Sunday, June 24, 2007

First the Independent, now the WSJ… Who’s next?

On Friday past, page A2 of the WSJ was devoted almost entirely to Peak Oil – without ever mentioning the words “Peak Oil”.

Why cover the issue reasonably well and not call it by its popular name? Good question, and I have no good answer.

What strikes me, and as a Wall Street working stiff keeps me up at night, are the risks Peak Oil presents to the banking system in the midst of Wall Street’s ostrich act, particularly private equity.

For example, billions upon billions of U.S. $ have been borrowed from banks by private equity funds to finance acquisitions (and leverage returns) of companies that are already highly leveraged to oil – airlines, for example. If the Peak Oil camp is correct in their assertions there is simply no way all of the borrowed money will be paid back (unless we have a round of hyper inflation). Now, add this to the growing mortgage default crisis and housing depression… and you have the conditions for a system failure that would make the early (I am dating myself here) 1990’s Savings & Loan/RTC debacle look like the common cold standing next to the 2008 avian flu.

The good news, if I can call it that, is that in this scenario the impending energy crisis might be put off for a few years – that is, if it hasn’t already begun - giving us precious time to make adjustments. Work with me for a minute…

The U.S housing market is not getting better, despite attempts by the talking heads to convince you otherwise – one can hold their finger “in the dyke” for only so long. This compounded with mortgage defaults will likely (not possibly) lead the U.S. into recession; at the same time, China’s economy will slow due to internal pressures and the U.S. slowdown; U.S. and China’s problems spread into worldwide recession, stocks head down, and energy consumption slows.

Now some very smart people that I have great respect for, like Gary Shilling, believe that this will cause U.S. bond prices to rise and commodities to fall – to which I will give an unqualified “maybe”… because the wild card is the reaction of governments and central banks: Do they print money and inflate? Do they protect their currencies or do they protect their export markets? This is one of those Rumsfeld moments… these are “unknown unknowns”.

So what’s this got to do with “Peak Oil”? Everything. Oil makes Wall Street go, even if Republican’s and Wall Street types do not recognize this salient fact. But Wall Street makes oil go and this, too, is so even if Democrats, environmentalists, and peaknics do not recognize this salient fact. But is it the chicken or egg that comes first? If you have a reasonable argument as to which please email me.

But let us get back to the original point of this post: We are now seeing the Peak Oil story, or a rose by any other name, consistently breaking into the main stream media and the financial media. At some point markets will, absolutely, positively, discount this new risk, at which point it is my belief that all hell is going to break lose - good for some, bad for others, but just plain ugly for most.

Yours for a better world,

Mentatt (at) yahoo (dot) com

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