Expected by whom? How many experts predicted $37 a barrel oil in December 2008 last summer when it hit $140 a barrel? Has the worldwide recession bottomed out, or are we in for a decade-long depression? Darned if I know.
Expected by whom? How many experts predicted $37 a barrel oil in December 2008 last summer when it hit $140 a barrel? Has the worldwide recession bottomed out, or are we in for a decade-long depression? Darned if I know.
The Truth Hurts
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This means that the price of oil, diesel, petrol, food, milk, clothes and pretty much everything is going to go higher. This will force people to make choices about where they spend their money which will mean certain businesses (95% of all businesses which are non essential) will suddenly have less customers. Many will go bust or at least offload significant number of employees. These employees will default on their home, car and credit card loans. These defaulted loans will further impact the banks and other lenders and expose how over leveraged they are as we have already witnessed with recent bank troubles. All of this at a time when the global economy is already struggling and money is being printed like crazy. In short our global economic system is not going to survive because it is based on growth.
It is based on growth because who in their right mind would knowingly invest in an airline (as an example) when they know that prices for oil are going through the roof (over $150 at least, likely higher though)? Who would invest in a bank when they know that there are going to be so many more defaults on home loans, credit cards, car loans etc which will likely bring down even more banks? Who is going to invest in a toy company when people are going to be tightening their belts and letting their kids play with less toys or hand me downs? Who is going to invest in any business which is likely to collapse when people shift their spending habits from "wants" to "needs", not by choice but by sheer necessity?
The moment it becomes common knowledge that the global production rate of oil is declining no matter what we do in terms of more drilling and tar sands etc nobody is going to invest in any company that isnt going to grow because of higher oil prices (pretty much all companies!). Why invest in something that is going to lose money? Why would you invest money into a company even if it didnt decline but didnt grow either? Investors look only to invest where there is likely to be an increase in share price not stagnant or decreasing share prices.
macdoc
Philosopher
Few predicted a massive recession - that's really not a factor in this as demand is down due to a slow economy and that last spike was speculative to a large degree.
http://www.arabianbusiness.com/542255-energy-chief-predict-100-oil-between-2010-2015
$100 oil does not take into account the US dollar devaluation that is pretty certain. That will spike it up in the $200 range as the economy picks up again.
$100 plus is best all around as it sets a level for getting fossil free by 2025 as Sweden has committed to.
Saudi Arabia cannot tolerate low prices as they will go into deficit ( yeah hard to believe
) will be forced to cut production.
Interesting times.
http://www.arabianbusiness.com/542255-energy-chief-predict-100-oil-between-2010-2015
$100 oil does not take into account the US dollar devaluation that is pretty certain. That will spike it up in the $200 range as the economy picks up again.
$100 plus is best all around as it sets a level for getting fossil free by 2025 as Sweden has committed to.
Saudi Arabia cannot tolerate low prices as they will go into deficit ( yeah hard to believe
) will be forced to cut production.Interesting times.
macdoc
Philosopher
Nah - growth is NOT a prerequisite at all for a vibrant economy.
Better has a huge role to play and many businesses like mine are designed around a steady state without growth.
Your view is that of the next quarter MBA who is trying to pump stocks.
A hydro facility does not need to grow
A baker and butcher even a candlestick maker does not need to grow.
Some farms have been in a steady state for a century or more - they don't need to grow.
You are in frontier mode.
As for airlines - they will be the first two switch to bio-fuels - they already are as they have a small fleet and and easy transition and the money to go and do it.
Greentech is the next bubble and it will be huge - you might want to consult one of the more successful VCs on the planet about that.
http://earth2tech.com/2008/03/24/john-doerr-how-greentech-investing-adds-up/
http://www.redherring.com/Home/18901
It's the very first self financing bubble and there is more VC money chasing Green projects than there are opportunities.
High oil provides enormous opportunity. There is $5-10 billion a day in oil revenues flowing right now.......slicing any % of that off is a winning strategy.
GE and Siemens do it by retrofitting multiple dwellings and other energy reduction strategies....both have big divisions.
If oil goes to $200 then an PHEV or high tech diesel is self financing the savings in transport is more than the financed cost of the new vehicle. That already happened in some cases in the last spike.
Look at Denmark jumping on wind energy and creating a huge industry and income.
China is lining up big time to make billions in Greentech.
And indirectly - Saudi Arabia is funding it's own demise.
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The Truth Hurts
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Whilst I cannot claim that I picked the price of oil dropping to $37 per barrel I can explain what is going on... I will be as brief as possible.
Basically as per my previous post oil prices shot up because global oil production rates plateaued at approx 86-87 million barrels of oil per day from 2005 till 2008 rather than increasing like they had in previous years. This mean that the global oil production rate did not keep up with global oil demand as the world economy grew. Thus, there was not quite enough for everybody so someone had to miss out on oil. How do "they" work out who misses out? Simple, it is an auction whereby we all have to bid for the oil and richer countries simply outbid poorer countries for the oil hence the price of oil rising from $100 in Jan 08 to $147 in July 08. This high prices causes massive upheaval to the global economy (see my previous post) and thus as companies go bust or wind back production this is called "demand destruction". Less need for oil so supply/reserves increase and ensures demand is easily met and the auction process means the price drops.
The thing is that global oil production is at peak which means that it is about to decline remorselessly. The International Energy Agency just within the last month or so released a paper stating that they believed the decline rate for global oil production would be 9.1% per year!!!!! This is scary stuff! They went on to say that if the right investment into oil was made the decline rate could be reduced to 6.4% per year! Which is still very scary!
To give some perspective on what a global oil production decline of 6.4% would mean... check out what happened back in 1973/74 after the Yom Kippur War where the US assisted Israel in defeating Eygypt and Syria and OPEC (Organization for Petroleum Exporting Countries) decided to stop providing oil to the US. That was a small shortfall of oil but caused a massive economic shock to the world.
Do you have a link to this?
There are some mitigating factors. Attempt to decrease greenhouse gas emissions are one, as are rising fuel economy standards on US cars and the development of alternative energy sources. If oil production is really going to drop 9% per year any competently run company is going to be seeking alternatives.
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I am not yet able to properly post URLs but I am able to provide them in streched out format. Just take the spaces out and it should work. It is a Financial Times article...
h t t p : / / w w w . f t . c o m /cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658,dwp_uuid=f2b40164-cfea-11dc-9309-0000779fd2ac.html?nclick_check=1
Unfortunately the problem is that our global economy is so reliant on cheap oil that if it does decline anything like 9.1% or even 6.4% it will be catastrophic and no company will be in a position to utilize green technologies.
To be honest you should check out Chris Martenson's website Crash Course and do his crash course as it explains way better than I could why oil depletion is such a big deal. It deserves your attention!
However, you can only take a horse to water.... so good luck either way.
h t t p : / / w w w . f t . c o m /cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658,dwp_uuid=f2b40164-cfea-11dc-9309-0000779fd2ac.html?nclick_check=1
Unfortunately the problem is that our global economy is so reliant on cheap oil that if it does decline anything like 9.1% or even 6.4% it will be catastrophic and no company will be in a position to utilize green technologies.
To be honest you should check out Chris Martenson's website Crash Course and do his crash course as it explains way better than I could why oil depletion is such a big deal. It deserves your attention!
However, you can only take a horse to water.... so good luck either way.
timhau
NWO Litter Technician
Do you know how annoying trying to edit out those spaces was? I gave up and retyped the header.
For others interested I fixed it in the quote.
I would like to see the details of the report. 9% seems awfully steep.
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Sorry about that gdnp. A few more posts and that wont be a problem anymore...
9% is scary deep. I have been a Peak Oil Doomer for 3 years now and am pretty much expecting the worst however 9% was alot higher decline than I nor most other PO Doomers predicted.
The worrying part is that the International Energy Agency has been notorious for predicting peak oil in 20 or 30 years time so for them to turn around with this report and say there is actually a problem and it is worse than most expect is concerning because it flys in the face of what they normally claim.
9% is scary deep. I have been a Peak Oil Doomer for 3 years now and am pretty much expecting the worst however 9% was alot higher decline than I nor most other PO Doomers predicted.
The worrying part is that the International Energy Agency has been notorious for predicting peak oil in 20 or 30 years time so for them to turn around with this report and say there is actually a problem and it is worse than most expect is concerning because it flys in the face of what they normally claim.
Er,... yes. This is called "inflation" and we've known about it for some time. It's not exactly a new concept.
Er, no. It means that the price of everything is going to go higher, that's all. The businesses that people need will raise prices accordingly, which in turn goes into a general wage increase, and we end up with a substantial increase in prices all around.
Yes. All this is happening now, even without expensive oil. It's called a "recession," and again is old news.
No evidence of that so far.
Someone who expects the airline to be able to turn a profit, either because of a better business model or better route structure, someone who recognizes that there will still be demand for airplane flights.
And someone who recognizes that the worst thing to do in a time of inflation is to simply put their money into the mattress, where it will not generate any income at all.
Same person. The one thing you can't do is invest in "nothing" in times of inflation.
And I still haven't seen where "growth" comes into it. A company with a steady ROI of 3% on its money doesn't need to grow to be a worthwhile investment. Indeed, companies that are getting smaller can be worthwhile investments as long as they're still returning money -- for example, by "focusing on the core business."
Because it pays money in dividends. In fact, dividend yield has been the major source of income from stocks for most of the history of Wall Street; it's only in the past twenty years or so that you've seen major companies that refuse to pay dividends in an attempt to raise stock prices.
Not by coincidence, this is about when executive compensation in the form of stock options started to really take off. "Growth" isn't about returning value to investors, but about inflating executive compensation, since it gives them more "free" money through their options.
This is simply wrong. There are literally thousands of mutual funds -- and millions of investors -- who invest where they are likely to get a good return on their money through dividends and current income.
macdoc
Philosopher
Excellent post.
We'd be far better off is stocks WERE based on dividend return rather than speculative multiples of earnings where buyers expect a larger stock valuation as their "return".
In my view due to the fractional lending banks should NOT be allowed to lend for stock purchase - especially on margin purchases.
They should only lend against new wealth ( a mine, building, vehicle etc ) to keep M3 matched to economic activity and real economy wealth creation.
Between fractional lending and speculative margin buying it created an enormous house of cards where real wealth and wealth creation was almost ignored. ( China being an exception ).
We'd be far better off is stocks WERE based on dividend return rather than speculative multiples of earnings where buyers expect a larger stock valuation as their "return".
In my view due to the fractional lending banks should NOT be allowed to lend for stock purchase - especially on margin purchases.
They should only lend against new wealth ( a mine, building, vehicle etc ) to keep M3 matched to economic activity and real economy wealth creation.
Between fractional lending and speculative margin buying it created an enormous house of cards where real wealth and wealth creation was almost ignored. ( China being an exception ).
So you say.
Here's what the IEA say: Global oil production increased in 2006. It increased again in 2007. It increased again in 2008.
http://omrpublic.iea.org/World/Table1.xls
http://omrpublic.iea.org/world/wb_wosup.pdf
What plateau? If your claims are based on fiction, why should we consider them any further?
Why? The long international leg of delivery is often the most fuel-efficient by far. Shipping goods thousands of miles from China to a major rich-world port often consumes much less fuel than carrying the goods from a port to a retailer.
There's even less fuel burnt when services are traded across borders. How much do you think oil prices affected the call charges for my last conference call (or email)? Perhaps if oil prices increase 20% or 50% then call charges will rocket so high that I can only phone or email people in the same country?
How do you expect "localisation" will work? Perhaps you think fuel consumption will fall if we set up duplicate factories & offices in many locations around the world?
Edited to add: The two main engines behind globalisation have been lower trade barriers and efficient means of long-distance communication. As far as I can tell you're not proposing to turn the clock back to small steamers and shortwave radio; nor are you proposing that tariff barriers go back up. So how would a change in the price of one input (which is common to both global and local economic activity) put the globalisation toothpaste back in the tube?
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We'd be far better off is stocks WERE based on dividend return rather than speculative multiples of earnings where buyers expect a larger stock valuation as their "return".
Not really. Stock prices are based on both growth and earnings, as you might expect. If AAAA is returning a steady $1.00/share in dividends, then it's worth less than BBBB which is returning $1.00/share in dividends and is expected to grow by 10% into the foreseeable future. For this reason, BBBB will probably trade at a higher price per share.
Earnings growth makes stocks more valuable. Even CCCC, which pays next to nothing in dividends, might be valuable if it's expected to grow enough.
Huh? So, if I borrow money to buy a car, which is expected to depreciate to zero value over the next ten years, that's good and the bank should lend it to me. If I borrow money to pay for my daughter's wedding, which returns nothing but happiness to my family, the bank should do it? But if I have an investment opportunity that will make me a fortune and I want to buy lots of shares, the bank should forbid it?
No, what created the enormous house of cards was lending money to people who couldn't pay it back. Which shouldn't be done, regardless of purpose. But on the other hand, if you want to borrow $5000 to spend an evening snorting coke off a hooker's tatas, and are good for the money, why should the bank stop you?
rjh01
Gentleman of leisure
Interesting links. From the first link
World oil supply
Year Oil supply % increase
2005 - 84.6811
2006 - 85.5319 1.00%
2007 - 85.6001 0.11%
2008 - 86.7532 1.31%
2008 is the first 3 quarters only
In short world supply is increasing at a very low rate. During this time (until mid 2008) oil prices were going up fast. Yet oil supply was hardly going up at all. What is the world GDP growth for those three years? I know for China it is huge. About the only thing that stopped oil prices going even higher was that the economy stopped growing in USA, followed by the rest of the world.
Edit. The units are Million barrels / day
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The Truth Hurts
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Thanks for pointing that out rjh01, it is pretty much how I was going to reply.
bobrayner, as you have seen by rjh01's post, you are correct in saying that global oil production has increased however this increase has been insufficient when compared to global economic growth (and associated oil demand). This is why oil prices rose so sharply in the first half of 08. Thus, you should consider my claims further as they are not based on fiction they simply require appropriate investigation and understanding.
bobrayner, as you have seen by rjh01's post, you are correct in saying that global oil production has increased however this increase has been insufficient when compared to global economic growth (and associated oil demand). This is why oil prices rose so sharply in the first half of 08. Thus, you should consider my claims further as they are not based on fiction they simply require appropriate investigation and understanding.
You misinterpreted what they wrote. Here's the relevant quote from their fact sheet:
That's old news -- that says that after we've pumped a lot of the oil out of THIS particular hole, we can't get much more our of it. So we have to move to another hole, which is where the idea of "reserves" comes from. In their words, "The world’s endowment of oil is large enough to support the projected rise in output, but rising oilfield decline rates will push up investment needs. Proven reserves of close to 1.3 trillion barrels equal more than 40 years of output at current rates; remaining recoverable resources of conventional oil alone are almost twice as big."
So we need to dig more holes. No surprise, really.
Their actual prediction for world oil production is that it will continue to increase, relatively slowly : "World oil production, net of processing gains, is projected to rise from 82 mb/d in 2007 to 104 mb/d in 2030."
So you don't really need to worry about being hit by a piece of falling sky.
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We all may know about inflation however we are all very new to hyperinflation which is what is likely to happen as the Fed and US Tresury attempt to solve this credit crunch (triggered by peak oil and bad financial practices) by printing more money out of thin air.
Are you kidding? Do you honestly think that as prices of consumables go higher that those businesses will pay their employees more? Maybe in "normal" inflationary times however when the price of toys made from oil and imported from China go up because the price of oil has tripled the toystore will have to raise its price in order to make the same profit it made prior to oil prices rising. There is no profit to pass on. If anything there is less profit as consumers decide to buy something else smaller for their children to play with or start doing the old hand-me-down second hand option. This situation is not good for the toy store or their employees who would likely be let go as the business scales down and attempts to outlast its competitors in the recesion.
It is a recesion now, but because it is the start of energy decent brought about by the relentless decline of global oil production it will eventually be labelled a depression, then the 2nd Great Depression, then they will have to come up with a new name every year as the world adjusts to life with less and less available or affordable liquid fuels and plastics.
That someone will be pretty lonely investing in an airline when oil is $200 a barrel. Especially when there is indisputable evidence that global oil production has peaked and it is clear that the worlds economy is going into permanent recession (opposite to growth) due to inaddequate or unaffordable liquid fuels.
Investing in nothing and holding cash is not very smart I agree however there are things that can be invested in which will bring a return or at the very least preserve your wealth during this downturn and it isnt toy stores or airlines. You can invest in physical precious metals (paper investment is risky), you can invest in companies which are involved with the set up and maintenance of oil rigs or special oil refineries which are able to process heavy sour crude oils as these are the dregs of most declining oil wells and will be what is available. Sweet light crude is becoming a thing of the past.
Most companies during this economic downturn will not be returning profits, they are going to be doing everything they can to hold on. They are offloading jobs to save money, they are merging to save money, they are declaring ever greater losses. Even Toyota recorded its first financial loss in over 70 years! Everyone is currently hanging on by the skin of their teeth waiting for things to settle down and for credit to become more available and confidence to return... unfortunately due to the fact we are about to enter energy decent brought about by the peaking of global oil production there is going to be more bad news for our global economic system and it is not going to handle it well. When peak oil becomes an indisputable fact after 2 or 3 years of declining global production and ever increasing price for oil, investors are going to realise that most businesses are not a sound investment. This is when it gets ugly.
The Truth Hurts
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The International Energy Agency are not able to report the truth about peak oil because if they did it would collapse the global economic system very quickly. They have the authority behind them to be believed when they say something because they are the International Energy Agency after all. If you cant believe them then who can you believe right? So if they reported the truth that the world is now at Peak of oil production and that every year there is going to be less oil many many investors are going to believe them and will act accordingly by removing their investments from industries which are high oil consumers or likely to become obsolete in a severe ongoing downturn. Unfortunately there are not many essential businesses and most businesses these days make their money because people have so much disposable income.
I will dig up some info about the IEA and their predictions which will enlighten you about their ability to predict and post the link or past the charts here shortly...
I will dig up some info about the IEA and their predictions which will enlighten you about their ability to predict and post the link or past the charts here shortly...
Which would be more likely to collapse the global economic system: an accurate prediction of a coming catastrophic event that would allow people to prepare, or lying about it so that people are hit unaware?
As an analogy, which would cause more damage and loss of life: warning people that a Cat 5 hurricane was going to strike in 3 days so they could prepare, or lying to them and telling them that everything was fine?