The EIA notices Retail Price Inelasticity in Heating Oil

From the most recent "This week in Petroleum":

Two factors may offer an explanation for the smaller decline in retail heating prices. The first is the relative strength of the global distillate market. Distillate fuel includes both heating oil and diesel. In the United States, heating oil makes up a relatively small portion of the domestic distillate market while diesel fuel makes up most of the remainder. This is true for much of the rest of the world. Until fairly recently, distillate prices have shown surprising strength compared to other petroleum products due to strong global demand for distillate. As a result, distillate prices did not fall as much as crude oil prices.

The second factor may be related to events of the past summer. The summer is when heating oil customers are typically offered contracts to lock-in prices for the upcoming winter. The price for residential heating oil reached its historic peak last July, averaging $4.53 per gallon. Some heating oil customers may have been anxious about those unusually high prices and wanted to shield themselves from possibly higher prices in the winter. When a customer locks in a contract with a heating oil company, the company often enters into a similar contract with a wholesaler, guaranteeing they will be able to supply that customer with enough heating oil for the winter at a stable price. (This type of commitment is even required by law in Connecticut.) Moreover, many heating oil companies buy some of their heating oil in the off-season to ensure an adequate supply for the winter, regardless of any pre-arrangement with their customers. So another reason heating oil prices this winter have not fallen as quickly as crude may be that some of the volume heating oil dealers (and customers) bought earlier was quite expensive. Thus, a portion of this additional expense may have been passed on to the customer during this heating season.

OPEC's Comments for February

OPEC further lowers expected consumption numbers in this short, once-a-month podcast.

WTI is Disconnected - and that Should Matter to Propane Retailers

Here is an excellent piece from the Financial Times on the NYMEX benchmark crude value - West Texas Intermediate. West Texas Intermediate is a grade specification that is found in Texas and Oklahoma, and has major inventory storage in Cushing, Oklahoma. (Here is a recent article from the Guardian UK about Cushing.)

The problem is, when Cushing fills up with supply, the front month of the crude price curve gets exceptionally cheap. This is the same phenomena as when corn price drops 30-50% as the harvest comes in - to much supply for the physical capacity to store the product.

Well, Cushing is full. Way full. And likely the logistical bottlenecks associated with this over-supply are likely to get worse instead of better as we run through the month of March - a time when domestic inventories typically build significantly. This over-supply is a result of several factors - lack of demand for products such as unleaded gasoline in the 4th quarter of 2008 ius a big one. But additionally, the crude market is actually making it advantageous for companies to store product right now, allowing them to forward sell the commodity and lock in guaranteed profits.

The article from the Financial Times mentions how WTI is not an effective benchmark because its logistical storage constraints are creating a disconnect between WTI crude and Brent crude (the European benchmark).

The spread between WTI and Brent, the European benchmark, which is increasingly seen as more representative of global market conditions, was trading at more than $7 a barrel on Wednesday, after reaching a peak of $10.06 on January 15.

Historically, WTI trades at a premium of between $1.50 and $2.50 a barrel to Brent.

The front-month WTI contract has come under pressure because of weak US demand, increasing supplies from Canada and rising crude stocks at Cushing, Oklahoma, a hub in the US distribution network.

Why does this matter? Because it is ALMOST IMPOSSIBLE for new waterborne propane supply to get bid into the country. Not only does one have to pay the freight, but one has to overcome the difference in the front month spread between the European market and the domestic market. This means that propane would need to increase in value by +$.10 to adjust for this inconsistency between the markets.

China - Big Problems

From 2000 to about 2006 many experts expressed concern over the current accounts deficit and the negative savings rate in the US. Additionally, folks have pointed to the over $1.0 trillion dollars of US debt that China holds on its books as a concern for the future. With the current downturn in full effect - China is bracing to get hit even harder than the US. Here are two worthwhile articles from Asia Times (bold emphasis is mine)

China On the Brink
The ripples emanating from the global recession may have seemed tiny at first as they traveled across the Pacific, but they are about to hit China with the full force of a tsunami. And there is real concern among the Chinese leadership that the impact may well surpass anything we've seen in the US or Europe. That's because the economic crisis in China is taking on a fundamentally different shape than in the countries where it originated.

The crisis in Western markets began at the top and worked its way down. When the US property bubble burst, it hurt some homeowners, but the real damage it inflicted was to undermine confidence in complex financial instruments and the banks that owned them. It was essentially a financial panic, and the first people to be laid off were Wall Street MBAs working at investment banks and hedge funds.

The effect on the real economy only came later. As big-name banks failed, consumer confidence took a nosedive, and as surviving banks retrenched, credit to consumers and business dried up. Only in the fourth quarter of last year - six to nine months after the first big bank, Bear Stearns, collapsed - did these factors result in significant working-class job losses.

The process unfolding in China is precisely the opposite. The threat comes not from the commanding heights of the economy, but from the grassroots. All along the coast, thousands of small factories that rely entirely on US and European export markets are cutting back production or shutting down. Their margins were thin to begin with, and now their orders are being slashed. The first to be affected aren't the global professionals that populate China's big cities, but the migrant workers that made those factories hum.

The Coming Fury
The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives - one coming to a halt, the other chugging along on a separate track - no longer applies, if it ever had. Rather, US-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed, middle-class spending in the United States, which has collapsed.

China's growth in 2008 fell to 9%, from 11% a year earlier. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales.The sudden end of the export era is going to have some ugly consequences. In the past three decades, rapid growth reduced the number of people living below the poverty line in many countries. In practically all countries, however, income and wealth inequality increased. But the expansion of consumer purchasing power took much of the edge off social conflicts. Now, with the era of growth coming to an end, increasing poverty amid great inequalities will be a combustible combination.

In China, about 20 million workers have lost their jobs in the last few months, many of them heading back to the countryside, where they will find little work. The authorities are rightly worried that what they label "mass group incidents", which have been increasing in the last decade, might spin out of control.

The Ultimate Team Player

First, an apology. I have slacked off over the past three weeks or so, actually I am in the middle of a certification class to be able to teach MBA classes on line, and the certification is kickin' my butt. The coursework has really gotten in the way of my ability to write and post. I am still reading - but can't report. Not to worry, I only have one more week of the 6-week course left - and I am loaded for bear tonight with about 6 worthwhile posts. I will sit here until I fall asleep on the "f" key - as I have done once or twice before. So, without further adieu...

My first posting regards a weekend article from the New York Times on Shane Battier. (Yes, the basketball player.) It turns out that Mr. Battier is the ultimate team player - not measured by statistics but rather by his team's winning when he is on the court. The article is a long one, and it is by one of my favorite business authors - Michael Lewis (of Liar's Poker fame). Lewis spent many weeks on the best seller list with Moneyball. This article is similar, but it essentially makes the point that basketball is the most selfish professional sport - because every statistic tracked (points, assists, rebounds) is a selfish one. That is, the player might choose to rebound a ball (and recieve credit) or to deflect the ball to an open team mate to start the fast break (no credit).

Why do I post it here? It made me think about the necessity for an organization to have role-players that are not looking for the credit and high profile. Harry Truman once said "It is amazing what can be achieved when no one cares who gets the credit." Shane Battier doesn't score, or rebound, or assist particularly well. But he wins, and he helps his team win.

Enjoy the article. A selection follows:

Battier’s game is a weird combination of obvious weaknesses and nearly invisible strengths. When he is on the court, his teammates get better, often a lot better, and his opponents get worse — often a lot worse. He may not grab huge numbers of rebounds, but he has an uncanny ability to improve his teammates’ rebounding. He doesn’t shoot much, but when he does, he takes only the most efficient shots. He also has a knack for getting the ball to teammates who are in a position to do the same, and he commits few turnovers. On defense, although he routinely guards the N.B.A.’s most prolific scorers, he significantly ­reduces their shooting percentages. At the same time he somehow improves the defensive efficiency of his teammates — probably, Morey surmises, by helping them out in all sorts of subtle ways. “I call him Lego,” Morey says. “When he’s on the court, all the pieces start to fit together. And everything that leads to winning that you can get to through intellect instead of innate ability, Shane excels in. I’ll bet he’s in the hundredth percentile of every category.”

There are other things Morey has noticed too, but declines to discuss as there is right now in pro basketball real value to new information, and the Rockets feel they have some. What he will say, however, is that the big challenge on any basketball court is to measure the right things. The five players on any basketball team are far more than the sum of their parts; the Rockets devote a lot of energy to untangling subtle interactions among the team’s elements. To get at this they need something that basketball hasn’t historically supplied: meaningful statistics. For most of its history basketball has measured not so much what is important as what is easy to measure — points, rebounds, assists, steals, blocked shots — and these measurements have warped perceptions of the game. (“Someone created the box score,” Morey says, “and he should be shot.”) How many points a player scores, for example, is no true indication of how much he has helped his team. Another example: if you want to know a player’s value as a ­rebounder, you need to know not whether he got a rebound but the likelihood of the team getting the rebound when a missed shot enters that player’s zone.

There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group. On the baseball field, it would be hard for a player to sacrifice his team’s interest for his own. Baseball is an individual sport masquerading as a team one: by doing what’s best for himself, the player nearly always also does what is best for his team. “There is no way to selfishly get across home plate,” as Morey puts it. “If instead of there being a lineup, I could muscle my way to the plate and hit every single time and damage the efficiency of the team — that would be the analogy. Manny Ramirez can’t take at-bats away from David Ortiz...

Some Snowy Reading

I checked out "The Snowball" from the library last week. Not having seen a copy of the book before, I figured it would take me a week to 10 days of committed reading to get through. Maybe not. This Warren Buffet biography is 800 pages of detail about the life experiences and thoughtful musings of the Oracle. I will definitely have to renew the book to get through.

However, I found a few excerpts from the book at the Financial Times website, FT.com. In lieu of reading all eight hundred pages, these selections do well to give a flavor for the man and his world.

Part 1

Part 2: (here's a selection from this selection)

Warren Buffett and Bill Gates met for the first time over the Fourth of July holiday in 1991, when Katharine Graham, chairman of the Washington Post, and her editorial page editor and friend Meg Greenfield had dragged Buffett to Greenfield’s house on Bainbridge Island for a long holiday weekend. To Buffett, a weekend on an island a half-hour ferry ride from Seattle that could be escaped only by boat, seaplane, or hitching a ride over the bridge by car was an “anything for Kay” event. Greenfield had also recruited him for an all-day visit at the nearby four-house compound on the Hood Canal that Bill Gates had built for his family. Gates, 25 years Buffett’s junior, was appealing to Buffett mainly because he was known to be brilliant and because the two of them were neck-and-neck in the Forbes rich-list. But computers looked like Brussels sprouts to Buffett; no, he did not want to try them this once. Greenfield, however, had assured him that he would like Gates’s parents, Bill Sr and Mary, and that other interesting people would be there. With some reluctance, Buffett had agreed to go.

On the morning of Friday, July 5, Buffett pulled on a cardigan and arranged his wayward hair into a neat, gray comb-over. Greenfield crammed five of them into her little car for the 90-minute drive to the Gates compound. “While we’re driving down there, I said, ‘What the hell are we going to spend all day doing with these people? How long do we have to stay to be polite?’ ”

Gates had similar feelings. “I had a constant dialogue with my mom,” he says, “which was, ‘Why don’t you come to the family dinner?’ ‘No, Mom, I’m too busy, I’m working.’ So she told me Katharine Graham was coming, and Warren Buffett.” He was interested in meeting Graham, now a 74-year-old legend who had softened into an older but still patrician figure, like a witty version of Queen Elizabeth, but, “I told my mom, ‘I don’t know about a guy who just invests money and picks stocks. I don’t have many good questions for him; that’s not my thing, Mom.’ But she insisted.” Gates flew in on a helicopter so he could make a quick getaway. When a tiny car pulled up, he was surprised to see a group of famous people – Greenfield and her guests – pop out like a gang of circus clowns.

Graham was taken over to meet Gates, who looked like a recent college graduate, in a red sweatshirt over a golf shirt, his collar turned up in a little saucer around his neck. While Gates was arranging for Graham to take a seaplane ride, Buffett was introduced to Bill Gates Sr and his wife, Mary. Then Bill Gates III, known as Trey, was brought round to meet Buffett.

Observers kept a weather eye on this introduction. Gates was well-known for unleashing his impatience on things that didn’t interest him. Buffett no longer walked off to read a book when he was bored but had a way of disentangling himself quickly from conversations he wanted to exit.

Buffett skipped the small talk; he immediately asked Gates whether IBM was going to do well in the future and whether it was a competitor of Microsoft. Computer companies seemed to come and go, and why was that? Gates started explaining. He told Buffett to buy two stocks, Intel and Microsoft. Then he asked Buffett about the economics of newspapers, and Buffett told him that they had got worse, because of other media. Within minutes the two were immersed in conversation.

“We talked and talked and talked and talked and paid no attention to anybody else. I started asking him a whole bunch of questions about his business, not expecting to understand any of it. He’s a great teacher, and we couldn’t stop talking.” They were starting to attract attention. “We were sort of ignoring all these important people, and Bill’s father finally said, gently, that he’d prefer that we join in a little more.

“Bill started trying to convince me to get a computer. I said I don’t know what it’s going to do for me. I don’t care how my stock portfolio is doing every five minutes. And I can do my income taxes in my head. Gates said he would pick out the best-looking gal at Microsoft and send her to teach me how to use the computer. He would make it totally painless and pleasant. I told him, ‘You’ve made me an offer I almost can’t refuse, but I will refuse it.’ ”

At sunset the helicopter had to leave. Gates did not go with it.

“Then at dinner, Bill Gates Sr posed the question to the table: What factor did people feel was the most important in getting to where they’d gotten in life? And I said, ‘Focus.’ And Bill said the same thing.”

Summary of the World Economic Forum

* Davos consensus is for no growth at all in the world economy in 2009
* Without fixing the over-leveraged banks and the over-indebted consumer, any stimulus will be limited in its impact
* The Prime Ministers of Russia and China were there, and essentially said "it's the US's fault"
* At the same time, the entire world is looking at the US to fix the problem
* The question is "Is there a limit on the amount of US debt that the world will buy?"
* China is currently spending $500 billion on stimulus - without that stimulus China is expected to have a zero growth rate. China needs 8% growth each year to absorb newly created workers into its economy.

Saudi Arabia's Quest for Economic Diversity

A recent post on FinanceAsia.com discusses Saudi Arabia's attempted movement from an economy based solely on oil.

Saudi Arabia is in the middle of an economic transformation. Long known as the oil capital of the world, the kingdom is now focusing its economic policies on manufacturing and other non-oil activities as it tries to move away from oil dependence and build on its other competitive advantages.

Both domestic and overseas demand for Saudi goods is on the rise - the country's non-oil sector grew 5.8% in 2007, thanks in part to a boom in the non-oil hydrocarbons industry.

"The non-oil trade data illustrates that the diversification going on within the Saudi economy is focused on generating greater value-added from the kingdom's hydrocarbon reserves rather than developing unrelated industries," writes Brad Bourland, Jadwa Investment's chief economist.

With hydrocarbons leading Saudi Arabia's non-oil sector, Sabic is the undisputed leader. The company has three major petrochemical projects underway in Kayan, Sharq and Yansab, and is investing more than $12 billion in adding 20 million tonnes of petrochemical production capacity to the kingdom by 2010. If growth goes as planned, Sabic will have 75 million tonnes of petrochemical production capacity by the end of the decade.

Sabic is hardly alone in seeing opportunities in the petrochemical sector. National oil leader Saudi Aramco is currently building a $10 billion petrochemical plant on the Red Sea, called PetroRabigh, with Japan's Sumitomo Chemical.

"We are the most cost-effective production location in the world for the industries we are targeting," says Amr Al-Dabbagh, governor of the Saudi Arabian General Investment Authority (Sagia). He goes on to explain how, as the lowest cost location for targeted industries, including petrochemicals and plastics, he expects investment in the sectors in to increase.

What does this mean for domestic propane retailers? It means that a large net exporter of propane is doing its best to start consuming the propane that otherwise would go to Africa or America. Many propane cargoes originate from Yanbu and Ras Tanura, and if these locations begin creating their own polyethylene pellets it will greatly impact the import/export economics of the industry.

The economic development cities are crazy - new, clean, big, and hot (a lot like Vegas). Here are their websites: Jazan, King Abdullah, Knowledge and Prince AbdulAziz bin Mousaed.

Heating Oil and Propane Dealers will Benefit Greatly from a Tax Cut Stimulus

It seems like everyone these days is paying close attention to the governmental stimulus package. It is for a good reason, though, as a shrinking economy means job losses and hardship for business owners trying to generate a return on their assets. And politicians and economists vary on the type and size of stimulus to offer. Should it be a works program? Should it be a tax cut? What will offer the best return of "invested" stimulus dollars?

Economists are divided on the payouts of different types of stimulus, but it is generally thought that a broad public works and infrastructure investment will yield an economic multiplier of one to two times the stimulus investment. That is, if one million dollars are invested, the GDP will increase by one to two million dollars. That range of rate of return is not particularly good. Using my personal finances as a litmus test, I ask for a more compelling return than simply "getting all my money back" when I invest.

Based on the work of Christina Romer (the chairperson of the Council of National Economic Advisors), we anticipate a much bigger multiplier for a tax cut - somewhere between 2.5 and 3.0 times the dollars invested.

Why? Because the government does not know the best place to spend money - but business owners do. Business owners like the men and women of our industry. If you had an extra 5% of cash flow, what would you do with it?

Would you take home more? Or maybe pay out larger salaries and bonuses to your employees to help them deal with these hard times? Each of these two options goose the economy by increasing consumer spending - as folks buy "stuff" from places like the Home Depot and "services" from people like the local landscaping company.

Would you use it to invest in additional capital items for your business? This is where the real and compelling bang for stimulus our buck is! Almost any business owner has the thought kicking around in his head "If I only had an extra $x dollars I could [buy that truck/build that plant/hire that person/invest in that new computer routing software] that would yield an immediate return to their business. When an asset is added to the business that can yield an acceptable risk-adjusted return, then the economy grows. This is true whether you are the local auto auction or the local heating oil company.

It is a challenge for government-types to think in the manner of the entrepreneur on a trillion-dollar scale. Finding worthy homes for the first couple hundred billion probably isn't that hard - but the returns diminish with the amount spent. As they say: "Easy Come-Easy Go."

So tax relief is coming to business owners throughout the nation. And your business is getting a raise. How will you employ the cash to grow your business and do your share for economic growth?

Two Great Web Resourses for Learning and Research

Here are two great resources for learning and growth. The first is www.academicearth.org. It offers streaming video of full lectures from colleges all over the nation (Stanford, Harvard, Yale) in all different types of classes. If you need to learn cost accounting - it is there. If you want to brush up on Plato's Republic it is there, too (in a two part series!).

Now the world is flatter and more democratic than ever as it regards the disemination of learning. Here is a lecture on venture capital from the Yale business school. The guest lecturer is one of the co-founders of the Blackstone Group, Steven Schwarzman.



The second website is www.scribd.com.

Scribd is a website where folks can post presentations, annual reports, and letters to share with the viewing public. Scrbd works best with stuff that is hard to find for the average joe - stuff that you had to have a reason to get and is not originally meant for publication to the widest internet audience. Here is a great piece on the Canadian Tar Sands.

Larry Summers' Impact on Economic Policy

Time magazine has a profile of Larry Summers this week...or Dr. Summers as he is called by folks in the Obama administration. His role in this White House as special economic adviser to the President is on par with senior intelligence advisers. A quote in this article is that having a debate with Doctor Summers is like "getting run over by a tank with a Lotus engine, and finding the experience educational."

Summers' immediate task is to convince skeptical Senators that shelling out nearly $1 trillion over two years isn't another exercise in traditional pork-barrel spending but a vital step needed to save jobs and invest in the future. Some Republicans call the current plan wasteful; free-spending Democrats long for more investments over years, not months. Summers argues that the stimulus bill splits the difference: not only will most of the money go to reviving the economy in the next 18 months, but much of it will also go to projects that could save money over the long term, such as weatherizing 75% of federal buildings and computerizing medical records. "The bill does a good job of marrying the twin imperatives of putting people back to work and doing the work that needs to be done," he says. "No $825 billion bill is going to not have some projects that any individual disagrees with."

Here is Larry Summers in his own words. The topic is unemployment and labor unions.

Propane Comments from EIA - This Week In Petroluem

Propane Inventories Continue Much Lower
Primary supplies of propane continued their sharp descent last week, falling by 3.1 millions barrels to an estimated 47.5 million barrels as of January 23, 2009. Nevertheless, propane inventories remain more than 5 million barrels ahead of the same period last year despite the recent surge of winter storms across a wide swath of the country. The Midwest led regional declines with 1.5 million barrels last week, while the Gulf Coast reported the next largest drop with a 1.2 million-barrel decline. The East Coast and the combined Rocky Mountain regions showed similar declines of 0.2 million barrels during this same time. 

From this point, the equation is very simple: 

Cold Winter Weather = Bad Supply Problems 

Moderate Winter Weather = Supply Problems - especially in the Northeast

Above Average Temps = A chance to catch our collective breath 

2 Billion Cars

Try these statistics to blow your mind:

• Today - 100 million cars on the road
• 2020 - 2 billion cars on the road
• In the next 10 years, the world will use the equivalent of one quarter of all the crude that has used up to now.

The video is a little dry - but it is valuable, and it is available here.

MLP's: The Buy of the Century

Here is some great press for the midstream MLP segment from a writer on Seeking Alpha.

The good news is that once-in-a-generation fear levels produce equally rare opportunities as quality stocks get thrown out with the rest. Among the very best available are the energy infrastructure Master Limited Partnerships (MLPs). Even the best of this group have been far oversold based on their very solid fundamentals, and thus offer historically high yields for such strong businesses. How oversold? Historically the best of this group offered about 2% higher yield than ten year treasuries. They currently offer over 8.5% higher yields – over 11%.

Shift Happens, Part II

I posted the first version of this video a few months ago - it is a great eye-opener as you consider the demographic shift that the world is undergoing. Frequent readers of this blog know that I do all I can to keep up with what is going on in IndoChina - the economies of India and China are the real driving force behind the cost effectiveness of the future of hydrocarbon energy.

Here are some bullets from the video:

• India has more honors students (figured as top 25% of the class) than we have students.
• China will be the largest English speaking country in the world soon.
• If we shipped every single job in the US to to China it would still have a labor surplus.

Further, here is an article from the NY Times regarding economic stimulus, Chinese style. Hundreds of billions of dollars being spent on infrastructure...roads, railways, concrete and steel.