denko

Don't Believe Long-Term Oil Forecasts

Hi Michael Fitzsimmons

While agreeing with both what you and Kevin Steyck - I would like to point out that convectional economic points to market prices equaling/equating the marginal cost to produce a product.

In the oil industry that marginal cost per barrel can be as low as $8 per barrel, (Angola, Venezuela, Nigeria) with the Saudi's likely to produce oil at an even lower marginal cost per barrel. Hence any premium received above that real cost is not based on economic absolute fundamental but on a speculative positioning.

Speculative plays are largely justified to account for a host of the otherwise real and perceived indirect costs; in which case the structure of the international oil oligopoly; sovereign hostility, peak oil time discounting plays, and a dollar or two for considerations of carbon pollution - per barrel are a weak (rather than absolute) consideration.

But what has historically truly capped oil in the $20 to $30 range is that at about a long term sustained price of about $40 per barrel, refined tar sands or coal , and other hydro-carbons via the Fischer–Tropsch process become economically viable. That is their long term marginal cost begins to equate with price (revenue) per barrel.

The estimated reserves in both coal and tar sands will free the United States, Canada and perhaps Mexico from a dependence on foreign oil beyond an extremely long term foreseeable horizon. Estimates of over 150 years are deemed reasonable unless the population demographic in these countries takes some unlikely and perverse upward tack.

The long term capital outlay to process these alternatives as against straightforward oil drilling and the volatility on current speculative oil prices, implies that in the short term higher prices can be fairly sought, and more importantly achieved, and will most likely do so into the nearer short term.

Not all the OECD nations share this enviable fall-back or buffer and of the BRIC nations China and India stand 'naked' too. Their future will remain hostage to the impish vagaries of oil.
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Is not the current oil spike sustained by a US's extraordinary position on interest rates and hence the 'US dollar carry', and those hedged by an expectation that if US(?) interest rates rise, gains on debt positions in either notes of bonds will far outweigh falls in oil price positions?

You'd think so ..
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To the poster suggesting 'grapefruit nuclear reactors in domestic cars'¿

Can you imagine what a fallout it would be the the auto wrecking industry!

The national road grid, would become pot-holled by run-away reactions to every fender-bender, and a widespread family DNA mutation accretion to the the national gene pool, in which case Halloween would be all the more ghoulish - yet real - going forward! :o)


On Nov 08 11:59 AM Michael Fitzsimmons wrote:

> i tend to agree with you and site several reasons why:
>
> 1) even at oil prices of $145/barrel, production of the largest oil
> companies was down year-over-year
>
> 2) the US continues to spend huge sums of money to obtain oil: witness
> the war in iraq and afghanistan (which is not about the taliban,
> but about getting caspian sea energy treasures to market without
> going through russia or iran).
>
> 3) the chinese are now selling more cars (the vast majority of them
> gasoline powered) every month than america.
>
> 4) the U.S. has still not adopted a non-gasoline personal transportation
> solution (like natural gas vehicles) and therefore is still addicted
> to foreign oil despite all the rhetoric from the obama administration.
> it is clear obama and energy secretary chu are held firmly in the
> grasp of oil and coal power as they are "agnostic" about natural
> gas transportation even as supply has mushroomed and prices have
> dropped.
>
> so, the U.S., and the world for that matter, continue on a collision
> course with the reality of worldwide oil supply/demand. if the economy
> does come back from the last prices spike (not a given), the current
> "glut" of oil supplies will be worked off in a matter of months and
> the next price spike will exceed the last one. the world is on an
> economic yo-yo driven by the new world reserve currency: oil. the
> U.S. is the biggest user by far (~25% of total), oil is priced in
> US dollars, but the U.S. is in deep debt and after 8 years of Bush
> China owns *alot* of it. so, you tell me, who is in the catbird seat
> going forward?

Looks Like a 'V' to Me

Hmmm ... no where near a 'V' at this stage.

No likelihood that the US will recover from its earlier excesses - as at the time when it entered into the housing collapse.

Well not until the US generates its own savings.

Failing that, savings will have to be bought from the profits of China's depressed labour cost savings.

So this process/mechanism will have to perpetuate for some time yet.

One leg of which is the US consumer - to continue to gorge herself on the mostly unneeded and under-priced bling and propylene plastic appliances that go 'plink in the night', or if not, then probably the very next day.

If that is the case, this is only a small bounce.

A bounce supported by those expecting and punting on a price model that implies the consumer standards of pre Jul 2007 are to one day return.

Not only return but will then continue to climb and spiral unendingly upwards - as before Jul 2007.

This assumes too that the US consumer will be at the top of the consumer goodie hierarchy - which seems unlikely.

Not very likely at all ...

So don't expect a permanent recovery. Perhaps ever.

Think rather of the world economy to follow a 'y' - in the lower case - if an alphabetic symbol must be had.

Perhaps better yet described by the khaf sofit of the hebrew alphabet?

Oy vey? Who knows¿

A world economy landing up ultimately on the trash/garbage heap, stashed atop all the wasted and discarded poly-propolene products that ever supported the American dream¿

Beware the Buffett Effect: Part II

errata

derivatives weapons of mass destruction should be derivatives financial weapons of mass destruction

Financial Regulatory Reform: The Good, Bad and Ugly

<i>Another good proposal would reduce the importance of the credit rating agencies, such as Moody's and Standard & Poor's. These agencies must share a good part of the blame for putting AAA labels on toxic assets.

Federal and state regulators too often allow fiduciaries to use the rating agencies as a "safe harbor" when buying assets, eliminating their own responsibility for due diligence. These safe harbors give the rating agencies far too much power and, given their poor performance in the last crisis, led many fiduciaries to take inappropriate risks. The Treasury proposal calls for reducing or eliminating references to credit ratings in many regulations...</i>

Living4dividends ... thanks for the good post. & sure ...

There should never have been, and probably is still no need, for ratings agencies to be regulated.

For too long financial institutions, seeking to accumulate quality asset backed securities, deemed themselves aloof of normal trade practices in their mutli-million $ deals.

The most humble yet savvy roast chestnut or barrow merchant would apply and endorse a greater due diligence when acquiring his daily bag of nuts/stock in trade than some of the world's greatest (err vainglorious) purchasers of CDOs.

Purchasers simply abandoned the principal of 'caveat emptor' - and their reliance on the rating agencies seal of approval - PAID FOR BY THE SELLOR - has led to a predictable outcome.

Did BUYERS ever think to get their own ratings agencies assessment? Clearly - never!

If only they'd sought the barrow merchants advice - 'thinks like joe for jellied!'
(joe rook - the crook) (jellied eels - deals)

i.e. always - think like a criminal - and only ever trade at 'face' value - Buy with a long face; Sell with a straight face; (and err... Hold with a two face¿)

fwiw

...but 'they' know all this!

'A Chicken in Every Pot': The Economy Will Recover

Arnold

It is sometimes too easy to get lost in the fog of the national equilibrium equation - as bedeviled by the monetary impact of the reserve requirements.

The 1930's parallel the period of the massive advances in the auto industry - and at a time when oil was for all intents infinite and unlimited.

As example and of particular significance is the tractor sector of the US auto industry. In the late 1920's their were just under 700 000 functional tractors in the US, that figure more than doubled by the start of the WWII.

That increase in numbers alone more than doubled US agricultural output, but the vast enhancement of the tractor as a machine and as a farming implement caused output to further nearly quadruple farming output or yield - chasing horses, mules and farm labor forever from the US countryside.

That farming impact was not restricted, the trucking industry too incurred a revolution as well. Furthermore the US family car just started to become accepted as a functional way of life in millions of US households.

Yes, economic levers had/have an impact - but those levers where dwarfed by the auto revolution unfolding on the US at that time.

Regrettably we have no similar machine at todays foreseeable horizon, which is likely to feed/lubricate on a virtually unlimited supply of energy, and that will potentially quadruple the output of a vast sector of the current US economy within a decade as starting in 2009!

Thus the economy will not recover - by dint of what some economist, or banker or government agency does or refrains from doing, if the US is to replicate any recovery that happened in the 1930's.

Some pretty awesome science needs to come to earth. A prayer? Perhaps...but don't hold your breath.

Contrary hope pinned on economic policy and theory at this time is simply inane.

Your point - tries to imply this. It is wrong for doing so...

The Value of U.K. Housing: Uptick Is an Illusion

I agree with a Misha - a good article, but spare us the snide political innuendo and the petty asides.

You have more to offer....

Cheers

Data Suggests This Is Not a Short Covering Rally

Err ... no!

The man is saying that MORE shorts where written, hence a bearish sentiment endures, despite the recent bounce?

AND

That the recent bounce was not forced covering - either. Hence bullishness.

Mixed signals - Ya'd think¿


On Jun 15 09:21 AM Alphameister wrote:

> One more leg kicked out from under the bear's stool.

More on the Secular Bull Market in Commodities

bwahaha !! Yeah!

Its state of the art technical analysis ...the red line goes up , and then it seems to go down, and then it splashes - a bit.

So buy commodities into the super-duper bicycle ?

Ya think...

On Jun 11 03:27 PM BigJake wrote:

> you gotta be kidding me on the graphic right?