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The Paradise Perspective: Commentary from a Free and Compassionate Alternate Reality
- Introduction -
Part One of this column discussed the economic situation and government action, and several readers complained that I was not cheerful or optimistic in my views. Today's column won't be any more upbeat, I am afraid, although I do offer some positive notes and suggestions in the final section.
An accurate sense of what is coming at least gives one better odds of making the most of what the future holds. Ask those who sold their stocks (or better still, sold short) before the Crash of 1929, or who left Hitler's Germany before the worst began (or Stalin's Soviet Union, or Fidel's Cuba, or Pol Pot's Cambodia, or Idi Amin's Uganda, or Mugabe's Zimbabwe, or – well, any of a hundred examples recent enough to still be within living memory, including natural disasters such as Mt. Saint Helen's [video; 1 min 21 sec]). No one wants to hear bad news, but for those not hoping to become Darwin Award candidates, listening carefully to the rumbles of potential oncoming disaster is simply another part of personal responsibility and even, at times, self-preservation.
This could indeed be one of those times. Decide for yourself, but at least take an open look at the situation before dismissing such thoughts.
Today, in Part 2 of this "Year Ahead" column, I'll discuss oil and precious metals, food, and environmental issues in varying degrees of detail. Inevitably, the economic situation (and government responses) will become part of the discussion. I'll finish up with predictions and, as mentioned, provide a few suggestions and offer some encouraging words.
- 1 -
The Peak Oil Sucker-Punch
Oil topped out at $147/barrel this past July, a gain of about $60/barrel from the lows of earlier in the year. As I write this sentence on Christmas Day, oil is pegged at $36.84. What a roller-coaster ride! Volatility is the sign of an unstable and unsettled market; exactly what one might expect when powerful forces are pushing prices in both directions. The obvious question: will oil stay cheap or quickly rise again in price? Note that "cheap" is a relative term: the average price for a barrel of oil in 1998 was $11.91, which is to say that oil is more than three times as expensive, even now, than it was a decade ago. (The link in the previous sentence shows oil prices back to March, 1946, at which time a barrel of oil cost $1.37).
Update 1/5/09: checking the price today at 321energy.com, I see oil is $48.73, up about 25% in just over a week; oil now costs more than four times as many dollars as in 1998 and over thirty-five times as many dollars as in 1946.
Long term, the dollar price of oil will go even higher – and eventually much higher. I believe "eventually" will arrive within the next year and a half – heck, maybe later this winter – even if the demand destruction we have seen in the last few months continues and worsens, for three reasons, each of which would raise the dollar price of oil all by itself:
- first, falling production will eventually outpace falling demand (and demand will not fall forever);
- second, the dollar is on a path to hyperinflation; and
- third, falling prices have already slowed or stopped some planned (and perhaps some operating) oil production and exploration projects.
Oh, wait – there is a fourth reason: government wants to help solve the problem (for example, via ethanol mandates). Always a bad sign . . . .
Like everyone else, I have been surprised at the speed and depth of the current price slump for crude oil and other commodities, but then I have often made the point that exact timing and velocity of markets and other dynamic phenomena are inherently unpredictable – and our current situation is truly unprecedented. Longer-term trends, on the other hand, are easier to discern and, especially when supported by multiple fundamentals, reasonably reliable.
What is the undeniable trend for oil? Diminishing production at higher cost per barrel, and thus higher – at some point, much higher – real pricing. Here is how I put it midyear (including the chart mentioned in the text below), and the fundamentals have not changed:
http://www.energyfiles.com/eurfsu/uk.html
"A note on conservation and other voluntary reductions of usage: yes, higher prices – even for crude oil and gasoline – tend to reduce demand, as consumers change their habits in response. It may happen that the economic downturn now in progress will reduce demand enough to lower prices temporarily. But take a good look at the down-slope of the graph above before telling yourself that voluntarily lower usage will lead to an ongoing match with available supply anytime soon. Once again, other nations, and almost certainly the world as a whole, have or will have very similar down-slopes for crude oil supply. Unlike the OPEC oil embargo of the 1970s, the escalating oil shock of today and tomorrow will increasingly be based on actual, systemic, unfixable (at least in the near term) shortages – as well as on Reasons Number One and Three. " -- 2008 Update, Part 2*
If you visit energyfiles.com, you can see for yourself that the UK graph above is representative of just about every oil-producing region on Earth. The exact shape and timing of the peak vary, but in every case a peak occurs and is followed by diminished production. The down slopes are, in many cases, quite steep.
Global oil production has already peaked, or will peak soon, depending on whose data you believe. Either way, big changes are coming. The global economic crisis has given us not only demand destruction but also deleveraging (see also here); individuals and institutions have been selling anything and everything to meet margin calls, replace lost income, and raise cash. This has depressed the price of precious metals, oil, and many other things commonly used as investments. While oil demand may remain lower for some time (although upward pressure will continue from global population growth, among other things), oil production at most existing sites will continue dropping, and new production will be far more expensive than what it replaces. Making the situation worse: the recent steep drop in prices combined with the credit crunch has, as mentioned, hammered new and financially marginal projects, some of which have shut down or been put on hold. This will further reduce our near-term ability to replace the accelerating loss of production from older sources. The same forces are at work for metals as well as for oil; today's lower prices will actually reduce near-term future supply.
Enjoy low gasoline prices while you can, because the price of oil will rebound at some point and then continue upward. Oil usage might contract even more in 2009 than it did in 2008, which could mean that pricing will remain low for most of the year or even a bit longer (on the other hand, recent oil pricing is below costs for many producers, so even-lower prices are unlikely).
Exact timing is always guesswork, but – especially given the current hyperinflation of the U.S. money supply – my expectation is nonetheless for oil prices to again breach $100/bbl before the end of 2009, and possibly before Spring. At the extreme, the dollar price of a barrel of oil could exceed today's price for an ounce of gold by 2010 or 2011, while gold's price could rise to multiple thousands of dollars per ounce. Hard to believe? See this list of hyperinflation episodes at WikiPedia or check out the numbers in the chart on Germany 's hyperinflation in last week's Part 1 of this column before dismissing the possibility. Here's that chart again:
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