The New Oil Sheiks

From Andrew Snyder
Executive Editor, BreakAway Investor

“Oil jumped to $74 today after yesterday’s gas inventories showed a greater than expected drop ahead of summer driving season and growing anxiety over what’ll happen to Iranian oil imports and Nigeria.

The new oil sheiks

“It’s no surprise that the current Iranian and Nigerian situations drove oil to $74. But it couldn’t have come at a worse time for Americans already struggling to keep up with $3 pump prices. We’re just weeks ahead of peak summer driving season that could eventually send crude to about $80, and send prices at the pump well above current levels.

“The crude run is showing no near-term signs of letting up. All it’ll take is further disruption to supplies (Iran, hurricanes, for example), and crude will make a pass at $80 and continue trekking higher. And if you really believe Iran won’t use its oil supplies as a weapon in the event of war, I’ve got some swampland I can sell you in Florida.

“The worst part – OPEC says there’s nothing more it can do to bring prices back down. Already most of the 11 members of OPEC are pumping at full capacity. And then it doesn’t help that we, or even Israel are close to shoving Iran's nuclear program down its throat. Nigeria is a mess. And Iraqi oil exports aren't likely to return to 2 million barrels a day any time soon.

“But it gets worse. According to the Energy Information Administration, the average price of a gallon of regular will average about $2.62 this summer. It's already up to $2.89 where I pump gas. That translates into an outlay of about $45 a week in cash for gas. If gas stays that high throughout the summer, $45 turns into $900. And high gas prices for a year...that's $2,340. I'm sure you feel the pinch too.

“But does that mean you have to ride your bike to work? Gas prices may not come down anytime soon, but there is a way to turn this situation into some extra profits ­­maybe enough to cover your weekly gas expense simply tagging along with the world’s newest oil sheiks – ethanol producers.

Ethanol is the play to own in today's market

“There are a select few companies that are benefiting significantly from the raging bull market in oil. Ethanol producers, for one, are seeing interest as refiners try to cut out the MTBEs, an additive mixed into gas to cut back on pollution, before the peak summer driving months. Unfortunately, studies have found that MTBE is a carcinogen if it gets to a water source. Because of that fear, states are beginning to ban MTBE and are instead opting for ethanol as an additive replacement. Better yet, demand for the ethanol additive is likely to outpace supply.

“The traditional infrastructure of the oil industry is fraying at the seams. Saudi Arabia has announced that it may not be able to satisfy the West's demand for oil as early as 2015, despite running at full capacity. Iraq hasn't begun to recover to its pre-war output levels, and isn't likely to for some time. And Iran remains a wild card in the geopolitical arena that could drive oil to $80 a barrel or higher as soon as next month.

“And it's not just a Middle Eastern problem. Nigerian rebels have attacked oil platforms and kidnapped foreign workers, cutting the country's oil production by 10% in recent months. The situation is so bad that Goldman Sachs, the world's largest trader of energy derivatives, has predicted that oil could "super-spike" to $105 a barrel!

Brazil about to kiss arab oil goodbye

“In an age of soaring energy costs, unstable oil producers, and geopolitical unrest, Brazil is on the verge of declaring itself "energy independent." That's no small feat when you consider that Brazil is the fifth-largest country in the world. The country has based its fuel needs "almost entirely" on ethanol, which is made in Brazil from sugar cane.

“Brazilians have spent more than 30 years working to kick the oil habit, and while they haven't gone ‘cold turkey’ yet, they already enjoy big savings at the pump. They've slashed an estimated $120 billion in oil costs since it started aggressive research and development of alternative fuels.

Translate that reduction to a U.S.-sized economy, and you've got a savings of almost $2 trillion.
“That's nearly one-fourth of our national debt! In those 30 years, Brazil's gas stations offer pure ethanol, a mix of gasoline and 20% ethanol, or gasohol. And it's widely expected that Brazil will finally achieve its energy independence - something the United States has attempted to do since 1973.

“The ethanol industry in Brazil is so hot that producers are investing about $9 billion in new sugar mills to increase ethanol production. Brazil's road to energy independence had a rocky start. The country was importing about 80% of its oil when The Arab Oil Embargo of 1973 quadrupled the price of crude.

“Suddenly nearly 40% of all foreign-exchange income was going down the oil drain, and the country quickly plunged into recession.

“For Brazil, the crisis was clear: find a replacement for oil or risk national bankruptcy.

“In 1973 Brazil was ruled by a military dictatorship that could coerce its people into using petroleum alternatives before all the bugs were worked out. So General Ernesto Geisel decided to kill two economic problems-rising oil prices and a floundering sugar industry-with one stone.

“Soon much of the country's plentiful sugar cane was being fermented into a new high-octane fuel: ethyl alcohol, better known as ethanol. It was initially used only as an additive to make gasoline supplies last longer. Over time, however, new automobiles were introduced that could run with less and less gasoline, and eventually on 100% ethanol.

“The scheme still wasn't profitable by the time democracy returned to Brazil in 1985. Heavy government subsidies had been necessary to keep ethanol cheaper than gasoline, especially during years of lower oil prices. Still, the groundwork for energy independence was in place, and it's finally starting to pay off.

“In 2003, major automobile manufacturers introduced flexible-fuel or "flex-fuel" cars capable of running on any mixture of gasoline and ethanol...including pure ethanol. A new tax break for driving alcohol-powered cars was introduced the same year.

“Best of all, rising oil costs and more efficient fermentation methods have finally made ethanol cheaper at Brazilian pumps without government subsidies. This year alone ethanol sales are expected to hit nearly 5 billion gallons, eliminating the need for 323,500 barrels of gasoline a day.

“And these pioneering efforts are just the tip of the iceberg. A full-scale energy revolution is about to begin, and investors who get in on the ground floor are going to be sitting on some "sweet" profits.

“But will ethanol really catch on in the United States? The answer may surprise you...it's already here… powering some 4.5 million U.S. vehicles.

“There are currently 4.5 million flex-fuel cars already on U.S. highways, many of them in government service at places like MacDill Air Force base and the Kennedy Space Center. These aren't experimental concept cars or crackerbox-size rice-burners. They're models you already know made by companies like Chrysler, Dodge, Ford, Chevrolet, General Motors, Mercedes and others.

“So why haven't most Americans heard about them? There are only 600 places in the United States where you can get engine fuel that's more than 10% ethanol. And many of those are fleet car fueling stations that aren't open to the public. Compare that with Brazil, where 29,000 of the country's 31,000 stations sell pure ethanol alongside regular gas.

“So it's only a matter of time before the rest of the world catches on to what Brazil already knows about ethanol:

“It's one of the cheapest fuels around-the energy cost to produce ethanol is as low as 8 cents per gallon, significantly lower than gasoline. In 2004 alone, ethanol use cut the U.S. trade deficit by $5.1 billion, eliminating the need to import 143 million barrels of oil.

“What's more, we'll never run out. Ethanol can be fermented from rice hulls, rice straw, sugar cane bagasse, corn fiber, municipal solid waste, switch grass and other stuff we might otherwise throw away. And while petroleum takes hundreds of thousands of years to form, ethanol can be produced in as little as 13 hours.

“And of course, the big one, we don't have to buy it from Middle Eastern fanatics!