Now, Chavez’s aggressive economic policies are again being called into question, this time as the country slides into what could be a protracted period of stagflation, which is defined by the exasperating mixture of torpid economic growth and high inflation.

Before that, however, the period from 2004-2007 was marked by rapid economic growth – punctuated by a miraculous 19.42% burst in 2004. Since that time, unfortunately, Venezuelans have watched as their standard of living was slowly eroded by restrictive price controls, rapid inflation, unsustainable public spending, and widespread nationalizations that have put a stranglehold on industry.

Even as these problems festered, an unprecedented surge in oil prices allowed Chavez to maintain his questionable – and ultimately unsustainable – economic policies. When the bull market in commodities abruptly stalled last year, Venezuela’s economy lumbered to a stop.

Venezuela’s economy grew by 3.2% in the fourth quarter of 2008 and just 0.3% in the first quarter of 2009. Then – for the first time in more than five years – that country’s economy contracted, shrinking 2.4% in the second quarter.

Unfortunately for Venezuela, the decline in gross domestic product (GDP) did little to quell surging inflation.  The annual rate of inflation climbed to 26.2% in July, according to the Central Bank of Venezuela. Many foreign sources have it higher.

President Chavez insists his country is not in the midst of a financial crisis, but analysts believe this is just the beginning of a bad-news saga that will trip up a country whose heavy-handed economic policies have made it few friends.

“To sum up, we could say that such scenario of stagflation has two basic components,” Orlando Ochoa, an economist and professor with Andrés Bello Catholic University (UCAB), told El Universal. “On the one hand, price control, exchange control, nationalizations and restricted distribution of foreign currency damage supply. On the other hand, lower oil prices curtail revenues and have an impact on demand.”

Going forward, Venezuela’s currency controls are perhaps the biggest hurdle for the economy to overcome. Chavez and his cabinet have said they are preparing to announce measures to stimulate the economy, but that may not be enough.

The problems that come with over-reliance on oil and a vast net of unwieldy social programs and the cost burden of nationalized industry aren’t going anywhere. And the nation’s other obstacle – the gap between its official and parallel exchange rates – won’t be addressed until at least the end of September.

An Unparalleled Problem

Indeed, the problems facing Venezuela are many. But President Chavez and his cabinet believe they have the solution.

“There is a remedy,” Venezuelan Finance Minister Ali Rodriguez said in an interview broadcast on state television. “The differential between the official dollar and the [so-called] ‘parallel dollar’ can be reduced.”

Rodriguez was referring to the difference between the country’s “official” exchange rate – which remains at 2.15 bolivars per U.S. dollar – and the so-called “parallel market,” which suggests a rate of about 6.5 bolivars per U.S. dollar.

The official exchange rate of 2.15 bolivars per U.S. dollar was arrived at in 2003, when Chavez imposed currency controls that force Venezuelans who want to import goods to apply for a government permit. Importers that are unable to get permits to buy currency at the official exchange rate have been forced to turn to the parallel market, where they pay three times the official price.

The problem now is that a large drop in oil revenue has sharply reduced the amount of dollars the government has available to exchange. That has driven more importers to the pricier parallel market. Some have stopped importing entirely.

With limited access to imports, Venezuela’s manufacturing sector contracted by 8.5% in the second quarter.

“The manufacturing sector is going to have a negative performance, mostly because of the restriction in imports and dollars, which has caused a drop in the supply of primary materials,” Miguel Carpio, an economist at Banco Federal CA in Caracas, told Bloomberg News. “Add to that the drop in consumption, and this is going to be a very difficult year.”

Now, with the threat of stagflation looming large, Chavez has no choice but to take action. But economists are unsure of what the government will do.

Few analysts expect the government to order an outright devaluation, because it would push inflation beyond the 28% annual rate. (Venezuela last devalued the official rate in 2005, weakening the currency by 11%.)

Instead, the government could try to lower the parallel rate by issuing dollar-denominated debt, by creating a second, separate exchange rate for “necessary” industries, or by doing both those things.

Traditionally, the government chooses to subsidize certain favorite industries – mainly heavy machinery, foodstuffs and medicines – by allowing them to trade bolivars at the official rate and driving other non-essential goods producers to the parallel market.

This could be taken a step further by imposing a tax on lower priority industries seeking dollars at the official exchange rate, Russ Dallen, head trader at Caracas Capital Markets, said in a research note. Or the government could simply create multiple “official” rates for different industries. Venezuela may create four different exchange rates to help the government deal with a drop in oil revenue.

“This complicated system, if implemented, would satisfy the requirements of the government of pretending not to have a formal devaluation of the exchange rate,” Dallen said.

Credit Suisse Group AG (NYSE ADR: CS) said in an Aug. 28 report that it expects the government to avoid devaluating its currency by selling dollar-denominated debt to the parallel market. In 2008, after an aggressive sale of dollar-denominated bonds, the administration was able to bring down the parallel rate to around 3 bolivars.

Ultimately, it’s Chavez – who opened the door to speculation in August by saying he would “restore balance” to the parallel rate – who will decide what to do about his country’s quandary. But he won’t be making a decision until later this month.

“Is there going to be an adjustment? I can’t respond to that right now,” Chavez said Sunday at the presidential palace in Caracas. “If any adjustment comes, it will be in September, towards the end of the month.”

But whatever Chavez decides to do, his remedy is likely to fall short, analysts say. That’s because the parallel rate is not the problem – it’s actually a symptom of flawed economic principles. The restrictive price-and-exchange-rate controls, government expansion, and political obtuseness that Chavez has made the cornerstones of his economic policy will continue to conspire against Venezuela until there is reform.

“We always said the situation was only tenable for the government if oil prices not only remained high, but also rose constantly. But that has not happened, and the fall in oil income is now clearly in evidence,” UCAB’s Ochoa told Inter Press Service News Agency. “That’s the first factor contributing to stagflation, to which are added price and exchange controls and restrictions on hard currency availability, which harm supply and investment, and thirdly, the policy of nationalization.”

Venezuela’s Crude Oil Slick

In the years leading up to the financial crisis, Chavez used PDVSA’s growing revenue to finance large social programs, as well as the nationalization of other industries.

Spending on social programs soared 340% from 2000-2005, according to the Center for Economic and Policy Research. It rose even higher as oil prices soared into 2008, boosting purchase orders and fueling a spending spree among even the poorest Venezuelans.

But since the financial crisis eviscerated commodities prices, Venezuela’s oil bounty has all but evaporated. Oil brought in $22.8 billion in the first six months of 2009. That’s less than half of the $52 billion it brought in during the first half of last year. For 2008 as a whole, oil generated about $90 billion in revenue for Venezuela.

Meanwhile, FONDEN – Venezuela’s development fund – has already committed all but $3 billion of the nearly $20 billion it had available at the end of January, as the government used most of the money in the first half of the year to sustain fiscal spending.

And while Venezuelan oil traded at an average of $53 a barrel in the second quarter, up from $40 a barrel in the first three months of 2009, that’s still a far cry from last year’s levels.

That means borrowing has had to rise to compensate for the decline in revenue.  Venezuela’s domestic debt jumped 44% during the first half of the year to $20.42 billion from $14 billion at the end of 2008.

“Public spending keeps rising and is financed by more public debt, which increases spending in a vicious circle, while the government defers or postpones workers’ demands, which is itself another sign of the approaching recession, although the government seeks to deny it,” economist Domingo Maza Zavala, a former head of the Central Bank told the IPS.

Calculations based on official figures suggest domestic and foreign debt repayments will total about $19.6 billion between the second half of this year and 2011, the Latin American Herald Tribune reported. Roughly $10 billion of that total will be due on foreign debt, with the remaining $9.6 billion destined for the domestic account. Total state debt is estimated at $50.3 billion.

What’s the government figures don’t include is the cost of compensating private companies that have been taken over or bought out under Chavez’s nationalizations and expropriations.

Chavez’s government earlier this year seized the assets of more than 70 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by PDVSA.

PDVSA demanded that service companies accept a 40% cut in their bills; when they refused, the Venezuelan government seized at least 12 drilling rigs, more than 30 oil terminals, and about 300 boats.

The demonstration was a pointed reminder of a 2007 incident, which is still playing out in the international courts. Two years ago, Venezuela forced six oil majors to hand over equity stakes of 60% or more to PDVSA. However, Exxon Mobil Corp. (NYSE: XOM) and Conoco Phillips (NYSE: COP) opted to walk away from their contracts rather than accept a minority role.

This conflict is still being disputed, and last year Exxon won a court order to freeze $12 billion in assets from PDVSA as compensation for its lost projects. Additionally, Chavez’s heavy-handed policy has cost the country untold billions worth of oil-related investments, as many oil majors now refuse to operate there

“There is the uncertain outlook over how the extensive nationalization pursued over the past 12 years will pan out,” Alvise Marino, an analyst at Ideaglobal, told The Wall Street Journal. “Based on the government’s unimpressive track record on the economic management front, we tend to take a less-than-optimistic view.”

The Colombia Conundrum

In addition to alienating foreign oil majors, Chavez has also sequestered Venezuela from many of its neighbors, especially Colombia. Chavez has ordered his country to prepare for an outright “rupture of relations” with Colombia after that country gave the United States permission to use its military bases.

The United States says access to the bases will help it fight drug trafficking, but Chavez has his own theory. He says American use of the bases could be used as a launch point for an invasion of his oil rich nation.

“Those seven military bases are a declaration of war,” Chavez said last week. “We must prepare for the rupture in relations with Colombia. There is no possibility of a return [to normal relations] with Colombia, an embrace.”

However, cutting off ties with Colombia poses yet another economic hurdle for the Venezuelan economy to overcome. Colombia provided about $6 billion in products to Venezuela in 2008, or about 15% of Venezuela’s total imports, according to Venezuela’s government statistics institute INE.

In fact, when Chavez closed the border for three days in 2006, there was shortage of food in Venezuela.

Chavez can turn to other South American countries, but his credit extends only so far.

“Nobody wants to sell to Venezuela if payment isn’t made in advance,” José Rozo, president of Fedecámaras Táchira, the region’s main business association, told the Latin American Herald Tribune

About 70% of trade activity in Venezuela depends on imports from Colombia, Rozo said, adding that the only country that had been willing to export on credit had been Colombia.

Without Colombia, Venezuela will have to settle for trade terms that heavily favor its partners.

For instance, Argentine President Cristina Fernandez de Kirchner made a visit to Venezuela last month, and signed no less than 22 accords. Virtually all of the deals were in Argentine’s favor, the Tribune reported.

“We’re going to drive a horse and cart through all the regulations if they want to do business with us,” an Argentine official told the paper prior to the signing of the deals. “Prompt payment. Simple procedures. Fewer controls. Less bureaucracy. No delays. Hard currency. I’ll tell you the rest when I’ve thought of them.”

That means if Venezuela wants to keep doing business with Argentina, it’s going to have to pay more.

And that will fuel inflation.

“The cost of purchasing in Argentina is higher, and that means that prices will be higher in Venezuela,” Abelardo Daza, an economics professor at Caracas-based IESA business school, told The Journal.

Source: Is Venezuela’s Stagflation the Beginning of the End for Chavez?

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

“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe…well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia…the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways…and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader…do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation…now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule…short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning. “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.

Right now the gold-to-oil ratio is trading around 7. That means a single ounce of gold is roughly worth seven barrels of light sweet crude. With oil trading near $130 a barrel, this is an extreme low point for the ratio.

The previous drop in mid-2005, when an ounce of gold was briefly worth 6.5 barrels of oil, was the lowest the ratio has been in decades.

Oil Too Expensive, or Gold Too Cheap?

So what does it mean when the gold-to-oil ratio moves toward an extreme like this? In historical terms, it suggests that something is out of whack. Either oil has gotten too expensive, or gold has gotten too cheap.

The last time we saw an extreme in the other direction was late 1998, when the gold-to-oil ratio rose above 26. That was a case of oil being way too cheap… and of course, crude oil bottomed out for all time just a few months after that.

Given the way oil is trading now — the recent rocket ride to $130 a barrel, etc. — some think that oil has gotten too expensive, too fast. Their view would be that the price of oil has to come down, perhaps by a lot, and that the gold-to-oil ratio is reflecting this.

Your humble editor disagrees with this view for a number of reasons.

For starters, there’s a lot of hot air about how oil could be a bubble and speculators are driving oil prices… but there is little proof of this charge, and a lot more evidence pointing in the other direction.

Germany’s Folly

Angry German politicians have gone so far as to call for a worldwide ban on oil trading. They think that $130 oil is all the evil speculators’ fault, and that all the traders should have their hands tied.

This is about the dumbest thing I’ve ever heard, and a good example of how politicians can be dangerous. One of the key functions of markets is price discovery; through self-interested buying and selling, the markets act as a useful forecasting tool. (One of the best forecasting tools we have at any rate.)

Without a functioning market mechanism to determine the price of a valued good, the market breaks down. You either have lots of one-off transactions taking place in the dark, or else you have some government committee setting the price by fiat. I hear Soviet Russia tried that. It didn’t work out too well.

The activity of traders and speculators also provides much-needed liquidity to markets. When, say, an airline like Southwest buys heating oil futures contracts to lower its exposure to jet fuel costs, more often than not there are traders on the other side of the transaction. Without someone to take the other side of a trade, end-users of oil and gas products have no way to hedge their business risk.

In a very real sense, speculators are paid to take on risks that hedgers don’t want. Risk transference is a vital market mechanism. The German politicians don’t get this. Or maybe they do get it, but they just don’t care.

Trying to restrict trading would be a fool’s errand anyway. There is more than enough competition among global exchanges to keep the trading going, even if some goofball government tries to ban trading on a local basis. That’s a very good thing.

Et Tu, George?

Hedge fund legend George Soros is blaming the speculators, too, calling the oil price a bubble. Without putting too fine a point on it, this is a major piece of hypocrisy.

Why? Because the existence of men like Soros show exactly why big markets are hard to manipulate.

If the price of oil were truly in a bubble, some big hedge fund player with guts and foresight could come along and make a killing by shorting the daylights out of it… thus driving the price of oil back down to non-bubble levels in the process.

This is exactly what Soros himself did in 1992. That was the year he earned the nickname “The Man Who Broke the Bank of England,” for the huge score he made shorting the British pound.

Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

One hundred ninety-five dollars is the “live-out allowance” here in Fort McMurray. This place is ground zero for the Athabasca tar-sand boom. That money amounts to hardship pay, and the miners here need it.

Fort McMurray isn’t a big town. It has just three exits on the only highway within 100 miles. Forty years ago, there wasn’t much here at all. Now it’s one of the fastest-growing towns in Canada… and the extra $50,000 or so a year those miners earn puts a lot of juice into the local economy.

I spoke to a mortgage broker here yesterday afternoon. She told me they did a billion dollars in mortgages in Fort McMurray in 2007. You’d have to sell three beachfront condos a day for a year to make that kind of money in Florida. In Fort McMurray, they did it selling mobile homes.

A typical doublewide mobile home costs around $450,000 here. A modest two-bedroom with a garage, under 1,600 square feet, will set you back nearly $700,000.

That isn’t likely to decline anytime soon. Everyone is spending money up here, and the population will continue to increase. In 1963, one company mined the tar sands. Now, more than 60 companies are falling over one another for acreage. With oil over $100 a barrel, mining this trillion-barrel deposit is just too profitable, and too safe to ignore.

———- Advertisement ———-
Penny Stock set to drill Canada’s largest oil sands field

Canada’s single largest oil sands holding – over 707,700 acres – is now controlled by a tiny $4 stock

They’re conducting tests to determine how much oil is buried beneath their land… Preliminary estimates are 60 BILLION barrels of oil.

The results are due back in any day… that’s when I expect this tiny company’s share price to rocket to $20… $30… possibly even $50 a share.

To read more on the story, click here.
————————————

I see three important factors that set the tar sands apart from nearly every other large petroleum deposit in the world… factors that continue to justify your investments in the area.

1. Canada’s oil sector is private. Last week, I talked about the increasing power of state-owned oil companies. In places like Saudi Arabia and Venezuela, huge government-run companies control all aspects of oil production. Canada’s government stays out of the oil-production business.

2. Canada operates under the rule of law. I love Canadian and Australian natural resource investments. These countries have long histories of being investor friendly. Russia and Venezuela have a tendency to screw companies and individual investors.

3. Canada has a short, safe, efficient transportation route to its largest consumer – the United States. Saudi Arabia can’t say this. Its oil production is threatened by instability… and the transportation route is half the world.

These three reasons will drive an explosion in Canadian oil sands. Production will climb from 1.1 million barrels per day in 2006 to 3.8 million barrels per day in 2020… That’s 250% growth in just 14 years.

Alberta has 857 projects on the books worth $169 billion. Those projects include everything: mines, electrical generation, parks, biodiesel plants, and roads.

However, the bulk of that money comes from oil-sand development. This is one of the greatest growth stories on the planet right now. And there are lots of ways to get in…

You can buy Suncor Energy and make decent gains, but it’s like the Microsoft of the oil sands. Everybody knows about it. I prefer sticking to smaller producers and infrastructure ideas.

I still like Husky Energy for a refining infrastructure play. It’s one of Canada’s largest and most powerful oil companies… and it counts the brilliant Li Ka-shing (China’s richest man) as a big investor. Its early investments in heavy oil refining have made it one of the largest refiners in the region. S&A Oil Report readers are up about 55% on the stock… and I see bigger gains ahead.

You can also buy natural gas for a play on Canadian oil sand development. Mining and processing the oil sand consumes huge amounts of natural gas. More and more of Canada’s natural gas exports to the U.S. will be diverted to the oil sands, which should support North American natural gas prices.

Whichever route you choose, I recommend you choose it soon. I believe a long era of high oil prices is ahead… and buying into Athabasca is the safe way to profit.

Good investing,

Matt Badiali

P.S. Most investors have no idea that the development of Athabasca is also a tremendous opportunity to collect some of the highest income payments in the world.

Source: Three Reasons You Need to Invest in Tar Sands Today

This from the Financial Times:

The spot price of Nymex West Texas Intermediate hit a record $130.30 a barrel on Wednesday. On Tuesday investors had rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

“The dollar is one major culprit behind skyhigh oil prices, says Justice Litle in Taipan Daily, “but there are many other small factors that add up.”

“For example, China, after suffering through its worst earthquake in decades, has had to shut down mines and wells for safety reasons. Apart from the terrible human tragedy of more than 34,000 lives lost, this can only add upward pressure to oil prices.

“In South America, Venezuelan oil exports recently dropped to a five-year low, and evidence is mounting that the country has become a state sponsor of terrorism under Hugo Chavez.

“In Nigeria, rebels continue to keep oil and gas production on a knife edge. In places like Russia and Mexico, oil and gas output is declining at an eye-opening rate.

“The little things pile up; if it’s not one thing, it’s another. This is generally the case when supply and demand are so tightly matched there is almost no margin for error. That’s where we stand now in terms of global oil demand vs. available daily supply.”

The high and rising price of oil is causing real pain in the heartland… and yet the view looks quite different from the Middle East.

Chakib Khelil, the Algerian oil minister and president of OPEC, has flatly stated that “there is no shortage.”

The oil minister of Qatar is even more blunt. “The market doesn’t need more oil,” he says.

Hussain al-Sharistani, the oil minister of Iraq, takes the strangeness even step further. “There is more oil in the market than consumers want,” he argues. (Which begs the question: Which consumers exactly?)

There is obviously plenty of bad news in crude oil’s meteoric rise. But the bright side is, real pain means the U.S.A. — and much of the world — is finally on the cusp of real change. That means profit opportunity on a major scale.

Nosebleed Oil Prices — Whose Fault?

A few weeks ago, OPEC members seemed to shrug their collective shoulders at the thought of $200 a barrel oil. President Khelil points out that much of the price rise is due to a weak dollar. (Every one percent decline in the dollar’s value, OPEC estimates, increases the price of crude by $4 a barrel.)

So the dollar is one major culprit. But there are many other small factors that add up.

For example, China, after suffering through its worst earthquake in decades, has had to shut down mines and wells for safety reasons. Apart from the terrible human tragedy of more than 34,000 lives lost, this can only add upward pressure to oil prices.

In South America, Venezuelan oil exports recently dropped to a five-year low, and evidence is mounting that the country has become a state sponsor of terrorism under Hugo Chavez.

In Nigeria, rebels continue to keep oil and gas production on a knife edge. In places like Russia and Mexico, oil and gas output is declining at an eye-opening rate.

The little things pile up; if it’s not one thing, it’s another. This is generally the case when supply and demand are so tightly matched there is almost no margin for error. That’s where we stand now in terms of global oil demand vs. available daily supply.

It’s not rocket science to see how all these factors add up to $127 a barrel oil. For years, naysayers have been telling us that the price of oil was about to collapse and head back to ‘cheap’ any day now.

Of course, what was cheap just kept edging higher and higher. First it was $25 a barrel. Then it was $35. Then $45, $55, $65. And now we’re at the point where $85 or $90 a barrel oil would probably seem ‘cheap’ relative to today.

Growth and More Growth

The supply side of the equation is tough and getting tougher. And when we look to emerging markets, it becomes clear that the demand train isn’t slowing down.

The U.S. consumer might be spent, but consumers in other countries are just rolling up their sleeves.

For example, Bloomberg reported last week, “China’s retail sales climbed at the fastest pace since at least 1999, signaling that domestic consumption may help to buffer the world’s fourth-biggest economy against an export slowdown.”

At the same time, Thailand reportedly booked its fastest growth in two years in the first quarter of 2008.

A key debate these past few years has been whether or not domestic demand growth would kick in strong enough, allowing export-heavy regions of the world like Asia to become captains of their own economic fate. The evidence suggests this is happening.

Then add to that mix the fact that shopping malls are spreading like wildfire in Russia, cheap cars are conquering India, Southeast Asians are doubling and tripling the amount of meat in their diets, and so on.

For much of the 20th century, the Western world threw a party that the rest of the world missed out on. Now that the West is miring itself in economic slowdown, ROW (a common Wall Street acronym for “rest of the world”) seems to be saying, “No thanks. We’re not much interested in your pity party, either… but we do intend to get our fair share of those resources you’ve been hogging.”

The Good News

Again, there is plenty of good news, too.

High oil prices may be here to stay, but the reasoning behind this phenomenon is not all bad. It’s a good thing for ROW to be coming on line… to see new wealth being created, new economic breakthroughs, new dreams of escaping poverty and hardship on a grand scale.

And here in the land of plenty (the United States), it’s good to see habits truly changing for the first time. It was a phenomenon itself these past few years how stubborn the American consumer seemed to be in the face of rising gas prices.

No matter how much pain was felt at the pump, we just kept driving. The gas-guzzler culture seemed to be bulletproof. Ford Excursions and Chevy Suburbans just kept rolling off the lots.

Rising raw material prices, in particular rising food prices, are now causing real hardship and what represents a cause for shoppers in developed economies to grumble is a matter nothing short of life and death for the millions less fortunate around the world. This note considers what many emerging countries are doing and why their actions, far from alleviating the problem, are actually making matters worse.

Lord Mark Malloch Brown is a junior minister in the current Labour administration. He has a reputation for being forthright and often puts his colleagues’ hackles up. He is also the former deputy secretary general at the United Nations and an acknowledged authority on global issues of critical concern. His recent comments regarding the growing food crisis are significant both because he has identified some of the root causes and because he has taken steps to raise the matter where some of his more craven colleagues dare not.

Lord Malloch Brown describes, somewhat unoriginally, the confluence of factors he sees as serving to cause food prices to rise as a “perfect storm”. These factors are: a series of poor harvests in Australia, the incremental demand for improved diet caused by the newly prosperous parts of China and India, coupled with the now wide-spread process of biofuel “flag planting” on land previously devoted to the production of food stuffs. We would add a few additional factors, on which more below.

Bang on cue, the United Nations secretary general Mr Ban Ki-moon has warned that, if allowed to escalate, permanently higher food prices could not only damage global growth but also, possibly, global security too.

Rightly, the secretary general has stuck to the UN’s remit by indicating that an environment that has seen wheat prices double and the price of rice explode higher could seriously put back the process of global poverty elimination. “If not handled properly, this crisis could result in a cascade of others (including the imposition of quotas and the banning of exports) and become a multi-dimensional problem affecting economic growth, social progress and even political security around the world”.

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

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

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

The developed world has hardly covered itself in glory on this matter either. In particular legitimate questions might be asked of Western countries’ commitment to what has become known as the “Washington Consensus”. Part of the reason why a number of African countries are now back on the verge of starvation is that developed nations, through their International Monetary Fund (IMF) conduit, actively encouraged many African governments to cut farming subsidies and focus instead on producing cash crops for export and by so doing, open up their previously closed economies.

That the plan has backfired is made obvious by the fact that many countries are now struggling to grow sufficient to meet basic levels of domestic demand. Whilst the UN falls back on its World Food Programme to raise sufficient funds to feed starvation zones, what is really required is greater research and development, improved credit facilities and ultimately a “green revolution” similar to that which took place in parts of Asia, not that the Asian experience is without its own pressure right now.

From the point of view of global economics there has always been a gulf between the “haves” and the “have-nots”. Generally speaking, the larger a country is, the greater the likelihood that it will be richly endowed with natural resources. The fact that not even the largest countries are so well endowed in every scarce resource is reflected in the fact that imported inflationary pressure has become a global issue. Indeed, some of the world’s largest and most populous countries are those with the greatest dependency on imported raw materials.

Estimated top global countries by resource production

The chart shows resource wealth, calculated using the most recent production data for energy, basic resources and agricultural products using average prices achieved over the previous quarter. Against this is plotted a countries’ wealth on a per capita basis, to show that some countries are likely to benefit significantly more than others. On this basis, Saudi Arabia, Canada, Australia and Russia stand out. The second chart (below) compares the global share of a country’s estimated resource wealth against its share of global population.

For the tale of the tape, the TSX Exchange tacked on another 1.05%, while the TSX Gold Index gained 2.9% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, added 1.37% with the advancing issuers beating the decliners by a 584 to 434 margin on volume of over 223 million shares traded.

Shares of Crystallex International continued to slide after comments made by the Minister of the Environment and Natural Resources of Venezuela that call for a ban on open pit mining in Venezuela. Crystallex maintains that the Minister’s comments “are in conflict with the Las Cristinas environmental impact study approval, construction compliance guarantee bond request and environmental tax request issued by the same ministry.” Welcome to Venezuela. Crystallex ended the day flat at C$0.84.

Sprott Inc’s second day of trading proved to be similar to the first as shares in the well-known resource investment firm fell C$0.14 to close at C$9.70. The company, whose mutual funds and hedge funds made C$42.3 million last year, completed its $200 million initial public offering at C$10 each.

Shares of Southern Hemisphere Mining got a modest boost after reporting a 78 metre drill intercept running 0.96% copper and 0.4 grams silver per tonne at its El Arrayan project in Chile. Southern ended the day up C$0.035 at C$0.25.

Beleaguered Southwestern Resources has inked a deal to sell its troubled Boka gold project in China to Hong Kong East China Non-Ferrous International Mineral Development Co. for $9.4 million and a 2.7% net smelter return on production is excess of 6.5 tonnes. Southwestern ended the day down C$0.02 at C$0.53.

Rumours are circulating that Hathor Exploration is about to table some good news for shareholders. No word on what that news is. The company recently discovered the Roughrider zone on its 90% owned Midwest NorthEast uranium property in Saskatchewan’s Athabasca Basin. Hathor ended the day up C$0.16 at C$2.76.

Given the strong run up in Canadian equities, the Monday holiday in Canada may well give investors pause and a correction may be in the offing. We will see what Tuesday trading has in store.

Source: Resource Stock Roundup: Saturday, May 17th, 2008