Friday, September 21, 2007

Don’t deny what your eyes are seeing.

1. The October crude oil contract, now expired, closed out near $84 - a new record.
2. Gold front month is trading, as we speak, at $743 – it took out last year’s high in a single day and never looked back.
3. The U.S. Dollar is at a 40 year low as measured by the dollar index
4. Saudi Arabia, for the first time in many decades, did not move its interest rate policy in lockstep with the U.S. Federal Reserve – in layman’s speak the Saudi’s are depegging their currency from the U.S. Dollar
5. Commercial inventories of crude and finished product in the U.S., the world’s largest energy consumer, are declining at an alarming rate – about 10% in the past 3 months. Although prices have moved higher, there has been no change in the slope of the line measuring the inventory’s decline.

Now a definition:

“Occam's razor (sometimes spelled Ockham's razor) is a principle attributed to the 14th-century English logician and Franciscan friar William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory. The principle is often expressed in Latin as the lex parsimoniae ("law of parsimony" or "law of succinctness"):

“entia non sunt multiplicanda praeter necessitatem,”

which translates to:

“entities should not be multiplied beyond necessity.”

This is often paraphrased as "All things being equal, the simplest solution tends to be the right one," or alternately, "we should not assert that for which we do not have some proof." In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest entities (although this is not always the same as simplicity[1]). It is in this sense that Occam's razor is usually understood.

Originally a tenet of the reductionist philosophy of nominalism, it is more often taken today as a heuristic maxim that advises economy, parsimony, or simplicity in scientific theories.” –

Using Occam’s razor to keep us germane to the discussion at hand:

1. None of the solutions bandied about by glad-handing politicians and miscreant schemers such as hydrogen, ethanol, solar, wind, tidal, gerbils on a treadmills… have proven to have any potential to scale to our society’s current requirements.

2. Every data point available shows world production of crude oil and condensate in decline.

3. North American production of natural gas has been in decline for several years.

4. Even with a 700% rise in the price of crude oil since the beginning of the decade, no significant finds are on the horizon, despite the tremendous financial incentive of the exploration companies.

It then follows that a smoothed “peak” has been reached in world oil production, and in North America’s case, in natural gas as well.
The U.S. economy, currency, real estate, and financial markets are at serious risk. If you have assets, a business, etc… these risks and opportunities should be the very center-point, almost to the exclusion of everything else, of your personal and business strategies. If not, the sounds of “woulds, coulda, shoulda” will, to steal a line from the movies – “Echo in Eternity”
Yours for a better world,

Mentatt (at) yahoo (dot) com

Thursday, September 13, 2007

Downsize, Downsize, Downsize

Then Simplify, Simplify, Simplify.

I write this blog for a specific audience - successful, 35 +, and responsible for providing for, and providing direction to, a family. You have worked hard at a career for a decade or two (or three, or more), saved some money, own a business or are a professional, and own a home, and like it or not have made some implicit “promises” to spouses and children. In a world of declining energy supplies many of these “promises” will, by necessity and through no fault of your own, be broken.

Here you are, a 50-year-old guy with 2.1 children, a dog, and a “$3, $5, or $10 million net worth”. Life is good. You aren’t the CEO of a Fortune 500 company, but your family has the best of everything, and hopefully you won’t be joining some of those big shot CEO’s in prison any time soon.

What is the source of your wealth? How did you calculate that net worth? “Well, my house has $3,000,000 in equity, my stocks are worth $1,500,000, and cash and personal belongings make up the balance.” Or maybe your house has $1 million of equity, you have little financial assets, but your business is worth $3,000,000… Whatever.

How much will your house be worth in a perpetual energy crisis? Zipity-do-da, that’s how much. If the U.S., with a little less than 5% of the world’s population should be required to consume only 5% of the world’s oil (down from 25%), and that is EXACTLY what is going to happen by 2020 or so, the transportation system that supports the value of your home will not exist. No tickie, no laundry. In 15 years, the oil available to America will decline in the neighborhood of 80% (please feel free to email me and I will happily show you how I arrived at that number), so, how exactly are the landscape folks that keep the Everglades (I live in South Florida) from consuming your yard and home going to make it out to your spread? And, exactly how do we evacuate 5 million people if a category 5 hurricane should threaten without the aforementioned transportation system? People will figure that one out pretty quick, and the demand for homes in hurricane zones, or areas lacking water resources, or mountainous regions requiring provisions to be transported over long distances will collapse like a wet paper bag…

So, you have a successful business or practice. Is it necessary for your customers/clients to drive to your place of business? There will be a great many less of them making the trip with an 80% decline in oil supplies for American consumption. What about your employees? Are you going to provide a bunkhouse for them within walking distance of your place of business? Do they want to live in a bunkhouse? Would you?

So much for the equity in your home, your income, and the value of your business -
The bottom line is this: Most of what you value is an illusion brought to you by cheap and abundant energy. Unfortunately, energy will neither be cheap, nor abundant, in the very near future. Not next tuesday, mind you, but you can draw a sloping line on a graph, right? We did those exercises in high school math for a reason. The U.S. consumes nearly 20.5 million barrels of oil per day in 2007 - and in 2020 we will be down to around 5 million barrels per day. The slope will begin gently, and then accelerate. The worst of the effects will be somewhere in the middle of the sloping line. No amount of financial engineering, politcal debate, currency devaluation, war, or other human activity is going to change the outcome - although some SIGNIFICANT reduction in consumption could elongate the sloping line, and hence the length of time for the outcome to unfold, it will not change the outcome.

No one likes this vision, especially people who have worked hard and sacrificed their entire lives to put it all together. In doing so, you must have made a lot of good choices. It is my opinion that you must make a very good choice, RIGHT NOW, and continue to make good choices, or else. But that was always the case, wasn’t it?

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, September 12, 2007

OK, Now What?

The following was front page, lead article on Bloomberg News, Wall Streets primary news service:

Sept. 12 (Bloomberg) -- "Crude oil rose to a record $80.18 a barrel in New York after supplies dropped the most this year.

U.S. oil inventories fell a greater-than-expected 7.01 million barrels to 322.6 million last week, the Energy Department said today. Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand."

Peak Oil is here. Actually it has probably been here for 2 years – and we are just beginning to feel its effects. Now that Peak Oil is here… after the OPEC meeting of 9/11/07 (more on that in another post, but let’s just say that OPEC blinked while staring into the abyss. They recognize that they are no longer in control of increasing the supply of oil) and the production and inventory reports for 2005-2007, I am calling the Peak to have arrived somewhere between yesterday and mid 2005… now what?

For the past several years I have been doing my best to condense the data into understandable and sufferably short reports to help family, friends, and others who were interested in a rational co-examination of the facts of our energy situation. Although I have believed for several months that the peak probably had already occurred, I held my tongue on this until the preponderance of, actually the overwhelming preponderance of, market price signals and supply data which, to my mind, show that we have indeed reached the Peak. Once again - now what?

While I will continue to report the monthly production, exports, and reserve number on this blog, from this point forward I will discuss what I believe to be the implications of our new found circumstance on the American people, economics, financial markets, real estate, and anything else I think relevant to the discussion on a national, regional, and local level, now that our sources of energy available for consumption have entered permanent decline. As my crystal ball is broken and out for repairs, this is not a prediction service: if the data should change I will change my position forthwith. Lest you think me a pessimist, I am no such thing. The waves will still roll in for those inclined to surf, spring will be as lovely as it has always been, and a walk in the park will still be a walk in the park. Life will be good – at least for those who accept that the rules will be changing. For those insisting on the status quo… well, let’s just say that I am not so sanguine about their mental health prospects.

So, without further ado… (and at the risk of sounding like I am preaching)

Trumpets will not blare, nor fireballs come forth from the sky. Over the next year or so the impacts will barely be perceptible. Food prices will rise significantly, retail vacancies in your downtown district will begin to rise, inventories of houses for sale far from urban employment centers will build, and second home and resort markets will begin a permanent economic descent. Places like my home of South Florida will cease growing, with indicators like declining public school populations, and declining home prices, and rising commercial vacancy rates already presenting. There will be attempts by interested parties to manipulate you into believing that this is all temporary. It is not. It will accelerate over time. What to do?

Downsize your life, your overhead, and the distance you must travel to work and your kid’s school. Many will be left holding the bag – just make sure it isn’t you. Economize on all things, and save your shekels (just don’t hold them in U.S. dollars; gold, silver, farmland, etc… all would be preferable stores of value). You don’t need to buy a new, fuel-efficient car. Just drive the one you have less. Walk if possible, or ride a bike, maybe pack a lunch to save a drive to the deli… Not for politics, or to be green, but to get you used to the way you are going to live in the future, because YOU WILL BE DOWNSIZED – like it or not, so you might as well like it. On another note, take that vacation you have always wanted. Safaris might not be possible in the era of your retirement years.

If you are a business owner, stop trying to expand your business (unless you are in the various energy fields, or green building products, etc… or some other industry that will expand in an era of declining fossil fuels). The guys who CONTRACT their business, cut their overhead, and remove as much financial capital from their business NOW (provided you do the right thing with it) will be in much better shape than the guys who try to expand, spending precious capital and time in a futile effort – because in the aggregate the economy cannot expand unless its energy consumption rises. Of course there will be some winners of market share in the short term – but not in the long term. NAFC (Not a $#%#^ing chance).

Business will go on - people will need shoes, and dental care, and food, clothing & shelter – but it will contract. Consumerism is doomed. If that’s your life, change it now, for your own mental health as much as for how you are viewed by your own family and your community. You don’t want to be seen as another Leona “the Queen of Mean” Helmsley, do you?

The next year or two, maybe even 3, is for practice. After that, things will get a bit more serious. Remember those advertisements from the big mutual fund houses of future retirees - smiling (Thin!), healthy old people doing something absurd, like kayaking a 5 rated white water river? These and other tooth fairy fantasies will be dashed on the rocks of the Peak Oil storm. We weren’t misled (by others). We misled ourselves. Let’s stop it, and let us take responsibility for ourselves.

Check back soon. I got a lot to say.

Oh, and by the way... the U.S. dollar is doomed

Yours for a better world,

Mentatt (at) yahoo (dot) com

Sunday, September 9, 2007

“Hope Springs Eternal.” - Alexander Pope

It does seem so. Despite having been consistently lied to by our politicians, clergy, law enforcement, and the media we seem to have an unquenchable thirst for subterfuge – as long as it tells us that which we wish to believe – we seem ever willing to down still more of their harsh and harmful manipulations.

“I assure you that if there's any shortage we will supply more crude to the market, but I think the market is really stable at this time,” OPEC Secretary-General Abdalla El-Badri said in an Aug. 28 interview in Luanda, Angola.

“A little inaccuracy sometimes saves tons of explanation.” – H.H. Munro

Thank you for that Secretary El-Badri. I have a question: why is it that OPEC will not allow an open and independent audit of their oil reserves and deposits? Why does the entire world have to take the word of, and I am sorry to call you this, a politician?

“A lie has short legs.” Anonymous

America has a very free Press no matter how you argue it, and even so the U.S. federal government has several redundant oversight mechanisms – but the world is required to take at face value the word of an organization that might well (certainly) have interests in direct contravention to our own. Am I the only normal person left? Doesn’t anybody in Washington think this unacceptable?

I want to leave oil alone for a while… over the next 90 days some very hard truths are likely to become apparent, so allow me to kvetch about my other obsession – the U.S. dollar.

Maybe you noticed, maybe you didn’t, but the dollar hit a 23-year low this week. The signs were everywhere: Gold and crude oil near record highs, (these things are priced in DOLLARS) and wheat and milk making new records almost daily – and with M3 money supply growing at 13% and interest rates just over 4% (10 year Treasuries) this is a run away train on a collision course with an oil tanker. I cannot envision a scenario in which the dollar does not sag (if not outright collapse) lower than any reasonable person thought possible.

But my hating the dollar, well that’s nothing new. My clients and readers know I have been on this rant for years, and probably will be until the dollar is replaced by a new currency (think I am talking crazy? The dollar is not the first U.S. currency – the Continental was, hence the term “not worth a Continental” and in my life time “not worth a Dollar” might well be a term in common usage). Even if there is no energy shortage/crisis, the U.S dollar is going down. If an energy shortage/crisis does materialize the U.S. dollar could very well collapse in a bout of runaway inflation. What is the answer? Well there isn’t one for the dollar, but for investors… well, in my opinion it is financial suicide to own any dollar denominated investments. Hard assets, and the derivations of hard assets are the best stores of value – with the exception of most U.S. real estate (but that depends on the level of inflation; if you have enough inflation real estate will be a good store of value).

Everything depends on the energy situation. Most Americans, even rich Americans, have little in the way of liquidity (doubt this? If the wealthy have so much liquidity then why the credit crunch? ). Their source of wealth is their business, or in the case of the corporate exec, his/her stock/401k/stock options. If energy, as I assert, becomes less available to grow the economy, the problem for ALL business people becomes overcapacity (at least in the short term - long term is much more problematic). If you owned a widget factory or skyhook service company your best course of action, (not just you but for all market participants) in the face of declining demand is to SHRINK your business rather than have the entire industry in a chronic state of overcapacity. If you doubt this, just give a call to your local mortgage company or real estate brokerage.

Now let’s stay on this idea train… fearing overcapacity, businesses shed employees, increasing unemployment and tipping the economy into recession, further harming the dollar and real estate, increasing the price of oil in dollar terms. Or, by ignoring the threat of overcapacity, businesses continue to expend capital and effort in a futile attempt to grow their businesses… you get the idea. In an energy-constrained environment the economy contracts either way. This is why you are being bombarded with commentary from the Fed Chairman, the Treasury Secretary, the President, and every Tom, Dick and Harry Congressman and Senator that everything is “fine” the “economy is fundamentally sound”, and that the various financial markets will continue to provide positive returns. If they had any faith whatsoever in free and open markets, they would have kept their mouths shut instead of trying to manipulate the American people.

All of the production and consumption data point to a “divergence”, as far as the economy and the financial markets are concerned, in the very near future, in my opinion. The aggregate of the total BTU’s from liquid petroleum products, BTU’s from Natural Gas (“NG”), and, it would appear, BTU’s from Coal (although this is very difficult to calculate accurately, as none of the numbers supplied by the EIA are perfect to begin with, and with the different BTU content of the various types of coal so disparate) appear to have peaked in 2005.

The entire American economic system and the valuation of our financial markets and currency depend on ever increasing economic growth. This growth will NOT be possible without ever increasing BTU’s to produce more work within the economy. ALL of the potential incremental increase for worldwide oil production lies within OPEC and Russia…

And OPEC just told you they are not going to increase supply.

Whether OPEC can or cannot increase at this moment is really immaterial, although I believe it unlikely that OPEC could increase output by over 500k to 700k per day for any sustained period. Further, oil consumption continues apace, while discoveries continue to decline and total far less than consumption in every year for the last 2 decades. How many more years can we consume 23 Billion barrels more than we discover in a given year before production enters terminal decline? ZERO (+or- 2).

This is not to say that the equity market cannot continue to rise in NOMINAL terms, with certain commodity based equities actually rising in REAL terms – after all, the world’s central banks just injected a half trillion dollars into the system. But it does mean that your dollar-denominated investments are doomed. Yes, doomed. (In my humble opinion).

Yours for a better world,

Mentatt (at) yahoo (dot) com

Friday, September 7, 2007

The production data for June 2007 will be posted in the next week at the U.S. Department of Energy’s Energy Information Administration (“EIA”). You can count on a summary of the data here by "yours truly" shortly after the release. Unfortunatley, the weekly inventory numbers published by the EIA each Wednesday tell the story long before the production data is released. Despite near record prices, inventories have fallen precipitously. Not coincidentally, the U.S. dollar has been doing its own version of “the dive”, and U.S. market and economic data continue to point to the distinct possibility of a recession. Let me be abundantly clear: If in fact 2005 holds as the peak year for world oil production, economic recession will be the new paradigm. The world economy might be able to wring a couple years, perhaps as much as 3 years, of economic growth from efficiency… but no more. Perhaps that is where we are now. It will not be entirely clear until several years after the fact, but if you do not hedge your bets before that time…

This is what I envision the other side of the “Peak” would look like: Employment, vehicle miles traveled, automobile and home purchases, consumer purchases, etc… all cease to grow. The dollar declines, gold rises, the Yen carry trade is undone, the U.S. equity market wobbles, and commercial oil inventories begin a steep decline (at least until the market realizes that “this is it” and then prices will rise enough to slow or stop the inventory decline), and special interest groups do their best to muddle the picture for the public. Well, let’s see now… Check, check, check, and check.

Look, there is a lot “we” could be doing, but “we” won’t. There is a lot “they” could be doing, but “they” won’t, either. So it is all pretty much up to “you”. What will “you” do?

Yours for a better world,

Mentatt (at)

Monday, September 3, 2007

The Power (Insanity) of Positive Thinking

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mentatt (at) yahoo (dot) com