This from Sovereign Society:

The “Elastic Rubber Band” theory is a popular investment term to describe wide price swings in asset markets. Market moves are usually exaggerated on both sides of the trade and this year’s volatility in oil prices is a testament to that swing.

In a bull market, trends tend to rise far above anyone’s boldest predictions while the same is true when a major reversal lends to big price declines. Could anyone have possibly predicted crude oil would be trading at $35 six or even twelve months ago?

Now oil producing countries are looking to arrest a crash in oil prices – down a formidable 76% since peaking in July at US$147 a barrel. Oil now trades at a 4-year low and is down a dizzy 62% in 2008 – its first calendar year decline since 2001. In late 1998, amid the Asian economic crisis and the Russian debt default, oil prices bottomed at US$10.50 a barrel (see above chart).

Is it possible we’ll see US$10 oil again? I don’t think it will happen, barring another Great Depression.

Global governments are in the midst of the greatest expansion of credit in modern history. As liquidity eventually finds its way back into credit markets and lending commences once again, commodities, including oil, should find a bottom. That’s what happened in 1998 as the Asian economic crisis ended; ten years later, oil is still trading 233% higher though down a mind-boggling 76% from its all-time high in July.

O.P.E.C. (Organization of Petroleum Exporting Countries) announced production cuts of 2.2 million barrels per day this week to stem the rapid decline in crude. With the global economy now either in recession or heading into a serious period of economic contraction in 2009, demand for oil and other distillate products has declined sharply since September. China, the largest importer of most raw materials and the world’s third largest importer of oil, saw exports decline in November for the first time in years.

It would seem logical to assume that oil prices have clearly overshot to the downside at this point. I would imagine most of the decline in global demand has already been priced into oil at $35 a barrel. The fact is, global long-term supplies are not being replaced by annual production, with most oil fields now in decline.

Only several months ago, the world stood at a net deficit of about 2 million barrels per day or, roughly, 86 million barrels of demand per day against supplies of 84 million barrels. Now that gap has not only narrowed but, in the span of just three short months, has turned into a gusher as supplies overwhelm producers.

It’s unlikely that a new bull market is taking hold in oil any time soon. We’ve just had a bust. Yet it would be a mistake to dump oil and the energy stocks at this point after huge declines since July. If anything, this is the time to buy oil ahead of aggressive U.S., European, Chinese and Japanese economic stimulus in 2009. If history is any guide – the Asian experience ten years ago, a depression by all accounts, eventually saw oil bottom at a ridiculously low level – it’s hard to believe we’ll see $10 oil again.

Source: Elastic Band Theory Stretches Oil Price Crash

This from Whiskey & Gunpowder:

Lately I’ve been discussing concept of scarcity in the energy and natural resource sectors. In one recent note, I discussed how the idea of scarcity has transformed from a “geological” basis to an “above ground” basis. In another note I discussed how the financial system of the world has broken down. This breakdown has damaged many a portfolio. But I still believe that an investment focus that is based on future scarcity of energy and mineral resources is basically correct.

In the future there will still be profound restraints on the availability of energy and natural resources. So owning shares in firms that “do energy” or “do resources” is still a good idea over the medium and long term.

We Still Have a Big Problem

We still have a big problem. The credit system is broken (and that’s the nicest thing you can say about it). Many large banks in the world are broken too (ditto). The investment model of the modern era, starting back in the 1860s during the U.S. Civil War, has almost ground to a halt. That is, the idea and method of “floating capital” is not functioning. Indeed, capital no longer seems to float. Actually, it seems like capital has been sinking like a stone.

The lack of capital (at least, in the forms that we’ve come to utilize it for large scale investments) means that it is difficult – impossible in some cases – to go forward with the new energy and resource projects that are designed to mitigate the present depletion’s in older oil fields and other resource provinces.

In the face of this, most governments of the world are trying just to look good for the TV cameras. Central banks and government treasuries across the world have been reduced simply to throwing money at whatever problems catch their collective eye. Squeaky wheels get the grease. So we see the national treasuries “recapitalizing” busted banks. We see the likes of the U.S. Big Three automakers coming hat-in-hand to Congress for a bailout, and Congress in turn acting like it knows how to run a sophisticated manufacturing business. And we hear announcements, from China to the U.S., of massive new public works programs to get the world moving again.

It’s like if we pour enough concrete, and then everything will turn out all right. Somebody ought to ask the Japanese about that. They all but paved the island of Honshu in the 1990s, and still lived through a stagnating era.

Can things really turn out all right? Can we return to some happy past? As Heraclitus once noted, “You cannot step twice into the same river, for other waters are continually flowing on.”

Prosperity Stolen from Fort Knox

Indeed, all rivers flow to the sea. In Asia Times Online, the always insightful Henry C. K. Liu recently wrote that the credit crash has “turned out to be a catastrophic, global, financial perfect storm of unprecedented dimension that will cause serious structural damage to all market economies around the world. It may even spell the end of the cowboy finance capitalism of the past two decades in which risks are socialized and gains privatized, with debt manipulated to act as phantom capital.” Yep.

A fellow Pittsburgher, financial writer Jim Willie, is even more pessimistic. He thinks that in 2008 the U.S. economy and financial structure suffered “mortal wounds.” Jim states – using a very clever turn of phrase (I wish I’d said this) — that a “decade of prosperity was stolen from Fort Knox.” That is, major elements of U.S. monetary policy in recent years involved the gold carry trade enacted by the U.S. Treasury in the 1990s.

What is the gold carry trade? The U.S. Treasury and Federal Reserve treat the details like state secrets. But what has leaked out makes for a sordid story – treasonous, even. It’s enough to make you wish that we still executed people by firing squad in this country. Let me put it this way. Perhaps President-Elect Barack Obama thinks that his biggest surprise will come when he gets “THE briefing” and finally learns what is really out in the tightly guarded hangars near Groom Dry Lake in Nevada (a/k/a “Area 51”), and Dugway Proving Ground in Utah. Well just wait until Pres. Obama asks how much of the original Fort Knox gold still remains the unencumbered property of the U.S. government. Surprise, surprise.

The Wolf is At the Door – Say Hello to the Nice Wolf

In 2008 we all experienced the destruction of a world-wide credit bubble. This was the end of many decades of dollar-abuse and monetary malpractice by the U.S. Federal Reserve and the utterly profligate U.S. government in general. As Gresham’s Law states, “Bad money drives out the good.” And decades of bad money did not just drive out the good stuff. In turn it sowed the seeds of its own destruction.

It was just a question of time before the wolf showed up at the door, and that time has arrived. Say hello to the nice wolf. So now it’s time to face the fact that the U.S. economy is in far worse shape than most people believe. And it will be in bad shape for a long time to come. If everything goes right, it might take a generation to clean out the stables.

But we are already off to a bad start. The 2008 credit meltdown has caused huge collateral damage. And in 2009 we will see an extraordinary attempt to re-inflate that bubble. Will it work? Probably not like people expect.

The traditional financial system is now in the fight of its existence. The system was based on U.S. dollar hegemony and the supremacy of U.S. national power. That, and the way that the U.S. benefited from ingrained habits of foreign monetary authorities kowtowing to Washington based on decades of living with Bretton Woods and its ghosts. It all hit the wall in 2008. But like the creatures in the Aliens movies, these critters won’t stay dead for long. The Wall Street/Treasury Axis will come back to fight hard and play dirty.

Things to Do to Ensure Your Security

I believe that the old system is irretrievably doomed. But you cannot replace something with nothing. There is still no “new” system that has come around to take the place of the old one. Thus the big task for 2009 is to save your personal wealth from going down with the ship. So how do you ensure your security?

In the short term you can protect your financial interests by increasing your cash position as a percentage of your assets. When all else fails, add to cash. Yes, we will probably see inflation in the future, but for now more cash is better.

Also, in anticipation of inflation you should own physical metals like gold and silver. I mean it. I’ve said it before. OWN GOLD! And I mean OWN THE METAL. Take delivery! Maybe I sound like the Mogambo Guru on this, but he’s right. Let me quote Mogambo. “Own freaking gold!”

And get out of any but the very best shares. The first requirement for share ownership is to look for companies with enough cash to fund operations and make it through some very lean times. Then you also want to invest in firms that are going to be important in the world that’s coming down the tracks.

What kinds of firms will be important? Well, energy and resource firms for starters.

Source: Falling Prices and Scarce Energy

We believe this is another body blow to the ailing green industry, as Washington taps a source of energy with huge potential returns. Moreover, president-elect Obama has hedged his bets on oil shale – perhaps surprising many green advocates.

On October 27, 2008, Obama told supporters in Denver…

“When it comes to oil shale right now, I think we have to do more research and more science to discover whether or not the amount of oil that would be generated would justify what would inevitably be some disruption of the landscape here in Colorado…Colorado is blessed with a lot of natural resources.”

By opening up 1.9 million acres of federal land in Wyoming, Utah and Colorado, the U.S. could be looking at an additional 800 billion barrels of oil, according to the Department of the Interior. That’s three times more than Saudi Arabia’s proven oil reserves.

More than 70% of American oil shale is on federal land. It’s mostly in Colorado, Utah, and Wyoming. More than 50 tar sands deposits are found in eastern Utah, containing an estimated 12 to 19 billion barrels of oil.

Since oil currently trades at about $50 a barrel, down from nearly $150 a barrel this summer, the economics of shale may not make financial sense today. However, oil prices will inevitably rebound, and if they surpass $60 a barrel then oil shale becomes viable.

Where Obama may hurt oil shale is in the environmental impact of production. Squeezing oil out of rock requires tremendous amounts of water. The process also spews a lot of greenhouse gasses (but so does ethanol).

If Obama stays the course on Bush’s oil shale policy, the place to put your money would be in new oil-shale technology. There would be a scramble to produce oil shale with cleaner methods, although the impact remains unknown so far on the ultimate price per barrel.

But for investors, oil shale could present a much larger bonanza than green.

This from Rude Awakening:

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances. And these “other kinds” tend to be very expensive to develop.

There are many different kinds of hydrocarbon molecules in the world. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I’m just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the non-oil forms of carbon is the cost of converting it into a viable fuel. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input — all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel.

The tar sands are full of hydrocarbons, but they are not inexpensive to extract. The same goes for every other non-convention hydrocarbon source.

The nearby chart shows the total hydrocarbon resources in the world and the relative costs to convert them into a barrel of oil or oil equivalent. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time…at a price. But that price will almost certainly be more than $60 a barrel…much more.

Source: $60 Oil…And Why it Won’t Last

These are the words of retired Marine General James Jones, the president of  21st Century Energy, the group behind the recent open letter by 27 U.S. political elders to both presidential candidates and every member of Congress saying the U.S. faces “a long-term energy crisis.”

There’s two ways of looking at it. Oil-rich nations are getting rich at the expense of the U.S. thanks to sky-high crude oil prices, says energy investing expert Byron King.

In June, as you know, the price of oil just rocketed up (as the dollar fell). I follow oil like a hawk, and even I was astonished at the pricing trajectory. I really thought that profit taking and the general negative impact on the world economy would have to slow down oil’s rise. But no, oil kept moving up.

I kept wondering… Who the heck is buying this oil? Are you broke yet?

But somebody is buying the expensive oil, and we are in the midst of the greatest transfer of wealth in history. Entire nations are being impoverished. Other nations are being enriched beyond their wildest dreams.

Rising energy prices, and the related transfers of wealth, are among the great strategic movements of our time. Since the dawn of the oil age, we in the U.S. have had some semblance of control over energy prices. Heck, at one point, prices were so low that the state of Texas empowered the Railroad Commission of Texas to stabilize prices.

It’s a long story, but the West has, more or less, always had a handle on energy prices, even in the face of OPEC, over the last 40 years or so. At the end of the day, the West could have faced down the major oil exporters and kept some sort of lid on the upside of energy pricing. Not any more.

The people who sell oil are, of course, more than happy to take our money. They are ecstatic, truth be told. In a matter of a few years, Western energy demand is moving the wealth of many generations into new hands. Some nations are getting rich, while others are getting poor — fast.

A few years ago, Russia was a post-Soviet basket case. Now the Russians are buying up much of Western Europe.

A few years ago, the United Arab Emirates was a dusty backwater. Now the UAE is becoming a world destination, and its sovereign wealth fund is buying the Chrysler Building in New York.

Meanwhile, expensive oil is breaking the backs of the middle classes in the U.S. and many other countries. Wait until next winter, when millions of households in the U.S. and Europe cannot afford to heat their homes. Ugh!

And world economic growth is stalling as oil prices rise. So it really seems as if the rising prices have to moderate. This is what happened in the first couple of days of this week, with oil trading down, from $145 to $136 per barrel. Finally, a breather. Whew!

Source: Rising Energy Costs and the U.S. Economy