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Nice short post by Stockaphobe from the Investor Village precious metals board:
I'm starting to think ahead to how I'm going to trade the end of the year and then the new year. My seat of the pants recollection (prior to an in-depth analysis) is that the end of the year tends to be good, but the new year can be quite treacherous.
Following this post are the charts this analysis is based on. Here's the tabular results:
The trades I find attractive are as follows:
MontyHigh, www.worldofwallstreet.us
I've been leveraged long and wrong for about a week and a half now. The leverage is around 3 to 1 via Gold Futures options which at least have limited downside. Its been quite painful.
I've been feeling quite bamboozled not knowing what to do about it for a few days because I don't want to sell out right at the low. After pondering things here's my best gold chart:
The obvious feature on the graph is the consistenly rising price within the three year channel. The price of gold is now nearing the bottom of the channel which means longer term its probably getting very close to probably a good time to buy (and its probably not the time to close out losing positions). The price has also been supported by the 30-week simple moving average with only one isolated weekly close below that average.
The green area is the 30-year US treasury-bond yield. The yield has been down there near the 2008 crisis lows for more than a month. Unlike 2008, which was a single V shaped crisis, the yield is going down back down again indicating another surge of great fear. The price of gold bottomed early in the 2008 crisis and climbed thruout the 30-year treasury yield's V-bottom. The big rise in gold in the summer of 2009 was a fear episode like 2008's. The next leg down in the 30-year treasury yield that started in mid-oct 2011 was accompanied by a gold price rise just like 2008. I consider the last two weeks of price weakness that accompanied the falling treasury yield to be the result of Gold Cartel manipulating the December options expiration. If so, the price of gold may soon jump backup as the options expiration period has passed.
The blue arrows identify situations where the price of gold fell from the top of the channel to the bottom of the channel, bounced to the middle of the channel and then started falling again. In both of the previous two cases the price fell all the way to the bottom of the channel. In 2009 it took 6 weeks (four more beyond where we are now in 2011) to get to the bottom of the channel. In 2010 it took 4 weeks (two more beyond where we are now in 2011) to get to the bottom on the channel. Those bottoms, in both cases where multi-month bottoms
Putting this all together, my favored scenario is for gold to fall back to the bottom of the channel and put in a multi-month bottom. That target, if it hit immediately is around $1640 or another 2.5% down.
Of course, it could also immediately bounce (the Euro rumors of a "plan" are back) and either never hit the bottom of the channel or take a few weeks to get there which would relieve my current discomfort.
Falling out of the bottom would mean that the current phase of the gold bull market (as bounded by the rising channel) is over. If that kind of penetration occurs it will probably be quite dramatic as speculators watching the same trendline either dump long positions or jump into short positions.
So, I'm expecting 2.5% more leveraged pain with but with a downside of another 5% or so if the support is lost. I may turn some of my call options into synthetic put options to limit the downside risk. A call is turned into a synthetic put holding the options and then shorting a futures contract.
How low do you think the current gold correction will go?
MontyHigh, www.worldofwallstreet.us
WARNING: This may not be my greatest post and may not be worth your time.
As explained in a prior post (click here), I'm now long gold with a fairly large position because I was expecting a pre-Thanksgiving bounce (WRONG). Here's the table that was the basis for that expectation:
Instead, gold has dipped pretty hard. So, how does one manage such a trade? I'm going to reexamine mine entry criteria and then compare what has happened with previous such calendar-based trades.
Here's the charts for gold for the last 8 years where green arrows represent the calendar-based entry equivalent to this trade (at the close of the Wed one week before the Wed before Thanksgiving).
The first thing I see is that the 2007 trade looks most like this year's trade and, contrary to what was in the table, was actually a loser. Going back and looking at the numbers I see that I made a mistake constructing the table, ARGHH!.
The next thing I see is that several years had decent gold price dips like this current one: 2007, 2010, 2008, 2006. It looks to me, based on the 2007, 2010, 2008 and 2006 charts, that a four or five day pop is about due. I expect I'll manage this trade by waiting for a four or five day pop to exit.
MontyHigh, www.worldofwallstreet.us
I'm hardly an expert, but it seems to me that something significant has changed as far as the Euro crisis is concerned. In the past, the media buzz would be about the Merkel and Sarkozy team. Sarkozy and Merkel would always be meeting, talking, preparing for important meetings, having plans to come up with plans with racy, hopeful headlines coming out every few days. I just don't hear any such buzz.
I think Merkel has dug in her heals and said "No More" to German financed bail outs while everyone else, including Sarkozy, are asking for more. Is this just a negotiating standstill of some kind? Or, is everyone off trying to figure out how their country handles what comes next by themselves? I think the danger of a "Lehman" moment for the Euro crisis is now higher than it ever has been.
What do you think?
MontyHigh, www.worldofwallstreet.us
I like to look for historical patterns around days where the manipulation may be rampant and last night I looked at Thanksgiving. I was expecting to see a pattern of using the lightly traded Friday session to turn the price down. I didn't see much of a pattern there. I did see a nice pattern on the week leading up to Thanksgiving.
So, to be methodical, here's a dead-simple trading system:
Here's the results (one row for each of the different entry days):
Its pretty rare to see something like rows 33, 34, 35 and 36 where for each of six years in a row you get a tradeable bump up where all the trades are decent winners.
I also see that something extraordinary happened on Friday before Thanksgiving 2008 with gold rising 8% in one day. Looking back at the charts I see that was the short-term pop off a bottom during the 2008 panic. The S&P500 jumped something like 15% during those days. I've excluded 2008 from the average results because its such an out-lier.
This kind of trade looks pretty attractive to me. I have already opened a position for just this short-term trade.
By the way, the results for the S&P 500 are also attractive (but not as attractive as for Gold) either in average returns or percentage winners. Silver's results are attractive but without the consistency of gold and without a higher average return. So, gold is the place for me for this short-term trade. I have taken all my protective shorts off (copper and S&P500). I expect I'll revert to a smaller long-gold/short copper trade next week, but until them this long gold is the only short-term trade for me.
Of course, past results are no sure predictor of what will happen so everyone thinking about this has to do their own due diligence and manage their risk appropriately.
MontyHigh, www.worldofwallstreet.us
Here's a link to a newspaper article covering the Debt Ceiling supercommittee timetable. Looks like things start really getting hot around Thanksgiving. For me, the rich part is that even if they don't agree on cuts the automatic cuts don't start until Jan 2013 (after the election). I guess that's why they call them "politicians".
Here's some highlights from the article:
Nov. 23: Deadline for the committee to vote on a plan with $1.5 trillion in deficit reduction.
Dec. 2: Deadline for the committee to submit report and legislative language to the president and Congress.
Dec. 23: Deadline for both houses to vote on the committee bill.
Jan. 15, 2012: Date that the "trigger" leading to $1.2 trillion of future spending cuts goes into effect, if the committee's legislation has not been enacted.
If you are trading you may want to keep this timetable in mind.
MontyHigh, www.worldofwallstreet.us
Last weekend around this time I felt completely bamboozled after looking at the charts. This week I feel like I'm seeing some things. This posts puts a few of the things I see up with comments. Click thru to see the charts in their full resolution.
First oil:
Oil is rising hard and fast. We know that when it gets too high it crashes the world economy.
The more representative $BRENT crude oil has put in a higher low and broken out of that downtrending channel.
Brent is also now rising faster than commodities in general. The world economy cannot grow in the face of a strong, sustained real rise in the price of oil, IMHO.
Gold and the US dollar are rising at the same time. That indicates real fear.
Commodities in general look bearish to me having failed to close the gap at the 2008 highs and remaining under the moving averages.
Copper looks bearish to me also.
China has bounced off a bottom but is at resistance.
The US stock market has bounced up off a double-bottom and is fighting with significant resistance at the head and shoulders neckline which is also the 61.8 fibonacci line.
My overall conclusion is that we are in a relief rally that has about run out of gas, but that this week will put it to the test. If China, the S&P500 and copper move up this week then the rally probably continuesthru the end of the year following the usual seasonals. I guess its possible for the S&P500 to continue higher for a while despite everything else falling as money seeks out a US safe haven from Europe (and Asia).
Gold seems strong against the S&P500, copper and commodities (not shown) and seems to be accelerating out of the above 3 year channel. I'm bullish because I think its different from earlier in the bull market. If it were business as usual it would take a lot longer for gold to recover from the August overbought condition.
I've been dubious about silver, but this chart shows that when silver bounces off the bottom bollinger band that it typically goes up to the top bollinger band and runs for a while (with the 20-day moving average as an exit signal). I guess I have to get me some silver, especially if the S&P 500 goes up this week.
At this point I'm long gold futures options, long gold stocks, have one silver stock, am long gold/short copper futures and short the S&P500 (as deflation insurance). Based on this look at the charts I expect I'll jettison the S&P 500 if it breaks thru the resistance and holds it and will find some way to buy a good chunk of silver if it doesn't.
Of course, everyone has to take responsibility for their own investing and this is not a recommendation.
MontyHigh, www.worldofwallstreet.us
My savings took a giant hit (~70%) from my top in 2007 to the bottom 2008. That was before I started using technical analysis. That can happen when you depend just on fundamental analysis and your analysis is WRONG. I don't ever want to have that happen again.
The above chart shows that there was something I could have done to profit from the big crash in 2008. Go long gold and short copper. Gold as a store of value in times of fear and uncertainty. Copper as a commodity whose price is sure to get hit hard in a major economic slow down. The chart shows that ratio making a continuous move that could more than double what you have at risk, supported the whole way by a very tight 20-day moving average.
The fundamental buzz around copper concerns the almost certainty of a significant recession in Europe (China's biggest export market) along with scary anecdotal stories out of China itself regarding a potential housing bust.
I've already long and strong (but not heavily leveraged) gold with various kinds paper and physical gold. I expect I'm going to play that 20 day moving average on the long gold short copper trade with a decent sized percentage of my networth at risk via the futures market as both a big economic/market hit insurance trade with an expectation of profit. A decent size position, but not anything that could blow me up.
Of course, I'm not recommending any such thing for anyone else, this post is merely pointing out an interesting looking chart that shows you want to look for if another major downleg in this Great Recession resumes.
MontyHigh, www.worldofwallstreet.us
I put my "ASPO-USA Takeways" post up on the top energy investing board. Here's the thread (click here). What follows is the response from the board leader (emphasis added). I believe its significant if you are looking for a big peak oil impact in the USA soon.
"<<Expect the USA to have to get along with between 20% and 50% less oil by 2020.>
IMO growth in production from the tight oil plays in both the US and Canada will come as a very big surprise to the peak oil folks.
They will be producing several million barrels a day more supply.
By 2020 the higher millage vehicles will also be eating into demand by perhaps 2 million barrels a day.
By 2020 we may have nat gas in the truck fleet offsetting maybe 1 to 2 million barrels a day.
Yes oil prices are going higher, but it is not all gloom and doom.
The higher oil prices go the faster the development tight oil will be and also the faster the move to nat gas in transportation."
For perspective, here's a snippet from another place in the thread:
"Here are two statistics from the EIA:
Having read these guys and listened to the Peak Oil experts, I believe the BRY board guys are genuine experts with the ears closer to what is actually happening, at least in the USA and Canada, than the ASPO experts, so its worth giving them a listen. There is more good material in the linked thread.
Given that the US has falling liquid fuels demand, my revised estimate is that things will be tight but not catastrophic like having to get by with 50% less oil.
Once again, I'm probably done with posting on Peak Oil for a while.
MontyHigh, www.worldofwallstreet.us
"“We give the investor the rope, we put it around his neck, and after he’s standing on the chair, we even kick the chair out from under him!” – One broker on the phone with me describing their “service” to leveraged traders."
They (the financial industry) aren't your friends.
MontyHigh, www.worldofwallstreet.us
This quote from "gracelandupdates.com", a subscription service I'm finding a lot of value in.
Here's what I included as an off-topic comment I put in my weekly report at my not-related-to-investing-or-energy day job to try to give some of the people I work with a bit of a wake-up call:
"Off topic: I attended the Peak Oil conference downtown last week. Here’s the key results:
I think it summarizes my honest appraisal of the situation at hand. My overall reaction to the conference was:
I expect that this is my last post specifically about the conference so those of you who found my website specifically for the Peak Oil commentary can tune out at this point.
MontyHigh, www.worldofwallstreet.us
Here's some highlights:
Robert Hirsch - a guy worth listening to. Claims no change since last year. Peak oil is on track. Dept of Defense has published 2012 as the possible peak data with a 10 mbpd decline by 2015. That's dramatic. Hirsch estimates a 16% decline of world GDP in the decade after the decline starts based on the correlation of GDP with oil production.
Hirsch expects the mass psychology (based on the previous two crisis of 73 and 79) to be: panic, fuel shortages, large price increases, stock market declines, deepening recession, inflation, rising unemployment. I'd like to add windfall profit taxes and punishment of speculators.
Hirsch rightly defines "the problem" as a liquid fuels problem, not a general energy problem.
Robert Rapier, chemical engineer.
US per capital oil consume is 23bbl/per person/per year. China's is 2. The big Peak Oil question today is: How does the US come out of recession when oil prices hover at recession inducing levels.
An overlooked point regarding Energy Return On Energy Invested (EROEI) is that it will take more energy (also more man-power) to create that energy and that the energy invested needs to be subtracted from what is produced. E.g. 6 mbpd of oil sands oil is not worth as much as 6 mbpd of light sweet Saudi crude, because substantially more of that 6 mbpd oil sands oil had to be reinvested in keeping production going.
Global warming is really out of US and EU control. US and EU CO2 emissions are declining and a complete end of US and EU emissions only puts the world back to the mid 90s.
Jeff Reuben, Part 2.
Continues his theme that oil prices constrain economic growth. Does not expect much higher price movement immediately.
Charlie Maxwell, Verteran Energy Analyst
Thinks the Peak is 2016 at 95 mbpd and that resource nationalism is a key supply constraint. Refining capacity for high-sulphur fuel will allow a lot more Saudi sour crude to be sold. Thinks shortages show up in 2015 and that there will be at least 15 years of shortages.
Thinks that energy efficiency is the best investing theme.
Natural gas production is going to increase but mom and pop drillers are going to take a beating as they will not be able to keep up with the required technology. Mid-cap high-tech shale drillers should be winners.
Afterwards I complimented him on his CVE pick and asked him if he still liked it and he said it was still his number 1 pick and that SU is also great.
Wes Jackson, President Of The Land Institute gave the lunch key note speech and gave an agriculture needs to be sustainable speech and got a standing ovation. This clearly shows that ASPO is aligning itself with the general "green" sustainable movement and cannot be considered to be an objective energy obsever any more.
Gail Tverberg, Dmitri Orlov and Nicole Foss - gave their view of the economic implications of Peak Oil. The consensus is the financial system (fiat money loaned into existence) is doomed because all the debt depends on economic growth to pay off and Peak Oil crimps the economy. Nicole Foss says "cash" is what you want to hold. Orlov says it doesn't matter whether its inflation or deflation: if you don't have any money you can't buy anything. Quite gloomy.
I decided I'd heard enough and decided not to stay for the fund raiser dinner or sit in for the "investors round table" Saturday.
My raw detailed notes follow.
MontyHigh, www.worldofwallstreet.us
Robert Hirsh, author
Thoughts on declining world oil production.
He's right... Its a liquid fuels problem. Long-term we could shift some applications to electricity, but not soon.
No changes to the Peak Oil prognosis since last year. Soon decline. No quick fixes. Increasing economic distress.
All liquids are in a production range (6%) since 2004.
Dept of defense says speak 2012 and down 10 mbpd by 2015. Lots of other organizations are on-board.
Hirsch believe is that we stay in the plateau for 1 to 4 years and then the long decline.
Administration Mitigation:
Rationing, Forced Carpooling, Forced Telecommuting, Misc.
Physical Mitigation – energy efficiency (light duty vehicles), EOR, oil sands, Venezuela heavy oil, gas-to-liquids, coal-to-liquids. There's 100T$ of capital that runs on liquid fuels.
Best case on mitigation is 36 mbpd in 20 years.
But world coal production is also peaking. Canadian oil sands limit is 6 mbpd.
What about shale gas (not shale oil)? GTL and direct powering of fleet is neither quick nor inexpensive.
Best case mitigation overcomes decline only after a decade. We are late starting.
Extrapolates a 16% drop of world GDP in the decade after the decline starts.
Likely mass psychology (based on the previous two crisis, 73, 79):
Panic
Fuel shortages-
Large price increases
Stock market declines.
Deepening recession
Inflation
Increasing unemployment.
Wind and solar won't help – this is a liquid fuels problem and they are intermittent.
Hirsch claims Peak Oil will trump climate change as soon as it kicks in.
Again, this could kick in 1 to 4 years. But the mass psychology could change at any moment.
Robert Rapier – chemical engineer. Live in hawaii after growing up in OK.
Navigating a new reality.
He thinks about this every day. He could pitch Peak Oil everyday, but is trying to come up with some new stuff.
US barrel is 23/person/yr. China's is 2.
Big question: How do you come out of recession when oil prices hover at recession inducing levels.
Don't say “Peak Oil” say “Resource Depletion”.
Don't get hung up on the Peak itself. There's definitely not enough oil to meet $100 demand.
Shale Oil is not Oil Shale-- Shale Oil is what we get with frac'ing. Oil Shale is like mining the moons of Saturn for methane. Its there but its not worth getting.
Beware EROEI. Globally EROEI is declining (e.g. oil sands). The good news is it will take more effort to create that energy. The bad part is the energy invested needs to be subtracted from the 85 mbpd what we need. This is a good point.
A process with poor EROEI could be economical.
There is no time unit in EROEI.
Biomass inputs are frequently omitted.
Inputs and consumed energy are often conflated.
Carbon Emission Quandary
US per capita CO2 emissions is 4x the world. But the emerging world has more capitas. China emits more CO2 emissions. Only 35% of Indians know what global warming is. Only 20% of Chinese think its a problem. Even if US and EU emissions went to zero we'd only go back to the mid 90s and it would still be growing.
US and EU emissions are decling, but the rest of the world emissions are rapidly rising.
Perhaps putting a tarriff on high carbon emitters might have an impact.
What's ahead?
Idealistc future – green economy takes over and we are saved. They are right it takes a lot more man-hours to make renewable energy than to to get high EROEI energy.
Realistic
green delusions come to an end.
Coal, natural gas and nuclear will provide the bulk of global electricity.
Crude oil provides the bulk of our fuels at higher prices
Higher CO2 emissions.
CTL, GTL, tar sands – dirty energy is coming.
More difficult food vs fuel tradeoffs.
Oil exporters become richer relative to consumers.
Jeff Reuben – What does the post-peak world look like.
Jeff's definition of Peak is different from most in this room. His definition depends on what the cost of the energy is. What matters is how much oil we can afford to burn. Today oil prices are over $100/bbl. At $100/bbl oil sands are on route to 3 mbpd. At $200 maybe 6 mbpd. When he thinks of Peak Oil he thinks of it as an economics situation: Price. We are at Jeff's kind of Peak. The impact prices are having on our ability to consume. The Peak is on what we can afford.
High prices trigger recession. The debt crisis is a response to an oil induced recession (all that stimulus). His take on the debt is a little bit different than the mainstream. It might as well be denominated in barrels of oil, because you need oil to get the economic growth oil provides to grow our way out of the deficits.
The US hasn't even begun the draconian measures needed to unwind those deficits. The current oil shock is not transient. This is now a permanent state of triple digit oil prices. Static economies make people unhappy. Folks don't have jobs. Immediate solution will be closing borders. That's a major change. Suspects government will look very different in the future. Further stimulus is out of the question. There won't be another round of coordinated stimulus. The kind services governments can provide will be quite different. Government services will be delivered thru minimum wage subcontractor not the high-paid government sector. Trade will be increasingly regionalized. Distance costs money. US deficit is equivalent to Greece's. Greece depends on Germany, but the US depends on its arch-enemy, China. In the new world, China will not be financing the US treasury. China's inflation is 6%. The cause is food and fool. Moving the Yuan against the US dollar would help. A 40% increase in the Yuan would ramp up oil prices in the US. In a world of zero-sum growth. The more China grows, the less the OECD grows.
As far economics go, we've already crossed the Peak and we are already in a world of triple-digit oil. We are now in a zero-sum world.
Where are we going with price? Hard to say, the economy can't grow with triple-digit oil prices. Oil prices will fall with the next oil price induced recession.
Q: Shouldn't we expect a pretty bad reaction (not just a static economy) when oil prevents growth given that growth is required service the debt? JEFF: That's right. The US exercise all kinds of debt default.
Charlie Maxwell -
World Peak 2015-2020.
Top 50 oil companies are in trouble – their Peak is 2013. They are negative Q3 over Q3 this year.
Thinks we'll hit 95 mbpd around 2016. That's 7 mbpd more than today's 88 mbpd. Then a plateau. 2020 it starts down. He doesn't pay to much attention to his own forecasts. He's learned not to.
Resource nationalism is a key factor constraining supply.
Refining capacity will allow more ready-to-go high-sulphur crudes (1-2 mbpd).
Peak Oil is geologic, demographic (too many people) and cost and could be political.
7 billion people. 1790 to get the first billion.
Who has Peaked: Russia, US, Mexico, Norway, UK, Oman, Argentina, Egupt, Columbia, Australia, Syria, Gabon, China (projected 2014). Russia could increase output but practical factors, not geologic, is keeping it under Peak. Mexico is similar. They could grow, but politically they can't.
Now the money comments after passing thru the standard stuff.
A huge cube: six sides
oil, gas, coal, nuclear, renewables (bio, wind, solar, hydro), conservation and efficiency (most important).
There are a lot of cases where you want to use it more efficiencies. This is the great investing opportunity. We'll have some small amount of growth.
Example: Heat-pumps separate active molecules from cold molecules (passive molecules). They are running around 50% conservation factor.
Efficiency will be our Saudi Arabia.
Another big factor is natural gas. Nuclear in the US is for a couple of generations.
Natural gas and efficiency are not enough. Shortages show up in 2015. There will be at least 15 years of tightness. This isn't doom and gloom. Happiness is often based on expectations. US mass psychology expectations are unrealistically high. There will be a blunting of expectations. The most healthy time for the Danish people ever was during the war years (43, 44 and 45) [no liquor, cigarettes, sugar, etc.]
Charlie thinks mom and pop gas drillers are going to take a beating (45% to 28% of natural gas). Mid-cap high-tech shale drillers should be the winners.
Wes Jackson, President The Land Institute
Bio fuels don't possibly scale. A 10-year has lived thru the burning of ¼ of all the oil ever burned.
Soil is more important than oil and is as much of a non-renewable resource as oil. The day will when we stop treating soil like dirt. The most important invention of the 20th century was turning atmospheric nitrogen into ammonia. Without this, 40% of humanity wouldn't be here.
Soil is as big an issue as oil. If we can keep our soils in place...
Here's my summary of what I heard this afternoon:
Chris Martenson, author "Crash Course" - gave an abbreviated version of his standard pitch. His key insight: A money system that requires perpetual growth is unsustainable upon meeting Peak Oil which prevents growth is quite an accomplishment and the main difference between this year's conference and last year's is basically that view is now quite accepted. I wish he had brought some new insights this year.
Kjell Aleklett, Swedish Academic - I came in on the of this and he seemed to be doing an excellent regional review of oil and coal production and consumption. He has a book coming out with tonnes of data. I don't read books much, but will probably make an exception for this.
Richard Heinburg - big picture guy who's life work was inspired by the 1972 Limits to Growth. Expects more of the same: persistent unemployment, declining household net worth and income, financial instability. Didn't do much for me.
Jeffrey Brown - great, data filled presentation indicating that between now and 2020 the amount of oil available for OECD import will fall by something like 30%- 60% depending on whether world oil production stays constant or starts falling. The US imports 60% of its oil. That means the US will have to get along with 18% less oil with very rosy assumptions: assuming US production remains constant and world production stays constant. That's scary enough but it could be more like 40 to 60% less oil under more realistic assumptions. That's the end of life as normal.
Dr. Minqi Li, academic U of Utah - lots of data extrapolating moderated Chinese growth. If it continues there will be huge problems (available oil and global climate change). I would like to pay more attention to Dr. Li.
My raw detailed notes follow.
MontyHigh, www.worldofwallstreet.us
Chris Martenson: Two Key Facts
This is a summary of his "Crash Course".
The three E's: Economy, Energy, Environment. Today just economy and energy.
Fact 1: The money-system is based on growth. Its all loaned into existence. We have an exponential money system. Money growth (M3) has an R**2 fit between an exponential functional. Up until 2008 when the largest deviation (flat M3) ever started.
If the world is going to stay “the same” we need to get back on track. Tomorrow's growth is the collateral for today's debt (Colin Campbell).
Fact 2: Energy is the master resource. Because of 1, we need energy consumption to continue growing exponentially.
But, oil discovery peaked in 1964.
EIA 2008 – Peak conventional (cheap easy oil) is in the past.
So, what will fund tomorrow's growth?
Intermediate Conclusion: Something that must grow (money system) is meeting something that can't grow (liquid fuels).
The economy is a complex system. Complex systems are inherently unpredictable.
So, Peak Oil will starve the economy. Complex systems when starved for energy simplify. That's going to happen to our economy.
Also, with no growth, what is a stock or bond worth? For 13 years the S&P 500 has had zero nominal growth.
Intermediate Conclusion: Energy will consume a growing proportion of disposable income.
Intermediate Conclusion: Food prices will mirror energy. Unrest will follow. E.g. Egypt became a net energy importer in 2010.
This framework has allowed Martenson's portfolio to do extraordinarily well. There's a huge gap between what you know to be true and what you believe to be true. We've got to believe that the future will be very different from the past.
Jeffrey Brown:
Available Net Exports = Exports minus China and India.
Texas fell post-peak 3.7%/year. North sea 4.8%/year. Price increases did not help production.
There's been a gap of 12mbpd between 2005 actual production and the prior trend. We should be at 94 mbpd not current 84.
Net Export depends on both production and export. Exports go to hell if production peaks but internal consumption continues to growth (e.g. Mexico). Net export decline rates accelerate with time and are front loaded.
Exports have fallen 3 mbpd since 2005. 21 of 33 exporters had their export rate decline 2005-2010. Net exports are tracking the model from 2006 and are falling. The model predicted this decline as the trend was up before 2006.
Saudi Arabia the same thing for exports.
Now China and India imports are growing so available exports have gone to hell even faster. This can be expected to accelerate. Available net exports fell 2.8%/year from 2005 to 2010.
Now let's extrapolate. China consumption grew 70% from 2002 to 2010. India 40%. Top 33 exporters consumption grew 28%. Extrapolating this data sequence (flat production) but rising consumption net available exports drop 5.1% per year!!! That's a big deal. From 32mbpd to 21 mbpd in 2020.
With a 1% post-peak production rate its worse (of course) with a 60% reduction in oil available to importers.
Browns personal recommendations: Try to live on 50% less of current income. Localize – minimize travel.
Dr. Minqi Li, University Of Utah.
We are entering another major structural crisis like in the 30s.
China is growing in GDP, energy consumption (more) 20% and CO2 emissions (more) 25%. Entegy and CO2 bigger than use. China consumes 50% of world coal. Coal growth is accelerating and this will continue and overtake oil to become the world's largest source of energy.
It takes 11$ of oil price increase to produce 1 mbpd increase in supply 2004-2011.
To get coal to liquids 1 mbpd its 200 million tonnes of coal or 2.7% of world coal production. 1.7% of world natural gas production.
If China keeps growth 8%/year and ROW 2.5% per year, 98 mbpd is needed, 8% of world GDP needed for oil 2020. 198$/bbl. Oil This can't happen.
If China grows 5%, ROW 1%, oil stays under 90mbpd, oil spending 5% of GDP. Expect long term slow/no growth.
Coal and China – 260 billion tons ultimately recoverable (estimate). Could be higher with Mongolia. China is not nearing peak coal production. China's Inner Mongolia this year is producing more coal than all of the USA. China Peak is more like 2030. China has very large hydro potential, but coal will dominate China's energy future until 2030 at least. Predicts 5degC warming!!! That's like end of world scenario.
China energy efficiency with very optimistic assumptions.
That's a scary talk. Follow this guy.
Lars Shell's Book: A Peek At Peak Oil. Coming soon. Get it.
Richard Heinburg, author “The End Of Growth”
Inspired all his life by 1972 “Limits To Growth”
Discussing “Depletion, Disaster, Debt”.
The idea of economic growth came about via the industrial revolution (coal) and petroleum.
Debt came from economic growth with advertising to pull forward demand producing consumer credit. Automobile industry led this. The mortgages, credit cards, etc. “Tomorrow's growth is collateral”. All money is debt. The interest comes from economic growth.
1980s was a turning point: Globalization begins (labor is outsourced to Asia), wages stagnate, financialization of the economy. Debt has been growing faster than the economy since the 1980s. To a bank, debt is an asset. Total US debt stopped growing with the global financial crisis (2008).
High oil prices is a cap on economic growth for developed countries. The growth crisis drives the financial crisis and the political crisis.
Planetary limits are no longer theoretical.
Our economic future:
persistent high unemployment
declining household income and net worth.
financial system instability.
Claims we are at a fundamental change of trend for economic situation.
Main advice. Build local resilience. The national political system can't get good things done. There's more possibility at the local level.
Resilience is usually at odds with economic efficiency (not energy efficiency).
Rapid economic growth is an artifact of fossil fuel use. Its end is a return to normal.
Politicians promising a return to the old normal will not be able to deliver.
Professor Catton – author “Overshoot”.
We don't think of people as people. We think of them as resources or customers. That's dehumanizing. We must realize that perpetual growth on a finite planet is non-sense.
Jean Leherrer – talk based on ASPO France web site.
Energy per capita in the US has been flat since the 1970s. Real-income per capita has been flat (or declining) since 2000 (rising since the 1970s at least.
Oil stats should be measured in energy, not volume or weight. And what kind of energy? Thermal or usable electricity. Makes a big difference. Reserves also have different interpretations.
Here's my brief summary:
What follows is my raw notes from each speaker.
MontyHigh, www.worldofwallstreet.us
Roscoe Bartlett, US congressman really gets it – We have been stuck at 84 million barrels per day (mbpd) for over five years despite earlier EIA predictions (from 2005 and 2008 and 2010) calling for higher production. Meanwhile China is building more cars than the USA, 13 million per year. Bartlett expects a conflict over energy with China.
Bartlett supported the Ryan budget. It takes 25 years to close the budget, but it depends on 2.6% GDP growth. Bartlett doesn't think any substantial GDP growth is going to occur because of Peak Oil.
Chris Skrebowski – A Physical And Economic Challenge To Economic Growth
Oil consumption has been growth at 1.6% / year since the early 80s. We left trend around 2007. The growth in demand is coming from the developing countries while developed country consumption is falling slowly.
Has a graph showing prices started rising in 03 after a century of reasonably consistent sub-30$ prices. There was a bubble at the end of 07 with overcorrection. The 03 rate price rise resumed in 2009 from the bust, but in 2011 it got bubbly again. So, what's next? Brent has completely diverged from WTI because cushing is oversupplied right now. Key conclusion there is a price which causes a economic contraction. Recent US economic growth may be due to falling WTI oil price.
Crude oil production has been flat for 5 years. All liquids has had a little bit of growth. Its bio-fuels and natural gas liquids.
EIA 2009 graph shows peak (apart from unidentified projects) in 2012. Roughly half of all production by 2030 is from unidentified projects.
Chris thinks there is only 1 mbpd OPEC spare capacity and no extra global stocks. The situation it tightening up rapidly. He estimates that supply / demand tightens until 2014 which is the Peak. He claims there is a ceiling on prices which reduces economic activity to match supply.
The economic debate is whether its the rate of oil price change that limits economic growth or whether its the absolute real price that affects economic activity. There is a correlation that whenever the oil price goes up, US economic growth goes down.
Oil companies are making increasingly higher assumptions when deciding whether to invest in a project. They are investing in projects where the price is high enough to put the US into recession. They must be assuming that the developing world (China) can keep growing with these prices.
Well worth looking at the graphs when they become available.
Professor Catton
American oil production actually went up the last couple of years, but its just a blip.e
Catton argues that economic stimulus does not work because we are in resource depletion (especially USA oil depletion).
We used to classify countries (people) as rich vs poor. We should think about this in terms of high energy consumption (homo colossus) vs low energy consumption (homo sapiens. All of the modern wonders are based on tapping fossil fuels.
Each one of use in the room consumes as much energy as a 40-tonne dinosaur. With a 300,000,000 x multiplier this is a big deal. Homo colossus crowds out homo sapiens.
Human carrying capacity – the maximum human population that an environment can support indefinitely. The Peak will hit Homo Colossus much harder than homo sapiens.
There will be resource wars. WW2 was a resource war. Oil was a key thing that Japan was after.
The people of the revolutionary war were homo sapiens and yet were quite admirable.
Catton ends with the idea that our dependence on non-renewable resources is a ponzi scheme.
Jeff Rubin
Soaring oil prices affect the speed at which the US economy grow. Its bad enough when folks buy SUVs for daily commutes, but its a lot worse when the government doesn't get it. The government doesn't get it because they are listening to economists (who don't get it).
If your GDP is growing slower than its potential (e.g. 3%) then you have a lot of slack. When its growing faster you get inflation. You can step on the gas (QE3) and get results only when you have rightly estimated potential growth.
Jobless rates indicate that there's slack. So, they think they can step on the gas. But they don't consider the price of oil. $100 oil gives you an economy flat as a pancake even with historic stimulus. Economists don't include the price of oil when calculating potential growth, but they should. All the stimulus does is rack up debt (like Greece).
China's problem is that of every rapidly industrializing economy: inflation. They may want a stronger currency to keep oil cheap.
In the 1970s the US gave the Japenese bond-holders a 40% hair-cut by depreciating its currency. The lower the US dollar goes the higher the price of oil goes as oil is priced in dollars.
Our economy cannot grow at the rate it used to grow because of higher priced oil. The most important thing the US congress can do is recognized that 3% economic growth is no longer possible.
Over lunch, Robert W Howarth, Ph.d Cornell University mentioned that the data on marcellus shale natural gas drilling has changed the story from:
There's never been evidence of frac'ing causing contamination from depth
to if you live within a kilometer of a well you have a 75% chance of your well water being contaminated by natural gas.
He says that the documentary where the guy out west who lit his faucet on fire is actually accurate and it that is has been shown that the natural gas came from depth from fracing.
I'll continue to report from the conference as I'm able.
MontyHigh, www.worldofwallstreet.us
The first session was in the US Capital visitor's center. This highlights an important new reality. When I was a kid you could walk up to the Capital, walk right inside, cruise the Rotunda and go sit in the gallery and listen to the House or Senate debate without any preparations or speaking to anyone.
Now to get into just the visitor's center you have to run the gauntlet:
Enter thru an underground secure bunker kind of entrance.
Walk thru the who knows what kind of radiation-driven “metal detectors”.
Take your belts off and your electronics out and run them thru the scanners.
Submit to a search for food and drink (plus weopons, etc.).
All this happens surrounded by more than a dozen armed police officers; and when you are done all you've done is enter the Visitor's center. The only access to the actual Capital is in scheduled, ticketed, chaperoned tours.
That's a dramatic change that seems scary to me.
Stay tuned. I'll be putting "on-topic" summaries up of the conference as it progresses.
MontyHigh, www.worldofwallstreet.us
The technical analysis folks believe that gaps in the price history (where there's a gap between one day's trading range and the next) tend to get filled. This chart shows a nice-sized gap in the general stock market between last Thursday and Friday. We now have quite a gap opening up today with "Bernanke Speaks" two-day FOMC meeting results tomorrow.
I was feeling quite scared this morning. Usually that means the bottom is just about in. I expect I'll find some kind of bounce trade to put on this morning. Maybe medium-smallish position in S&P 500 futures.
MontyHigh, www.worldofwallstreet.us
Will these customers get their money back if they are under the FDIC insurance limits? Yes, almost certainly, but the FDIC insurance fund is just about out of money. If there is a cascade of bank failures the customers won't get their money back, at least in terms of the buying power of what is returned.
The fear this kind of headline produces should help support (or drive up) the price of gold as more people want to store some wealth in a vehicle (a currency) that won't go-to-zero should the banking system collapse. That should make gold a "good investment" at least compared to other vehicles (bonds and stocks).
But if you hold gold, what form do you hold it in? Can you can trust where you have it stored to not have your gold "go missing" like MF customer money?
MontyHigh, www.worldofwallstreet.us
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