The actual title of the article I just read was “US loses just 345,000 in May, raises hopes”

JUST 345,000?

Employers throttled back on layoffs in May and cut the fewest jobs in any month since the financial crisis erupted last fall — raising the brightest hope yet that an economic recovery will take hold later this year.

But with companies still reluctant to hire, the nation’s jobless rate rose to a quarter-century high of 9.4 percent, and it likely will keep rising into 2010, possibly within striking distance of its post-World War II peak of 10.8 percent.

“Less bad, yes,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, said, summarizing the economy. “Good, no.”

The press is still in the “Less bad” mood, but this is still significant as the nation is now at 9.4% (reported).  More over, people are starting to revise their end estimates.  Previously economists were saying this wouldn’t go beyond 10%, now it is expected that unemployment may hit almost 11%.

Two large issues are on the horizon – taxes and energy cost.

1) The massive amounts of money spent for a stimulus that hasn’t worked will be coming back to haunt us soon.  As a result, the government will need to find a way to raise money in order to continue paying benefits.  There is only one way this will happen: raise taxes.  If they raise business taxes, that will impact earnings.  In turn, companies will look for cost savings in order to boost their profits.  Where do you think that will start?

Employees.

As such, more layoffs would come back into play.  While, possible, not as bad as 600K per month layoffs none the less.

2) Energy.

Oil/Energy is once again getting out of control for reasons NOT based on demand.  If energy continues to move toward $90, earnings will once again be impacted.  Again, here we go.  Companies will slow spending, construction will diminish, the consumer will cut back which means retail will hurt…  and there we go, layoffs will start once again as companies attempt to rightsize for the market conditions.

This is a bad cycle we are in and, I fear, it is going to be a prolonged cycle.

Remember that whole Russian/Ukrainian natural gas dispute that caused Gazprom, the largest natural gas producer in the world and the largest company in Russia, to shut off natural gas delivery to the Ukraine? Well, the effects are being felt throughout the EU.

Nine countries are now experiencing problems with natural gas delivery – Slovakia, Greece, Croatia, The Czech Republic, Turkey, Poland, Hungary Romania and Bulgaria have suffered supply drops anywhere from 5 to 30%.    

Not that I am trying to be paranoid, but the leaders of the European countries need to be paying attention to this event as it has the ability to predict what an aggressive Russian government may chose to do if it decides to act aggressively in the future. As the world continues to consumer oil and natural gas, energy will be a source of conflict (more so than today).  The need for energy will, potentially, cause countries to become more aggressive, and what better way to paralyze your enemies than cutting off their energy sources?

As this disagreement continues to unfold, it will be interesting to see if European leaders decided to begin to find alternative sources for natural gas.  Will this be a trigger event that spurs change, or will the European governments remain complacent?

Let me just say, I have no issue with Russia – the comment yesterday about treasonous speak and this post on the gas conflict between Russia and the Ukraine are purely coincidental – I am simply pointing out a potential future that would I expect as natural resources become more scarce.

I had previously said that Oil could not have fallen at a worse time because the U.S. Consumer has a short memory.  They are back to their old ways, starting to purchase SUVs with no regard to the fact that oil will once rise again.  

Another reason the fall in oil prices could not have come at a worse time is due to the fact that technical advancements will come to a stand still.  Companies no longer need to spend money in order to find cheaper source of energy since oil is cheap enough. 

If the U.S. Wished to stay as an oil consuming nation, but desired to break its dependence on foreign oil it could do so by turning to lands within the Western United States.  The answer is oil sands.

Oil sands, or tar sands, are a combination of clay, sand and bitumen that can be mined and refined into usable oil.  The problem, however, is the process is rather pricey.  It can cost up to $70 to produce a barrel of oil from Oil Sands, and when the price of oil is currently at around $45, there is no motivation for companies to continue development.

Since Oil Sands mining and refinement is rather new on a significant scale the price to produce will – naturally – be high.  The only way cost will decline is if the technology is utilized on a large scale, so the technology is no longer “unique”.  

So, here is my question:  If the government is truly concerned about becoming energy dependent, what will it do to keep such projects moving forward?  What will it do to keep innovation from victim to a slowing economy?

Southwest airlines, one of the few profitable airlines left out there, swung to a loss for the first time in 17 years the company report on Thursday.  Guess what? The loss is due to rising energy costs.  Guess what? it’s because LUV overpaid for their fuel and is now a victim to “mark-to-market” accounting.

Years back Southwest Airlines started to hedge their fuel costs – paying a pre-determined price for a commodity in order to avoid large and often unpredictable shifts in pricing.  This is based on the belief that prices will continue to rise at a predictable rate which allows a service provider the ability to complete energy purchases before the price increases.  Problem is if the price of fuel on the open market falls below your cost paid the company needs to show a loss based on current account rules.

Hello Southwest, welcome to an accounting rule that doesn’t seem to be based in reality.

From everything one hears in the news there seems to be small – slight – signs pointing to an energy crunch in the United States, if not the world.  Many believe the world is / has reached a “peak oil” scenario – worldwide production of conventional crude oil peaks in volume resulting in the rise of oil prices due to the lack of easily accessible oil – and energy costs will continue to rise over the coming decades.  The trend already may been seen in pricing costs.

In the past 7 years oil prices have moved from less than $30/barrel to almost $100/barrel while oil field discoveries are starting to slow and are coming from more remote locations than every before.  Add political and economic instability to the mix and it could be easy to see why prices would move upward.

Little does the general public know but the United States actually has roughly the third largest oil reserves in the world – welcome to Oil Sands.  This source of energy, oil specifically, is not what one would typically expect from oil – the whole gusher and drilling rig – rather oil is trapped in shale and sand which requires companies to utilize a separation process in order to gain access to the oil.  The problem with this procedure is cost.

Crude oil, historically, was at a price point that “normal” margins for Oil Companies when producing resources in the United States.  At $30 a barrel a company had a profit margin of roughly 11%.  Just for perspective, Microsoft’s profit margin in roughly 30% and Coke’s in about 20%.  The way oil companies were making their profit was on volume.

Due to the high cost of extraction cost of Oil Sands, at $30/barrel it was highly unprofitable for an oil company deal with this form of energy.  Essentially, the price of oil needs to be above $75/barrel in order for oil producers to even break even with Oil sands.  Now that energy costs are trending higher, it makes both fiscal and political sense to tap this resource.

So, let me ask you this – With an energy crisis, rising prices and the fact that the U.S. has 40 Billion barrels of estimated oil in sands; wouldn’t you think the government should be promoting the development of this energy?

Harry Reid does not.

He wants to continue limiting the use of this oil, making it difficult for companies to extract, as well as have access to the land on which the oil sits.  While it does not remove our focus from oil to clean energy, accessing this oil would help limit our exposure to foreign and possible hostile governments.  Isn’t that part of the reason for facing the energy crisis head on?

If we are indeed facing an energy crisis can someone, please, explain to me how this is in the United States best interests?