Remember how I mentioned that oil was dropping uber fast, and that if the decline continued gas has the potential to hit $.99 again?  Do you also remember how I mentioned the only way to prevent the decline is with some major event?  Well, there is one on the horizon – OPEC has signaled “significant” production cuts in hopes of stopping the potential slide.

Via Bloomberg:

A “severe” cut may be needed to halt the decline in prices, group president Chakib Khelil told the Associated Press in a Dec. 6 interview.

The members of OPEC believe that a reasonable price for a barrel of oil is roughly $75, but obviously the market doesn’t agree with the thinking right now.  But why does OPEC hold this view?  The countries that have membership in OPCE obtain most of their government budgets from the profits pulled in from oil sales.  The lower the price of oil, the less funding available.  The less funding available, the less money for things such as roads… schools… and military spending.

In case you were curious as to what countries made up OPCE, here you go:

• Algeria
• Angloa
• Ecuador
• Indonesia
• Iran
• Iraq
• Kuwait
• Libya
• Nigeria
• Qatar
• Saudi Arabia
• United Arab Emirates
• Venezuela

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

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?

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.

With Ike hitting the U.S. late Friday night / Early Saturday morning, the news and picture of the aftermath are now coming out.

Initial news reports are indicating the economic damange, mainly due to the fact that oil infrastructure seemed to have been missed, is much less than had been expected.   The major problem facing the areas hit by the storm is the lack of power, roughly 2.6 million customers in Texas and Louisiana are out of power.

Interested in some pictures of the aftermath?  Chron.com has a nice wrap up.

This is worth reading – Melissa Clouthier was Live Blogging her Hurricane experience.

If you are interested in the Hurricane and the impact to oil, check out The Oil Drum. They have data showing what Oil rigs are out of order due to the storm.  Outstanding write-up, great read and a new add to my “must read” list.

If you’ve ever wanted to feel small, just take a look at this:

Hurricane Ike over Cuba

This is a picture that NASA took as Ike passed over Cuba. Now realize that the storm has doubled in size since this picture was taken. Amazing. Simply amazing.

The storm looks to be on track to his Houston at some point this evening. With nearly a million people moving out of Ike’s path, gas prices on the rise due refinery shut downs, and 15 foot storm surge expected, this will be a wild weekend for some in Texas.

Here is the current model…

Others talking about the storm:

Hurricane Ike Resources
Jonny Torres – Ike video coming ashore
Diary of a Mad Poker Player – Hurricane Ike
Symonsez – Hurricane Ike Not Intense But Has Serious Muscle

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!

As I had mentioned previously, the storm track for Ike seems to change by the hour.  Models have the system moving back toward Houston about 24 hours after it looked as if Ike was going to the US/Mexican border and a Hurricane warning is extended almost to New Orleans.

The evacuation orders in Texas are also starting, and Houston is starting to feel the worry that a storm of this size can bring.  What really surprises me is, with nearly 96% of oil production off line in the Gulf, the price of oil continues to decline.  That says a lot, I believe…

More to come.

It’s funny what people, or governments, will do when it comes to money.  All of 20 hours ago the countries that make up OPEC were hinting production levels would remain the same until their next meeting.  Surprise, they were just blowing smoke.

Apparently “production levels would remain the same” means “cuts output to shore up falling market” in some languages.  News came out around 10 PM eastern that a 520,000 barrel a day (1.7%) cut was being put into place because “a shift in market sentiment causing downside risks to the global oil market outlook”

Translation – Out government budgets are directly tied to the price of oil and, with oil under $100, we cannot continue to grow.

5 years ago a barrel of oil was $30, today it is roughly $105.  The governments of OPEC countries had no budget issues then and sure do not now.  If there was ever a sign that OPEC is not looking out for the world this is it – they want the money.    Expect more cuts in the coming months.

Other Reactions:

Stocktock: OPEC Cuts Oil Production
Indiblitz.com

First the good news – models suggest New Orleans looks to miss the brunt of Hurricane Ike.

The bad new – compare the storm track above with the Gulf Coast Oil platforms and you’ll see the production area is on the east side of the storm, not a good area to be. I’m surprised oil prices managed to stay below $110 with the storm on the way. Maybe the oil bubble is over, maybe the market really doesn’t think this will hurt production…

The really bad news – Houston could be the new target of the storm.