“Oil prices and [their] moves this year have reflected times of historic upheaval in the world economy,” wrote Phil Flynn, of Alaron Trading. This is “all about the price of oil adjusting itself to a new world economic order and the price of oil adjusting to the fears and the constantly evolving economic crisis.”

OPEC will have to be part of that adjustment, and the cartel is caught between the proverbial rock and hard place.

Mark T. Williams, of Boston University, notes that “the real story is how will OPEC react, and will they become more aggressive in restricting supply.”

Williams continued, writing of the cartel that: “Should they become more aggressive in supply quotes, how will this impact the economy? In particular, the global economy is vulnerable and such OPEC-imposed quota restriction could push the economy in even a deeper recession, further pushing down oil prices.”

Source: Oil Plummets Again, OPEC Caught in a Bind

Crude fell even as OPEC was pondering a second production cut. Abdullah al-Badri, OPEC’s secretary general, said the cartel could cut production again if prices keep falling. “We will have to wait and see how the market will react [but] if this problem continues then we will have another cut,” Badri said.

“OPEC is losing the war on oil prices,” wrote Phil Flynn, of Alaron Trading. “The truth is that another emergency meeting or talk of another production cut before the first one has had a chance to take hold is a sign of OPEC desperation.”

“OPEC doesn’t know what to do at this point,” said DTN’s Darin Newsom. “Prices keep falling due to demand decreases and are not responding to cuts in supply … Certain members, most notably Venezuela, aren’t making money with crude at these price levels.” So, it’s “not surprising that another round of meetings are being called for.”

Source: Oil slips slightly -  OPEC mulling a second production cut

Inflation is up significantly from the 1.7% increase reported in April, Statistics Canada reported yesterday (Thursday). And high gas prices are to blame as fuel costs rose 15.0% in May compared with the same month last year – that’s considerably faster than the 12-month change of 11.6% posted in April.

Excluding gasoline prices, 12-month inflation grew 1.6% in May.

Last week, the central bank voted to keep its overnight interest rate at 3%, warning that inflation risks have “shifted slightly to the upside.” But the bank quickly followed that up by saying global demand for Canadian goods and services remains strong despite a U.S. slowdown.

“This report will not push the bank to raise rates in 2008, but we do see 100 basis points of hikes coming in 2009 as Canada’s inflation problem heats up,” Meny Grauman, an economist with CIBC World Markets Inc. in Toronto, said in a note to clients, Bloomberg News reported.

With an end to the rate cuts, the Canadian dollar is on the rise. The loonie has gained 1% since the June 10 decision to hold rates steady, Bloomberg reported.

Recession Protection?

Earlier this month, Canada announced its gross domestic product (GDP) shrank 0.1% in the first quarter, marking the country’s first decline since the second quarter of 2003.

But this is where inflation could actually be a friend.

In today’s world, where interest rates are low and commodity prices are high, Canada’s in a very strong position for two reasons:

• It has oil reserves – somewhat larger than the Middle East – in the form of the Athabasca oil sands.

• And it’s the world’s largest producer of uranium, with 25% of the world market. (Australia is a close second, with about 23%.)

Since Canada is a chief oil exporter, its oil companies are on the receiving end of soaring prices. And in turn, that helps pad the economy’s pocket, becoming an unlikely protective barrier to another quarter of negative GDP growth.

Also working in the economy’s favor, month-to-month wholesale sales jumped 1.4% in April, more than doubling forecasts of 0.6%, Reuters reported. This suggests that domestic demand is able to wade through inflationary waters and lends credence to justifying a future interest rate hike.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is July 15.

Source: Can Inflation Save Canada from Recession?

Market participants shrugged off supply threat news from Nigeria. Royal Dutch Shell reported that it had shut in production at its main offshore oil field after an attack by boat by local militants. The Shell platform produces 200,000 barrels a day.

Instead traders focused on a decision by China’s National Development and Reform Commission to raise gasoline, diesel and jet-fuel prices by 17, 18 and 25%, respectively.

“This follows the trend of other Asian countries reducing government fuel subsidies, which should, over time, put a dent in demand,” said analysts at Action Economics.

However, Sean Brodrick, a natural resources analyst for MoneyandMarkets.com, wrote that “oil bears and stock bulls alike are seizing on this news from China like drowning men grasping at lifelines … [but] I hope they can live with disappointment.”

Upping China’s gasoline and diesel prices by 46 cents a gallon, is “probably not enough to have much impact on existing demand,” Brodrick said.

Source: Crude Plunges

The first comes from Karl N. and he says…

Charles, First you have to buy into the assumption that fuel prices are realistic and will continue to increase! In reality, there is no reason for them to be where they are.

Second, Ethanol requires no more energy to produce than gasoline. Producers must pump, refine, and transport gasoline. Global hunger increased before ethanol because the American farmers cannot cost effectively operate. Fertilizer, fuel, seed, transport costs, living expenses, land and machinery have all increased substantially since the 1960’s without a significant increase in grain prices. The market will have more grain with the increased production of Ethanol than without it.

Please do not buy into propaganda that Ethanol is not efficient to produce, will contribute to world hunger or will drive food prices up (a loaf of bread uses 4-5 cents of wheat in it).
The truth is that unless grain prices increase more farmers will be forced to quit and food supplies will decrease.

I have to say Karl, that fuel prices are realistic even at today’s price. Granted, a lot of speculation has helped take prices higher. But the truth is that according to the Energy Information Administration, the world’s oil production peaked in 2005.

Sure, more oil is being found. But it’s not being found in easy-to-reach places. It’s all offshore, sands, and shale. Production from these areas should come online in time to replace lost production from older wells. The net result? Flat to slightly higher production in the next five to ten years.

Even with US consumption falling, consumption in China, Brazil and India is skyrocketing. The truth is, if these countries keep buying more and more, then oil isn’t too expensive.

Second, you have to admit that corn-based ethanol isn’t the most efficient way to make energy, right? The US Department of Energy says that corn-based ethanol produces a whopping (note the sarcasm) 26 percent more energy than required for production.

That’s god-awful.

Cellulosic ethanol, on the other hand, could produce up to 80 percent more energy than is required to produce it. That’s much better. But mass-scale production is also far off. (There are a few companies setting up pilot plants. But that’s all)

Now, I agree that global hunger isn’t all ethanol’s fault. I’d place the blame on the emerging economies like Brazil, Russia, India and China. But you have to admit, using farmland for fuel means there’s less farmland available for food. And if there’s less food being made, prices move higher.

In addition, corn-based ethanol was a big reason why corn jumped well over 100% after President Bush first announced the ethanol initiative. The effect is obvious – the ethanol hype is helping prices move higher. And this has been a boon to farmers.

Better yet, farmers are poised to make even more money in the years to come, mainly because of growing global demand for food.

I also received an e-mail from Sam L. that said…

As a seasoned investor I wouldn’t put one penny in green stocks, not now or for the near future. It is all hype and no action.

All hype and no action, Sam? How about geothermal producers that are taking off? Or solar producers which are making profits? Wind producers are doing well, and many high-tech battery manufacturers are on the cusp of inking huge, multi-million dollar revenue generating deals.

If you think investing in clean energy is a bad idea, just take a look at the Market Vectors Global Alternative Energy Fund (GEX) and you’ll see that the sector’s been clearly moving higher. And the PowerShares Global Clean Energy Portfolio (PBD) has been doing the same.

It seems to me that investing in green stocks is a great thing to do. What you want to do is avoid the companies that have no profits… the ones that are using very experimental technologies that haven’t been proven yet. These companies may do well in the future, but you take a huge risk by putting your money on them now.

In its weekly inventory report, the Energy Information Administration said that crude stocks fell by 4.8 million barrels for the week ended May 30.

However, refinery utilization was up 1.8%, at 89.7% of capacity, compared with 87.9 % a week earlier, and that led to gains in gasoline, up 2.9 million barrels, and distillates, up 2.3 million.

“Today’s report of a drawdown in crude stocks and builds in distillates and gasoline could show that refiners are beginning to increase production of products in response to higher profit margins,” wrote Thomas Hartmann, of Altavest Worldwide Trading.

But “coupled with slowing consumer demand for gasoline and a strengthening dollar, it’s of little surprise to see crude prices back off,” he added.

Source: Oil Moves Lower

Shares in leading German solar stocks rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world’s biggest solar energy market thanks to its “feed-in” tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

Traders were wary as they watched Arthur, the first Atlantic storm of the season, churn across the Gulf of Mexico without reaching hurricane status or impacting oil installations.

Charles Perry, president of Perry Management, said there is some “conservatism” in the market right now as crude has been unable to bounce back to the $130 level, with the feeling that we have “not seen all the drop yet” in the oil price.

But it’s possible that “this week will be quite volatile,” Perry said. “All traders are looking for signs to indicate which way the price is going.”

Perry said there was a “giant profit taking last week,” as trading volume shot up, accelerating to about 45 million contracts on Friday. “So today, the traders are establishing a new position at a lower price.”

Source: Crude Inches Higher – Traders look for New Floor after Major Profit Taking

“The days of meeting an unchecked demand for energy through monolithic carbon intensive power stations are coming to an end. Increasingly the emphasis will be on energy efficiency, renewables, cleaned up fossil fuel plant and micro generation,” the company said in a statement accompanying its full-year results, according to Britain’s The Guardian newspaper.

SSE, which currently gets 15% of its energy from nuclear suppliers, said it believed “one more tranche of nuclear power stations will be necessary, but that the deployment of such power stations should be minimised through the maximum exploitation of renewable energy sources.”

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

Floyd Brown in Investment U looks at another alternative energy source: the Fischer-Tropsch process, used to create synthetic fuels.

“The process works like this: Coal is broken into its components by subjecting it to high temperature and pressure, using steam and measured amounts of oxygen. This leads to the production of synthetic gas.

“In the United States, a small firm provides technology to produce ultra-clean synthetic fuels and chemicals. It licenses its proprietary derivative process from the Fischer-Tropsch method.

“It converts synthesis gas derived from coal, petroleum coke, biomass, natural gas, or municipal solid waste into liquid hydrocarbon products. This includes ultra clean diesel fuel, jet fuel, naphtha, specialty chemicals and other fuel products. It also manufactures anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea.”

Read on here to find out Floyd’s cashing in on this conventional energy alternative.

The big news today is happening on the highways…

But first, let’s look at the basic figures.

Yesterday produced a weak rally in the stock market – with the Dow up 68 points. Oil lost $3, to close at $128. The dollar rose slightly. And gold got whacked for a $17 loss, but still closed above $900.

You’ll remember how we left you yesterday…we hope you remember, because we can’t. But we think we said that the US consumer should be cutting back. His energy is much more expensive. His food is more expensive. His house is going down in price. He can’t borrow as he used to. He has to cut back, we keep saying; he has no choice. And when he cuts back, the US has to go into a slump. And here we agree with Warren Buffett; it will be longer and deeper than more people think.

We agree with George Soros too; the slump will result in a “noticeable decline in living standards” for most Americans.

But as we signed off, we noted that we were waiting for the evidence…the proof that the consumer is cutting back.

Now we have it. And it comes from the highways.

“Steepest drop in driving since ‘40s,” says a CNN headline item.

According to the report, Americans drove 11 billion miles less this past 12 months than they did the year before.

In the 1940s, the reason for the cutback in driving was obvious to everyone – the country was at war. The auto companies practically stopped making cars so they could turn their production to tanks, jeeps, and trucks. Oil too was diverted from leisure use in the 48 states and used to power ships and airplanes.

But after the GIs came home, they got married, bought cars, filled up their tanks, and headed for the open road. Every year since, until very recently, the national odometer showed more miles driven than the year before.

Now, something big has happened…for the first time since WWII, Americans are driving less.

America’s truckers too are pulling off the road. A report in the New York Times says that many cannot afford to fill their tanks. Diesel fuel is selling for as much as $5 a gallon. This puts the cost of filling a 250 gallon tank well above $1,000. And many truckers fill their tanks three times a week.

Naturally, the auto industry has to downshift. Not only because gasoline is so expensive, but also because the average household is struggling to pay its other bills too. After it pays the interest on its debt, it has less left over than ever before. And then, it has to pay for food, gasoline…and other things, many of them imported. Of course, food and energy are rising sharply, but until recently, Americans could count on low-cost Asian producers to cut prices on our imports. Now, import prices are rising at 14.8% — the highest rates since the early ‘80s.

We’ve already accused the official numbers of lying; now we call Bill Gross, who runs the biggest bond fund in the world, PIMCO, to the stand, to help make our case.

“If we calculated inflation the same way other countries do it, our CPI would be 1% higher,” says Gross. (Bond yields would be 1% higher too, he notes.)

Prices are going up more than the official numbers tell us, in other words. About the only thing that is going down, for the typical American, is the price of his house. And here the news that house prices are going down more than we thought too. The latest survey results from Case/Shiller show the average house in America’s largest 20 cities down 14.4% in March compared to a year earlier – the largest drop on record.

Can you blame the lumpenconsumer for getting down in the dumps? Everything that we warned him about is happening to him. His bills are coming due…his assets are going down…and his income is falling.

Yes, dear reader, that too. The job numbers show a modest decline in employment. What they don’t show is the many people who are “self-employed” who are having a hard time finding work. One of the great benefits of the internet was that it allowed workers much more flexibility. Many found they could leave the 9-to-5 office routine, move to the beach or the mountains and still continue to work on-line. Here in London, for example, there are probably thousands of Americans who are enjoying life in the city, while continuing to work via the worldwide web. We see them in Starbucks, for example, with their heads down and their laptops up. Freelance work was a big advantage for the former employee, because it allowed him to go where he wanted when he wanted. It was a relief to the employer too because it permitted him to reduce internal office costs and fixed expenses. But in a downturn, the easiest thing for an employer to cut is the out-of-office staff. He can just send them an email!

Often these freelance consultants are mature workers who then find it very difficult to get back into the regular market.

“Out of a job and out of luck at 54,” begins an article on the subject in today’s press. Apparently, there are many thousands of people who are “too young to retire, too old to get a new job,” says the report.

Curiously, these facts and circumstances are not showing up in the stock market. Instead, they are showing up in consumer confidence numbers – which continue to sink. Traditionally, stock indices and consumer confidence numbers coincide. When stocks go up, people are confident. When they go down, they lose heart. But not necessarily in that order. In 2005, however, the numbers began to diverge. Stocks rose. Confidence fell. Investors saw clear sailing. Consumers saw rough seas.

Who’s the better weather forecaster? We’ve put our money on the consumers.

And more opinions…

*** Another item from the automobile sector. An auto dealer south of Kansas City has tried to motivate buyers by offering a free gun with every new auto. Predictably, the European press regards this as more proof that Americans are all gun-crazed yahoos.

We don’t know why they needed more proof. We thought the matter had been settled; of course Americans are gun crazed yahoos. At least, the best of them are.