"Inflation Fears Supported by Rallies in Oil and Natural Gas, with Natural Gas hitting New Record” Market WrapUp by Chris Puplava

Inflation Fears Supported by Rallies in Oil and Natural Gas, with Natural Gas hitting New Record
BY CHRIS PUPLAVA

Gold renewed its climb Wednesday, rising past $470 an ounce intraday before settling to $468.5 an ounce, up $6.20. The rally in gold was bolstered by inflation fears as a broad commodity rise was seen as the CRB index closed at 333.33, up 6.30, crude oil up $1.28 to $66.35, and natural gas rising to an all time high of $14.10 per million British Thermal Units (BTU), up $0.98, largely in part to the recent hurricane disruptions in the Gulf of Mexico and strong demand for heating fuel.

The Natural Gas Supply Association (NGSA) released an article today stating that an increase in winter demand is expected to further stretch current natural gas supplies. “U.S. natural gas markets so far appear to be compensating for ongoing Hurricane Katrina-related supply disruptions, but Hurricane Rita and an anticipated increase in heating demand are expected to stretch natural gas supplies even further, likely resulting in higher wholesale costs this winter,” said NGSA in their annual assessment.

Both Hurricane Katrina and Rita have cut into natural gas production increases this year, as the nation’s 6,000 natural gas producers were on track to expand our domestic production this year prior to the hurricanes, despite more wells and increased exploration activity, said NGSA Chairman Joseph A. Blount. Blount expects production to remain relatively flat while demand is on the rise, tightening the supply-demand balance.

Weather is still the largest single factor affecting demand according to the NGSA. U.S. government scientists say that this year’s hurricane season is expected to be worse than expected with as many as 18-21 tropical storms, 9-11 hurricanes, and 5-7 intense hurricanes.

The U.S. Minerals Management Service said that 1.5 million barrels of daily oil output in the Gulf was offline as of Tuesday, 100% of the Gulf’s daily output, as a result of Katrina and Rita, and more than 78% of daily natural gas production still remains offline. With rising oil and natural gas prices, renewed interest in coal-liquid fuel technology is on the rise, as coal is seen as the cheaper alternative for natural gas.

The rise in price of gasoline above $3.00 a gallon from the destruction of Hurricane Katrina was a wake up call to the country, even with the opening of Federal oil reserves. However, the scenario of a refining crisis comes as no surprise to some. World energy economist Michael Economides predicted a coming refining crisis in his May 2005 World Energy Monthly Review, “Refineries: A Disaster Waiting to Happen.” He indicated that the U.S. hasn’t built a refinery in about 30 years, with the number of U.S. refineries falling from about 325 in 1980 to fewer than 150 today, and refining capacity of roughly 20 million bpd falling to 17 million bpd over the same period. The aging refineries pose a significant concern to current refining capacity where old equipment is corroding and increasing the likelihood of failure. Over 25 years ago the U.S. had roughly 6 million barrels of excess capacity; today there is none, which is exactly why the opening of U.S. strategic reserves brought down crude oil futures but not our pump prices after Katrina struck.

Not only does the U.S. no longer have spare refining capacity, but our foreign oil bill continues to surge. U.S. total petroleum imports rose to $20.7 billion in July, up 4.3% since June and up 24.5% since January.

The rise in the foreign oil bill comes from increased demand coupled with rising oil prices, while light crude has more than doubling over the past year.

The 2005 Energy Bill didn’t do anything to cut U.S. oil consumption. According to the American Council for an Energy Efficient Economy, the final bill that was hammered out between the House and Senate would see U.S. oil demand rise from 20.5 million barrels a day today to 26 million barrels a day by 2020. Several provisions that would have kept consumption to 25 million barrels a day by 2020 died in the joint conference.

However, what the bill did do was provide a provision to develop the first coal-to-liquid fuel program in the United States, utilizing coal gasification/liquefaction technology, which turns waste coal into high quality zero-sulfur hydrogen and carbon monoxide gases, and then into liquid diesel and other fuels. The provision appropriated $100 million to Waste Management and Processors Inc (WMPI) to help the company finance a $612 million dollar plant that will produce more than 5,000 barrels of zero-sulfur fuel a day selling at $1.25 a gallon.

John W. Rich Jr., president of Waste Management and Processors Inc (WMPI) has been pushing for the advancement of liquefied coal fuel, a technology that has the potential to dramatically reduce our nation’s dependence on foreign oil. Rich is looking to increase the size of the plant for subsequent projects 10-12 times the scale of his $612 million dollar plant to achieve greater economies of scale, selling the coal-based fuel for under a $1 a gallon. Rich has already had talks with major coal companies in West Virginia, Kentucky, Wyoming and western Pennsylvania.

Pennsylvania Governor Edward Rendell, has already contracted to purchase 15-20 million gallons of the coal-based fuel for the next ten years, which would likely cost the state roughly 50% of what it now pays for diesel. The U.S. Department of Defense (DOD) is interested in using the coal-based fuel for aviation fuel.

Unlike domestic oil supplies, the U.S. coal reserves are considerable, with the U.S. containing roughly 29% of the world’s coal reserves (see chart below).

As indicated above, the U.S. spent more than $20.7 billion on petroleum imports in July, an economic drain from money leaving the country to foreign nations and oil companies. This money would be better spent on strengthening our energy infrastructure and putting the money towards U.S. companies developing the technology and plants, shrinking our trade deficit.

The US Geological Survey estimates the total identified coal resources as being 1,600 billion tons, with another 1,600 billion tons of unidentified resources estimated. According to Waste Management and Processors Inc, the U.S. currently produces roughly 1.06 billion tons of coal annually, and if the US were to produce, from coal alone, the amount of oil equivalent to what the US imports, the US would consume an additional 0.912 billion tons annually, putting total coal production/consumption at 1.972 billion tons annually.

Given U.S. coal reserves of 1,600 billion tons, the U.S. would have 811 years of coal-based fuel reserves!

(1,600 billion tons of coal) / (1.972 tons per year) = 811 Years of Reserves

Minimizing the risk of disruption to our energy supplies is crucial, whether they are caused by accident, political intervention, terrorism or industrial disputes, or Mother Nature. Coal has an important role to play at a time when we are increasingly concerned with issues relating to energy security and our dependence on foreign oil. Unlike the oil market, with it being concentrated in a few countries with Saudi Arabia as the world’s largest producer, the global coal market is large and diverse, with many different producers and consumers on every continent. Coal supplies do not come from one specific area, which would make consumers dependent on the security of supplies and stability of only one region, but are spread out worldwide with coal trading internationally.

Many countries rely on domestic supplies of coal for their energy needs, with Japan, Korea, China, Germany and the United Kingdom as the five largest importers. Coal-based power is not dependent on the weather and can be used as a backup for wind and hydropower, and already provides 40% of the total world electricity generation as of 2002.

Source: IEA 2004
*Other Includes: Solar, wind, combustible renewables, geothermal and waste

Other benefits that coal has over oil is that coal does not need high pressure pipelines or dedicated supply routes, and coal supply routes do not need to be protected at enormous expense. There are talks of more nuclear power plants to replace oil and gas for U.S. energy needs, but concerns over security are well founded in a post 9/11 era. With crude futures on a resilient march upward and gasoline following in tandem, sulfur-free coal-based fuels are looking brighter and brighter, as evidence for the demand in coal pushing up the average coal spot price.

Sector Summary
Description	Last Price	Price Change	Today's % Price Change	Week To Date % Price Change	1 Month % Price Change
Dow Jones Industrial Avg.	10,473.16	16.95	0.20%	0.50%	0.70%
Nasdaq Composite Index	2,115.40	-1.02	0.00%	-0.10%	-0.30%

Basic Materials	1,241,078	13,162	1.10%	1.70%	7.00%
Capital Goods	678,208	-245	0.00%	0.60%	2.20%
Conglomerates	777,868	362	0.00%	0.30%	1.60%
Consumer Cyclical	788,067	7,005	0.90%	1.70%	2.10%
Consumer/Non-Cyclical	1,315,392	5,224	0.40%	1.00%	1.60%
Energy	2,915,804	32,971	1.10%	2.40%	8.20%
Financial	4,598,522	8,234	0.20%	0.60%	2.60%
Healthcare	2,274,204	2,822	0.10%	-0.40%	0.00%
Services	4,522,162	1,706	0.00%	0.10%	-0.70%
Technology	2,973,015	8,712	0.30%	0.00%	0.10%
Transportation	348,603	3,018	0.90%	0.80%	1.90%
Utilities	918,484	7,127	0.80%	1.40%	4.60%