Bruce Pile

Peak Oil as a Function of Earth's Volume

If you are thinking that we just need to look for new vistas of oil lying around in all that vast undrilled earth, you should read Ken Deffeyes' books The Impending World Oil Shortage (written in 2003 when nobody was concerned about oil) and Beyond Oil where the Princeton geologist explains the necessary conditions for the formation of oil. You don't have those prerequisites in the ocean floors beyond the shelf structures, which he says rules out some 70% of the earth's surface. The other places where you have these conditions have pretty much already been prodded except deep water. Here, however, as Simmons explains in his books, you have only relatively small fields that tend to play out fast, more like a gas field. But at least there are some out there that haven't been tapped yet.

But applying a ratio of the premium oil bearing strata to the whole earth and saying we need only apply the magic of technology and time to create oil where there is none is just plain silly.

Sugar's Fundamental Shift?

Corn ethanol is virtually useless in replacing oil with it's EROEI of 1.3, meaning that it takes over 20 barrels of finished ethanol product to save one barrel of imported oil. No nation can be self sustaining with corn derived fuel. Sugar ethanol has an EROEI about the same as oil and can effectively replace oil.

At some point, hopefully, the dunce nations (the U.S. is chief dunce) that account for 40% of global ethanol use will abandon the corn growers' political brew and start using sugar like the other 60%. This could add dramatically to the basic recession resistant food demand for sugar. If oil supply destruction continues to catch up to demand destruction, and the oil price heads back into a climb, effective crude replacement could come back into vogue.

Congress has turned a cold shoulder to the Pickens Plan for converting our vehicles to natural gas. Natural gas and sugar are the only two viable replacements for oil on the scale needed. The other options, solar, electric, hydrogen, and the other things do not have the EROEI needed or the near term availability needed. Until cellulose ethanol is developed, sugar may become a very important bridge fuel for years.

Dennis Gartman on Gold, Oil, Government and the Economy

So he apparently is calling a bottom in the stock market saying stocks will be higher 6 months from now, much higher 12 months out, and higher still 24 months from now. We will hold him to that and see if he is right.

Bespoke's Commodity Snapshot (1/12/08)

Of what use is a Bollinger Band anyway? With stocks, you don't really want to go by selling when they are near the upper band because a stock typically rides the upper band all the way up a monster climb. The only time you should be trading in the center of the band is when the stock is wandering and doing nothing. Do you buy a stock to wander or to do a monster climb?

Burst Bubble? Commodities' Long-Term Story Remains Intact

If you look at a chart for relative valuation between paper and hard assets over the last 50 years, it's clear that there is a powerful cycle at work with about a 15 year bull/bear phase. We seem to be clearly beginning a bull phase for hard assets that is just now getting going (only about 4 years into it). The cycle has yet to even revert to the mean.

As for the volatility that goes along commodities, you can either be the fast trader and try to anticipate each gyration and buy and sell around them (good luck with that) or you can dollar cost average into a line-up buying more aggressively after the corrections and adjusting the line-up only if the good areas of sector warrant it. You pretty much have to make up your mind which approach suits you and stay with it.

It seems to me that most fast traders anticipate 4 or 5 phantom corrections for each real one and wind up rotating in and out too much and being on the sidelines when a lot of the quantum surges happen when they least expect them. They chop the bull climb into bitty pieces of small gains to mix with small loses, which typically results in underperforming a more stable strategy. Not that there aren't traders who can do better with faster trading, but averaging better long term results this way is precarious to say the least.

Ben Bernanke's Tightrope Act

Investor enthusiasm for commodities is nothing new. It didn't start with the current monetary stress over the housing problems. It is, in fact, a large scale bull market that began about 6 years ago (about the same time the housing bubble began). What's new is the added steam the commodities bull is receiving from the basic paper vs hard asset revolution that is taking place.

If you were to plot the relative valuation of the CRB and the S&P 500 over the last 15 years to look at this paper/real thing, you would have the chart shown recently in an article titled "Commodities Secular Bull Continues into 2008" (http:marketoracle.co.uk/Art...). This tell-tale chart shows that, even with the current runup, we have come way down in valuation of commodities relative to paper in general and stocks in particular over the last 15 years and that we probable aren't at the end of the commodities bull, but are entering a new phase of it (commodity bull markets historically run at leat 15 years and we are only about 6 years into this one). After a huge descent from the mid 90s, the chart shows a consolidation pattern over the last 6 years with 3 major runs at a resistance level. The first was in early '03 at the end of the last stock bear market. The second was in the middle of the stock bull market in May '06 when both stocks and commodities got clobbered together. Both of these runs failed to break the resistance. The third is happening now at what may be the beginning of a new stock bear market and this powerfull run has just now broken the resistance level and has a very long way to go before we approach the paper/real levels of the mid 90s. Think back to that time when stocks, intangible intellectual property rights, and complex debt leveraged deals were our preoccupation while we ran around in gas guzzling SUVs not giving a thought to real assets like oil and food. Now the preoccupation is what to do about oil and food and how to clean up the CDOs, CDSs, and other paper messes we have made.

The current "spike" in commodities can't really be compared to say the mid '06 run. There, the stock bull market was intact, the housing problem wasn't upon us yet, and the Fed was in the driver's seat. Now, it is a vastly different market condition. In addition to a strong investor turn away from paper in general and the Fed debased dollar in particular, we have emerging some very strong basic supply/demand forces coming to the aid of commodities like peak oil, peak food, and the combo of the two - the fuel crop frenzy.

Investor enthusiasm = sell is a concept that works well with individual stocks tied to an individual company story or even with a hot sector. But it's not so true of the more large scale, rare bull markets that tend to involve many sectors and have the legs to run well past initiating enthusiasm and attention. It is precisely this kind of more investable bull area that you want to find, not avoid.

Too Much Money Chasing Too Few Commodities

Even if there were no currency debasing issues, most things in the commodity space should be entering a long bull market simply due to supply and demand for global construction metals and the imposition of fuel crops on an already maxed out food crop market. When you look at what just the currency issue is doing with a commodity having little practical use, such as gold, it suggests a compounding effect where the things of the most vital practical use, such as food and fuel, may attract money at a faster rate adding still more to their appeal as a dollar hedge.

The crops market in particular will be under huge pressure from the effects of peak oil and the aggressive but misquided food based ethanol mandates. Compounding idiocy with stupity, our government has responded from their 35 year sleepwalk on energy policy with the idea of hogging the food supply to make a low EROEI foreign oil replacement that actually displaces very little oil and serves only to add severe food inflation to severe oil price inflation, which they greatly help out with their severe currency debasing campaign. How many "stupid" pills do these guys take a day? If they're going to do ethanol, wait intill the high EROEI, nonfood cellulose designer feedstocks are out of the labs in a few years instead of grabbing up whatever happens to be laying around in our backyard and causing inflation havoc.

Commodity Analysts Believe the Party's Over

These same analysts published an article right here at seekingalpha.com back on September 20 titled "Currency Analysts Expect Dollar to Strengthen" complete with the photos above. They projected a chart of Euro vs Dollar that had it going down to around 1.32 in March '08. Well here we are and they were like way wrong on that. They don't seem to have a grasp of what's taking hold of commodity vs circulating currency markets. Their predictions sound similar to what Steve Forbes and the majority of analysts said about oil in mid '05 - it has got to go down from this ridiculous spike up to $50/barrel because it has gone up too far too fast. They made no attempt to understand what was behind it.

Which of the 6 Agriculture ETFs is Best?

Could you explain the difference between an ETF and the ETN? As I understand it, it is a "note" or some kind of debt instrument similar to a bond. As such, could it get caught up in the credit mess?

Crop investing has always been perilous because a shortage in any one crop has always been fleeting. There was always the option of sacrificing other crops to dissolve the shortage. Then along came peak oil and mandated ethanol plant buildout. Now fuel crop production is pushing all the crops into a shortage to make room for the energy gap. So all these commodity "plays" are really a play on just one commodity - oil. The bottom line is that the growing shortage of oil will induce a fuel crop buildout that will far exceed any attempt to stretch the arable land available for crops. And the low ER0EI corn craze will ensure no effective easing of the oil shortage untill cellulosic and newer forms of high EROEI designer ethanols come out of the lab. That's not going to happen for years. Untill then, fuel crops can mushroom out of control alongside the oil shortage. There is an excellent oildrum.com post by Stuart Staniford on the explosive growth physics of fuel crops. Just click on his profile and go to the list of stories by him. It's the Jan. 7 agri piece.