Wednesday, August 29, 2007

The Federal Government of the United States' back door admission of Peak Oil.

Today, August 29, 2007, was the day the Federal Government admitted that they believe peak oil is here. This was on Bloomberg News today:

Aug. 29 (Bloomberg) -- The U.S., the biggest emitter of gases blamed for global warming, said it will contribute to the next round of emissions cuts, a first step to setting limits since rejecting the Kyoto Protocol six years ago.

``We will also come through with what we believe will be our contribution'' to limits that will be set during talks through next year, Harlan Watson, the senior climate negotiator for the U.S. Department of State, said today at a media conference in Vienna. He didn't say by how much the U.S. would curb its emissions.”

You see, the U.S. would never, ever, under any circumstance accept a decrease in their carbon emissions quota – unless it was happening, or already happened, anyway. And if it is going to happen in any event, well we might as well get some political mileage out of it. After all, if Peak Oil production and Peak Oil imports are here for the world, and Peak Natural Gas happened in North America in 2001, and Peak BTU’s of coal happened in the U.S. in 1999, the U.S. has nothing to lose by agreeing to emit fewer carbon atoms into the atmosphere - since we have fewer hydrocarbons to burn, we will emit fewer carbon compounds. Simple like that.

Unless of course you believe that the Bush Administration suddenly found the environmentalist within its soul, and out of the goodness of their heart, and in a new found desire to be a better neighbor decided that they would unilaterally accept that which was an anathema at Kyoto, Japan just 6 years ago.

Why now? Why today? Indeed.

Inventories of total crude, finished motor gasoline, and distillate fuels fell to 656,110,000 barrels from 678,815,000 from 7.20.07 to 8.24.07.

When an oil importing nation as dependent as the U.S. loses 3.5% of its inventories in 5 WEEKS, and at a time of very high prices, which should have increased incentives to produce more and consume less – but did not – it is time to worry about those imports. Because there are only 3 components to the inventory equation:

Domestic production + imports – consumption = inventory change

Since domestic production was nearly unchanged in the past 5 weeks, and consumption was actually down (slightly) the only thing left are imports, which by necessity must have declined by over 22.5 million barrels, during the 35 day period.

All of the above data I found on the U.S. Department of Energy’s website. These are hard data. The conclusions that I draw from the data are this:

Something has to give, RIGHT AWAY. Inventories must stop declining RIGHT NOW, OR ELSE. There is nothing in the data that says that this trend will continue,nor that it will reverse course. That is one of those “unknown unknowns”. Unfortunately, we will know soon enough.

Mentatt (at) yahoo (dot) com

Sunday, August 26, 2007

Natural Gas in North America

Natural Gas (“NG”) production in North America appears to have peaked in 2001 at 19.616 trillion cubic feet (“tcf”), and despite increasing our drilling efforts by over 120% since then, production has fallen to 18.523 tcf in 2006 (it had fallen to 18.074 in 2005 but rebounded somewhat in 2006.) The predictive powers of the U.S. E.I.A. and (chuckle) Cambridge Energy Research Associates leave something to be desired. In 1995, and as recently as 2002, both organizations were in print saying NG production and supply would be able to grow without constraint until at least 2020 (Gufaw!). Here, in chronological order by year is U.S. NG production in tcf:

2001: 19.616
2002: 18.928
2003: 19.099
2004: 18.591
2005: 18.074
2006: 18.531

In 2006 we imported 4.187 tcf, with the vast majority 3.604 tcf coming by PIPELINE from Canada. Canada exports about HALF of its NG production to the U.S. – and here comes the rub: Canada’s production appears to be in decline, and its internal consumption of NG is rising (sound familiar?). Declining Canadian production and increasing domestic demand is a recipe for DRAMATIC decline in NG exports to the U.S. And just in case you think Mexico is coming to the rescue… the U.S. imported a paltry .013 tcf of NG from its neighbor to the south. Worse, the U.S. will most likely have to export some of its largess to Mexico for political reasons, as Mexico is a major oil EXPORTER to the U.S.

And the hits keep coming… The rate of decline in North American NG production is likely be far, far, far steeper than the decline rate in crude oil production due to the unique geological properties of NG (as a gas it comes out of the ground under pressure, and when that pressure is gone that is the end of the well, and a NG well gives little indication of the when the end is near. One day you show up for work and the pressure gauges pretty much tell you it is time to look for other opportunities.)

The problem for the U.S., and all of North America, is that there are no NG pipelines from Iran, Russia, or Oman coming into North America. NG use is 99% driven by local, or at least local as in your own continent (and forget going over mountain ranges like the continental divide making western and eastern North America 2 separate energy islands for both oil and NG).

So, what are the U.S. EIA and CERA saying now? I found this pearl of wisdom on CERA’s website (Please note the date):

HOUSTON, February 8, 2006 – As North Americans experience their most expensive winter on record in terms of energy consumption, many industry observers and participants—as well as consumers—have concluded that higher natural gas prices are here to stay. Many now believe that high natural gas prices are no longer spurring a supply response, and that the price of natural gas at the Henry Hub—the US benchmark—will never again fall below $5.00 per million British thermal units (MMBtu).

In contrast, Cambridge Energy Research Associates (CERA) expects prices to gradually ease over the coming years, and eventually return to sub-five dollar levels.

Relief Alternatives Limited

“Sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available,” Robert Ineson, CERA Director for North American Natural Gas, told a briefing at the firm’s CERAWeek 2006 here today.

Demand for natural gas in the United States and Canada will exhibit remarkable resilience over the next few years, and will remain strong despite high natural gas prices. “There will be little price elasticity in the residential, commercial, and power sectors. The industrial sector has already been pared back to a toughened core. Natural gas demand for power generation will grow despite ongoing gas price strength,” Ineson said.

CERA believes that consumers will realize substantial price relief only if a significant increase is made in the supply of natural gas available to North America. The source for additional natural gas supply will not be the increasingly mature producing basins of the United States and Canada, despite rising production from unconventional gas resources—including coalbed methane, shale gas, and tight sandstones.

LNG the Only Source

CERA believes the answer is liquefied natural gas (LNG). “Meeting North America’s growing natural gas requirements in the face of stagnant indigenous productive capacity will not be possible without increasing volumes of LNG imports from overseas,” according to Ineson. “Simply put, there is no Plan B. LNG is the only potential natural gas supply source big enough and timely enough to meet the need.”

“Major new LNG regasification projects will begin to come on stream in 2008,” Ineson said. “As the new supplies enter the market, North American natural gas price pressures will begin to ease. CERA expects LNG deliveries to outstrip continental gas demand growth between 2008 and 2010, sending prices below $5.00 per MMBtu.”

Well, there you have it, and since we are going to IMPORT our way out of this problem, we will need to go headlong into the construction of the infrastructure necessary to import all of the NG we are going to need in the form of Liquid Natural Gas (Want to make a bet that whoever benefits from any construction contracts is a client of CERA?).

Once again, we have a blatant attempt to manipulate the public with propaganda; promoting solutions that do not take into account the scale required to have a meaningful impact. How much will the projects underway (expected to be completed 2010) be able to add to U.S. NG consumption? A whopping 1 to 2%, and this is only if the exporters can actually fulfill their part of the transaction. Care to make a bet on the eventual completion date? Now take a good look at the North American NG production decline rate and the U.S. in particular. And why do the major oil companies pay these guys tens of millions of dollars per year even though they have been wrong in every market call and production forecast since 1998? Because CERA says what their customers want the MEDIA to hear (read any story about future energy supplies in ANY major news outlet and you will likely find that CERA is an acknowledged source). Big oil and others can fund these guys by “retaining” them as consultants, and then plant their misinformation in major news outlets giving them great legitimacy – with no liability to the guys who are really pulling the strings. Clearly, they learned something from their mishandling of the climate change public relations fiasco. (Disclosure: I own stock in most of CERA's clients. So what am I complaining about? The interests of the executives at these companies do not always (rarely) intersect with that of their shareholders.)

Assuming the LNG market will actually develop (I sincerely doubt this. I will poke holes in this argument big enough to drive a truck through in a future post) to the point where it was possible to solve our short-term supply problem…Didn’t these guys learn anything from our Oil predicament? Did they skip the “America is addicted to Oil” speech? The U.S. can barely fund its imported oil purchases (and does so through the issue of IOU’s), can you imagine the impacts to our trade imbalances and the value of U.S. dollar if these guys were right?

The bottom line is this: North America is confronted with a NG shortage as well as an oil shortage. Understanding the magnitude of the issue will give you an opportunity. Or you could pull a Jim Hanson. Just ignore the issue and hope it will go away.

Hold on to your wallets.

Yours for a better world.

mentatt (at) yahoo (dot) com

P.S. Jim Hanson was the creator of the muppets. He died of what would have been a very curable "Strep" infection, but decided to ignore the issue and hoped it would go away. It did.

Friday, August 24, 2007

The import crisis explained (and how it likely was the straw that broke the housing camel’s back).

But first our quote of the week:

"Right now, success is judged by how much energy is used. Think about it, the person who is successful has a really big car; they take really expensive vacations; they have a really big house. Now we have got to have another yardstick by which we measure success because success can't continue to be measured by how much energy we use." Congressman Roscoe Bartlett (R - Maryland), the only scientist in the U.S. Congress. (Good thing he is from Maryland. If he represented my district of Boca Raton, Florida, he wouldn't make dog catcher talking like that.) OK, let's get back to the issue...

Net oil imports (we really need these) to the U.S peaked in 2005 at 12,549,000 bpd, declined in 2006 to 12,278,000 bpd, and declined again in the first 4 months of 2007 to 12,039,300 bpd. As a matter of fact 2007 imports are slightly lower than 2004’s imports of 12,097,000. The price increase of oil (in U.S. dollars, no less) from the beginning of 2004 to the present? An increase of over 75% - from $40 to $71 (the close of the front month contract as I write this), so, please, don’t tell me that the "DEMAND" simply was not there. Truth is, there is a great deal of "demand" for $40 per barrel oil, just no "supply" of $40 per barrel oil. That’s the cool thing about neoclassical economics. "Supply" and "Demand" will always come into equilibrium through "Price". Unfortunately, that is a bunch of B.S., because in the very near future, we are going to "Want" a lot more oil then we are going to "Get", because the countries that are selling this oil to the U.S. have seen their domestic production decline, and the number of cars, homes, people, plastic manufacturers… increase dramatically as a result of all that money we are sending them for the oil they sell us. The U.S. will never again see 12,549,000 bpd of imports (unless bird flu or nuclear war breaks out in Asia).

Keep in mind that the world production peak of crude oil and condensate (not NGPL’s, ethanol, XTL, CTL…) occurred in May 2005. Is this a coincidence - peak imports and peak production having occurred in 2005? I think not. Now let us look at the mirror image of this: That the U.S. aggregate Vehicle Miles Traveled peaked in 2004 (yes, the Federal Government tracks how many miles we drive. Source:… makes sense when one considers that we can’t consume that which is not there.

So what’s this have to do with housing? Well, didn’t housing peak in the summer of 2005, too? Peak imports, peak production, peak miles traveled, peak housing… (how far behind can peak stock market be?)

The Federal Reserve stimulated the economy after 9/11 knowing full well that flooding the system with that kind of liquidity would likely cause some kind of asset bubble trouble. What they did not count on, and still do not count on, was the decline in energy availability for soccer moms and commuting dads (decreasing total trips to the mall) to get back and forth to their distant homestead, and the extra $400 per month in fuel costs, while exporting all of that extra money to the oil exporting nations in the form of IOU’s -and all of its concomitant effects on the U.S. dollar (don’t get me going) - while at the same time “Chindia” was busy exporting cheap labor. The U.S. was caught in the vice of monetary inflation and wage deflation – many things cost more, but wages were not rising due to pressures from overseas. (Please spare me the productivity crap that the Department of Commerce spoon-feeds the media, or “How we can all get rich by taking in each other’s laundry for a fee!” The Fed, clever as ever, came up with an ingenious plan. They no longer published the money supply measure M3! After all, if we can’t see it, maybe no one will notice! Ta Da! (round of applause… not)

I know, I know… what about all those unscrupulous mortgage brokers, realtors, and Wall Street investment banks? Yea, they really did take the ball and ran with it (and jammed it down not a few throats) but let me ask you something… If oil supplies were as plentiful versus demand as they were in 1999… and gasoline was a buck a gallon for the past 7 years… Wouldn’t the economy have grown another percent (or 2) each year (compounded) for the past 8 years? Would housing be in the soup in that environment as bad as it is now? Heck, would 9/11 even have occurred in the absence of our ABSOLUTE reliance on the current Saudi regime? (WHOA!! Never mind, that got away from me… politics and diplomacy are not my thing.)

As the saying goes, when it comes to the residential real estate market of American suburbia: “You ain’t seen nothing yet”. If people can't drive to it, or drive to work from it, will it be worth anything? I doubt it.

(Remember, when I speak of these things I mean as they relate to REAL, or constant, dollars. Maybe we should start to price housing versus gold bullion or WTI crude oil – you know, how many ounces of gold or barrels of oil it would take to buy the median home…)

Yours for a better world.

Mentatt (at)

Friday, August 17, 2007

If you only knew

I wonder how many Americans realize just how close we just came to a major bank failure – and what that would mean. Americans have not had a good scare since the early 1990s, and that wasn’t a “holy $##%! I just #%@!! in my boots” scary. This was.

Remember all those talking heads on CNBC commenting about how much “capital is sloshing around the world”? What happened to all that capital? How did we get from there to the current “credit crunch”? Where did all that capital come from, and where did it go? In our system, money is created when it is loaned into existence. It is also destroyed when those loans default (or when a loan is repaid, but that is not the issue here).

The Fed put us here, and is now navigating some tough stuff to get us out without too much harm. The good news is that the Federal Reserve has just telegraphed their intention to abandon the U.S. dollar in favor of the banking system/housing/real estate market. It was the right thing to do, really, as there was no way the Fed could save the value of the dollar, so they might as well save the dollar/economy. Further, a huge amount of liquidity has been pumped into the system, with more surely to follow. In my opinion this will only increase commodity inflation versus the dollar – the dollar will fall against oil, gold, silver (especially at these levels courtesy of the “credit crunch”), corn, wheat, milk, etc… If you are in debt, or hold commodities, inflation is your friend. If you own cash, C.D.’s, etc… inflation is your mortal enemy. The Fed talks tough about inflation, but what the Fed really, really, really fears is DEFLATION (just take a look at Japan for the past 17 years).

Deflation, not inflation, causes bank failures, falling money supply, mortgage defaults, stock market crashes. The Fed just” ain’t gonna” stand by and let that happen. They will print till they can’t turn the crank anymore, and since it is in no one’s interest for the dollar to crash against other currencies; the other central banks will fall quietly into line (my friend FireAngel from thinks this is the case with the exception of New Zealand and Australia’s central banks). My focus was not on the currency trade opportunity (typical American), but the dollar/commodity exchange rate.

I received many emails from people who think I am a ”goldbug”; I am no such thing. I simply despise the U.S. dollar as a store of value. Gold, silver, land, timber, livestock, oil, etc… are likely to be a better store of value. A diversified portfolio would include some, if not all, of these, in addition to financial assets. I am afraid that the purchasing power of the U.S. dollar will decline which will be exacerbated by the continuing decline in home prices, the proverbial “double whammy”.

Stay tuned, the Fed as well as the markets have more work to do. If the Fed and the other central banks continue to pump money into the system (and I believe that they will) this new liquidity will find a home, and it won’t be homes, and these new dollars will not be good for your existing dollars.

Yours for a better world,

Mentatt (at)

Thursday, August 16, 2007

Credit crunch?

The U.S. equity markets have been hard on the nerves for the past several weeks. I received an email today asking me if I am so smart, how come I did not sell at the top of the market a few weeks back? And why are energy companies underperforming the markets if there is an energy crisis looming? Good question… if you admire unreasonable expectations.

The credit crisis has very, very, very little to do with the looming energy crisis. It has some impact – all else being equal if the economy does not grow, demand for fuels will not grow, taking pressure off oil prices. All things are not equal. Besides demand, we have this pesky problem with supply. At any time in the past 50 years could you have imagined that oil prices would be as high as $71.48 (that was the front month contract as I write this) going into an economic slow down? In the last recession prices fell below $20. Why is the price closer to $100 than $20? Let’s look at some data (please don’t let your eyes glaze over):

Commercial inventories of U.S. crude oil have declined about 4.8% in the last 5 weeks to 335,228,000 barrels of oil. (
Now you may think that that is a lot of oil. So let me put this in perspective: In the week of August 20, 1982 the U.S. commercial inventories of crude oil stood at 361,185,000 barrels of oil. We had more oil in inventory in the period shortly after our last oil crisis than we do today, 25 years later to the week. Do you know how much oil the U.S. consumes per day in 2007? About 20,500,000 barrels per day - that means we have 16.35 days of supply (not including the Strategic Petroleum Reserve). We import 60% of that oil. In 1982 the U.S. consumed approximately 15,800,000 barrels per day and imported approximately 25% of that. Houston, we have a problem…

OPEC just told us that they plan on producing over 250,000 bpd per day LESS in 2008 than in 2007 (and they produced less in 2007, than they projected in 2006), while non-OPEC production will, by all accounts, decline in 2008 from 2007.

The oil producing countries are not only producing less, they are consuming more, and will have less and less and less oil available to importing countries, the largest of which is the U.S.

The credit crisis has created some great bargains within the energy complex. I have laid out the case for much higher oil prices. The average multiple in the group is substantially lower than the market’s average. We are one headline, one hurricane, one terrorist attack, one pipeline shutdown, one import crisis, etc… from MUCH higher oil prices. In that environment, would you rather own U.S. dollars (treasuries, C.D.’s.etc…) or energy (equity or commodity)?

It is true that Natural Gas (“NG”) is dragging down the energy indexes, but I would not count on that for too much longer. In my next blog I will cover NG, where the future, as far as North America is concerned, is at least as dire as that for oil.

If you try to time this you run the risk of being shaken out at precisely the wrong time. The markets do not operate at our convenience. If you think the credit crunch came unexpectedly, wait till you see the energy crunch. The credit crunch was just a warm up.

Yours for a better world,

Mentatt (at)

Wednesday, August 15, 2007

n case you passed over this article today in the WSJ: "OPEC Says Market Woes Cloud Output View", OPEC just told you that they cannot increase oil production. Here is the lead to the story:

Dubai, United Arab Emirates – “Damping expectations that it will pump more crude to ease high prices, the Organization of Petroleum Exporting Countries said uncertainties over world economic growth were clouding the outlook for oil demand.” The Wall Street Journal August 14, 2007

OPEC went on to say that they expect demand for their oil to be DOWN next year by 239,000 bpd compared to forecast demand in 2007 (which they have not met), and that the sub-prime problems in the U.S., Blah, Blah, Blah, etc… Prices are over $73 per barrel, U.S. commercial inventories are down about 5% in the past 3 weeks, OECD total inventories as measured in days of supply is nothing short of ALARMING - but we don’t need more oil production because of the sub-prime issues! This would be hilarious if it wasn’t so serious.

I wanted to ask (to whom?) if there was any chance that the decline in world wide oil supplies contributed to the real estate declines and subsequent mortgage defaults… you know, who came first -the chicken or the egg - but at this point I think the subject quite moot.

I have never said this in my blog before, but there is only one conclusion that I can draw from the past 2 years of production data, price signals, and OPEC claiming that we do not need more oil, and it is this: Peak Oil is here.

Mentatt (at) yahoo (dot) com

Sunday, August 12, 2007

The U.S. dollar, not so almighty anymore (and it could get MUCH worse)

Central Banks around the world added over $400 billion of “liquidity” (they printed money or bought securities) to the system.

Gold is up 6.8% this year; amazing, considering that gold has increased in price each and every year for the past 6 years. Gold is just another “hard currency”, so said another way the U.S. dollar is down about 6.8% (not exactly, but you get the point) against gold this year, and has been down versus gold for each of the 6 previous years.

Americans bought much less gold bullion, as measured by American Gold Eagle sales, in the first half of 2007 than they did in the first half of 2006. This is not true in the rest of the world (or gold prices would have fallen). The best explanation I have heard for this phenomenon is that American’s have far more faith in their government than citizens of other countries. I do not believe that faith is warranted regarding the American currency. Consequently, it is difficult to believe that the bull market in gold is over when the citizens of the largest economy do not own the metal in proportion to the rest of the world. As a matter of fact, I do not think the bull market in gold will be over until you see people waiting in lines trying to exchange their falling currency for gold.

The Federal Reserve is in a uniquely tough position. If they cut rates to support real estate (and the banking system, the Fed’s only true client) without the concerted effort of the other central banks, the dollar will fall, setting off a round of import inflation, and remember, we import oil, lots of it – at least for now. At some point the Fed is going to stop trying to pay for asset bubbles with a new bubble. Let me refresh your memory: 1998’s Asian Contagion and the Long Term Capital hedge fund crisis brought forth a spigot of liquidity from the Fed which led to the doubling of the NASDAQ stock market over the following 18 months and its subsequent crash. At which point the Fed began to add liquidity until the events of 9/11 at which time the Fed really poured it on, creating the housing bubble of 2001-2006. Now, here we are again but with a BIG difference. The U.S. dollar is going down like a whiskey shot, and the U.S. continues to borrow over $1.1 BILLION per day just to buy oil, and printing more money every day to do so with no hope of getting off this treadmill. The Fed’s past behavior made some real estate speculators very wealthy at the expense of the poor suckers stuck in those previously overvalued homes with mortgages they cannot pay. What a country! Now, what asset are they going to inflate in order to bail out real estate?

This is not to say that gold prices could not fall in the near term with the rest of the markets – it certainly could as investors might need to raise cash to pay for margin calls and sell their precious metals to do so. I do not sell gold bullion, and this is not a recommendation to buy gold bullion. Any investment decision you make you do so entirely on your own. I am precluded from giving specific investment advice in this forum. That is why I do not discuss individual stocks or bonds or make market calls. I can continue to speak in general terms – so let me start with my loathing of the U.S. dollar as a store of value. This disclosure and disclaimer aside, let us move on.

If you believe that the real estate market and the stock market have finished their gyrations and put in a long term bottom and are ready to resume their inexorable climb to “infinity and beyond”, have I got a tooth fairy for you…

Oil prices have slipped from their highs in the upper $70’s, but look at the trend. Oil continues to make higher highs and higher lows, and we are one event, one headline, from $100 - $150 per barrel oil. That won’t do much for housing, but it will do wonders for energy companies of all stripes. I continue to advocate buying energy companies on dips and sell offs and pruning the top performers on rally’s, redeploying to sectors in the energy complex that have not kept the pace. In the near term this is going to take courage, and will at times be met with “buyers remorse” as the housing and mortgage crisis plays out. Due to S.E.C. regulation, I cannot be more specific than this. This is not a recommendation to buy or sell oil futures or options. If you want to talk to me, you know where to reach me.

Important things to know for the next week:

• August 15, 2007 is a big day on Wall Street. That is the day investors must inform the big hedge funds that they intend to withdraw money from their funds.

• Oil inventories and Natural Gas inventory reports from the U.S. E.I.A. will increase in their importance each week through the OPEC meetings. Oil inventories are report each Wednesday and Natural Gas each Thursday, both at 10:30 am

• PPI, CPI, Housing Starts, and Building Permits are all on the economic calendar

Remember, the OPEC meeting is September 11, 2007. If I am correct, they will give some kind of excuse as to why it is not necessary for them to raise oil production - perhaps OPEC will use the U.S. Housing down turn or the market’s recent gyrations as the raison du jour. The bottom line: OPEC will not be able to meet the IEA and EIA call for a 2.2 – 2.5mm bpd increase in production. My bet is 500k at most, and for perhaps 6 months. Considering the declines within non-OPEC producers such as Mexico, Norway, and the U.K. that 500k is the proverbial "drop in the bucket".

Lastly, Chairman Bernake, Secretary Paulson, etc… are all out on the airwaves trying to manipulate you. Remember a couple weeks ago when both of these guys said the mortgage problem was, what was the word? “Contained”? Yes, that was it, “contained”. Now the word on Wall Street is “Contagion”. Announcements come on the front page, retractions on page 33 – and in small print.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, August 8, 2007

“Yes, but how was the play, Mrs. Lincoln?” - Bradley Fallon

The monthly production numbers for world oil production May 2007 were released yesterday by the U.S. Department of Energy. There is no need for hyperbole. The data are terrible. So without further ado:

Worldwide Crude & Condensate production averaged 73,063,000 bpd for May 2007. This is down from the peak month of May 2005 when production averaged 74,272,000

Worldwide “All Liquids” production averaged 84,175,000 for May 2007. This is down from the peak month of July 2006 (said month was an anomaly within 2006) when production averaged 85,392,000

To summarize:

Crude & Condensate

2005 average crude and condensate production = 73,791,000

2006 average crude and condensate production = 73,546,000

2007 average crude and condensate production = 73,282,000, January - May data

All Liquids

2005 All liquids = 84,542,000

2006 All liquids = 84,481,000

2007 All liquids = 84,171,000, January - May data

The trend remains – and it is ominous. We now have 2 full years of data. During this time prices have increased by 50% or more, depending upon the contract one uses as the measurement. Producers have been given great incentive, and yet have been unable to deliver increased production. Although we cannot know with certainty that OPEC has peaked until at least 1 more full year’s worth of data is available, the non-OPEC production certainly appears to have peaked indeed. Further, if the OPEC meetings of September 11, 2007 and December 5, 2007 do not result in an actual increase in production, for investment purposes at least one would have to assume, without certainty, that OPEC has in fact peaked. On the other hand, if 2.5 million additional barrels per day comes pouring out of Saudi Arabia in the coming months, as the EIA and the IEA are calling for but that many of us are saying is impossible... well, we would have a lot of egg on our faces - the truth will out in the next few months.

The decline in worldwide production of oil also seems to be showing up in various inventory reports. U.S. commercial stocks declined over 6,000,000 barrels last week and over 4,000,000 barrels in this morning’s weekly report. A few more weeks like that and there won't be much for me to talk about on this blog anymore. Remember all those guys on CNBC claiming we’ve got too much inventory sloshing around? Where are they now? I guess their 15 minutes of fame is up.

What does it all mean? No matter how you, or the EIA, or OPEC, or CERA or I spin this, there are 371,000 fewer barrels per day available to the import market, or roughly 1%, than 2 years ago. Considering that the importing nations expect supplies to increase 2% per year, this is a significant event. If this continues, this is going to make some people quite wealthy, but will be an unmitigated financial disaster for most folks. To my mind, in the absence of a worldwide recession the U.S. import crisis could come at any moment, and if you aren’t worried about supplies next winter, you should be. Either that or it is an egg facial for me.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Monday, August 6, 2007

Food and Fuel

Wheat hit a new record today:

“Wheat rose to a record in Chicago on speculation that demand for U.S. inventories will climb after unfavorable weather hurt crops in Europe.” - Bloomberg News, 8.6.07

Soybeans fell 1.3% today, but are still up 42% in the past year.

Corn has been down of late, but look for corn to catch up over the next several months – unless the federal government takes away its ethanol subsidies (I have a better chance of pinch-hitting for A. Rod).

You see, farmers planted more acres of corn than at anytime in the past 63 years to take advantage of that subsidy and the anticipated demand from the ethanol plants due to come on line. Thoses extra corn acres came at the expense of other food crops.

Am I the only person concerned about this? Government subsidies are “incentivising” farmers to grow more corn (animal feed) for fuel while “disincentivising” farmers from growing food for people. Does anyone at the Department of Agriculture have the temerity to stand up to the Department of Energy? We pay them for this, don’t we?

Look, I am a hardcore capitalist and a life long Republican (once upon a time I even held a local elective office – ouch!), but doesn’t anybody have a problem with subsidizing billionaire’s jet fuel (indirectly, I know but there it is, just the same) at the expense of poor folk’s bread, milk, and eggs? This is an unqualified disgrace.

And it won’t do thing about our long term energy problems.

Yours for a better world,

Mentatt (at) yahoo(dot).com
Food and Fuel

Wheat hit a new record today:

“Wheat rose to a record in Chicago on speculation that demand for U.S. inventories will climb after unfavorable weather hurt crops in Europe.” - Bloomberg News, 8.6.07

Soybeans fell 1.3% today, but are still up 42% in the past year.

Corn has been down of late, but look for corn to catch up over the next several months – unless the federal government takes away its ethanol subsidies (I have a better chance of pinch-hitting for A. Rod).

You see, farmers planted more acres of corn than at anytime in the past 63 years to take advantage of that subsidy and the anticipated demand from the ethanol plants due to come on line. Thoses extra corn acres came at the expense of other food crops.

Am I the only person concerned about this? Government subsidies are “incentivising” farmers to grow more corn (animal feed) for fuel while “disincentivising” farmers from growing food for people. Does anyone at the Department of Agriculture have the temerity to stand up to the Department of Energy? We pay them for this, don’t we?

Look, I am a hardcore capitalist, but doesn’t anybody have a problem with subsidizing billionaire’s jet fuel (indirectly, I know, but there it is just the same) at the expense of poor folk’s bread, milk, and eggs? This is an unqualified disgrace.

And it won’t do a thing about our long term energy problems.

Yours for a better world,

Mentatt (at) yahoo(dot).com

Friday, August 3, 2007


The U.S. equity market had a rough day today, to say the least. Just when we thought it was safe to go back in the water…

It is starting to dawn on the market that the housing bubble’s bursting is going to get a lot of us wet. But some we will be drier than others.

Oil & Natural Gas (“NG”) producers, and especially energy service companies, have been beaten down with the rest of the crowd. The fear is that oil demand will decline with an economic contraction. Egh! Wrong! Thanks for playing. For better or worse, energy demand is going to be limited by supply, not world economic growth.

As the holder of a securities license, and as head of a NASD member firm, I am prohibited from making specific recommendations in this forum. I CAN say that it is my opinion that energy companies are being priced as if oil was already $40 - $45 per barrel, when in fact oil is $75 per barrel. Some of this is because NG is, in fact, trading at little more than $40 a barrel of oil equivalent (“BEO”) and uranium is priced even worse – at $3 BOE, but even though we will heading into year end with NG reservoirs full, I will tell you one absolute, unequivocal truth: Winter is coming. And, in fact, oil prices in the spot market may have gotten ahead of themselves; but take a look out several months in the oil futures market and see if the commodity market thinks the sell off in energy equities is warranted.

Energy consumption is higher in the 3rd quarter than the 2nd, and higher in the 4th quarter than the 3rd. It is my opinion that 2007 will be no different, housing bubble or no housing bubble, and that OPEC will not be able to meet the EIA and IEA calls in the 4th quarter. Energy, precious metals, and agricultural assets are attractive (and they are more so today), and everything even remotely related to housing is doomed for the next generation or so, and I mean that very literally.

Keep your eye on the barrel, er, ball.

Mentatt (at)

Thursday, August 2, 2007

The Four Kinds of Lies, cont… But first,

Quote of the day:

“Some people worry about peak oil. I worry more about peak grain.” - Niall Ferguson, Professor of History at Harvard University

As I have posted before, there are now 4 kinds of lies: Mine, yours, statistics, and OPEC’s.

Quickly, I want to discuss statistics. Today, I read that housing prices have fallen 2.8% nationally, “the worst decline since the 1930’s”. I can’t measure the aforementioned quote, but I can take the 2.8% to task.

To arrive at the “2.8%” the authors compared median prices in May 2007 to My 2006. Median is defined as the point at which 50% sold for a higher price and 50% for a lower price. All else being equal, this is as proper a method as any. But, things are not equal. The sub-prime market has imploded in the last 6 months. The buyers that the sub-prime lenders financed were disproportionally represented within the lower 50%. Removing these moves the median point higher than it would otherwise be. However, the mainstream media is more than aware of the American public’s math phobia, and were at little risk of being found out.

Let us move on to the really important liar – OPEC.

OPEC is a cartel, and cartels are of little consequence if they cannot set prices in BOTH directions (up and down). The EIA and IEA both project that OPEC’s production will grow by roughly 2.5 MILLION BARRELS PER DAY IN THE FOURTH QUARTER, but this is very, very, very unlikely. From this point forward, OPEC is likely to use one of the 2 methods of price influence that it has left in its arsenal. Jawboning. OPEC is powerless to lower prices by increasing production, a political weapon they used so effectively against the Soviet Union. They do retain the power to cut production – but only in a perfect world. Prices are now so high that there is just too much incentive to cheat for each individual member. As Dr. Ken Deffeyes of Princeton University famously quipped:

“The good news is that OPEC no longer controls oil prices. The bad news is that NO ONE controls oil prices.” (Emphasis added.)

The world market is now fully in control of oil prices, not OPEC, and when the market comes to the full realization that OPEC can no longer raise production for any meaningful length of time (which could very well come this fall with the advent of the OPEC meetings and the OECD’s call for increased production unmet), and that production will begin to decline permanently, the reaction in the financial markets will be overwhelming.

The financial markets are priced, and our economies structured upon the expectation of continuous growth in the economy, money supply, earnings, consumption, oil supplies, inflation, etc… With oil supplies decreasing rather than increasing this expectation will be replaced by the reality of an environment in which corporate earnings and economic growth will no longer be possible. In such an environment would you pay 18X earnings for a stock? Would you even pay 1X book value? I think not. Markets will have to “re-price” this new condition - that GE, Microsoft, 3M, Ford, Pfizer, etc… will not only be unable to grow their earnings, but that their earnings will go into a sort of “terminal decline”. Not only will stock prices be “adjusted” to this new condition, but the debt markets - treasury, municipal, and corporate bonds – and real estate, will get an “adjustment” as well. Did I mention the U.S. Dollar? Those of you reading my rants for the past couple of years know how I feel about the Dollar. So far, my concerns have proved well founded.

Think about the political consequences of 95 million workers opening their 401k statements post Peak Oil… seeing the aforementioned “adjustment”… and then looking for someone to blame.

No, this will not happen all at once, and as it unfolds the various and sundry special interests will do everything within their power to manipulate the less informed (and in the short term it may work to some extent) with their particular standard program of denial (remember all those groups in the 1980’s and ‘90’s working the public’s perception of global warming?). Even after this adjustment period is underway there are some things you can do to improve your personal and financial circumstances. There will be a tremendous effort to manipulate you, and not a shred of that effort will be in your best interest, as the interests will be looking to sell assets to the uninformed without which there would not be a market. Think of the South Florida developer retaining the services of a public relations firm. The PR firm’s job is to plant stories in the media to manipulate the public, the developers job is to sell units – and it is your job not to be manipulated into doing things that are not in your best interests.

Remember, the definition of money as a: medium of exchange and standard and store of value. In the permanently contracting economy of the world’s largest debtor nation, what are the impacts upon the fiat currency (the U.S. Dollar) as a store value? When the U.S. Dollar loses its hegemony, what will th U.S. trade in the world markets in exchange for imported Oil? Will you wait until these circumstances overtake you and your life’s work or will you reject the attempts to manipulate you?

Yours for a better world,

Mentatt (at)