Population Unrest

‘Pretty Steep’

Smart Investing Daily has been banging the drum on global food inflation issues and shortages. The skyrocketing prices of foodstuffs driven by consumption and a weak U.S. dollar are wreaking havoc on the living expenses of the average consumer around the world; you can read our commentary here.

Energy prices, namely crude oil, are also at record levels, further exacerbating global cost-of-living expenses in both the goods and services that we buy — as well as food. Interesting enough, one of the “solutions” to our energy problem may in fact seriously endanger our most precious commodity of all, WATER.

Water, Water Everywhere, but Only a Small Amount to Drink…

I find it fascinating that we can trade just about anything these days. You can bet on the rise and fall of the prices of everything from corn to oil, electricity, soybeans, natural gas, timber and even pork bellies. Heck, if you wanted to you can even make investments in the weather and the amount of rainfall in a certain period of time. (Farmers may use these sorts of investment vehicles to protect their crop prices and yields.)

But you can’t trade water on an exchange…

The human body is composed of over 70% water. Water is even more essential than food for our basic survival. In fact, you can only live about three to five days without water; however, there is evidence to prove that a healthy adult can last 30 to 40 days without food!

Water is so necessary, but potable water is NOT a tradable commodity like oil nor is its scarcity the topic of many headlines. All life on Earth needs water to survive and grow; we don’t “need” oil.

Maybe we take it for granted because nature gives us a “free” supply in the form of rain, glacial runoff and underground aquifers that don’t require much to tap into. But what if that supply becomes tainted?

Water covers about 70% of the Earth’s surface, most of it being salt. Freshwater is available, but very limited in comparison, especially in certain areas… and not all of it is drinkable. Fresh water is found in a few places on Earth:

• Ground sources such as groundwater, hyporheic zones and aquifers make up about 1.6% of the total water found on Earth.
• Precipitation, which includes rain, hail, snow, fog, etc., equals about .001% of total water on Earth.
• Surface water such as rivers, streams, glaciers is about 3%.

Less than 5% of our total water supply is fresh water. Now there are some new technologies that are changing that. We can also get clean fresh water through desalinization. A Jan. 17, 2008, article in The Wall Street Journal stated that “Worldwide, 13,080 desalination plants produce more than 12 billion gallons of water a day.”

While that may seem like there is a large amount of drinking water available, consider the facts:

• The average human needs about two quarts per day of drinking water to survive.
• The World Bank estimates the global population to be about 6,775,235,741.(As of the end of 2009.)
• This means that we need to consume at least 13.5 billion quarts of water daily, which is the equivalent of 81 million barrels a day. (Oil barrels, fluid barrels would be even more.)

According to the CIA, the world consumes over 96 million barrels of oil per day – just a bit higher than the bare minimum drinking water humans on Earth need to survive. The reality is that it takes about3,000 liters of water, converted from liquid to vapor, to produce enough food to satisfy one person’s daily dietary needs, not including all the other things we use water for (showers, toilets, etc).

Using those figures, our daily demand is more like 121 BILLION BARRELS per day, which dwarfs the amount of daily oil usage. That is a serious commodity.

Energy Meets the Ecosystem

I hope these numbers have your head spinning, because they should. Our dietary and health dependency on water is of major importance and it’s no minor resource. I imagine that desalinization and water treatment companies will be excellent long-term investments.

But that is not the only story here. Our problem is expensive oil! Alternative energy and exploration for oil and natural gas is front and center. Politicians are looking for anything to get the cost of energy down and/or to reduce our dependence on fossil fuels.

With the U.S. consumer under pressure and our government scrambling to cut costs and boost the economy, I am worried that some methods used to extract crude oil and natural gas that are potentially unsafe may get rubber-stamp approval with cutbacks and unaffordable energy prices.

One method is even using water (though not potable water) to extract more oil and natural gas from hard-to-reach places like rock and shale, deep underground.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.)

Hydraulic Fracturing (aka “Fracking”)

I’m talking about Hydraulic Fracturing. Essentially, it’s like setting off a huge explosion of water, sand and chemicals deep underground, which creates fractures in the rock and allows the oil and natural gas to be collected. The sand (or other particulate) fills in the fractures and prevents them from closing when the injection process stops. The oil and natural gas can pass through and be collected from the wellhead.

The method has been around since 1903, and first used for oil and gas wells in the U.S. in 1947. It was first used commercially by Halliburton (HAL:NYSE) in 1949.

The problem lies with the chemicals used in the process and their potential effects both underground, on the surface and even in gases escaping into the air. Combustible and carcinogenic contaminants can infiltrate ground water reserves, soil, foods and even lead to seismic events and cause surface subsidence.

There have been several major incidents recently in both Pennsylvania and Texas where chemicals escaped into groundwater supplies and into the atmosphere and forest areas. In Pennsylvania, all drilling by Cabot Oil and Gas was halted in the state after several contamination incidents caused by fracking. In 2009, in Cleburne, Texas (not to far from where I live), there were earthquakes that were believed to be caused by this process. They were the first earthquakes reported in the town’s 140-year history.

The EPA is currently conducting a study to examine the effects of fracking, the results of which will not be released until 2014.

The biggest issue I see is the lack of publicity this topic has garnished. Even worse would be big oil companies getting to contaminate our most important natural resource without recourse. There are arguments on both sides of course; the oil companies claim that there are no documented proven cases where hydraulic fracturing contaminated ground water. They are also citing the amount of revenue, jobs and reduced energy costs that come from drilling and the fracking process.

As much as I want cheap energy sources and jobs in the U.S. and around the world, sacrificing our limited and diminishing water supply and creating potential instability in the ground’s surface is just not worth it. Budget cuts and greed may be our worst enemy right now as we await the results of the EPA study. Even after that, I am unsure what, if anything, the government will do to restrict the fracking process if it is indeed proved to be dangerous.

Consumers paid more for gas and food in April, lifting inflation to its highest level in two and a half years. But inflationary pressures have begun to ease this month, and analysts say some prices could taper off by summer.

The Consumer Price Index increased 0.4 percent in April, the Labor Department said. In the past 12 months, prices have risen 3.2 percent. That’s the biggest year-over-year gain since November 2007 through October 2008.

Excluding volatile food and energy, which account for about 20 percent of the CPI, the index increased 0.2 percent in April and has risen 1.3 percent over the past 12 months. That’s still below the level the Federal Reserve considers a healthy pace of inflation.

Economists like to study costs outside food and energy — the so-called “core” prices — to see long-term trends. Food and energy can rise or fall sharply from month to month.

The cost of new and used cars, clothing and medical care all increased, pushing up the core index. Car prices likely increased because of temporary parts shortages caused by the March 11 earthquake and tsunami in Japan. Most other prices were subdued.

Oil has fallen from $ 114 a barrel earlier this month to about $ 100 Friday. Prices of corn and other grains have also declined in recent days

Economists say gas and food prices should fall later this year. High prices are likely slowing the economy this quarter. But growth should increase in the second half of this year, they say.

“With commodity prices now dropping back, it looks like inflation is close to peaking,” said Paul Ashworth, chief U.S. economist for Capital Economics. He says year-over-year inflation should climb to 3.5 percent before dropping in the second half of the year.

Cary Leahey, an economist at Decision Economics, said yearly inflation figures should start to decline in the next several months, although core prices should continue to rise. The Federal Reserve won’t need to start raising interest rates until next year to keep inflation in check, he said.

The price of gasoline rose 3.3 percent in April. That accounted for half of last month’s increase. Gas has risen more than 33 percent in the past year because of demand in fast-growing developing countries and political turmoil in the Middle East. Gasoline is averaging $ 3.98 a gallon nationwide, up $ 1.09 from last year.

Food prices increased 0.4 percent last month. That was half the previous month’s increase, which was the largest in nearly three years. The price of fresh vegetables fell. Dairy, meat, fish and eggs all rose.

Federal Reserve Chairman Ben Bernanke has said that the impact of higher food and gas prices should be temporary. The central bank has also said it is watching closely for any signs of inflation.

Last October, the core index had risen only 0.6 percent in a year, and the Fed was more concerned about falling prices. That increase was the smallest for 12 months since the core index was created in 1957.

HCPG Blog We’re seeing a ton of patterns like the following.   It’s a great pattern for commodities coming off the bottom.  You don’t get the exact bottom but often a nice meaty move.      Here are a few that have already triggered (and have been in our newsletter — strategy was swing long into the break) and a few that have not broken yet for your trading pleasure: Happy to have the commodities back for a trade  (also note the Ag theme –we like Potash and Mosaic $ POT $ MOS)

Oil declined for a third day in New York as signs that the global economy is slowing stoked speculation that fuel demand may falter.

Futures slid as much as 0.8 percent today before reports that may show sales by U.S. retailers fell in May for the first time in 11 months and China’s industrial production slowed. Prices dropped to a four-week low yesterday after China said oil-product consumption slipped 4 percent and Standard & Poor’s cut Greece’s credit rating to the lowest held by a nation.

“The market is concerned about economic growth,” said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted crude in New York will average $ 100 a barrel this year. “The economics suggest oil should be lower rather than higher.”

Crude for July delivery declined as much as 75 cents to $ 96.55 a barrel in electronic trading on the New York Mercantile Exchange, and was at $ 96.67 at 11:37 a.m. Sydney time. The contract yesterday slid $ 1.99, or 2 percent, to $ 97.30, the lowest since May 17. Prices are 29 percent higher the past year.

Brent oil for July delivery fell 34 cents, or 0.3 percent, to $ 118.76 a barrel on the London-based ICE Futures Europe exchange. The more actively traded August contract lost 32 cents to $ 118.10. The European benchmark contract is at a record premium of $ 22.09 a barrel to U.S. futures.

Economic Reports

U.S. advance retail sales may drop 0.5 percent, after a 0.5 percent gain in April, according to the median forecast of 81 economists surveyed by Bloomberg News ahead of Commerce Department data today.

China’s industrial production growth may have slowed to 13.1 percent in May from 13.4 percent in April, a separate Bloomberg survey shows. Consumer price inflation, also scheduled for today, may have climbed to 5.5 percent from 5.3 percent.

China’s National Development and Reform Commission yesterday said the country’s daily consumption of fuels dropped to 650,000 metric tons in May while inventories rose. China is the world’s second-largest oil consumer, after the U.S.

S&P cut Greece’s credit rating to CCC. “There is a significantly higher likelihood of one or more defaults” in the country, the agency said.

“Almost every day, there is some fresh economic data that seems to fit better in an anemic recovery than in one that is robust or dynamic,” Peter Beutel, the president of Cameron Hanover Inc., an energy advisory company in New Canaan, Connecticut, said in a note e-mailed today.

U.S. Stockpiles

The most-active oil option yesterday was the July $ 90 put, a bet that prices will fall, which ended unchanged at 11 cents. The second-most active contract, the July $ 95 put, rose 21 cents to 58 cents.

An Energy Department report tomorrow may show U.S. gasoline supplies increased by 1 million barrels from 214.5 million, according to the median of eight analyst estimates in a Bloomberg News survey. Crude stockpiles probably fell 1.75 million barrels, the survey shows.

Royal Dutch Shell Plc’s Nigerian unit has declared force majeure on Bonny Light oil loadings for this month and July because of multiple fires on the Trans Niger pipeline, the company said in an e-mailed statement yesterday.

Shell originally planned to ship 243,333 barrels a day of Bonny Light in June and 204,839 barrels a day next month, according to loading programs obtained by Bloomberg News. Force majeure is a legal clause allowing companies to miss deliveries because of circumstances beyond their control.