Morris R. Beschloss 2015-10-07 04:04:17
Skirting the pipeline veto While the administration has blocked the Keystone XL oil pipeline and retained the 1974 U.S. crude oil export embargo, reliable sources have revealed alternatives to keep major refining capacity operating at full strength. With rail transportation proving cumbersome and increasingly dangerous, there seem to be few complaints regarding these policy transgressions: 1) Despite the continuing XL blockage, the Canadians are moving volumes of "oil sands" through two "stealth pipelines" all the way from the Athabasca oil region in Alberta to huge refineries on the Gulf Coast, creating a windfall for refined oil derivatives for five major U.S. companies. With increasing railroad-tanker accidents causing mayhem, this "digression" is not being openly challenged. 2) With the 1974 U.S. oil export embargo excluding Canada, the U.S. Energy Agency already has permitted offshore shipments of "light oil condensates," considering them not restrained by the embargo, which countered cutoff of temporary Mideast oil shipments in the wake of the Arab/Israel October war. 3) Since Canada was excluded from the "Nixon-era export embargo," Canadian intermediaries have become increasingly active buyers of American West Texas Intermediate export shipments. While domestic U.S. oil prices seem stuck in the low $40-perbarrel range, foreign Brent crude, which designates the much heavier oil produced in the North Seas, Nigeria, Venezuela and especially Saudi Arabia, the spread for Brent has widened beyond the $5 mark, allowing major U.S. refineries to buy cheap while garnering higher prices within the U.S. and abroad. That also is a leading reason why gasoline at the pump has not gained accordingly, while domestic crude oil has remained relatively flat. Barring major changes in these unpublicized methods, America's world-leading refinery capacity will greatly benefit from this unconventional but highly profitable alternative. PRODUCTIVE REFINERS While commodities in general and their industrial segment in particular have been experiencing their worst comprehensive price performance in decades, the 60% price crash of crude oil appeared to first catch the media headlines with the travail of plummeting gold prices not far behind. With the second half of 2015 well underway, this spreading commodity drought has impacted a broad range of industrial commodities, including coal, oil, natural gas, copper, iron ore (steel), scrap, and even zinc and nickel, which generally have held up during previous industrially-generated economic downturns. But hardest hit in the U.S. has been the near depression of the energy sector, which in 2014 was responsible for nearly all additional employees, keeping America's job creation standing in the positive column. With the increasing surplus of oil and natural gas hitting the markets in 2015's second half, tens of thousands of job terminations seem to be underway, especially in the upstream end (production and exploration). The inflated supply is increasingly overcoming static worldwide demand. The major exception to this frustrating energy turn of events is America's dominant refinery capacity, acknowledged as the most numerous (140-plus refineries) and sophisticated in the world. By dint of unusual circumstances, the extensively upgraded capacity of this energy segment has found exports of oil derivatives, especially to Central and South America, a growing volume and revenue generation. This includes gasoline, diesel oil, heating and cooling elements, as well as jet fuel and has allowed America's sophisticated refining capacity to achieve levels unmatched anywhere else in the world. With the cost-price spread between light condensate U.S.-produced WTI and the much heavier foreign Brent crude reaching a record margin in the $5-$6 per-barrel range, America's refineries are in increasing demand by ever-increasing global markets. While finding a way to more rapidly access Canada's oil sands, and circumventing the 1974 oil embargo, which has not been removed by the administration (with the exception of Canada), U.S. refineries have been able to quadruple their output since the beginning of the current millennium. While this expansion continues within a currently declining American energy output, the U.S. refining sector of the overall domestic energy arena is reflecting its good fortune by the cash-flow distributions to its investors; while exploration and production continues in a decreasing mode along the wide channel that includes distribution and retail. Even at the current productive refinery generating level, the ever more intricate refining sector still is short of reaching its full capacity. COMMODITY PRICE DEPRESSION When attempting to determine the cause behind the universal 2015 global commodity price depression, in the past such overall cost deflations have only been found in the worldwide depression of the 1930s, and to a lesser extent in the recent great financial recession of 2008-2010. Normally, such comprehensive price drops tend to reflect monetary shortfalls engendered by vast unemployment, major commodity surpluses, lack of demand buying power or a global population decline. Since these factors, or a combination thereof, do not now seem to be the cause, it would seem that universal supply across a wide range of such basic commodities as oil, copper, iron ore (steel), zinc, nickel, gold, silver, platinum and palladium, plus a growing amount of agricultural products such as wheat, corn and soybeans, indicates a major shift in supply availability, overpowering the demand of a slowing growth in the world's current 7.2 billion population. 1) In the case of rare metals and energy derivatives, which have taken the most drastic price hits in the U.S., these have worsened as the dollar has become the world's most expensive currency. This decreases their value when converted to lesser global monetary ratings. 2) China, by far the greatest importer of coal, oil, natural gas and even substantial agricultural requirements, has greatly lowered imports of all types as that nation digests its oversupply to compensate for a slowing population growth. The anticipated transfer of tens of millions from farms to cities has left China with empty high-rise buildings constructed in new cities on speculative population growth realization that is slow in materializing. 3) Since the current global population is expected to reach nine billion by mid-century, the current pause in overall demand growth may prove to be a temporary expedient. This likely will prove to be underestimated at this time since the supply/ demand equation of accelerating developing nations, particularly in the Southeast Asian block, may cause an unexpected rise in consumer goods demand. In the meantime, however, the current slough may cause severe extraction and massive cutbacks that will have reduced commodities' supply capability just at a time that a new demand wave will be needing goods that no longer are readily available, thus boosting prices. The cancellation of multi-billion-dollar projects and the dismissal of tens of thousands of employees, especially in the fast-growing energy production arena, could be responsible for a future supply/demand reversal and its disruptive negative consequences. RISE IN MERGERS AND ACQUISITIONS While the first half of 2015 built up a record head of steam, the second half of 2015 will put an exclamation mark behind all-time-high merger and acquisition expenditures. With higher Fed fund-inspired interest rates expected by the end of this year, the $1 trillion available from worldwide private equity offers will be put to work so as to utilize a perfect storm of terminating low interest rates and opportunities galore in acquiring or merging with good companies that now are lagging in long-term potential growth sectors such as energy and telecom. These may be available at attractive prices due to the current economic downturn. And this factor could make for bonanzas not normally available when these sectors were enjoying more fortunate economic developments. But even health care, which is enjoying prosperous growth, seems to have become the focus of multibillion-dollar "marriages," such as Aetna and Humana, and Cigna and Anthem. Even the ailing energy industry, especially the excavation and production subsectors, which were hit by a 50% price reductions in 2014's second half, is leaving no stones unturned in cost-cutting. This led to cash-rich oil giant Royal Dutch Shell making an $82 billion purchase of BG Group. This makes the buyer even m ore effective as redundant technical and manpower requirements are consolidated. Already Exxon Mobil and Conoco-Phillips are looking for similar mergers to cope with diminished oil and natural gas prices that show little sign of much improvement, especially in light of major Iranian volume coming back on the market. In any case, all-time-high mergers and acquisitions will become a major windfall for financially well-heeled acquirers. MORRIS BESCHLOSS is a global economic analyst, award-winning long-term top business executive, and avid blogger for all aspects of worldwide financial, geo-political, and economic happenings.
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