Monday, September 3, 2007

The Power (Insanity) of Positive Thinking

I ran into a friend of mine, a fellow Wall Street working stiff (actually he manages several sales offices for a major investment bank) I had not seen in a while at the gym today. Of course our conversation went to the markets, the sub-prime issue, and energy.

When you work for a Wall Street “sell side” firm as broker, salesman, economist, M&A banker, etc… your job security requires you to be an optimist, and not just in public. Indeed, one needs to convince themselves of certain things or one is not going to be terribly effective. That said, I was somewhat appalled at the outright dismissal I received from my friend after I communicated my energy concerns. He said he didn't want to hear more, as it interfered with his "positive thinking"! Wall Street, as represented by the people that communicate its collective ideas to the public, is, in my experience, completely unaware of our (the U.S.) energy situation. Worse, although completely unaware they have hardened opinions that they deliver with force and verve.

I have several questions for my Wall Street brethren; and for our purposes here, please answer on the spot, without the benefit of research (after the questions I have an explanation):

1: How many barrels of oil were consumed worldwide in 2006?

2: How many barrels of oil were discovered worldwide in 2006?

3: Can you name the top 10 oil exporting countries in the world, their growth or decline in production, and their growth or decline in domestic consumption?

4: Can you name the top 10 oil importing countries in the world, their growth or decline in domestic production, and their growth or decline in domestic consumption?

5: Can you name the 10 largest oil fields in the world, their date of discovery, and intelligently discuss if production has been increasing or decreasing over the past 5 years at each particular field?

6: Do you know the BTU content of Crude Oil, Ethanol, and Natural Gas Plant Liquids (“NGPL’s) by volume, and what composition of “All Liquids” production each represents? Do you even know the difference between Crude Oil and NGPL’s?

7: If you cannot rattle this rather minor list off of the top of your head… Why the $%##!! do you even have an opinion? Why would any investor in their right mind listen to you (what’s up with the blind leading the blind)?

Let’s face it: Whatever opinions or beliefs you now have are the product of what you have read or watched in the media. Not that the data has not been available to you or to the media, but for reasons unknown to me the data do not seem to find their way into concise reports - with the exception of the web’s Blogsphere, and these seem to be dismissed as some sort of heretical naysayer.

(You don’t have to be a Wall Street Master of the Universe to indulge in this exercise. Anyone running a business that requires the SLIGHTEST strategic planning (like whether or not to by a new fax machine up to determining next year’s human resource requirements) that is making assumptions about their future energy supplies should stand up, take their head out of the sand, and indulge in a little “if/then” forecasting.)

I have been writing on the subject of energy production, and its distribution to its ultimate consumer – you and me – for several years now. I never said the world was running out of oil - just that the OECD countries would not be able to increase their consumption due to supply constraints, that eventually that would cause a permanent decline in their economic output (i.e. their collective GDP would contract in perpetuity) and that this eventuality would begin as an “import crisis” similar to the 1970’s. The problem is that our economic system is predicated on never ending growth in collective GDP (or should I use the out of date GNP, or GGP, since I am speaking globally?), i.e. earnings growth, money supply growth, credit supply growth, etc… and within a year or 2 or 3 of the Peak in world energy production that expected growth isn’t going to happen anymore.

I have received emails from people pointing out that Europe’s consumption of energy has not grown in some years yet Europe’s GDP has continued to grow during this time frame. This argument is specious to my mind, as I believe that the Europeans, much like the U.S., merely exported the energy intensive portions of their economies to Asia, and that the better measure will be world economic production/world energy production. Of course, there is some slack/waste in the system, and that is why it will take several years after peak oil/energy production is reached to see that event manifest itself in economic production.

The data continue to support a May, 2005 peak for world wide crude & condensate production, and August 2005 for “all liquids” production, and I continue to believe that should the trend hold through to May 2008’s data, that we could say that the peak has likely already occurred, and that we could expect to experience a “terminal decline” in production.

Worse, OPEC continues to support those dates. The following piece was on the front page of today:

“Sept. 3 (Bloomberg) -- OPEC, the supplier of more than 40 percent of the world's oil, will keep production unchanged next quarter because the crude market is well-supplied, an Algerian minister said. Qatar's oil minister said no change was needed.

``There is no change in the situation of the market,'' Algerian Energy Minister Chakib Khelil said in an interview late yesterday in Algiers, the country's capital. ``OPEC members are likely to keep their current production quotas'' when the Organization of Petroleum Exporting Companies meets in Vienna on Sept. 11.

The International Energy Agency has called on OPEC to increase output in the fourth quarter so oil importers can build stockpiles before winter in the northern hemisphere and prevent further gains in prices. Indonesia, OPEC's second-smallest producer, is alone so far among the 12-member group in calling for an increase in production.

OPEC should leave its quotas unchanged, Qatari Oil Minister Abdullah bin Hamad Al-Attiyah said today. ``We should roll over production,'' Al-Attiyah said in an interview in Doha, Qatar's capital. ``The price is high because of geopolitics and a lack of oil refining capacity.''

Crude oil has almost tripled in four years, rising to a record close of $78.21 a barrel on July 31 in New York. Demand in China and India and supply disruptions in OPEC members Iraq, Nigeria and Venezuela are driving up prices.

Crude oil for October delivery was at $74.35 a barrel, up 31 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:57 a.m. in London.”

The article even BEGINS with a mispresentation... "OPEC, the supplier of more than 40% of the world's oil..." OPEC supplies over 70% of the world's oil exports - what the heck does an oil importer care more about? World production or world exports? Is it even close? JUST LOOK AT THE NAME! The Ogranization of Petroleum EXPORTING Countries! It is not the Organization of Petroleum PRODUCING Countries, is it? Because it is their ability to EXPORT that makes them important, and because of declining oil production and increased domestic oil consumption these guys are going to be exporting less, and less, and less...

Now, I know my Wall Street colleagues might buy the Qatari Minister’s explanation… but, really… what do “geopolitics and refining capacity” have to with the “high price” of oil, in a world where inventories are being drawn down and gross exports (oil available on the world market to importing nations) are in decline? If the problem was “geopolitics” tanker rates would be near their highs to compensate for the risks, and if refining capacity were the problem, the “crack spread” (the margin, or “spread”, that refiners receive between the difference for a barrel of crude and a barrel of refined product) would be huge, yet they are below average. This can be seen in gasoline, as prices are down 30 to 40 cents per gallon retail in the past 90 days, yet the price of a barrel of oil in the spot market today is about the same, or higher, than the average for the month when gasoline hit its high.

In other words the Qatari Minister is completely full of it… and did the Bloomberg reporter call him out on it? HA! Our media can’t wait to out some dopey politician’s sexual Peccadilloes, but call out an OPEC Minister on the most important issue of our time? Nah. We can trust these guys. They wouldn’t mislead us. We’re their friend.

Folks, you don’t have to wait for the September 11 OPEC meeting. The only thing you can believe coming from these guys is this: OPEC will not increase its production quotas this fall. I don’t believe they can, but even if they could – IT IS NOT IN OPEC’S INTERESTS TO DO SO.
Yours for a better world,

Mentatt (at) yahoo (dot) com

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