High-speed Internet can exert a profound impact on how local businesses and consumers improve their own personal productivity and expand their entertainment venues. Our thinking here is very much along the lines of our “Cell Phone Indicator” that we use in emerging markets – improved communications boost the local economy.

The House Energy and Commerce Committee approved $6 billion in rules for billions in government funds to spur high-speed Internet networks in unserved and underserved areas.

The Internet funding portion of the stimulus bill — a potential huge boon to phone, cable, and wireless companies – helps fulfill President Obama’s campaign promise to make high-speed communications ubiquitous in America. The $6 billion is widely considered a first step in a program that could last several years.

The grants will be issued by the Commerce Department and the U.S. Department of Agriculture. Lawmakers and trade groups are arguing over some language ambiguity regarding spending, but that is not expected to become a major impediment to the roll out of these new services.

Once the new high-speed infrastructure is in place, customers can expect to have access to services that many Americans currently enjoy such as streaming video, teleconferencing, mobile Internet and effective e-commerce.

Even more important, a reliable and fast Internet infrastructure is perhaps the number-one motivator for larger corporations to relocate into these regions that can provider low-cost, high-quality labor forces. Coupled with tax incentives, rural Internet can substantially boost local economies – and the fortunes of independent telephone companies that can deliver bundled communications services.

How big is this rural Internet market? A 2007 survey by the Pew Internet and American Life Project concluded that only 38% of rural residents have a broadband Internet connection. In the cities and suburbs, the penetration rate is 55%.

The new bill also allocates $1 billion solely for wireless carriers to bolster their infrastructure for mobile cell phone and laptop connections.

While major players such as Verizon, AT&T, Comcast and others will profit from this new cash infusion, we believe local services stand to gain as well. One in particular that we identified is CenturyTel, Inc. (NYSE: CTL), in Monroe, Louisiana.

Currently trading at slightly over $27.00, CTL is in the low end of its 52-week range of 20.45 – 40.35.

In the third quarter ending September 30, 2008, CTL reported revenues of $650,000, down 8.2% from the same period the year before. Its net income plunged 23.5% to $82,760.

So why do you we believe CTL merits your attention? Because CTL added 20,600 high-speed Internet customers during Q3 – representing a 2.5% revenue contribution from Q3 in 2007 for similar services.

One troubling piece of data about CTL is its recent acquisition of local telco, Embarq Corp. in Overland Park, Kansas. As part of the deal, CenturyTel will assume $5.8 billion in debt as part of the all-stock merger.

Still, what remains to be seen is how much Embarq’s territory could benefit from the $6-billion dole out.

We suggest you keep an eye on CTL as the money pours forth from Washington. Local economies, and their telephone companies, could stand to benefit mightily from an upgraded digital network.

“There has been a lot of talk recently about Embarq wanting to be acquired,” Kagan told MarketWatch.com. “However, the financial crisis that is on the front page every day made finding a partner difficult. That may have lowered the price Embarq hoped to get. CenturyTel saw an opportunity and jumped in to acquire Embarq. Timing was on CenturyTel’s side in this deal.”

The all-stock deal – announced yesterday (Monday) – calls for CenturyTel to pay $5.8 billion for Embarq, and to assume $5.8 billion of that company’s debt, Network World reported.  The buyout will knit together two phone companies with a local/regional focus that cater chiefly to customers in less-populated parts of the country, MarketWatch reported. The new combined venture will have operations in 33 states and combined revenue of more than $8.8 billion.

The acquisition “makes great strategic sense,” Glen F. Post III, the chairman and chief executive officer of CenturyTel, who will assume the CEO’s mantle with the merged company, said during a conference call yesterday. “It diversifies our revenue and provides us with expanded networks, expertise and financial resources to build long-term shareholder value.”

U.S. telecom carriers have spent at least $150 billion on acquisitions during the past three years as they bulk up to slash operating expenses – and to match up better against new rivals emerging from such businesses as cable TV and wireless communications. Already this year, Verizon Communications Inc. (VZ) agreed to buy Alltel Corp. for $5.9 billion in cash and $22.2 billion in debt, a move that makes it the largest U.S. phone company, Bloomberg News said.

Verizon reported its third-quarter earnings yesterday. [For additional details, check out Money Morning’s Global Investing (News) Roundups, elsewhere in this issue.]

CenturyTel rebuffed a $9.2 billion offer from Alltel in 2001, selling the phone-service operator its wireless assets instead.

Analysts expect the deals to continue – and probably to accelerate. Indeed, Credit Suisse Group AG (ADR: CS) analyst Chris Larsen wrote in a research note that the CenturyTel/Embarq merger would likely serve as the catalyst for the long-expected wave of consolidation deals between rural telecom carriers. Those deals could well include a move by Windstream Corp. (WIN) – the second-biggest rural carrier – to buy out the much-smaller Frontier Communications Corp. (FTR).

“We think a Windstream/Frontier transaction is the next most logical [deal],” Larsen wrote.

Consolidated Communications Holdings Inc. (CNSL) is also viewed as a potential buyout target, Reuters reported.

CenturyTel may also look at doing more deals within in a year, if there are more buyout opportunities that match up well, Post, the CEO, said.

Embarq solicited offers earlier this year, but the company’s plans to auction itself off to the highest bidder were shelved by the global credit crisis, which made it tough for potential suitors to line up financing for any deal. In early October, however, news reports surfaced that Embarq had hired JPMorgan Chase & Co. (JPM) to look for buyers for the company.

The Overland Park, Kan.-based Embarq is the local phone company created by the 2006 spin-off from Sprint Nextel Corp. (S), and its service area covers 18 states. It provides local and long-distance communications services to both consumer and business customers. This includes voice, data, high-speed Internet, satellite video and wireless services, sold both on a wholesale level and through third parties.

CenturyTel also provides local and long-distance voice, Internet, broadband and television services in 25 states. As of Dec. 31, its local exchange telephone services unit operated 2.1 million telephone access lines in 24 states, of which about 70% were concentrated in Alabama, Arkansas, Missouri, Wisconsin and Washington.

The buyout price of $40.42 per share for Embarq represents a 36% premium over the company’s closing share price from Friday.  Since Embarq is twice as big as CenturyTel, Embarq shareholders will own about 66% of the combined company after the deal closes.

Although Embarq is the larger of the two companies, it faces greater competition from cable operators and other telecom-service providers because it operates in some urban and suburban markets. The Monroe, La.-based CenturyTel operates almost entirely in rural areas where competition is less intense.

But the newly merged venture should be much more competitive overall, since it could realize annual savings of about $400 million within three years, executives with both CenturyTel and Embarq said on yesterday’s conference call.

While Post remains as CEO of the merged company, Embarq CEO Thomas A. Gerke will stay on to serve as executive vice-chairman.

CenturyTel yesterday reported operating revenue of $650 million for the third quarter of 2008, down more than 8% from the same quarter in 2007. Net income was $82.8 million, down more than 23% from a year ago.

Embarq yesterday reported operating revenue of $1.5 billion for the third quarter of 2008, down about 4% from the third quarter of 2007. Net income was up nearly 2%, to $160 million. Through the first three quarters of the year, the company’s operating revenue was $4.6 billion, down from $4.8 billion for the first nine months of 2007.

Once the deal is finished, the newly combined company will have about 8 million telephone customers, 2 million broadband customers, and 400,000 video customers.

The purchase is CenturyTel’s largest since selling shares to the public in 1968, and may pose a challenge – in part because it will bolster the company’s subscriber ranks in such economically hard-hit regions as Nevada and Florida, where foreclosure rates have jumped, Bloomberg said.

“This increases CenturyTel’s exposure to some difficult economic environments like Las Vegas and Florida, markets that have been a little more hard hit than they’re used to serving,” Stifel Nicolaus & Co. Inc. (SF) analyst Chris King told Bloomberg. King rates CenturyTel shares as a “Buy.”

Before the deal can close, stockholders from both companies will have to provide their approval. The merger will also have to pass muster with state and federal regulators. The companies hope to close the deal in the second quarter.

Source: CenturyTel’s Buyout Bid for Embarq Will Likely Jump-Start a Wave of Mergers Among Rural Telecom Players

In fact, the decline in U.S. oil consumption will be quite painful for pretty much every American. Prices for fuel will rise, and you will wish that was the only problem. Spot shortages will turn into large scale “dry outs.”

You should anticipate that every level of government will do things to discourage using liquid fuel, from charging user fees and “congestion pricing” to higher taxes. Heck, the government might even appeal to your patriotism to drive less. And don’t be surprised to see rationing in one form or another, even with expensive fuel and costly fees and taxes.

But this is not a book review of James Howard Kunstler’s 2005 volume The Long Emergency, or his recently released (and exceedingly well-written) World Made By Hand. The point is that oil use will fall in the years to come, because world oil output is falling. You cannot use what is not there in the first place.

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Setting the Stage for CTL

So this sets the stage to explain why Coal to Liquid (CTL) is about to simply take off in the U.S. The U.S. will adopt CTL, because it has to do so. There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

According to a 2006 estimate by the National Coal Council, a robust CTL industry could produce about 2.6 million barrels per day of oil-equivalent fuel by 2025. This is about 12.5% of current U.S. daily demand. But it is tricky to draw comparisons over time frames of nearly 20 years. Certainly, a lot of things will change between now and 2025 in the realms of both demand and supply.

And a large-scale CTL program will dramatically increase the demand for coal. Can U.S. mines deliver? There are issues here, to be sure. The U.S. is supposed to have that mythical “250 years of coal reserves, at present rates of consumption.” But that estimate is 35 years old. And much U.S. coal is buried deep, in thin seams, and thus hard to mine. Plus, some 40% of U.S. coal resources are in Alaska — much of it north of the Arctic Circle. So even with coal, the U.S. needs to be wary of believing its own press releases.

***********************************

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The U.S. Department of Energy says it could be the key to unlocking an oil deposit in the Rocky Mountains that’s three times the size of Saudi Arabia’s reserves.

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***********************************

Still, CTL can serve as a liquid fuel supplement for at least several decades. And CTL technology is pretty well developed, based on many decades of operational success by Sasol in South Africa. The Air Force believes that the CTL plants of the future can even be relatively “green,” based on evolving technology for removing pollutants from the coal and sequestering carbon dioxide. It will also be possible to reduce the volumes of coal in the blend by adding some types of plant-derived materials.

Thus, it is not a question of if the U.S. will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.

One way or another, CTL is coming. And one way or another, we at Penny Sleuth are going to find a way to invest in the companies that will build it out.

Until we meet again…
Byron W. King

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Source: Stand By for CTL

In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

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The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors.

Future Liquid Fuel Supplies — We’re Running Out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over five million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

*************************************

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But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Washington will be asked this week to answer allegations that subsidies amounting to 11p a litre on B99 [biodiesel with up to 1% petroleum added] exports from the US, plus “splash-and-dash” operations being conducted through the US, represent unfair competition.

The European Biodiesel Board lodged a formal complaint against the US with [the European commissioner] at the end of last month after a disastrous period for British, German and other biodiesel producers.

D1, one of the leading UK firms, announced in April that it would be closing its newly built refineries and laying off all its staff there because it could not compete against cheap US imports. Elliott Mannis, D1’s chief executive, said it was an “unbelievable situation” that Europe had sat on its hands so long and let B99 cause turmoil in a market that has opened up to huge new demand.

The case against the US will not be one-sided. Manning Feraci, of the US National Biodiesel Board, has said: “It is hypocritical for the EBB to cry foul while they benefit from a blatant trade barrier.”

Byron King in Energy and Oil is bullish on another alternative energy source: coal to liquid or CTL.

“The US will adopt CTL, because it has to do so,” says Byron. “There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

“It is not a question of if the US will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.”

“The biofuels debate is interesting from a number of angles,” says Merryn Somerset Webb in Money Week. “Firstly, it is not absolutely true to say that the commitment of land to the production of biofuels automatically reduces food production everywhere (although that hardly makes the European Union’s full-on encouragement of plant-derived fuel right).

“Supporters of biofuels tend to use the Brazilian experience as justification for the dash to plant-derived fuel alternatives, not that that country’s success should detract from the fact that there are a lot of other places where land which would otherwise have been used to grow food for human consumption has now been given over to the production of biofuel to feed machinery!

“The EU could, for example, call a halt to its pre-announced intention to derive 5.75% of petrol and diesel to be manufactured from plants, although we understand the EU’s difficulties given growing stresses in the oil market too.”

This from The Wall Street Journal:

With oil’s multi-year ascent showing no signs of stopping — crude futures set another record Tuesday, closing at $129.07 a barrel in New York trading — energy security has emerged as a major concern for the Pentagon.

The U.S. military consumes 340,000 barrels of oil a day, or 1.5% of all of the oil used in the country. The Defense Department’s overall energy bill was $13.6 billion in 2006, the latest figure available — almost 25% higher than the year before. The Air Force’s bill for jet fuel alone has tripled in the past four years. When the White House submitted its latest budget request for the wars in Iraq and Afghanistan, it tacked on a $2 billion surcharge for rising fuel costs.

Synthetic fuel, which can be made from coal or natural gas, is expensive now, but could cost far less than the current price of oil if it’s mass-produced.

The report also reveals that the Pentagon has embraced planning around peak oil theory:

Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, “energy security becomes an oxymoron.”

“The U.S. will adopt liquid coal (also known as coal to liquid or CTL), because it has to do so,” says Byron King in his Energy and Oil blog.

“There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for liquid coal.”

The oil will simply not be available in the volumes that the government, industry and people in general have come to expect. So the phenomenon of declining oil use will not be voluntary, graceful or cheap.

In fact, the decline in U.S. oil consumption will be quite painful for pretty much every American. Prices for fuel will rise, and you will wish that was the only problem. Spot shortages will turn into large scale “dry outs.”

You should anticipate that every level of government will do things to discourage using liquid fuel, from charging user fees and “congestion pricing” to higher taxes. Heck, the government might even appeal to your patriotism to drive less. And don’t be surprised to see rationing in one form or another, even with expensive fuel and costly fees and taxes.

But this is not a book review of James Howard Kunstler’s 2005 volume The Long Emergency, or his recently released (and exceedingly well-written) World Made by Hand. The point is that oil use will fall in the years to come, because world oil output is falling. You cannot use what is not there in the first place.

Setting the Stage for CTL

So this sets the stage to explain why Coal to Liquid (CTL) is about to simply take off in the U.S. The U.S. will adopt CTL, because it has to do so. There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

According to a 2006 estimate by the National Coal Council, a robust CTL industry could produce about 2.6 million barrels per day of oil-equivalent fuel by 2025. This is about 12.5% of current U.S. daily demand. But it is tricky to draw comparisons over time frames of nearly 20 years. Certainly, a lot of things will change between now and 2025 in the realms of both demand and supply.

And a large-scale CTL program will dramatically increase the demand for coal. Can U.S. mines deliver? There are issues here, to be sure. The U.S. is supposed to have that mythical “250 years of coal reserves, at present rates of consumption.” But that estimate is 35 years old. And much U.S. coal is buried deep, in thin seams, and thus hard to mine. Plus, some 40% of U.S. coal resources are in Alaska — much of it north of the Arctic Circle. So even with coal, the U.S. needs to be wary of believing its own press releases.

Still, CTL can serve as a liquid fuel supplement for at least several decades. And CTL technology is pretty well developed, based on many decades of operational success by Sasol in South Africa. The Air Force believes that the CTL plants of the future can even be relatively “green,” based on evolving technology for removing pollutants from the coal and sequestering carbon dioxide. It will also be possible to reduce the volumes of coal in the blend by adding some types of plant-derived materials.

Thus, it is not a question of if the U.S. will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.

One way or another, CTL is coming. And one way or another, we at Outstanding Investments are going to find a way to invest in the companies that will build it out.

Until we meet again…

Byron W. King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: The Coal to Liquid Debate Part II

I heard some of the “inside baseball” information on one major DOD program that will convert large amounts of U.S. coal into synthetic liquid fuel. This will be a government-industry partnership, with the U.S. Air Force as the lead agency.

In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors. It made me glad to have the likes of CONSOL Energy (CNX: NYSE) and Foundation Coal Holdings (FCL: NYSE) in the portfolio. I already have some other ideas for additional investment opportunities in this sector. So keep your Outstanding Investments subscription current.

Future Liquid Fuel Supplies — We’re Running out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Really, by 2025, the rest of the oil-producing world will simply lack the product to export. This will be due to reasons of depletion on a global scale, and fast-growing internal demand in oil-producing nations. Gasoline consumption in places as diverse as Russia, Iran, Venezuela and Saudi Arabia is just soaring, so there is less net oil available for export.

And oil output everywhere is flat or declining. (Just last month, Russia announced a plateau in oil output.) And closer to home, Mexico’s Cantarell field is simply crashing at an annual depletion rate of 8% or more.

So what will happen in 2025? Will the U.S. pump its own oil? No, it’s not there. Will the U.S. continue to import large volumes? No, it won’t be available. The bottom line is that conventional oil sources for the U.S. — domestic output and imports — are simply drying up.

Be on the lookout for Part II tomorrow!

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: The Coal To Liquid Debate Part I

The chart is below, click on it to see it full size.

Click on the image for a larger version

Queensland’s coal industry has never had it better. Yet one of the ironies of the recent rise in contract thermal and metallurgical coal prices is that coal producers may not be able to take advantage of them this year.

If you missed the news, thermal coal prices for 2008 more than doubled from $50 to $130. Meanwhile, the 2008 contract price for coking coal used by steel makers tripled, going from $80 to $300.

Unlike more widely traded commodities such as oil and copper, the prices for coal (both thermal and metallurgical) and iron ore are set in annual negotiations between major producers and consumers. The major producers are the large mining companies. Those include BHP Billiton, Rio Tinto, Xstrata (in coal), and Value (in iron ore).

The major consumers for thermal coal, used to heat boilers for steam-generated turbines and electric power, are Japanese Korean and electric companies. The relationship between these companies and Aussie firms go back all the way to the 1960s, when Japan and Korea began their post-war industrial growth spurts. For steel, the major consumers of Australian metallurgical coal and iron ore are Japanese, Korean, and, of course, Chinese steel makers. China is the world’s largest steel-producer (and consumer).

The price rises should be good news for Aussie producers. The trouble, at least in the coal business, is that bad weather and infrastructure bottlenecks are making it harder for Aussie firms to increase production volumes this year. You can’t sell what you can’t get to market.

So while export earnings for Aussie resource producers will be up this year because of the rising coal price, actual production volumes will not increase. As evidence, consider the first quarter production figures from Rio Tinto earlier this month. Rio’s coal operations are in the Bowen Basin of Queensland. That area was subject to heavy flooding in the first quarter. Coal production fell by 27%.

So who will benefit from the rising contract prices? The short answer is that coal mining service companies probably will. For the coal producers to expand production, they will to invest in mine expansion and infrastructure. In Queensland, where many of the mines are underground, that means work for the specialist firms that help build underground mines. Stocks to watch in the sector include:

1. Walter Diversified Services (ASX:WDS). According to the company, “Walter Diversified Services Limited (WDS) is principally engaged in the provision of specialist services to the underground coal mining industry, and to the infrastructure oil, gas and water pipeline construction and maintenance sectors in Australia.”
2. Whitehaven Coal Limited (ASX:WHC). Whitehaven actually operates several open-cut coal mines in New South Wales. But the company, which is really a group of companies, also mines and sells metallurgical and high grade thermal coals
3. Cockatoo Coal (ASX:COK) Cockatoo isn’t producing any coal yet. But it’s involved in four projects in Queensland, the Wonbindi project, the Dingo Coal Project, Guluguba and Mintovale. Cockatoo’s are in Queensland’s Surat coal basin, with slightly lower quality than the Bowen Basin coal. But as they are unmined, when production commences the company will be able to take full advantage of higher contract prices.

Another development to watch for? Coal-to-liquids (CTL) production of diesel fuel becomes economic with high crude oil prices, especially in areas where “stranded coal seams” are not large enough to mine economically as conventional coal. Those stranded seams now have to new routes to energy viability.

We covered one Aussie company engaged in the CTL business late last year in the Australian Small Cap Investigator. We suspect that there may more like it soon, if current events are any indicator.

Al Robinson
for The Daily Reckoning Australia

Food the world over continued to surge in price yesterday.

Last week, we were shaking our heads at rice’s parabolic run up to $19 . Yesterday in Chicago, futures busted through $20 per 100 pounds. Chicago rough rice jumped 42% in the first quarter and has more than doubled in the last 12 months.

Markets in Thailand and Vietnam rose to new all-time highs, as well.

“Thirty-three countries around the world face potential social unrest because of the acute hike in food and energy prices,” announced World Bank chief Robert Zoellick, one of the catalysts for yesterday’s buying spree. For those nations, “there is no margin for survival.”

Accordingly, nations across the globe are scrambling to shore up food supplies and nix exports. In addition to new trade controls imposed by India, Egypt, Vietnam Cambodia, the Philippines and China, Saudi Arabia announced it too would cut import taxes, including totally eliminating its wheat tariff.

“It’s more than just commodity prices rising,” Chris Mayer notes. “We could actually see shortages of certain commodities. You have Saudi Arabia and India scrapping import duties on foodstuffs to try to encourage more supply.

“On the other side, you have countries such as Vietnam saying rice exports will fall 11% this year. That has far-reaching effects. For one thing, it will change the way people spend their money — more on food — and it will also encourage agricultural investment.”

Corn and wheat — the American diet staples — also shot up yesterday. Wheat popped 4%, to $9.36, in Chicago on word of exceptionally dry conditions in the Great Plains and abnormally wet soil in the Midwest. Wheat traded as high as $13 in March, but has since backed off.

Corn, on the other hand, found itself at a new record high yesterday. Corn for May delivery rose to just under $6 per bushel.

“This cold, wet start to April,” explains Kevin Kerr, “means farmers may not get corn into the ground before May 1. That is devastating. If cold, wet weather persists in the Corn Belt and farmers don’t plant until after May 1 and then, as in ‘83, we see dry weather come in around June, well, then you can kiss this crop goodbye.”

Even if farmers managed to sow their crops, Kevin tells us that current yields based on planting intentions have no room for error… nothing less than a near perfect harvest will satisfy demand.

“A disaster would take only a nod from Mother Nature. Last year, Australia and China — maybe this year it’s our turn to get spanked. I have decided to head out to see some of my farmer friends in Minnesota and Iowa with my family in a couple weeks. I will keep you posted on how the fields look as I visit each of their farms.”

The 5 will tag along for the ride… stay tuned.

Even sawdust prices have doubled over the past year. According to the AP, a significant decline in lumber production this year has damaged global sawdust supply. Demand for the stuff — for animal bedding, particleboard, and fast-food hamburgers — is evidently considerable.

Due to the slowdown in housing, U.S. sawmills shipped about 114 million board feet of lumber per day during the first quarter — a 15% decline from the same period in 2007. Down nearly 30% from 2006, says the U.S. Forest Service.

The U.S. stock market remained mostly flat yesterday. Traders kept major indexes unchanged most of the day, apparently content with Tuesday’s massive rally. Traders looked like they might dump shares across the board after Ben Bernanke admitted that the U.S. economy might contract this year. But by the end of the day, neither the Dow, S&P or Nasdaq fell more than a few tenths of a point.

“We had a good bottom,” legendary investor George Soros said yesterday of the rally following the JP Morgan/Bear Stearns buyout. But “This will probably not prove to be the final bottom,” he added, suggesting that this faux-bottom might last from six weeks to six months.

“I don’t think we are halfway through the fallout, because to think what happens in the financial markets doesn’t affect the real economy is nonsense… This whole crisis underscores the conceit of many in the markets that we can pretend to understand the properties of complex asset structures when they have cyclical sensitivities, and we have not experienced those since they were created.”

Like the U.S. markets, dollar trading was mixed yesterday and this morning. The dollar index still trades around 72.5, and as we write this morning, we see a slight bias toward buying those belabored greenbacks. The euro trades for $1.56, pound for $1.99 and yen 102.

Crude oil has endured a volatile 24 hours… the black goo rose 4% yesterday, to nearly $105, on a surprise decline in gasoline stockpiles, courtesy of the U.S. Energy Information Association. In spite of recent reports indicating that Americans were cutting back gas consumption, the EIA said supplies fell 4.5 million barrels last week, double the decline expected by the Street.

This morning, crude futures are being sold off on word that crude oil supplies are growing and some dollar strength. Last we checked, a barrel of the light sweet stuff was trading for $103.

For once, gold didn’t budge as oil prices swung up and down. The precious metal has been stuck in a tight range most of the week, just below $900.

“I’ve got some ‘inside baseball’ information on one major upcoming Department of Defense program,” Byron King wrote to us this morning, after rubbing elbows with DoD and Energy Department officials this week in Washington. “An upcoming U.S. Air Force-industry partnership will aim to convert large amounts of U.S. coal into synthetic liquid fuel.

“In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. Funding will come from the private sector, not the Air Force or any other government source.

“The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy.

“Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development.

“The wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon. This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors.” Byron’s prepared the Outstanding Investments portfolio accordingly, and promises to add a few investment opportunities in this sector soon. If you haven’t already, subscribe here.

We almost felt sorry for Ben Bernanke yesterday. He looked tired in his testimony before the Joint Economic Committee of Congress. Every congressman who had the floor made effectively the same statement: “There’s panic among my constituents. They’re facing bankruptcy and foreclosure. This is real. They are in real pain. You’re the expert, what are we supposed to do?”

This guy could use a nap…

Bernanke’s responsibility at the Fed is first and foremost to the Fed… a private entity set up to run the nation’s money. He paid lip service to price stability and maximum employment. He recommended Congress focus on education and energy policy. But of late, the Fed’s been hamstrung keeping global banks solvent in a liquidity crisis. The dollar and Main Street be damned. Monetary policy, our good friend Kurt Richebacher tried to prove ad nauseam, is effective only up to a point. Bernanke, for what it’s worth, appears to be willing to admit that fact publicly for the first time.

Congress’ duty in this case is to get its own fiscal house in order — rein in deficit spending and quit wagging fingers at everyone else for mucking up. But the hard choices it’s faced with make it impossible for any in Congress to take a stand on government revenues, social programs, the endless war or pork spending without fear of losing their jobs.

None of the congressional members brought up Fannie Mae or Freddie Mac, the mortgage enablers established by that august body for the purpose of greenlighting mortgages at the local and regional level in effort to meet their political mandate that every citizen be entitled to their shot at the American Dream.

Through these government-sponsored agencies, the U.S. mortgage market has effectively been nationalized by Congress. The Financial Times reported this morning, Fannie, Freddie and the FHLB network provided 90% of the financing for new mortgages at the end of 2007.

“If I’m reading the chart correctly,” writes a reader, “just over a paltry third of us here in the U.S. believe we are having a positive influence on the world.

“This is good! I’d have thought we were much more arrogant than that, and I’m relieved to see there’s some humility here in my homeland. It would be truly disturbing if the vast majority of us believed we were having a positive influence on the world, while the rest of the world disagreed. Maybe we aren’t the ugly Americans we’re often reputed to be. And if we really are ugly Americans, it’s comforting to see that at least we realize our own shortcomings.”

The 5 responds: Unfortunately, that was a BBC poll. While they did include Americans in the sample, it was a predominantly international look at the perception of the U.S. and other countries’ impact on the world. It may yet be as disturbing as you think. But then, “Markets make opinions” the old-timers say. We’ll have to see how this financial crisis plays out. Humility on a massive scale may yet be in store for Americans.

“The sweeping financial ‘reform’ announced by Hank Paulson is quite worrisome,” writes another.

“If allowed to go into effect as announced, we are basically giving control of our financial system to the agency that created the mess to begin with. This is a private company with no answerability to the people, or even the Congress, if truth be told. It is also extremely opaque in its operations. With these new powers, it could put all the pieces in place for any type of action behind the scenes and spring it on the populace, full-blown at a moment’s notice.

“What I am specifically concerned about at first glance is the ability of the Fed to implement price and capital controls. Could you give some insight into how such measures would affect the common working man/woman and what a person with moderate means can do to protect against the most pernicious effects of such action?”

The 5 responds: History shows price controls… or any centralized control of the economy… would be a disaster. For a good look at centralized versus free markets in the 20th century, we recommend Daniel Yergin’s book and PBS documentary Commanding Heights. We still believe Bernanke, the Fed and even Paulson want to avoid price controls and let the market sort these problems out as much as possible.

But history also shows that the more egregious the economic situation, the more the people want their government to “do something” about it, including price and capital controls. As we pointed out earlier this week, we just passed the 75th anniversary of the day FDR declared it a crime for citizens hold gold. Crazier things have happened.

What can you do about it? Raise your voice or get the hell out of the way.

“Risk, scarcity and what you can do about them”… today’s themes in a nutshell. Judging by pre-enrollment at our investment symposium in Vancouver this year, readers of The 5 are as keenly interested in these themes as we are. Come join us as we host some of the most engaging speakers in the independent investment world and nearly 1,000 of your fellow travelers:

A View From the Peak: Seeking Profits in a Time of Risk and Scarcity.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Our bulletin board aficionado Gunner Guenthner announced his latest “jumper” from the Pink Sheets to the Amex this morning. He’s hammering away an update as we speak… stay tuned. Nanocaps “jumping” to an exchange generally indicates something great is happening with the company… institutional and pricing support are likely follow.