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.

As energy prices rose over the last 4 years, so did Russia’s desire to once again become a major player in world politics.  This time, however, the country could actually afford to do so because the huge amounts of capital the sale of oil and gas provided to its government.  The new found money allowed Russia to start expanding their military once again, and it also provided them a means of purchasing (for lack of better words) it’s way into situations.  Think of it as a pay for play.

Now that energy prices are falling, and the demand for oil and natural gas is low in Europe (and in the world in general at this moment) Russia finds that all may not be as positive as they had previously expected.  In order to counteract the decline in energy and the credit crisis, Russia has devalued their current – the rouble – 9 times.  This has the potential to cause inflation/hyperinflation if energy prices to not improve, not to mention that fact that it also can wipe out the savings of the average Russian citizen.  

Russia is vulnerable simply because their empire is built on natural resources. They have no major industry to speak of, no goods that are produced and consumed on a mass world wide scale, so what is the country to do when their base is threatened?  Use it as a weapon – be it for self-preservation or aggression.

If you take note, Russia is talking about cutting off natural gas supplies to the Ukraine once again.  The last time this took place was in 2006.  Both sides have their own version of what is taking place.  Russia says the Ukraine is expecting unrealistic prices and that they pay off their debt.  The Ukraine says they’ve paid their debts and believes the cost of gas it too high.

I am not saying Russia is in the wrong, just imagine if Russia was acting with purely political interests in mind.  “We don’t like the President you chose, ok, we are shutting off your supply to gas.” or “You didn’t vote in our favor during the last session of the UN, your oil transfers now will come in at 10% of what you were previously getting” all suddenly become possible tools within their power.  

Not a big deal, you may be thinking – wrong.  Russia provides roughly 25% of the EUs natural gas.  If it wanted to make life difficult as an act of aggression or self-preservation, it could do so really quickly.

This is the power Russia truly has.  Unless the EU takes steps to prevent dependence on Russia, they run the risk of being help at Russia mercy. I hope that someone in Europe is paying attention to this…

American’s just don’t get it, and I fear the masses won’t internalize our national dependency and the  need for alternative energy sources until it is too late.

This is not a rant about global warming – that is another discussion for another time – this is simply pointing out that American’s just don’t get get that the price of oil will rise once again.  Just because it’s $38 today doesn’t mean it will be $38 tomorrow.

According to edmunds.com, pickups and SUVs will outsell cars in the month of December.

Trucks and SUVs will outsell cars in December, according to researchers at the automotive Website Edmunds.com, something that hasn’t happened since February.

 

Meanwhile the forecast finds that sales of hybrid vehicles are expected to be way down.

 

Combined with discounts negotiated at the dealership, the actual prices consumers pay can be amazingly low, said Edmunds.com sales analyst Jesse Toprak.

 

“I can get about $10,000 off a large SUV,” he said.”There’s probably not going to be a better time.”

He is right, he could get roughly 10K off an SUV but what about when the price of gas goes back to $4/gallon, be it a year from now or three years from now?

Let’s say a large SUV has a tank size of roughly 20 gallons and gas goes up to $4/gallon once again.  This means the consumer will be paying $45 more per fill up.  If we assume they fill up the tank every week, that means they will spend an extra $2340 per year and if 4 years that “savings” would have vanished.

Now is the worst time for oil to have fallen because everyone, from corporations to the consumer, will be moving away from researching and investments in alternative energies because there is no cost savings. Why spend the money on research and development if it costs less to simply buy oil?

Now is the time we should be moving to hybrid technologies, now is the time the nation should be going to solar and natural gas… basically, now is the time we should be looking forward and attempting to find a way to free our nation from dependency on foreign oil, not trying to go back to our old ways.

As it seems I have no “normal” hobbies, I tend to do a lot of reading about the financial markets (finance, commodities, stocks) and I feel safe saying most people have no clue just how low gas has potential to get in the next few months.  While this low will be temporary, you still will be surprised.

Essentially, the bottom has fallen out of the entire commodities market.  Metals, Oil, Natural Gas and Agricultures are falling as if people will never need to drive, build or eat again.  For example, the price of oil has fallen from almost $150 this past spring to roughly $40 this past Friday and, obviously you’ve see the price of gas at the pump fall too.  All of this can be tracked back to the recession; the “pop” of the speculation bubble and the financial melt down.

Historically there is roughly a 6-week lag between the price of oil and the price of gas at the pump.  So, while oil has dropped $25 in the last month (from roughly $65 to $40) the price of gas still has more room to drop.  Based on the close price of oil today ($40), one could reasonably expect to see the U.S. average for a gallon of gas to drop to around $1.35 within the next 4 to 6 weeks.

As with all things financial market related, market “corrections” tend to over swing both ways.  Oil at $150 was way too high for current condition and supply (part speculation bubble) and oil falling like a rock is the correction of that bubble.  Where is going to stop, no one knows… but if it continues to fall, say to the level of $20 per barrel, the U.S. could see $.99 for a gallon of gas once again.

This could change at any time – an unexpected war, production interruptions, terror attack – but as long as oil continues to fall hard, gas is going to follow.

Think I am making this up?  Jan 09 Unleaded Gas Futures are now at .90

Just a quick reality check.

Iran has the second largest proven natural gas reserve in the world, second to to Russia. Iran also roughly 10 percent of the world’s total proven petroleum reserves and sits on one of the largest oil fields in the world so, when the Iranian government says their nuclear program is of a “Peaceful nature” I am a bit skeptical.

Now Mohamed ElBaradei, head of the the UN’s International Atomic Energy Agency, has “serious concern” and stated:

Iran needs to give the agency substantive information to clear up suspicions…We need, however, to make use of all relevant information to be able to confirm that no no nuclear material is being used for nuclear weapons purposes”

I have no issues with the Iranian people, I simply have a great deal of skepticism of government (Iranian or otherwise) at this point. Furthermore, the U.N. has proven itself to be a lame duck organization, unable to govern itself out of a paper bag, which only raises my doubts even more.

At this point the E.U. needs to wake up and look at what is in their back yard. The only way Iran will disclose their activities is from financial pressure from Europe.

UPDATE:

Here is an interesting WSJ Opinion write up by Richard Holbrooke, James Woolsey, Dennis Ross and Mark Wallace – a good bi-partisan group of highly qualified individuals. The article can be summed up by this paragraph:

Tehran claims that it is enriching uranium only for peaceful energy uses. These claims exceed the boundaries of credibility and science. Iran’s enrichment program is far larger than reasonably necessary for an energy program. In past inspections of Iranian nuclear sites, U.N. inspectors found rare elements that only have utility in nuclear weapons and not in a peaceful nuclear energy program. Iran’s persistent rejection of offers from outside energy suppliers or private bidders to supply it with nuclear fuel suggests it has a motive other than energy in developing its nuclear program. Tehran’s continual refusal to answer questions from the International Atomic Energy Agency (IAEA) about this troublesome part of its nuclear program suggests that it has something to hide.

I had been expecting oil to rise as Ike moved into the Gulf, but for a range of reasons that is not happening.  What did happen is the spike in Gas prices:

“The wholesale price of gasoline ranged from $4 to nearly $5 a gallon at the U.S. Gulf Coast on Thursday…That is up significantly from about $3 to $3.30 a gallon on Wednesday…The wholesale price of gasoline is what refineries charge retailers. Retailers then mark up those prices for the customer so they can make a profit — so if these wholesale prices hold, it could mean that pump prices for U.S. drivers easily break through the July 17 record of $4.114 a gallon.”

If the storm continues to head north, I would expect Gas, Oil and Natural Gas to increase in price.  Who knows these days, it’s a wild market right now!

Ike slammed into the Bahamas causing serious damage, hurt the relief efforts already underway in already suffering Haiti, and just went ashore in Cuba roughly an hour ago.  The storm is now a Category 3 Hurricane, down froma 4, and is expected to come in to the Gulf of Mexico on Tuesday or Wednesday.

The current storm track can be found here and here.  Storm models show Ike drifting east or west of New Orleans, which can give the city a break but can mean trouble for Houston, Mississippi or Alabama.

Something to keep in mind: the price of oil.  NYMEX Crude and Nymex Henry Hub Futures (Natural Gas) are both up 2.26 and 3.0% respectively.  If the storm causes a shutdown of oil / gas production and OPEC cuts oil output expect the prices to rise.

Update: Oil Price Coverage

• WSJ – Energy sector Hums Again
• Reuters – Oil rises over $2 to top $108 on hurricane threat

  From the Reuters article…

Hurricane Ike is expected to enter the Gulf of Mexico as a severe Category 4 storm, a U.S. Federal Emergency Management Agency official said on Sunday. It may threaten Gulf energy rigs that account for a quarter of U.S. oil output and 15 percent of natural gas production.

• AP – Gulf oil and gas producers give Ike a serious look

With nearly 88 percent of crude-oil and 74 percent of natural-gas output shut due to Hurricane Gustav, it is easy to see how Ike could shut down all production once again.

More and more it is looking like Hurricane Ike will head into the Gulf of Mexico.  From data thus far the storm is really looking like a monster.

Current Storm path models and projected center positions can be found here and here.

Just a few things to think about…

If this does maintain strength, and does hit the Gulf, will the folks in New Orleans and Texas be hitting the road again or will people stay and try to ride it out?

Will nearly all of the oil and natural gas production shut down in preparation, as with Gustav?   Some 25% of oil drilling is still off line because of the last event, if this storm rolls through how will this impact the price of oil?

Are local and federal governments ready to respond to two major storms back to back?

We may know by mid next week…. But in the mean time continue to check out Symonsez for Hurricane coverage – some truly great stuff here.

…but do now thanks to Hurricane Gustav – The Gulf of Mexico has roughly 4,000 off shore oil and gas rigs.