The Dark Years

Don't Believe Long-Term Oil Forecasts

This is one of the most relevant and salient observations I have seen in Seeking Alpha as it deals with an inconvenient reality that one day there just will not be enough oil to drive the world economy. Guessing, estimating, forecasting, or prognosticating exactly when or why that will happen defers the issue to an uncertain future.

We argue about short term issues of supply and demand, price adjustments up or down, and what impact those forces will have on the economy without adequate attention to what happens when there is no oil, or substitute energy to maintain the world. We ignore, or fail to include in our contemplation that our 300 million or so population consume twenty or so percent of the daily WORLD supply. Although we have great military strength and reach it cannot last forever because it is based on a continued supply of cheap oil, just as our growth driven economy is, and the cheap stuff is disappearing. If we do not as individuals, or as a nation focus on muddling through toward frugality and conservation in energy consumption my oldest daughter will experience a very different and unpleasant future. Human nature is to deal with the here and now and immediately evident future. If we continue down this path for the next twenty to forty years we just might be scre235. What do you think?

Are We Becoming a Nation of Renters? Investing for the New Housing Dynamic

Without cheap oil there never would have been an explosive growth in housing, but we did have cheap oil for a very long time. Suburbia grew and with it home ownership. It was desirable to move into the inexpensive hinder lands of major cities because with cheap gas and a good road system it was cost effective to get to a far away job. We would all do well to remember that American society, and it's great wealth has been, and remains based on cheap oil.

Underlying the economic turmoil of recent years is the dawning reality of peak cheap oil and the impact of raising costs for the product. As availability of oil declines and demand increases prices will climb and BRIC countries will outbid us for the resource we need to maintain growth. If the economy does not grow we will likely not be building huge tracts of new homes, and neither the working class, nor the middle class will be able to afford to buy much of anything. Credit worthiness for many has been destroyed and clearly the situation is not improving so where will the credit come from? More than likely it will be a long road back to climbing wages (and employment at more than minimum wages) with consumers being able to rebuild their shattered FICO scores. It could also be a long time before banks again lend. So I just do not see a very rosy future, especially since no one seems to factor in the Black Swan of oil price shocks resulting from a decline in world production. Such an event would have a very profound impact on builder's development plans, prices for homes built, and rental values such that there "may" not be any wise strategy to follow.

The New Economy and Canadian Housing's Bubble Status

One of the things that drove the bubble in the US was favorable tax policies. The 1997 Clinton Administration introduction of a 250k/500k exemption from long term profit on sale of your personal residence that certainly helped. With rapid price increases a family could gain quick wealth every two years by buying and selling (and of course moving) into a new home. Those who could took their gain and turned the previous residence into a rental and then began taking deductions for depreciation, taxes, association dues, mortgage interest and repairs. The gain got them into another residence and their fortunes seemed to take off. My point is that the favorable effect of these tax breaks helped fuel our bubble, but I doubt that is the case in Canada since presumably Canada does not offer such incentives. As I understand it taxes are significantly higher in Canada and less complicated as there are fewer loopholes and credits. Canadians pay high taxes but receive more from their government in the form of quality medical services which has some off setting benefit in dollars available to buy housing with. What all this leads to is the conclusion that it is very difficult to make like kind comparisons.

How Bloomberg Fabricates U.S. Housing Numbers

The housing market is dismal and despite the many commentators, pundits, forecasters, insightful gurus, and talking heads hinting at recovery I am not optimistic. They use dubious statistics based on false premises that are more wishful thinking than akin to reality. It is not getting better soon.

I do live in what could be called ground zero. Here in Orange County the boom was just great, until it was not. Our home was purchased in November 2001 for around 700K and rose to around 1.450k in fair market value in late 2006. It is 3400 square feet in a great gated community, but were we to sell today I would market it for 1.150, and take 1 million. If you could get the cash together today to buy a new home in Woodbury, a close proximity new community, 600-700k would buy you a 1900 to 2300 square foot home that was almost a zero lot line and encumbered with dual association fees as well as hefty taxes of 1% to the state, and another .08% in Mello Roos bond expense. We are staying the course, but many of our friends and neighbors have not been able to do so. Some had jobs with the mortgage and banking industry at excessively high compensation levels and lost much of the wealth they had acquired as they over invested in homes and rental units that were heavily geared. Some moved to the mid west and and began a new life with much less expectation of acquiring wealth through real estate ownership. Most do not discuss their personal situation, but you can sense their fears about the future. Looking around they appear to be justified.

We live near an Irvine Company development called "Orchard Hills" which WAS projected to have around 4000 or so homes and was anchored to a very upscale Shopping Center which was built. None of the houses have even been started although they could have been ready in late 2007. Signs announcing the project said they would be available in 2008, then 2009, then 2010, and then the signs disappeared. All of the paved primary roads are in place, as are the underground utilities and landscaping. Some of the communities entrances even have their fake Italian guard towers in place. The various builders who have committed to construct homes there and paid premiums as advances for rights to build must be in great fiscal pain. The anchor shopping center has many vacant building and the shops that are open are not doing well. The upscale, and expensive Von's Grocery is usually empty, and almost no one uses the CVS drugstore. It is no problem to get a table at the expensive and trendy Zavs' Restaurant. I would guess it could be several years before construction is restarted, if it ever is and all the while there are great carrying costs by the developer, and the home builders to participate in a project that might not come into being. The shopping center tenants are stuck with hard leases and have little recourse except to stay the course and tough it out.

These observations from the ground level, rather than from some cloud on which sit the anointed cognoscente leave me believing that we have not seen the worst of the great housing bust. Those who claim a recovery are just fooling themselves and those who believe them.

Don't Argue with Paul Tudor Jones About Gold

I think that in a turbulent world rational people search for anything that offers a sense of stability. Gold has always had a value and will in the future. The only real question is what will the value be. Gold is unlike any other asset in that over the longer term it will always be worth something in exchange for currency (and other mediums of exchange), or barter for the necessities of life. It seems to me reasonable that we all would be wise to keep some physical gold in our safety deposit box as a hedge against an uncertain future. Prognosticators, pundits, news letter promoters, futurists, hedge fund managers, etc., will argue, forecast, contemplate, suggest, evaluate, promote, and endlessly address the question about the direction of gold prices. Some will be correct, some sort of in the grove, and some just wrong. If the world we know today were to end, or be drastically changed gold would still have some value. I personally will continue to own physical gold, and hold some small positions in gold mines as a hedge against an uncertain future because I know at the least physical gold will have some type of value.

Gold Is Not in a Bull Market

What Nadler does not discuss is the prospect of a Black Swan event and that is a serious disruption in the world supply of oil. Gold and silver would have a quick upward trend in that event.

Have We Reached Peak Oil?

I quite agree with your commentary. The words "Peak Oil" or any other related phrases are seldom uttered by pundits, television commentators, or prognosticators of the future except to try to explain away the reality. It is as if there is a secret code of silence about an event that will rock our civilization to it's very foundation that has been mutually and universally agreed to by anyone who ought to know. Same to a lesser extent is the more evident and observed concept of global warming. We can easily see the effects of global warming with our own eyes, but cannot, at least at present see, or understand the effect of peak oil production. We just hope the problem will go away, or somebody, somewhere will take care of it. The longer we sit on our behinds and do nothing the worse the crisis will be.

James Howard Kunstler has written a speculative, but insightful book about the future when the absence of cheap oil unhinges our society. It is worth a read. The Long Emergency was written in 2004 or 2005 and much of what he suggests will happen seems to be coming true.


On Oct 28 09:48 AM perceptions_now wrote:

> Regrettably, I am of the opinion that Oil Production has already
> effectively Peaked in 2005, in that it has subsequently failed to
> keep up with inflation, Demand or Population growth.
>
> There are no new sources of Oil, which will now prove sufficient
> in size to overcome the depletion of the existing, but decaying old
> super fields.
>
> If we were just treading water, with no growth, we would need 1 new
> Saudi Arabia every 3 years, just to stay where we are!
>
> If Production were to keep up with inflation, Demand & Population
> growth, then another 2 Saudi Arabia's would need to be found &
> put into production every 3 years.
>
> Unconventional sources such as Canadian Tar Sands & Shale and
> the newer deep water fields are simply not significant enough to
> offset the depletion rates at the old super fields, such as Ghawar
> & Burgan.
>
> I suspect the current Production plateau may continue, for a short
> period, but production will fall behind Demand. However, as Demand
> outstrips Supply and Prices rise, those very Price rises will trigger
> the Global Oil Cost/GDP Ratio to run ahead too much, thus triggering
> another Economic & Share Market pullback.
>
> The old rules are changing, the return on Money & Energy are
> being irreversibly delevered. The EROEI (Energy Return On Energy
> Invested) was 100/1 in the early days of Oil, it is now less than
> 10/1 and falling. New Oil is going to be much more costly to find
> & Produce and the Investment return is not going to be anywhere
> near what it used to be.
>
> When the general perception finally accept that Oil has Peaked, then
> the rush away from Oil will begin, into the search for something
> else, which may not be there. This process will also severely dilute
> the capital needed for Oil Exploration and the EROEI will be further
> eroded!
>
> In fact, even though Demand and Price has been rising, the investment
> in new Exploration has already been falling!
>
> In the interim, Oil producing countries, particularly OPEC, refuse
> to verify or even discuss their actual level of their reserves.
>
>
> If that happened, then the conjecture & uncertainty would come
> to an end.
>
> There are a few likely scenario's -
> 1) The levels of reserves are substantially UNDERSTATED, THE IS MUCH
> MORE OIL THAN COMMONLY THOUGHT.
> Whilst this is a very unlikely outcome, in this instance the result
> would be the usual where Supply exceeds Demand, the Price of Oil
> would fall!
> An outcome not favoured by major self interest groups!
>
> 2) The levels of reserves are substantially OVERSTATED, THE IS MUCH
> LESS OIL THAN COMMONLY THOUGHT.
> This would be the likely outcome and in this instance that would
> spark a MASSIVE & URGENT MOVE AWAY FROM OIL, towards other possible
> Energy sources, particularly for the transport sector.
> That would result in a massive fall in Demand for Oil, in the near
> term and as usual where Supply exceeds Demand, the Price of Oil would
> fall!
> An outcome not favoured by major self interest groups!
>
> 3) The levels of reserves REMAINS UNKNOWN, UNVERIFIED & SUBJECT
> TO CONSTANT CONCERN.
> This is the current Status Quo outcome and the result is as usual
> where Demand appears to exceed Supply, there is constant pressure
> on the Price of Oil to rise!
> THE PREFERRED OUTCOME for major self interest groups!
>
> There are no guarantees in life, but the likely outcomes suggest
> that in 5-10 years, the Global Economic outlook, will be significantly
> different to today and I am not talking of upside!

World Recovery Is in the Hands of OPEC

Tony:

You are spot on in your precise observation. The real problem is that the world is dealing with a realization that Peak Cheap Oil is upon us. America is the most profligate user, and with our 300 million population we use about twenty or so percent of the entire daily world supply. Our competition for what remains is in large measure is China (and others) with six billion or so people. Accepting and acknowledging the realities of pending crisis like Peak Cheap Oil, Potable Water, and Peak Food Production will help ease our transition from a Super Power to a more humble lower tier player.


On Oct 26 04:10 PM Tony Daltorio wrote:

> This article is so wrong in so many ways.....
>
> 1) Even considering the use of military force to seize oil assets
> around the world is why Americans have become more & more unpopular
> globally.
>
> 2) The problem isn't OPEC or "speculators" - it's end of cheap oil,
> the rise of the emerging world, and vast overconsumption by the United
> States.
>
> 3) I'm so sick of hearing about the bubble in commodities. There
> are TWO bubbles right now - the US Treasury and stock markets.<br/>
>
> 4) Finally, there is no comparison between the rampant speculation
> going on in stocks right now as compared to the minor speculation
> in commodities. It's like comparing the light of the sun to the light
> of one firefly.

Fantasy Housing Numbers a Prelude to the Next U.S. Crash

I think that Alphameister has a good point. Some mortgages do go down in payment rates. W have a three year adjustable against our residence that just reset. At 6.15% it reset to 4.125% or so and the payment of the $300 k or so balance went from $1896 per month to $1537 per month. Of course that could all change next December as it adjusts every year there after, but we are prepared to deal with that.

An interesting question, not discussed is the TAX consequences of individuals being forgiven debt. Many years ago I lost a property in Alaska and had to pay capital gains on the difference between what it was sold for and what I owed. It was a big bite and I wonder if anyone is considering if this has an impact on the millions of citizens who have lost their homes and are basically broke, but have a debt to the IRS. What say you all?

We're Living Through the Best of Times

No matter inflation, deflation or stagflation our economic well being is firmly fixed on a continued source of cheap oil. If the worldwide peak is upon us as I believe that source more than likely will be disrupted.in the near future, say over the next five years. As we use about twenty percent of the 85 million barrels per day produced in the world for our 300 million souls, what do you think will happen to our economy?

A shortfall of even say 2 or 3 million barrels per day would likely be a great calamity politically and economically. This is not about the availability of the remaining oil in the world, but about it's price and our ability to pay what the worldwide market sets it at. Your thoughts do not touch on this elephant in room. Very few pundits, commentators, economic thinkers, nor even prognosticators of the future even consider this issue as relevant, important, or material to considerations about the shape of the future. Certainly our "friends" on Wall Street would not dare mention it as it could disrupt profits. I choose to wallow in pessimism until those esteemed members of the informed media, and our collective political leaders recognize the magnitude of this problem we and the world face. There is no simple fix for it, like throwing billions of newly created dollars at energy independence projects because the implementation time lines are too long. I voted for the President in the hope that we would end the "wars of choice". I expected he would devote those resources (dollars saved) to a massive alternative energy and fuel efficient transportation system. That did not, and is not likely to happen, but the hope I retain, and for which I do have optimism is that one day we will have a leader, either party would be fine, who will just tell us the truth that if we do not take the necessary steps to deal with the impending reality of Peak Cheap Oil we are, just sc57982.

Commercial Real Estate: The Gathering Storm

A worthwhile read. Enjoyed the graphic displays. Fundamental point is correct.

Donald Ingram and ryanclarke had good comments.

My view from Orange County California would be in agreement in general with the author. Housing values exploded here in ground zero between 2001 and 2006 and then tanked. Commercial property did the same. All of the excessive faith in a forever increasing market caused normally rational and conservative people to go out and leverage and buy before they lost their share of the pie. I know many individuals who have lost their jobs and homes and have little option except to downsize and restructure their lives, often by moving to less expensive states. Recovery, if it ever comes is a long way off for most Americans. We just do not recognize the magnitude of the problem, nor crucially it's true source. The success of Suburbia is based on cheap transportation of virtually everything, and that means cheap oil. While there are many non believers in Peak Oil as an affordable resource fundamental to our way of life the evidence is that the last upward spike in oil pricing was an element in the collapse of the housing market. As the oil prices returned to lower levels we began to return to business as usual. Those left behind because their credit was destroyed, their saving disappeared, and they have no prospect for a job at anywhere near their original pay levels are unlikely to recover to buy another house. Nor will they be buying at Maceys or any high end outlet store. When, not if oil prices again spike dramatically the devastation will be even greater. For a view of the future everyone ought to read James Howard Kunstler's book about the future, he has termed The Long Emergency.

Three Asset Classes that Can Actually Outpace Coming Inflationary Price Increases

Mr. Ahlgren:

A thoughtful and reasoned article which I believe has great insight. There, is another Phase that few are aware of, or understand. When the reality of Peak Affordable Oil coupled with Peak Potable Water slams against a world of increasing demand due to population growth there will be massive financial disruptions here and abroad. Everyone knows, but seldom pauses to reflect on the fact that we consume in the neighborhood of twenty percent of the daily world oil production for our drop in the bucket population of 300 million. Those who deny that the peak has arrived do so because were they to admit the truth and begin to discuss what to do there would be terrible political repercussions. So lets just speculate that oil supply dwindles at the same time China calls in it's markers with our treasury bonds, imagine how awful that would be. Humanity deals better with possible near term threats, than those further out there even when the threat could result in an economic and social calamity of massive magnitude.

The Greatest Depression Is Coming

A good analysis that does not go far enough. The real under lying driver of the next coming great depression is the giant in the room and that is the advent of Peak Affordable Oil and it's sister Peak Potable Water. Few discuss this issue as it likely too awful to contemplate, but despite what the denial folks say it is here. So what happens to our economy if Saudi Arabia admits their great oil fields are in terminal decline and oil leaps to $500 per barrel overnight? Heck it is clear that Mexico's production is in decline and that is a major source of our oil consumption. America uses around 20 to 25% of the worlds oil every day and we only have 300 or so million people, so what happens when the world oil production drops to 80 mbpd from the current 87? What would that do to housing in Orange County? Come on folks our society is built on cheap oil and suburbia is built on cheap water so what happens to our economic system when a "shock" comes out of the blue? Where do we go, what do we do? We can be sure that China and India want whatever oil is available and they can pay for it because they own us (in US Treasuries) and can pay the premium when supply collides with demand, and we cannot.

Dow 10,000: Show Me the (Real) Money

Mr. Ambrose Evans Pritchard has it right. A contingency plan is wise and prudent, especially in today's uncertain times.

Everyone is fixated on the direction of markets, housing costs, unemployment, and related indicators of depression or a move back to growth and a return to normal times. Generally speaking the giant in the room and under the rug is ignored and that is of course Peak Affordable Oil and Peak Potable Water. Assuming that you are not in denial that these realities are upon us, and given the gravity of the situation we all would be wise to follow this persons example. Think about a world where oil, the driver of our economy jumps to $500 per barrel due to world depletion and inability to replace sufficient oil at an affordable price to meet increasing demand. There is nothing out there that can match the value of oil and it's related products based on "energy in as to energy expended". The prospect for an "oil shock" like Saudi Arabia admitting their store of the product is in terminal decline would be very disruptive for the entire world, and especially so for the US with its profligate use of around twenty percent of of the world's output.

So having some gold in your portfolio, and your pocket make sense as well as holding the tools for a more self sufficient type of life style.

On the Rise of Gold

A very interesting article. One small point and that is should in the next twenty years the cost of oil raise to say $400 to $500 a barrel I would expect an unwinding of society and economic turmoil. Peak cheap oil would be the culprit. Without cheap oil or alternative energy sources of an equal "energy in to energy out ratio" we could not generate the electricity that runs the "information" age which allows gold to become the new currency replacing flat. Without massive supplies of cheap oil the world could easily fall into the greatest depression of all time. Gold and silver, and perhaps other scarce metals would still have great value, but as a physical money. Peak cheap oil, peak potable water, and peak world food production are the issues of the hour, day, decade, and century, that is there in the room, an very few recognize or mention. We humans, myself included tend to deal with things that effect us in the short term, say five years out at most. Although we can recognize the bigger issues we concentrate on the smaller ones like this years' tax return, employment, the price of housing, and where the market will go tomorrow morning. Some of accumulate a small stash of gold coins as a hedge against the calamity we can see, but hope that will not happen, as we believe (kind of) that those in the know (our leaders) we find a solution. How recognizably foolish we are.

Thank you for a thoughtful article.