global pollution is causing many people to be more responsible.  Technological solutions can reduce if not easily reverse our contribution to global pollution. 

Meanwhile, as a precautionary measure I would avoid investments in fashionable seaside properties.  I would not want to live on or near flood plains.  Anyway, the views and the air are so much better on high ground.   

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October 20 2016

Commentary by David Fuller

WikiHillary for President

My thanks to a subscriber for this informative column by Thomas L Friedman for the New York Times.  Here is the opening:

Thank God for WikiLeaks.

I confess, I was starting to wonder about what the real Hillary Clinton — the one you never get to see behind closed doors — really stood for. But now that, thanks to WikiLeaks, I’ve had a chance to peruse her speeches to Goldman Sachs and other banks, I am more convinced than ever she can be the president America needs today.

Seriously, those speeches are great! They show someone with a vision, a pragmatic approach to getting things done and a healthy instinct for balancing the need to strengthen our social safety nets with unleashing America’s business class to create the growth required to sustain social programs.

So thank you, Vladimir Putin, for revealing how Hillary really hopes to govern. I just wish more of that Hillary were campaigning right now and building a mandate for what she really believes.

WikiHillary? I’m with her.

Why? Let’s start with what WikiLeaks says she said at Brazil’s Banco Itaú event in May 2013: “I think we have to have a concerted plan to increase trade ... and we have to resist protectionism, other kinds of barriers to market access and to trade.”

She also said, “My dream is a hemispheric common market, with open trade and open borders, some time in the future with Energy that is as green and sustainable as we can get it, powering growth and opportunity for every person in the hemisphere.”

That’s music to my ears. A hemisphere where nations are trading with one another, and where more people can collaborate and interact for work, study, tourism and commerce, is a region that is likely to be growing more prosperous with fewer conflicts, especially if more of that growth is based on clean Energy.

Compare our hemisphere, or the European Union, or the Asian trading nations with, say, the Middle East — where the flow of trade, tourism, knowledge and labor among nations has long been restricted — and the case for Hillary’s vision becomes obvious.

The way Bernie Sanders and Donald Trump have made trade and globalization dirty words is ridiculous. Globalization and trade have helped to bring more people out of poverty in the last 50 years than at any other time in history.

David Fuller's view -

Thomas Friedman makes a good point at a time when there appears to be less enthusiasm for either candidate than at any previous US Presidential Election which I can recall, staring with Eisenhower versus Stevenson in 1956.

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October 20 2016

Commentary by David Fuller

Australian Seaweed Found to Eliminate More Than 99% of Cow Burp Methane

Here is the opening of this interesting story from New Atlas:

Australia's CSIRO has identified a strain of seaweed that can reduce bovine methane emissions by more than 99 percent if added to cow feed in small amounts. This could be huge for climate change, but it also has significant benefits for farmers.

I thought this was a cow fart story; it's not. Sadly, according to Australia's CSIRO, the vast majority of bovine methane – some 90 percent of all emissions – comes from burps, not from backdraft.

But whichever end it comes from, methane represents a problem. In climate change terms, methane is a greenhouse gas 28 times more powerful than carbon dioxide. In agricultural terms, when cows burp out methane, as much as 15 percent of the Energy in their feedstock is being thrown away instead of converted into meat.

For more than a decade, researchers have been aware that adding seaweed to a cow's diet made a significant reduction to that methane release, leading to cleaner agriculture and better meat production. Early tests found seaweed could cut back methane release by as much as 20 percent.

But recently, Australian scientists have been re-running tests with a variety of different species of seaweed to find out which is the most effective, and now, a very clear winner has emerged.

David Fuller's view -

This has the potential to be a very important discovery.  Clearly the challenge of growing and harvesting many thousands of hectares of a particular type of seaweed known as Asparagopsis taxiformis sounds daunting, controversial and expensive.  Nevertheless, assuming biochemists can identify and recreate the key ingredients for methane reduction, they should be able to reproduce them much more efficiently.      

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October 18 2016

Commentary by David Fuller

Central Banks Have Lost the Plot, QE is Sending the World Over a Cliff

In 2008 the central banks reacted to a massive crisis they had completely failed to foresee by cutting rates to record lows and embarking on “quantitative easing” – pumping trillions of dollars into their economies by buying up the assets of commercial banks. The trouble is that eight years later they are, to varying degrees, still doing it. Like doctors keeping their patients on a drip many years after an operation, they are losing credibility and producing very dangerous side effects.  

There are at least 10 serious drawbacks to this – all of which can be accepted for a short period but become either politically explosive or economically unwise if continued indefinitely. 

  1. Savers find it impossible to earn a worthwhile return, which drives them into riskier assets thus causing the price of houses and shares to be inflated ever higher. 
  2. Higher asset prices make people who own them much richer, while leaving out many others, seriously exacerbating social and political divides and fuelling the anger behind “populist” campaigns. 
  3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion. 
  4. Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany in particular. 
  5. Those people who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more. 
  6. Companies have an incentive to use borrowed money to buy back shares – which they are doing on a big scale – rather than spend the money on new and productive investments. 
  7. Central banks are starting to buy up corporate bonds, not just government bonds, to keep the system inflated – so they are acquiring risky assets themselves and giving preference to some companies over others. 
  8. “Zombie companies”, which can only stay in business because they can borrow so cheaply, are kept going even though they would not normally be successful – dragging down long-term productivity. 
  9. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash whenever it does come to an end – wiping out business and home buyers who got used to ultra-low rates for too long. 
  10. People are not stupid; when they see emergency measures going on for nearly a decade it undermines their confidence in authorities, who they think have lost the plot. 

I am not an economist but I have come to the conclusion that central banks collectively have now indeed lost the plot. The whole point of their independence was that they could be brave enough to make people confront reality. Yet in reality they are blowing up a bubble of make-believe money to avoid immediate pain, except for penalising the poor and the prudent. 

Earlier this year I put this view to the top staff at the central bank of a major Far East economy, thinking they might set my mind at rest and explain why everything made sense. But, far more alarmingly, they said they agreed with me: their problem was that no single authority can opt out of these policies because they might cause a recession for their own country unless there was a global, co-ordinated move gently to raise interest rates. 

David Fuller's view -

I think most economically savvy people would now concur with William Hague’s article.  I also think a coordinated global response led by the USA and other developed economies would be the least disruptive.  The problem is that the US economy, while somewhat firmer than others due mainly to its technology lead, significant Energy production and healthier banking sector, is clearly leading the economic recovery cycle among major nations.

Consequently, a unilateral rate hike, even if only 25-basis points, could push the US Dollar Index up out of its current trading range.  If so, this would be a headwind for not only the US economy, in proportion to additional USD strength, but also for emerging markets which borrowed in the highly liquid currency at lower levels.  In other words, a too strong Dollar could further delay the next global economic recovery which is sorely needed.

This item continues in the Subscriber’s Area, where a PDF of William Hague’s article is also posted.

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October 17 2016

Commentary by David Fuller

What OPEC Oil U-Turn Missed: Peak Demand Keeps Getting Closer

Here is the opening of this interesting article from Bloomberg:

OPEC’s decision last month to reverse its policy of unfettered production and cut oil output to boost prices may be at odds with the industry’s most important long-term trend: demand for what they produce could start falling within 15 years.

If rapid improvements continue in renewable Energy, electric vehicles and other disruptive technologies, petroleum consumption will peak in 2030 and decline thereafter, according to a Report from the World Energy Council. As the globe’s largest producers gather in London this week for the Oil and Money conference, they might want to check their assumption that the market will grow for decades to come.

The plunging cost of renewable Energy -- with solar-module costs falling 50 percent since 2009 -- is already upending the business model of utilities. Disruption could spread to the oil industry as electric vehicles become more economic than gasoline or diesel cars, potentially displacing millions of barrels of daily fuel use by the late 2020s. Projections for decades of demand growth that underpin investments in oil projects could be misplaced.

“The longer-term outlook, beyond 10 years, is certainly less rosy,” said Alex Blein, London-based Energy-portfolio manager at Amundi, which holds more than $1 trillion of assets. “Given the advances in battery technology, by 2030 carbon-powered vehicles will be the exception rather than the norm. This will inevitably impact on oil demand.”

David Fuller's view -

Whether OPEC actually reduces production, other than by accident, war or strikes, remains to be seen.  However, OPEC is guaranteed to face more competition from countries which follow the USA lead by developing their fracking potential.  Additionally, renewable technologies are likely to develop even more rapidly than forecast.  Energy independence will be the ambition of every successful nation, and many will achieve it within the next fifteen to twenty years.    

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October 14 2016

Commentary by Eoin Treacy

Google and 3D Printing Buildings

This article by Katie Armstrong from 3D Printing Industry dated May 3rd may be of interest to subscribers. Here it is in full:

3D printed buildings are the way of the future! At least that’s what Eric Schmidt, executive chairman of Google’s parent company, Alphabet, says.

Imagine you could walk onto an empty block of land one day, and have a house built on it a few days later. Sounds like science fiction, doesn’t it? What if I told you it was already happening?
A recent conference in Los Angeles saw Schmidt predict the technologies that would be game changers. The Milken Institute’s Global Conference, which brings together leaders from diverse sectors and industries around the world, explores solutions to today’s most pressing challenges in financial markets, industry sectors, health, government and education. Schmidt talked about synthetic meat made from plants, VR, self-driving cars, and 3D printing for buildings.

Schmidt points out that constructing buildings, both residential and commercial, is time consuming, Energy intensive, and costly. He said that construction represented 5% of the economy, but that homes and buildings built in an industrial environment could be cheaper, more efficient and built on 100% recyclable material.

This isn’t the first time Schmidt has sung the praises of 3D printing technology and its potential applications. Back in 2013 he predicted the rise in the use of 3D printing, and he wasn’t wrong.
The implications of 3D printed houses and infrastructure are incredible. Instead of a home taking months to build, it could take just days. A company in China claimed to have built 10 houses in under 24 hours in 2014, with all their materials coming from recycled waste materials.

With the UN estimating that three billion people will need housing by 2030, large scale 3D printers are being suggested as a solution to this. They could be the solution to cheap, reliable housing which would replace slums in developing countries.


Eoin Treacy's view -

It occurs to me that homebuilding is a sector ripe for disruption. It is totally reliant on individuals who specialise in one set of skills. Carpenters, roofers, block layers, masons, plumbers, and electricians are all needed on a building site and because of designated duties one cannot start until the other has finished. In addition each of these trades tends to have a negotiated pay rate which is rather generous and has no bearing on what work is being done. 

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October 13 2016

Commentary by David Fuller

Hydrogen Heating a Step Closer as Government Adviser Backs UK Trials

Radical plans to use hydrogen to heat UK homes and businesses have moved a step closer after the Government’s official climate advisers said the plan was “technically feasible” and called for major trials to be undertaken.

In a report, the Committee on Climate Change identified using hydrogen in place of natural gas in the UK’s existing gas grid as one of the two “main options” for greening Britain’s heating supplies.

It said the second was the use of heat pumps, which use a reverse refrigeration process to draw heat from the air, ground or a water source.

The Government must decide by 2025 what role hydrogen will play in order to implement its chosen plan in time to hit its 2050 climate targets, Matthew Bell, the CCC chief executive, said.

About 80pc of UK homes are currently heated using natural gas from the grid, which produces carbon dioxide when burnt.

The CCC estimates that if the UK is to comply with the Climate Change Act, which requires greenhouse gas emissions to be slashed to 20pc of their 1990 levels by 2050, the majority of homes and almost all businesses will need to cease burning natural gas.

However, the CCC said the UK’s attempts at green heating so far had “been unsuccessful” and called for the Government to devise “a proper strategy”.

This including doubling the rate of installation of heat pumps this parliament in homes that are not on the gas grid, many of which use heating oil, as well as conducting the “sizeable trials of hydrogen for heating”.

“The main options for the decarbonisation of buildings on the gas grid in the 2030s and 2040s are heat pumps and low-carbon hydrogen,” the CCC said in a report.

In addition, the UK could also use some district heating networks in urban areas, taking heat from a central source through insulated pipes to homes and businesses.

David Fuller's view -

This is clearly a project for the future and unlikely to be of any near-term benefit.  Nevertheless, it provides further evidence of Energy creativity in this fascinating era of accelerating technological innovation. 

At the beginning of this century alarmists were worried about running out of Energy, against a background of every higher prices for crude oil.  The exact opposite is happening as a result of human ingenuity.  In the next decade and well beyond, we will be awash with increasingly cheap Energy from a variety of different sources.  That will be good news for consumers and GDP growth in developed economies, but don’t tell anybody – they won’t believe you. 

A PDF of Emily Gosden's article is posted in the Subscriber's Area. 

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October 11 2016

Commentary by David Fuller

Email of the day 3

On UK fracking:

I fully agree with your comment David. This decision on fracking, if extended across the midlands and north, could do more to bring about the 'Northern Powerhouse' than all the politician's hot air and boondoggles. Those regions could once more become powerhouses of the global economy, especially if EU countries stay with their current policies on fracking. Energy costs in Europe will continue to do enormous damage to competitiveness. The UK can break free.

David Fuller's view -

Thank you – powerfully said and I certainly agree.

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October 07 2016

Commentary by David Fuller

Free to Frack, Now We Are Cooking With Gas

Here is the opening of Juliet Samuel’s article on this important development for the UK, published by The Telegraph:

Free to frack at last. The Government has cleared the logjam stopping the development of Britain’s first shale gas reserves and Cuadrilla Resources, the company at the centre of it all, can finally rev up the drills.

The intervention of Sajid Javid, Secretary of State for Communities and Local Government, opens the door to an industry that will generate jobs, cheaper household bills, Energy security and lower carbon emissions. It has taken far too long to get to this point, but now that we have, there must be no more delays. 

 It has been a staggering six years since Cuadrilla first began work on the Lancashire site it wants to drill. In that time, shale gas extraction has gone from being a marginal industry to the United States’ biggest source of Energy, making the country self-sufficient for the first time in decades. While this mini-industrial revolution was taking place across the pond, Britain was obsessing over planning documents, legal appeals and face-painted, drumming protesters in kilts.

The birth of a shale gas industry could be a huge bonus for Britain at a time of rising economic uncertainty. Investors are watching nervously to assess the effects of Brexit and Theresa May has lurched leftwards to deploy a stream of anti-business rhetoric. So it matters more than ever that the Government means it when it claims Britain is open for business. This first permission granted to Cuadrilla is a decent start.

The direct economic benefits of fracking are obvious. Cuadrilla’s work alone could create several thousand jobs, many of them in the North, and it has several rivals trying to develop their own sites in the region. The development of the US’s gas industry also led to a rapid revival of the country’s declining manufacturing industry. Companies that had for years been shifting their operations to Mexico and Asia started setting up factories in the Gulf to take advantage of bargain Energy prices.

Full-scale production in Britain is still some years away, but when it comes on-stream, the whole country will benefit. We are heavily reliant on gas for heat and power. Household electricity bills have risen 14pc since Cuadrilla started work in Lancashire, even as prices have plunged abroad. MPs harangue Energy companies constantly about why Britain pays such high bills. If they were serious about cutting costs, they would look to their own obstructive policies.

Of course, we do not know quite how much gas can be recovered from the rocks under Lancashire, because Cuadrilla has not been allowed to find out. But the estimates so far suggest it is an enormous amount and easily enough to provide a massive boost for Britain’s Energy security without the eye-watering costs of a project like Hinkley Point C.

David Fuller's view -

This is a sensible decision, long overdue.  Europe has the highest Energy costs of any major region of the globe.  It is yet another reason for the EU’s economic underperformance. 

Fracking will be of enormous benefit to the UK economy, creating the potential for significantly lower Energy costs in the next decade and beyond, while providing many new jobs.  Lower Energy costs will help all sectors of the economy and make independent Britain the most cost-competitive country in developed Europe.  From the USA to Japan this will attract more manufacturing companies to Britain for export to the European region.  This will be transformative for the Midlands and also northern regions of the UK. 

A PDF of Juliet Samuel’s article is posted in the Subscriber’s Area.

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October 05 2016

Commentary by David Fuller

Alaska Oil Reserves May Have Grown 80% on Giant Discovery

Alaska’s oil reserves may have just gotten 80 percent bigger after Dallas-based Caelus Energy LLC announced the discovery of 6 billion barrels under Arctic waters.

The light-oil reserves were found in the company’s Smith Bay leases between Prudhoe Bay and Barrow along the Arctic shore, according to a statement from Caelus on Tuesday. As much as 40 percent of the find, or 2.4 billion barrels, is estimated as recoverable, the company said. That compares with the state’s proved reserves of 2.86 billion barrels in 2014, almost 8 percent of the U.S. total, Energy Department data show. 

“It’s a really exciting discovery for us, and we think it’s really exciting for the state of Alaska,” Caelus Chief Executive Officer Jim Musselman said in a phone interview. “They need a shot in the arm now.”

Alaska’s oil output has been gradually declining, to 483,000 barrels a day last year from a peak of more than 2 million barrels a day in 1988, Energy Department data show. The last major field brought online was Alpine in 2000, which averaged 62,000 barrels a day in September, Alaska Department of Revenue data show.

Musselman, the man who engineered the $3.2 billion sale of Triton Energy Ltd. to Hess Corp. in 2001, founded Caelus in 2011 to explore and develop petroleum resources on the North Slope. In 2014, the company formed a partnership with affiliates of Apollo Global Management LLC to invest in oil and gas properties in Alaska.

The development will cost between $8 billion and $10 billion over the life of the project, which could be brought into operation by the fall of 2022, Musselman said. Located about 125 miles from any other facilities, the company will need to build pipelines and roads. An oil price of about $65 a barrel and greater certainty on state tax policy and incentives is needed to develop the field, he said.

“A lot of the investment decision is going to revolve around what happens within the state from a regulatory standpoint,” he said.

Caelus said its newly discovered field could produce as much as 200,000 barrels a day.

David Fuller's view -

Light crude oil is highly desirable, being more valuable than the many heavy crudes available because it produces more gasoline and diesel when refined.  Assuming further drilling confirms the size of this discovery, it is an important development for the economies of both Alaska and the USA generally, although Caelus’ oil cannot be developed quickly.  Nevertheless, it also has two important messages for the global crude oil market. 

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September 30 2016

Commentary by Eoin Treacy

"One Belt, One Road"- An Economic Roadmap

Thanks to a subscriber for this report from the Economist Intelligence Unit focusing on Africa which may be of interest. Here is a section:

According to the World Bank’s Private Participation in Infrastructure Projects Database and InfraPPP, Kenya and Tanzania have awarded 12 PPP infrastructure projects since 2011. These represent investments of more than US$1.3bn (see Africa table 1). All projects relate to electricity generation, mobile-phone networks and roadway construction. As the power networks of the African countries individually profiled in this report still demonstrate high infrastructure risk with their domestic power networks, demand for continued Energy sector enhancements is likely to persist until more such projects come online. 

Among projects in various stages of pre-development with confirmed investment values, the largest directly concerning any of the African countries profiled here is the US$7.6bn Dar es Salaam-Rwanda-Burundi Railway, which involves Tanzania (see Africa table 2). For single country projects, Zimbabwe’s US$2.3bn Southern Energy Power Project is being planned around multiple financial contributors including US$1.3bn in debt and US$105m in equity from Chinese sources. Officials in Kenya at present are seeking to address their country’s deficiencies in transportation and Energy with two big-ticket projects. The first and most prominent is the US$2.3bn extension of the Standard Gauge Railway connecting the capital, Nairobi, to Malaba, on the border with Uganda, and Kisumu, on the edge of Lake Victoria. The other is a US$2.2bn, 1 gigawatt solar Energy programme. Dar es Salaam, Tanzania’s commercial capital, will further benefit from US$2bn in transportation improvements going towards the city’s bus system 

Another 57 identified infrastructure projects are at stages of pre-development or partial completion. Most (nearly 90%) target transportation, water and waste, social and health, Energy and telecom needs in Kenya. Tanzania’s projects mainly target port facilities in Dar es Salaam and other commercial centres.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Africa will be responsible for the majority of population growth over the coming decades. It therefore represents an important potential market for globally oriented companies and countries. China has been at the forefront of developing relationships with African countries not least to secure preferential access to essential resources to fuel its own growth. The building of infrastructure to facilitate the trade between China and East Africa in particular is a major endeavour and should help foster economic development not least as increasing numbers of very low cost manufacturing jobs migrate from China. 

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September 29 2016

Commentary by David Fuller

In U-Turn, Saudis Choose Higher Prices Over Free Oil Markets

Here is a section of this topical article from Bloomberg:

Saudi Arabia has ended its flirtation with free oil markets.

It took the kingdom’s new oil minister, Khalid Al-Falih, just six months to blink, ending the country’s two-year policy of pump-at-will. 

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.

The decision at this week’s meeting of the Organization of Petroleum Exporting Countries in Algiers to cut production was necessitated by Saudi Arabia’s tattered finances. The kingdom has the highest budget deficit among the world’s 20 biggest economies, may delay its first international bond issue and now faces fresh legal uncertainty after the U.S. Congress voted Wednesday to allow Americans to sue the country for its involvement in 9/11.


For all the justifications, the last two years haven’t panned out as Riyadh thought they would. At home, the kingdom has burned through more than $150 billion of foreign-exchange reserves, government contractors have gone unpaid, and this week the king announced unprecedented pay cuts for civil servants.

Saudi Arabia will suffer a fiscal deficit equal to 13.5 percent of gross domestic product this year, the International Monetary Fund estimates. When it comes to economic growth, Saudi Arabia is slowing sharply to about 1 percent this year while Iran, its nearby rival, is accelerating toward 4 percent.

David Fuller's view -

Saudi Arabia was never likely to achieve more than a Pyrrhic victory in its attempt to bankrupt the USA’s shale oil industry.  In fact, the Saudis have been the biggest losers, burning through more of their once enviable financial reserves than any other oil producer. 

How could this happen?  The Saudi’s were looking for a replay of the 1970s, when they did damage US domestic oil production with the same tactic of competitive oversupply. 

What the Saudis did not fully understand two years ago, was the extent to which technology was changing the global Energy industry.  Hydraulic fracturing, known colloquially as fracking, can now tap vast quantities of oil and gas reserves found in shale formations, and not just in the USA. 

Moreover, the combination of previously high oil prices and concerns over global warming have led to the development of renewable forms of Energy, which are becoming increasingly competitive. 

(See also yesterday’s lead item: OPEC Agrees to First Oil Output Cut in Eight Years)

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September 28 2016

Commentary by David Fuller

OPEC Agrees to First Oil Output Cut in Eight Years

OPEC agreed to a preliminary deal that will cut production for the first time in eight years. Oil prices gained more than 6 percent as Saudi Arabia and Iran surprised traders who expected a continuation of the pump-at-will policy the group adopted in 2014.

The group agreed to drop production to a range of 32.5 to 33 million barrels per day, said Iran’s Oil Minister Bijan Namdar Zanganeh, following a meeting in Algiers. While some members of OPEC will have to cut output, Iran won’t have to freeze production, he said. Many of the details remain to be worked out and the group won’t decide on targets for each country until its next meeting at the end of November.

The lower end of the production target equates to a nearly 750,000 barrels-a-day drop from what OPEC said it pumped in August.

The deal will reverberate beyond the Organization of Petroleum Exporting Countries. It will brighten the prospects for the Energy industry, from giants like Exxon Mobil Corp. to small U.S. shale firms, and boost the economies of oil-rich countries such as Russia and Saudi Arabia. For consumers, however, it will mean higher prices at the pump.

"The cut is clearly bullish," said Mike Wittner, head of oil-market research at Societe Generale SA in New York. "What’s much more important is that the Saudis appear to be returning to a period of market management."

The agreement also signals a new phase in relations between Saudi Arabia and Iran, which have clashed on oil policy since 2014 and are backing opposite sides in civil wars in Syria and Yemen. The deal indicates that Riyadh and Tehran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that sunk another proposal to cap production earlier this year.

Brent crude surged as much as 6.5 percent to $48.96 a barrel in London. The shares of Exxon Mobil, the world’s largest publicly listed oil company, climbed 4.2 percent, the biggest one-day increase since February.


David Fuller's view -

This service has often mentioned that supply is the crucial factor for all commodities.  Supply can change dramatically, particularly for agricultural commodities.  For industrial resources such as crude oil, production cutbacks and supply breakdowns or strikes will firm prices.

In contrast, demand changes gradually, increasing somewhat when prices are low and declining when they are high.  GDP growth or weakness will also influence demand.

This item continues in the Subscriber’s Area.

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September 27 2016

Commentary by David Fuller

How Clinton Beat Trump in Their First Debate, By the Numbers

Here is the opening of this informative article from Bloomberg:

Democratic presidential nominee Hillary Clinton took a page out of Republican Donald Trump’s playbook in their Monday night debate to beat him at his own game.

In the span of just a few hours, Clinton saw her odds of moving back into the White House rise from an already-high 69 percent before the debate to 73 percent afterward, according to prediction market aggregator PredictWise. Trump’s chances slumped accordingly. “This is a large shift” and relatively rare, happening only once or twice per election cycle, said PredictWise founder David Rothschild.

Clinton’s odds of winning several battleground states also improved over a comparable four-hour period: by nine points in North Carolina, four points in New Hampshire, and three points each in Pennsylvania, Ohio, and Colorado.

Snap polls conducted after the debate similarly favored Clinton, including 62 percent of respondents in a CNN poll and 51 percent in a survey by the Democratic firm Public Policy Polling. Even the Mexican peso, increasingly a barometer of Trump-related anxiety, rallied.

At the root of this emerging consensus was Clinton’s ability to control the agenda. At one point she parried a question about her private e-mail server with a scant 46-word reply, all the while keeping Trump on the defensive about his business practices and unreleased tax returns. Trump spoke more than Clinton, including interrupting and attacking 24 more times than his rival.

David Fuller's view -

I watched the debate as it occurred and it was a consummate performance by Hillary Clinton.  She was calm, composed, unflappable and most of all, better informed. 

Clinton was the polished matador, verbally sidestepping a charging Donald Trump.  As the debate progressed she put him increasingly on the defensive with barbed comments.  He fell for it every time, unable to deflect them and becoming increasingly defensive, relying on denial.  He questioned her stamina, but she smiled throughout and he looked exhausted near the end. I could only fault her for occasional smugness. 

We know that debating skills are not the full measure of aspiring presidential nominees.  Trump supporters will be relieved that their candidate did not self-destruct.  They will say that he is a strong, successful businessman rather than a slick politician. 

The same was said about Ronald Reagan after his debate with Jimmy Carter in 1980.  Carter was sharper but Reagan had more warmth and smiled a lot.  Clinton smiled during most of last night’s debate while Trump frowned, glowered and even snarled. Which candidate would you rather join for lunch?

Clinton supporters will say that she was smarter, more inclusive and presidential than her opponent, and showed reassuring Energy.  Undecided voters watching this debate for insights are more likely to favour Clinton, even though she is the establishment candidate facing a somewhat rebellious electorate. 

Trump’s momentum during most of September has been checked.  Possible risks for Clinton during the remainder of the campaign are that Trump should be able to improve on his performance in the remaining two debates.  Also, liberal third party candidates are more likely to draw support away from Clinton than Trump.    

(See also: The Complete First 2016 Presidential Debate, and judge for yourself if you have not already seen it.  Additionally, see: I Muted Donald Trump and Hillary Clinton During the Debate.  I Still Knew the Score, from The New York Times.) 

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September 26 2016

Commentary by Eoin Treacy

Musings from the Oil Patch September 20th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

So looking forward in a world of slow economic activity as experienced for the past decade, we can see VMT growth slowing and potentially a shift toward more fuel-efficient vehicle purchases – both not positive for gasoline demand. We then have the question of the impact of greater millennials in the population and the impact of the disruptive factors we enumerated earlier. 

A Ford Motor Company (F-NYSE) senior executive told an analyst meeting recently that the company expected autonomous vehicles to represent 5% of the auto fleet sales in 2025, or potentially a million cars per year. Self-driving vehicle technology seems to be moving toward the mainstream faster than many anticipated. The City of Pittsburgh, Pennsylvania is now allowing Uber to test an autonomous vehicle taxi service. The cars are equipped with 20 cameras and seven sensors to help them navigate the city’s streets. The taxis will be required to have a human driver behind the wheel in case control of the vehicle needs to shift, along with an engineer in the front seat. Right now the service is free, and it has attracted many reporters who will publicize it. Will it attract many customers? Unless a taxi causes significant traffic disruptions or a life-threatening accident, we suspect the test will be declared a success. The industry, however, is still awaiting the federal government’s issuance of guidelines about how self-driving vehicle regulations should be constructed. Traffic laws are primarily under local control, but basic national standards are important for the regulatory process and the vehicle manufacturing process, including vehicle safety and emissions standards. Steering wheels and pedals, or not? 

Self-driving technology’s primary benefit is to reduce and/or eliminate accidents and especially deaths. In 2014, according to data from the U.S. Department of Transportation, which is responsible for the Fatality Analysis Reporting System, there were 29,989 fatal motor vehicle crashes in which 32,675 deaths occurred. This represented 10.2 deaths per 100,000 people and 1.08 deaths per 100 million vehicle miles traveled. Some 38% of the deaths involved car accidents, while 25% related to pickup and SUV vehicle accidents. Only 2% of the deaths involved large trucks while the balance was accounted by motorcyclists, pedestrians and bicyclists. All deaths from large truck crashes were 12% of total vehicle deaths. 

There remain a number of legal issues about self-driving cars that need to be resolved. Who is given a ticket for a self-driving car failing to heed traffic rules or becoming involved in an accident: the passenger, a driver in the vehicle, the owner of the vehicle, or the engineer who wrote the software? These issues will be overcome with time, but the impact on Energy markets will likely come in dramatic fashion. Once auto companies feel comfortable that their self-driving cars will not be involved in accidents, they can begin designing vehicles for greater passenger comfort and entertainment, while using lighter materials since the heavy steel cages required now to protect passengers in accidents will no longer be needed. Reducing vehicle weight will make vehicles much more fuel-efficient and thus reduce future fuel consumption.

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

Three themes of autonomous vehicles, electric vehicles and new ownership models tend to be conflated when speculation about the future of transportation is discussed. These could all have an effect on the number of miles travelled but could also break the link between that measure and gasoline consumption. 

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September 20 2016

Commentary by Eoin Treacy

Tesla Wins Massive Contract to Help Power the California Grid

This article by Tom Randall for Bloomberg may be of interest to subscribers. Here is a section:

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of Energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like Energy storage to be contracted as a reliable resource in an emergency situation."


Eoin Treacy's view -

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 

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September 19 2016

Commentary by David Fuller

Email of the day 2

On the Hinkley Point decision:

I was shocked to read that Theresa May had agreed to go ahead with Hinkley Point. Electricity is highly likely be available at a small fraction of the cost from other clean sources for the lifetime of this white elephant. And reports of construction delays, massive cost increases, and safety concerns at EDFs other construction sites are troubling. We taxpayers are being lumbered with a big bill far into the future. And UK industry will be lumbered with high Energy costs and reduced competitiveness. This is the kind of decision-making I had hoped we would escape on leaving the EU (if we do!)

David Fuller's view -

Well said, and thanks for your thoughts. This was obviously a political rather than an economic decision. I believe Ambrose Evans-Pritchard had said Mrs May had no choice. I do not know all the background facts so I do not want to be too critical but Mrs May found herself in an invidious position over Hinkley Point, which she had not created.

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September 19 2016

Commentary by Eoin Treacy

SunEdison's TerraForm Units Both Say They're Seeking Buyers

This article by Tiffany Kary and Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section:

Multiple companies have expressed interest in TerraForm Power. Golden Concord Holdings Ltd., a Chinese clean-Energy group, is planning to bid for SunEdison’s controlling stake in the company, people familiar with the plans said in August. That would challenge a joint offer from Canada’s biggest alternative- asset manager, Brookfield Asset Management Inc., and billionaire David Tepper’s Appaloosa Management LP hedge fund.

TerraForm Power said in August that it was considering plans to set up an auction to sell itself, according to people familiar with the matter. SunEdison, which has been selling off assets in Chapter 11, said earlier this month that it had reached an agreement with the two non-bankrupt yieldcos over when and how they would bring claims as part of the bankruptcy.

The process may not lead to a deal, according to Swami Venkataraman, an analyst at Moody’s Investors Service.

If the bids “highly undervalue” TerraForm Power and its assets, “they may choose to operate as an independent company for some time,” Venkataraman said in an e-mail Monday.

The case is SunEdison Inc., 16-10992, U.S. Bankruptcy Court, Southern District of New York (Manhattan)  


Eoin Treacy's view -

SunEdison’s financial engineering resulted in the company’s bankruptcy with the yieldcos into which it poured all of its productive assets are now the subject of investor interest. For companies seeking to pick up clean Energy assets at a discount in order to benefit from the cash flows they throw off and/or to bolster their green credentials Terraform Power and Terraform Global represent potentially attractive targets. 

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September 15 2016

Commentary by David Fuller

Hinkley Point C: Prioritising the Politically Sexy Over the Economically Rational is a Waste of Money

Here is the opening of this article by Tom Welsh for City A.M:

The new nuclear plant at Hinkley Point, which has finally been approved by EDF’s board, will be the most expensive power station anywhere in the world. Beset by delays (first proposed in 2006, it was meant to come online in 2017), it won’t be operational until 2025 and EDF will still receive its enormous £30bn subsidy even if Hinkley generates nothing until 2029.

Some were hoping the new government would junk the project and instead shore up UK Energy security by incentivising a constellation of lower-cost, smaller schemes. But despite the unexpected delay in approving the scheme, the signs are that the Energy secretary will persist with George Osborne’s nuclear folly, locking consumers into massively higher prices for decades.

Hinkley highlights a significant problem with Theresa May’s renewed focus on industrial strategy, essentially a greater role for the state in guiding the economy. Politicians will pursue schemes beyond the limits of reason, first, because they’re betting with other people’s money, but also because of a lack of imagination about the alternatives and a hope that the prestige of such grand projects will somehow rub off on them.

David Fuller's view -

I am disappointed with the Hinkley Point approval, not because of China’s involvement or the French EU connection, but because everything that we have seen so far with similar projects on Finland’s Olkiluoto Island and France’s own Flamanville project on the Cotentin Peninsula, has been woeful to date, including absurdly expensive. 

(See: Britain Should Leap-Frog Hinkley and Lead 21st Century Nuclear Revolution, plus my comments)

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September 15 2016

Commentary by Eoin Treacy

U.S. Stocks Rise on Apple Rally as Oil Advances; Bonds Mixed

This article by Oliver Renick and Jeremy Herron for Bloomberg may be of interest to subscribers. Here is a section: 

U.S. stocks rose from a two-month low as Apple Inc. extended a rally, while a rebound in crude boosted shares of Energy producers. The selloff in longer-dated bonds eased amid data showing the American economy is on uneven footing.

The S&P 500 Index jumped as Apple pushed its four-day gain past 11 percent. The index slipped toward its 100-day moving average before pushing higher as the level held for a fourth day. Industrial production contracted more than forecast and retail sales unexpectedly slid, sending the odds for a rate increase next week below 20 percent. The dollar was little changed after initially turning lower on the sales data.

Sterling slid after the Bank of England said another rate cut this year is possible. Oil erased gains to fall back below $44 a barrel. 

Equities continued to whipsaw investors after Friday’s rout jolted markets from a two-month torpor and wiped almost $2 trillion in value from stocks amid concern that central banks would deliver smaller doses of stimulus even as the global economy sputters along. Apple’s advance has buttressed U.S. equity indexes, as consumers snapped up the new iPhone model.


Eoin Treacy's view -

Apple still has the world’s largest market cap at $620 billion so its underperformance over the last year has represented a drag on the wider market. In fact the drag has been compounded by the impact Apple’s decline in sales growth has had on its suppliers. 

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September 12 2016

Commentary by David Fuller

Parliament Calls for Carbon Capture to Revive British Industry and Slash Climate Costs

A high-level Parliamentary inquiry has called for a massive national investment in carbon capture to revive depressed regions of the North and exploit Britain's perfectly-placed network of offshore pipelines and depleted wells.

Lord Oxburgh's cross-party report to the Government has concluded that the cheapest way to lower CO2 emissions from heavy industries and heating is to extract the carbon with filters and store it in the North Sea oil.

The advisory group said the technology for carbon capture and storage (CCS) is ready to go immediately and should cut costs below £85 per megawatt hour by the late 2020s if launched with sufficient conviction and on a large scale, below the strike price for the Hinkley Point nuclear project. 

It could be fitted on to existing gas plants or be purpose-built in new projects, and could ultimately save up £5bn a year compared to other strategies. Unlike other renewables CCS does not alter with the weather or suffer from intermittency. It can be “dispatched” at any time, helping to balance peaks and troughs in power demand. 

“I have been surprised myself at the absolutely central role that CCS has to play across the UK economy,” said Lord Oxburgh, a former chairman of Shell Transport and Trading.

“We can dramatically reduce our CO2 emissions, create tens of thousands of jobs, and give our domestic industry a great stimulus by making use of technologies which are now well understood and fully proved,” he said.

No other country is likely to take the plunge first since few have the magic mix of industrial hubs, teams of offshore service specialists, and cheap, well-mapped, sea storage sites all so close together. “CCS technology and its supply chain are fit for purpose. There is no justification for delay,” says the report, to be released today.

Lord Oxburgh said the state must take the lead and establish the basic infrastructure in the early years.

The report called for a government delivery company modelled on Crossrail, or the Olympics Authority, taking advantage of rock-bottom borrowing costs. It could be privatised later once the CCS has come of age.

The captured CO2 is potentially valuable. Some could be used for market gardening in greenhouses, to produce biofuels, or for industrial needs.

Most CCS in North America is commercially exploited to extract crude through enhanced oil recovery by pumping CO2 into old wells, a technology that could give a new lease of life to Britain’s depleted offshore fields. “We could keep North Sea production going for another hundred years,” said Prof Jon Gibbins from Sheffield University.

David Fuller's view -

In this exciting new, varied and fast changing era of Energy, tech-savvy nations should way outperform over the longer term.  What Energy systems will they have?

This item continues in the Subscriber’s Area, where a PDF of the article is also posted. 

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September 07 2016

Commentary by David Fuller

Email of the day

On the post Brexit future for Britain:

David, I have the impression that City AM is running a series of articles to raise spirits in the City in this first week back from the holidays. Well, not a bad thing to do in comparison with the post-Brexit stuck-in-the-mud approach of some other papers I won't name. I particularly like this article in today's edition of city AM.

This is a truly uplifting article. It makes so may good points it is hard to choose one or two (though I know you will agree that London is the coolest place to live on the planet). Its main point is that wages in China have increased 5 fold in 3 years and at the same time, after one region in the USA, "the next most competitive location is the British Midlands from Birmingham to Manchester and beyond, plus the High Tech triangle that runs between King’s Cross, Cambridge and Oxford." I travel the world a lot and my impression is exactly as recorded in this article. I am very excited about the post Brexit future for Britain.


David Fuller's view -

Thanks for a very interesting and enthusiastic email of general interest.  (Note for subscribers: I have attached the two links which came with this email so that you can access them without leaving the Fuller Treacy Money site.)

There is certainly no harm in raising spirits in the City or anywhere else, with genuine good will and realistic optimism. What those of us who favour Brexit need to avoid is hubris – a repellent and destructive state of mind.  There are big, exciting challenges ahead, requiring a realistic can-do spirit. We also need to encourage rather than alienate disheartened Remain voters.  The UK needs their Energy and constructive input.  Personally, I remain very optimistic about Brexit, but I do not underestimate the challenges. 

Incidentally, Pippa Malmgren, who wrote the article for City A.M. above is an interesting contributor.  An American and successful businesswoman, she was a financial advisor to President George W Bush, before moving to London where she now lives and works.  Similarly, the author of this email is a key participant in the High Tech triangle which runs between King’s Cross, Cambridge and Oxford.   

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September 07 2016

Commentary by Eoin Treacy

Enbridge May Have Just Touched Off a 'Supermajor' Race for Pipes

This article by Tim Loh for Bloomberg may be of interest to subscribers. Here is a section:

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the Energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest Energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”


Eoin Treacy's view -

The MLP sector, which is heavily weighted by pipelines, crashed lower with oil prices. The high leverage employed in the business models of pipeline companies was a major contributing factor in this underperformance. However with increased evidence that oil prices have hit medium-term lows, the relative resilience of North American economic growth and continued low interest rates, it is a natural time for companies to think about acquisitions. 

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September 02 2016

Commentary by Eoin Treacy

The Credit Strategist

Thanks to a subscriber for receiving permission to post this edition of Michael Lewitt’s ever interesting report. Here is a section on junk bonds:

Junk bonds may be rallying but it has little to do with corporate credit quality, which keeps deteriorating. As of the end of August, 113 companies had defaulted on their debt in 2016, already matching the total number of defaults from 2015. The year-to-date default count was also 57% higher than a year earlier. In case anyone is paying attention (it appears they are not), the last time defaults were this high was in 2009 when 208 companies failed during the financial crisis. Standard & Poor’s is now projecting that the annual default rate will hit 5.6% by June 2017 with 99 junk-rated companies expected to default in the 12 months ending June 2017. That would significantly exceed the 79 U.S. companies that defaulted in the previous 12-month period ending June 2016, which resulted in a 4.3% default rate. While low oil prices are a major contributor to this ugliness, Energy companies only accounted for 57% of the defaults in the 12 month period ending in June 2016. That means that there is plenty of distress to go around

Even more disturbing is the fact that defaults are rising rapidly while many leveraged companies continue to enjoy low borrowing costs courtesy of the Federal Reserve. If interest rates were remotely normalized, the default rate would already be well above 5% and heading to the high single digits. None of this appears to bother investors, who are chasing yield in the rare places they can find it, which is always in all the wrong places. As a result, the normal spread-widening that occurs when defaults spike is not occurring, which is a very unhealthy phenomenon because it signals high levels of risk-taking and complacency on the part of investors. 

The history of the modern junk bond market teaches that most returns are earned in compressed periods after the market suffers a sharp sell-off. The rest of the time, investors are pushing water uphill as they invest in securities that offer poor-to-mediocre risk-adjusted returns until the point when the bottom falls out and they suffer catastrophic losses. There is good reason why very few credit hedge funds or other large investors made any money in junk since mid-2014, when the market began a sharp sell-off that coincided with the slide in oil prices and the slowdown in China. This sell-off ended early this year when the market began to rally based on the realization that the Federal Reserve lacks the intellectual capacity to understand the consequences of its own policies or the moral courage to change them. But investors are chasing zombies because numerous companies are not generating enough cash flow to reduce their debts or repay them when they mature. Instead, they are just living on fumes and waiting for the day of reckoning when their debt matures and they can’t pay it back. More of them will hit the wall when their debt comes due and they can’t refinance it at a reasonable interest rate because they are financially infirm. Standard & Poor’s is telling us that more of these companies are heading to the boneyard. Investors should be selling rather than buying this risk.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I don’t think there is any argument that central bank measures to inflate asset prices through, previously unimaginably, low interest rates and outright purchases of bonds have had a distorting effect on asset prices. In fact that was the whole purpose of the policies in the first place. After-all quantitative easing was conceived to avoid an even more calamitous crash and succeeded on many fronts.  The problem is that we are now more than seven years into an era of extraordinary monetary policy and the self-sustaining robust growth that could upend dire warnings of overvaluations has been slow to appear. In fact because much of the G7 is contending with weak growth the extent of the dislocation in valuing bonds has increased. 

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August 31 2016

Commentary by David Fuller

We Should Seize the Benefits of Brexit Sooner Rather Than Later

The new trade department has exciting scope for free-trade agreements. For 43 years trade has been the ''exclusive competence’’ of the EU. During the referendum we were told that no one would want to do deals. But countries are queuing up.

The most worthwhile agreements are with fast-growing emerging economies that have high tariffs. As long as we remain in the EU there is no chance of deals with the two biggest countries – India ended talks with the EU in frustration at 28 member states demanding exclusions and China will not accept the EU’s political conditions for talks. But China has a deal with Switzerland, and India is negotiating one. Both would be keener still for one with us. Deals involving 28 countries take forever but bilateral trade deals typically take less than two years. And we can ensure they cover crucial UK industries such as services, which many EU deals exclude.


Every week that we delay Brexit costs the British taxpayer nearly £200 million in membership fees. So both the Treasury and Health (which will have first call on extra spending) should be pushing for a speedy exit.

Although we will still be able to recruit EU nurses if we wish, leaving should be a stimulus to the NHS and our universities to expand training. At present we turn away up to three quarters of British applicants for nursing courses.

The new Department for Business, Energy and Industrial Strategy will want to incorporate all EU law and regulations into UK law to give business certainty and enable it to prune, amend and replace items which are unnecessarily burdensome. Assuming the UK retains the Climate Change Act commitment to reduce emissions by 80 per cent it will be able to reduce the cost of doing so by scrapping EU renewable targets.

David Fuller's view -

Full-Brexit will be the most promising step the UK has taken in decades.  Mrs May’s government will lower taxes to confirm to the world that we are open for business and the most entrepreneurial economy in Europe, with the world’s leading international financial centre. 

What about our current trade partners in the EU?  In the days immediately following full-Brexit we should not be surprised if Germany and our other trade partners within the EU signal that they remain open for business. 

(See also: May Spells Out Immigration Limits as the First Brexit Red Line, reported by Bloomberg)

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August 31 2016

Commentary by Eoin Treacy

D.E. Shaw Considering Major Stake in TerraForm

This article by Nathan Reiff appeared in Investopedia and may be of interest to subscribers. Here is a section:

D.E. Shaw is one of the most recent companies to express an interest in buying SunEdison's shares of TerraForm. Shaw already owns about 6.7% of TERP shares following a negotiation made to forgive SunEdison debt. While this is a significant stake already, it is nowhere near SunEdison's huge percentage of ownership of the company. By purchasing up additional "Class B" shares in TerraForm, D.E. Shaw would attempt to capitalize on SunEdison's bankruptcy declaration by acquiring one of its most valuable holdings.

Golden Concord has also recently made it known that it is interested in purchasing now-defunct SunEdison's shares of TERP stock. The company, which is China's largest new Energy company that is not government-owned, no doubt also sees a prime investment opportunity. For both D.E. Shaw and Golden Concord, however, added interest in SunEdison's stake in TERP means that the competition for those shares is rising, and the price is likely to go up as well. Throughout Monday, August 29, shares of TERP were trading at higher levels as a result of the increased interest.


Eoin Treacy's view -

To coin a pun “solar has been under a cloud of late”. Last year’s decision by Nevada to side with established utilities and force solar power providers to help pay for the grid, which they had being using for free, foreshadowed wider questioning of the subsidies on which the installation sector has relied upon. The bankruptcy of SunEdison and Tesla bailing out/absorbing SolarCity are both symptomatic of the challenges facing the sector. 

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August 30 2016

Commentary by David Fuller

British Sovereignty Depends on Leaving the EU and the Single Market

Here is the conclusion of this apt column by Gerard Lyons for The Telegraph:

To regain sovereignty and to have a sensible points-based migration system it is necessary to be outside both the EU and the Single Market. That should rule out the Norway option.

That fills some with fear, but it should not. The UK is remaining global in its focus, while at the same time ensuring more share in success through a better migration and domestic economic policy.

There is every reason to expect us to remain a strong and attractive economy in which to invest, while key challenges we face – like our twin deficits – are not the result of Brexit.

Now it is possible the UK may agree a specific deal with the EU. After all, they need the City, and also we are a huge export market for them. But we can’t assume anything.

Hence we should proceed based on leaving and trading under the World Trade Organisation (WTO). On that basis, we can leave at the end of Article 50 being concluded, whatever happens.

The UK is already a member of the WTO and it is there to facilitate trade, not stop it. Outside the EU, we can trade freely under WTO rules and reduce import tariffs.

If we accept that is what would happen if we leave, then that should give the UK greater bargaining power in any EU negotiation. Also, from that base, in time, we could conduct trade deals in our best interests, focused on services, with fast growing markets as well as with the EU.

It is people and firms that trade, not bureaucrats. Being competitive and having something that others want to buy are key. Globalisation, the internet and technical change point to new networks, and highlight that ideas and trade in the 21st century know no bounds.

Dr Gerard Lyons is Chief Economic Strategist at Netwealth Investments and an adviser to Parker Fitzgerald.

David Fuller's view -

If “Brexit means Brexit”, as the PM has repeated, it really should be a swift process of total withdrawal from the EU.  Then, and only then, can the UK government negotiate freely with other nations, including those of the EU.  Anything less than a total withdrawal will waste time and Energy in the web of EU rules and regulations designed to prevent countries from leaving. 

PM Theresa May’s biggest challenge may be to gather all the UK support she can for this transition, although the EU is unintentionally helping with its own policies, including the tax claim against Apple and Ireland.    

A PDF of Gerard Lyons' column is in the Subscriber's Area.

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August 30 2016

Commentary by Eoin Treacy

The Frozen Concentrated Orange-Juice Market Has Virtually Disappeared

This article by Julie Wernau for the Wall Street Journal may be of interest to subscribers. Here is a section:

Americans drank less orange juice in 2015 than in any year since Nielsen began collecting data in 2002, as more exotic beverages like tropical smoothies and Energy drinks take market share and fewer Americans sit down for breakfast.

When they do drink orange juice, they aren’t drinking it from concentrate.

Frozen concentrated orange juice was invented in Florida in the 1940s, primarily as a way to provide juice for the military, readily storable and easy to ship. But frozen juice has been losing favor for years.

Not-from-concentrate orange juice surpassed the concentrated orange-juice market in the 1980s. Now, the 1.4 million gallons of frozen concentrate that Americans drink each month pales in comparison to the 19.1 million gallons of fresh juice consumed each month, Nielsen said.

Louis Dreyfus Co. is scaling back the one citrus facility in Florida that is devoted entirely to concentrated orange juice. The commodities giant is laying off 59 of the plant’s 94 workers as its sells the operation that packs frozen concentrated orange juice into cans for retail.


Eoin Treacy's view -

Changing consumption habits where people are more concerned not only with the taste but the quality of the foods they consume are having wide ranging effects on the commodity markets. To most people frozen orange juice does not taste as good as a freshly squeezed navel or Valencia orange. However since squeezing one’s own oranges is both time consuming and expensive the vast majority of orange juice consumed comes from either concentrate or is pasteurized. 

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August 25 2016

Commentary by David Fuller

Email of the day

On UK should declare unilateral free trade:

Note: You can access the links in the email below because they were provided by the subscriber and I have loaded them so that you will not be removed from this site when you close them, unlike with links in newspaper articles which I post.

I mentioned briefly when we met a couple of weeks ago that the UK should declare unilateral free trade as it leaves the EU. We didn't get time to explore the thinking behind this so I have collated here some articles which set out the case, very compellingly in my view. First, an article in today's City A.M.  

Roger Bootle, whom I know you respect, has also proposed unilateral free trade. I believe you published this article when it first appeared.

He says "If we declared unilateral free trade, we would immediately cut through the doubts concerning a possible trade deal with the EU and put ourselves in the driving seat with regard to any future negotiations. Because this policy would involve abolishing tariffs on imports from the rest of the world, it would reduce prices and intensify competition in the UK market. Continental exporters would find they would only be able to sell to us at lower prices. The industries that would suffer, such as the German car industry, would put pressure on their governments for a deal with us, which we might accommodate – if it suited us. With one bound, we would be free."

Bootle was one of the very few economists who actually analysed the pros and cons of EU membership and published a book (The Trouble With Europe) arguing the case. Few politicians or economists went to such lengths. One who did is Patrick Minford. He has also written compellingly on this topic and the pdf attached goes into the issue in some detail.

The counter-argument has been put by Martin Wolff in the Financial Times in an article titled "Brexiteers' idea of unilateral free trade is a dangerous fantasy."

This was written before the referendum, and is in tune with the FT's opposition to leaving both before and after the referendum outcome. He finishes by dismissing the idea saying "Forget free trade: the UK will not return to the 19th century." Oops... wasn't that the century in which Britain was Great?

Wolff appears to favour tariffs. In contrast Minford has this to say to those who argue that universal free trade would not work for the UK: "It relies on the idea that under Brexit the UK would move to being a protected economy with tariffs and barriers against the rest of the world including the EU, much as it was back in the 1970s when it was ‘the sick man of Europe’. Yet after three and a half decades of market reforms since those grim times, the UK is now largely a free market economy and Brexit would allow it to join the global market as a free trading nation, able to buy its goods and services from the world market at world prices, and ready to sell its products to the world at those world prices too.

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

What the author conveniently forgets is that the decision to join was made by referendum - presumable he was OK about that. Then, despite his argument that we are not wise enough to decide these things by referendum, he illogically finishes by arguing for a second vote! I guess this is in true EU style: 'Come on you peasants, vote until you give the right answer.' Emotion always trumps reason once belief and self-interest are involved.

I lived and worked in Switzerland for a while and became impressed with their referendum system, held several times each year with many questions each time. The politicians role is to implement what the voters want. Switzerland may be the only true democracy on the planet, and the country wonderfully exemplifies the complete opposite of the attitude in that FT article and the attitude of the EU. Switzerland has a record of many centuries of effective governance and harmony despite having 4 totally distinct races and languages. It's also one of the wealthiest countries perhaps because of these factors. If the EU had been established on the Swiss model maybe it could have achieved similar prosperity, harmony and long-term survival as Switzerland. But the EU model is in many ways the opposite.

As you know, I voted Remain. I could have voted either way, but the desire to avoid breakup of the UK swung my vote. But now that the democratic decision to leave has been made I am fully behind the decision and actually rather happy about it. But we could mess it up by haggling deals with an EU which will be unable to do anything fast or effectively and which will assume it has the upper hand. During my long career as a senior executive in industry I attended several coaching courses on negotiation skills. The most important thing I learned was the concept of BATNA - be very clear what is your 'Best Alternative To A Negotiated Agreement.' You are negotiating from a very weak position if you are not absolutely clear about how you can reasonably walk away. If there is no negotiated agreement with the EU then the willingness of the UK to open to free trade across the world is by far the best option. It may anyway be the best solution.

Which leaves my one remaining concern, the stability of the UK. Phillip Johnson outlined one potential solution that makes very good sense to me, if not maybe for a certain power-hungry politician in Scotland! Though her country-folk may be wiser than her if it came to a vote.

What are your thoughts for and against unilateral free trade?  Do you see any major negatives?

Best wishes

David Fuller's view -

Thanks for a terrific email, certain to be of interest to subscribers in the UK, Europe and probably beyond.  I also appreciate the informative links and reports. 

Replying to your points, I have also posted Telegraph articles by Patrick Minford, Roger Bootle and others on free trade.  It makes sense as we will obviously want to be trading with the world, where possible, not just the protectionist, socialist, slow-growth EU.  Also, we do not want to be slavishly following the EU’s tortuous rules on leaving the Eurozone, which are mainly designed to lock countries in.  

Free trade is desirable, I believe, although it is certainly not without risks.  A number of our industries will be alarmed over the prospect of free trade, even if we have reciprocal agreements with many countries.  China springs to mind, as does any other country with state-controlled industries.  Consider steel - how can you protect Port Talbot or any other industry which China would like to bankrupt through state subsidies, so that they would have greater access to our market? Perhaps we don’t trade with China, although I would be reluctant to close doors on any important country.  Perhaps we need to have a few strategic industries, such as Port Talbot steel, which receive preferential treatment such as very inexpensive Energy, for instance.  Other companies would want similar subsidised benefits, but then we would be moving away from free trade. These are challenges, albeit manageable.

Re the FT, it has some good columnists and contributors but too many bad ones in its desire to be the EU’s socialist business (oxymoron?) English language paper.  The article by Richard Thaler is shocking, as you point out. 

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August 25 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 24th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section:

The Obama administration’s Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) released their Phase II fuel efficiency and greenhouse gas emissions regulations for heavy-duty trucks. This group includes the largest pickup trucks sold as well as the traditional 18-wheelers on the highways. The standards are to be phased in between the 2021 and 2027 model years. The existing standards, which were designed for the 2014 through 2018 model years, will remain in place until the new standards take effect.

The heavy-duty truck standards come as the government has just begun negotiations with auto manufacturers over the final fuel efficiency ratings for light-duty vehicles where the industry is lagging behind the targets in the standards. Heavy-duty trucks are the second largest and fastest growing segment of the U.S. transportation system measured by their emissions and Energy use. They currently account for about 20% of carbon emissions, yet only account for about 5% of the vehicle population. 

Carbon emissions from transportation is now the largest contributor to overall greenhouse gas emissions. Three charts showing annualized sector shares of total emissions confirm this conclusion. It should be noted that the country’s total carbon emissions peaked in January 2008 and have declined steadily since. On an absolute basis, over the past 8 1/3 years there are 1,410.1 million metric tons of less carbon emissions, or a decline of 16.2%. The transportation sector contributed about 9.1% of that decline. The significance is that transportation’s emissions dropped 6.4% over that time span while overall emissions declined 16.2%. The overall figure reflects the sharp decline from coal’s use due to the shale revolution and low natural gas prices along with static electricity consumption. At the same time, the decline and then flat trend in vehicle miles driven coupled with more fuel-efficient autos also helped reduce the transportation sector’s emissions. One can see these trends at work by looking at the sector shares in 1973, 2008 and 2016.

The United States has done well in reducing its carbon emissions by 16.2% since the start of 2008. The weak economy and Energy revolution have been primarily responsible. Going forward, the Energy policies targeting the transportation sector, coupled with technological improvements in overall Energy use, will become more important in driving down carbon emissions. Thus, the reason for the heavy-duty truck standards. They have support from the industry and truck manufacturers who see economic opportunities from more efficient engines. The Independent Truck Owners Association estimates the new standards will add $12,000-$14,000 to the cost of new tractors, which often cost upwards of a quarter of a million dollars, but they hope to recover those higher costs through improved fuel efficiency.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The surge in supply of natural gas coupled with the fact it is both cleaner than other fossil fuels and domestically available is supporting a revolution in developing new sources of demand. Toyota is now marketing is hydrogen fuelled Mirai automobile in the USA where the hydrogen will be sourced from natural gas. Improving the efficiency of the heavy vehicle fleet is a laudable goal and will also improve the environment so it can be viewed as a win win which is dependent on natural gas prices staying competitive. 

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August 24 2016

Commentary by Eoin Treacy

UK Industrial Revolution 2.0

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Potential GDP growth slowed in the UK after the debt crisis and Brexit is another structural shock. Monetary policy does not have the ability to correct these impairments. A structural policy is required, for example, the priority being given by new British PM, Theresa May, to the industrial sector within economic policy. An industrial renaissance is the objective.

We motivate the need for industrial strategy through the new information based theory of economic growth. Over time, knowledge and knowhow is created and embodied into products. The more specialized these products and the broader the range produced, the more complex the economy. Complexity is a medium- to long-term predictor of economic growth.

The UK is not coming from a standing start. The UK has retained or created industrial strengths in sectors from cars and industrial machinery to aerospace and defense. The sizeable depreciation of sterling and relatively low production costs give UK industry an advantage. These cyclical benefits can be secured with a structural policy aimed at maximizing R&D (knowledge) heavy, high-skill (knowhow) manufacturing.

A modern industrial strategy is about creating the right environment for new products and markets to emerge and jobs and income to grow. A successful neo-industrial policy requires a holistic approach. We discuss four areas likely to appear within an industrial strategy: infrastructure (including digital), Energy, skills and innovation. Policies here could enhance complexity and the economy’s capacity to generate, share and use information. A consistent policy approach with long-term commitments could counterbalance Brexit-related uncertainty.

The Chancellor, Philip Hammond, is expected to ease the UK’s austerity policy by year-end. We argue the fiscal adjustment needs to be seen through the lens of industrial strategy. Public sector funding costs are extremely low and the Bank of England has re-started gilt-based QE. After the referendum the government has a reason and opportunity to maximize the benefits via an industrial policy.


Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

As we pointed out ahead of the referendum, the UK had a big choice to make. It could become a vassal state subject to an increasing autocratic central government or it could throw out the rule book and refashion itself into a free market example of dynamism that would benefit from its proximity to, but separation from, a much larger neighbour.  I described this latter option as the Hong Kong solution and it would appear to be what the UK is now moving towards. 

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August 24 2016

Commentary by Eoin Treacy

A Grim Outlook for the Economy, Stocks

Thanks to a subscriber for this interview of Stephanie Pomboy expressing a bearish view which appeared in Barron’s. Here is a section:

The presumption supporting equity prices is that all the bad news we’ve seen this year has been due to anomalies—the lagged effect of the strong dollar and weaker Energy prices as well as Brexit. Everyone is looking for a significant second-half rebound for earnings and GDP—when the clouds will part and the sun will come out. I strongly believe that won’t happen, in large part because of inventories. Inventory accumulation has been explosive.

What’s caused this growth in inventories?
It isn’t because companies ramped up production. Companies aren’t using cheap capital to increase production and capital expenditures, but are lavishing money on shareholders instead. They bought the lie that consumer spending would turn up any moment, and produced at the same pace. Now they find themselves with a monster inventory overhang. Inventory-to-sales ratios across a variety of industries—manufacturing, machinery, autos, wholesale—are at the highest level since 2009. In prior inventory liquidation cycles, nominal GDP growth is cut in half during the liquidation phase. As for profits, we’re starting with five negative quarters and we haven’t even begun the inventory liquidation cycle. So the second half will be a real eye-opener.

In your view, today’s too-low rates will cause the next financial crisis. Describe it.
In the past rates that were too high were the trigger. Not this time. No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.

No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up.


Eoin Treacy's view -

The way people generally think about pensions is that you accumulate a pot of money over your lifetime, purchase an annuity with a yield greater than your living costs and a maturity that extends to the end of one’s life. Of course that is not realisable in practice so pension funds have to manage the duration of the overall portfolio so they can plan to meet future liabilities with some degree of accuracy. 

The problem is that in formulating their models they typically assume a 7% yield. That’s OK when nominal interest rates are somewhere close to that level but with rates close to zero, for nearly a decade, they have no choice but to rely on capital appreciation to make up for the absence of yield. The alternative is to take on a lot more risk to capture the yield they require. For example, and this is obviously not a recommendation, Rwanda’s senior unsecured US Dollar B+ 2023 bond currently yields 6.195%. 


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August 22 2016

Commentary by David Fuller

Carbon Capture Can Drive a 21st Century Revival of British Industry

Renaissance beckons for the once great industrial hubs of northern England and Scotland, and the unexpected catalyst may be stringent global climate controls.

What looks at first sight like an economic threat could instead play elegantly to Britain's competitive advantage, for almost no other country on earth is so well-placed to combine Energy-intensive manufacturing with carbon capture at a viable cost.

The industrial clusters of the Tees Valley and the Humber are linked by a network of pipelines to depleted and well-mapped oil and gas fields in the North Sea, offering rare access to infrastructure for carbon storage deep underground.

Liverpool has old wells of its own offshore in the Irish sea. Scotland's heavy industry in Grangemouth and the Forth have feeder pipelines to the Golden Eye.

Such sites may not be worth much today - with carbon prices in Europe too low to matter at barely $5 a tonne - but the COP21 climate deal agreed in Paris last December transforms the long-term calculus.

It implies a tightening regime of higher carbon penalties for the next half century, ending in net zero CO2 emissions. Once prices approach $50 a tonne the equation changes. Beyond $100 it inverts the pyramid of Energy wealth: profits accrue to those with access to the cheapest low carbon power.

"Storage will be much more valuable than the fossil fuels themselves. If you are an Energy-intensive industry in the middle of Europe and you don't have C02 storage, you're stuffed," said professor Jon Gibbins from Edinburgh University.

David Fuller's view -

This is interesting and entrepreneurial long-term thinking.  I believe we will hear more of it following Brexit because the UK has voted to retake control of its destiny.  That is an exciting and positive development which will inspire additional creativity and economic development.  

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