Wednesday, November 23, 2011

'Problem Banks' Declining, Failures Still Climbing

The FDIC says the number of U.S. banks in financial distress continues to decline.

At the end of the third quarter there were 844 “problem” institutions on the FDIC's list, down from the 865 at the end of the second quarter, and 888 at the end of the first quarter.

Though this decline is being heralded as good news, we must remember that at the end of the first quarter last year, the number of lenders on the FDIC's "problem banks list" had climbed to 775, which was the highest level since 1992.

This means there are still 69 more banks on this list than there were at the end of the Savings & Loan crisis. That provides some perspective on the magnitude of the current problem.

Martin Gruneberg, acting chief of the FDIC, said that a central concern for the agency is whether banks can generate income from a greater demand for loans, something that is still lacking.

Americans are still overwhelmingly in debt and are doing all they can to deleverage.

“The key issue is going to be can there be a pick up in economic activity and generate demand for loans, Gruenberg said.

Any rational observer knows that the global economy is getting worse, not better. The likelihood of increased economic activity and a higher demand for loans is slim or none, and that won't change for quite some time. We've entered a new economic reality where the limits to growth are finally being recognized.

One-quarter of homes with a mortgage are underwater. Unemployment remains troublingly high. Moreover, wages and incomes remain flat or depressed for the vast majority of Americans. This is not a recipe for increased economic activity or borrowing.

Last year, one-third of American consumers were considered sub-prime and couldn't even qualify for a home loan. When a third of your market is disqualified, that's obviously a very bad sign.

The problems in the European banking system could quickly and easily spill over into the U.S.

While Gruenberg said direct U.S. bank exposures to the European sovereign debt crisis is “relatively” limited, he added that a “key” risk for US institutions as well as for the global economy is the potential contagion effects that would result from a serious financial crisis in Europe.

As a result, Gruenberg said the FDIC is pressing banks to hike capital and improve their liquidity. He said that closer attention is being paid to “potential avenues of contagion” such as each institution’s derivatives exposure. However, he added that banks generally have much stronger levels of capital and liquidity than they did years before.

We can only hope.

Having 844 banks on a "problem" list is clearly an issue of great concern. It's certainly not the mark of stability.

More than 100 banks failed in each of the last two years; a total of 140 banks were shuttered in 2009 and 157 institutions failed in 2010. The trouble is not yet behind us.

A total of 90 U.S. banks have already failed this year. With six weeks to go before 2011 concludes, who really doubts that number won't reach 100 yet again?

Since the creation of the FDIC in 1933, there have been only 12 years in which 100 banks failed in a single year. The last two were among them. We made yet add to that total.

To provide some perspective, a mere three U.S. banks failed in 2007 and just 25 U.S. banks were closed in 2008, which was more than in the previous five years combined.

The banks on the "problem" list are considered the most likely to fail. However, their names are never made public for fear of creating a run on those banks.

Bank failures over the previous two years pushed the number of FDIC institutions to below 8,000 for the first time in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

While the number of banks considered at risk for failing may have declined, the problem can only be described as going from really, really bad to really bad.

Keep your eye on Europe's debt crisis and how that affects the banking system there. The fallout could be both catastrophic and contagious.


Thursday, November 17, 2011

Oil: Supply and Demand Reach Tipping Point

In March 2010, the Smith School of Enterprise and the Environment published a paper stating that the capacity to meet projected future oil demand is at a tipping point and that the development of alternative energy fuel resources needs to be accelerated in order to ensure energy security and reduce emissions.

The Status of Conventional Oil Reserves – Hype or Cause for Concern?, published in the journal Energy Policy, concludes that the age of cheap oil has now ended and demand will start to outstrip supply as we head towards the middle of the decade.

The report also suggests that the current oil reserve estimates should be downgraded from between 1150-1350 billion barrels to between 850-900 billion barrels, based on recent research.

Overcoming such potential oil shortages will be a vexing challenge.

The world is currently consuming more than 88 million barrels of oil daily, an annual total amounting to nearly 32 billion barrels. But with the developing world continually using ever greater quantities of oil, that amount will only grow in the coming years.

However, according to a research paper by Joyce Dargay of the University of Leeds and Dermot Gately of New York University, official forecasts by OPEC and the U.S. Department of Energy may be underestimating the future demand for oil by 30 million barrels a day.

If this is accurate, the next oil crisis is going to be life altering for all of us.

Dargay and Gately base their conclusion on the observation that the demand for oil no longer appears to respond to price. While price increases in the 1970s placed downward pressure on the worldwide demand for the fuel, the increased oil prices of the past decade had no such effect. Instead, worldwide demand for oil increased by 4% during that time.

Dargay and Gately project that per-capita oil demand will grow to 138 million barrels a day in 2030.

If that's accurate, the supply of oil won't even begin to keep up with increasing global demand.

Unfortunately, Peak Oil is upon us, and recent oil finds have been far too small to make an appreciable difference in overall supplies.

The International Energy Association (IEA) says that growth in worldwide oil demand is outstripping growth in new supplies by 1 million barrels a day per year.

According to the IEA, it’s getting harder to access and exploit conventional resources and, “The age of cheap energy is over.”

Oil companies are having to go into ever deeper waters, at ever-increasing expense, just to retrieve the finest oil. That's because the cheaper, easier to access, land-based oil supplies are clearly in decline.

For example, the once-mighty Cantarell field was the third-largest oil field in the world. Today, it is one of the chief reasons why Mexico's oil exports are shriveling. That poses a critical problem for the U.S. since Mexico is the number two exporter to our nation, following Canada.

This sort of decline is a prime reason why there is now such an interest in oil sands, which result in a heavier, lower-grade, harder-to-refine oil. Oil sands are also much more expensive to refine, resulting in higher prices for consumers.

Here's the reality; there's still plenty of oil left in the earth, just not cheap oil. Those days are over. Simple market forces are revealing that there is not enough oil to keep up with rising global demand and, as in any market, that means rising prices.

Eventually, and much sooner than most people realize, the margin of supply will shrink to the point that our lives, and our modern economy, will be irrevocably altered.

Tuesday, November 15, 2011

World Oil: The Clock is Ticking

While many Americans may believe that the U.S. gets almost all of its crude oil from overseas, that is not the case. The U.S. produces about half of the roughly 19 million barrels of oil it uses each day. And our neighbors, Canada and Mexico, are our number one and number two sources, respectively.

Every day, Canada provides the U.S. with 1.9 million barrels of oil, while Mexico sends the U.S. 1.1 million barrels each day.

What's troubling about Mexico is that it's primary oil sources are expected to be depleted by 2019.

By contrast, Saudi Arabia is the number three exporter to the U.S., sending this nation just over 1 million barrels of oil each day.

For decades, our nation's thirst for oil seemed unquenchable. However, the Great Recession and continuing economic hardship have dropped U.S. demand from 21 million barrels per day prior to the recession to the current level of 19 million barrels of oil each day, or 798 million gallons.

That amounts to 22.6% of the oil used around the world each day. And experts predict that U.S. demand will only rise over the coming decades.

But we are not alone in our increasing demand for oil.

At present, the world is using 88.20 million barrels of oil per day. That demand has been continuously growing, along with the world's developing economies. And for the world's developed economies to continue growing — a must under the perpetual-growth paradigm — oil is a requisite.

However, average annual global crude oil production has been flat since 2005. That problem is projected to worsen over the next quarter-century.

The US Energy Information Administration (EIA) has some very bad news for all of us.

The EIA projects that while world oil demand will climb to 105 million barrels per day by 2030 (a significant increase from the current level of 88.20 million bpd), the anticipated increase in conventional oil production will be just 11.5 million bpd, meeting less than half of the growth in demand.

It's also critical to note that in years recent years the EIA has been continuously ratcheting down is projections for the amount of supply that will be available in the future.

Six years ago, the agency predicted that 120 million barrels a day would be available by 2030. But it has now cut that estimate to 105 million barrels a day.

How much lower will that estimate continue to go?

The International Energy Association (IEA) says that growth in worldwide oil demand is outstripping growth in new supplies by 1 million barrels a day per year. According to the IEA, it’s getting harder to access and exploit conventional resources and, “The age of cheap energy is over.”

China and India, each with populations of over 1 billion people, are home to two of the world's most rapidly developing economies. And as such, the demand for oil in those countries is also rising rapidly.

Due to the robust expansion of these economies, the combined energy use of China and India is expected to more than double by 2035, when they will account for 31% of global energy use.

China's oil consumption is projected to rise 119% by 2025. But even then, the Chinese will still be using only about half as much oil as the U.S. will be.

With worldwide oil usage anticipated to increase to 105 million barrels a day, up from 88 million barrels today, the question most experts ask is, where will all of that additional oil come from?

Many have supposed that Saudi Arabia's giant oil fields would account for much of the supply.

But according to Matthew Simmons, the author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," that is highly unlikely.

Simmons, who died last year, believed that Saudi Arabia, now producing around 9 million barrels a day, would soon begin to lose production capacity. According to his research, the Saudi oil fields have matured, leading to their inevitable decline.

As a result, Simmons concluded that worldwide oil production has peaked. Instead of increasing to the IEA's original projection of 120 million barrels a day by 2025, Simmons concluded that global production could in fact be half that rate — meaning less than what it is today.

This would be an absolutely staggering blow to the global economy. The price of oil would escalate exponentially and our way of life would be irrevocably altered.

Some have concluded that the U.S. must, in the effort to achieve oil independence, begin drilling in Alaska's Arctic National Wildlife Reserve. But unfortunately, experts have countered that such a tactic would result in 250-800 million barrels a year — the amount the U.S. currently consumes in just two to six weeks.

Obviously, that is not the answer.

Simmons asserted that the world needs to considerably reduce its consumption of transportation fuels to fend off a potential crisis, a contention other experts in the field support.

Since 70% of the world's oil is used as transportation fuel, new forms of fuel are required, as well as a reduction in the number of people and goods moved by cars and trucks.

The latter would radically alter our way of life. But it seems that such change is inevitable anyway. Why not do it on our own terms by initiating the planning and implementation immediately? Why wait for another oil shock?

Simmons called for an increase in the use of trains and ships to make shipping more efficient and to reduce worldwide oil consumption.

Obviously, the U.S. oil industry has a huge stake in seeing to it that American consumers do not decrease our gluttonous consumption of their product. But if Simmons was correct in his assertions, the clock is ticking on world oil supplies and the time to act is now.

Biodiesel, which is manufactured from vegetable oils, recycled cooking greases and oils, or animal fats, is one possibility.

Biodiesel can be used in any diesel engine, usually without any engine modifications, and is the safest of all fuels to use, handle, and store. It is also non-toxic, biodegradable and sulphur-free. Soybeans, one of the largest and most abundant U.S. crops, are one of the principle sources of biodiesel.

This fuel is already being used to power the busses and other municipal vehicles in numerous U.S. cities, such as St. Louis, Phoenix, Cincinnati, Portland, Oregon and Lexington, Kentucky.

The Department of Energy calls biodiesel the fastest growing alternative fuel in the nation, as its use has increased 5000% since 1999.

One way or the other, it's time to start exploring alternatives to crude oil for a variety of reasons: its limited, and perhaps dwindling, supply; various environmental factors; and the economic prospects that a new industry may provide, including jobs.

There are lots of good reasons to wean ourselves from our dependence on foreign oil, not the least of which is our national security. Oil imports have also created an enormous trade imbalance that is sucking billions of dollars out of the country each and every day.

So we shouldn't let U.S. oil companies stand in our way.

In fact, if they were wise, those companies would recognize the opportunities at hand and lead the way themselves.

Tuesday, November 08, 2011

Global Oil Demand Will Spike Over Next 24 Years

According to the U.S. government, global oil consumption is likely grow by more than than 25 percent over the next quarter century.

In its annual international energy outlook, the US Energy Information Administration (EIA) said world oil demand is expected to climb to 112.2 million barrels per day in 2035, a 27 percent increase from the current level of 88.20 million bpd.

Here's the kicker: the anticipated increase in conventional oil production would meet less than half of this growth, at 11.5 million bpd.

That leaves a gap of 24 million barrels each day.

Where will all of the additional oil be found to meet this growing demand? As it stands, average annual global crude oil production has been flat since 2005. That does not bode well for the future.

The EIA said that most of the projected growth in liquid fuels "is in the transportation sector, where, in the absence of significant technological advances, liquids continue to provide much of the energy consumed.”

The EIA’s projections were based on current government policies and do not include any proposed or potential regulations, including the recently announced US fuel economy standards that would force automakers’ fleets to average 54.5 miles per gallon by 2025.

However, there would need to be a massive national initiative geared toward conservation to offset the rapidly escalating global demand for oil and oil-based fuels.

The EIA sees total global energy use increasing 53 percent over the next 24 years, led by developing nations such as China and India. Last year the agency predicted a 49% increase.

As it stands, developing nations already use slightly more energy than those in the developed world. And by 2035, they are expected to use double.

The agency predicts that fossil fuels will continue to be the dominant fuel choice in 2035, with renewables constituting just 14% to the world's overall energy consumption.

So much for any hopes of a green energy renaissance that might solve the world's energy predicament, or curb the rise in greenhouse gas emissions.

The EIA sees energy-related carbon dioxide emissions rising 43% by 2035. That's because oil (29%) and coal (27%) are expected to account for a total of 56 percent of global energy output by 2035.

The agency says that most future renewable energy supply will continue to come from wind and hydropower. Nuclear power is expected to go from about 5% of overall energy consumption in 2008 to about 7% in 2035.

It's hard to feel encouraged by anything in this report. It reveals a future of continually growing oil demand that is no way matched by supply. It reveals tremendous, and increasing, global competition for finite energy resources. It reveals an explosive rise in greenhouse gas emissions and a continued reliance on dirty fossil fuels.

One obvious conclusion can be derived from this report: energy prices are sure to climb, and this will negatively affect the global economy. The oil gap, in particular, will wreak havoc — particularly in the US, which is a heavily dependent oil economy.

Another very obvious conclusion is that the future will be very different from the present world we live in.