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February 20 2014

Commentary by David Fuller

How to Save Water on Fracking

Here is a brief sample from this informative editorial by Bloomberg:

One way to minimize fracking's drain on fresh water is to substitute, as much as possible, water that's already been used to frack other wells. After fracking, 10 percent to 50 percent of the water flows back up through the oil or gas well and is typically disposed of through injection into deep wells, a practice that has been linked with minor but troubling earthquakes. If it is instead cleaned of chemical additives as well as metals and minerals from deep underground, it can be reused. Frackers can also use brackish water from aquifers or municipal and industrial wastewater. Some are even beginning to frack not with great quantities of water but with a foam that contains nitrogen, carbon dioxide and relatively small quantities of water. Some of these options even make fracking cheaper.

 Regulators need to ensure these alternative practices are consistently adopted. Pennsylvania has the right approach. Before withdrawing water in that state, drillers must win approval for a water-use plan that discloses how much water a well will use, from where and what effect that will have on local sources. To be approved, these plans must include wastewater recycling.

David Fuller's view -

The unconventional production of oil and particularly natural gas from fracking is another area where US technology - in this one instance largely shared by Canada - is streaking away from the rest of the world.  Bloomberg’s editorial confirms that fracking technology continues to develop at a rapid pace.  This is extremely beneficial for the US economy which has much lower Energy costs than any other large developed country.  Consequently, manufacturing industries are moving to the US, reversing the trend of earlier decades since the 1980s.

The US is also producing fewer CO2 emissions thanks to the surging consumption of its own natural gas.  Additionally, it also kept a number of its nuclear power stations open and is also becoming a leader in new nuclear technology.  It is also benefiting from the technological advances which are boosting the efficiency of solar Energy

Other developed countries are also utilising solar power, but mostly after weakening their economies by prematurely closing nuclear power stations and investing heavily in inefficient wind farms which are proving to be deeply unpopular.  These countries continue to resist fracking, either because they lack the technology or are on record for their opposition to fossil fuels.  Ironically, they have to burn more coal – the biggest pollutant of all – because their green technologies are far from being consistent sources of Energy.  

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February 19 2014

Commentary by David Fuller

It is time to bring climate change in from the cold and learn to adapt to it

Here is the opening from this interesting column by economist Andrew Lilico, published by the Daily Telegraph:  Note: I have used the title as it appeared in the newspaper on Tuesday, feeling that it is more appropriate.

There are many interesting questions one can raise about how climate scientists and economists model both climate change and the human contribution to it. But I’m not going to discuss any of those here. I’m going to take as a given that global warming does exist and has many accepted, worrying effects – and try to argue that we should not be attempting to prevent it, but instead be looking to adapt to it.

It is interesting to enquire initially just whose job is it to tell us how to respond if we believe climate change is happening and materially human-induced. When various clever non-scientists raise concerns about climate change models they are waved away by specialists in the area, told that these are proper scientific questions for proper scientists. Yet all too often scientists fail to apply the same rules to themselves. The issue over whether there is global warming and what the human contribution to it might be is – at least to a material extent – a scientific question. But whether we should do anything about it and, if so, which of the available technical options is best to adopt, is emphatically not a question for scientists. Instead, it is a question for economists, which then puts you very much in my world.

For any ongoing event, there are at least five kinds of potential policy responses: ignore, accelerate, prevent, reverse or adapt. Assuming we do not wish to accelerate or ignore global warming, the three relevant options are reversal, prevention (called “mitigation” in the climate change jargon) or adaptation.

For 25 years the main approach politicians have discussed has been prevention. Margaret Thatcher led the way, with her November 1989 speech to the UN General Assembly. Later we had Kyoto and Al Gore and the Stern Review and David Cameron with the huskies, and now Philip Hammond and Ed Miliband arguing about who sees climate change as the greater “national security threat”.

In the late 1980s and early 1990s it seemed plausible that prevention (or even reversal) was a genuine option. We had great successes with limiting sulphur emissions causing acid rain, chlorofluorocarbons (CFCs) destroying the ozone layer and (earlier) smoke that had caused the famous fogs of London.

Yet the past 25 years have taught us that our scope, capacity and will to prevent climate change by limiting CO2 emissions is much less than was the case for these other pollutants.

These decades of devising fabulously expensive mitigation schemes are hoped, at best, to take a few tenths of a degree centigrade off global warming during the 21st century, compared with a likely rise of two to four degrees. The low-end estimates of the cost of such futility is put at 1pc to 3pc of GDP, with some models suggesting the actual cost is much higher.

Those of a scientific bent respond by saying we must enormously increase our efforts, doing far more to prevent warming proceeding. But the Chinese and Indians and Americans will never agree, and in economically depressed Britain the public appetite for even the sacrifices we make at present has all but evaporated, let alone asking for more.

Even if prevention were feasible, standard policy analysis suggests it would be a terrible idea. Already, according to UK government criteria, it is rare to find a global warming mitigation policy that comes anywhere near having benefits that match costs.

For example, the renewable Energy strategy was found to have a 20-year cost of £57bn to £70bn but benefits of only £4bn to £5bn. This problem is so endemic that a few years ago the guidance for ministerial sign-off of policy impact assessments had to be changed so that ministers no longer declare that they are satisfied that benefits exceed costs. Nowadays they sign to say they merely believe that benefits “justify” costs. Even those few assessments that did find positive net benefits, such as the 2008 UK Climate Change Act, assumed international agreement that has never come through.

Given this, it is preposterous to suggest that the UK’s doing 10 or 50 times as much to prevent global warming could possibly be a good policy, even if it could work. The economics of trying to prevent global warming has simply never added up.

David Fuller's view -

I would not want to tell many of those living in the USA, and enduring their coldest winter in decades, that they face global warming.  Similarly, I would not say to the unfortunate people with flooded homes and farms in Somerset, UK that this amount of rain was not unprecedented. 

We know from the Earth’s history that climate change has always been a random factor, occasionally traumatic and often stable for lengthy periods, at least in human terms.  We also know that temperatures during our lives have been well within the extremes that our continents have endured, often for centuries.  Against that background, it is appropriate to think ahead and prepare for some of the more likely reoccurring events that cause hardship.

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February 18 2014

Commentary by Eoin Treacy

WTI Crude Rises to Four-Month High as Cushing Supply Seen Lower

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

“The bulls can take it to around $105 before running into resistance,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The bulls are in control of the market. A lot of the strength we’re seeing is predicated on the narrowing of the WTI-Brent spread.”

Brent crude is becoming a “broken benchmark” for the global oil market because of declining supplies from the North Sea, Citigroup Inc. analysts said in a report dated yesterday.

Cushing stockpiles dropped 4.23 million barrels in the two weeks ended Feb. 8 as the southern leg of TransCanada Corp.’s Keystone XL pipeline moved oil to the Gulf Coast of Texas from the hub.

Supplies at the hub probably tumbled 1 million to 1.5 million barrels last week, Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois-based consulting company, said in a note to clients. Phil Flynn, senior market analyst at Price Futures Group in Chicago, forecast a 1 million- barrel decrease. Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC., predicted Cushing supplies slid 1.9 million. Baruch also forecast a drop.


Eoin Treacy's view -

While there is still a ban on crude oil exports within the USA there is no such ban on distillate products. Since WTI still trades at a discount to other global benchmarks, US refiners can probably produce higher value products at more competitive prices than their European competitors. The opening of the southern portion of the Keystone pipeline is probably helping to facilitate refiner demand for crude which could be helping reduce the discount of WTI to Brent.


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February 17 2014

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report dated February 4th. Here is a section:

The Dutch government earns about €12 ($16.3) billion annually from the sale of Groningen production. The decision to cut output means state income will fall by €600 ($813.2) million in 2014, €700 ($948.7) million in 2015 and €1 ($1.4) billion in 2016, given the projected production and gas prices. The lost income will be in addition to the €1.2 ($1.6) billion to be spent over the next five years to strengthen buildings, houses and infrastructure in the region. These investments hope to reverse the decline in house prices due to the actual and potential earthquake damage.

Making up for the potential €3.5 ($4.8) billion drain on the Dutch treasury over the next 3-5 years is the first order of business for the government. Expectations are that some of the lost income will be recouped by increased imports and exports that will find their way through the Dutch Energy hub. The expectation that Groningen’s gas volumes would be cut has already boosted local gas prices, which should not be a surprise, but also a pain for citizens and businesses. The biggest beneficiary of the Dutch cut will be Gazprom (GAZ.BE), which sees being able to sell an additional 175 Bcf of gas to Europe, thus earning an additional $1-2 billion in revenues, and further strengthening Europe’s dependency on Russian gas. Oil-price-linked gas imports will keep Energy prices in Europe high providing an environment in which slightly cheaper Russian pipeline gas can capture a greater market share.


Eoin Treacy's view -

The full report quoted above is posted in the Subscriber's Area.

The Netherlands has benefitted enormously from its Energy resources not least in cementing Rotterdam as a globally significant port. However, as one of Europe’s most densely populated countries, the prospect of the emotional wellbeing of the population being put before gas production has resulted in a potential headache for its neighbours. 

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February 10 2014

Commentary by David Fuller

Bernard Tan: Indonesian Energy Deficit

My thanks to the author for his latest interesting, extensively illustrated report.  Here is the opening:

The full report is posted in the Subscriber's Area.

Indonesia joined OPEC in 1962 and left the cartel in 2008 when it realised it was going to become a structural net importer of Energy. Funny thing is most people I polled while writing this essay were under the impression that Indonesia is still part of OPEC!

Oil production has been since 2000, from over 1.4 million barrels per day to less than 800,000 by late 2013. There was actually a period from 2007-2010 when production stabilised at just below 1 million bpd but has seen fallen steeply again. See chart below.

The latest data shows that Indonesia crude oil production will continue to plunge. According to Indonesia’s BPPT (Agency for the Assessment and Application of Technology), crude oil production could drop to as low as 124 million barrels by 2030 or about 340,000 barrels per day.

The natural consequence is net imports go up as shown in the next chart.

Actually, Indonesia only became a structural net importer of crude oil in late 2012 but since then, the deficit has accelerated. It is now in the region of 4 million barrels per month or more than US$400 million at current oil prices.

According to BPPT, net imports could reach 408 million barrels by 2030 or 34 million barrels per month. That’s nearly $4 billion per month at current oil prices.

The deficit in oil isn’t coming from the demands of electricity generation. As can be seen from the next graph, oil based electricity generation capacity has been roughly stagnant since 2004. Most of the increase in Indonesia’s electricity generation since 2005 has been from coal and to a lesser extent, natural gas.

The culprit is motor vehicles as shown by the next chart of monthly motor vehicle sales in Indonesia. From 2004-2009, Indonesia’s monthly motor vehicle sales oscillated around the 40,000 level. Prior to this, it was around 25,000. But from 2010 onwards, it grew rapidly and in Sep 2013, was approaching the 120,000 level, almost 3x the level of 2004-2009 average levels.

As we all know, once people own motor vehicles, they drive them around, thus needing ever growing amounts of petrol and diesel. Even if motor vehicle sales fall off from now on, the installed base cannot help but grow ever larger. If current sales levels are maintained, more than 100,000 new vehicles will pour onto Indonesia’s roads every month, adding to the demand for imported oil.

David Fuller's view -

Indonesia is a resource-rich developing economy with a rapidly increasing oil shortage problem as Bernard Tan points out.  Indonesia appears to have plenty of coal for electricity generation but its soaring rate of consumption must have negative consequences in terms of pollution. 

Indonesia’s BPPT (Agency for the Assessment and Application of Technology), quoted above, offers a grim projection for oil imports by 2030, including 34 million barrels per month costing nearly $4 billion per month at current prices!  

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January 30 2014

Commentary by David Fuller

Economy in U.S. Grew 3.2% as Consumer Spending Picked Up

Here is the opening from this informative report by Bloomberg:

The U.S. economy expanded at a 3.2 percent pace in the fourth quarter as Americans’ spending climbed the most in three years, laying the ground for further improvement in 2014.

The annualized gain in gross domestic product matched the median forecast in a Bloomberg survey and followed a 4.1 percent advance in the prior three months, Commerce Department figures showed today in Washington. Growth in the second half of the year was the strongest since the six months ended in March 2012. Consumer spending, which accounts for almost 70 percent of the economy, rose 3.3 percent, less than estimated.

The pickup in demand allowed the economy to overcome cutbacks in government outlays caused by the partial federal shutdown in October. Diminishing fiscal challenges and progress in the labor market will probably sustain consumer and corporate demand in 2014, helping explain why the Federal Reserve decided yesterday to keep paring stimulus.

“There is a fair amount of strength in the economy,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who was the second-best U.S. forecaster of the economy the past two years, according to data compiled by Bloomberg. “Consumer spending is on solid ground. We’re seeing other engines of growth picking up -- capital spending is rebounding, exports are up.”

David Fuller's view -

Consumer and corporate confidence are now the keys to gradually improving GDP growth from here on.  It should improve for the most part, albeit not exponentially as the problems created by credit crisis recessions linger for more than five years.  Nevertheless, the USA has some stunning advantages; not least its very competitive Energy costs, thanks to fracking.  Moreover, in this exciting era of visibly accelerating technological innovation, the USA is often at the forefront of new discoveries and commercial breakthroughs.

What about the January effect?

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January 29 2014

Commentary by Eoin Treacy

JPMorgan Said Near Decision on $2 Billion Commodities Unit Sale

This article by Jodi Xu, Hugh Son and Andy Hoffman for Bloomberg highlights some important developments in the commodities markets. Here is a section: 

Blackstone, the world's largest private-equity firm, sees commodities as another way to diversify its lines of business, one person said. The firm has grown fee-paying assets and tapped streams of revenue that are less dependent on the market cycles that drive private-equity profits.

Mercuria would gain oil infrastructure assets in North America and a global chain of warehouses for its metals trading business. Registered in Cyprus with headquarters and major trading operations in Geneva, Mercuria is the fourth-largest independent commodities trader. The company posted a profit of $343 million in 2012 on revenue of $98 billion.

Macquarie, which has an existing trading business in oil and gas, power and coal, has been expanding that business in the past years, buying a stake in British metals-warehousing company Scale Distribution last year. It is the fourth-largest trader in natural gas in North America, according to its website. Macquarie competed with JPMorgan for assets from RBS Sempra Commodities, a venture between Royal Bank of Scotland Group Plc and Sempra Energy, in 2010.

While JPMorgan's commodities unit also drew interest from Grupo BTG Pactual, the Brazilian investment bank, the bank ended its pursuit, people said this month.

KKR, which teamed up with U.S.-based Energy trader Castleton Commodities International LLC, is no longer involved in the process, according to a person familiar with the situation. A spokeswoman at KKR declined to comment on its interest, while a representative for Castleton didn¡¯t respond to a request for comment via e-mail.


Eoin Treacy's view -

The CFTC is currently being lobbied by commodity consumers such as utilities, steel and chemical companies to increase restrictions on position sizing in the futures markets. Over the last decade investment banks have been able, through a roundabout mechanism, to build up substantial positions in commodity contracts well beyond what was envisaged when regulations were initially formulated. 


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January 27 2014

Commentary by Eoin Treacy

ICBC Offers Clients Option to Recoup Funds in Troubled

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

China Credit Trust made three interest payments since 2011 totaling 670.9 million yuan, according to a statement dated Jan. 16 that was posted on the trust company's website.

ICBC began rejecting calls to bail out the investors 10 days ago after the Guangzhou Daily reported that the lender may be forced to repay investors when the product matures at the end of this month. That stoked concern that the nation's first default in a decade on such high-yield investments was looming.

"Looks like everyone is off the hook here,?¡À Gavin Parry, managing director of brokerage Parry International Trading Ltd. in Hong Kong, said in an e-mail. ¡°We also avert a bullet for the money markets, as rates were sure to spike on a default."


Eoin Treacy's view -

This announcement follows the PBoC¡¯s intervention in the money markets last week and the granting of an additional mining licence to Zhenfu Energy. Both measures were aimed at quieting investor anxiety at the prospect of the nation¡¯s first high yield trust default. There is never a good time to instil market discipline so it is understandable that the authorities did not wish to head into the New Year holiday with such a momentous event occupying investor sentiment.  Nevertheless, the issue of moral hazard remains very real and until the prospect of a deteriorating bad loans problem is resolved conclusively confidence is unlikely to improve meaningfully. 

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January 23 2014

Commentary by Eoin Treacy

Argentinean Peso Plunges as Central Bank Scales Back Suppor

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

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves which have fallen 31 percent to $29.4 billion. Reserves are the government’s only source to pay foreign creditors. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 25 percent, the most in the world, according to data compiled by Bloomberg.

“They’re running out of cash and they’re sitting in the corner at the moment,” Phillip Blackwood, who oversees $3.5 billion in emerging market assets as a managing partner at EM Quest Capital LLP, said in a phone interview from London. “There’s a feeling in the market that they’re not going to intervene any more.”


Eoin Treacy's view -

The decline in commodity prices over the last few years has put pressure on the economies of related countries, which had become reliant on the income generated from the sector while prices had been higher. Despite the fact that the Continuous Commodity Index has found at least near-term support near 500, continues to extend its bounce and may be forming a medium-term base, the price of industrial resources in particular remains below levels producing countries had budgeted for.

In yesterday’s piece discussing Sterling cross rates with commodity currencies I highlighted the fact that a significant number of commodity related markets find themselves in the position that they need to devalue their currencies in order to foster their competitive edge in other parts of their economies.

The Argentine Peso is an exaggerated example of the requirement to devalue a currency and is more reflective of a deficit in standards of governance than any other single factor. Nevertheless, the currency’s parabolic acceleration is a trend ending signal of undetermined duration as taught at The Chart Seminar. Once it ends, the country’s competitiveness will have been restored at least until the next devaluation.

The Latin America Dollar Index has returned to test the 2003 and 2008 lows and a clear upward dynamic will be required to suggest the return of demand dominance in this area. The Brazilian Real and Mexican Peso both occupy 33% weightings in the Index.

The US Dollar has been consolidating in the BRL2.4 area for much of the last six months and a clear downward dynamic would be required to question current scope for additional upside.

The US Dollar has also been ranging below the MXN13.5 since late June and has firmed of late. Mexico represents an interesting case at this level. Standards of governance are improving and attempts are now being made to foster investment in Energy infrastructure. The country has a dynamic manufacturing sector and a land border with the USA. As a result, the Peso is unlikely to come under the same pressures are other commodity currencies and any additional weakness can be viewed as fostering the country’s competitive advantage in manufacturing.

The US Dollar has base formation characteristics against both the Chilean Peso and the Colombian Peso. It is now testing the upper side of these congestion areas and clear downward dynamics would be required to question potential for successful breakouts. 

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January 23 2014

Commentary by Eoin Treacy

Winter storm Janus: Natural gas prices soar in Northeast

This report from the Christian Science monitor highlights the tight situation currently evident in the USA’s natural gas market. Here is a section:

"While supply is greatly increased because we have plenty of natural-gas production, right now we have a transportation and storage issue," Dennis Weinmann, a principal at Coquest Inc., a Dallas Energy brokerage and consulting firm, told The Wall Street Journal. "We don't have gas where we need it right this second." 

On a typical day, industry watchers say the Northeast's natural gas infrastructure is in need of an upgrade, particularly as natural gas production booms in the US. When extreme winter hits suddenly, and everyone stays home and turns up the heat, the strain on that pipeline system increases. Nearly all natural gas pipelines headed into New York and New England were constrained Wednesday, according to the US Energy Information Administration (EIA). 

Eoin Treacy's view -

Henry Hub is still very much a local market for North America. The boom in shale gas production saw prices plummet and it has taken a few years for the market to restore equilibrium. The fact that a short-term event such as a dramatic winter storm has caused a price spike suggests that the excess supply has been worked through and while prices can be expected to pull back once the weather improves, the $4 area is likely to represent a new floor.


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January 22 2014

Commentary by Eoin Treacy

Canadian Oil Sands: Getting The Facts Straight

This article by Doc Mike at Seeking Alpha may be of interest to subscribers. Here is a section: 

Fincom claims that COSWF is a high-cost producer. Yet, the company reports its cost per barrel of $41.48 CAD. How does this compare with, say, oil shale producers in the Bakken?

From a recent Reuters article:

"We've seen tremendous variability in cost and well performance between operators as each tests different methods of well completion," said Jonathan Garrett, analyst at Wood Mackenzie. Among the factors that can affect costs: lateral length, stage count, proppant volume and type, fluid volume and type, sleeves versus plug-and-perf.

Wood Mackenzie has an overall Bakken break-even price of $62 a barrel at current well costs, Garrett said. But for high-quality parts of the formation such as the Parshall and Sanish fields, that number goes down to the $38-$40 range.


?While producers can break even at just below $40 a barrel in most places, the Bakken needs prices in the $80-$85 range to attract capital from other shale areas.

Eoin Treacy's view -

The evolution of the USA's domestic oil and gas production represents a significant challenge for Canadian Energy producers not least in securing markets and transportation networks for their output. However the fact that any commodity tends to trade at the marginal cost of new production suggests that the Canadian oil sands are likely to remain economically viable resources for the foreseeable future. 

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January 21 2014

Commentary by Eoin Treacy

Email of the day on the 3rd Industrial Revolution

The email of the day yesterday on global macro outlook (plus Eoin’s reply) prompted me to write my thoughts on whether high tech is played out. Actually I think just the opposite. In agreement with David and Eoin, I believe we are in the early stage of massive new growth generated by breakthroughs in technology.

A year ago I attended and presented at a conference in New York City entitled “Are You Ready for the Third Industrial Revolution?” While preparing my presentation I did a lot of research on factors that drive an industrial revolution. I’ll summarize here for the sake of brevity, but I think one can identify three main themes: a new more efficient Energy source, improved communication/transport systems, and improved financial structures.

In the first industrial revolution, innovations in England from approximately 1790 led to the replacement of wood power by coal power; new transport systems based on steam-power initially for boats on canals followed by the first railways; steam-power drove the first mass printing presses which led to mass education for the first time in human history; and a new financial model based on the first stock exchange initially out of Lyons coffee house on the Stand in London.

The second industrial revolution, a century later, was jointly driven by US and European inventors. It followed a similar pattern, with oil replacing the less-efficient coal; development of new transport based on the internal combustion engine out of Europe with Messers Daimler and Benz being the most notable contributors; the building of mass transport highways for the first time, electrification of cities driven by the incredible inventiveness of Thomas Edison; and a new financial breakthrough in the form of the limited liability company.

So, where are we in the third industrial revolution? One of the three factors that drive an industrial revolution must be clear to us all. We all use it every day. The internet is a massive breakthrough in communications. It is now linking all humanity instantaneously for the first time. The impact on communication efficiency, spread of ideas, synergy of creativity globally, and global education is already very clear. At the time of the conference last year I was less sure about the second factor, a new Energy source. Gas is a stopgap in my mind, a last play on the hydrocarbon theme, though likely to be very significant in coming decades in driving down Energy costs. But over the past year my reading around solar power has convinced me that it is just about ready to make a major impact. The efficiency of capture of sunlight was until recently in the 10% range and depended on expensive ingredients in the panels. But breakthroughs in graphene technology suggest that 50-100% capture efficiency is achievable and the materials will be very low cost. The impact could be absolutely incredible. (Think through all the ways it could change Energy generation and usage. Thankfully, it will soon bypass windmills and other “green” Energy sources currently in vogue).

The third factor, innovation in our financial system, is a clear need and currently unsolved. I am wondering whether crowd-funding is part of the answer at least, and I have personally invested Angel money in helping build one company here in the UK.

Finally, one additional point is worth making. Eoin hinted at this in his response yesterday to the email of the day. He was referring to medical breakthroughs (my own field of work) but his comment is applicable to all fields I believe. New technologies take a long time to develop to a level of real usefulness and payback. I did a lot of research on this over a decade ago and I gave public presentations and published research papers on this matter. All the evidence is that it takes 15-25 years for any new technology to get to the "payback” phase. This seems to apply to all technologies in all fields. Moreover, the eventual real value of a new technology may not be obvious at first, and it may differ from the intentions of the original innovators.

Personally, I have been building a second investment portfolio alongside my usual “trend-following” portfolio. I have been buying ”Third Industrial Revolution” companies, those that are driving the revolution, mostly in the USA and UK. By applying trend-following principles in selecting when to buy I have achieved gains of 10%-70% for over 20 companies over the past year. It is really interesting to build such a portfolio as it makes one very aware of the incredible breakthroughs and moreover keeps one very positive about the future! If other members of the collective are building such portfolios it would be interesting to share ideas and experience.

Eoin Treacy's view -

Thank you for this enlightening email contributed in the spirit of Empowerment Through Knowledge which as you point out is very much in line with our view.

In addition to technological innovation, the 3rd industrial revolution will differ from the others in an important respect. While the first and second were largely relevant to a small proportion of the global population, the third industrial revolution will be global and should help unleash humanity’s creative potential as never before.

In the realm of innovations in the financial sector, classic economic terms such as GDP and GNP are not particularly appropriate for a global system where capital can move relatively freely in search of the most attractive opportunities. The iPhone is a great example of how inefficient our view of value creation is. The majority of the benefit from the intellectual property resides in the USA, but many of the parts are assembled elsewhere and the phone registers as an import on trade figures.

In monitoring markets, we see that accommodative monetary policy in one jurisdiction has the capacity of fuel investment booms in other countries. However, the role of money flows in fostering global growth dynamics is more difficult to demonstrate in concrete terms. I suspect that when we think about financial innovation, what we need is a new way of conversing about global capital. Local considerations will always be important and protectionism is an ever present threat but the global macro environment is likely to become increasingly important.

As a medium of exchange and partnership, I wonder if Bitcoin and other crypto- currencies represent the thin end of the wedge in unleashing excess savings for investment and overcoming capital controls. It will probably be at least a decade before we have any semblance of an answer to that question.

I’ve posted this fascinating chart from the USA’s National Renewable Energy Laboratory on a number of occasions over the last year. I find it useful because it highlights the improving trajectory of solar cell efficiency but also the fact that totally new technologies are appearing at an increasing rate and the pace of obsolescence is also increasing. Therefore while graphene is a technology that is still in its infancy, it is not difficult to imagine the potential for innovation. 

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January 20 2014

Commentary by David Fuller

Tim Price: Power failure

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. Here is a brief sample:

Make time, if you can, to watch this 2013 investment review from Century Management. For all the problems and financial distortions caused by overconfident central bankers and hopelessly indebted governments, Arnold Van Den Berg manages to convey a wonderfully balanced and even optimistic assessment for the US economy (and by extension for much of the world). A hat-tip to Jonathan Escott for bringing it to our attention. Van Den Berg highlights, for example, the impact of fracking on the domestic Energy market; an Egyptian fertilizer company recently established a plant in the US where natural gas prices are now cheaper than in the Middle East. He also alludes to the advances in 3D printing, nanotechnology, artificial intelligence and robotics. As an example of the latter two trends, he points out that in July last year, the US Navy landed an unmanned fighter jet on the aircraft carrier USS George H W Bush:

“When you consider that the computer had to factor in airspeed, altitude, the angle-of-attack, pitching, a rolling flight deck, not to mention the changing winds and seas, this was a historic landing for the Navy and maybe equally so for robots and artificial intelligence.”

David Fuller's view -

The report quoted above is posted in the Subscriber's Area.

This reminds me of one of my favourite quotes, which I also picked up from Tim Price:

“We have Stone Age emotions.  We have medieval institutions.  And we have god-like technology.”

Edward O Wilson

Fortunately, most of us do not invest in the Stone Age emotions or medieval institutions.  However, we can and do invest in the companies which benefit from god-like technology.

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January 20 2014

Commentary by Eoin Treacy

Email of the day on the global macro outlook

Liked your weekly commentary today especially the summary on Gold.  I have made money on gold and I don't wish to chase that market again.  

Now you keep talking regulary about innovation and technology.   As you are probably aware you are in conflict with the Harvard University Economic academic's view of technology and innovation.  They hold we are well past the big innovation gains from technology especially IT technology.  In fact these bunch of academics seem to beleive these innovation benefits ended at the turn of the last century i.e. 2000.  There message appears to be that the last decade has simply delivered fancy hardware / software toys that have offered business no productivity tools.   Mums and dads may like these toys but for business they are just staff time wasters.

I do beleive medical science has much to offer mankind in the future.  However that picture is a bit cloudy also.   Utilizing any new innovations seems to be determined by price.   My son Keith (has a PhD in genetics worked for Merrill Lynch) now works for a medical services company running the cancer treatment businesses.  He is some what cautious on medical innovation.  He sees government unwilling to embrace new technology unless their is a demonstrated cost saving to the government.  As he points out this is not always easy to demonstrate.

We all know US medical Insurance companies are also capping not premiums but the medical services they will offer to their insured patients.   We also here in Australia see lots of pressure from government to cap the more expensive medical procedures.  This must ultimately slow innovation in medical science.   The largest shareholder in the company Keith works for is no other than KKR who own a bit over 50% of the business.

Fridays profit warning from Royal Dutch Shell seems to suggest at least some of the dumb money must now be looking closely at getting out of the "Fracking" business.  Let's see if the other big dumb money provider in BHP also throws in the towel on what I see as a very stupid business.  I am not environmentalist this is just about a reasonable return on capital.

I listened to a Economist speaking on oil on Bloomberg the other night. He had a cautious view on Oil prices saying its always priced at the marginal producers cost structure I.e the fractures cost as we all know.  The dumb money frackers must be getting increasingly sick of this profit-less business.  I know Iraq, Iran, Saudi Arabia etc, etc are not going ignore 1,000 years of hating and killing one another.  The Libyan oil fields now producing 200,000 to 300,000 barrels a day are not going to revert overnight to again produce 1.8 million barrels a day.  Try talking to an oil geologists how hard it is to get an oil well flowing again.  This is an extremelly challenging task.  Lastly the US embraces Iran nuclear industry and all is forgiven about the Bush Evil Empire statement.  Somehow I don't think it's that easy.   The oil business is challenging. 

You are right the RBA is on the sell side of the AUD.  As to the future level of the AUD local economists are very worried.  They fear when we shortly become a very large Energy exporter the AUD will come under pressure to rise.  This will make most other local export industries uneconomic.  There was a comment on Bloomberg the other night from a US oil company that said the oil business is now too expensive and costly.   That LNG is the go and forget the US, go straight to Australia where it is cheaper and easier.  True I am not making this up.

Perhaps we can talk more about these big picture matters at the Sydney conference.

Eoin Treacy's view -

Thank you for this thought provoking email which touches on a number of the issues I anticipate discussing with delegates at the upcoming Chart Seminar and Global Strategy session in Sydney. With only two weeks left before these events please contact Sarah Barnes [email protected] to secure you place.

From what I have read of the Harvard Economics team’s research, they tend to focus on the significant challenge of increasing processor speed as “gates” approach the width of a silicon atom. An acceptance of this limit helps to explain the urgency with which companies are investigating the potential of carbon nanotubes, graphene and other substances for the production of future generations of microchips.


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January 17 2014

Commentary by Eoin Treacy

ICBC Will Not Repay Troubled China Trust Product, Official Says

This article from Bloomberg news highlights some potentially important developments in China. Here is a section: 

Industrial & Commercial Bank of China Ltd. is rejecting calls to bail out a troubled 3 billion-yuan ($495 million) trust product, a bank official with knowledge of the matter said, stoking concern that the nation’s first default on such high-yield investments may be looming.

ICBC, which distributed the product sold by a trust company to raise funds for Shanxi Zhenfu Energy Group, won't assume primary responsibility after the coal miner collapsed, according to the executive, who asked not be identified while negotiations continue. China's largest bank may be forced to repay investors, most of whom were Beijing-based ICBC's own private banking clients, Guangzhou Daily reported yesterday.

A default on the investment product, which comes due Jan. 31, may shake investors' faith in the implicit guarantees offered by trust companies to lure funds from wealthy people.

Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flow outside the formal banking system.

“Nobody wants this default to become a trigger for a financial crisis,” Xue Huiru, a Shanghai-based analyst at SWS Research Co., said of China Credit Trust's product. “Breaking the implicit guarantee may help the long-term development of China's financial system, but the short-term pain would be too much for the economy to take.”

Eoin Treacy's view -

While the Chinese banks maintain listings on both the mainland and Hong Kong, they remain organs of the Chinese administration. Therefore their actions can be interpreted as reflecting the motivations of those in power. The fact that on the one hand the administration has been attempting to clamp down on lending to the property market, while on the other the banking sector has been making abundant use of trusts to increase lending, reflects just the type of contradiction that is inherent in a one party system where politicians are personally enriched by holding sway over the actions of state owned organisations.


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January 14 2014

Commentary by David Fuller

The Weekly View: Dovish on the Fed, Bullish on Japan

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their excellent timing letter, posted by RiverFront. 

Moving to Japan, as we wrote extensively last year, Japan’s Prime Minister Shinzo Abe’s economic policies, in addition to the world’s most aggressive central bank easing by the Bank of Japan, have kick-started growth after decades of stagnation and deflation.  This year’s challenge is to incorporate ‘third arrow’ structural reforms to sustain growth with monetary and fiscal initiatives.  We are focussed on: (1) wage hikes that should more than offset consumer tax hikes, driven by 2013 earnings growth of 40% following significant yen weakness; (2) approval of the Trans-Pacific Partnership (Japan is a major partner) – a bipartisan bill to support the President Obama’s ‘trade promotion authority’ is wending its way through congress, and (3) nuclear restarts following regulatory approval that will help reduce Japan’s fuel import bill, lower Energy prices, and rebalance trade.  

David Fuller's view -

I commend this issue of The Weekly View to subscribers.

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January 13 2014

Commentary by David Fuller

Email of the day 1

Which companies will benefit most from technological innovation?

“I listen with greatest interest your comments, very instructive!  Question: could you list those companies which - in your opinion - will benefit most from the technological innovation and the competitive Energy prices in the USA. Looking forward to hearing from you.”

David Fuller's view -

Thanks for the feedback.

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January 13 2014

Commentary by Eoin Treacy

Indonesia Eases Mineral Ore Ban as Freeport Keeps Copper Exports

This article by Yoga Rusmana and Agus Suhana for Bloomberg highlights some important developments in the industrial metals sector. Here is a section:

Indonesia's President Susilo Bambang Yudhoyono signed a regulation for the ore ban, Energy and Mineral Resources Minister Jero Wacik told reporters, after an 11th-hour meeting of government ministers in Cikeas, West Java, yesterday. The rule, which goes into effect today, permits exports of minerals that are processed or refined in the country.

The decision will ease concerns about disruptions to copper shipments and is a compromise that reduces the impact of the ban on the country's mining industry. Indonesia accounts for 3 percent of the global copper supply, 18 percent to 20 percent of nickel and 9 percent to 10 percent of aluminum from bauxite, according to Goldman Sachs Group Inc. estimates.

"The essence of the government regulation is to uphold the 2009 Mining Law that means starting midnight on Jan. 12, exports of mineral ore will be banned," said Hatta Rajasa, the Coordinating Minister for the Economy. "That means all must be processed or refined."


Eoin Treacy's view -

As a major producer of industrial metals Indonesia has a vested interest in attempting to reap the greatest possible benefit from its production. Insisting that the ore is processed domestically before export is one such attempt. Fostering additional development of the domestic manufacturing sector would be a logical next step in that policy. This initiative is likely to be bullish for nickel and tin and may represent a medium-term bullish catalyst to reignite investor interest. 


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January 07 2014

Commentary by David Fuller

Frigid Air Threatens Coldest U.S. Weather in Two Decades

Here is the opening from last night’s report from Bloomberg:

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite Energy demand and damage Great Plains winter wheat.

Wind chills plunged past 60 degrees below zero Fahrenheit (minus 51 Celsius) in parts of the upper Midwest. Chicago’s high today won’t reach zero and may just hit that tomorrow, according to the National Weather Service. New York City, which had a pre-dawn reading of 54, will drop to 6 by tomorrow, while the temperature at Dallas Love Field was 16 at 7 a.m. local time.

Winter storms and frigid air add volatility to commodities trading and spot power markets. Natural gas futures in New York have surged more than 20 percent since Nov. 1 as the coldest start to the U.S. heating season in 13 years boosted fuel demand. Last week, as snow and cold gripped the nation, spot power for New York City jumped more than 11-fold in one hour, while wheat climbed the most since mid-October. This week, cities from Minneapolis to Pittsburgh may have record-low highs.

David Fuller's view -

Climatic extremes are becoming more frequent occurrences.  Australia is currently experiencing record heat, while during the same week the US is facing what will be the coldest winter in at least twenty years.  The Philippines is struggling to recover from record floods. Inevitably, these events are at least short-term blows to GDP growth in the countries most affected.      

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January 07 2014

Commentary by Eoin Treacy

Juanito and his bright manana

Thanks to a subscriber for this interesting assessment of Mexico’s recent Energy reforms from Deutsche Bank. Here is a section:

Engineering services, equipment and pipes suppliers, and offshore/onshore drillers should be among the first to reap the benefits of the sector’s opening. Their dependence on congress enforcing operating rules is limited; thus, they are already starting to provide services to companies exposed to the sector. Deep-water crude oil exploration and extraction and complex downstream projects should be target businesses for global integrated oil companies. Returns for these should be evident in the long term.

Globally listed vehicles with potential long-term positive spillover It is still early to assess the impact on listed companies but we have made a first attempt to identify our preferred names to play Mexico’s Energy Reform.


Look out for better entry points to play this secular story Hefty expectations behind Mexico’s current rich valuation should soon undergo a reality check. In the short-term, consensus’ potentially lower estimates on the elimination of the fiscal consolidation regime could push the IPC to a 2014 P/E above 20x, 50% higher than 10-year average multiples and 100% over the MSCI EM index. Such large premium is difficult to prevail as the full impact of the Energy Reform is likely to materialize post 2015.

Eoin Treacy's view -

The full report is posted in the Subscriber's Area.

Whatever the motivations for finally choosing to reform the country’s Energy sector, the long-term benefits for the economy are likely to be considerable provided the trajectory of improvements in governance remains positive. Here is a link to two earlier posts focusing on this development. 

The Mexbol Index, where the foreign affiliates of global Autonomies have a  significant weighting, has an historic P/E of 19.55 and yields 1.81%. It has been ranging with a mild upward bias in the region of the 200-day MA since June and a sustained move below 39,000 would be required to question medium-term scope for additional upside. The iShares Mexico ETF (EWW) has a similar pattern.   

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January 06 2014

Commentary by Eoin Treacy

U.S. Cold Blast Threatens Crops as Cattle Futures Rise to Record

This article by Luzi Ann Javier, Jeff Wilson and Elizabeth Campbell for Bloomberg may be of interest to subscribers. Here is a section:

As much as 15 percent of winter-wheat plants in the Great Plains face damage, Kyle Tapley, a senior agricultural meteorologist at MDA Weather Services in Gaithersburg, Maryland, said in a telephone interview. The potential for frost will increase in Florida tonight and tomorrow as temperatures drop to the upper 20s Fahrenheit, damaging citrus groves, he said.

Livestock slaughter will slow because it's harder to transport animals in the cold and snow, and cattle will have trouble gaining weight, according to commodity broker Allendale Inc.

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records and ignite Energy demand. Hard-freeze warnings and watches, which are alerts for farmers, stretch from Texas to central Florida, and 90 percent of the contiguous U.S. will be at or below the freezing mark today, according to the U.S. Weather Prediction Center in College Park, Maryland. Wheat futures headed for the biggest two-session gain in more than a month.


Eoin Treacy's view -

So far, the cold weather has had the greatest effect on Live Cattle prices which have moved to a new high, having ranged below $135 for nearly two years. It will probably be a while before we have greater visibility on how much damage has been done to orange and wheat crops.  


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January 03 2014

Commentary by David Fuller

December 30 2013

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

"Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

"Best regards for 2014"

Here is a section from the article: 

"Beijing's long-term goal: commercialize the technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

"A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

"China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

"The push into thorium is part of a broader national Energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear Energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

"Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But Energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

"At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

"The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."




Eoin Treacy's view -

The USA is an Energy superpower. China is not. This simple fact helps to explain the emphasis China has put on securing Energy assets overseas, purchasing the technology required to begin exploiting its unconventional oil and gas resources and developing a multi-strand nuclear policy. China aspires to provide a first world standard of living for its citizens and this will require Energy production to expand by multiples over the next few decades. It has no choice but to explore every possible avenue if it is to achieve that goal not least if air quality is to improve. 

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December 23 2013

Commentary by David Fuller

EU leaves shale gas out of stricter law on environmental studies

Here is the opening from this report by Reuters:

BRUSSELS, Dec 20 (Reuters) – EU governments on Friday endorsed an outline deal on new rules to assess the impact on the environment of projects such as oil and gas exploration, after removing references to shale gas that had blocked agreement.

 Some European nations are eager to develop shale gas as they view the United States’ shale gas revolution and cheap Energy costs compared with Europe as a huge competitive advantage.

 But the geology in Europe is very different and public opposition is strong on environmental grounds. 

 Many of those keenest on exploiting shale gas, such as Britain, say extra EU regulations on the Energy form are unnecessary and would get in the way of its development.

 British Prime Minister David Cameron wrote to Europe Commission President Jose Manuel Barroso this month laying out his arguments against new rules for shale gas.

 On Friday, EU ambassadors approved a revised draft law, updating legislation first agreed more than two decades ago and for the first time including an assessment of a new project’s impact on climate change, EU diplomats said.

 In a statement, Valentinas Mazuronis, environment minister of Lithuania, which holds the EU presidency until the end of the year, said the reforms would streamline the process and set minimum requirements across the European Union.

 The proposals, endorsed by ambassadors on Friday, still need to be signed by the European Parliament and by ministers to become law.

 The parliament had called for mandatory shale gas impact assessments, but EU diplomats said negotiations between representatives of the Parliament, the Commission, the EU executive, and member states had been blocked until that requirement was dropped.

 So far, shale gas is already covered by 17 different pieces of EU legislation, but there is no specific law.  

David Fuller's view -

In other words, the EU having been forced to back off a complete ban on shale gas and oil developments has nevertheless introduced even more legislation sufficiently soaked in treacle to deter the development of individual countries’ Energy resources.  Why?

Call me cynical but there are two main reasons, I suggest.  1) A combination of militant greens and politicians beholden to renewable Energy suppliers do not want to see any new production of fossil fuels in Europe, even though natural gas from shale properties would lower the region’s CO2 emissions.  2) Competitively priced shale gas and oil in Europe would undercut the EU’s extremely expensive green Energy technologies.

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December 23 2013

Commentary by Eoin Treacy

Shenhua Buys $1.5 Billion of Assets From Parent in Expansion

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

Shenhua Energy, which generated 69 percent of its sales from coal and 29 percent from power production in 2012, according to data compiled by Bloomberg, is buying related companies as it seeks to broaden its earnings base.

The company said yesterday it plans to invest $90 million in a venture that will explore for shale gas in Pennsylvania. Last year, the company agreed to buy 3.45 billion yuan of assets from its parent, including stakes in three companies and rail cars.


Eoin Treacy's view -

Closer environmental scrutiny of coal fired power stations and competition from natural gas in the USA, and reduced demand for steel, has acted as a significant headwind for the coal sector globally. The result has been that it was among the worst performers this year. Some of the larger companies have attempted to diversify by either investing in value added products such as chemicals and/or producing coal seam gas. With natural gas prices at their highest level in a number of years the competitive disadvantage coal has been at is now being eroded. 


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December 19 2013

Commentary by Eoin Treacy

Natural Gas Climbs to Most Since July 2011 on Record Supply Drop

This article by Naureen S. Malik for Bloomberg may be of interest to subscribers. Here is a section:  

The size of the storage withdrawal also indicates that as onshore U.S. production grows, well shut-ins during cold weather are playing a bigger role in disrupting output than hurricanes have in recent years, said Schork and Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.
"Going into the winter, the market appeared convinced that the industry was amply supplied,¡± Viswanath said. ¡°Now, however, in the aftermath of the very cold weather and the resulting high demand and freeze-offs, these assumptions are possibly being tested"
Gas production has fallen 25 billion cubic feet since the first week of December, mainly in the Rockies and the Midcontinent region, said Luke Larsen, an analyst at LCI Energy Insight, an Energy analysis and consulting company in El Paso, Texas. Daily output in the lower 48 states slid 2.7 percent to average 72.49 billion in the week ended Dec. 12.


Eoin Treacy's view -

This unexpectedly large withdrawal and its effect on inventories suggests that the oversupply situation which has depressed natural gas prices has come back to at least equilibrium. With prices above $4 a great deal more unconventional supply becomes economic, but suppliers are likely to want to see prices stabilise near this level before taking a risk on increasing output.
Natural gas has rallied impressively over the last month to test its high for the year near $4.40. A sustained move below $4.20 would be required to confirm resistance in this area and to delay potential for additional upside. 

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December 17 2013

Commentary by David Fuller

Australia to be an energy superpower by mid 2017

Here is the opening from this informative article by Ambrose Evans-Pritchard of The Telegraph (UK):

Australia is to become a global gas superpower by the middle of the decade and eliminate its current account deficit for the first time in almost 40 years, according to Morgan Stanley.

“Liquefied natural gas (LNG) exports from Australia could be the next big thing,” said the bank in a new report.

It predicted a “huge ramp-up” in LNG output that could transform the country’s economy, claiming that Australia could overtake Qatar by to become the world’s biggest exporter of LNG as soon as 2017 rather that 2030 as widely assumed.

By then Australia would be a major force in global Energy production, with LNG and coal exports together matching the country’s vast iron ore shipments.

Two-thirds of the world’s entire increase in traded LNG capacity is currently from Australia. While the US has a glut of natural gas from shale sources, it will be five to 10 years before it has the export terminals and infrastructure to sell large amounts on the global market.

This gives Australia a window of opportunity. It can benefit from the shortage of LNG supplies in Asia, especially in Japan where closure of nuclear reactors after the Fukushima disaster has left the country heavily dependent on gas imports. Gas is selling in Japan at almost $19 per British thermal units (BTU), compared to just $4.3 in the US.

David Fuller's view -

Well done Australia, for seizing the initiative in terms of tapping gas reserves and converting this key resource into LNG for Export.  I hope this article above is accurate in the forecast for 2017 and welcome feedback from Australian subscribers.

I have been concerned by the slow development of natural gas resources in Europe and also Asia, not least in terms of shale properties.  However, Australia’s progress and future exports are right in line with FT Money’s forecast of lower Energy prices in real (inflation adjusted) terms before the end of this decade.  

All this, Australia, and let me also add my hearty congratulations on a commanding Ashes victory.  It pained me, initially, but Australia’s inspiring, one sided victory was thoroughly deserved and good for the game of cricket.  I now hope to see some contests in the remaining two Ashes series matches.        

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December 16 2013

Commentary by David Fuller

Energy and Jobs. The transformation of Americas energy market is starting to have a direct impact on vital British [and European] industries

Here is the opening from this important editorial from The Times, which is relevant not only to Britain but also most countries which have chemicals industries:

“Welcome to Boomtown USA,” says the sign at the entrance to Williston, North Dakota. Its unemployment rate is under 2 per cent. Its gas flares are visible from space, and its pride at helping to reverse America’s long slide towards Energy dependency is palpable.

There are no such signs in Britain because there is still no large-scale British fracking industry. Instead the economy remains yoked to high Energy costs and low growth that compare well only with its sluggish European neighbours.

Britain’s Energy-intensive industries, chief among them chemicals manufacturers, are struggling with gas prices three times higher than in the United States. Electricity costs twice as much as in America and the chemicals sector across Europe is in a “fight to the death”, in the words of one analyst, as investment and jobs go elsewhere. Prompt steps must be taken to begin to bring them back. If the price is that the coalition’s green credentials are further undermined before the next election, it is one that must be paid.

For now, Europe’s largest maker of PVC is the giant chemical works owned by Ineos in Runcorn. It produces 38 varieties of polyvinyl chloride, used in hundreds of products from clingfilm and swimming pool liners to pharmaceuticals and drainpipes. It uses as much electricity, much of it from gas-fired power stations, as Liverpool. Historically it has exported much of its output to North America, but its future is now much less certain.

The Government’s Committee on Climate Change warned yesterday that low American shale gas costs as a result of fracking “could present a direct competitiveness risk to UK gas-intensive firms trading with the US”. The committee said that “in the longer term there is a risk that investment and jobs could relocate to the US”.

Viewed globally, this relocation is already under way. Taiwanese and Saudi chemicals firms are among those planning investments worth more than $90 billion in new US plants to take advantage of low Energy costs. From being a net importer two years ago, America expects to be exporting chemicals worth $30 billion a year by 2018. At the same time it is preparing to boost its gas liquefaction capacity by a third in order to sell its shale gas surpluses abroad.

The impact on British industry will be profound, and the policy imperatives are clear. The Government should, first, avoid the trap of committing itself to high prices for future Energy supplies when there is a clear possibility that wholesale prices will fall rather than rise in the medium to long term. That it has already guaranteed extravagant prices for power from new nuclear plants to woo foreign investors only makes it more important not to follow the same path for renewables. The result would be higher domestic Energy bills and the risk of steep job losses for the sake of self-imposed carbon targets not observed even elsewhere in Europe.

David Fuller's view -

Wake up politicians, and smell the coffee.  You are weakening your economies and increasing unemployment by driving away Energy dependent industries. 

This is not America’s fault.  In fact, the USA’s private sector has shown the way, by using technology, commonsense and commercial initiative to lower its dependency on often hostile Energy cartels.  Thanks to fracking technology, which the USA’s private sector invented, it has lowered its Energy costs and increased the efficiency of its economy.  In the ultimate riposte to militant green lobbyists, who would weaken our economies while darkening our homes and streets, the USA has also lowered its CO2 emissions by using fracking to produce much more natural gas.


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December 16 2013

Commentary by David Fuller

The Weekly View. Updating 10 Conditions for Sustainable Growth

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their informative letter published by RiverFront.  Here is the opening

For economic growth to be self-sustaining, without extraordinary fiscal and monetary accommodation, ‘Main Street’ needs to feel confident about its employment and financial prospects, in our view.  Wall Street has clearly benefited from government and Federal Reserve policies – the stock market and earnings have risen to record levels – but the average household has struggled with depleted savings and stagnant incomes.  Moreover, government support has already begun to ‘taper – temporary payroll tax reductions have ended, unemployment insurance has been scaled back, food security programs have been cut, and sequestration remains in effect (although further spending cuts may soon be lifted in budget negotiations).  Given this backdrop, we think recent employment and manufacturing data are encouraging.  In The Weekly View, 6/22/09, we set forth ten conditions that we thought were necessary for a sustainable economic recovery.  When we last revisited this list on September 16, most of the conditions were met but still signaled below-average growth.  Since then, despite a government shutdown, the most recent data show that nearly all of our requirements have been fulfilled and continue to improve.  Thus, we expect accelerating year-over-year economic growth in 2014.   

David Fuller's view -

Please note - the RiverFront report is posted in the Subscrber's Area.

The RiverFront team did not specify how much accelerating growth they are expecting for the US economy. My own view is that modest GDP growth will continue given the Fed’s ongoing monetary stimulus, plus the USA’s inherent advantages of competitive Energy prices and an expanding lead in technological innovation.  

It is not quite five years since the USA’s credit crisis recession bottomed, so previously deleveraging consumers remain somewhat cautious.  Moreover, many families have seen little or no increases in their wages.  Chastened and more regulated banks are similarly cautious, particularly regarding business loans to small companies.  

There are some informative graphics in this issue of The Weekly View which may interest subscribers.  

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December 12 2013

Commentary by David Fuller

UK fracking chief pledges billions to villages

Here is the opening from this Sunday Times (UK) article which quotes the sensible, plain-talking Aussie who runs the private company Cuadrilla Resources (subscription registration required for the full article but a PDF is in the Subscriber’s Area.) 

THE founder of the controversial shale-gas explorer Cuadrilla Resources wants to hand towns and villages billions of pounds from fracking what he calls “the people’s gas”.

In his first interview in Britain, Allan Campbell, the Australian behind Cuadrilla, claimed his company has discovered “another North Sea”, but bemoaned the lack of political will to develop it.

“I’ve got a great admiration and fondness for this country from whence my ancestors came, but the regulatory and planning system here is just bullshit,” he said.

“There is no leadership, there is no oomph.”

The company claims to have discovered 200 trillion cubic feet of gas thousands of feet underground in Lancashire — sufficient to meet typical British demand for more than 50 years — but has been hamstrung by mounting opposition to fracking.

David Fuller's view -

For all the warnings and scare stories, how many fracking disasters from water table pollution to earthquakes and widespread desecration of the land are we hearing about in the USA today?  Very few and the benefits of fracking considerably outweigh the risks. 

The UK has extensive resources of shale gas and oil, extending from Cornwall to Scotland.  The development of this valuable resource would transform the UK economy, and obviously not just in the south. 

There is a political problem for the Conservative led government because it dare not offend anyone during the countdown to the next election which has to occur by 7 May 2015.  On current evidence the delays in fracking mean that it is unlikely to be lowering the UK’s Energy costs by that date.  What a pity. 

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December 11 2013

Commentary by David Fuller

Fracking Boom Pushes U.S. Oil Output to 25-Year High

Here is the opening of this informative article from Bloomberg:

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to Energy independence.

The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.

“You can’t swing a cat without hitting a barrel of oil in North America,” saidStephen Schork, president of the Schork Group Inc., an Energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”

U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.


David Fuller's view -

Remember growing up with all those stories about how we were going to run out of oil, to the point of being impoverished and sitting in the dark?  They persisted right into the 21st Century.  People are still inventing reasons to avoid tapping their natural resources, and paying much higher prices for their Energy.  Who benefits from that?

 Technology is everything.  It improves our livelihoods, as most of us know.  We have only begun to see how it can reduce pollution, because that challenge was not sufficiently prioritised previously.     

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December 10 2013

Commentary by Eoin Treacy

Oil Market Outlook 2014

Thanks to a subscriber for this educative report from DNB which is sure to be of interest to subscribers. Here is a section:

Recently Lynn helms, the head of North Dakota's Department of Mineral Resources stated that 86% of the state¡¯s output has break even prices of 45 $/b or lower. This is much lower numbers that we have seen in earlier calculations. The break even price includes 10 % cost of capital and is after tax and royalties according to the Department. The break even prices for the top 4 counties in the Bakken field was said to be 40 $/b for Williams, 37 $/b for Mountrail, 26 $/b for McKenzie and 31 $/b for Dunn. These are low numbers, but note that they would be well-head break evens which means you will have to add maybe 5-15 $/b in transportation costs to reach a refinery. Still if the break even costs to reach the sea is 45 $/b plus 15 $/b, this is lower than the estimates we have operated with so far. We will probably have a test of the North Dakota Break even prices when we get the reported November numbers from the oil industry in North Dakota because in November the price for Bakken crude oil into the Clearbrook pipeline system was about 80 $/b. If this price was not low enough to dent any activity in the Bakken it may indicate that the break even costs are on their way down rather than up in North Dakota. According to Wood Mackenzie the break even price for Bakken is at 62 $/b. Also this is meaningfully lower than the 77 $/b we have been leaning on as the average Bakken break even price calculated by PIRA Energy. PIRA is however telling us that they are about to revise their break even calculations for the Bakken lower these days.

There are many numbers floating around and what we should probably focus on is the development reported by the key players in the shale industry. It is probably not very relevant to put any weight on what small insignificant producers may report of IP-rates, break even costs, drilling time, etc, etc. In the US shale oil industry (note this is not shale gas) there are 25 players that are behind most of the volume produced. We have made a list of these players in the Appendix. The largest shale oil player is by far EOG, but other players are on the rise. Note that this list of 25 players only includes 3 International Oil Companies (NOC¡¯s). This industry is in other words not at all driven by the large international integrated oil companies. Note that Royal Dutch Shell is not at the list at all. The largest of the oil supermajors is ConocoPhilips. Our point is that if you wish to follow the broad development of costs and efficiency in this industry you should focus on the 25 names mentioned in the Appendix. Don't waste effort in looking at the development for the very small players (unless you are evaluating investing directly in them of course.

Eoin Treacy's view -

At we have defined peak oil in terms of the rising cost of production and this is borne out in the fact that much of the new supply now reaching market is at a cost substantially above that of providers such as Saudi Arabia. As a result we can conclude that while the medium-term outlook for oil prices is for lower to lateral ranging, prices are unlikely to fall below the marginal cost of new unconventional production.

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December 09 2013

Commentary by Eoin Treacy

It is safe go to back in the water

Thanks to a subscriber for this educative report by Christeen So for CCB International which may be of interest to subscribers. Here is a section:

Policy tailwinds. We expect China waste and water names to continue to outperform backed by favorable government policies towards environmental protection. We see China’s waste-to-Energy (WTE) market continuing to expand in line with the government objective to lift the WTE-to-total treatment ratio from 20% in 2010 to 35% in 2015F. China’s wastewater treatment (WWT) market is likely to experience a gradual slowdown in new capacity additions as the WWT ratio continues to rise over the medium term; however, tariff hikes should mitigate the effect on earnings.

“Market has yet to factor in potential growth from new markets such as hazardous waste treatment (HWT) and water renovation projects. We believe HWT will become a new important income stream for China’s waste operators given increasing demand for third-party waste treatment and the higher returns it brings (levered IRR: 15-20%) compared with WTE (levered IRR: 10-15%). As China is still behind in its water renovation plans, we expect more investment in this area in the medium term; good news for WWT operators.

“Volume growth from new project wins, collection points growth, and M&A opportunities. We expect waste/waste water volume growth from project wins in both existing and new geographical areas, a rising number of waste/waste water collection points, and large-scale M&A. Watch for established SOE players with strong political connections, experienced management teams, solid“

Catalysts and risks. Near-term catalysts include (1) more lucrative waste/water project wins, (2) faster-than-expected penetration into new business segments, (3) additional supportive policies, and (4) large-scale value-accretive M&A. Downside risks to our view include (1) slower-than-expected new capacity expansion, (2) on-grid tariff, waste tipping fee, and water tariff cuts, and (3) rising interest rates.

Eoin Treacy's view -

The changing priorities of the Chinese administration from an outright focus on growth to a more nuanced, human capital, centred approach has obvious benefits for the environmental sector. Water treatment has been a particular beneficiary since China has substantial issues with providing ample water for its growing needs and related shares have rallied impressively. 

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December 06 2013

Commentary by Eoin Treacy

Putin Frees Russian Gas Chilled Amid Permafrost

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

Global LNG capacity will reach 468 million tons in 2018, from 295 million this year, according to Energy Aspects. That includes the expansion of output from Russia and excludes projects in East Africa and Cyprus that will probably be delayed into the next decade, said Trevor Sikorski, the consultant’s head of natural gas, coal and carbon.

There will be “enough room for everyone” in the LNG market and those with more competitive costs will benefit, Denis Solovev, a Novatek spokesman based in Moscow, said today by e-mail, citing earlier remarks by Mikhelson.

Putin pushed for the gas export law to increase the clout of Russia in global LNG markets. The nation is the world’s biggest gas exporter. It accounts for about 5 percent of LNG supply and 30 percent of pipeline deliveries, according to data
from BP Plc.

Eoin Treacy's view -

The creation of an increasingly large global LNG market necessitates not only that supply increases but that export terminals are built and that this valuable commodity is transported across long distances.

While the USA’s natural gas revolution has created bull markets in pipeline and rail shares, the global market represents an opportunity for tankers to transport LNG across oceans. While we can expect more ships to be built to service this market, at present there is a comparatively small number of pure plays.

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December 03 2013

Commentary by David Fuller

Shell to GE Lured by Gas-Fueled Ships on Record Supply

Here is the opening and a latter section of this informative article from Bloomberg:

Royal Dutch Shell Plc (RDSA), General Electric Co. (GE) and a company co-founded by T. Boone Pickens are planning investments in natural-gas-powered shipping as record U.S. output spurs the merchant fleet to use a new fuel. 

Clean Energy Fuels Corp., which Pickens helped start, will begin construction next year on the country¡¯s first fuel station for cargo ships running on liquefied natural gas in Jacksonville, Florida. Shell said in March it¡¯s planning LNG plants for the Great Lakes and Gulf Coast. GE, evaluating five locations, says the U.S. will need 50 to 100 small-scale plants for ships, trains, mining and trucks by 2025, each costing $50 million to $150 million.


Ship owners started switching to lower-sulfur diesel from bunker in northwest Europe and North America because of national and international anti-pollution rules phased in since 2005. LNG cuts sulfur emissions by 90 percent to 95 percent and also releases less carbon dioxide and nitrogen oxide, according to DNV GL. Alternatives include burning low-sulfur diesel or installing equipment called scrubbers that clean exhaust.

Rising demand could drive fuel costs higher. While U.S. natural gas futures plunged 74 percent to $3.960 per million British thermal units from the record reached in 2005, prices will average $4 in 2015 and $4.25 in the longer term, Morgan Stanley estimates.

LNG ship fuel would cost about $800 a ton in the U.S., $1,000 a ton in Europe and $1,200 in Asia, according to estimates by New York-based shipbroker Poten & Partners Inc. That compares with global prices of $1,300 for an equivalent amount of diesel and $950 for fuel oil with scrubbers.

David Fuller's view -

Natural gas is certainly well on its way to becoming the world¡¯s most important fuel, because of its availability, price, and considerably lower contribution to pollution.  

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December 03 2013

Commentary by Eoin Treacy

Canada Dollar Touches Lowest in Three Years on Rate Outlook

This article by Ari Altstedter and Andrea Wong for Bloomberg may be of interest to subscribers. Here is a section: 

The currency fell against the majority of its most-traded peers before a central-bank meeting tomorrow, when policy makers are projected to hold the benchmark interest rate at 1 percent.

A report last week showed third-quarter economic growth was the fastest in two years even as exports fell, frustrating the Bank of Canada's expectations for trade to drive growth as over-indebted consumers pare back.

"There's still a bias, there's a possibility somewhere down the road that the Bank of Canada possibly has another interest-rate cut," said David Bradley, director of foreign exchange trading at Scotia Capital Inc., a unit of Bank of Nova Scotia, by phone from Toronto. "With the announcement tomorrow, that's just kind of weighing on the Canadian dollar."


Eoin Treacy's view -

US domestic oil and gas supply growth continues to displace Canadian supply and makes developing additional markets for Canada¡¯s Energy resources a national priority. Since it will still be a few years before export facilities on the west coast come online, the country¡¯s export growth ambitions will need to rely on other sectors. Depending on how much exports are impacted, the possibility remains open that the Bank of Canada may decide to opt for additional easing in an effort to rebalance the economy towards domestic demand not least since the Canadian Dollar has been trading at historically high level for the last few years. 

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December 02 2013

Commentary by David Fuller

"Green energy could kill Britain's economy"

Here is the opening of another excellent article by Matt Ridley for The Times (subscription required to read the full article but a PDF version is in the Subscriber’s Area.)

The Chancellor is to knock £50 off the average Energy bill by replacing some green levies with general taxation and extending the timescale for rolling out others. On the face of it, the possibility that global Energy prices may start to fall over the next few years might seem like good political news for him, and some of the chicken entrails do seem to be pointing in that direction. There is, however, a political danger to George Osborne in such trends .

For Government strategists reeling from the twin blows of Ed Miliband’s economically illiterate but politically astute promise of an Energy bill freeze and the Energy companies’ price hikes, the prospect of lower wholesale Energy prices might seem heaven sent. But in many ways it only exacerbates their problems, for the Government is right now fixing the prices we will have to pay for nuclear, wind and biomass power for decades to come. And it is fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these deals look and the more they threaten our economic competitiveness. The Liberal Democrats have not allowed the Chancellor to cut subsidies for the renewable Energy industry, the most regressive redistribution of wealth since the Sheriff of Nottingham was in his pomp.

They argue that what has driven Energy bills up threefold in ten years is mainly an increase in the wholesale price of Energy, rather than any great lurch towards subsidising renewables. True, but most of the lurch is yet to come and as wind power capacity quadruples by 2020, it will add £400 to average bills — not to mention driving up the price of Energy to industry, which will pass it on to consumers.

“There is not a low-cost Energy future out there,” said Ed Miliband when Secretary of State for Energy and Climate Change in 2009, at the time an enthusiast for discouraging Energy use by price rises. It even became fashionable to argue, when Chris Huhne filled that post, that higher prices would cut bills (yes, you read that right) by encouraging people to use less power.

Anyhow, the forces that have driven Energy prices up in recent years appear to be fading. Consider some of the reasons that oil and gas prices rose in 2011, the year Energy companies pushed up prices even more than this year. Japan suffered a terrible tsunami, shut down its nuclear industry and began scouring the world for gas imports to keep its lights on. At about the same time Libya was plunged into civil war, cutting off a key supplier of gas. Add in simmering tension over Iran, Germany’s sudden decision to turn its back on nuclear power, the legacy of a couple of cold winters and the lingering depressive effect on oil and gas exploration of low Energy prices from much of the previous decade, and it is little surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have driven a surge of new exploration. Deep offshore technology is advancing rapidly and huge gas fields have been found in the Mediterranean and in the Indian and Atlantic oceans. In the United States, the shale revolution has glutted both gas and oil markets, displacing imports. Iran is coming in from the cold, Libya is back on stream and Australia is preparing to export huge volumes of gas. Should the rest of the world start producing shale gas — China, Argentina, Poland and others are on the brink, even Britain might one day deign to join them — that would further add to supply.

David Fuller's view -

This is an excellent summary of what FT Money has been pointing out over the last four years, as the Archive will confirm.

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December 02 2013

Commentary by David Fuller

Email of the day (2) - On the cause of site teething problems:

“Hi David and Team, Thank you for outlining the background to the teething problems that your new venture is experiencing at present. I appreciate your candour and honesty in describing the difficulties you are facing and I assure you that as a very satisfied subscriber for many years you have my full support. Just take care not to overwork or neglect your health (I was very surprised to get an immediate response to an email sent by me on Monday at 11a.m. Japan time which meant that you were still working at 2 a.m.!)”

David Fuller's view -

Thank you so much for this generous and most thoughtful email.  I love being part of this interactive service and have plenty of Energy for the new challenge with colleagues I both like and respect.  However, I was very grumpy this morning because I knew subscribers would be concerned and I did not have time for the daily workout in the home gym.

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December 02 2013

Commentary by Eoin Treacy

Musings from the Oil Patch - an educative report

Thanks to a subscriber for this always educative report by Allen Brooks for PPHB dated November 26th. Here is a section: 

Wall Street is changing what it wants from producers active in the shale revolution. Until commodity prices, especially natural gas, move higher, the profitability of developing shale resources will be challenged. For some producers, depending upon the quality of their shale assets and the cost of their operations, there is still likely financial pain ahead. Service companies are struggling to ascertain the level of activity for the industry over the next few years and the types of equipment and services that will be in demand. This will help them decide where to invest. Service companies are also considering where to place their capital bets - North American shale plays, offshore or select international land and shale plays. Additionally, the service companies need to better understand which of their product and service business lines will be of long-term value and which ones they should dispose of. These considerations suggest the service industry is on the cusp of a restructuring. The recent announcement by Weatherford International (WFT-NYSE) that it plans to shed four business lines is a manifestation of that trend. We have also had National Oilwell Varco (NOV-NYSE) decide to split off its oilfield distribution business into a new company. Other corporate moves have involved offshore drilling companies announcing plans to establish MLPs and/or separate companies to hold segments of their current rig fleets. Some of these restructuring moves are designed to help boost capital returns to investors, especially those seeking yield. On the other hand, restructuring of the industry may be due to too many companies chasing the same business and the fact that many of these companies are owned by private equity firms needing to cash in on their investments.

Eoin Treacy's view -

To say that the surge in US unconventional oil and gas supply has been disruptive is an understatement. A measure of just how much of a change this has caused can be seen in how complicated it has been to identify clear winners within the Energy complex. A number of large companies paid too much for drilling rights and have been forced to accept write downs, others are now attempting to claw back costs by squeezing service companies. Concurrently rail is competing with pipelines to attract investment capital. Some of the greatest beneficiaries have been consumers such as utilities, chemical and industrial companies rather than the producers of natural gas.

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November 29 2013

Commentary by David Fuller

Euro-Area Inflation Holds at Less Than Half ECB Ceiling

Here is the opening of this informative article from Bloomberg:

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank's ceiling, underscoring the weakness in parts of the euro region's economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union's statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate "is largely coming through because of base effects in Energy," said Guillaume Menuet, an economist at Citigroup Inc. in London. "Once these start to fall out of the calculation, it's quite likely by the spring of next year we'll have again more evidence of weakening price pressures."

Today's data mark the 10th straight month that the rate has been less than the ECB's 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a "prolonged" period of weak consumer-price growth and "very high" unemployment.

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month's surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

David Fuller's view -

It is no surprise that the Euro region's economic recovery remains weak. However, this does not detract from the ECB's considerable achievements since 'super' Mario Draghi was appointed president on 1st November 2011.

Unfortunately, there is little that he can do about Europe's high costs for Energy. Fracking would certainly reduce this problem but it is not happening, at least not yet. I expect money supply to remain very stimulative and Draghi may wish to engineer the Euro somewhat lower.

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November 29 2013

Commentary by Eoin Treacy

Bankers Get Hand With Collateral in Boost to Debt

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

Pena Nieto, who took office a year ago, has negotiated with opposition parties to pass laws to spur competition in telecommunications, make teachers more accountable for performance and raise taxes to reduce the country's dependence on oil revenue.

The changes, including those from the Energy bill Pena Nieto sent to Congress, may boost economic growth to more than 5 percent within two or three years, central bank Governor Agustin Carstens said in an August interview. The banking bill alone may lift growth by 0.5 percentage point within two or three years, he estimated in May.

The economy has expanded this year at the slowest pace since the 2009 recession, with growth of 1.3 percent in the third quarter from a year earlier.

The banking initiative “together with the package of reforms discussed in the past two months helps to increase the potential growth of Mexico,” said Ociel Hernandez, a strategist at Grupo Financiero BBVA Bancomer SA. He recommends buying fixed-rate peso bonds due in 2036.

Eoin Treacy's view -

Pena Nieto, who took office a year ago, has negotiated with opposition parties to pass laws to spur competition in telecommunications, make teachers more accountable for performance and raise taxes to reduce the country's dependence on oil revenue.

The changes, including those from the Energy bill Pena Nieto sent to Congress, may boost economic growth to more than 5 percent within two or three years, central bank Governor Agustin Carstens said in an August interview. The banking bill alone may lift growth by 0.5 percentage point within two or three years, he estimated in May.

The economy has expanded this year at the slowest pace since the 2009 recession, with growth of 1.3 percent in the third quarter from a year earlier.

The banking initiative “together with the package of reforms discussed in the past two months helps to increase the potential growth of Mexico,” said Ociel Hernandez, a strategist at Grupo Financiero BBVA Bancomer SA. He recommends buying fixed-rate peso bonds due in 2036.

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November 29 2013

Commentary by Eoin Treacy

Japan Price Gauge Rises Most Since 98 in Boost to Abe

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

Households face the prospect of sustained inflation for the first time in almost a generation, a dynamic that could hurt spending unless wages begin to rise. The focus is turning to salary negotiations early next year that may determine the success of Abe's bid to reflate the world's third-largest economy.

“The data reflects the clear effect of rising import prices, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo. ”The tone is strengthening for Japan to emerge from deflation and that is helping to set conditions for wage increases.”

Eoin Treacy's view -

One of the greatest challenges in breaking Japan's deflationary cycle has been in changing consumer habits which became accustomed to delaying purchases in order to secure lower prices. Aggressively targeting the value of the Yen has boosted prices for imported goods, not least commodities and especially Energy. The next ingredient will be wage growth and we are already seeing signs of movement on this front with Nomura committing to increasing what it pays employees.

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November 29 2013

Commentary by Eoin Treacy

Monthly Oil - Short Term Bearish

Thanks to a subscriber for this informative chartbook by Torbjorn Kjus for DNB which may be of interest to subscribers. The full 192-page report is posted in the Subscriber's Area but here is section:

So far in 2013 we have issued 8 short term oil market reports. 5 of them have been bearish and 3 have been bullish. Directionally we have been correct in 5 out of the 8 reports. This is about spot on our long-term average performance which is 35 correct out of 55 published reports (64% correct). Our target is to have a hit ratio above 51% on the direction because the oil market is a flip of the coin market and the average participant should hence be at 50%. We conclude bearish in this 9th short term report of 2013. It is a little bit too early for the new year rally in oil prices that we have often seen and we see a fairly high risk in the short term for players taking profit on the currently very high Brent-WTI spread which is this time mainly caused by an unsustainably large Brent-LLS spread instead of mainly consisting of a large LLS-WTI spread.

Eoin Treacy's view -

This has been an eventful month in the Energy markets with the prospect of easing tensions with Iran dominating headlines. However, the prospect of increased tensions in Iraq remains a tailwind for Brent oil prices. Meanwhile, the continued revolution in domestic US supply has changed the historical relationship between the world's major oil contracts.

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November 27 2013

Commentary by Eoin Treacy

Email of the day (1)

on "cheap" Energy:

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Eoin Treacy's view -

Thank you for this insightful email which brings us to the question of what exactly the term cheap Energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of technology and the marginal cost of production.

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November 25 2013

Commentary by David Fuller

Deepak Lalwani's India Report

My thanks to the author for his informative report published by LALCAP. It is posted in the Subscriber's Area but here is a brief sample:

The Indian economy grew at 5%, a decade low, for the fiscal year to 31 March 2013. Growth slowed even further to 4.4% in Q1 (April-June 2013) of the current fiscal year to 31 March 2014. The Q2 (July-September) GDP figure is expected on 29 November, and fears remain that growth back to 5% looks optimistic. Investors are increasingly concerned that India is stuck in a stagflation (stagnant growth + high inflation) environment. The wholesale price index (WPI) rose to an eight-month high of 7% year-on-year, driven by more expensive Energy and manufactured goods. At the heart of India's inflationary pressure is a sharp rise in food prices which are threatening re-election prospects for the ruling coalition Government, led by the Congress party. Food inflation in October rose 18.2%. In the last 60 months food inflation has averaged over 12% per month. Onion prices have risen from Rs 20 per kilo last December to Rs 100 per kilo last month in Delhi and Bombay. The price of salt has rocketed in East India from about Rs 18 per kilo to well over Rs 100 per kilo. With five state elections in progress, the humble onion's power in toppling past Governments is focussing minds.

David Fuller's view -

To state the obvious, governance has never been easy in India's, large and ethnically diverse country. Its coalition governments have been weak and consequently beholden to minority factions. Nevertheless, the Congress Party appointed an impressive Reserve Bank of India Governor, Raghuram Rajan, in September.

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November 22 2013

Commentary by Eoin Treacy

Novartis Sets $5 Billion Buyback as It Seeks Faster Growth

This article by Eva von Schaper for Bloomberg may be of interest to subscribers. Here is a section: 

The drugmaker also said a review of its pipeline will lead to more approvals and higher sales by 2017. Novartis's stable of cancer drugs and sales are set to grow annually for the next five years, despite the anticipated loss of exclusivity on its cancer drug Gleevec, the company said.

The Alcon unit is now set to grow at a mid- to high-single digit rate. The company said last month group sales would do better than previously expected. Europe's biggest drugmaker by sales has begun a review of units such as its animal-health operation that lack global scale.

Novartis announced this month it would sell its diagnostics unit to Grifols SA for $1.68 billion, part of a strategic review of its market segments. The company now has three units with global scale, Jimenez said: pharmaceuticals, the eye-care business Alcon and the generics arm Sandoz. Novartis has said it wants its businesses to be among the industry leaders or it will consider divesting them.

Eoin Treacy's view -

The healthcare sector represents important cross currents from the perspective of a globally oriented thematic investor. From first principles the Energy, technology and healthcare sectors represent areas of research from which new inventions or discoveries can literally create value by changing forever how we live or lives. 

Healthcare tends to do this through investing in technological development which creates new therapies as well as lowering the cost and increasing the availability of existing products. The net result is that the sector is both large and diverse, with a comparatively small number of companies dominating the global market. 

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November 21 2013

Commentary by David Fuller

Email of the day

On the Larry Summers speech and BMW

"David, I enjoyed your comment on the Larry Summers speech. The BMW plant is not a car plant as such, it manufacturers carbon fibre for car manufacture back in Germany. The reason the two (German) partners went there was because of cheap Energy - something that doesn't exist in the Europe. Google opened a huge server farm there three years ago for the same reason. With shale gas (a game changer you said very presciently a while ago) the US must become, with mass automation, the prime location for new manufacturing. The more automation the more competitive advantage!

"Socially the issue seems to me to be not capital formation but cash re-allocation. The ceramic manufacturer in your response must be more profitable than when it had 3000 workers. The trick is how to harvest and then distribute the cash. A big question!!"

David Fuller's view -

Thanks for your interesting email. I know that the BMW plant in rural Washington is a bold move into carbon fibre, as I posted Bloomberg's article on the subject as my lead item on 15th November. And I agree that Energy costs of one-fifth of what is available in Germany was the key draw. 

The USA's competitive Energy costs, mainly thanks to fracking but also hydro-power for the BMW plant, are a phenomenal advantage which is certain to attract more high-tech manufacturing. This is also mentioned regularly in the Friday 'Big Picture' Audios.

The social issue that you point out is an important topic. Personally, I would rather see successful corporations and wealthy individuals redistribute profits within communities, rather than the government through higher taxes. Bill Gates and Warren Buffett have set excellent examples in recent years and others are following their lead. I hope to see more of this in the UK and other countries.

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November 19 2013

Commentary by David Fuller

The Weekly View: When Yellen Talks, People Listen

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting letter, published by RiverFront. It is posted in the Subscriber's Area but here is the opening

Clarifying her view of quantitative easing (QE) asset purchases during her Senate confirmation hearing last Thursday, Federal Reserve Chairman nominee Janet Yellen said that, at this point, "the benefits exceed the costs." Although some within the Fed want to start reducing purchases and replace them with extended forward guidance on zero interest rates, Yellen seems to currently favor both forward guidance and keeping the purchase program in place for now. That said, she framed her dovish stance as promoting more robust economic growth to "regain the ground lost in the crisis and the recession" with the intent to end extraordinary monetary policies as soon as possible. Regarding the duration of QE, Yellen acknowledged that the Fed cannot expand its balance sheet forever: "The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks. So I do not see the program as continuing indefinitely… at each meeting we're attempting to assess whether or not the outlook is meeting the criterion that we've set out to begin to reduce the pace of purchases.

David Fuller's view -

Despite the USA's considerable economic advantages of very competitive Energy prices and a growing lead in technology, Janet Yellen is unlikely to find the US economy growing at the pace she would like for commencing QE tapering.

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November 18 2013

Commentary by David Fuller

Email of the day (3)

On manufacturing in Wisconsin

"Greetings from a loyal subscriber living in, as you put it in Friday's audio, "of all places, Wisconsin!" Obviously, you initially confused the states of Washington and Wisconsin as it relates to the new BMW facility. While Washington will benefit from the BMW plant, Wisconsin is no stranger to manufacturing being the headquarters location of companies such as Harley Davidson, Johnson Controls, Joy Global, Rockwell Automation, Kohler, SC Johnson (aka Johnson Wax), Snap-On Corporation and Oshkosh Truck Corporation to name a few. Combined with a strong German heritage, it is too bad BMW didn't find its way to "fly-over country". Keep up the great work and I look forward to remaining a loyal subscriber for many years to come!"

David Fuller's view -

I am not sure how Wisconsin found its way into my Audio, but thanks for pointing it out and enlightening me regarding the manufacturing importance of your state. The "of all places" quote above was not meant to sound disparaging, but I was intrigued that BMW was building this expensive plant in a small town of 20,000 people in the state of Washington. Really cheap Energy was clearly a key benefit, given BMW's ovens and furnaces used in the manufacturing of carbon fibre. I am sure competitive Energy prices will attract more manufacturing companies to the USA, including the state of Wisconsin. This could be a secular trend. Thanks also for you encouragement and enthusiasm for our service.

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November 18 2013

Commentary by David Fuller

China's Bold, Contradictory Reform

Here is the opening to this interesting editorial from Bloomberg

Call it policy presentation with Chinese characteristics. After the meeting of its leadership last week, China's Communist Party issued a muddled communique that aroused no great excitement. Then, on the weekend, well ahead of the usual schedule for such announcements, the party released a longer follow-up statement worth getting excited about.

It's radical stuff -- in principle, if not (yet) in policy. Maybe China's new president, Xi Jinping, aspires to be another Deng Xiaoping after all.

The "Decision on Major Issues Concerning Comprehensively Deepening Reforms" was nothing if not wide-ranging. Tucked inside it were the biggest headlines, so far as many foreign observers are concerned: China's notorious one-child policy is to be softened, and the system of arbitrary confinement to "re-education" in labor camps, a tool of political repression, is to be ended.

Most of the statement, though, is devoted to a comprehensive list of economic and financial reforms. This emphasis is deliberate: "The reform of the economic system is the focus of all the efforts to deepen the all-round reform." Many of the proposals echo the long-standing recommendations of pro-market advocates at home and abroad.

The statement calls for China's financial sector to be liberalized. There will be new private banks, as well as further moves toward exchange-rate flexibility, market-determined interest rates and capital-account convertibility. The blueprint calls for price reforms in water, Energy, transportation and telecommunications. Farmers will be given new property rights, including the right of succession and the ability to sell shares in their land or use it as collateral. The system of household registration, which controls workers' movement from countryside to city, will be eased (though curbs on migration to the biggest cities will remain).

David Fuller's view -

Bloomberg's second paragraph above summarises the reaction of numerous China watchers. Many of us hoped for another Deng Xiaoping when Xi Jinping was first appointed. He had more power than his immediate predecessors but the new President obviously did not have Deng's political stature. Consequently he had to negotiate his way and has successfully done so, judging from this abridged 60-point document.

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November 15 2013

Commentary by David Fuller

BMW Makes Lone Shift to Carbon Fibre to Gain Auto Edge

Here is the opening to this fascinating article by Chris Reiter for Bloomberg

Bayerische Motoren Werke AG (BMW)'s bid to save its cars from potential extinction starts with hundreds of thousands of fine white strands snaking upwards in a production hall in ruralWashington.

Looped through an almost mile-long course, what looks like the world's thinnest rice noodles will be stretched, toasted and eventually scorched black to create carbon fiber -- a material thinner than human hair and yet tougher than steel.

BMW will use the sleek, black filaments for the passenger frame of the i3 electric car, which goes on sale at dealers inGermany tomorrow and around the world in the coming months. It's the first effort to mass produce a car made largely from carbon fiber and represents the biggest shift in automobile production since at least the 1980s when the first all-aluminum car frames were made.

The strategy started taking shape six years ago, as Norbert Reithofer, then the newly appointed chief executive officer, examined trends affecting the industry and concluded that increased environmental awareness would likely prompt tougher emissions regulations that could make the future of autobahn cruisers like the 5-Series sedan unsustainable.

"Looking forward to 2020, we saw threats to our business model," Chief Financial Officer Friedrich Eichiner, who was head of strategic planning at the time, said in an interview in his sparsely furnished office in BMW's landmark four-cylinder headquarters building in Munich. "We had to find a way to bring models like the 6-Series, 7-Series and X5 into the future."

For BMW to continue to sell cars that live up to the company's "ultimate driving machine" claim, the manufacturer needed to offset those emissions with a viable electric vehicle for growing cities, where more and more potential customers would live. That was the start of the i3.

At the time, electric cars had the reputation of being sluggish because of the heavy battery needed to hold a charge capable of moving the car at least 100 kilometers (62 miles) -- the range considered necessary for daily use. That meant the car needed to be lighter to reduce the size and cost of the power pack and improve handling. The lightest and strongest material available is carbon fiber.

David Fuller's view -

There are a number of interesting points in this article which the introduction above only begins to touch on. For instance, why build a $100 million plant at Moses Lake Washington, a little town of approximately 20,000 people? Well, the local utility charges only 3 cents per kilowatt hour for hydro-power to run the plant's Energy-hungry ovens and furnaces. Bloomberg says this is less than one-fifth the cost of fuel in Germany. The town is also also appears to be reasonably close to a port.

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November 13 2013

Commentary by Eoin Treacy

Libya, Iran, Brent & the Other Side of the Equation

Thanks to a subscriber for this informative report focusing on Libya’s Energy sector. The full report is posted in the Subscriber's Area but here is a section

Turnaround season in US refining has caused a major oversupply of US crude, but international markets have been roiled by a surprise re-outage in Libya. In this note we focus on the Libya issue. We also address the countervailing improvement in US-Iranian relations and the upcoming decision on Chinese-Iranian oil imports sanctions exemption. We very briefly show Iraqi, other OPEC, and Saudi production. Notably, the 550kb/d fall in Iraqi production from 2012 highs to September 2013 lows was under-appreciated by the market, obscured as it was by Syria, Egypt, Libya, and Iran. Note: IEA non-OPEC supply forecasts of 1.8mb/d marginal growth for 2014 are for an all-time high.

Things can’t get worse in Libya
The 1mb/d+ outages that have characterized oil markets since the 2008 peak price have been due to Libya and Iran. To be clear, these are enormous outages that have clearly driven global (Brent) oil prices higher. For thirty years Libya, for all its international controversy, steadily supplied world oil markets with around 1.3mb/d of light sweet oil. Consensus was that the relatively small population of Libya, at around 6m, made it politically stable. Until it wasn’t. Now the country is in disarray, with factions independently taking control and interrupting oil exports. There is no single movement here, as we show in this note. However we do take the view that the situation in Libya cannot now get materially worse, with possibly less than 90kb/d of exports of light sweet crude, there is little left to lose, and plenty to gain. The country is working on a new constitution, and we think there is reason to believe that it is this process that is causing the upsurge in disruption by local interests.

A huge shift in Iran
’s newly-elected President Hassan Rouhani has ushered in a seismic shift in global geopolitics that has reverberated across the oil world, notably to the consternation of the Saudis and other Sunni Gulf oil states. With the all-important blessing of Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s Parliament, Rouhani quickly reached out to US President Obama directly, and subsequently has moved Iran into nuclear talks over enrichment that had all but died under the leadership of previous President Ahmadinejad. Although nuclear talks in Geneva have ended, there is agreement to meet again as soon as November 20. Rouhani openly hopes for a deal to sanctions that have been the primary cause for the precipitous drop in Iranian oil production and exports. Intelligence suggests that the Obama regime is pushing Congress to soften its stance on sanctions while negotiations are underway, with a notable upcoming decision on the potential for an exemption for China to import Iranian oil, that needs a decision by December 2.

Eoin Treacy's view -

The Brent Crude – West Texas Intermediate spread remains a useful illustration of just how much the global oil market has changed. For decades Brent traded at a discount to WTI, this situation began to change from the early 2000s when the relationship became much more volatile. On the chart we can see that the last three years are distinctly different. As with any spread it is worth considering influences on both constituents.

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November 12 2013

Commentary by Eoin Treacy

Email of the day (1)

on agriculture prices and genetic innovations
“I thought I would give you a heads up before Friday's USDA report. Because of the Government shut down last month, the USDA was unable to collect many of their test plots, and this has led to questions about the validity of the report. The average guess for the corn yield is 159, up from 155 in September, and the average for soybeans is just under 43, up from 41.2.

“From farm reports and the countless test plots that I have seen, I think the trade is underestimating both crops, especially the corn crop. The growing season certainly had its problems. The latest planted crops ever, followed by the driest ever July and August for Iowa, Illinois and Indiana. So, it is of no surprise that the average guess for corn is 5 bushels below the record set in 2009. However, my data shows that the final yield will be above the previous record of 165. For, while the headlines shout that Mother Nature is winning the battle of Global Warming with the scientists, in a dark alley the Crop Scientists are giving Mother Nature a real hiding.

“Since last November I had kept a print out on my desk of a test plot of irrigated corn in Nebraska that averaged 304 bushels, with the top variety yielding 390. That print out was recently consigned to the bin as this year I witnessed 301 in Illinois as an average on non-irrigated corn with hardly any rain at all for July and August. Perhaps even more amazing is an average of 244 for a whole region on the Eastern seaboard, or 274 in S Michigan, with a 9 year previous average of 157, and a previous record of 208, all non-irrigated. From 2010 to 2012 the Corn Belt was visited by multiple biblical plagues which kept us from fulfilling the promises of the geneticist, but I believe that the top end of the corn yield has increased some 30 bushels in the last 4 years. There is an old adage "big crops get bigger" that should soon be changed to "big crops get much bigger".

“The soybean data that I have seen supports a yield north of 44, more than a bushel above the average guess. Last year's final bean yield surprised massively on the upside, and after many years of iffy bean yields, it looks like the soybean geneticist are also getting their act together. A 43 yield keeps the carry out tight, 44 plus makes it quite comfortable.

“It may be asking too much of our fickle and abused planet to give us both a good growing season in S America this winter as well as the Midwest next summer, but if it does, it should take prices down to levels that discourage acres , and we are a long way from those prices. One day we may wake up and realise that the cure for high prices was high prices.

“If I am right it could soon be "lights out" for the grain markets. That perhaps is apt and fitting, as the deserted grain pits in the CBOT building more and more resemble wards of a hospice.

“As you know, these are my thoughts only, as no one else would want to be tarnished with my reputation.”
Eoin Treacy's view - Thank you for this informative email which arrived last week and for your humility in sharing your views. Genetics represent the promise of a second green revolution that could help alleviate the issues relating to competition between Energy, food and high pricing. Your assertion that new seeds are contributing to higher yields is a welcome development from the perspective of consumers but one must wonder just how much of this news is already in the price.

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November 12 2013

Commentary by David Fuller

Email of the day (1)

More on the Climate Change debate
"Re jellyfish!-for what it's worth Christopher Booker-Sun Tel 9 days ago - said that the combined Antarctic and Arctic ice has had a mega freeze-and is back to normal more or less. Elizabeth Browning does appear to talk cool sense (and is relevant to jelly fish! - decadal Pacific oscillator, if you remember). A change from opinionated hysterics; I bet 99% of people who think they can "save the planet" (I'll do the jokes) have done zilch scientific homework. It's a farce."
David Fuller's view - Thanks for your thoughts and for pointing our Christopher Booker's articles on this subject for The Telegraph. Here is the opening from his article on 21st September: The ice is not melting, yet the scaremongers blunder on:

The news that hundreds of scientists and officials from all over the world are this weekend converging on Stockholm to discuss the next 2,000-page report from the UN's Intergovernmental Panel on Climate Change (IPCC) again highlights what is the most terrifying political conundrum facing our country today. Emerging in instalments over the next seven months, this report will try to convince the world, without a shred of hard evidence, that the prospect of catastrophic man-made global warming is "extremely likely".

The air is already thick with familiar claims and counterclaims, President Obama quotes yet another laughably silly paper trying to make out that "97 per cent of scientists" support the IPCC "consensus". Sceptics point out yet again that the lack of global warming over the past 17 years makes a nonsense of all those computer-model projections on which the IPCC has been basing its case for 23 years. And we can only look on this endlessly sterile non-debate with a suffocating sense of déjà vu.

Noting Barack Obama's 97% claim above I have to say, in the social science field of trend extrapolation, if subscribers heard that 97% of investors were predicting continuation rather than reversal, most of us would be looking to take the opposite view.

Can we say the same about trend extrapolations in natural science? Not really, although there is so much uncertainty, fear and opportunism surrounding the climate change debate that too many interpretations and forecasts are biased on the basis of social science.

Here is the opening from another Telegraph article by Hayley Dixon, published on 8th September: Global warming? No, actually we're cooling, claim scientists:

There has been a 29 per cent increase in the amount of ocean covered with ice compared to this time last year, the equivalent of 533,000 square miles.

In a rebound from 2012's record low, an unbroken ice sheet more than half the size of Europe already stretches from the Canadian islands to Russia's northern shores, days before the annual re-freeze is even set to begin.

The Northwest Passage from the Atlantic to the Pacific had remained blocked by pack-ice all year, forcing some ships to change their routes.

One ship has now managed to pass through, completing its journey on September 27.

A leaked report to the UN Intergovernmental Panel on Climate Change (IPCC) seen by the Mail on Sunday, has led some scientists to claim that the world is heading for a period of cooling that will not end until the middle of this century.

If correct, it would contradict computer forecasts of imminent catastrophic warming. The news comes several years after predictions that the arctic would be ice-free by 2013.

I have long been concerned that the debate over climate change is largely split along stereotypical right versus left political views, and the latter group has certainly won the public relations battle, at least up to now. Those who are global warming sceptics or even agnostics, are often described as ignorant or worse, being corporate industrial polluters on the scale of satanic mill operators from the Victorian era. In contrast, those on the left who forecast potential disaster are praised for being aware, clean and green, and trying to save the planet. They have received Nobel Prizes for their efforts. However, if the significant previous reduction in Arctic ice proves to be temporary, and it may judging from the latest evidence, those who have driven up our Energy bills, weakened our economies and blotted our landscapes with wind farm monstrosities will not be quickly forgiven.

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November 11 2013

Commentary by Eoin Treacy

Oil-to-gas switch in transportation

Thanks to a subscriber for this fascinating report from Deutsche Bank highlighting the point that while US natural gas exports will not take place until 2015, the adoption of technology that promotes the use of the commodity is already occurring. The full report is posted in the Subscriber's Area but here is a section
Economic benefits of gas as an oil substitute stay intact
We believe the impact of the gas tariff hike in July 2013 on vehicle fuel switching to natural gas is limited as the lengthened payback period is still economically attractive for conversion. The planned diesel/petro upgrade as a move to reduce emission will enhance the cost competitiveness of natural gas as a fuel substitute and offset the negative impact from rising natural gas price. There is also downside potential for natural gas price in China in the long term on increasing supply from unconventional gas and US LNG exports.

Environmental benefits and improving infrastructure/supply
Compared with gasoline and diesel, CNG and LNG are much cleaner and can significantly reduce transportation-related emissions. Many local governments have laid out aggressive plans to roll out natural gas applications in public transportation, as an important part of raising gas usage in the total Energy consumption mix. Accelerating construction of the gas refuelling station and strong growth in LNG imports will support continued growth in oil-to-gas switch in transportation.

Natural gas application in vessel and other areas; export market potential
LNG conversion in vessels could be another big growth driver with national development guidelines and target just released. Moreover, great potential exists in LNG-fuelled construction, drilling and mining machinery markets. As China is a pioneer in LNG vehicle application, domestic equipment players are well positioned to exploit overseas markets, especially the US market where gas price is most competitive vs. oil.
Eoin Treacy's view - It has been our view at FT Money since at least 2010 that the development of unconventional oil and gas resources represents a game changer for the Energy sector and the wider global economy. This is now reasonably well understood by governments less encumbered by climate ideology. China’s policy makers have committed themselves to working out how they can best make this change in global Energy dynamic work to their advantage. The obvious answer is to do whatever they can to produce more gas and consume more of it in preference to coal and oil.

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November 11 2013

Commentary by David Fuller

Behind the Scenes of Tokyo's Political Soap Opera

Here is the opening from this interesting column by William Pesek, published by Bloomberg
Shinzo Abe faces plenty of roadblocks in his quest to revive Japan's sluggish economy. His mentor wasn't supposed to be one of them.

Former Prime Minister Junichiro Koizumi is easily the most popular Japanese politician of the last 20 years. Not since Yasuhiro Nakasone in the mid-1980s had a Japanese leader made such a splash domestically and globally. Not coincidentally, both were keen reformers -- as Abe, too, claims to be.

After he left office in 2006, the now-71-year-old Koizumi seemed happy to stay in the shadows. That changed last month, when he made a very public about-face from his previous support of Japan's nuclear industry. "Nothing is as costly as nuclear power generation," Koizumi said in an Oct. 1 speech, arguing that Japan "could do well without" the dangerous reactors on its seismically active shores.

Since then, Koizumi has made a series of televised comments about the crisis at Fukushima, the dangers of atomic waste, the desirability of Japan (TPX) hawking nuclear hardware overseas, and the urgent need for green alternatives. His campaign is landing a major blow to Abe's revival plan. "Abenomics" claims to be firing three arrows -- monetary and fiscal stimulus, plus deregulation -- but there's a nonadmitted fourth: cheaper Energy. The anti-nuclear movement Abe sought to contain now has a bona fide political rock star on its side.
David Fuller's view - I do not doubt that Junichiro Koizumi's comments on nuclear power will resonate with many Japanese citizens. That is why I was surprised when Taku Yamamoto, Chair of the LDP's Energy Committee announced this new, central plan to reopen and run Japan's nuclear reactors, which I discussed on 23rd October. I also said I would welcome informed views on this subject and received this informative email from a Japanese subscriber two days later.

Meanwhile, my technical assessment of Japan on 23rd October still applies and USD/JPY looks more likely to move upwards from current levels over the medium term.

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November 08 2013

Commentary by David Fuller

Paper: China Plans 3rd Shale Gas Auction

Here is a middle section from this additional report from Reuters
The blocks to be auctioned will be located mainly in the southwest city of Chongqing as well as in the provinces of Sichuan and Hubei, the paper said, citing an industry source close to the Ministry of Land and Resources.

Compared with the second round of the auction, all the major Chinese state firms will participate, implying there is more confidence in the potential of the shale gas blocks. However, there is no interest yet from private companies, the paper said.

Results of the auction will be announced as early as January next year, the paper said, adding that resource rich blocks in the Erdos Plateau in Inner Mongolia may also be included in the sale.

Stymied by the cost of drilling and complexity of tapping shale gas, China has struggled in its bid to revolutionize its Energy supplies and unlock what may be the world's largest shale gas reserves by emulating the frenetic exploration and production of the U.S. shale boom.

But Chinese oil giant Sinopec is for the first time pumping shale gas from test wells in commercial quantities in what it hopes will be a breakthrough in the development of a badly needed new Energy source.
David Fuller's view - There are two important reasons why China has yet to develop its extensive shale oil and gas resources.

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November 08 2013

Commentary by David Fuller

Saudi Arabia Throttles Back from Record High Oil Output

Here is the opening of this article from Reuters
KHOBAR, Saudi Arabia, Nov 8 (Reuters) - OPEC heavyweight Saudi Arabia has cut back oil output that had held at record rates of around 10 million barrels a day for three months running to help offset a plunge in output from fellow OPEC member Libya.

The world's top oil exporter turned down the taps to 9.75 million barrels per day (bpd) in October - versus 10.1 million bpd the previous month, an industry source familiar with the matter told Reuters.

"I don't read too much into the Saudi reduction," said Richard Mallinson, geopolitical risk analyst at Energy Aspects.

"Production is still at a high level, summer demand may have eased a bit and the market was slightly better supplied."

The industry source said it was typical for there to be a reduction in the amount of crude oil burned for power generation at this time of year.

The kingdom's major oil customers say there was no sign of big Saudi cuts in exports last month and that the drop mostly reflected reduced domestic crude burning.

Riyadh lifted output to 10.05 million bpd in August, the highest since records begin in 1980, according to figures from the U.S. Energy Information Administration.

It pumped around that record rate during the third quarter before slowing down in October.
David Fuller's view - Saudi Arabia is still the swing producer in terms of global oil output. It increased production in August, as WTI crude was approaching the 2011 and 2012 highs just above $100 a barrel. More importantly, Brent crude was also approaching the upper side of its trading range over the last three years.

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November 05 2013

Commentary by Eoin Treacy

Comparing the CRB Index with the Continuous Commodity Index (Old CRB)

Eoin Treacy's view - There is often some confusion between which of these indices is more reflective of commodity prices generally so it is important to denote the differences in calculation. In simple terms, the CRB Index gives more weighting to Energy while the Continuous Commodity Index represents the original unweighted index that dates from the 1970s. The difference in calculation results in quite marked differences in performance. Just such a case is now evident.

The CRB Index has been negatively affected by the decline in Energy prices and broke downwards to new 16-month lows yesterday. A short-term oversold condition is evident but a clear upward dynamic would be required to pressure short positions.

The Continuous Commodity Index (CCI) is unweighted and has fallen for five of the last six weeks, returning to test the lows near 500. A short-term oversold condition is also evident here. At FT Money we have long expressed a preference for the CCI as an aggregate measure of commodity performance because of its lengthy back history and consistency of calculation.

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November 04 2013

Commentary by Eoin Treacy

On roads and rails, natural gas threatens diesel's dominance

Thanks to a subscriber for this informative article by John Kemp for Reuters. Here is a section
In 2012, the United States consumed almost 8.7 million barrels of gasoline per day and 3.7 million barrels of distillate fuels, most of them used in transportation, according to the U.S. Energy Information Administration.

Much of that diesel fuel was used in trucks, locomotives and high horsepower industrial engines, where its market share is now threatened by LNG and CNG.

The equipment needed to compress and liquefy natural gas, dispense it safely, store it on board, and use it in dual-fuel engines is being rapidly developed and installed across North America.

LNG as a transport fuel enjoys powerful backing from petroleum producers like Shell as well as major manufacturers and suppliers like Caterpillar and GE and oilfield services companies like Schlumberger and Baker Hughes.

The fuel market appears to be nearing a tipping point. If the present gap between natural gas and crude oil prices remains for another 2-3 years, it should be enough for natural gas to establish a major beach-head in the transport market, pitting crude oil in direct competition with natural gas.
Eoin Treacy's view - A fact often overlooked when considering the outlook for major oil companies is that both Exxon Mobil and Royal Dutch Shell produce more natural gas than oil. Therefore they have a vested interest in securing new customers and markets for their products.

High oil prices encouraged a supply response in unconventional resources which has since yielded substantial dividends for the USA. However, the high price environment in the rest of the world has also created an opportunity for investment in unconventional supply and substitution by natural gas.

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November 01 2013

Commentary by Eoin Treacy

Mexico: Opening Up âOne of the Worldâs Most Closedâ Energy Sectors

This article from [email protected] may be of interest to subscribers. Here is a section
On the Texas side of the border, Eagle Ford Shale oil production has grown from just 352 barrels a day in 2008 to 362,936 barrels a day in 2012. Overall oil production in Texas has doubled — an increase of more than one million barrels a day — over the past four years, to a current pace of nearly 2.2 million barrels, according to the U.S. Energy Information Administration. Daily oil production in North Dakota has also skyrocketed in recent years. The robust development of the Mexican side of the Eagle Ford Shale alone would double Mexican oil production, according to Sherr.

Given the deterioration in its production volumes, does Mexico have any other alternative to pursuing these kinds of reform options? According to Kotschwar, “there is a real threat that if [the government doesn't undertake] this [reform], [it] will have to take less popular reforms, such as raising taxes” on income, as well as value-added taxes, in order to compensate for Pemex’s inability to generate more revenues for the federal government.
Eoin Treacy's view - Here is a link to a map of the Eagle Ford Shale from the EIA which appears to stop at the Mexican border. However geology pays no attention to national boundaries. It is reasonable to expect that Mexico has some of the same shale and tight oil and gas formations as Texas. Production of course is dependent on the differing regulatory structures evident in the jurisdictions.

Production generally deteriorates when oil companies are nationalised because the motivation for profit alters and political considerations take precedence. As Mexico’s middle class expands and its manufacturing prowess improves, demand for a more enlightened Energy policy, that can increase production, is likely to mount further. The country has remarkable Energy resources but it will probably need external partners if they are to be developed efficiently.

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October 30 2013

Commentary by Eoin Treacy

Guinness Atkinson Energy Brief

Thanks to the authors for this edition of their monthly report. The full report is posted in the Subsriber's Area but here is a section on the medium-term outlook for natural gas
A wall of new US gas demand is coming, starting in 2015: exports of gas via liquid natural gas (LNG); expanded export capacity into Mexico; coal plant retirements; gas' share of electricity generation growing; industrial in-shoring; natural gas vehicles. The question is: what price does a wall of supply need to meet this demand outlook? Our hunch is that in three years the gas price should be moving from 20% of the oil price ($3.50 gas is like $21/barrel oil) to 33% (if oil is $110 that is $36/barrel or $6.00 gas). That is 71% up on the $3.50 today and 118% up on 2012 average price of gas of $2.75
Eoin Treacy's view - Veteran subscribers will be familiar with the most basic law of supply and demand; when the price of a vital commodity drops, supply increases and substitution is possible - demand will increase.

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October 28 2013

Commentary by Eoin Treacy

Canadian Dollar Halts Three-Day Loss as Focus Shifts Fed Policy

This article by Ari Altstedter for Bloomberg may be of interest to subscribers. Here is a section
The currency fell the most last week since June after the Bank of Canada dropped a bias toward higher interest rates it had included in every policy statement for more than a year, even as it held the benchmark rate at 1 percent. The Fed, which starts a two-day policy meeting tomorrow, is unlikely to begin tapering the bond-buying program its used to lower interest rates and stimulate the economy, according to the median estimate of a Bloomberg economist survey.
Eoin Treacy's view - Among Canada’s many attributes are world class industrial and Energy resources, a land border with the world’s largest economy and a relatively small but educated population. However, the increasingly competitive position of both US Energy resources and manufacturing relative to Canada represent a challenge. Even though the US Dollar has been comparatively weak against most global currencies, it has been relatively steady against the Loonie, not least because the interest rate differential is only 100 basis points.

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October 28 2013

Commentary by Eoin Treacy

Aussie Strengthens Before Fed Meeting Tomorrow, RBA Stevens Talk

This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section
“The market is looking for further confirmation that tapering is still some time off, and if we do get that we’ll get some more U.S. dollar weakness,” said Jim Vrondas, the chief currency and payment strategist at OzForex Ltd. in Sydney. “We should see some reversal of the nervousness that we saw toward China and the Aussie dollar last week, and a move back toward the 97-cent mark.”

Australia’s dollar gained 0.2 percent to 96.06 U.S. cents as of 5:09 p.m. in Sydney after falling 1 percent last week, the biggest five-day decline since August. The Aussie rose 0.5 percent to 93.80 yen.

The currency will face selling pressure toward the 97.50 U.S. cent level, Vrondas said.
Eoin Treacy's view - A number of factors have combined to have a positive effect on Australian equities. Among these are the RBA’s resolve to stem the advance of the Australian Dollar, continued availability of liquidity on a global basis, the change of government to a more market friendly administration, industrial metal prices bottoming, Energy export facilities beginning to come on line and generally competitive yields.

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October 25 2013

Commentary by David Fuller

October 25 2013

Commentary by David Fuller

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From Japan, on the country's changing policies regarding nuclear power

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Friday 25th October 2013

Political Dysfunction Harms U.S. Global Standing: Kerry - Here is the opening from this interesting article by Terry Atlas & Nicole Gaouette for Bloomberg:

Secretary of State John Kerry blamed the government shutdown that ended last week for fueling international doubts about America's commitment to global leadership, eroding U.S. standing and influence.

Kerry spoke yesterday as some of America's closest allies are criticizing U.S. electronic spying and questioning its resolve in confronting international crises. The discord risks undermining longtime alliances and support for the Obama administration's pursuit of negotiations with Iranand Syria.

Leaders in Israel and Saudi Arabia, the two closest U.S. allies in the Mideast, are faulting American moves regarding Iran's nuclear program and Syria's chemical arsenal. German Chancellor Angela Merkel and European leaders are echoing angry complaints from Latin America about U.S. surveillance. Asian diplomats, with China in their backyard, are questioning America's pledges to bolster their security after the U.S. backed away from a threatened military strike against Syria.

"It's the perception that there's an abandonment of a robust international agenda," said Ian Brzezinski, a senior fellow at the Atlantic Council, a Washington policy group. "In a world where America is seen as less engaged, our opponents will see more opportunity to assert their values."

"It's less likely to be conducive to the spread of democracy and rule of law," said Brzezinski, a former Defense Department official under President George W. Bush. "It creates a less stable world."

Ben Rhodes, President Barack Obama's deputy national security adviser, said complaints from overseas don't reflect a weakening of American influence, describing such gripes about U.S. power as a cyclical occurrence.

My view - There is little doubt that the ongoing US political impasse leading to brinkmanship over the debt ceiling and the recent partial government shutdown has undermined America's reputation for sound governance.

Nevertheless, there is also a 'damned if you do and damned if you don't' aspect to criticism of US international policies in the last few years. This reflects global anxiety over not only the decisions and events being questioned but also the uncertainty caused by domestic problems in most countries, not least due to weak GDP growth which compounds the difficulties of governance. Consequently, there is additional apprehension over what happens when the US really does exit from quantitative easing (QE).

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Email of the day - From Japan, on the country's changing policies regarding nuclear power:

"Thank you for your comments everyday. I enjoy the comments.

"As for the Japanese electric utilities reform, the reform of Japanese electric power utilities is under way. The generation units and the supply units of all the utilities will be separated. The bill will be introduced into the Diet this fall.

"On the other hand LDP have the discussion about the integration of the reactors' operations. One reason is the operation risks are too big for private enterprises. Another reason is the government want to export the power reactor units. The government needs stable and safe operations to avoid the bad reputations.

"Now several reactors' safety inspections are under way. These reactors will probably run next spring or summer. The Energy costs are high in Japan as you said. Japanese Economic Circles have been demanding restarting the reactors."
David Fuller's view - Thank you so much for responding to my request on Wednesday for insights on this topic. Your summary sounds like what I would describe as a 'virtuous circle' for Japan, in that everyone stands to benefit:

1) Japan needs cheaper Energy to propel its economic recovery and this will require nuclear power. 2) The Japanese public needs reassurance that a policy of centralised control and administration of nuclear power will avoid another Fukushima. 3) Japan's economy would benefit from a commercial nuclear power industry but first it needs to reassure potential buyers by successfully reviving its own domestic capacity.

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October 24 2013

Commentary by David Fuller

Are Those White Elephants In The Water?

This is an excellent column by Matt Ridley for The Times (UK) (may require subscription registration but a PDF is posted in the Subscriber's Area). Here is the opening
Here's a short quiz. Question One: which source of Energy is allowed to charge the highest price for its electricity? Question Two: which source of Energy is expected to receive the greatest capital expenditure over the next seven years? The answer to both questions is offshore wind.

Offshore wind farms are the elephant in the Energy debate. Today, the Energy department estimates that electricity prices are 17 per cent higher as the result of green policies and that this will rise to 33 per cent by 2020 or 44 per cent if gas prices fall, as many expect. Offshore wind is the single biggest contributor to that rise. Of the £15 billion a year that the Renewable Energy Foundation thinks consumers are going to be paying in total green imposts by 2020, the bulk will go to support offshore wind.

Britain is a proud leader in offshore wind. "The UK has more offshore wind installed than the rest of the world combined and we have ambitious plans for the future," says Ed Davey, the Energy Secretary. I wonder why that is. Could it be that other countries have looked at the technology and decided that it's far too costly? George Osborne says he does not want Britain out ahead on
green Energy. He should take a long hard look at why we are so far out ahead on this extravagant folly.

Currently we get under 3 per cent of our electricity from offshore wind, or less than 0.5 per cent of our total Energy. If Mr Davey's ambitions are realised and 20 per cent of our electricity comes from offshore wind in 2020, then we will need 20 gigawatts of capacity because wind turbines, even at sea, operate at less than 40 per cent of capacity. That's about six times what we have today and the cost of building it would be greater than the investment in nuclear Energy over the period
David Fuller's view - I have long been an opponent of wind farms because they are the most expensive and least reliable source of renewable Energy. They are also a monstrous blot on the countryside and for sea views, taking up far more space than any other sources of Energy, and for less output. They are murderous cuisinarts for birds and we are only beginning to understand the extent to which they adversely affect sleeping patterns for anyone living within approximately a mile of these towering, noisy eyesores.

The UK Government has been incredibly naïve about wind farms, and apparently no one more so than the Prime Minister. The current Energy Secretary mentioned above appears to have learned nothing and is little more than a cheerleader for a bad policy which he temporarily oversees. This incompetence has jeopardised Britain's Energy security and increased prices far more than would have been necessary with sensible policies, starting with fracking for shale oil and gas.

(There are 26 Archived articles and comments on this subject which you can access via the 'Search' facility shown upper-left, fourth item down. Click on that and it will open a window; type in wind farms and then click on the blue Search button to the right of the window.)

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October 23 2013

Commentary by David Fuller

Japan Mulls Plan for One Operator to Run All [Nuclear] Reactors

Here is the opening from this interesting Bloomberg article
Japan's government is discussing a radical overhaul of its nuclear power sector, the world's third largest, that would combine the nation's 50 operating reactors into a single company to rebuild an industry that's been effectively halted by the March 2011 Fukushima disaster.

The company would be owned by Japan's nine regional utilities, and two wholesalers Japan Atomic Power Co. and Electric Power Development Co. (9513), while the government and local reactor makers would give financial and technical support, Taku Yamamoto, who chairs the ruling Liberal Democratic Party's Energy committee, said in an interview.

Part of the profit from sales of the new company's electricity would be funneled toward the cleanup of Tokyo Electric (9501)Power Co.'s wrecked Fukushima atomic station and victim compensation, which combined may cost more than 11 trillion yen ($112 billion). The plan would keep Tokyo Electric alive to shoulder Fukushima costs and avert any blackouts in Tokyo, the host of the 2020 Olympics.

"The plan is based on Tepco's profits covering Fukushima costs without taxpayers' money and to increase the government's role in the nuclear industry," said 61-year-old Yamamoto. "Who's going to like a bankruptcy of Tepco? The company has to go on working hard for the Fukushima disaster until it dies."

Setting up a comprehensive nuclear-management company should help Japan expand its exports of reactors and operation skills as domestic electricity demand slows, Yamamoto said.

Tsuyoshi Numajiri, a spokesman for Tokyo Electric which is also known as Tepco, declined to comment on lawmakers' discussions to spin off nuclear operations at utilities, saying such plans are subject to change.
David Fuller's view - I was surprised to see this article because nuclear power has been a dead issue in Japan following the understandable public reaction to the Fukushima disaster in 2011. That will not easily or quickly change. Nevertheless, this plan may help and it sounds sensible.

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October 18 2013

Commentary by Eoin Treacy

Adjusting to reality

Thanks to a subscriber for this informative report from Standard Chartered focusing on the Middle East and North Africa. The full report is posted in the Subscriber's Area but here is a section
Social and political challenges in the wider Levant and North Africa are in stark contrast with the economic boom much of the GCC is enjoying. The GCC economies are benefiting from years of robust hydrocarbon dynamics, although they also face longer-term challenges.

Saudi Arabia is pouring resources into its longer-term development objectives, supporting healthy economic growth. Yet this brings inflation and concerns about productivity. Dubai‟s economy, which not long ago faced severe challenges, is performing extremely well against a backdrop of strong investment in the region, benefiting from its role as a trade and services hub. Jordan is now fast-tracking badly needed Energy reforms to slow the drain on government finances. Egypt‟s political transition is ongoing, and funding from the GCC is supporting the Egyptian pound (EGP) and the balance of payments. Reforms, however, have been delayed and look unlikely as long as social pressures and political uncertainty remain high.

We see three core themes for the region:

1. The need for subsidy reforms to reduce the load on government finances. While these measures may bring near-term pain, they are essential to reduce heavy subsidy burdens in the region.

2. Employment challenges are widespread, even in wealthy economies like Saudi Arabia. Creating sustainable employment opportunities is a priority.

3. The region needs to develop strong and robust legal systems, which are key to sustaining cross-border investment flows that are necessary to support economic growth and create employment.
Eoin Treacy's view - The Middle Eastern region has been among global laggards during the post credit crisis boom that has overtaken the majority of global stock markets. Political upheaval, violence and inflation have increased uncertainty. Changes in the administration of countries such as Libya have also resulted in oil production cuts However countries that have avoided the ravages of war, have been able to increase production and the economic outlook is turning more positive. The elevation of Qatar and the UAE from frontier to emerging market status by MSCI in June appears to have been a catalyst for improved investor sentiment. (Also see Comment of the Day on from June 5th).

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October 14 2013

Commentary by Eoin Treacy

Email of the day

on an addition to the Chart Library
October 14 2013

Commentary by Eoin Treacy

Martin Springâs On Target

Thanks to the author for this edition of his iconoclastic report. This month he kindly reviews Crowd Money but here is a section on the German utilities sector
German companies now have to pay almost three times as much for electricity as their American competitors, according to a Siemens study. One reason is that there’s no supply in Europe of cheap shale gas. Another is the cost of huge subsidies given to producers of wind, solar and biomass power.

Because of lack of a national grid, too much of that power is generated in the North, yet isn’t available where it’s needed, in the South. And because those supplies are so erratic, polluting coal-fired plants have to be used to make up the difference, increasingly being fuelled by imports from the US.

The German government has shut half the nation’s nuclear power production, and planned to close the rest. It’s committed to sourcing 80 per cent of its electricity from renewables by the year 2050. Subsidies for wind and solar power are now costing $23 billion a year, and forecast to total $735 billion by 2050.

Most of these extra costs are being loaded on consumers, with the pain greatest for those least able to afford them. More than 300,000 households are having their power shut off for lack of payment as winter approaches.

One consequence of the chaotic policymaking is that Germany’s emissions of greenhouse gases are actually rising, with older “dirty” power stations being reopened.

Energy policy, known in German as Energiewende (Energy turnaround), is an “unholy mess,” says FT editor Tony Barber.
Eoin Treacy's view - Iberdrola’s CEO highlights that the politically driven subsidies for wind and solar are not only affecting German consumers.

“More than 50 percent of the bill European consumers are paying today has nothing to do with power generation and networks, and that’s because of political decisions,” said Iberdrola’s Ignacio Galan. “That has already created a lot of distortions.”

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October 09 2013

Commentary by Eoin Treacy

The impact of rising east coast gas prices

Thanks to a subscriber for this detailed report from Deutsche Bank focusing on the Australian gas market. The full report is posted in the Subscriber's Area but here is a section
Access to LNG infrastructure and a demand side response will limit price rises.
We disagree with the premise that east coast gas prices must rise to international pricing equivalence. In our view the theoretical arbitrage opportunity for 3rd party gas seller to achieve LNG netback pricing will not eventuate. The three CSG-to-LNG projects currently under construction have sufficient reserves to meet their combined export requirements, suggesting no net additional supplies are needed from 3rd parties. In addition, we believe there will be a demand side response to rising gas prices, led by the power generation sector which currently represents c.30% of gas demand on the east coast. Higher gas prices imply power stations move up the cost curve and generate less, acting as a natural release valve to rising prices.

The impacts on the Australian economy are negative but manageable
Higher gas prices will inevitably lead to higher input costs for end consumers. However if prices increase to $6-7/GJ as we expect, there are no stocks within Deutsche Bank’s Australian coverage universe facing double digit earnings downside. In addition, mitigation opportunities led by increased Energy efficiency and fuel switching could see earnings impacts further reduced. We do not subscribe to the thesis of looming irrevocable damage to the Australian economy from higher Energy costs
Eoin Treacy's view - As Australia’s natural gas export capacity ramps up it is likely to offer a useful template for the USA where the debate continues on how committed the country should be to exports.

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October 01 2013

Commentary by David Fuller

The Threat of 'Abegeddon' From Taxes in Japan

Here is the opening for this interestingly sceptical column by Bloomberg's Asia-Pacific columnist, William Pesek
Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan's huge debt burden, the world's largest. Unfortunately history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.

That's not the conventional wisdom of the moment. Markets are euphoric over surging confidence among large Japanese manufacturers. September's jump in the quarterly Tankan (JNTSMFG) index -- to the highest levels since before the Lehman Brothers Holdings Inc. collapse in 2008 -- gave Abe just the tail wind he needed to raise the consumption tax to 8 percent from 5 percent starting in April 2014, with a further 2 percent increase in the cards for 2015.

Yet Abe is ignoring two things that could end his revival program, dubbed Abenomics: the precedent set by Hashimoto, Japan's 53rd prime minister, and the specter of inflation.

Hashimoto's 1997 sales-tax increase scuttled Japan's best chance at strong growth in a decade. By the time Hashimoto left office in 1998, business leaders were deriding him as Japan's Herbert Hoover, the 31st president who botched the U.S. exit from the Great Depression with badly timed austerity measures.

Inflation heightens the risk Abe is making the same mistake. The government hailed news last week that consumer prices are rising at the fastest pace since 2008 as a vindication of Abenomics. Yet the 0.8 percent jump in prices excluding fresh food in August was purely an Energy story, driving by a surge in costs for fuel imports.
David Fuller's view - All of William Pesek's remarks in the column above are relevant and no one ever thought that the challenge of reinvigorating Japan's economy was going to be easy. After all, there is the enormous government debt and the national loss of confidence over the last 25 years. The Fukushima disaster in 2011 has compounded Japan's Energy problems and the global economy is soft.


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September 30 2013

Commentary by David Fuller

September 27 2013

Commentary by David Fuller

Shale Gas Study Showing Minimal Methane Leakage Exposes Rifts in Enviro Movement

Here is the opening from the Huffington Post's article on this study
A new Environmental Defense Fund-University of Texas methane gas study has exposed deepening rifts in the environmental movement over the future of natural gas.

One of the central tenets of anti-shale gas activists -- such as green campaigner Bill McKibben, NGO's like Environmental Working Group or websites like Desmogblog -- is that methane leaked during the hydraulic fracturing extraction process makes natural gas more carbon polluting than coal carbon. The assertion that 'natural gas is bridge to a low carbon Energy future' is a sham, they claim. But a growing number of progressive-minded Energy experts at the EDF, Natural Resources Defense Council, Council on Foreign Relations and elsewhere are taking a more science-based approach, and letting the empirical evidence guide their views.

Indeed, methane is a potent greenhouse gas, so leaks could theoretically wipe out the documented climate benefits with respect to reduced carbon emissions of natural gas, a comparatively clean fossil fuel. But the fears were based almost entirely on a contested study presented as a letter and released two years ago by two Cornell University scientists who claimed catastrophic levels of methane were being leaked by fracking operations.

In its most recent estimate based on ancient data extending back to 1990 to the Paleolithic era of shale gas extraction technology, the Environmental Protection Agency had estimated that "natural gas systems" emit about 1.3 percent of total natural gas production. Many in the natural gas industry had asserted that this estimate was outdated and way too high, while anti-fracking campaigners said it understated the methane leakage problem.

Now we almost certainly know the answer. Released September 23, the report led by David Allen at the University of Texas found that methane emissions from new wells being prepared for production, a process known as completion, captured 99 percent of the escaping methane -- on average 97 percent lower than the 2011 EPA estimates. It is the most comprehensive shale gas emissions study ever undertaken on methane leakage, covering 190 well pads around the United States.

Energy experts and environmentalists celebrated the finding that almost all the escaping methane could be captured by state of the art equipment. "The good news is that under EPA regulations issued in April 2012 most fracked natural gas wells will have to capture or flare methane during well completions staring in 2015," wrote Dan Lashof on his blog at the Natural Resources Defense Council.
David Fuller's view - This is welcome news and another triumph for technological innovation. If you agree, tell your politicians because the world needs to use more natural gas and fracking provides access to the shale reserves in most countries

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September 27 2013

Commentary by David Fuller

The World's Climate Scientists Explain How to Avoid Drastic Global Warming: It's Not Easy

Here is the opening for this interesting summary of the Intergovernmental Panel on Climate Change (IPCC) report
Humans are warming the planet. Climate scientists are 95 percent sure of this - as sure as they are that cigarette smoking causes cancer. That's one takeaway from the big new climate report by the Intergovernmental Panel on Climate Change, which began rolling out Friday.

The major report synthesizes the vast array of climate science research out there. Humans have pushed temperatures higher by burning fossil fuels, clearing forests, and other activities. If we keep emitting greenhouse gases, that will lead to more ice melt and higher sea levels in the decades ahead.

None of this is too surprising. Climate scientists have known that humans are warming the planet for many years - their confidence has gone up, but the conclusion has stayed the same.

Even so, it's worth reading through the summary of the IPCC report to see what else the climate panel has to say. There are some new details here, including the critical point that humans will have to keep the vast majority of their fossil-fuel reserves in the ground if we want to keep global warming below 2ºC, the level deemed "dangerous" by world leaders.

1) Humans are in control of how much the planet will heat up in the decades ahead. We can choose 1ºC (or less) of global warming. Or we can choose a drastic 4ºC.

This may seem like an obvious point, but it's worth dissecting. The IPCC report notes that there's typically a fair bit of natural variability in the climate system, thanks to volcanic eruptions, solar cycles, and various ocean processes. As a result, we're likely to see some fluctuations in global temperatures for years to come - the recent slowdownis a perfect example - even as the long-term trend is upward.
David Fuller's view - I have had a good look at the official summary of the IPCC report released today, and you will not be surprised to hear that it is an uncomfortable read. However, its' 'solution', and apparently only for part of the problem, at least in terms of what IPCC has said so far, is to significantly reduce the use of fossil fuels.

We already know that not a single developed country has had much 'success' in doing this, and the cost has been uncompetitively high fuel costs and a risk of future blackouts, as we face here in the UK. More importantly, developing countries and not least those with high populations have made it very clear that they are not going to reduce their consumption of fossil fuels. Their priority is GDP growth because they know that higher fuel costs would be devastating for their numerous citizens who still live in conditions of severe poverty.

We can reduce CO2 emissions with natural gas and the new generation of nuclear Energy. Simultaneously, we can develop less costly technologies for capturing CO2 when using fossil fuels. Additionally, it should not be beyond the ability of today's rapidly developing technologies to suck CO2 emissions out of the atmosphere.

(See also: Four Numbers Say Wind and Solar Can't Save Climate, posted on 23rd September, and This Car Runs on Gas Made Out of Thin Air, posted on 6th September 2013

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September 23 2013

Commentary by David Fuller

September 23 2013

Commentary by David Fuller

Amid Economic and Safety Concerns, Nuclear Advocates Pin Their Hopes on New Designs

Here is a sample from this informative article from Time Science & Space
The challenge of nuclear waste - another factor that has held back new construction in the U.S., since no one can agree where to put it - is also at the heart of another atomic start-up. TerraPower is experimenting with a traveling-wave reactor design, which would largely eliminate the need for uranium enrichment. (Traveling wave refers to the fact that fission occurs bit by bit in the reactor core, as if a wave of Energy were slowly spreading through it, rather than in the entire core all at once as in standard fission.) In conventional reactors, composition of the isotope uranium-235 has to be increased in the fuel before it becomes fissile. TerraPower's reactor design could use the depleted uranium found in nuclear waste, burning it for decades without refueling. That revolutionary potential is what attracted Bill Gates, who is one of TerraPower's main funders. "We think we could have a prototype by the early 2020s and become the commercial reactor of choice by the 2030s," says John Gilleland, TerraPower's CEO
David Fuller's view - These are promising developments and new nuclear projects offer the best and most practical long-term solutions to our Energy problems.

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September 23 2013

Commentary by David Fuller

Four Numbers Say Wind and Solar Can't Save Climate

Here is the opening and some additional samples from this informative column by Robert Bryce for Bloomberg
This month, the Intergovernmental Panel on Climate Change will begin releasing its fifth assessment report. Like earlier reports, it will undoubtedly lead to more calls to reduce emissions of carbon dioxide worldwide.

As the discussion unfolds, I would urge everyone to keep four numbers in mind: 32, 1, 30 and 1/2. These are the numbers that explain why any transition away from our existing Energy systems will be protracted and costly. Let's take them in sequence.

First, 32: That's the percentage growth in carbon dioxide emissions that has occurred globally since 2002. In the past decade, these emissions have increased by about 8.4 billion tons. And nearly all of that has happened in the developing world. In Asia, emissions rose 86 percent; in the Middle East, 61 percent; and in Africa, 35 percent.

In the U.S., meanwhile, carbon dioxide emissions were 8 percent lower in 2012 than they were in 2002, largely due to a surge in shale gas production, which has reduced coal use. In Europe, carbon dioxide emissions have been essentially flat for a decade.

That 32 percent increase in global carbon dioxide emissions reflects the central tension in any discussion about cutting the use of coal, oil and natural gas: Developing countries -- in particular, fast-growing economies such as Vietnam, China and India -- simply cannot continue to grow if they limit the use of hydrocarbons. Those countries' refusal to enact carbon taxes or other restrictions illustrates what Roger Pielke Jr., a professor of environmental studies at the University of Colorado, calls the "iron law of climate policy": Whenever policies "focused on economic growth confront policies focused on emissions reduction, it is economic growth that will win out every time."

Over the past 10 years, despite great public concern, carbon dioxide emissions have soared because some 2.6 billion people still live in dire Energy poverty. More than 1.3 billion have no access to electricity at all.

Now to the second number: 1. That's the power density of wind in watts per square meter. Power density is a measure of the Energy flow that can be harnessed from a given area, volume or mass. Six different analyses of wind (one of them is my own) have all arrived at that same measurement.

Wind Energy's paltry power density means that enormous tracts of land must be set aside to make it viable. And that has spawned a backlash from rural and suburban landowners who don't want 500-foot wind turbines near their homes. To cite just one recent example, in late July, some 2,000 protesters marched against the installation of more than 1,000 wind turbines in Ireland's Midlands Region.

Consider how much land it would take for wind Energy to replace the power the U.S. now gets from coal. In 2011, the U.S. had more than 300 billion watts of coal-fired capacity. Replacing that with wind would require placing turbines over about 116,000 square miles, an area about the size of Italy. And because of the noise wind turbines make -- a problem that has been experienced from Australia to Ontario -- no one could live there.


Now let's turn to the third number: 30. This represents the massive scale of global Energy use, which is about 250 million barrels of oil equivalent per day, or the output of about 30 Saudi Arabias. (Since the 1970s, the Saudis have produced about 8.2 million barrels of oil per day.) Of that 30 Saudi Arabias of daily Energy consumption, we get 10 from oil, nine from coal, seven from natural gas, two from hydro and 1 1/2 from nuclear.

That remaining 1/2 -- the final number -- represents the amount of Energy we get from all renewable sources, not counting hydropower. In 2012, the contribution from all of those sources amounted to about 4.8 million barrels of oil equivalent per day, or roughly one-half of a Saudi Arabia. Put another way, we get about 50 times as much Energy from all other sources -- coal, oil, natural gas, nuclear and hydropower -- as we do from wind, solar, geothermal and biomass.
David Fuller's view - If we are going to reduce global carbon dioxide emissions anytime soon, meaning within the next five to ten years, countries need to take two important steps: 1) Increase the production of natural gas which exists within shale formations in most countries; 2) Build new nuclear power stations.

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September 19 2013

Commentary by David Fuller

Email of the day

On the cost of 'Gulf of Mexico Oil Riches'
"I refer to your recent item on oil/gas riches in the Gulf of Mexico.

"As these are at great depth, the recovery cost must be very high. This should help to place a floor under the oil price

"Any idea what cost of production would be? Maybe one of the Energy experts, who read Fullermoney may wish to contribute."
David Fuller's view - My guess is that only the oil companies involved know approximately what the eventual cost of production is likely to be. However, we do know a big portion of it, in that figure of over $100 million to drill each of these deep wells. Fortunately the success rate is high and they are already certain that the resource is massive, according to the article. Additionally, the increased drilling activity confirms the optimism of these large oil producers.

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September 18 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report on the Energy sector. Here is a section
We have discussed in many previous articles the reasons why social trends are undercutting vehicle miles driven – the growing use of the Internet for working and for shopping, the preference for social contact through electronic medium rather than personal contact for our teenagers and youth, and housing and work patterns that favor the use of alternative modes of transportation over personal vehicles. The cartoon below addresses why America's teenagers are not getting their driver's licenses. It is hard to see many of these factors changing soon.

We remain convinced that Toyota's view of future new car sales in the U.S. will prove more accurate than the forecasts calling for an ever upward sales projection. In the early 2000s, before the financial crisis, when yearly car sales were in 19-20 million units a year range, the market was in a bubble supported by the housing bubble and the use of home equity loans to finance all sorts of consumer spending including new vehicles. We believe that U.S. social and demographic trends impacting the amount of driving will prove stronger than auto forecasters who believe we will return to historic auto-buying patterns. None of these beliefs are overly negative for the outlook for the auto industry or those businesses closely associated with new car sales, however, increased vehicle fuel-efficiency mandates will take a toll on the volume of gasoline sales meaning a challenging future for the petroleum industry. That outlook needs to be assessed in light of the other trends at work in the U.S. and North American Energy market, all of which could result in the U.S. reassessing its prohibition against crude oil exports.
Eoin Treacy's view - Gasoline prices have been ranging within a somewhat triangular pattern since early 2011 and have dropped from the July peak near $3.25 to test the progression of higher reaction lows. While some steadying is to be expected in the current area, a clear upward dynamic will be required to check the downward bias.

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September 18 2013

Commentary by David Fuller

Merkel gambles on big energy shift

Here is the opening of this informative article published by Power Engineering
Energy-conscious to an extreme, Olaf Taeuber relies on just a single 5-watt bulb that gives off what he describes as a ''cozy'' glow to light his kitchen when he comes home at night. If in real need, he switches on a neon tube, which soaks up all of 25 watts.

Even so, he found himself seeking help last week to fend off a threat from Berlin's main power company to cut off his electricity, one of a growing number of Germans left unable to pay their soaring Energy bills. He is among those feeling the immediate effects of Chancellor Angela Merkel's most ambitious domestic project: Germany's energiewende, or Energy revolution, under which the country is shutting down its nuclear power reactors, discouraging coal-fired plants and encouraging a near-complete shift to renewable Energy sources.

''Often, I don't go into my living room in order to save electricity,'' said Mr. Taeuber, 55, who manages a fleet of vehicles for a local social services provider. ''You feel the pain in your pocketbook.''

''Energy poverty,'' as Germans now call it, is just one of the many problems confronting Ms. Merkel's plan, the likes of which has never been tried - not just in Germany, but in any major industrial country. Energy prices in Germany - the highest in Europe - have spiked 30 percent over the last five years as costs have risen with the transition. Providers pulled the plug on an estimated 312,000 German households unable to pay their bills in 2011, according to official figures.

Newly constructed offshore wind farms churn unconnected to an Energy grid still in need of expansion. Carbon emissions actually rose last year as oil- and coal-burning plants were fired up to close gaps in Energy supplies. Energy-intensive industries have begun to shun the country for fear of the even steeper costs ahead.
David Fuller's view - Arguably, this is a brave move by Mrs Merkel and Germany but is it entirely rational? Opinions will obviously vary on the emotive topic of expensive green Energy versus fossil fuels such as crude oil and, increasingly, natural gas. These are obviously much cheaper if produced domestically. However, with a troubled Middle East and other Energy exporters keen to see prices just below levels that could weaken global demand (crude oil Brent and WTI), we have not yet reached the point where Energy costs are likely to be permanently lower in real (inflation adjusted) terms, due to increased global supplies. Upside breakouts from these trading bands shown above would certainly be a headwind for the global economy.

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September 18 2013

Commentary by David Fuller

African states push back on Chinese oil deals

Here is the opening for this interesting article from the NYT & IHT, using the latter paper's headline
NIAMEY, Niger - In Niger, government officials have fought a Chinese oil giant step by step, painfully undoing parts of a contract they call ruinous. In neighboring Chad, they have been even more forceful, shutting down the Chinese and accusing them of gross environmental negligence. In Gabon, they have seized major oil tracts from China, handing them over to the state company.

China wants Africa's oil as much as ever. But instead of accepting the old terms, which many African officials call unconditional surrender, some cash-starved African states are pushing back, showing an assertiveness unthinkable until recently and suggesting that the days of unbridled influence by the African continent's mega-investor may be waning.

For years, China has found eager partners across the continent, where governments of every ilk have welcomed the nation's deep pockets and hands-off approach to local politics as an alternative to the West.

Now China's major state oil companies are being challenged by African governments that have learned decades of hard lessons about heedless resource-grabs by outsiders and are looking anew at the deals they or their predecessors have signed. Where the Chinese companies are seen as gouging, polluting or hogging valuable tracts, African officials have started resisting, often at the risk of angering one of their most important trading partners.

"This is all we've got," said Niger's oil minister, Foumakoye Gado. "If our natural resources are given away, we'll never get out of this."
David Fuller's view - There are two important aspects to this situation: 1) Africa's governments are becoming worldlier, which is certainly in their own interests; 2) Worldwide demand for crude oil, natural gas and all other forms of Energy can only rise as the global economy recovers.

Currently, few developed economies have secured their future Energy supplies at internationally competitive costs, although many still have a window of opportunity in which to do so. The main exceptions are Canada, the USA, Norway and Australia. Yes, they have their own domestic supplies of crude oil and natural gas. However, most other developed economies could improve both their Energy supplies and costs if they prioritised development of their own shale resources. The USA pioneered this technology and has utilised it increasingly successfully, with little evidence to date of serious earthquakes or the contamination of water supplies predicted by naysayers.

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September 17 2013

Commentary by Eoin Treacy

North Dakota Oil Production Posting A Huge Jump In July

Thanks to a subscriber for this update on US onshore oil production from the Bakken formation from DNB. The full report is posted in the Subscriber's Area but here is a section
According to the Industrial Commission of North Dakota the number of drilling permits in July was 178 while it rose to 276 permissions in August, which is by far the highest number of drilling permits issued in a month so far this year. This suggests we should expect further large hikes in output going forward.

After having posted the largest Year-on-Year increase of crude oil output in May-2012 of 280 kbd, the growth had fallen every month since then to 157 kbd in June and most people had expected the growth to continue to drop for the coming months. Hence it is interesting to note that the year on year growth for July in North Dakota jumped back up to 198 kbd. Even if oil production in North Dakota should not increase any more from now to the end of the year, the year on year growth will average about 140 kbd for the remaining 5 months of the year.

The average rig count per month in North Dakota has fallen from 185 rigs in January to 182 rigs in July according to the Industrial Commission of North Dakota. According to Baker Hughes the number of horizontal rigs working in the Bakken was 157 in July and 159 in August. In July last year there were 209 horizontal rigs working in the Bakken, yet production was 199 kbd lower. This fact is quite telling for what is going on in this industry. Efficiency is improving quicker than many though possible and it is no longer possible to count the number of rigs to get a feel for how many wells will be drilled.
Eoin Treacy's view - The revolution in unconventional oil and gas supply continues to be a game changer for the Energy sector. However, due to the high prices paid for drilling rights and the ensuing collapse of natural gas prices, the stock market performance of many shale gas companies lagged the wider market as they adjusted to the new pricing environment. In many cases this necessitated migrating to shale oil properties, not least in the Bakken and Eagle Ford formations. That process has ended and shares are responding favourably once more.

While shale oil and gas have been making headlines this is by no means the only source of additional supply likely to affect the Energy markets over the next decade. Offshore and particularly deep water drilling also represent important opportunities for the sector. A piece contrasting the performance of these two portions of the Energy sector in Comment of the Day on January 18th 2013, which highlighted the outperformance of the offshore drilling sector may be of interest.

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September 17 2013

Commentary by David Fuller

Blow to Abenomics as Japan shuts last nuclear reactor

My thanks to a subscriber for this informative article by Ambrose Evans-Pritchard of The Telegraph (UK). Here is the opening and also a section from the conclusion
Japan has switched off its last nuclear reactor and will have to rely on imported oil and gas to power its industrial machine for the rest of the year, bowing to anti-nuclear sentiment as controversy rages over the botched handling of the Fukushima clean-up.

Failure to revive Japan's nuclear industry is a major setback for premier Shinzo Abe, who had hoped to restart at least eight of the country's 50 reactors this year to cut reliance on ruinously expensive crude oil and liquefied natural gas (LNG). While a surge in output from solar and other renewables has plugged a gap equal to three reactors, it too comes at a high cost.

Mr Abe's dash for growth after 15 years of deflation and perma-slump depends crucially on affordable Energy, but Japanese companies must now pay three times as much as US rivals for power.

Tokyo says it costs four time more produce power from oil compared to coal or nuclear reactors, creating an incentive to build new coal plants.

The cost squeeze threatens to offset gains from a 20pc fall in the yen against the dollar since Mr Abe first signalled his monetary blitz last year. It has also wiped out Japan's trade surplus, leading to deficits in 2011 and 2012 for the first time in over 30 years. Junko Nishioka from RBS said this takes away a key shield protecting Japan against a bond market crisis.

Nuclear power provided a third of Japan's electricity before the Fukushima melt-down in February 2011, when all plants were switched off.


For now, at least, Mr Abe's broader economic gamble is working. The Bank of Japan's vow to purchase $75bn a month of Japanese bonds and double the monetary base by mid-2014 has been electrifying. Growth was 4.1pc in the first quarter and 3.8pc in the second quarter, making Japan the fastest-growing economy in the G7 so far this year.

The question is whether it is a monetary "sugar rush" or a genuine revival. Failure to find affordable Energy quickly could prove the Achilles Heel of Abenomics.
David Fuller's view - I maintain that Abenomics is a winning formula for Japan but Energy costs are the biggest obstacle. Given Japan's long history of nuclear horrors - from Hiroshima and Nagasaki in 1945 to Fukushima in 2011 - it is understandable that its citizens will not tolerate the reopening of these plants.

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September 13 2013

Commentary by David Fuller

Wildcatter Hunch Unlocks $1.5 Trillion Oil Offshore U.S.

Here is the opening section for this important discovery and development story by Edward Klump for Bloomberg
Texaco Inc. geologist Robert Ryan didn't suspect he was helping change the Energy future of the Gulf of Mexico when he gave the go-ahead for a well that would break the world record for deep-water drilling.

The project known as BAHA, undertaken in 1996 by Texaco and its partners, Royal Dutch Shell Plc (RDSA), Amoco Corp. and Mobil Corp., was a dry hole. That normally would've made it a flop. Instead, BAHA's discovery of oil-rich sands where none were thought to exist was the first step in unlocking a $1.5 trillion trove of crude that's revived the prospects of a body of water many thought had long ago given up most of its fossil-fuel riches.

Just as technology has allowed explorers to tap vast new oil and natural gas supplies in onshore shale fields, it's now reinventing the Gulf. BAHA was the first deep-water well to try plumbing the Lower Tertiary, a layer of the earth's crust formed more than 25 million years ago after mammals had replaced dinosaurs as the dominant life form.

A series of recent finds in the ultra-deep has profoundly changed the thinking on U.S. offshore geology, with 2013 seeing the Gulf of Mexico become one of the most promising frontier oil plays in the world and the fastest-growing offshore market.

New seismic equipment and computer power has allowed explorers to see into once-invisible layers of rock. Engineering innovations enable them to drill five miles into the earth through waters more than 10,000 feet deep, where temperatures are more than hot enough to boil water and high pressures approach the weight of four cars resting on one square inch.

The Gulf is heading for record deep-water output equivalent to almost 2 million barrels of oil a day in 2020, according to industry researchers Wood Mackenzie Ltd. The U.S. estimates about 15 billion barrels of recoverable oil remain to be found in the Lower Tertiary.

While most U.S. shale fields have now been identified and mapped, the Gulf is seen as having much bigger yet-to-be-discovered potential -- 48 billion barrels of oil compared to the 13 billionbarrels estimated for onshore and coastal oilfields, according to U.S. data.

Investment is pouring in, with 42 drilling rigs operating in 1,000 or more feet of water as of Sept. 9 -- 35 percent more than four years earlier, according to U.S. data on the Gulf. By the end of 2015, 60 rigs are slated to be working in the deep water off U.S. shores, estimates Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.
David Fuller's view - This is a fascinating and hugely significant discovery and development project which is only now coming into production. Importantly, technology is once again proving that Mother Earth remains a cornucopia of oil and gas supplies for our rapidly developing global economy. Indeed, it actually underpins our global economic expansion for many more decades, during which renewable Energy sources, led by solar power, will be refined and perfected to the point where they can eventually become the major sources for our inexhaustible Energy requirements.

Lest future generations take this almost for granted, think back over the second half of the last century and the earlier years this century. Most forecasters were convinced that recoverable supplies of global oil were rapidly diminishing. They feared that the free world would be held to ransom by a dwindling, mostly despotic and unstable group of Energy suppliers. They forecast that Energy prices would only rise in real rather than inflationary terms.

Fullermoney has forecast that technological innovation would result in a much more favourable outlook for both Energy supplies and their real cost before the end of this decade, not least since US oil companies invented hydraulic fracturing technology, commonly know as fracking

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September 11 2013

Commentary by David Fuller

Eagle slaughter: Wind farms kill 67 eagles in 5 years

Here is the opening from this alarming but all too predictable report from The Washington Times
WASHINGTON (AP) - Wind Energy facilities have killed at least 67 golden and bald eagles in the last five years, but the figure could be much higher, according to a new scientific study by government biologists.

The research represents one of the first tallies of eagle deaths attributed to the nation's growing wind Energy industry, which has been a pillar of President Barack Obama's plans to reduce the pollution blamed for global warming. Wind power releases no air pollution.

But at a minimum, the scientists wrote, wind farms in 10 states have killed at least 85 eagles since 1997, with most deaths occurring between 2008 and 2012, as the industry was greatly expanding. Most deaths - 79 - were golden eagles that struck wind turbines. One of the eagles counted in the study was electrocuted by a power line.

The president of the American Bird Conservancy, Mike Parr, said the tally was "an alarming and concerning finding."
David Fuller's view - This is a disgrace and Fullermoney is among others who have long described wind farm technology as Cuisinart for birds.

The plight of eagles understandably attracts headlines but think of the many thousands of smaller birds that are being killed by windmills, and barely noticed, if at all.

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September 06 2013

Commentary by David Fuller

Ice Melting Faster in Greenland and Antarctica in UN Leak

Here is the opening to this interest report from Bloomberg
Ice in Antarctica and Greenland is disappearing faster and may drive sea levels higher than predicted this century, according to leaked United Nations documents.

Greenland's ice added six times more to sea levels in the decade through 2011 than in the previous 10 years, according to a draft of the UN's most comprehensive study on climate change. Antarctica had a fivefold increase, and the UN is raising its forecast for how much the two ice sheets will add to Earth's oceans by 2100.

The changes in the planet's coldest areas are a "very good indicator" of a warming planet, according to Walt Meier, a research scientist with the U.S. National Aeronautics and Space Administration.

"It's an early warning system," Meier said by phone fromNASA's Goddard Space Flight Center in Greenbelt, Maryland. "When you think about a couple of degrees of warming, in the U.K. or U.S., it's not something that would be too noticeable, whereas in an area of snow and ice, it can have a huge effect. With sea ice, minus 1 to plus 1 is the difference between skating on the ice and swimming in the ocean."
David Fuller's view - We cannot afford to assume either that this is not happening or that it is only a temporary anomaly. Of course our increasing human population and developing technologies are warming the planet. However, I suggest the solution is not to throw the world into economic depression by banning fossil fuels. We need a variety of Energy sources to prosper, including fossil fuels while they remain competitive.

The solutions to our human contributions to global warming can be found in our technologies. After all, we put carbon dioxide in the atmosphere and have the incentive to take some of it back out, if it is a potentially useful resource, as other articles including the previous one above on "gas made out of thin air" suggest.

Note: There appears to be a contradiction in this article, if I am reading it correctly. The second paragraph above says that Antarctica's ice is also melting more quickly. However, the 'Melt Season' section at article's end says: "The extent of Antarctica's sea ice 'very likely' increased 1.2 percent to 1.8% percent a decade over the same period."

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September 03 2013

Commentary by Eoin Treacy

Rebirth of the Cold War

Thanks to a subscriber for this interesting report by Lucas Hermann and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section
European gas volumes in 2013 may be well below their 2008 peak but with spot prices hitting new seasonal highs you'd be hard pressed to know it. With indigenous supply collapsing and LNG diverting to Asia, a market that should be in the doldrums looks poised to see prices breaking to the upside. As Gazprom's market share moves towards record levels and its export supply hits new peaks we worry quite where Europe expects to go next for its gas. We conclude that despite sub-par gas demand growth to 2020 European prices are moving to a new phase, with US LNG imports much needed if Russia's ever growing dominance and high pricing is to be contained.

Back in Gazprom's embrace
We are concerned. With indigenous gas production in steady decline, Norwegian output at peak, gas storage levels at five year lows and the start-up of material Asian-focused LNG capacity unlikely to begin in earnest for another 12-18 months European gas pricing looks increasingly to be balanced on a knife's edge. Influenced by an unusually severe winter, Europe is again caught in Gazprom's embrace and with it confronting elevated, oil-linked pricing. For Europe's IOC gas suppliers, not least Statoil, a new golden age is just arriving.

Whoops – we forgot about where to source forward supply
Moreover, after five years during which, perhaps deluded by the promise of unconventional gas, the continent's utility buyers and aggregators have been reluctant to commit to new supply be it LNG or pipeline gas, we question where a recovering Europe will source its much needed future supplies. With the delivery of European unconventional gas if anything moving backwards, North African stability in question and additional Caspian flows unlikely pre-2019 (and even then set at a paltry 10bcm) home-grown options look narrow.
Eoin Treacy's view - One can't but have a pessimistic attitude to Europe's Energy security when so many public officials have invested political capital in debunking unconventional supply initiatives. It is therefore notable that the European commissioner for Energy, Geunther Oettinger, was today quoted saying “Germany needs to keep option of shale gas open as it makes Putin nervous”.

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September 02 2013

Commentary by Eoin Treacy

Batista's OGX Soars as Rout Boosts Ibovespa Weighting: Rio Mover

This article by Denyse Godoy for Bloomberg may be of interest to subscribers. Here is a section
OGX has the third-highest weight in the Ibovespa at 5.21percent, according to data compiled by Bloomberg. That compares with 0.92 percent on Aug. 30, the data show. BM&F Bovespa SA is considering excluding stocks trading for less than 1 real, or penny stocks, from the Ibovespa, which is otherwise weighted just by trading volume, according to a statement on the exchange operator's website.

“Shares slumped on Friday as foreign investors massively sold because OGX would not be part of the MSCI Brazil anymore,” Sandro Fernandes, a trader at Geraldo Correa, said by phone from Belo Horizonte, Brazil. “Today shares are rallying because some funds needed to buy more stock as OGX's weighting on the Brazilian benchmark increased.”
Eoin Treacy's view - The Bovespa Index has been ranging with a downward bias for more than two years and dropped abruptly from May to a July low near 44000. The heavy weighting of Energy, resources and banking shares has been a headwind for performance and OGX in particular has been a concern. (Also see Comment of the Day on July 30th.

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August 27 2013

Commentary by David Fuller

While Britain Dithers, the world is fracking

Here is the conclusion from this forceful article from The Times (UK) (note, subscription registration required but a PDF version is in the Subscriber's Area
Russia imagined that Gazprom would bring its gas customers to heel by threatening a big winter freeze that would reach as far as Germany, but even Bulgaria has used a global gas glut to renegotiate the price down by 20 per cent. Meanwhile Azerbaijan, Kazakhstan and Turkmenistan have become rival suppliers with the Trans-Anatolian Natural Gas Pipeline bypassing Russia entirely. For the first time since the 1989-90 revolutions much of Europe can look forward to being totally free of a Russia that under Vladimir Putin is regressing to bullying Soviet pathologies. In the longer term, Europe may also benefit from the huge offshore gas reserves of Cyprus, Israel and Lebanon.

Which brings us back to Europe's noisy Green Luddites and the politicians who pander to them. Angela Merkel has signalled the closure of Germany's remaining nuclear power plants, even as her country will still import nuclear-generated Energy from France and Poland. Her Energy policy is as much of a mess as ours, with northerly offshore wind farms lacking connection with southern industries. The Italian Government has also caved in to environmental lobbyists over deep-water oil prospecting in the Adriatic. Judging from opinion surveys, the Poles would happily frack but, for the time being, their geology makes this prohibitively expensive. Britain should grab a piece of this global action as soon as possible - perhaps with a sovereign wealth fund so that the fruits are not squandered.

Despite his Cotswolds affinities, David Cameron has unambiguously endorsed fracking. He says local communities will receive economic benefits and there'll be minimal impact on a countryside that is no more "scenic" than northern Britain, and which was "industrial" itself when charcoal was used in the iron industry. It is just inhabited by people who know how to bounce the media better than those in Cheshire or Cumbria.

Since the PM cannot give this truly existential issue his undivided attention, amidst attending to Syria or gay rights abuses in Russia, he should designate an articulate champion who can make the case for shale gas with the urgency our Energy crisis demands. Michael Fallon is the obvious choice. Or is Energy policy - and hence what folk pay for such basic rights as heat and light - going to be dictated by the likes of Bianca Jagger and Dame Vivienne Westwood in what, to coin a second new word, is starting to look like a "celebocracy" as well as "chummocracy"?
David Fuller's view - I favour lobbying for fracking in the UK or wherever one lives, if your country also has considerable reserves of shale gas and oil. The benefits will be cheaper Energy costs, as we see in the USA, contributing to a more vibrant economy for many decades.

If you liked the article above and can log-on to The Times, you may also be interested in the mostly sensible emails which follow

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August 23 2013

Commentary by Eoin Treacy

Tesla Model S receives top marks in NHTSA safety testing

This article for GizMag by Angus MacKenzie may be of interest to subscribers. Here is a section
Tesla reports that the all-electric sedan received a 5 stars in every NHTSA category. Only 1 percent of all manufacturer vehicles achieve a five star rating and the NHTSA does not publish a star rating above 5. However safety levels better than 5 stars are captured in the overall Vehicle Safety Score (VSS) provided to manufacturers. The S scored a record 5.4 VSS rating and set a new record for the lowest likelihood of injury to occupants.

The test scores are based on figures obtained during front, side, rear and rollover incidents. Tesla's high front collision score was achieved in part due to its large front crumple zone. With no massive gas/diesel engine up front, the Model S' front hood becomes more effective in diffusing Energy because the entire zone being dedicated to safeguarding occupants.
Eoin Treacy's view - While Tesla has made waves in the electric car sector by delivering on the type of range people require of a car that costs from $64000 to $85000, the fact that it is also an industry leader in safety will help to alleviate concerns consumers might have about what is still a very new technology.

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August 23 2013

Commentary by Eoin Treacy

Every U.S. Home Becomes a Power House in Utility Grid's Twilight

This article by Christopher Martin, Mark Chediak and Ken Wells for Bloomberg highlights some important dynamics in the Energy markets. Here is a section
“Renewable Energy is so unlike fossil fuel Energy,” says John Farrell, a senior researcher with the Minneapolis-based Institute for Local Self-Reliance, a group pushing distributed generation. “You don't need large amounts of capital to build it, you don't need to produce it all in one place and use high- voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables.”

Farrell is a supporter of distributed power. However, the Bernstein Energy industry black book, a kind of bible of Energy trends published by Sanford C. Bernstein that's followed devoutly by institutional investors, also predicts that parity in the cost of unsubsidized solar and conventional electricity will radically change the Energy dynamic.

“The technology and Energy sectors will no longer simply be one another's suppliers and customers,” the report finds.

“They will be competing directly. For the technology sector, the first rule is: Costs always go down. For the Energy sector and for all extractive industries, costs almost always go up. Given those trajectories, counter-intuitively, the coming tussle between solar and conventional Energy is not going to be a fair fight.”
Eoin Treacy's view - My view – Themes such as the growth in natural gas supply from what were previously considered unconventional sources, the high price of Energy encouraging efficiency, the pace of technological development and a regulatory environment heavily skewed in favour of wind and solar is creating a highly disruptive environment for utilities. Those that keep pace with change will survive and possibly thrive. The outlook is likely to be much more uncertain for those that fail to innovate.

The Dow Utilities Average (P/E 14.4, DY 4.07%) has a long record of dividend growth and competitive yields and it performed impressively from the 2009 lows as demand for investments with defensive characteristics increased. The Average surged higher from November in a manner inconsistent with the previous three-year uptrend and subsequently experienced its largest decline since early 2009. The net result is a loss of momentum with prices currently trading at the same level as this time last year. A sustained move above 500 will be required to reaffirm medium-term demand dominance and question current scope for additional volatility and ranging.

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August 22 2013

Commentary by Eoin Treacy

Email of the day (1)

on the medium to long-term outlook for oil
“Please find attached a report plus slides from DNB Markets on the long term trends of the oil market. DNB got considerable media coverage with their bold – and disputed – forecast in the summer of 2012 that 2013 and 2014 oil prices would drop from the levels seen in 2011 and 2012. So far DNB has been right. Well, since last summer many other analysts have had to change their earlier optimistic (i.e. high) oil price scenarios to take into account the shale revolution and weaker demand. DNB Markets confirms its earlier predictions of cheaper oil in coming years, but not a return to cheap oil as such. The report includes a good overview of the North American shale revolution.”But does that mean Saudi Arabia will choose to cut to protect prices this time? We are not sure. The fact is that Saudi Arabia does not really need a certain oil price to balance their budget, the kingdom needs revenues. The revenues from oil sales are a function of both price and volume. It is of course not a factor of price alone. Here is some food for thought when it comes to what kind of strategy Saudi Arabia will choose the coming years:

Currently Saudi Arabia is producing about 9.8 million b/d which at 100 $/b is worth 358 billion USD per year. If as an example Saudi Arabia have to cut output by 1.5 million b/d to 8.3 million b/d to maintain 100 $/b, revenues will drop to 303 billion USD per year. How far can the oil price drop and still provide the same revenues of 303 billion USD per year? The answer is 85 $/b. Saudi Arabia could in other words earn the same oil revenues by maintaining production at 9.8 million b/d and let the oil price slip to 85 $/b as the kingdom would receive by cutting output to protect the oil price. This is just an example to illustrate the strategic choices that could soon face Saudi Arabia. The benefit for the kingdom of maintaining output at a higher level to a lower oil price is that it would provide a larger oil market share for them, and also probably higher global oil demand.

What the kingdom will choose to do is not “written in stone”. During the 1980's the Saudis cut massively to protect the oil price but changed that tactic after losing too much market share and then targeted volume instead. This time it might be a better strategy to let prices slide towards 85 $/b instead. The Saudis are fully aware of the cost curves for the shale oil industry and they know that many sellers would disappear if the oil price drifted lower than 80 $/b. Why not let the market take care of this adjustment and just let oil prices slide 15-20%? As already described if the price falls more than that, then non-OPEC will come to the rescue instead and start cutting output (drilling less shale wells).
Eoin Treacy's view - It has been our view at Fullermoney since at least 2010 that shale oil and gas represent a game changer for the Energy sector, not least because the additional supply unlocked with new technology and an innovative state of mind among wildcatters changes the dynamics of the market.

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August 20 2013

Commentary by Eoin Treacy

Peru to welcome US$15bn in copper mining projects from 2013-2015

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section
Peru's Minister of Energy and Mines Jorge Merino Tafur said $15 billion in mining project programs are now underway that will raise Peru's copper production by 1.3 million to 2.8 million tonnes by 2016.

These projects are scheduled to commence operations between 2014 and the first half of 2015, he noted.

Among these projects are Chinalco's $4.8 billion Toromocho Copper Project in Peru's Junin region with production scheduled to begin in December; Glencore/Xstrata's $5.2 billion Las Bambas copper project in the Cusco Region, scheduled to commence production in May or June of 2015; and the $5 billion expansion of Freeport-McMoRan's Cerro Verde copper mining joint venture, which is slated to start production by 2015.

Merino noted that the country has other great projects like Southern Copper's Tia Maria, the long-delayed Tambogrande gold project, Anglo American's Quellaveco and Michiquillay copper projects, Rio Tinto's La Granja Copper Project and other polymetallic deposits, which he suggested should be exploited to bring more development around the country.
Eoin Treacy's view - The Oyo Tolgoi mine came online in the last few months, bringing to fruition an almost decade long struggle to develop Mongolia's vast mineral wealth. However while the mine represents a large source of new supply, it is by no means the only major project slated to come on line in the next few years. Latin America and Africa remain significant supply growth candidates as the above article demonstrates.

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August 15 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovation
"Thank you for the chart showing the efficiency of various types of solar panel. Here is a popular press article just published making the point that solar is now nearly ready to compete - without subsidy - even with low priced coal and gas.

"The technology is advancing rapidly and there are more recent advances not mentioned in the chart nor the newspaper article. Graphene may have the potential to trump the best of existing technology by delivering over 60% efficiency in capture of sunlight.

“So, no need for those ugly inefficient subsidized windmills!

“I observe that the share price of some solar power companies has sky-rocketed in recent months, with some being up 4-5x this year.

“What a wonderful age of opportunity we live in!"
Eoin Treacy's view - I share your optimism about the future and thank you for these informative articles which help to highlight the pace of technological innovation in solar cells and how this is altering perceptions of the sector's viability for electricity production. As you point out solar cell manufacturer shares have been rallying impressively since January. (Also see Comment of the Day on July 19th) It is worth considering the cause and effect of the rally in renewable Energy shares.

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August 13 2013

Commentary by Eoin Treacy

Email of the day (2-4)

on additions to the Chart Library
“Please could you add the share Tableau Software (DATA on NYSE) to the chart library. This company IPO'd in May and is now trading around double that level so worth looking at the chart. Many thanks"


“Please add Energy Assets Group (EAS) to the chart library”
Eoin Treacy's view - Thank you for these suggestions which have been added to the Chart Library

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August 13 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovations
“An interesting technology development in Energy production. Fullermoney readers may be interested in this video report on research into the printing of solar cells just like Australia's polymer banknotes.”
Eoin Treacy's view - Thank you for this informative article highlighting the different ways in which solar power production can be enhanced. The evolution of polymer solar cells evokes the trade-off that occurred in chip manufacture with the advent of cheap memory in the 1980s. This allowed Intel's higher Energy consumption models to dominate until ARM gained an advantage in handheld devices where heat and Energy consumption trumped brawn.

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August 13 2013

Commentary by Eoin Treacy

State Council issues policies to form a Rmb4.5tn market

Thanks to a subscriber for this interesting report by Michael Tong and Jun Ma for Deutsche Banks which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
On 11 August, China's State Council published a detailed set of guidelines to boost the environmental protection and Energy conservation industries and ncrease their domestic demand and improve their economic structure. The State Council aims to raise the total output value of the environmental protection industries to Rmb4.5 trillion (USD730 billion), or a CAGR of 15%, by 2015 to form a new pillar industry for Chinese economic growth. In this note, we provide a summary of this newly announced policy document and a list of the major players which may benefit from increasing investment and expanding market demand as a consequence of strong government support.

Guiding principles
The faster development of the Energy conservation and environmental protection industries should 1) stimulate potential market demand to form a new economic growth driver, 2) expand domestic consumption, stabilize growth, and optimize the economic structure, 3) improve the environmental quality of certain livelihoods and accelerate ecological development.

A Rmb4.5 trillion market by 2015
By spurring technological innovation and expanding demand for green and Energy-saving products and related services, the government aims to grow the Energy conservation and environmental protection industries at a CAGR of 15% or above, with total industrial output value to reach Rmb4.5tn by 2015.

Key areas of environmental protection
Key areas of environmental protection: denitrification and desulphurization equipment, new water treatment technologies and equipment, integrated system solution for solid waste treatment, technologies for remediation of contaminated soil, development and application of environmental monitoring instruments.

Key areas for Energy conservation
Key areas for Energy conservation: high-efficiency boilers, high-efficiency electrical motors, regenerative combustion technology and equipment, new Energy vehicle technologies, industrialization of semiconductor lighting technology
Eoin Treacy's view - The success of China's development plans rests on enhancing the productivity of its human capital. Improving the living conditions of its citizens through the provision of sewage, clean air and fertile land are among the administrations priorities as the economy transitions to more of a services and valued-added focus.

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August 12 2013

Commentary by Eoin Treacy

German Utilities Hammered in Market Favoring Renewables

This article by Tino Andresen for Bloomberg may be of interest to subscribers. Here is a section
While utilities across Europe have seen demand dwindle, those in Germany are also contending with a phase-out of nuclear Energy. RWE and EON acknowledge the decision to close all reactors by 2022 forces them to abandon plants they had counted on to produce income for years.

Smaller competitor EnBW Energie Baden-Wuerttemberg AG said last month it will shut four plants in Marbach and Walheim following “a drastic fall in revenue.” The utility expects earnings from generation and trading to plunge as much 40 percent this year.

The shift from fossil fuels has also hurt other operators in the country. Vattenfall AB, a Swedish utility with coal and nuclear plants in Germany, announced plans July 23 to split off non-Nordic units after writing down $4.6 billion. It will have to cut investments and push through deeper cost cuts, it said, partly blaming the failure of nations to align policies.

“The idea of an integrated European Energy market is in shambles,” Chairman Lars G. Nordstroem said last month. “Energy politics is becoming increasingly national. Everyone looks at their natural assets and their policies.”
Eoin Treacy's view - Nothing highlights Europe's Energy disadvantage more than the underperformance of the utility sector. Not only is the Eurozone a major Energy importer without a significant domestic supply of oil and gas, but a number of countries have embarked on an ideological quest to introduce renewable Energy at uncompetitive rates.

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