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A Further Retreat from Oil Investments
I understand that oil’s 20+% retracement from its high is not unprecedented; such a pullback often occurs in a bull market. I also know that currently available values in oil and gas stocks seem excellent and that pullbacks in bull markets are the right time to accumulate bargains.
Nonetheless, instead of buying I’ve been increasingly liquidating oil and oil service stocks. I’ve sold my options on oil futures. I’ve increased the EIS portfolio’s cash position for one reason. This pullback may be over quickly but if it isn’t we could be entering a very unusual period of global contraction that would imply significant additional downside risk, particularly for oil related stocks. That could occur due to the emergence of a combination of some of the following possible new trends:
- a major contraction in China’s growth rate
- a period of maximum new oil and gas production over the next two or three years
- oil exporting countries experiencing a vicious cycle of lower oil prices causing less funding available to finance their growth; slower growth resulting in more oil available for export; contributing to lower oil prices, etc.
China
Analysts are conflicted about what the likely direction will be for post-Olympic Chinese oil use. Here is a good discussion of the arguments for greater and lesser oil use.
One important factor, however, is that lesser oil use is likely the favored direction of the Chinese government for several reasons. First, the Chinese economy can grow more easily in a low-price oil world, which would be fostered by lower Chinese demand. Second, lower oil prices reduce the troublesome risk of inflation in the Chinese economy. Thirdly, lower oil prices take pressure off the government to restrict energy prices and to subsidize oil which distorts the Chinese economy.
Thus, to the extent the government can control Chinese oil demand, it would clearly be happy if it were lower, not higher. There is evidence that Chinese consumers are buying fuel inefficient cars to show off. A wise Chinese government might well put high taxes on such purchase or take other steps to discourage such profligate oil use at a time of tight oil markets.
More important is the possibility that the Chinese economy will simply hit a growth wall. It has been expanding at an unsustainably high 10+% rate for over 10 years. That means enormous infrastructure projects have gone into the pipeline. If end product demand is lower due to the OECD slowdown, China may face a severe capital spending slowdown. As we know, a reduction in capital spending has a multiplier effect in slowing the general economy, just as the great capital spending boom of the past 10 years has had a multiplier effect on growth.
A much more erudite version of this argument was recently published by Vitaliy Katsenelson who describes the bloated and inefficient Chinese economy with this example: “the biggest mall in the world - the South China mall, with space for fifteen hundred stores, only has a dozen stores open for business - it is empty. Shoppers never materialized. Billions of dollars have been wasted.” I highly recommend his entire essay which explains why China may well be due for a significant slowdown.
The Coming Period of Maximum Oil Production
According to the Wikipedia and other Megaprojects analysis the years 2008 - 2010 will see the most new oil produced from new large fields that has occurred in history and it will be far larger than it will during the five years following 2010. Visibility of production out to 2015 is possible because of the roughly 7-year lead times that new oil projects require from announcement to production of oil.
Here is a graph that summarizes the Wikipedia Megaprojects model:
A detailed discussion of projected oil coming on stream is beyond this essay, but much discussion can be found at the above links. Moreover, one important part of the numbers is the simple fact that Saudi Arabia is bringing on stream two major fields in 2008 and 2009 that together are projected to add 2mb/d to global production.
Therefore, if any period of time is likely to see an abundance of oil production in the world, it is the next 2 - 3 years. After 2010, as several respected analysts have pointed out, global new production is looking weaker and it looks especially weak after 2012, four years from now. But the period we are entering now looks to be especially strong for new oil production.
Oil Exporting Countries Growth May Slow
Enormous infrastructure projects are underway in the Middle East and Russia based on cash flow from high oil prices. If oil prices decline, pressure will be felt to slow such projects down. There would be a lag period; a slowdown will not happen quickly. But orders for projects under consideration would be delayed and very new projects may be scuttled. Such actions would depress global capital goods markets.
Particularly impacted would be UAE projects in Dubai that are focused on high end business and leisure travel. The OECD slowdown will put pressure on the these highly leveraged projects from a demand viewpoint and a lower price of oil would pressure them from the ability to continue to finance them.
Moreover, less than projected cash flow to oil exporters caused by lower oil prices would also restrict the ability of oil exports to bolster OECD economies by making investments and providing liquidity. There will be less ability to prop up weak OECD financial institutions or manufacturers.
All in the Context of an OECD Slowdown
All of the above is predicated on a continuing slowdown in OECD economies. If the West were not slowing down, there would be far less pressure on China’s economy. While greater near-term oil production would tend to slow the rise in oil prices or cause a temporary pullback, it would not contribute to a significant and lasting fall in oil prices without the weak demand caused initially by the OECD slowdown. And without lower oil prices, there certainly would be no economic stress to the oil exporting economies.
But if the OECD slowdown continues and becomes more exaggerated, three factors discussed above could exacerbate a global economic slowdown and prolong and aggravate a normal pullback in the price of oil and possibly of N. American gas. In fact, these factors would combine with a severe OECD slowdown to create a vicious cycle - a negative feedback loop - that I have tried to flesh out in very brief summary above.
If that were to become the case, oil could slip back to $80 - or even go lower. Natural gas in North America would probably stay above $7.50. But the possibility also exists that very weak global economic performance and a negative feedback loop could cause the financial markets - already weakened by the credit crunch and housing slump - to perform very badly.
Let’s also bear in mind that the U.S. financial position has been severely compromised by two terms of deficit spending and increased national debt of record proportions. The U.S. is still the bell-cow of the global economy. Its weakened financial condition (especially in the context of ever-growing entitlement spending and interest costs) would tend to add to the negative feedback loop described above.
OPEC to the Rescue?
As the price of oil falls, OPEC will eventually try to support oil prices by cutting production. But such a cutback might be more difficult to engineer given the fact that Saudi Arabia is committed to increasing its oil capacity by about 2 mb/d in 2008 and 2009. The Saudis might drag out their construction process and might cap a lot of it. But it is simply harder to reduce production when you are already committed to bringing on important new fields.
Moreover, the Saudis have good political reasons to want to see much lower oil prices in the near term. Specifically, they are locked in a desperate competition with Iran for political influence in the region, both in terms of Lebanon and Iraq. They do not want Iran to proceed to become nuclear, nor do they want Iran to continue financing radical Shiite fighters.
Much lower oil prices would put huge pressure on the Iranian economy and could become a significant bargaining chip for the Saudi’s to obtain the political concessions they want from Iran. So it is not altogether clear that the Saudis will initially cooperate in an OPEC effort to reduce production and it is unlikely OPEC could succeed without Saudi leadership.
The Alternative
All of the above will probably not come to pass if the OECD and particularly the U.S. economies suddenly turn around and begin to strengthen. The chances for such a turnaround will be enhanced by lower oil prices. If the U.S. economy turns around due to lower oil prices, I will have been wrong to withdraw my investment capital from the market. On the other hand, I will have lost only opportunity, not money. It is a chance I have decided to take.
I am embarrassed that only 45 days ago I wrote that oil is an investment Tsunami and that the challenge to investors is to stay invested in it. But conditions changed over the past 45 days.
If I were not convinced that an economic downturn not seen since the 1930’s is a real possibility and that it comes just as China is due for a downturn and oil supplies are due to increase at the highest rate in history over the next 2 - 3 years, I would not have sold my oil-related investments.
Most of the factors that are inherent in the negative scenario could have been perceived 45 days ago. I make no excuses for not seeing them. But I do listen to markets. I see oil moving down when increased political tensions in oil-intensive areas should cause it to move up. I do not like what I observe.
If I’m proved wrong by moving to the sidelines now, so be it. I will plead guilty to panic. But if panic is justified, it is far better to panic earlier than later. Some will not call this an early time but we will not know that for another year or so.
Tags: peak oil energy investments
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40 responses so far ↓
1 paultaut // Aug 13, 2008 at 12:53 am
Me, I plan to ride it out in my CanRoys and whatever they morph into.
Hypotheses: lets say you are right about the Saudi goals. If Israel decides to let Iran get Nucs, Iran will be able to exert more influence in the Middle East than the Saudi’s can ever hope to. ( I call this a Pipe Dream scenario). Lets say Israel bombs those facilities sometime in OCT., my best case scenario, the chances of a McCain presidency are probable, but oil skyrockets as does the dollar.
Another Scenario, China’s growth slows dramatically. So what? The prior ten years of growth still have to be fed electrical power to function and the same for the existing cars on the road. Meanwhile, there are still 300 Million chinese waiting to be urbanized. The growth rate may subdue because of the Economics of Scale but energy needs will continue to escalate.
The nub is that China is not the whole picture. It is less than half. Take Putin and his incursion, he has given the world a preview of the coming energy wars. India is nowhere out of the race for industrialization and neither are the rest of the Asian countries.
I believe getting out of oil is the absolute, right thing to do. US OIL, that is. They are the Scapegoats of the future.
Back a few years, oil dropped from around $80 to below $50. Big deal. If it repeated that Scenario, it would go below $100 easily. But what will have changed, Demand Destruction would evaporate and a belief that regardless of where it goes in the future it will ALWAYS drop will be instilled in the Eyes of the US public.
Jim, I don’t think you have panicked. You are just being prudent and a good american. I, hold dual citizenship and can flee the country to reside elsewhere if it gets as bad here as it might. I also hold a good chunk of cash in that country. The thing is that you have to exclude the US from the Global economy. It doesn’t do any good to think things will get better anytime soon here.
PS New tidbit, Average Prices of US homes are now lower than their respective mortgages in 1/3rd of US households.
Talk about wealth destruction and another shoe.
2 Investor88 // Aug 13, 2008 at 1:07 am
Jim, appreciate your detailed and thorough research. I have enjoyed and benefitted from reading your research and articles. I salute you for being above practical, ie moving aside from a coming freight train Tai Chi style in the name of risk control and optimizing profits. Being practical has led to reverse my overweight position in oil and gas stocks to 100% cash holding currently and watching.
3 Robert Essian // Aug 13, 2008 at 2:58 am
Jim, as a new investor and loving every minute of it what struck me this morning is the respect you have given all your readers.
The time and energy you took to make your thoughts known to us in a well written and thought provoking article is appreciated by me as well as the readers comments above.
Apologies are never necessary when the work ethic is there.
Every well respected analyst I have read tells me to listen to the market it speaks volumes. The Geopolitical problems of today have not moved the crude oil prices at all and the US has some serious financial issues all of these are current and absolute facts.
To conclude this, nothing really has changed for me and the future. I’m patient and frankly I look forward to learning more than I have in all aspects of the market. Thank you Jim
4 L Jakus // Aug 13, 2008 at 3:43 am
My understanding is that the Saudi’s always increase oil output before an election, as they are afraid of the Democrats winning, who are not as bought by the oil interests as the Republicans, and who, correspondingly, would make more of a push towards efficiency and alternative energy. My Nostradamus like prognosis — oil prices head towards $200 after the election.
Part of the problem with the old USA is that the people in charge are “way behind the curve”, and view the USA like it was not as it is. For example, back when US oil production peaked (1970) at 9.64 mbd (million barrels a day) the U.S. production represented 21% of world production of 45.89 mbd. Going back ten years to 1960 U.S. production, 7.04 mbd, represented 33.5% of world production of 20.99 mbd. In 2007 U.S. production of 5.10 mbd presented 7.0% of world production of 73.27 mbd. However, old ideas die hard, and the Saudi’s will probably do what they can to keep updated thinking from coming into popular parlance. In a way McCain, an oldster himself, is a good candidate for them.
5 paultaut // Aug 13, 2008 at 4:40 am
Tae Kwon Do
6 Nawar Alsaadi // Aug 13, 2008 at 5:25 am
Jim, I agree that the next 2 years, the market is expecting several projects to come online, not withstanding the expected 1m increase in oil demand for next year by the EIA (yesterday report), I will focus on supply:
The 3rd largest OPEC new supply for 2009 is supposed to 510k extra barrels from Iraq; this is supposed to be accomplished through the technical service contracts that Iraq was supposed to sign by June 30th 2008, according to today’s WSJ those contracts have stalled:
http://online.wsj.com/article/SB121859029778435427.html?mod=googlenews_wsj
Thus it is safe to push the extra 510k Iraqi production to 2010, should those contracts get signed by mid-2009, I personally expect Iraqi oil exports to decline in 2009 as the massive internal pent up demand get unlocked next year due to increased security and the government strong investment program in infrastructure due to oil windfall revenues of late.
As for Brazil, Chevron announced that they are likely to delay their 100k a day 2.8B oil project from an initial start in late 2008 to March 2009, thus we will not get significant production from this project before 2010:
http://www.bloomberg.com/apps/news?pid=20601087&sid=adPLvdXWdCfk&refer=home
Indonesia biggest oil field to come online in a decade is being delayed from December to March next year, thus further delaying the possibility to reach full production to well into 2010:
http://www.reuters.com/article/marketsNews/idUSJAK14639720080811
Further down the road Imperial energy is delaying its 300k bpd project in Canada by yet another year from 2011 to 2012:
http://calsun.canoe.ca/Business/2008/08/08/6382616-sun.html
StatoilHydro is delaying its major oil sands upgrade project by 2 years to 2016:
http://www.bloomberg.com/apps/news?pid=20601082&sid=a_Njq.G2t8mU&refer=canada
What is of interest is that all those delay announcements are from the first 12 days of August! only, while I don’t double some decent oil production is coming in the next few years, I believe it will be much more evenly spread out over the next 5 years then the Megaporjects production indicate, delays are VERY frequent in the oil industry, and especially so in the current environment of shortage in equipment and personnel.
Further more if you project continued strong depletion rates in Mexico’s Cantarell (at 30%+), and continued weakness in Russia for 2009, a lot of the extra production will be offset in the next 24 months, and finally it is important to remember that net exports continue to decline, as $113 oil continue to stimulate strong growth in the oil exporters economies.
I don’t expect oil to hit $200 anytime soon, however I don’t see it going under $100 either, and at $100 oil companies stand to make a bundle!.
Good luck,
Nawar
7 Elliot Miller // Aug 13, 2008 at 6:55 am
With the greatest respect the analysis reeks with panic. It postulates that high oil prices are bad, It postulates that low oil prices are bad. It postulates that any slowdown in China will be secular and massive, rather than cyclical and short and mild.
Like paultaut, I’m continuing to enjoy my well-covered and thoroughly hedged distributions from my favorite Canadian royalty trust (Crescent Point Energy Trust, which is still on the analysts’ buy list)
8 KV // Aug 13, 2008 at 7:28 am
I have a simpler read. Oil over $100 (even at $60, if the home equity credit lines were not available) was breaking the BACK of the average American.
Add the financial crisis (including all debt especially debt due to boutique war in Iraq), and the biggest, and most wasteful economy of the world starting to unravel.
It is really sad that many, many well-educated and good intentioned people have drunk the cool-aid of hypocrites of the most powerful nation (reminds me of “I, Caligula” episodes).
Not too long ago, we had conscripted army sent to foreign land for looting, but I digress: whatever happened to $250-$500 oil scenarios? It sounds so familiar to flowers in the street of Iraq! I know the answer, it will be after 2012 (and according to Mayan calendar, the world ends in 2012, so what me worry!).
Here is the equation most oil-rich investors do not know: A ten dollar item in a store cost no more than one dollar to display, and that one dollar usually going to China. So, for each dollar decline in Chinese exports to the US, we lose potentially $10 in retail sales, and the associated mostly non-productive feed-chain.
There is no real choice but go through protracted recession, inflation in daily living (food, clothing, toothpaste), and depression in illiquid assets beginning, what else, but after the election.
9 Jim Kingsdale // Aug 13, 2008 at 7:45 am
Mr. Miller: I did not say low oil prices are bad - other than for oil companies. I said they are good for the OECD and Chinese economies. I also did not say a Chinese slowdown would be secular and long. I’m thinking only of the next year or three, not longer term. I actually think a Chinese slowdown would in fact be cyclical and short - but that won’t mitigate the short term pain to the global economy. I’m ready to be criticized, but not by things I did not say.
10 Allocationist // Aug 13, 2008 at 8:06 am
I continue to value your thoughtful insights. Thank you!
11 wynn // Aug 13, 2008 at 8:08 am
love this latest post. it plays to all my biases. negative on china and curing high prices with high prices. of course i was never long so im not smart just happy if your latest is correct. thanks for your work. please keep thinking for me.
wynn
12 cwd // Aug 13, 2008 at 8:08 am
Thanks, I agree with what you say, although you don’t mention the manipulation the currency.
The US has allowed foreigners to recycle dollars back by buying US government bonds.
This has been great for the Wall Street Fraudsters, but a diaster for American manufacturing and jobs.
We talk about a recovery. Where is it coming from?
Are the Wall Streeters coming up with some innovative products to ramp their profits or home prices going to start rising opening the home ATM again?
I don’t think this is a run of the mill recession.
I think we will see $80 oil sooner than one would think. At that time, I think the producers and service stocks should represent real value.
13 jose // Aug 13, 2008 at 8:37 am
Dear Jim,
You will have always our respect. The reason is that you do not say just what you would do. But you tell what actually you do. This makes you for me a reference credible analyst.
The comment has surprised me. A reader may think that the tsunami paradigm… However, there is one stong reason for selling the stocks: credit bubble. We have not seen the end. Pay attention to this.
The price of oil has growth exponnentially in the first half. This was unsustaineable. Do not consider the price a reference until this is stabilized. I think that right below $100.
Thank you again and regards,
Jose L.
Madrid
14 Rich // Aug 13, 2008 at 10:42 am
Dear Jim,
Your recent sentiments echo that of the RGE monitor, which has been warning of asset destruction across all classes, including commodities, in the wake of the credit crisis, global recession, and Nouriel Roubini’s assessment that we are only in the 2nd inning of this process. He believes that long term emerging markets and global growth will return, but feels the next 1.5-2 years are filled with great uncertainty and high risk of significant deflation. Short and medium term volatility with long term growth shifting to emerging markets is the prediction of the PIMCO crew as well [http://www.pimco.com/TopNav/Home/Default.htm]Other doom and gloom advocates [Jim Rogers, and others] believe this will result in hyperinflation and a declining US dollar, and corresponding increases in commodity valuation [he favors agriculture, others energy or precious metals]. If there is one lesson the last year of sequential asset destruction has taught, it is that the ability to predict what will happen is not an exact science. In fact, in keeping with Nicholas Taleb’s “black swan” theory our ability to predict is worse than ever. When you factor in the unpredictability of government intervention in markets, it is fair to say prediction is impossible. The fact that major investment firms can be on opposite ends of the spectrum regarding the dollar, commodities, equities, etc., speaks volumes. Inflation vs. deflation, dollar up vs. dollar down, gold up vs. down, oil $80 vs. $200…non-compatible divergent outcomes depending on who you listen to or how your brain interprets data at any point in time.
After some soul searching I have come to believe in the impossibility of prediction. I like the concept of getting beyond the endless game of prediction…and realizing it is just a trap.
I always like checking your site and appreciate your insights!
Regards,
Rich
15 paultaut // Aug 13, 2008 at 11:09 am
Jim, you are out of oil. Have you also dumped ZENN?
Russian tanks are not pulling out.
16 KV // Aug 13, 2008 at 2:24 pm
Nawar Alsaadi,
All these delays have anything to do with propping up the oil prices to a minimum of $100?
With that in mind, why do we want to drill more off-shore places? Just to file away for the future?
You see, Saudis are right, there is no oil crisis, and in their mind, at about $80~$100 they are getting a fair value of their product.
As of today, the US uses nearly 800,ooo barrels a day LESS! And, this is without the push to conservation. The best way to improve the quality of life - environment - is to tax the gas 100% and start paying the debt created by the oilmen, the real snake oil salesmen,
Now about Jim’s actions on going to cash.
Well it is high time to book profits from futures contracts, especially if the cows are going to come home, pregnant and sick.
Now only if he motivates himself to reevaluate the mudplay by all the oil sands companies, he would be really ready to have all the cash to diversify and invest for income and growth, not speculation he has been doing while calling it a long term investment strategy. I do grant that he is not biased by his thinking and does turn on a dime, though from others’ posts, I think many may not have been.
17 Isaac // Aug 13, 2008 at 2:26 pm
I don’t think you should beat yourself up Jim. These are tricky times, with eddies and cross-currents. Its very difficult to judge the relative magnitude of all these trends you’ve done so well to identify. Highlighting those trends and throughing the ideas out there in an intelligent and sincere manner is a welcome service to those of us who read your postings. So please keep it up. My cloudy vision sees a downward trend for another year atleast, and I don’t think we will adapt quickly enough to prevent the big oil shortfall once global growth resumes. Here in the US we have a broken leadership pattern, squandered wealth and tens of millions of people in frivilous jobs, and I’m not to optimist for their/our future. I’m trying to save enough money to pay all the taxes I’ll be shouldering (expecting a 60 plus % bracket in 1-2 years).
18 Mike // Aug 13, 2008 at 2:29 pm
Good grief! I feel like I’m standing on the deck of the Titanic watching my oil guru Jim rowing rapidly away from the sinking ship. Too late for me to re-arrange the deck chairs I guess. I’m going to have to ride those oil stocks down I was using to hedge against inflation. Bummer! On the other hand, I bought in at $60 - $70 oil, so I might come back up in a bubble…
19 KV // Aug 13, 2008 at 2:45 pm
Mike,
LOL! This is good.
In all fairness to Jim, he has guts to say what he is doing, and rowing rapidly away is not a bad strategy if he has other options to reinvest cash including parking in foreign CDs.
20 Tommy Atkins // Aug 13, 2008 at 4:44 pm
Hi Jim:
With all do respect, I think you’re being awfully optimistic about oil supplies. First, note that the bulk of increases scheduled for the next 4 years are from OPEC, none of which are verifiable data. Checking the past does not give one much confidence. The megaprojects data says that OPEC should have increased supplies by about 4mb/d from 2004 thru 2007. EIA data says actual supplies increased about 1.3mb/d. Further, the elephant in the room is worldwide production declines, which the IEA now says average more than 5%, or (in their estimate) about 3.5mb/d each year. So in the next 4 years, declines will total 14mb/d. While the MP data suggests we’ll get at least that much, the bulk of the anticipated increase is from OPEC. And that doesn’t account for any demand growth, worldwide. Even the conservative IEA says demand growth will average at least 1%, for another 3 or 4mb/d. Do you really think production will top 100mb/d within 4 years? I guess we’ll see!
Whether it does or not, I’m betting that supply and demand will remain tight enough, combined with ever-more-expensive drilling projects, to keep upward pressure on prices for the forseeable future.
Having said all that, recession in the US is inevitable and Wall Street will not be happy. I personally think we’re in for a very long spell of grief on Wall Street in a zero-growth economy. I guess we’ll see whether commodities like oil and gold remain a refuge for the Street in such dismal investing times.
But CASH? hmmm…I’d sure like something that’s a little more inflation-protected. Cash lost you money in the ’70s.
Cheers!
21 fran // Aug 13, 2008 at 6:23 pm
i don’t believe the people of the major economies would bear the brunt of your scenario, nor would the political class have the backbone to pander/dance/cajole to quiet the hordes. the alternative will be “open printing” of fiat currency to delay/defer the eventual catastrophe as long as possible. we’ve been at similar economic precipesses in the past. we’re more apt to inflate our way to other deplorable circumstances, hopeing to “luck out” again.
if the hordes are not pacified this way, if your scenario happens, then the presses will not be creating fiat currency. the machinery will be producing ammunition for someone, for some purpose to establish order/control.
22 MKR // Aug 13, 2008 at 8:51 pm
Jim:
Why do I have the feeling I am in church listening to the pastor imploring that God is coming soon (Tsunami) one week only to hear in next weeks sermon that God might not be coming for a long time and armageddon (worst economy since the 30’s) is just around the corner? China is collapsing, OPEC et. al. will pump oil like madmen to make up for falling per barrel prices, big fields are coming on line like dandelions after a spring rain. Sheeesh!
A few things to consider from the cooler heads will prevail school.
1. Demand destruction is overrated. The price at the pump nearly doubles in a year and US oil consumption is down maybe 4%? That really isn’t much - and that’s the low hanging fruit. Worldwide demand may stabilize for a year or so, but inevitably the demand growth will return - especially if oil drops below $100bbl for any protracted period of time.
2. All the major oil fields remain in decline. If anything, the decline of these fields may accelerate as oil co’s. abandon the expense and R&D initiatives to extract the remaining oil from these fields.
3. Although you now worry about the major oil producing countries pumping increasing amounts to make up for the per barrel shortfall, the opposite could be true too. Mr. Putin is not going to panic produce (he can’t - his oil is too expensive to extract) and OPEC has learned their lessons in the 80’s and will be more patient this time as they are flush with cash. Mr. Chavez will be only too happy to cut off his nose (and oil production) to spite his face.
4. Don’t even get me started about middle east/Russian/Venezuealan geopolitical tensions that could arise at any minute.
5. PS - at $100 bbl, priced in Euro’s, oil is cheaper than it’s been in the past 5 years for that major oil consuming region.
To paraphrase what a wise man once said, “a Tusnami is subject to many voilent ups and downs, the key is to just hold on!” I’m not going to get cute, I’m holding on.
23 Jim Kingsdale // Aug 13, 2008 at 9:30 pm
MKR: you may well be proved correct.
24 paultaut // Aug 13, 2008 at 10:02 pm
Dollar up, gold and oil up also. When has this occurred before? I don’t know, I am asking.
Ultimatum from Russia to America: You are either with us or against us.
25 Robert Essian // Aug 14, 2008 at 3:26 am
Jim, I talked to my wife last night about all that has been learned. I came away feeling even better about my (our) situation. Jim Rogers says it’s good to talk.
She explained that what’s happening is everyone is willing to take the bus, car pool, put on the extra sweater and turn the heat down because of high oil and gas prices. Hence demand destruction.
She also went on to explain that as soon as oil and gas starts to come down in price that this routine will be modified a bit. Instead of taking the bus or train five days a week it will be three, the sweater will come off half of the time and the heat will be turned up. Hence more supply of oil and gas being used.
In addition she added that our wages which are set to go up 3-4% by January will help cool the impact on the family budget. More spending and more fuel usage.
Oil and gas are really terribly good buys right now and if we purchase new shares with the cash we have (after getting out 50%) at levels of $110 then $105 then 100 and so on that at some point this thing will turn around and quick.
The reasoning about this is the false sense of security lower oil prices will have on the market, the dollar and inflation all of which are just hiding behind the corner.
Russia, China and most super powers are now positioning themselves in regards to the inevitable crunch to secure supply’s of oil. A form of hoarding you might say. The slicing of the pie.
Conflict or the fear of it is a real issue when dealing with the future Peak in oil.
In the case of Russia she is securing the oil in her backyard as I see it, just as we will in ours and have with Iraq.
Though Iraq is not in our backyard we have an obligation to protect Saudi Arabia and the dollar in that region and I suppose we are showing we are willing to do that.
Look everything happening today is happening for a reason. Perhaps the super powers are looking around and strategically asking themselves where is the least line of resistance and then applying themselves. This is no different than what we are doing as investors. Time is short regarding this issue of Peak Oil and it is my responsibilty to ask myself what I would do as a leader that believes in this theory.
The risk is the Theory is bogues and I lose some money and a lot of time. If the Theory holds then perhaps I better our family situation. The risk- rewards must always be measured.
Finally, some of this may seem simplistic but I’ve tried to boil this thing down without all the rhetoric that is being played out in todays market. Essentially it’s back to the fundamentals of buy low and trade high but watch out for your blind side because the hit can be devestating. Respectfully…
26 Rich // Aug 14, 2008 at 5:07 am
More on declining demand from Lehman in FT this morning:
http://www.ft.com/cms/s/0/99e4c70a-6944-11dd-91bd-0000779fd18c.html?nclick_check=1
The interesting question is whether the past demand declines following ‘73 that occurred in developed world and recent declines in US, will be matched by demand declines across all markets.
27 KV // Aug 14, 2008 at 5:34 am
At the least, we agree that demand is going down in the US. Now, does anybody know what is happening in the rest of the world? I bet the demand destruction is much more severe: much higher taxes, lower income, higher inflation, and relatively lower wages, all point to look at energy in different way, with emphasis on less oil more alternate (Germany) and walk more.
Those who were predicting $500 a barrel needs to take Economy 101 and understand the basic rule in economics is not supply and demand but substitutes for expensive stuff. It just take a bit more time.
Oil is still a good investment, but it does not meet the need of speculators. Sorry, Jim, you speculated and it is good you got out when you did. Those who invested in oil for income (like paultaut), probably got into this stuff long before the oil went to stratosphere.
28 KV // Aug 14, 2008 at 6:35 am
U.S. Consumer Prices Rose More Than Forecast in July (Update1)
By Shobhana Chandra
Aug. 14 (Bloomberg) — U.S. consumer prices climbed more than forecast in July, reducing the ability of the Federal Reserve to lower interest rates should the economic slowdown deepen.
The consumer price index climbed 0.8 percent, twice as much as anticipated, the Labor Department said today in Washington. The cost of living was up 5.6 percent in the year ended in July, the biggest jump in 17 years. So-called core prices, which exclude food and energy, also rose more than projected.
The report may intensify the debate between those Fed policy makers that forecast inflation will slow and those concerned that price pressures will accelerate. Increases beyond food and fuel, including gains in clothing, airline fares and education, make it less likely that central bankers will be able to keep interest rates unchanged for long.
There is “a tremendous amount of cost pressure here that is affecting many, many industries,” William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Today’s report “raises the general trajectory” of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, he said.
Still, commodity costs have retreated since mid-July, indicating the rise in total consumer prices may slow. Crude oil futures dropped as low as $112 a barrel this week after topping $147 last month. Regular gasoline, which reached a record $4.11 a gallon on July 17, has fallen about 8 percent, according to AAA.
29 Robert Essian // Aug 14, 2008 at 8:14 am
KV, lets be honest, if Jim didn’t have this column we couldn’t voice some of our concerns or have a forum to discuss same.
Making personal comments and observations (pointedly) serves no master.
Comes down to this, you have a glass of water and you take a sip. Later you take another sip and so on…Pretty soon the glass is half empty and you’re real thirsty but you have a couple of real big dudes that are thirsty too and are willing to do whatever it takes to get the next sip. Sure there’s a lot of water left but not if you have to share it so what are you willing to do (pay) for that water. If it’s life or death as I percieve it, I might pay well over $500.00 for it. I believe that’s what’s being implied by $500.00 oil.
Whatever the market will bear!
Now, Jim probably could give a hoot about our comments and that would be fare. I suspect he could weather most any storm financially. Calling him a speculator (he might be) has a ring of negativity to it that frankly is below the belt and cowardly. Just chill a little and enjoy the bantering because no one is going to make decisions regarding their situation based on what we say anyways. I assume your not.
30 KV // Aug 14, 2008 at 8:40 am
Robert Essian,
I did not call Jim a speculator, but his investment thesis as a speculation, and I also complemented him on his ability to change. When you advocate a thesis, you will find opposite views, and frankly that adds much more in refining and adapting the thesis to changing scenarios.
You see, I live in the world of numbers, and I could care less about glass half empty or full, especially I can measure it is 51% full, or 49% empty. In investing we measure by numbers, not wishful thinking, or emotional nonsense you promulgate perpetually. Ultimately all investments are measured in $, just like oil price to $500. By the way, at $500 it would have gone up 20 times from what it was in 2000, it is really tulipmania thinking and that is what I have been pointing out, not whatever!
Finally, Jim can think for himself and comment if he so chooses and he can also send a private e-mail as well.
31 Robert Essian // Aug 14, 2008 at 9:20 am
KV, ” well Jim you speculated and lost”, …
Regarding numbers, I guess you can look at them as half empty or half full…50-50
Next topic.
32 KV // Aug 14, 2008 at 9:35 am
RE - There is a difference between verb “Speculate” and noun “Speculator”. I hope you look it up. Anybody can speculate sometime, while speculator does it all the time. Got it?
50-50 allows you decide nothing; or whatever; 51% -49% tell you how much you made or lost.
33 Robert Essian // Aug 14, 2008 at 9:49 am
Geez…You’re so sensitive…
Sorry Jim, I’m done blogging now…Promise
34 KV // Aug 14, 2008 at 9:55 am
RE
You incorrectly quoted me as: “well Jim you speculated and lost”
What I stated in a previous post was: “Jim, you speculated and it is good you got out when you did…”
I do not intend to sell my investments in oil as they were made a long time ago and they produce substantial income. I believe we will be an oil-based, more precisely fossil fuel based, economy for at least 10 years or more, and there is profit in it, except I do not believe this is the right time to invest in oil/gas/fossils etc.
35 paultaut // Aug 14, 2008 at 10:17 pm
Boy do I have a new Hypotheses to push onto the rest of you.
Demand Destruction or what happens when supply exceeds demand as is currently occurring here in the USA. Prices drop, yes, obvious.
Don’t you think that the Oil Complex is already adjusting to this? Oil Inventories and distillate inventories are dropping to accomodate this destruction. At some point, an equilibrium will be reached and the still relatively high prices will remain until the next Oil Shock. You should have an inkling when refinery runs stabilize.
I hate to say this, but the dollar may have reached a sustainable bottom. Two words that were removed from my vocabulatory have returned…”War Premium”.
I started investing in the CanRoys when the first one was listed on the Amex. Oil was around $25-30 at the time I believe. I took out my original investment years ago. I am currently playing with the House’s money and the related dividends have added another 50%. I am loathe to sell any of them because they are all pure profit.
36 paultaut // Aug 14, 2008 at 10:19 pm
vocabulary, sorry.
37 Robert Essian // Aug 15, 2008 at 4:27 am
Paul, I have been playing the house money for years and it is a lot less stressful. My house is just about paid off (15 payments) and I have no credit card debt or car debt. Great retirement package for my wife and I plus 401 k max so house money is just plain fun. Now I personally think this is the best time to get in and purchase some E&P stocks as the price falls to certain bench marks. Going forward this will create a nice addition to a life without any bills, just cash. The geopolitical activities will create uncertainty going forward and can only help oil stocks,ad to that the demand will rise and supply diminishing is a win win. All numbers point to this happening. Will I take a hit from time to time you bet but I would hate to be out when a serious event occurs causing the stocks to rise in seconds.
Finally, I had no right nailing KV yesterday, his comments are his own whether I agree or not. This will never happen again under any circumstance.
38 paultaut // Aug 15, 2008 at 5:07 am
Yeah, I know. I’m doing the same thing to some one called Jack Yetiv.
The thing about these posts, is that one does not go off somewhere, do some research, come back and then comment. All of the Commentary comes from the part of the brain which was stimulated the most at the time of the Reading. For instance, like Jim K, I can turn on a dime not because I am panicking but because somewhere everything clicks into to place and I make a decision, right or wrong, this decision can be adjusted for future events.
I did not expect the commodity collapse, especially in the grains. But should have expected Platinum Group to collapse in light of all of the tech. for cars into the future most of which will not involve catalytic converters.
Commentaries allow participants to vent. However, I take particular exception to the Writers of Articles which others read and may take action because of what is said. When this occurs, as it did with JY, I respond reasonably at first. But if my commentary is ridiculed and I am proven right, I expect a retraction. Not for myself but for the people the writer misled by not doing historical due diligence.
I am a retired stockbroker and I know all about “pushing” positions. All anyone has to do is visit an office before the markets open and listen to the commentary running on the loudspeakers.
39 KV // Aug 15, 2008 at 6:00 am
RE – Don’t worry, you did not hurt me, and actually provided a forum to express my views, which, I can surmise as: it is all about profit at minimum risk. I can only compute profit with numbers and I can only minimize risk if I develop a thesis and perpetually verify it. As you said before, it is the ying-yang, but of profit vs. risk, (and mathematically, a loss is a negative profit).
Paultaut – It is good to know I am not the only one riding out this downturn while collecting pretty substantial dividends/distributions on investments whose cost basis is near zero due to substantial part of the distributions as return of capital. So, like you, I am on the house money – that is I have no original investment at risk. Or, my cost basis is near zero.
And finally, RE, I agree with you that Jim has created a unique forum and I hope he continues, even when his views are put on fire!
40 Robert Essian // Aug 15, 2008 at 8:22 am
KV, language is a wonderful thing and when I express myself in the down home style it is because I learned while coaching kids in all sports that not everyone gets it. I have found that by simplifying the speak that the marginal are in the game.
I too have numbers as a strength and I also know that emotions play an even greater role. Many of the smartest people I know panic or sell when it isn’t necessary for the long run. I have been guilty of that as I focus most of my attention on commodities now.
The commodities market is way quicker and riskier than what I focussed on before. Frankly I like that. The charge I get satisfies my need for adrenalin.
I’ll live the way I always do, work hard, treat people the way I would want to be treated and not take myself too seriously.
I’m not always so kind with my words but I’ll man up, apologize sincerely and move on. Respectfully.
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