Fed Up With
Financials? Go Drilling Instead
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By: Martin Denholm
Managing Editor
Smart Profits Report |
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Published:
September 22, 2008
You know what?
I'm done with the financial sector for now. For the past week or
so, everyone (except perhaps folks in parts of deepest, darkest
Peru) seems to have pontificated ad nauseum about the woes
within the sector. Sure, people want to know the details --
after all, this is one of the biggest financial meltdowns in
history -- but just how much is enough? And it's not like the
24/7 television coverage added any clarity to the whole murky
financial mess.
Stock markets around the world tumbled following the recent
bankruptcy of Lehman Brothers, coming just six
months after Bear Stearns folded. The near-collapse of two other
major American companies -- Fannie Mae (NYSE: FNM) and Freddie
Mac (NYSE: FRE) in the housing sector -- added to the worry that
Uncle Sam might have an increasingly tough time writing more
checks. But apparently there was at least one more check in the
checkbook, and The Federal Reserve used it to bail out American
International Group (NYSE: AIG) to the tune of $85 billion.
While Bank of America's (NYSE: BAC) purchase of Merrill Lynch
(NYSE: MER) served to alleviate some fears, attention quickly
focused on the next potential card to fall. Washington Mutual
(NYSE: WM) recently reported it added $4.5 billion in loan loss
provisions for the current quarter, and Moody's responded by
cutting the company's bonds to "junk" status.
But sliding somewhat under the radar is another important
issue...
To Drill Or Not To Drill?
While the financial world frets, lawmakers in Congress are
mulling over a vote on a wide-ranging new energy package -- one
that contains a controversial measure. With a moratorium on
offshore drilling set to expire on September 30th, Democrats
have proposed lifting it -- a move that could pave the way for
offshore oil drilling on the U.S. coastline.
In a U-turn from their original opposition to the idea,
Democrats now suggest repealing the ban on offshore drilling, in
place since 1981, as long as it's part of a wider energy plan.
Having initially stated that offshore drilling wouldn't have
enough of a positive impact on U.S. gasoline prices, the Dems'
new proposal would give coastal states the option of drilling
between 50 and 100 miles off their coastline. Any areas more
than 100 miles from the coast would be totally open to drilling.
The vote comes at a good time, too...
Preserve The Environment, Or Pay $4 For Gas?
While oil prices have declined dramatically from the record high
of $147.27 a barrel on July 11th, consumers still aren't seeing
much relief at the gas pump. Not yet anyway. Yes, average prices
have slipped back under the $4 a gallon level, but the
devastation of Hurricane Ike crippled many refineries along the
Gulf of Mexico and pushed the price back up.
In all, the hurricane forced the closure of 14 refineries in
Texas and Louisiana, or 20% of U.S. refining capacity. That took
3.7 million barrels of production offline -- and both companies
and experts in the region say it could be another week before
normal operations resume.
So it's perhaps no surprise that public sentiment towards
long-term offshore drilling has shifted in favor of exploration,
in order to alleviate some of the pressure at the pump as well
as break America's dependence on foreign oil resources, and
provide a safety net from attacks to oil supplies in the Middle
East and Africa.
Florida is one such state in favor...
Florida To Get Its Drills Out?
Florida's main tourist attractions are well documented: Theme
parks. But the state is also home to other attractions, such as
a wide array of wildlife. For as long as the offshore drilling
ban has remained in effect, residents have argued that drilling
would pose a threat to the state's lucrative coastline
attractions.
But with gas prices having hit $4 a gallon, times are a changin'.
And in a state that has now become the focal point of election
campaigns, it's a crucial issue. That's where John McCain could
pick up some support. According to a Mason-Dixon Polling and
Research survey, 6 in 10 Floridians support McCain's
pro-offshore drilling stance (a stance he made crystal clear in
his speech at the recent Republican Convention, declaring,
"We'll drill new wells offshore and we'll drill them now.")
Many agree with Florida's Lieutenant Governor, Jeff Kottkamp (a
Republican), who says he and his fellow leaders in the state can
drill offshore, while also preserving its natural beauty, thanks
to newer, safer technology.
Quoted in the International Herald Tribune (IHT),
executive director of the Florida Petroleum Council, David Mica,
says natural gas could hold more promise than crude oil. That's
because existing wells that were restricted because of the
offshore drilling ban could be explored "in less that two years
in an environmentally friendly sensitive way," due to modern
technological advances.
Aside from the environmental issues, there is also a deeper
reason for wanting to drill: National security. With foreign oil
an increasingly unstable resource, due to Middle East tensions
and Russia's recently renewed aggression, the need for
alternative energy sources is unfortunately heightened, even if
it means slightly comprising the environment.
You can see why: Almost two-thirds of America's 21 million
barrels of oil usage per day are imported from the Gulf, Africa,
and Latin America.
But is offshore drilling the "cure all" for America's oil needs?
Massive Drilling Could Have Little Impact
The U.S. still gobbles up one-quarter of the world's oil
production, yet only possesses 3% of the world's oil reserves,
so drilling might not be enough. In addition, it may not have
the quick and positive impact on gas prices that many expect.
While many politicians are obviously keen to pander to voters'
wishes at this time of year, some Republicans believe the
Democrat plan is a crafty way of promoting offshore drilling,
but one that doesn't actually boost domestic production very
much.
Quoted in Reuters, Republican Roy Blunt of Missouri is
one such dissenter, saying it "removes the financial incentive
for coastal states to team up with the federal government to
break our dependence on foreign oil and bring prices down at the
pump."
Others point out that some states will be reluctant to
participate if there is no revenue sharing plan. And still
others complain that restricting firms from drilling within 50
miles from the shore means they can't take advantage of oil
located in the outer-continental shelf.
In addition, the IHT notes that government analysis has shown
that a widespread offshore drilling program "would result in a
price reduction of perhaps two-tenths of one cent 18 years after
drilling begins."
This issue is a longer-term concern -- but one well worth
watching in the run-up to Election Day on November 4th.
P.S. Speaking of energy resources, the October
Xcelerated Profits Report issue features a brand new
natural gas play from commodities expert Lee Lowell. Having been
involved with the commodities sector for 17 years, including six
as a market maker in the NYMEX trading pits, where he set the
prices for oil and natural gas, Lee tells me that this is a
terrific opportunity to get into a depressed market at a bargain
price. And having seen the play, you don't want to miss it. For
more information, simply
click here.
Martin Denholm
Managing Editor
Smart Profits Report
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