Oil Predictions (previous blogged on 28 July 2006, 10:08:09 PM)

What the corporate big shots are saying

In December a litre of petrol cost around R5. 8 months later, we’ll be paying R7 a litre. Where will we be by the end of the year?

On New years day this year (2006) I remember reading – with disbelief – that experts (people who called themselves bankers, or economists, and who are generally respected for their insights) were predicting oil prices to average around $50 a barrel this year. They maintained this delusion until April/May, and even for some time after oil prices first broached the $70 level. Does anyone know when last oil was in $60-something territory? It’s been more than a few weeks now, and it’s fair to say it’s heading north, to $80.

Right now we’re at $75.01 [$98 in 2008], and we’re looking at another petrol price hike next week. I called a friend of mine, who works at Standard Bank (in the Merchant Division). He organizes finance and sets up deals between the big blue chips – most recently, companies like Sasol. I asked him, since future projections of oil prices form an important backdrop to these deals, what the industry insiders (some would say experts) were predicting. He said the feeling was that $100 was certainly possible over the short term, but that over the longer term (1-2 years) they saw oil slipping back to $50. Say what?

I asked him to substantiate the reasoning they were using, but I am under the impression they are playing with numbers, rather than astutely aware of a bottom-line in-the-desert-and-the-dust paradigm, an unshakable real-framework when dealing with oil prices.

Here’s reality: We’re in a new era. Things are different now. Two decades ago we were still in an era of Discovery. We could boost capacity when things got comfortable, because we had some West-controlled oil fields like Prudhoe, and the North Sea, and the Saudi fields were in good nick. Today we’re in an era of Depletion, meaning, as supply gets tighter, all we can do is pump faster. Unfortunately we’ve reached a stage now where we’re pretty efficient, and demand is starting to outpace our efforts at being both efficient producers and efficient consumers (if ‘efficient consumer’ makes sense).

Thus the overriding paradigm is that you have tightening supply, and demand inflation, which is simply a situation of consumers demanding more goods than what is being produced. And abracadabra, prices will increase.

And they are. There are a few headlines wailing: ‘Now for the big squeeze’ and ‘Markets stunned by 7.5% surge in factory gate prices’. There are also experts like Jim Rogers who are now openly stating the obvious: Without a major new oil discovery, prices are going to shoot upwards, and everyone (‘including me’, he confides) is going to be shocked. Merrill Lynch, for example, continue – I don’t know why – to pontificate, seeing $60 for the foreseeable future.

At the moment we have some serious things going on. We’ve got a disaster in Iraq – the country is nowhere near the production it was at Prewar, and is unlikely to come anywhere near those levels for months or years. We’ve also got a widening crisis in the Middle East, which threatens to suck in the world’s second largest supplier – Iran. And while all this is happening, China’s economy is galloping at almost 11%.

While my friend at Standard Bank suggested – even without a major discovery – that we’ll see prices somehow fall asleep at a $50 level (he’s even suggested $45) the above processes are continuing unabated. $45 would certainly be possible if 10% of the world stopped consuming at the rate they are consuming (but downscaling will happen whether we choose to or not in the future), if Israel and their enemies had a 1 year anniversary of being Forever Friends and if Hurricanes basically hovered in the same spot for days on end. It’s more likely that the Boks will beat New Zealand, cows will jump over the moon, and pigs will take flight.

So since higher – that’s much higher – oil prices are guaranteed in the near future (alarm bells aren’t ringing yet, but they will be), what are the implications?
In a word, inflation. Inflation hurts creditors, so expect banks to backfire with higher interest rates (and that’s going to hurt everyone: credit card holders, anyone in debt).
Holders of fixed assets like property can usually expect the value of these assets to increase (as inflation increases).

I believe we are moving towards a condition known as galloping inflation. Prices are going to increase too rapidly over a short period of time. Nobody expects this to happen. It’s known as a ‘hard landing’, but I prefer to call a spade a spade: it’s a crash. In a crash, people lose their jobs in the millions, and soon no one has any money. There’s a lot of panic selling, including cars and homes. Under those conditions, things that we thought had a lot of value (like a house, or a car), suddenly have a lot less value. Everyone is selling because the middle class is taking a hit. I don’t believe this is a ‘negative’ or pessimistic’ view. I honestly see a number of signals supporting this view (and I am not the only one) and I sincerely hope I’ve miscalculated.

The only class to come out of this mess more or less intact will not be the rich, but the super rich. They can pick up these properties at bargain sale after bargain sale, by dipping into their vast fortunes and expanding their empires. That’s not to say the super rich have orchestrated a crash – over the very long term I doubt whether depletion is in anyone’s interest. Perhaps major landowners who have the relics of feudalism hanging on their walls (spears, shields, coats of arms etc) might come into their own again.

While the opinion expressed in the above paragraph might seem overly imaginative, I do suggest people start to think, and use their own imaginations. Things are happening in the world now that are not normal. We are way beyond normal, and the crazy thing is, nobody seems to be picking up these signals. Oh and one more thing, I received an sms yesterday from my friend, the banker. Here’s the exact quote:

“I am busy changing my mind, thinking that the price is actually only going up from here.”

World: Get Used To Doom and Gloom - My Predictions

When serious information is communicated, people quickly filter it into good/bad news, and the worst news goes immediately to a recycle bin called: Doom and Gloom. And the purveyors of these facts are called Doomsayers and 'Negative'. C'mon people, a bit of critical thinking...think you can do that? It's the least you can do.

I have predicted on this website $100 oil for about 2 years before it happened. I've suggested investing in gold when gold was still $300. (Invest in coal now too). Stock exchanges worldwide are at an extreme level of volatility. This will get worse, with some massive downward corrections. To be clear, by July this year, $90 oil will be a distant memory; two digit oil will have a 'feel-good' factor about it. By July oil will be anywhere between $105 and $120. What people simply don't realise is that none of this is temporary. It's not a temporary blip, temporary problems, temporary shutdowns, temporary crisis. It's something else, and all human beings will be swept into the torrent. It will be chaotic downward shift.

Economists will calmly tell you that high oil prices will dampen demand, and thus prices will not rise any more. Wrong. Oil right now is cheap. Wait until exporters decide to keep the oil for themselves, to run their own countries with their remaining reserves. The voracious race to buy cars and build houses and malls and to run suburbia and the world (with all its festivals and world cups) is not concerned with oil prices, they're concerned with making money. To make money they have an immediate individual focus on meeting deadlines, finishing projects. There is no global view. There is no community consciousness. Bad weather? Who cares. Howz my bottom line? Demand is already powering far, far in advance of the supply curve...even if just the demand for motor vehicles.

Right now oil is cheap. Did I say that already? I'm repeating it here again because some aren't getting the obvious. Oil is cheap. We drive out the stuff to go to gym or a convenience store 3km away. In time, we will be accused of squandering...we'll be indicted by our children for our reckless greed. What were you doing? Our excuse will be that 'everyone was doing it', that it was a lifestyle, that we were distracted, and people were contradicting each other. If that's going to be your excuse, read this website. It's clear. The signal is consistent.

Peak Everything really means that stock exchanges will never again surpass peaks reached roundabout now/recently. There will be small crashes and corrections, and then more carnage, with an overall downward bloodletting. Stagflation is a scenario with slow economic growth (soon to become a permament recession) and relatively high unemployment, coupled with high prices. The reason we face this is because of low capacity in virtually every sector worldwide. The financial system that we have based all the wealth of the world will collapse. It always was going to, what with the system of interest rates and it's inflationary effect. On a more basic level, the collapse we face is due to the everyday demands of a large human population on Earth, where each human organism expects to have their own car, house and appliances, consumes goods with exdpensive packaging transported sometimes thousands of miles by container ships.

The WWF estimates that we currently consume the equivalent of 1.4 planets. If that doesn't make sense, the fossil fuels we're using are 'stored energy'. It's like using up a credit card when you have no money in the bank. You just can't keep on doing this. Take away our fuel inheritance and we're short of half a planet for 7 billion voracious predators/consumers to run our shopping malls, suburbia and everything else.

Power supply is a problem worldwide, from Pakistan to Britian, from China to South Africa. High food prices are affecting everyone, not only because of higher fuel price inputs, but because of climate change and pollution as well. The poor will suffer, and increase in number. Crime and unemployment will increase.

In the future we will need to become farmers, and become a community again. Computers and the internet can keep our communication and inefficiencies down. We will live more locally and the world will become a lot larger. Superstores will become extinct. Airlines will fall out of the sky. Trains will become big, so too streetcars. You will be restricted at the market to what can be grown or made locally. Life will be about what is essential, addressing fairly basic our needs on a large scale, not so much about convenience or what we 'want'

But the emphasis should be on this kindset: a permanent decline. A permament contraction. A strong likelihood of war, and a nuclear exchange as resource depletion begins to bite on a planetwide scale. This is not the distant future, it's now. It's happening.

Do you expect petrol prices to come down again after a few months? Then clearly you still have not heard or understood a word being spoken or written. You have no idea how serious our collective situation. Wake up!

Peak Everything: Waking Up to the Century of Declines

Kunstler: Forecast 2008

For the tiny fraction of people who actually pay attention to real events -- those, for instance, who know the difference between Narnia and Kandahar -- the final hours of 2007 leading into the fog-shrouded abyss of 2008 must induce great racking shudders of nausea. Has there ever been a society so exquisitely rigged for implosion? The whole listing, creaking, reeking edifice stands like one of those obsolete Las Vegas pleasure palaces awaiting a mere pulse of electrons to ignite a thousand explosive charges perfectly placed to blow away the structural supports.

More: This Is the Sound of a Bubble Bursting

The inertia holding everything together that I described in last year's forecast finally melted away at mid-summer and events began spooling out of control. Specifically, the massive tonnage of debt-backed securities circulating through the financial sector stood revealed for the mostly worthless bales of paper they truly are, and the investment community was left suspended in mid-air, grinning unconvincingly, like Wile E. Coyote thirteen yards beyond the edge of the mesa, with a sputtering grenade in each hand and an anvil tied to his ankles.

On the ground out in the heartland, in the anxiety-drenched, over-valued beige subdivisions of California and the ennui-saturated pastel McHousing tracts of Florida (not to mention the pathetic vinyl outlands of Cleveland and Detroit) a mighty keening welled forth as mortgage rates adjusted upward, and loans stopped "performing," and "for sale" signs failed to turn up buyers, and sheriff's deputies showed up with the rolls of yellow foreclosure tape, and actual ownership of the re-poed collateral entered a legal twilight zone somewhere north of the Florida State Teacher's Pension Fund and south of the Norwegian Municipal Councils' investment portfolios.

What a mighty goddam mess was left out there by the boyz at the Wall Street genius desks, who engineered a magical system for eliminating risk from the capital markets -- only to see it leak back in from a million holes and seams and collapse the greatest bubble ever blown.

In the background, the US dollar sank to record lows against the euro and the pound sterling, the price of oil jumped 56 percent across the year just grazing the $100-a-barrel mark, drought punished the American southeast and Australia's grain belt, floods ravaged Texas and England, the polar ice shrank dramatically, but the US escaped any major hurricane action for a second year in a row.

Except for the murder of Mrs. Bhutto just a few days ago, the international scene was supernaturally quiet. Even Iraq fell into a torpor, variously attributed to utter exhaustion among the warring factions or to the US troop "surge" under general Petreus. Iran got a surprise clean bill-of-health on its nuclear bomb-making activity from America's own investigators, to the consternation of Mr. Bush & Co.

The non-human denizens of Planet Earth didn't have such a good year. Honeybees, Yangtze river dolphins, and house sparrows took big hits, and Al Gore went up another suit size (as well as winning part of the Nobel Prize for his Powerpoint show). Which brings us finally to the heart of the matter: what's coming down the pike starting tomorrow, January 1, 2008?

Down and Dirty

I shudder to imagine how things will play out now as we turn the corner into 2008. Not to put too fine a point on it, but my little walnut brain can't imagine any scenario in which the US economy doesn't end up on a gurney in history's emergency room. It's not necessary to rehash the particulars of the Greenspan bubble-blowing disaster. The outcome is what concerns us. The web cables have been blazing for months with arguments as to what form the workout will take. There's little disagreement about the fundamentals at the housing end of things.

The housing market is in a death spiral. Eventually, the median price of a house will have to fall back to the median income, and it has a very long way to go, perhaps 50 percent. Until that happens, houses will be generally unsellable. At the same time, of course, an anxious finance sector will be offering fewer mortgages and on much more rigorous terms, so there will be far fewer qualified buyers even for distress sales. And the median income itself may soon not be what it has been. The whole equation has changed.

As the painful re-pricing process plays out, many owners/sellers will be upside-down and under water in what they owe on the mortgage in relation to the value of the house they occupy. Quite a few may have lost jobs and incomes along the way. Most of these unfortunates would be better off just mailing in the keys and walking away. But in so far as these awful liabilities are peoples' homes, full of all their stuff and their childrens' stuff, not to mention being the repository of all their previously-imagined wealth, as well as their hopes and dreams, walking away is psychologically more easily said than done.

Surely in this election year, schemes will be advanced to bail out these poor suckers. But the beneficiaries of such a putative bail out would be far outnumbered by the home-owners still making mortgage payments, plus property taxes jacked up during the recent orgy by greedy public officials, and I don't think this majority would stand for the unfairness of seeing their neighbors simply let off the hook on their obligations. Perhaps the one thing that congress could do is change the insane law that treats foreclosures like some kind of bizzaro capital gain and piles additional huge tax demands on people who can no longer afford to buy their kids a frozen burrito. The issue of what to do about the dispossessed will be so politically red-hot that it could upset the election process --but I get a bit ahead of myself.

One thing the public doesn't get about the housing debacle is that it is not just the low point in a regular cycle -- it is the end of the suburban phase of US history. We won't be building anymore of it, and those employed in its development will have to find something else to do. Now, unfortunately the whole point of the housing bubble was not really to put X-million people in so many vinyl and chipboard boxes, but rather to ramp up a suburban sprawl-building industry as a replacement for America's dwindling manufacturing economy. This stratagem ran into the implacable force of Peak Oil, which not only puts the schnitz on America's whole Happy Motoring / suburban nexus, but implies a pervasive trend for contraction in everything from the daily distances we can travel to the the very core idea of regular economic growth per se -- at least in the way we have understood it through the age of industrial capital.

But to return to my point, something like 40 percent of all new jobs after the year 2000 were created in the final burst of suburban expansion -- everything from the excavators to the framers to the sheet-rockers, and then the providers of granite countertops, the sellers of appliances and furnishings, and cars to service the far-out new subdivisions, and so on. This is the end, therefore, not only of the production "home-builders," but perhaps everything from Crate and Barrel to WalMart, too, eventually.

By the way, the housing collapse was only one phase of a more generalized real estate debacle, because the commercial side of the business has also begun a nauseating slide into non-performance and equity destruction. In other words, we built way too many strip malls, power centers, and office parks. God knows what will happen to the owners of these white elephants, or the mortgage and lien holders of these things -- but as one wag remarked to me some years ago as we both gazed upon a forlorn abandoned strip mall outside of Tulsa, "...we don't need that many evangelical roller rinks...."

What happens out there on the housing market scene will certainly redound in banking and finance and whatever still constitutes the US economy generally. The fears and uncertainties surrounding all credit-backed tradable securities derive first from the millions of troubled home mortgages dangling slowly in the wind. These fears and uncertainties will multiply as defaults commence in commercial real estate, and desperate individuals next enter a wave of credit card default, all of it, too, securitized and sprinkled all over the world. None of this stuff has yet been priced into the public disclosures of the many troubled banks and bank-like companies holding it.

Nor does anyone really know how this is affecting the hedge funds, and their staggering leveraged positions in things that are looking more and more like quicksand. I can't imagine that quite a few major banks will not collapse in the first half of 2008. It is hard to escape the conclusion that many hedge funds will also blow up, given the unsoundness of their counter-parties' positions, not to mention the frailty of the bond reinsurers. But the death of more than a few hedge funds could easily unwind the entire global finance system -- meaning a period of destructive chaos followed by a set of severely different institutional arrangements, with untold loss of imagined capital wealth along the way and big changes in everyday life.

The world has never really been in a situation like this before and it is impossible to say what it might lead to. But there is no doubt that the American public has enjoyed an artificially high standard of living in relation to the value of what we actually produce -- fried chicken, hair extensions, and the Flaver Flav Show -- so the conclusion is pretty self-evident.

Others have said (and I concur) that 2008 will be the year that the issue of Peak Oil not only takes stage in the forefront of American politics, but pushes global warming aside as the most immediate threat to the "modern" way-of-life. There is every reason to believe that the world has arrived at its all-time oil production peak -- and some statisticians would even pin-point the exact moment as July 2006. Since then a few new and crucial story-lines have emerged to allow us to understand what is happening out there on the world oil scene.

One story-line is that only "demand destruction" among the world's poorest nations has kept the oil markets functioning "normally" among the OECD nations and the rising Asian players. Even so, oil priced in US dollars more than doubled in 2007. It remains to be seen whether demand destruction in a wobbling US economy -- with the suburban builders crippled -- will keep oil prices from jumping into the uncharted territory beyond $100-a-barrel. But two other forces are in operation now.

One is the growing oil export problem, soon to be a crisis. It now appears that exports, in nations with surplus oil to sell, are going down at an even steeper rate than production declines. Why? They are using more of their own oil. The population is growing robustly. The Saudi Arabians are building the world’s largest aluminum smelter and many chemical factories. This takes a lot of oil. Russia, another big exporter, saw its car sales jump by 50 percent in 2007. Mexico is depleting so rapidly, and using so much more of its own oil, that it might be out of the export game altogether in three years. That will be bad news for the US, since Mexico is tied with Saudi Arabia as America's number two leading source of oil imports. Remember, the US now imports close to three-quarters of all the oil we use.

The second new factor on the Peak oil scene is "oil nationalism." It is prompting countries like Norway and Russia to husband more of their own resources as the awareness hits that they are past peak and might want to keep their own motors humming further into the future. Oil surplus nations are also trending more toward selling their oil on the basis of long-term contracts with favored customers rather than just auctioning the stuff off on the futures market. This makes oil a much more important element in geopolitical power politics. Note that the US may not enjoy "favored customer" standing among many of these nations.

Matt Simmons, the leading investment banker to the oil industry, predicted at a major conference in October that the US is much closer to encountering a problem with chronic spot shortages of oil (and gasoline, of course) than the public realizes, and Simmons says that this supply problem will be extremely disruptive in every imaginable way -- economically, politically, and socially. Most of the commentators I take seriously see the price of oil oscillating in 2008 between $80 and $160-a-barrel. Simmons says Americans will keep sucking up the price increases, but they will probably freak out over spot shortages.

I have no idea how presidential election politics will play out in 2008. It must be obvious that so many nasty pitfalls lie out there in the months ahead that something's got to shake up the current scripted mummery among the contenders. The current batch of candidates will soon find their story-lines and pre-cooked messages out-of-date as the nation faces crises in finance and energy (at least). Given the uneventful geopolitical scene of the past 18 months (since the Hezbollah-Israel War and up to the murder of Mrs. Bhutto in Pakistan), odds are that the US will have more rather than less trouble from the rest of the world in 2008-- especially if our own financial recklessness trips up the global economy.

Back in the early days of George W. Bush, even before 9/11, I used to joke with my friends that Bill Clinton would return as the Emperor Bill the First. The joke doesn't seem so funny anymore with Hillary off and running. I never liked the way she muscled her way into a US senate seat -- sending the message, in essence, that there was not one genuine New York resident qualified for the job. But there is so much more about her I dislike now, starting with her presumption of dynastic entitlement to the annoyingly phony way she nods her head (like one of those old "drinky-bird" toys) to put across the idea that she is a fabulous "listener."

I write this a few days before the Iowa caucuses and then the New Hampshire primary. New York's Mayor Bloomberg is suddenly making noises again about entering the race as an independent. That might lead to a situation as fractured as the one in 1860 that saw a multi-party scuffle send Lincoln into office (or the election of 1912 when Teddy Roosevelt made a credible run on the independent Bull Moose line). At the moment, I'd like to see both John Edwards and Barack Obama roll on. The mere thought of a president Huckabee gives me the chilblains, and the rest of the Republican pack I would not want to have as my county supervisor.

In any case, whoever ends up in the oval office will preside over one king-hell of a clusterfuck. In the immortal words of TV's erstwhile "Mr. T," I pity da fool who gets elected into this mess. There will be a whole continent full of bankrupt, re-poed, and idle former WalMart shoppers, many of them with half of their skin tattooed and many of that bunch all revved up to "roll heavy and gun up" against the folks who screwed them.

Which leads me to my penultimate observation of the moment: 2008 will be the year that celebrity wealth goes into hiding. A land full of people crying into their foreclosure notices will take a dim view of the Donald Trumps and P. Diddys luxuriating out there and may come looking for scalps -- though in the case of Mr. Trump they'll be sorry they woke up the wolverine that lives on his head. Basically, though, I'm not kidding. Conspicuous displays of wealth will be so "out" that Mr. Diddy might take to club-hopping in a 1999 Mazda. Lindsay Lohan and Paris Hilton may have to double-up living in a minuteman missile silo to keep the angry mobs of fans-turned-vengeful-berserkers away.

Okay, my final comment. After being chastised endlessly about mis-calling the DOW in 2006 (I said 4000), I have learned my lesson about making numerical predictions for the stock markets. So let's just say there is no fucking way that the DOW, the NASDAQ, and the S & P will not end the year 2008 absolutely on their asses. The charade of permanent prosperity based on getting something for nothing is over. That sound you hear out there is reality knocking on the door. It has been standing out in the cold for a long time and it is not happy with us.

Running To Work

I got here a lot quicker than expected - 28:45. If it is 5km then I ran a pace that's a tad about 5 min/km which ain't bad. Also took a quarter as long for the engine to cool off.

Tonight I have a huge table tennis tournament with Alex. I've beaten him in the last few encounters. I ought to have done, since I played a lot of tabletennis when I taught Chinese kids in December last year, and eventually I had picked up their skills and tricks and was beating them in virtually every game. We've already started sending a number of 'posturing' sms in lieu of the upcoming game.

Tomorrow morning I'm gonna be doing another early morning ride. This ought to be the toughest one so far, but I seem to be raising my game in terms of cycling fitness. Running helps a lot.

The run here includes an incredibly long and steep incline. If I manage to maintain the madness and run this route once a week, I should go into buff mode before long.

Meanwhile, how to solve this:

In lieu of next year's presidential election I'd like to do a citizen mediated ‘Virtual Election’. Historically this is the domain of user-generated-content. This is how Korean based Ohmynews became so credible and very successful. The candidate who interfaced with them and their netizens actually won the election and is Korea’s current president.

It just so happens that one of the South African candidates – Cyril Ramaphosa who is a real contender – used to be on the board of this company. So what we would like to do is basically have him announce his candidacy/intentions/philosophy/ideas/promises on reporter.co.za – obviously as an improved site than it currently is – and then have citizens get involved in the process. Asking questions, debating, evaluating. Seems to me a forum would be a great resource to add to facilitate the desired level of interactivity..

What is a practical way for us to kick off a Virtual Election campaign within our current infrastructure, so that it can be activated?

Schizm

Take a careful look at this picture. It shows a soldier using a lever to pry open a crack. Not sure what the sign in the background says, but I'd guess it's Iran.

I was one of the few writers/bloggers/commentators, who decried the war in Iraq before it even started. I didn't support it from beginning, to middle, to now.

So let me be one of the first to say, I don't support the war in Iran. And I know what you're thinking. You're thinking: but there isn't a war in Iran.

We'll see. Russia has already pulled out its technicians. The drum beat has already started. I guess it's hard to understand or believe or imagine the inevitability of it if you don't understand the Vonnegut Imperative. That the future will be one where only some countries have petroleum.

I think only a handful of people know this. Meanwhile in South Africa oil has recently risen by the highest margin ever, and is set to rise again, by 30 cents.

When I mentioned this to my father, he mentioned the exchange rate. Ah, but it's not R7.70 to the $, it's R7.07. It's actually strengthened a little.

I've given my father books and articles to read, but he prefers not to read them. It's a common reaction. Because once we know where we stand, we realise there really is very little we can do, except expect things to get a lot worse in our lifetimes. Not a nice thought.

But perhaps, I hope, we can look forward to a world, at the very least, with more bicycles in it.

For more information on the War On Iran, click on the title of this Post.

Or follow this link: http://www.chomsky.info/articles/20070405.htm