Saturday, January 9, 2010
Rate of Change
One of the commenters mentioned Robert Rapier's excellent blog in my last post. I recommend his blog highly. Robert is a chemical engineer, with excellent math and analytical skills. I read his stuff on a regular basis.
The ongoing debate between Stuart Staniford, Jeffrey Brown, and Robert Rapier has been lively - sometimes a bit too lively for Rapier's tastes, and perhaps rightly so.
For my part, I am not a physicist, geologist, or chemist as the above mentioned are, respectively. I read their stuff, and a great many others, and then try to make sense out of it all with the help of the market's price mechanisms. I see the debate between them as one over the "rate of change", and I have been on the "slow and steady" rate of change for Oil import decline (wrong for 2009 where U.S. imports declined 11.5% and I had thought 6 to 8%) and increasing deflation (wrong for 2009). That is the problem with forecasting - you gotta be willing to admit error when the data does not support one's assertions.
So far, the rate of change projected by the doomers since 2005 or so regarding Saudi Arabia production capacity has been wrong - and the decline in Mexico's production was much worse than projected by all but the most doomer of doomers; meanwhile the U.S. surprised to the upside (although not for those who knew that Thunderhorse was coming on line).
Several years ago I made a call to the author of "Out of Gas", David Goodstein. He is a world renowned physicist and the provost at Cal Tech. Imagine my surprise when he picked up the phone and chatted amiably with me. I remember very clearly his idea of margin of error in making projections for world wide oil production - that it was best to use a decade, or even 2 decades. Most of the debate in community uses a 3 year margin of error, and I understand why - that gives one a 100 billion barrel margin of error. Goodstein obviously felt that a 300 to 600 billion barrel of error was more appropriate. Of course, folks with Dr. Goodstein's reputation are more circumspect about putting it on the line - and that is quite understandable (btw, I recommend his book VERY highly. It is no more than an afternoon's read, and very much worth the time for a any layman investor).
At first, I was convinced by Staniford's arguments - until it didn't happen. Remember my old trader's maxim - "when I am wrong, I am gone." But Stuart's assertions were primarily around production, particularly Saudi production. Jeff Brown's assertions were built around exports, and so far, those assertions have been borne out - whether by the mathematics of the "Export Land Model" or because of economics I cannot say with any authority. Which brings me to my point. "The truth will out." By the end of 2012 we will know which it is to be (well, at least I think so). This is not to say that Stuart Staniford will not eventually be proved correct, only that it did not happen on the time line projected. To be fair, every analysis of this issue is working with very incomplete data, to say the least. On the other hand, if you think like an actuary or pension fund manager, with 10 year horizons, the probability is a near certainty.
Which is why I always ask someone: "How old are you?" If you are 70+, own more bonds than equities, some gold, and go play golf! If you are 45 with kids and a family to provide for... well, its a whole different ball game than your father's experience. If you are 25! "Rejoice in thy youth!" But recognize that the rules governing your economic existence are going to be very different than mine.
It seems to me that many in the "doomer" camp at places like TheOilDrum.com were rooting for the end of the world for the sake of getting it over with, and because they HATE the current system. For me, the energy issue was always one of economics/politics - I am a capitalist, which is a dirty, dirty word with that crowd, and look to profit personally by betting on the outcome.
2009 turned out to be a year where EVERYBODY was more than a little bit wrong - some years are like that, as they said in my hometown when I was a kid: "sometimes it just bees that way". But the markets are still speaking. Inventories are still speaking. And they are at odds with each other. If you are an investor, this is no time to throw your hands up in the air and walk away.
Posted by The Short Story Man at 6:10 AM