The Indian government subsidizes most fuel costs, meaning state oil firms are forced to sell fuel at hugely discounted rates to shield consumers from inflation. But with the price of oil soaring to a recent high of $135 a barrel, refineries have been unable to cover costs and pressed to the point of bankruptcy.

The inability to pass high prices onto consumers cost state-run refiners about $43 billion for the year ended March 31, Serangulam V. Narasimhan, finance director at Indian Oil Corp. Ltd., said last month. The companies lost roughly $18 billion the year prior.

The Indian government had tried to cope with the matter by scrapping a 5% import tax on crude oil and cutting the import tax on gasoline and diesel to 2.5% from 7.5%, but the measures proved ineffective. So, yesterday (Wednesday), the government attempted to ease the burden on the refiners by boosting its subsidized fuel prices for the first time since February.

The price of gasoline will rise 11% in the Indian capital of New Delhi to $1.17 (50.6 rupees) per liter. Indian drivers will pay 9% more for diesel, and families will be charged an additional 17% per cylinder of cooking gas, India’s Oil Minister Murli Deora told reporters.

Still, as Deora also pointed out, even with the price hike, India’s state-owned oil companies are projected to lose a total of $58.4 billion this fiscal year, which runs from April through March 2009.

“The prices should have been raised higher for a real impact,” Ballabh Modani an analyst with Mumbai-based Enam Securities Pvt. told Bloomberg News. “There’s no point in an ad hoc increase.”

While the companies still stand to lose a significant amount of money, the Indian government must tread carefully when raising prices, as wholesale prices are already at a three-and-a-half-year peak of 8.1%.

The hike in fuel prices was India’s biggest in 12 years, and is expected to add another between 0.5% and 0.6% to wholesale prices. If the government had pushed prices any higher, it would have been risking social unrest among the nation’s poor who are already coping with high food prices.

“Already milk, vegetables, wheat – the price of everything has gone up so much,” Balaram, an office driver earning a little over $100 a month, told Reuters. “And now gas and petrol. With my salary, after paying my rent and my expenses, what will I send home? How will I feed my family and what will I save?”

Together, food and fuel account for about 75% of household spending for poor families in Asia. And India, despite its growing reputation for economic success, currently has the largest number of people living in abject poverty: more than 350 million, or about a third of the population.

Source: India Fuels Inflation by Bailing Out Refineries

“The principal direction is the creation of a complete line of ships and equipment to extract and transport oil and gas from offshore deposits,” said Mr. Putin. “This includes drilling platforms, ice-class gas carriers and icebreakers.”

Building new ships to develop Russia’s offshore resources was the FIRST item on the agenda of the FIRST cabinet meeting of the new Medvedev government.

Russia will leverage its long and proud tradition of building exceptional vessels for its navy and commerce fleet. The maritime-industrial decline of the post-Soviet era is coming to an end. “Priorities have been decided,” said Deputy Prime Minister S. Ivanov, “We have enough money.”

Ah, music to one’s ears… “We have enough money.” When was the last time anyone in the US heard a politician make such an affirmative, purposeful declaration?

And to learn of these developments you have to read about them in the Sakhalin Times, not the New York Times or Los Angeles Times. U.S. news media, of course, have other things to cover — like motorists whining about the price of gasoline.

Each nation has its different priorities, I guess. What you see depends on where you stand. So where does the US stand on “energy?” While Russia is developing, the US is ignoring events. The political class, and its media enablers, rush headlong towards the energy-equivalent of the Little Big Horn.

More on the topic here.

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: Russia: Energy Priority #1

In their search for explanations as to why oil has surged past $130 per barrel, Washington, Wall Street and the financial media are as clueless as cavemen after a freak summer snowstorm. Despite the head scratching, the blame game is nevertheless in full force.

Speculators and big oil companies are being trotted out as scapegoats, and increased margin requirements and taxes on windfall profits and futures trading have been mentioned as appropriate sanctions. It should be clear that this is pure farce, and that no one understands what is actually happening.

The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of the very markets over which they formerly held unchallenged title. As more affluent foreigners consume more of the resources and products they previously exported to us, Americans are being forced to cut back. The rising dollar-based price of gasoline is simply an illustration of this global trend.

Poorly concealed behind contrived government statistics, the signs of America’s falling standard of living are everywhere; all one has to do is look. We are unloading our SUVs for less-desirable compacts, and are paying more to fly on crowded planes (where we pay to check luggage and dine only on what we bring onboard). We now buy our lattes from McDonald’s Corp. (MCD) or not at all, and we increasingly forego dining out, trips to the mall and vacations – just so we can scrape together enough to fill our gas tanks and kitchen pantries, pay taxes and insurance, or make credit card, mortgage or car payments.

The collective belt tightening is simply the down payment on the U.S. government’s massive bailout of Wall Street investment banks and mortgage lenders. As the U.S. Federal Reserve creates money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.

The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the “free lunch” currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. And four-dollar gasoline is just the beginning.

For all the talk of increased global demand, few seem to understand from where it actually comes. The surge in global demand is both a function of the increased purchasing power of foreign currencies and the fact that foreigners are choosing to spend more of their incomes themselves.

In other words, former Fed Chairman Alan Greenspan’s famous “global savings glut” is turning into a global consumption binge, with Americans unable to crash the party. This trend will only get worse as the dollar-denominated price of just about everything that is either imported, or capable of being exported, goes through the roof.

We can look for scapegoats all we want but the simple fact is Americans are going to have to get used to a much lower standard of living. Those who have been putting all the food on our tables are finally pulling up chairs and are serving themselves.

Source: That Pain You Feel at the Pump is From a Dollar Crisis, Not an Oil Crisis

Q: Any new comments on the refiners? – C.

Record high oil prices are brutalizing refiners. They can’t pass along the rising costs to consumers, so the companies’ margins are down to whiskers.

In April, I thought things couldn’t get worse. The price of a barrel of oil cost more than the amount of gasoline you can make from it. It didn’t make sense… It was like a bushel of wheat becoming more expensive than the bread you could make from it.

But that’s exactly what happened two months ago. So I figured gas prices had to rise, increasing the refiners’ margins, and jacking up their share prices. But since then, the price of oil has risen faster than the price of gasoline. The “crack spread” – the difference between the cost of oil and the price of gas or diesel – has worsened, and refining stocks have fallen further.

I was too early, but the situation still looks good for big gains… when and if the price of oil declines. If you own refiners, keep holding with an eye on your stops.

Q: I hear the same argument for natural resources as for agriculture – short-term peaks and long-term demand. What’s a short-term versus long-term strategy? – R.A.

I look at the long-term argument for agriculture investment as a function of population and modernization. The world has more people living better, and many of those people want to live like Westerners. That means eating more beef, chicken, and pork, which in turn takes a whole lot more soybeans and corn. So agriculture will continue to rise in the long run.

In the short term, agricultural stocks will face the same ebbs and flows of any market. And right now, I think we’re seeing a short-term peak.

Look at the current situation in fertilizer stocks, for example. Intrepid Potash (IPI) trades for more than 100 times earnings. Potash Corp (POT) trades for more than 40 times earnings.

These are mining companies… They usually trade at a discount to the overall market (which has a P/E of 18). How do you expect to make money as in investor when you are buying a depleting asset at 40 times its current earnings?

My inclination is to stay away from these stocks at these valuations. I’m sure you can find a few gems out there, but the big, easy money in most ag stocks has been made.

Q: What’s going on with copper? Is it too late to buy copper producers? – L.M.

Copper is a critical component of housing, cars, air conditioners, plumbing, and electricity transmission. If you don’t have copper, you don’t have modern civilization. So copper prices, much more so than gold and silver, reflect the health of the global economy…

From 2000 to 2007, the world’s copper production grew 14%. Global demand has risen at a steady 4% a year for the last 100 years, but Chinese demand for copper doubled between 2001 and 2007.

In fact, from 2000 to today, China’s growing demand for copper has accounted for 99% of the global growth in copper consumption.

China holds 16% of the world’s copper-smelting capacity, so turning copper ores into copper pipe is clearly a major industry in China. But very little of that finished copper leaves the country. Of all the raw copper China imported in 2006, it exported about 26% of it as finished goods. In 2007, that number dropped to 9%. This year (through March), China only exported about 3% of that copper. That means domestic demand for finished copper is growing.

In other words, China is solely responsible for the rising copper price. At $3.75 per pound, copper is trading near all-time highs… up roughly 400% in the last five years.

I know you don’t read Growth Stock Wire for my analysis of China’s economy… And I’m not going to try to guess what the suits at Goldman Sachs have trouble guessing. I’ll just say I believe copper prices are going to remain high enough for us to make terrific gains in base-metal producers.

Good investing,

Matt

Editor’s note: Natural-resource expert Matt Badiali answers reader questions every Wednesday in Growth Stock Wire. If you’ve got a question for the Commodity Investor, drop us a line.

Source: The Commodity Investor Q&A

Google says the term “solar powered car” is one of the hottest search trends on the internet, as Americans seek alternatives to high fuel costs.

According to a recent Lehman Brothers report, the solar-powered-car revolution may not be coming anytime soon. The Wall Street bank in predicting crude oil prices at $83 a barrel in 2009 and as low as $70 in 2010.

Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon. This is up 22% from this time last year! 22 percent! 22! Hahahaha!

Just when I thought I had completely lost my sense of humor, I ran across a MoneyNews.com article titled “Lehman Bros. Report: Oil Bust in the Cards”. Hahahaha! Thanks, Lehman!! Hahaha! I needed the laugh!

“Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon,” says The Mogambo Guru. “This is up 22% from this time last year! 22 percent! 22! Hahahaha!

“It gets even funnier when Lehman is not just predicting lower prices, but “Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.” At this point I am laughing so hard that my stomach hurts, and since I am on the verge of pooping in my pants, I am desperately trying to stop laughing by sticking my own thumb in my eye, but it does no good!”

Just when I thought I had completely lost my sense of humor, I ran across a MoneyNews.com article titled “Lehman Bros. Report: Oil Bust in the Cards”. Hahahaha! Thanks, Lehman!! Hahaha! I needed the laugh!

Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon. This is up 22% from this time last year! 22 percent! 22! Hahahaha!

It gets even funnier when Lehman is not just predicting lower prices, but “Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.” At this point I am laughing so hard that my stomach hurts, and since I am on the verge of pooping in my pants, I am desperately trying to stop laughing by sticking my own thumb in my eye, but it does no good! I just keep going, “Hahahaha! Oww! Hahahaha! Oww!”

But $70 a barrel of oil? Hahahaha! Oww! Hell, the cost of production is higher than that! So does Lehman think that production costs are going to go down? Hahahaha! Oww!

Bill Bonner here at The Daily Reckoning, taking no notice of my anguish or my thumb, says, “Ten years ago, China imported 165 million barrels of oil per year. Today, the total is more than 1 billion. Wonder why the price of oil hit a new high last week – above $126 a barrel? Well, China is a big part of the answer.” A whopping 600% increase in ten years, and yet Lehman thinks that oil will go down in price? Hahahaha! Oww!

Kevin Kerr at Whiskey and Gunpowder says, “According to the most recent data from the U.S. Energy Information Administration, oil demand for countries in the Organization for Economic Cooperation and Development – which includes developed nations like Japan, Germany and the United States – has gone up 14% since 1980. Oil demand for the rest of the world, however, has skyrocketed 43%. That’s more than three times as fast!”

And yet Lehman thinks that the price of oil will go down? Hahahaha! Owww!

So, handily summing up, you can take it from me, the Loudmouth Mogambo Prognosticator (LMP), the guy with the ready laugh and the sore eye where somebody keeps sticking his thumb in it, when I tell you that there is no way, absolutely no way, absolutely no freaking way in hell that oil will be that low next week, next month, next year or ever! Hahahaha! Oww!

I was going to go to the medicine cabinet to find something that would stop my eye from mysteriously hurting, when it fell on Sean Brodrick at MoneyandMarkets.com writing, “According to the International Energy Agency, China’s overall oil demand rose by 7.8% in February from a year earlier, much higher than earlier estimates of a 5.3% gain. And gasoline demand rose by 22.8%!”

Careful Mogambo Scholars will take particular note of the use of Mr. Brodrick’s use of exclamation points in highlighting the rise in gasoline demand, as this means to me a rise in the use of internal combustion engines, meaning that a lot of work is being done, which means that a lot of raw materials are being consumed.

In fact, he reports, “As a result of that surge in demand, China’s crude oil imports rose 15% in the first quarter and 25% in March. Its imports are rapidly accelerating!” Again one notes the use of the exclamation point!

And in another very populous country, India, he says that “oil product sales – a proxy of demand – surged by 10.9% in February compared to a year earlier.” Yow! Eleven percent in one year!

The interesting part, which is a euphemism for, “the price of oil is going to go through the freaking roof one of these days real soon, and for a long time after that, too, and if you want to make a lot of money, then get your worthless butt in gear and go out and buy things connected with oil” because all of this gigantic surge in demand is coming at a time when supply is shrinking.

This is made manifest when Mr. Brodrick reports that “oil production is already shrinking in 60 of the world’s 98 oil producing countries. So it’s no surprise that in March, global oil supply fell by 100,000 barrels per day, led by lower supplies last month from OPEC, the North Sea and non-OPEC Africa.”

And Kevin Kerr agrees, too. “Unfortunately” he writes, “there’s no way for supply to keep up.” As in “no way, absolutely no way, absolutely no freaking way in hell, just as The Mogambo put it in a previous paragraph”, which he could have said but didn’t.

This is important stuff, so I call up the local paper and tell them that I want one of their stupid little reporters to come over for my news conference so that I can tell the world what is happening. The little receptionist asks, “Is this The Mogambo?” and I proudly say, “Yes, it is!” Then, suddenly, the line goes dead! So I call back, and the same little receptionist asks, “Is this The Mogambo?” and I proudly say “no!”

Then she says, “Is this about inflation?”, and I say, yes, it will impact inflation, and before I can say another word, she says, “It’s you, you Stinking Mogambo Idiot (SMI)!”, and hangs up again!

So, if you never read in your newspaper how inflation is going to kill all of us, especially inflation in the price of energy, then blame the stupid little receptionist.

The inflation you can blame on the corrupt Federal Reserve, and the corrupt Congress (except Ron Paul), which encouraged them, and the corrupt Supreme Court, which let them continually ignore the part of the Constitution that requires that money be only of silver and gold.

Until next time,

The Mogambo Guru
for The Daily Reckoning

The Mogambo Sez: Being as sweet and brief as I can manage, under the circumstances, if you aren’t buying gold and silver, you are a moron.

Source:  ‘Oil Bust’ Headline Makes a Good Punch Line

The Dow rose more than 90 points yesterday. Oil, gold, the dollar – all held steady.

But here’s some good news.

Last month, the price of gasoline went down 2%, says the Labor Department.

Wait a minute. Do you remember gasoline prices going down in April? We don’t. As we recall, oil prices were soaring…and so was the price of gasoline. We’re beginning to sniff something funny in the air…a rat.

It was largely thanks to this reported drop in prices at the pump that the Consumer Price Index registered a scant 0.2% increase for the month of April. And it was largely because of this low inflation reading that the yield on the 10-year note stayed below 4%, says Gary Dorsch.

Our view is that higher consumer price inflation is in the pipes and will soon be backing up in the bathtub drains. Dorsch says the US money supply is now increasing at a 16% rate; higher inflation can’t be far behind.

Generally, we don’t trust numbers. Who can trust a 5 after all – with a bottom like a communist sickle and its top nicked from a swastika? Who can trust an 8 – wandering back and forth and never getting anywhere? And what about the zero? What does it mean? You put it in front of a number and it means nothing. You put it behind…and all of a sudden you’ve got 10 times as many. So, let’s look a little more at those numbers – that is, at the crooked 4s, the slick 6s, and the empty 0s – put out by the feds.

Getting back to the price of gasoline, we check the records from NY gasoline futures trading and find the price actually rose 12% in April. How come the feds put it down as minus 2%? Turns out, they made a ‘seasonal adjustment.’ But turning plus 12 into minus two sounds like more than an adjustment; it sounds like either magic or major surgery…like turning a prince into a frog or a fat man into a slim woman.

Elsewhere, we find the feds working their magic on all the primary numbers. The IMF, for examples, says food prices rose 43% last year. Yet, after the feds waved their wands, US food costs were up only 5.1%. And import costs rose 15% year to year – according to the numbers when they first got off the boat. But by the time the Labor Department statisticians had finished ‘adjusting’ them, they were down to only 0.2%.

Only investors, of course, are gullible enough to believe the government numbers. Consumers believe the numbers they see at the check-out counters and the pumps. What they see is sharply rising prices. Even newspaper reporters shop…and even they see what is happening.

“Inflation may be worse than the consumer price index shows,” reports a suspicious USA Today.

“Food costs jump most in 18 years,” notices the Washington Post.

Consumers don’t figure out consumer price increases – they pay them. The combination of lower wages and higher prices squeezes them like thumbscrews. What can they do?

Californians may be among the last Americans to wake up in the morning, but they’re the first to spot a trend. And the big trend in California today is recession.

House prices have fallen more in California than anywhere – down 29%, according to the California Realtors Association. A thousand foreclosed houses are auctioned every day in the Golden State. And joblessness hit 6.2% in March.

What are Californians doing to cope? They’re doing just what you’d expect. “Californians are cutting back on spending,” says James Saft in the International Herald Tribune. “Besides causing woes for state and local government, the cutback is giving California’s economy another knock and makes further job losses, home repossessions and banking problems more likely.”

Nordstrom says a third of its sales come from California and sales overall are down 6.5% in the first quarter. Starbucks says it is just not selling as much mocha in CA as before. Jack-in-the-Box, too, says the Californians aren’t buying as much of its dreadful food.

Meanwhile, other towns – such as Modesto, Stockton and Merced – are said to have 60% of their homeowners “upside down,” with more mortgage than house. Their unemployment rates are above 10%. And Vallejo, a city in Northern California, is taking the coward’s way out. It is slashing its wrists – it says it will declare bankruptcy.

Welcome to California, dear reader. Welcome to the future.

*** “The only way to make a real change is to make a real change…otherwise, you’re just buying time. Big problems need big changes…not parametrical changes, but paradigmatic changes. You have to change the system, in other words, not just the details.”

We had dinner with a fellow who made a real change – Jose Pinera. As Chile’s Labour Minister in the ‘80s, he completely changed the system of public pension financing and provided a model for the rest of the world.

We’ll let Jose tell his story as he told it to us last night:

“I was one of the ‘Chicago Boys.’ That is, I studied under the great economists at the University of Chicago…and then I got my Ph.D. in economics at Harvard, which added a little bit of humanism to the hard-edged teaching in Chicago. So, they called me a ‘Chicago Boy’ and a ‘Harvard Man,’ which is the way I like to think of myself.

“Things fell apart in Chile during the Allende years. We had to rebuild the country afterwards. So, I went on TV and I said what I thought…about how to reform the pension system…or what you call in the US, Social Security.

“A little background. You see, almost all the world’s pension systems came from the same source – Otto von Bismarck. He set up the first one in Prussia and it was later taken up in almost all the developed countries. We set it up in Chile in 1925. It wasn’t set up in America until ten years later.