Sunday, December 30, 2007

The following is a guest post by my good friend Dr. Saif K. Lalani of Vanderbilt University

by Saif Lalani
December 28, 2007

It is now clear now to anyone with at least a double digit I.Q. that the world oil production is at or near its maximum potential. Peak Oil will bring with it a host of new problems for the world's central banks. Rest assured that they do not have a Plan B to deal with ever rising prices of food and energy. With the way they are currently handling the housing crisis it does not seem that they even have a Plan A.

At some point in the near future the world's central banks will have to learn the difference between Geology and Economics. To my knowledge there are no central bankers with a major in one and a minor in the other. Absurd? Not really. Since oil is the lifeblood that keeps the world rolling one would hope that someone currently in power would have been enchanted with these two fields of study. (BTW the protagonists in the timeless classic “Atlas Shrugged” majored in 2 such apparently conflicting fields, Physics and Philosophy simultaneously). One teaches that the well once dry is dry. The other teaches that if we stand in front of the dry well with a large enough check, things can change. Hence their inability to understand the intractability of the problem.

There are currently 2 major schools of thought on how Peak oil will affect prices of things in general, the major concern for central banks. The first is that since oil is so essential for production and transportation of almost all things, the prices of everything will head to the stratosphere. The second and not so popular version is that once businesses acknowledge peak oil, spending and hiring will “collapse” resulting in deflationary forces that will match and even exceed the downward march in oil availability. I personally believe that we will have massive inflation in prices of everything essential and massive deflation in everything discretionary.

So what should the central bankers endeavor to do during the coming turbulent times?

Lets start as all physicians do. First, do no harm. Sounds quite simple but it isn't. Central bankers have egos as large as football fields. They think they can save the housing market, stock market, solve the energy crisis, cure cancer, make it rain and part the seas by slightly tweaking interest rates. Central banks need to understand what they can and what they cannot control. Trying to save sprawling suburbs with 0% interest rate policy is probably going to be less effective than trying to arrange good public transportation preferably in the form of electrified rail.

Second, publicly acknowledge peak oil. Do not put some technocrap spin on it. Tell it for what it is. Can you imagine the progress we would have made if one prominent central banker would have said this even 2-3 years back? Prepare the world for hardship. It is going to come regardless what they may say.

Third, ensure that loans are available for energy projects with a positive EROEI (energy returned on energy invested). Peak oil is likely to stress the banking sector to levels unseen since the great depression. Remember extremes can occur in both directions. Whereas once banks thought it made sense to extend no documentation loans to people to buy insanely expensive properties, they may not even fund good sound energy projects in the future. The fed and other central banks could in this case lend directly to fund such projects. Since energy prices would be the main reason for unemployment and inflation this would fall within their mandate. It is important to stress that positive EROEI is very important otherwise every action will just lead us into a deeper hole. They would likely need help with assessing EROEI but should have no problem in obtaining such help.

Fourth, do not attempt to rescue the dying industries. Detroit automakers, airlines and travel and tourism in general will come under increasing stress. The first 2 could not make money when oil was under $20 a barrel and will certainly not be able to survive for long without help in the future. There will be increasing pressure to “do something” about it. The Fed must resist the urge to help out. No rescue package for airline bonds or GM's junk paper will make an iota of a difference in the long run. Might as well fund an extra geothermal project with the money.

Finally it is paramount that we have honesty in statistics. The fed and other central banks need to report correct unadjusted inflation and GDP statistics. This will allow us to assess the actual impact of the problem and effects of the solutions we may try to implement.

I would like to end by thanking the central banks for making it a truly wonderful and entertaining

12 days of Christmas

On the 12th day of Christmas look what my true dove brought for me
Mortgage lenders with just no brains
Angry Crammer who never informs but always entertains
Never ending one time write-downs
Bank CEOS moonlighting as clowns
Surging food grain prices
Unsolvable housing crisis
Falling US dollar
Restaurant portions that keep getting smaller
3 rate cuts that messed up things
Gold prices that got wings
Double prices for milk and cream
And a C.P.I. report that said this was all just a bad dream.

Happy New Year to All

This post has been used by permission. © Saif K. Lalani

Saturday, December 29, 2007

“Letting the cat out of the bag is a whole lot easier than getting it back in” – an Old Country Saying

Hillary Clinton told the American people that if you vote for her the price of gasoline would go down because she is going to scare the oil exporting countries into producing more oil and dropping their price.

Why is it so hard for the political establishment to come clean with the American people?

Silly question.

What would you do if you knew for absolutely, positively, without question sure that the world was entering a period of permanent decline in energy availability? What would happen if EVERYONE, EVERYWHERE was also sure? Wouldn’t you/they behave differently? Maybe… very differently? It’s impossible to know what that means exactly, but it means something, and politicians are in the business of getting elected, not forecasting or predicting future events, especially if that future is not what the electorate wants to hear.

So they lie to us.

In mathematics the transitive property states: if a = b and b = c then a = c

So if politicians lie to us to get elected, and we in turn elect them, then it seems reasonable that they would continue to lie to us after their election. But claiming that as President, Hillary would have the power to lower gasoline prices boggles the mind (I read the U.S. Constitution in its entirety, nothing there about gasoline price powers). Now if as President, Clinton would double the price of gasoline by raising sales and use taxes on the commodity this would drive demand for gasoline down and hence the demand and price for crude oil (Contrary to popular belief gasoline and crude oil are not one and the same). If Clinton had the power to arbitrarily lower gasoline prices, wouldn’t that increase demand for gasoline? Hillary Clinton attended the best universities, so I am going to take a leap here and assume that she has some knowledge of basic economic principals, and that she knows full well that her claim is an out right lie… but I am going to bet that the tactic works, that this will bring more of the electorate to her camp, and furthering the belief that lying is an effective campaign and political strategy for those seeking office.

By the way, our political establishment assures us that everything is peachy concerning our energy. Should we believe them?

Yours for living in interesting times,

Mentatt (at) yahoo (d0t) com

Friday, December 28, 2007

OK. I’m back.

Year-end is as good a time as any to take stock. Let’s see now…

The U.S. dollar has gotten creamed.

Crude Oil trades just shy of $100.

Gold is rocking in response to the $. Silver, too.

Housing has a severe pneumonia.

Agricultural commodities like wheat, soybeans, and corn are trading at record, or near record prices.

If you have been reading my stuff for a while this is all check, check, and check…

Now for 2008:

Nothing new:

The U.S. dollar continues to weaken versus commodities and the currencies of oil exporters (versus the Euro? No opinion because it just isn’t that important – unless you are a currency trader).

Crude trades over $100, with a high of $140, and a low of $75 (I had dinner last night with FireAngel of fame and he felt $165 was very possible. His calls have been nothing short of prescient, so I moved my own projection up from $130. Brave of me, no?).

Gold and Silver continue to appreciate against the $.

Corn trades higher in sympathy with oil and natural gas. Soybeans and wheat? Tough call.

For the U.S. economy:

In Nominal Dollars, no recession if oil supplies are equal to or surpass 2007. In Real Dollars we might be in a recession right now. The data for inflation, the GDP deflator, money supply, etc… is so disparate (it doesn’t add up) and unwieldy that Alexander the Great and his pesky Gordian Knot pale by comparison.

The Great Unknown is the response to the U.N.’s International Panel on Climate Change’s final report to the General Assembly. I don’t care how many Larry Kudlow, pooh-bah jerks the deniers line up to mock those tree hugging scientists, this issue is going to be big - REALLY big. Like rationing electricity big. Or leaving coal in the ground unburned big. BIG.

I am back and will be posting regularly and I wish for you and yours a happy, healthy, and prosperous new year!

Mentatt (at) yahoo (d0t) com

Friday, December 21, 2007

Follow up on Aristotle Onassis’ famous quip

On my December 13, 2007 post I quoted Aristotle Onassis, a keen observer of the human condition, in his most famous remark:

“If women didn't exist, all the money in the world would have no meaning.”

I got a remarkable amount of email from testosterone challenged men and women who likely don’t shave their underarms lambasting me for insinuating that Alpha Males, driven to compete by the need for female sexuality, were a significant portion of the problem that has led us to the 2 sides of the same problem coin, “Peak Oil” and “Climate Change”. I wasn’t insinuating at all – I was stating this as firm conviction.

Several days later, this article was linked to the’s web site. I wonder if the good professor received as much flack as I? I wonder if he will lose his tenured position for observing the obvious?

Folks, what is the purpose of hair dye, breast implants, cosmetic dentistry, high heels, make-up, and beauty magazines (all OK with me. Actually at my age a dimmer switch is probably the best cosmetic)? Are these not the Ovarian American’s response to the Estrogen Challenged American’s instruments of status such as high priced automobiles, mansions, and exquisite tailoring? I am not suggesting that ALL Ovarian Americans and ALL Estrogen Challenged Americans use these tools to further their interests, but as anyone who has ever killed a little time at the magazine rack at the airport will agree: Though there are dozens of rags targeting the American Bride, have you ever heard of “Groom” magazine?

Yours for a better post fossil fuel and post politically correct world,

Mentatt (at) yahoo (d0t) com

Thursday, December 20, 2007

Apocalypse Delayed

Despite the mortgage meltdown and housing crash, the U.S. economy will likely not enter a terrible recession in 2008.

At the end of 2006 I wrote that 2007 would likely see a recession brought about by the housing crash and much higher oil prices. Perhaps we are in a recession right now or perhaps I was close, but no cigar.

So here is the deal for 2008:

For the U.S., it is all about OIL SUPPLIES, not oil prices. If oil in the world markets is there and available for the U.S. to import, there will likely be no recession and a decent gain in the stock market of between 8 and 12 %. At this moment, I would be willing to bet that the oil will be there for 2008, because we have some big projects coming on line around the world and the restarting of Thunder Horse in the Gulf of Mexico. I think these projects will yield more production than the decline in the established fields from depletion.

I am also assuming that 2008 will be the year that supplies of “All Liquids” (petroleum) will peak for purposes of establishing an investing and trading schematic. Perhaps the peak in crude and condensate will remain 2005, and perhaps not. I am not predicting nor forecasting. That is for the guys at organizations like ASPO and CERA to do. It had appeared that 2006 would be the peak in all liquids but a large increase in production of natural gas plant liquids (“NGPLs”) in November appears to have changed that, and, no I am not concerned with monthly “peaks” but yearly averages. Even if 2008 does not eclipse 2006 it will be close enough for our purposes here.

Unless, of course, I am wrong: If world oil production should actually decline in 2008, and/or if U.S. imports should decline, all bets are off. The U.S. would enter a steep recession, the markets would get clobbered, and oil prices would send you in to sticker shock.

Either way, housing will not recover in 2008, and housing in South Florida will NEVER recover. I live here in South Florida. I wrote to our clients in 2005 that the South Florida housing market was doomed to a 10 year correction. We are 2 years into that correction, and unfortunately, the energy crisis will strike the U.S. before South Florida has a chance to begin recovering. South Florida is entirely dependent upon cheap gasoline for commuting and tourism, and electricity for cooling of homes, workplaces, shopping malls, etc... Electricity is going to be rationed here before the last 8 years of the correction is complete. So I repeat: If you have an extra single family home or 2 in South Florida, get what you can NOW (in my humble opinion), because like it or not, things are going to enter the surreal over the next several years for housing in this market.

I would expect oil prices to be exceptionally volitile, with a range for front month contract between $70 and $130. If you are a trader, this is going to test your intestinal fortitude.

Now that I have waffled at least as well as any politician… We are in the “Land of the Philistines”, with the U.S. economy and financial markets entirely dependant on supplies of imported oil. This is the one crucial data point, and everything else you read, hear, or see in the financial media is a “puff piece”.

Mentatt (at) yahoo (d0t) come

Monday, December 17, 2007


In a recent post I misquoted a study of agricultural output in which I stated:

“It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food.”

My apologies, 80% of the cost bringing certain agricultural products to market was fossil fuels, not 80% of retail food prices. I knew I must have made a mistake while reading Stuart Staniford’s excellent piece on retail food prices at

Chastised though I was for my error, I was very happy to see a top “Peak Oil” analyst who agrees with me that the food situation in the U.S. is not going to lead DIRECTLY to hunger and anarchy (hunger is a societal/economic problem in the U.S. There is certainly more than enough to feed the population), though neither he nor I are quite so sanguine about the rest of the world.

This is not to say that food inflation is not a serious issue - it is. Nor am I suggesting that 10 years hence the issue could not become much more acute - it could. I AM suggesting that we (you know, the people) will respond as our parents and grand parents did during the great wars of the 20th century. We will figure it out and grow enough of our own food to make up for the decline in industrial agricultural output. For a resident of my hometown of Boca Raton, or Beverly Hills, or some such other rarified community might think this is the end of the world, but it ain’t.

No, I believe that in the U.S., the “Peak Oil” issue is going to be felt initially in the form of a violent economic contraction. Yes, food will be very, very expensive, but there will be enough of it, as far as the impacts of Peak Oil (I have no opinion on the effects of climate change, genetically modified seeds, etc… Oil is all the worry I can handle at the moment, folks).

I will be taking the next week or so off to enjoy some time with family and friends.

Mentatt (at) yahoo (d0t) com

Sunday, December 16, 2007

Green. The color for those who cannot count (and I am not talking about money)

I can’t help myself. I will confess. I still subscribe to “Fortune Magazine” (among other rags of the financial press). Maybe I have a touch of the masochistic, or maybe old habits die hard. Whatever the case, I invest for a living so I read this stuff.

For the December 24, 2008 issue “Investor’s Guide 2008”, most of the first 20 pages contain advertising for all things “Green”.

“The Most Fuel Efficient SUV On Earth”, - Ford Motor Company

“Waste Management is using the resources our disposal to create the energy equivalent of saving over 14 million barrels of oil per year” - Waste Management

“Our Plans for Bio-Fuels Are Growing” British Petroleum

And my personal favorite…

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his McMansion holding a cup of coffee, his Wall Street Journal tucked under his arm and a shit-eating-grin on his face because he just saved the flipping planet by using materials to build his house from the Sustainable Forestry Initiative.

The silliness did not end there, but you get the point.

The Editors have absolutely no problem throwing their readership “under the bus”. Considering the volume of reporting in the past 60 days on the impending oil import crisis, price signals from the oil markets, and countless academic papers on the issues, there is NO CHANCE that the editors are not aware that this is all harmful propaganda for their readers, their PAYING readers. “Sorry, dear reader, the advertiser paid more. And by the way, when you get blown up in the market, we’ll report on that, too. Hey, we aren’t analysts here, we are just journalists.”

The powers that be will continue this charade for as long as possible. Their net worth depends on it. They need to convince you that the markets will continue to function as they have, money supply will continue to grow, technology will trump physics regarding our energy consumption, etc… so that they can SELL YOU their paper assets before they decline in real value any more. That’s the game, the story, and the strategy. If you fall for it, you will look back on this BS in 10 years and wonder how you could have been so dumb.

There is no such thing as a fuel efficient SUV, any more than the tooth fairy.

Waster Management is full of baloney. The methane from the refuse they are talking about equals 14 million barrels of oil equivalent? Maybe. Anybody care to guess how many HUNDREDS of MILLIONS of barrels of oil were wasted in creating that waste? Certainly not Waste Management.

And the cute, double entendre of British Petroleum for growing Bio-Fuels (complete with a picture of a corn stalk)? Get a new schtick, guys. No one, not even the great unwashed, believes that one anymore. Still, you have got to give them credit for their stick-to-it-ivness.

But can you imagine the financial press foretelling the situation accurately? We would have to adjust my favorite advertisement to:

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his 800 square foot, well insulated home, which is getting by with its ration of electricity by having a college dorm size fridge, and a grand total of 10 compact fluorescent light bulbs fixing his bicycle or waiting for public transportation. Don’t even ask about AC…

This is where we are going, folks. This is what it means to our lifestyle if we accept, and even if we don’t accept, the U.N.’s IPCC analysis on carbon emissions and the realities of the impending oil import crisis. If you have the means, the motivation, and the intellect, there is much you can do to improve your circumstances. There is little your government is going to do for you. Spending time waiting for the government to solve this with a tooth fairy, techno fix is a fool’s errand. Personal responsibility is going to take on a whole new level of meaning in the brave new energy/carbon constrained world we are entering.

The 1960’s slogan: “Question Authority” needs revision…

Question and Doubt EVERYTHING the media says.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Saturday, December 15, 2007

Politics as usual

Anyone, right or left, Democrat or Republican (I am lifelong anti big-government Libertarian Republican. You might find that a contradiction in terms considering my firm belief that ONLY government can do anything about Climate Change. I think not. Only a moron believes in NO government) listening to the debate over Climate Change (“CC”) and the U.S. Administration’s seemingly deranged approach to the negotiation would do well to take a stroll down memory (history) lane. The political realities are such that those in power and wealth at this time in our history have never been more powerful, relative to the masses, and have been endowed with wealth beyond the wildest DREAMS of our ancestral establishment members.

The 7 original states of the Confederacy, later joined by an additional 4, made WAR with and upon the U.S. government resulting in the slaughter of over 600,000 individuals (a rather significant percentage of the free population of 27,500,000) rather than give up their position of primacy while attempting to defend the indefensible – slavery.

“Meet the new boss, same as the old boss” – from The Who’s “We won’t get fooled again”

Of course we will get fooled again. Or maybe just bullied. It is all semantics, really.

We are in a pitched battle. Unfortunately, only one side in this battle for safety of the world is armed, and it ain’t us – at least at the moment. I am hopeful for a turn for the better in this regard. Not a perfect solution, mind you, but perhaps an increasingly better operating environment over time, because this might be the very definition of the “Universal Issue”. After all, there is no wealth, no power, no sex, no influence, no sex (“you said sex twice” to which I replied “I like sex”, paraphrasing Monty Python), if there is no livable environment.

A U.N. spokesman said yesterday that the Bali negotiations "were a beginning, not an end", and when the U.S. appeared to be losing (any) control, as well as any credibility, of the outcome the U.S. delegation rolled over. What does the U.N. mean we are beginning? The end of coal usage? Because in order to meet the IPCC's final determination would mean the END of coal use, while continuing Oil and Natural Gas use with either natural depletion doing the job for us, or some kind of regulatory impediment to their use. All of which means a significant contraction in the world's aggregate wealth, and while the poor would certainly feel this most severely in real terms, the fall from power that the world's super rich fear is the primary "fly in the ointment" holding reform back. If you doubt this, let me ask you something: Do you think consideration for the world's poor is what is holding our political institutions back? Give me a break.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Friday, December 14, 2007

“Unintended Consequences” meets “Cost/Benefit Analysis”

Well, they sort of meet. Perhaps I should say Unintended Consequences DOES NOT MEET Cost/Benefit Analysis/

Cost/Benefit Analysis (“CBA”) simply is not done in America with the exception of an occasional stab by business (Corporate America is TERRIFIED of CBA because it might hold up to the harsh light of day that for the most part Corporations get very, very, very little benefit and a great deal of cost from their CEOs; more on this later).

Unintended consequences (“UC”) is what it is – an outcome, result, or side effect of an action or actions.

Now imagine the UC’s of a standard operating procedure of no CBA and you have just described our political, justice, economic, healthcare, financial markets, and energy policies. Why? Because CBA’s are not warm and fuzzy! They deal with the harsh realities of life. What policy maker is going to stand up to the microphone and say:

“Expending 60% of America’s healthcare dollars on the final 3 weeks of life of the terminally ill adds nothing to the quality of their life and prevents us from doing many positive things, so we are not going to do it anymore. If you are this sick, you are going to die.”

Or a surgeon tell a patient:

“You have a tumor in your prostate. We are not going to operate because 90% of time you are going to die of something else, long before you might die from cancer of the prostate. If we do the surgery, you are more than likely to be impotent for the rest of your life. Further, we will save the system a ton of money.”

Politicians and cancer surgeons are in the business of telling people what they WANT to hear, and then stripping someone else of the cash (tax payer or you and me by way of our insurance provider) to fund the activity.

One of my personal favorites: Somehow the U.S. has wound up with the highest percentage of its peacetime population in prison in the history of mankind. Now, that is a strong statement, considering we had some pretty tough competition from Russia, Cuba, Saddam era Iraq, and China. Still, somehow we pulled it off. And what do we get for our efforts? Plenty of crime and a huge financial liability to fund our massive justice and prison system. But you won’t see any lawyers trying to right this ship (or our crazy divorce and family law which only serves to hurt everyone concerned, except the lawyers), because it works just fine for them and their bank account.

Do I have to mention car accidents (26,347 deaths per year)? Obesity and physical inactivity (365,000 deaths per year)? Tobacco (435,000 deaths per year). Alcohol (85,000 deaths per year)? Yet we spend more money on the war on drugs than prevention for all of these combined, while less than 17,500 people per year die of drug overdoses. But how can lawyers and the rest of our embarrassment of a legal system make money preventing car accident deaths or obesity deaths? Believe me, if they could, drugs would be legal and we would be handing out stiff prison sentences to those who put us in danger with their aggressive driving or fat fuckers standing in line at McDonalds.

Anyway, rant over. The point is our government does things on the policy level with absolutely no consideration towards the cost versus the benefit of any given course of action, only the cost versus VOTES they can garner. You can bet your LIFE the U.S. federal government will not engage in CBA as it regards our energy policy until well after it is too late. I imagine it will be the same story for climate change.

“Lord, grant me the power to change the things I can, accept the things I can’t, and the power to ignore the dumbasses that surround me…”

Mentatt (at) yahoo (d0t) com

Thursday, December 13, 2007

“If women didn't exist, all the money in the world would have no meaning.” Aristotle Onassis

Ponder that for a moment.

Have you given that enough thought? Good. That line sums up why a “Power Down” will never happen. Why we will drive right over the cliff with our foot on the gas pedal, and why we will fight all the way down the back side of Hubbert’s Peak. It’s why communism doesn’t work, why we make war, and why Helen launched a thousand ships.

Don’t get it? Perhaps you are wondering what the hell I am talking about? I’ll give you a clue:

The alpha male took that as a given.

Mentatt (at) yahoo (d0t) com
EIA Monthly World Oil Production for September 2007 Just Released

The world’s oil fields had a pretty good month in September, according to the U.S. Dept. of Energy’s Energy Information Administration. A nearly 1 million barrel-per-day increase over August in crude and condensate production, still the trend remains: Average daily production world crude and condensate production by year:

2005 = 73,807,000
2006 = 73,539,000
2007 = 73,134,000

Since July 2007 U.S. inventories have declined by nearly 12%, and OECD inventories have declined somewhat more. Prices have risen 40% or so. I look forward to the supply data for the period 7/07 – 12/07 with great anticipation, and will recast it along with inventory and consumption data and price action. At the moment, something appears amiss in the data compiling, or the price inelasticity of oil is much worse than had been previously believed. In addition, it would take perhaps another 6 to 12 months to determine if any new “production” from OPEC was an actual increase in production or a drawdown in OPEC inventories. OPEC (Saudi Arabia) is none to helpful in this regard.

On another note, yesterday’s coordinated activity of world Central Banks is conclusive proof that a potential dollar crisis has the powers that be running for clean underwear.

Yours for a better world,

Mentatt at yahoo (d0t) com

Wednesday, December 12, 2007

The front page, center column, of the Wall Street Journal this morning:

“Saudi Industrial Drive Strains Oil-Export Role”

I would very much like to congratulate the many contributors to the “Peak Oil” discussion at and for their part in making the American people, and the citizens of the world, aware of this emerging crisis.

While many of us had been pointing out that “Peak Oil” would strike the major industrial importing countries long before the rest of the world, particular recognition should go to Jeffrey Brown, a volunteer contributor at for coining the term “The Export Land Model”, constructing the model and, above all, having the patience to explain the issue, ad nauseum, to the chronically intellectually dishonest and challenged members of our mainstream media, financial services industry, and government. (I’m sorry, I really should get over it, but I just can’t seem to miss an opportunity to call these folks out for what they are.)

To all: Enjoy your moment in the sun. The ramifications of your analysis, which appears to be more or less as correct as one could hope for considering the less than perfect data we are working with to arrive at these conclusions, might beg us to remember to “be careful what you ask for, you may get it”. Not that any of us asked for an energy crisis, we just pointed out the obvious.

As the financial market’s participants knowledge of the issue comes to full bloom, I would hope that the consequences and impacts of this outcome would be the driving force behind all policy, and personal, decisions.

The question is, and I will quote Bob Shaw from

“Are humans smarter than yeast?”

(Yeast will ferment our alcohol for us as they grow and consume the resources within their environment but in the process destroy themselves by destroying the environment within the fermenting medium)

I’d like to think so, Bob, but would have to say that, at this moment, the real question is:
Are the people in power capable of helping the people avoid the yeast’s fate, or are they more interested in staying in power? Unfortunately, we know the answer to that question.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, December 11, 2007

The Fed is not The Problem. When it comes to the financial markets… We are The Problem.

We have a Problem. Considering the amount of hot air blowing out of the talking heads today one would think that the institution that is the U.S. Federal Reserve Bank has the power to solve The Problem. Anyone may read the Federal Reserve Act of December 23, 1913. If you take the trouble to do so you will be as sure as death and taxes that the Fed cannot solve The Problem.

Like most problems, The Problem is not a uni-faceted phenomenon, or should I say is not without the subsequent problems inevitably caused by The Solution(s) - proposed, enacted, or ignored – that the Problem will eventually have.

The Problem that the U.S. financial system is experiencing is not housing, or sub-prime mortgages, P/E multiples, or consumer spending, or consumer debt, etc… these are merely symptoms of the condition that is The Problem.

The Problem is the U.S. borrows $2 billion or so each and every day to fund its current account deficit, and the preponderance of that is for the purchase of OIL (I told you there was more than a one part to this problem, and you had to have known that it would include oil). There it is. That is The Problem. The good news is that we don’t have to do one damn thing to solve The Problem, because The Solution to The Problem is going to happen without any of us having to lift one F$#&^!# finger, and boy are we NOT going to like it, not one bit.

You see, in the coming 10 or so years U.S. Oil imports are going to decline dramatically. Over the following decade Oil imports will decline to the point of the inconsequential. And that will be the end of the current account deficit, the U.S. Dollar (in international trade), the U.S. Treasury Market, the Stock Market, the Federal Budget Deficit, Medicare, Social Security, and any and all Welfare State Transfer Payments (I don’t give ONE HOOT about your political sensibilities, left or right, right or wrong, for or against, just calling them as I see them). The impacts from the previously mentioned fact of disappearing Oil imports mean all of these things.

For a family man in his 40’s this should be quite disconcerting, but not surprising. Your participation in Social Security and Medicare, while not voluntary, is quite futile. You will receive absolutely no value for your input except the warm and fuzzy feeling one gets from letting the previous generation bilk you out of the fruits of your productive years while sending your progeny off to combat zones to fight and die for the very last squirt into the toilet of imported Oil to put off the day of reckoning onto another generation of Americans, and a future American Administration and Congress for the sole purpose of allowing the previous occupants of those illustrious branches of our Federal Government to be able to say: “Not on my Watch”. The Ponzi scheme that is the American financial system is ENTIRELY built, at this moment in time, on the continued flow of cheap oil imports in exchange for dubious IOU’s backed by the full faith and credit of the world’s largest debtor nation, a country that has no intention of paying them back. The amusing thing is that we accept this grand theft as our birthright while arguing over school prayer, flag burning, gay marriage, the Ten Commandments in government buildings, french or freedom fries, and other nonsensical, contrived issues which only continues to mask the harsh reality that in doing so we are merely tightening the rubber band further for the eventual “SNAP”.

For the same family man in his 40’s, contributions into the financial system will meet a similar fate. What contributions you make now are purchases that allow some seller somewhere to liquidate. Our family man here will not have the same opportunity in the future, say in his 60’s. There will be no buyer for all (some perhaps, though I think not) of the financial assets he (you) has so assiduously accumulated over his (your) working life. Why? Because the global financial system requires an ever-increasing use of BTU’s to power exponential economic growth, something the long-term readers of this blog know to be impossible, both from a mathematical and geological point of view.

Some very smart folks in the 1970’s warned us about the mathematical certainty that infinite linear systems and finite resource endowments are mutually exclusive events, not to mention the absurdity of making war for financial interests (often called “American Interests” – though very few Americans have any interest in these “interests”), Korea, Viet Nam, Iraq, Iran… sorry, I am getting ahead of myself/country. Did the powers that were, as it were, attempt anything constructive at that time? Not a shred. And the powers that be, of our time, will they attempt anything constructive? Not if Chuck Norris and Oprah Winfrey have anything to say about it. “Problem? What Problem?”

Well, they say that no matter where you go, there you are. Here we are, indeed.

Mentatt (at) yahoo (d0t) com
“The End of Cheap Food” Cover Headline of Economist Magazine, December 10, 2007

What they should have said is “The End of Cheap Oil Means the End of Cheap Food”. Still they have come a long way since their 1999 cover story of “$5 Dollar a Barrel Oil?” That was the equivalent of the Boston Red Sox error of the century in print journalism. (I often wonder if the fellow who came up with that is in any way embarrassed. He should not be, forecasting is inherently failure prone.)

The New York Times ran a cover story in the Sunday Business Section 2 days ago on the mathematical certainty that oil imports into the U.S. are going to fall – although they did their best to obfuscate just enough so that their readers were left with plenty of hope for a techno fix.

Why these august publications are not capable of making the link and connecting these dots – and what it means to food prices and economic growth – is beyond me. As the volume of imported oil into the U.S. declines the rate of food inflation is more than likely to accelerate. The question is at what rate? Does a 3 % annual decline in oil imports mean a 3 % annual rise in food prices, or is it more like 30%?

It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food. If the cost of fossil fuels doubles (not an unlikely event in my opinion) does the price of food rise 80%, or might it be more?

I prefer to believe that the market will respond quickly with more locally and personally produced food products, and if this means my neighborhood smells more like a barnyard street market in Peru than a fresh cut lawn in spring how will that affect housing values in my neighborhood? JUST KIDDING!! (about housing values in my neighborhood, pretty serious about the rest) Had you for a second… People will respond, working class and poor folks simply won’t be able to afford not to (if I may use the double negative). How else can a population with ZERO savings afford a near doubling of their food and energy costs?

Can you imagine, instead of marching for a cure for breast or prostate cancer, we have Johnny Appleseed marches for fruit trees and raspberry bushes? Al Sharpton marching for equal rights to inner city gardening space? Martha Stewart giving instruction on not just goat cheese dressing, but on milking the goat as well?

“May you live in interesting times”.

Mentatt (at) yahoo (d0t) com

Friday, December 7, 2007


U.S. Crude oil inventories peaked this year in the week ending 7/6/07 at 352,580,000 barrels.

For the week ending 11/30/07 U.S. crude inventories stood at 305,240,000 barrels.

In 5 months U.S. inventories declined 11% (peak to trough).

Each week our friends (with friends like these who needs an enema?) in the media report the inventory decline of the week with an explanation:

• Bad weather delayed offloading of ships
• Storms in the Gulf of Mexico delayed oil deliveries
• Falling Demand (my personal favorite)
• Refinery Outages (???)
• My dog ate my inventory homework

Guys, guys, guys… I know that whatever journalism school you attended was long on style and short on statistics but even a journalist can see a trend forming here: you know, rising prices and declining inventories. You folks are supposed to be experts at ferreting out the truth, and though you have proven quite adept at calling politicians for what they are, you seem to have gone tone deaf, or your B.S. meter is on the blink, when the party at the microphone is an oil executive or Wall Street analyst/CEO. After all, these are our “best and brightest”. Look at the great job they did when they conceived the idea of mortgage-backed securities!

Of course, during this time prices rose over 40% (and rose over 800% over the past 8 years) and was again explained as:

• Demand from China and India is driving prices higher (give that journalist a cigar)
• International Politics
• Terrorism
• The decline in the value of the U.S. Dollar
• Greedy oil companies
• U.S. Energy Policy
• Greedy Speculators

In the land of the free market, maybe it is the consumer that is responsible for the price response of the supply demand equation. Did that one ever dawn on you? Maybe, just maybe, the same force is working upon the value of the dollar versus commodities, like oil for instance. Ya think?

Yours for better journalism covering the most important issue since Noah built himself a boat.

Mentatt (at) yahoo (d0t) com

Wednesday, December 5, 2007


Front page of the WSJ today has a blurb about airlines being unable to grow in 2008.

A couple of weeks ago it was the U.S. automobile manufacturers.

6 months ago it was banking.

Last year it was housing.

Exactly how do you sell more houses, cars, and airline seats if your total supply of oil is falling?

Which industry is next? I am not sure but I have some candidates:

Trucking, Shipping & Overnight Delivery
Travel & Leisure
Hotel & Hospitality

What else would the beginning stages of peak oil in the U.S. look like?

Nothing. This is exactly what it would look like. It is what it is.

Mentatt (at) yahoo (d0t) com
OPEC says market well supplied, declines to increase production

I got to hand it to the public relations folks at OPEC. They did a great job of keeping everyone off balance for the past 2 weeks. The media fell for the OPEC head fake so consistently it was embarrassing to watch. Thankfully, that’s over.

So let’s go through the scenario - OPEC meets at a time when :

• Oil prices have closed in on their all time record, rising over 50% this year alone, and up over 800% in 8 years.

• Inventories the world over have been in steep decline during the traditional “shoulder period”, the period between peak summer gasoline demand and peak winter heating demand, the time when inventories are normally building.

• In terms of “days of supply”, the only inventory number that really counts, the OECD country’s inventories are heading into the red zone.

• The world’s production of crude and condensate (“C & C”) has been flat to slightly declining for 2.5 years. Prices have doubled during this period. Spare me the lack of demand argument.

• Oil imports into the U.S. have declined for 2 years at roughly 1% per year. While oil imports have SURGED for China and India far more than the decline in U.S. imports.

• OPEC country's domestic consumption continues to rise, with projected 2008 year over year increase in demand second only to China at over 350,000 barrels per day.

• OPEC has increased production over 2 million barrels per day since 2000, but their exports have actually declined due to the increase in domestic consumption.

So, what does the gas station to the world do/say? That the world is “well supplied”.

Well, guys, that wasn’t the OECD country's point was it? No, there is no shortage of $90 per barrel oil. The problem is, the OECD countries were looking for some $50 - $60 per barrel oil, of which there seems to be an EXTREME shortage.

Note to the U.S. Department of Energy, the 2008 Presidential candidates, Congressman Bart Stupak, the iconic moron Richard Blumenthal (the Connecticut Attorney General who testified that the problem with oil prices stemmed from allowing all of the American Oil companies to merge! In other words, he proposed to solve the energy crisis by tough enforcement of the anti-trust laws, and in the process follow Eliot Spitzer’s example, and Rudy Giulliani, on how to get ahead in politics), etc…

When crude oil is $200 per barrel OPEC will again claim that the market is well supplied – and it will be! Just not with $100 per barrel oil.

So stop wasting the public’s time. OPEC is likely unable to increase production, and even if they could it would be for a very short time and not by a terribly meaningful amount. You know what you have to do, and yes the beginning stages of that discussion might well cost you your political career. Yet you ask young people to risk their lives and limbs in a war for oil while you refuse to risk only your jobs? Perhaps if politicians were shot for cowardice (the U.S. has done that to more than a few teenagers in its history, right?) we might get a better quality candidate.

The Great U.S. Energy Crisis has arrived.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T) com

Sunday, December 2, 2007

2 + 2 + 2 ≠ 7, but the market thinks it does

The IPCC’s FINAL report on climate change was clear: Cease growth in Carbon emissions within 7 years and reduce to essentially 0 all carbon emissions within 40 years or suffer horrific consequences. (Forget your politics for a moment. If you are arrogant enough to have an opinion that contradicts the IPCC report but were not invited onto the panel you are the very definition of a MORON, so please, stop reading and go find yourself a recent issue of People Magazine. It is more your speed.)

I don’t think that that was terribly hard to understand.

The Peak Oil Activist community, many of which are some of our best minds in academia, and many in the Oil industry itself, has articulated fairly convincingly that oil supplies will not continue to grow much longer, if they have not begun to contract already.

The Automobile industry, the housing industry, the “this, that, and other industry” is projecting growth out till kingdom come… in complete contravention of the simple mathematical concept “e”, or the “exponential function”, and in complete denial of the political interventions coming due to the IPCC report and the constrictions coming due to the lack of sufficient fossil fuels.

But at the moment, the financial markets believe these projections - 2+ 2 + 2 = 7. Carbon constrained + Fossil Fuel Constrained + Unlimited Industrial Growth = Business as Usual!! Yes! We can have exponential growth in automobile manufacture while cutting our carbon emissions to 0! Yes! We can have exponential growth in the world economy at precisely the time world oil supplies are in terminal decline! Remember, this logic has been brought to you by the same “best and brightest” that brought you this great reasoning: "If we bundle a thousand sub-prime mortgages together and wave our magic wand they will be magically transformed into AAA grade investment bonds."

I know I should be careful, and not offend someone by goring their personal sacred cow (as I recently did over dinner with friends and clients when I had the ill manner to say that the declining Dollar (and rising Euro) would not save South Florida's housing market with oodles of Europeans buying properties in South Florida).

As sure as 2 + 2 + 2 ≠ 7, the markets will figure this one out, too. And there will be hell to pay. I just can’t tell you when, exactly. I CAN tell you it is not “if” but “when”, just not “exactly” when. The myriad doom and gloomers, and other curmudgeons, keep predicting the date of this “collapse” and that “meltdown”, using what statistical model for their forecast I know not – and neither do they. I enjoy James Howard Kuntsler's work as much as the next guy, but has shown no marked ability at calling market (if I may risk the use of understatement) tops. Though he will eventually and most certainly be correct, it may be years until that time.

But I am speaking to you, not those guys. So let me ask you a something(s):

What date, exactly, did you first start to use a computer? (uh, 1984) What date did it dawn on you that it was a life changing development? (uh, 1984) Now, WHAT DATE, EXACTLY, DID YOU BUY MICROSOFT AND INTEL STOCK AND TELL EVERYBODY THAT CAME NEAR YOU THAT THEY SHOULD BUY SHARES IN THESE COMPANIES? (uh, I never bought the stock, or: I bought these stocks in 1999, just before the market crashed.) Or maybe you were to young to take advantage of those life changing opportunities that you were faced with everyday. So, what about Google? (I TOTALLY missed Google).

Here’s your second chance. Don’t blow it.

Mentatt (at) yahoo (d0t) com

Saturday, December 1, 2007

Connect the dots

One of my favorite bloggers, Professor Joseph Dancy of the SMU School of Law pointed out the following agricultural data points recently:

“The boom in biofuels is boosting demand and constraining food supplies; 20% of the US corn crop is already used to produce ethanol. Agricultural commodities are the subject of a growing battle between energy demands and food demands of the world’s population. The UN's World Food Organization predicts that demand for biofuels will grow by 170% in the next three years.

Wheat prices surged to record highs last month. Expectations are that rising global demand for U.S. wheat will deplete inventories, leaving them at the lowest level in three decades. Wheat prices on the Chicago Board of Trade topped $9 a bushel for the first time ever.

The U.S. Department of Agriculture cut its estimate of Australia's wheat crop to 21 million metric tons from last month's estimate of 23 million tons. Australia was expected to be the world’s second largest wheat exporter. The USDA’s estimate of Canada’s wheat crop also declined 5.6 percent last month.

The USDA raised its’ forecast of expected wheat exports as foreign buyers are flocking to the U.S. The world market expects poor harvests in major producing regions, and rising demand from industrializing nations such as China.

The USDA estimates crop-year ending stocks of wheat will fall to 362 million metric tons in 2007- 2008, down from 456 million metric tons a year earlier. This is the lowest inventory level since 1973-1974.

Ukraine was the world's seventh-biggest wheat exporter last year. The Ukraine government said it will restrict grain exports last month to moderate domestic food price increases.

Russia, last year's third-largest wheat exporter behind the U.S. and Canada, said it may impose a 10 percent export tax on the grain in November and a 30 percent export duty on barley.

Global wheat inventory stockpiles at the end of June in the five biggest-exporting countries fell to 107 million tons, a 34-year low. Wheat was the fourth-biggest U.S. crop in 2006, behind corn, soybeans and hay, according to government data.
The higher wheat prices have increased the cost of staple foods such as bread and pasta. Higher pasta prices prompted consumer groups in Italy to launch a one-day boycott of pasta last month. Prices there have soared as much as 20 per cent over the last several months.

Corn prices hit a three-month high last month after China signaled that it could become a net importer for the first time in more a decade. One of the world's four biggest corn exporters last year, China will encourage more imports of the grain, and discourage domestic output of crop-based fuels, in an attempt to keep food inflation under control.

The amount of U.S. lands planted in corn has increased 18.5 percent this year, from 78.3 million acres last year to 92.9 million acres. The USDA forecast that fertilizer use should increase by 5 percent overall, with use on corn up 9.5 percent.

The USDA is forecasting record fertilizer expenditures for 2007. Fertilizer accounts for roughly 20% of a corn farmer’s operating cost.

Over the last year the price of eggs went up by 33.7 percent, whole milk 31.1 percent, and navel oranges were up by 13.6 percent in the U.S. according to a government report. Other dramatic increases included fresh chicken up by 8.4 percent, apples up by 8.7 percent, and dried beans up by 11.5 percent.

Barley prices in Winnipeg, Canada, gained 41 percent in the past year on increased demand for animal feed and for brewing beer. Canada is one of the world's biggest barley producers. Corn has gained 53 percent in that market as demand for grain-based ethanol surged.

Driven by a combination of trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. There are reports of cows being stolen from Wisconsin dairy farms.

Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations’ top agriculture official warned last month. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it is 65 per cent.

The USDA is expecting a record breaking year for agricultural exports from the U.S. Exports are expected to reach a record $79 billion in fiscal year 2007, topping the old record set the previous year. USDA says sales are expected to reach another record in 2008.

The value of all U.S. crop production this year is forecast to rise 14 percent from 2006, to $136.2 billion. The value of production from cattle, hogs, chickens and eggs will increase 18 percent, to a record $140.2 billion

Rising prices for livestock and grains should push U.S. net farm income to a record high in 2007, 48 percent greater than a year earlier according to the USDA. Farm income is expected to rise to $87.1 billion from $59 billion last year. "This is a great time to be a farmer," said Christopher Hurt, an economist at Purdue University in West Lafayette, Ind. "Farming may be the healthiest sector of the economy."

A rise in agricultural income could boost sales of farm machinery, seeds, and farmers will also be able to afford more fertilizer according to agricultural economists.

A boost in farm income this year has accelerated agricultural equipment sales according to representatives of the equipment manufacturing industry. Combine sales are up so far this year by nearly 9 percent according to Russ Green, president of Caterpillar’s North American operations. “Obviously there is reason for optimism,” Green said. “Usually 14-18 months after an upturn in commodity prices we’ll see an upturn in equipment sales.”

Ag Equipment Newsletter, a publication for agricultural equipment marketers, in its Sept. 15 issue reported results of its annual survey of North American equipment dealers, noting, “It’s difficult to find a product category that dealers aren’t enthused about next year.” From Joseph Dancy

Professor Dancy is not offering opinions here, just reporting the facts as they are in the agricultural commodities markets.
Enough of the facts; let’s move on to the really important issue: My opinion.

(Just kidding. Remember that commercial for the “Real Yellow Pages” a decade or 2 ago? Under the heading “Headcases” the scene cut to a hip New York City party, and one character leans over to the person she is talking to and says: “Enough about me, darling. Let’s talk about you. What do YOU think of my new hairdo?”)

Well, I am only partially kidding. In any event, it is my assertion that most, if not all of the changes noted above have been brought about by the increased costs of fertilizer, pesticides, diesel for farm equipment, as well as transportation fuel to ship foodstuffs across continents and oceans to the final consumer. The trend “is what it is” and for investors “the trend is your friend”. Of course, for poor folks here and the world over, this trend is no friend. Any impartial analysis of world Wheat inventories and supplies would not the analyst with a warm and fuzzy feeling as it applies to actually feeding people. Though investors that have been long Wheat might feel warm and fuzzy about the positive impact on one’s portfolio.
There is little or no additional acreage available with which to increase industrial production levels of Wheat, Corn, Soy Beans and other grains. Increasing acreage in one means decreasing acreage in another, and we know how musical chairs works out in the end. There are only two ways to increase the amount harvested: Increase crop yield per acre and/or increase acreage planted.

My argument stands that while this is no Armageddon, it is no walk in the park, either. As these trends compound like interest on a mortgage, or creep up on you like the Alternate Minimum Tax, even in wealthy countries like the U.S. people will have to respond (or else it would be Armageddon).

What will the response be? Good question – and perhaps a very complicated, difficult answer. Or maybe as simple as an increase of a couple percent in local food production per year until, 40 years or so hence, nearly all food supplies are produced regionally. I think the simple answer is the most likely outcome, and that is why I believe the energy crisis, while brutal economically, will not be the Apocalypse.

Mentatt (at) yahoo (d0t) com

Thursday, November 29, 2007

Dead Money

The price action in crude today left much to be desired. In the span of just over 2 months crude hit the ejection button, catapulting from $70 to just over $99 intraday as measured by front month WTI. Since then, it appears crude hasn’t even reached for the parachute’s rip-cord yet. Even with the Canadian pipeline explosions, which drove crude prices up over $4 at one point during the day, oil could not muster a decent closing gain, closing at $91. That ain’t a good sign.

As I always say, markets zig and markets zag, they don’t zig and zig. That last rally is now in the midst of a correction of its own making, necessitated by the viciousness of its ascent, and it is unlikely that it is done, especially with the ForEx markets unwinding the Long Euro/Short Dollar trade. I hate the Dollar versus commodities, but I have no illusions about the Euro, which will have commodity inflation problems of its own.

This could mean a correction for Gold, too.

The longer-term story for higher oil prices is very much intact, but you can be shaken out of the best opportunities if you harbor unreasonable expectations – like expecting rallies to go on forever without interruption.

The trade now might be away from the commodity and back to the equities. Unfortunately, you might have to endure some pain before the pleasure.

On the other hand, this might be a short, and delayed, “shoulder period” price slide. After all, we are going into the teeth of the Northern Hemispheres winter, and China’s import appetite seems to be back with a vengeance, after a respite in September and October. That, and the fact that inventories continue to fall precisely when they should be rising – it is not cold enough for fuel oil and it is not the summer driving season – might make this correction somewhat short lived – though it could still be painful.

Have I run out of “on the other hands” yet? That’s the problem with trading for a living. You need those extra other hands to keep all those balls in the air.

Mentatt (at) yahoo (dot) com

Wednesday, November 28, 2007

An Apocalypse NOT!

I get a decent amount of email from the “doom and gloom” folks asking me when I think the “collapse” takes place. Collapse? What collapse?

The decline in oil availability will be a slow, grinding process (in my opinion) that will not fit nicely in a 2 hour movie, 3 minute pop hit, or 15 second political sound bite mindset. I hope I can disabuse the doomers that visit here that they need some kind of bomb shelter. Although I fully appreciate your point of view, my commentary is directed toward how one might direct the investments that they have worked so hard for. I sincerely believe that the U.S. oil supply situation will have profound effects on our financial and real estate markets and currency over the next 5 years, but I do not think this will happen on a Tuesday afternoon. Nor do I believe that we will descend into anarchy. Are not resource wars (starting with Iraq), and the prospect of hyperinflation, and stagnant or declining GDP enough? Well, at least I hope they are.

My issue is this: Why should you work so hard only to pour your investment dollars into a leaking bucket? You would have been better off spending those shekels on vacations, expensive wine, and song. (Actually, that sort of appeals to me.) Some might find that pecuniary, but those that do probably did not spend a career doggedly pursuing some level of financial independence. Actually, I am quite sure that on some level the tied dye set is HOPING for a collapse. Teach those yuppie pricks a lesson.

I know that a lot of the peak oil blogsphere is filled with disaster scenarios, but I sincerely doubt this is the most likely outcome. That argument that we will experience immanent agricultural disaster due to declining energy inputs is just not that likely. The markets are efficient enough to redistribute those inputs away from Suzie-Cuzie’s trip to the mall and into the farmer’s tank and fertilizer bin. Yes, food is going to get much more expensive, and yes, this will fall disproportionately on the poor. But the aggregate AMOUNT of food available to Americans is not the problem, but rather how to pay for assistance to the poor.

This is not to say that our agricultural exports won’t decline and harm others. I sadly think that is a rather likely outcome. Those of you that have been following my blog know that I have great concerns in this area. Wheat and corn production will become an increasingly expensive proposition, and that will negatively affect aggregate crop production, just look at wheat inventories, and in turn available exports and domestic meat production, but the lesson of history is that people will be “incentivized” to produce some of their own food. As an avid gardener, I can tell you that a simple kitchen garden can overwhelm your ability to consume all that is produced at harvest time, the surplus of which can certainly be preserved. It will not be necessary to produce ALL of our own food (at least not for 20 or 30 years, all bets are off at that point in the oil production curve) just enough to bring the marginal scarcity food cost down to an affordable level.

I get email from one dour fellow who tells me that we have lost all of the knowledge to do this. What knowledge, gardening? Get a grip, and join my garden club. You would be impressed with what these folks know.

As my friend FireAngel from likes to point out, if India can feed over 1 billion people with less arable land and far less fossil fuel imports, North America certainly can feed its population.

There is also some slack for the economy in the wasteful way in which we use oil. FireAngel recently pointed out that driving around in circles does not increase GDP.

If it were going to be Armageddon, what would be the point of investing? Better to blow it all on a trip around the world.

No, the Apocalypse won’t be arriving anytime soon, but a paradigm shift is, in my opinion, underway as I write this. In this paradigm shift, there will be winners and there will be losers. Not much different than our current reality. It is the INSISTING that things be a certain way that will get you into trouble. Flexibility and adaptability will go a long way in the environment I foresee.

No, it won’t be business as usual. We are likely to be a whole lot less mobile, live in smaller homes, and consume less frilly BS. We won’t be commuting as far, be more involved in our communities and our children’s lives, and we even might all have a new hobby – gardening. But I ask you: Is that really Armageddon?

Yours for a better world,

Mentatt (at) yahoo (d0t) com
What goes up must come down meets what goes in must come out.

Any farm boy knows that whatever hay they fork into the front of the horse stall they will have to shovel out the back and wheel it over to the manure pile. Same thing with fossil-fuels. Whatever we burn comes out the tail pipe/smokestack. Elementary, my dear Watson.

The U.S. reported a decline in greenhouse gas emissions, the first decline since 2001, when the U.S. was last in recession. This was on the news wires today:

“U.S. emissions of greenhouse gases fell 1.5 percent in 2006, the first annual reduction since 2001.

Total emissions fell to 7.1 billion metric tons, according to the report today from the Energy Information Administration, the statistical arm of the U.S. Energy Department. The year-to- year drop in gases blamed for global warming is the third since 1990.

The decline was largely the result of cuts in carbon dioxide output, which fell 111 million metric tons below 2005 levels. Favorable weather conditions, higher energy prices and increased use of natural gas for power generation lowered carbon pollution, according to the report.” Bloomberg News November 28, 2007

Trust you me, if we emitted less it is because we CONSUMED less, and we consumed less because that WAS ALL WE HAD TO CONSUME. We consumed all that was available. (If some moron comes on T.V. and says: “Good news! The U.S. is lowering its carbon footprint!” You will know you are in the presence of an imbecile, although I am sure some miscreant will try and run this past the folks on the couch.)

Anybody care to take the other side of a wager? I will bet greenhouse gas emissions will be lower in 2007 than in 2006 irrespective of weather conditions this winter.

You can’t emit what you don’t burn.

Yours in a lower carbon foot print (HA!),

Mentatt (at) yahoo (d0t) com
It is the denial of our energy situation that assures the certainty of the outcome.

For years now, the American people have been misled by the collective denial, and outright lies, of our political and media establishment.

“The Hydrogen Economy”, “Electric Cars”, and “Clean, Environmentally Friendly Ethanol” each controlled the headlines for about 2 years each since 2001. Today, ethanol made the front page of The Wall Street Journal as the evidence overwhelms the folks in charge of the propaganda for denial that this bio-fuel is not so environmentally friendly and provides little more energy to the end user than was consumed during its production. What’s next, solar powered bicycles?

I was actually fairly impressed with the WSJ for having the temerity to make this a front page article. When the idea of the “Hydrogen Economy” fizzled, the mainstream media did not report on its demise, leaving the great unwashed to assume that “they” were still working diligently on our George Jetson future. I think that perhaps, this time, the WSJ recognizes that further (complete) denial is not in their best interest, any more than putting their fingers in the proverbial dyke. Witness, in the span of 2 weeks, “Peak Oil” and “Ethanol Craze Cools as Doubts Multiply” make the front page headline. Amazing. Perhaps a little late, yet still amazing. When was the last time you heard a politician admit they were wrong?

The jaw boning in the financial media remains deafening, despite the WSJ’s newfound affection for the facts. Two days ago, the financial media was abuzz with reports that OPEC was going to increase their output of crude oil to bring down the price of oil and thus save the world economy from recession. This morning, OPEC is scrambling to get to the microphones to reign in any unrealistic expectations.

“Crude oil was little changed in New York as OPEC ministers said the group is doing all it can to control prices, countering reports of a plan to raise output.

The Organization of Petroleum Exporting Countries currently has no plan to raise oil output when it meets next week in Abu Dhabi because the market is well supplied, Qatar's oil minister said today. Libya's top oil official said the group is unable to increase production any further.” Bloomberg News, November 26, 2007

Folks, none of the available data supports any suggestion of a rapid increase of oil supplies from the exporting countries. Actually, all of the available data suggests that their exports are heading into inexorable decline. Pay no attention to the man behind the curtain! The Wizard of Oz can no more “stand in front of an oil well with a check book”, or an army, and demand that that well produce more.

Oil is slowing the world economy, not the other way around.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, November 27, 2007

The U.S. equity market found and Oil seems to have lost their respective “footing” in today’s trading. Seems oil traders are beginning to believe news reports of declining oil/gasoline demand due to higher prices. Thank goodness you have me, assisted by my trusty calculator, to cut through the propaganda. And speaking of propaganda, this was on Bloomberg News today:

“U.S. motorists cut back on gasoline purchases during last week's Thanksgiving holiday as prices stayed above $3 a gallon, a report from MasterCard Inc. showed.

Consumers purchased an average 9.32 million barrels of gasoline a day in the week ended Nov. 23, down 1.7 percent from the same week last year, MasterCard, the second-biggest credit- card company, said in its weekly SpendingPulse report. It was the fifth consecutive week that demand at the pump dropped compared with a year earlier.” Bloomberg News, November 26, 2007

Now that’s really interesting because according to EIA data:

(you can read the table yourself here:

Wholesale prices for RBOB Gasoline finished the week ended 11/16/07 at $239.150, and;

Wholesale prices for RBOB Gasoline finished the week ended 11/17/06 at $156.036

A price increase of 53.26% yielded a demand decline of 1.7%? Or did a SUPPLY decline of 1.7% require a 53.26% increase in price in order to bring supply and demand into equilibrium?

And that begs another question: Did the price increase really bring supply/demand equilibrium, or was the rise in prices cushioned by drawing down inventories?

Hmmm… The plot thickens… So let’s go to the video tape! (or to the EIA data base, as it were)

RBOB Gasoline inventories as reported by the EIA, week ended 11/17/06: 42,747,000 barrels

RBOB Gasoline inventories for week ended 11/16/07: 40,446,000

The plot gets thicker… let’s have a look at finished gasoline products (not just RBOB)

EIA total gasoline inventory week ended 11/17/06: 110,431,000
EIA total gasoline inventory week ended 11/16/07 104,516,000

The plot is as thick as frozen molasses at this point. Let me sum up the disparate data:

1. Wholesale gasoline prices increased 53.26% year over year
2. “Demand” fell 1.7%, according to Bloomberg
3. Inventories declined 5.35%
4. Retail gasoline prices increased 38% (per Bloomberg)

Forget for a moment the different percentage increase in price for retail and wholesale, as these are different markets. Let us just use the 38% increase in retail prices. Now perhaps you think that crude or other finished products increased by the amount gasoline inventories declined (plus the 1.7% decrease in “demand”). Nope. Crude oil inventories for the same week over week period were down approximately 8%, distillates were down 3%.

Inventories went down in all categories, gasoline consumption for the entire year is down, as is the week over week 11/17/06 and 11/16/07.

Now I know I have a lot of moving parts here, but it seems a reasonable hypothesis to say that supply fell, prices increased enough to bring demand into equilibrium with supply, but not nearly enough when inventories are taken into account. Since inventories have been in steep decline, and since it is impossible to draw inventories down past ZERO, either inventories begin to build, right away; or the price will begin to rise significantly; or inventories and prices can remain in equilibrium right here, but only if supplies increase by the amount of the inventory draw of the past several months; or the WORLD economy, particularly China, India, and the Middle East, must contract enough to ease the pressure on oil demand. (My readers will remember the “chicken or the egg” problem I outlined in an earlier post)

One of the above moving parts has to give. If you can arrive at the correct outcome, and have capital, and the courage of your own convictions... the opportunity is overwhelming. Or you can turn on the tube and catch another exciting episode of “desperate housewives”.

I have made my bets, and I hate TV. Consequently, I find myself in front of this computer trying to make sense of all of this. At this moment, all of the data taken together support a peak in Oil supply for the U.S. as past tense, and perhaps for the world as well.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T0 com
Hypocrisy, self-dealing, disinformation & propaganda, and just plain chutzpa know no bounds.

This just in from OPEC: Indonesia is in favor of increasing OPEC output by 500,000 barrels per day!!!

HAHAHAHAHAHAHAHAHA! Isn’t that a scream?

For those of you who don’t think this is as nearly as funny as I do…

Indonesia, though still technically a member of OPEC, is a NET OIL IMPORTER!! And has been for several years. Of course they want OPEC to increase their output, and hence their exports. What importer does not want that?

And do you know how much political sway Indonesia holds over OPEC? ZIP.

Well, while we are wishing for things… I would like to have black hair, be young, thin, and good looking again! Oh, Sh$#!, I just looked in the mirror… I am still me.

Mentatt (at) yahoo (d0t) com

Monday, November 26, 2007

The U.S. equity market is stumbling terribly, with 10-year Treasury bond yields under 4%, yet the front month contract for WTI crude oil has benn stubbornly fixed above $92 per barrel.

What else would the peak in U.S. oil supplies look like?

Look, the U.S. equity, bond, AND housing markets are all foretelling a recession; why not oil? Maybe oil is foretelling the peak in oil supply is of greater import than the looming recession – or maybe not.

But it sure looks that way to me.

On another note, unless the equity market finds its footing FAST, the Fed is going to be forced to cut, stretching the inflation rubber band into a moon shot for 2009. I am not making a prediction here, but will react to the Fed instead. If they cut rates 50 bps, look for the dollar to crater versus commodities (and currencies).

Who knows? Maybe the only way to save housing is with 1% interest rates (and the resultant $300 per barrel oil)… but even that would only forestall the inevitable.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Sunday, November 25, 2007

The U.S. Air Transportation Association reports that for the first time, fuel has become the single highest cost component – 25.4 %. And fuel was about 20% cheaper in Q3 than today’s price. Meanwhile, FedEx issued its second profit warning in as many months on increasing fuel costs and declining demand.

Major investors in the U.S. automobile industry forecast 2008 to be the worst car market in 15 years.

China’s year over year October oil imports increased 16.5%, while world production declined just under 1 % and net exports of oil declined better than 3%.

Heating Oil for this winter’s delivery are at record prices, while inventories are declining at precisely the time when they were building in the past.

The U.S. Housing market, essentially our only manufacturer, is on the canvas bleeding from every hole in its head. (Where are those experts that were quoted in South Florida’s newspapers in early 2006 saying the market would recover within a quarter or two? Laughing all the way to the bank at your expense, cashing checks from the developers and brokers that paid them, sometimes directly and sometimes through “public relations” firms, for their expert spin.)

Yet the American mainstream media continues to report our energy situation in a “balanced” way, a way that gives equal exposure to the thoughts and ideas of a very vocal, and very wrong, few. A few who clearly did not put their money (or their client’s money) where their mouths were – if they had they would have been reduced to penury and litigation long ago and even the myopic morons calling themselves journalists would be able to clearly see that these emperors have no clothes. A few who continue to make their case in the complete absence of empirical data, while the media continues to abdicate their responsibility of keeping the American people informed and instead continues to opt for Mark Twain’s famous “misinformed”.

For those of us who have worked a lifetime to provide for our families and secure their future, we are at a cusp; choose wisely and prosper, or choose poorly and see your life’s efforts confiscated in a vicious bout of hyperinflation, disappearing home equity, and the shrinking purchasing power of your diminishing sources of income.

The markets are shouting their dire warnings to you in the form of commodity prices and oil supply constraints. On the other side are the establishment Wall Street firms, politicos, and media with a tremendous interest in maintaining the status quo for as long as possible - irrespective of the certainty of the outcome I describe.

What to do? Follow your mother’s advice: DO YOUR HOMEWORK!! And reading the newspapers does not count.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0t) com

Saturday, November 24, 2007

10 year U.S. Treasuries yield below 4%

Gold over $820

Crude oil nearly $100 (as measured by WTI, Tapis crude already over $100)

U.S. housing in an absolute freefall

U.S. stock market underwater for 2007

The U.S. Dollar declining rapidly versus commodities (not to mention our trading partners currencies)

Now let me ask you 1 question:

Which Wall Street firm (besides me) warned you about this?

Not a one.

And you believe them about future oil supplies??!!

Mentatt (at) yahoo (dot) com

Sunday, November 18, 2007

As my readers know, I have been studying and writing about the peak in world oil production for the past several years and its effects on our businesses, investments, families, and our way of life.

The recent, and final, U.N. I.P.C.C. report on climate change has just been released, and while I know that the report has been on the cover of every major newspaper and magazine, I wanted to quickly say that it is not an exaggeration to point out the political solutions to this problem are going to change EVERYTHING in our lives. The report is very direct, forceful, and leaves little room for interpretation and manipulation:

“The world will have to end its growth of carbon emissions within seven years and become mostly free of carbon-emitting technologies in about four decades to avoid killing as many as a quarter of the planet's species from global warming.” As reported in the Washington Post November 18, 2007

Simply put, this means the end of industrial growth, and as life is certainly not fair, there will be winners and losers in the mad scramble about to come.

I will be researching and commenting on this in the future at least as much a I will about oil supplies.


Yours for a better (post-industrial) world,

Mentatt (at) yahoo (d0t) com

Saturday, November 17, 2007

The great commodities “boom” of the 21st Century

Commodity prices will “boom” and the environment might just go “boom”, too. I manage money, not environmental practices, but I recognize that I might be soiling my own nest, as it were.

That said, here is an interesting quote from the International Energy Agency’s (the European counterpart of the U.S Department of Energy’s EIA) lates World Energy Outlook:

“The increase in China’s energy demand between 2002 and 2005 was equivalent to Japan’s current annual energy use.”

Readers of my blog know that world-wide crude oil production is down nearly 2 MILLION BARRELS PER DAY since May 2005 when compared to August 2007, yet Chine has increased their consumption, to say nothing of India, Viet Nam, etc… dramatically. It follows by mathematical necessity that someone else lost oil to ChIndia, Inc.

That would be the U.S., among others, and that is why the price of oil, and everything else, is going to much, much higher, while the purchasing power of your currency, and the real value of your financial assets are going much, much lower.

Don’t blame the politicians, the oil companies, or any other part of the cold cruel world… You have been forewarned, and you are now forearmed.

I received an email from a rather bright, investment banker type (and, no, that is not an oxymoron… I said bright, not ethical) incredulously asking me if I really felt crude oil prices would rise past $300 sometime in the next several years… to which I responded:

“Welcome to the conversation”

Yours for a better (post-industrial) world

Mentatt (at) yahoo (d0t) com

Thursday, November 15, 2007

Energy crisis or food crisis?

I have not commented on the world’s inventory of grains, particularly wheat and corn, lately… and things have gotten much worse than I had warned my readers about last year.

“Global stockpiles of wheat will fall to 109.8 million metric tons by the end of the marketing year on May 31, down 11 percent from a year earlier, the USDA said last week. Farmers worldwide are expected to plant more of the grain to capitalize on higher prices.” Bloomberg New November 13, 2007

My readers might remember that as of last year, “days of supply” for wheat was about 57 days, THE LOWEST LEVEL ON RECORD, down from well over 110 days in 1999. Well, inventories are in free fall, and the world’s population increased 1.3%+ over the past year. We are looking at skyrocketing food costs and shortages of wheat based products.

If you think people will react poorly to gas lines, you should try food shortages.

I have a question: Am I the only guy on Wall Street that finds this vaguely important?

We are deep in the danger zone for wheat inventories. We cannot manufacture wheat, we cannot order it from the Martians, or pray for Manna from heaven. We have to grow it. If we run out, we have to wait till next year for additional supply.

I have another question: Am I the only citizen that thinks our food supply is more important than gay marriage, freedom fries, and Barry Bonds nutritional supplements? Am I the only normal person left?

Mentatt (at) yahoo (d0t) com
Next week I will be traveling by air during the notorious Thanksgiving holiday. Instead of dreading it, I will be savoring every line I wait in, every rude traveler, and every indignity of the security screening process. Perhaps I will get lucky and warrant the full body search it seems every 10th passenger is subjected to.

We have very few holiday-crowed airports left in our oil constrained future to contend with. Delta is going to merge with SOMEONE (looks like United at the moment), and this is only the first of many mergers that will dramatically shrink the number of planes (and passenger seats) in the air. Certainly there will be a great deal of air travel in the future, but as jet fuel (Jet A-1 is very close to kerosene) is a product of crude oil (not natural gas plant liquids, ethanol, etc…) and as crude is in obvious decline, their will be a certain and significant decline in the availability of jet fuel… less fuel means fewer planes and passengers in the air. And that means over capacity in our air travel system.

I wonder if this will improve their on-time arrival performance?


I will freely admit that I have been a shameless capitalist my entire life, and hope to continue for quite some time. However, as an alumni of "the wrong side of the tracks", I think it silly to ignore the political ramifications… For instance, I wouldn’t invest in a personal jet (not that I can afford one) at the moment. It seems politically incorrect (impossible) that our wealthiest citizens would be permitted to consume thousands of gallons of precious fuel on a cross-country private jet flight when working (and non-working, but voting) poor are unable to compete economically for that same fuel to heat their homes. Any student of history will recall that that kind of class privilege while others are being harshly challenged did not work out so good for the folks running things just prior to the French Revolution (I can just see Paris Hilton paraphrasing Marie Antoinette, “let them burn wood”).

A blessed and joyous Thanksgiving to all!

Mentatt (at) yahoo (dot) com
What comes first, the chicken or the egg?

Is a lack of economic growth about to cut demand, and prices, for oil – or is a lack of oil cutting into economic growth?

Stay with me for a second… What does the early economic reaction to lower oil supply look like? Would the headline read: “demand for oil fell this month to”, or “supply of oil fell this month to”? It would look the same, and it would be a “glass half empty or half full” kind of moment, wouldn’t it? Demand, as measured in classical economics, cannot exceed supply as the price mechanism simply chokes off the demand and substitutes appear (what substitute there is for oil, I don’t know). Supply, however, can exceed demand, at least in the short run. That is what inventories are all about.

Looking at the supply and inventory data from the EIA and the price signals from crude oil, my interpretation is that a lack of oil is cutting into economic growth. If the oil supply cannot be expanded, further growth will be impossible. And if that is true, then (you know, that if/then sequence again) further economic growth will not be possible. And if that is true, we are in for one wild ride as the market re-prices all of the myriad financial assets. And if that is true, ______________ (go ahead, YOU fill in the blank)

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, November 12, 2007


Finally!! This just hit the various news services:

“Crude-oil prices are being driven higher by ``market fundamentals,'' said Guy Caruso, head of the U.S. government's Energy Information Administration.

Rising demand coupled with ``insufficient'' investment, lack of access to resource bases in the U.S. and elsewhere, and a ``dramatic rise in the cost of doing business'' are boosting prices, Caruso told reporters today at a briefing in Washington.

``We think we're in a different era with relatively higher real oil prices going out through 2030,'' he said. The Energy Information Administration is the statistical arm of the U.S. Energy Department." Bloomberg news, 11.12.07

This is the first report that I have seen in which a member of the energy establishment linked current crude prices with fundamentals. I guess he figured better now than at $150 per barrel.

It would now appear that Daniel Yergin of Cambridge Energy Research Associates and the Energy Information Administration are no longer working together on the propaganda effort.

Mentatt (at) yahoo (d0t) com

Sunday, November 11, 2007

“Markets 101”

How many times in the past 2 years have you read some publication say that the bottom for housing is 6 months away? Who writes this stuff anyway, and why? How do they stay employed when they are so $%^#!! wrong? They keep writing this drek because their masters want them to, need them to, help bring parties to the other side of the trade.

How many times have you seen articles in the financial press telling that oil “could” go to $100. Lots. And how many articles have you seen saying oil prices are unsustainable and could go as low as $60, but $50 is not out of the question? Plenty. Now with oil at $96, and the financial press implying that the top is $100 and the bottom is $50, do you think that there is a single market participant with more than 2 working neurons who believes the press? Would you put up $96, risking $46 of downside to make $4? Do you think these guys have rocks in their head?

Forget for a moment that oil futures expire and cease to exist and that the oil is consumed and will never be traded or produced again… let us just focus on the market for crude oil. A commodity market needs sellers as well as buyers; it is a zero sum game. For every winner, there is an equal and opposite loser. Every dollar of profit that you pocket in a commodity trade would have wound up in the pocket of the contra party to the trade had the contra party not entered into the trade. Pretty simple, really.

Here is my point. The markets are constantly being manipulated by the financial press. Positively or negatively is up for debate, but not the fact itself. After all, if there were no press whatsoever, would the markets be the same? Nope. It follows then that there must be SOME agenda of the journalist, editor, publisher, etc… What might that be? Maybe they really do feel you have a right to be informed, maybe they just want to sell advertising and will shamelessly publish sensationalized BS for that purpose, maybe, just maybe, they have been influenced by the public relations firms that represent their largest advertisers. And maybe, just maybe, these parties have interests that are in direct contravention to your own. Maybe these parties want to influence the market (maybe? Give me a break), as in create sellers who are influenced by the $46 of downside risk for $4 of upside potential insinuated by the nonsense that passes for journalism in the financial press.

Folks, maybe I am wrong, and oil prices will reach $50 before they reach $150, but the market is pretty much equally split on these potential outcomes, hence prices are nearly $100 per barrel. Since the press is not so equally split, and so clearly to my mind is pitching the “oil prices have come too far and will fall soon” idea so hard, many of the “weak hands” have sold and my bet is the buyers will overwhelm what sellers that are left.

Market tops are formed when market participants are “sure” prices are going higher and collectively throw their last dollars at the commodity, equity, housing market, etc… Correct me if I am wrong, but there appears to be sufficient worry, as measured by tone of the financial press, that prices will collapse.

Now this is just market psychology in a normally functioning market. Through in some spot shortages of heating fuel this winter or gasoline next summer and I will be writing about what market panics look like.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Friday, November 9, 2007

In May 2005 world production of crude and condensate = 74,298,000 bpd, and in August 2007 world production = 72,512,000 bpd, a decline of 1,756,000 barrels per day of crude and condensate from peak month to most recent month. During this time prices have risen roughly 60%; in other words the market brought the decrease of supply and into equilibrium with demand via price. Just in case I need to spell it out for you: The market mechanism of increasing prices failed to stimulate increased production. Why? Maybe no increase is possible.

If we use annual averages, world production of crude and condensate stacks up like this:

2005 average production - 73,807
2006 average production - 73,544
2007 average production - 73,093

(My goodness, even an economist, or a politician, can see a trend forming…)

Peak production of “all liquids” (crude and condensate, natural gas plant liquids - primarily ethane, propane, butane, and isobutane, ethanol, bio-diesel, coal to liquids, etc…) in August 2006 = 85,467,000 barrels per day, and in August 2007 production = 83,920,000, a decline of 1,547,000.

If we use annual averages, world production of “all liquids” stacks up like this:

2005 average production - 84,631
2006 average production - 84,603
2007 average production - 84,335

In order to compare “apples to apples” I should use the crude and condensate production numbers from August 2006, but I won’t… I can see your eyes glazing over. Let us just leave it with: the rate of decline in “all liquids” is slightly less than the rate of decline for crude & condensate. (If you really are interested in the actual figure for crude & condensate production in August 2006 it was 73,760,000. You can work the rest out.)

But “all liquids” are not created equal. For instance: 1 gallon of gasoline = 124,000 Btu, while the energy content of ethanol is 83,333 Btu’s per gallon, and 91,000 btu’s for 1 gallon of propane. If your car could run on 100% ethanol you would need to buy roughly 50% more fuel to drive the same number of miles (or drive 1/3 fewer miles on a tank full).

Let me get to the point: While the decline in “all liquids” from 2005 to 2007 is .35 of 1%, the BTU decline is roughly double that. This does not take into consideration the energy consumption of ethanol, bio-diesel, and coal to liquids production, which to get back to comparing “apples to apples” would need to be subtracted from the “all liquids” gross Btu content.

The production data continues to support a peak of crude oil production in May of 2005, with 2.25 years of data, and the “all liquids” data is telling us not to expect any miracle from “alternative fuels”. I’ll let the academics split hairs over the date of Peak Oil. If you are a resident of the U.S., Peak Oil is in the past, and if you are an investor you have precious little time to do something intelligent.

I want to finish by saying that I do not “hope” for any particular outcome. I trade and invest for a living. If the data showed oil supplies were increasing, my strategies would change. I don’t fight the data, or as they say on Wall Street, “don’t fight the tape”.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, November 7, 2007

“Jokers to the left of me, Jokers to the right, here I am. Stuck in the middle…”

Several days ago I wrote about (CNBC) the Cheerleaders, Inc.’s own Larry Kudlow and his call that oil was a short and that as a contrarian he would go long (own) the bank stocks. If I was dismayed then, I am incredulous now.

Here we are, on the cusp of the greatest challenge to civilization since the advent of the squalid criminals of the Third Reich (though the dirt bags don’t deserve the capital letters), an energy crisis of mythic proportion, and all the captains of industry (titanic) can say is to advocate that you invest your hard earned assets into a doomed sector. Me thinks they need some suckers to unload their positions on. Don’t fall for it.

Just look at the banking stocks – they are cratering. We could see $150 to $350 billion in write offs, and no new business coming in. Many of these banks might have to raise capital by issuing more stock, but don’t worry… the Fed is going to be right there for these guys and will print an ADDITIONAL ½ TRILLION dollars to bail them out and destroy the value of your savings.

People thought the housing crisis was bad 4 months ago… Ha! That was sooooooooo August of 2007. Things are so bad right now it is impossible to assess where exactly we are or what anything is worth, which is why the bank stocks like Washington Mutual and Citi look like incoming mortars, and the hits keep coming. As it is impossible for ALL of us, or even a significant percentage, to sell our suburban homes and move to small farms or walkable cities (after all, who would we all sell to?), by mathematical necessity, the investments we have made into these car centric assets (liabilities, actually) will contract so significantly as to be surreal. We are months, not years, from the point where the future consequences of Peak Oil/Peak Oil Imports will become common, man on the street, knowledge. As that wave crests, the rush of folks to the other side of the boat will be more than a little disorienting.

If you think you can avoid risk by going to cash, I got a bridge to sell you and some swampland, too. Same with bonds.

On another note, don’t be taken in with the “oil is at $100 and the global economy has not collapsed” argument.

Of course the GLOBAL economy will not collapse based on oil prices. After all, commodity trading, including international trade, is a zero sum game – for every winner there is a loser. It is not the PRICE that is the problem for the GLOBAL economy (I want to make very clear that the GLOBAL economy and the U.S. economy are not one and the same anymore), the problem is the aggregate supply of oil, and that my friends, is not going anywhere but down. And while the GLOBAL economy can withstand higher energy prices, the importing nations, particularly the U.S., will feel the ill effects, as the price of oil goes up faster than imports come down our deficit widens. Can you imagine if we were able to import significant liquified natural gas? For better or worse, the oil portion of our trade deficit issue will crest as the aggregate value of imported oil declines with aggregate volumes. What happens on the other side of THAT is worth considering and I shall do so in another post.

"I do not concern myself with why. Sometimes I think in terms of where, other times when... and always how much." 6 days of the Condor.

Mentat (at) yahoo (dot) com