Million Gallons of Oil a Day Gush into Gulf of Mexico

May 13, 2010 by · Leave a Comment 

Interviews with surviving Deepwater Horizon rig workers show how explosions led to what may be the world’s worst oil spill

By David Randall

2010-05-12T172405Z_806941934_GM1E65D03XV01_RTRMADP_3_OIL-RIG-LEAK

Rep. Edward Markey (D-MA) holds a can of oil collected from the Gulf of Mexico during the Oversight and Investigations Subcommittee of the House Energy and Commerce committee hearing on the Deepwater Horizon Rig Oil Spill on Capitol Hill in Washington May 12, 2010.

REUTERS/Yuri Gripas

An extraordinary account of how the Deepwater Horizon disaster occurred emerged yesterday in leaked interviews with surviving workers from the rig. They said that a methane gas bubble had formed, rocketed to the surface and caused a series of fires and explosions which destroyed the rig and began the gushing of millions of gallons of oil into the Gulf of Mexico, threatening wildlife and coastal livelihoods. Oil-covered birds caught by the outer edges of the 135-mile slick are now being found.

Word also came yesterday that the oil spill may be five times worse than previously thought. Ian MacDonald, a biological oceanographer at Florida State University, said he believed, after studying Nasa data, that about one million gallons a day were leeching into the sea, and that the volume discharged may have already exceeded the 11 million gallons of the 1989 Exxon Valdez disaster, widely regarded as the world’s worst marine pollution incident. Mr MacDonald said there was, as of Friday, possibly as much as 6,178 square miles of oil-covered water in the Gulf.

Meanwhile, at the site of the ill-fated well, a mile beneath the surface, a massive metal chamber had been positioned over the rupture so it could contain and then capture the bulk of the leaking oil. The operation, which uses undersea robots, and has never before been attempted at this depth and pressure. But last night, the formation of ice crystals meant the dome had to be moved away from the leak.

The interviews with rig workers, described to the Associated Press by Robert Bea, a University of California Berkeley engineering professor, recall the chain reaction of events that led to the disaster. They said that on 20 April a group of BP executives were on board the Deepwater Horizon rig celebrating the project’s safety record. Far below, the rig was being converted from an exploration well to a production well.

The workers set and then tested a cement seal at the bottom of the well, reduced the pressure in the drill column and attempted to set a second seal below the sea floor. But a chemical reaction caused by the setting cement created heat and a gas bubble which destroyed the seal.

As the bubble rose up the drill column from the high-pressure environs of the deep to the less pressurised shallows, it intensified and grew, breaking through various safety barriers. “A small bubble becomes a really big bubble,” Professor Bea said. “So the expanding bubble becomes like a cannon shooting the gas into your face.”

Up on the rig, the first thing workers noticed was the sea water in the drill column suddenly shooting back at them, rocketing 240ft in the air. Then, gas surfaced, followed by oil. “What we had learned when I worked as a drill rig labourer was swoosh, boom, run,” he said. “The swoosh is the gas, boom is the explosion and run is what you better be doing.” The gas flooded into an adjoining room with exposed ignition sources, he said. “That’s where the first explosion happened,” said Professor Bea, who worked for Shell Oil in the 1960s during the last big northern Gulf of Mexico oil well blow-out. “The mud room was next to the quarters where the party was. Then there was a series of explosions that subsequently ignited the oil that was coming from below.”

According to one interview transcript, a gas cloud covered the rig, causing giant engines on the drill floor to run too fast and explode. The engines blew off the rig and set “everything on fire”. Another explosion below blew more equipment overboard. The BP executives were injured but nine crew on the rig floor and two engineers died. “The furniture and walls trapped some and broke some bones, but they managed to get in the lifeboats with assistance from others,” said the transcript. The workers’ accounts are likely to be presented in some form to the hearings held by the US Coastguard and Minerals Management Service, which begin next week.

By then, the success of the dome-lowering, if it is resumed, will be known. On Friday, a BP-chartered vessel lowered a 100-ton concrete and steel vault on to the ruptured well in an attempt to stop most of the gushing crude from fouling the sea. “We are essentially taking a four-storey building and lowering it 5,000ft and setting it on the head of a pin,” said BP spokesman Bill Salvin. With the contraption on the seafloor, workers needed at least 12 hours to let it settle and stabilise before the robots could hook up a pipe and hose that will funnel the oil up to a tanker. By today, the box the size of a house could be capturing up to 85 per cent of the oil.

The task became urgent as toxic oil crept deeper into the bays and marshes of the Mississippi Delta. A sheen of oil began arriving on land last week, and crews have been laying booms, spraying chemical dispersants and setting fire to the slick to try to keep it from coming ashore. But now the thicker, stickier goo is drawing closer to Louisiana’s coastal communities.

There are still untold risks and unknowns with the containment box. The approach has never been tried at such depths, where the water pressure is enough to crush a submarine, and any wrong move could damage the leaking pipe and make the problem worse. The seafloor is pitch black and the water murky, though lights on the robots illuminate the area where they are working. If the box works, another one will be dropped on to a second, smaller leak at the bottom of the Gulf. At the same time, crews are drilling sideways into the well in the hope of plugging it up with mud and concrete, and they are working on other ways to cap it.

12-20

Gold’s Bull Market Turns 9 Years Old

March 18, 2010 by · Leave a Comment 

By Mary Anne & Pamela Aden

Gold, silver and the metals group are coming down from their January highs, on the eve of gold’s nine year bull market run. Considering the gold price has had nine consistent yearly gains, and it’s still above $1000 is a feat in itself. Gold’s bull market is solid, a new phase has begun and it’s currently declining in a sharp, yet normal downward correction.

Corrections tend to cause fear. And considering the volatility we’ve seen in recent years, the fear level rises fast. The word bubble is the buzz word, and it’s understandable since we’ve had so many over the last decade. The tech bubble was followed by the housing bubble, the credit bubble, and the debt bubble that continues to grow.

The debt bubble is an ongoing reality; it’s international in scope and it’s the biggest ever. This is hanging over our heads and over the markets, and it isn’t going away, it’s just getting bigger.

GOLD RISES WITH UNCERTAINTY

Debt monsters of the past have tended to end in deflationary depressions, but it’s important to understand that gold can rise in this kind of environment. Remember, gold rises during economic uncertainty. In the early 1930s, for example, during the Great Depression, President Roosevelt raised the price of gold almost 70% from $20.65 to $35 an ounce in a struggle to bring back inflation.

Gold is money. It’s the currency of last resort when monetary times are difficult. So when gold rises in all currencies, as it’s been doing for several years, you know the rise is enduring and superior (see Chart 1). So even though gold has no yield or earnings to measure like the other markets do, it has true value.

The central banks are flooding the markets with their own currencies, and competitive devaluations will continue to grow. Many countries depend on exports for economic survival. This means the best price in the current deflationary environment wins, which is what a cheaper currency does.

This situation originally started with globalization and it’s bullish for gold. The U.S. is still in a delicate situation. It needs a weaker dollar to compete and stimulus measures must continue, which are both ultimately bullish for gold.

This is one important reason why we do not think gold or commodities are in a bubble. We believe they are rising within a mega trend that could last several more years, perhaps a decade. Some say that China is in a bubble and if they are, the demand for commodities will fall. China may be overheated but we don’t think it’s in a bubble. Their growth, even if it’s only a part of what they claim, is solid.

Commodities are in demand and this continues growing with each passing month. China is the engine for demand. It’s the biggest consumer of many raw materials, like aluminum, copper and iron ore. In fact, just last month the number of iron ore and coal ships hired to carry cargo to China jumped 38%.

Rio Tinto, the second largest resource company in the world, forecasts that China’s consumption will be more than double by 2020. That’s only 10 years away.

China and other countries are also buying gold. It currently only makes up about 2% of the reserves in emerging markets. With the average being 10%, there is interest and a need to continue adding gold to their reserves.

Aside from central banks, mutual funds are adding gold to their portfolios as well. This month, the second biggest U.S. public pension, the California State Teachers retirement system, is considering investments in commodities in order to boost returns and provide a hedge against inflation.

Yes, gold is slowly making its way into mainstream investing, in large part thanks to the Exchange Traded Funds, ETFs. They have made it easy to invest in gold and commodities.

BAD NEWS COINCIDES WITH DECLINING MARKET

Debt and how it’s handled will be the driving force in the markets looking out to the years ahead. And interest on the debt, compounded, will be the biggest problem.

This is why there are so many doubts that the economic recovery will be sustained. The commodities, metals and energy fell sharply in recent weeks on concern that rising job losses in the U.S., and mounting debt in Europe, will slow economic growth and, therefore, curb demand.

Interestingly, this type of news becomes more common when the markets are due for a downward correction anyway. The great rises in the metals and crude oil were overextended and they’ve been poised for a downward correction.

With copper being the global economic barometer, the fact that it fell sharply for the first time since the rise began a year ago, provided a good example of bad news hitting an overextended market. A bull market decline is now underway.

Gold is a good example too. Its seven month rise that peaked in November, which we call the C rise, was a bullish one that had reached maturity. By gaining 40% and meeting our original target level, we knew the bulk of the rise was over, for the time being.

GOLD: “D” decline underway

A D decline is now underway. These declines tend to be the sharpest intermediate declines in a bull market, and so far this one is following the pattern. Chart 2 shows that gold’s leading indicator (B) declined clearly below its uptrend and it could now fall to the low area while the gold price itself stays under downward pressure.

The $1000 level is a key support area, which is near the prior C peak in 2008. The 65 week moving average, now at $975 is rising and it’s set to reach the $1000 level in a few months, which will further reinforce the support at $1000. For now, $975 to $1000 is the strong support level for gold.

Interestingly, gold at $975 would be a 20% decline from the November $1218 peak. The worst D decline so far in the current bull market was in 2008 during the financial meltdown. Gold fell almost 30% from March to November. This was an extreme case in an extreme situation. A decline to the $950 level would be similar to the 2006 D decline, which was the second worst decline since 2001.

In other words, the extent of the decline is about half over. As for timing… since 2004, the D declines have been lasting about twice as long compared to the first years of the bull. This means we could see the decline end any time from here on out, if it’s on the shorter end, but more likely it could last until April.

Pressure is likely to stay on gold and the metals in the weeks ahead, which means it’s time to take advantage of weakness by adding or buying new positions. Gold’s major trend remains up, indicating it’s headed higher. But for now, it will temporarily remain under downward pressure by staying below $1110.

12-12

It’s Not Just Me

April 24, 2006 by · Leave a Comment 

It’s Not Just Me
By Bob Wood
Any Bear will tell you it’s tough making a living on the short side of the markets, risking your hard-earned capital on the idea that markets are heading lower. And it’s just as hard for the Bear writing weekly columns about the markets’ shaky footing. Since, in both cases, “wrong” can be costly, never assume that a Bear takes his position just to be contrarian or different.
You can be sure of one thing about the Bears whose work I follow. Neither are they pessimistic or negative by nature. But to me, it seems only the Bears are doing any real analytical work, though few people prefer listening to or believing Bears over Bulls, so strong cases must be made for their side.
Several better-known Bears tend to agree about the near- and long-term future of stock and bond markets and now add information relating to real estate. To me, their analyses are much more compelling than those offered by TV’s Bulls. And to assure you that not only the guy writing on page 6 of TMO is bearish, I’m sharing thoughts from other financial writers, whose thinking I respect and follow.
On the stock market, I can hit two birds with one rock by citing a quote from one guy whom I wouldn’t have known except for the other. In his most recent work, the Mogambo Guru quotes Robert Prechter from the “Elliot Wave.”
And in talking about Newtonian physics and “big moves,” Robert Prechter, of Elliott Wave fame, says that the recent huge (>40%) losses in Middle-Eastern stock markets is just prolog. “This year the U.S. stock market is shaping up to drop at least as fast. Generally when stocks levitate into a market cycle, they make up for it by crashing.
In 1929, stocks rose for 2.5 years into the 2.7-year cycle. Then they lost 50 percent of their value in 2 months. In 1987, stocks rose for 3.1 years into the 3.3-year cycle. Then they lost 40 percent of their value in 7 weeks.” If you think you got the guts to weather a 40% drop in your portfolio, maybe you ought to re-think that optimistic assessment when he goes on to say “But given that the bear market is of Grand Supercycle degree, the largest in nearly 300 years, the coming drop should dwarf both of those crashes.”
And not only these two voice their concerns about today’s stock market. Richard Russell also chimed in this past week.
“But with the massive amount of debt built into the US economy, I don’t see how the Fed could tolerate a path of contracting liquidity—it would be too dangerous. The more probable path would be the Fed raising rates too high and setting off trouble in the housing market— remember, the effects of rate changes don’t usually appear until six months to even a year after the last rate change.
In the meantime, stock market action is erratic and suspect. While the Dow holds and even creeps higher, the majority of stocks are failing to follow. How about this surprising statistic—only 50% of the stocks in the S&P 500 are now holding above their 50-day exponential moving average (statistics from the great DecisionPoint site). In other words, we’re seeing persistent internal deterioration in the stock market, despite the better performance of the Dow.
What are the markets waiting for or looking at? One thing they’re looking at is the oil situation, and they’re wondering if there’s any way that it can be resolved—Nigeria, Iraq, Venezuela, Iran? Has the US lost control of the world’s oil markets? Well, there’s always Canada.
In response to all the uncertainty, the stock market seems to have adopted a “what, me worry?” attitude. Here we have an “Iran problem,” an expensive mess in Iraq, huge negative trade balances, China taking away our manufacturing base, rising interest rates, record high oil prices—and lots, lots more. And does Wall Street worry? Not at all. The only thing the boys on Wall Street are worried about is the size of next year’s bonus.
Jim Stack of Investech Research now allocates 39% of his model portfolio to cash. While his reading of technical tools like charts leads him to think that bull market trends will continue, his concerns center on the real estate market. Of particular concern: more than $2 trillion in mortgages are the adjustable rate variety. And with rates now rising, those debts will see rates “that will be reset at much higher levels in 2006-07.’’
Since the middle class seems to save little, the pain could be most intense there. And speaking of real estate, Bill Fleckenstein noticed this Wall Street Journal item.
“It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won’t get hurt). They will bear the brunt of the pain, because in many cases, they loaned the entire purchase price. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market.
In turn, that will accelerate the collapse in house prices somewhere along the way.
The story closes with a description of how slow the market has recently become in Florida, demonstrated by an email sent last week by real-estate broker Mike Morgan read as follows: “We went three days this week with not a single showing.
That’s incredible. I have 35 listings. We usually get 2-6 showings a day. . . . I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their ‘life savings’ if they sell the homes in today’s market.”
Ladies and gentlemen, that is going to happen to a lot of people around the country.
And, after they have lost their life savings, the financial institutions that were the engine behind this folly will take their own hit. Easy Al tried to bail out one bubble with another bubble. While it bought some time, it will end in far-worse pain.’’
But the overall economy looks pretty good, doesn’t it? How many times have you heard that the economy is ‘’strong and getting stronger’’ and unemployment and inflation rates are nearly at record lows? But here’s another problem: whom do you believe when smart arguments come from both sides of an economics issue? We’ve all seen glorious statistics issued by government agencies and touted by those making fiscal policy!
I tend to listen to people who work for me—those whom I pay for access to their work, including some cited in this article. I don’t see much conflict in their thinking. One such source, Kurt Richebacher, notes in his latest letter how government statistics have changed over the past 40 years.
“We have pursued these and other changes in the U.S. statistics for years with great misgivings. There has been an unusual, concerted drive to produce better looking statistics. Obviously, these contributions have been decisive in creating the perception of the U.S. economy’s superior performance. The particular importance of the inflation rate arises from the fact that it has a large effect on real GDP and productivity growth, two aggregates of highest economic and political assessment’’.
So, if you understate inflation enough, the economy looks like it’s growing smartly when it is actually in recession—the thinking of some right now. John Williams of “Shadowstats.com” shows how using methodology of the 1980s to calculate today’s rate of inflation produces a result of 6.6%, while using a method from the 1970s yields a 7.4% inflation rate. And that would take GDP growth to about a negative 4%.
Speaking of government accountability and the veracity of its reports, Williams offers more interesting items this week. It seems that some have misgivings about reporting our country’s financial position, such as material weaknesses and “problems with fundamental record keeping and financial reporting, incomplete documentation and weak internal control.’’
He adds that auditors will not apply their signatures to attest accuracy of the nation’s financial accounting, with three reasons cited: “serious financial management problems at the Dept. of Defense, the federal government’s inability to account for billions of dollars of transactions between federal government entities, and the federal government’s ineffective process for preparing the consolidated financial statements.’’
Comforting? Here’s more. Deeper in his report is the writer’s opinion of the National Debt, “only $7 trillion,’’ at the time, which does not account for the federal government’s true liability total. Left out are items for projected Social Security and Medicare benefits at about four times that amount. And “the new prescription drug benefit, which is one of the largest unfunded commitments ever undertaken by the federal government, will serve to increase this financial and fiscal challenge.”
It seems the President has pushed through his prescription drug plan with no apparent thought about how to pay for it. This information comes from David Walker, Comptroller General of the United States, who should know! And since we borrow to pay our deficits — and more every year to pay interest costs on that debt, rapid money printing as seen during the Greenspan era seems like the easiest thing for government leaders to do. And so they continue the printing.
Williams concludes that “risks of the current circumstance evolving into a hyperinflationary depression remain extraordinarily high. An unfolding inflationary recession is the worst of all worlds for financial markets. Particularly hard hit will be the U.S. dollar, with downside implications for both equity and bond prices.’’ But the story does get better. He adds that “when the system re-stabilizes, post-crisis, there will be exceptional investment opportunities for those who have been able to preserve their wealth, capital and liquidity.’’ And Russell agrees.
So what do we do about this now? If you’ve been reading this column regularly, you’ve heard it all before. In his latest “Gloom, Boom and Doom Report” (wish I’d thought of that!), Marc Faber says, “In my opinion, the dollar will depreciate mostly against gold. In the long run, what you will see is the standard of living in America decline very significantly compared to the standard of living in Asia.
And the stock market capitalization of the U.S., which is now 52% of the world’s stock market capitalization, which will decline to somewhere between 20 and 30% and the Asian stock market capitalization will rise to between 20% and 30%, possibly 50% of the world’’.
And you thought I was gloomy, eh? To me, these sources make perfect sense. Remember, it is hard being the Bear when investors would much rather be hopeful. But there is hope! In economics, we always find winners and losers, just as in the markets. The outlook for gold, energy and Asian markets offer hope for positive returns. And of course, hedging with bear market mutual funds makes any bear market a lot less worrisome.
Have a great week…I mean it!
Bob