What If?

BTW, I am heading to Boston this Wednesday, October 25, 2006, for the Boston University Conference “A Midnight Ride for Peak Oil”. I will post my notes sometime next week.

Thomas Jeffers & Co., LLC

“Global warming and escalating energy prices may make the North American status quo of vehicle-based commuting, large suburban homes, mammoth shopping malls and urban sprawl economically unsustainable. Yet such dire pronouncements are daunting for most people.” And…

``The U.S. in essence borrows about $2 billion a day, every day, principally from Asian states, to finance its consumption,'' the paper states. ``The single-largest category of imports is the approximately $1 billion per working day borrowed to import oil. The accumulating debt increases the risk of a flight from the dollar or major increases in interest rates.''

Bloomberg.com October 23, 2006, Front Page Article, Global Warming May Be Mother of All Finance Woes: John F. Wasik

These kinds of comments are making it into some pretty mainstream, establishment media publications – not just the “loony left”, as we derisively referred to many of the environmentalists back in the ‘80’s and ‘90’s (as it turns out, Wall Street was wrong on that whole global warming thing), MAYBE this is worth paying attention to…

What if? A reasonable question if ever I heard one. Think not? You must have never experienced a losing investment. It is usually the risk you did not consider, did not see, or dismissed outright, that comes along and levels you. Just ask South Florida’s single-family home investors…

If you go to the following link:

http://www.eia.doe.gov/ipm/supply.html and then click the “1c”

You will find yourself at the U.S. Department of Energy’s EIA monthly production number of crude oil and lease condensates. It is fairly plain to see that conventional crude oil production has actually declined over the past 24 months.

And if you go to the following link:

Go to http://www.eia.doe.gov/ipm/supply.html and then click 1c

You will find yourself at the U.S. Department of Agriculture’s “Reports by Commodity, Index of Estimates.”
I love the Internet, you can actually get useful, factual data… sometimes.

So let’s play a little “what if”.

What if the world has another poor crop year in 2007, and Wheat inventories drop below 50 days of supply (currently around 57 days), and Corn inventories drop below 25 days currently around 31 days). In 2008 more of the same, with inventories at 44 days for Wheat and 21 days for Corn. And, “what if” the Peak Oil guys are correct and we have an on going energy “problem” (“crisis” has been overused), and are unable to increase our production of oil.

Now, I dislike being so pecuniary, but this Blog is directed at how energy and carbon constraints might affect one’s net worth… the above scenario is not a good one for a lot of investors.

Now, just for ONE moment, let us forget prices. Let’s talk physics, not economics, but only for a second so that I can make my point and get back to economics…

Let us suppose that total oil availability for the U.S. falls from 20.7 mbpd (million barrels per day) in 2006, to 20.5 mbpd in 2007, 20.3 mbpd in 2008, and 20 mbpd in 2009. Never mind where I came up with these numbers (but I am willing to bet they are close) - we are playing “what if”, remember? Work with me. If the total liquid petroleum supplies available for consumption for the U.S. fall from 20.7 mbpd in 2006 to 20 mbpd in 2009… Who/what benefits? Who/what is harmed? How do you profit? What are the probabilities? Don’t worry about the price, concern yourself only with aggregate supply. Remember, a Joule of energy has no idea how much it cost its consumer.

The insurance industry is built on taking low probability/high consequence events (think plane crashes and hurricanes) and quantifying their impact probability. Unfortunately, I do not believe that the above scenario is low probability. Most non-politically motivated students of this issue believe that the probability of this occurring before 2020 is approaching 90 – 99 % (that is anecdotal by the way, not empirical… but you get my point). So, is the probability distribution linear (you know, 13 years left between here and 2020, so 1/13 for 2007, 1/12 for 2008, 1/11 2009…), Logistic, Gaussian (if you are not familiar with these just go to wikipedia.com and search them)… who knows, and why bother? Getting this exactly right is not necessary. What IS necessary is taking appropriate action prior to negative market reaction. Not sure what that is? Me neither, or I wouldn’t need my day job. But I have some ideas. Stay tuned.

Greg Jeffers

Mentatt (at) yahoo.com