415: "Peak Oil Plateau" problem - hitting the constraints to western growth
03-08-2012
Peak Oil: The ravages of Peak Oil are starting to bite hard now. There are many forces working together to drive up oil prices:
· Quantitative easing – printing of money – that debases the US dollar, floods the world with cheap money and sends commodity prices up
· Tightening of oil supply as all countries are now producing at their maximum – no-one is holding back any longer
· Chinese relentless increase in oil demand as 25 million new cars hit the streets each year
· Developing nations all burning more oil as the middle classes increase and more gasoline and diesel is burnt
Struggling Oil Producers: The Iranian and Middle East security risk premium is increasing with major security and political problems in the following oil producing countries: Nigeria, Syria, Libya, Iran, Iraq, Venezuela, Yemen, Sudan, Egypt. The smaller oil producing nations are dropping like flies into a wave of civil disorder – with big concerns that wider problems could break out in Saudi Arabia and other large oil producing nations.
Note: Assumes no further escalation in disruption to oil supplies due to war or civil disorder.
Debt Fuelled Recession: As the US and Europe stumble from debt induced stagnation into recession in the next few months partly caused by high oil prices, the remedy for this will be more printed money, which should further increase oil prices. Much of the oil price increase has been caused by quantitative easing – along with increases in oil taxation. Both seem likely to continue – raising oil prices further. The Middle East will get the blame. But recall that the USA shut down offshore drilling for a year in 2011, put a stop to the Enbridge pipeline to Canada and put oil sanctions in place against Iran. No wander US oil prices are rising. Bombing Libya took out 1.4 million bbls/day, letting Egypt fall took out 0.3 million bbls/day, and having Sudan partitioned has lead to 0.4 million bbls/day being shut-in. Syria’s oil production is dropping as is Iran’s, Yemen’s and Nigeria’s. Venezuela continues to decline from 1999 when President Chavez took over. This has forces Saudi Arabia’s hand, and in our view, they are now producing at a maximum in the run up to the US driving season. The bottom line is – cracks are appearing everywhere and an oil crisis is on the horizon. It only takes the Iran situation to deteriorate for oil prices to scream above $150/bbl then a global recession to commence again. In any case, by August, our view is that Europe will be in another widespread recession and the USA will be tipping into recession. We wish we could be more optimistic, but there are simply too many problems bubbling onwards.
Iran: Meanwhile there is the Iranian issue unresolved – Iran is 12-18 months away from building a nuclear weapon and the question is – do you think Israel and the USA are going to sit back and watch this happen without taking direct action? It will probably happen just after the US election. Israel and the US may already have decided this in their meeting this week.
More Turbulence: So for the remainder of 2012, watch out for severe market jitters as economic indicators start pointing down by May 2012. We expect the recession to become very clear by August 2012. Obama might just about survive this to get re-elected November 2012. Then its most likely a war will break out end 2012 to early 2013. By mid 2013 – frankly – we thing everything will be going pear shaped. No amount of printed money will help by then – because the size of the US debt will just be too large. Large scale economic collapse will occur when there is a run on the US bond market and the dollar crashes.
Bond Bubble: It’s very clear in our view that the Fed has created a huge US dollar bond debt bubble – and this will eventually go pop. It just needs the dollar's reputation to be tarnished one step further to create this tipping point. If the US is forced to increase interest rates and/or is unable to print any more money, then debt default or a rapid hyperinflation would occur – or widespread bankruptcies in both private and public sectors. Its only the Feds ability to print money to pay for debt payments that saves the US from bankruptcy. No other country in the world could get away with this. Having a deficit of 10% of GDP, debts of 110% of GDP, and unfunded debts liabilities of $75 Trillion means the US is bankrupt – apart from its ability to print the dollar. But this economic empire is likely to implode shortly as the Fed finally loses control of it's fiat currency. At this point:
· Oil prices will skyrocket in dollar terms
· Gold prices will skyrocket
· Silver prices will skyrocket
· Commodity prices including food will rise sharply
· All imported goods prices to the US will rise sharply
· It’s just a question of time. Not if, but when.
Peak Oil Plateau: As we have been warning for six years now, we are bumping along a Peak Oil plateau. Crude oil production has not risen since 2005. Yes, conventional crude production is declining. It is only production of heavy oil from oil sands, biofuels and natural gas liquids that has prevented production from dropping. Oil production struggled to rise from its 2005 to its July 2008 peak, then back again to it’s early 2011 peak. Production has since dropped – and Saudi is producing at its maximum. There are simply too many countries that are suffering production difficulties for a variety of security, political, war, regulatory and funding issues. Don’t expect oil production to rise much from here onward. The fuel for those 25 million extra Chinese cars each year will need to come from the western developed nations.
Wastage and Waging Wars: As the USA and the UK to a less extent has raged wars in Iraq, Kuwait, Libya and Afghanistan at gigantic expense with no clear benefits to their oil security, t
he Russians and Chinese have been a quietly gaining oil/gas contracts and boosting their economies without waging wars. These far flung foreign ground interventions are something the west cannot afford any longer. The US has about 300 US military bases around the world in 140 countries – why? The GDP of China and India has been double that the USA’s in the last 15 years even though they do not have the global reserve currency to trade with – they need to use the US dollar. But eventually, the gigantic US debts will need to be paid off and in our view, China will be asking the US for its gold and oil – hard physical assets – to pay for the fiat debts that have been amassed over many years of the US spending well beyond it’s means. The Chinese will want shale gas, oil, gold, water and farmland in return for these debts. Eventually – from the failed dollar – a new order will be created – a new currency – possibly backed by gold or something tangible like oil or farmland. The Chinese are likely to control this currency. This is the new economic order than will become apparent within the next decade.
US Bond Issue: The reason for mentioning all of this is to make you well aware of the risks of investing in the fiat US dollar currency and US bonds. There is a high chance they will blow up to be worth almost nothing. It is far better instead to invest in hard physical assets like oil, gold, silver and farmland. The world is swilling with too many dollars - they have been exported all around the world creating asset bubbles. Too many developed nations are and have been living well beyond their means. Its not the first time this has happened of course. Look at the Romans. Look at Argentina in 1980. The Soviet Union in 1988. Malaysia in 1997. Iceland in 2008.
The Fed Creates Bubbles: The US economy has been mismanaged for many years. Starting with Alan Greenspan – who created the hi-tech bubble of 2000, then the start of the housing bubble of 2007 with interest rates held at 2% for years an
d now Bernanke who has created the bond debt bubble of 2012. This bubble has helped drive up real estate prices in China, stock market prices in the US and UK – and oil prices globally. These waves of printed money that were meant to help prop up the US real estate market and create US employment have of course ended up being speculated by bankers to try and make higher returns on risky assets. It’s created other bubbles – meanwhile real estate prices continue to drop. The final phase of this money printing binge is general inflation, and it will get ugly because savings are being destroyed, there is no incentive to invest in US business as the public sector continues to grow and taxes rise. The US is starting to look like a socialist state that is failing – as private businesses move investment overseas and the dollar value continues on a long steady decline. The war machine gets older. Babyboomers retire and economic growth stagnates in inflation adjusted terms.
Property: As fiat currencies inflate and their value is destroyed, anyone holding property will at least come out the other side with a real physical asset that can be used. But be c
areful not to own property in far flung suburban areas with poor rail, tube or bus communications. Because as oil prices rise, the cost of commuting will increase. It’s better to own higher quality property in good areas close to well paid jobs in cities. If these jobs are engineering or oil related, even better. Be careful not to be too exposed to financial jobs – since when the really big financial crisis hits, many of the financial jobs will be lost. This actually makes London look a bit vulnerable, albeit the London economy is so gigantic and there are so many rich foreign people importing money into the city that its still possible in the event of a financial crisis, London could do better than say 80% of other places around the world. In London, best to focus investment close to Crossrail – the new cross-London rail line and it's stations. We would expect prices in such districts as Farringdon, Tottenham Court Road, Maryland and Paddington to rise at a far faster pace than other districts. Abbey Wood is an interesting higher risk crossrail terminus – if this branch line is build, property prices in this deprived part of London will sky-rocket.
Stocks – The Action Is Over: The US and UK stock market rally from Christmas to early March was spectacular. We made money as well - in oil, silver and gold. But for most of the stocks – it’s time to get out as warmer weather approaches. Like last year – there will be an inverse correlation between temperatures in the northern hemisphere and stock prices. The closer we get to the summer, the further stock prices will fall. If you did not make money in stocks in the first 2 months of 2012
– our feeling is – it’s too late now. You should be getting out if anything, not in. But hold onto your gold and silver and mining stocks. Because the action is just about to begin!