Mentatt

2008-02-17T06:54:00.000-08:00

I have moved my blog to:

AmericanEnergyCrisis.blogspot.com

Greg T. Jeffers

2008-02-16T09:53:00.000-08:00

The "safe" municipal bond market might not be so "safe".

I wrote this post 1 1/2 years ago.

Considering the melt down in the municipal auction markets last week, this might

be the beginning of something big. Or maybe not. There are 2 sides to every trade. A Winner, and a Loser!

The debt auction market in the U.S. is the largest Ponzi scheme in the history of the art. As long as new buyers come along to buy out the (previous suckers) maturing bonds, everything goes swimmingly. When those buyers don't show up... well, just check out what happened in the muni auction market last week. Buyers were not willing to commit capital to bail out the previous dimwits.

("Dimwit" is how I would define anybody willing to hold U.S. dollar denominated debt for the paltry interest now received for holding what is essentially toilet paper. That's just me.)

This might not be a big blow up, but that remains to be seen. In this environment, it pays to view all credit instruments as toxic waste until proven otherwise.

Yours for better world,

Mentatt (at) yahoo (d0t) com

2008-02-15T19:19:00.000-08:00

Corn

The following is a guest post from Dr. Saif K. Lalani

(Disclaimer: I am precluded from making any specific recommendations in the securities markets. Dr. Lalani is not, and I have left his commentary intact. The following does not constitute investment advice in any manner, shape, or form. And yes, I own corn futures personally and in the fund.)

What can 5 "Bernanke Bucks" do for you?

Corn is the largest US crop in terms of dollar value. It is one of the things we can proudly say that we export. It also happens to be one of the 4 commodities that is set to go ballistic in 2008/2009.
Why? Read on.

Our policy makers have figured out that fighting the housing crisis and coming up with a productive energy policy was not a challenge worthy enough. How indeed could they make things worse? After all they are paid for a reason right? After months of contemplating they came up with the answer. If they could make food extremely expensive (along with everything else), then they would have a real challenge worthy of their mighty incompetence. And so they did.

The US energy bill has mandated huge amounts of bio-fuels to be part of our energy mix over the next 15 years. Ethanol distilleries are being set-up to absorb more than 40% of the US corn crop this year. If that does not scare you then perhaps this will. The US is by far the largest corn producer and exporter in the world. The US is often called the Saudi Arabia of coal. Well, in oil terms the US is the equivalent of - Saudi Arabia plus Russia plus Norway plus Iran and Iraq - for corn. The US single handedly exported 70% of the world's corn in 2006. My friends, that 70% is about to disappear. There is no nation on this planet who can compensate.

According to University of Iowa, the breakeven prices for Corn planted after Soybeans is about $4.00 a bushel. For Corn planted after Corn it is about $4.35. For Soybeans it is about $8.00 a bushel.

Considering the average yield of about 150 bushels an acre for corn and 50 bushels per acre for Soybeans you have earnings per acre of about:

$150 for Corn planted after Soybeans
$100 for Corn planted after Corn
$250 for Soybeans.
At current prices.

Now in 2007 farmers planted the largest corn crop ever. So most of the corn farmers are considering planting falls in the Corn after Corn category. Sure, you can switch acres around but there aren't enough acres around unless we develop three dimensional planting. Now if you were a farmer and had planted the largest corn crop ever and had to choose based on those margins what would you choose?
And remember there is also wheat, which is far more profitable than either of these choices competing for acreage. It is also highly likely that University of Iowa's calculations for breakeven costs may be on the conservative side. As Natural Gas prices break out to the upside we may see even higher prices for Fertilizer (required by corn, especially if it is following a previous corn crop).

So here you have a commodity where you can buy the long-dated futures for $5.00 a bushel where the downside seems to be extremely limited in the medium term. In addition you have demand in China growing at 15% plus a year. Sure demand growth may slow but 5% of a large number is still significant, especially as we have no capacity to increase supplies.

Corn is also an important commodity for other reasons. It is an easy way to hedge against a dollar collapse as well. Being an international commodity, corn prices will shoot up during a dollar crisis. Corn also enjoys strong political protection as U.S. Senators from the Midwest have a vested interest in keeping farmers happy. Finally, Corn has something that gold and silver do not. Unlike the latter, corn can actually be eaten. It is hence an excellent way of hedging your rising food costs for life. Do not be dettered by the fact thqt corn has risen over 100% since 2006. Corn at $5.00 is the equivalent of gold at $500 an ounce. Corn is still 70% below its inflation adjusted all time peak of $15 a bushel. And that is using the government inflation figures, which frankly are about as useful as Jim Crammer's rants. Using real inflation figures from Shawdowstats.com corn would have to climb over $40 to exceed its previous high. With every arable piece of land being used and India and China consuming increasing amount of poultry (which requires corn feed), a perfect storm is brewing for agricultural commodities in general and corn in particular." - Dr. Saif K. Lalani

2008-02-15T13:57:00.000-08:00

North America Oil Import Crisis 101

As my regular readers know, I believe that a structural supply/demand imbalance will have a significant impact on the prices of crude oil, natural gas, agricultural commodities, precious metals, the U.S. Dollar, and other commodities linked to the energy sector over the next several years.

The U.S. imports nearly 60% of the oil and a significant portion of the natural gas it consumes, and imports 25% - 30% (Source U.S. Department of Energy) of the world’s exported oil with less than 4.6 % (Source U.S. CIA Factbook) of the world’s population. I firmly believe that the top oil exporting nations will have less oil available to export as a result of higher domestic consumption and flat or declining production. With less imported oil available to the U.S. the supply/demand balance will be brought into equilibrium by significantly higher prices for crude oil. In the case of North American Natural Gas, the future supply picture is quite bleak, and it appears that North American production of natural gas has peaked. There is little possibility that U.S. imports of liquefied natural gas (“LNG”) will be of sufficient volume during the next 10 years to overcome the deficit in North American production.

Herewith are the numbers to support my contention:

The top 10 oil importing nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of barrels per day ("bpd") imports:

Rank Country Net Imports

1. United States 12,220,000
2. Japan 5,097,000
3. China 3,438,000
4. Germany 2,483,000
5. South Korea 2,150,000
6. France 1,893,000
7. India 1,687,000
8. Italy 1,558,000
9. Spain 1,555,000
10. Taiwan 942,000

Demand from China, India, and the balance of Asia, as well as the oil rich Middle East will continue to draw imports from the industrialized nations, in the Investment Managers opinion.

The top 10 oil exporting nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of exports:

Rank Country Net Exports 2006 (Barrels of oil per day)

1. Saudi Arabia 8,651,000
2. Russia 6,565,000
3. Norway 2,542,000
4. Iran 2,542,000
5. U.A.E 2,515,000
6. Venezuela 2,203,000
7. Kuwait 2,150,000
8. Nigeria 2,146,000
9. Algeria 1,847,000
10. Mexico 1,676,000

(All data from the U.S. Department of Energy, Energy Information Administration (“EIA”)

The oil importing nations can only import oil that the oil exporting nations export, and the EIA’s export data appears to support my (and many other folks) contention that rising domestic consumption coupled with declining production in many of the exporting nations will lead to declining aggregate oil exports – and declining oil availability for the importing nations.

One Jeffrey Brown, an independent geologist and contributor to theoildrum.com, gave the issue a brand name - "The Export Land Model".

Domestic consumption in 4 of the 5 top exporters (the exception being low population Norway, where production of Crude & Condensate (“C & C”) is in steep decline and exports have declined from 3,145,000 barrels per day in 2000 to 2,542,000 in 2006) is growing vigorously, while production appears to be plateauing or in outright decline, leaving less and less available for export, in my humble opinion. Venezuela and Mexico’s production are in steep decline, and Mexico may become a net oil importer within 5 to 10 years. The aggregate world production of C & C has declined from a peak of 74,298,000 barrels per day (“bpd”) in May 2005 to 72,512,000 bpd in August 2007, a decline of 1,756,000 bpd from peak month to most recent month. The peak year for world oil production was 2005 with world C & C production averaging 73,807,000. For 2007, average daily world C & C production is down to (click 1.1d) 973,093,000 barrels per day. Since 1950, and with the exception of the 1970’s oil embargos, world C & C supply has steadily grown by between 2% and 10% percent per year. Over the past 2 years, it has fallen by just over 2% from the peak month of May 2005. During this time prices have risen dramatically and supply has been unable to maintain its historic growth.

Demand appears to be inelastic, as since 1999, C & C prices have risen nearly 900%
(from trough to peak) and demand has increased during this time by approximately 15%.

This is not to imply that the world is “running out” of oil in the near term, but that the world will be unable to increase the amount of C & C it produces for a time, which will then be followed by a period in which C & C production will go into terminal decline. An environment of constrained oil and natural gas supply will benefit certain commodities, industries, and companies while placing other industries and companies in an extremely challenging environment. Understanding this issue might be the difference between losing your life savings to either market disruptions or hyper-inflation (or for that matter deflation, though I think in the U.S. case it would be more hyper inflation of commodities and chronic deflation in all sectors having to do with housing).

I firmly believe that rising oil prices will have multiple secondary effects including, but not limited to:

A concomitant rise in prices of all other fuel sources including coal, uranium, and Natural Gas, and;
An increase in prices of certain agricultural commodities which rely on fertilizers and pesticides, and;
A decrease in prices of certain metals which are used in infrastructure, and;
An increase in prices of certain metals used in energy related infrastructure, and;
Strengthening of the currencies of certain oil exporters versus certain oil importers.
The collapse of the U.S. Dollar.

The answer to the Falling value of the U.S. Dollar is not the other major currencies. ALL CURRENCIES CAN FALL IN VALUE TOGETHER. How? AGAINST THE THINGS THAT THEY CAN BUY. Oil, Natural Gas, Corn, Wheat, Soy Beans, Silver, Gold, Palladium, etc... will rise in price versus ALL currencies if Oil production goes into decline.

"When you find yourself in a hole, stop digging." - Anonymous

Leveraging up to expand your business will lead to disaster in this environment, as will holding U.S. dollars as a store of value (and suburban real estate).

I am of the opinion that although the average American investor is quite literate, unfortunately they are quite innumerate - so much so that the average American investor is not even capable of defining the term. With that in mind let's go to the online encyclopedia, Wikipedia.org, for a definition:

Innumerate: marked by an ignorance of mathematics and the scientific approach

If you are an investor, educate yourself and take action. If you are innumerate, don't sweat it. You can become numerate with a little effort and a high speed connection - and rather than trusting me, another Wall Street huckster with an agenda, click the links, read my sources, and come to YOUR OWN conclusions. But like it or not, the above numbers are as hard as rock. And there are no pipelines coming into earth from outer space, so we are going to have to live with the fact that there will be less oil available for import in the very near future.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2008-02-14T05:11:00.001-08:00

North American Natural Gas Crisis 101

While the U.S. imports over 60% of the liquid fuels (oil and NGPL's) it requires, the U.S. only imports 1% to 2% of the Natural Gas ("NG") it requires in the form of LNG. Yes, the U.S. imports a good deal more NG from Canada by PIPELINE, but that export partner is unable to increase its NG exports to the U.S. because, it appears, from data supplied by the U.S. Department of Energy that both U.S. production and Canadian production of NG peaked in 2001.

It follows that if the U.S. wants to increase its use of NG it will have to buy it in the International markets in the form of LNG as there are no pipelines stretching under the Atlantic and Pacific oceans.

Electricity is generated from Coal, NG, Nuclear, and Hydro power (and a very small amount of Oil). If the U.S. wants to increase its electricity generation, then the U.S. must increase the use of at least one of these energy sources.

Folks, it has been years since the U.S. added a nuclear power plant, and it has been years since the U.S. has constructed significant coal fired power capacity (there have been some, but total MegaWatt capacity was insignificant). There has been a conspicuous lack of Hoover Dam projects... That leaves NG. Substantially all of the new electricity generating capacity added in the U.S. since 1996 has been NG fired.

Now, let's add it up...

No new non-NG power plants + Declining NG production in North America = Less electricity generation capacity OR an increase in LNG imports.

Any Questions? (Please! Don't confuse the distant future with the present. Of course we will build nuclear power plants - some might even come on line by 2020. Wind and Solar? Too little, too late for this round. But what do we do in the mean time?)

The problem is that in order to get the LNG tankers to land on our soil we will need:

A. The capacity in the form of LNG re-gasification terminals, and;

B. To be willing to pay a premium over other LNG importers to entice the tanker to the U.S.

Here comes "The Rub".

With Oil at $94 per barrel (that is the front month WTI as I write this, Louisiana Light is more like $98 in the spot market, so the $1.175 Billion figure is somewhat understating the issue), and importing a net figure of roughly 12.5 million barrels of oil per day, the U.S. BORROWS $1.175 BILLION each and every day of the year to fund its oil purchases.

This borrowing of money, and printing of dollars, is what is laying low the U.S. currency. Since I have laid out the case why, if anything, the U.S. will try to become MORE ENERGY DEPENDENT by increasing imports of LNG, further increasing U.S. borrowing to fund its International energy purchases, just how is it that the U.S. Dollar avoids a collapse?

Here comes the really good part...

It is the price of the marginal supply that sets the price in the market. The U.S. will have to compete with the Asian nations for the LNG and LNG is trading, right now, in some markets north of $15 per mcf. Prices in the U.S. as we speak are $8.35 (Henry Hub Spot).

While the world watches breathlessly the oil supply problem, it is at least as likely that the knock out punch, at least as far as the U.S. is concerned, will come from NG.

My associate at the Sleepy Hollow Funds, Dr. Lalani, likes to point out that the U.S. wastes tremendous amounts of electricity and could conserve greatly to ameliorate the electricity issue...

Great. Like shutting off the lights at the Empire State Building? Turning off street lights? Shutting businesses earlier? All of which WILL happen eventually.

Why not just stand the U.S. dollar up in front of a firing squad at dawn tomorrow?

Yours for a - better views of the night sky without all that pesky light pollution - world,

Mentatt (at) yahoo (d0t) com

2008-02-13T05:31:00.000-08:00

This is hysterical!

"Oil is Little Changed as OPEC Mulls Cut to Counter Slow Demand"

I am simply embarrassed for the journalist that wrote the story.

Demand for oil in 2008 will be above 2007 demand IF THE OIL IS AVAILABLE. If it is not available, we can't demand that which is not there.

To read this article one would think that the world was about to experience an oil GLUT. Yet total OECD oil inventories, as measured in "days of supply" is at the lowest level in in years.

The WTI crude front month contract closed at $92.79! Does the reporter realize that 5 years ago the OPEC price "band" for its average price for all grades was $20 to $28?

OPEC likely cannot increase production. Even if they could, it might be dawning on them that it is not in their best interests to do so. If either case is true, this is it. The U.S. economy is sitting on the oil import crisis time bomb, and the fuse is lit. Still, even so, the sensation will not feel explosive, more like Chinese water torture.

Of course, I could be wrong and OPEC has plenty of spare capacity... Then why are we making that huge investment to wring oil from the Tar Sands of Canada? If OPEC has so much spare capacity, why destroy the environment of Alberta, apply to build nuclear plants there (in order to cease using Natural Gas to as a heat input), drill in 7,000 feet of water and 23,000 feet of rock and earth off the coast of Brazil and the Gulf of Mexico, and use THE VERY FOOD WE EAT as fuel? Come on, would ANYBODY do ANY OF THAT if we could just buy the Oil from OPEC? NAFC. (That's a technical term - Not A F%$^ Chance).

If I blew in this reporter's ear he would thank me for the change.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2008-02-12T19:06:00.001-08:00

My Epiphany

I spent today presenting our new hedge fund to investors. I liken it to a Broadway actor on his 7,000th performance of "Cats". I have said this stuff so much, I am starting to get sick of hearing it myself. Still, each time, the presentation requires that I sit through the initial "But I thought we had plenty of Oil" or "but what about nuclear?" And I have to patiently disabuse them of their (from my view, that is. Still, I recognize that my vision might not be completely accurate) misinformed opinions... ugh!!!

So here was my epiphany:

I was speaking with a businessman who have I great deal of respect for. This guy was up to speed on all the issues - and was not concerned in the least. Why not?

And then it occurred to me - He was not a trader, investor, broker, etc... His concern was payroll this friday, the health insurance bill, and the rent. In his business, he has never been required to forecast economic conditions, interest rates, earnings... 6, 12, 18 months from now. He has never come to work and watched his life's work get destroyed because some finance minister somewhere just announced a currency devaluation, or there was an assassination, or hurricane, or locusts, drought... WHATEVER rock that people in our industry did not turn over that led to their demise (OK, I am being dramatic here, but work with me. In our business, you are only as good as your last trade, your last quarterly performance, your last good/bad call... all of which is normal in the securities industry. Now throw in the fact that you put essentially ALL of your assets into the portfolio... Just ask the guys at the Amaranth Hedge Funds). No, this fellow was not a corporate CEO (those guys worry holes in their stomach, too), he was a successful private business owner. Never in his life did he draw out a forecast past the end of this quarter. He was too busy surviving here, and now, and living the good life.

If he were REQUIRED to draw out a 5 year plan, he might feel differently, or if he had ever lost everything he had on a bad bet, or if he had watched an entire department get walked out the front door by security guards who then unceremoniously cut up the newly departed's corporate IDs with a pair of scissors... but this was not in his experience. He was focusing on today's sales, next week's bills, and this weekend's beer.

And I don't blame him.

99% of the people do not have the resources to put themselves in a position to benefit from the U.S.'s energy pickle, and the 1% that does have the needed resources might make the wrong decisions regarding how best to handle the opportunities and risks.

Maybe it IS better not to know.

Yours for a better ignorance is bliss world,

mentatt (at) yahoo (d0t) com

2008-02-10T18:56:00.000-08:00

Wheat, Corn, & Rice are the major food staples for the world. This is serious stuff.

"Feb. 11 (Bloomberg) -- Wheat futures in Chicago rose by the daily limit for a sixth day, breaching $11 a bushel for the first time as the U.S. forecast its lowest inventories in 60 years.

U.S. stockpiles will drop to 272 million bushels at the end of May, 6.8 percent less than expected a month ago and down 40 percent from the prior year, the Department of Agriculture said in a report Feb. 8. Inventories will be the lowest since 1948 when farmers grew less and shipped more wheat overseas to help countries to rebuild after World War II, economists said."

I don't make this stuff up. We have a food production problem, an energy problem, a currency problem, a trade deficit problem, we are at war, and the voters in the American presidential race are more concerned with the symbolism of the shade of the candidates skin, the contents of their underwear, or their lack of conservative credentials than with a pesky problem like not enough food or fuel.

Call me crazy, but that just doesn't compute.

Speaking of not computing...

The world financial markets are getting beat up, economies are hitting the skids all over the western world, and the price of Oil is having a hard time staying below $90 per barrel (as I write this the front month WTI contract is trading at $92.09 on ACCESS). Shouldn't oil be getting killed in a recession? The media tells me it will, CERA tells me it will, but the futures market says no. I'm going with the guys who actually have skin in the game.

Yours for a better low carbohydrate world,

Mentatt (at) yahoo (d0t) com

2008-02-09T19:55:00.000-08:00

The U.S. Defense Budget is Unsustainable

Sustainability is the new watchword. Well, that and "Green". Sit through commercial TV for an hour or so and you will see what I am talking about.

Here is something that is not sustainable under any circumstance: Last year total military expenditures totaled $626.1 BILLION, a number that is greater than the COMBINED expenditures of the next 168 largest sovereign nation military budgets.

The U.S. Navy should be renamed the "U.S. Petroleum Protection Force" as the Navy's job is primarily to maintain security for the floating oil inventory held in world's tanker fleet. If you added the cost of tax payer money for this fleet gasoline is already well over $6 per gallon in the U.S.

The following is from J.R. Nyquest's excellent website:

"Whatever your opinion of the War in Iraq, the most strategically significant result of the war has nothing to do with Iraq. Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff, has admitted that the U.S. military commitment to Iraq and Afghanistan “may have undermined the military’s ability to fight wars against major adversaries….” The U.S. military has changed its focus, losing sight of the real enemy – the most dangerous enemy of all.

The danger from Russia and China is not well understood. To complicate matters further, there is a new, rising incompetence in Washington. There is blindness in the governing class, a lack of understanding, an unwillingness to work with facts, a falsification of meanings, and fatal disregard for historical truth. Enemies are not recognized as enemies. Subversion is not recognized as subversion. Madness goes about in the guise of political correctness.

There are, of course, flashes of truth and moments of recognition. On the night of the Feb. 5th presidential primary, Republican Senator Orrin Hatch told an interviewer that he feared America could lose the economic wherewithal to sustain its armed forces. The interviewer completely ignored the senator’s statement. It wasn’t something journalists are ready to take seriously. Even so, the senator offered up a warning. He had begun thinking about the military budget and the prospect of declining revenues. You might say that the “writing is on the wall.” The U.S. dollar is falling, the banks are in trouble, the stock market is ready to tumble, the housing bubble is bursting. What will happen to the economy? What will happen to the military?

In recent testimony, National Director of Intelligence Michael McConnell told Congress that Russia, China and OPEC could use their growing financial power to advance strategic goals damaging to U.S. national interests. According to McConnell, American intelligence was concerned “about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends.” In other words: The enemy has cash, and cash can buy people and companies. " J.R. Nyquist

Senator Hatch, however you view his politics, can count. In the absence of energy inputs, the U.S. will simply be unable to sustain a military budget anywhere close to its current size and scope - which is not enough, at this moment, to protect the nation from a coordinated effort of our largest "competitors".

Why did no one in the Mainstream Media scratch their head when President Bush was rebuffed by Saudi Arabia? They were too busy scratching their politically correct butts.

The combinations and permutations of various outcomes to the U.S. energy crisis will be powerfully felt in our nation's politics in the very near future.

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-02-09T12:08:00.000-08:00

The Rich Man's Housing Crisis

Large, expensive houses will decline in value more precipitously than utilitarian housing in an era of declining energy availability and increasing food and energy prices.

The financial markets and the credit markets have only just begun to wreak their havoc, and that havoc will impact the wealthy in ways that might be incomprehensible at this moment. But just ask any Florida homeowner of "luxury" or "executive" residences how the sale of their home is going. The short answer is there is NO MARKET for these properties... and I in my opinion, there never will be. Once the oil import and North American natural gas production twin crisis's hit, Corporate America is going to take a hatchet to their payroll, Wall Street is going to be renamed Floor Street, and Real Estate agents are going to skip being called "waiter!" (because restaurants will be deserted) and go right to migrant crop worker.

(Disagree with my vision? Tell you what - I will tell you what futures contracts I am buying in the commodities market. You take the other side of the trade. It is a zero sum game, so whatever I lose you stand to make - or the other way around.)

At the same time the equity in your home goes to zip-ity-do-da, the source of you wealth might be headed there, too. Own bonds? Hyper inflation and the dollar crisis will convert them to toilet paper. Own equities? Better be gold miners and energy companies - the rest are circling the drain. Own a private business? Hope it is not leveraged, dependent on cars for customers or employees, or discretionary. Not going to be a lot of use for the millions of financial planners, brokers, insurance salesmen (folks, I am in the financial services business - that career path is doomed), real estate agents, lawyers, hair stylists, retailers, etc... are any of these types your customer? Well, they are going to have a great deal less discretionary spending money than they have now.

Someone is going to be left holding the bag. It doesn't have to be you.

Yours for a better world

Mentatt (at) yahoo (d0t) com

2008-02-08T16:58:00.000-08:00

Did you duck, or is that shiner something you are proud of?

The worst week for the U.S. stock market in 5 years ended with nothing resolved.

The front month WTI crude oil contract rose $3.66, finishing one of the most volatile weeks in oil trading in recent memory. The financial press blamed the rise on the possibility that OPEC would require importer customer to pay in Euro's rather than U.S. Dollars.

The financial press has a warped sense of cause and effect, and this report continues that trend. The funny thing is, there just are not enough Euros around to replace the Petro-Dollar as the oil trade currency, and if there were, can you imagine the import inflation of the Persian Gulf nations? Last time I checked, their currencies were still pegged to the U.S. Dollar... It then follows that either; A: the press is wrong (as usual), or; B: OPEC was just jaw boning the price back to a more "acceptable" level, or; C: none of the above and it was just the Oil market reacting to an over sold condition. I am going to go with "C" until proven otherwise.

Coal continues its meteoric rise. Can Natural Gas be far behind? Not likely, unless you intend to pull an Abe Lincoln and start reading by candlelight.

"And The Hits Keep Coming"...

Folks, the U.S. is literally running out of WHEAT.

The situation for corn is not much better.

Farmers will, no doubt, chase last years commodity winners, wheat and soy beans, at the expense of corn. At some point, however, you simply don't have enough acres and available fertilizer to keep this game of musical chairs going - hence the greatest bull market in agricultural commodities since "The Flood" (you know, the one Noah made famous).

But my long term readers knew this was coming. The problem now is that the world MUST DO SOMETHING RIGHT NOW to avoid very real, and very serious, food shortages.

American's have this sense that it cannot happen here, and if that includes you, you would be incorrect. It can. It might not, it does not have to - it is not ineluctable... but it can CERTAINLY happen here. And if this inventory trend continues it WILL HAPPEN HERE. That's it. Either the production and inventory trend reverses... or the U.S. will experience EXTREME increases in the prices of wheat, corn, milk, eggs, bread...

It seems that the supply/demand equation of many commodities - Oil, Natural Gas, Food Grains... are balanced on the edge of a knife, and that is a tough place to stand. Some of these are going to fall off that knife's edge - and into the abyss.

"And that's the way it is"...

Mentatt (at) yahoo (d0t) com

2008-02-06T18:44:00.000-08:00

"A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently and die gallantly. Specialization is for insects." -- Robert A. Heinlein

Couple more days like today and many investors just might feel like dying - gallantly or otherwise.

While front month Crude Oil continues to slide, later month delivery contracts are not falling very much. Front month might be down $14 from its peak, but crude for December 2010 delivery is no more than $3 or $4 from its high. Why? Lots of reasons. Here is one possibility...

Over the next several years the market, by necessity, must "discount" (take into consideration) a "Black Swan Event".

Here is a definition from Wikipedia.org:

"In Nassim Nicholas Taleb's definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event."

I have been harping on Natural Gas ("NG") lately, and with good reason (see my earlier posts). Now, apply a significant hurricane in the Gulf of Mexico, a terrorist attack, or maybe even an accident like a LNG tanker explosion and NG is $50/MMBtu instead of $8/MMBtu. No, you cannot invest in the hope that a "Black Swan Event" ("BSE") will strike, but you have to insure your portfolio because, I can assure you, a BSE will occur at some point in the future. This is one of the primary reasons portfolio theory insists that investor's diversify.

No, you can't plan on a "BSE", but you can "tilt" your portfolio into the areas that are attractive now and would hold or increase in value if one of the more likely BSE were to take place.

Mentatt (at) yahoo (d0t) com

2008-02-05T19:30:00.000-08:00

Natural Gas at a cusp

As I write this, Natural Gas ("NG") trades at roughly a 50% discount to oil in BTU's. A better comparison would be heating oil or gasoline - finished products - because NG can be taken from the well head and burned at an electric plant or at your home. Crude cannot be used until it is processed into finished fuels. The discount might be nearly 60%.

This will not last. The U.S. Department of Energy's EIA's data shows imports from Canada in decline and U.S. production falling since 2001. Canada has no ability to export more NG in the future under any circumstances. This will force the U.S. to compete for Liquified Natural Gas ("LNG") in the world export markets, and we all know what that means: The marginal supplier sets the price - and that's if we could get it, and we can't. The supplies aren't there, the infrastructure isn't there, and the MONEY isn't there. Think about it: This would mean that the U.S. would have to issue MORE IOU's to the various international energy suppliers; that the U.S. would be MORE energy dependent on the very folks we dislike and antagonize so intensely.

Oil and North American NG prices should move to BTU parity because:
1) increased LNG usage in Asia where they are paying $15 NG equivalent
2) Increased NG usage in NG exporters (Russia, Iran etc)
3) decreased drilling for NG in North America.

A) Coal prices have set a new floor for NG.
B) At 110 per ton (current prices) NG price floor would be $9.50 in the long run.
C) Coal prices could double from here easily with Australia's mines struggling.
D) Demand for coal is growing at 8% per year in the developing world (where the population growth is).
E) Nuclear plants have a long lag time and that situation is worse.
F) Slower drilling has not fully impacted us yet. 6-18 months for full effect of slowing Canadian and US drilling.

In addition, NG is simply the best hydro carbon fuel available. Coal is an environmental nightmare we are only now awakening to. Oil imports into the U.S. are unlikely to increase by any meaningful amount, and in fact could decline precipitously at exactly the same moment that NG supplies fall (and prices rise).

Folks, this is serious stuff. I cannot give specific advice in this forum, but the opportunities are staring you directly in the face. And not just the opportunity to profit, but the opportunity to avoid significant losses. The U.S. economy cannot expand without the ability to grow the generation of electricity.

What was the last thing Mrs. Lincoln said to the President?

"Duck!"

This is, yet again, another excellent opportunity for you to do the same.

Mentatt (at) yahoo (d0t) com

2008-02-05T06:59:00.000-08:00

Whoops!

The ISM number came in today... and it was an unmitigated disaster.

My call on escaping a recession, even in nominal terms, appears to be on very thin ice.

It is important in trading and investing to have the ability to change your mind, admit you are wrong, and regroup. Small loses are never a problem - BIG losses are the problem. Insisting that you are correct in the face of mounting evidence to the contrary will lead you to ruin.

Accordingly, it would appear that the odds of a recession, as measured by the data collecting agencies of the Federal Government, are now well above 50%. This is especially troubling because our government regularly understates the GDP deflator (inflation).

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-02-04T19:47:00.000-08:00

"Utilities Turn From Coal to Gas, Raising Risk of Price Increase"

North American Natural Gas shortages might be here before Oil shortages, or worse - they might arrive simultaneously.

But coal is no longer the option many were led to believe.

There are tremendous opportunities in the offing, but the there are some very real economic disasters that will be visited upon us (Americans). Yes, we will be forced to "power down" over the coming decades. There will be winners and losers in the process, despite the probability that socialism creep will be the new political environment (more on that later).

I have no idea why the American Mainstream Media is so grossly misinforming the American People - but they truly are.

America has a SIGNIFICANT oil import crisis brewing, and there is simply not enough coal, natural gas, nuclear power, ethanol, gerbils on treadmills, political flatulence... to make up for the soon to be missing BTU's. Placing your hard earned assets into the companies and industries that are sure to get demolished in this environment is just plain silly. Use your common sense, and don't believe one word coming from Wall Street or CNBC.

Yours for a better post CNBC world,

Mentatt (at) yahoo (d0t) com

2008-02-02T17:54:00.000-08:00

Finally, the housing situation is sinking in...

Read that link.

Maybe? No maybes... Gonna happen, no matter what... only question is the time it takes to unfold.

25% nationwide, 40% to 50% declines in markets like South Florida.

The Fed's attempt to inflate is going to work alright - just not on real estate. It will work on commodities.

Yours for a better world.

Mentatt (at) yahoo.com

2008-02-02T16:24:00.000-08:00

The Euro is the next sucker's bet

For those who have been reading my stuff for the last few years you know I have been telling people that the U.S. $ is doomed. I gotta lay off the hyperbole.

The dollar will continue to lose purchasing power, but not as fast as the Euro will from this point onward. Keep that in mind when listening to the "international play" coming at you from Wall Street. My good friend and fellow hedge fund manager Dr. Lalani likes the currency's of the oil exporters (with the exception of Mexico), and I couldn't agree more. But the Euro makes up more than half the Dollar index, and any move down versus the dollar will increase the index.

Also, as I have said many, many, many times: "Markets zig and zag, they don't zig and zig". We have had one hell of a ZIG in precious metals (and other commodities, and one hell of a ZAG in U.S. equities and the U.S. Dollar. Nothing moves in a straight line. NOTHING. After the zig comes the zag (calling the turn is bit tricky). If you can't call the turn, at least don't zig after a market has been zigging. Finally, I am not suggesting that you short ANYTHING. Shorting requires EXTREME discipline, something the average individual investor is sorely lacking in. What I am suggesting is that on any pull back in precious metals that that would be the time to add to positions.

This is not to say that I think the commodity bull has stopped running - far from it. But silver and gold are NOTORIOUSLY volatile. I would not be surprised to see each of them retrace 50% form their eventual highs. The problem is calling the high, and at that I am no better than you are.

2008-02-01T05:22:00.000-08:00

Whither Oil Prices?

U.S. oil supply and consumption data argue heavily against a U.S. recession. Look, I don't make this stuff up. Just click the link and look at the supply/consumption data yourself. If the U.S. were in a recession, would year over year oil consumption 1/07 vs. 1/08 be up roughly 1.4 %? Not unless we had one REALLY big oil spill.

Further, I was the dummy that said last year we would be in a recession by the end of '07, or early '08. I was close, but no cigar. Recessions are caused by tight money policies of the Federal Reserve and Fiscal discipline on the part of the Federal Government. It is an election year, and if anything, our officials cannot be accused of being tight with money or very disciplined with their spending habits.

On another note...

For every buyer, there is a seller. They can't both be right. Welcome to the markets - I don't care if it is stock on the NYSE, corn at the local farmer's co-op, or the corner newspaper guy. Even in positive sum markets, on any individual trade your win is somebody else's loss.

There are also 2 sides to every investment decision. Stay with me...

The IEA claims that there is no immanent peak in oil production. They blame the lack of production on a lack of investment... Now, I ask you: If you were an oil company, would you increase investment in exploration & production if you felt the oil was not there to be found? Would you buy your dog a kitty cat scratching post?

Somebody get those guys at the IEA a V-8!

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-01-31T05:05:00.000-08:00

The worst January in equities since 1970 appears to be in the books.

Folks, as you know, I am precluded from making specific recommendations in this forum. I can speak in general terms.

The equity market is, in my opinion, going to swing up and down rather briskly, and will likely be very tough to stomach. The problem is, the bond market (U.S. Treasuries, Don't even THINK about corporate paper) has had the greatest of runs, and his little to gain and much too lose; real estate is in shambles. So you are stuck with with some equity exposure. If you are of advancing years, say over 55, there are products available from and backed by the world's largest insurers that will guarantee your principal while giving you most, but not all, of the opportunity for gains.

These products have been out in the marketplace for years but have really gotten their act together recently. Not too long ago I looked askance at them, but they have responded to the markets and are now designed to provide immediate income, a fixed "walk away date" or the ability to provide lifetime income. And since they protect your principal like a bond, but give you some upside if the equity market goes higher, they are, in my opinion, one of the few vehicles that would benefit in an inflationary environment. Further, as principal is guaranteed, they would not be harmed in a deflationary environment.

There is no such thing as the "perfect investment". Your circumstances, time horizon, tolerances, etc... are unique. These products are not for everyone, and you should not consider them if you need to draw on them when you are under the age of 59 1/2.

Please keep in mind that it is my view that the Fed rate cuts will lead to a lower U.S. dollar and inflation, and that in the future energy supply shortages will add fuel to the fire of market volatility.

Lastly, I am not looking for business here. These require state by state licensing, so call your own financial advisor. If they have any questions you can always email me.

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-01-30T17:19:00.000-08:00

The Fed is in full scale flight from the U.S. Dollar.

With the latest 50 basis point cut (1/2 of a percent), the Fed Funds rate now stands at 3%, significantly lower than the headline rate of inflation (which was a lie the day it was written).

It seems that the U.S. is no longer interested in the production of anything with the exception of more asset bubbles. Tech, housing... what's next?

The U.S. energy consumption data does not support recession fears. Consumption of total fuels is up, year over year, in the most recent 4 week period. You see, it does not matter if you look like crap, feel like crap... what matters is how you SMELL. So far, the consumption data says the economy smells OK, and with the Fed enthusiastically joining the ranks of the world's oldest profession... I think we squeak through. Of course, I will continue to follow the energy supply/consumption data and report back if anything changes.

Yours for a better cheap money world,

mentatt (at) yahoo (d0t) com

2008-01-29T15:29:00.000-08:00

This just in.... (HA!)

"The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974..."

May push rates below rate of inflation? This journalist certainly has a knack for the understatement. Assets bubbles are going to come, for sure... but they won't be were the Fed wants them. Say hello to $200 Oil, $25 Nat Gas, $10 Gallon of Milk, $8 per dozen eggs, $35 Silver, and $2000 Gold. Say goodbye to the value of your savings if you continue to hold them in dollars or fixed incomes securities denominated in U.S. dollars.

"BP's Global Refining Margins Sink Almost Four-Fold on High Oil"

"Folks, the lack of new refineries is soooooo 2006" - Dr. Saif Lalani. Production of conventional crude oil is in decline, not ifs, ands, or buts. We now have TOO MUCH refining capacity, and whenever an industry experiences overcapacity, their margins get killed.

"Yahoo to lay off 1000 workers"

Call me old fashioned... but for me to pay 30, 40, 50 times earnings for a stock, there has got to be some damned sure earnings growth in evidence, and it has to last YEARS. Otherwise, these stocks are going down like a rock in a pond.

"Still no sign housing market hitting bottom"

WTF???!!! There are several signs of where the bottom is. Rents are 3 to 3.5 % of the purchase price of homes in most bubble markets. When rents get to 5 to 5.5% of median purchase price the market will see the bottom - so either rents go up by 80% or prices come down another 40%, give or take. Any questions you jerks at the Sun Sentinel (South Florida's POS rag). Here is another sign of a bottom: When median income can pay for a mortgage that is 80% of the purchase price of a home. Are these metrics really that hard to understand? Now take the next leap. Inflation will help those housing metrics, deflation will kill them. Hope for inflation. Be ready for anything, but my bet is on monetary inflation.

Folks, most things lend themselves to just a LITTLE BIT of old fashioned homework.

Check back here for a no BS assessment of the incomprehensible HS we are spoon fed from the Main Stream Media.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2008-01-26T05:39:00.000-08:00

The “Peak Oil” issue is now everyday, front page news

On January 22, 2008 Shell Oil CEO Jeroen van der Veer, Chief Executive issued a letter to all Shell employees about the coming of oil shortages in the near future and the challenges the company and the world faced by the constraints on energy supply and climate change.

Mr. van der Veer is not the first Oil Company CEO's to come clean, Chevron, Total, and the CEO of other companies have been willing to confront the issue, if not the immediacy, of Peak Oil.

The Wall Street Journal, which up until this past summer disparaged the theory (data) or ignored the issue has now had 4 front page articles in the last 90 days on Peak Oil. Today, January 26, 2008 the WSJ had another front page story on Peak Oil, this one covering a "Peak Oil Aware" family in Michigan and that family's efforts to prepare for the social, economic, and political fallout of an oil shortage - AND DID SO WITHOUT MOCKING THEM! Holy Molly!

Remember, the financial markets are "discounting mechanisms", that is they discount in the present the probability of future events. The U.S. energy situation is starting to sink in to the Main Stream Media and the Corporate Establishment. Significant reaction in the market place is not far behind.

I will leave you now withe the prophetic words of the
1960's singer/songwriter Bob Dylan:
(Or you can listen here)

“Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Come mothers and fathers
Throughout the land
And don't criticize
What you can't understand
Your sons and your daughters
Are beyond your command
Your old road is
Rapidly agin'.
Please get out of the new one
If you can't lend your hand
For the times they are a-changin'.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'.
And the first one now
Will later be last
For the times they are a-changin'.” Bob Dylan’s 1964 classic “The Times They are a Changing"

Indeed.

mentatt (at) yahoo (d0t) com

2008-01-22T05:20:00.000-08:00

A Tale of Two (Classes of) Commodities

It appears that a recession is a certainty in real terms. The government's nominal argument ain't fooling anybody.

The run in commodity prices for the near term is over, and painful corrections are likely in many commodities. Base metals are no where to be, but even precious metals and energy commodities will likely be overcome by the contraction, at least for the next several quarters.

The energy crisis is not going away, though. This is just a time out on the field. Opportunities of magnanimous proportion will present themselves. This is the time to get your ducks in a row.

The bond market has had the mother of all rallies. I could be wrong, and rates could head lower and bond prices higher, but I am not willing to make that bet at these prices (still I sold weeks ago and bond prices moved higher since then) and would prefer to hold cash.

There are now 2 kinds of commodities. Those that will rise in price as the energy shortage takes hold over the next few years - and everybody else. One group will soar, the other will humble you. Gold and SIlver? Tough call. They have had a hell of a move up, and there are not many bids around for anything. Still, Gold and Silver tend to do well in deflation AND inflation, but discretion is the better part of valor. This is no time to be a hero. That time will come.

Mentatt (at) yahoo (d0t) com

2008-01-21T17:36:00.000-08:00

Asset prices are plunging. First Real Estate, now the world equity markets.

This looks like DEFLATION to me, and I am losing (lost) faith that the Fed can re-inflate.

Monetary deflation coupled with commodity price inflation (though commodities may not be inflating again for sometime) is about as bad as it could have been. America, welcome to Japan, circa 1990.

You will read and hear a great deal of specious cause and effect explanations from the media, for most of which the journalist engaged in perhaps 30 seconds or so of research before trumpeting their findings to the public.

Here is one cause and effect you will not see in the Main Stream Media:

The energy complex has been unable to deliver increasing amounts of BTU's in sufficient quantities to maintain economic growth.

For my money this is THE cause and effect.

Mentatt (at) yahoo (dot) com

2008-01-20T08:44:00.000-08:00

“They’re here!’ – Poltergeist

The ghost of 1973 is here, and it is here to haunt the U.S. for a long, long, LONG, long, long time to come.

In my last post I covered U.S. population increase of about 1% per year. Since total oil supplies to the United States PEAKED in 2005 at 20,802,000 barrels per day (“bpd”) and the 2005 mid year population for the U.S. was 295,895,897 (U.S. Census Bureau data), each and every American consumed 7% of a barrel (.07) of oil per day during that year.

For the 10 months data available for 2007 U.S. mid year population was 301,621,157, and this increase population had less oil, 20,683,000 bpd available to consume – or 6.86% of a barrel of oil.

The average 2007 American had 2.4% LESS OIL available to consume than the average 2005 American. Natural Gas use and availability fell during this period, too (though this is more closely tied to wheather than oil is). Total coal availability BY VOLUME was up roughly .5% in 2007 from 2005, though it is likely that total production of coal BTU's fell as U.S. supplies are declining in BTU content.

What does it mean? That the average American lifestyle will decline until/unless this trend reverses. No matter what fiscal or monetary stimulus our government attempts. Either population falls, or per capita oil supplies increase… or our consumptive lifestyle declines.

Argue what you will as to whether this is good or bad, a blessing or a curse, for our humanity, etc…. It is without debate that the political, economic, and social impacts of this phenomenon will be felt in increasing measure over the next several years.

My bet is that the U.S. dollar’s decline versus commodities will likely be BREATH TAKING.

Yours for a better world, one way or another.

Mentatt (at) yahoo (d0t) com

2008-01-17T20:10:00.000-08:00

The U.S. population topped 303 million this month.

In 1973, the year of Arab oil embargo, the U.S. population was just under 212,000,000.

In 1973 the U.S. consumed 17,308,000 barrels oil, and in 2006 the U.S consumed 20,687,000 barrels of oil.

In 1973 the U.S. was still using oil as a primary means of electricity generation. In 2007 oil generated less than 8% of electricity.

Industry has substituted natural gas, nuclear, and coal fired electricity for oil to the extent possible.

The only efficiencies left to be rung out of the system:

More efficient cars. This will have moderate impact in the short term as the installed rolling stock of vehicles cannot be replaced fast enough (to prevent);

Less total miles driven. On average each American motorist will drive fewer miles each year from this point forward. Pretty simple really. There are more Americans accessing declining oil imports and domestic production. No amount of economic stimulus, monetary or fiscal, will negate the (work and kinetic energy) laws of physics.

It is not likely possible for inflation adjusted non-internet retail sales to come back in this environment, for example. If the consumer is 2/3 of the U.S. economy, and the consumer is experiencing: declining access to credit, increasing energy and food costs, and has ZERO savings, and is now constricted in his/her transportation opportunities, how does the U.S. economy come again to experience real economic growth? Corporate spending you say? The effects of declining transportation fuels will hot corporate America at least as hard as consumer America, but more on that in a future post.

A good friend of mine likes to say that driving around in circles does not increase GDP. Maybe. But less circle driving is certainly bad news for the auto industry, the fast food industry, retailers, rubber and glass producers, lawyers for drunk drivers, etc...

If the U.S. has seen peak oil imports, then the U.S. will see peak (real) economic growth soon, if it is not past tense (I say "soon" because there are still great efficiencies to be rung out of our wasteful use of electricity - I would not be long Utilities). If this is true, and it is very, very possible, we can expect tough times for Wall Street and Banking to be a permanent condition. This is not to say that we will not have vicious rallies in the markets. We will. Nor that hyper inflation could not drive the market up in NOMINAL terms. It could.

Still, your wallet will not be fooled.

Hmmmm....

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-01-17T18:40:00.000-08:00

Here's a fun fact to know...

The U.S. Dollar as measured against other currencies by way of the Dollar Index closed today at 76.23. In December of 2007 the Dollar index hit a low of about 74.50. With me?

Well... in the last 4 weeks the dollar rose 3% versus the various international currencies yet fell over 10% versus gold and silver. Hmmmm... Perhaps the various central banks are willing to debase their currencies, too... Hmmmmm...

Can you say "Hyper-inflation" boys and girls? HI PER IN FLAY SHUN!! Very Good!!

Yours for a better post debt driven reserve system of currency world.

Mentatt (at) yahoo (d0t) com

2008-01-17T18:29:00.000-08:00

“A recession is when your neighbor loses his job. A depression is when you lose your job.”

Is the U.S. in a recession? In real terms, probably. In nominal terms (you know, the kind of data reported by the U.S. Commerce Department), I doubt it.

The government understates the rate of U.S. price inflation. The headline numbers as reported by the U.S. Federal Government for 2007 of 4.1% for retail inflation and 6.3% for wholesale inflation defy credulity.

Before your eyes glaze over, here is the deal. If the economy experiences 0% REAL growth, and inflation of 7%, if the government reports inflation of 4% they can claim 3% in GDP growth. Got that? If the same methodology of collecting and reporting inflation data are employed in the future, we may have a year in which unemployment rises to 10%, and GDP grew by 10% (which is what the U.S. is likely to experience as oil imports decline and the price of oil rises).

Gold and silver are telling you a great deal about where THEY think inflation is.

The stock market is telling you a great deal about what they think REAL economic growth will be for 2008.

Yet the Federal Reserve chairman told Congress that the Fed sees the economy continuing to grow in 2008.

And thanks to the wonders of data massaging and nominal reporting THEY CAN ALL BE RIGHT!!

Confused? You are meant to be. Now go be a good little consumer and borrow some money, order up a double frapa-poofy, swishy-weenie, mocha chino, and watch some T.V. programming interspersed with commercials extolling you to EAT! DRIVE! DIET!
AHHHH!!! The good life…

Yours for a better - post-consumer, non-obese, black coffee drinking, living within your means, real men don’t eat quiche (or how to spell it for that matter) - world.

2008-01-15T15:21:00.000-08:00

Inflation at the wholesale level for 2007 rose a the fastest pace in 26 years.

The sad thing is that the U.S. Federal Government understates the measure of inflation in no uncertain terms. Which is why gold, silver, oil, natural gas, wheat, corn, etc... continue to soar and give the lie to the data coming out of that den of iniquity commonly known as Washington, D.C.

Retail sales took an "unexpected" fall (clearly the journalists calling this unexpected have not been reading up and researching here) of ".4". Yea, and pigs fly! REAL Inflation was most likely somewhere between 7% and 9%... if "sales" fell .4, and that would include the RETAIL PRICE OF GASOLINE, THE REAL FALL WAS MUCH WORSE!!!

Another country heard from, Wall Street's own Jim Kramer tells us that the Federal Reserve could have prevented the markets woes with a stroke of its interest rate pen. Earth to Jim: If the U.S. cannot expand its consumption of BTU's (energy) no amount of stimulus is going to spur growth within our borders (actually any growth spurred by said spurious activity would happen in Saudi Arabia, Iran, Venezuela, etc...). Folk's, one way or another you are going to have to come to terms with this issue.

Speaking of Wall Street... Anyone notice who our "best and brightest" had to go hat in handfor capital to keep their ships afloat? The folks that sell us our oil. They have so many of our dollars that these "Sovereign Wealth Funds" (fancy words for "Dictatorships of Countries Endowed with Oil") have nothing to lose in propping up our banking system, lest those dollars become worthless even faster than they would have left to the Fed's devices.

Meanwhile, General Motors rolled over and and has admitted that the end of oil is in sight and that ethanol is just a stop gap. I wonder if the pension manager's know what that means?

The U.S. dollar is at real risk of a full fledged catastrophe. I don't know what will precipitate it, but at any time in the next 1000 days we could see a move in the American currency that would jar the American people out of their consumptive/political/societal stupor.

Stay awake. This movie is just getting good.

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-01-11T05:17:00.000-08:00

This is funny...

``Outside of oil, the trade deficit is moving in the right direction,'' said Russell Price, senior economist at H&R Block Financial Advisors in Detroit.

That is right out of the macbre joke: "Other than that, Mrs. Lincoln, how was the play?"

Earth to Mr. Price:

There IS nothing "outside of oil" as applied to the U.S. Trade Deficit.

Clearly, Mr. Price is an economist that skimped on his history studies. The U.S. was at one time the largest CREDITOR nation the world had ever seen. That began to change when the U.S. went from OIL EXPORTER to OIL IMPORTER. By the time the U.S. Oil production began to decline in earnest in the early 1970's, the U.S. was on its way to becoming, what we are in fact today, the largest DEBTOR nation the world had ever seen. And the only HOPE for our trade deficit is this:

When the oil exporting nations no longer have oil to export the U.S. won't go into debt to buy oil anymore. That's the cure. When there is no oil left to buy.

Talk about a cure that is worse than the disease!

Yours for a better post B.S. world,

Mentatt (at) yahoo (d0t) com

2008-01-10T06:18:00.000-08:00

The following is a guest post by Dr. Saif Lalani, Vanderbilt University. He wrote this article after sharing a cup of coffee with my 14 year old son and I at a Nashville Starbucks... Hysterical!
_________________________________________

$2100 a barrel Frappucino

Frappucino prices today hit an all time high by decisively crossing the $2100 a barrel mark. Prices at the Frappucino pump crossed $4.25 for about 300 ml (A barrel contains about 160,000ml). Widespread shortages of both chocolate and strawberry flavors were reported. The recent surge has been attributed to increased consumption in both China and India. China's imports rose a whopping 18% over last year as its sugar and caffeine needs exceeded domestic production. People were irate over the latest rise.

“This is not a non-renewable, difficult to extract, indispensable commodity like oil. We are still being charged 20 times as much” said Amy Potter. Amy plans to cut back on her discretionary Frappucino consumption as much as she can. “I FRAP-POOL with my husband whenever I can. We buy an extra-large and share rather than buy 2 small cups. But there is only so much you can cut back.”

The White House urged FPEC (Frappucino producing and Exporting Companies) to increase production to cool the overheated market. It is believed that SA i.e. Starbucks is the only one with significant spare capacity. “The market is adequately supplied” said CEO Howard Schultz. “The increase in prices is due to a lack of customers.” “It is” explained the CEO “exactly like the oil market where prices are going up due to a lack of refinery capacity (i.e. customers of oil). Basic Economics 101.”

Frappucino analysts however point to other factors . “Speculators are the prime culprit. At least $1,500 a barrel is coming due to speculation.” said Michael Lynch. “ The real problem” said Fadel Gheit “is a lack of blending capacity for the heavy gunky sour milk. We are running low on light sweet milk.” Daniel Yergin of CFRA said that prices were being influenced by below-udder rather than above-udder factors. Other economists blamed the low interest rates for causing a bubble in prices. “The fed needs to understand how the weak dollar is increasing prices” said John Cain author of “Why Bernanke Bucks don't buy you much at Starbucks”. Geopolitics is another issue. 25 Cows were brutally killed in the latest attack in Finland. The FOE (friends of earth) Group who blame methane from cows as being the principal reason for Global Warming took credit for this massacre. In Iraq the standoff between the 2 major cow sects over grazing pastures got worse. The 2 sects were unhappy with the proposed division with each insisting that the grass was clearly greener on the other side.

Senator Stupak held a special session in the senate where he proposed a gouging investigation. “Friends, we cannot allow our citizens to be robbed in broad daylight like this. A barrel of milk with enough sugar and chocolate costs about $125. The rest is pure profit. I propose we levy a windfall profits tax and use the money to give tax cuts to the oil industry which charges us so little for a way superior and essential product.”

Presidential hopeful Hillary Clinton promised to do just that if elected. Others such as Senator John Edwards proposed increasing production of other sources of caffeine such as chocolate and green tea. A growing number of alarmists however feel that the world has reached Peak-Frappucino. “The world is consuming more Frappucino than it is producing.” said Matthew Simmons, author of the book Twilight in the Cafeteria, “The era of cheap Frappucinos is over”, he added. Starbucks, however dismissed such claims, saying that it could meet increased demand for the next 50 years. Jeffery Brown said that Starbucks employees will be consuming its entire production within 15 years leaving it with nothing to export. Legendary investor T Boone Pickens seemed to agree with Starbucks. In a move that shocked the markets T. Boone Pickens sold his Frappucino contracts and bought oil contracts. “Oil and Frappucino will one day be the same price. Whether it is at $500 a barrel each or $4000 a barrel each I do not know.”

This article is dedicated to Matthew Simmons for his untiring work in trying to educate the world about how cheap oil really is and how big a problem we have. To Jeffery Brown for his “Export Land Model” work which the WSJ just recently saw the light on. To Stuart Staniford for bringing to bear his enormous intellect on the peak oil problem. To oilycassandra (Youtube Profile) who has given a whole new meaning to the term “education at all costs”. And finally to all those others who have endured criticism and ridicule in trying to help others understand, and have carried on the good fight. "

2008-01-09T12:08:00.000-08:00

“Men are at a disadvantage when we argue with our women cause we have a need to make sense” - Comedian Chris Rock

Argue the sexist nature of that comment all you’d like. It sums up my problem with the inventory report (or “petroleum propaganda report”) we get every Wednesday from our Federal Government.

I am at a disadvantage when assessing the U.S. Department of Energy’s inventory report, because I, too, have a need to make sense.

Here was the HEADLINE REPORT:

Crude Oil inventories declined 6.8 million barrels

Gasoline inventories rose 5.22 million barrels

Distillate inventories rose 1.52 million barrels

OK, to John Q. Public it would seem reasonable to conclude inventories went nowhere. The system drew down some crude and built an equivalent amount of finished products. No problem, right?

Wrong. If you take the time to read and analyze the report, something John Q. Public simply will not do, but compulsives like me will happily do so, you will find that, surprise, surprise, our government fudges numbers so that they fit nice-nice in the headlines.

Buried in the text of the “special report” you will find this annoying little statement, paragraph 3:

"U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 6.8 million barrels compared to the previous week. At 282.8 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 5.3 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories increased by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.2 million barrels last week. Total commercial petroleum inventories decreased by 8.1 million barrels last week, and are in the bottom half of the average range for this time of year." EIA weekly petroleum report, link above

NOW READ THE LAST LINE FROM THE ABOVE PARAGRAPH AGAIN. Got it?

Well, if crude oil was drawn down nearly equally to the build in gasoline and distillates (diesel and heating oil) what’s up with the 8.1 million barrel decline for the week?

And so, I did the absurd, and actually had the temerity to go line by line in the report… What a concept, right? I mean would a reporter at the Wall Street Journal or the New York Times do such a silly thing? Nope, and that is why the U.S. is going to get blindsided by this - For the simple reason that our journalists in the mainstream media are so innumerate that they are intimidated by a little basic arithmetic and a spreadsheet.

So here’s the deal.

3 million of the 8.1 million draw was propane. No big deal (unless you heat with propane like most of rural America) as this is not a transportation fuel.

The other 5 million barrels was spread around in “Other Oil”, “Residual Oil”, and “Unfinished Oil”.

So why not just combine Crude Oil with these other categories and report that as your headline number? I am sure there is a logical explanation, like for the convenience of the folks assembling the data, or for politicians in the middle of a tough primary fight, or for the benefit of professional traders (versus the little guy), and I am sure that is all very reasonable.

It is important to point out that the consumption data do NOT POINT TO RECESSION. I have argued in this forum several weeks ago that we will not enter recession this year if: The Federal Reserve cuts interest rates aggressively, and; the oil import picture does not decline. The data shows an increase in availability of oil and an even greater increase in consumption. Of course, therein lies the rub against my argument. Imports will have to rise to avoid recession. If they do not, all bets are off - no matter what the Fed does.

Lastly, the accuracy of the data in general is questionable at best, but it is the best we have. Unfortunately, that is not good enough. We might trip over a significant shortage in the very near future. There is a minimum volume of oil in the system below which we cannot go without going into spot shortage situations. How soon? Months, not years. This is by no means a certainty, but a significant probability. You heard it hear first (and I am not hoping for any particular outcome. I just call them as I see them and I use a calculator because I have little faith in the claims of others. If you doubt my reports, I have given you the links to the various sites that I used as my sources).

Mentatt (at) yahoo (dot) com

2008-01-09T05:19:00.000-08:00

It ain’t just housing

I got an email from a regular reader linking me to an article regarding Highway Revenue Bonds. FYI, these are bonds issued my municipalities that are repaid through the revenue received from users of the project. A good example would be water and sewer revenue bonds (which are pretty safe in terms of default… people living in the burbs really aren’t looking for that rustic outhouse look just yet).

But Revenue Bonds for a highway project? A project that PROJECTS a 30-year payback period IF, and only IF, there is exponential growth in the use of the highway? How do you think that is going to work out in an oil-constricted future? Hell, 20 years from now I sincerely doubt much demand for toll roads.

By the way, let me toot my horn for a moment…

Last summer I wrote about a future credit crisis – Student Loans. Seen Sallie Mai’s stock price lately?

Just another of those unintended consequences. The Federal Government gets the great idea to provide loans to college students. So what do colleges do? Raise tuition, give faculty compensation that substantially exceeds the rate of wage inflation, pass the expense on to the students, because now they can “afford” it (by means of going into debt. If this sounds vaguely familiar to the housing crisis and easy credit, well, that is only because it is the same damn thing).

Making loans easily available often drives up the price of the financed commodity, to the substantial detriment of the participants. Just ask a South Florida homeowner.

Yours for a better not-so-easy-credit world

Mentatt (at) yahoo (d0t) com

2008-01-08T13:33:00.000-08:00

A Nation of Realtors

The U.S. has become a nation of realtors, stockbrokers (like yours truly), lawyers, bankers, loan officers, and day traders.

The housing crisis is telling us loud and clear:

"Get a real job!!"

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2008-01-06T13:00:00.001-08:00

The U.S. Housing Market, “Another Fine Mess” – Laurel & Hardy

Remember David Lereah? The chief economist for the National Association of Realtors from 2001 to 2007 earned the nickname “Baghdad Bob” for his consistently optimistic projections for residential real estate, even publishing 2 books about why prices would continue higher (2005) and why the market won’t crash (2006). Great work, Dave, and kudos to the American mainstream media (“MSM”) for using this MoRon as a source to help bury the American public alive with debt.

Mr. Lereah got to the top in his profession by telling people what they wanted to hear. Perhaps I need to take a lesson from this jerk. Daniel Yergin, too, but I digress…

The Federal Reserve Bank has but one client: The U.S. Banking system.

The U.S. Banking system is entirely dependent upon one market: The U.S. mortgage market (residential and commercial).

(If A = B, and B = C: Then A = C)

And

The median family income must exceed the mortgage requirement of the median family home (however you define it) in order to amortize the loan.

The market rent for commercial space must be sufficient to amortize the carrying costs and debt service of land costs and improvements or the property is on the fast track to foreclosure.

Any rational analysis of housing and incomes would lead to the conclusion that many markets, totaling tens of MILLIONS of homes, must decline in market price by 50% in order to bring median income and median home price into equilibrium, or that NOMINAL median income must rise at least 100%(!), or some combination of the 2. This is where the Fed comes in. IF: the Fed can inflate the money supply; and, IF that increase liquidity can be directed toward real estate, the U.S. MIGHT be able to avert a significant banking/housing/economic disaster. Even IF the Fed is successful in inflating the money supply (devaluing the U.S. $ further) it seems reasonable to conclude that not ALL of that new supply would flow into Real Estate (after all this is not a command economy). Some, if not all might find its way into other asset classes. It appears this is happening as we speak with Gold and Oil prices rising by over 1/3 since the summer credit crisis began and the world’s central banks began their liquidity injections.

You see, it does not matter that the average home in America has 30% or 40% equity - as I have heard it argued that it would take a HUGE decline in home values before the equity in U.S. banks, about $1.1 trillion, is wiped out because of this cushion. The U.S. mortgage market is in excess of $11 trillion, with 2/3 of that for 1 to 4 family homes, or $7.3 trillion, the preponderance of this is in the HIGH price homes (not the number of homes but the number of DOLLARS) and these markets are taking the biggest hit. South Florida, California, and other coastal zones that were hot in the boom will be taking 30%, 40%, and sometime 50% hits to home values. It is not a big reach to say that it is entirely possible that all $1.1 trillion of “equity” of the U.S. banking industry might be a thing of the past.

Remember, I am speaking in NOMINAL dollars. If the Fed is able to inflate the money supply and funnel these dollars into the Real Estate market disaster might be averted. Then again, it might not be averted either.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2008-01-05T20:32:00.000-08:00

“Always drink upstream from the herd” - Old Country Saying

My friends love to tease me about my response to anything they quote to me from the mainstream media (“MSM”) – “Propaganda!” is my usual response.

Unfortunately, it is not just the MSM that is taking shortcuts with the public’s relative “informedness” or lack there of, the various federal agencies charged with data collection and reporting should be charged with dereliction of duty. Under no circumstance is unemployment 5% or inflation 3%, under no circumstance is housing going to “bottom” in 2008, under no circumstance is ethanol or hydrogen going to replace the missing BTU’s from the decline in hydrocarbons, and under no circumstance is any agency of the federal government or any major corporation going to come clean on these issues until our media gets its head out of its ass and into the sunshine.

OPEC is a case study in pathological deception. OPEC would have you believe that they can pump as much oil as they wish but that the problem with high oil prices has to do with refineries, speculators, violence in Nigeria, the U.S. Housing Crisis and hem lines in Paris this spring.

The U.S. Department of Energy's EIA has gotten into the act. On the same day as the Iowa Presidential Caucus, the EIA reported that crude oil stocks fell by just over 4 million barrels per day, but not to worry folks because most of that was represented on the other side of the production pipeline by an increase in distillates and gasoline. OK, now let's go to the video tape, or the EIA website, Just click the link directly above. Notice that net petroleum stocks not including the SPR declined by over 7 million barrels for the week? Notice at the bottom of the page that "unfinished oil" declined over 2 million barrels? What exactly is "unfinished oil"? Isn't crude unfinished? Couldn't those 2.2 million barrels have made it into the headline number as 6.2 million barrels of crude oil were drawn down from inventories?

If you believe what the MSM, Corporate America, and our Government spoon feed the masses, well, by all means, blow all of the sunshine up your skirt that turns you on. That does not change the 1 salient issue: Oil imports into the U.S. Nothing else matters. If 2008 sees a decline of over 2% from 2007 as happened in 2007 from 2006, all the finger pointing, first black/woman presidents, gay sex bathroom stings, invasions, hydrogen skateboards, dyslexic poets and double jointed porn stars won't be enough to distract the legions of the great unwashed from being really, really, really pissed off. Not to mention selling their stocks and walking away from their mortgages and credit cards. Maybe we make it into 2009 before a nasty round of hyper-inflation, and then again maybe we don't. There is a reason why gold is at $860 an ounce, oil near $100, and wheat (WHEAT! You know the Staff of Life!) nearly tripled in 2007, and it ain't because the folks in charge are telling you the truth.

Propaganda? No, folks we left propaganda behind some time ago - this is more like the Funny Papers meets Truth, Justice and the American Way!

Yours for a better world,

mentatt (at) yahoo (d0t) com

2008-01-02T17:19:00.000-08:00

“It don't take a genius to spot a goat in a flock of sheep” – Old Country Saying

$100! Oil, that is, traded at or above $100 today after surging nearly $4 on for no particular reason (other than the fact that our collective oil problem is sinking in through the shield of denial).

Well, trumpets did not blare, the wheels did not come off the economy, and the world didn’t come to an end. $100, $98, $96… there just isn’t enough difference between these prices to make today anything special or enough pain at these prices to retard demand. Here’s the deal: OPEC and the U.S. are no longer in charge of oil demand, distribution, or price. The U.S. will consume EVERY DROP it can get its hands on, irrespective of price, and that price will be set in a very competitive world market. U.S. crude and refined product imports declined 2% in 2007 from 2006, and that trend is going to continue in the short term and then accelerate. Also it is worth mentioning that while total availability of oil fell, the total usage rose slightly. This was possible by drawing down our inventories. These inventories muffled what would have been a true explosion in oil prices, and that explosion has only been delayed, not permanently denied.

Now, let us use our capacity for abstract thought…
What other commodities are likely to surge in price (in dollar terms) in reaction to oil? You can make a lot of money if you pay attention here - or you could lose your life savings if you listen to the droning bullshit coming from cheese-doodles-for-brains Financial Planners, Advisors, Money Managers or whatever the f&%@#!$ these jerks are calling themselves these days.

Oil is going higher. The U.S. imports Oil. The U.S. runs a massive trade deficit. The U.S. has no choice but to continue to run this deficit for as long as the sellers of oil will take their phony IOU’s. This means the U.S. $ is DOOMED. Any questions?

Sorry… that got away from me. You are still going to need U.S. Dollars (if you live in the U.S.) to pay taxes and to pay your bills. Let me restate by saying that the U.S. $’s purchasing power is going to decline fairly dramatically over the next several years. You will know what I mean when milk is $10 per gallon, gasoline is $8 per gallon, bread is $6 per loaf and a dozen eggs is 9 buckaroos. That is my measure of doomed.

If you want to hold the value of your life’s work in a doomed currency I want to wish you the best of luck with your vow of poverty (and chastity; everything has its price – no tickie no laundry)

Yours for a better $100 plus per barrel of oil world,

Mentatt (at) yahoo (d0t) com

2007-12-30T06:35:00.000-08:00

The following is a guest post by my good friend Dr. Saif K. Lalani of Vanderbilt University

MONETARY POLICY IN THE ERA OF PEAK OIL
by Saif Lalani
December 28, 2007

It is now clear now to anyone with at least a double digit I.Q. that the world oil production is at or near its maximum potential. Peak Oil will bring with it a host of new problems for the world's central banks. Rest assured that they do not have a Plan B to deal with ever rising prices of food and energy. With the way they are currently handling the housing crisis it does not seem that they even have a Plan A.

At some point in the near future the world's central banks will have to learn the difference between Geology and Economics. To my knowledge there are no central bankers with a major in one and a minor in the other. Absurd? Not really. Since oil is the lifeblood that keeps the world rolling one would hope that someone currently in power would have been enchanted with these two fields of study. (BTW the protagonists in the timeless classic “Atlas Shrugged” majored in 2 such apparently conflicting fields, Physics and Philosophy simultaneously). One teaches that the well once dry is dry. The other teaches that if we stand in front of the dry well with a large enough check, things can change. Hence their inability to understand the intractability of the problem.

There are currently 2 major schools of thought on how Peak oil will affect prices of things in general, the major concern for central banks. The first is that since oil is so essential for production and transportation of almost all things, the prices of everything will head to the stratosphere. The second and not so popular version is that once businesses acknowledge peak oil, spending and hiring will “collapse” resulting in deflationary forces that will match and even exceed the downward march in oil availability. I personally believe that we will have massive inflation in prices of everything essential and massive deflation in everything discretionary.

So what should the central bankers endeavor to do during the coming turbulent times?

Lets start as all physicians do. First, do no harm. Sounds quite simple but it isn't. Central bankers have egos as large as football fields. They think they can save the housing market, stock market, solve the energy crisis, cure cancer, make it rain and part the seas by slightly tweaking interest rates. Central banks need to understand what they can and what they cannot control. Trying to save sprawling suburbs with 0% interest rate policy is probably going to be less effective than trying to arrange good public transportation preferably in the form of electrified rail.

Second, publicly acknowledge peak oil. Do not put some technocrap spin on it. Tell it for what it is. Can you imagine the progress we would have made if one prominent central banker would have said this even 2-3 years back? Prepare the world for hardship. It is going to come regardless what they may say.

Third, ensure that loans are available for energy projects with a positive EROEI (energy returned on energy invested). Peak oil is likely to stress the banking sector to levels unseen since the great depression. Remember extremes can occur in both directions. Whereas once banks thought it made sense to extend no documentation loans to people to buy insanely expensive properties, they may not even fund good sound energy projects in the future. The fed and other central banks could in this case lend directly to fund such projects. Since energy prices would be the main reason for unemployment and inflation this would fall within their mandate. It is important to stress that positive EROEI is very important otherwise every action will just lead us into a deeper hole. They would likely need help with assessing EROEI but should have no problem in obtaining such help.

Fourth, do not attempt to rescue the dying industries. Detroit automakers, airlines and travel and tourism in general will come under increasing stress. The first 2 could not make money when oil was under $20 a barrel and will certainly not be able to survive for long without help in the future. There will be increasing pressure to “do something” about it. The Fed must resist the urge to help out. No rescue package for airline bonds or GM's junk paper will make an iota of a difference in the long run. Might as well fund an extra geothermal project with the money.

Finally it is paramount that we have honesty in statistics. The fed and other central banks need to report correct unadjusted inflation and GDP statistics. This will allow us to assess the actual impact of the problem and effects of the solutions we may try to implement.

I would like to end by thanking the central banks for making it a truly wonderful and entertaining

12 days of Christmas

On the 12th day of Christmas look what my true dove brought for me
Mortgage lenders with just no brains
Angry Crammer who never informs but always entertains
Never ending one time write-downs
Bank CEOS moonlighting as clowns
Surging food grain prices
Unsolvable housing crisis
Falling US dollar
Restaurant portions that keep getting smaller
3 rate cuts that messed up things
Gold prices that got wings
Double prices for milk and cream
And a C.P.I. report that said this was all just a bad dream.

Happy New Year to All

This post has been used by permission. © Saif K. Lalani

2007-12-29T08:08:00.000-08:00

“Letting the cat out of the bag is a whole lot easier than getting it back in” – an Old Country Saying

Hillary Clinton told the American people that if you vote for her the price of gasoline would go down because she is going to scare the oil exporting countries into producing more oil and dropping their price.

Why is it so hard for the political establishment to come clean with the American people?

Silly question.

What would you do if you knew for absolutely, positively, without question sure that the world was entering a period of permanent decline in energy availability? What would happen if EVERYONE, EVERYWHERE was also sure? Wouldn’t you/they behave differently? Maybe… very differently? It’s impossible to know what that means exactly, but it means something, and politicians are in the business of getting elected, not forecasting or predicting future events, especially if that future is not what the electorate wants to hear.

So they lie to us.

In mathematics the transitive property states: if a = b and b = c then a = c

So if politicians lie to us to get elected, and we in turn elect them, then it seems reasonable that they would continue to lie to us after their election. But claiming that as President, Hillary would have the power to lower gasoline prices boggles the mind (I read the U.S. Constitution in its entirety, nothing there about gasoline price powers). Now if as President, Clinton would double the price of gasoline by raising sales and use taxes on the commodity this would drive demand for gasoline down and hence the demand and price for crude oil (Contrary to popular belief gasoline and crude oil are not one and the same). If Clinton had the power to arbitrarily lower gasoline prices, wouldn’t that increase demand for gasoline? Hillary Clinton attended the best universities, so I am going to take a leap here and assume that she has some knowledge of basic economic principals, and that she knows full well that her claim is an out right lie… but I am going to bet that the tactic works, that this will bring more of the electorate to her camp, and furthering the belief that lying is an effective campaign and political strategy for those seeking office.

By the way, our political establishment assures us that everything is peachy concerning our energy. Should we believe them?

Yours for living in interesting times,

Mentatt (at) yahoo (d0t) com

2007-12-28T17:30:00.001-08:00

OK. I’m back.

Year-end is as good a time as any to take stock. Let’s see now…

The U.S. dollar has gotten creamed.

Crude Oil trades just shy of $100.

Gold is rocking in response to the $. Silver, too.

Housing has a severe pneumonia.

Agricultural commodities like wheat, soybeans, and corn are trading at record, or near record prices.

If you have been reading my stuff for a while this is all check, check, and check…

Now for 2008:

Nothing new:

The U.S. dollar continues to weaken versus commodities and the currencies of oil exporters (versus the Euro? No opinion because it just isn’t that important – unless you are a currency trader).

Crude trades over $100, with a high of $140, and a low of $75 (I had dinner last night with FireAngel of theoildrum.com fame and he felt $165 was very possible. His calls have been nothing short of prescient, so I moved my own projection up from $130. Brave of me, no?).

Gold and Silver continue to appreciate against the $.

Corn trades higher in sympathy with oil and natural gas. Soybeans and wheat? Tough call.

For the U.S. economy:

In Nominal Dollars, no recession if oil supplies are equal to or surpass 2007. In Real Dollars we might be in a recession right now. The data for inflation, the GDP deflator, money supply, etc… is so disparate (it doesn’t add up) and unwieldy that Alexander the Great and his pesky Gordian Knot pale by comparison.

The Great Unknown is the response to the U.N.’s International Panel on Climate Change’s final report to the General Assembly. I don’t care how many Larry Kudlow, pooh-bah jerks the deniers line up to mock those tree hugging scientists, this issue is going to be big - REALLY big. Like rationing electricity big. Or leaving coal in the ground unburned big. BIG.

I am back and will be posting regularly and I wish for you and yours a happy, healthy, and prosperous new year!

Mentatt (at) yahoo (d0t) com

2007-12-21T05:55:00.000-08:00

Follow up on Aristotle Onassis’ famous quip

On my December 13, 2007 post I quoted Aristotle Onassis, a keen observer of the human condition, in his most famous remark:

“If women didn't exist, all the money in the world would have no meaning.”

I got a remarkable amount of email from testosterone challenged men and women who likely don’t shave their underarms lambasting me for insinuating that Alpha Males, driven to compete by the need for female sexuality, were a significant portion of the problem that has led us to the 2 sides of the same problem coin, “Peak Oil” and “Climate Change”. I wasn’t insinuating at all – I was stating this as firm conviction.

Several days later, this article was linked to the EnergyBulletin.net’s web site. I wonder if the good professor received as much flack as I? I wonder if he will lose his tenured position for observing the obvious?

Folks, what is the purpose of hair dye, breast implants, cosmetic dentistry, high heels, make-up, and beauty magazines (all OK with me. Actually at my age a dimmer switch is probably the best cosmetic)? Are these not the Ovarian American’s response to the Estrogen Challenged American’s instruments of status such as high priced automobiles, mansions, and exquisite tailoring? I am not suggesting that ALL Ovarian Americans and ALL Estrogen Challenged Americans use these tools to further their interests, but as anyone who has ever killed a little time at the magazine rack at the airport will agree: Though there are dozens of rags targeting the American Bride, have you ever heard of “Groom” magazine?

Yours for a better post fossil fuel and post politically correct world,

Mentatt (at) yahoo (d0t) com

2007-12-20T07:52:00.000-08:00

Apocalypse Delayed

Despite the mortgage meltdown and housing crash, the U.S. economy will likely not enter a terrible recession in 2008.

At the end of 2006 I wrote that 2007 would likely see a recession brought about by the housing crash and much higher oil prices. Perhaps we are in a recession right now or perhaps I was close, but no cigar.

So here is the deal for 2008:

For the U.S., it is all about OIL SUPPLIES, not oil prices. If oil in the world markets is there and available for the U.S. to import, there will likely be no recession and a decent gain in the stock market of between 8 and 12 %. At this moment, I would be willing to bet that the oil will be there for 2008, because we have some big projects coming on line around the world and the restarting of Thunder Horse in the Gulf of Mexico. I think these projects will yield more production than the decline in the established fields from depletion.

I am also assuming that 2008 will be the year that supplies of “All Liquids” (petroleum) will peak for purposes of establishing an investing and trading schematic. Perhaps the peak in crude and condensate will remain 2005, and perhaps not. I am not predicting nor forecasting. That is for the guys at organizations like ASPO and CERA to do. It had appeared that 2006 would be the peak in all liquids but a large increase in production of natural gas plant liquids (“NGPLs”) in November appears to have changed that, and, no I am not concerned with monthly “peaks” but yearly averages. Even if 2008 does not eclipse 2006 it will be close enough for our purposes here.

Unless, of course, I am wrong: If world oil production should actually decline in 2008, and/or if U.S. imports should decline, all bets are off. The U.S. would enter a steep recession, the markets would get clobbered, and oil prices would send you in to sticker shock.

Either way, housing will not recover in 2008, and housing in South Florida will NEVER recover. I live here in South Florida. I wrote to our clients in 2005 that the South Florida housing market was doomed to a 10 year correction. We are 2 years into that correction, and unfortunately, the energy crisis will strike the U.S. before South Florida has a chance to begin recovering. South Florida is entirely dependent upon cheap gasoline for commuting and tourism, and electricity for cooling of homes, workplaces, shopping malls, etc... Electricity is going to be rationed here before the last 8 years of the correction is complete. So I repeat: If you have an extra single family home or 2 in South Florida, get what you can NOW (in my humble opinion), because like it or not, things are going to enter the surreal over the next several years for housing in this market.

I would expect oil prices to be exceptionally volitile, with a range for front month contract between $70 and $130. If you are a trader, this is going to test your intestinal fortitude.

Now that I have waffled at least as well as any politician… We are in the “Land of the Philistines”, with the U.S. economy and financial markets entirely dependant on supplies of imported oil. This is the one crucial data point, and everything else you read, hear, or see in the financial media is a “puff piece”.

Mentatt (at) yahoo (d0t) come

2007-12-17T13:07:00.001-08:00

Woops!

In a recent post I misquoted a study of agricultural output in which I stated:

“It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food.”

My apologies, 80% of the cost bringing certain agricultural products to market was fossil fuels, not 80% of retail food prices. I knew I must have made a mistake while reading Stuart Staniford’s excellent piece on retail food prices at theoildrum.com:

Chastised though I was for my error, I was very happy to see a top “Peak Oil” analyst who agrees with me that the food situation in the U.S. is not going to lead DIRECTLY to hunger and anarchy (hunger is a societal/economic problem in the U.S. There is certainly more than enough to feed the population), though neither he nor I are quite so sanguine about the rest of the world.

This is not to say that food inflation is not a serious issue - it is. Nor am I suggesting that 10 years hence the issue could not become much more acute - it could. I AM suggesting that we (you know, the people) will respond as our parents and grand parents did during the great wars of the 20th century. We will figure it out and grow enough of our own food to make up for the decline in industrial agricultural output. For a resident of my hometown of Boca Raton, or Beverly Hills, or some such other rarified community might think this is the end of the world, but it ain’t.

No, I believe that in the U.S., the “Peak Oil” issue is going to be felt initially in the form of a violent economic contraction. Yes, food will be very, very expensive, but there will be enough of it, as far as the impacts of Peak Oil (I have no opinion on the effects of climate change, genetically modified seeds, etc… Oil is all the worry I can handle at the moment, folks).

I will be taking the next week or so off to enjoy some time with family and friends.

Mentatt (at) yahoo (d0t) com

2007-12-16T07:54:00.001-08:00

Green. The color for those who cannot count (and I am not talking about money)

I can’t help myself. I will confess. I still subscribe to “Fortune Magazine” (among other rags of the financial press). Maybe I have a touch of the masochistic, or maybe old habits die hard. Whatever the case, I invest for a living so I read this stuff.

For the December 24, 2008 issue “Investor’s Guide 2008”, most of the first 20 pages contain advertising for all things “Green”.

“The Most Fuel Efficient SUV On Earth”, - Ford Motor Company

“Waste Management is using the resources our disposal to create the energy equivalent of saving over 14 million barrels of oil per year” - Waste Management

“Our Plans for Bio-Fuels Are Growing” British Petroleum

And my personal favorite…

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his McMansion holding a cup of coffee, his Wall Street Journal tucked under his arm and a shit-eating-grin on his face because he just saved the flipping planet by using materials to build his house from the Sustainable Forestry Initiative.

The silliness did not end there, but you get the point.

The Editors have absolutely no problem throwing their readership “under the bus”. Considering the volume of reporting in the past 60 days on the impending oil import crisis, price signals from the oil markets, and countless academic papers on the issues, there is NO CHANCE that the editors are not aware that this is all harmful propaganda for their readers, their PAYING readers. “Sorry, dear reader, the advertiser paid more. And by the way, when you get blown up in the market, we’ll report on that, too. Hey, we aren’t analysts here, we are just journalists.”

The powers that be will continue this charade for as long as possible. Their net worth depends on it. They need to convince you that the markets will continue to function as they have, money supply will continue to grow, technology will trump physics regarding our energy consumption, etc… so that they can SELL YOU their paper assets before they decline in real value any more. That’s the game, the story, and the strategy. If you fall for it, you will look back on this BS in 10 years and wonder how you could have been so dumb.

There is no such thing as a fuel efficient SUV, any more than the tooth fairy.

Waster Management is full of baloney. The methane from the refuse they are talking about equals 14 million barrels of oil equivalent? Maybe. Anybody care to guess how many HUNDREDS of MILLIONS of barrels of oil were wasted in creating that waste? Certainly not Waste Management.

And the cute, double entendre of British Petroleum for growing Bio-Fuels (complete with a picture of a corn stalk)? Get a new schtick, guys. No one, not even the great unwashed, believes that one anymore. Still, you have got to give them credit for their stick-to-it-ivness.

But can you imagine the financial press foretelling the situation accurately? We would have to adjust my favorite advertisement to:

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his 800 square foot, well insulated home, which is getting by with its ration of electricity by having a college dorm size fridge, and a grand total of 10 compact fluorescent light bulbs fixing his bicycle or waiting for public transportation. Don’t even ask about AC…

This is where we are going, folks. This is what it means to our lifestyle if we accept, and even if we don’t accept, the U.N.’s IPCC analysis on carbon emissions and the realities of the impending oil import crisis. If you have the means, the motivation, and the intellect, there is much you can do to improve your circumstances. There is little your government is going to do for you. Spending time waiting for the government to solve this with a tooth fairy, techno fix is a fool’s errand. Personal responsibility is going to take on a whole new level of meaning in the brave new energy/carbon constrained world we are entering.

The 1960’s slogan: “Question Authority” needs revision…

Question and Doubt EVERYTHING the media says.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-12-15T06:48:00.001-08:00

Politics as usual

Anyone, right or left, Democrat or Republican (I am lifelong anti big-government Libertarian Republican. You might find that a contradiction in terms considering my firm belief that ONLY government can do anything about Climate Change. I think not. Only a moron believes in NO government) listening to the debate over Climate Change (“CC”) and the U.S. Administration’s seemingly deranged approach to the negotiation would do well to take a stroll down memory (history) lane. The political realities are such that those in power and wealth at this time in our history have never been more powerful, relative to the masses, and have been endowed with wealth beyond the wildest DREAMS of our ancestral establishment members.

The 7 original states of the Confederacy, later joined by an additional 4, made WAR with and upon the U.S. government resulting in the slaughter of over 600,000 individuals (a rather significant percentage of the free population of 27,500,000) rather than give up their position of primacy while attempting to defend the indefensible – slavery.

“Meet the new boss, same as the old boss” – from The Who’s “We won’t get fooled again”

Of course we will get fooled again. Or maybe just bullied. It is all semantics, really.

We are in a pitched battle. Unfortunately, only one side in this battle for safety of the world is armed, and it ain’t us – at least at the moment. I am hopeful for a turn for the better in this regard. Not a perfect solution, mind you, but perhaps an increasingly better operating environment over time, because this might be the very definition of the “Universal Issue”. After all, there is no wealth, no power, no sex, no influence, no sex (“you said sex twice” to which I replied “I like sex”, paraphrasing Monty Python), if there is no livable environment.

A U.N. spokesman said yesterday that the Bali negotiations "were a beginning, not an end", and when the U.S. appeared to be losing (any) control, as well as any credibility, of the outcome the U.S. delegation rolled over. What does the U.N. mean we are beginning? The end of coal usage? Because in order to meet the IPCC's final determination would mean the END of coal use, while continuing Oil and Natural Gas use with either natural depletion doing the job for us, or some kind of regulatory impediment to their use. All of which means a significant contraction in the world's aggregate wealth, and while the poor would certainly feel this most severely in real terms, the fall from power that the world's super rich fear is the primary "fly in the ointment" holding reform back. If you doubt this, let me ask you something: Do you think consideration for the world's poor is what is holding our political institutions back? Give me a break.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-12-14T16:58:00.001-08:00

“Unintended Consequences” meets “Cost/Benefit Analysis”

Well, they sort of meet. Perhaps I should say Unintended Consequences DOES NOT MEET Cost/Benefit Analysis/

Cost/Benefit Analysis (“CBA”) simply is not done in America with the exception of an occasional stab by business (Corporate America is TERRIFIED of CBA because it might hold up to the harsh light of day that for the most part Corporations get very, very, very little benefit and a great deal of cost from their CEOs; more on this later).

Unintended consequences (“UC”) is what it is – an outcome, result, or side effect of an action or actions.

Now imagine the UC’s of a standard operating procedure of no CBA and you have just described our political, justice, economic, healthcare, financial markets, and energy policies. Why? Because CBA’s are not warm and fuzzy! They deal with the harsh realities of life. What policy maker is going to stand up to the microphone and say:

“Expending 60% of America’s healthcare dollars on the final 3 weeks of life of the terminally ill adds nothing to the quality of their life and prevents us from doing many positive things, so we are not going to do it anymore. If you are this sick, you are going to die.”

Or a surgeon tell a patient:

“You have a tumor in your prostate. We are not going to operate because 90% of time you are going to die of something else, long before you might die from cancer of the prostate. If we do the surgery, you are more than likely to be impotent for the rest of your life. Further, we will save the system a ton of money.”

Politicians and cancer surgeons are in the business of telling people what they WANT to hear, and then stripping someone else of the cash (tax payer or you and me by way of our insurance provider) to fund the activity.

One of my personal favorites: Somehow the U.S. has wound up with the highest percentage of its peacetime population in prison in the history of mankind. Now, that is a strong statement, considering we had some pretty tough competition from Russia, Cuba, Saddam era Iraq, and China. Still, somehow we pulled it off. And what do we get for our efforts? Plenty of crime and a huge financial liability to fund our massive justice and prison system. But you won’t see any lawyers trying to right this ship (or our crazy divorce and family law which only serves to hurt everyone concerned, except the lawyers), because it works just fine for them and their bank account.

Do I have to mention car accidents (26,347 deaths per year)? Obesity and physical inactivity (365,000 deaths per year)? Tobacco (435,000 deaths per year). Alcohol (85,000 deaths per year)? Yet we spend more money on the war on drugs than prevention for all of these combined, while less than 17,500 people per year die of drug overdoses. But how can lawyers and the rest of our embarrassment of a legal system make money preventing car accident deaths or obesity deaths? Believe me, if they could, drugs would be legal and we would be handing out stiff prison sentences to those who put us in danger with their aggressive driving or fat fuckers standing in line at McDonalds.

Anyway, rant over. The point is our government does things on the policy level with absolutely no consideration towards the cost versus the benefit of any given course of action, only the cost versus VOTES they can garner. You can bet your LIFE the U.S. federal government will not engage in CBA as it regards our energy policy until well after it is too late. I imagine it will be the same story for climate change.

“Lord, grant me the power to change the things I can, accept the things I can’t, and the power to ignore the dumbasses that surround me…”

Mentatt (at) yahoo (d0t) com

2007-12-13T18:40:00.001-08:00

“If women didn't exist, all the money in the world would have no meaning.” Aristotle Onassis

Ponder that for a moment.

Have you given that enough thought? Good. That line sums up why a “Power Down” will never happen. Why we will drive right over the cliff with our foot on the gas pedal, and why we will fight all the way down the back side of Hubbert’s Peak. It’s why communism doesn’t work, why we make war, and why Helen launched a thousand ships.

Don’t get it? Perhaps you are wondering what the hell I am talking about? I’ll give you a clue:

The alpha male took that as a given.

Mentatt (at) yahoo (d0t) com

2007-12-13T05:30:00.001-08:00

EIA Monthly World Oil Production for September 2007 Just Released

The world’s oil fields had a pretty good month in September, according to the U.S. Dept. of Energy’s Energy Information Administration. A nearly 1 million barrel-per-day increase over August in crude and condensate production, still the trend remains: Average daily production world crude and condensate production by year:

2005 = 73,807,000
2006 = 73,539,000
2007 = 73,134,000

Since July 2007 U.S. inventories have declined by nearly 12%, and OECD inventories have declined somewhat more. Prices have risen 40% or so. I look forward to the supply data for the period 7/07 – 12/07 with great anticipation, and will recast it along with inventory and consumption data and price action. At the moment, something appears amiss in the data compiling, or the price inelasticity of oil is much worse than had been previously believed. In addition, it would take perhaps another 6 to 12 months to determine if any new “production” from OPEC was an actual increase in production or a drawdown in OPEC inventories. OPEC (Saudi Arabia) is none to helpful in this regard.

On another note, yesterday’s coordinated activity of world Central Banks is conclusive proof that a potential dollar crisis has the powers that be running for clean underwear.

Yours for a better world,

Mentatt at yahoo (d0t) com

2007-12-12T05:47:00.001-08:00

The front page, center column, of the Wall Street Journal this morning:

“Saudi Industrial Drive Strains Oil-Export Role”

I would very much like to congratulate the many contributors to the “Peak Oil” discussion at TheOilDrum.com and EnergyBulletin.net for their part in making the American people, and the citizens of the world, aware of this emerging crisis.

While many of us had been pointing out that “Peak Oil” would strike the major industrial importing countries long before the rest of the world, particular recognition should go to Jeffrey Brown, a volunteer contributor at TheOilDrum.com for coining the term “The Export Land Model”, constructing the model and, above all, having the patience to explain the issue, ad nauseum, to the chronically intellectually dishonest and challenged members of our mainstream media, financial services industry, and government. (I’m sorry, I really should get over it, but I just can’t seem to miss an opportunity to call these folks out for what they are.)

To all: Enjoy your moment in the sun. The ramifications of your analysis, which appears to be more or less as correct as one could hope for considering the less than perfect data we are working with to arrive at these conclusions, might beg us to remember to “be careful what you ask for, you may get it”. Not that any of us asked for an energy crisis, we just pointed out the obvious.

As the financial market’s participants knowledge of the issue comes to full bloom, I would hope that the consequences and impacts of this outcome would be the driving force behind all policy, and personal, decisions.

The question is, and I will quote Bob Shaw from TheOilDrun.com:

“Are humans smarter than yeast?”

(Yeast will ferment our alcohol for us as they grow and consume the resources within their environment but in the process destroy themselves by destroying the environment within the fermenting medium)

I’d like to think so, Bob, but would have to say that, at this moment, the real question is:
Are the people in power capable of helping the people avoid the yeast’s fate, or are they more interested in staying in power? Unfortunately, we know the answer to that question.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-12-11T20:11:00.001-08:00

The Fed is not The Problem. When it comes to the financial markets… We are The Problem.

We have a Problem. Considering the amount of hot air blowing out of the talking heads today one would think that the institution that is the U.S. Federal Reserve Bank has the power to solve The Problem. Anyone may read the Federal Reserve Act of December 23, 1913. If you take the trouble to do so you will be as sure as death and taxes that the Fed cannot solve The Problem.

Like most problems, The Problem is not a uni-faceted phenomenon, or should I say is not without the subsequent problems inevitably caused by The Solution(s) - proposed, enacted, or ignored – that the Problem will eventually have.

The Problem that the U.S. financial system is experiencing is not housing, or sub-prime mortgages, P/E multiples, or consumer spending, or consumer debt, etc… these are merely symptoms of the condition that is The Problem.

The Problem is the U.S. borrows $2 billion or so each and every day to fund its current account deficit, and the preponderance of that is for the purchase of OIL (I told you there was more than a one part to this problem, and you had to have known that it would include oil). There it is. That is The Problem. The good news is that we don’t have to do one damn thing to solve The Problem, because The Solution to The Problem is going to happen without any of us having to lift one F$#&^!# finger, and boy are we NOT going to like it, not one bit.

You see, in the coming 10 or so years U.S. Oil imports are going to decline dramatically. Over the following decade Oil imports will decline to the point of the inconsequential. And that will be the end of the current account deficit, the U.S. Dollar (in international trade), the U.S. Treasury Market, the Stock Market, the Federal Budget Deficit, Medicare, Social Security, and any and all Welfare State Transfer Payments (I don’t give ONE HOOT about your political sensibilities, left or right, right or wrong, for or against, just calling them as I see them). The impacts from the previously mentioned fact of disappearing Oil imports mean all of these things.

For a family man in his 40’s this should be quite disconcerting, but not surprising. Your participation in Social Security and Medicare, while not voluntary, is quite futile. You will receive absolutely no value for your input except the warm and fuzzy feeling one gets from letting the previous generation bilk you out of the fruits of your productive years while sending your progeny off to combat zones to fight and die for the very last squirt into the toilet of imported Oil to put off the day of reckoning onto another generation of Americans, and a future American Administration and Congress for the sole purpose of allowing the previous occupants of those illustrious branches of our Federal Government to be able to say: “Not on my Watch”. The Ponzi scheme that is the American financial system is ENTIRELY built, at this moment in time, on the continued flow of cheap oil imports in exchange for dubious IOU’s backed by the full faith and credit of the world’s largest debtor nation, a country that has no intention of paying them back. The amusing thing is that we accept this grand theft as our birthright while arguing over school prayer, flag burning, gay marriage, the Ten Commandments in government buildings, french or freedom fries, and other nonsensical, contrived issues which only continues to mask the harsh reality that in doing so we are merely tightening the rubber band further for the eventual “SNAP”.

For the same family man in his 40’s, contributions into the financial system will meet a similar fate. What contributions you make now are purchases that allow some seller somewhere to liquidate. Our family man here will not have the same opportunity in the future, say in his 60’s. There will be no buyer for all (some perhaps, though I think not) of the financial assets he (you) has so assiduously accumulated over his (your) working life. Why? Because the global financial system requires an ever-increasing use of BTU’s to power exponential economic growth, something the long-term readers of this blog know to be impossible, both from a mathematical and geological point of view.

Some very smart folks in the 1970’s warned us about the mathematical certainty that infinite linear systems and finite resource endowments are mutually exclusive events, not to mention the absurdity of making war for financial interests (often called “American Interests” – though very few Americans have any interest in these “interests”), Korea, Viet Nam, Iraq, Iran… sorry, I am getting ahead of myself/country. Did the powers that were, as it were, attempt anything constructive at that time? Not a shred. And the powers that be, of our time, will they attempt anything constructive? Not if Chuck Norris and Oprah Winfrey have anything to say about it. “Problem? What Problem?”

Well, they say that no matter where you go, there you are. Here we are, indeed.

Mentatt (at) yahoo (d0t) com

2007-12-11T05:45:00.000-08:00

“The End of Cheap Food” Cover Headline of Economist Magazine, December 10, 2007

What they should have said is “The End of Cheap Oil Means the End of Cheap Food”. Still they have come a long way since their 1999 cover story of “$5 Dollar a Barrel Oil?” That was the equivalent of the Boston Red Sox error of the century in print journalism. (I often wonder if the fellow who came up with that is in any way embarrassed. He should not be, forecasting is inherently failure prone.)

The New York Times ran a cover story in the Sunday Business Section 2 days ago on the mathematical certainty that oil imports into the U.S. are going to fall – although they did their best to obfuscate just enough so that their readers were left with plenty of hope for a techno fix.

Why these august publications are not capable of making the link and connecting these dots – and what it means to food prices and economic growth – is beyond me. As the volume of imported oil into the U.S. declines the rate of food inflation is more than likely to accelerate. The question is at what rate? Does a 3 % annual decline in oil imports mean a 3 % annual rise in food prices, or is it more like 30%?

It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food. If the cost of fossil fuels doubles (not an unlikely event in my opinion) does the price of food rise 80%, or might it be more?

I prefer to believe that the market will respond quickly with more locally and personally produced food products, and if this means my neighborhood smells more like a barnyard street market in Peru than a fresh cut lawn in spring how will that affect housing values in my neighborhood? JUST KIDDING!! (about housing values in my neighborhood, pretty serious about the rest) Had you for a second… People will respond, working class and poor folks simply won’t be able to afford not to (if I may use the double negative). How else can a population with ZERO savings afford a near doubling of their food and energy costs?

Can you imagine, instead of marching for a cure for breast or prostate cancer, we have Johnny Appleseed marches for fruit trees and raspberry bushes? Al Sharpton marching for equal rights to inner city gardening space? Martha Stewart giving instruction on not just goat cheese dressing, but on milking the goat as well?

“May you live in interesting times”.

Mentatt (at) yahoo (d0t) com

2007-12-07T05:29:00.001-08:00

Inventories

U.S. Crude oil inventories peaked this year in the week ending 7/6/07 at 352,580,000 barrels.

For the week ending 11/30/07 U.S. crude inventories stood at 305,240,000 barrels.

In 5 months U.S. inventories declined 11% (peak to trough).

Each week our friends (with friends like these who needs an enema?) in the media report the inventory decline of the week with an explanation:

• Bad weather delayed offloading of ships
• Storms in the Gulf of Mexico delayed oil deliveries
• Falling Demand (my personal favorite)
• Refinery Outages (???)
• My dog ate my inventory homework

Guys, guys, guys… I know that whatever journalism school you attended was long on style and short on statistics but even a journalist can see a trend forming here: you know, rising prices and declining inventories. You folks are supposed to be experts at ferreting out the truth, and though you have proven quite adept at calling politicians for what they are, you seem to have gone tone deaf, or your B.S. meter is on the blink, when the party at the microphone is an oil executive or Wall Street analyst/CEO. After all, these are our “best and brightest”. Look at the great job they did when they conceived the idea of mortgage-backed securities!

Of course, during this time prices rose over 40% (and rose over 800% over the past 8 years) and was again explained as:

• Demand from China and India is driving prices higher (give that journalist a cigar)
• International Politics
• Terrorism
• The decline in the value of the U.S. Dollar
• Greedy oil companies
• U.S. Energy Policy
• Greedy Speculators

In the land of the free market, maybe it is the consumer that is responsible for the price response of the supply demand equation. Did that one ever dawn on you? Maybe, just maybe, the same force is working upon the value of the dollar versus commodities, like oil for instance. Ya think?

Yours for better journalism covering the most important issue since Noah built himself a boat.

Mentatt (at) yahoo (d0t) com

2007-12-05T07:00:00.000-08:00

Duh!!

Front page of the WSJ today has a blurb about airlines being unable to grow in 2008.

A couple of weeks ago it was the U.S. automobile manufacturers.

6 months ago it was banking.

Last year it was housing.

Exactly how do you sell more houses, cars, and airline seats if your total supply of oil is falling?

Which industry is next? I am not sure but I have some candidates:

Trucking, Shipping & Overnight Delivery
Travel & Leisure
Hotel & Hospitality
Retail

What else would the beginning stages of peak oil in the U.S. look like?

Nothing. This is exactly what it would look like. It is what it is.

Mentatt (at) yahoo (d0t) com

2007-12-05T05:27:00.001-08:00

OPEC says market well supplied, declines to increase production

I got to hand it to the public relations folks at OPEC. They did a great job of keeping everyone off balance for the past 2 weeks. The media fell for the OPEC head fake so consistently it was embarrassing to watch. Thankfully, that’s over.

So let’s go through the scenario - OPEC meets at a time when :

• Oil prices have closed in on their all time record, rising over 50% this year alone, and up over 800% in 8 years.

• Inventories the world over have been in steep decline during the traditional “shoulder period”, the period between peak summer gasoline demand and peak winter heating demand, the time when inventories are normally building.

• In terms of “days of supply”, the only inventory number that really counts, the OECD country’s inventories are heading into the red zone.

• The world’s production of crude and condensate (“C & C”) has been flat to slightly declining for 2.5 years. Prices have doubled during this period. Spare me the lack of demand argument.

• Oil imports into the U.S. have declined for 2 years at roughly 1% per year. While oil imports have SURGED for China and India far more than the decline in U.S. imports.

• OPEC country's domestic consumption continues to rise, with projected 2008 year over year increase in demand second only to China at over 350,000 barrels per day.

• OPEC has increased production over 2 million barrels per day since 2000, but their exports have actually declined due to the increase in domestic consumption.

So, what does the gas station to the world do/say? That the world is “well supplied”.

Well, guys, that wasn’t the OECD country's point was it? No, there is no shortage of $90 per barrel oil. The problem is, the OECD countries were looking for some $50 - $60 per barrel oil, of which there seems to be an EXTREME shortage.

Note to the U.S. Department of Energy, the 2008 Presidential candidates, Congressman Bart Stupak, the iconic moron Richard Blumenthal (the Connecticut Attorney General who testified that the problem with oil prices stemmed from allowing all of the American Oil companies to merge! In other words, he proposed to solve the energy crisis by tough enforcement of the anti-trust laws, and in the process follow Eliot Spitzer’s example, and Rudy Giulliani, on how to get ahead in politics), etc…

When crude oil is $200 per barrel OPEC will again claim that the market is well supplied – and it will be! Just not with $100 per barrel oil.

So stop wasting the public’s time. OPEC is likely unable to increase production, and even if they could it would be for a very short time and not by a terribly meaningful amount. You know what you have to do, and yes the beginning stages of that discussion might well cost you your political career. Yet you ask young people to risk their lives and limbs in a war for oil while you refuse to risk only your jobs? Perhaps if politicians were shot for cowardice (the U.S. has done that to more than a few teenagers in its history, right?) we might get a better quality candidate.

The Great U.S. Energy Crisis has arrived.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T) com

2007-12-02T19:26:00.001-08:00

2 + 2 + 2 ≠ 7, but the market thinks it does

The IPCC’s FINAL report on climate change was clear: Cease growth in Carbon emissions within 7 years and reduce to essentially 0 all carbon emissions within 40 years or suffer horrific consequences. (Forget your politics for a moment. If you are arrogant enough to have an opinion that contradicts the IPCC report but were not invited onto the panel you are the very definition of a MORON, so please, stop reading and go find yourself a recent issue of People Magazine. It is more your speed.)

I don’t think that that was terribly hard to understand.

The Peak Oil Activist community, many of which are some of our best minds in academia, and many in the Oil industry itself, has articulated fairly convincingly that oil supplies will not continue to grow much longer, if they have not begun to contract already.

The Automobile industry, the housing industry, the “this, that, and other industry” is projecting growth out till kingdom come… in complete contravention of the simple mathematical concept “e”, or the “exponential function”, and in complete denial of the political interventions coming due to the IPCC report and the constrictions coming due to the lack of sufficient fossil fuels.

But at the moment, the financial markets believe these projections - 2+ 2 + 2 = 7. Carbon constrained + Fossil Fuel Constrained + Unlimited Industrial Growth = Business as Usual!! Yes! We can have exponential growth in automobile manufacture while cutting our carbon emissions to 0! Yes! We can have exponential growth in the world economy at precisely the time world oil supplies are in terminal decline! Remember, this logic has been brought to you by the same “best and brightest” that brought you this great reasoning: "If we bundle a thousand sub-prime mortgages together and wave our magic wand they will be magically transformed into AAA grade investment bonds."

I know I should be careful, and not offend someone by goring their personal sacred cow (as I recently did over dinner with friends and clients when I had the ill manner to say that the declining Dollar (and rising Euro) would not save South Florida's housing market with oodles of Europeans buying properties in South Florida).

As sure as 2 + 2 + 2 ≠ 7, the markets will figure this one out, too. And there will be hell to pay. I just can’t tell you when, exactly. I CAN tell you it is not “if” but “when”, just not “exactly” when. The myriad doom and gloomers, and other curmudgeons, keep predicting the date of this “collapse” and that “meltdown”, using what statistical model for their forecast I know not – and neither do they. I enjoy James Howard Kuntsler's work as much as the next guy, but has shown no marked ability at calling market (if I may risk the use of understatement) tops. Though he will eventually and most certainly be correct, it may be years until that time.

But I am speaking to you, not those guys. So let me ask you a something(s):

What date, exactly, did you first start to use a computer? (uh, 1984) What date did it dawn on you that it was a life changing development? (uh, 1984) Now, WHAT DATE, EXACTLY, DID YOU BUY MICROSOFT AND INTEL STOCK AND TELL EVERYBODY THAT CAME NEAR YOU THAT THEY SHOULD BUY SHARES IN THESE COMPANIES? (uh, I never bought the stock, or: I bought these stocks in 1999, just before the market crashed.) Or maybe you were to young to take advantage of those life changing opportunities that you were faced with everyday. So, what about Google? (I TOTALLY missed Google).

Here’s your second chance. Don’t blow it.

Mentatt (at) yahoo (d0t) com

2007-12-01T10:19:00.000-08:00

Connect the dots

One of my favorite bloggers, Professor Joseph Dancy of the SMU School of Law pointed out the following agricultural data points recently:

“The boom in biofuels is boosting demand and constraining food supplies; 20% of the US corn crop is already used to produce ethanol. Agricultural commodities are the subject of a growing battle between energy demands and food demands of the world’s population. The UN's World Food Organization predicts that demand for biofuels will grow by 170% in the next three years.

Wheat prices surged to record highs last month. Expectations are that rising global demand for U.S. wheat will deplete inventories, leaving them at the lowest level in three decades. Wheat prices on the Chicago Board of Trade topped $9 a bushel for the first time ever.

The U.S. Department of Agriculture cut its estimate of Australia's wheat crop to 21 million metric tons from last month's estimate of 23 million tons. Australia was expected to be the world’s second largest wheat exporter. The USDA’s estimate of Canada’s wheat crop also declined 5.6 percent last month.

The USDA raised its’ forecast of expected wheat exports as foreign buyers are flocking to the U.S. The world market expects poor harvests in major producing regions, and rising demand from industrializing nations such as China.

The USDA estimates crop-year ending stocks of wheat will fall to 362 million metric tons in 2007- 2008, down from 456 million metric tons a year earlier. This is the lowest inventory level since 1973-1974.

Ukraine was the world's seventh-biggest wheat exporter last year. The Ukraine government said it will restrict grain exports last month to moderate domestic food price increases.

Russia, last year's third-largest wheat exporter behind the U.S. and Canada, said it may impose a 10 percent export tax on the grain in November and a 30 percent export duty on barley.

Global wheat inventory stockpiles at the end of June in the five biggest-exporting countries fell to 107 million tons, a 34-year low. Wheat was the fourth-biggest U.S. crop in 2006, behind corn, soybeans and hay, according to government data.
The higher wheat prices have increased the cost of staple foods such as bread and pasta. Higher pasta prices prompted consumer groups in Italy to launch a one-day boycott of pasta last month. Prices there have soared as much as 20 per cent over the last several months.

Corn prices hit a three-month high last month after China signaled that it could become a net importer for the first time in more a decade. One of the world's four biggest corn exporters last year, China will encourage more imports of the grain, and discourage domestic output of crop-based fuels, in an attempt to keep food inflation under control.

The amount of U.S. lands planted in corn has increased 18.5 percent this year, from 78.3 million acres last year to 92.9 million acres. The USDA forecast that fertilizer use should increase by 5 percent overall, with use on corn up 9.5 percent.

The USDA is forecasting record fertilizer expenditures for 2007. Fertilizer accounts for roughly 20% of a corn farmer’s operating cost.

Over the last year the price of eggs went up by 33.7 percent, whole milk 31.1 percent, and navel oranges were up by 13.6 percent in the U.S. according to a government report. Other dramatic increases included fresh chicken up by 8.4 percent, apples up by 8.7 percent, and dried beans up by 11.5 percent.

Barley prices in Winnipeg, Canada, gained 41 percent in the past year on increased demand for animal feed and for brewing beer. Canada is one of the world's biggest barley producers. Corn has gained 53 percent in that market as demand for grain-based ethanol surged.

Driven by a combination of trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. There are reports of cows being stolen from Wisconsin dairy farms.

Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations’ top agriculture official warned last month. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it is 65 per cent.

The USDA is expecting a record breaking year for agricultural exports from the U.S. Exports are expected to reach a record $79 billion in fiscal year 2007, topping the old record set the previous year. USDA says sales are expected to reach another record in 2008.

The value of all U.S. crop production this year is forecast to rise 14 percent from 2006, to $136.2 billion. The value of production from cattle, hogs, chickens and eggs will increase 18 percent, to a record $140.2 billion

Rising prices for livestock and grains should push U.S. net farm income to a record high in 2007, 48 percent greater than a year earlier according to the USDA. Farm income is expected to rise to $87.1 billion from $59 billion last year. "This is a great time to be a farmer," said Christopher Hurt, an economist at Purdue University in West Lafayette, Ind. "Farming may be the healthiest sector of the economy."

A rise in agricultural income could boost sales of farm machinery, seeds, and farmers will also be able to afford more fertilizer according to agricultural economists.

A boost in farm income this year has accelerated agricultural equipment sales according to representatives of the equipment manufacturing industry. Combine sales are up so far this year by nearly 9 percent according to Russ Green, president of Caterpillar’s North American operations. “Obviously there is reason for optimism,” Green said. “Usually 14-18 months after an upturn in commodity prices we’ll see an upturn in equipment sales.”

Ag Equipment Newsletter, a publication for agricultural equipment marketers, in its Sept. 15 issue reported results of its annual survey of North American equipment dealers, noting, “It’s difficult to find a product category that dealers aren’t enthused about next year.” From Joseph Dancy

Professor Dancy is not offering opinions here, just reporting the facts as they are in the agricultural commodities markets.
Enough of the facts; let’s move on to the really important issue: My opinion.

(Just kidding. Remember that commercial for the “Real Yellow Pages” a decade or 2 ago? Under the heading “Headcases” the scene cut to a hip New York City party, and one character leans over to the person she is talking to and says: “Enough about me, darling. Let’s talk about you. What do YOU think of my new hairdo?”)

Well, I am only partially kidding. In any event, it is my assertion that most, if not all of the changes noted above have been brought about by the increased costs of fertilizer, pesticides, diesel for farm equipment, as well as transportation fuel to ship foodstuffs across continents and oceans to the final consumer. The trend “is what it is” and for investors “the trend is your friend”. Of course, for poor folks here and the world over, this trend is no friend. Any impartial analysis of world Wheat inventories and supplies would not the analyst with a warm and fuzzy feeling as it applies to actually feeding people. Though investors that have been long Wheat might feel warm and fuzzy about the positive impact on one’s portfolio.
There is little or no additional acreage available with which to increase industrial production levels of Wheat, Corn, Soy Beans and other grains. Increasing acreage in one means decreasing acreage in another, and we know how musical chairs works out in the end. There are only two ways to increase the amount harvested: Increase crop yield per acre and/or increase acreage planted.

My argument stands that while this is no Armageddon, it is no walk in the park, either. As these trends compound like interest on a mortgage, or creep up on you like the Alternate Minimum Tax, even in wealthy countries like the U.S. people will have to respond (or else it would be Armageddon).

What will the response be? Good question – and perhaps a very complicated, difficult answer. Or maybe as simple as an increase of a couple percent in local food production per year until, 40 years or so hence, nearly all food supplies are produced regionally. I think the simple answer is the most likely outcome, and that is why I believe the energy crisis, while brutal economically, will not be the Apocalypse.

Mentatt (at) yahoo (d0t) com

2007-11-29T18:11:00.001-08:00

Dead Money

The price action in crude today left much to be desired. In the span of just over 2 months crude hit the ejection button, catapulting from $70 to just over $99 intraday as measured by front month WTI. Since then, it appears crude hasn’t even reached for the parachute’s rip-cord yet. Even with the Canadian pipeline explosions, which drove crude prices up over $4 at one point during the day, oil could not muster a decent closing gain, closing at $91. That ain’t a good sign.

As I always say, markets zig and markets zag, they don’t zig and zig. That last rally is now in the midst of a correction of its own making, necessitated by the viciousness of its ascent, and it is unlikely that it is done, especially with the ForEx markets unwinding the Long Euro/Short Dollar trade. I hate the Dollar versus commodities, but I have no illusions about the Euro, which will have commodity inflation problems of its own.

This could mean a correction for Gold, too.

The longer-term story for higher oil prices is very much intact, but you can be shaken out of the best opportunities if you harbor unreasonable expectations – like expecting rallies to go on forever without interruption.

The trade now might be away from the commodity and back to the equities. Unfortunately, you might have to endure some pain before the pleasure.

On the other hand, this might be a short, and delayed, “shoulder period” price slide. After all, we are going into the teeth of the Northern Hemispheres winter, and China’s import appetite seems to be back with a vengeance, after a respite in September and October. That, and the fact that inventories continue to fall precisely when they should be rising – it is not cold enough for fuel oil and it is not the summer driving season – might make this correction somewhat short lived – though it could still be painful.

Have I run out of “on the other hands” yet? That’s the problem with trading for a living. You need those extra other hands to keep all those balls in the air.

Mentatt (at) yahoo (dot) com

2007-11-28T20:03:00.001-08:00

An Apocalypse NOT!

I get a decent amount of email from the “doom and gloom” folks asking me when I think the “collapse” takes place. Collapse? What collapse?

The decline in oil availability will be a slow, grinding process (in my opinion) that will not fit nicely in a 2 hour movie, 3 minute pop hit, or 15 second political sound bite mindset. I hope I can disabuse the doomers that visit here that they need some kind of bomb shelter. Although I fully appreciate your point of view, my commentary is directed toward how one might direct the investments that they have worked so hard for. I sincerely believe that the U.S. oil supply situation will have profound effects on our financial and real estate markets and currency over the next 5 years, but I do not think this will happen on a Tuesday afternoon. Nor do I believe that we will descend into anarchy. Are not resource wars (starting with Iraq), and the prospect of hyperinflation, and stagnant or declining GDP enough? Well, at least I hope they are.

My issue is this: Why should you work so hard only to pour your investment dollars into a leaking bucket? You would have been better off spending those shekels on vacations, expensive wine, and song. (Actually, that sort of appeals to me.) Some might find that pecuniary, but those that do probably did not spend a career doggedly pursuing some level of financial independence. Actually, I am quite sure that on some level the tied dye set is HOPING for a collapse. Teach those yuppie pricks a lesson.

I know that a lot of the peak oil blogsphere is filled with disaster scenarios, but I sincerely doubt this is the most likely outcome. That argument that we will experience immanent agricultural disaster due to declining energy inputs is just not that likely. The markets are efficient enough to redistribute those inputs away from Suzie-Cuzie’s trip to the mall and into the farmer’s tank and fertilizer bin. Yes, food is going to get much more expensive, and yes, this will fall disproportionately on the poor. But the aggregate AMOUNT of food available to Americans is not the problem, but rather how to pay for assistance to the poor.

This is not to say that our agricultural exports won’t decline and harm others. I sadly think that is a rather likely outcome. Those of you that have been following my blog know that I have great concerns in this area. Wheat and corn production will become an increasingly expensive proposition, and that will negatively affect aggregate crop production, just look at wheat inventories, and in turn available exports and domestic meat production, but the lesson of history is that people will be “incentivized” to produce some of their own food. As an avid gardener, I can tell you that a simple kitchen garden can overwhelm your ability to consume all that is produced at harvest time, the surplus of which can certainly be preserved. It will not be necessary to produce ALL of our own food (at least not for 20 or 30 years, all bets are off at that point in the oil production curve) just enough to bring the marginal scarcity food cost down to an affordable level.

I get email from one dour fellow who tells me that we have lost all of the knowledge to do this. What knowledge, gardening? Get a grip, and join my garden club. You would be impressed with what these folks know.

As my friend FireAngel from theoildrum.com likes to point out, if India can feed over 1 billion people with less arable land and far less fossil fuel imports, North America certainly can feed its population.

There is also some slack for the economy in the wasteful way in which we use oil. FireAngel recently pointed out that driving around in circles does not increase GDP.

If it were going to be Armageddon, what would be the point of investing? Better to blow it all on a trip around the world.

No, the Apocalypse won’t be arriving anytime soon, but a paradigm shift is, in my opinion, underway as I write this. In this paradigm shift, there will be winners and there will be losers. Not much different than our current reality. It is the INSISTING that things be a certain way that will get you into trouble. Flexibility and adaptability will go a long way in the environment I foresee.

No, it won’t be business as usual. We are likely to be a whole lot less mobile, live in smaller homes, and consume less frilly BS. We won’t be commuting as far, be more involved in our communities and our children’s lives, and we even might all have a new hobby – gardening. But I ask you: Is that really Armageddon?

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-11-28T14:44:00.000-08:00

What goes up must come down meets what goes in must come out.

Any farm boy knows that whatever hay they fork into the front of the horse stall they will have to shovel out the back and wheel it over to the manure pile. Same thing with fossil-fuels. Whatever we burn comes out the tail pipe/smokestack. Elementary, my dear Watson.

The U.S. reported a decline in greenhouse gas emissions, the first decline since 2001, when the U.S. was last in recession. This was on the news wires today:

“U.S. emissions of greenhouse gases fell 1.5 percent in 2006, the first annual reduction since 2001.

Total emissions fell to 7.1 billion metric tons, according to the report today from the Energy Information Administration, the statistical arm of the U.S. Energy Department. The year-to- year drop in gases blamed for global warming is the third since 1990.

The decline was largely the result of cuts in carbon dioxide output, which fell 111 million metric tons below 2005 levels. Favorable weather conditions, higher energy prices and increased use of natural gas for power generation lowered carbon pollution, according to the report.” Bloomberg News November 28, 2007

Trust you me, if we emitted less it is because we CONSUMED less, and we consumed less because that WAS ALL WE HAD TO CONSUME. We consumed all that was available. (If some moron comes on T.V. and says: “Good news! The U.S. is lowering its carbon footprint!” You will know you are in the presence of an imbecile, although I am sure some miscreant will try and run this past the folks on the couch.)

Anybody care to take the other side of a wager? I will bet greenhouse gas emissions will be lower in 2007 than in 2006 irrespective of weather conditions this winter.

You can’t emit what you don’t burn.

Yours in a lower carbon foot print (HA!),

Mentatt (at) yahoo (d0t) com

2007-11-28T05:30:00.000-08:00

It is the denial of our energy situation that assures the certainty of the outcome.

For years now, the American people have been misled by the collective denial, and outright lies, of our political and media establishment.

“The Hydrogen Economy”, “Electric Cars”, and “Clean, Environmentally Friendly Ethanol” each controlled the headlines for about 2 years each since 2001. Today, ethanol made the front page of The Wall Street Journal as the evidence overwhelms the folks in charge of the propaganda for denial that this bio-fuel is not so environmentally friendly and provides little more energy to the end user than was consumed during its production. What’s next, solar powered bicycles?

I was actually fairly impressed with the WSJ for having the temerity to make this a front page article. When the idea of the “Hydrogen Economy” fizzled, the mainstream media did not report on its demise, leaving the great unwashed to assume that “they” were still working diligently on our George Jetson future. I think that perhaps, this time, the WSJ recognizes that further (complete) denial is not in their best interest, any more than putting their fingers in the proverbial dyke. Witness, in the span of 2 weeks, “Peak Oil” and “Ethanol Craze Cools as Doubts Multiply” make the front page headline. Amazing. Perhaps a little late, yet still amazing. When was the last time you heard a politician admit they were wrong?

The jaw boning in the financial media remains deafening, despite the WSJ’s newfound affection for the facts. Two days ago, the financial media was abuzz with reports that OPEC was going to increase their output of crude oil to bring down the price of oil and thus save the world economy from recession. This morning, OPEC is scrambling to get to the microphones to reign in any unrealistic expectations.

“Crude oil was little changed in New York as OPEC ministers said the group is doing all it can to control prices, countering reports of a plan to raise output.

The Organization of Petroleum Exporting Countries currently has no plan to raise oil output when it meets next week in Abu Dhabi because the market is well supplied, Qatar's oil minister said today. Libya's top oil official said the group is unable to increase production any further.” Bloomberg News, November 26, 2007

Folks, none of the available data supports any suggestion of a rapid increase of oil supplies from the exporting countries. Actually, all of the available data suggests that their exports are heading into inexorable decline. Pay no attention to the man behind the curtain! The Wizard of Oz can no more “stand in front of an oil well with a check book”, or an army, and demand that that well produce more.

Oil is slowing the world economy, not the other way around.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-11-27T16:53:00.000-08:00

The U.S. equity market found and Oil seems to have lost their respective “footing” in today’s trading. Seems oil traders are beginning to believe news reports of declining oil/gasoline demand due to higher prices. Thank goodness you have me, assisted by my trusty calculator, to cut through the propaganda. And speaking of propaganda, this was on Bloomberg News today:

“U.S. motorists cut back on gasoline purchases during last week's Thanksgiving holiday as prices stayed above $3 a gallon, a report from MasterCard Inc. showed.

Consumers purchased an average 9.32 million barrels of gasoline a day in the week ended Nov. 23, down 1.7 percent from the same week last year, MasterCard, the second-biggest credit- card company, said in its weekly SpendingPulse report. It was the fifth consecutive week that demand at the pump dropped compared with a year earlier.” Bloomberg News, November 26, 2007

Now that’s really interesting because according to EIA data:

(you can read the table yourself here: http://tonto.eia.doe.gov/dnav/pet/hist/rbob-nyhW.htm)

Wholesale prices for RBOB Gasoline finished the week ended 11/16/07 at $239.150, and;

Wholesale prices for RBOB Gasoline finished the week ended 11/17/06 at $156.036

A price increase of 53.26% yielded a demand decline of 1.7%? Or did a SUPPLY decline of 1.7% require a 53.26% increase in price in order to bring supply and demand into equilibrium?

And that begs another question: Did the price increase really bring supply/demand equilibrium, or was the rise in prices cushioned by drawing down inventories?

Hmmm… The plot thickens… So let’s go to the video tape! (or to the EIA data base, as it were)

RBOB Gasoline inventories as reported by the EIA, week ended 11/17/06: 42,747,000 barrels

RBOB Gasoline inventories for week ended 11/16/07: 40,446,000

The plot gets thicker… let’s have a look at finished gasoline products (not just RBOB)

EIA total gasoline inventory week ended 11/17/06: 110,431,000
EIA total gasoline inventory week ended 11/16/07 104,516,000

The plot is as thick as frozen molasses at this point. Let me sum up the disparate data:

1. Wholesale gasoline prices increased 53.26% year over year
2. “Demand” fell 1.7%, according to Bloomberg
3. Inventories declined 5.35%
4. Retail gasoline prices increased 38% (per Bloomberg)

Forget for a moment the different percentage increase in price for retail and wholesale, as these are different markets. Let us just use the 38% increase in retail prices. Now perhaps you think that crude or other finished products increased by the amount gasoline inventories declined (plus the 1.7% decrease in “demand”). Nope. Crude oil inventories for the same week over week period were down approximately 8%, distillates were down 3%.

Inventories went down in all categories, gasoline consumption for the entire year is down, as is the week over week 11/17/06 and 11/16/07.

Now I know I have a lot of moving parts here, but it seems a reasonable hypothesis to say that supply fell, prices increased enough to bring demand into equilibrium with supply, but not nearly enough when inventories are taken into account. Since inventories have been in steep decline, and since it is impossible to draw inventories down past ZERO, either inventories begin to build, right away; or the price will begin to rise significantly; or inventories and prices can remain in equilibrium right here, but only if supplies increase by the amount of the inventory draw of the past several months; or the WORLD economy, particularly China, India, and the Middle East, must contract enough to ease the pressure on oil demand. (My readers will remember the “chicken or the egg” problem I outlined in an earlier post)

One of the above moving parts has to give. If you can arrive at the correct outcome, and have capital, and the courage of your own convictions... the opportunity is overwhelming. Or you can turn on the tube and catch another exciting episode of “desperate housewives”.

I have made my bets, and I hate TV. Consequently, I find myself in front of this computer trying to make sense of all of this. At this moment, all of the data taken together support a peak in Oil supply for the U.S. as past tense, and perhaps for the world as well.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T0 com

2007-11-27T08:28:00.001-08:00

Hypocrisy, self-dealing, disinformation & propaganda, and just plain chutzpa know no bounds.

This just in from OPEC: Indonesia is in favor of increasing OPEC output by 500,000 barrels per day!!!

HAHAHAHAHAHAHAHAHA! Isn’t that a scream?

For those of you who don’t think this is as nearly as funny as I do…

Indonesia, though still technically a member of OPEC, is a NET OIL IMPORTER!! And has been for several years. Of course they want OPEC to increase their output, and hence their exports. What importer does not want that?

And do you know how much political sway Indonesia holds over OPEC? ZIP.

Well, while we are wishing for things… I would like to have black hair, be young, thin, and good looking again! Oh, Sh$#!, I just looked in the mirror… I am still me.

Mentatt (at) yahoo (d0t) com

2007-11-26T19:08:00.001-08:00

The U.S. equity market is stumbling terribly, with 10-year Treasury bond yields under 4%, yet the front month contract for WTI crude oil has benn stubbornly fixed above $92 per barrel.

What else would the peak in U.S. oil supplies look like?

Look, the U.S. equity, bond, AND housing markets are all foretelling a recession; why not oil? Maybe oil is foretelling the peak in oil supply is of greater import than the looming recession – or maybe not.

But it sure looks that way to me.

On another note, unless the equity market finds its footing FAST, the Fed is going to be forced to cut, stretching the inflation rubber band into a moon shot for 2009. I am not making a prediction here, but will react to the Fed instead. If they cut rates 50 bps, look for the dollar to crater versus commodities (and currencies).

Who knows? Maybe the only way to save housing is with 1% interest rates (and the resultant $300 per barrel oil)… but even that would only forestall the inevitable.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-11-25T11:27:00.000-08:00

The U.S. Air Transportation Association reports that for the first time, fuel has become the single highest cost component – 25.4 %. And fuel was about 20% cheaper in Q3 than today’s price. Meanwhile, FedEx issued its second profit warning in as many months on increasing fuel costs and declining demand.

Major investors in the U.S. automobile industry forecast 2008 to be the worst car market in 15 years.

China’s year over year October oil imports increased 16.5%, while world production declined just under 1 % and net exports of oil declined better than 3%.

Heating Oil for this winter’s delivery are at record prices, while inventories are declining at precisely the time when they were building in the past.

The U.S. Housing market, essentially our only manufacturer, is on the canvas bleeding from every hole in its head. (Where are those experts that were quoted in South Florida’s newspapers in early 2006 saying the market would recover within a quarter or two? Laughing all the way to the bank at your expense, cashing checks from the developers and brokers that paid them, sometimes directly and sometimes through “public relations” firms, for their expert spin.)

Yet the American mainstream media continues to report our energy situation in a “balanced” way, a way that gives equal exposure to the thoughts and ideas of a very vocal, and very wrong, few. A few who clearly did not put their money (or their client’s money) where their mouths were – if they had they would have been reduced to penury and litigation long ago and even the myopic morons calling themselves journalists would be able to clearly see that these emperors have no clothes. A few who continue to make their case in the complete absence of empirical data, while the media continues to abdicate their responsibility of keeping the American people informed and instead continues to opt for Mark Twain’s famous “misinformed”.

For those of us who have worked a lifetime to provide for our families and secure their future, we are at a cusp; choose wisely and prosper, or choose poorly and see your life’s efforts confiscated in a vicious bout of hyperinflation, disappearing home equity, and the shrinking purchasing power of your diminishing sources of income.

The markets are shouting their dire warnings to you in the form of commodity prices and oil supply constraints. On the other side are the establishment Wall Street firms, politicos, and media with a tremendous interest in maintaining the status quo for as long as possible - irrespective of the certainty of the outcome I describe.

What to do? Follow your mother’s advice: DO YOUR HOMEWORK!! And reading the newspapers does not count.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0t) com

2007-11-24T14:37:00.001-08:00

10 year U.S. Treasuries yield below 4%

Gold over $820

Crude oil nearly $100 (as measured by WTI, Tapis crude already over $100)

U.S. housing in an absolute freefall

U.S. stock market underwater for 2007

The U.S. Dollar declining rapidly versus commodities (not to mention our trading partners currencies)

Now let me ask you 1 question:

Which Wall Street firm (besides me) warned you about this?

Not a one.

And you believe them about future oil supplies??!!

Mentatt (at) yahoo (dot) com

2007-11-18T14:41:00.000-08:00

As my readers know, I have been studying and writing about the peak in world oil production for the past several years and its effects on our businesses, investments, families, and our way of life.

The recent, and final, U.N. I.P.C.C. report on climate change has just been released, and while I know that the report has been on the cover of every major newspaper and magazine, I wanted to quickly say that it is not an exaggeration to point out the political solutions to this problem are going to change EVERYTHING in our lives. The report is very direct, forceful, and leaves little room for interpretation and manipulation:

“The world will have to end its growth of carbon emissions within seven years and become mostly free of carbon-emitting technologies in about four decades to avoid killing as many as a quarter of the planet's species from global warming.” As reported in the Washington Post November 18, 2007

Simply put, this means the end of industrial growth, and as life is certainly not fair, there will be winners and losers in the mad scramble about to come.

I will be researching and commenting on this in the future at least as much a I will about oil supplies.

THIS IS BIGGEST THING THAT HAS HAPPENDED SINCE THE WHEEL - you just don't know it yet.

Yours for a better (post-industrial) world,

Mentatt (at) yahoo (d0t) com

2007-11-17T07:08:00.001-08:00

The great commodities “boom” of the 21st Century

Commodity prices will “boom” and the environment might just go “boom”, too. I manage money, not environmental practices, but I recognize that I might be soiling my own nest, as it were.

That said, here is an interesting quote from the International Energy Agency’s (the European counterpart of the U.S Department of Energy’s EIA) lates World Energy Outlook:

“The increase in China’s energy demand between 2002 and 2005 was equivalent to Japan’s current annual energy use.”

Readers of my blog know that world-wide crude oil production is down nearly 2 MILLION BARRELS PER DAY since May 2005 when compared to August 2007, yet Chine has increased their consumption, to say nothing of India, Viet Nam, etc… dramatically. It follows by mathematical necessity that someone else lost oil to ChIndia, Inc.

That would be the U.S., among others, and that is why the price of oil, and everything else, is going to much, much higher, while the purchasing power of your currency, and the real value of your financial assets are going much, much lower.

Don’t blame the politicians, the oil companies, or any other part of the cold cruel world… You have been forewarned, and you are now forearmed.

I received an email from a rather bright, investment banker type (and, no, that is not an oxymoron… I said bright, not ethical) incredulously asking me if I really felt crude oil prices would rise past $300 sometime in the next several years… to which I responded:

“Welcome to the conversation”

Yours for a better (post-industrial) world

Mentatt (at) yahoo (d0t) com

2007-11-15T16:22:00.000-08:00

Energy crisis or food crisis?

I have not commented on the world’s inventory of grains, particularly wheat and corn, lately… and things have gotten much worse than I had warned my readers about last year.

“Global stockpiles of wheat will fall to 109.8 million metric tons by the end of the marketing year on May 31, down 11 percent from a year earlier, the USDA said last week. Farmers worldwide are expected to plant more of the grain to capitalize on higher prices.” Bloomberg New November 13, 2007

My readers might remember that as of last year, “days of supply” for wheat was about 57 days, THE LOWEST LEVEL ON RECORD, down from well over 110 days in 1999. Well, inventories are in free fall, and the world’s population increased 1.3%+ over the past year. We are looking at skyrocketing food costs and shortages of wheat based products.

If you think people will react poorly to gas lines, you should try food shortages.

I have a question: Am I the only guy on Wall Street that finds this vaguely important?

We are deep in the danger zone for wheat inventories. We cannot manufacture wheat, we cannot order it from the Martians, or pray for Manna from heaven. We have to grow it. If we run out, we have to wait till next year for additional supply.

I have another question: Am I the only citizen that thinks our food supply is more important than gay marriage, freedom fries, and Barry Bonds nutritional supplements? Am I the only normal person left?

Mentatt (at) yahoo (d0t) com

2007-11-15T05:30:00.001-08:00

Next week I will be traveling by air during the notorious Thanksgiving holiday. Instead of dreading it, I will be savoring every line I wait in, every rude traveler, and every indignity of the security screening process. Perhaps I will get lucky and warrant the full body search it seems every 10th passenger is subjected to.

We have very few holiday-crowed airports left in our oil constrained future to contend with. Delta is going to merge with SOMEONE (looks like United at the moment), and this is only the first of many mergers that will dramatically shrink the number of planes (and passenger seats) in the air. Certainly there will be a great deal of air travel in the future, but as jet fuel (Jet A-1 is very close to kerosene) is a product of crude oil (not natural gas plant liquids, ethanol, etc…) and as crude is in obvious decline, their will be a certain and significant decline in the availability of jet fuel… less fuel means fewer planes and passengers in the air. And that means over capacity in our air travel system.

I wonder if this will improve their on-time arrival performance?

Perhaps.

I will freely admit that I have been a shameless capitalist my entire life, and hope to continue for quite some time. However, as an alumni of "the wrong side of the tracks", I think it silly to ignore the political ramifications… For instance, I wouldn’t invest in a personal jet (not that I can afford one) at the moment. It seems politically incorrect (impossible) that our wealthiest citizens would be permitted to consume thousands of gallons of precious fuel on a cross-country private jet flight when working (and non-working, but voting) poor are unable to compete economically for that same fuel to heat their homes. Any student of history will recall that that kind of class privilege while others are being harshly challenged did not work out so good for the folks running things just prior to the French Revolution (I can just see Paris Hilton paraphrasing Marie Antoinette, “let them burn wood”).

A blessed and joyous Thanksgiving to all!

Mentatt (at) yahoo (dot) com

2007-11-12T14:24:00.001-08:00

What comes first, the chicken or the egg?

Is a lack of economic growth about to cut demand, and prices, for oil – or is a lack of oil cutting into economic growth?

Stay with me for a second… What does the early economic reaction to lower oil supply look like? Would the headline read: “demand for oil fell this month to”, or “supply of oil fell this month to”? It would look the same, and it would be a “glass half empty or half full” kind of moment, wouldn’t it? Demand, as measured in classical economics, cannot exceed supply as the price mechanism simply chokes off the demand and substitutes appear (what substitute there is for oil, I don’t know). Supply, however, can exceed demand, at least in the short run. That is what inventories are all about.

Looking at the supply and inventory data from the EIA and the price signals from crude oil, my interpretation is that a lack of oil is cutting into economic growth. If the oil supply cannot be expanded, further growth will be impossible. And if that is true, then (you know, that if/then sequence again) further economic growth will not be possible. And if that is true, we are in for one wild ride as the market re-prices all of the myriad financial assets. And if that is true, ______________ (go ahead, YOU fill in the blank)

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-11-12T12:01:00.000-08:00

OMG!

Finally!! This just hit the various news services:

“Crude-oil prices are being driven higher by ``market fundamentals,'' said Guy Caruso, head of the U.S. government's Energy Information Administration.

Rising demand coupled with ``insufficient'' investment, lack of access to resource bases in the U.S. and elsewhere, and a ``dramatic rise in the cost of doing business'' are boosting prices, Caruso told reporters today at a briefing in Washington.

``We think we're in a different era with relatively higher real oil prices going out through 2030,'' he said. The Energy Information Administration is the statistical arm of the U.S. Energy Department." Bloomberg news, 11.12.07

This is the first report that I have seen in which a member of the energy establishment linked current crude prices with fundamentals. I guess he figured better now than at $150 per barrel.

It would now appear that Daniel Yergin of Cambridge Energy Research Associates and the Energy Information Administration are no longer working together on the propaganda effort.

Mentatt (at) yahoo (d0t) com

2007-11-11T05:13:00.001-08:00

“Markets 101”

How many times in the past 2 years have you read some publication say that the bottom for housing is 6 months away? Who writes this stuff anyway, and why? How do they stay employed when they are so $%^#!! wrong? They keep writing this drek because their masters want them to, need them to, help bring parties to the other side of the trade.

How many times have you seen articles in the financial press telling that oil “could” go to $100. Lots. And how many articles have you seen saying oil prices are unsustainable and could go as low as $60, but $50 is not out of the question? Plenty. Now with oil at $96, and the financial press implying that the top is $100 and the bottom is $50, do you think that there is a single market participant with more than 2 working neurons who believes the press? Would you put up $96, risking $46 of downside to make $4? Do you think these guys have rocks in their head?

Forget for a moment that oil futures expire and cease to exist and that the oil is consumed and will never be traded or produced again… let us just focus on the market for crude oil. A commodity market needs sellers as well as buyers; it is a zero sum game. For every winner, there is an equal and opposite loser. Every dollar of profit that you pocket in a commodity trade would have wound up in the pocket of the contra party to the trade had the contra party not entered into the trade. Pretty simple, really.

Here is my point. The markets are constantly being manipulated by the financial press. Positively or negatively is up for debate, but not the fact itself. After all, if there were no press whatsoever, would the markets be the same? Nope. It follows then that there must be SOME agenda of the journalist, editor, publisher, etc… What might that be? Maybe they really do feel you have a right to be informed, maybe they just want to sell advertising and will shamelessly publish sensationalized BS for that purpose, maybe, just maybe, they have been influenced by the public relations firms that represent their largest advertisers. And maybe, just maybe, these parties have interests that are in direct contravention to your own. Maybe these parties want to influence the market (maybe? Give me a break), as in create sellers who are influenced by the $46 of downside risk for $4 of upside potential insinuated by the nonsense that passes for journalism in the financial press.

Folks, maybe I am wrong, and oil prices will reach $50 before they reach $150, but the market is pretty much equally split on these potential outcomes, hence prices are nearly $100 per barrel. Since the press is not so equally split, and so clearly to my mind is pitching the “oil prices have come too far and will fall soon” idea so hard, many of the “weak hands” have sold and my bet is the buyers will overwhelm what sellers that are left.

Market tops are formed when market participants are “sure” prices are going higher and collectively throw their last dollars at the commodity, equity, housing market, etc… Correct me if I am wrong, but there appears to be sufficient worry, as measured by tone of the financial press, that prices will collapse.

Now this is just market psychology in a normally functioning market. Through in some spot shortages of heating fuel this winter or gasoline next summer and I will be writing about what market panics look like.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-11-09T18:47:00.001-08:00

In May 2005 world production of crude and condensate = 74,298,000 bpd, and in August 2007 world production = 72,512,000 bpd, a decline of 1,756,000 barrels per day of crude and condensate from peak month to most recent month. During this time prices have risen roughly 60%; in other words the market brought the decrease of supply and into equilibrium with demand via price. Just in case I need to spell it out for you: The market mechanism of increasing prices failed to stimulate increased production. Why? Maybe no increase is possible.

If we use annual averages, world production of crude and condensate stacks up like this:

2005 average production - 73,807
2006 average production - 73,544
2007 average production - 73,093

(My goodness, even an economist, or a politician, can see a trend forming…)

Peak production of “all liquids” (crude and condensate, natural gas plant liquids - primarily ethane, propane, butane, and isobutane, ethanol, bio-diesel, coal to liquids, etc…) in August 2006 = 85,467,000 barrels per day, and in August 2007 production = 83,920,000, a decline of 1,547,000.

If we use annual averages, world production of “all liquids” stacks up like this:

2005 average production - 84,631
2006 average production - 84,603
2007 average production - 84,335

In order to compare “apples to apples” I should use the crude and condensate production numbers from August 2006, but I won’t… I can see your eyes glazing over. Let us just leave it with: the rate of decline in “all liquids” is slightly less than the rate of decline for crude & condensate. (If you really are interested in the actual figure for crude & condensate production in August 2006 it was 73,760,000. You can work the rest out.)

But “all liquids” are not created equal. For instance: 1 gallon of gasoline = 124,000 Btu, while the energy content of ethanol is 83,333 Btu’s per gallon, and 91,000 btu’s for 1 gallon of propane. If your car could run on 100% ethanol you would need to buy roughly 50% more fuel to drive the same number of miles (or drive 1/3 fewer miles on a tank full).

Let me get to the point: While the decline in “all liquids” from 2005 to 2007 is .35 of 1%, the BTU decline is roughly double that. This does not take into consideration the energy consumption of ethanol, bio-diesel, and coal to liquids production, which to get back to comparing “apples to apples” would need to be subtracted from the “all liquids” gross Btu content.

The production data continues to support a peak of crude oil production in May of 2005, with 2.25 years of data, and the “all liquids” data is telling us not to expect any miracle from “alternative fuels”. I’ll let the academics split hairs over the date of Peak Oil. If you are a resident of the U.S., Peak Oil is in the past, and if you are an investor you have precious little time to do something intelligent.

I want to finish by saying that I do not “hope” for any particular outcome. I trade and invest for a living. If the data showed oil supplies were increasing, my strategies would change. I don’t fight the data, or as they say on Wall Street, “don’t fight the tape”.

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-11-07T14:54:00.001-08:00

“Jokers to the left of me, Jokers to the right, here I am. Stuck in the middle…”

Several days ago I wrote about (CNBC) the Cheerleaders, Inc.’s own Larry Kudlow and his call that oil was a short and that as a contrarian he would go long (own) the bank stocks. If I was dismayed then, I am incredulous now.

Here we are, on the cusp of the greatest challenge to civilization since the advent of the squalid criminals of the Third Reich (though the dirt bags don’t deserve the capital letters), an energy crisis of mythic proportion, and all the captains of industry (titanic) can say is to advocate that you invest your hard earned assets into a doomed sector. Me thinks they need some suckers to unload their positions on. Don’t fall for it.

Just look at the banking stocks – they are cratering. We could see $150 to $350 billion in write offs, and no new business coming in. Many of these banks might have to raise capital by issuing more stock, but don’t worry… the Fed is going to be right there for these guys and will print an ADDITIONAL ½ TRILLION dollars to bail them out and destroy the value of your savings.

People thought the housing crisis was bad 4 months ago… Ha! That was sooooooooo August of 2007. Things are so bad right now it is impossible to assess where exactly we are or what anything is worth, which is why the bank stocks like Washington Mutual and Citi look like incoming mortars, and the hits keep coming. As it is impossible for ALL of us, or even a significant percentage, to sell our suburban homes and move to small farms or walkable cities (after all, who would we all sell to?), by mathematical necessity, the investments we have made into these car centric assets (liabilities, actually) will contract so significantly as to be surreal. We are months, not years, from the point where the future consequences of Peak Oil/Peak Oil Imports will become common, man on the street, knowledge. As that wave crests, the rush of folks to the other side of the boat will be more than a little disorienting.

If you think you can avoid risk by going to cash, I got a bridge to sell you and some swampland, too. Same with bonds.

On another note, don’t be taken in with the “oil is at $100 and the global economy has not collapsed” argument.

Of course the GLOBAL economy will not collapse based on oil prices. After all, commodity trading, including international trade, is a zero sum game – for every winner there is a loser. It is not the PRICE that is the problem for the GLOBAL economy (I want to make very clear that the GLOBAL economy and the U.S. economy are not one and the same anymore), the problem is the aggregate supply of oil, and that my friends, is not going anywhere but down. And while the GLOBAL economy can withstand higher energy prices, the importing nations, particularly the U.S., will feel the ill effects, as the price of oil goes up faster than imports come down our deficit widens. Can you imagine if we were able to import significant liquified natural gas? For better or worse, the oil portion of our trade deficit issue will crest as the aggregate value of imported oil declines with aggregate volumes. What happens on the other side of THAT is worth considering and I shall do so in another post.

"I do not concern myself with why. Sometimes I think in terms of where, other times when... and always how much." 6 days of the Condor.

Mentat (at) yahoo (dot) com

2007-11-06T19:37:00.000-08:00

Yes, this means “Peak Oil”, and all of its myriad consequences, is real and will dominate every aspect of your life FROM NOW ON.

But first, our quote of the day:

"Blaming the speculators is a lazy explanation. There is a genuine problem here," says Paul Horsnell, the head of commodities research at Barclays Capital.

And our other quote of the day:

“Eventually, all currencies (except gold) go to zero. The only difference is the speed at which they get there. Warranted or not on relative merits, the U.S. dollar is winning the race among major currency pairs.” – Michael “Mish” Shedlock

Or as a famous mob hit man was reported to have remarked just prior to sitting in New York State’s electric chair, “I never killed nobody who wasn’t gonna die anyway”.

I never thought of it that way, but ALL currencies eventually go to zero, and the U.S. Dollar is no exception. It is just that the denial and unrepentant mismanagement of our currency by the powers that be staggers the mind. I don’t have to point out that the price of crude oil keeps setting new records, and is just 2 bucks from the magical “$100”. It is, and if you have been reading my stuff for a while and held cash instead of energy and precious metal plays, you might feel a little sheepish… AND YOU SHOULD. Now get over it! Why would you prefer to own U.S. Dollars instead of a diversified portfolio of energy equities and commodities? Would you short the energy sector and go long the U.S. Dollar? Well that is exactly what you are doing.

You have little time to take action. After that its “woulda, coulda, shoulda”.

Let me repeat that which I have been ranting about for several years now: Oil is $98, a new record. The U.S. $ has broken below 76 on the dollar index, a new record. Gold is $835… This is not a coincidence!

Mentatt (at) yahoo (dot) com

2007-11-03T11:14:00.000-07:00

“I am right, the whole world is wrong”

That seems to sum up the simple minded reasoning of the “energy cornucopians”, with Daniel Yergin their chief Elf saying:

“Oil prices are becoming increasingly decoupled from the fundamentals of supply and demand,” Dr. Daniel Yergin, chairman of Cambridge Energy Research Associates, said today in Washington D.C. “With prices over $90 a barrel and strong anticipation of $100, the oil market is showing signs of high fever, stoked by fears of clashes in the Middle East and resulting disruptions of supply.” -Front Page, CERA website, October 29, 2007

You got that, you dumb ass oil traders? You guys (that would include me) are all wrong!!! You don’t know what you are doing!! Daniel Yergin, Pulitzer Prize winning author and economist, Master of Time, Space, and Dimension, Wizard, and Grand Pooh Bah says we are a bunch of dummies and we know the price of oil and the value of nothing!! The “Fundamentals” do not support the current market price!!!!

OK, I’ll bite.

Dear Dr. Dan “The Man” YerGan:

What f#$%%!! fundamentals are you referring to? Why do you not publish your data? Please! Just post your summary data on the largest 50 oil fields! Then we will actually have something to compare the supply and production data to when it comes in. You know, that pesky “scientific method” you’ve heard tell about while completing your Doctorate. Even a dumb trader like me has heard of the “scientific method”, and I don’t have the benefit of a Ph.D.

The following is from G.R. Morton’s website:

February 2002
Technology may help combat volatile oil prices, study suggests....  $6.95 - Oil and Gas Investor - AccessMyLibrary.com - Feb 1, 2002
"oil prices are projected to average $20 a barrel in 2002, compared with approximately $26 in 2001, CERA president Joseph Stanislaw said."
What was the reality? Well in 2001, according to the BP Statistical World Review of Energy, the price of WTI averaged $25.93. CERA predicted $20, but BP says the actual number was $26.16--totally in the wrong direction. The price went UP, not down as CERA said.

February 2003
US commercial oil stocks reach low  Subscription - Financial Times - Feb 20, 2003
"Cambridge Energy research Associates (Cera), the Boston-based consulting group, expects world oil prices to drop after any war to the low to mid $20 range."
The reality was that the average price in 2003 was $31.07 and the price never did fall into the low $20's range after the Iraq war.

February 2004
As Demand Rises, Oil Firms Focus on Finding New Reserves, Expanding... $6.95 - Dallas Morning News - AccessMyLibrary.com - Feb 11, 2004
"Oil prices are expected to remain in the upper $20 to low $30 per barrel range through 2005, CERA Analysts said Tuesday. "
The reality was that the price ended up at $65 at the end of 2005. Wrong again.

June 2005
Putting a cap on oil supply worries.
Subscription - Dallas Morning News - HighBeam Research - Jun 22, 2005
"The growth in oil supplies could force prices well below $40 a barrel as early as 2007, The CERA report said."
This is a full paragraph report on the same claim
"In a June report, CERA said it believed that between now and 2010 there will be a substantial increase in worldwide oil production capacity, providing a supply cushion of 6 million to 7.5 million barrels per day that could cause oil prices to "slip well below $40 a barrel as 2007-08 nears."Peter Enav, "Uncertain Saudi Supplies Hold Key to China's Growing Thirst for Oil," Pittsburgh's Post-Gazette, http://www.post-gazette.com/pg/05236/558766.stm
This year, started at oil in the mid $50s but as everyone knows, we are now at $80/bbl. Cera's perfect record continues.
It was this prediction, which caused Jeff Brown to declare "Daniel Yergin Day," when, contrary to Yergin's prediction of $38/bbl, the price reached twice that value in little more than a year! http://graphoilogy.blogspot.com/2006/07/daniel-yergin-day-july-13-2006.html

2006
As near as I can tell, CERA and Yergin took 2006 off and didn't predict future prices. Indeed, the few comments made in 2006 seemed to indicate that Yergin and CERA were beginning to get the idea that the fundamentals of supply and demand were favorable for higher prices. Yergin was quoted as saying:
“The world oil market is in the grip of a slow-motion supply shock, in which a $70 to $75 barrel price reflects an aggregate disruption of over 2 million barrels a day,” Daniel Yergin, the chairman of Cambridge Energy Research Associates, said in remarks this week at a Washington energy conference. http://www.signonsandiego.com/uniontrib/20060427/news_1b27oilecon.html
But, it appears that he was right, but for the wrong reasons. On July 15, 2006 he ascribed the rise in price to geopolitical tensions:
CRUDE TOPS $78 PER BARREL ON M-EAST, NIGERIA SUPPLY WORRIES Subscription - All Africa - HighBeam Research - Jul 15, 2006
"the oil price has become a register of geopolitical tensions and fears," said Daniel Yergin, who heads Cambridge energy Research Associates."
According to this theory, I presume, if Rodney King had his way, and we could all just get along, oil prices would plummet. If this is the true explanation for the rise in oil price over the past 5 years, the world must be becoming more geopolitically tense and fearful.

June 2007
But as we enter 2007, Yergin and CERA are back pounding the drum that oil prices will fall. This is what I heard Yergin imply on Larry Kudlow's program. It reflects what he said in print earlier in the year. In June, 2007, a Yergin interview reported this:
"ISTANBUL, June 27 (Reuters) - World oil prices will drop to the low $60 range by the beginning of next year as long as the security premium in the world oil market does not rise, said Daniel Yergin, chairman of Cambridge Energy Research Associates. " http://uk.reuters.com/article/oilRpt/idUKL2727647820070627?pageNumber=2

OK, I am back.

Now look in every article you see in ANY media story about future oil supplies. Notice anything? Why is Daniel Yergin the media go to guy in over 80% of the articles on oil supply in Lexis/Nexis? The guy has NEVER been right in his prognostications on oil prices, so again, why is he the "expert" the media wants to talk to? Because he won a Pulitzer Prize?

Wikipedia says of the Pulitzer Prize:

"The Pulitzer Prize, pronounced /'pʊl.ɪt.sɚ/ ("PULL-it-ser"[1]), is an American award regarded as the highest national honor in print journalism, literary achievements, and musical composition. It is administered by Columbia University in New York City."

How, exactly, does that qualify Dr. Dan the Man YerGan as an expert on Oil prices? Particularlly since he hasn't been correct on Oil prices since Noah built himself a boat? And who in their right mind would continue to hire this meally mouthed cheese brain and his inept forcasting firm when they could have hired someone who has been DOBA (if you don't know these acronyms just Google them), like yours truly? I will tell you who - parties and organizations interested in misleading the public for their benefit - and your detriment.

Folks, you are being purposely misled. By whom, and for what purpose, well, that is another story. Not much into conspiracy theories myself. But this is just too much coincidence for your BS meter not to be going off in the red zone.

"That's all I have to say about that" Forrest Gump

Mentatt (at) yahoo (dot) com

2007-11-01T14:00:00.001-07:00

More terrible advice from the denial factory of the American Main Stream Media

On Tuesday past, the price of WTI December crude oil contracts fell $3. That night, Larry Kudlow, an economist with his own CNBC TV show, made the suggestion it was time to short oil and go long the banks (betting oil was heading down and bank share prices heading up. The very next day, crude oil surged nearly $6! And the following day, the bank index fell 5.14 %! Great call Larry!

The energy crisis is a major component of the housing crisis, which is a major component of the coming banking crisis.

Exxon

Today Exxon reported earnings that disappointed Wall Street. The coverage was focused on their troubles in refining. My eyes focused on this:

“Oil and natural-gas output from Exxon's wells dropped 2.1 percent to the equivalent of 3.92 million barrels a day, led by a 14 percent decline in crude production in Africa, the company's biggest source of oil. Lower output more than offset gains from higher crude prices, the company said.” Bloomberg News

Big oil’s production has been in decline for several years. Oil prices have risen 800% this decade, but the big guys have seen their production decline. What else would Peak Oil look like? It would look just like this.

Keep your eye on the ball. Trumpets will not blare, nor the earth to quake. The economic fallout of declining energy supplies will more likely be a slow, grinding, wearing event punctuated by periods of rebound. That is, until the concept becomes conventional wisdom – at which point the political and social fallout might make the economic fallout pale by comparison.

Mentatt (at) yahoo (d0t) com

2007-10-31T16:08:00.001-07:00

The Fed has spoken

The Federal Reserve cut interest rates today by ¼ point… blah, blah, blah… you can get that B.S. from CNBC. People read my stuff because I get to the f$#**%! point.

Here is how the headlines should read (if I were the editor).

“The Federal Reserve has decided to abandon the U.S. dollar in favor of trying to save housing. The Dollar is going down like Paris Hilton, while Oil is going to pull a Tony Soprano and blow a hole in the back of the U.S. economy’s head. As the Fed can’t save both the $ and housing, they chose housing, since homeowners vote- and foreign U.S. bond holders do not. You see, Americans wouldn’t know how to save money at gun point so there is no chance that the Fed had to concern itself with hurting the consumer’s savings – he doesn’t have any.”

My first of many bows...

Oh, and by the way, the December crude oil contract is trading at nearly $96 in aftermarket trading. $100? Don’t worry about $100 oil. Worry about $300 to $500 but not $100. Worry about empty gasoline stations. Worry about long lines at any open gas stations if the government institutes rationing (and eventually, they will, even though it is the absolute dumbest thing they could possibly do). Worry about spiraling food costs. Worry about political repercussions… just don’t worry about $100 per barrel oil, because it won’t be there for long.

I wrote my first piece on oil when the front month crossed $40 per barrel. My clients thought I had slipped a gear. I remember feeling some sense of vindication when, several months later, National Geographic ran a cover story titled “The End of Cheap Oil” for their June 2004 edition. I sent copies to friends and clients. They told their secretaries to tell me that they were not in. I learned not to bring up my oil theories until clients were with me long enough that I did not appear as a fear monger. What a difference 3 years and oil near $100 makes.

This does not mean that Oil could not experience a significant correction, it certainly could. It could also climb straight to $150 without blinking. That is why trading is such a hard way to make a living. The trend remains firmly in place, and unfortunately, “you ain’t seen nothing yet.”

Mentatt (at) yahoo (d0t) com

2007-10-31T10:21:00.001-07:00

As I write this, the EIA crude oil inventories have just come out but the Fed’s interest rate announcement is 3 hours away.

Front month oil, which was down $3 yesterday has recouped all of those losses and then some, setting a new record today. The price action surprised me somewhat, but a good friend pointed out that even though there was a build in refined product the crude draw was the big issue.

“The refining capacity problem is sooooooo 2006” was how he explained it. The absence of a “shoulder period” this fall could mean permanent overcapacity for oil refining and shipping. Let me sum it up for the jerks we are stuck deciding amongst for President: It’s not the refineries, stupid.

It does not matter how much “wishcasting” (a take off on forecasting) Larry Kudlow, Pat Buchanan, Hillary Clinton, Al Gore, Ben Bernake, Goldman Sachs and the rest of Wall Street, CNBC etc… do. They can shout what they will from the mountaintops. This is not something that these people can spin. They cannot sweep oil supplies and inventories under the carpet. It is what it is, and it does not care if you are Republican, Democrat, Conservative, Liberal, Libertarian, etc… Kudlow was on his show last night telling people that Oil was a short (that you could make money betting it was going down – this has been his position for several years now… thankfully he is not running a portfolio for anyone, he’s just another know-nothing entertainer posing as an economist. Actually, he IS an economist; maybe he is an economist posing as an entertainer… one could go crazy trying to figure this out… just kidding). I was trying to buy some options on oil futures yesterday, and even though the front month was down $3, my bid was not hit. I should have called Larry and told him to take the other side of the trade…

Somebody should tell Larry Kudlow, et al, that while they have been saying oil is a bubble since it hit $35 in 2003 the price has nearly tripled (If oil falls back to $75 no doubt these dopes will claim vindication, meanwhile had you listened to them and went short you would have hanged yourself in your garage long ago).

Now we await the Fed.

2007-10-30T19:54:00.001-07:00

CNBC should be ashamed

I watched, in absolute awe, the show “Kudlow & Co.” on CNBC this evening. Larry was talking about Global Warming and Peak Oil, though he can’t quite get himself to use the term “Peak Oil” (a rose by any other name…).

Rather than have guests such as Dr. David Goodstein of Cal Tech or Dr. Ken Deffeyes of Princeton University, you know someone who has actually STUDIED the problem, Kudlow did the courageous thing and had Pat Buchanan appear in their stead. The 2 proceeded to shout at the top of their lungs their view of Peak Oil and Global Warming, not once uttering a shred of empirical data. But they did so with such force and verve! I have to say, I am quite relieved. We have nothing to worry about. Larry Kudlow and Pat Buchanan said so. My bet is most of America agrees with Kudlow and Buchanan.

Oil for December delivery dropped $3 today

The front month oil futures contract has been on an unbelievable tear up nearly 50% for the year and 15 % for the week, before giving up ground the past 2 days. It is due for some profit taking. Could that profit taking bring crude down to $75 by year-end? Sure. Could we see $100 before year-end? Sure. Trading the near contracts is going to be a hard way to make a living for a while, but has been pretty good to us lately. On the longer end, the futures price never got above the low 80’s. The multi year trend of higher highs and higher lows is still very much in place and the supply/demand situation continues to support that trend. As I say time and time again: “Markets zig and zag, they don’t zig and zig”. The front month contract went from $68 to nearly $94 in less than 3 months – we are due for a zag, but you got to keep an eye on the production and inventory numbers.

The Fed's interest rate decision tomorrow could have a big impact on energy prices. If the Fed cuts more than expected, say 50 basis points, the U.S. Dollar could really react quite negatively and lift the price of Oil, and Gold, in dollars. I have no opinion on what the Fed will do, and I never will. I merely react.

2007-10-29T20:41:00.001-07:00

Today I received an email from a friend who follows my blog. He sent my blog to his Financial Advisor, and the Advisor emailed this back to him, which he forwarded to me:

“Tell your friend he is an idiot and that why he runs a blog.

Inflation is no where close to the 1970 levels, short term interest
rates are no where near the levels they were in the 70's.

As a whole the world is less dependent on oil than it was in the 70's,
more importantly we are more diversified on where we get our oil (Not
dependent on the M.E.)

Real estate is an issue, but keep in mind of all the financing options
we have currently which were not available in the 70's (3/1, 5/1, 7/1
IO's etc......)and also keep in mind you can currently get 30 yr fixed
at 6.5%.

Now keep in mind that the S&P 500 gets more of their revenues from
overseas operations where in the 70's it was mostly dependent on the US.

I am tired of typing. Tell this guy to get his facts straight and not
use terms like ...."I believe" and "I think” “

Well, my facts are straight, and I give my sources unless it is my opinion. Then I do the correct thing and add the qualification.

Now I enjoy a good fight, and I sincerely hope this man of poise, grace, education, and intellect will indulge me.

Dear Financial Advisor (“FA”):

Under no circumstance… On my worst day, unfed, unwashed, and with no sleep - could I think as slow as you, not even if I tried.

I have a comments section, although most people just email me directly. Please, by all means, pick your poison. If you take exception with any of my conclusions and assertions please write me. I will be happy to post your comments. You will not be the first to disagree with me. The beauty of the crude oil commodity markets is that they are the ULTIMATE meritocracy. The smarter guy keeps the other guy's money.

I will be happy to let you know which contracts I am bidding for in the Commodity Futures and Options market. Since I am, what was it… an “idiot”? I will give you a tremendous opportunity - to make a great deal of money by taking advantage of my limited cerebral capacity. I will tell you what contracts in the commodities market I am trying to buy. You sell them to me; taking the other side of a trade versus an “idiot” should be like taking candy from a baby. Just to make it fair, since I am an energy bull and an “idiot” I will only take “long” positions; you can short them to me. If I am truly an “idiot”, you will get to keep all of my money. Of course, if it is you who is the “idiot”, I will get to take all of your money. Got it? Excellent. My email is:

Mentatt (at) yahoo (dot) com

I look forward to cleaning you out.

2007-10-27T09:23:00.000-07:00

Oil and the markets

The U.S. equity market experienced a contraction in value of biblical proportion beginning in 1973. In real dollars, it took the market 20 YEARS to recover. The catalyst was oil and currency issues (sound familiar?)

The following is from wikipedia.org

“The stock market crash of 1973–4 was a stock market crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom,[1] it was one of the worst stock market downturns in modern history.[2] The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year.

In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock Exchange's Dow Jones Industrial Average benchmark lost over 45% of its value, making it the seventh-worst bear market in the history of the index.[2] 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'.[3] In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to -2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974.[1]

Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash.[4] From a position of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%.[1] At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders.[5] In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%.[5] However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation.
All the main stock indexes of the future G7 bottomed out between September and December 1974, having lost at least 34% of their value in nominal terms, and 43% in real terms.[1] In all cases, the recovery was a slow process. Although West Germany's market was fastest to recover, returning to the original nominal level within eighteen months, even it did not return to the same real level until June 1985.[1] The United Kingdom didn't return to the same market level until May 1987 (only a few months before the Black Monday crash), whilst the United States didn't see the same level in real terms until August 1993: over twenty years after the 1973–4 crash began.”

While the Arab oil embargo did not precipitate the market collapse, the peaking of oil production in the U.S. several years earlier and the collapse of the Bretton Woods agreement in the years just prior to 1973 probably began what the embargo most emphatically accelerated and the Iranian crisis of 1979 finished.

Fast forward to 2005-06: The world enters peak production of crude oil and condensates, and perhaps all liquids. How many years before the effects of our current currency problems and declining oil availability begin their inevitable demand destruction within the American economy? Not many, in my opinion.

“Between January and October of 1978, the Dollar lost fully 25% of its value against a basket of the currencies of its major trading partners.” The Privateer Market Letter

We are perhaps a third of the way through that decline, and I do not believe that it is an exaggeration to say that the U.S. Dollar is currently in free fall, nor do I believe that I am out of bounds in my belief that the U.S. Dollar has MUCH, MUCH, MUCH further to go in terms of declining purchasing power, particularly versus energy, metals, and agricultural commodities than it did in 1978.

So here’s the deal:

As in the 1970’s, as this energy crisis gets going the real estate downturn will morph into a full-fledged crisis. While the equity markets MIGHT head higher in NOMINAL terms (certain commodity based equities will head higher in REAL terms) due to the eruption of hyper-inflation, in real terms, and in terms of employment and compensation, the contraction within the financial services industry will be quite pronounced.

Metro New York City’s real estate prices will collapse in real terms, as will South Florida, Boston, California and other areas that had experienced out sized gains… so much so that the Federal Reserve, in an effort to protect, perhaps even save, the U.S. banking system, will aggressively devalue the U.S. currency in a bid to spare the banks from defaults on loans to properties whose values have fallen below the mortgage lien. Not that it will work – it won’t – but they will feel that they must at least try. This action will only serve to worsen commodity inflation. Think back to 1979-80: Gold, Silver, Oil… all at record prices. Yes, those prices fell back as that energy crisis subsided. This energy crisis will not subside in our lifetime.

Please understand that when I speak of real estate I do not mean just housing. Office, retail, and commercial vacancy rates will become higher than at anytime in history, and landlords will be forced to lower rents for the remaing tenents. Some properties will do well, such as agricultural and warehouse properties at railroad yards, for example. After all, farmland can always be rented to farmers, and rail shipping will survive trucking. But areas that relied on workers commuting to and from work via personal automobile will be in for some tough times. Matt Simmons of Simmons International, Wall Street’s largest investment bank to the energy industry, is fond of saying that we could “free” the workforce by allowing perhaps as many as 10 million office workers to work from home saving a great deal of gasoline, which I have no doubt will be required at some point. The question I have is what are we going to do with the office space vacated by 10 million workers? How do the property owners service the debt on those buildings? How do the banks survive those defaults? We are talking hundreds of billions of dollars here – and that is just for office space. What about gas stations, auto mechanics, parking facilities, etc… What about the merchants and vendors that serviced these “freed workers”?

The U.S. currently has over 17 MILLION vacant homes. 17 MILLION! And I do not believe that figure includes the 6.8 million second home market. So now we have 24 million vacant homes (getting to and from those 6.8 million second homes in an energy crisis requiring some kind of rationing will no longer be possible). Who is going to pay the mortgage on these properties? This is why I tell my clients that South Florida’s real estate market will likely NEVER recover. NEVER.

Unemployment will rise, perhaps spectacularly, wages will stagnate, and inflation will rage, similar to the stagflation of 1970’s, just worse. For a businessman or professional in his early to mid 50’s or younger, the new environment will be like nothing in their experience. The concept of “savings” in U.S. Dollars, or equity in a suburban home, will be laughable, a major reason that commodity prices have only just begun their ascent. Once John Q. Public figures out just how worthless their paper currency has become the scramble to exchange it for hard assets like commodity futures, bullion, land, timber, livestock, etc… will be nothing short of a deluge, like the breaking of a dam. Unfortunately, I cannot be more specific in this forum.

With the increase in inflation and unemployment (1970’s stagflation on steroids) will come overcapacity for nearly every business and industry in the U.S. If you think that means every body EXCEPT YOU, well, that will be a quick trip to bankruptcy court. Survivors will be those that DELEVERAGE their businesses. We will get through this, perhaps, but the adjustment period is going to be quite painful in economic terms. Of course, there are many variables: the political and leadership talents of our elected officials and the governments of other countries, the American people's willingness to accept that forces beyond their control is the cause of this, not the Chinese, or greedy OPEC, etc... Such variables are beyond our ability to calculate effectively.

The world economy, and the U.S. economy in particular, will contract severly. Is it a recession, a depression, or will the new environment get its own special designation? I don't know and could not possibly care less - you and I are not running for President. Therefore, this is all about you, personally. (I say this because I constantly hear people, when confronted with the energy data for the first time, say: "we should do this" and "we should do that". I always want to ask: "who's we?" And "what power do you have to enact any of your silly, arrogant, and ill conceived ideas?" Everybody's an expert.)

The 2 important financial items for You, Inc., are your income and your assets. The store of value that you choose for your assets will determine what you have left over from your efforts, and how you manage your contribution to the economy will determine your income. If your income depends on an industry that depends on cheap and abundant energy… well, let’s just say that you will need to find a new way to make a living. If your store of value is the U.S. Dollar or bonds denominated in U.S. Dollars, the purchasing value of your savings will plummet. Don’t do this to yourself. For those of you who don't think this could possibly happen, did you think it was possible for the Soviet Union to politically collapse in a matter of days? Did you think it was possible to kill 3000 Americans in lower Manhattan with a couple of passenger jets?

Life will be good, but the economic rules are changing. If you don’t deal with the change, the change will deal you out. For those that get it right, this will be like a slow pitch down the middle of the plate. For those that get it wrong, it’ll be more like 2 guys carrying you off the battle field on a stretcher. By mathematical necessity, most folks will get it wrong - and there just ain't enough stretchers.

I know that many will not appreciate my analysis, it isn’t what you WANT to hear. Too bad - because whatever it is, it is, and whatever it ain’t, it ain’t - it does not give a damn what we appreciate.

Yours for a better world,

Mentatt @ yahoo (d0t) com

2007-10-25T05:43:00.000-07:00

So much for the "Shoulder Period"

For reaseons either obvious or unknown, the "Shoulder Period", that is, the time between summer driving demand for gasoline and winter's demand for heating oil, has been called off this year. Inventories are such that it just ain't gonna happen, as heating season is almost here... that is, unless winter gets called off again (no opinion on the weather).

And as I said in an earlier post... "uh-oh"

Yours for a better world,

mentatt (at) yahoo (d0t) com

2007-10-25T05:37:00.000-07:00

The beginning of the end of U.S. oil imports…

Net imports of liquid petroleum products into the U.S. were 12,220,000 bpd in 2006 according to the U.S. Dept. of Energy’s EIA. It is my estimation that the U.S. has entered the early stages of terminal decline in its oil imports – said plainly, imports will decline each and every year from this point forward. It does not matter who we invade, how much the price of oil rises, what conservation efforts are forced upon us – the U.S. will have less and less oil to run its economy and transportation system from now on.

Yesterday the EIA reported a “surprise” drop in U.S. inventories; certainly not a surprise to my readers, nor to any informed observer – inventories have been declining rapidly for several months now. The following is from Bloomberg.com today.

“Crude oil rose near $89 in New York after the biggest drop in U.S. imports since March caused an unexpected decline in inventories. Brent futures climbed to a record in London.

Stockpiles fell 5.3 million barrels last week to their lowest since Jan. 5 as imports plunged 13 percent, the Energy Department said yesterday. A gain of 963,000 barrels was expected, according to a Bloomberg News survey. Reports Darfur rebels attacked a Sudanese oil field and Lebanese soldiers fired on Israeli aircraft pushed prices higher today…

Imports Plunge

The decline in U.S. crude-oil stockpiles left them at 316.6 million barrels, 5 percent higher than the five-year average for the period, the department said. A week earlier, supplies were 7.8 percent higher than the five-year average.

``A lot has to do with imports that weren't there,'' said Herwin Schonewille, an oil trader with Fortis Bank NV in Brussels.
Daily crude-oil imports plunged by 1.3 million barrels to 9.1 million, the lowest since the week ended March 2. The biggest drop was on the east coast, where imports fell 667,000 barrels a day, down 32 percent from a three-year high of 2.08 million barrels a day the week before.

U.S. fuel stockpiles unexpectedly fell last week as imports of gasoline and blending components declined and refiners shut units for maintenance before winter. Refinery operating rates fell to 87.1 percent of capacity, a four-week low.
Gasoline inventories fell 1.93 million barrels to 193.8 million, 3.6 percent less than the five-year average for the period, the report showed. A 475,000-barrel gain was expected, according to the analyst survey.” - Bloomber News

Let me repeat: “A lot has to do with imports that weren’t there”. Indeed.

At some time in the near future the average American citizen (I refuse to use the term “consumer” – we are not “consumers”, we are citizens. I will rant further about this in a future post) is going to grasp the consequences of our energy situation. That 2 legs on the economic stool, housing and automobile manufacturing, are broken, with no hope of regaining their former stature. That providing necessities for themselves, and provisioning their homesteads, will become more challenging, while their economic position has become quite precarious. That our political leaders are as impotent in the face of this reality as they were in the face of Hurricane Katrina and the destruction of New Orleans.

The repercussions felt in the financial markets and the economy will likely be devastating to the point of the surreal. “Don’t just stand there, do something”.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-10-23T20:22:00.000-07:00

This is not religion…

“I just think…”, “I believe…”, “if we just…”, “all we got to do is…”

Belief and hope have no place in parachute packing, brain surgery, rock climbing, bomb-detection, land mine removal, AND ENERGY SUPPLIES. While prices speak louder than words, supply numbers speak louder than prices, as prices reflect the value of the currency used to purchase the commodity.

“Behind the rhetoric about speculators, inadequate refining capacity, and geopolitical threats there lies the fundamental fact that world oil stockpiles have begun to shrink. The IEA reports that during the 3rd quarter, OECD stockpiles fell by 33 million barrels or 360,000 b/d during a quarter when stocks normally increase by 280,000 b/d.

Outside of the US, stockpiles are near the low end of the normal range and there are fears that they will continue to drop to critical levels this winter. Beyond this there is fear that given flat production and high demand from Asia, these stocks will never be replaced.” - Tom Whipple

There is a reason oil hit $90 per barrel (my underhanded disparagement of the U.S. Dollar above notwithstanding). The recent price increase was necessary to balance the supply of oil with demand from the market place – sort of. I say “sort of” because we still have the buffer of inventories. Should that buffer begin to disappear… look out! It is lights out.

”As this unfolds, you're going to have to find alternatives that are going to do the job that oil is doing. Everyone is going to have to come to grips with this in the next two or three years. People are going to have to figure it out.'' — T. Boone Pickens at the ASPO-USA Houston Conference October 19 2007

And that begs the question: figure out what, exactly? There is no simple solution (see above “all we got to do is…”). The solution(s) is going to happen over time with a great many adjustments to myriad unforeseen consequences, the majority of which, for Americans, is going to be drastic changes in their lifestyle. Specifically, most Americans will become considerably poorer.

Dr. James Schlesinger, the first U.S. Energy Secretary, said that “Americans have to be hit over the head with a 2 X 4” to get them to make the changes needed to adjust to our energy situation.

Well, of course! Who, “on the long end of the stick” and raised in a competitive society, would agree to willingly become poorer? I don’t imagine the local convenience store would be terribly successful in selling lottery tickets for that outcome.
In a previous post I quoted the famous line “If you find yourself in a hole – stop digging”. Well, we are all in a hole here, and the only difference is the depth.

The big problem is with our assumptions… My house will build equity as I pay the mortgage… U.S. Dollars will hold value… I will always be able to drive to work/school/grocery shopping… life is fair… this outrageous student loan for a literature degree is a good investment… the stock market always goes up in the long term… I can always borrow money… Food comes from the grocery store… water comes from the tap in my kitchen… I can live off interest and social security payments…

Many (most, if not all) of these assumptions will prove invalid at some point during a period of contracting energy availability, and since ALL OF THE DATA point to NOW as the beginning of energy decline this is an excellent time to revisit your assumptions.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-10-22T06:38:00.000-07:00

I received a great deal of email regarding my post as to: "why does it have to be Apocalypse"?

I did not say things would not get tough economically, especially for the poor and working class (and as an alumni of the poor and working class this really does have a special place in my heart - but this ain't about me), I merely expressed the concept that things do not have to fall into anarchy. Jeash!

As many of you know, the price of energy will be felt first in the price of food, which will be felt disproportionally on the poor and working class families.

The following is an article in its entirety from yahoo.com news:

Living paycheck to paycheck gets harder
By ANNE D'INNOCENZIO, AP Business WriterFri Oct 19, 7:51 PM ET

The calculus of living paycheck to paycheck in America is getting harder. What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.

Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

Food pantries, which distribute foodstuffs to the needy, are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

From Family Dollar to Wal-Mart, merchants have adjusted their product mix and pricing accordingly. Sales data show a marked and more prolonged drop in spending in the days before shoppers get their paychecks, when they buy only the barest essentials before splurging around payday.

"It's pretty pronounced," said Kiley Rawlins, a spokeswoman at Family Dollar. "It seems like to us, customers are running out of food products, paper towels sooner in the month."

Wal-Mart, the world's largest retailer, said the imbalance in spending before and after payday in July was the biggest it has ever seen, though the drop-off wasn't as steep in August.

And 7-Eleven says its grocery sales have jumped 12-13 percent over the past year, compared with only slight increases for non-necessities like gloves and toys. Shoppers can't afford to load up at the supermarket and are going to the most convenient places to buy emergency food items like milk and eggs.

"It even costs more to get the basics like soap and laundry detergent," said Michelle Grassia, who lives with her husband and three teenage children in the Bedford-Stuyvesant section of Brooklyn, N.Y.

Her husband's check from his job at a grocery store used to last four days. "Now, it lasts only two," she said.

To make up the difference, Grassia buys one gallon of milk a week instead of three. She sometimes skips breakfast and lunch to make sure there's enough food for her children. She cooks with a hot plate because gas is too expensive. And she depends more than ever on the bags of free vegetables and powdered milk from a local food pantry.

Grassia's story is neither new nor unique. With the fastest-rising food and energy prices since the 1980s, low-income consumers are stretching their budgets by eating cheap foods like peanut butter and pasta.

Industry analysts and some economists fear the strain will get worse as people are hit with higher home heating bills this winter and mortgage rates go up.

It's bad enough already for 85-year-old Dominica Hoffman.

She gets $1,400 a month in pension and Social Security from her days in the garment industry. After paying $500 in rent on an apartment in Pennsauken, N.J., and shelling out money for food, gas and other expenses, she's broke by the end of the month. She's had to cut fruits and vegetables from her grocery order — and that's even with financial help from her children.
"Everything is up," she said.

Many consumers, particularly those making less than $30,000 a year, are cutting spending on nutritious food like milk and vegetables, and analysts fear they're further skimping on basic medical care and other critical services.

Coupon-clipping just isn't enough.

"The reality of hunger is right here," said the Rev. Melony Samuels, director of The BedStuy Campaign against Hunger, a church-affiliated food pantry in Brooklyn.

The pantry scrambled to feed 5,000 new families over the past 12 months, up almost 70 percent from 3,000 the year before.

"I am shocked to see such numbers," Samuels said, "and I am really concerned that this is just the beginning of what we are going to see."

In the past three months, Samuels has seen more clients in higher-paying jobs — the $35,000 range — line up for food.

The Regional Food Bank of Northeastern New York, which covers 23 counties in New York State, cited a 30 percent rise in visitors in the first nine months of this year, compared with 2006.
Maureen Schnellmann, senior director of food and nutrition programs at the American Red Cross Food Pantry in Boston, reported a 30 percent increase from January through August over last year.

Until a few months ago, Dellria Seales, a home care assistant, was just getting by living with her daughter, a hairdresser, and two grandchildren in a one-bedroom apartment for $750 a month. But a knee injury in January forced her to quit her job, leaving her at the mercy of Samuels' pantry because most of her daughter's $1,200 a month income goes to rent, energy and food costs.

"I need it. Without it, we wouldn't survive," Seales said as she picked up carrots and bananas.
John Vogel, a professor at Dartmouth College's Tuck School of Business, worries that the squeeze will lead to a less nutritious diet and inadequate medical or child care.
In the meantime, rising costs show no signs of abating.

Gas prices hit a record nationwide average of $3.23 per gallon in late May before receding a little, though prices are expected to soar again later this year. Food costs have increased 4.5 percent over the past 12 months, partly because of higher fuel costs. Egg prices were 44 percent higher, while milk was up 21.3 percent over the past 12 months to nearly $4 a gallon, according to the Bureau of Labor Statistics.

The average family of four is spending anywhere from $7 to $10 extra a week — $40 more a month — on groceries alone, compared to a year ago, according to retail consultant Burt Flickinger III.

And while overall wage growth is a solid 4.1 percent over the past 12 months, economists say the increases are mostly for the top earners.

Retailers started noticing the strain in late spring and early summer as they were monitoring the spending around the paycheck cycle.

Wal-Mart and Family Dollar key on the first week of the month, when government checks like Social Security and public assistance generally hit consumers' mailboxes.

7-Eleven, whose customers are more diverse, looks at paycheck cycles in specific markets dominated by a major employer, such as General Motors in Detroit, to discern trends in shopping.
To economize, shoppers are going for less expensive food.

"They're buying more peanut butter and pasta. And they're going for hamburger meat," Flickinger, the retail consultant, said. "They're trying to outsmart the store by looking for deep discounts at the end of the month."

He said the last time he saw this was 2000-2001, when the dot-com bubble burst and the economy went into a recession after massive layoffs.

For now, low-price retailers are readjusting their merchandising and pricing.

Wal-Mart is becoming more aggressive on discounting. It announced Thursday it is expanding price cuts to 15,000 items, ranging from Motts apple juice and Progresso soups to women's fleece tops, heading into the holidays.

Family Dollar, whose food offerings were limited to candy and snacks until two years ago, has expanded its mix of groceries like fruit cups, cereal and such refrigerated items as milk and ice cream while cutting back on shoes. This summer the chain began accepting food stamps.

Food pantries are also getting creative. Samuels said her church, Full Gospel Tabernacle of Faith, just started offering free cooking classes to teach clients who are diabetic or have other health conditions how to prepare vegetables like squash. It's also offering free exercise classes.

"We are trying to make them health conscious," Samuels said. "It's not right to give them just anything. Our mantra is eat well and live well."

The energy crisis is already here for poor folks, and it will be here soon for rich folks, too. But I maintain that things do not have to fall completely apart, and that there is much that can be done, particularly on the local level.

Yours for a better world,

mentatt (at) yahoo (d0t) com
___

2007-10-21T19:36:00.000-07:00

The “Shoulder Period” should be here, and if it ain’t… uh-oh.

The “Shoulder Period” for oil demand, the time between summer driving and winter heating, and then between winter heating and summer driving, should be here. During the shoulder period the average decline in spot prices has been over 20% for the past couple of decades, although, so far, Fall 2007 Shoulder Period has not quite turned out that way. In fact, since last spring, oil prices have risen while the refiner’s “crack spread” has fallen – exactly what one would expect if energy supplies were declining.

Does this mean the “Shoulder Period” has been permanently banned? Tough call – maybe, but it would seem a bit premature. If by December 2007 we have not experienced some kind of price decline in the spot and front month, all bets are off. At the very least, it is a curious, and perhaps important, data point.

We shall see…

Mentatt (at) yahoo (d0t) com

2007-10-21T07:15:00.000-07:00

Why does it have to be Apocalypse?

One of the biggest problems with getting the public informed and the authorities doing something constructive about our energy problem are the “Apocalyptic Crazies”. Here we have this serious energy dilemma, but instead of serious policy discussion in the political arena the powers that be have declined to tackle it. If you were a career politician, would you embrace a concept whose banner is carried by folks that see this as “The end of the world as we know it”? The expression has become so popular on the web that it is recognized as “TEOTWAWKI” quite broadly.

It is not that I have an opinion about the validity of their argument 30 years hence. It seems to me their view of the future is as probable as, if not much more probable, than the optimistic case. It is simply that accepting it as a foregone conclusion or denying it as even remotely possible seems to me to be a rather feckless public policy.

Well meaning or not, I really wish the “oil crash” crowd would keep it to a low roar. And I truly appreciate their contribution in getting the problem distributed in the blog-sphere when the main stream media would not touch it…but right now we need intelligent policy discussion, not silence, at the top of our political institutions. Thankfully, several U.S. Congressmen, former CIA Directors, and former U.S. Energy Secretaries have been raising the alarm. I hope that the “TEOTWAWKI” crowd does not drown their good sense and courage out.

Yours for a better world,

Mentatt (at) tahoo (d0t) com

2007-10-18T20:16:00.000-07:00

Where is OPEC with all that oil?

Oil, as measured by the WTI front month contract, closed just under $90 today. All that talk about how “the fundamentals do not support $70 per barrel oil” look a bit silly right about now.

So where is OPEC?

“OPEC cannot do much now,” Libya’s top oil official Shokri Ghanem told a news agency. “OPEC did all that it can.” – Arabnews.com October 17, 2007

I can just hear the MoRons in Washington: “But you promised!”
(ha ha he he ha ha)… and I love that “fundamentals do not support the price” pitch. Just for fun, please publish your “fundamental analysis” that forms the basis of your claim. What “fundamentals” are we talking about? Supply? That has been in decline. Demand? Hate to tell you guys, but that has been unable to rise because of an inability to increase supply – ergo, price is the mechanism for keeping the market balanced in this commodity. Further, if the “fundamentals” do not support the rise in price, what’s up with gold, silver, wheat, corn, milk, copper, zinc, etc… over the past few years?

This was on Bloomberg.com today:

“However, the oil price rise has evidently nothing to do with rising gold prices,” Dhafer Al-Qahtani, co-CEO and chief investment officer at Dammam-based Arbah Capital, told Arab News.
“All indications were there about the rising oil price,” he said, adding that a major pointer was supply was not meeting rising demand. The Middle East situation is escalating in all directions involving countries like Turkey, Iraq, Iran and Syria. That’s why supply is not catching up with demand.”
“I will not be surprised if it goes up to $90 or $95 a barrel sooner than expected. Winter conditions that will boost oil demand will aggravate the situation further. In reality, production is not online with demand so supply is short and price will go higher and higher,” Al-Qahtani said.
He hinted that the rising oil price would have its impact on many other fields of economic activity. “Inflation will grow globally. There will be all-round price increase. Air travel, especially, will become costly. And there will be a renewed cry for finding a cheaper substitute or alternative energy source,” Al-Qahtani added.” Bloomberg news

Duh.

Anybody notice that Steve Forbes, Daniel Yergin, Michael Lynch, et al, have all been conspicuously absent from the likes of CNBC? These were the “oil is going back to $20…then $30… then $35…” crew; apparently they have had the good sense to keep a low profile, particularly after their scathing criticisms of their intellectual betters (me, for instance). Larry Kudlow might still be flapping his gums, but not about oil. It would be too much for him to say “I was wrong, folks” (after all, he did a stretch in Washington, and those guys “may not always be right, but they are never wrong”). Hey guys, what is the value of a Ph.D. who can’t count and refuses to be corrected? I mean, there is always room for a good BS artist in every major corporation, especially for one with your establishment credentials, but you got to stop drinking your own Kool-aid. You got to stick to pontificating about stuff that people cannot measure – predicting oil prices is clearly not your thing.

OK, I am back.

The markets, including oil, zig and zag, they don’t zig and zig. Oil will likely not move in a straight line, the last several weeks not withstanding. So if and when prices retreat somewhat and the cheerleaders at CNBC announce for the 58th time that the crisis has past, don’t fall for it.

This energy crisis is at least as likely to be a slow motion train wreck as a crash. More like a python slowly squeezing the world economy until it finally notices it is getting difficult to breath. At that moment, the deluge will be unmistakable. It is not possible to predict that moment with any accuracy, but considering the price action in the oil markets it seems unlikely that it is too far away. It then follows that this might be a good time to get your house in order, get your act together, etc…

Here is a fun fact to know: If every American suddenly had reason to believe that gasoline supplies might become erratic and decided to fill up their gas tanks… there is not enough gasoline in the system to do so. Which means an even greater panic would ensue once the late arrivals showed up at the empty gas station. How do think that might play out in the stock market? In the housing and autos market?

It is something to think about.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-10-18T06:30:00.001-07:00

The U.S. Dollar falls to a record low…

This will be a short rant, as my usual readers know how I feel about the prospects for the U.S. Dollar.

Oil is at a record, gold is at 27 year highs, silver is nearing a record – all as priced against the U.S. $. If you were a Canadian citizen, earning and saving Canadian Dollars you might not know what all the fuss is about because the Canadian Dollar has maintained much its value versus these commodities.

The first baby-boomer just took early-retirement, in a few years the waves of boomers hitting the medicare rocks will come crashing in. The only way to fund this stuff in the future is for the U.S. to monetize its debt (a nice way of saying print enough money to purchase all of the outstanding debt obligations).

You would be better off saving toilet paper instead of dollars. At least TP can be used as a barter item.

The U.S. Dollars decline is not a mere coincidence with the rise in oil prices. Forgetting for the moment that oil is priced in dollars, the U.S. borrows over $1.2 every business day to fund its oil purchases, and if you look up 2 paragraphs you will see that the U.S. has no intention on making good on those debts. It then follows that cash is trash (bonds too) and oil is still very, very, very cheap.

BTW, since the Fed appears to have abandoned the U.S. $ in favor of housing, it follows that hyperinflation is likely in our near future. That means the stock market should head significantly higher (over the medium to long term, no opinion about tomorrow, next week or next month…) in NOMINAL DOLLARS - We will all be rich, sort of. Unfortunately, milk will be $15 per gallon, bread $8 per loaf, and a dozen eggs $12, and a pair of those Chinese made athletic shoes will be $300.

Yours for a better world…

Mentatt (at) yahoo (d0t) com

2007-10-17T14:03:00.001-07:00

“If you don’t read the newspapers, you are not informed. If you do read the newspapers, you are misinformed.” - Mark Twain

OMG! Oil, as measured by the front month WTI contract, is within striking distance of $100 per barrel! That seems to be the theme for CNBC, the WSJ, Forbes, Barrons, etc… you know, all those cheerleaders and rags that previously said there was no problem with oil supplies (the U.S. was merely obsessing about corn ethanol for humanitarian reasons).

I have some bad news for those jerks in the media. $100 is not some kind of ceiling through which oil cannot penetrate. After $100, like 10,000 on the Dow Jones Industrial Average, lies some higher, more problematic price – like $150, then $200, and eventually $300 per barrel. As my good friend “FireAngel” from the theoildrum.com is fond of saying, the only way to change this outcome is to cut the number of gallons in a barrel of oil.

So what does $300 per barrel of oil mean to you and me? It means we have much, much less oil available to us for our lifestyle. It means:

1. New Orleans will never be rebuilt, nor will any other future major natural disaster of similar scale (are you listening Florida and California?).
2. American children born in 2007 will not need a driver’s license when they are 30.
3. Your 401k will become a 201k, and then a 101k, and then just a k…
4. Social Security and Medicare will fail.
5. America’s farm labor workforce will be 33% of the population by 2030, not the 1.5% of 2007 (Texas A&M might actually be a better bet than Harvard for junior after all).
6. Student loans will be a future credit crisis. (Borrowing $200k for a literature degree will, in retrospect, not appear to be an intelligent investment.)
7. The luxury car you now drive will be a very nice pottery holder in your garden.
8. But, your milk goat is really going to appreciate those fine leather seats, and your chickens will really enjoy perching on the engraved wood steering wheel.
9. You’ll be using dollar bills to light candles on your birthday cake because they are cheaper than matches.
10. Homes will come with only 1 zone heating and AC - your bedroom.
11. You’ll be thin again!
12. Home cooking!
13. Your wife’s depression/personality disorder, junior’s ADHD, and your alcohol problem… cured, with all that fresh air and sunshine instead of driving everywhere.
14. South Florida’s housing crisis will never be resolved.
15. The Southwest water problem will no longer be academic.
16. You won’t feel so rushed anymore. You won’t be spending time going to the gym, filling up the car, commuting…
17. No problem not fulfilling your new year’s fitness resolution as walking and biking will no longer be optional means of transportation.
18. You will care far more about who is Mayor than who is President.
19. You will get to know the neighbors, one way or another.
20. Conspicuous displays of consumption or wealth will not be good for your health.
21. The response time for 911 is going to be a great deal longer than it is now.
22. The end of Feminism, Liberalism, Conservatism, etc… these were luxuries of the cheap fossil fuel era.
23. No more keeping up with the Jones’. Keeping up will be quite enough.
24. Flush it and forget it will be replaced by compost it and fertilize with it.
25. You will never have to mow the lawn again, ‘cause your gonna need that hay.
26. You won’t have any trouble finding a parking space.
27. No more road rage, you will truly appreciate the use a of vehicle.
28. You are going to look fabulous in designer jeans while working in your garden, fixing your bike, etc…
29. Golf courses will become community gardens or farms and that home on the 9th hole will likely become a home in the Spinach field or pumpkin patch... and you will be working on your swing all right – for your hoe, your scythe, your axe…
30. The demand for lawyers, stockbrokers, accountants, insurance agents, realtors, hair -dressers, massage therapists, psychologists, etc… is going to dry up in ways I am not poetic enough to describe (and I own a brokerage firm).

No, this won’t happen overnight, but that is not the point. The point is that it WILL happen. Things will change, and since “for the better” or “for the worse” is an abstract I have no comment on either. Things will change and some people will be the “winners” in the new paradigm, while others will be the “losers” (sorry, more abstractions), and it is up to you to decide where it is you would like to be and what actions you plan to take to execute your plan.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

2007-10-15T19:29:00.000-07:00

“For every expert there is an equal and opposite expert” – unknown

People are always sending me this article and that quote from some “expert” on the future of oil prices. Beware the simple solution for the complex problem.

If everyone was cock sure that oil was going to $100, the price would be there, right now, as there would be no sellers at $84.50

If everyone was cock sure that oil was going to $50, the price would be there, right now, as there would be no buyers at $84.50

The reason oil is trading at $84.50 is that there are sufficient people wishing to sell to buyers willing to buy AT THAT PRICE.

This is no longer academic. I read with great amusement this “expert” and that “expert” predicting this price or that. I am always curious how much of their net worth they have placed at risk in energy commodities and equities, as well as the derivative trades in precious metals or agricultural property (not derivatives as in options, but betting on higher precious metals prices is frequently “derived” from a belief in higher energy prices as is betting on higher corn prices).

So here’s to the experts: Put your money where your mouth is. If you are correct, you will not need that tenured position any longer. You can be on the other side of the endowment solicitation. I will be taking the other side of the trade. May the smartest man win. You see, that is the beauty of the markets. The market environment is the ultimate meritocracy. The guy with the best balance of brains and chutzpah wins.

This is not to say that the front month could not trade down; considering its meteoric rise and the fact that we are heading into the “shoulder period”, well, I certainly think it could (or not). I am saying that the trend remains firmly upward, though not in a straight line. Will we break last year’s shoulder period lows? NAFC.

On another note… Do you know what the thousands of public relations firms actually do? They wine, and dine, and bribe, and drug, and solicit, and blackmail, etc… their media contacts into writing/producing articles/news segments that benefit their client – with no regard as to the accuracy of the report.

“All I know is what I read in the newspapers” - Will Rogers

Mentatt (at) yahoo (dot) com

2007-10-13T10:56:00.000-07:00

Just another Regression toward the Mean

The United States consumes nearly 25% of the world’s liquid petroleum resources (“oil”) yet has only 4.5 % (approximately) of the world’s population. Over the next decade or so, the U.S. will consume somewhere in the neighborhood of 10% of the world’s oil, and within 20 years, 5% of the world’s oil. Worse, the gross production of oil will also decline during the period. How can I be so sure? Because a Regression toward the Mean is a certainty, the only area up for debate is the rate of regression.

First, a definition from Wikipedia.org:

“If random variables X and Y have standard deviations SX and SY and correlation coefficient ρ the slope of the regression line is given by

p x SY/SX

A consequence of this is that a change of 1 standard deviation in X is associated with a change of ρ SDs in Y. Unless X and Y are perfectly correlated ρ will be less than unity. Thus, for a given value of X the value of Y that would be predicted by the regression line is always fewer SDs from its mean than X is from its mean. Regression to the mean will occur if | ρ | < 1, so in practice it always occurs.

Note that regression toward the mean is more pronounced the less the two variables are correlated, i.e. the smaller | ρ | is.”

What are the 2 variables? U.S. oil consumption, and non-U.S. oil consumption. You disagree? You have a better chance of making an argument that pi is not 3.1415… and e is not e = 2.7182…

The funny thing, and I do this for a living, is trying to convince someone that is “certain” this is not so but who could not define pi or e – yet still has strong convictions, based on not one shred of research or hard data, on energy supplies. The late Malcolm Forbes once said that “being rich does not make a man right more often, just harder to correct”.

I received an email recently from a fellow Wall Streeter who said he did not subscribe to the “doom and gloom” of my analysis. I wrote him back:

“It matters little what you or I subscribe to. What
does matter is being correct and then placing your bets
accordingly.

The very words "doom and gloom" are put out there to
belittle other viewpoints of resource capacity. For
every seller there is a buyer (or we would have no
market) and only one of them is correct in their assessment of future
prices.

Further, "Doom and Gloom" cannot be measured. Oil
imports, BTU's consumed, bushels of wheat and corn -
these can all be counted and measured. If the answer on the right
side of the equals sign ( = ) translates into what
ever you call “doom and gloom” - well, the data does not
really care about your semantics...”

Correct me if I am wrong, but an overweight, hypertensive patient who dismisseshis physician’s conclusions as “doom and gloom” is a fool, no?

Let’s get back to the issue:

In other words, over the next 20 years, the U.S. will go from consuming over 20.3 million barrels per day (“bpd”), every day, to consuming less than 5 million bpd, every day. No more casual drives through the country side, no more silly car commercials, no more heating more than 1000 square feet of living space and then, only if you are very wealthy and only if the political realities are accepting of such.

A great shock is going to be felt in the markets. All of the pension liabilities, current valuations and multiples, insurance tables, medicare, social security, etc… EVERYTHING will need to be “reassessed”. A nice way of saying most financial assets will lose most of their value.

I speak only in constant U.S. dollars. I have no opinion on what reaction the U.S. Government, and its Department of Treasury and Federal Reserve Bank, might have. After all, Oil has not risen much, if at all, in price for Canadian consumers as their currency is not being devalued as is the U.S. dollar is.

Oh, and by the way. The EIA’s data for July world oil production is out. Production of crude and condensate continues to decline, India and China’s imports continue to rise, and U.S. imports continue to fall… but more on this in a future post.

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-10-08T18:14:00.000-07:00

A Store of Value (and I am not talking about Target)

I hate the U.S. Dollar. If you have been reading my stuff you know I have for years.

Hating the U.S. Dollar does not mean I “like” other currencies. I don’t. I like commodities, and I like certain agricultural land. I even like the equities of companies in certain commodity businesses. When I say I hate the U.S. Dollar, I don’t mean that I would want to own the Euro here, or the Mexican Peso (Ha!), or the Ruble, etc… Now there might be some currencies that I do like, but not more than commodities and I am precluded from giving specific investment advice in this forum and that would include specific currencies.

To get to the point… in 1979 the world’s currency basket lost roughly 15% of its purchasing power. In other words, all currencies lost value. There is no easy fix to this issue like “buy gold!” or “buy silver!”. After all, gold peaked in 1980 only 1 year after the “79 currency debacle and took 27 years to recover.

No, there is no silver bullet (pun intended), the rules still apply: diversify, do your homework, believe half of what you see and nothing that you hear, remember that markets zig and zag, they do not zig and zig and zig, and stay the hell away from the $#%%! Bond market. How much is the coupon yield? And what was the money supply increase? Your total real return is negative. If you need clarification, just email me…

Which brings me to China. China, China, China! I remember when it was: Japan, Japan, Japan! (I am dating myself here). Look what happened there. Now be careful. China is nearly as much at risk due to energy constraints as the U.S. is, and their banking system is a Friday the 13th sequel waiting to happen.

Meanwhile, back at the currency ranch… our trading partners will at some point try to protect their export markets, and will do so by increasing their money supply and devaluing their currency. While this might be relatively good for the dollar in the ForEx markets, it is extremely inflationary, devaluing the purchasing power of ALL currencies.

And this is your store of value?

Yours for a better world,

Mentatt (at) Yahoo (dot) com

2007-10-08T17:28:00.001-07:00

So much said, but so little that makes sense…

The web is chock full of Peak Oil analysis: dates, decline rates, population impacts, energy prices, etc… 99% of which is doomer BS or attempted political manipulation.

Here is a hard truth: There is little to nothing that 95% (I pulled that number out of the air) of the American population can do to try and control their own destiny in post PO America. Some of the remaining 5% is so wealthy that it matters little what they do. It is the upper middle and professional classes that have the most to lose and the best opportunity to make adjustments.

First things first: If you are doing it, stop reading “doomer porn”. How does it help your position to read BS written by people who are HOPING for disaster? OK, I will admit they may eventually be proven correct. So what? How does that improve YOUR circumstances? No more so than knowing you have high cholesterol and high blood pressure… if you don’t/won’t do anything about it. I could make a good argument that it would be better to not know so that you could live the time you have left with peace of mind.

Action works. Planning works. Having the means makes life much easier.

If you have a few bucks and the capacity for abstract thought (these don’t always go together; I know a lot of successful folks that became successful precisely because they had zero capacity for abstract thought – sometimes sheer force of will carries the day) it is time to educate yourself in the commodities futures markets, precious metals, as well as agricultural land. I know, these have already risen a great deal, and no, you have not “missed the boat”. An understanding of the risks facing the US $ would help, too. I could give you my opinions and strategies, but then you would ignore these as just more BS from some huckster (and you may be correct), and besides I am on the learning curve here, too. No, you have to do the research yourself. Opportunities abound in the energy futures market. I am constantly amazed when I read postings from some of the smartest guys in the world on this issue – and then see that they have not taken a position in the market that will pay off in spades if they are correct. TheOilDrum.com is full of these guys. They have been dead right on the price of oil for 3 years, and they should be multi-millionaires – but they forgot to put their money where their minds are. And they have excellent minds.

Many investors living in urban centers like my own South Florida wrongly assume that ALL real estate markets did a face plant. Farmland has been the number 1 performing asset class in real estate for at least the past 2 years, and maybe 3. Can you imagine the look on a Boca Raton local’s face when you told him you were buying cornfields back in 2005? He might have tried not to laugh in your face, but he probably would have failed. Still, the last laugh always belongs to the better-informed investor, because for every buyer there is a seller – and ONLY ONE OF THEM IS RIGHT.

So let’s talk about real estate/land investing. The hot spot for years and years has been the sun belt of the U.S. Southwest. We have built cities for millions of people in places that have no water. In the history of mankind, has this ever been done before? NEVER. From Mesopotamia to Egypt to London to New York … the one thing every major city (well, except maybe Atlanta) had in common is that it was built around a supply of water. We NEED water, among other things. In America, people have migrated over the past 40 years from arable, temperate, regions with adequate water to places that would not exist without air conditioning and significant food and water transportation inputs. Now while these inputs will likely be available for some time to come, their availability is going to contract, and that will affect the market price for those inputs that will stagger the occupants.

Let me digress for a moment to address those in doubt about this outcome. In any closed system, the consumption of all inputs is directly correlated to amount of energy available to create, transport, store, and consume the input, and it does not matter if it’s a clan of beavers in a mountain lake or 4 million inhabitants of metro Phoenix. For the beavers the energy input is solar evaporation bringing rain to higher elevations that replenish the lake. If less rain falls, the lake (a closed system) will contract. If aggregate BTU availability to North America (a closed system) contracts then inputs relying on energy (i.e. water, AC, sewage treatment, garbage removal) contract – no exceptions.

The man who bought my neighbor’s house in South Florida 2 years ago as an investment curses the day he ever saw the place. It has been vacant for most of the 2 years, he can’t sell it, and he can’t rent it for anything near his costs. I remember him walking around the property with pride on closing day. Markets are like that. The market is pricing good farmland in the Great Lakes region at a significant discount, and desert property at a significant premium because the market participants are not including in their calculations a significant energy shortage/crisis/problem/issue (in my not so humble opinion) and are overvaluing some amenities like the soon to be grassless golf course, and undervaluing other amenities, like access to sufficient fresh water (is that really an amenity?). Markets are like that (from the department of redundancy department).

Forget the Miami condo on Biscayne Bay – they are doomed, and irrespective of what you read in the local paper or hear from the media they are not coming back any time soon. Farmland can always be rented to farmers, and it holds its value even when the local currency does not. What was considered wealth before stocks, bonds, and other financial instruments? Land, livestock, precious metals, goods, timber, etc… much of this stuff still trades in the futures market, just in case you aren’t interested in having a herd of cattle in your backyard, and these futures, when liquidated, would likely hold their purchasing power in an environment of a declining U.S. $ (and you know how I feel about the U.S. $). Land does not trade like gold and oil so you will have to get your hands dirty here.

Real hiccups from energy indigestion could be felt at any moment, and then again, maybe not for a couple years. If I knew which day exactly I wouldn’t need my day gig. But, as I said before - “markets are like that” - things can change so fast that once the change begins, you can’t take advantage of it. And therein lies the rub.

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-10-06T19:47:00.001-07:00

I received an email today from a rather bright young fellow who asked me how long it would be before Wall Street is looking forward to the EIA monthly world oil production numbers the way the look forward to the various reports coming out of the U.S. Department of Commerce, et al.

An excellent point; and to answer your question… soon, I would imagine.

Taking this to its next logical step… it would seem that at that time wealth, power, and money would flow in different directions than is now the case. At this time, Wall Street still appears willing to pay a premium for “growth” (of earnings I presume), after all, the average multiple for tech stocks is what? 40X? What multiple will they command when growth appears to no longer be possible? 4X? 3X? And what of the value of the long term bonds and other debt instruments of the airlines, auto manufacturers, mortgage lenders, Investment Banks, etc… if the long term view is one of perpetual energy descent? What are the legal, legislative, and political implications of this magnitude of defaults? It hurts my head to try and wrap my mind around this.

The EIA’s own data show a substantial decline in oil imports for the U.S. from 2006 to 2007, nearly 3%. If I read the data correctly, it would appear that for the month over month September 2006 to September 2007 imports declined nearly 7%! That might explain the remarkable drop in crude inventories and finished products of late. If this trend should continue, and I am not saying that it will or won’t, this winter will be somewhat problematic – at least for CERA & Daniel Yergin, Michael Lynch, Steve Forbes, Larry Kudlow… (Actually, I think these guys have been pounded into submission at this point. I just can’t help myself.) as well as for folks who heat their home’s with oil. For the moment, a BTU of Natural Gas (“NG”) is half the price of a BTU of oil, but that will change.

I want to stress how fast markets can change – sometimes overnight – and this is just the kind of data point change that can demolish the best quant model money can buy. So watch the data carefully, have a plan, and a plan B, and don’t deny to yourself what your own eyes are seeing.

Forget the production numbers (sort of). Pay extremely close attention to the import numbers, tanker rates and traffic, and the value of the U.S.$ versus not only the dollar index (remember, our trading partners will eventually try to protect their export markets by printing and devaluing thier own currency just as the U.S. has done) but versus precious metals as these will be far more telling than gross world production.

I know this sounds pecuniary… but I am not running for office nor do I pretend to have a macro solution(s). I am far more interested in the potential micro solution(s), which has/have a much greater potential for success.

Mentatt (at) yahoo (d0t) com

2007-10-06T13:49:00.001-07:00

My wife just returned home from her native Japan with 2 data points I thought I would share with you:

1. Plastic grocery bags are no longer free
2. Garbage service in the Tokyo to Osaka megalopolis is no longer one size fits all. You pay by volume and weight.

Japan has little to no oil, natural gas, or coal. Plastic bags are derived from crude oil, and landfill space is at a premium making the garbage fee a no-brainer.

For those American’s who have never been to Japan (not talking about visiting a western style hotel), the first time is always an eye opener.

Upper middle-class Japanese typically have just one bathroom in their home. The home is perhaps 1000 square feet, frequently with 3 floors, and because space is at such a premium many homes have a compact circular staircase. The Japanese are tidy folks, never wearing their shoes in their homes, and are big on solar power – as a disinfectant. They would prefer, if possible, to place their bedding and sheet, pillows, clothes, etc… out in direct sunlight as a means of keeping pathogens at bay. Clothes dryers are not the universal item that they are in America.

The most striking anecdote I can share has to do with their husbanding of energy resources. At the end of the day many Japanese will retire to their “Ofuro”, combination shower, steam, bath (but no toilet, that is in a separate room/closet) room. After a good wash and spritz, it is customary to soak in a large tub of hot water; however, when they are finished they do not waste the energy in the tub of hot water – they use it to wash clothes, for hot water bottles, etc… the Japanese would no more waste this energy source than tramp through their mother-in-law’s house with muddy boots on.

And, of course, many middle class Japanese do not have cars. Manhattanites (and former Manhattanites like yours truly) can relate to this, but not so the rest of America.

America can look toward its trading partners and see the waves coming in. It won’t be many years before Americans are billed for their garbage by the pound, their auto insurance by the mile, and their carbon emissions by volume, and this will have a profound impact on our way of life

Even the Wall Street Journal, who just last year was snickering at us “Peak Oil types”, has had the temerity to run an article this past week on the impacts of $100 oil:

“How well could the world economy survive $100 a barrel?”  According to the Journal, “The answer is quite well — so long as several conditions still hold true. The price rise would probably have to be gradual. Inflation couldn't get so bad as to force big interest-rate hikes. Oil-rich nations would need to pump their profits back into U.S. and European economies.” WSJ

Just over 3 years ago, when oil was in the $40’s, I wrote a letter to Larry Kudlow at CNBC that he and Steve Forbes, Michael Lynch, et al., were all wet and that they were completely uninformed as to our energy prospects; my comments were met with derision and mockery. A little crow can be good for the digestive system. Larry, eat hearty.

Look, as the WSJ tacitly admits, $100 per barrel oil is a foregone conclusion - and I believe that the world economy could handle $100 per barrel oil with barely a sniff. But it is not the PRICE of oil that will derail the economy (although given enough time it would, it just isn’t going to get that much time) it is the amount of oil AVAILABLE to the world economy that is the problem.

So, here you are, a middle-aged, self-made man of means - what do you do?

There are 2 key issues as I see it: your personal balance sheet and your income.

What is the source of your wealth? Do you build solar self-sufficient dwellings or do you sell cars? Is your business located at the proverbial beach right in front of the Tsunami? If it is, and that would be most of us (me, too), how can you best transition your future business prospects? If you were looking for pat answers, sorry, I don’t have them. You will have to figure that out for yourself. If you don’t address these issues now, you risk joining the wreckage of the homebuilders, real estate brokers, and mortgage loan officers (and if you think these businesses are just in a cyclical downturn, then by all means, now is the time to enter these industries. Please let me know, I would like to use you as a control group). It is a wonderful thing being in a business with large barriers to entry in a growing industry within an expanding economy… it is quite something else to be in a business in an industry suffering from overcapacity within a contracting economy. To get a handle on the difference you would need to find some greybeard who was in business from 1974 to 1983 or hit the history books…

What is your store of value? You know, like savings, stocks and bonds, real estate, etc… where do you store your unconsumed production? A continual/perpetual oil supply decline will wreak havoc on the purchasing power of the U.S.$, versus not only other currencies (imports) but domestically produced goods and services as well. Will your income/business be there to service the debt on your balance sheet? If not, whatever equity is there won’t be there for long.

It is my firm belief that you must have a strategy other than hoping or “wishing on a star” because we are running out of time. The energy crisis is here, and it couldn’t care less if you believe it or not, and once you are FORCED to believe, it will be too late.
This is sort of a repeat of the housing market in South Florida. In late 2004 and early 2005 we were advising clients that this was going to end badly, and that one was better off being too early than too late. Then along comes July 4, 2005 (or so), and like someone hit the switch, we went from seller’s market, to buyer’s market, to no market. You couldn’t get out at ANY price that was better than foreclosure. It is now over 2 years later and only NOW do market participants get the picture, but only as they stare foreclosure and bankruptcy in the face.

This is not a forum for advice, as I am precluded from making specific recommendations in this blog. Please feel free to email me.

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-10-04T19:18:00.000-07:00

Problem Solved.

I got a call yesterday from a friend and reader of my meanderings. He works at a large trading firm and one of the traders there called him to point out that, while I might be correct on the price of oil, what do I have to say now that the stock market did not crash?

When did I say it would crash? Never in my life… Actually, if the Fed continues to flood the system with money the market can rise to infinity – you just can’t buy anything with the money you receive when you sell your stocks. The important thing to remember is that some organizations and corporations are going to benefit from the energy situation, and others are going to be harmed. If you can figure out the “who”, well, you will do just fine. I cannot comment on that in this forum.
But, really. That is not why the trader called my buddy; he called to gloat. The market is telling him that I’ve got it all wrong - so there.

Here is a quote from my favorite curmudgeon, James Howard Kuntsler:

“Okay, here’s the big problem in America; we made this unfortunate set of choices to create the drive-in utopia, the happy-motoring utopia. America’s oil consumption is the greatest misallocation of resources in the history of the world. We’re not going to be able to continue this living arrangement and that makes it, by definition, the greatest misallocation of resources in the history of the world.

But we like things the way they are. So we will not change our behavior until conditions force us to change. We Americans have put so much of our resources, so much of our wealth, so much of our spirit into constructing and assembling this energy-intensive infrastructure for daily life, that we can’t imagine letting go of it.

But get this; no combination of alternative fuels or systems for running them will allow us to run Walt Disney World, Wal-Mart, and the interstate highway system. We’re not going to run those things on any combination of solar, wind, nuclear, bio-fuel, used French fried potato oil, dark matter, or all the other things that we’re wishing for, or even a substantial fraction of it.

I’m not against alternative fuels or making investment in alternative systems. But what you need to know is we’ll probably be disappointed in what they can actually do for us. They can do things for us, but not the things that we’re wishing they can do for us. One of the main implications of “the long emergency,” therefore, is that we’re going to have to downscale everything we do. So the 3,000-mile Cesar salad will not be with us that much longer.”

Actually, in some respects, Mr. Kuntsler is an optimist.

The data continue to point to a 2005 peak in production. The market’s price signals have led me to call “Peak Oil” in past tense. Still the media and the relatively informed continue to debate the “when” of Peak Oil. It might be very entertaining, it might be even sell a little advertising, and it certainly will keep billing up at the public relations firms – it being their duty to manipulate the stories in the media for the benefit of their clients – but it is absolutely not relevant anymore. That peak has arrived or will arrive soon is far less relevant than the fact that it will arrive – no matter what. It is the preparations that matter… The following is a quote from an ingenious blogger commenting on the Association for the Study of Peak Oil.

“This is not only bad for the public discourse, but IMHO, it isn't very good for ASPO, either. Because they risk being rendered obsolete by their own data. ASPO has done the important work of establishing dates and reserves, but shortly, if their own estimates are right, when peak oil is will be an established, documentable fact - if it isn't already. And while ASPO will then have the satisfaction of being right, it will also have the problem of being irrelevant, if it hasn't taken a lead on the next step - where do we go from here?” - SHARON ASTYK

And there is NO satisfaction in being right – the satisfaction comes from being prepared. This is not a debate you can win, a college you can get into, nor a fair maiden’s hand to capture. It just is what it is – the most important event in modern history, and it doesn’t come with instruction manuals, accredited institutions to educate us on the solutions, or a spokesperson. “Wishing on a star” won’t help.

“If you find yourself in a hole, stop digging” – unknown

Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-09-21T06:08:00.000-07:00

Don’t deny what your eyes are seeing.

1. The October crude oil contract, now expired, closed out near $84 - a new record.
2. Gold front month is trading, as we speak, at $743 – it took out last year’s high in a single day and never looked back.
3. The U.S. Dollar is at a 40 year low as measured by the dollar index
4. Saudi Arabia, for the first time in many decades, did not move its interest rate policy in lockstep with the U.S. Federal Reserve – in layman’s speak the Saudi’s are depegging their currency from the U.S. Dollar
5. Commercial inventories of crude and finished product in the U.S., the world’s largest energy consumer, are declining at an alarming rate – about 10% in the past 3 months. Although prices have moved higher, there has been no change in the slope of the line measuring the inventory’s decline.

Now a definition:

“Occam's razor (sometimes spelled Ockham's razor) is a principle attributed to the 14th-century English logician and Franciscan friar William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory. The principle is often expressed in Latin as the lex parsimoniae ("law of parsimony" or "law of succinctness"):

“entia non sunt multiplicanda praeter necessitatem,”

which translates to:

“entities should not be multiplied beyond necessity.”

This is often paraphrased as "All things being equal, the simplest solution tends to be the right one," or alternately, "we should not assert that for which we do not have some proof." In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest entities (although this is not always the same as simplicity[1]). It is in this sense that Occam's razor is usually understood.

Originally a tenet of the reductionist philosophy of nominalism, it is more often taken today as a heuristic maxim that advises economy, parsimony, or simplicity in scientific theories.” – Wikipedia.org

Using Occam’s razor to keep us germane to the discussion at hand:

1. None of the solutions bandied about by glad-handing politicians and miscreant schemers such as hydrogen, ethanol, solar, wind, tidal, gerbils on a treadmills… have proven to have any potential to scale to our society’s current requirements.

2. Every data point available shows world production of crude oil and condensate in decline.

3. North American production of natural gas has been in decline for several years.

4. Even with a 700% rise in the price of crude oil since the beginning of the decade, no significant finds are on the horizon, despite the tremendous financial incentive of the exploration companies.

It then follows that a smoothed “peak” has been reached in world oil production, and in North America’s case, in natural gas as well.
The U.S. economy, currency, real estate, and financial markets are at serious risk. If you have assets, a business, etc… these risks and opportunities should be the very center-point, almost to the exclusion of everything else, of your personal and business strategies. If not, the sounds of “woulds, coulda, shoulda” will, to steal a line from the movies – “Echo in Eternity”
Yours for a better world,

Mentatt (at) yahoo (dot) com

2007-09-13T06:10:00.001-07:00

Downsize, Downsize, Downsize

Then Simplify, Simplify, Simplify.

I write this blog for a specific audience - successful, 35 +, and responsible for providing for, and providing direction to, a family. You have worked hard at a career for a decade or two (or three, or more), saved some money, own a business or are a professional, and own a home, and like it or not have made some implicit “promises” to spouses and children. In a world of declining energy supplies many of these “promises” will, by necessity and through no fault of your own, be broken.

Here you are, a 50-year-old guy with 2.1 children, a dog, and a “$3, $5, or $10 million net worth”. Life is good. You aren’t the CEO of a Fortune 500 company, but your family has the best of everything, and hopefully you won’t be joining some of those big shot CEO’s in prison any time soon.

What is the source of your wealth? How did you calculate that net worth? “Well, my house has $3,000,000 in equity, my stocks are worth $1,500,000, and cash and personal belongings make up the balance.” Or maybe your house has $1 million of equity, you have little financial assets, but your business is worth $3,000,000… Whatever.

How much will your house be worth in a perpetual energy crisis? Zipity-do-da, that’s how much. If the U.S., with a little less than 5% of the world’s population should be required to consume only 5% of the world’s oil (down from 25%), and that is EXACTLY what is going to happen by 2020 or so, the transportation system that supports the value of your home will not exist. No tickie, no laundry. In 15 years, the oil available to America will decline in the neighborhood of 80% (please feel free to email me and I will happily show you how I arrived at that number), so, how exactly are the landscape folks that keep the Everglades (I live in South Florida) from consuming your yard and home going to make it out to your spread? And, exactly how do we evacuate 5 million people if a category 5 hurricane should threaten without the aforementioned transportation system? People will figure that one out pretty quick, and the demand for homes in hurricane zones, or areas lacking water resources, or mountainous regions requiring provisions to be transported over long distances will collapse like a wet paper bag…

So, you have a successful business or practice. Is it necessary for your customers/clients to drive to your place of business? There will be a great many less of them making the trip with an 80% decline in oil supplies for American consumption. What about your employees? Are you going to provide a bunkhouse for them within walking distance of your place of business? Do they want to live in a bunkhouse? Would you?

So much for the equity in your home, your income, and the value of your business -
The bottom line is this: Most of what you value is an illusion brought to you by cheap and abundant energy. Unfortunately, energy will neither be cheap, nor abundant, in the very near future. Not next tuesday, mind you, but you can draw a sloping line on a graph, right? We did those exercises in high school math for a reason. The U.S. consumes nearly 20.5 million barrels of oil per day in 2007 - and in 2020 we will be down to around 5 million barrels per day. The slope will begin gently, and then accelerate. The worst of the effects will be somewhere in the middle of the sloping line. No amount of financial engineering, politcal debate, currency devaluation, war, or other human activity is going to change the outcome - although some SIGNIFICANT reduction in consumption could elongate the sloping line, and hence the length of time for the outcome to unfold, it will not change the outcome.

No one likes this vision, especially people who have worked hard and sacrificed their entire lives to put it all together. In doing so, you must have made a lot of good choices. It is my opinion that you must make a very good choice, RIGHT NOW, and continue to make good choices, or else. But that was always the case, wasn’t it?

Yours for a better world,

Mentatt (at) yahoo (dot) com