Saturday, June 16, 2007

Corrections and Additions

Knowledgeable reader Fabius Maximus was kind enough to point out an important distinction between oil shale and oil sands, two hydrocarbon sources which I had incorrectly lumped together:

"Kerogen -- aka "oil shale" -- is not in commercial production, except in a few pilot plants build with government money.

I suspect you are thinking of bitumen -- aka oil sands -- mined in Canada.

Oil shale is not commercially feasible to mine at today's oil prices with current technology. The same is true about switchgrass. Neither is even close to commercial production, despite claims of promoters.

For that matter, it's not clear that Canada has the necessary natural gas and water to mine and refine enough bitumen to produce 5 million barrels/day of synfuel -- the commonly quoted production goal for the year 2020."

Thank you, F.M., for taking the time to elucidate a key point in a key topic (synfuel substitutes for oil). If you'd like to read more by Fabius Maximus, you can find a number of archived articles at Defense and the National Interest, a very rich source of information on Defense issues, the war in Iraq, the GWOT and much more.

Frequent contributor Harun I. added this comment about hedging--an investment strategy I will be addressing as part of my own education on this subject:

"The futures markets reason for existing is to transfer risk. When commodity prices rise, ceteris paribus, we see those prices increases as end users. And it means we can purchase less of the things we need in effect, changing our standard of living. Prices can rise due to monetary related issues or supply/demand issues which can be complex. But for end users it is simple: they purchase less or substitute.

If you listen to the podcast of the interview of Steve Jobs and Bill Gates, these guys frequently use the phrase "took the bet". This is what business is about. Trading is a business and therefore we take bets.

I bet that if fat cattle futures go from 70 to 114, rib eye steaks are going to cost more at the checkout counter. Why not buy futures to lock in the price at 70? Currently we hear and see mortgage lenders advertising how rates are at 40 year lows. We all know they won't stay this low but how many people are taking action to lock in these rates by shorting bond futures/options? The inevitable rate rise will change the purchasing plans of many, but if doesn't have to be this way.

Major corporations, banks, farmers etc..., do this (put on hedges) everyday to protect profits. If we can convince people to turn off the TV, sit down in their comfy chair, open a book that will educate them on the business of commodities and how it can help protect their profits (earnings/purchasing power) while sipping on a glass of fine wine then, IMHO, our work is done."

Thank you, Harun, for providing us with additional information on hedging. As a mere pawn in the game of life, I am interested in hedging my "bets"--not just the bets I consciously place in the stock market, but in the involuntary "bets" we all make by being citizens of this country and participants in the global economy: bets in the value of the dollar, bets on interest rates, bets on commodity prices, bets that real estate won't plummet, and much more.

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