Daily Archives: July 2, 2008

NVIDIA Stubs Its Toes.. All Of Them (NVDA, AMD)

NVIDIA Corporation (NASDAQ: NVDA) has just come out and issued an earnings warning over several issues. The graphics processor giant said that second quarter revenue and gross margin are expected to be lower than guidance provided during its first quarter conference call back on May 8, 2008.  It now sees total revenue from $875 million to $950 million.  This is a HUGE disappointment.  First Call had estimates at $1.1 Billion in revenues.  The decrease in revenue and gross margin is being noted because of the following reasons:

  • end-market weakness around the world,
  • the delayed ramp of a next generation MCP,
  • and price adjustments of GPU products to respond to competitive products.

NVIDIA said it also plans to take a one-time charge from $150 million to $200 million against cost of revenue for the second quarter to cover warranty, repair, return, replacement and other associated costs and expenses.  These arose from a weak die/packaging material set in certain versions of its previous generation GPU and MCP products used in notebook systems.  It noted that certain notebook configurations with GPUs and MCPs manufactured with a certain die/packaging material set are failing in the field at higher than normal rates.  NVIDIA said that abnormal failure rates with systems other than certain notebook systems have not been seen, and it has started discussions with its supply chain regarding this material set issue and the Company will also seek to access insurance coverage for this matter.

This might actually be a break for Advanced Micro Devices Inc. (NYSE: AMD).  It is unknown if the same end weakness that is mentioned is also true at AMD or if maybe this is Caused by AMD and its graphics chipsets from the old ATI that it acquired.  We cannot drop any fears that some of the issues do not overlap.  But that failure rate hasn’t been the same according to available data seen out of AMD.  AMD shares are down with NVIDIA, with shares down 3.7% at $5.44 at the close and shares are down another 1.3% at $5.37 in after-hours trading.

NVIDIA had already been weak for some time, so much may have been known.  Its stock closed down 3.8% at $18.03 in regular trading.  Unfortunately NVIDIA stock is halted until 5:05 PM EST. It’s hard to imagine that this won’t see a new 52-week low as its 52-week trading range was $17.31 to $39.67.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 4:01 pm in Earnings Warning, Semiconductor, ,

The 52-Week Low Club (GM)(CC)(HTZ)(CAL)(UAUA)(MNI)

GM (GM) falls as issue of Chapter 11 is raised. Drops to $10 from 52-week high of $43.20.

Circuit City (CC) drops as Blockbuster (BBI) withdraws bid. Plummets to $2.10 from 52-week high of $15.33.

Hertz Global Holdings (HTZ) Earnings in car rental industry falling apart. Sells off to $6.58 from 52-week high of $27.20.

Continental Airlines (CAL) High oil, low airline stock prices. Moves to $8.74 from 52-week high of $38.79.

UAL (UAUA) Ditto. Falls to $4.02 from 52-week high of $51.60.

McClatchy (MNI) Newspaper stock drops after brokerage downgrade. Off to $5.80 from 52-week high of $28.73.

Douglas A. McIntyre

Posted on: July 2, 2008 – 2:47 pm in HI/LOW, , , , , ,

OneBeacon, White Mountain Files Shelf Registration (OB, WTM)

OneBeacon Insurance Group (NYSE: OB) isn’t a household name.  But today it filed for a $1 Billion mixed securities shelf registration.  With a $1.67 Billion market cap, this may get attention even for a smaller insurer.

There are being registered as an indeterminate number or amount of common shares, preferred shares (for HOLDINGS TRUST unit), debt securities, warrants, purchase contracts, depositary shares and units of OneBeacon Insurance Group, Ltd.

This also say that in addition to the filing White Mountains Insurance Group, Ltd. (NYSE: WTM) or certain of its subsidiaries may sell up to 71,754,738 shares of OneBeacon Class A common shares.

Net proceeds from the sale of the securities are earmarked for general corporate purposes, which may include, without limitation, repayment of borrowings, working capital, capital expenditures, share repurchase programs and acquisitions… But it will receive no proceeds from the sale of shares by selling shareholders.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 1:54 pm in Financial Stocks, Secondary Offering, ,

Will Cisco Systems Ask Jerry Yang To Leave Its Board? (CSCO, YHOO, MSFT)

Most people think of Jerry Yang as the Chief Yahoo! over at Yahoo! Inc. (NASDAQ: YHOO).  But there is another Jerry Yang role, and we aren’t talking about him living up to the branding of "chief Yahoo!" in more ways than one.  We have gone over and over how Jerry Yang and kids managed to destroy value for shareholders.  If there had been a long-standing record or a current path that was working this entire situation and reasoning would have been different.  But those suppositions include the "IF, THEN" factor and the truth is now the exact opposite.

The role of Jerry Yang that he currently holds that gets very little attention is his role as a member of the board of directors at Cisco Systems, Inc. (NASDAQ: CSCO).  He has actually been on the board of directors over there since July 2000, according to Capital IQ. 

We looked over the other anti-takeover provisions at CapitalIQ to see what else was there. We also looked over the corporate governance section over at Cisco’s website.  Yang is on the investment/finance committee of the board at Cisco.  But CapitalIQ notes that Cisco does not have a classified board, its member terms are for 1 year, and it lists its "removal of directors only for cause" as NO.  Shareholders do have the ability to act by written consent, although it may be a far stretch to believe that this represents any such issue that shareholders would want a special meeting.

The company has sent out the general proxy materials to shareholders in September for each of the last two years for the annual shareholder meeting to be held in November. 

It is probably doubtful that John Chambers or today’s board of directors would go out of their way to make any direct actions on an interim basis.  Yang also isn’t in the position to sink Cisco either as an independent, even if he is on the investment/finance committee for Cisco.  The one thing that may save Yang and keep him valuable is that the competition for Cisco with Yahoo!’s merger adversary at Microsoft (NASDAQ: MSFT) may now have enough forward competition that the company could keep him on for that matter. 

Sometimes it is good to clean house a little, and keeping a Jerry Yang around for 2009 probably isn’t as attractive and probably doesn’t offer quite the same insight as in many of the years before. 

In today’s world of the Internet, anything is possible.  Reinvention is possible.  New business segments that didn’t exist are possible.  And even redemption is possible.  Either way, the Doubting Thomas analogy is a hard one to get past.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 12:49 pm in Insider Activity, Internet, Management Change, , ,

Getty Images Goes Bye-Bye (GYI, GOOG, MSFT)

The long-awaited $34.00 cash buyout of Getty Images, Inc. (NYSE: GYI) by Hellman & Friedman looks as though it is coming to an end.  The company has issued a statement that today is the closing date and this is the last day that Getty shares will trade because of going private and being de-listed at the NYSE.

What is interesting is that Hellman & Friedman bought DoubleClick back in 2005 in a deal that was valued around $1.1 Billion, and within three years this was a leading huge Internet acquisition where the firm sold DoubleClick to Google (NASDAQ: GOOG).  The private equity firm sold DoubleClick to Google for around $3.1 Billion.

Getty Images was our top performing Special Situation Newsletter pick where we identified the company’s structure in early 2007 as one that would fall victim to the equivalent of an effective industry de-merger.  We saw the issues affecting Getty and taking it far south and the total buyout price was still under our expected price return exit.  That’s because the erosion we expected came far faster and even harder than we expected.

Getty Images is roughly worth $2 Billion today.  You could argue that the entire DoubleClick profit is being used to buy Getty.  We think Getty will actually do better as a private company for now and the company has taken many steps (which readers and critics have written about how personally Draconian the measures were) to protect their business interests.  Hellman & Jordan may do the same and it may not. 

We aren’t inclined to predict who will own Getty Images after 2010 or 2011, but we are fairly certain that it will look different as an operating company or via who runs it.  Hell, Bill Gates may even want to be a free agent by then and there is another shot for a monopoly or at least a highly dominant market share… and we aren’t talking about Microsoft (NASDAQ: MSFT)

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 12:31 pm in Internet, Media, Mergers and Buy Outs, , ,

Starbucks Actions Severe Enough to Spur Credit Rating Activity (SBUX)

Standard & Poor’s (via its Ratings Services) has placed its corporate credit ratings on Starbucks Corp. (NASDAQ: SBUX) on CreditWatch with negative implications.  This pertains to the corporate ratings including the ‘BBB+’ long-term corporate credit and ‘A-2′ short-term ratings.

This move on CreditWatch come after word that it will close approximately 600 underperforming company owned stores in the U.S.  S&P noted that this is far more than the 100 store closures previously announced.

The credit action is also based on the internal cost estimates of between $328 million and $348 million, with cash charges of about $100 million on an after-tax basis.

S&P also noted the slower growth of U.S. stores to less than 200 in 2009 as the reason for CreditWatch.  It is important that S&P said in its release that it does not expect credit metrics to change significantly due to the charges….

But S&P did also say it would reassess Starbucks’ business risk profile in light of lower consumer spending, revised growth plans, and increased competition.

Before this ratings action we had seen Starbucks shares trading up close to 3%, but shares are now only up 0.3% at $15.67 on light to normal trading volume.

Those old analogies of "how can a coffee company trade with a P/E ratio north of 50?" are now no longer looking just pessimistic and nay-saying.  They are starting to look like an omen.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 11:03 am in Analyst Calls, Food, Retail,

A GM (GM) Chapter 11?

Merrill Lynch has said what many people already believe. One of the large US car companies could go into bankruptcy. Merrill’s comments target GM (GM).

The brokerage’s analysis is that the biggest US car company will need to raise $15 billion to make it through current conditions. According to Reuters, Merrill Lynch analyst John Murphy cut GM to "underperform" from "buy".

The threat to GM is no longer on the expense side. When the company was in deep trouble three years ago, sales were fairly robust. In 2006, the US market had total vehicle sales of 17 million. GM was successful in making its target of taking $9 billion in annual operating costs out of the firm. If sales had stayed steady, GM would have been fine.

With annual American car sales trending toward 14 million or below for 2008, the industry’s problems have turned to rapidly falling revenue. If the average vehicle bought in the US costs the consumer $25,000, at least $75 billion in domestic sales could be taken out of the market in two years. With close to 25% of the total pie, GM would be devastated if the present sales level moves into 2009.

GM is likely to find a buyer, if things go that far. The candidates would be VW, which would like to have a slice of the US as large as Toyota’s (TM) or Renault/Nissan. Either operation could pull billion of dollars in redundant management, manufacturing, and product design costs out of the American firm.

Douglas A. McIntyre

Posted on: July 2, 2008 – 10:34 am in Autos, ,

Blockbuster Realizes Circuit City Is Garbage In Garbage Out (BBI, CC)

Blockbuster Inc. (NYSE: BBI) is seeing a surge in early trading ahead of a long weekend.  The company realized that the buyout interest of wanting to own Circuit City Stores Inc. (NYSE: CC) was ill-founded and realized it was as good of a fit as chocolate and dog food. 

Last night, Circuit City acknowledged that the bidding interest from Blockbuster was done after initial due diligence.  More importantly, the ailing computer and electronics retailer reiterated that it is exploring its own strategic alternatives on an active and ongoing basis.

Circuit City shares are down 14.5% at $2.18 and Blockbuster shares are up 12% at $2.82 after an hour of trading.

We noted along with Circuit City’s earnings that it sounded more and more like the company really wants to pursue a go-it-alone strategy.  We’d advise the company that a board of directors revolt needs to take place and the first and fastest way to see the Circuit City stock rise would come from the company firing Philip Schoonover.  A constant and steady destruction by management missteps is no way to build shareholder value.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 9:38 am in Consumer Electronics, Mergers and Buy Outs, Retail, ,

More Losses For Merrill Lynch (MER)

Oppenheimer says that Merrill Lynch (MER) lost $5.8 billion in the second quarter.

The analysis also says Merrill will cut is dividend.

According to MarketWatch, Oppenheimer analyst Meredith Whitney also slashed Merrill’s full-year estimate for 2008 to a per-share loss of $5.37, significantly wider than her prior estimate of a loss of 45 cents a share.

Douglas A. McIntyre

Posted on: July 2, 2008 – 9:31 am in Brokerage Firms,

Abu Dhabi Sends X-Ray Order to AS&E (ASEI)

American Science and Engineering, Inc. (NASDAQ: ASEI) has announced this morning that the company has received a $55.1 million contract from the Abu Dhabi Customs.

The Customs Administration at Abu Dhabi, the largest emirate in the United Arab Emirates, has ordered multiple OmniView, Z Portal and Z Backscatter Van X-ray detection systems to scan cargo trucks, passenger vehicles, and containers at strategic border checkpoints.

AS&E is a leader in X-ray detection technology used for customs, transport screening, and more.  To put the size of this order in perspective as a $55.1 million order, the company generated only $42.02 million in revenues during the Q1-2008 period.

Shares are up over 2.5% at $51.93 in the first 10 minutes of trading today with only about 19,000 shares trading hands.  Its 52-week range is $42.10 to $73.40, and its average trading volume is about 116,000 shares.  Its market cap is currently $455 million.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 8:41 am in Uncategorized,

Fiserv Sells Insurance Ops, To Shrink Float (FISV)

Fiserv Inc. (NASDAQ: FISV) has announced a rather interesting move, and interestingly enough all that will be accomplished on the surface is a direct shrinkage of the company.

The company has announced that it will sell a majority interest in insurance business operations to Trident IV, a private equity fund managed by Stone Point Capital LLC.  You can take that it gave that operation an implied new value of $1 Billion, because the company will receive a $510 million payment as net proceeds for a 51% stake. The equity valuation would be lower though, as it lists the proceeds being $205 million in equity and $335 million in debt.  Fiserv noted that this will free up capital and will allow it to focus on financial products.

Simultaneously, the company has announced that it will turn around and repurchase up to 10 million shares of common stock in a repurchase program of roughly 6% of its float.  Based upon yesterday’s close that would be $453 million if it used the entire sum at that fixed theoretical price. 

The company has said this action will dilute earnings in 2008 by $0.02 to $0.03 and it is backing GAAP EPS of $3.28 and non-GAAP EPS of $3.40.  First Call has estimates as $3.34 EPS on a non-GAAP basis.

Its 52-week trading range is $44.16 to $58.32.  Shares are indicated higher by roughly $1.00 in pre-market trading, although there are no shares that have yet traded hands.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 7:44 am in Financial Stocks, Mergers and Buy Outs, Stock Buybacks,

Top 10 Pre-Market Analyst Calls (BJ, CPWR, FITB, GM, JCI, RJF, SJM, SUPG, UAUA)

These are not anywhere near all of the research upgrades & downgrades we are seeing, but here are ten of the impacting calls we have seen so far in early trading today:

  • BJ’s Wholesale Club (NYSE: BJ) Raised to Overweight from Neutral at JPMorgan.
  • Compuware (NASDAQ: CPWR) Raised to Overweight from Neutral at JPMorgan.
  • Fifth Third Bancorp (NASDAQ: FITB) Raised to Outperform from Neutral at R.W.Baird.
  • General Motors Corp. (NYSE: GM) downgraded to Underperform at Merrill Lynch.
  • Johnson Controls (NYSE: JCI) Cut to Underperform at Goldman Sachs.
  • Raymond James Financial (NYSE: RJF) Raised to Outperform at KBW.
  • Smuckers (NYSE: SJM) Raised to Buy from Hold at Deutsche Bank.
  • SuperGen (NASDAQ: SUPG) Raised to Market Outperform at Rodman & Renshaw.
  • UAL (NASDAQ: UAUA) Cut to Neutral from Buy and removed from CONVICTION BUY LIST at Goldman Sachs.
  • VeraSun Energy (NYSE: VSE) Raised to Outperform at Oppenheimer.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 7:06 am in Analyst Calls, , , , , , , , ,

IPO PRICING: Energy Recovery, Inc. (ERII)

Energy Recovery, Inc. (NASDAQ: ERII) has priced its initial public offering of 14,000,000 shares of common stock at $8.50 per share, which was within the $7.00 to $9.00 range.

Of these shares, 8,078,566 are being sold by the company and 5,921,434 are being sold by selling stockholders. Net proceeds from the offering for working capital and other general corporate purposes.

Citigroup and Credit Suisse were joint book-runners, and HSBC Securities, Janney Montgomery Scott, and SEB Enskilda AS were listed as co-managers.  The company has granted the underwriters a 30-day over-allotment option to purchase an additional 2,100,000 shares of common stock.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 6:53 am in IPOs, Water,

Ballard Power & Plug Power Extend Exclusive Lock-Up (BLDP, PLUG)

Plug Power Inc. (NASDAQ: PLUG) and Ballard Power Systems (NASDAQ: BLDP) have extended their existing supply agreement through December 31, 2010, which was currently set to expire on May 1, 2009. Under the new agreement, Ballard will remain the exclusive supplier of fuel cell stacks for Plug Power’s GenDrive(tm) product line of fuel cell power units.

Ballard’s Mark9 SSL(tm) fuel cell products supply power to GenDrive hydrogen fuel cell units, which replace lead-acid batteries in lift trucks used in large warehouse, distribution and manufacturing facilities.  Plug Power integrates the fuel cell product with the balance of plant to produce a reliable motive power system that offers customers compelling benefits over the incumbent technology for the following:

  • continuous power for increased productivity;
  • reduced operational costs;
  • elimination of a battery charging room;
  • and the elimination of the storage and handling of toxic materials.

Ballard has a market cap of nearly $400 million and is expected to have revenues of about $70 million in 2008, while Plug Power has a market cap of about $212 million and is expected to have revenues of about $20 million in 2008.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 6:47 am in Alternative Energy, ,

IPO FILING: ZONARE MEDICAL SYSTEMS (ZONE)

ZONARE MEDICAL SYSTEMS, INC. has filed for an initial public offering to sell up to $86.25 million as the nominal securities amount.  The company has applied to take on the stock ticker of "ZONE" on NASDAQ.

The underwriting group has listed Citigroup and Piper Jaffray as joint book-runners and listed the co-managers as Cowen & Co. and Canaccord Adams.

The company is involved in innovative software based image acquisition technology with its own proprietary Zone Sonography(tm) system which allows ultrasound systems to convert from full featured cart-based systems to premium compact systems.  In short, it is a diagnostic imaging system across a wide range of clinical applications and settings.  The company received FDA clearance in September 2002 and has received regulatory approvals to sell products in most major countries. It shipped its first commercial ultrasound system, the z.one system, in March 2005 and subsequently launched the z.one mini system in November 2006 and z.one ultra system in March 2007.

It sells systems through a 26-person direct sales force in the United States and through a combination of distributors and direct sales personnel in approximately 40 international markets.

For the three months ended March 31, 2008, its combined total of revenue and change in deferred revenue totaled $9.5 million compared to $5.4 million for the three months ended March 31, 2007.  In the year ended December 31, 2007, Zonare had a combined total of revenue and change in deferred revenue of $30.0 million and total revenue of $27.5 million, which represented growth over the year ended December 31, 2006 of 61% and 388%, respectively.  Its net loss for 2007 was $26.0 million and the company has not been profitable since inception and as of March 31, 2008 its accumulated deficit was $148.5 million.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 6:17 am in IPOs, Medical,

IPO FILING: Liquidnet Holdings Inc.

Liquidnet Holdings Inc. has filed for an initial public offering to sell up to $500 million as the nominal securities amount.  This is going to be a somewhat more complicated IPO as the structure appears to have A shares and B shares, and the company has not taken any applied stock ticker and has not yet established which stock exchange it will list on.

The underwriting group is rather large.  Its lists Goldman Sachs and Credit Suisse as the lead underwriters, and other managers are listed as Liquidnet (itself), JPMorgan, Lehman Brothers, and Sandler O’Neill.

The company is an electronic marketplace for institutional investors to trade equity securities worldwide for buyers and sellers of large blocks of equity securities.  This is essentially an old ECN and now referred to as a dark pool, enabling trading clients to trade with each other directly and anonymously via the Internet on its electronic trading platform. As of May 31, 2008, its notes that its community was comprised of 514 members globally that collectively accounted for an estimated $15.9 trillion in equity assets under management, or an average of $30.9 billion per member.  In 2007, its average trade size in the U.S. was 51,580 shares.

In 2007 revenues were $346.45 million, up from $252.679 million in 2006; and the annual earnings attributed to each year were $97.51 million in 2007 and $80.5 million in 2006.  The company also noted growth in Q1 2008 over Q1 2007 with revenues and earnings of $107.07 million and $25.72 million in Q1 2008 and $77.347 million and $23.159 million in Q1 2007.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 6:03 am in Brokerage Firms, IPOs

IPO FILING: Alimera Sciences, Inc. (ALIM)

A company called Alimera Sciences, Inc. has filed for an initial public offering to sell up to $75 million as the nominal securities amount.  The company noted that all shares will be sold by the company and it has applied for the stock ticker "ALIM" on NASDAQ.

The underwriting group for this IPO is listed as Credit Suisse, Citigroup, Cowen & Co., and Leerink Swann.

The company is a biopharma operation in R&D and commercialization of prescription ophthalmic pharmaceuticals, with a present focus on diseases affecting the back of the eye or retina as these diseases are not well treated with current therapies and represent a significant market opportunity. Its most advanced product candidate is Iluvien, an intravitreal insert to provide a sustained therapeutic effect for up to 36 months in the treatment of diabetic macular edema, and the company has completed enrollment of 956 patients in two Phase III pivotal clinical trials.

For all practical purposes, the company is a pre-revenue stage and all financials so far revolve around R&D and administrative expenses.  The company has 5 venture capital groups that have backed it.

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 5:51 am in Biotech, IPOs,

Honda (HMC) Sells Two Of Top Five Cars In US

It speaks volumes that Honda (HMC), an also-ran Japanese car company behind Toyota (TM) for years, had two of the top five selling cars in the US during June. It is a testament to the firm’s willingness to stay with small cars and small-engine SUVs when there was a temptation to move into the heavy pick-up market.

Chrysler did not have a single car on the list.

The Honda Civic sold 39,967 units during June, up 9.5%. The Accord sold 39,704, up 37.3%, more than any vehicle on the top ten list.

Ford’s (F) only two vehicles on the list were the F-series pick-up with sales down by 40.5% to 38,789, and the Focus, off 5.5% to 17,950. So much for Ford selling small, fuel-efficient cars.

Douglas A. McIntyre

Posted on: July 2, 2008 – 5:37 am in Autos, , ,

UnitedHealth Guidance Tanks Again (UNH)

UnitedHealth Group (NYSE:UNH) is again lowering its guidance.  The company now sees $2.95 to $3.05 EPS on revenues of around $81 Billion range.  Its prior guidance was $3.55 to $3.60.  First Call has estimates of $3.52 EPS on $around $81 Billion in revenues.  Its earnings from operations are now expected to be $6.5 billion and cash flows from operations approaching $5 billion. Prior estimates for cash flows from operations were $5.7 billion to $6.0 billion.

The health insurer has seen a continuation of the pressures in the first quarter on greater-than-expected pressure on premium yields in an intensely competitive environment. Medical cost trend remains within its previously projected range of 7.5% +/- 50 basis points, and projected 2008 consolidated medical care ratio is expected in the range of 82.5%, +/- 50 basis points, with a medical care ratio in the range of 83.3% +/- 50 basis points. Its prior estimates were 81.3% and 82.3% respectively, with the same +/- 50 basis points skewing.

While this is looking uglier than before, this stock is almost pricing in a universal healthcare market where its earnings are under constant pressure beyond competition.  At $25.63 on yesterday’s close, we get even a sub-10 P/E for 2008 even if we take estimates down to an even lower $2.75 EPS (forecast is now $2.95 to $3.05).

The company’s 52-week trading range is $25.29 to $59.46, and we normally see about 12.4 million shares trade hands.  We are likely to see both the 52-week low and the volume challenged early on this morning..

Jon C. Ogg
July 2, 2008

Posted on: July 2, 2008 – 5:26 am in Earnings Warning, Healthcare,

The Latest, And Perhaps Best, Case For $200 Oil

With the price of oil moving up so sharply, the demand should go down. Those dynamics are immutable.

The International Energy Agency, the big think tank in the industry, says demand will keep going up because of the expanding need for crude in Asia, Latin America, and the Middle East. According to The New York Times, "By 2013, oil demand in developing countries will account for nearly 49 percent of total global demand, the report said, compared with 36 percent as recently as 1996. "

That puts the US, Japan, and Europe in Hades for the foreseeable future. Even if these regions use less fuel, prices will continue to rise.

The information from the agency drives home the point that the most critical dynamics of rising oil prices will not change. Countries like China will continue to underwrite the price of gas and diesel to keep their economies moving. They cannot afford to see the transportation of manufactured goods and commodities dented. Even though the central government has raised the price of fuel, it still writes most of the check for a tank of petrol.

Perhaps worse, the rising price of crude lets oil-rich countries keep more of the stuff at home. Saudi Arabia could cut oil exports by half and still bring in the total number of dollars it did a year ago. The kingdom and its neighbors, along with Venezuela, Brazil, and Mexico, are using more and more oil to power vehicles for their citizens. Additional oil is also needed in these countries as they build their own infrastructures.

Oil prices may make modest moves up and down, but the trend is ugly and the solutions few.

Douglas A. McIntyre

Posted on: July 2, 2008 – 5:02 am in Oil & Gas