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

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

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

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

To summarize:

Crude & Condensate

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

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

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

All Liquids

2005 All liquids = 84,542,000

2006 All liquids = 84,481,000

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

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

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

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


Yours for a better world,


Mentatt (at) yahoo (dot) com

Food and Fuel

Wheat hit a new record today:

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

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

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

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

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

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

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

Yours for a better world,

Mentatt (at) yahoo(dot).com

Food and Fuel

Wheat hit a new record today:

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

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

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

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

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

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

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

Yours for a better world,

Mentatt (at) yahoo(dot).com

Ka-BOOM!!

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

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

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

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

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

Keep your eye on the barrel, er, ball.

Mentatt (at) yahoo.com

The Four Kinds of Lies, cont… But first,

Quote of the day:

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

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

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

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

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

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

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

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

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

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

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

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

Yours for a better world,

Mentatt (at) yahoo.com

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

Quote of the week:

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

Couldn’t have said it better myself.

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

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

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

It is what it is.

But that is not the end of the story…

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

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

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

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

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

Yours for a better world,

Mentatt (at) yahoo.com

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

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

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

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

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

But I digress...

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

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

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

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

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

Yours for a better world,

Mentatt (at) yahoo.com