Sunday Edition: August 19, 2007
No More Weekend Editions
When I was in high school my English teacher (who bore a striking resemblance to Mr. Kotter from Welcome Back Kotter) had us read the book Iacocca: An Autobiography. For the younger readers out there, Lee Iacocca is a former CEO of Chrysler who is credited with turning around the carmaker’s fortunes in the 1980s after it was on the verge of bankruptcy. As a result, he became one of the most widely-recognized businessmen in the world. One custom that Mr. Iacocca shared in his book that really impressed me was that in spite of all his hard work, he was adamant in setting aside Friday night, Saturday, and Sunday for his family. Only on Sunday night would he crack open the briefcase and get a head start on the coming work week.
In tribute to Mr. Iacocca, instead of posting an occasional “weekend edition,” a “Sunday edition” will be posted on a regular basis from this point onward. Therefore, 6 out of 7 days a week you will now be able to find new material at Boom2Bust.com.
Thar She Blows!
After a slow beginning to the 2007 Atlantic hurricane season, Hurricane Dean is making headlines as it marches through the Caribbean. When I first saw that the projected path of Dean was shifting south, I was glad that the probability of the storm making landfall in the United States, especially in populated areas and/or in the vicinity of energy infrastructure, was diminishing. However, upon looking closely at the U.S. National Hurricane Center’s 3-day projected path, I noticed that the hurricane appeared to be headed in the direction of Mexico’s Bay of Campeche, located off the south-eastern coast of the country in the Gulf of Mexico. The significance of this area is that it accounted for 73% of Mexico’s total crude oil production in 2005.
The Bay of Campeche is the site of Mexico’s Cantarell oil field, one of the largest oil fields in the world, according to the Energy Information Administration (EIA). In 2005, Cantarell oil made up 60% of Mexico’s total production. Also in that year, Mexico was the second largest source of crude imports for the United States.
Energy markets have been volatile since 2004 and 2005 when hurricanes Ivan, Katrina, and Rita pummeled energy infrastructure on the U.S. Gulf Coast. The Gulf of Mexico accounts for roughly 1/3 of domestic U.S. oil production and more than 15% of its natural gas. Also, almost 1/2 of U.S. refining capacity is located in Gulf Coast states and is vulnerable to storm damage.
As I write this, Reuters is reporting that oil prices have tumbled over 1% in early overseas trade as Hurricane Dean appeared unlikely to disrupt key production and refining centers in the U.S. Gulf Coast region. “Oil prices are falling because Hurricane Dean is heading away from the U.S. oil centres. That’s the main factor driving down prices,” said David Moore, a commodities analyst at the Commonwealth Bank of Australia.
However, the U.S. National Hurricane Center is forecasting that while Dean could spare the U.S. Gulf Coast it could strengthen into a rare and potentially catastrophic Category 5 storm and slam into Mexico’s Yucatan Peninsula.
If Dean crosses the Yucatan and enters the southern Gulf of Mexico, it could disrupt oil production in the Gulf of Campeche and cause havoc in the global oil market. Earlier today Reuters reported that Mexico has already started to evacuate 13,360 workers from its Gulf of Mexico oil rigs. According to the state oil company Pemex, the impact of the evacuations on oil production will be known early Monday. A company spokeswoman said, “Production is currently normal, but this (the evacuations) will affect production. We will have an idea (of how much) early on Monday.”
Time’s Up
Back on June 21, I published “Housing Slump Ends In 2 Months.” The post focused on Bank of America’s Chief Executive Officer Kenneth Lewis, who told Bloomberg on June 19 that the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to declare that the housing market will begin to improve in the next month or two, forestalling a recession. And I wrote, “It will be interesting to see just how Mr. Lewis’ housing prediction pans out 2 months from now. I’m circling August 19 on my calendar…”
August 19 is here, and the signs of an improved U.S. real estate market are missing. July new-home sales are predicted to have slowed to a 10-year low when announced later this week. Inventories of unsold homes on the market represent an 8.8-month supply at the June sales rate (last month reported), the highest inventory of homes for sale in 15 years. The slump has been made worse in recent months by turmoil in the mortgage market triggered by rising defaults by subprime borrowers falling behind on payments on adjustable-rate loans. Many of those borrowers are in or heading toward foreclosure, adding to the already large inventory of homes for sale and weighing on home prices. A wave of defaults has already forced banks to tighten mortgage lending standards, which will likely prolong the worst real-estate slump in 16 years. The weak housing market is also expected to weigh on economic growth in the second half of 2007 as demand falls for construction materials, appliances, and home furnishings.
Have a wonderful week,
Christopher E. Hill
Editor
editor@boom2bust.com
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