Friday, June 29, 2007

Numbers don’t lie, but the people doing the counting do, and sometimes they can’t even count…

I am amazed at how much press the distance that food travels from farm to dinner plate is getting on the web these days. “Slow food”, “the 3000 mile caesar salad”, “the 100 mile diet”… guys (and gals), you have got your eye on the wrong ball. The liquid fuel energy expended in shipping or trucking food is the absolute LEAST of all of the energy inputs, perhaps a couple of percent of the total BTU’s of agricultural inputs.

The real risk to our food supply is an insufficient supply of hydrocarbon based FERTILIZER, followed distantly by an insufficient supply of PESTICIDES. Hold on, Lefty, I’m not going to gore your sacred cow… in addition to my real job, for fun and profit I run an organic farm in Middle Tennessee where we raise dairy goats for market, and chickens, pigs, vegetables, and fruit for our table. My organic credentials aside… I want to share with you an experiment we did on the farm this year.

We took 2, 15-feet by 30-feet plots and planted corn. On 1 plot we added several inches of composted manure from our horse stalls, straw, grass clippings, leaves, wood chips and other organic matter and worked it into about 8 inches of top soil giving us about 12 inches of loosened soil on planting day and sowed with corn. On the other, we added no organic material, tilled the soil, and planted the same seed of corn. Neither plot received commercial fertilizer.

As of June 28, 2007, 8 weeks into the project, the corn in the improved soil is nearly twice the height of the corn growing in the unimproved soil. The plants are a dark, healthy green, while the corn in the unimproved soil is a sickly pail green.

We will do an exact measurement by weight and cob count at harvest, but I have a good idea of the outcome.

BTW, we did a similar experiment with tomatoes... same outcome.

The risk to our food supply is falling production per acre due to a lack of nitrogen fertilizer, which, as many of you know is made from natural gas feed stocks, not a lack of transport fuels (at least not for several decades). And, no, we don’t have enough cows, horses, goats, etc… to provide enough manure to replace the nitrogen we now get from fertilizer. So don’t worry about how far your food has traveled; worry about how far the fertilizer traveled, from where, and how much nitrogen fertilizer is available, because we can’t go organic fast enough to make up the difference.

Now, this brings up another issue: If we consume our “crop waste”, switch grass, wood chips, etc… to make cellulosic ethanol, how are we going to maintain the food production capacity of our farm land’s soil? It follows that if we don’t have enough hydrocarbons to run all of the world’s vehicles then presumably we will be in a similar predicament regarding hydrocarbon based fertilizer… is the answer then to take the organic matter out of our top soil to produce ethanol? Sure, as long as we prefer driving to eating.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, June 25, 2007

The following was posted on the front page, first paragraph of the International Energy Agency’s website:

“Global oil product demand is revised up to 84.5 mb/d for 2006 and 86.1 mb/d for 2007 (revisions of +250 kb/d and +420 kb/d, respectively). This results from baseline adjustments for non-OECD countries and also has the effect of reducing the miscellaneous-to-balance. World demand is now estimated to rise by 2.0% or 1.7 mb/d in 2007.

May world supply fell by 565 kb/d to 84.9 mb/d. Seasonal OECD stoppages compounded weaker OPEC crude supply, notably in Nigeria, where outages are near 800 kb/d. Non-OPEC 2007 output is trimmed by 110 kb/d to 50.2 mb/d, with growth of 0.9 mb/d this year." – IEA, June 25, 2007

OK, if oil “demand” is to increase by 420,000 bpd and “supply” has been falling by 200,000 bpd over the past 2 years… it doesn’t take too much on gray matter (spelling “gray” gives me away as an American) to figure out that there must be inventories out there that are being drawn down… and either supply increases to meet demand or price increases to dampen demand… Any questions?

Yours for a better world,

Mentatt (at) yahoo (dot) com

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

Wednesday, June 20, 2007

Several days ago, The Independent, one of the U.K.’s largest newspapers, ran a full front-page story on Peak Oil. This was the first major western newspaper to do so. So, for those of you wondering why it took so long for one of the “majors” to make the grade, consider some of the stunningly double speak BS coming from “them”.

“We can't conserve our way to energy independence, nor can we conserve our way to having enough energy available. So we've got to do both.” -George W. Bush, quoted in "Bush Launches Effort to Sell Energy Policy Overhaul," The Washington Post, 4 May 2001

Got that? And you thought “they” were going to solve the energy crisis. Well, “they” can’t even string a coherent sentence together, even though prepped in advance.... This would be freaking hilarious if it wasn’t so serious… but what else should one expect from an individual who said:

“It is clear our nation is reliant upon big foreign oil. More and more of our imports come from overseas.” Yep, George W. Bush

Imagine that.

"... the supply-demand fundamentals seem consistent with the view now taken by market participants that the days of persistently cheap oil and natural gas are likely behind us." Ben Bernake, Chairman of the US Federal Reserve - Economic Club of Chicago, 15 June 2006.

I didn’t know Bernake was an attorney as well as an economist! He forgot “inclined”, “reasonably”, and “perhaps” to really put them to sleep.

This might have been the first major news article that did more, but not much more, then quote “Investment Banker” Matt Simmons and “Pulitzer Prize winning author” Daniel Yergin for 2 “separate but equal” opinions on the matter. As a matter of fact, there are only 2 repositories as a source for the official denial of Peak Oil: Yergin’s Cambridge Energy Research Assoc. (“CERA”), and the U.S. Geological Survey. Tellingly, neither of these organizations has published data for review supporting their assertions – yet every major news publisher, in an apparent attempt to appear balanced, continues to quote their opinions without asking, “where’s the beef”? I’d like to remind the mainstream media that, while I truly loved his book “The Prize”, Yergin has NEVER even been CLOSE in forecasting on the price of oil or natural gas. He should stick to journalism and economics, which are best used in the rear view mirror, and leave his crystal ball at home.

Yours for a better world,

Mentatt (at) blogspot (dot) com

Monday, June 18, 2007

We might need a sub-prime mortgage to buy Bread, Milk, and Eggs…

It has been my assertion that one of the market signals indicating the approach or the arrival of Peak Oil will be rising prices of foodstuffs and agricultural products.

Last week the price of wheat rose 18%, and is up 72% in the past 12 months. The price of corn rose 9.7% last week, and is up 80% in the past 12 months.

Mind you, these price increases have occurred while ethanol still represents less than 2% of our liquid fuels. Now contemplate grain prices if President Bush succeeds in his “20 in 10”, in which ethanol is being called upon to make up nearly 20% of our liquid fuel needs (I guess the good news is that that ain’t never gonna happen).

Milk prices have surged nearly 60% since last spring:

“A worldwide shortage of milk means dairy farmers in Vermont and elsewhere are likely to receive record paychecks for their milk this year, according to the region's largest dairy cooperative.

"We see prices to be very strong for the rest of the summer, fall and early 2008 for the farmer," Agri-Mark spokesman Doug DiMento said. "We're expecting prices to be in the $20 (per hundredweight) range and above for the rest of 2007."

For 2008, prices are more difficult to project, but DiMento said expectations are that prices will remain in the $20 range.

That's a big improvement from May of last year when the Boston market price was $12.61 a hundredweight, DiMento said. He noted, however, that because of Vermont's distance from Boston, farmers here received approximately 63 cents less per hundredweight – or $11.98.” – Bruce Edwards, Rutland Herald

I am happy for the farmers, but I doubt the holders of U.S. debt will be too happy if this should continue. The U.S. federal government can obfuscate the true reporting of inflation only so much. Food and energy inflation may well overwhelm that obfuscation.

The decrease in overall availability of oil and natural gas, and its concomitant increase in price will at some point, in my opinion, decrease overall factory food production and increase the price of their products – and I believe it is likely that we are seeing the beginning manifestations of that now. If, in fact, this is only the beginning… what are the ramifications of $12 per gallon milk, $10 per dozen eggs, and $8 for a loaf of bread when it costs $200 to fill up Soccer Mom’s minivan? What if food price inflation does not stop there? And what will the reset be for Soccer Mom’s adjustable rate mortgage? Interest rates would by necessity move significantly higher in the environment envisioned here.

On a long enough timeline the probability of these events rises to a near certainty. The debate is really about the timeline, and that timeline has everything to do with the volume of exportable oil available to the U.S. to import. My apologies if it appears that I am U.S. centric but, a: this is where I buy my food, and b: The U.S. is the largest agricultural exporter in the world. The effects felt here for these products will be magnified around the globe.

My brother asked me if we couldn’t overcome the problem with WWII era victory gardens. At first I thought he was silly - now I think him prophetic. American’s do not need to grow ALL of their personal food, just some of it. It is the marginal demand increase or supply shortfall that is the issue (well, sort of ). If every household had a good sized garden and some fruit trees, they might be able to produce 10 or 20% of their vegetables and fruit, and grains are not hard to grow, either. Over time, as oil supplies decline and the impact on factory agriculture accelerates, there is also the opportunity for people to increase their own personal production, as their skills increase over time. There might even be an opportunity for an enterprising soul in all of this.

Of course, impacts on the current economic structures and on our personal life styles are another matter entirely. How many white collar American’s can envision being responsible for growing enough food – or else? Still, as I have said in many previous posts, American’s will remain much more interested in eating than in driving.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Saturday, June 16, 2007

This was on the front page of the IEA website today:

"The IEA predicted in its monthly oil market report that global oil demand will increase by two percent this year, revising upwards an earlier estimate due to a considerable adjustment of previous demand data. David Fyfe, an oil analyst in the IEA said, referring to supply and demand, “to us, the balance looks particularly stark at the moment”. He added that for refiners “the system is quite stretched …with little wiggle room”.

That pretty much says it all.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Thursday, June 14, 2007

The U.S. Department of Energy’s EIA production data for March 2007 has just been released – The world’s average daily production of crude and condensate for the month was 73,538,000 barrels per day. EIA crude and condensate data for the past 2.25 years:

2005 average crude and condensate production = 73,791,000
2006 average crude and condensate production = 73,546,000
2007 average crude and condensate production = 73,293,000 Q1 data

EIA data for “All Liquids” (crude, condensate, natural gas plant liquids, ethanol, coal to liquids, tar sands… hence the term “All Liquids”) stands as follows:

2005 All liquids = 84,542,000
2006 All liquids = 84,481,000
2007 All liquids = 84,125,000 Q1 data

Though peak production continues to be May 2005, a decline of less than ½ of 1% year over year is not steep enough, in my opinion, to come to any conclusions other than that the data continues to give additional support to the argument that peak is either here or fast approaching. Market signals support the argument more forcefully, as average prices (incentive to produce more oil comes from the average price of the commodity over a longer period of time, i.e. 3 years, rather than a high price peak lasting only a short period with lower average prices) have remained well above prices that had in the past sent the industry into overdrive to achieve additional production. As we say on Wall Street, “the trend is your friend” (although in this case that saying may ultimately prove untrue). And if the sky-rocketing lease rates for drilling rigs is any indication, and I think that it is, the world’s energy industry complex has been putting in a Herculean effort to increase production - without results.

One must also take into consideration that over 60 billion barrels have been consumed since May ’05 and these 60 billion barrels have been permanently removed from the ultimately recovered oil endowment. We are now over 60 billion barrels closer to peak (or past peak) than we were in May 2005, by mathematical necessity. To give you some sense of scale, it is worth noting that the 60 billion barrels of oil the world consumed in these past 2 years was more than all of the oil the world had consumed prior to WWII. Try and get your mind around that.

A continuation of this trend could best be explained by the “duck analogy”. If it swims like a duck, quacks like a duck, and walks like a duck, and it has feathers… it is probably a duck. We may not be able to see the feathers, yet… but it sure swims, walks, and quacks.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, June 11, 2007

This was on the front page of the IEA website today:

“Financial Times, 08 June 2007

Claude Mandil, Executive Director of the IEA, said to the Financial Times that "biofuels would pose no threat to Opec", and that even in the worst case-scenario for the oil cartel, there would be a dramatic need for them to an increase production, so "Opec has nothing to fear". Mr. Mandil said he sees the need for oil, continuing to grow, and the IEA forecast that global oil demand in 2015 would rise by close to 10m barrels a day to 94.8m b/d.”

HA! HA! Boy, I bet those OPEC guys are terrified of corn ethanol.

This was on the front page of yahoo news today:

There is adequate crude oil in the market and commercial oil inventories are at a high level, Iranian Minister of Petroleum Kazem Vaziri Hamaneh told reporters on the sideline of a regional oil and gas conference here.

"There is sufficient crude oil in the market, there is no shortage of crude oil," he said when asked ifOPEC should raise supplies to the market to ease high oil prices. "Commercial oil stocks are at a very high level, at a comfortable level. The reason for the price hike is not the level of the crude oil stocks. It's not that problem."

Which data point is this guy reading from? OECD inventories are down to 53 days of supply and the U.S. EIA predicts inventories will decline to 50 days by December 2007.

This was the front page of Bloomberg new today:

“Crude oil rose more than $1 a barrel after Saudi Arabia, the world's biggest exporter, told Asian refiners that it would curb shipments for a ninth month in July.”

Didn’t Saudi Arabia say they had 3 million barrels excess production available? Then why cut their contract supply customer’s oil shipments?

Confused? You are meant to be.

Yours for a better world,

Mentatt (at) yahoo (dot) com
"There are known knowns. These are things we know that we know. There are known unkowns. That is to say, there are things we know we don't know. But, there are also unknown unknowns. These are things we don't know we don't know." - Donald Rumsfeld discusing the War in Iraq (but it could easily have been the scientific community discussing world oil production)

This Blog focuses on energy, and how the inevitable decline in oil production will affect the financial markets, food supplies, and politics. These subjects require their participants to look forward decades, not months.

There will likely be no sudden confirmation of Peak Oil or its impacts (unless politics screws things up). If you are looking for this to be definitively declared in some reliable venue you will likely be disappointed. I continue to point to data from the EIA that appears to support the "Peak is here/near" camp, and the probability is increasing with data from each pasing month supporting this position. Still, this data, by no means, indicates a certainty - but a high enough probability in the near term for people interested in the above fields to hedge their bets accordingly. No more, no less. This story continues to evolve, and one must react to the data, not read into the data that which is not there.

March 2007 data is due out shortly and I will report back forthwith.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Sunday, June 10, 2007

Some dots that need to be connected to our montage…

• The price of wheat is back to near record highs. After this year's harvest, wheat inventories, as measured in days of supplies, might approach the critical 50 day mark, down from 57 days this year, and over 120 days in 1999. Corn is in a similar position.

• The U.S. Energy Information Administration projects days of supply of OECD commercial oil stocks will retreat to roughly 50 days in December 2007 (down from 53 days currently, and a high of 56 days in June of 2006) for only the 3rd time since the 1970’s oil shocks, and will further decline by December 2008. If you think supplies are “tight” now, you ain’t seen nothing yet.

• Although we have yet to receive the EIA’s data for world oil production for March 2007, we can count. Tanker traffic would indicate no change in the continuing decline of production, Asian customers of Saudi Arabia had been informed of cuts in their shipments (this is the primary area of growth in world oil consumption) and Saudi shipments continue to decline despite production coming from recently developed fields, and it has been reported that production declines continue apace for Mexico’s Cantarell oil field.

• Though gasoline prices have hit a new record at the pump, demand in the U.S. continues to grow.

• Oil exporting nations continue to flex their newfound muscles, with Russia leading by example.

From Bloomberg News, June 10, 2007

“Russian President Vladimir Putin assailed the dominance of the global economy by a small group of developed countries and called on them to recognize a ``new balance of power'' in the world.

``The new architecture of economic relations requires a completely new approach,'' Putin said at the St. Petersburg International Economic Forum today. Russia intends to become an alternative global financial center and to make the ruble a reserve currency for central banks, he said.

Traditional institutions such as the World Trade Organization are ``archaic, undemocratic and inflexible'' Putin said. Russia, the largest economy outside the WTO, has been trying to join the group for more than a decade.” - Bloomberg

“I’d like to repeat that because it sounds vaguely important” - George Carlin

A “new balance of power” in the world, one in which the oil exporting nations (Russia, OPEC) lord it over the importing nations (Europe, The U.S., China, India, and Japan) is in the cards. How the importing nations deal with it – by cooperation and conservation and an orderly transition to an economy less dependent on oil, or by the use of force – is less apparent, but after the U.S. experience in Iraq I am somewhat hopeful.

For the economic transition in the U.S., and the world, I am less hopeful. I believe that that is likely to be rather stark, whether or not it is sudden. Although we cannot determine with any certainty the peak date or the slope of the decline until well after the fact, the data continues to point to a peak nearly 2 years ago, and for any planning to be effective it must be commenced well in advance. Further, peak oil will arrive in the importing nations well in advance of the world production peak, and it is quite possible that we are seeing the early manifestations of that event now, in the form of record U.S. retail gasoline prices.

I continue to believe that we have some wiggle room, as there is substantial waste, or “fat”, that can be cut before we start cutting into the muscle and bone of the world economy, but that the fat will disappear at some point soon.

This is the time to get your act together, or you will be stuck with “woulda, coulda, shoulda” sometime in the near future. So stop digging your hole.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, June 6, 2007

Sometimes, we do not share the same conclusions, even when we share the same data.

I had a most interesting dinner tonight with “fireangel” at (that’s his handle). Though working on his second Doctorate in something other than energy or finance, his knowledge and grasp of the impact of one upon the other was impressive.

We discussed Peak Oil's impacts on the financial markets, the banking system, Globalisation, food production, etc... in which we were boringly in sinc, but told me I was all wet on my post on the impact of energy descent on human population. I won’t bore you with the details, and since population is not my area of expertise whatsoever, I was more than willing to accept that the conclusions he arrived at, from the same data, were more compelling than mine for the time period under discussion. As I said before, I am not hoping for any particular outcome, just an open, co-examination of the facts in search of the “truth” sort of thing. His points were well taken, and I felt better about things as this is not one of the more fun topics of energy descent.

I don’t think I have to emphasize the importance of an open, free, forthright, and vigorous discussion of the data concerning oil, natural gas, and coal production and reserves. Not only are we not getting one, we are constantly bombarded with media stories that are biased and purposely manipulative – but which say what most people want to hear:

That the American way of life (the amount of energy we consume per person) will go on, without negative impacts or inconvenience.

Maybe it will. But if it is to do so, the world oil production data, as reported by the U.S. Department of Energy, Energy Information Administration, had better start to show an increase in production, and soon, or our myriad conclusions will be quite moot. The March, 2007 production data is due out in the next few days. You can count on a post from "your truly" upon its release.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Tuesday, June 5, 2007

Not enough carbon to bake the planet

Good News

I received an email from a very nice person asking me if I had any good news considering my views on our energy condition. I do.

Here it is:

There is not enough coal, oil, and natural gas to cause the kind of devastating climate change you hear bantered about the mainstream media these days. This is not to say there will not be impacts, like 3 feet of water in your condo's lobby at some point if your condo happens to be on the beach in South Florida, it just will not be nearly as bad as currently projected.

Wanna know why I am so cock sure? If you took all of the hydrocarbons available, all the coal, oil and natural gas, methane from decaying permafrost, etc… by atomic weight versus the atomic weight of earth’s atmosphere it won’t be enough to get us to 500 parts per million of CO2, never mind the 1000 parts per million prediction that’s been getting traction in the media lately (and, yes, I took into consideration the atomic weight differential when O2 is added to C from combusted Hydrocarbons).

Don’t think that’s good news? You should, and it is. (There are a couple of wrinkles to this... like, if we could actually use all of the tar sands in Canada AND the shale in Colorado as quickly as we might wish we just might succeed in setting off the greatest mass murder event since those Bozos of the Third Reich. (Even I think I sound sensationalist now.) Not to worry. This is a NAFC probability (Not a Freaking Chance).

The bad news is still the bad news. There are not enough hydrocarbons available to us to kill ourselves with by continuing to live as we do - even if we wanted to.

mentatt (at) yahoo (dot) com

Monday, June 4, 2007

I sent copies of my previous posts on “Denial” to a friend and fellow Wall Street working stiff, who then showed it to another of the traders at his firm. After reading the posts, the trader sarcastically remarked, “I guess that means we can short everything”, and when pressed, retorted (and I am paraphrasing here), “I’ll be playing golf by then”, meaning the advent of the era of declining energy supplies.

I can think of nothing that better exemplifies the American spirit of denial of our energy situation. I might have spent 6000 or more hours on this research project, wrote dozens of articles, many of which were published, and at one time had 3 “fact checkers” in my employ to make sure that I had the details and facts correct – but in the space of 5 minutes this very educated, top earning Wall Street talent dismissed my assertions and conclusions out of hand. Perhaps the irony was lost on him – after all, I was writing about DENIAL!

Oh, and by the way… you know that golf game you were planning to take up full time? Will the course need fossil fuel powered landscaping equipment? What about pesticides and fertilizers for the fairways and greens (these are made from fossil fuels)? Will you be driving to the course? Will the club’s employees need to drive to work? Will the employees be able to afford a $200 fill up?

Maybe you should take up gardening…