Peak (Export) Oil/USD Survival

boobtube audio: I Want My Bailout Money rap track (3:14)

via Jim Sinclair’s MineSet

As reported in the Ft.com, the International Energy Agency has again reduced its oil demand outlook given a downward revision for global GDP growth to 1.2 percent.

“Forecast global oil demand has been sharply revised down for 2009,” to 85.3 mmbd “following a reassessment of global economic prospects”

…

“The expected two-year contraction in oil demand would be the first since 1982 and 1983.

“Highlighting the weak state of demand, both for oil and for seaborne transport, floating storage is estimated to have risen recently to between 50m-80m barrels.”

which obviously is almost one whole days worth of global consumption.

“I think war is a dangerous place.” - Washington DC, 7 May, 2003

“So I analyzed that and decided I didn’t want to be the president during a depression greater than the Great Depression, or the beginning of a depression greater than the Great Depression.”
- Washington D.C., Dec. 18, 2008

…and thank goodness for that

The US social security system is nothing but a giant idiot sanctioned pyramid scheme.

Taxpayers pay one percent of their income as an “insurance premium” for retirement. Only that, just like Madoff’s Ponzi scheme, there is no capital base accrued, so unlike an insurance firm, claims are not drawn from an accumulated fund of contributions.  The vast baby boomer generation is shortly to be calling upon the next generation to pay for their retirement.  And as with all Ponzi schemes, the ride has to end sometime, and everyone falls off.

Unfortunately, even if you don’t live in America, you’re in on this one.  The social security benefits will be paid, though not with actual national income, but with newly printed fiat currency.  The boomers will receive their benefits, though the actual purchasing power shall be severely diluted.

Why are YOU exposed?  Because YOUR government has the vast bulk of its national reserves denominated in USD. When the dollar is devalued, YOUR currency will initially appreciate, then ultimately when that effects the balance of trade to too greater a degree, your currency will be likewise inflated to cope.

chart via John Williams' www.shadowstats.com

It is a pyramid scheme.  Almost as immoral as the quasi-Govt. central banks robbing to population of purchasing power by way of inflating their currencies.  But who said governments should be moral anyway.  They, like the media, are merely comprised of ordinary people like you and me, and if we’re satisfied to be drip-fed stale inconsequential policy and entertainment, then perhaps we don’t deserve an honest money system.

So we stumble on, complaining about what we’re told to complain about, hedge funds this month, (oil companies & Arabs last year) , whilst the Ponzi masters use the dull old dollar to rob and steal from all of us. Welcome to the world we deserve.

via flickr.com

James Turk has compiled the performance of gold versus various countries over the last seven years, and he highlights the relative stability of the gold exchange rate, as opposed to the fiat currencies.

…

We can see that gold is rising against every national currency. The reason for this phenomenon is that the dollar is the world’s reserve currency, and because of this role, it is held as a reserve by central banks around the world. The dollar provides part of the base upon which other currencies are created. Therefore, as the dollar is debased, other national currencies are also being debased along with it. In other words, the US dollar is now going down a ‘black-hole’, and its gravitational pull is dragging every other currency down with it as evidenced by the rising gold price this decade in all currencies.

There is one other unique aspect apparent in the above table. The average annual rates of appreciation that gold has achieved against the nine currencies in this table is remarkably consistent. Gold appreciated 13.3% to 13.6% on average for eight years in terms of four of the currencies. Gold gained from 10.6% and 10.8% against the two best currencies, the euro and Swiss franc. The euro and the Swiss franc are the ‘best’ in the sense that less of their purchasing power has been inflated away compared to the other seven currencies. …

…

Gold shows remarkable consistency when viewed over the long-term. Thus, it is national currencies that are volatile, not gold. Annual changes in gold are a result of currency fluctuations, not anything inherent to gold itself, and this point is proven by the consistency of gold’s average annual appreciation this decade, which smoothes out the annual volatility.

Gold Climbs Again - Eight Years in a Row, James Turk (2 Jan 2009)

Q: Is the Swiss franc still pegged to gold in some way?

Nothing like thin markets and traders on leave to launch a military offensive.  Likewise, nothing like a Christian holiday, thereby sleepy Western news services, to be a great time to rattle sabres on the Indian subcontinent.

Funnily enough, oil and gold markets are barely flustered.

Oil is still considered by most to be suffering the receding tsunami wave of demand destruction.  Considered by all, except of course the oil companies that is, whom have begun stockpiling in any vessel available as the mother of all contangos predicts that they’ll making a killing against the costs of storage.

What does this unusually large contango mean?  Well, in a normally functioning market, forward storage margins are so thin, that the crude futures market is a poor place to make a substantial buck.  Now a situation exists where the markets are quite dislocated from reality.  So what do the oil companies know that the useless smarts on wall street don’t?

The ever so thin margin the industry has been struggling to achieve these last few years, between a fully supplied market and a demand constrained market, has been attained at an incredible, increasing cost in capital and energy.  With the fruits of industry labour being whittled away by the credit crisis, increasingly delicate production is being shut down left right and centre.

(Slide from Matt Simmons 1998 presentation in Perth,
 lifted from http://www.simmonsco-intl.com/files/Houston%20Energy%20Institute.pdf) 

These aren’t simple taps on simple tanks.  Infrastructure investment has not kept pace with demand, and not for lack of trying.  Little (formerly ‘big’) Oil can find cheaper reserves on other companies balance sheets than in the ground. Especially with Massive (NOCs) Oil competing globally for leases.

Add to that, Mexico may not be an oil exporter in two years.  Gazprom is being told to charge more in lieu of the failing Russian oil take. And Hugo Chavez is nationalising gold mines.

Do those whom are stockpiling oil to sell at a later date think the world will be awash in oil? And what of the mighty dollar, a fiat currency being printed to prop up a blatantly unjust financial fiasco.  The global reserve currency that denominates the trade in the world’s most vital commodity.  Is the oil contango another symptom of oil companies/traders seeking a hedge against the dollar?

Damn we live in interesting times.

(Photoillustration by: Ji Lee via www.portfolio.com/news-markets/national-news/portfolio/20…)

Note to self:  Places sadly to be struck from the ‘Must visit one day’ list;

1. Middle East 
2. Greece
3. Russia
4. Israel
5. Pakistan
6. India

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS - FLASH UPDATE - December 20, 2008

• Growth Surges/Accelerates in Broad Money Components
• Monetary Base Up 97.5% Year/Year
• Fed Actions Begin to Kick In — For Better and Worse
• U.S. Dollar Remains Key to Markets

Bulk of M3 Components Surge an Annualized 63.4% in Latest Week. The seasonally adjusted data on M2, institutional money funds and large time deposits at commercial banks (M3 components that account for roughly 90% of the total measure) have shown a pattern of accelerating growth for the last three weeks (see the Fed’s H.6 and H.8 reports). In the three weeks ended December 8th/10th, annualized growth was 39.3%, the annualized growth for the last two weeks was 49.8%, and the annualized growth in the most recent week was 63.4%.

…

Monetary Base and Reserves Continue to Explode. The St. Louis Fed’s Adjusted Monetary Base in the two weeks ended December 17th was up 97.5% from the year before…

…

As previously discussed in the Money Supply Special Report (www.shadowstats.com, right hand column), the effects of money supply growth can be problematic as to economic activity. The Fed always can drive the economy into recession and deflation by contracting broad money growth. The reverse, however, is not true. Excessive money growth does not assure economic growth, although it always will assure higher inflation.

this week’s ASPO-USA Peak Oil Review, as compiled by former CIA analyst, Tom Whipple

….

When Fatih Birol, the IEA’s chief economist, was interviewed by the Guardian newspaper last week he was pressed to explain just what “level off towards the end of the projection period” actually means. To the astonishment of the interviewer, the answer came back as 2020 - only 11 years from now. For an Agency that has steadfastly maintained that there was plenty of oil to keep on increasing production for the foreseeable future, this admission caps the turnaround that came with the publication of this year’s Energy Outlook. In that publication, the agency says new research shows that oil production from the world’s existing oil fields may be declining at 6.7 percent a year rather than the 3.7 percent rate previously estimated. 

 

The impact of this admission on government policy has yet to been seen. Many believe that a 2020 date for the plateauing of world oil production is far too optimistic and that a more realistic time frame is between 2010 and 2013 if it has not come already due to the economic slowdown. The next shoe to fall in the general recognition of imminent peak oil may be at the US’s EIA which will be changing leadership in about a month.

…

an excerpt from Peter Cooper’s weblog, Hedge fund redemptions to crash Q1 markets

When reading about the $50 billion Madoff hedge fund fraud it hit me on the head: hedge fund redemptions at the end of this year are going to be absolutely huge, and that will mean a massive sell-off in global capital markets in the first quarter.

That would also mean a further rally for the the US dollar, as assets sold are redeemed largely in US dollars and thus boost demand for the greenback. Gold might take a slight set back although will more likely be in increased demand as a safe haven asset and diversification against the coming dollar crash.

…

There is a roundtable interview between Matt Simmons and Robert Hirsch, conducted by Jim Puplava available at Financial Sense. Well worth your 55 mins. (mp3 via Financial Sense)

Please forgive the sarcasm.

The IEA has reduced its medium-term demand forecast by 170,000 barrels a day from its November estimate, to 86.37 million barrels a day. Their 2008 forecast has slashed 40,000 barrels a day from last month’s report.
Demand is now projected to be 200,000 barrels a day less.

Looks like I can buy that SUV after all </sarc>

James Conrad writes at Seeking Alpha, a great four page piece on the where and whys of this fundamentally interesting period in monetary history.

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At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.

…

Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.

…

All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.

The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.

…

Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.

…

Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily involved in downward gold price manipulation. However, this month, both HSBC and GS took lots of deliveries of gold from COMEX. Given the size and bureaucracy at such firms, it is certainly possible for the majority of traders to be entirely honest, while others, at the same firm, may be totally corrupt.

More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.

the complete, four page article is at Seeking Alpha

The first visit to Venezuela by a Russian President speaks volumes of both the decline in US supremacy, and the increase in petro-nationalism.

Medvedev’s visit to latin america, including meeting the socialist Lula in Brazil is a clear sign that world’s oil suppliers desire to unite.  New power blocks are forming, with the old bullies wondering who they can play with.

… “Develop the ruble as a regional currency. Create a fully functioning oil exchange, trading in rubles… We must break the strings tying us to the financial Titanic, which in my view will soon sink.” - Professor Igor Panarin (Nov 24)

The few remaining oil regions not the exclusive domain of the national oil companies, are increasingly facing competition for their development by the NOCs themselves.  Saudi Aramco is showing up in Africa and Asia, nudging Big Oil out of the way.  It is not only the middle eastern NOCs that the beleaguered western oil companies are struggling against, but also the sovereign wealth funds of China and India.  The super-giant Daquing oil-field is now in decline, the the publicly listed (albeit government controlled) companies CNPC, Sinopec and CNOCC, are out hunting for oil. Including taking swipes at US oil companies such the unsuccessful 2005 bid for Unocal.

To what degree Russia cooperates with OPEC will be quite interesting.

Russia will coordinate with members of the Organization of Petroleum Exporting Countries including Venezuela to keep oil prices from being “too low or speculatively high,” President Dmitry Medvedev said.

Major price swings aren’t in the interest of either oil- producing or consuming countries, Medvedev said yesterday in a Caracas ceremony where he and Venezuela President Hugo Chavez signed energy accords. He said Russia would “coordinate fundamentally with Venezuela” and other OPEC nations, without specifying how.

“We will be coordinating, but it doesn’t mean that we’ll be colluding,” Medvedev said. Stable oil prices “are important for us and important for our economy, just as they are for the economy of Venezuela and other countries.” - Bloomberg (Nov 27)

 They certainly have similar needs.  It is reported that OPEC has managed to attain cuts of about 1.2M b/d, and are signaling further cuts of 1.5M b/d.  Markets probably require cuts of 3M b/d to stabilise prices.  The most actively traded contract on the February NYMEX is for $25 per barrel.  I imagine the likes of Russia, Venezuela and Iran would not be able to sustain prices at those levels for more than a few months at best.  Saudi Arabia conceivably could given its vast cache of private wealth.

Demand is noticeably slipping, with US down 5 percent for the first ten months of the year.  The world is on track for the first reduction in demand in a generation.  Unfortunately, depletion rages on, and the current reduction in demand is less than a quarter of the low end estimate for global depletion.  Meanwhile, Non-OPEC non-NOC oil production is being shut down due to these oh so temporarily low oil prices.

Then you have the OECDs International Energy Agency (IEA),  asserting all manner of what on close inspection seams to be science fiction.  Amongst other idealised claims, new oil to the tune of six new Saudi Arabia’s need to be found in the next 22 years, at a cost of $300bn per year.

chart via Energy & Capital

For a more detailed review of the IEAs recent report I recommend, A Peak-Oiler, but still in the closet? IEA’s 2008 Report (Nov 17), written by Aage Figenschou, with Matt Simmons.

Also of note is the recently published (Oct 29) UK Industry Taskforce on Peak Oil and Energy Security. 

If you knew you were in the poo, and you believed with all your heart the only course of action was to restore confidence in your banking system with shock and awe, what would you do?

As the required money that needs to be injected into the system does not exist, and your new boss will shortly be asking for a lot more money for his own shock and awe package, what to do?

Obviously you need to borrow the money from someone.  Ideally someone ignorant enough that you can manipulate the deal so that you only have to pay them back cents in the dollar.

So, you know you have make new money with such brutal force that the subsequent effects that the debt you use to create the money, itself will be worth less.  There is still the matter of how you convince people to buy the debt.  Obviously a cataclysmic financial crisis creates its own deflationary effects as assets are sold down, and money is withdrawn from the system (not being reinvested).  You know that that money of course needs to by put somewhere.

Luckily you are in a unique position whereby the world, and your creditors, genuinely believe your currency to be the safest place to be, so they flood into USD instruments, which includes US Treasury debt.  Fabulous, as that demand drives down the yield you need to pay on new issuances, and you know your going to issue a ruddy great swag of that.

image pbs.org

Sad of course that your population and especially their descendants never had a chance of avoiding the coming bill for your actions.  Devaluing your dollars, which is what you knowingly understand to be a necessity, will rob them of not only their meager savings, but also devastate their purchasing power.

Just in time for energy and food shortages no less.  It is a good thing lives are cheaper now too </sarc>

The Fed Pledges $7.2 Trillion of YOUR Money. Bloomberg News reports that the U.S. government is prepared to lend more than $7.4 trillion — approximately half the value of everything produced in the nation last year — to rescue the financial system, which has been in cardiac arrest since the credit markets seized up.

The Government Has Already Spent $4.3 Trillion Bailing Out Wall Street. According to CNBC, as of last week, the Federal government had already spent $4.3 trillion in bailouts, from $900 billion for the Term Auction Facility … to $112 billion bailing out AIG … to $540 billion backing up Money Market funds … to $700 billion for the Treasury Asset Relief Program (TARP), and more.

$4.3 trillion — that’s more than America spent on World War II, adjusted for inflation. And it’s all going down a black hole created by Wall Street bankers.

All that money has to come from somewhere. Investors are stuffing their money into Treasuries with no yield, and the government still has to go out and borrow more. The U.S. Treasury is on course to borrow $1.5 trillion this year, and it’s still not enough! Next year’s budget deficit will easily top $1 trillion; more than double this year’s deficit.

- Sean Brodrick (Nov 26)

Then there is a devil’s advocate view on Gold. GOLD: Not the “Safe Haven” You Think It Is

Which I must confess to being a little skeptical of, as clearly the US has been in desperate trouble for a while now, and the interventionist Federal Reserve (which no longer sounds like a conspiracy theory term), has had a hell of a challenge ahead of it, trying to convince the world to buy US debt.

At the end of the day, gold has generally held it’s value, whilst fiat currencies have always been inflated away.  Often in a terminal hyper-inflationary phase.

We now have a fiat global reserve currency, that is being inflated at the most phenomenal rate.  For the best part of a century the stability of the USD supported the world through boom bust cycles.  Towards the later part of the century, with energy cost pressures weighing heavily upon the US economy, and the French demanding to take their dues in bullion, Nixon put the last nail in the coffin of USD stability.  What followed was decades of global turbulence as floating currencies sloshed from one economy to the next in increasing frequency of boom/bust cycles.  As one region crashed, capital flowed out and into other regions to bubble up for another bust.

What spared the US was its twin golden geese.  The petrodollar;

1. The right to be the printers of the world’s reserve currency, and
2. Having the most important resource in the world, globally traded in its own currency.

And what was made of this gift of WWII conquest?

In a masterstroke of planning and ingenuity, the US invested the bounty of the world, safe from the ravages of floating fiat currencies, into.. Suburbia.

Thus, my view on Bob Prechter’s revelations are; that gold may not have been a hedge against recessions in the past, nor appreciated  during expansions has he has outlined, but…

and here is the gotcha we all hate so much..

It’s different this time ;?)

Chart from kitco.com: Early morning trade on the London markets.
As the COMEX is now division of the of the NYMEX, it is during that
trading period we often see price blips.

NB: there is a great weblog article (and its comments) on the coming short squeeze on the Comex at http://www.prestonpoulter.com/wordpress/?p=366#comments

An interesting week ahead no doubt.

A little optimisim in the US on Friday, then Citibank wobbled.

The ransom for the Sirius Star, a Saudi VLCC, comes due on the last day of the month. Send in the Indian Navy I say.

The US auto industry bailout needs to be settled.  Which is of course an underhand bailout of the financial industry, as every time an industry is nationalised, the relevant credit default swaps are secured.  Not that I’m saying the auto industry is short of need.  Their chronically underfunded pension plans are certainly in dire need of support, as of course are the 5 million ancillary jobs that support the big auto makers.

Most interesting this week could be the end of year gold and silver COMEX contracts, that may need to be squared away for those futures that have be ‘called for delivery’.  Add to that, Thursday 27th is a holiday.

Amidst the global de-leveraging pressures there have been no shortage of stories of the tight supply of physical precious metals.  The Perth Mint was reported in the Australian Newspaper that they have suspended taking orders until January due to overwhelming demand.  Furthermore, production in Australia is at a 20 year low. News.com.au (24 Nov) | Bloomberg (23 Nov). This is on-top of rumors of Middle Eastern bullion accumulation.

At some point, not to far away, the COMEX precious metals markets may no longer drive the prices for physical bullion.  The tail shall wag the dog.  Or is it the tail shall eat the dog.

One way I prefer to look at this is to say that more than 50% of the players who moved towards gold over the last 2 ½ years are gone from the market. What makes this even more interesting however is in June 2006, front month Comex gold was trading close to $585. This past Tuesday, with the open interest at the same level as that last week of June 2006, front month gold was trading at $730, a full $145 higher. Clearly, the rate of short covering that has occurred during this liquidation cycle was at a much higher rate than the rate at which these same shorts were put on. In other words, the shorts were more eager to get out than the longs were which is really saying something when we consider just how much hedge fund deleveraging and index fund redemption related selling has been occurring. When you have reports of unprecedented demand for gold bullion, shortages in the spot market, mints closing down sales, etc., as a short in the paper market, you simply no longer have any ammunition with which to bolster your side of the argument. You realize that you are flirting with the devil since the only thing you have going for you is long liquidation and that in and of itself cannot last indefinitely as even a paper market must eventually align itself with the real fundamental world. That alone is sufficient reason to take your profits quickly and do not tempt your luck.
- Dan Norcini

The boom bust cycles, which are intensifying in frequency and intensity (more so since the closing of the gold window in the US dollar), has this time seriously undermined the global reserve currency. All this new money that has been created to prop up the balance sheets of distressed financial corporations, and the with the Obama Government becoming the spender of last resort, it will not be long before the the deflationary breeze is blasted well away.

Luckily, during this period of turbulence the world has two US Presidents to turn to.

Not a lot of room left.

Wow, there is more to this bloging world than I thought.
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Ron Paul questioning Fed Chairman Ben Bernanke

boobtube video 5:12 mins