Sunday, December 30, 2007

The following is a guest post by my good friend Dr. Saif K. Lalani of Vanderbilt University

by Saif Lalani
December 28, 2007

It is now clear now to anyone with at least a double digit I.Q. that the world oil production is at or near its maximum potential. Peak Oil will bring with it a host of new problems for the world's central banks. Rest assured that they do not have a Plan B to deal with ever rising prices of food and energy. With the way they are currently handling the housing crisis it does not seem that they even have a Plan A.

At some point in the near future the world's central banks will have to learn the difference between Geology and Economics. To my knowledge there are no central bankers with a major in one and a minor in the other. Absurd? Not really. Since oil is the lifeblood that keeps the world rolling one would hope that someone currently in power would have been enchanted with these two fields of study. (BTW the protagonists in the timeless classic “Atlas Shrugged” majored in 2 such apparently conflicting fields, Physics and Philosophy simultaneously). One teaches that the well once dry is dry. The other teaches that if we stand in front of the dry well with a large enough check, things can change. Hence their inability to understand the intractability of the problem.

There are currently 2 major schools of thought on how Peak oil will affect prices of things in general, the major concern for central banks. The first is that since oil is so essential for production and transportation of almost all things, the prices of everything will head to the stratosphere. The second and not so popular version is that once businesses acknowledge peak oil, spending and hiring will “collapse” resulting in deflationary forces that will match and even exceed the downward march in oil availability. I personally believe that we will have massive inflation in prices of everything essential and massive deflation in everything discretionary.

So what should the central bankers endeavor to do during the coming turbulent times?

Lets start as all physicians do. First, do no harm. Sounds quite simple but it isn't. Central bankers have egos as large as football fields. They think they can save the housing market, stock market, solve the energy crisis, cure cancer, make it rain and part the seas by slightly tweaking interest rates. Central banks need to understand what they can and what they cannot control. Trying to save sprawling suburbs with 0% interest rate policy is probably going to be less effective than trying to arrange good public transportation preferably in the form of electrified rail.

Second, publicly acknowledge peak oil. Do not put some technocrap spin on it. Tell it for what it is. Can you imagine the progress we would have made if one prominent central banker would have said this even 2-3 years back? Prepare the world for hardship. It is going to come regardless what they may say.

Third, ensure that loans are available for energy projects with a positive EROEI (energy returned on energy invested). Peak oil is likely to stress the banking sector to levels unseen since the great depression. Remember extremes can occur in both directions. Whereas once banks thought it made sense to extend no documentation loans to people to buy insanely expensive properties, they may not even fund good sound energy projects in the future. The fed and other central banks could in this case lend directly to fund such projects. Since energy prices would be the main reason for unemployment and inflation this would fall within their mandate. It is important to stress that positive EROEI is very important otherwise every action will just lead us into a deeper hole. They would likely need help with assessing EROEI but should have no problem in obtaining such help.

Fourth, do not attempt to rescue the dying industries. Detroit automakers, airlines and travel and tourism in general will come under increasing stress. The first 2 could not make money when oil was under $20 a barrel and will certainly not be able to survive for long without help in the future. There will be increasing pressure to “do something” about it. The Fed must resist the urge to help out. No rescue package for airline bonds or GM's junk paper will make an iota of a difference in the long run. Might as well fund an extra geothermal project with the money.

Finally it is paramount that we have honesty in statistics. The fed and other central banks need to report correct unadjusted inflation and GDP statistics. This will allow us to assess the actual impact of the problem and effects of the solutions we may try to implement.

I would like to end by thanking the central banks for making it a truly wonderful and entertaining

12 days of Christmas

On the 12th day of Christmas look what my true dove brought for me
Mortgage lenders with just no brains
Angry Crammer who never informs but always entertains
Never ending one time write-downs
Bank CEOS moonlighting as clowns
Surging food grain prices
Unsolvable housing crisis
Falling US dollar
Restaurant portions that keep getting smaller
3 rate cuts that messed up things
Gold prices that got wings
Double prices for milk and cream
And a C.P.I. report that said this was all just a bad dream.

Happy New Year to All

This post has been used by permission. © Saif K. Lalani

Saturday, December 29, 2007

“Letting the cat out of the bag is a whole lot easier than getting it back in” – an Old Country Saying

Hillary Clinton told the American people that if you vote for her the price of gasoline would go down because she is going to scare the oil exporting countries into producing more oil and dropping their price.

Why is it so hard for the political establishment to come clean with the American people?

Silly question.

What would you do if you knew for absolutely, positively, without question sure that the world was entering a period of permanent decline in energy availability? What would happen if EVERYONE, EVERYWHERE was also sure? Wouldn’t you/they behave differently? Maybe… very differently? It’s impossible to know what that means exactly, but it means something, and politicians are in the business of getting elected, not forecasting or predicting future events, especially if that future is not what the electorate wants to hear.

So they lie to us.

In mathematics the transitive property states: if a = b and b = c then a = c

So if politicians lie to us to get elected, and we in turn elect them, then it seems reasonable that they would continue to lie to us after their election. But claiming that as President, Hillary would have the power to lower gasoline prices boggles the mind (I read the U.S. Constitution in its entirety, nothing there about gasoline price powers). Now if as President, Clinton would double the price of gasoline by raising sales and use taxes on the commodity this would drive demand for gasoline down and hence the demand and price for crude oil (Contrary to popular belief gasoline and crude oil are not one and the same). If Clinton had the power to arbitrarily lower gasoline prices, wouldn’t that increase demand for gasoline? Hillary Clinton attended the best universities, so I am going to take a leap here and assume that she has some knowledge of basic economic principals, and that she knows full well that her claim is an out right lie… but I am going to bet that the tactic works, that this will bring more of the electorate to her camp, and furthering the belief that lying is an effective campaign and political strategy for those seeking office.

By the way, our political establishment assures us that everything is peachy concerning our energy. Should we believe them?

Yours for living in interesting times,

Mentatt (at) yahoo (d0t) com

Friday, December 28, 2007

OK. I’m back.

Year-end is as good a time as any to take stock. Let’s see now…

The U.S. dollar has gotten creamed.

Crude Oil trades just shy of $100.

Gold is rocking in response to the $. Silver, too.

Housing has a severe pneumonia.

Agricultural commodities like wheat, soybeans, and corn are trading at record, or near record prices.

If you have been reading my stuff for a while this is all check, check, and check…

Now for 2008:

Nothing new:

The U.S. dollar continues to weaken versus commodities and the currencies of oil exporters (versus the Euro? No opinion because it just isn’t that important – unless you are a currency trader).

Crude trades over $100, with a high of $140, and a low of $75 (I had dinner last night with FireAngel of fame and he felt $165 was very possible. His calls have been nothing short of prescient, so I moved my own projection up from $130. Brave of me, no?).

Gold and Silver continue to appreciate against the $.

Corn trades higher in sympathy with oil and natural gas. Soybeans and wheat? Tough call.

For the U.S. economy:

In Nominal Dollars, no recession if oil supplies are equal to or surpass 2007. In Real Dollars we might be in a recession right now. The data for inflation, the GDP deflator, money supply, etc… is so disparate (it doesn’t add up) and unwieldy that Alexander the Great and his pesky Gordian Knot pale by comparison.

The Great Unknown is the response to the U.N.’s International Panel on Climate Change’s final report to the General Assembly. I don’t care how many Larry Kudlow, pooh-bah jerks the deniers line up to mock those tree hugging scientists, this issue is going to be big - REALLY big. Like rationing electricity big. Or leaving coal in the ground unburned big. BIG.

I am back and will be posting regularly and I wish for you and yours a happy, healthy, and prosperous new year!

Mentatt (at) yahoo (d0t) com

Friday, December 21, 2007

Follow up on Aristotle Onassis’ famous quip

On my December 13, 2007 post I quoted Aristotle Onassis, a keen observer of the human condition, in his most famous remark:

“If women didn't exist, all the money in the world would have no meaning.”

I got a remarkable amount of email from testosterone challenged men and women who likely don’t shave their underarms lambasting me for insinuating that Alpha Males, driven to compete by the need for female sexuality, were a significant portion of the problem that has led us to the 2 sides of the same problem coin, “Peak Oil” and “Climate Change”. I wasn’t insinuating at all – I was stating this as firm conviction.

Several days later, this article was linked to the’s web site. I wonder if the good professor received as much flack as I? I wonder if he will lose his tenured position for observing the obvious?

Folks, what is the purpose of hair dye, breast implants, cosmetic dentistry, high heels, make-up, and beauty magazines (all OK with me. Actually at my age a dimmer switch is probably the best cosmetic)? Are these not the Ovarian American’s response to the Estrogen Challenged American’s instruments of status such as high priced automobiles, mansions, and exquisite tailoring? I am not suggesting that ALL Ovarian Americans and ALL Estrogen Challenged Americans use these tools to further their interests, but as anyone who has ever killed a little time at the magazine rack at the airport will agree: Though there are dozens of rags targeting the American Bride, have you ever heard of “Groom” magazine?

Yours for a better post fossil fuel and post politically correct world,

Mentatt (at) yahoo (d0t) com

Thursday, December 20, 2007

Apocalypse Delayed

Despite the mortgage meltdown and housing crash, the U.S. economy will likely not enter a terrible recession in 2008.

At the end of 2006 I wrote that 2007 would likely see a recession brought about by the housing crash and much higher oil prices. Perhaps we are in a recession right now or perhaps I was close, but no cigar.

So here is the deal for 2008:

For the U.S., it is all about OIL SUPPLIES, not oil prices. If oil in the world markets is there and available for the U.S. to import, there will likely be no recession and a decent gain in the stock market of between 8 and 12 %. At this moment, I would be willing to bet that the oil will be there for 2008, because we have some big projects coming on line around the world and the restarting of Thunder Horse in the Gulf of Mexico. I think these projects will yield more production than the decline in the established fields from depletion.

I am also assuming that 2008 will be the year that supplies of “All Liquids” (petroleum) will peak for purposes of establishing an investing and trading schematic. Perhaps the peak in crude and condensate will remain 2005, and perhaps not. I am not predicting nor forecasting. That is for the guys at organizations like ASPO and CERA to do. It had appeared that 2006 would be the peak in all liquids but a large increase in production of natural gas plant liquids (“NGPLs”) in November appears to have changed that, and, no I am not concerned with monthly “peaks” but yearly averages. Even if 2008 does not eclipse 2006 it will be close enough for our purposes here.

Unless, of course, I am wrong: If world oil production should actually decline in 2008, and/or if U.S. imports should decline, all bets are off. The U.S. would enter a steep recession, the markets would get clobbered, and oil prices would send you in to sticker shock.

Either way, housing will not recover in 2008, and housing in South Florida will NEVER recover. I live here in South Florida. I wrote to our clients in 2005 that the South Florida housing market was doomed to a 10 year correction. We are 2 years into that correction, and unfortunately, the energy crisis will strike the U.S. before South Florida has a chance to begin recovering. South Florida is entirely dependent upon cheap gasoline for commuting and tourism, and electricity for cooling of homes, workplaces, shopping malls, etc... Electricity is going to be rationed here before the last 8 years of the correction is complete. So I repeat: If you have an extra single family home or 2 in South Florida, get what you can NOW (in my humble opinion), because like it or not, things are going to enter the surreal over the next several years for housing in this market.

I would expect oil prices to be exceptionally volitile, with a range for front month contract between $70 and $130. If you are a trader, this is going to test your intestinal fortitude.

Now that I have waffled at least as well as any politician… We are in the “Land of the Philistines”, with the U.S. economy and financial markets entirely dependant on supplies of imported oil. This is the one crucial data point, and everything else you read, hear, or see in the financial media is a “puff piece”.

Mentatt (at) yahoo (d0t) come

Monday, December 17, 2007


In a recent post I misquoted a study of agricultural output in which I stated:

“It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food.”

My apologies, 80% of the cost bringing certain agricultural products to market was fossil fuels, not 80% of retail food prices. I knew I must have made a mistake while reading Stuart Staniford’s excellent piece on retail food prices at

Chastised though I was for my error, I was very happy to see a top “Peak Oil” analyst who agrees with me that the food situation in the U.S. is not going to lead DIRECTLY to hunger and anarchy (hunger is a societal/economic problem in the U.S. There is certainly more than enough to feed the population), though neither he nor I are quite so sanguine about the rest of the world.

This is not to say that food inflation is not a serious issue - it is. Nor am I suggesting that 10 years hence the issue could not become much more acute - it could. I AM suggesting that we (you know, the people) will respond as our parents and grand parents did during the great wars of the 20th century. We will figure it out and grow enough of our own food to make up for the decline in industrial agricultural output. For a resident of my hometown of Boca Raton, or Beverly Hills, or some such other rarified community might think this is the end of the world, but it ain’t.

No, I believe that in the U.S., the “Peak Oil” issue is going to be felt initially in the form of a violent economic contraction. Yes, food will be very, very expensive, but there will be enough of it, as far as the impacts of Peak Oil (I have no opinion on the effects of climate change, genetically modified seeds, etc… Oil is all the worry I can handle at the moment, folks).

I will be taking the next week or so off to enjoy some time with family and friends.

Mentatt (at) yahoo (d0t) com

Sunday, December 16, 2007

Green. The color for those who cannot count (and I am not talking about money)

I can’t help myself. I will confess. I still subscribe to “Fortune Magazine” (among other rags of the financial press). Maybe I have a touch of the masochistic, or maybe old habits die hard. Whatever the case, I invest for a living so I read this stuff.

For the December 24, 2008 issue “Investor’s Guide 2008”, most of the first 20 pages contain advertising for all things “Green”.

“The Most Fuel Efficient SUV On Earth”, - Ford Motor Company

“Waste Management is using the resources our disposal to create the energy equivalent of saving over 14 million barrels of oil per year” - Waste Management

“Our Plans for Bio-Fuels Are Growing” British Petroleum

And my personal favorite…

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his McMansion holding a cup of coffee, his Wall Street Journal tucked under his arm and a shit-eating-grin on his face because he just saved the flipping planet by using materials to build his house from the Sustainable Forestry Initiative.

The silliness did not end there, but you get the point.

The Editors have absolutely no problem throwing their readership “under the bus”. Considering the volume of reporting in the past 60 days on the impending oil import crisis, price signals from the oil markets, and countless academic papers on the issues, there is NO CHANCE that the editors are not aware that this is all harmful propaganda for their readers, their PAYING readers. “Sorry, dear reader, the advertiser paid more. And by the way, when you get blown up in the market, we’ll report on that, too. Hey, we aren’t analysts here, we are just journalists.”

The powers that be will continue this charade for as long as possible. Their net worth depends on it. They need to convince you that the markets will continue to function as they have, money supply will continue to grow, technology will trump physics regarding our energy consumption, etc… so that they can SELL YOU their paper assets before they decline in real value any more. That’s the game, the story, and the strategy. If you fall for it, you will look back on this BS in 10 years and wonder how you could have been so dumb.

There is no such thing as a fuel efficient SUV, any more than the tooth fairy.

Waster Management is full of baloney. The methane from the refuse they are talking about equals 14 million barrels of oil equivalent? Maybe. Anybody care to guess how many HUNDREDS of MILLIONS of barrels of oil were wasted in creating that waste? Certainly not Waste Management.

And the cute, double entendre of British Petroleum for growing Bio-Fuels (complete with a picture of a corn stalk)? Get a new schtick, guys. No one, not even the great unwashed, believes that one anymore. Still, you have got to give them credit for their stick-to-it-ivness.

But can you imagine the financial press foretelling the situation accurately? We would have to adjust my favorite advertisement to:

The lead line “Meet The New Environmentalist” under a picture of your average middle class millionaire standing in front of his 800 square foot, well insulated home, which is getting by with its ration of electricity by having a college dorm size fridge, and a grand total of 10 compact fluorescent light bulbs fixing his bicycle or waiting for public transportation. Don’t even ask about AC…

This is where we are going, folks. This is what it means to our lifestyle if we accept, and even if we don’t accept, the U.N.’s IPCC analysis on carbon emissions and the realities of the impending oil import crisis. If you have the means, the motivation, and the intellect, there is much you can do to improve your circumstances. There is little your government is going to do for you. Spending time waiting for the government to solve this with a tooth fairy, techno fix is a fool’s errand. Personal responsibility is going to take on a whole new level of meaning in the brave new energy/carbon constrained world we are entering.

The 1960’s slogan: “Question Authority” needs revision…

Question and Doubt EVERYTHING the media says.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Saturday, December 15, 2007

Politics as usual

Anyone, right or left, Democrat or Republican (I am lifelong anti big-government Libertarian Republican. You might find that a contradiction in terms considering my firm belief that ONLY government can do anything about Climate Change. I think not. Only a moron believes in NO government) listening to the debate over Climate Change (“CC”) and the U.S. Administration’s seemingly deranged approach to the negotiation would do well to take a stroll down memory (history) lane. The political realities are such that those in power and wealth at this time in our history have never been more powerful, relative to the masses, and have been endowed with wealth beyond the wildest DREAMS of our ancestral establishment members.

The 7 original states of the Confederacy, later joined by an additional 4, made WAR with and upon the U.S. government resulting in the slaughter of over 600,000 individuals (a rather significant percentage of the free population of 27,500,000) rather than give up their position of primacy while attempting to defend the indefensible – slavery.

“Meet the new boss, same as the old boss” – from The Who’s “We won’t get fooled again”

Of course we will get fooled again. Or maybe just bullied. It is all semantics, really.

We are in a pitched battle. Unfortunately, only one side in this battle for safety of the world is armed, and it ain’t us – at least at the moment. I am hopeful for a turn for the better in this regard. Not a perfect solution, mind you, but perhaps an increasingly better operating environment over time, because this might be the very definition of the “Universal Issue”. After all, there is no wealth, no power, no sex, no influence, no sex (“you said sex twice” to which I replied “I like sex”, paraphrasing Monty Python), if there is no livable environment.

A U.N. spokesman said yesterday that the Bali negotiations "were a beginning, not an end", and when the U.S. appeared to be losing (any) control, as well as any credibility, of the outcome the U.S. delegation rolled over. What does the U.N. mean we are beginning? The end of coal usage? Because in order to meet the IPCC's final determination would mean the END of coal use, while continuing Oil and Natural Gas use with either natural depletion doing the job for us, or some kind of regulatory impediment to their use. All of which means a significant contraction in the world's aggregate wealth, and while the poor would certainly feel this most severely in real terms, the fall from power that the world's super rich fear is the primary "fly in the ointment" holding reform back. If you doubt this, let me ask you something: Do you think consideration for the world's poor is what is holding our political institutions back? Give me a break.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Friday, December 14, 2007

“Unintended Consequences” meets “Cost/Benefit Analysis”

Well, they sort of meet. Perhaps I should say Unintended Consequences DOES NOT MEET Cost/Benefit Analysis/

Cost/Benefit Analysis (“CBA”) simply is not done in America with the exception of an occasional stab by business (Corporate America is TERRIFIED of CBA because it might hold up to the harsh light of day that for the most part Corporations get very, very, very little benefit and a great deal of cost from their CEOs; more on this later).

Unintended consequences (“UC”) is what it is – an outcome, result, or side effect of an action or actions.

Now imagine the UC’s of a standard operating procedure of no CBA and you have just described our political, justice, economic, healthcare, financial markets, and energy policies. Why? Because CBA’s are not warm and fuzzy! They deal with the harsh realities of life. What policy maker is going to stand up to the microphone and say:

“Expending 60% of America’s healthcare dollars on the final 3 weeks of life of the terminally ill adds nothing to the quality of their life and prevents us from doing many positive things, so we are not going to do it anymore. If you are this sick, you are going to die.”

Or a surgeon tell a patient:

“You have a tumor in your prostate. We are not going to operate because 90% of time you are going to die of something else, long before you might die from cancer of the prostate. If we do the surgery, you are more than likely to be impotent for the rest of your life. Further, we will save the system a ton of money.”

Politicians and cancer surgeons are in the business of telling people what they WANT to hear, and then stripping someone else of the cash (tax payer or you and me by way of our insurance provider) to fund the activity.

One of my personal favorites: Somehow the U.S. has wound up with the highest percentage of its peacetime population in prison in the history of mankind. Now, that is a strong statement, considering we had some pretty tough competition from Russia, Cuba, Saddam era Iraq, and China. Still, somehow we pulled it off. And what do we get for our efforts? Plenty of crime and a huge financial liability to fund our massive justice and prison system. But you won’t see any lawyers trying to right this ship (or our crazy divorce and family law which only serves to hurt everyone concerned, except the lawyers), because it works just fine for them and their bank account.

Do I have to mention car accidents (26,347 deaths per year)? Obesity and physical inactivity (365,000 deaths per year)? Tobacco (435,000 deaths per year). Alcohol (85,000 deaths per year)? Yet we spend more money on the war on drugs than prevention for all of these combined, while less than 17,500 people per year die of drug overdoses. But how can lawyers and the rest of our embarrassment of a legal system make money preventing car accident deaths or obesity deaths? Believe me, if they could, drugs would be legal and we would be handing out stiff prison sentences to those who put us in danger with their aggressive driving or fat fuckers standing in line at McDonalds.

Anyway, rant over. The point is our government does things on the policy level with absolutely no consideration towards the cost versus the benefit of any given course of action, only the cost versus VOTES they can garner. You can bet your LIFE the U.S. federal government will not engage in CBA as it regards our energy policy until well after it is too late. I imagine it will be the same story for climate change.

“Lord, grant me the power to change the things I can, accept the things I can’t, and the power to ignore the dumbasses that surround me…”

Mentatt (at) yahoo (d0t) com

Thursday, December 13, 2007

“If women didn't exist, all the money in the world would have no meaning.” Aristotle Onassis

Ponder that for a moment.

Have you given that enough thought? Good. That line sums up why a “Power Down” will never happen. Why we will drive right over the cliff with our foot on the gas pedal, and why we will fight all the way down the back side of Hubbert’s Peak. It’s why communism doesn’t work, why we make war, and why Helen launched a thousand ships.

Don’t get it? Perhaps you are wondering what the hell I am talking about? I’ll give you a clue:

The alpha male took that as a given.

Mentatt (at) yahoo (d0t) com
EIA Monthly World Oil Production for September 2007 Just Released

The world’s oil fields had a pretty good month in September, according to the U.S. Dept. of Energy’s Energy Information Administration. A nearly 1 million barrel-per-day increase over August in crude and condensate production, still the trend remains: Average daily production world crude and condensate production by year:

2005 = 73,807,000
2006 = 73,539,000
2007 = 73,134,000

Since July 2007 U.S. inventories have declined by nearly 12%, and OECD inventories have declined somewhat more. Prices have risen 40% or so. I look forward to the supply data for the period 7/07 – 12/07 with great anticipation, and will recast it along with inventory and consumption data and price action. At the moment, something appears amiss in the data compiling, or the price inelasticity of oil is much worse than had been previously believed. In addition, it would take perhaps another 6 to 12 months to determine if any new “production” from OPEC was an actual increase in production or a drawdown in OPEC inventories. OPEC (Saudi Arabia) is none to helpful in this regard.

On another note, yesterday’s coordinated activity of world Central Banks is conclusive proof that a potential dollar crisis has the powers that be running for clean underwear.

Yours for a better world,

Mentatt at yahoo (d0t) com

Wednesday, December 12, 2007

The front page, center column, of the Wall Street Journal this morning:

“Saudi Industrial Drive Strains Oil-Export Role”

I would very much like to congratulate the many contributors to the “Peak Oil” discussion at and for their part in making the American people, and the citizens of the world, aware of this emerging crisis.

While many of us had been pointing out that “Peak Oil” would strike the major industrial importing countries long before the rest of the world, particular recognition should go to Jeffrey Brown, a volunteer contributor at for coining the term “The Export Land Model”, constructing the model and, above all, having the patience to explain the issue, ad nauseum, to the chronically intellectually dishonest and challenged members of our mainstream media, financial services industry, and government. (I’m sorry, I really should get over it, but I just can’t seem to miss an opportunity to call these folks out for what they are.)

To all: Enjoy your moment in the sun. The ramifications of your analysis, which appears to be more or less as correct as one could hope for considering the less than perfect data we are working with to arrive at these conclusions, might beg us to remember to “be careful what you ask for, you may get it”. Not that any of us asked for an energy crisis, we just pointed out the obvious.

As the financial market’s participants knowledge of the issue comes to full bloom, I would hope that the consequences and impacts of this outcome would be the driving force behind all policy, and personal, decisions.

The question is, and I will quote Bob Shaw from

“Are humans smarter than yeast?”

(Yeast will ferment our alcohol for us as they grow and consume the resources within their environment but in the process destroy themselves by destroying the environment within the fermenting medium)

I’d like to think so, Bob, but would have to say that, at this moment, the real question is:
Are the people in power capable of helping the people avoid the yeast’s fate, or are they more interested in staying in power? Unfortunately, we know the answer to that question.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, December 11, 2007

The Fed is not The Problem. When it comes to the financial markets… We are The Problem.

We have a Problem. Considering the amount of hot air blowing out of the talking heads today one would think that the institution that is the U.S. Federal Reserve Bank has the power to solve The Problem. Anyone may read the Federal Reserve Act of December 23, 1913. If you take the trouble to do so you will be as sure as death and taxes that the Fed cannot solve The Problem.

Like most problems, The Problem is not a uni-faceted phenomenon, or should I say is not without the subsequent problems inevitably caused by The Solution(s) - proposed, enacted, or ignored – that the Problem will eventually have.

The Problem that the U.S. financial system is experiencing is not housing, or sub-prime mortgages, P/E multiples, or consumer spending, or consumer debt, etc… these are merely symptoms of the condition that is The Problem.

The Problem is the U.S. borrows $2 billion or so each and every day to fund its current account deficit, and the preponderance of that is for the purchase of OIL (I told you there was more than a one part to this problem, and you had to have known that it would include oil). There it is. That is The Problem. The good news is that we don’t have to do one damn thing to solve The Problem, because The Solution to The Problem is going to happen without any of us having to lift one F$#&^!# finger, and boy are we NOT going to like it, not one bit.

You see, in the coming 10 or so years U.S. Oil imports are going to decline dramatically. Over the following decade Oil imports will decline to the point of the inconsequential. And that will be the end of the current account deficit, the U.S. Dollar (in international trade), the U.S. Treasury Market, the Stock Market, the Federal Budget Deficit, Medicare, Social Security, and any and all Welfare State Transfer Payments (I don’t give ONE HOOT about your political sensibilities, left or right, right or wrong, for or against, just calling them as I see them). The impacts from the previously mentioned fact of disappearing Oil imports mean all of these things.

For a family man in his 40’s this should be quite disconcerting, but not surprising. Your participation in Social Security and Medicare, while not voluntary, is quite futile. You will receive absolutely no value for your input except the warm and fuzzy feeling one gets from letting the previous generation bilk you out of the fruits of your productive years while sending your progeny off to combat zones to fight and die for the very last squirt into the toilet of imported Oil to put off the day of reckoning onto another generation of Americans, and a future American Administration and Congress for the sole purpose of allowing the previous occupants of those illustrious branches of our Federal Government to be able to say: “Not on my Watch”. The Ponzi scheme that is the American financial system is ENTIRELY built, at this moment in time, on the continued flow of cheap oil imports in exchange for dubious IOU’s backed by the full faith and credit of the world’s largest debtor nation, a country that has no intention of paying them back. The amusing thing is that we accept this grand theft as our birthright while arguing over school prayer, flag burning, gay marriage, the Ten Commandments in government buildings, french or freedom fries, and other nonsensical, contrived issues which only continues to mask the harsh reality that in doing so we are merely tightening the rubber band further for the eventual “SNAP”.

For the same family man in his 40’s, contributions into the financial system will meet a similar fate. What contributions you make now are purchases that allow some seller somewhere to liquidate. Our family man here will not have the same opportunity in the future, say in his 60’s. There will be no buyer for all (some perhaps, though I think not) of the financial assets he (you) has so assiduously accumulated over his (your) working life. Why? Because the global financial system requires an ever-increasing use of BTU’s to power exponential economic growth, something the long-term readers of this blog know to be impossible, both from a mathematical and geological point of view.

Some very smart folks in the 1970’s warned us about the mathematical certainty that infinite linear systems and finite resource endowments are mutually exclusive events, not to mention the absurdity of making war for financial interests (often called “American Interests” – though very few Americans have any interest in these “interests”), Korea, Viet Nam, Iraq, Iran… sorry, I am getting ahead of myself/country. Did the powers that were, as it were, attempt anything constructive at that time? Not a shred. And the powers that be, of our time, will they attempt anything constructive? Not if Chuck Norris and Oprah Winfrey have anything to say about it. “Problem? What Problem?”

Well, they say that no matter where you go, there you are. Here we are, indeed.

Mentatt (at) yahoo (d0t) com
“The End of Cheap Food” Cover Headline of Economist Magazine, December 10, 2007

What they should have said is “The End of Cheap Oil Means the End of Cheap Food”. Still they have come a long way since their 1999 cover story of “$5 Dollar a Barrel Oil?” That was the equivalent of the Boston Red Sox error of the century in print journalism. (I often wonder if the fellow who came up with that is in any way embarrassed. He should not be, forecasting is inherently failure prone.)

The New York Times ran a cover story in the Sunday Business Section 2 days ago on the mathematical certainty that oil imports into the U.S. are going to fall – although they did their best to obfuscate just enough so that their readers were left with plenty of hope for a techno fix.

Why these august publications are not capable of making the link and connecting these dots – and what it means to food prices and economic growth – is beyond me. As the volume of imported oil into the U.S. declines the rate of food inflation is more than likely to accelerate. The question is at what rate? Does a 3 % annual decline in oil imports mean a 3 % annual rise in food prices, or is it more like 30%?

It has been calculated by a number of credible sources that roughly 80% of retail price of food in the U.S. was to pay for the fossil fuel inputs of oil and natural gas into cultivating, fertilizers, pesticides, harvesting, transportation, etc… of our food. If the cost of fossil fuels doubles (not an unlikely event in my opinion) does the price of food rise 80%, or might it be more?

I prefer to believe that the market will respond quickly with more locally and personally produced food products, and if this means my neighborhood smells more like a barnyard street market in Peru than a fresh cut lawn in spring how will that affect housing values in my neighborhood? JUST KIDDING!! (about housing values in my neighborhood, pretty serious about the rest) Had you for a second… People will respond, working class and poor folks simply won’t be able to afford not to (if I may use the double negative). How else can a population with ZERO savings afford a near doubling of their food and energy costs?

Can you imagine, instead of marching for a cure for breast or prostate cancer, we have Johnny Appleseed marches for fruit trees and raspberry bushes? Al Sharpton marching for equal rights to inner city gardening space? Martha Stewart giving instruction on not just goat cheese dressing, but on milking the goat as well?

“May you live in interesting times”.

Mentatt (at) yahoo (d0t) com

Friday, December 7, 2007


U.S. Crude oil inventories peaked this year in the week ending 7/6/07 at 352,580,000 barrels.

For the week ending 11/30/07 U.S. crude inventories stood at 305,240,000 barrels.

In 5 months U.S. inventories declined 11% (peak to trough).

Each week our friends (with friends like these who needs an enema?) in the media report the inventory decline of the week with an explanation:

• Bad weather delayed offloading of ships
• Storms in the Gulf of Mexico delayed oil deliveries
• Falling Demand (my personal favorite)
• Refinery Outages (???)
• My dog ate my inventory homework

Guys, guys, guys… I know that whatever journalism school you attended was long on style and short on statistics but even a journalist can see a trend forming here: you know, rising prices and declining inventories. You folks are supposed to be experts at ferreting out the truth, and though you have proven quite adept at calling politicians for what they are, you seem to have gone tone deaf, or your B.S. meter is on the blink, when the party at the microphone is an oil executive or Wall Street analyst/CEO. After all, these are our “best and brightest”. Look at the great job they did when they conceived the idea of mortgage-backed securities!

Of course, during this time prices rose over 40% (and rose over 800% over the past 8 years) and was again explained as:

• Demand from China and India is driving prices higher (give that journalist a cigar)
• International Politics
• Terrorism
• The decline in the value of the U.S. Dollar
• Greedy oil companies
• U.S. Energy Policy
• Greedy Speculators

In the land of the free market, maybe it is the consumer that is responsible for the price response of the supply demand equation. Did that one ever dawn on you? Maybe, just maybe, the same force is working upon the value of the dollar versus commodities, like oil for instance. Ya think?

Yours for better journalism covering the most important issue since Noah built himself a boat.

Mentatt (at) yahoo (d0t) com

Wednesday, December 5, 2007


Front page of the WSJ today has a blurb about airlines being unable to grow in 2008.

A couple of weeks ago it was the U.S. automobile manufacturers.

6 months ago it was banking.

Last year it was housing.

Exactly how do you sell more houses, cars, and airline seats if your total supply of oil is falling?

Which industry is next? I am not sure but I have some candidates:

Trucking, Shipping & Overnight Delivery
Travel & Leisure
Hotel & Hospitality

What else would the beginning stages of peak oil in the U.S. look like?

Nothing. This is exactly what it would look like. It is what it is.

Mentatt (at) yahoo (d0t) com
OPEC says market well supplied, declines to increase production

I got to hand it to the public relations folks at OPEC. They did a great job of keeping everyone off balance for the past 2 weeks. The media fell for the OPEC head fake so consistently it was embarrassing to watch. Thankfully, that’s over.

So let’s go through the scenario - OPEC meets at a time when :

• Oil prices have closed in on their all time record, rising over 50% this year alone, and up over 800% in 8 years.

• Inventories the world over have been in steep decline during the traditional “shoulder period”, the period between peak summer gasoline demand and peak winter heating demand, the time when inventories are normally building.

• In terms of “days of supply”, the only inventory number that really counts, the OECD country’s inventories are heading into the red zone.

• The world’s production of crude and condensate (“C & C”) has been flat to slightly declining for 2.5 years. Prices have doubled during this period. Spare me the lack of demand argument.

• Oil imports into the U.S. have declined for 2 years at roughly 1% per year. While oil imports have SURGED for China and India far more than the decline in U.S. imports.

• OPEC country's domestic consumption continues to rise, with projected 2008 year over year increase in demand second only to China at over 350,000 barrels per day.

• OPEC has increased production over 2 million barrels per day since 2000, but their exports have actually declined due to the increase in domestic consumption.

So, what does the gas station to the world do/say? That the world is “well supplied”.

Well, guys, that wasn’t the OECD country's point was it? No, there is no shortage of $90 per barrel oil. The problem is, the OECD countries were looking for some $50 - $60 per barrel oil, of which there seems to be an EXTREME shortage.

Note to the U.S. Department of Energy, the 2008 Presidential candidates, Congressman Bart Stupak, the iconic moron Richard Blumenthal (the Connecticut Attorney General who testified that the problem with oil prices stemmed from allowing all of the American Oil companies to merge! In other words, he proposed to solve the energy crisis by tough enforcement of the anti-trust laws, and in the process follow Eliot Spitzer’s example, and Rudy Giulliani, on how to get ahead in politics), etc…

When crude oil is $200 per barrel OPEC will again claim that the market is well supplied – and it will be! Just not with $100 per barrel oil.

So stop wasting the public’s time. OPEC is likely unable to increase production, and even if they could it would be for a very short time and not by a terribly meaningful amount. You know what you have to do, and yes the beginning stages of that discussion might well cost you your political career. Yet you ask young people to risk their lives and limbs in a war for oil while you refuse to risk only your jobs? Perhaps if politicians were shot for cowardice (the U.S. has done that to more than a few teenagers in its history, right?) we might get a better quality candidate.

The Great U.S. Energy Crisis has arrived.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T) com

Sunday, December 2, 2007

2 + 2 + 2 ≠ 7, but the market thinks it does

The IPCC’s FINAL report on climate change was clear: Cease growth in Carbon emissions within 7 years and reduce to essentially 0 all carbon emissions within 40 years or suffer horrific consequences. (Forget your politics for a moment. If you are arrogant enough to have an opinion that contradicts the IPCC report but were not invited onto the panel you are the very definition of a MORON, so please, stop reading and go find yourself a recent issue of People Magazine. It is more your speed.)

I don’t think that that was terribly hard to understand.

The Peak Oil Activist community, many of which are some of our best minds in academia, and many in the Oil industry itself, has articulated fairly convincingly that oil supplies will not continue to grow much longer, if they have not begun to contract already.

The Automobile industry, the housing industry, the “this, that, and other industry” is projecting growth out till kingdom come… in complete contravention of the simple mathematical concept “e”, or the “exponential function”, and in complete denial of the political interventions coming due to the IPCC report and the constrictions coming due to the lack of sufficient fossil fuels.

But at the moment, the financial markets believe these projections - 2+ 2 + 2 = 7. Carbon constrained + Fossil Fuel Constrained + Unlimited Industrial Growth = Business as Usual!! Yes! We can have exponential growth in automobile manufacture while cutting our carbon emissions to 0! Yes! We can have exponential growth in the world economy at precisely the time world oil supplies are in terminal decline! Remember, this logic has been brought to you by the same “best and brightest” that brought you this great reasoning: "If we bundle a thousand sub-prime mortgages together and wave our magic wand they will be magically transformed into AAA grade investment bonds."

I know I should be careful, and not offend someone by goring their personal sacred cow (as I recently did over dinner with friends and clients when I had the ill manner to say that the declining Dollar (and rising Euro) would not save South Florida's housing market with oodles of Europeans buying properties in South Florida).

As sure as 2 + 2 + 2 ≠ 7, the markets will figure this one out, too. And there will be hell to pay. I just can’t tell you when, exactly. I CAN tell you it is not “if” but “when”, just not “exactly” when. The myriad doom and gloomers, and other curmudgeons, keep predicting the date of this “collapse” and that “meltdown”, using what statistical model for their forecast I know not – and neither do they. I enjoy James Howard Kuntsler's work as much as the next guy, but has shown no marked ability at calling market (if I may risk the use of understatement) tops. Though he will eventually and most certainly be correct, it may be years until that time.

But I am speaking to you, not those guys. So let me ask you a something(s):

What date, exactly, did you first start to use a computer? (uh, 1984) What date did it dawn on you that it was a life changing development? (uh, 1984) Now, WHAT DATE, EXACTLY, DID YOU BUY MICROSOFT AND INTEL STOCK AND TELL EVERYBODY THAT CAME NEAR YOU THAT THEY SHOULD BUY SHARES IN THESE COMPANIES? (uh, I never bought the stock, or: I bought these stocks in 1999, just before the market crashed.) Or maybe you were to young to take advantage of those life changing opportunities that you were faced with everyday. So, what about Google? (I TOTALLY missed Google).

Here’s your second chance. Don’t blow it.

Mentatt (at) yahoo (d0t) com

Saturday, December 1, 2007

Connect the dots

One of my favorite bloggers, Professor Joseph Dancy of the SMU School of Law pointed out the following agricultural data points recently:

“The boom in biofuels is boosting demand and constraining food supplies; 20% of the US corn crop is already used to produce ethanol. Agricultural commodities are the subject of a growing battle between energy demands and food demands of the world’s population. The UN's World Food Organization predicts that demand for biofuels will grow by 170% in the next three years.

Wheat prices surged to record highs last month. Expectations are that rising global demand for U.S. wheat will deplete inventories, leaving them at the lowest level in three decades. Wheat prices on the Chicago Board of Trade topped $9 a bushel for the first time ever.

The U.S. Department of Agriculture cut its estimate of Australia's wheat crop to 21 million metric tons from last month's estimate of 23 million tons. Australia was expected to be the world’s second largest wheat exporter. The USDA’s estimate of Canada’s wheat crop also declined 5.6 percent last month.

The USDA raised its’ forecast of expected wheat exports as foreign buyers are flocking to the U.S. The world market expects poor harvests in major producing regions, and rising demand from industrializing nations such as China.

The USDA estimates crop-year ending stocks of wheat will fall to 362 million metric tons in 2007- 2008, down from 456 million metric tons a year earlier. This is the lowest inventory level since 1973-1974.

Ukraine was the world's seventh-biggest wheat exporter last year. The Ukraine government said it will restrict grain exports last month to moderate domestic food price increases.

Russia, last year's third-largest wheat exporter behind the U.S. and Canada, said it may impose a 10 percent export tax on the grain in November and a 30 percent export duty on barley.

Global wheat inventory stockpiles at the end of June in the five biggest-exporting countries fell to 107 million tons, a 34-year low. Wheat was the fourth-biggest U.S. crop in 2006, behind corn, soybeans and hay, according to government data.
The higher wheat prices have increased the cost of staple foods such as bread and pasta. Higher pasta prices prompted consumer groups in Italy to launch a one-day boycott of pasta last month. Prices there have soared as much as 20 per cent over the last several months.

Corn prices hit a three-month high last month after China signaled that it could become a net importer for the first time in more a decade. One of the world's four biggest corn exporters last year, China will encourage more imports of the grain, and discourage domestic output of crop-based fuels, in an attempt to keep food inflation under control.

The amount of U.S. lands planted in corn has increased 18.5 percent this year, from 78.3 million acres last year to 92.9 million acres. The USDA forecast that fertilizer use should increase by 5 percent overall, with use on corn up 9.5 percent.

The USDA is forecasting record fertilizer expenditures for 2007. Fertilizer accounts for roughly 20% of a corn farmer’s operating cost.

Over the last year the price of eggs went up by 33.7 percent, whole milk 31.1 percent, and navel oranges were up by 13.6 percent in the U.S. according to a government report. Other dramatic increases included fresh chicken up by 8.4 percent, apples up by 8.7 percent, and dried beans up by 11.5 percent.

Barley prices in Winnipeg, Canada, gained 41 percent in the past year on increased demand for animal feed and for brewing beer. Canada is one of the world's biggest barley producers. Corn has gained 53 percent in that market as demand for grain-based ethanol surged.

Driven by a combination of trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. There are reports of cows being stolen from Wisconsin dairy farms.

Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations’ top agriculture official warned last month. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it is 65 per cent.

The USDA is expecting a record breaking year for agricultural exports from the U.S. Exports are expected to reach a record $79 billion in fiscal year 2007, topping the old record set the previous year. USDA says sales are expected to reach another record in 2008.

The value of all U.S. crop production this year is forecast to rise 14 percent from 2006, to $136.2 billion. The value of production from cattle, hogs, chickens and eggs will increase 18 percent, to a record $140.2 billion

Rising prices for livestock and grains should push U.S. net farm income to a record high in 2007, 48 percent greater than a year earlier according to the USDA. Farm income is expected to rise to $87.1 billion from $59 billion last year. "This is a great time to be a farmer," said Christopher Hurt, an economist at Purdue University in West Lafayette, Ind. "Farming may be the healthiest sector of the economy."

A rise in agricultural income could boost sales of farm machinery, seeds, and farmers will also be able to afford more fertilizer according to agricultural economists.

A boost in farm income this year has accelerated agricultural equipment sales according to representatives of the equipment manufacturing industry. Combine sales are up so far this year by nearly 9 percent according to Russ Green, president of Caterpillar’s North American operations. “Obviously there is reason for optimism,” Green said. “Usually 14-18 months after an upturn in commodity prices we’ll see an upturn in equipment sales.”

Ag Equipment Newsletter, a publication for agricultural equipment marketers, in its Sept. 15 issue reported results of its annual survey of North American equipment dealers, noting, “It’s difficult to find a product category that dealers aren’t enthused about next year.” From Joseph Dancy

Professor Dancy is not offering opinions here, just reporting the facts as they are in the agricultural commodities markets.
Enough of the facts; let’s move on to the really important issue: My opinion.

(Just kidding. Remember that commercial for the “Real Yellow Pages” a decade or 2 ago? Under the heading “Headcases” the scene cut to a hip New York City party, and one character leans over to the person she is talking to and says: “Enough about me, darling. Let’s talk about you. What do YOU think of my new hairdo?”)

Well, I am only partially kidding. In any event, it is my assertion that most, if not all of the changes noted above have been brought about by the increased costs of fertilizer, pesticides, diesel for farm equipment, as well as transportation fuel to ship foodstuffs across continents and oceans to the final consumer. The trend “is what it is” and for investors “the trend is your friend”. Of course, for poor folks here and the world over, this trend is no friend. Any impartial analysis of world Wheat inventories and supplies would not the analyst with a warm and fuzzy feeling as it applies to actually feeding people. Though investors that have been long Wheat might feel warm and fuzzy about the positive impact on one’s portfolio.
There is little or no additional acreage available with which to increase industrial production levels of Wheat, Corn, Soy Beans and other grains. Increasing acreage in one means decreasing acreage in another, and we know how musical chairs works out in the end. There are only two ways to increase the amount harvested: Increase crop yield per acre and/or increase acreage planted.

My argument stands that while this is no Armageddon, it is no walk in the park, either. As these trends compound like interest on a mortgage, or creep up on you like the Alternate Minimum Tax, even in wealthy countries like the U.S. people will have to respond (or else it would be Armageddon).

What will the response be? Good question – and perhaps a very complicated, difficult answer. Or maybe as simple as an increase of a couple percent in local food production per year until, 40 years or so hence, nearly all food supplies are produced regionally. I think the simple answer is the most likely outcome, and that is why I believe the energy crisis, while brutal economically, will not be the Apocalypse.

Mentatt (at) yahoo (d0t) com