Saturday, July 28, 2007

This was a bubble (housing) to pay for a bubble (tech stocks 2000).

Quote of the week:

``Housing is bust, and wishful thinking cannot unbust it anytime soon,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Couldn’t have said it better myself.

For the past 18 months or so we have been listening to the National Realtor Assocociation, Federal Reserve officials, Wall Street executives, and the Mortgage Bankers Association (and every other “kook, loony and squalid” fill-in-the blank) “talk their book” (an old Wall Street term for promoting whatever securities that were “long” in ones portfolio) regarding the housing market. A group of Florida Realtor’s even went so far as to call on a higher power – they had a “prayer breakfast” to ask the Almighty for a better housing market. A better example of what you read and hear in the media CAN hurt you and is designed to manipulate you cannot be found.

Housing is doomed in many of the formerly hot markets, and is plain awful in the rest of the country. Not only had the prices soared due to an overabundance of cheap and easy credit (you won’t see that for at least another generation), now those markets are horribly overbuilt, and the units over-improved. I look at the future foreclosure market in my home of South Florida. McMansion after McMansion were built on lots that were overpriced to begin with, and then, in an effort to recoup a really silly purchase price for the lot, the builder over appointed the unit in order to raise their profit margin – after all, one can’t make money with a $300,000 structure built on a $700,000 lot.

Now the supply of these units is overwhelming the demand, and that circumstance is only going to get worse as the Wall Street debt distribution machine sputters to a stall. Turns out those multi-million dollar homes were not being bought with “cash” (you know, accumulated capital) after all – and as the “Little Rascals” know, “no tickie, no laundry” - or no financing, no buyers.

It is what it is.

But that is not the end of the story…

The oil import crisis looming over the U.S. has been mildly painful up until now. The refiner’s “crack spread” has narrowed significantly, leaving gasoline prices at the pump down nearly 10% from their peak earlier this summer even though crude oil has risen roughly 10% during the same period. The “crack spread” erosion is mostly done now, and a continued rise in the price of crude will be reflected at the pump directly… but that is not The Problem.

The Problem for the U.S. will be a sharp decline in imports over the next several years, sharply crimping the economy, while at the same time the housing market implodes. What is unknown is the reaction: Will we experience hyperinflation similar to Argentina earlier this decade, or a deflationary spiral (on steroids) like 1989 – 2006 Japan? It is simply unknowable at this time, but a plan “A” and a plan “B” would very much be in order. It is my opinion that it will be one or the other, not business as usual.

How might it begin? The Federal Reserve has to make a decision: Does it defend the U.S. $? Or does it try to support the housing market? It cannot do both. I cannot imagine a circumstance where the Fed does not abandon the U.S. $ in favor of the housing market; after all, the voters own houses in America, and foreign investors will feel the $’s decline more than the American public, at least initially (and that will change), and they do not vote in our elections.

I asked my good friend FireAngel (he is a contributor at, and a Phd. Candidate at one of our most prestigious universities) what he viewed would signal the oncoming event. Gold and Oil, as priced in $’s would surge in price, with gold exceeding $1000 per ounce and perhaps a great deal more (this is not a recommendation to buy gold – remember this is only his opinion as a signal of the $ weakness). I completely agree and I would add that food inflation would accelerate rapidly at this time as well.

The IEA and the EIA both have projected a world oil supply number for Q4 that will simply not be met. OPEC has 2 meetings planned at their Vienna headquarters during the remainder of this year, the next being September 11. How will the market react when OPEC cannot meet the IEA and EIA expectations? We will know soon enough.

Yours for a better world,

Mentatt (at)

Thursday, July 26, 2007

The U.S. Dollar is not the lifeboat you want to be sitting in.

The market may have taken it on the chin 2 days ago, but it got its head handed to it today. The knee jerk reaction was “a flight to quality” – U.S. Treasuries. Now, who in their right mind thinks U.S Treasuries have any quality left? Only those Americans who do not possess a passport and have never converted currencies (do big money manager’s really lack a passport? No, I just like insulting them).

The $ is on the ropes; the U.S. housing and debt markets (excluding for the moment Treasuries) are on the ropes. If the Fed lowers rates to help housing, mortgages, and the CDO market, the $ will go down like a rock in a pond. If the Fed holds rates steady, or heaven forbid, tries to control food and energy prices by raising rates (insanity), they stem the bleeding in the $ temporarily and kill the U.S. economy. As my friend Fireangel from likes to say: Bernake must be the dumbest man on the planet, because that designation is defined as willingly taking over the job of the former Fed Chairman, Alan Greenspan. Why? Because there is no way out of THIS “conundrum”, and although he had nothing to do with the circumstances, the blame for the train wreck will fall entirely on Bernake (and maybe the next President).

Perhaps you think I am being alarmist, after all the Dow hit a record 14,000 and has doubled since 2002… but that measures the value of the market against the $; if you compare the market against gold since 2002, the market is down; if you measure it against silver, the market is down far more than versus gold; if you measure the market against crude oil, the market is an unmitigated disaster. In fact, you would have done better if you held milk (no real way of doing so) instead of stocks for the past 5 years.

If milk, corn, wheat, gasoline, and healthcare continue their price appreciation (inflation) and must be purchased using real dollars, why would you measure the market in nominal dollars? Doesn’t make a lot of sense, does it?

But I digress...

In the short run, the various central banks can get together to support the dollar. My contention is that the central banks might want to, but their politicos might not. Some might not even want to, and we (Congress) may not want them to… The following was front page on Bloomberg news today:

“Some U.S. lawmakers deem the yuan's ascent -- about 9 percent since the Chinese government ended a link to the dollar -- insufficient to narrow the trade gap. The Senate Finance Committee is set to consider legislation aimed at pushing China and other countries to raise the value of their currencies.”

Now how can the Fed be successful in defending the value of the dollar in a political environment in which our elected officials want “China and other countries to raise the value of their currencies” (the mirror image of which is a decline in the U.S. dollar)?

This brings us back to The Problem. Energy - and oil in particular. The U.S. is borrowing over $1.2 billion every business day to finance its oil purchases. That piles up into a heap of money in a hurry. That pile devalues the dollar as it increases, leading us to borrow more money to buy the oil… see where this is going? So why is it so hard for the guys running the train set? (Next year those prima donna baby boomers that elect to “go ugly early” are going to start drawing on Social Security, Medicare, and “the drug benefit”. If you think the dollar is cheap now, just wait for the collision of the baby boomer’s entitlement drain and significantly declining U.S. oil imports.)

Oil, at this moment, is priced in U.S. dollars, and the price of oil is set by the incremental imported barrel of oil. The value of the dollar is declining, while at the same time the supply of oil in the export markets is declining. If this continues, the U.S. will increasingly find itself being priced out of the international Oil market ($100, $150, $200 per barrel) it created and once controlled. And that, my friends, for better or worse, is going to change the world.

Yours for a better world,

Mentatt (at)

Wednesday, July 25, 2007

The Housing crash meets the oil crash. (This will be better than “Alien Vs. Predator)

Yesterday, the U.S. equity market took it in the chin as it began to dawn on rich people that poor people might not be able/or willing to pay their mortgages.

``We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' Countrywide CEO Mozilo said of the housing slump during a three-hour conference call with investors. Bloomberg News, July 24

This is only a surprise to the coastal elites. Working people knew they couldn’t pay these mortgages when they took them. They believed that trees grow to the moon and that they would be able to sell before too many payments went by. But the housing analysts have one other problem they have managed to overlook: Energy. The funny thing is that the energy analysts may have overlooked housing. Allow me to explain:

Energy prices could quite possibly retreat hard IF housing brought the U.S. economy into a condition of deflation. This scenario is unlikely, but possible. Ignoring all of the possible outcomes is what got us into this situation, and investors need to pay attention - not get lost in some “belief system”.

This begs another question, as I believe that an oil import crisis is looming for the U.S.:

Even if housing declines Japanese style (unlikely, except for South Florida and other mania zones), will the other oil importing nations, China, Japan, and Europe come to mind, with their huge U.S. dollar reserves and their huge trade surplus with the U.S., continue to support a currency exchange rate that allows a nation with 4.5% of the world’s population to continue to consume 25% of the world’s oil (and continue to import 33% of the world’s oil exports)?

Unlikely, in the extreme.

Now let your mind wander to a world where the U.S., with 4.5% of the world’s population is only able to consume 10% of the world’s oil production, i.e. only consume its own production (either due to the aforementioned import crisis or due to currency exchange rates – pick your poison). What does that country look like? Do homes 30 to 50 miles from the primary sources of employment retain any value? I rather doubt it. What about vacation and second home markets? These would be worse, if possible. And if they retain little to no value, hasn’t the U.S. eclipsed Japan’s housing debacle of the 1980’s and 1990’s by a large margin? Most certainly. And, again, if so it would follow that the U.S. would be in the grip of a terrific deflationary period. The very thing that in the previous paragraph I said was unlikely. One could make themselves nuts going around and around and around with this. Good thing it’s too late for me. Makes things easier…

Things are far worse than they appear in housing land:

Today it was reported that existing home “Purchases declined 3.8 percent to an annual rate of 5.75 million, the slowest pace since November 2002, from a revised 5.98 million in May, the National Association of Realtors said today in Washington”. Bloomberg News

A classic case of your, and mine, mainstream media being manipulated and in turn manipulating the public, willingly or otherwise, in this case by the NAR. You see, the 5.75 million homes sold is only the numerator. The denominator, or the total number of homes has increased over 15% since 2002. When comparing apples to apples the ratio is much worse than 2002. Another important number is days of supply, and THAT number of existing homes is the worst in DECADES, not “since 2002”, and is not accurate in as much as many mortgages in default have not listed the home to be sold, and are not being counted in the supply. The number of homes has increased dramatically since 2002 from efforts like condo conversions and new home building… and that wave has not drawn to a close yet (just take a look at the Miami sky line).

Unfortunately, I do not see a resurgence in the housing market, under any circumstance, before the oil import crisis delivers the coup de grace. Many attempts will be made by certain "interests" to manipulate, cajole, motivate, misinform, and confuse you in an effort to gain some advantgage. But take a good look at what is going on in the credit and currency markets before you take the bait.

Yours for a better world,

mentatt (at)

Monday, July 23, 2007

Last week, the price of U.S. crude in the spot market crossed $80 per barrel. The data continues to support the case for much higher oil prices, and much lower supplies. For those of you who have politely listened to my rants of the past 2 years, I appreciate your patience and would like you to note the following from the front page
of today’s Bloomberg news:

“July 23 (Bloomberg) -- The $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away.
Jeffrey Currie, a London-based commodity analyst at the world's biggest securities firm, says $95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as next year.

``We're only a headline of significance away from $100 oil,'' said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc. ``The unrelenting pressure of increased demand has left the market a coiled spring.'' New disruptions of Nigerian or Iraqi supplies, or any military strike against Iran, might trigger the rise, Kilduff said in a July 20 interview.

Higher prices will increase revenue for energy producers from Exxon Mobil Corp. to PetroChina Co., while eroding profit at airlines including EasyJet Plc and railroads such as Union Pacific Corp. The U.S. and other oil-importing nations risk accelerating inflation, while higher energy costs threaten to restrain growth.” - Bloomberg

For better or worse, the price signals are telling you something important – that the probability of coincidence of my position on oil supplies is falling with the ascending price of oil as well as each production report. Perhaps the balance of my analysis is correct as well – that U.S. food supplies in an energy constrained world will be a much bigger issue than energy supplies – and energy supplies are going to be a big problem.

Whoever said “To you who have ears to hear…” should have met the guy who said “may you live in interesting times” because you really need to and you will, like it or not.

mentatt (at)

Wednesday, July 18, 2007

On the Eve of Crisis

Oil prices, as measured by the “front month” contract for West Texas Intermediate and Brent are within a couple U.S. $ of their politically induced high of last summer. Unfortunately, this is not “The Problem”. The Problem, more than price, will be an import crisis.

The Problem is also breaking into Wall Street’s psyche:

In a report issued today by Barclays, ``If non-OPEC supply was going to mount any kind of a surge then one might have thought the signs of the renaissance would be evident by now,'' Barclays Capital analysts Paul Horsnell and Kevin Norrish said in their report. Concern is growing ``that the weakness in non- OPEC supply is a structural rather than a transitory phenomenon.'' – Bloomberg news

I’ll bet these guys are a hoot at a party. They certainly have a gift in understatement. "structural rather than transitory"? You can say it, guys: The Problem is not temporary - it's permanent.

A more poignant observation was made by “Fireangel” (that’s his handle) from

“Americans have to get over the notion that if they stand in front of an oil well with a large enough check in their hand oil will magically appear from the well.”

During the 1970’s, America’s economy, spirit, and vision of the future were broken by an oil import crisis that PALES in comparison to the import crisis we face today. This might lack originality, but this one is not your father’s import crisis. Then, the U.S. imported less than 3 million barrels per day (“bpd”), in 1990 the U.S. imported a net 6 million bpd, and in 2006 the U.S. IMPORTED 12 MILLION BPD, or roughly 60% of our liquid petroleum needs.

Stay with me through the numbers, because the scale of the problem is insurmountable – and that’s The Problem: Scale.

The world produces nearly 85 million bpd, but most of that oil is consumed within the countries that produced it. The surplus oil, that is oil that was produced by a given country but not consumed within that country, is then exported for trade amongst the importing nations - the U.S., Europe, Japan, China, and India. This surplus/exports is roughly 36 million barrels per day (2005). The problem is that the amount of surplus oil available for export to the importing nations is a function of:

The growth or decline in production within the exporting nation; and the growth or decline of consumption within the exporting nation. A nation producing 2 million bpd, consuming 1 million and exporting 1 million with an annual 4% decline in production and a 2% increase in consumption will not be exporting oil in just over 1 decade. As a matter of fact, their exports (not total production) will decline by 10% the first year after the production decline begins (4% of 2MM = 80k; 2% of 1mm = 20k; 80K + 20K = 100k or 10% of 1mm). The United Kingdom and Mexico’s oil production is falling much faster than that. The UK went from peak production to oil importer in 6 years.

The simple fact is this: Importing nations can only import that which the exporting nations are exporting. This is going to come down on us, fast.

Back to the numbers… The U.S. imports over 12 million bpd, or 1/3 of ALL OF THE AVAILABLE EXPORTS.


1. China and India’s oil demands are growing exponentially, and
2. Exporting nations aggregate oil production is declining, and
3. Exporting nations internal oil demand is growing (they benefit from higher prices and buy more “stuff” that consumes oil)


The oil available to the U.S. to import is going to decline permanently until oil imports are no more. Further, this has been the circumstance for the past 2 years, and it is my opinion that this will be the case, with a steepening in the decline rate over time FROM NOW ON. RIGHT NOW. THIS MOMENT. AM I CLEAR?

In relation to #3 above, the exporting nations are taking in billions of U.S. $’s and are expanding their automobile fleet, home size, HVAC, and appliances usage in fantastic terms. These require energy, much of which is most likely to come from OIL. Hence, with continually declining production, and continually increasing consumption, the exporting nations will have less, and less, and less, oil to export until, finally, they have no exports available at all. Jeffrey Brown, otherwise knows as “Westexas” at has given this concept the acronym ELM, for Export Land Model. In his model, Jeff posits that within 9 years, + or – 2 years, there will be little to no oil available for export. Got that? In 2016, no more super-tankers crossing the globe to bring us our Oil fix (Hope you aren’t long tanker stocks). This doesn’t mean we have until 2015 to make adjustments or feel the impacts. Unless something changes, a crisis environment will be upon us shortly – and IMHO, you are seeing the beginning effects of this now in the price of oil.

How do we continue to grow GDP, feed ourselves, support our currency, fund Medicare and Social Security, and fund our defense budget at the time when the U.S. oil supply is 40% of what we now enjoy? It can’t be done - something has to give – but there are a great many special interests whose holy cows will need to be gored to sort this out, and we all know what that means: Whatever programs the government adopts to deal with this will be late and very inefficient, long on politics and short on competence – and they will take good care of their own.

You need to take care of yours.

To paraphrase "Fireangel":

Americans have to get over the notion that:

Food comes from the grocery store - no, food is produced with oil
Their paychecks come from their employer - no, it comes from an economy driven by oil
Their water comes from a tap in your kitchen - no, it is pumped there by, among other things, energy from oil
Their transportation comes from GM, Ford, Mercedes - no, it comes from oil. (Try driving with no fuel)
Their sanitation, police, fire protection, and other municipal services come from local government - Nope, all brought to you courtesy of oil.
Fill in the BLANK - odds are, in American society, it was brought to by cheap and abundant oil.

And in 9 years you are going to have 60% less of all of the above

Mentatt (at)

Monday, July 16, 2007

Food Price Rise Accelerates

Those of you following this Blog for some time know how much I believe oil prices and availability effects food prices and availability. That effect is starting to become quite apparent to consumers, and now, even to wealthy bankers. The following is from’s front page:

July 16 (Bloomberg) -- Rising prices for food, from yogurt in the U.S. to steak in South Africa, are causing heartburn at the world's most powerful central banks.

The fastest increase in food-commodity prices in at least a decade has already led monetary authorities in England, Mexico, Chile and South Africa to lift borrowing costs. It is also sowing doubts about the U.S. Federal Reserve's focus on core inflation, which excludes food and energy, and about China's gradual approach to tightening credit.

As Fed Chairman Ben S. Bernanke prepares to deliver his semiannual report to Congress this week, central-bank officials worldwide are anxious that climbing costs may trigger consumer concerns about faster inflation. To keep them from being self- fulfilling, some of the biggest economies might have to push interest rates higher.

An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded during the last 18 months. ``We haven't seen anything on this scale before,'' says Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development.

Global Inventories

The U.S. Department of Agriculture's estimate for global inventories of grain are at the lowest level in 30 years in terms of days of consumption, says Carl Weinberg, chief economist for High Frequency Economics in Valhalla, New York. – Bloomberg News

I find it rather frightening that central banks believe they should try to control food prices through tighter monetary policy, without taking our energy predicament into consideration. It is my opinion that this is further denial of our energy situation by the political establishment. After all, tighter policy would slow the economy - food production included. Didn't they get the memo about our grain inventories? (I can just see Bernake reporting to the President: "I contained the inflation problem sir, with a judicious round of rate increases, and the only negative effect was a lack of food!" Good work, old boy!)

While it is true that a central bank engineered economic slow down or recession would likely suppress the price of food and energy, at least in the short term, it is hard to argue that this is the best strategy to pursue as it relates to food. There has been no public mention of a study of energy and its effects on our food supply by the federal government in spite of a great deal of material written on the subject and very much available to our political and economic leaders.

One might rail against my position on energy’s effects on agriculture, but it is hard to argue with a 23% increase in the price of food in the past 18 months. Further, the fact that my assertions regarding alarmingly low grain inventories are now breaking into the mainstream media should bring peoples view of our circumstance from the surreal to the very real. If my assertions are correct, this is only the beginning of a sustained and painful escalation in the price of food - and a decline in food availability.

Yours for a better world,

Mentatt (at)

Thursday, July 12, 2007

EIA Data for April 2007

The U.S. Department of Energy’s EIA production data for April 2007 has just been released – The world’s average daily production of crude and condensate for the month was 73,404,000 barrels per day. EIA crude and condensate data for the past 2.33 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 = 73,302,000, January - April data

EIA data for “All Liquids” (crude, condensate, natural gas plant liquids, ethanol, coal to liquids, tar sands… hence the term “All Liquids”) for April 2007 was 84,327,000 barrels per day. EIA All Liquids average daily production for the past 2.33 years:

2005 All liquids = 84,542,000
2006 All liquids = 84,481,000
2007 All liquids = 84,148,000, January - April data

The peak month for average daily production continues to be May, 2005. We now have 23 months of declining production, while at the same time prices continue to rise. There is no shortage of incentive for the producers to produce.

The Blogs are abuzz with the release from the IEA that, in their opinion, a significant oil "supply crunch" is likely unless OPEC increases output by an additional 1 million bpd immediately, and more over the next 5 years. This is very much a "show me the money" moment. OPEC (Saudi Arabia) claims they have the capacity to continue to control the oil markets and prices by increasing the supply of oil in EXACTLY SUCH TIMES AS THIS. If, in fact, they have such capacity we will know it shortly, (by December, at the absolute latest). There is no need to speculate. A couple of posts ago I listed an alphabet soup of acronyms that were denying the problem - and losing the argument to the data; well, you can remove the IEA from that list. Another 12 months of data continuing the above trend and the rest - EIA, CERA, USGS, API (wow, the list of those who deny is getting rather short!) - will fall quietly into line.

The truly disquieting thing about this sudden about face of the IEA is that the IEA is a political organization - at leaset as much so as a geologic, scentific, data repository, etc... organization, and as such is not in the business of making controversial calls - like causing a panic in the public or in the oil markets. In my view, the IEA must see Peak Oil, they called it a "Plateau", as being upon us or already in the past. Under no other circumstance would they make this kind of pronouncement.

I take no joy in having the data continue to confirm my assertions. The unforeseen outcomes and unintended consequences of a permanent decline in liquid petroleum products could very well be significantly worse than any of us could have imagined, especially if declines in North American Natural Gas production were to occur simultaneously.

Monday, July 9, 2007

The IEA Just Blinked

Today it was reported in a Reuters article that the OECD’s International Energy Agency:

"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010," the IEA said.
"It is possible that the supply crunch could be deferred -- but not by much."

The IEA's previous Medium-Term report called for world demand growth of two percent a year between 2006 and 2011. It now expects global demand to reach 95.8 million barrels per day (bpd) from 86.1 million bpd in 2007. The forecast assumes average global GDP growth of 4.5 percent annually.

"The results of our analysis are quite strong," said Lawrence Eagles, head of the IEA's Oil Industry and Markets Division. "Something needs to happen."

"Either we need to have more supplies coming on stream or we need to have lower demand growth."

"Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak," the report said. – from the Reuters article on Yahoo, MSNBC, and everywhere else on the web, July 8, 2007

Like I said, the IEA just blinked. Still can’t quite go with the term “Peak Oil” - they like the semantically pleasing “Plateau Oil” better. But I ask you: What’s the difference? Are they suggesting that while the world cannot increase its production, it can maintain production exactly where it is, 310 Billion Barrels per decade or about twice what might turn out to be the total reserves of Saudi Arabia, indefinitely?

Still, this is quite a move for the IEA, who just last year said that they foresaw no constraints in the uninterrupted growth in oil production through at least 2030.

Here is the clincher: Within moments of the story breaking, the price of the average oil company equity on the New York Stock Exchange rose about 1%. Just look at a graph of today’s trading in XLE or IGE, 2 large exchange traded funds of the oil producers. That can only mean that the millions of people that trade in the space know about this issue and acted on the information to the tune of 10’s of billions of dollars in market capitalization. This is not the only means by which they will take action to either protect themselves or take advantage of perceived opportunities. For all of OPEC’s lies, big oil’s obfuscations, CERA’s manipulations, and the government’s ignorance or unwillingness, the issue is CLEARLY understood by millions of investors – and for better or worse, they are the people that count.

This can be spun no other way. Not only did the IEA blink, they just called OPEC’s bluff: Produce the oil, now, if you can.

Let me translate this even more clearly: OPEC - Put up or shut up

Yours for a better world,

Mentatt (at) yahoo (dot) com
No Wars, No Hurricanes… but West Texas Intermediate is still over $72 per barrel. With oil inventories in the U.S. at multi year highs one might find this surprising – I do. Then it came to me; there are hundreds of grades of crude oil, and our inventory reporting system treats them all the same – they are all just crude oil. Perhaps there is plenty of heavy, sour oil and not so much WTI. No way to know for sure, of course. It’s just a thought…

The API, CERA, ASPO, TOD, etc… continue to argue over the date of arrival for Peak Oil, and whether it even exists, etc… I have no idea why they waste so much breath at this point. The EIA production data for April 2007 is due out any day. I would be willing to bet that gross production will not eclipse May 2005 (the current peak oil production month). If this trend should continue for 3 full years (10 months from now) it will be the first time since the 1970’s oil shocks that production fell 3 years in a row. Considering that the demand side is giving tremendous price incentive to the producers to increase supply (not to mention that at the end of said 3 year period the earth will have 93 billion barrels less oil left under the bell curve then it had at the beginning), what other conclusions can one draw other than that the energy complex cannot increase production?

On the other hand, if supply should begin to steadily increase there will not be a single ear left that would be willing to listen to Peaknik assertions, though eventually they will most certainly be proved correct.

I belong to the camp that says that the market will tell you more through price action than any of the aforementioned groups, as the market is bigger, deeper, and has far more resources. Both sides have dug in hard. One of them is likely to look quite silly in a little over a year, 2 years at the most. So far the data supports the Peakniks, but we must wait for more data before drawing any conclusions, or we will sound more like CERA rather than a group of intelligent geeks enjoying a co-examination of the facts.

I will post on this again as soon as we have the EIA April 2007 data.


Food prices continue to rise, but corn has been falling. What’s up? If I knew for sure I would not need my day job. Prior to harvest, corn inventories are expected to be the lowest ever recorded. Certainly the market is expecting a bumper crop of corn. Is it enough corn to supply all of the ethanol plants scheduled for completion this year with enough corn to meet their ethanol production schedule? Not unless a great deal of corn is diverted from feed to fuel – with the effect of steeply higher corn prices.

Yours for a better world,