World Of Wallstreet

Elgin Mining (ELG.V) Buyout Of Gold Ore Resouces (GOZ.TO)

Elgin Mining (ELG.V) made an offer to buy out Gold Ore Resources (GOZ.TO) in an all stock transaction nominally at a premium of 66% to GOZ.TO's recent closing price. As of 9:40AM GOZ.TO is trading up 25% relative to yesterday's closing price.

Here's my take on the situation:

• GOZ.TO is a small (44K oz/year), high-cost gold producer with a mine in Sweden that is making a lot of money at current gold prices, but which has no growth prospects. 
• ELG.V is a mine reopener of a high-grade mine in the middle of nowhere (see any towns, roads, cities anywhere near the mine in the map below?) in the Northwest Territories of Canada. The mine closed in 2005 due to low gold prices. They have at least one big-name executive (founder of Kinross Gold is the Chairman).
• I hate mine reopeners as I lost a tonne of money in 2007 on base metal mine reopeners. The mines look like money makers at current metal prices and then they are un-economic and "go to zero" when the price declines.
• But, I remain bullish on the price of gold.

I've decided to sell all my GOZ.TO even though it looks on the surface like the mine reopener will work. Here's why it looks like the mine reopener will work:

• The cash cost of that ELG.V mine has got to be entirely driven by the price of fuel since there are no roads. Transporting fuel and equipment and people, etc. in and out has got to be the primary cost driver for that remote mine.
• So, whether that mine reopener remains profitable depends primarily on the ratio of the price of gold to the price of fuel (see chart below).
• The price of gold relative to oil now is approximately twice what is was in 2005 and is trending higher and has been consistently higher ever since 2009. This seems very promising.
• As long as this remains the case the mine reopener will probably "work",

However, in the light of my reasoned conclusion that Peak Oil is "real" and "significant", I just don't want to touch anything that completely depends on the price of oil staying low relative to any other thing including gold. I don't like high-cash cost gold producers that use diesel either for power generation or for open-pit mining.  I'M OUT.

MontyHigh, www.worldofwallstreet.us

P.S., I kind of suspected GOZ.TO was a value-trap when I bought. There wasn't any kind of catalyst for revaluing the company. They had:

• No growth prospects, no chance of increasing production above that 100K oz/year level that seems to cause gold miners to get a decent valuation.
• No commitment to returning profits to stockholders with either share buy-backs or with dividends.

Next time I buy into a gold-miner value play there has got to be an exit strategy.

Best Of The Web: Gregor.us - The End of Growth in the United States

Gregor McDonald is among the best on Peak Oil and its implications. He brings the data and the analysis. He is not long-winded. I'm currently wondering whether his monthly piece with Chris Martenson is is worth enough by iteself to get me to try out Martenson's subscription service.

His latest (click here) really puts last week's unemployment numbers in perspective. I'll put a chart in here, but I rec you click thru to read the piece.

MontyHigh, www.worldofwallstreet.us

Peak Oil/ Shale Oil: What The Experts Think

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: 

US liquids fuel use is about 19.5 MMBO http://www.eia.gov/steo/gifs/Fig15.png

US liquids fuel production is about 9 MMBO: http://www.eia.gov/steo/gifs/Fig13.png

 

By 2020, US liquids fuel production should increase probably in the range of 10 to 11 MMBO."

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

 

ASPO-USA Conference Takeaways

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:

• Peak oil is proceeding right on schedule with growing oil supply/demand tightness leading up to the Peak around 2015.
• Expect the USA to have to get along with between 20% and 50% less oil by 2020.
• Expect the price of oil to continue to limit economic activity, especially in the OECD (including USA) resulting in much slower or no economic growth in the OECD.
• Expect ordinary investment vehicles (stocks and bonds) to produce negligible to negative real returns with great volatility.
• The entire financial system requires exponential growth (to pay the interest on debt). As Peak Oil blocks the possibility of continued exponential growth at prior rates expect either a complete financial system collapse or significant money printing injected straight into big finance to simulate exponential growth."

I think it summarizes my honest appraisal of the situation at hand. My overall reaction to the conference was:

• The guys bringing empirical data and analysis (Jeffrey Brown, Kjell Aleklett, Chris Skrebowski, Charlie Maxwell...) are what primarily give the conference credibility and value.
• The top "what does it mean" analysts (Jeff Rubin, Jeffrey Hirsh, Chris Martenson) add a lot of value and are responsible for the key insight of what Peak Oil means for the world and OECD economy. 
• I'm really disappointed that the only thing to show up since last year that has a significant chance of changing the Peak Oil timetable (and a small chance of changing the whole story) was not addressed. The use of horizontal drilling and frac technology to extract Shale oil could be significant but nobody at the conference had any real insight on that. I guess anybody who does is out there buying leases or drilling for oil and doesn't have the time to brief the rest of us.
• The broadening of Peak Oil to Peak Everything (and the alignment with the green sustainability movement), in my view, dilutes the Peak Oil message and credibility and doesn't provide me much value. I expect this statement will provoke some negative comments. 

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 the URLs for my other conference-related posts:

http://www.worldofwallstreet.us/2011/10/going-to-the-peak-oil-conference-this-week.html

http://www.worldofwallstreet.us/2011/10/what-some-experts-are-saying-about-tight-shale-unconventional-oil.html

http://www.worldofwallstreet.us/2011/11/aspo-usa-conference-report-the-new-reality-its-an-empire-not-a-free-country.html

http://www.worldofwallstreet.us/2011/11/aspo-usa-conference-report-lunch-time-buzz-75-of-methane-in-your-well-water.html

http://www.worldofwallstreet.us/2011/11/aspo-usa-conference-report-thursday-morning-notes.html

http://www.worldofwallstreet.us/2011/11/guest-post-from-anonymous-forget-peak-oil-the-biggest-blowup-of-our-lifetimes-is-here.html

http://www.worldofwallstreet.us/2011/11/aspo-usa-conference-report-th.html

http://www.worldofwallstreet.us/2011/11/aspo-usa-conference-report-friday-notes.html

ASPO-USA Conference Report: Friday Notes

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 20^th 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...

 

 

ASPO-USA Conference Report: Thursday Afternoon Notes

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.

ASPO-USA Conference Report: Thursday Morning Notes

Here's my brief summary:

• ASPO-USA has gone from a pure technical study of Peak Oil to emphasizing the economic impact and moving towards policy recommendations.
• Chris Skrebowski had the best presentation and he's expecting a tightening supply situation (falling spare capacity) up to the 2014-2015 Peak. No change from last year. He also brought a lot of data showing that rising oil prices impact economic growth. 
• Congressman Roscoe Bartlett really gets it. He claims there's been a oil production plateau for five years and expects a conflict with China over energy in the future.
• Jeff Rubin seems to really have an edge having correctly predicted over 100$ oil at last year's conference. His message this year is that Peak Oil is going to prevent 3% US GDP growth going forward.
• The litmus test for determining whether a speaker is actually concerned with Peak Oil or is a Environmental Climate Change activist trying to coop Peak Oil is whether they distinguish between a liquid fuels problem or just talk about an energy problem and renewable energy.

 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.

ASPO-USA Conference Report: Lunch-time Buzz "75% of methane in your well water"

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

ASPO-USA Conference Report: The New Reality – Its An Empire, Not A Free Country

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

What Some Experts Are Saying About Tight-Shale Unconventional Oil

I like reading a good web site post, but what I really like is finding an excellent, on-going source of information. If you are really interested in energy investing, the investor village BRY board is such a place. I don't have time to really follow it, but if I were serious about energy investing I would. Here's the thread where I asked them what to investigate at the ASPO USA Peak Oil conference this week (click here). My inquiry provoked a discussion of how the Tight-Shale Unconventional Oil affects Peak Oil. What follows is, in my view, the two top posts:

"

Posted 10/30/2011  2:54:54 AM by Petroeng

Recs: 12 Add to Favorites Report Abuse Send PM Ignore

Re: I'm Attending The ASPO-USA Peak Oil Conference This Week The entire statistical basis for Peak Oil fell apart in 2005-2008.  Peak Oil was based on a statistical analysis of conventional reservoirs that have been or would be discovered and production projected, based on the hypothesis that oil was a finite resource that was limited to those conventional reservoirs.  The two events that started to cause the statistical basis to erode was the extension of exploration to deepwater, which could be argued is fairly minor due to the expense and techological challege, which is true.  The event that really shot Peak OIl apart was the application of horizontal drilling and multi-stage fracturing to unconventional reservoirs, first limited to natural gas in the Barnett and now spreading to many shale plays worldwide, which include both liguid-rich natural gas and outright oil.  The volume of conventional reservoirs that could produce is limited by the combination of the need for the source rock, reservoir rock, and a seal, which is limited to relatively small amount of the earth's crust.  However, the so-called shale plays are much more extensive, dwarfing the conventional reservoirs volumes.  A good analogy maybe an elephant to a gnat, on a rock volume basis.  True, not everything will be productive, and there will be ranges in economics, which can now be estimated for the variety of shale plays.   In short, the entire basis for Peak Oil was eroded with the emergence of the shale plays - and no one in their right mind would claim the Hubbert conceived of them in his original model.  At $3.00 oil, the shale plays don't work, but we are not at $3.00 oil and the shale plays work very well, and will work even better as the technology improves.  The shale plays are one of the most transformative series of events in the world's energy history, and like the advent of the internet, they will change everything.

 

Msg # 81299	Posted 10/30/2011  11:03:46 AM by bigenergybull
Recs: 7 Add to Favorites Report Abuse Send PM Ignore	Re: I'm Attending The ASPO-USA Peak Oil Conference This Week The shale plays basically prove that the economists were always right: Don't tell me we have a shortage.  Tell me "at what price" we have a shortage. That obviously applies to oil demand (at $100 world demand is 89 MBPD, at $60 it would be higher and at $200 it would be lower) It now applies to oil supply...although the curve is not linear, and the curve is steep at our current equilibrium. "The curve is steep" means that it takes significant oil price increases to increase the supply (because of all the depletion we are running against).  Its not vertical as the hard core Peak oil people would maintain (IE - even if oil was $300 a barrel we would not be able to increase the world's oil production---NO CHANGE in oil price is high enough to cause an increase in supply) The curve is not linear means that there are certain "price steps" at which significant supply growth stops.  The breakeven price of new offshore drilling is one, the breakeven price of new oilsands expansion is another, the breakeven price of oil in unconventional resevoirs, albeit quite low, is another...and of course the breakeven budget prices of Saudi Arabia and other Middle East states should probably be considered another, perhaps the highest price point of them all). Anyone talking about Peak Oil being "the end of days", and going back to farming with a horse and plow because we don't have enough oil to run the tractors, well, they've been proven resoundingly wrong, and should sound like shrill doomsdayers to most educated people now.  The tractors may run on Natural gas, or they may run on Eagleford/Bakken/Cardium/Oil sands oil, but they will run, and in greater numbers than ever as we feed a booming world population.  7 Billion strong, and growing.

"

Let me know what you think, especially about "the end of days" comment.

MontyHigh, www.worldofwallstreet.us

I'm Attending The ASPO-USA Peak Oil Conference This Week

Here's the link to the speakers list(click here). Leave me a reply if there's anyone in particular you want me to ask a question of. I'm pretty convinced that Peak Oil is real and significant, but have not:

• Found any way to trade it for excess profit OR
• Made any significant lifestyle adjustments other than buying a prius and buying a suburban home w/natural gas heat closer to key infrastructure.

Here's the chart I'm going to present as a conversation starter:

I got hip to Peak Oil too late to benefit from that really juicy run-up from 1999 thru mid-2008. Since then, Peak Oil doesn't seem to have provided a mechanism for excess returns. My questions are:

• If Peak Oil is real, why hasn't it been providing excess returns lately - probably because the price of oil keeps crashing the world economy, but I'd like to hear the thoughts of others.
• When will Peak Oil start providing excess returns and what industries will it show up in?
  • Long crude oil (near-term futures or long-term, e.g. 2016 futures)?
  • Long oil producers with significant reserves in politically safe places?
  • Long alternative fuel producers (natural gas)?
  • Long natural gas futures (near-term or long-term)?
  • Short oil-intensive, discretionary industries (airlines, tourism, gambling, etc.).
  • Something else?

• Will this North Dakota, tight-oil fracing production and technology (and potential follow-ons) change the Peak Oil timetable or the energy outlook for the USA significantly? 

Again, let me know if there are any particular questions you want me to check out or people you want to ask a question of. Last year I got a quite nice tip from Charles Maxwell regarding going long Cenovus (CVE). I made a little money on that in my mother's account. If I had stuck with it I would have done better.

I will probably be lugging a laptop to the conference and posting live therefrom (in a pretty crude fashion). That would be from Thurs thru Saturday morning this week.

MontyHigh, www.worldofwallstreet.us

FWIW, here's my post from last year's conference (click here). 

Not Much Peak Oil Lately

I'm pretty convinced that Peak Oil is real and significant (probably very significant). But, even though I've been looking, I'm still having trouble finding a way of investing that makes real money based on Peak Oil implications. The problem is: When the price of oil takes off it tends to take out the entire world economy. Peak Oil is so significant that unhedged Peak Oil investments can't grow quickly relative to other investments.

The above chart shows that, apart from the Empire slamming a little oil producing country [Libya] up against the wall early this year, crude oil has not done better than the general stock market for a full two years. No Peak Oil excess profits for the last two years.

As seen above, the trend over the last 10 years of crude-oil vs the general stock market yields an extra "triple" in gains. That's an extra 11.5% gains compounded annually. There is one big problem and one small problem with a long crude oil/short US stocks:

• BIG: That 2008 crash - who has the guts to hold thru that kind of crushing downturn. 
• SMALL: That 2006 drop - I wouldn't want to hold thru that.

I believe that holding crude oil futures a few years in the future mitigates the 2008 crash, but I haven't pulled together the facts to match it.

An alternative would be to hold a stock while being short the general stock market. What is more representative of a Peak Oil investment than Suncor (SU), the large-cap Canadian Oil Sands company?

The above trading system provides a way of harvesting Peak Oil profits while limiting downside risk.The entry condition is pretty harsh and the exit condition is pretty lax. That means you'll make money if Peak Oil is real and significant and be "out" most of the time if not and will get churned for losses some of the time. The trading system produced four trades. The results are as follows:

• 263% gain
• 26% gain
• 16% loss
• 6% loss

For an overall compounded gain of 261% over 10 years or more than 13.5% compounded annually. Seems attractive. I guess I will be watching for a breakout of the current trading range.

I can't claim this post is fully baked, but I think it captures my current Peak Oil investment thinking. What am I missing? What's your plan for dealing with (or investing based on) Peak Oil? Leave me a comment.

MontyHigh, www.worldofwallstreet.us

 

Peak Oil Trade: Now Short Hawaiian Airlines (HA)

I wish folks didn't have to get hurt by Peak Oil, but it seems pretty likely that Hawaii's toursit trade is one of those things which will suffer. So, I just went short Hawaiian Airlines with about 2% of my portfolio. Its got two good scenarios which make it go down:

• Peak Oil Kicks In - Increasing the expense of Tourists getting to Hawaii and increasing the expense of all that stuff Hawaii imports to serve the tourists. 
• Another Recession - And suddenly a lot fewer people have the easy cash to go to Hawaii.

As I see it fundamentally, only the best of all worlds (global boom with falling oil prices) makes for a long-term big up move for Hawaiian Airlines. What do I have wrong other than entering this trade a little late in the game? By the way, HA is quite a liquid stock. 

MontyHigh, www.worldofwallstreet.us

 

FWIW: What I'm Holding Now

A reader, who appreciates my stock picking, asked me for some of my top picks at this point. I thought it might help him, you dear reader and myself to go through what I'm holding now with one sentence on why I'm holding it.

I'm currently leveraged up with futures and options roughly 2.5 to one and long-only. I expect I'll stay this way as long as everything keeps moving higher and will back off the leverage and go partly (or even leveraged) short when the price action turns dicier.

I, for one, do not believe in Peak Copper. There is plenty of copper in the ground that can be extracted at $3.00/lb and the current copper price action is either:

• Some kind of unsustainable speculative spike OR
• A harbinger of a dramatic drop in the purchasing power of the US dollar.

I expect that the current copper price action is a combination of both.

That aside, I'm going to list my holdings in descending order by their nominal value. By this I mean, if I have an option for 100 shares of a stock and the shares trading at 30$/share, the option's nominal value is $30 * 100 = $3,000.

So, here we go:

• Gold Call Options - See my recent posting on January Gold and Silver Seasonals for the thinking behind this.
• Silver Call Options - Something extraordinary is happening with silver (click here) . I'm holding on to see what happens even though what follows could turn quite ugly. 
• Gold Resource Corp (GORO) - Yes, I'm quite overweight this stock, but where else can you find a combination of all of the following: high-grade gold/silver rocks to mine in a politically safe location, competent management, stock-holder friendly management, excellent exploration upside and with a commitment to pay 1/3 of cash flow as dividends? I intend to hold as long as all of these attributes hang together. 
• Yamana Gold (AUY) Call Options - I'm bullish on gold and gold miners and I think AUY, which has been lagging while it has been digesting its recent gains is poised for significant growth. Plus this is quite liquid and I can jump out instantly if my outlook changes.
• Rubicon Minerals (RBY) Call Options And Stock - These guys have the best combination of rocks, location and infrastructure of any Gold Explorer I know. I'm holding them because they are a take-out target, extremely high-quality and reasonably liquid and have significant exploration upside. I'm pretty late to this party, but the options were quite under-priced (with virtually no time-value premium) and the stock seems reasonably liquid if I need to close some gold positions. 
• 2015 Crude Oil Futures - I don't see how Crude Oil in Dec 2015 can have lower price than it has in Jan 2011 given the competitive currency devaluation going on and given the impending impact of Peak Oil. I expect to load up further on these when whatever bad thing comes that will follow this current speculative blow up.
• Fortuna Silver (FVI.TO) - Extremely competent mining management which made it thru the 2008 crash much better than other Jr silver / zinc miners and the company has a big growth kicker (a silver/gold mine) coming online in the H2 2011.
• Dynasty Metals And Mining (DMM.TO) - Great gold rocks in the politically risky Ecuador. I'm expecting them to make their deal with the government, turn up the production and start printing money soon. Although risky, the risk seems to be basically uncorrelated with the price-of-gold-and-silver risk that dominates my larger holdings. I like unncorrelated risk provided the reward looks substantial enough.
• Medusa Mining (MLL.TO) - Great high-grade, low-cash cost, increasing production Gold miner in the Phillipines with excellent exploration upside. Another high-quality gold stock. Seems like another GORO, but without quite as much stockholder friendliness, political safety and dividend commitment.
• Cenovus (CVE) - A Canadian Oil-Sands Peak-Oil growth-play recommended to me personally by Charlie Maxwell at the ASPO conference. All of its production is based on SAGD technology which means its more environmentally friendly (with no open-pit mining). 
• South African ETF (EZA) Calls - A call explained in a recent post. South Africa should get a lot more investor interest now that it is formally the "S" among the BRICS (Brazil, Russia, India, China) leading emerging market countries.
• Gold Ore Resources (GOZ.TO) - A micro-cap high-cash cost Swedish gold producer that should be printing money with its recent operational improvements and with the higher price of gold.
• Aura Silver (AUU.V) - A risky little silver explorer whose properties are right next to the mine that Fortuna Silver is opening (also not too far from the Gold Resource Corp mine). I'm hoping that they find some medium-high-grade silver and eventually sell out to Fortuna.
• Troy Resources (TRY.TO) - An operationally competent, dividend paying, small-cap gold miner where I have an actual stock certificate sitting around from an earlier private placement. I'm holding at least until I get around to opening a brokerage account that will accept a physical stock certificate.
• Minefinders (MFL.TO) - A Mexican open-pit Silver/Gold miner turn-around play which has consistently over-promised and under-delivered. With some operational management changes perhaps they'll get their mine running right and we'll see a quick stock-price double. Nice and liquid should my silver/gold outlook change.
• Couer D'Alene Mines (CDE.TO) - A large-cap, growth Silver play that seems to finally have its mines working right and whose jerk of a CEO has announced that he's looking for a successor. Nice and liquid should my silver outlook change. 
• Ruby Creek Resources (RBYC.OB) - A very small holding in a Tanzanian alluvial (panning-for-gold) property. My good, extremely sensible investing buddy, Tobinator left is day-job to join this company. I'm in with the small position primarily to maintain the relationship, but also out of respect for his judgement.

Well, that's what I'm holding and qualitatively why I'm holding it. The heavy gold/silver options weighting explains why I'm watching the short-term gold and silver price action so closely and not doing as much stock picking, but perhaps this list gives you a couple of investing ideas.

MontyHigh, www.worldofwallstreet.us

 

Macroeconomic Outlook: Let The Charts Talk

In this post I'm going to put up the interesting subset of the charts that I use to evaluate the global macro-economic condition.

Unless I state otherwise, what has happened since last summer is really what I'm concentrating on in a chart.

The charts pretty much agree that we are on the verge of an inflationary melt-up with the leading charts showing this meltup already underway. An inflation meltup is a time of increasing inflation accompanied by unsustainable economic growth. The S&P500, $GOLD, gold stocks and crude oil all have targets that are 20%ish or higher above current levels. Is 20% inflation over the next year or so enough to be considered a siginficant inflation jump? How long this persists and what happens afterwards I don't really know. Key charts are at resistance and if they bounce off this week then the clear inflationary meltup call may subside. I expect I'll be referring to these charts thruout the week to determine whether they confirm my inflationary hypothesis.

Here's the key messages I get from the charts:

The U.S. dollar bounce triggered by Euro troubles seems to have bumped topped, run out of energy and has broken down thru a couple of key areas of support. A dollar turn-down facilitates the inflationary melt-up hypothesis.

Several leading indicators (semiconductors, crude oil, copper) have just broken out of resistance which, if the breakout holds, points towards an inflationary breakout.

Peak Oil looks like it might be starting to bite as crude oil relative to other commodities is no longer lagging and has broken thru the 100 day moving average I use to detect trend changes.

Something extraordinary is happening with silver as it appears that the "Huge Silver Shorts Are Really In Trouble This Time" theory may still finally be right. I expect I'll be holding onto my leveraged silver positions with trembling finger to the exit trigger while this parabolic rise continues.

Gold (and gold stocks) still look strong.

Now, here are the charts:

The S&P 500 is one more up day (or week) from breaking out of a perfect cup and handle formation while we are in a seasonally strong time of year. A breakout targets another 17% rise for the S&P to over 1400. This is what I mean about being on the verge of an inflationary melt up.

The semiconductors, which typically lead the S&P 500, have already broken out.

The US dollar has completed an Euro-trouble triggered over-sold bounce and looks (to me) to be resuming its decline have broken down thru resistance and the 100 day sma. By the way, that's an upside down cup and handle formation targeting 71. This pattern is only invalidated if the dollar can crawl above 83.5. The dollar has been driving virtually all markets for some months now and a fall to that 71 target will very probably produce quite a bracing inflationary meltup.

The BDI is the main item I see that is not confirming the inflationary meltup. Does this mean that this is a pure monetary kind of inflation taking place?

Copper has completed its highest weekly close ever and is threatening to breakout above that $4/lb resistance. A weekly close clearly above this week's close would add strong weight to the inflationary meltup hypothesis. Ask yourself this, does it benefit J.P. Morgan (click here and here) to have copper produce a bullish technical signal after they have accumulated a humongous long position (80% of LME inventory copper)? Which way do you think copper will break if a price rise benefits J. P. Morgan?

Crude oil is breaking out of a cup and handle formation which targets around 110$/bbl. That's an inflationary meltup. The world has shown no ability to avoid an economic downturn after such a crude oil price spike. So, this points towards an inflationary meltup and then an inflationary recession. Whether this is confirmed this week is pretty important.

The S&P 500 has consistently been unable to keep up with commodities for the last few months. Just as in the inflationary 70s, the general stock market (unleveraged) is not a good place to be in an inflationary meltup.

Uranium, like the S&P500 and crude oil, is on the verge of breaking out of a cup and handle formation. This cup and handle targets a 35% price rise.

Crude Oil, relative to commodities in general, has broken thru a descending trend-line and the 100 day moving average. Crude oil is not lagging general commodities any longer. If this continues it points to Peak Oil beginning to bite. This is an ugly scenario: Monetary driven inflation supplemented by Peak Oil driven inflation leading to quite a nasty global economic downturn (perhaps inflationary). This is another one to watch closely as the week progresses.

A falling gold/silver ratio ordinarily points to the inflation trade being "on". It has been doing that for quite some time and is now in an extraordinary state. At no time in the last 10 years has the gold / silver RSI been in such a consistently oversold condition. On other occasions it would go oversold and then strongly correct back to an RSI 50 (typically going further up to the RSI 70). On other occasions, one would have to jump out of silver as soon as the RSI oversold condition was relieved. But now, something extraordinary is going on. I'm in real fear of my leveraged silver positions taking a big, sudden hit, but I'm holding on tight. 

Silver has been rising hard since the end of August. It has been supported all the way by the SMA 20. The trading policy of exiting leveraged long positions after two days with no higher high has been good in this kind of silver rise during this run and on earlier runs. One reenters when either a bottom has formed or when a white candle with a higher high occurs. Alternatively, you could wait for the 20 day moving average to be pierced prior to exiting.

The $CDNX index (mostly Jr precious metals miners) is capable of staying RSI overbought for weeks. Its been doing that lately and looks like its already started another such run. Hold onto those gold mining exploration Jrs at least as long as that RSI stays up there over 70.

The large cap gold miners (represented by the $HUI index) have been outperforming the S&P500 since Apr and, like crude oil, are breaking out of a cup and handle formation. This targets a 26% price increase over the S&P 500 (whose cup and handle formation, not yet confirmed points to a 17% price increase). So we have a reason for expecting a 47% rise in large-cap miners. How much higher might the small-cap miners and explorers rise?

Well, that's how I see it. The charts don't always continue like I predict. The dollar immediately turned around last month (on Euro fears) after I put out a post saying the dollar was kicking off another inflationary run. Everyone has to do their own due-diligence and this post is educational, not investing advice.

MontyHigh, www.worldofwallstreet.us

Silver And Crude Oil Parabolic Runs

Let's look at the 6-months charts leading up to the spectactular end of the crude-oil run in 2008 and the last six months for silver.

Crude oil ran 68% from $87.5 to 147$ over the full six months.

Silver has run 62% so far, from $17.5 to $28.5 (as of the time of this writing) in little more than 3 months.

As I walked in the office I was thinking: "When Peak Oil hits, crude will again run like silver. I'll be there and I'll go leveraged long hard, just like I am in silver."

But then I reconsidered. Crude Oil may not jump again like it did in 2008. Crude Oil is very different from silver. Consider that:

• Even at current prices, silver annual mine production (click here or here) is only worth around 17B$/year (600 million oz at $28.50/oz).

• At the parabolic top, annual crude oil production (click here) is worth around 3.8T$/year.

Crude Oil production is more than 1,000 times bigger than silver mine production and was almost 7% of world GDP when it topped. What stopped the crude oil parabolic rise was the global economy breaking down under that price load.

Silver on the other hand doesn't even lightly affect the world economy. If what is driving its price rise is the huge silver short position being squeezed, the price of silver can run and run and run. Only when it threatens the existence of those silver shorts (thought to be led by J.P. Morgan) and thus the world financial system, will external forces come to bear to end silver's run.

As far as Crude Oil prices go, the powers-that-be are tuned into what the outcome of a crude oil price is. I expect they will bring external forces to bear much more rapidly should another speculator assisted crude oil price spike commence. I'm expecting a Peak-Oil induced crude oil price rise, but not another parabolic rise like in 2008. Crude Oil is more likely to run like gold has been running (steadily rising) rather than spiking like silver.

MontyHigh, www.worldofwallstreet.us

 

Best Of The Podcasts: Puplava Interviews Jeff Rubin On Peak Oil Impact On The Economy

Here's the best podcast I've heard in a few weeks: http://www.financialsense.com/user/334 (pick the 10/23/2010 mp3). After listening to this podcast (which I expect will get a repeat listen with note-taking) a number of non-petroleum ideas come to mind for trading Peak Oil, including:

• Short New Zealand - which is heavily dependent on long-distrance transport (tourism, frozen lamb export, etc.).
• Buy Great Northern - a Lake Superior Iron Ore producer.
• Short Long-Term Treasuries - at the right time as an Oil Price spike causes price inflation which is fought with rising interest rates.

Let me know if it was worth your time.

MontyHigh, www.worldofwallstreet.us

Go Ahead... Put Peak Oil To The Test

Go to this URL: http://stockcharts.com/charts/performance/perf.html?$WTIC,$COPPER

Slide that slider bar back and forth and change the starting date that you are comparing copper to oil.

Ask yourself:

1. "What fraction of the time did the starting date give crude oil a better performance than a regular, old, crummy, mineable base metal like copper? What fraction of the time was the red line higher than the blue line?"
2. "If copper has out-performed crude-oil over that big a section of the last decade, why should I think that crude oil is really all that different from other extractable commodities and why should I think that something called Peak Oil means that crude oil is going to spike higher than other prosaic commodities over the next decade?"

I'm always on the look out for evidence that runs counter to my beliefs. I believe Peak Oil is real and significant, but I'm going to have to ponder this one a little more deeply. It is really contra-intuitive to me that crummy old copper (for which there are plenty of deposits, just at lower and lower grade) has outperformed crude oil as much of the last decade to date as it has. Do you have any insight into why this might be?

By the way, I've also tried $GOLD and $SILVER and the situation is more pronounced. I expect its different for natural gas, but perhaps that is because the natural gas industry has had an extraction technology breakthru over the same period (horiztontal drill and frac).

MontyHigh, www.worldofwallstreet.us

 

US Association For The Study Of Peak Oil (US-ASPO) Conference Thoughts: Listen To These Folks

I expect I'll be recording my thoughts and conclusions from the US ASPO conference in a series of posts. I expect I'll give each of the main questions I came to the conference to learn more about separate posts. They are:

1. Is Peak Oil real? I went in assuming it was real, but was looking for the latest data in terms of confirming or denying it.
2. When does Peak Oil bite? When does it start significantly changing my investing and personal landscape?
3. How significant is Peak Oil and what does its impact look like?
4. What preparation should I make, in terms of investing and in my personal life? 
5. Which voices are the most credible and the most important to pay attention to in-order to track Peak-Oil and its implications going forward?

This post covers the last question. In this first post, I provide my notes for the speakers who had enough to contribute to make it to the "Must Follow" list. I'll be trying hard to follow all of these folk's work. Bold print is used to high-light the takeway actions for myself and key points which for me were new and significant. This voices are listed in a logical order rather than the order of importance. 

Chris Skrebowski, Energy Institute, London - Skrewbowski is the best analyst I know of in terms of empirically looking at oil supply going forward. Follow his work. Determining the actual liquid fuels peak is much harder after 2008 as demand has changed. OECD demand has shrunk will developing demand is still growing. OPEC has extra supply but its hard to tell how much. The EIA show 2012 as the peak not counting "unidentified projects".  Skrewbowski thinks late 2014 is the peak (THAT's JUST 4 YEARS AWAY!!!). Skrebowski goes with 4.7% depletion of all existing production based on 3/4s of EIA's 6.7% depletion for post-peak fields. Skrewboski is expecting no production growth for 2012 with a little growth in 2013 and 2014. EIA is predicting demand growth of 1.2 Mbpd/year with no double-dip recession. Only half of oil demand is now the OECD. The peak will be around 93.8 million bpd. Current spare capacity is around 4 mbpd with the Saudis, Kuwait and UEA having 2/3s of spare capacity. Takeway: The Saudis control the price of oil. They have been targeting successfully a price band of between $70 and $80/barrell for years and should be able to continue to control the price of oil for another 2 years. Iran, Ecuador and Venezuela oil production is in a sustained decline. Iraq is a real wild-card. Apart  from political/security concerns they could produce a lot of oil and shift the peak a couple of years. Takeway: Watch Iraqi oil production closely. The real (inflation adjusted) price of oil is higher now than in 96 of the last 100 years. $100/barrel price is needed to bring on new Arctic, Deep-Water, oil-sands, etc. The U.S. economy goes into recession whenever its oil expense exceeds 4% of GDP. Takeway: Find a way to graph and watch this.

Jeffrey Brown discussed the availability of oil exports as Peak Oil kicks in. The key idea is that exports can be expected to drop off even faster than oil production as exporting countries keep more for themselves. This was backed up with a strong, empirical case based on examining several exporting countries that have already peaked. This idea is not new, but the conclusion of his pitch (if my notes are right) was that IF oil production plateaus at the current level AND IF India and China and oil exporter consumption keeps growing at the recent rates THEN in 5 years the rest of the world will have to get along with one third less oil. Brown is a significant contributor worth following.

Chris Martenson - what a great presenter! Great popularizer, but still very empirical. Fantastic at boiling it down to the key convincing information and seeing the big pictures. Takeway: Buy the DVD and show it to all of my scientifically oriented kids and nieces and nephews. Takeway: Find a way to follow this guy's works. He claims there is a relationship between the economy and energy and that energy is the key input to the economy. He claims peak coal in 2030. Integrates fiat, fractional reserve money system where money is loaned into existence with Peak Oil. The money system requires continued GDP growth which it has been getting from cheap oil-based energy (whose consumption has been growing at roughly an exponential rate). He claims that bad and unexpected things are bound to happen as oil-based energy cannot continue to grow and thus the fiat money system can no longer grow. The money system will have to change. The money system is a complex non-linear system and is inherently unpredictable. Martenson answers the question: "How did we get two bubbles in one decade: Internet and Housing" when ordinarily they come at least a generation apart" with the answer: "They are really one big credit-expansion bubble which hasn't blown up yet". Financial markets do not change gradually and some kind of fundamental change is about to happen. Takeway: I've got to get more liquid so that I can change course when the big changes hit. My illiquid little gold miners cannot continue to hold the fast majority of my portfolio value.

Dr. Robert Hirsch, Senior Energy Advisor, MISI - Seems to have the best overall view (and makes the best overall case) that Peak Oil is significant and what its implications are. Takeway: Get his latest book and read the implications (and timing) chapters. Hisch makes a strong empirical case that oil consumption correlates with world GDP 1 to 1 (1% GDP growth correlates with 1% oil consumption growth) and that with Peak Oil we might very well be looking at a 4% fall in oil (and GDP) for at least a decade (that's a more than 40% drop in world GDP!!!). Many more good points were made, but I didn't take notes. Not a radical, but still quite a gloomy outlook. I think that's the way it is.

Hope you found this useful. Leave me a comment and let me know which Peak Oil voices you think are the most important.

MontyHigh, www.worldofwallstreet.us

 

Why Puplava Has Been Wrong On Crude Oil

I've been listening to financialsense.com's weekly broadcasts for about a year now.

Jim Puplava has been a crude oil and precious metals perma bull the whole time. Obviously, he has been dead wrong on crude oil since the beginning of July. That's five months of being really, badly wrong to the tune of over 60% in the crude oil price. You can't chalk that up to missing a short-term correction.

This weekend's broadcast telegraphs why Puplava has been so wrong: The entire discussion of crude oil and energy is entirely focused on supply issues. The failure to consider changes in demand clearly accounts for Puplava's missing a really important call. Clearly it has been falling demand and the anticipation of further falling demand that has been the driving force behind crude oil prices since last July.

I expect that over the long-term, the Peak-Oil related supply issues are so substantial as to overcome the recession related demand-reduction, but it may be a while. So, I'm reduced to watching, rather than trading.

MontyHigh

P.S., Obviously I've made tonnes of bad calls myself over the last year and most of all the same bad call as Puplava, not seeing that the jig was up for commodities in July. I'm not trying to blame Puplava, but rather understand where he went wrong so that I can avoid following him over a cliff next time.

Juicing The Stock Market For The Election

Ann Coulter isn't exactly my favorite news source, and what she covers isn't usually on-topic for World Of Wallstreet, but here's some interesting quotes from a recent column (click here for the whole thing):

"Clinton's vice president, Al Gore, lost an election that should have been his in a walk. In fact, he was the first incumbent president or vice president in 100 years to lose an election in peacetime with a good economy."

"As election predictors go, the Dow Jones has been remarkably accurate. If the Dow goes up from the end of July to the end of October, the incumbent president or vice president wins; if it goes down, the incumbent loses. It has been wrong only four times since the Dow was created in 1896.

Thus, on Nov. 1, 2000, an article in The New York Times began: 'The verdict of the Dow Jones industrial average is in, and it says Al Gore is headed for the White House.'"

This clearly illustrates why we can expect an all-out push by the Republicans in the executive branch (controlling the treasury, bureau of labor statistics, etc) and their political allies, the big banks and the federal reserve, to pull out all the stops to juice the stock market between the end of July and October.

It will be very interesting to see how far the Republican's international allies: Saudi Arabia, Kuwait and the smaller gulf states, go to help with the election. These allies depend on the US military for protection and I would presume that they would prefer to have a hawk like McCain, who will continue the protection, rather than "pull out immediately" Obama in the White House.

So, I'm expecting to hear about OPEC increasing production in the August / September time frame and to see falling oil and gasoline prices in September and October.

Of course, not all oil exporters are sympathetic to an assertive US foreign policy. What will the other big oil exporters do? I would presume that Russia, Venezuela and Iran may prefer to see the less assertive Obama in the White House. Will they decrease their production to counteract Saudi production increases and keep oil prices high through the election? Hard to tell and I guess they won't, but we'll see.

Its going to be interesting and I'm hoping to find an opportunity to "get long" in oil (probably via long-dated futures contracts) immediately prior to the election.

Leave a comment if you see any good trading opportunities coming from the upcoming election.

MontyHigh

Scariest Thing I Read Today

From today's Peak Oil Review (which is weekly required reading for me):
"Mexico is facing a double problem of declining output and proved reserves that have shrunk to just nine years of supply at today’s rate of production." Something like 40% of Mexico's federal government budget comes from oil revenues. The implications of a nine year reserve life and falling production are pretty ominous for the stability of America's most populous neighbor.