Market Review: Burn Me Once...

Summer is ablaze here at The Daily Reckoning HQ in Baltimore – but we’re not the only ones feeling the heat…

BP, the world’s second largest publicly traded oil company, is under even more scrutiny after the second explosion in four months rocked their oil refinery in Texas City.

According to the BP website, the fire that started Thursday night and burned for about nine hours, was due to a “mechanical failure in a thick piece of steel piping located between a compressor and heat exchanger in the Resid Hydrotreating unit.”

Just one more event for BP to add to it’s already soiled track record. In 2004, they had four deaths in the workplace, and this year’s tally is up to 16. Compare that to their competitors, Conoco Phillips and Exxon Mobile, who have each had only one work-related death since 2002.

Coincidentally, Thursday’s incident occurred just one day after the Wall Street Journal printed an article detailing the investigation into the explosion that claimed 15 lives at the Texas City plant in March – the deadliest petrochemical-industry accident in 15 years.

“London-based BP acknowledges faulty equipment and other troubles at the unit at the Texas City refinery,” writes the WSJ, “although it doesn’t directly connect those problems to the accident. In addition to the deaths, more than 170 people were injured.”

One month after the accident, the Occupational Safety and Health Administration (OSHA) put the BP refinery on a national watch list of safety violators in all industries, and the Chemical Safety and Hazard Investigation Board has identified a number of safety problems at the Texas City plant.

According to WSJ, “there hasn’t been a new oil refinery built in the U.S. since 1976, and most plants show their age.” One example they give is of a technician in BP’s Indiana refinery that fell and cracked his head open after a rotten handrail gave way. A BP internal report showed that the handrails, which date back to the 1940’s, had not gone through the procedure to be inspected or repaired.

Sounds like a good place to work, doesn’t it?

Thursday’s explosion may be partially attributed to BP’s attempt to keep up with the soaring demand for crude oil. An Energy Department report from July 27 says, “U.S. refineries operated at 93.5 percent of capacity last week, up 0.7 percentage point from the week before.”

“When refineries are running at such high rates, maintenance gets deferred and accidents happen,” said Rick Mueller, an analyst with Energy Security Analysis Inc. “This is still the peak gasoline demand season, which leads to greater refinery activity.”

The accident in Texas City, along with another fire that affected production at Murphy Oil refinery in Louisiana on Thursday, pushed the price of crude oil up to $61.05. Texas City was forced it to cut 70,000 barrels per day of crude processing and slow petrol output by 35,000 bpd.

“The marathon that refiners have been running for the past year and a half is far from finished, and their plants have already begun showing clear signs of exhaustion,” said Frederic Lasserre of Paris-based SG Commodities in a note to clients.

Of course, accidents do happen, dear reader. We understand that. But in the rush to get things done, important factors, in this case, employee safety and equipment upkeep, are overlooked. And we’re just a bit concerned with the frequency in which these accidents are occurring – especially when demand for oil isn’t going to slow down anytime soon. In fact, a Bloomberg survey of energy analysts show that next week, crude oil may rise for a third week on speculation that stockpiles will decline because of higher fuel demand.

If oil refineries don’t get their acts together, oil at $61 a barrel will seem like a dream come true for American consumers.

Kate Incontrera
The Daily Reckoning

July 31, 2005 — Baltimore, Maryland

P.S. Chaos at U.S. oil refineries is just one more reason that the focus is being shifted more and more to alternatives to oil, using resources that we don’t have to scramble for. Our energy expert, Justice Litle, has detailed three very specific ways to pile up profits on this surge in power demand.

— Daily Reckoning Book Of The Week —

The DR’s Editor-in-Chief, Addison Wiggin’s newest book, The Demise of the Dollar (and why it’s great for your investments), has just been released this week…

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to “manage” the dollar’s value.


THIS WEEK in THE DAILY RECKONING: This week’s essays have it all – insights into America’s impending energy crisis, the factors surrounding the situation in Taiwan…and even affairs of the heart. It’s all below…

The Most Flattering Fraud Of All                07/29/05
by Bill Bonner

“Everything in this world is connected – manias and bubbles, liberty and happiness – and even affairs of the heart and economics. Bill Bonner explains…”

Uncle Sam’s Asleep At the Wheel           07/28/05
by Sean Brodrick

“There is an energy crisis bearing down on America, and fundamental forces are lining up that could drastically alter the way we live, work…every aspect of our daily lives. The Sovereign Society’s Sean Brodrick explores…”

Red Storm Rising                    07/27/05
by Kevin Kerr

“Energy price hikes are a major problem for the Baltic states – which could mean trouble for American investors as well. Kevin Kerr gives us the whole story…”

Decapitation Strategy                     07/26/05
by Dan Denning

“Two weeks ago, a Chinese general said that if the U.S. intervenes in any conflict with Taiwan, they would be forced to retaliate with nukes. Dan Denning looks at the factors surrounding the situation and wonders if this threat could become a reality…”

Saving and Investing Aren’t Synonymous!         07/25/05
by The Mogambo

“How is putting money in the bank is the same thing as buying shares of stocks, when one of them can go to zero value and the other can’t? Clue: It’s not. The Mogambo gives us all the details on the plan to ‘save’ Social Security…”


FLOTSAM AND JETSAM: The disconnect between what oil experts are saying and what oil is actually doing is widening to Grand Canyon proportions. Sean Brodrick explores…

by Sean Brodrick

Recently, the Organization of Petroleum Exporting Countries cut its forecast for growth in demand in the third and fourth quarters of 2005 by 600,000 barrels per day…the International Energy Agency lowered its fourth-quarter demand for OPEC oil by 700,000 barrels per day…and Morgan Stanley economists have flat out called oil a “bubble.”

Sounds bearish for oil prices, right? Not so fast. What we can observe happening in the oil markets is actually very bullish for oil prices.

For example, bookings of supertankers for oil exports from the Middle East soared to the highest monthly level this year in July – and shipping costs doubled along the way, according to Bloomberg. Oil production in Norway – usually the No. 3 global exporter, behind Saudi Arabia and Russia – has hit an 11-year-low…and China’s oil-thirsty economy is humming along at 9.5% growth, shrugging off any and all efforts to slow it down.

These don’t sound like the ingredients for lower demand or too much supply for me.

What’s more, speaking of OPEC, the Saudis also recently told the world’s leading industrial powers that OPEC will not be able to meet Western oil demand in 10-15 years. This was the first time – ever – that OPEC has made such an announcement.

Now consider this: What if OPEC is lowering its forecast in preparation for cutting its production quotas at its next meetings. Why would OPEC do that? Well, either it wants higher prices, or it sees difficulty in meeting current production levels starting as early as the third quarter. Either way, that’s bullish for oil.

And if you think we’ll be able to take care of our own energy needs ourselves without some drastic changes…think again. U.S. strategic oil reserves are equal to just 70 days of supply.

In fact, despite ratcheting back demand growth, the IEA still expects oil demand to rise to 85.9 million barrels a day by the fourth quarter of this year. That’s higher than global refining capacity of about 84.5 million barrels per day. But the IEA has a history of being too optimistic – the squeeze could come a lot sooner than Wall Street is willing to believe.

It’s as if we’re finally heading toward the end of the oil era. And the transition – as we’ve seen at the pump recently – may be a brutal one. The oil gauge is slowly moving toward empty…and the world’s largest suppliers say they won’t be able to fill us up again.

This is a core economic shift that will be an underlying trend in the financial markets – and your daily life – for decades. It is crucial that you understand the implications, the dangers, this shift represents.

We’ve seen oil crises before…the last one most people remember is the 1973 oil embargo. But history is dotted with energy emergencies that make the oil shock of the ’70s look tame. Heck, Britain was hit hard by an “energy crisis” some 400 years ago. At the time, wood provided basic energy plus the charcoal needed to smelt iron. But the forests were quickly disappearing. Shortages got so bad that laws were passed restricting woodcutting.

Today, we’re facing another kind of energy crisis…

The largest declines in oil production last year occurred in the U.S., where output fell by 160,000 barrels a day, and in Britain, where output declined by 230,000 barrels a day. We’re near the bottom of the barrel for many of America’s oil fields.

America imports 58% of its oil – and we import more and more oil all the time. In fact, U.S. oil imports jumped 5.3% last year over 2003, versus a 5% rise for the world. So our dependency on oil from people who’d like to kill us is increasing, and increasing faster than the global average.

The world’s energy use is increasing rapidly. Global oil consumption grew by nearly 2.5 million barrels per day last year – more than DOUBLE the 10-year average rate.

Oil already pushed past the $60 mark recently, and financial markets initially plunged on the news. How will they react when oil breaks $70…$80…or Goldman Sachs’ recently predicted $105 per barrel?

Most economists pull the 1970s oil crisis out as an example of how rising prices eventually crimp demand and send prices lower. But let me give you two reasons why it’s different this time: China and India.

Over the last three years, China has accounted for over a third of the global increase in oil demand. As GDP increases, so does a country’s oil use. And Chinese President Hu Jintao says China aims to quadruple its GDP, to $4 trillion, by 2020.

Already, China’s and India’s economies are roaring, and their energy use is ramping up, as their citizens are making the switch from bicycles to scooters to cars. Last year, more than 1 million cars were sold in India. Car sales there are roaring along at a 20% growth, and sales are expected to surge for another 10 years. Meanwhile, China is seeing auto sales grow by 16% a year, with 2.79 million cars and light trucks sold in the first half of this year alone. Newly mobile consumers in both countries will need oil and gas – and lots of it.

Both these countries have roaring economies that use more and more oil every month. They are competing with the United States for global energy resources. This wasn’t the case back in the last oil crunch. It could make this one drastically different.

Today’s energy crisis is transforming the world – from geopolitics to the financial markets to the gas pump to the price of 75% of everything you consume on a daily basis.

Sean Brodrick
for The Daily Reckoning

P.S. I’d like to be able to tell you that the U.S. government is doing everything it can to prepare for the coming energy emergency…but I can’t. In fact, when I think about how little prepared this country is for the changes that are about to hit us, my hands automatically clench into fists.

America is unprepared – but YOU don’t have to be.

That’s why I’ve just created an in-depth energy crisis report. I outline the FOUR FORCES bearing down on energy-dependent America, forces that could wash over our economy like a tsunami. I lay out the six likely consequences of the next oil shock. And you’ll read about 10 energy companies you may want to add to your portfolio immediately — plus, a widely held stock you should sell or avoid at all costs.

The Daily Reckoning