Gold and Oil Price Limits

Now everybody’s getting crazy in the price forecasting side of things. Increasingly, in an effort to draw attention as contrarian prophets, tout sheet vendors around the world are making price calls on oil and gas that while possible, are not likely. There are very real market factors that limit the heights to which any commodity price can soar.

And whereas we are living through a period of commodity hyper-inflation, these new records across the board in pretty much everything except coffee (which may very well be next) lack one common characteristic of any such event that we ultimately and in retrospect refer to as a “bubble”.

In the cases of the last three bubbles that we’ve witnessed the implosion of this decade, all three suffered from an excess of supply in the face of diminishing demand. The internet technologies of 2000 were over-invested in to the point where broadband was selling for less than it cost to run.

The real estate bubble and the credit bubble, inextricably linked, more or less collapsed together. The excess of credit caused an excess of supply real estate-wise, the fallout from which we are still only starting to feel the pain of, rosy forecasts from the mainstream notwithstanding. When the derivative possibilities of every credit configuration imaginable had been spit shined and rolled out among dopy institutional investors, the jig was up, and internet pages with the words “food riots” have multiplied by a factor of at least a million.

Both gold and oil, in direct opposition to these “bubble” markets, though not closely linked in terms of their effect on each other’s prices, nonetheless share a common differentiator that will ensure their exclusion from the bubble club membership for the foreseeable future. Namely, supply of both of these cannot easily be increased, and so therefore we are witnessing diminished supply relative to consumption of these core commodities.

Believe what you will, if every talking head in a suit out there agrees that gold is a “safe haven” investment when currencies start to emit the scent of a most unpleasant perfume, its money. The only way we will ever see a reduction in global demand for money is if the population of human beings collapses dramatically (an inevitability, at some point in geo-time scale, considering the finite essence of all things), or we suddenly come up with a range of technologies that miraculously feed, clothe and house the whole planet to their heart’s content. Neither event likely to occur in anyone old enough to read’s lifetime.

Unlike gold, oil is consumed finally, its role as an energy carrier completed once and for all upon combustion. While we still have billions of barrels locked up in everything from shale to sand to tires, the costs of extraction to some degree negate the supply side possibilities. Gold, theoretically, is never lost, but only recycled. The exception is the minute (relatively) quantities lost to ablation – the incrementally-eroded- through- wear portion – and the dental inventory safely slumbering in the mouths of un-exhumed relatives beneath our feet in quiet neighbourhoods.

With this in mind, it is forgivable to mistakenly presume that a limited supply under pressure from growing and never ending demand might result in an terminally steep upward price trajectory, but I beg to differ.

In the case of oil, for example, one need only ask one’s self, “At what price gasoline-per-gallon do I join the 95% of the planet’s population that can’t afford to drive?”

There is a figure, no matter how rich you are, that you can arrive at. So there’s the rub: With every dollar increase in the price of gasoline, fewer drivers are starting the car, and are electing instead for the bike, horse, or feet. Therefore, there is a point in the not-too-distant-future where the diminishing demand will fall below the available supply, and that is the point (in a perfect world) where the price of oil would peak, and start to fall. Thanks to the massive Perception Management Machine, popularly known as “journalism” under contract to the governments and bankers who collude daily to fleece Joe Average, the real peak will probably arrive much later, allowing the perpetrators of (what will then become) the bubble to profit by shorts and bankruptcies all the way back down again.

That, I predict, will be the terminal point of the Petroleum Age, because co-incident with the impoverishment of the nation through unaffordable transportation, and compounded by an urban design mentality (or utter lack thereof) where a one hour commute by car is considered normal, there will be a rather prolonged period of a famine of sorts, because who will be able to afford a loaf of bread that costs $25 per kilometer just to ship?

At this point, civil unrest will prompt government to bite the bullet and jump on the alternative fuel technologies bandwagon with genuine gusto, so the benefit to humanity will be, at long last, the mass adoption of cleaner fuels and technologies so our children and theirs will hopefully be able at least to breathe.

The unfortunate, but nevertheless un-mourned victim of this will petroleum, and the price of all its by-products. Hydrocarbon-based plastics will be replaced by natural glycogens from clean energy production, and the tenaciously-trapped over-priced oil in shales beneath the Rocky Mountains will be permitted to rest in peace, their hydrocarbon content no longer of sufficient value to extract.

Thank God…necessity is indeed the mother of invention.

But getting back to gold. Now there’s a tough one to figure out. With every collapsed currency, a new generation of bankrupts appreciates profoundly the inherent value of gold. There is no conceivable replacement, because there is no substance that can stand up to the scrutiny of history and maintain its appeal as the Ultimate Store of Value.

At what point does the price of gold thwart desire of its possession? Contrary to oil, for every dollar gold rises in value, the more precious a metal it becomes, both to brides and bankers. Is it conceivable that future generations will purchase with un-batted eyes an ounce of gold for ten thousand, twenty thousand…or even one hundred thousand dollars?

What might diminish the universal desire to possess wealth in the form of gold? To that question I can fathom no answer, except the drastic ones earlier suggested. In the context of these deliberations, $2,000 gold is an easy call.

Comments

[zenalgorithm]

I've read that eventually nanotechnology will be able to manipulate matter at the atomic level, thus you could create gold, platinum etc...

[GH]

Zenalgorithm: You apparently don't understand the difference between atoms and their components (quarks such as protons, neutrons, and electrons). Nanotechnology can build structures from individual atoms, but it cannot change an atom of one element into an atom of another element.

Nuclear fission and fusion can do that... but you don't want to mess with those.

[David Lentz]

Yes, yes, $2000 gold ... when? If it arrives after oil crashes for the last time, when I am growing potatoes in my lawn and canning fruits to get me through the winter without starving -- a winter that I'm cutting down the trees in my yard to burn for heat -- then I really could care less about gold, whether it's priced at $2000 or $200000.

As Keynes reminded us all, in the long run we are dead.

Matters of pricing are of interest to us only over the short haul.

[captbob]

An epicurean delight for the mind. It's verbal flavors only exceeded by it's unerring accuracy. Why should intelligent information always by flavored "Dry Yawns"??
Bravo!

[FoxV]

ah yes 'Lentz, touting the sage wisdom of Keynes. Keynes quote wil one day be changed to "why should I care in the long run I will be dead"

Because what Keynes logic doesn't take into account is that someone will be left to deal with the mess that was wrought by no regard for the future. As it stand today, you already have to clean up the mess of three generations (you, father, grandfather). If you don't, you're children will have to clean up the mess of four generations

And when your middle age children are picking potatoes out of your backyard to feed you're feeble body and you are burning the last of your retirement stock and bond certificates and paper dollars to keep warm in the winter you'll say to yourself

"Man I really wish I bought some gold, but am I ever glad Keynes is dead"

[ottorock111]

how's that southwestern call of yours doing, James?

[GMiki]

What alternate energy? When? Unless we return to the age of the cave dweller who didn't leave home, we need oil. Electric cars? To plug in where and draw on what electricity source, produced how? Coal is finite and in demand--ask the South Africans. Natural gas--not so abundant as you think. Uranium--we're in undersupply right now.

Gold at $2,000--not that long from now as these things go. A couple of years? Currently in consolidation/correcti... but will be up for the year.

Silver is already in shortage as both an industrial metal and as money.

Platinum? In undersupply due to the South African energy situation.

Base mentals? Undersupply on many of these.

Food--definitely a big draw down.

[jlounsbury59]

GMiki - Electricity will be produced from relatively inexhaustible sources, including turbines driven by tidal motion, wind and geothermal sources, as well as solar energy. The age of combustion (and nuclear power for electricity is drawing to an end. I agree with your opinion on gold and other metals.

[bearfund]

GMiki - To a large extent I agree; alternative fuels have some potential but the current technologies aren't going to cut it, and burning food makes things worse rather than better. Unlike most authors, Mr. West actually mentions the real change that will be made: better urban design. Today's exurbs will mostly be depopulated or returned to their original rural state, producing agricultural goods for consumption in nearby densely populated walkable cities. Oil will still be used as a fuel barring some miracle of technology, but fewer goods will be transported shorter distances and people will travel less. Only the most efficient vehicles will consume oil: ships and trains. Expect sail to make a comeback, at least as a supplementary source of power. No, I'm not joking.

When? Not soon, but sooner than most Americans think. I'd put this scenario at 50% probability in 40 years, 90% in 100 years. American culture, and in particular the export of its cultural values and mores to China and India, along with subsidies, are hindering the speed with which the market responds to pricing signals. In a rational world, oil demand would be much more elastic thanks to more flexible lifestyles and better infrastructure. But with the car-centric mentality and a steadfast devotion to the silly idea that your quarter acre of land and your 4-door car are the hallmarks of the good life, coupled with decades of underinvestment in everything from refining to railways, it's going to be a long and painful process. It may even happen so slowly you don't notice it.

[Thinkingahead]

James;
Don't you think that before even liberal democrats pay $25 for bread, that they will demand the US tap the big oil reserves in Alaska and offshore Florida, California and the whole east coast?

[L-bow]

Will somebody please explain how the fed it going to continue to inflate after years of massive money printing turbo-charged by derivatives. Relatively speaking, who is left to borrow? We are deflating: Gold, Bonds, Stocks and Real estate are falling!
Granted, the federal govt just handed every tax payer a couple hundred bucks, but that cannot be the norm and the fed is watching money be destroyed by deleveraging much faster than they are creating it. Holding gold during deflation spells broke!

[User 30121]

HAPPINESS is having GMIKI and BEARFUND commentary to read!!!!!!
DONT STOP!!!!

[jt]

User30121, GMIKI, and bearfund...you're my peeps. The problem is...we're in the minority...the VAST minority. The rest have 1984ingly been brainwashed by governmentspeak. They wouldn't recognize the truth as it was pushing them off the cliff, since there'd be a loudspeaker nearby letting them know that it was some oil company somewhere that had just sent them to their death, that the landing won't be so bad b/c the govt has sent out rebate checks and the family will be able to use them for their funeral.

Following Keyne's principles was one of the hugest frauds (purposely so, actually) ever committed on this country. Anyone who holds him up as some kind of genius to be studied and obeyed should likewise be touting the skill of the marksman who is going to put a bullet in his brain from 1000 meters. Both have killed them just as assuredly, the first financially.

Much better to read Ron Paul's new 160+ page book--The Revolution--A Manifesto. At least then the silent (actually baaaahhhing) sheeple people of this country might start to have a clue what this country was all about, why our founding fathers came here and what they were actually fleeing from and trying to avoid repeating, what has been done to it, and what we can do to to even have a slim chance to save it.

Gold and silver are and always have been real money. The fraud of fiat currency is not a new one...and every one has ended badly for the country and its working class. Don't believe it...but then get your soup dish out and practice standing in lines...bundle up your paper money and prepare it for keeping your family warm on the cold nights that will be coming. Better yet...get that wheelbarrow ready. jt

[coaster]

Interesting article and reader's comments. The fact that were suffering from a lack of planning begs the question, where in our history or in nature itself do you find planning. Every species continues doing the same thing until it cant. I see people flogging their SUVs down the fast lane, but at some price gasoline-per-gallon they too will change. I completely agree, "it's going to be a long and painful process."

[anaconda]

This round of commodity inflation is being driven by the weak world reserve currency -- the Dollar -- and by increasing demand in a world economy that has seen an economic run of growth, unmatched in history.

The Federal Reserve has a tightrope to walk. Providing liquidity for the markets, but not generating runaway inflation in the process. Signs are that the Fed understands the dilemma, as the Dollar has stabilized against the Euro and is slightly rising.

Oil as a commodity has been effected the same way.

Oil has an inelastic demand curve, but at some unknown breakpoint, those that can't afford oil and it's derivative products now, will not "grow" their wealth enough to begin consuming oil products, and those that can now afford to consume oil products will cut back consumption -- killing increased demand.

Should the Dollar, which is the monetary vehicle oil is currently largely denominated in, stabilize, that will also help stabilize the price of oil.

The current price is a huge spur to exploration and development of oil, and, while the cost is steep, the technology is available to produce petroleum from sources that were uneconomical, below $70 a barrel: Namely, ultra-deepwater, deep-drilling in offshore areas just beyond the continental shelf.

Brazil has had some huge finds (initial estimate, 33 billion barrels) of oil in the last few months, in geologic formations, which are repeated all over the world, including off the U.S. East coast.

This is a virgin, unexplored territory, and already discovered fields of this geologic type (Brazil) suggest no phyisical shortages are on the economic horizon (30 years).

So, again, monetary and budgetary policy, along with trade policy that protects the value of the Dollar and its world reserve currency status, will go along way to restrain commodity inflation -- as oil is the commodity that is crucial to the rest of the commodity chain.

Oil is the stick that stirs the drink.

Oil is expensive now, but if its price stabilizes, the economy will adjust without being strangled.

Oil is Mastery is a blog that focusses on deep water oil exploration.

[br1756]

A quick reality check on the above comments.

At 85 million barrels per day, 85x365 = 31,000 or 31 billion barrels.

So a "huge find" of 33 billion barrels represents approximately one year's global consumption at today's rates.

What will limit us in the end will be the rate of extraction long before all the oil is gone, and by this measure it looks like it will be well before 30 years are up before we are down to say, 40 million barrels per day. Simply look up the rate of production from the world's major producers, and apply some of the depletion curves which have already occurred in Mexico, the North Sea, the USA, etc.

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[UserNoob]

GMiki had it right when s/he stated above:

"Base mentals? Undersupply on many of these."

[nukem]

The "we need renewable energy people" are leading us over an abyss. Renewables are hogwash they will never give us anything but an insignificant supply of energy. There's only one source that can meet our demands that's nuclear. We are only short of nuclear fuel in this country because activist restrict/prohibit mining and it's against the law to reprocess spent nuclear fuel.

In addition we are currently only using about 5% of the full potential of the nuclear fuel we do have. It is estimated that we have enough nuclear fuel for at least a 1000 years and maybe much, much longer. I wish the anti-nuclear people would just shut up, I don't want to hear it anymore.

[frflyer]

You people who don't believe in the potential of alternative energy are so wrong it makes my stomach turn. You are the ones being brainwashed.

How is it that Denmark already has 20% of their energy supplied by wind power. Somehow, the intermittency of wind power hasn't been a deterrent for them. Meanwhile, we argue in America, about whether these sources are sufficient, and we don't even have 1% solar and wind power yet. Using less land than now used for coal mining, solar power plants in the southwest deserts would power the entire nation, and never ever need any fuel of any kind.
The amount of propaganda designed to resist the change to renewable power sources is enormous, and that is the BS you are listening too. Read the article in Scientific American Jan. 08

Scientific American A Solar Grand Plan
www.sciam.com/article....


This proposal would give us 69% solar electric grid by 2050.
And we can do it by spending less in public money over the next 40 years than we spent to build the high speed information highway over a similar time frame. and spending about 1/8 of what we give to oil companies annually in tax credits and other subsidies.
www.setamericafree.org...

And those subsidies to oil are about 1/10 of the total hidden costs of oil, not to mention the $300n billion that it adds to our trade imbalance.

[GMiki]

They say it's good we're in the minority, in that it extends the gold bull for many years.

By the way whoever said we're in deflation and that gold is down--it isn't. It has been briefly consolidating and is up over $900 today. And look at the platinum group metals--a nice pop this week.

Of course we will develop alternate types of energy within 40 to 50 years. But we don't have that long before we're in crisis mode.

I see in re 33 billion barrels of oil, which field is the deepest find ever and will present almost impenetrable barriers due to water temperature versus planet interior temperature at that depth. (Thanks, Jim Puplava, for that info.)

For sure Ron Paul has been the only economic realist among the candidates. Nice guy, too.

[john2]

i really dont get why so many of you people are saying whats the point of buying gold you cant eat it etc. the point is to make it act like a savings account becuase unlike your current one which is priced in dollars which are getting weaker by the second gold will only get stronger.

[hvnlypc]

I can not believe it!!!! 130 dollars a barrel of oil!!!! Wow!!!!! Now that is enough incentive to look at technology. All the hype over the oil supplies running out is just a bunch of hype. We actually have about 50 years more oil supply than is needed. Technology has been developing new super-conductors and super-conducting magnets. Once we have a room temper super-conductors and magnets it will than be possible to make powerful small generators to supply an electric motor in a car and the car would never have to stop to recharge or fill up, nor will it cost anymore than the purchase price of the car powered by it they can also be used to generate energy right in the house to supply the whole house, battery replacement too.
Oil is only supplying about 37% of the energy needs of today which is a pretty big market; however, super-conducting technology such as generators are about to tap magnetic fields for energy as long as it has a magnetic field (i.e. earth, sun, solar system) these generators will be able to supply 100% of the energy needs of today and for the future. Bigger market more profit. All these people, investing heavily in the oil market based on speculation make me wonder if they took the super conducting technology into account because I in my calculation we are about 5 to 8 years from having the technology which upon that date oil is not going to be in demand as I is now. You know china will pass laws to use cars made with this technology and any country that is not oil rich country will too which means the oil rich countries will be the only ones using oil for energy maybe. I guess all those who speculated about the oil supply never really thought about the future however they think I think they will be looking for a money tree after they lose all they have in the oil markets. By the way you never know it can be developed sooner. Ask your local scientist.