Thursday, November 8, 2007

Connecting the dots

Oil is nearing that magic $100 per barrel mark - only a matter of time now before that threshold is reach. Just think, we'll be talking about these days as the "good old days" before too long.

Jim Kunstler sez:
One of the biggest laughs of the season came out of a New York Times business section story last Tuesday by reporter Michael Grynbaum, who wrote, "Oil is on a steady march toward toppling the inflation-adjusted high of $101.70 it set in April 1980, analysts said, though many are at a loss as to what keeps driving the price." (Italics mine.) Actually, lots of people know what is driving up the price -- just not anybody who works at that once-august and now-clueless newspaper. It can be stated simply -- the demand line has crossed the supply line -- though that simple fact has many curious ramifications.

Among the most subtle is a theory out of Doug Noland's latest Credit Bubble Bulletin (published every Friday).
"There are literally trillions of dollars of liquidity sloshing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real 'things'. . . . Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice . . . . Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets -- as opposed to U.S. securities -- and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed."
In short, foreigners stuck holding dollars that are hemorrhaging value would rather spend them on something other than dollar-denominated financial paper, and nothing is more crucial to the maintenance of industrial economies than oil. Noland's theory comes on the heels of reported oil and gasoline shortages in China, bad enough to have caused some civil unrest -- and bad enough for China's leadership to want to spend some of its vast US dollar reserves bidding up oil prices in the open markets to quell that unrest.

This is nothing more complicated than hoarding behavior on a global scale, a mounting crisis of frightened self-interest that has already been well-described by investment banker Matthew Simmons. Simmons was only one of many analysts who spoke at the mid-October Houston conference put on by ASPO-USA (the Association for Study of Peak Oil) -- to which The New York Times failed to send a reporter. Simmons has also said that the American public (and its leaders) will probably not "get" the fundamental problem with oil until rising prices are joined by spot shortages -- i.e. gas station lines, which will represent hoarding behavior on the basis of individual motorists.

Behind the hoarding dynamics are several clear circumstances.

One biggie is the growing export crisis, described by geologist Jeffrey Brown. Countries like Saudi Arabia and Mexico that sell oil to importing nations like The USA and Japan are using more of their own oil and producing less. Mexico's trajectory is so steep (due to the severe depletion of its giant Cantarell oil field) that it could easily go from being America's Number 3 source of imports to zero in less than five years. The anticipated yearly growth in worldwide oil demand next year will equal 80 percent of the USA's entire oil production.

The export crisis is only an additional layer on top of the general peak oil situation, but it illustrates the way that complex systems we depend on -- and oil markets are one -- are liable to wobble and fail just as the world comes off the all-time oil production peak for good. Finance is another complex system and it, too, is entering a stage of robust instability. Food production is yet another, with a grain scarcity that has driven wheat prices to all-time highs. The roster of complex systems entering phase change is long and gruesome.
In the meantime, you'll be happy to know that our government is going even further into debt, and should be able to keep on borrowing money through 2009.

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