We believe this is another body blow to the ailing green industry, as Washington taps a source of energy with huge potential returns. Moreover, president-elect Obama has hedged his bets on oil shale – perhaps surprising many green advocates.

On October 27, 2008, Obama told supporters in Denver…

“When it comes to oil shale right now, I think we have to do more research and more science to discover whether or not the amount of oil that would be generated would justify what would inevitably be some disruption of the landscape here in Colorado…Colorado is blessed with a lot of natural resources.”

By opening up 1.9 million acres of federal land in Wyoming, Utah and Colorado, the U.S. could be looking at an additional 800 billion barrels of oil, according to the Department of the Interior. That’s three times more than Saudi Arabia’s proven oil reserves.

More than 70% of American oil shale is on federal land. It’s mostly in Colorado, Utah, and Wyoming. More than 50 tar sands deposits are found in eastern Utah, containing an estimated 12 to 19 billion barrels of oil.

Since oil currently trades at about $50 a barrel, down from nearly $150 a barrel this summer, the economics of shale may not make financial sense today. However, oil prices will inevitably rebound, and if they surpass $60 a barrel then oil shale becomes viable.

Where Obama may hurt oil shale is in the environmental impact of production. Squeezing oil out of rock requires tremendous amounts of water. The process also spews a lot of greenhouse gasses (but so does ethanol).

If Obama stays the course on Bush’s oil shale policy, the place to put your money would be in new oil-shale technology. There would be a scramble to produce oil shale with cleaner methods, although the impact remains unknown so far on the ultimate price per barrel.

But for investors, oil shale could present a much larger bonanza than green.

But they were wrong. The Datastream Internet Index reached its peak on January 3, 2000, and then collapsed, falling 93.8% over the next 34 months.

In 2005, investors thought the real estate market was “different.” Homeowners were buying houses more expensive than they could afford because they thought inflation would protect them. While home prices could stagnate, they wouldn’t go down.

But, as you know, they were wrong. Beginning July 2006, real estate has fallen 16.2%.

Investors will come up with any excuse to continue pumping money into a sector that’s produced amazing returns for them in the past. And when the money starts piling in, it’s time for you to get out.

Today, the sector is oil. In inflation-adjusted terms, the price of oil is up 140% in the last 18 months. At first glance, the logic seems plausible…

———- Advertisement ———-
Have you heard of The 19,900% Mutual Fund?

Most people haven’t. That’s because for years only a select group of investors have been able to own shares.

Add in the fact that it’s turned turn each $10,000 stake into almost $2,000,000 and you can see why MarketWatch calls it the “Holy Grail” of mutual funds.

The good news… for what may be a very limited time, now you can own shares.

Click here for more details…
————————————

Global demand for oil is surging. Most of this increase comes from emerging economies like China and India. And global oil supply is on the decline. A large cause is poor reserve management by nationalized oil companies.

Venezuela’s oil production, for example, decreased by at least 1 million barrels per day (bpd) since President Hugo Chavez nationalized the country’s oil fields between mid-2006 and 2007. And Iran’s leaders can’t attract private capital and technology, so production is down 3 million bpd to half of what it used to be under the Shah.

Russia and Nigeria are in the same boat… The problem is, high oil prices make governments greedy. They take over oil fields and mismanage them, decreasing supply growth… and leading to even higher oil prices.

This imbalance has catapulted the price of oil to stratospheric levels. Even when adjusted for inflation, the price of crude oil is now far above its 1980 peak.

In the long run, simple economics tells us the price of a barrel of oil should equal the cost of producing the most expensive barrel of oil needed to meet global demand.

According to the Energy Information Administration (EIA), the oil market has a small surplus of existing production. And according to a Dallas Federal Reserve economist, the most expensive barrel of oil needed to meet global demand is being produced at just $50. With oil currently priced at $137 a barrel, the incentive to find and produce more oil is enormous.

This process takes time… But there are already signs supply is climbing. Shale oil in the Dakotas and in the Canadian tar sands – which costs about $70 a barrel to produce in both places – is attracting enormous amounts of investment capital.

In addition, research into the process of converting coal to oil might yield a more environmentally friendly process sometime in the near future, which would overcome one of the major hurdles facing coal-to-oil production now. The supply of coal in the U.S., if you were wondering, is plentiful.

From the demand side, the EIA reports consumption in 30 developed countries has fallen 460,000 bpd since last year. Most of that decline comes from plummeting U.S. demand.

This commodity rally – and the oil boom in particular – is not any different than previous booms. The market will find a new equilibrium, and the price of oil will undergo a nasty correction.

Good investing,

Ian

P.S. As my colleague Matt Badiali explained in a recent DailyWealth essay, don’t confuse brains with a bull market. If you own oil and gas stocks, now’s the time to keep an eye on your stops. On the other hand, the market has mauled refiners. But I think right now, refining stocks are perfectly positioned for the coming oil rout.

Source:  Why Oil May Be Headed for $50

If you want free market commentary today, go over yonder to our colleagues at Money Morning, who have it all under contrarian control.

Back here at the western edge of the Great Plains and at the foot of the Rocky Mountains, there is a lot of empty retail space. Maybe it’s early in the summer shopping season. Maybe people are flying and driving less for vacation. Or maybe there’s just way too much retail space in America.

Either way, the whole geography of America’s strip mall retail network lends itself to huge booms and busts. And since we’re coming off a boom, this could be the bust. The architecture of the retail network offers you clusters of stores selling linens, patio furniture, $20 shoes from China, and huge quantities of chocolate. It all comes via truck, rail and container ship. And with global fuel prices high, it’s expensive to get things to the middle of the continent, a mile up from sea level.

But cheap energy convinces you that long logistics tails are merely matters of proper inventory management and just-in-time delivery. For the last fifty years, energy has trumped distance. That’s why America’s malls and stores are located in large residential developments which are themselves miles outside city centres. Fortress Wal-Mart.

Most of these future feudal outposts here on the Front Range of the continental divide were built by large national developers like KB Homes and Lennar. The homes are nice enough, with great views of the mountains. And they are conveniently located near grocery stores and shopping. But there are probably too many of them, and more still are being built.

They are not, we reckon, particularly well made. On the way to lunch today, our brother told us the Chipotle (a Mexican fast food joint serving enormous burritos stuffed with cheap calories) at Flat Irons Crossing Mall was vacant because the foundation had cracked. Other stores in the massive mall suffered the same fate. The mall is less than ten years old.

You wonder, with all the “For Sale” signs out front of these cookie cutter houses what these cul de sacs and neighbourhoods will look like in twenty years. Will people still live here and commute to work? Or will the whole economy of this particular living arrangement become a casualty of more expensive energy?

The word we used for it about six years ago was simple: Suburbistan. A place where the parts (copper wire, plumbing, wood frames) are worth more than the whole…empty tracts of houses built for people who couldn’t afford them with real money and which, in any case, are the ticky-tacky icons of a giant mis-allocation of the nation’s capital.

Right now, though, it’s not that bad. Times are tougher for sure. Good paying work is harder to get. This is a function of the globalisation of labour and free trade agreements. Jobs are created. But they aren’t the same jobs America created in the post-War boom of the 1960s and 1970s. They aren’t in manufacturing with high wages, lifetime employment, and defined benefit pensions (think General Motors).

The jobs created in America today pay lower wages and don’t come with a pension at all, unless it’s defined contribution scheme. New jobs come from services and retail (think Wal-Mart) and reflect the nation’s shift towards debt-based consumption and asset-based saving, neither of which lead to long-term capital formation. America is becoming a nation of window shoppers.

In fact, it’s evident now that capital is being either exported (as factories) or sold (as equity) to pay the bills (as debt). And that’s for the capitalists! For the workers and wage slaves, there is more job mobility, but less job security. Do you think it’s a good trade? How long before a clever politician begins appealing to the growing sense of resentment…and a desire for something “to be done” to someone?

The time is ripe on the national scene for a demagogue who appeals to America’s sense of injured pride and national greatness. That should be interesting to watch. Both Obama and McCain would fit the bill nicely, despite coming from opposite ends of the political spectrum. They share at least one belief in common: that State power should be used to shape people’s lives in whichever way the State chooses. America will be worse off with either way.

The country has huge fiscal and geopolitical challenges. It also still has a lot of nuclear weapons and, at least in Washington D.C., an exalted sense of its place in the world order. So much for American modesty, or walking softly and carrying a big stick for a rainy day. Watch out the anti-anti-American backlash.

Here in the mountains, Colorado has always been a bit of a boom-bust state. In the late 1970s and early 1980s it boomed with high oil prices. Natural gas drilling on the Western Slope boomed. Exxon Mobil opened a refinery in Parachute to turn oil shale into something like crude oil (kerogen). The U.S. Department of Energy even exploded a nuclear bomb underground near Rulison in Western Colorado to try and liberate stranded pockets of natural gas.

Nuclear mining! Lang Hancock would have loved it!

When oil prices crashed in the early ‘80s, Exxon shut the whole oil-shale retorting plant down. Who needs an alternative to crude when you have Prudhoe Bay, the North Sea, the Gulf of Mexico and Saudi Arabia? Oil prices stayed low for years and people resumed carefree consumption. National law makers went on a long holiday from serious thought and a realistic energy policy.

But hey, these things go in cycles. People have always been thoughtless and unprepared in the midst of great luxury. Same species, different century.

If you’ve lived through a bust, you don’t forget it and you never quite behave the same way because of it. The locals still refer to the day Exxon pulled the plug at Parachute as “Black Monday.” The massive housing development Exxon built for all the future employees at the facility became a retirement community known as “Battlement Mesa.”

–Valuations are out the door for now. If small brokers that offered their clients leverage keep collapsing and liquidating their portfolios, you’d have to be a daredevil or playing with someone else’s money to be a buyer.

–It’s not that there’s no value in the market. It’s that there are so many sellers. The trouble is you just don’t know how much more forced selling there’s going to be. With so much stock being dumped on the market, it pays to be very discrete.

–A quick word about GE before we move on. GE is a world-class jet engine maker. It’s also a shameless money-lender.

–GE’s commercial finance business in Australia has a much higher profile than its business in the States, which goes under a different name altogether But the company’s dirty little secret is getting out: it’s really a financial company masquerading as an industrial.

–The company generated huge earnings during the credit boom as a commercial lender, not an industrial manufacturer. GE reported a double digit decline in first quarter earnings, and promptly blamed the whole thing on Bear Stearns. But if GE’s CEO Jeffrey Immelt were being candid with investors, he would admit that the problem isn’t with Bear Stearns, but in the performance of GE’s financial segments. Don’t take out word for it. Look below.

GE Summary of Operating Segments (unaudited)

Source: Edgar Online

–You can see that GE’s two big financial segments, Commercial Finance and GE Money, showed a twenty per cent and a nineteen per cent decline in profit in the first quarter, respectively. Earnings in the infrastructure business were actually up.

–GE used to be company that made money by making things. Now it’s a company that loses money by lending money. It’s a pretty good symbol for much of what’s wrong about American capitalism. The truth is, it should probably be two companies, not one.

–While the share market digests the news of collapsing brokers and falling financial profits, the grand poobahs of the world’s economy are wringing their hands in worry. What’s keeping them up at night? The three Fs, each its own kind of crisis: food, fuel, and finance.

–”The World Bank met on Sunday faced with a mounting food price crisis that has sparked deadly unrest in developing countries, underscoring the urgency of fighting hunger and poverty,” reports Channel News Asia.

–How urgent, you ask? The Prime Minister of Haiti was sent packing this weekend by crowds protesting soaring food and fuel prices. We don’t even know who the man is but reckon he won’t be the last public official to be ridden out of town on a rail before this current crisis is over (and it may not be any time soon).

–As usual, it’s the people at the margin (whether lending or with food) that are affected first when surplus turns to scarcity. Despite all the daily signs of abundance here in Australia, let us not forget that there are about four and half billion people on the planet who have little margin for error in their daily lives. If food prices go up, many of these people go hungry.

—World Bank President Robert Zoellick, doing his best impersonation of Franklin Delano Roosevelt, wants a “new deal” for global food programs. He’s asked richer nations to contribute US$500 million immediately to help get food to poorer nations.

–IMF President Dominique Strauss-Kahn was less pragmatic but more rhetorical. Wrapping up his organisation’s annual spring meeting, he said that, “Food prices, if they go on like they are doing today … the consequences will be terrible…Hundreds of thousands of people will be starving…As we know, learning from the past, those kinds of questions sometimes end in war.”

–People often talk about resource wars being a common feature of the coming century (or decade). But it’s usually oil and energy they’re talking about, not rice and wheat. Food is fuel for the body (we’ve been watching the Biggest Loser). If you don’t have access to cheap calories, what good is cheap fuel?