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Jim Flaherty delivered the 2012 federal budget on Thursday, CBC’s Terry Milewski reports

Finance Minister Jim Flaherty delivers the federal budget in the House of Commons

By MoneyMorning.com.au

For years, the United States has feared an energy crisis.

That one day the U.S. would have to import nearly all its oil and gas from overseas.

If there was a disruption to the supply lines, it would lead to rising fuel prices and severe shortages. That would mean higher costs for businesses. And higher prices for consumers.

All of which could push the world’s biggest economy into recession. And cause mass civil unrest.

It would be the 1970s “oil shock” all over again. But this time… it would be much worse…

Energy Crisis Over?

But, despite those fears, the U.S. energy crisis never really happened.

Why?

Well, it may seem counter-intuitive, but it’s thanks to $100 oil.

That’s not something you’ll read anywhere in the mainstream press. But it’s true.

When oil prices were low, it was too expensive for explorers and producers to reach hard-to-get oil reserves. And the harder it is to get, the tighter the supply. And the more the West had to rely on the Middle East.

That was just fine for the Middle East oil cartel. It had plenty of easy-to-get oil.

And when oil prices soared from 2001 onwards, it seemed as though it would provide riches to the Middle East, while dooming the West (especially America) to economic depression.

In fact, some have argued the crash in 2008 was partly due to high energy costs. That may be true.

But sometimes it’s hard to look past the short term and focus on the long term. Short term, a high oil price was great for Saudi Arabia, Iran and the rest of OPEC. But it wasn’t great for the U.S. and the West.

But in the long term, the opposite will be true.

In fact, we believe the high oil price of the past 10 years has actually secured America’s energy future. And soon, it could do the same for the rest of the Western world too…

The Energy Future for Investors

You see, while high oil prices have caused short-term pain, long term it means hard-to-get energy reserves became viable.

This is where entrepreneurial and risk-hungry energy companies have started to exploit the high oil price.

In the U.S., this has mostly happened with the exploration of shale oil and shale gas reserves. 20 or 30 years ago, these resources were too expensive to consider.

That’s changed. To the extent that according to global energy giant, BP, the U.S. is set to be energy self-sufficient by 2030. And soon after it will become a net energy exporter.

That’s an amazing shift from where the U.S. was just a few years ago.

And so now, the race is on to sideline Middle Eastern influence in energy markets.

You see, while a high oil price is good news for big producers in the Middle East, it’s also bad news. Simply because a high oil price makes other projects viable.

And that means more price and supply competition. It explains why Saudi Arabian oil minister, Ali al-Naimi is so keen to make sure the market still knows who’s in charge.

As Bloomberg News reports:

“Saudi Arabia said it could potentially raise output capacity to 15 million barrels a day, from 12.5 million barrels a day, using new oil fields if needed.”

That’s all talk.

Saudi Arabia doesn’t really want to knock down the oil price. It just wants to make investors, explorers and producers think it can knock down the price.

Because while lower oil prices are actually better for the Middle East in the long term (because it makes competing oil fields less viable), in the short term, Middle East dictators like high oil prices because they can buy more trinkets (football teams, London and New York property, and so on).

And because they’re afraid of what could happen if prices fall and they can no longer afford the handouts they’ve promised their oppressed citizens.

Under-Explored East Africa

The effect is that explorers are pushing the boundaries of the exploration frontier. For years, when oil was just USD$20 per barrel, certain areas of the world were no-go zones. They were politically unstable…geologically inaccessible… or just plain not worth the risk.

But with oil at USD$100 per barrel, the reward has started to offset the risk. Of course, it’s still risky. Very risky.

But the risk is now worth taking. Norwegian oil company, Statoil is exploring in an almost untouched area – the east coast of Africa. To highlight just how risky it is, Statoil has hired armed security guards to patrol its offshore assets to protect them from pirate attack!

But even machine-gun toting pirates can’t keep the explorers away.

And why would they? The east African coastline is almost completely unexplored when it comes to oil and gas.

That’s highlighted by these amazing numbers from U.K-based explorer and producer, Afren plc…

For every 70 wells drilled in North, West and Central Africa, only one well has been drilled in East Africa.

Oil company, Africa Oil, makes a similar comparison. This time comparing the triangle of Kenya, Somalia and Ethiopia with the North Sea and the Suez Basin:

Fewer than 200 wells drilled, compared to 7,706 for the North Sea and Suez Basin. That’s just 2.5% the number of the wells drilled, in an area 10-times larger!

Despite the risks (including from pirates), exploring this untouched frontier is already starting to pay off. As the Financial Times recently reported:

“Statoil set the oil industry abuzz late last month when it announced it had found large volumes of natural gas off the coast of Tanzania, confirming east Africa’s reputation as one of the energy world’s most promising new frontiers.”

The Biggest Energy Shake-Up in 20 Years

The idea of frontier energy plays (whether it’s a geographical or technological frontier) is something we’ve focused on in Australian Small-Cap Investigator.

The idea that explorers and producers are doing things and going places that could shake up the entire world energy market.

This is attractive, because as a speculative investor, you want to be at the turning point of change. Because if you can identify a change in direction early – or as it happens – that’s where you can potentially make your biggest returns.

And as we see it, one of the biggest changes in direction is happening in energy markets right now. If you’re quick, there’s still time to get involved.

How?

We’re preparing a special report on the subject. So look out for it over the next couple of weeks.

Cheers.

Kris.

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By MoneyMorning.com.au

Political risk is being blamed for driving up oil prices. The looming threat of Iran, the constant risk of further money-printing by central banks, and concerns over unrest in Saudi Arabia are three that we’ve covered.

However, it’s worth pointing out one political risk that – in the longer run – could end up making crude oil cheaper. We’re talking about Venezuela.

Hugo Chavez is sicker than previously thought. This could force him to stand down – creating a power vacuum. And even if he continues in office, he could lose the election in October.

Chances are, any change in government could result in a major boost for oil production in Venezuela. It might even help to curb the power of both Iran and Saudi Arabia. Here’s why.

A Tale of Two Economies

The experience of Brazil shows how developing countries can take advantage of a commodity boom. In the last decade, Brazil has paid down its debts, becoming a net creditor. It has also invested in roads and ports.

This has led to a virtuous circle of increased economic growth, rising living standards and increased foreign investment. Adjusted for prices, Brazil is now the ninth largest economy in the world. Towards the end of last year, credit rating agency Standard & Poor’s upgraded its debt.

Venezuela has done exactly the opposite. Since Chavez came to power in 1999, he has wasted oil revenue buying votes and supporting countries such as Syria and Cuba. His decision to take 300 private companies into public ownership – many without compensation – has scared investors away.

The oil industry has been hit hard by Chavez’s policies. Not only did he reverse plans to let the private sector have a greater role, he raised production taxes and fired a large number of oil workers for political reasons – starving the state oil company of talent.

The ‘Chavez effect’ on oil production is easy to demonstrate: in 1998, when the price of crude oil hit a low of under $11 a barrel, Venezuela produced 3,167,000 barrels of crude oil a day. Twelve years later, despite record prices, output was only 2,090,000 barrels a day – nearly a third lower.

Could Chavez Step Down?

Despite these economic failures, Chavez was re-elected in 2000 and 2006. He runs what some call a ‘soft dictatorship’. Although the law allows free speech and free elections, these rights do not exist in practice.

Those who speak out against the regime may lose their jobs or have their firms taken over by the state. Critical papers and TV stations have been banned. Voters also face intimidation while the opposition has been heavily divided. This has made it hard to effectively challenge Chavez.

However, these things may be about to change. The opposition has finally united behind a single candidate, Henrique Capriles. Despite high levels of official pressure, huge numbers of people turned out to vote in the opposition primary.

More importantly, Chavez may not make it to the election. Last year doctors found that he had cancer. Ray Walser of the Heritage Institute tips henchmen Diosdado Cabello, Rangel Silva and Adan Chavez – Hugo’s brother – as possible replacements. But Andrew Cawthone of Reuters believes that “none of the figures around him has his charisma, political and rhetorical skills.” Overall, says Walser, “if Chavez dies, I think the chances are good for a reformist. Even if he does not I think we could see the Bolivarian movement self-destruct.”

Of course, even if Chavez dies or loses the election there is a chance that his cronies could still cling to power. In 2002, a popular uprising forced him out of office, only to see pro-Chavez forces remove his successor from power. Since then Chavez has put his supporters in key military positions. He has also devolved power to political militias, and worked with Russia, China and even Iran to arm himself to the teeth. A civil war could stop all output – increasing the price of crude.

It’s All About the Long Run

Even if Chavez goes in October, there will be little short-term impact on oil prices. When he leaves office, the state firm PDVSA is also likely to be sued over the seizure of assets in 2008 and 2009, delaying any investment. Foreign firms are likely to hold back until the political situation has calmed down.

However, the ability of a free Venezuela to lower oil prices in the long run is huge. The US Energy Information Agency (EIA) thinks that Venezuela has the second largest levels of proven reserves in the world. Oil cartel Opec even claims that it could have more crude oil than Saudi Arabia.

A committed private sector player could even find the huge amount of sea oil that is not currently viable. This would bring the total amount up to 513 billion barrels.

Clearly, this isn’t a story that will have an instant impact on investors. But in the long run, Venezuela could be a ‘game-changer’ for oil prices. We’ll be keeping a close eye on it and watching for potential opportunities.

Matthew Partridge

Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

A Better Inflation Bet Than Gold?

2012-03-23 – Kris Sayce

3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry

2012-03-22 – Michael Robinson

How to Invest in the Fastest-Growing Energy Business of the 21st Century

2012-03-21 – Aaron Tyrrell

Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

For editorial enquiries and feedback, email [email protected]

How a ‘Venezuelan Spring’ Could Push Down Oil Prices

By MoneyMorning.com.au

It’s not often that I feel sympathy for a politician.

But you have to feel for Spain’s prime minister, Mariano Rajoy. Three months into his government, and he’s facing a general strike from the unions on the one hand, and a potential buyers’ strike from investors on the other.

The unions are striking because they’re fed up with economic reform that might reduce their power. Investors are threatening to stop buying Spanish government debt because they want even more reform.

What’s a prime minister to do? And more importantly, what does his dilemma mean for you?

Spain – The Weakest Link in the Eurozone

Spain’s economy – more so than Italy’s – has always been the major fault-line in the eurozone.

Sure, Greece causes a lot of noise and commotion. There was always the chance that Greece would throw a hissy fit and pull out of the euro unilaterally. Better-behaved small countries like Portugal and Ireland barely warrant a mention in the papers these days.

Even so, people always knew that in terms of size, Greece by itself didn’t matter. It was the knock-on impact that everyone worried about. The big fear was always that the market would say to itself, “If Greece can go bust, maybe it will be someone who matters next time.”

So the point of all the bail-out packages wasn’t so much to save the smaller countries. It was to prevent fears about the small countries from spreading to the “too big to fail” ones.

For a short while, it seemed as if the European Central Bank’s LTRO (Long-Term Refinancing Operation) had done the job on that score. Now it’s starting to look as though that was over-optimistic.

Investors are fretting about Spain again. The government’s cost of borrowing over ten years has risen by around 0.5 percentage points since the start of this month.

The trouble is, Spain missed its 2011 budget deficit target (in other words, it ended up overspending by even more than expected). As a result, it set itself a softer target for 2012.

Markets don’t like to see this sort of target slippage. For now, they don’t care so much when it’s the US or the UK. Those countries have their own currencies and central banks who are prepared to print as much money as it takes to pay off their creditors.

Europe isn’t prepared to do that (although it might be getting closer to doing so). And as private investors in Greek debt have discovered to their cost, there’s no guarantee that a eurozone country with problems will make good on its debts. So naturally, investors are warier of European government debt than perhaps they once were.

Spain’s Big Economic Problems
– Debt and Unemployment

The Spanish economy’s big problem is private sector debt, which might end up on the government’s balance sheet. Spain had a massive property bubble. The fall-out from that bubble continues. Prices haven’t been allowed to fall as far as they really need to. And that means no one can be sure just how much bad debt is still sitting on the banks’ books.

When banks don’t know just how bad a state their balance sheets are in, they stop lending. That makes it even harder to dig an economy out of trouble.

Spain’s economy also has the usual European problem of overly restrictive labour laws that discourage hiring. This is something the government is trying to tackle. The general strike today is partly about an overhaul of labour rules. A new bill passed in February makes it easier to cut wages, reduces the power of the unions, and could cut the cost of firing staff.

Given that unemployment is standing at 23%, and an incredible 50% among young people, you have to wonder who’s left to go on strike. As one Spanish political communications professor tells Bloomberg, the unions “have a lot at stake as Spanish society is very much questioning their role… [They] don’t represent the unemployed.”

This is one of the rarely-appreciated benefits of having a ‘hard currency’ like the euro. When it’s harder to take the easy way out (allowing your currency to weaken) then sometimes you are forced to take genuinely tough measures to change the way your economy works.

Of course, the trouble is that it takes a strong government to cope with the resulting social upheaval. And if your economy is in such a deep hole that people don’t get to see the benefits of reforms, only the pain, then it’s even harder to push reform through.

So What Happens Next for Spain?

Spain’s economy can’t be allowed to go bust. And it won’t be. We’re going to see the usual back and forth about bail-out funds and arguing between the Germans and the rest of Europe. But the most likely outcome still seems to be some form of European quantitative easing. The ECB has already taken a pretty big step in that direction with the LTRO.

But what does all this mean? The short answer is that the future for Europe holds continued loose monetary policy, and a banking system in many countries that’s largely reluctant to lend.

John Stepek

Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

A Better Inflation Bet Than Gold?

2012-03-23 – Kris Sayce

3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry

2012-03-22 – Michael Robinson

How to Invest in the Fastest-Growing Energy Business of the 21st Century

2012-03-21 – Aaron Tyrrell

Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

For editorial enquiries and feedback, email [email protected]

Why Spain’s Economy is the Next Big Problem for the Eurozone

With Apple’s (NASDAQ:AAPL) much anticipated smart TV rumored to hit stores this year, the tech company’s gadget manufacturer is betting on its success.Hon Hai Precision Industry took around a 10 percent stake of 100-year-old Japanese firm Sharp, a maker of advanced televisions. Hon Hai’s own billionaire founder Terry Gou even put is own money in the deal that could position the Taiwan firm to push for orders to make the Apple TV, potentially taking the business from other TV manufacturers such as LG Display. This is a gamble on Hon Hai’s part though. This is because there is no guarantee the company will get Apple’s orders.Apple’s new TV, being called the iTV by many, is rumored to be 42-inches and may have voice control via the Siri technology. However, all of this is still speculation and we won’t know what the TV will have until its unveiling most likely sometime later this year.

Tom Jenkins, author of a key report on innovation, responds to the federal budget’s focus on spurring business innovation and development

This is what’s in the news for Wednesday March 28, 2012. The Wall Street Journal reports Goldman Sachs Group (NYSE:GS) agreed to change its board structure in order to persuade a union pension fund to drop a shareholder proposal that could have cost CEO Blankfein his job as chairman. The Wall Street Journal also reports the Airlines for America trade group representing the largest U.S. carriers called on the Obama administration to take action against the EU in a bid to end the bloc’s carbon trading market. Reuters reports Facebook CEO Mark Zuckerberg wants about $5B from Wall Street investors, but they won’t see much of him, and it could become an issue because of the control he exerts over Facebook via special shares. Finally, Bloomberg reports Transcoean (NYSE:RIG), the world’s biggest owner of offshore rigs, stands to benefit the most this year from a surge in demand as rental rates for ultra-deep-water rigs should climb 28% to a record $714,000.

Bargain hunters are wise to pay careful attention to insider buying, because although there are many various reasons for an insider to sell a stock, presumably the only reason they would use their hard-earned dollars to make a purchase, is that they expect to make money. Today we look at two noteworthy recent insider buys.

By JW Jones – www.OptionsTradingSignals.com

Welcome back to the world of options. My reality exists in three dimensions and far more combinations of potential positions than does the one-dimensional world of the stock trader.

The view from my turret is ruled by the three primal forces of options — time to expiration, price of the underlying, and implied volatility. Consider for a moment the fact that each of these factors can independently impact a given option.

Multiply this by several available expiration dates and strike prices; add in the fact that individual option positions can include a variety of short and long positions at different strikes and expirations, and the potential combinations that make up an option position in a single underlying can approach a very large number.

For those traders first beginning to navigate this unfamiliar world, I think it is important to understand trade selection is manageable. There are certain families of trades that are unified by similar characteristics.

It is important to become familiar with the various trade constructions available to the knowledgeable options trader. Grouping the potential trades into related groups dramatically reduces the number of trade setups you must consider before entering a new trade.

If you are familiar with the various trade constructions, it makes discussion of a specific family member whom we may consider for employment in a trade far easier to understand.

Description of the family characteristics will take a little time, but it forms the framework on which we can hang the individual trades we will discuss in future postings.

I want readers to begin to become familiar with these patterns because it is these families of multi-legged option trades that we will return to on a regular basis to consistently perform for us.

Let me begin discussion of the various families by pointing out the redheaded stepchild of the trade constructions available. This family member, the single-legged position of being long either a put or call, is not completely without utility.

The reason for its seldom use is that for the knowledgeable options trader, this position rarely represents the best risk / reward structure given the variety of available trade constructions.

One basic and important family is that of the vertical spread. We will return several times to this family not only because of its utility in its basic form, but also because these spreads form the basic building blocks for more advanced spreads such as butterflies and iron condors.

The basic vertical spread is constructed by both buying and selling an option of the same type, either puts or calls, within the same expiration series. This is a directional spread with one breakeven point that reaches maximum profitability at expiration or when the spread has moved deep in-the-money.

It has a defined maximum profit and defined maximum loss when established. The spread is used to trade directionally in a capital efficient manner and largely neutralizes impacts of changes in implied volatility.

There are four individual vertical spread family members — the call debit spread, the call credit spread, the put debit spread, and the put credit spread. Each has its distinct and defining construction pattern. These are not the only names by which these spreads are known. Trying to keep independent option traders confined to a single set of terminologies is like trying to herd cats — it is not going to happen.

For this reason, the additional confusing and duplicative names for these spreads include bull call spread, bear call spread, bear put spread, and bull put spread. To make matters even more confusing, traders often refer to “buying a call spread” or “selling a put spread.” This multiplicity of names for the same trade structure is mightily confusing to those getting used to my world.

I am a visual learner and find that a picture is worth well more than the often cited thousand words. When I review in my mind the various option families available to use in trade construction, I think of the characteristic family portrait of each as displayed in the profit and loss, or P&L, curve.

Attached below is the first in our series of family portraits, but remember within this framework is abundant room for individual variation.

This particular example is a call debit spread, a bullish position in Apple (AAPL).

We will see trades displayed in this format with many variations as we meet the different families. The solid red line represents the profit or loss at expiration. The dotted line represents the P&L curve today and the dashed line the curve halfway to options expiration from today.

In future articles I will discuss other trade constructions that are regularly employed by experienced option traders. Until then, be sure to manage your risk accordingly.

In 2012 subscribers of my options trading newsletter have won 12 out of 13 trades. That’s a 92% win rate,  pocketing serious gains with the trades focusing only on low risk credit spread options strategies.

If you are looking for a simple one trade per week trading style then be sure to join– www.OptionsTradingSignals.com

Jw Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.