Sunday, November 26, 2006

The Debate is Over

In case you missed it, this was front page today on

“While the political debate over global warming continues, top executives at many of the nation's largest energy companies have accepted the scientific consensus about climate change and see federal regulation to cut greenhouse gas emissions as inevitable.

The Democratic takeover of Congress makes it more likely that the federal government will attempt to regulate emissions. The companies have been hiring new lobbyists who they hope can help fashion a national approach that would avert a patchwork of state plans now in the works. They are also working to change some company practices in anticipation of the regulation.

"We have to deal with greenhouse gases," John Hofmeister, president of Shell Oil Co., said in a recent speech at the National Press Club. "From Shell's point of view, the debate is over. When 98 percent of scientists agree, who is Shell to say, 'Let's debate the science'?”

It would appear that CO2 caused Global Warming (“GW”) is no longer a political sideshow. I am still in awe of the various political interests’ ability to manipulate the opinions of the public of this scientific phenomenon. Finally, we have one of the largest Oil companies in the world throwing in the towel on the GW issue. “98 %”, Mr. Hofmeister? Try 99.99 % - but who’s counting? You can bet you life that laws and regulations on CO2 emissions are coming. As I stated in recent posts, there was a fair number of local, city, county, and state regulators at the Boston University Peak Oil conference – and they were there to do what the needs to be done, even if the Feds won’t, but the Feds are not about to let the states steal their thunder.

This is going to affect the markets, and consequently, your net worth. Don't let your politics cloud your investment judgment.

Greg Jeffers

Friday, November 24, 2006

All Oil is NOT created equal

I continue to receive email from people who continue to believe that the Tar Sands of Canada and the U.S. Shale deposits hold salvation for the U.S. and its petroleum demand. Nothing could be further from the truth.

"Unconventional petroleum resources (Canada's tar sands, Venezuela's bitumen and U.S. oil shales) are very large and very misunderstood. All oil is not created equal. Although they total trillions of barrels in the aggregate, expanding unconventional production is expensive, technically arduous and slow. Because these resources can not be produced at high rates, they can do little to postpone the peak in global production. For example, at forecast 2015 rates of production, it will take more than a century to produce Canada's 175 billion barrels of tar sand reserves. (A financial analogy: Imagine having $100,000,000 in your IRA, but being forbidden to withdraw more than $100,000 per year. You are rich, sort of.) With tens of billions of investment dollars, Venezuela could expand its bitumen production, but Chavez is in no rush to do so, nor are the importing countries showing any indication of readiness to make the investments in refinery modifications which would be required to deal with the increased proportion of very heavy oil. As for oil shale, global production has never exceeded 25,000 barrels a day, has fallen by half since 1990, and now provides just 1/10,000th of global energy. Typical oil shales have the energy density of a baked potato. (In Colorado, Shell hopes to pull the sword from the stone using electricity: a dedicated 1,200 MW powerplant will be needed to produce 100,000 b/d, making this project the world's largest electricity consumer.) Other oft-heralded types of unconventional liquids, such as gas-to-liquids and coal-to-liquids, are very capital intensive and offer abysmal energy returns. Biofuels, particularly Brazilian ethanol, will make an important contribution but only regionally. A breakthrough in the production of cellulosic ethanol is unlikely to occur before oil production peaks." - Randy Udall, Energy Analyst, Co-Founder ASPO-USA
Jeremy Gilbert, Former Chief Petroleum Engineer, BP
Steve Andrews, Co-Founder ASPO-USA

The best analagy to describe our energy predicament I have seen follows here:

"Oil production can be best understood by comparison with something such as wood. Imagine an island where there is one carpenter. The R/P ratio basis of oil usage revolves around the assumption that oil production works like a woodpile in the carpenter's backyard. Whenever he needs woods, he walks out to the pile and takes however much he requires. If things get busy and he needs more wood, he simply takes more wood from the pile. There is always enough to satisfy his needs until that fateful day when he removes the last plank and it is then all gone. The only factor in its price is demand - if fewer people want wooden things, the carpenter lowers the price to stimulate demand. If he has plenty of work on, he can increase the price and get the benefit.

Comparing this with oil, if the world has 1,050 Gb of oil remaining and we use 27 Gb a year, then dividing one by the other means that we will be able to use 27 Gb of the woodpile for another 39 years. Then the yard will suddenly turn out to be empty.

But oil does not sit in one huge whole in the ground, constantly being pumped out. Rather an oil field is a set of wells of different sizes, with new wells being set up as old ones dry out. The R/P ratio takes the view that the oil has already been found and is sitting patiently in the backyard. In reality, it is more like woodland than a woodpile.

If we imagine instead that our carpenter had to chop down a tree every time he needed to make something, the problems become more evident. Trees vary in their size, proximity and quality. Initially our man would pick those that were large, good quality and nearby. As this was relatively easy, his prices could be kept low. But, as time went on, he would have to cut more trees of smaller sizes, travel further to find them and use wood of a lower standard. This extra work would take longer and naturally result in higher prices. Eventually, unless the trees were managed and replaced, he would find himself unable to find enough wood to satisfy his customers.

But couldn't he cut the trees quicker to keep production up? He certainly could employ someone to help him (which would be like drilling more wells) but that would result in depletion occurring more quickly, and the quicker you cut away the large and nearby trees, the quicker you have to resort to the small and distant ones. New technology can only help so much; no matter what circular saw or four-wheeled vehicle you have, there's always a certain minimum time needed to cut down and drag a tree to the workshop. Production still falls, the best you can do is change the angle of the slope on the chart. Any increase in production means a gentler initial decline and a steeper subsequent one.

Oil production works in a similar way with the important distinction that, unlike trees, we cannot replace the oil we use. It is as if every tree the carpenter cut down was gone forever." - The Wolf at the (Author's name unkown)

If, in your strategic planning you are counting on the world's Oil supply to grow in endless abundance, you need a new plan.

mentatt (at) yahoo (dot) com
Oil, Food, the U.S. Dollar, and the “Global” Drought

On November 7th, 2006, the International Energy Agency (IEA) released its World Energy Outlook 2006. At a press conference announcing the new report, the agency's Executive Director was quoted as follows:

"The key word is urgency," IEA director Claude Mandil told a press conference in London following release of the study. "Urgency for immediate policies and measures to promote energy efficiency and facilitate technology development...

"On current trends, we are on course for an expensive and dirty energy system that will go from crisis to crisis. It can mean more supply disruptions, meteorological disasters or both. This energy future is not only unsustainable, but it is doomed to failure.

"Governments can either accept such a future, or they can decide to come together to change course." - The Oil Drum, November 24, 2006

Now read that again. The IEA, a government agency, and by extension, a political organization that normally would temper its commentary resulting in mealy mouthed, useless BS, is resorting to words such as “crisis”, “doomed”, “failure” and “unsustainable” to describe the world’s energy delivery system. The IEA, along with the U.S. EIA, are the 2 government-sponsored repositories of reserve, production, and distribution data for world energy supply and demand.

Venezuela and Bolivia are nationalizing their oil fields. Russia is “renegotiating” their oil contracts with the International Oil Companies (“IOC”). Iraq has disintegrated into civil war. Iran continues to jerk the world’s chain. The U.K. has passed from Oil exporter to Oil importer. Mexico’s production is declining. Nigeria has no ability to nationalize its fields, instead it resorts to kidnapping and blackmail – but isn’t that the same thing, really? The federal government and the financial media would have you believe that this is all a coincidence? Would anyone really care about the above countries if the Canadian Tar Sands and the U.S. Shale deposits really held a “trillion” barrels of Oil?

And the hits keep coming…

“The dollar fell to its lowest level in 19 months against the euro on speculation the Federal Reserve will lower interest rates early next year as central banks in Europe increase them.” Bloomberg News, November 24, 2006

The Dollar’s value versus the Euro in the above statement is certainly true; the part about why? Don’t you believe it. The media, in their never-ending inability to engage in abstract thought will report an indisputable fact – and then posture a completely plausible, but for the most part specious conclusion, yet simple enough for the average American college graduate’s 8th grade level of science and math skills to comprehend.

Here is my thought on the subject: The Dollar is going to keep falling, irrespective of what the U.S. and their trading partners do with interest rates, until the U.S. budget and trade deficits are brought under control. Since that is not going to happen in the absence of a crisis…

And coming…

Notice how I did not mention Saudi Arabia in my blow-by-blow country description? I am no diplomat; I have never worked in any foreign policy capacity. But, I will make a bet with you: Flip a coin as to what comes first – the peak in world Oil production or the collapse of the House of Saud. These 2 events are inevitable, and each event by itself will have a similar effect. Together, the compounded effect would be… well, disconcerting.

And coming

“Wheat prices rose to a four-week high in Chicago on speculation demand for U.S. grain is increasing while global inventories decline. U.S. exporters sold 361,400 metric tons of wheat in the week ended Nov. 16, up 12 percent from a week earlier, the U.S. Department of Agriculture said today in a report. Global inventories on May 31 will fall to 118.8 million tons, the lowest since 1982, after drought hurt crops in Australia, the U.S. and Ukraine. Prices are up 73 percent in the past year.
Australia will produce 10.5 million tons, 57 percent than last year, because of a 10-month drought. The U.S. will produce 14 percent less than last year and Ukraine's grain exports were down 10 percent this year because of drought.
Global production is expected to be 586.8 million tons in the crop season that started June 1, down from 618.9 million the previous season, and the world will use 615.1 million tons this year, the USDA said in a Nov. 9 report.” Bloomberg News November 24, 2006

Wheat prices are up 73% in the past year, the top 3 producers are all experiencing drought (coincidence or climate change? I have no idea but food is so important, it is worth considering) and the world consumed 615.1 million tons while producing only 586.8 million tons, a nearly 30 billion ton deficit. World population continues to grow (presumably the new arrivals will want to eat), and the automobile industry wants to pave over more farmland for roads, parking lots, and shopping centers the world over. Meanwhile, the oil industry has not been able to increase world oil production for over 20 months, and the U.S. Dollar is in a clear decline trend.

There are no coincidences in all of this. These systems are not independent of one another. Keeping your eye on the ball is really going to pay off.

Mentatt (at) yahoo (dot) com

Thursday, November 23, 2006


The level of denial at the top, and a people only too willing to believe what they want to hear, has left us in a most unsavory position.

Here are some of my personal favorites:

“Denmark had a 50% increase in its economy with a zero percent increase in energy consumption.” Bill Clinton, Newsweek, 11.27.06

All true – and completely irrelevant.

• Norway has fewer people than South Florida (4,610,820 (July 2006 est. CIA FACT BOOK), and population growth of .38%
• Norway has more oil per capita, and exports far more oil per capita, than any other nation. Russia and Saudi Arabia, numbers 1 and 2, aren’t even close
• Norway is the largest welfare nation on earth. Why not? They have the greatest Oil wealth. Of course they have no economic growth! They don’t need GDP growth in order to trade with the world!
• Japan is an example of an anti-Norway. With no domestic energy supplies, they must trade product (the P in GDP) for energy

In the speech, the former President insinuated that the Norwegians accomplished this feat by, among other things, replacing incandescent light bulbs with fluorescent bulbs – and the media ate it up. If the world had as much Oil on a per capita basis as Norway this might have some relevance - alas, it does not.

Let’s move on to some corporate manipulation of the public through our scientifically and mathematically challenged media.

We all know that if you pay somebody enough money, they will say anything. Have you ever followed, or worse, been involved in a large civil trial? Each side has their “expert” witness’s. Great system. These guys advertise a particular view point from which they will never waiver, no matter what new data become of available, and then claim credibility for their bought and paid for testimony because some formal educational establishment admits that they received a couple of years of part time training there several decades ago. Hell of a thing… Listen to this:

"Although annual global production has exceeded annual discoveries since the early 1980s, annual global reserve additions still exceed annual production because of reserve growth in existing fields.” - Dr Richard Vierbuchen, vice president, Caspian/Middle East region, Exxon Mobil.

I am embarrassed for Dr. Vierbuchen. Not for maintaining the company line, but for not obfuscating that statement more. The general public might have no idea what he is saying, but there are countless geology geeks buzzing around the web taking silly statements like that one apart. If you are going to speak an absurdity, well, you know the old saying “if you can’t dazzle ‘em with facts, baffle ‘em with Bulls—t.”

Allow me to explain. It is a simple matter to credit ALL of the reserve growth in a particular field back to the date the first well was drilled (the date of discovery) for a single aggregate number (and by the way, the “reserve growth” that he is speaking of is phenomena of the 50’s, 60’s and early 70’s; technology has improved on the estimation front, too. So much so that there was little if any “reserve growth” in fields discovered and developed after 1975 – If you doubt this, just email me and I will send you the data for Alaska’s North Slope and the U.K.’s North Sea.). When this is done for all fields, and it has been done COUNTLESS times (so there is no shot the good Doctor is unaware of these data points) we see that the peak discovery year was 1964, and that discovery has been trending down EVER SINCE. Also, that since the mid 1980’s or so, we have discovered less oil than we have been using, and our usage grows exponentially.

Lest you think I am Clinton bashing, let me work on the current occupant of the White House and his “Hydrogen Economy” and “Ethanol Economy”.

“Tonight I’m proposing $1.2 billion in research funding so that America can lead the world in clean, hydrogen-powered automobiles,” President George W. Bush, 2003 State of the Union address to Congress

“It better be” – President George W. Bush when asked if ethanol was the solution to our Oil addiction

Yes, we have cars that run on Hydrogen, and yes, we have cars that run on ethanol – and by the way, we also have cars that run on liquid petroleum products. Designing cars that run on different energy sources is not the problem – THE ENERGY SOURCE IS THE PROBLEM.

Unencumbered Hydrogen does not exist any place on earth. Hydrogen is a lonely element and only exists on this planet in the company of another element, such as Oxygen or Carbon (let’s forget Hydrogen and Carbons, the liquid form of which is the stuff we are in need of, and it certainly makes no sense to remove Hydrogen from Natural Gas such as Methane, CH4, when we could just burn the Methane). It follows that we would need to separate the H from the O in water. Problem is, we need an energy source to do this, and the energy we consume is greater than the energy stored in the resultant Hydrogen. You know, the old Energy Returned on Energy Invested (ERoEI) issue.

Could this be softened using Nuclear Energy? Maybe, but certainly not until we produce 100% of the world’s electricity needs with Nuclear and use the excess capacity to produce Hydrogen. Obviously, the use of ANY hydrocarbon to produce electricity so that some Nuclear power generation can be diverted to Hydrogen production is a loser in the ERoEI department. It would only make sense for excess capacity. Now, when do you think we will have that much Nuclear power? Not in my grandchildren’s lifetime, and my oldest is 13.

Ethanol is in the same ERoEI boat. It takes more energy to produce than it provides, more or less.

The President knows all of this. If the U.S. thought this was not the case our interest and commitment in Iraq and the rest of the Middle East would not extend to lives lost and trillions of dollars spent.

And the media ate it up - and spoon fed it to the pubic.

Mentatt (at) yahoo (dot) com

Monday, November 20, 2006

Look out for the Supremes

No, not the 1960’s R & B group. 12 U.S. states, several environmental organizations, and 2 science Nobel Laureates will have their case on Global Warming (GW) heard before the U.S. Supreme Court. The case is Massachusetts v. United States Environmental Protection Agency, 05-1120, and it has every opportunity to be “the shot heard round the world” (or not).

The evidence is ``so compelling that it has crystallized a remarkable consensus within the scientific community: Climate warming is happening, and human activities are very likely a significant causal factor,'' the scientists tell the justices. – Bloomberg News, 11.20.06

From some of my previous posts I received a number of emails from people who thought I had a political axe to grind. Sorry, no axe here - I am a realist capitalist. Legislation, regulation, and court decisions on GW are coming, and they must be factored into your expectations.

The risks to the economy of any meaningful action taken to reduce Greenhouse Gases (“GHG”) are quite real. The risks to the economy of no action taken are just as real. Irrespective of what the Supremes do, and I think they will side with the Environmentalists because of Justice Scalia and Thomas judicial history of being strict constructionists of the Law, the issue gains momentum daily and will overwhelm its resistors in the near future. What form the laws and regulations take I have no idea, but their impact on the economy and markets will not be positive under any circumstance.


Housing, Energy and the 2007 economy

In case you had any doubt, Housing is still in free fall. The pitch from the various bank economists presenting themselves as “independent experts” was that there was no bubble in asset prices. Now the pitch is housing’s troubles will not spill into the rest of the economy because energy prices have come down. Thank heaven these guys don’t work as traders on any Oil desk with my money working. These guys have not made 1 correct call on energy prices that I can remember. They should come with a warning like the one on cigarette packs.

My crystal ball is broken and I have NO IDEA about energy prices in the short term so I will hedge my bets: Follow energy prices AND aggregate supplies; if prices trend up – look out – coupled with Housing's pain I cannot see how the economy can expand. If energy prices trend flat to down, but supplies REMAIN flat to down, we will have the same outcome, in my opinion. Only if energy supplies rise AND prices fall is their a possibility of an expanding economy.

The odds of energy availability increasing for the U.S. is Slim and None, and Slim left town.

Mentatt (at) yahoo (dot) com

Sunday, November 19, 2006

"Last week, Cambridge Energy Research Associates (CERA) released a report saying that there was no imminent global oil problem and that enough new oil would come on-line to permit current levels of consumption -- and beyond! -- for more than a hundred years into the future. CERA's stunningly disingenuous report flies in the face of everything that is known about the current world oil situation.

CERA is fronted by Daniel Yergin, author of the Pulitzer Prize-winning history of the oil industry, The Prize. Apparently, Yergin has parlayed his legitimacy as an historian into running a disinformation service wholly owned by the IHS Corporation, a lobbying and public relations firm serving the defense, oil, and automotive industries. Apart from making a lot of money as executive vice-president of a company with about $300 million in net annual profits over about $500 million in gross revenues, it is a little hard to discern what Yergin's motives might be in shoveling so much bad information into the public arena.

Much of CERA's "story" hinges on the supposition that snazzy technology will allow the recovery of "oil" (liquid hydrocarbons) from solids that require costly mining and processing operations to covert them to liquids. In effect, CERA says that tar sands, kerogen shales, coal-to-liquids, plus super-deep ocean drilling will not only make up for currently depleting fields of easily-acessed liquid sweet crudes, but actually surpass current total production. This would seem, on the face of it, to violate everything that is known about Energy Returns on Energy Invested (ERoRI). And, in fact, the very companies working the tar sands in Alberta, Canada, have just this year steeply raised their dollar estimates of what it will take to convert that stuff into usable liquids -- it ain't a pretty story.

CERA does not acknowledge some of the fundamental facts of the current situation, for instance that the world's four super-giant fields responsible for at least 15 percent of total global production since 1980 (Ghawar in Saudi Arabia, Burgan in Kuwait, Daqing in China, and Cantarell in Mexico) have all passed peak and turned down into depletion. CERA doesn't acknowledge that discovery of new oil peaked worldwide in the 1960s with more than 40 years of steady decline since then. Or that there has been almost no provable meaningful discovery the past several years (and Chevron's as yet unproved deepwater "Jack" claim of 3 to 15 billion barrels total is not significant in the context of a world that now burns through 30 billion barrels a year.) CERA doesn't acknowledge that the predicted US peak of 1970 was absolutely on target and that our domestic production of regular crude has fallen from around 10 million-barrels-a-day in 1970 to under 5 m/b/d now (still declining yearly, including the Alaska North Slope fields). CERA doesn't acknowledge that current total global oil production through 2006 is at least absolutely flat and more likely falling (depending on whose numbers you look at), which would tend to indicate that the world has bumped up against the ceiling of its all-time total capacity. CERA doesn't acknowledge that exports are down nine percent this year because the nations with export capacity have growing populations and economies that require more and more of their own oil.

The CERA story also tragically gives aid and comfort to those who deny that climate change needs to be taken seriously, since it is saying, in essence, that we can easily continue pumping carbon dioxide into the atmosphere -- by burning as much coal as we can. The CERA report amounts to "don't worry, be happy."

 Perhaps most tragically, there is no corrective for this mendacious PR. It's not against the law to spread lies about a business venture -- which is what the oil industry is -- even if its truthful condition is critical to the functioning of our society. There's no oversight committee or agency authorized to investigate public relations activity. It's a basic case of buyer beware. Unfortunately, the buyers in this case are America's political leaders and the news media responsible for informing the public.

The mainstream media last week swallowed CERA's PR hook, line, and sinker, without a single reflective burp. It even drove the prices on oil futures markets down a few dollars a barrel -- though the price was back up by Friday. The only cogent analysis of the CERA report took place on the Internet, and for the most part on a single site:, which is the best-informed forum of debate on these issues operating in the United States.You can go directly to their initial response, composed by Dave Cohen by clicking on this link. It's worth taking the trouble to read.”
James H. Kuntsler

Since I could not have said it better myself – I didn’t. Much thanks to JHK for this.

mentatt (at) yahoo (dot) com

Saturday, November 18, 2006

The Third Deficit

In my previous posts I laid out the risks to the U.S. Dollar from the Federal Budget Deficit and the Trade Deficit. - “Twin Deficits”. We might have to change the name to “The Triplets”. You see, there is another government debt lurking out there – and it is growing every day. As of today, it is estimated at $2 trillion dollars, and by some estimates, it is growing at about 7% per year. That means it will be up to $4 trillion in the middle of the next decade.

“States and municipalities are looking at a gap that has been estimated at something like $2 trillion, with pension shortfalls of $700 billion and health-care costs -- also known as ``other post-employment benefits,'' or OPEB, as the analysts so felicitously put it -- of $1.4 trillion.” Bloomberg News, November 16, 2006

The implications of this trend on the municipal bond market are ominous. The City of San Diego settled FRAUD charges with the United States Securities and Exchange Commission just this week for issuing bonds to investors without disclosing their problematic pension and healthcare liabilities. Sounds a lot like the Social Security (pensions) and Medicare (healthcare) issues at the Federal level. It is too bad that the SEC can’t do something with the U.S. Congress and the U.S. Treasury Department.


The Great American Ponzi Scheme

In order to avoid China’s 4-2-1 problem – 4 grandparents and 2 parents supported by 1 worker – the U.S. immigration policy, the “Great American Ponzi Scheme”, has imported enough young people to continue to fund the Social Security and Medicare trust funds. For a number of reasons, that is coming to a close in the near future.

Had we not had the benefit of these immigrants over the past 20 years (legal or otherwise) the Social Security and Medicare trust funds would now be in default. Still, we grow our entitlement programs at an exponential rate – but future immigration will not be there to hold up its end of the Ponzi Scheme.

A “pay as you go” system means that today’s young workers pay for today’s retirees. What happens when you have too many retirees and not enough young workers? Nothing good.


What Housing Bubble?

How many reports have you read from the National Association of Realtors over the past year telling you first that housing is solid, then that housing was a little soft, then that there was a “correction” going on… If the Real Estate industry keeps it up, they might overtake Religion in the exagerated claims and false promises competition.

Housing starts in the U.S. fell October to the lowest level in more than six years. Building starts were 1.486 million, down 14.6 % from September, according to the Commerce Department. Building permits experienced their 9th straight monthly decline, to 1.535 million, the lowest since December, 1997.

``This is a shocking number.” said Phillip Neuhart, an economist at Wachovia Corp. Oh, yea? Shocking to who. In the Winter and Spring of 2005 we published extensively on the coming problems for housing (and we are Real Estate Brokers, among other things).

The beauty of numbers – housing starts, oil production, auto sales – is that they are empirical. Forget “bubbles, “corrections”, “weakness”… these cannot be measured. The old carpenter’s ditty, “measure twice, cut once”, says it all.

Energy companies paid millions to certain groups to sow disbelief on the data about global warming, and now deny that there is any energy supply problem developing.

Housing is just as energy intensive as autos. Should be interesting to see how the industry makes it in an environment of decling supply.

Why would anybody believe the press from any vested interest? Sometimes we don’t know the press came from/was manipulated by a vested interest. Still, as my late father used to say: “Believe nothing what you hear and only half of what you see – and you won’t get yourself into too much trouble”. When I read these manipulations parading as news I remember some of Dad’s more amusing wisdom: “I don’t know, it may be so, but it sounds like s--t to me.”

Mentatt (at) yahoo (dot) com

Friday, November 17, 2006

The 800-Pound Gorilla in the Room

The world’s most important repositories of data concerning world energy supply, the Energy Information Administration (“EIA”) of the U.S. Department of Energy and the E.U.’s International Energy Agency (“IEA”) have been tip toeing around The 800-Pound Gorilla in the room (Peak Oil) for nearly a decade. Not any more.

The IEA’s World Energy Outlook report is now out and can you believe it? On page 85 of the report: “Non-Opec conventional crude oil output peaks by the middle of the next decade, though natural gas liquids production continues to rise.”

Quite a change, from the IEA’s previous claim, that no peak was visible up to 2030. A stunning admission. When will the EIA come around? Soon. The production numbers don’t lie.

The IEA is still in a delusional state in predicting that the Kingdom of Saudi Arabia will be producing 14.6 million barrels of oil per day (“MBPD”) and 2.7 MBPD of Natural Gas Liquids in 2030 (p. 93), considering that Saudi Arabia has not been able to increase production substantially for years. But we must allow them time as they are a political organization – accordingly this will be an incremental process. Of course, so was the 25 years it took the U.S. to admit that CO2 from the burning of fossil fuels was causing climate change. One way or another, this won’t take that long.

Mentatt (at) yahoo (dot) com

Wednesday, November 15, 2006

“The Foot Bone’s connected to the Shin Bone…”

The currency risk (crisis) facing the United States, referred to most recently by Former Fed Chairman Paul Volker, and former Treasury Secretary and former Goldman Sachs Chairman Bob Rubin in my last post, did not come about in a vacuum. Nearly half of the U.S. Trade Deficit can be directly attributed to our International purchases of Oil. Further, I sincerely doubt the U.S. would have been running a Budget Deficit if the U.S. was capable of producing (extracting) all of its Oil requirements domestically.

This problem has its roots in the 1970’s peak of U.S. domestic oil production. Until that time, the U.S. was the world’s largest creditor nation (and until the mid 1960’s was the world’s largest OIL EXPORTER). As such, the U.S. ran a Trade Surplus. But then U.S. Oil production peaked, and the U.S. began its long, inexorable decent into debt by continuing to increase its Oil imports year after year after year while, at the same time, continuing to promise more than it could pay for in the form of entitlements (Social Security, Medicare, Medicaid, the Drug Benefit…). Hence, we now have the “Twin Deficits” of Trade and Budget fame. In 1969, the U.S. was an Oil exporter, but in 1971 the U.S. became an Oil importing nation - and never looked back. This, in spite of the harsh lessons dealt the U.S. during the 1973 and 1979 oil shocks. At the time of the last Oil embargo, the U.S imported less than 25% of the Oil it consumers. Today the U.S. imports roughly 60% of the Oil it needs to run its economy, while going deeper and deeper and deeper into debt. Further, the U.S. is beginning to import Liquid Natural Gas (“LNG”) for the first time, putting the U.S. further and further into debt and into reliance on foreign energy suppliers (If 25% reliance on foreign Oil did such a number on the U.S. in 1979/1980, just imagine what 60% reliance might do in a supply disruption today).

The only way to pay the debt back is to increase net nominal (not real) tax revenues, actually or de facto. This can be done in a number of ways:

• The U.S. can raise tax rates.
• The U.S. can cut services, entitlements, and spending for defense
• The U.S. can grow the size of its economy, thereby collecting more taxes without necessarily raising tax rates. For this to work, the U.S. must still get a hold of its spending.
• The U.S. can debase (lower the value of) its currency (or its trading partners can do it for the U.S.).

It is extremely doubtful that the U.S. could raise its tax rates enough to make much of a dent in its budget deficit and entitlement liabilities – to do so, the U.S. would have to tax its citizens into penury. How likely is it that the U.S. Congress would cut services and entitlements in the absence of crisis? Pigs have a better shot at flying. Can we grow our way out of this mess? Sure, if we had an unlimited supply of domestic Oil and Natural Gas (“NG”) and if we were also able to control our spending. In order to grow the economy we must increase our consumption of energy. And “therein lies the rub”: The only energy source we can increase consumption of is Coal, and Coal will not run the U.S. transportation system. Coal will not heat the homes of the approximately 60% of Americans that use NG for home heat. Not to mention the external environmental costs concomitant with the use of Coal.

So we are left with the currency. You see, to pay its IOU’s, a government is very much able to print more money and use it to pay its debts. The problem with that is the contra party, the guys that hold those IOU’s, don’t like that very much. They won’t extend any more credit on such terms. They will want MORE of that less valuable money in the form of interest in the future and for the exchange of goods and services that they sell us. That means higher interest rates and higher inflation. Much higher, and we all know what that means.

Now for the Coup de Grace: In just over 4 years, the Boomers will be turning 65, and will want those Social Security and Medicare benefits they have been paying for all these years. Problem is, the system was “pay as you go”, and the money that the Boomers paid in is long gone, and the younger generation is not going to be able to pay for the Boomers “pay as you go” entitlement demands. So how do we pay the Boomers and our creditors and our Oil suppliers? We don’t.

The Oil foot bone is connected to the deficit shin bone is connected to the U.S. Dollar Hip bone is connected to the…

And that’s why the Dollar is going down - like a rock in a pond.

Mentatt (at) yahoo (dot) com
Here Comes the Cavalry

Well, at least I am in good company. Thank G-d, I am not the only nut on the internet railing about the position we have allowed ourselves and the Dollar to get into.

This was front page on this morning.

“Nov. 15 (Bloomberg) -- Robert E. Rubin, Treasury secretary under President Bill Clinton, and former Federal Reserve Chairman Paul Volcker said foreign investors probably won't keep increasing dollar holdings, raising the risk of a slump in the currency.

Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes, Rubin said. Volcker said the U.S. borrowing requirements raise the risk of a ``crisis'' in the dollar as soon as the next two and a half years.

``It seems almost inconceivable that this will continue indefinitely,'' Rubin, who now chairs Citigroup Inc.'s executive committee, said in a videotaped message for a dinner hosted by the Concord Coalition yesterday in New York.
Rubin, 68, who served as Treasury chief from January 1995 to July 1999, helped engineer economic policies that allowed Clinton in 1998 to claim the first budget surplus in almost 30 years. The dollar, measured against the currencies of the largest U.S. trading partners, rose 14 percent under his tenure.

The U.S. currency has fallen in recent years, in part because of concern America will fail to attract enough capital to finance its borrowing. The Federal Reserve's dollar index has declined 27 percent since December 2001. The dollar is down 7.4 percent against the euro this year and is little changed versus the yen.


``It's incredible people have gone on so long holding dollars,'' Volcker said during a panel discussion at the event. ``At some point, you will get a situation where people have had enough,'' he said. He added that he wasn't ready to ``extend'' a previous prediction of a crisis within two and a half years.

The U.S. budget situation must be addressed now because the government is just five years from ``rapid acceleration'' in spending tied to Social Security and Medicare, Rubin said. He reiterated that the incoming Democratic majority in Congress and President George W. Bush should raise taxes to reduce the deficit.” -November 15, 2006

In my opinion, the situation will not be address prior to a Dollar crisis. If you are an American investor, it is time to get your house in order.

Mentatt (at) yahoo (dot) com

Tuesday, November 14, 2006

"The Tyranny of Distance"

“The Tyranny of Distance” Geoffrey Blainley

Once upon a time, Real Estate had 3 methods to describe its potential: Location, Location, Location. In the era of declining liquid fuel availability (and carbon constraints) the new maxim will be: How far? How far? How far?

"The Tyranny of Distance" will be the foremost consideration in the era of declining energy availability.

How long is my commute? How far is my children’s school? How far is the grocery store? How far does my waste have to be pumped from the toilet to the treatment area? How far is the water supply? How far are emergency services and law enforcement? How far is ________? (you know, fill in the blank)

Unless you have a miserably long commute (and if you are reading this it is likely you have the means at your disposal to avoid such a terrible fate; people with portfolios to protect usually don’t kill themselves commuting) you have probably not given much thought to this. But you will, and giving thought to this now can give you a tremendous advantage and create opportunities.

For example, small homes within walking distance of most services will be more desirable than their larger cousins deep in the suburbs, the locations of which require the use of much more energy for transportation (or a much longer walk or bike ride), and because they consume less energy to heat and cool. Regions with steady precipitation will be far more desirable than that lovely spread out in the desert. That cozy McMansion up in the Rockies will be a whole lot less cozy if any of the modern provisioning schemes are interrupted.

Commercial property will live under the rule of this Tyranny, too. Own a property in town that you rent to a butcher? Good for you! Own a warehouse out in the sticks dependent on the current trucking schematic? Not so good.

“The Tyranny of Distance: How Distance Shaped Australia's History” by Geoffrey Blainey is well worth the time and effort. Perhaps a sequel might be written: “The Tyranny of Distance: How Distance Shaped America’s Future in the post Peak Oil Era”.

Greg Jeffers

Mentatt (at) yahoo (dot) com

Monday, November 13, 2006

“This is either corn for feed or corn for fuel” - Richard L. Bond, President and CEO, Tyson Foods, Inc.

Thomas Jeffers & Company, LLC

The price of corn has risen sharply over the past year. One reason is because of poor crop yields in recent years. Another is demand for ethanol has increased. In previous posts I have outlined the risks associated with relying on food crops for transportation fuel.

“Tyson Foods Inc., the world's largest meat processor, warned Monday that rising corn prices could mean U.S. consumers will have to pay more for chicken, beef and pork next year as it ended its fiscal year with a third straight quarterly loss.

Bond said the price of corn, which is used as animal feed, is going up because of demand from ethanol plants that are springing up to provide alternative fuel sources to oil. Corn prices recently reached 10-year highs.

"I believe the American consumer is going to have to pay more for protein. We are at new levels on corn that are not likely going to be retrenching back to '06 levels," said Richard L. Bond, CEO, in a conference call with analysts.
Bond said meat producers, processors and retailers will have to pass the higher grain price on to consumers because they cannot absorb it in their profit margins.

"Quite frankly the American consumer is making a choice here. This is either corn for feed or corn for fuel, that's what's causing this," - Richard L. Bond, president and chief executive officer, - Yahoo Finance, 11.13.06

Allow me translate: We have an ETHANOL/CORN shortage brewing.

After you consider the aforementioned comments from Mr. Bond, please read the following comments from U.S. Secretary of Energy, Samuel Bodman:

"First off, as we all know, the global demand for energy is rising rapidly and will continue to do so. The Energy Information Administration (EIA) estimates that, by 2030, global energy consumption will grow by over 70 percent. Not surprisingly, the strongest growth is expected in developing economies in Asia – including China and India – with growth projected to triple in that region over the next 25 years.

Secondly, most national economies around the world, including the United States’, are fundamentally hydrocarbon-based. And they will remain so in the near-term. Though we estimate that oil’s share of total energy use will fall slightly in the coming decades (from 38 percent in 2003 to 33 percent in 2030), the demand for oil is still expected to grow strongly, reaching 118 million barrels per day by 2030. The United States, China, and India together will account for half of the projected growth in world oil demand. It’s fair to ask: is that type of growth even sustainable? Will the supply be available?

What I’m saying, is that this is a global problem and it goes like this: if we are to encourage economic growth around the world, if we are to raise living standards for all people of all nations the world needs a clean, affordable, diverse energy supply. If we look two or three or four decades into the future, we know that hydrocarbons alone will not meet the needs of a growing world economy. Even with all the technical expertise the world could offer and all the political will it could muster, eventually, we will run out of oil. And, even before then, the price of a dwindling supply will be prohibitive. At present, our world is overly focused on, and overly dependent upon, one source of energy. And that path is unsustainable." Samuel Bodman, U.S. Secretary of Energy, 11.11.06

2 decades out, Mr. Secretary? Not a chance, 2 years, maybe, but not 2 decades (3 and 4 decades is too silly to harass him about). How many American citizens know how the U.S. Department of Energy went about calculating demand? Not very many, but I love throwing a little light on this B.S. By extrapolating a never-ending increase in the supply of Oil, that's how. And the part about a “clean, affordable, diverse energy supply”? We've got a better chance with the tooth fairy, so I guess we ain’t “raising living standards” and we ain’t (my spell checker hates me) “encouraging economic growth”. However, Mr. Bodman should be credited with candor for this: "And, even before then, the price of a dwindling supply will be prohibitive."

They are getting close, the energy and political establishment. It's on the tip of their tongues, "Peak Oil". Can't quite say it, though: if they do they will give credibility to the scientists and mathematicians who have championed the concept and all of the really unpleasant economic side effects associated with declining energy supply will have to be addressed. Too, they will have to admit to an error in judgment (you know how much politicians and regulators are willing to do THAT), as a number of respected scientists have been telling the various government agencies of the coming Peak in world oil production for over a decade. Seems that, just like the Carbon Dioxide issue, our regulators would rather be sorry than safe.

“A Global problem” says Bodman. More like the end of Globalism, Mr. Secretary. Cheap and abundant energy is the only reason it is cheaper to make tennis shoes in China than the U.S. That supply line hasn’t got a lot of time left. “Made in America” won’t be a point of pride - it will be a necessity.

“At present, our world is overly focused on, and overly dependent upon, one source of energy. And that path is unsustainable." Talk about an understatement.

The colliding of the grain, carbon, and liquid fuels issues creates tremendous opportunities, but it won’t be business as usual. If you insist on business as usual, your business might not be here.

Greg Jeffers

Mentatt (at) yahoo (dot) com
How to win Friends and Influence the World Economy by the E.U.

It was a tough week to be stuck in 1984 sensibilities. Back then I believed that the global warming (“GW”) argument was a specious attempt by certain groups to gain political advantage. Several years ago it dawned on me - wooops! It is amazing how we can take a very little knowledge and turn it into such a hard opinion, so hard we are willing to argue blindly over it. In America, no one could ever admit that they drive badly, are an average lover, or that their opinions were manipulated by some special-interest group or other. Yet the last part must be so, or we would not need advertising agencies.

The global warming story was front page for several days each during the month of November on every major newspaper and news-website in the United States. If you missed it, well, this time it isn’t the media’s fault. If you just don’t believe it, well, maybe you have formed a hard opinion on subject with which you have not done your research. I don’t mean to sound preachy, but you must take your game out of 1984. In order to make money at this, we need to be better informed than the other guy, and to be able to admit we are wrong before it does us real damage. If you have hardened an opinion, you have become a “believer”, and you will not be able to mitigate mistakes – believers are never wrong.

Remember, in politics and investing, nobody cares what you think. This is a beauty pageant – it is the judge’s opinion that matters. Just who are the judges? The millions of people participating in the markets.

Here is a perfect example of why it doesn’t matter what you believe. The European Union (“EU”) has enacted a directive to regulate all “Energy using Products” from the energy consumed extracting the raw materials they comprise, to the energy they use during their productive lives, to the energy necessary to destroy, dismantle, or reclaim the product.

“E.U. directive 2005/32/EC otherwise known as a directive on every EuP…
The E.U., a bureaucracy that perhaps even overshadows our own, set a date of July 6, 2007, to put the directive in place. Its goal is “establishing a framework for the setting of eco-design requirements for energy-using products [EuP].”

EuP will require manufacturers to calculate the energy used to produce, transport, sell, use, and dispose of almost every one of its products. It will require that the manufacturer go all the way back to the energy used when extracting the raw materials to make its product, including all subassemblies and components. And in time, it will set limits on a product-by-product basis of how much energy can be used in a product’s entire lifecycle.

One analyst group, Tetra Tech, in a fact sheet, explains it this way: “The scope of the directive is very wide, being potentially applicable to any energy-using product … it applies to all energy sources, although it is likely that only those using electricity or solid, liquid, and gaseous fuels will be subject to implementing measures.”
- Ephraim Schwartz

Go to, select your language, put EuP in the search window, and read it for yourself.

This directive will affect every product sold within the EU, domestic or import. U.S. companies export a great many EuP’s to the EU. The effect of this directive will be strongly felt here in the U.S., long before the U.S. enacts similar regulations. I

Here is some more from Mr. Schwartz paper

“There is no denying at this point in time that if we value the lives of our children and grandchildren we must take positive steps to improve our environment. But that doesn’t mean it will come without pain. 
“When it comes into force, it will require a level of analysis and information collection that will be fairly onerous,” understates Eric Larkin, CTO of Arena Solutions, in talking about the impact of EuP on just on IT. Arena is a hosted product-lifecycle-management SaaS (software as a service) company.

Here’s why Larkin believes as he does. Article 8, section 3 of EuP says in part the following: “After placing an EuP … on the market … the manufacturer or its authorized representative shall keep relevant documents relating to the conformity assessment performed and declarations of conformity issued available for inspection by Member States for a period of 10 years after the last of that EuP has been manufactured.”

The burden will fall heavily on IT departments that must comply with a two-and-a-half-page list of “management system requirements for assessing conformity” for officials. (See Annex V of the document.)

Although Article 16 includes a three-year transitional period, some products with a “high potential for cost-effective reduction of greenhouse gas emissions” will be regulated much sooner. Among the list of products in that category are office equipment and consumer electronics.

Finally, here’s a snippet from Article 1, paragraph 2, that demonstrates the scope of this directive: “The directive provides for the setting of requirements which the energy-using products covered by implementing measures must fulfill in order for them to be placed on the market.”

Clearly the EU is taking GW very seriously. Still, you and I would be better off if we were not blind sided by such regulations.

Other political bodies will find it hard to continue their standard program of denial when it comes to GW. Take Australia. The country is reeling from a multi year drought, which this year has grown to biblical scale. The countries agricultural crisis is real and measurable, as the price of wheat (Australia is the third largest exporter of wheat) has surge over 50% this year due to poor crop yields and unrelenting demand.

“The failure of the Australian grains crop further reduces the worlds food stock piles. The "drought" in Australia is a symptom of a major redistribution of rainfall within Australia. Rainfall has decreased in the South East in many areas by half, but has increased by the same amount in the Northwest over the last 50 years (Australian Bureau of Meteorology). PM John Howard defends his lack of action on Kyoto quoting cost, but refuses to acknowledge the rainfall redistribution or that it could be a result of climate change.” Rod Campbell-Ross

I reviewed the data from the Australian Bureau of Meteorology and it would be hard to argue that a major rainfall shift has indeed occurred. Is this particular phenomenon caused by GW? Maybe, but in truth, I have no idea. Does it matter? Not even a little bit. The argument is gaining traction worldwide and governments will wish to appear to be doing something, anything, even if it is wrong.

This is not to say that I do not believe that we are altering our climate by burning fossil fuels and increasing the amount of CO2 in the atmosphere. I do. It is just that I have little faith that the G-8 nations plus China and India will be able to do the right thing for the environment and/or the economy.

Mentatt (at) yahoo (dot) com

Sunday, November 12, 2006

"The Carbon Tax is Coming. The Carbon Tax is Coming"

The ASPO-USA conference “A Midnight Ride for Peak Oil” held, appropriately enough, in Boston October 25-27, should have had their mascot, Paul Revere, on hand to awaken the residents of the land with a loud cry of “The Carbon Tax is Coming!”

It is coming, indeed. But first a definition:

“A carbon tax is a tax on all activities that emit carbon dioxide, principally the burning of fossil fuels — not just gasoline, but also natural gas, jet fuel, propane and coal.”

Today’s news

“Voters in a Colorado university town nestled in the foothills of the Rocky Mountains have passed the country’s first municipal carbon tax to fight global warming.

Boulder, Colorado., will charge residents and businesses the carbon tax based on how much electricity they use. Most electricity in Boulder is generated at plants that use coal, which produces more of the main greenhouse gas carbon dioxide, than natural gas or oil.” – MSNBC 11-10-06

You can count on other cities in California and the Pacific Northwest following suit soon. Milwaukee and Minneapolis have elected officials interested in a carbon tax as well, with a substantial number of smaller cities also studying the issue.

I hate taxes. You hate taxes. Now that we got that out of the way… Legislation and tax structures to limit Greenhouse Gasses (“GHG”) are coming on like a slow freight train picking up speed. A fair number of attendees at the Boston University Peak Oil conference were from local, city, county, and state governments. They were there to (hopefully) assess the problems of declining transportation fuel availability and climate change and to (hopefully) come up with ways government might mitigate these issues in ways that industry cannot. I must admit to being quite nervous about government’s abilities in such an endeavor (or any endeavor) but I understand that they must try.

You want to argue the politics of it? Go ahead, but not with me. This post address’s the impacts these eventualities will have on our investment portfolios. I apologize in advance if I appear pecuniary, but people who have worked an entire lifetime to build a portfolio and a business usually view this issue slightly differently than people who have not.

However it is installed a carbon tax will, at some point, lower our use of fossil fuels, and by extension, slow the economy. How can it be otherwise? Energy use drives the economy for the moment, and a carbon tax is a negative incentive to use less energy. Less miles driven means cars and tires wear out slower, smaller cars means less steel and glass is consumed. Encouraging telecommuting means less demand for office space, parking lots, toll collectors, gas stations and auto repair, luncheons… get the idea?

I particularly enjoy that telecommuting theme. The idea is to encourage corporations to allow much of their office, administrative, and sales staff to work from home. It seems like a good idea, and it is coming, one way or the other. But the unintended consequences are going to rock some people’s world.

For example, say we were successful in removing 10 million commuters from the nations highways by having them work at home. Let’s stay away from the productivity issues. Can you imagine how this might affect the office market? 10,000,000 workers consume 250 square feet of office space each, and one parking space. So what happens to the 2,500,000,000 square feet of office space they no longer use? How does the economy react to THAT? Do we just leave those hulking towers of steel, cement, and glass standing there? Where does that leave the construction industry?

Those 10 million people are going to be doing a lot less driving. What is the impact of 10 million people driving 7,500 fewer miles each year on the auto industry (and the related service industries)?

Will there still be jobs for these 10 million former commuters considering the effects on the auto and construction industries as well as the office market?

No, these things are not going to happen over night. Actually, they could if any kind of oil supply disruption occurred. But assuming no disruption, this process will play out over a decade or more. Still, the impact on the economy, industries, the financial markets, real estate, and your business will be jarring.

Mentatt (at) yahoo (dot) com

Saturday, November 11, 2006

The Dollar! As Good as… Lead
China to “Diversify Reserves”

“The dollar slid today against all 16 of the most-actively traded currencies Bloomberg tracks as People's Bank of China Governor Zhou Xiaochuan pledged to keep diversifying the country's foreign-exchange reserves. European Central Bank President Jean-Claude Trichet and Bank of Japan chief Toshihiko Fukui this week suggested they will raise rates.

‘We saw the comments from the People's Bank of China,'' said Niels From, a currency strategist at Dresdner Kleinwort in Frankfurt. ``The talk about central bank diversification gives a final push this week for the dollar to go weaker.'… Zhou said China will maintain its policy of diversifying foreign-exchange reserves, the world's biggest at about $1 trillion, because of ``safety, efficiency and liquidity.' ” 11.10.06

Did you ever wonder why the U.S. has been able to run budget and trade deficits of the magnitude that we do? Maybe a little, but let’s be honest – we Americans now think that it is our G-d given right to enjoy cheap access to capital, cheap imports because of our relatively strong currency, and cheap and abundant energy.

The entire world must pay for their oil imports with U.S. Dollars. Oil is priced in Dollars the world over (for now) and if Italy, Estonia, Nigeria, Japan, or Argentina wish to buy some Oil, they must have some dollars on hand. Where do these Dollars come from? By mathematical necessity, these Oil importing nations (all importing nations) must run a trade surplus with the U.S. if they want to have Dollars on hand. The mathematical necessity of that is that the U.S. must run a trade deficit with them. This is where the Dollars (Petrodollars) that the importing nations use to buy Oil comes from. But where do the Dollars come from? They come from U.S. Dollar “printing press”.

How great has it been to be in a position to print the world’s reserve currency at will and at terms so favorable?

If it were not for the “printing press” our lifestyle would not be anything near what it is today. How long can the printing press operate? That depends on how long the rest of the world will be required to acquire Dollars to make their international purchases of Oil. Ever hear of the Euro? Ever wonder WHY those fractious, infighting, backstabbing Europeans got together and united under one currency (not being an “ugly American” here, just recalling my European history)? Think it was just for fun, or cool, or some Continental Pride kind of thing? Nope. It was designed to challenge Dollar hegemony, and China just dropped the first shoe (sort of, the Euro was probably the first shoe, and there will probably be many more shoes dropping over the next few years).

John Q. American Public would be in for the surprise of his life if Saudi Arabia started to accept Euros from Japan and China in payment for its Oil. For those of you who have read my stuff over the years I have often questioned how long it will take Russia, now the world’s largest exporter of fossil fuels, and Europe, Russia’s largest customer, to start settling their energy transactions in their respective currencies – INSTEAD OF THE U.S. DOLLAR - or, at the least, have a dual currency Oil trading system.

Once the Dollar loses the total hegemony it now enjoys, the price of nearly all commodities, relative to us dollar holders, will rise DRAMATICALLY (think oil). The cost to finance those twin deficits of ours will rise DRAMATICALLY (think interest rates). The value of the Dollar will fall DRAMATICALLY versus our major trading partners currencies (think inflation).

What can we do about it? We could always invade Russia or Saudi Arabia to keep them from accepting other currencies (just kiding! I acutually received email from people who thought I was advocating this silly idea. I was just being sarcastic, folks!) Iraq planned to accept Euros instead of Dollars in their food for oil program back in 2001 or 2002 – and was invaded shortly thereafter, and now accepts only Dollars for its Oil. I doubt this is a coincidence (I have been a lifelong Republican, but I call it as I see it). Now Iran is setting up an Oil bourse to compete with the New York and London commodities exchanges – all the trades of which are to be settled in EUROS. Syria, while not a big oil exporter (maybe 200,000 bpd) is moving to accept Euros. These guys are setting examples to other exporting nations some of who don’t like the U.S. very much at the moment.

With all of this now freshly in your mind, consider the Fed’s decision to cease publication of M3 earlier this year. For those of you unaware of this development:

“On March 23, 2006 the Federal Reserve ceased publication of the M3 monetary aggregate, in line with an announcement it made in November, 2005. The M3 is a measure of money supply in the United States, The M3 is most general of the many measures of money supply, the quantity of money available within the economy for purchasing goods, services, and securities. The money supply is monitored and adjusted by a central bank, to keep inflation in check, because money supply has to change in tune with real Gross Domestic Product (GDP) to prevent inflation (or deflation).

In November last year, the US Federal Reserve announced that it would cease publishing M3 data, saying, "[the] M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years", adding that the costs of collecting the data required for the index outweighed its benefits.

Some commentators have questioned this decision and have speculated that this would allow the Federal Reserve to covertly fund the US budget deficit and its negative balance of trade or hide the fall in international demand for the US dollar. In March, 2006, Rep. Ron Paul introduced a bill (HR 4892) requiring the Federal Reserve to reverse its decision.” – Wikinews


Mentatt (at) yahoo (dot) com

Friday, November 10, 2006

Forewarned is Forearmed

Thomas Jeffers 8 Co., LLC
November 9, 2006

Natural Gas (‘NG”) is a most amazing substance. When we speak of NG in the industry we are referring to Methane for the most part, CH4 for those of you interested in the chemistry. Let me digress for a moment. Say the word “hydrocarbon” out loud. Hydrogen and Carbon! Hydrocarbons have different molecular shapes and strings, which gives them their individual properties such being a gas (NG), liquid (Oil), or solid (Coal) at sea level and room temperature.

Sorry, back to amazing NG.

NG is our only source of instant space heating. It lends itself to the efficient manufacture of fertilizers. It can be shut off and turned on instantly (think of a gas fired kitchen stove) – try that with a coal fired electrical plant as loads change throughout the day.

NG has some practical drawbacks. It does not transport easily. If you find oil some place on the globe it is a fairly simple matter to ship it. Not so NG. In order to ship it, it must be compressed and liquefied, contained under pressure, collected at the delivery point and regasified, and then transported by pipeline to its final destination, the end user. All the while it must be contained and maintained under pressure.

Oil will sit patiently in tanks until you need it. Gas will continually try to escape whatever means one has devised to hold it. Consequently, the U.S. has about 3.2 tcf (trillion cubic feet) of storage – about 50 days supply. As winter lasts longer than 50 days, and we tend to draw down the inventories as winter progresses, it should be obvious that we must therefore rely on current production to provide a cushion of flows to maintain the system’s pressure during the months of peak demand. That reliance might not prove very wise in the relatively near future. If the pressure in a pipeline system for delivering gas should fall below a certain level a great many “pilot lights” will be extinguished. One cannot simply turn the system back on and repressurize the pipeline or NG will be filling houses and buildings and sewers – one little spark…

Now it is winter, it is cold, the heat is off for a day or 2, maybe more. At what point do water pipes start to burst? My first job after college was selling heating oil for my family's business. I can tell you from first hand experience that the attitude of people without heat in their homes leaves much to be desired, and their plumbing problems are manifest. Now we have compounded our technical challenge of reigniting the pilot lights, building by building, and reestablishing pressure in the pipelines with a massive plumbing problem and probable water damage - on a regional scale.

The supply problem is that North America has doubled its drilling activities in the past 5 years, but our extraction rate has remained flat. The new wells we are drilling are declining much faster than those drilled just 8 years ago. What[ is going on here? It is only common sense to drill the easiest and most prolific sites first, and now we are left with the rest.

The NG supply situation needs to be addressed on many levels. But if you rely on NG directly, forewarned is forearmed.

Greg Jeffers

Mentatt (at) yahoo (dot) com

Thursday, November 9, 2006

Ethanol, Shmethanol, get used to riding a bike

Thomas Jeffers & Co., LLC
November 9, 2006

Transportation fuels, for the most part, must be in liquid form. We don’t have a shortage of coal, shale, or bitumen, but we cannot run our transportation infrastructure on them. We need LIQUID fuels to run our cars, trucks, buses, most trains…

Europe, which to it’s credit has gotten out in front on this issue, is not making the cut on using biofuels such as ethanol for its transportation needs.

“The European Union will probably miss a 2010 target to use more alternative fuels, the second time it will fall short in five years, said Hans van Steen, an EU official in charge of promoting renewable energy.
The EU wants biofuels to account for an average of 5.75 percent of transport fuel by 2010, Van Steen told the F.O. Licht World Ethanol Conference in Amsterdam today. The EU set a target of 2 percent for 2005, and member states averaged 1 percent, he said. Biofuels are made from corn, sugar or vegetable oils. The European Union will probably miss a 2010 target to use more alternative fuels, the second time it will fall short in five years, said Hans van Steen, an EU official in charge of promoting renewable energy.
The EU wants biofuels to account for an average of 5.75 percent of transport fuel by 2010, Van Steen told the F.O. Licht World Ethanol Conference in Amsterdam today. The EU set a target of 2 percent for 2005, and member states averaged 1 percent, he said. Biofuels are made from corn, sugar or vegetable oils.” “EU Expects to miss a second date for using biofuels”.

(If there is no pressing problem with future oil supplies, why the push into biofuel liquids?)

It is not that they are not using ethanol, they are, for 1% of their current fuel needs. A big problem is getting the ethanol system to scale. A bigger problem is the amount of fossil fuels used as inputs into the ethanol process contains nearly the same amount of energy as the final ethanol product.

Think about it. How do we grow corn? First we bring in big equipment to clear a field – and what does that equipment run on? Fossil fuels, not ethanol. What energy input was used in manufacturing the equipment? Fossil fuels. What about fertilizing, pesticides, sowing, harvesting, irrigating, processing, and then transporting said corn to the ethanol plant. At each stage of the process fossil fuels were consumed, and the energy from these fossil fuel inputs must be added up and compared to the total energy of the finished ethanol product. Why on earth would anybody do all that work if 1000 units of fossil fuel energy are consumed in order to generate ethanol containing 1000 units energy? Especially when corn prices are at 20-year highs on declining supply and increasing demand? This problem is called the Energy Returned on Energy Invested model, (“ERoEI”)

“Chicago Board of Trade December corn prices hit a new contract high Wednesday at $3.67 a bushel. At 2:00 p.m. EST, December corn was trading at $3.60, representing a gain of nearly 50% since mid-September.” Cattle Network 11.8.06

Let me repeat – a 50% increase in the price of corn in 2 months. Wheat is up 55% this year, and rice is not far behind. These three foodstuffs contribute, directly and indirectly, the majority of the world’s caloric intake. The potential impact on inflation should food prices start competing directly with fuel prices for product is problematic, if I may risk the use of understatment.

There are no easy answers to our energy dilemma. Perhaps one day we will solve the ethanol ERoEI problem, but not today. As I have said many times in previous posts, people will prefer eating to driving. The next time you see some “happy story” on ethanol in the media remember the ERoEI equation – and then wonder who is trying to BS you.

Greg Jeffers

Mentatt (at) yahoo (dot) com

Wednesday, November 8, 2006

hat you don’t know CAN hurt you – bad.

Thomas Jeffers & Co., LLC
November 7, 2006

The people have spoken. You may or may not like what they had to say, but it was hard not to hear. I worked for several campaigns when I was young – I even held elective office for a 2-year term as a councilman (we called them “trustees”) in small town America at a time when our largest employer and taxpayer, General Motors, was pulling up stakes and leaving town. Sometimes the only options available to you are bad and worse. I learned the best advice ever during those 2 years – stay the heck out of politics.

One of the things I like best about the Internet is that it gives people with absolutely no influence a venue to shout into the wind. However, if any of the new members of Congress were to give me 30 minutes to make my pitch it would be this:

America faces a permanent Natural Gas (“NG”) shortage in the near term, perhaps as early as winter 2008. The continent has approximately 9 years of reserves at today’s level of consumption and therein lies the rub: We will not be able to produce the NG at today’s level of consumption. Production will decline each and every year from NOW ON. Life Sentence, No Back Room Deals, No Recall Vote, No Tax Credits… No earthly power is going to change this unfortunate circumstance, and it is not up for debate. Yes, we will find new reserves, no we will not "run out" of NG in 9 years, or 15, or even 25 years. That is not how hydrocarbon extraction works, We will simply have a little less, each year, and every year, of NG to work with. Yet we would have demanded more and more if it were available.

We cannot even engage our usual fall back position of relying on imports. We don’t have the Liquid NG infrastructure here in North America and the potential exporters do not have the infrastructure on their end, either. And even if we could rely on imports – do we want to put ourselves in that position? Well, that is a policy decision and I will defer to you, Members of Congress. But don’t worry, you are decades away from being able to put yourself in a position of relying on others for NG – and by then they might not be willing to sell the NG to us in any event.

We won’t run out of NG in 9 years – because we will not be able to extract the NG at the same pace as 2006. The extraction rate will decline each year, stretching out the time between here and empty – but not increasing the total NG extracted.

NG accounts for just over 25% of electricity generated in the U.S., and nearly 60% of the country’s space heating needs, and these inputs are coming to a close (well, for the most part) by 2020. Besides being grumpy from being cold and dimly lit, the economy is going to reel from the effects of NG’s decline.

Right on the heels of the NG crisis comes the peak in world oil production. No, we are not going to run out of oil. We are going to have less and less available in the aggregate starting sometime between now and, lets say 2010, and, in any event –WE WILL HAVE LESS AND LESS AVAILABLE ON A PER CAPITA BASIS FROM THIS POINT FORWARD. That will be followed by a permanent pattern of declining availability of liquid petroleum products.

Despite the best efforts of the automobile and oil industries to generate misinformation it has become accepted scientific theory that the carbon released into the atmosphere from all of the hydrocarbons we burn is causing some significant negative climate change and all of the economic models for continued growth require an ever increasing amount of hydrocarbons to be burned. Even if we had unlimited oil and gas to burn – at some point we would have to stop doing so, or risk the world’s food supply, coastal areas, fresh water…

Yes, we have plenty of coal. Anybody remember Rickets? Only partly kidding. Yes, we have “clean coal” technology – an oxymoron if ever there was one, but without carbon sequestration technology and infrastructure this is quite moot.

Ethanol is a net energy loser. If it were energy positive, ethanol plants would run on ethanol – not fossil fuels. We have had access to alcohol for thousands of years, without anyone figuring out how to harness it mechanically to scale. Oil dominated the planet in less than 150 years (Col. Drake’s well, 1859).

Hydrogen is the equivalent of energy jail-bait. It consumes more than it contains and, by the way, you guys ever hear of the Hindenburg disaster? We would not need tow trucks to clear accident scenes. Bulldozers, maybe, to fill in those 90 foot craters, but not tow trucks.

If you purposely slow the economy to slow consumption of fossil fuels to give technology a chance to develop you might destroy the financial markets and real estate markets, the U.S. Dollar, and other various and sundry unintended consequences. If you do not, at some point in the very near future geology will do it for you – but the rubber band will be stretched that much more.

Then there are those pesky trade and budget deficits, You will want to reward your constituents in the time-honored manner of dipping into the public trough. Declining energy availability is going to be tough on tax receipts doing no favors for the federal budget deficit, and as energy prices rise we will need to borrow more and more to finance our international energy purchases, tightening that other rubber band, the trade deficit, but If you don’t reward your constituents, you won’t be around after the next election…

So as one astute observer of the game asked about the federal government's stratregy on the present energy front "WIll it be an organized retreat or a forced march back?" Don't count on the Department of Energy to solve this for you. When they were commissioned in the late 1970's the U.S. was importing less than 1/4 of it's oil. We now inport almost 2/3, leaving us one terrorist attack, one embargo, one ploitical flap, one geological miscalculation away from economic disaster.

Or you could ignore all of this, call me a quack, and hope it all goes away. Heck, that strategy worked for the past 30 years, should be good for another 30, right?

Oh, and by the way… Congratulations!

Greg Jeffers

Mentatt (at) yahoo (dot) com
Between a Rock and a Hard Place

The U.S. Financial System is predicated on the continued growth of the economy, as well as a consistent level of continued inflation.

Each week, the investing public is pummeled with data: Housing starts, auto sales, chip sales… a myriad of reports on the numbers of widgets sold in a given time frame the aggregate of which is the gross domestic production (“GDP”) of the U.S. economy. Still, to my mind, nothing sums it all up like “housing/autos”. The correlation between the performance of each other and the overall economy is complete.

Can “housing/autos”, and by extension, the U.S. economy, grow if oil and natural gas production/imports cease growing? Not for long. Are we at that critical juncture at this moment? The data do not look encouraging. So let’s examine the likely consequences resulting should this sad state come to pass circa 2006-07. In no particular order, this would include, but not be limited to:

1. The U.S. budget deficit would explode
2. At some point after this, foreign investors would cease to fund U.S. debt
3. The price of imports would soar. Today’s $60 sneakers from China might be $200
4. Interest rates would have to rise high enough for domestic savers to be encouraged to save enough to fund our debts.
5. The purchasing power of the dollar would plummet
6. Unemployment would rise substantially
7. Mortgage defaults would rise substantially
8. The cost of food and energy would rise substantially
9. The financial markets would get rocked
10. The housing and auto industries would collapse
11. Vacancy rates of commercial properties would rise to unprecedented levels

Our financial system is more leveraged, by far, than it has ever been. In 1970, the share of the Standard & Poors 500 Index total earnings represented by financial institutions was about 5% - today that number is approximately 50% if averaged over the 5 year period 2001-2005. From “Rosey the Riviter” of the 1940’s and 50’s, when roughly half of the manufactured goods sold in the international trade bore a “Made in America” stamp, America has become a nation of money lenders, stockbrokers, insurance, and real estate salesmen – with the token contractor thrown in for good measure. This is not a rant about politics. This rant is about the exposure we have constructed for ourselves in the 21st Century American economy. Any shock to the financial system will devastate our present day economy in ways that would not have been possible 30 years ago. Like it or not, we are conducting an experiment in uncharted territory the many possible outcomes of which leave much to be desired, to say the least. And an “energy tsunami” is headed our way.

What to do? I am precluded from making specific strategy recommendations in this forum. However, you can educate yourself – and filter the flow of misinformation from the spoon-feeding media that might be clouding your judgment. Most of the data that really matters on energy is to be found at a couple of government agency web sites, the Energy Information Administration of the U.S. Dept. of Energy and Europe’s International Energy Agency. Some very worthwhile consumption data is available from the BP Statistical Review (it would be best to disregard BP’s reserve data in my opinion. Non of the reserve data is independently audited or verified – BP merely reports the data provided by the various Oil producing nations, none of whom have an incentive to tell the truth). Get a copy of the “Hirsch Report” issued by the U.S. Dept. of Energy in February 2005 (which likely prompted the “America is addicted to Oil” speech). You can spend some time at the websites - and – great stuff. Scientific papers from the major research universities are available on line. If you email me, I will be happy to send you what I feel most pertinent.

Menatt (at) yahoo (dot) com

Thursday, November 2, 2006

Something doesn’t add up

Thomas Jeffers & Company, LLC

It is estimated that over 600 million passenger cars roam the planet in 2006. For the moment let’s forget about the number of trucks and aircraft and work with these numbers: freight consumes 30% of liquid fuels, and aviation 10%.

It is “conservatively” estimated that by 2030 (data from Exxon CEO Lee Raymond, November 4, 2004, American Chamber of Commerce) Asia will have 400 million cars, North America 300 million, Europe 300 million, South America 150 million and Africa 50 million. In other words, we are going to double the world automobile fleet in 23 years. Let’s assume that freight and aviation growth is proportionate.

Currently, the 2006 world auto, freight, and aviation fleet, consumes about 90% of the world’s daily liquid petroleum production of 84 million+ barrels.

Please! Don’t bother me with fuel efficiency gains (product cycle is 5 years minimum in autos). Everything being equal, we would need to maintain production, without any declines (currently between 4% and 6%) in the existing oil fields, and then discover, develop, and produce 10 NEW SAUDI ARABIAS IN THE NEXT 23 YEARS – A NEW SAUDI ARABIA EVERY 2.3 YEARS!!! Mind you, that is just 5% per year growth in the Automobile industry. Considering Asia’s economies are “projected’ (by whom?) to grow, on average, over 6% per year until 2030, this is not an outlandish assumption. Except for one small problem. It is not possible.

Forget CO2 emissions. Forget inadequate supplies of raw materials such as iron, copper, zink, and rubber. Forget paving over a substantial portion of the world’s remaining arable land for roads, highways, and parking lots. We don’t have to go there. This forecast would have the world consuming over 700 billion barrels of oil during the decade following 2030, 600 or so billion between 2020 and the end of that decade, and 450 billion or so between 2007 and 2019. Well, that ain’t gonna happen, UNDER ANY CIRCUMSTANCE.

But if you read the pasture muffins being promulgated by the various auto manufactures as to their future growth prospects – well, this is what they are telling their investors.

Want to see me do the same trick with housing numbers? They don’t add up, either.

What does it all mean? A great deal, I’m afraid.

Greg Jeffers

Menatt (at) yahoo (dot) com
Paradigm Shift

The energy conundrum discussed at this past weekend’s ASPO conference at Boston University was primarily directed at governments and the scientific and environmentalist communities. Let’s examine how this might affect the U.S. Economy and Financial Markets.

National Security

The U.S. Dollar is the world’s reserve currency, not least of which is because of the political security we enjoy. Yes we have a nasty and hotly contested election before us – but there will be no gunfire. Much of the world can’t say as much. With our trade and budget deficits our currency relies on our political hegemony. Can we maintain U.S. hegemony while increasing our reliance on foreign energy supplies? Not unless we are able to export enough to pay for our imports – we currently borrow $1 BILLION per day to finance our international energy purchases.

"The U.S. has only two percent of world oil reserves. We consume 25 percent of world oil production. We contribute eight percent of world oil production. That means we're pumping our reserves four times faster than the rest of the world. U.S. natural gas production has also peaked. The United States is now the world's largest importer of both oil and natural gas. From importing one third of the oil we use before the Arab Oil Embargo, the U.S. now imports about two thirds of the oil we use. Oil and natural gas production in Texas declined five percent in the first nine months of 2005. We're sliding down Hubbert's Peak.” And “We are just on the verge of not being able to feed the world. Tonight about one-fifth of the world will go to bed hungry." - Congressman Roscoe Bartlett on the U.S. House floor.

We continue to deplete our domestic reserves faster than the rest of the world depletes their respective domestic reserves.

The victors of WWII, the allies dominated by the U.S. and U.S.S.R. – these 2 countries were the largest oil producing countries in the world at the time. The vanquished? Germany and Japan - had no domestic oil supplies with which to prosecute the war. Can the U.S. maintain security while emptying its reserves? One thing is certain - countries barren of Oil do not have a great track record as superpowers.

Food Security

As I have related in recent posts, the world is experiencing flat to declining food production while at the same time its population is growing – so much so that world wide inventories of wheat and corn and rice (in terms of days of supply) are at multi decade lows, and the price of these commodities is at new highs. The questions are: Why is this happening? Is the trend continuing? It has been reported that if the next 2 crop years are as poor in yield as 2006 that the world will be in a full fledged food crisis. If true, and the data are compelling, we can expect a tremendous bout of inflation as the average American family spends much more on food than on gasoline, and a concomitant hike in short rates by certain central banks.

Worldwide wheat inventories are at 57 days of supply, corn is at 31 days of supply.

“To put the 57 days in historical perspective, the world price for wheat went up six-fold in 1973, the last time reserves were this low. Wheat prices ricocheted through the food supply chain in many ways, from higher prices for cereal and breads eaten directly by humans, to the cost for milk and meat produced from livestock fed a grain-based diet. If such a chain reaction happens this year, wheat could fetch $21 a bushel, again about six times its current price. It might fetch even more, given that there are two other pressing demands for grains that were not as forceful during the 1970s. Those happy days pre-dated modern fads such as using grains as a feedstock for ethanol, now touted as an alternative to petroleum fuels for cars, and pre-dated factory barns that bring grains to an animal’s stall, thereby eliminating farm workers who tended livestock while they grazed in fields on pasture grasses.” Wayne Roberts

For those of you old enough to remember the 1970’s, inflation, driven by food and energy, increased at the greatest rate in U.S. history. Inflation is a disaster for an economy, but if you play it right, it can make you rich, or at least negate its ill effects on you. Even if the markets crash and we must walk instead of ride, we still must make a living.

Financial Security

This may sound odd, but I think the best way to say what I have learned in my 2 decades- plus in the financial services business is this: You make money by not LOSING it. Think about it – how would your portfolio have done if you could go back in time and take out all the losers. Pretty good, huh? Well, we can’t. That’s why we diversify. Heck, if you were never wrong, diversification would be the last thing one would do. Here is where I am going. If energy becomes as constrained as the scientists presenting at the BU Peak Oil Conference suggest, then, without question, the upheaval in the markets will be stunning. I am precluded from making specific strategy recommendations in this forum but you can ask yourself, and research for yourself (or just call me): what assets held their values during times of turmoil? Plenty of examples of where to look. What still had value in post-war Germany and Japan and post-collapse of the Soviet Union. No, things will not be that bad here, of course, but the lessons are of value.

Maybe you think I am all wet and that there is plenty of Oil just waiting to be found in shallow deposits and good climate. Then why are we looking in 20,000 feet of water and 7000 feet of earth, 200 miles from shore? Why are we fighting over the North Shore so badly? Why are we even CONSIDERING a nuclear reactor in Alberta, Canada, to supply the necessary energy to convert the Tar Sands into a liquid. These are capitally intensive, expensive, and environmentally costly projects. If there were other projects available, I contend we would be doing them, instead. The circumstantial evidence is compelling. Between the price gains of recent years and the industries actions, I would vote to convict.

''You look at the globe and ask, 'Where are the big increments?' and there's hardly anything but Saudi Arabia. The kingdom and the Ghawar field are not the problem. That misses the whole point. The problem is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004. You're leaping by two million to three million a year, and if you have to cover declines, that's another four to five million.'' In other words, if demand and depletion patterns continue, every year the world will need to open enough fields or wells to pump an additional six to eight million barrels a day -- at least two million new barrels a day to meet the rising demand and at least four million to compensate for the declining production of existing fields. ''That's like a whole new Saudi Arabia every couple of years… It can't be done indefinitely. It's not sustainable.” - Sadad al Husseini, recently retired head of exploration and production for Saudi Aramco

"Consider this simple math. If Ken Deffeyes (Professor of Geology, Princeton University) is correct that the world oil production peaked in December, 2005, then we will use--at our current rate of consumption--more than 10% of all remaining conventional crude + condensate reserves in the next four years." -Jeffrey J. Brown is a petroleum geologist in the Dallas, Texas area.

This story will unfold over the next decade – not next month. But markets discount the environment going forward – they do not look in the rearview mirror (if they did, those “technical analysts” would be a lot wealthier than they are). Being aware of this paradigm shift and up to date on the data will give you an edge. In any transaction there is a buyer and a seller, and only one of them gets to be right.

Greg Jeffers

Menatt (at) yahoo (dot) com