Back to the Mailbag

Back to the Mailbag

by | published August 30th, 2010

As I sat there Friday, watching the market return to at least one day of sanity, I thought it was a good time to dig in and answer some more of your E-mails.

Let’s get right to them…

Q: I wonder about two issues that have been raised regarding natural gas.

The first is the environmental issue. I saw a documentary recently in which the filmmaker visited homes in three rural U.S. areas where fracking had been done to show, amongst other things, the ignition of tap water with a lighter. The film created a sobering image. But your writings indicate there is little basis to environmental concerns. What makes you confident that such claims are unfounded?

Second is a practical issue of demand and supply. Two obvious uses of natural gas are in cars and power plants. The problem, in both instances, is that we lack infrastructure. For cars, there would have to be conversions to engines that use natural gas and widespread dispensary in service stations. For electrical generation, coal plants would have to be converted to natural gas. These are not small things – they take time and acceptance. Could there be a meaningful lag between when the more abundant natural gas supplies are brought on-stream and when we are able to use them? ~ Dixie T.

A: First, the documentary in question, Gasland, brought up some hard and necessary questions about gas drilling, but it was not particularly careful in how it went about it. For example, the film made no effort to distinguish between gas seepage and fracking concerns. The producer couldn’t decide whether to be Michael Moore or Erin Brockovich… and ended up being neither.

But let’s be serious. There are significant environmental problems from callous drilling, and I do not take them lightly. My point is that there are technologies currently available to overcome those concerns and a state-level responsibility to regulate the drilling.

Second, the transition is already underway. Within the next decade, if not sooner, more electricity in the U.S. will be generated from natural gas than from coal. Once a carbon tax is introduced (and it is coming), the cost advantage from the use of coal will be minimized. We will still be using coal, but the age of gas power production is already here.

As for using natural gas in transport, that is also increasing. Several places – New York City for example – now encourage or even require a greater use of NG in taxis and buses. There are some important subsidies under discussion to expand applications in the current federal energy bill. And the existence of considerable unconventional sources here at home means encouraging its use also eases our reliance on foreign sources of oil.

There are four major uses for oil, and we have figured out how to lessen our reliance on three – power production, industrial use, and petrochemical feeder stock. It has been the solution to our transport needs that has remained so elusive. Natural gas is the key.

But can we pull it off? Energy transfer technology has been here for some time, and I answered a question earlier this month about companies poised to make a difference here “From the Oil & Energy Investor Mailbag…” (August 2nd, 2010).

The refitting of service stations would be quite doable. Almost two years ago, I wrote a report concluding that it would take $84,000 to re-equip an average U.S. gas station (including retail delivery, storage, and delivery system) to provide at least one pump for natural gas sales. There are a bit more than 115,200 stations in the country, and if 50% of them were to do so, the total capital investment would be about $49 billion. Spread out over five years, that comes to less than $10 billion a year, with most or all likely to be covered by a federal stimulus program. That is certainly feasible.

Q: Is the equation regarding the oil price correct as you wrote it? As I see things, I get the impression that equities = demand – supply, as opposed to what you wrote…

Also, as I see it, the hoarding we are noting seems to be a reflection of the fact that the market is viewing commodities as true valuable entities over U.S. dollars. I have the distinct feeling that I would rather take delivery of, say a contract of lumber, than save dollars.

Final question: My son is writing a paper on contango and speculation of oil prices on the peak. Any recommended references or insights? ~ Rakord

A: The thumbnail formula of “equity performance = demand – supply” was provided in my piece “How My Hallway Closet in Moscow Predicted Today’s Oil Market” (August 20th, 2010). So it appears we are on the same page.

The important thing to remember here is that the market is still viewing the balance from the demand side. That provides a continuing dynamic, to the extent that the underlying presumption of having enough supply to meet demand remains. What is does not do is compensate for volatility, since an appreciable rise or fall in either demand or supply will make the performance volatility spike.

But here’s the problem. As I have mentioned several times, we are moving from a “demand satisfaction” market reality to a “supply constrained” one. The only reason we have not seen this come quicker is the sluggishness of the market recovery. The gyrations on the demand side are not a result of the oil sector, but of outside holdover problems from the financial crisis. When matters stabilize, watch out…

You are correct in assuming that oil is becoming preferable to dollars. Other commodities are also seeing this development, but oil is already a financial asset in itself, while also being a highly-traded commodity. That puts oil in a very different position from timber (where the value is dependent primarily on market need for the product) or even gold (where the value is largely a result of its contrarian asset holding capability only). Oil does both, giving the access holder to it – through paper barrels (futures contracts) and wet barrels (the underlying actual crude oil consignment) – greater flexibility.

Once again, this dual nature of oil will provide increasing price instability moving forward.

As for your son’s paper, until my next book, The Vega Factor: Oil Volatility and the Next Global Crisis, comes out, I would suggest Daniel O’Sullivan’s Petromania: Black Gold, Paper Barrels, and Oil Price Barrels. Dan and I have some disagreements, but this is a good read.

Have a question of your own? I can’t provide personalized investment advice. But I enjoy hearing from you and will do my best to address your questions and comments in future broadcasts. Just send them to


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  1. Bernard Smits
    September 5th, 2010 at 20:14 | #1

    On the August 30th discussion well done both sides!
    I have however a request of a different nature. It is re-the what is becoming a continous stream of promotional material. Is it not possible for your staff to take off the mailing list the people who have allready joined your ‘Advantage’ newsletter?? For me all this promotional stuff undermines your stature and integrety eg. you are in danger of becoming like all the other newsletters which would be a great pity.Please find a way to leave us of that list?
    Ps. i bought my Valero a few days ago (for $ 16.22) thank you.

  2. Jeff Marshall
    September 8th, 2010 at 13:02 | #2

    Today’s update on the Chinese connecting with Chesapeake reminded me of some lessons learned during our trip to China in 08. We went with Agora, hosted by Keith Fitzgerald, for nearly 3 weeks. Fantastic. I guess the short version of a complicated lesson is that once the Chinese have the new technology, they will become your fiercest competitor. They don’t seem to care how they get the tech. We had speakers on the trip explain that in some instances, the tech secrets seemed to walk out the door with the night crew. Does this worry you, in respect to our investments in shale tech? Love the newsletter. Thanks, Jeff

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