In its weekly inventory report, the Energy Information Administration said that crude supplies rose by 750,000 barrels for the week ended March 6. That surprised analysts, who had been expecting a decline of about a million barrels.

Gasoline stocks declined by 3 million barrels, more than 2½ times expectations, while distillates rose by 2 million barrels, 10 times as much as projected. Refineries were operating at 82.7% of capacity, down from 85%.

The EIA also reported on falling demand. Total petroleum use over the past four weeks, including gasoline, jet fuel and diesel, averaged 19.3 million barrels a day, down by 2.1% from a year ago.

“On a fundamental basis the oil market remains very bearish,” said James Williams, of WTRG Economics. “With an OPEC meeting scheduled for the 15th, it increases the probability that they will cut [production].”

OPEC President Jose Botelho de Vasconcelos, of Angola, remarked that the cartel “is ready to take the decisions that will result in the stability of the oil market.”

Source: Crude Plunges

In its monthly report, the Energy Information Administration kept revising its demand forecast downward. World oil consumption is projected to decline by 1.4 million barrels a day in 2009, the EIA said. That’s 200,000 barrels a day more than the EIA had estimated a month earlier.

The EIA also predicted that oil will average $42 a barrel this year and $53 next year, a slight downward revision to the month-earlier forecast for prices to average $43 and $55, respectively.

Of  OPEC’s Sunday gathering in Vienna, Edward Meir, of MF Global (NYSE:MF), said that, “We are seeing the usual mixed signals ahead of the OPEC meeting,” and he predicted that the more hawkish camp will likely succeed in pushing through another cut of 500,000 to 1 million barrels a day.

Source: Crude Takes One Step Forward, Two Back

OPEC was on everyone’s mind.

“Crude-oil prices may be dictated by noise of further production cuts from OPEC nations this week, ahead of the meeting at the weekend,” wrote Nimit Khamar, analyst at Sucden Financial Research. This could push crude toward $50 a barrel, he said.

“A sustained rally beyond there is unlikely, given large-scale risk aversion and concerns over the global economy,” Khamar added.

OPEC Secretary General Abdalla el-Badri said yesterday that oil prices at about $40 a barrel were not suitable because they would not guarantee investment in future capacity beyond 2013.

Source: Oil Shoots Higher

“Chances are high that OPEC will move again to put through more cuts when it next meets on March 15,” wrote Edward Meir of MF Global (NYSE:MF). The weakness in the U.S. stock market had weighed on commodity sentiment in the previous session, when oil slumped 4%, he added.

OPEC has already agreed to cut cartel quotas by 4.2 million barrels a day since September, equivalent to about 5% of global oil demand.

The 11 OPEC members with quotas, all except Iraq, reduced output 3.8% to 25.3 million barrels a day in February, consultant PetroLogistics Ltd. of Geneva said yesterday. That’s down from 26.3 million barrels in January, according to Conrad Gerber, founder of PetroLogistics. Members have a quota of 24.845 million barrels a day.

Additionally, the Energy Information Administration will release data on U.S. petroleum supplies at 10:30 a.m. Eastern on Wednesday. Analysts surveyed by Platts expect an increase in crude inventories of 2.25 million barrels in the week ended Feb. 20. The analysts also expect a decline of 300,000 barrels in gasoline stocks as well as a drop of 1.8 million barrels in distillate stocks.

Source: Oil Edges Higher

U.S. crude fell $1.23 a barrel to $40.93 by 1500 GMT. London Brent crude was 25 cents down at $44.65 a barrel.

U.S. unemployment rose to a record peak in mid-January, while new orders for long-lasting manufactured goods fell for the fifth month in a row.

The feeble state of the U.S. economy was already illustrated by a larger-than-expected 6.2 million barrel rise in crude oil stocks last week, according to government data on Wednesday.

Stocks at Cushing, Oklahoma, the delivery point for U.S. crude oil futures, rose a further 300,000 barrels.

“U.S. crude has weakened against Brent again. The 300,000 barrel stock build in Cushing and the general crude stock build has caused this,” said Christopher Bellew, a broker at Bache Commodities in London.

“Run cuts and OPEC production cuts may offer some support,” he said.

OPEC Secretary General Abdullah al-Badri, speaking at the World Economic Forum in Davos, Switzerland, said OPEC would not hesitate to act again if the oil price remained low.

The Organization of the Petroleum Exporting Countries has pledged to cut supply by 4.2 million barrels per day since September last year to try to support oil prices, which have dropped more than $100 a barrel since July.

Badri said on Wednesday OPEC was expected to have delivered fully on its pledged supply curbs by the end of this month, but a weak economy would continue to erode demand for fuel.

OPEC next meets on March 15 to decide output policy.

Martin King, analyst with FirstEnergy Capital Corp, said OPEC had done a much better job of cutting supplies from the market than many had expected, setting the stage for a gradual price rebound in the second half of 2009.

“We see the crude market on the cusp of achieving real signs of stability, driven in part by tighter supplies out of OPEC.”

LONDON, Jan 29 (Reuters)

Oil prices fell towards $45 a barrel on Tuesday as the market began to anticipate data showing rising fuel inventories that reflect economic slowdown.

Prices had earlier advanced more than a dollar, boosted partly by cold weather in top energy consumer the United States, plus signs OPEC oil supply cuts may have begun to bite.

U.S. light, sweet crude for March delivery fell 66 cents to $45.07 a barrel by 1259 GMT. It earlier touched a session high of $47.49 a barrel and a session low of $44.40.

U.S. crude has rebounded from below $33 a barrel in the past week.

London Brent crude fell 92 cents to $46.04 a barrel.

“The retreat toward the lower end of the trading range is suggests the market is anticipating stock builds in the API figures,” said Christopher Bellew of broker Bache Commodities Ltd.

The American Petroleum Institute (API), an industry body, has moved publication of its weekly inventory report to 2130 GMT on Tuesdays from Wednesdays, a day earlier than official government inventory data released on Wednesday.

The government data is forecast to show that U.S. crude oil stocks rose a further 2.7 million barrels last week, the fifth straight week of gains.

Colder weather is expected to help draw down distillate stocks by 800,000 barrels, according to a Reuters poll. Gasoline stocks are likely to have risen by 1.3 million barrels.

ABOVE LOWS

The U.S. cold snap has helped prices move up from lows earlier in January of $32.7 a barrel, but analysts say the recovery may be temporary.

“Unless OPEC production cuts in January were substantially greater than what we have assumed, it is still too early to be calling an end to this current bear market,” Goldman Sachs said in a research note.

Oil’s supply/demand picture remains weak, Goldman said, pointing to a large counter-seasonal stock build in the United States and extremely weak demand in China, the world’s second largest energy consumer.

Oil has dropped more than $100 from a record peak above $147 a barrel in July last year, depressed by falls in demand as the credit crisis has pushed the global economy towards recession.

Goldman said retail investors were moving into oil, attracted by its low price, so that speculative positions or “length” in the oil market is now larger at $45 a barrel than it was at $147.

The Organization of the Petroleum Exporting Countries has agreed to reduce supply by 4.2 million barrels per day since September to try to support prices. The producer group is due to meet next in March.

A cyclone off western Australia has shut down nearly half of the country’s oil output, but some operators said production was likely to resume by Wednesday as the storm weakens.

Later on Tuesday, U.S. President Barack Obama goes to Capitol Hill to campaign for an $825 billion economic stimulus package to be put to a House vote within days.

LONDON, Jan 27 (Reuters)

This from Fleet Street Invest:

Israeli tanks have just rolled into Gaza…Almost three thousand miles away, Nigerian separatist blew-up an oil pipeline over the weekend…Meanwhile, Russia is locked in a dispute over the price of gas with Ukraine. Today they stopped deliveries of natural gas to Ukraine, Turkey and Europe to force the Ukrainians to pay up…

While fears about political instability drive the price of oil back up again, the OPEC oil barons are tightening the screws on global oil supplies…Oil was trading at just $35 per barrel on Christmas Eve. It’s over $50 this morning. That’s a 40% gain in just two weeks. And you can bet that it is going to go a lot higher. In fact, it could easily rise another 70% by the end of this year.

Investing in oil right now could turn out to be the trade of the year. And you can thank the OPEC oil cartel for that.

A Christmas present from the OPEC oil lords

OPEC has agreed to slash its daily oil output by 4.2 million barrels per day since September. That should have sent the price of oil soaring right away. But it kept falling instead because the market didn’t believe they would actually deliver those cuts. You see, the cartel has cried wolf too often in the past, promising cuts that it didn’t deliver on.

But this time things really are different. The massive fall in the oil price threatened to destabilise the economies of the oil exporting countries. And that directly threatened the political position of regimes that run these countries.

So the OPEC oil barons are deadly serious about driving the price of oil back-up. And there is clear evidence that they’re slashing output sharply.

In October, a barrel of the lower quality “heavy” crude that most OPEC countries produce traded for about $4 less than a barrel of high quality “light” crude. Most of the light crude is produced by non-OPEC countries. Right now, it is only about 40 cents cheaper. That shows how quickly OPEC has reduced supply. And the market is set to get a lot tighter in the month ahead as OPEC keeps cutting production.

Investing in oil right now is one of the smartest trades you make this year. The International Energy Agency predicts that oil will rebound to $85 per barrel this year. That’s a 70% gain on where it is now.

This is the time to invest in oil

We stayed out of investing in oil companies as the oil price soared to unrealistic levels in the first half of 2008. But that has totally changed. The price of oil has now fallen 66% from its peak last summer. And it is now unrealistically cheap.

The big question for investors is how to profit from this. You could invest in the big oil companies like Shell and BP . They are trading at very reasonable valuations right now of about five times last year’s earnings. These aren’t bad investments right now.

But these companies have a big problem. They’re finding it harder to replace their oil reserves. Increasingly, the big oil producing countries are handing over their oil reserves to their state-owned oil companies. That leaves the private oil companies to fight over the scraps.

That will hit the giant oil companies the hardest. Because they would have to make a truly major oil discovery to make a big difference to the size of their reserves. And the chances of that happening are going to get smaller in the years ahead.

Then there are the junior oil companies. A significant oil discovery can send their stock prices soaring. Triple digit gains when that happens aren’t uncommon. But many of them are in a bad way right now. Oil exploration is an expensive business. So the combination of lower oil prices and the freeze in banking lending is hitting them hard.

The potential profit from investing in a small cap oil company that strikes oil can be huge. But so are the risks. I doubt that many of the oil companies with less than $1 billion in market value are going to survive this downturn. So this isn’t a gamble that I would take.

Instead, on my Profit Hunter investment service, we have focussed on the mid-sized oil companies. These companies have the financial strength to get through this downturn. But they are still small enough to benefit massively from new oil discoveries. This is where the real money is going to be made in the next oil bull run.

Source: Get In On The Trade Of The Year

Global oil demand is not going to “plummet.”  And for the FT to say so is just plain silly, if not irresponsible.  OK, I know.  There’s an old saying that they teach in journalism schools.  “You have to sell newspapers.”  But this declaration by the FT highlights the perils of letting a headline-writer do your thinking for you.  It’s what I call “arguing a screaming conclusion.”  And a wrong conclusion at that.

Oil Demand – Down, Then Up

But let’s move past the headlines.  The Financial Times article explains that the World Bank has just issued a new study.  The World Bank believes that the world is entering into the toughest economic times “since the Great Depression.”  Thus overall world oil demand may fall by about half a million barrels per day in 2009.  That’s what the World Bank states in its report.

Only half a million barrels?  Heck, the total world demand for oil in the past year was about 87 million barrels per day (a fact that the FT article fails to note).  By comparison, the Saudi oil tanker that was hijacked off the coast of Somalia held two million barrels of crude oil.  And despite this act of piracy oil prices still fell over the next couple of weeks, even without that tanker plying its route across the deep blue seas.

So if the world experiences the next “Great Depression” (Release 2.0, I guess), a reduction in overall oil demand of half a million barrels per day is down in the statistical noise.  And what the World Bank is saying about the grim future of the world economy is not the equivalent of “plummeting” demand.  At least, not half a million barrels of lower usage.

How Bad Is It?

How bad is it out there?  Well, according to this week’s MasterCard Spending-Pulse data, U.S. retail gasoline demand is back to about the same levels it showed earlier in 2008.  That is, high gas prices hurt demand over the summer and into the fall.  (I drove less.  Didn’t you?)  But the current low fuel prices have evidently allowed demand to recover.  People are driving more.  It’s basic Economics 101.

I was talking with an economist for the American Petroleum Institute about two weeks ago.  He told me that overall gasoline demand in October was down 3%, year-to-year.  But diesel fuel usage was up by the same amount.  Overall U.S. oil demand is down about 8%, but that reflects the slowing use of oil in industry.  Out on the road, people are still driving and trucks are still hauling.

For all the sound and fury about the run-up in oil and fuel prices through July, and then the fall in prices after that, the aggregate demand for oil is only changing at the margins.

Built-In Oil Demand

In both the developed and developing worlds, there’s a lot of oil demand built into the economic and social energy system.   That’s what modern development is all about.  That’s how the system was built over the past 100 years or so.  Yes, you can wish that the system were different.  You can even try to change the system – and risk collapsing it in the process.

Whatever you do, you can’t change the system very fast.  To paraphrase a former Secretary of Defense, “You live in the world with the energy system you have.  Not the energy system you might wish you had.”

So at best, if you want to change things you are looking at a generational shift.  If you have a generation.  Do we have a generation?

What Will OPEC Do?

Let’s try looking at some different numbers.  How about 7 million barrels of oil per day?  That’s the amount of output that OPEC might have to shut-in if it wants to get prices headed back upwards in to the range of $75 per barrel or so.  At least, that’s according to Philip Verleger, a long-time industry player as quoted recently in Platt’s industry newsletter The Barrel.

Current daily oil output from OPEC is about 32 million barrels per day.  Verleger thinks that OPEC’s output ought to be more like 25 million barrels per day.  There’s the 7 million barrel shift.  Easy, right?  It would be as if Iran, Iraq and Qatar simply stopped exporting oil.  How likely is that to happen?  Umm… yes.  Clearly, Verleger has a radical take on things.

One way or another, can OPEC cut production significantly?  Does OPEC have the discipline to manage its own affairs to cut 2 million barrels, or 4 million, let alone 7 million barrels per day?   The issue is that numerous OPEC nations cheat on their production quotas.  Hey, they need the money.  Thus they lift the oil and sell it.  Really, cheating on OPEC quotas is not a problem.  It’s a tradition.

What of the Future?

Looking ahead by more than about two years, world oil demand is certainly going to grow.  It almost does not matter what we do in the U.S. or Europe.  When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there.  Many of these young people already have a cell phone and a laptop computer.  When they finish school, they will want an apartment and a car.

And at the rate things are going, the energy industry is still under-investing in the necessary systems of the future.  Depletion is still ongoing.  It gets back to the very basic point that every barrel you lift from the ground leaves one less barrel down there.  And the overall global depletion rate is 6% at best.  Maybe it’s 8%.  It might be 10%.  To replace that depletion, the general trend is for the energy industry to go further away, to deeper waters or more remote sites, to drill deeper wells, with hotter temperatures and higher pressures.  Those little hydrocarbon molecules are just plain tough to catch.

And keep in mind that nobody can produce oil that has not been discovered.  Or developed.  Or for which there are no handling facilities.  That takes investment, and lots of it.  Which requires money and finance, which is in rather short supply just now.  So there are just a few years in which the world can reorder the way it does oil, let alone the big picture on energy.  And there are a lot of moving parts in all of this.

The Moving Parts of Oil Production

One of our fellow (sister, actually) readers is deeply involved in monitoring the world oil situation.  The other day she sent me a thoughtful list of “ifs” that have to happen just to begin to get future oil production on firm ground.  Here it is:

• IF oil price rises above the marginal cost of new non-OPEC supply in time to get new production back on track;
• IF oil-producing countries and China stop subsidizing prices to their own populations;
• IF OPEC gives international oil companies (IOCs) like Exxon, Shell, Chevron, etc. access to explore and develop their reserves;
• IF the trillions in exploration and infrastructure capital are invested;
• IF OPEC invests seriously in increasing their own capacity;
• IF enhanced oil recovery (EOR) processes can really increase the recovery rate as much as hoped;
• IF the reported reserves are really there;
• IF the U.S. Geological Survey predictions of “yet-to-find” oil in the Arctic, offshore and elsewhere are correct;
• IF the Saudis can are capable of reaching and sustaining 15 million barrels per day of output;

IF, IF, IF …

“And,” adds my correspondent, “virtually all of these are outside the control of any policies that might be set by the oil-importing nations of the West.”

So unless a lot of things happen – pretty soon and in the right sequence, and competently — we’re going to be faced with the prospect that there’s not going to be enough oil to go around.  So oil prices are going to head back up.  People and governments are going to get desperate over supplies.  And much of the usual and predictable bad stuff that you’ve heard before is going to happen.  Which gets back to that Financial Times headline.  “Plummeting” demand?  Really.

A Few More Dots to Connect

President-Elect Barack Obama made a major announcement last weekend.  It was along the lines that his administration would work to invest in infrastructure.  Congress loved it because it means that the politicians can appropriate money to spend on concrete and steel.  That’s what I’ve been saying would happen.  But it’s nice to hear it.

The announcement was good in the short term for a couple of the OI stocks, like Alcoa (AA:NYSE), Cemex (CX:NYSE) and General Electric (GE:NYSE).   They all have things to sell into an infrastructure buildout, as do more recent additions like Koppers Holdings (KOP:NYSE) and Allegheny Technologies (ATI:NYSE).

Where will the U.S. government get the money to pay for the infrastructure buildout?  Same place it gets all the money to bail out the banks and Wall Street, I guess.  It’ll borrow it.  And in the process the U.S. borrowing will soak up most of the nation’s “spare” capital, such as it is.  U.S. government borrowing will crowd private borrowing.

The U.S. government can borrow money for the time being.  For some strange reason, people still want to buy U.S. Treasury bills, bonds and notes.  Don’t ask me why.  The interest rates are just about zero (safety sells, I suppose).  And the dollar is strong.

Actually, the dollar is much stronger than it ought to be.  I expect a major dollar-correction in the first quarter of 2009, which will be good for foreign-denominated stocks that trade on the Toronto Exchange.  (Although Canada is having some surprising political issues right now.  I’d appreciate hearing from Canadian readers about their take on what’s going on with Prime Minister Harper.)

In the longer run, the U.S. expenditures will come back as inflation.  That means that you want to look at owning gold and shares in the best-run gold miners.  If I had to pick just one gold miner with the best prospects, it would be Kinross Gold (KGC:NYSE).   It’s well managed.  Kinross just completed a series of mine expansions.  And it’s ramping up production to sell increasing levels of output into a generally rising gold market.

Source: Whither the Oil Markets

The U.S. dollar fell by its largest percentage in 13 years yesterday.

Et voila, the trend we believe is your friend returned with some impressive steam:

The Reuters/Jefferies CRB Index popped 5.9% — diddly squat compared with equity moves lately, but still the biggest daily gain for the index since its inception, in 1956.

Alas, despite the rise, the CRB is still down 24% this year.

Still, the Fed trimmed its target interest rate by 50 points yesterday, to a skimpy 1%. Lower rates generally bode well for investment in resource companies. Cheap money will boost inflation, consequently boosting dollar-denominated commodities.

The central bank of China joined the Fed sponsored rate-slashing party yesterday too. In fact, the “people’s” bank cut its lending rate for the third time in six weeks yesterday, to a bestial 6.66%. As the world’s biggest consumer of industrial metals, China’s rush to cheapen money isn’t so bad for commodities, either.

We suspect there will be mayhem yet before the commodities bull market continues in earnest. But yesterday’s action was a good sign.

Gold posted the least impressive gain of the commodity rally. It popped only $20 in the American trading session, and this morning, most of those gains were given back. An ounce goes for about $755.

Oil climbed as high as $69 a barrel yesterday, up $5. Oil got some extra help from a lower-than-expected supply report from the Energy Dept., along with more rumors that Opec is considering another production cut… already.

Copper, the sleek sista, is the standout this week. After striking a three-year low Monday, it has risen quickly every day since. Yesterday alone, it soared 12%.

The Bank of China — a state-owned lender — released earnings yesterday . Profits increased 11.5% year over year in the third quarter. The bank made about $2.5 billion during one of the worst credit environments in history. Chu se de gong zuo!

“Don’t know if you’ve noticed,” Chuck Butler points out this morning, “but the Chinese renminbi has remained virtually unchanged this week. Yes, the peg was dropped in July 2005, and it should move some each day, right? Well… When you realize that the reality of the situation is simply that China is a communist country and can do whatever they well please with their currency! And it looks to me as though China has restored the peg… Maybe it’s just a move to sit on the sidelines during these tumultuous times in the financial markets.”

The U.S. dollar played a big role in commodity gains yesterday, as well. The dollar index spent another day in the doghouse, falling 4 full points from Tuesday’s high, to 83.5. Turns out — and this might be hard to believe — loaning money at a mere 1% rate does not make your currency more valuable.

“The currency market is driving everything right now,” suggests Dennis Gartman. “It’s leading the capital markets, leading the commodity markets.” Among other things, Gartman predicted a 1-to-1 dollar-euro ratio in the coming years.

The Japanese government unveiled a $300 billion stimulus package overnight. Following in the footsteps of I.O.U.S.A., Prime Minister Aso said the package would include loans for small businesses and handouts for families.

And since Japan has already made one bad decision this week, keep an eye on the Bank of Japan this Friday. Rumors persist that the BOJ is considering cutting rates for the first time since 2001, to a silly-low 0.25%. In fact, traders are giving 60% odds that the BOJ cuts… incredible.

Fueling the fire for the cut was yesterday’s Japanese industrial output data, which showed the third straight quarterly decline. The yen’s recent 13 year high versus the dollar isn’t helping matters over there, either.

Factor all this in and you’ve got a decent explanation for a wild market yesterday. Stocks continued Tuesday’s rally most of the morning, but — as we forecast — “sold the news” of the Fed’s 50-point rate cut.

The major indexes leapt near the end of trading on word that the Japanese might be intervening in their banking system… but then gave it all away in the last minutes of the session. Stocks ended down… the S&P 500 dropped 1.1%. The Dow fell 0.8%. And the Nasdaq lost 0.5%.

GDP officially contracted in the third quarter, says the Commerce Dept. today. The economy shrank 0.3%. That’s good news, sort of, since Wall Street expected a 0.5% decline.

But still, it’s the biggest quarterly decline in seven years, when the U.S. entered a post-tech bust recession.

Hmmm, let’s see… economy is shrinking, stocks stumbling… the dollar reverting to its intrinsic value… what’s a big government to do? How about more multibillion-dollar bailout packages?

Not one, but two super-sized bailouts are currently brewing on Capitol Hill. According to Reuters, the FDIC and Treasury Dept. are working on a new federal program that would provide government guarantees on up to $600 billion of U.S. mortgages. They’re looking to back more than 3 million at-risk home loans, since it worked so well for Fannie (NYSE:FNM) and Freddie (NYSE:FRE).

The White House also confirmed yesterday that the Treasury Dept. is in talks to bail out General Motors (NYSE:GM). GM and the rest of the “Big Three” are lobbying for a larger chunk of the $700 billion financial rescue plan passed in September. Apparently the $25 billion loan Congress approved for it earlier this year ain’t enough.

Here’s a question Congress is incapable of asking: Can we afford it? For an answer, we check in on the Treasury site again to assess the nation’s credit limit:

The Federal debt has risen $502 billion since the end of the ’08 fiscal year, Sept. 30.

Funny story. We put out a press release for the film pointing out that the debt was rising this fast and cited the Treasury’s own chart. We were immediately attacked as alarmist. The numbers — and our credibility — were called into question.

The weight of denial out there in media-land is, well, very heavy.

“Equities — certain ones, mind you — are going to make much better inflation hedges than bonds,” suggests Dan Denning, “especially U.S. government bonds. There’s going to be a stiff penalty for staying in Treasuries as the supply increases. Plus, all that new stimulus. All that new borrowing.

“If you don’t want to own best-of-brand businesses now at these prices (including resource and energy companies), then would you ever want to own them? If you’re going to be in the equity markets at all, you could probably make a list of just five or 10 companies to own for the next 10 years, buy them now and throw away the key.

“Look to build a Crusoe Portfolio: stocks that could make you rich if you were stranded on a desert island for the next 28 years (or 10). Global brands, mostly lots of cash, selling as cheap as you’re likely to find them again.”

“Now’s a great time to be hunting for quality DRIPs,” adds our colleague Jim Nelson.

“Stocks offering dividend reinvestment plans (DRIPs) allow you to both receive dividend checks in the mail and buy more shares at a discount. For example, if Company A wants you to reinvest your dividends back into more shares, they could offer — as a benefit for signing up for their DRIP — a market discount on every purchase. Company A will take your shares and sign you up for this plan. When the dividends come out, they’ll reinvest them by buying more shares for you at a 10% discount to the market price.

“It’s as if the company were matching 10% of your investment, just like an employer-based 401(k). Here’s the best part: Most companies will let you split your shares into half ‘pay now’ and half ‘reinvest for later.’ So you are collecting current income from half your dividends while saving for your retirement through an employer-like ‘matched gains’ program from the other half.

“There are already over 1,000 DRIPs, most of which allow you to split your shares, and a few hundred of these ‘matched gains’ retirement plans. Many more are jumping on the bandwagon.”

The average cost of getting a higher education has continued to rise this year. Overall expenses of attending a university rose about 5% this school year, the College Board said yesterday. The average cost of a four-year private university rose 4.8% this year, to a price tag of $34,132 a year. Public colleges are getting pricier too, up 5.7% this year, to in-state costs of $14,333 each year.

Among all college graduates in 2007, 60% were in debt. The average exceeded $22,000.

“If Dean would have used an approach to his critique” writes a reader of Dean Baker’s scathing review of our film, “like the approach I.O.U.S.A. used in making the film, I wouldn’t have dozed off after Page 7. The future generations that he refers to happens to involve my children, and the U.S. spending problem is here today and probably still will be here in future generations.

“The lack of confidence in our government is here today and will continue if we don’t do something now. Maybe we, as supporters of the I.O.U.S.A. message, should pool our funds and buy him a copy of the DVD. He apparently didn’t hear the same message I did.

“Keep up the good work.”

The 5: Thank you. As you’ll see, not everyone agrees…

“I visited the Center for Economic and Policy Research Web site and read a couple of Dean Baker’s articles,” writes another. “As you commented, he seems to be on the same page as the Agora folks in a goodly number of his essays, but his political inclination clearly is leftist, as is CEPR’s. Why are you surprised that he took offense at a criticism of Social Security or deficit spending? He is a Big Government leftist criticizing Big Government conservatives.”

“Having Pete Peterson, Robert Rubin, et al. in your movie discussing the ‘debt’ is a big joke,” suggests the last reader today. “Rubin has helped ruin Citigroup (NYSE:C) with his DO NOTHING TITLE AND FAT CAT compensation. He was complicit in this leverage party and is still standing. He’s a disgrace and should be up on charges, just like his former ‘boss,’ Sandy Weill and ‘Chuckie Cheese’ Prince.

“As to Peterson, his Blackstone (NYSE:BX)firm used the credit markets to buy up and sell companies with real people losing thousands of jobs, running up debts on the balance sheets and taking home HUGE paydays. He even has called himself a FAT CAT himself. You want to glorify a former NIXON Cabinet member who also has some responsibility for this mess we are in? I’m outraged at you for shilling for Peterson and Rubin to support this movie. If you would have done your homework further, you could have probably found other funding/promotional sources.”

The 5: Obviously, you haven’t seen it.

Still, to you, I say, “Bring it on!” If all we’ve done is start a fight between Big Government “liberals” and Big Government “conservatives,” that would be fine with us. We’ve had our reservations about working with the Peterson Foundation, too.

But I will say this: We’ve been writing about this stuff for over a decade. Given the response the film has been getting from audiences around the country and the high level of interest and discussion that follows each screening, I’d say we’re doing a hell of a lot more than picking fights and shilling for FAT CATS. Every screening is followed by the suggestion we put the film in high schools. We’ve noticed students in universities across the country are taking it upon themselves to screen the movie and hold discussions. For the first time, people are actually discussing the topic rationally, without dismissing our assertion that building up trillions in government debt as “gloom and doom.”

We don’t vote, so it’s the least we could do to help save the Republic. Heh.

Cheers,

Addison Wiggin

The 5 Min. Forecast

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This from Taipan Daily:

The petrocrats were richly rewarded as crude oil climbed to new heights. Now a sharp decline in the price of oil threatens to tear their world apart. A time for drastic action could be at hand…

Today I want to talk about a situation that feels like a ticking time bomb – a time bomb that could go off sooner rather than later. It starts with this chart…

After climbing to nearly $150 a barrel earlier this year, the price of crude oil has fallen. A lot.

Crude’s big drop is good news for consumers, who won’t have to spend as much on gas and groceries. US prices at the pump recently fell ten cents to $2.92 a gallon, according to the AAA auto club. When the cost of fuel falls, the cost of transported goods falls too.

It’s also good news for the Federal Reserve. Thanks to falling oil prices – and falling commodity prices in general – the Fed doesn’t have to worry as much about inflation these days. They can flood the system with paper money to their heart’s content, knowing that the “early warning system” of rising commodity prices has been shut down. (At least for now.)

Big Trouble for the Petrocrats

In sharp contrast, falling oil is very bad news for men like Vladimir Putin and Hugo Chavez. You could even say it’s a flat-out disaster.

One or both of these men may have to take drastic measures in the only way they know how… and they may have to do it soon.

First a little explanation: As you likely know, these “petrocrats” were huge beneficiaries of the oil price run-up. Both had the good fortune of timing their political rise to a period of fast-rising oil wealth.

In Russia, Vladimir Putin amassed vast amounts of power, money and prestige as crude climbed to great heights. In Venezuela, Hugo Chavez used his gusher of funds to bribe the citizenry and spread influence throughout Latin America.

But that was then, and this is now. With the price of crude nearly cut in half from its 2008 highs, the roof is caving in on both men’s heads.

Evaporating Oligarchs

We’ll take a quick look at Russia first.

Though Putin has become extremely popular with average Russians, his real power base is concentrated with the oligarchs and the siloviki.

The oligarchs are Russia’s new class of billionaires — men who amassed great power and wealth in the chaos and turmoil of Yeltsin’s Russia in the 1990s. The siloviki (a Russian term) are the kingmakers and the lever pullers… the men in the shadows who decide Russia’s fate.

The two groups are deeply intertwined. The oligarchs have the money… the siloviki have the power… and Putin holds court over both.

Now, as the price of crude declines, the oligarchs’ fortunes are falling apart. As the New York Times observes, “perhaps no community of the super affluent has fallen as hard, or as fast, as the brash Kremlin-connected insiders whose wealth was tied up in the overlapping bubbles of the Russian stock market, commodity prices and easy credit.”

The numbers are staggering. Bloomberg calculates that the top oligarchs – the 25 richest Russians on the planet – have lost a collective $230 billion over the course of the recent market decline. (This is partly due, too, to a Russian stock market crash. Russia’s benchmark stock index, the RTS index, is down more than 70%.)

Effectively gain 12 times your money the second you buy this stock And likely as much as 190 times your money over the next few years. Don’t scoff — it has happened before under almost the exact same circumstances that one small petroleum company is now in prime position to cash in on. But you’ll have to move fast to ride along for 190-fold gains (or more).

Too Much Leverage, Comrade

To make matters worse, many of the oligarchs ran their affairs as if they were one-man investment banks. Huge quantities of leverage and debt were the norm. During boom times, it was no big deal for an oligarch to borrow many multiples of his net worth. The borrowed capital would then be put to work in even more speculative ventures. Now all that leverage is killing them.

This is a deadly serious problem for Vladimir Putin (a man reputedly worth tens of billions himself) because it leaves his power base badly fractured. If the oligarchs go down the drain, Putin could too.

Russia as a country is in a little better shape, thanks to a huge currency surplus war chest. Russia has upwards of $530 billion in reserves by some estimates. That’s rainy day money that can be spent as needed to keep the people calm and Moscow on its feet.

But none of that will matter to Putin if his hidden power network, a large part of which depends on the oligarchs, is destroyed. If something isn’t done to stop the bleeding, Vlad could wake up to anarchy in the Kremlin… or a new challenger risen up from the ranks… or even a dollop of Polonium 210 in his borscht.

Too Much Credit, Amigo

Hugo Chavez, Venezuela’s fiery leftist President, has arrived in a similar place by a different route.

Chavez didn’t make the mistake of leveraging up or staking his power on a group of rich insiders. Rather, he made the mistake of giving away his most precious resource for free… forgoing hundreds of billions in revenues in an aggressive effort to buy friends.

As it turns out, Venezuela only has one big customer who pays full price for oil: the United States. Most everyone else gets it at a huge discount.

In 2005, Chavez formed something known as the “Petrocaribe” club. He might as well have called it the “Chavez will bribe you to be his friend” club, for reasons you’ll soon see.

The 18 Latin American countries in the Friends of Chavez club – er, excuse me, Petrocaribe club – suck down roughly half the oil Venezuela produces. (That’s 1.2 million barrels out of 2.4 million barrels per day total… a 25% decline since Chavez rose to power.)

The upshot is that Venezuela, a country whose output should be rising but is instead declining, gives away half its oil for next to nothing. Chavez charges Petrocaribe members 30 percent of the market price up front, on 90-day terms, with the balance paid in installments spread out over 25 years.

Thirty percent down, 90 days same as cash and a 25-year repayment plan. What a deal!

If that deal sounds like a steal, that’s because it is. Chavez fancies himself a great liberator… the hope and salvation of Latin America… and he will grease the palm of anyone who agrees with him and stands against The Evil United States. (Never mind that The Evil United States is Venezuela’s only big customer paying cash on the barrelhead.)

Venezuela on the Precipice

Not only does Chavez give away half Venezuela’s oil to outsiders, he gives it away at home too. Thanks to mass subsidies, Venezuela has the cheapest gas prices in the world. You can fill up for your tank for twelve cents a gallon in Caracas… and that’s only the tip of the subsidy iceberg.

Not to put too fine a point on it, Chavez is a self-styled “revolutionary” with no concept of basic economics. He assumed the oil gusher would last forever, and spent money accordingly.

As if all the spending weren’t enough, Chavez has grossly neglected the maintenance and upkeep of PDVSA, the state-owned oil company. Rather than investing in technology and engineers, Chavez has ordered PDVSA to waste its time on hare-brained community schemes. He has installed political cronies in important positions, driven out key employees, and generally let the whole apparatus go to pot.

Now, like Putin, the falling price of crude is delivering the mother of all wake-up calls. Various sources estimate that if oil stays below $80 for long, Venezuela will have trouble paying its bills. Chavez is the type of guy who needs a frying pan to the face to see the error of his ways… and he is about to get it.

An Old Play From the Dictator’s Handbook

So what are Putin and Chavez going to do? Both men are in dire straits, and a ramp-up in oil production is not the answer.

Expanded oil output won’t help the oligarchs at this point. They need a higher price per barrel to shore up market values on their battered and bleeding holdings. And Chavez couldn’t expand production even if he wanted to. (Mazhar al-Sheridah, an oil expert with the University of Venezuela, says his country will need $32 billion and five years’ construction time to raise output.)

One option for both men is to lean hard on OPEC, and hope a round of deep cuts does the job of pushing oil higher. We’ll talk more about that in a minute. But there is another, older, more reliable play too… one that’s proven its effectiveness time and again in recent years.

Putin and Chavez can stir up turmoil on the cheap.

If there were such thing as a “dictator’s handbook” (or maybe a petrocrat’s handbook), you would find this play early on in the list of basic maneuvers. When things are going to hell at home, distract the populace (and the world) by starting a firestorm elsewhere.

It’s hard to solve a pressing problem with long-range tools like diplomacy and fiscal policy… but much easier to light a match and drop it in a drum of kerosene.

Return of the Fear Premium

For the past few years, crude oil traded with a hefty “fear premium” built in. The thought was that, with the supply and demand balance so tight, even the smallest conflict or disruption could have big ripple effects on the price and availability of oil.

Now that the markets are worried more about slowdown than runaway global growth, the fear premium in oil prices has gone away. If anything, it’s been replaced by a new deflationary mindset as “demand destruction” takes hold.

But “fear in the hearts of men” is back in the ascendant… in the hearts of Putin and Chavez anyway. As the walls crumble down around them, both could easily be on the verge of panic. Both know that oil prices must move higher if their regimes are to be saved from oblivion. And both are willing to do whatever it takes to save their own skins.

This is why falling oil is a geopolitical time bomb. Putin and Chavez could already be considered two of the most dangerous men on the planet. Now both men find themselves backed into a corner like wounded animals. And remember, the most dangerous animal of all is not the one hunting for its supper. It’s the one fighting for its life.

Whither OPEC?

We can’t know what’s taking place behind the scenes… what Putin and Chavez are saying to their closest advisers in their most urgent moments and so on. But we can know there’s a real powder keg brewing here. And OPEC is potentially a part of that mix too.

All I know is, if I were a ruthless petrocrat trying to save my regime from a downward spiral in crude oil prices, I would think big. I would try to set off the biggest, most explosive tinderbox possible, just to make sure my message gets through and the new “fear premium” takes full effect.

And if I could time that action with the actions of another powerful group, so much the better. That would just mean more bang for the geopolitical buck.

That’s where OPEC comes in…

In case you weren’t aware, OPEC is meeting later this week to discuss an emergency cutback in crude production. (Russia is not officially a part of OPEC, but Venezuela has long been a member.)

The market has been a tad jittery ahead of the OPEC meeting, but general expectations seem tame. Wall Street analysts are predicting a one million barrel per day production cut. There is also a general consensus that one million barrels won’t be enough to keep the price of oil from falling further.

Remember, too, that it isn’t just Russia and Venezuela who are hurting here. Many of the OPEC countries – not least Iran – have a lot riding on a high oil price. I suspect that OPEC will have to engage in a little “shock and awe” this week if they really want to get their message through. In 1973 they really took the gloves off, and we saw what happened the rest of that decade. Who’s to say they won’t do it again.

So there you have it. Mix geopolitical TNT with a paper currency fuse, and you’ve got a good chance of seeing energy prices spike higher before too long. Possibly much, much higher.

Source: Falling Oil is a Geopolitical Time Bomb