The economy, the stock market, and our understanding of the future direction for energy and transportation may all be on the brink of major changes .  This letter will open a discussion of these ideas. 

A Very Tough Month

Before turning to the future, I must confess that the immediate past month was  most painful for the EIS portfolio.   Oil prices hit a violent downdraft in July, which especially impacted my “options on futures” strategy.  It declined in value by about 33%.  Since the purpose of these options is to provide portfolio …

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The following report from Asia Times Online points to another example of strategic trade by China.  “Looking to fill the vacuum created when the Russians returned home from the five former Soviet Central Asian republics of Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkmenistan, and the roubles dried up, China is now making moves to become the new Central Asian superpower.”

China’s interest in these poor Muslim countries is primarily their fossil fuel resources.  Once again we see China wrapping up a supply of oil before it can hit the …

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A well-respected Dutch consultancy supported by substantial corporate interests including Shell has issued a report that warns of severe oil price shocks starting in 2010.  As my readers know, I have been suggesting a similar time frame for severe oil shortages based on my reading of predictions for supply constraints by many analysts and by the Wikipedia Megaprojects works. I have not analyzed the report in depth but my reading of the summary found aspects that were confusing.    For example, the report blames Mexico and Russia …

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  China’s Power Crisis Deepens as Coal Supply Dwindles (Update1) By Wang Ying July 29 (Bloomberg) — China, the world’s second-biggest energy consumer, is facing a deepening summer power crisis that may persist into the winter months, the nation’s dominant electricity distributor said. State Grid Corp. of China, which more than 1 billion people rely on for power, said electricity shortages have worsened because of inadequate coal supplies. Forty-six percent of the power stations connected to the distributor’s grid have coal stockpiles below the “caution line,” or …

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As I’ve previously written, I think British analyst Chris Skrebowski has as good a handle on likely future supplies and demand for oil and gas as anyone in the West.  Among other things he keeps a record of planned production of all major new oil fields as they are announced, giving us a good look forward  for about 5 - 7 years at oil supply. Skrebowski is Consulting Editor of Petroleum Review.  In the July issue he says the following about the price of oil and where …

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Below are posted some thoughts about  near to medium term economic conditions.     On the one hand, a top Citibank official forecasts declining home prices through 2009 in the U.S and England.  That is an important forecast, if it proves correct. Since declining real estate prices is the single most important driver  of risk to the solvency of financial institutions - banks and brokers - the prospect of another 18 months of lower real estate prices does not bode well for either the economy or stock prices in general.  It is hard to see stocks rising …

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This Winter could bring a good deal of economic strain to the roughly 8 million homes heating with oil.  The cost of natural gas heat is less than half that of oil, so that should push a fair amount of conversion from oil to gas.  Last year, about half of all U.S. households, 54 million, heat with gas.  As the report below from the Wall Street Journal states, “I don’t see any way to make the numbers work for middle-income people,” he says, adding, “They’re already …

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In the 1980’s it took almost 14% of disposable income to fuel one’s car for 15,000 miles per year.  Now it takes about 7%.  Granted that is up from 3% a few years ago, but it still is not enough to be anywhere near what American’s endured in the ’80’s.   The following very insightful analysis by Mark J. Perry with important help from Warren Meyer is well worth one’s time to read and then ponder. 

Yesterday’s …

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A prominent economic commentary web site believes that the combination of the housing downturn and high oil prices will cause an economic recession in the U.S.  It certainly seems like the stock market is in agreement. I would note, however, that most economic data fail to account for the greater fuel efficiency of the latest batch of cars being bought.  For people with a Prius, the cost of going 15,000 miles a year is actually a good deal less than the average American paid last year and even …

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Jeff Rubin, the Wall Street oil analyst who is closest to getting the reality of oil in my opinion, published this piece recently.   He predicts an average oil price of $150 in 2009 and $200 in 2010.  He also says 10 million Americans, mostly poor Americans, will give up owning a car by 2012.  I believe that would be called “demand destruction.”

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  WASHINGTON (Reuters) - Surging food and fuel prices have pushed some countries to a “tipping point,” the head of the International Monetary Fund warned on Tuesday, threatening hard-won efforts in many African countries to stabilize their economies. “If food prices rise further and oil prices just stay the same, then some governments will be unable to feed people and at the same time maintain stability in their economy,” said Dominique Strauss-Kahn, managing director of the IMF. “They need good policy options and they need help from the international community,” …

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Here is a comprehensive essay on the history of oil prices and a reasonable attempt to forecast them.   It come from The Oil Drum’s Australian Bureau.  Readers will find a number of similarities to my recent essay in Newsletter #16.  But it covers some additional ground using only a few well chosen charts.  I cannot recommend strongly enough that you read it. One of the interesting assertions in it is a Goldman Sachs estimate that current oil prices have reduced global oil demand by 5 …

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IMF warns of threat to poorer nations By Javier Blas in London Published: July 1 2008 22:30 | Last updated: July 1 2008 22:30 The rise in food and oil prices could “severely weaken” the economies of up to 75 developing countries, including Pakistan and Indonesia, the International Monetary Fund said on Tuesday in its first broad assessment of the crisis. Dominique Strauss-Kahn, IMF managing-director, warned that some countries were now at “a tipping point” because of the double impact of rising food and oil prices. He …

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If I were asked to recommend an energy advisory team for the next President I’d start with Robert Hirsch.   Hirsch is a defense planning expert who has headed up major consulting assignments for the Defense Department among other clients and in 2005 published a major study of the impacts and potential mitigation of Peak Oil.  It famously forecast that a successful transition from oil dependency would need to start 20 years before oil production peaked. In the interview below published on a web site operated by Allianz, …

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According to this report (reproduced below) Italy has instituted a windfall profits tax on its domestic oil companies with the proceeds to be given to the poorest consumers.  I’d prefer to see an across the board tax cut, given that everyone consumes oil products on a more or less equal basis.  Regardless of the details, though, I suspect that Italy is only the first of what will be many countries that will follow this path.  I know this tax model horrifies some of the more radical free market …

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