Not to crunch too many metaphors right here at the top, but a consensus seems to be firming up in the animate jello of the Internet that we have entered the Season of the Witch. An odor of ripeness fills the virtual air — something between dead carp and apples baking.

Whatever else appears to be going on in the upper stories and verdigris-tinged turrets of capital finance — currency rackets, gold switcheroos, interest rate arbitrage games, concealment of losses under rugs and behind curtains, Chinese fire drills performed by Spanish prisoners, executive three-card-monte set-ups, boardroom work-arounds, accounting quicksteps, Peter-to-Paul-shuffles, check kitings, pigeon drops, Ponzi schemes, hugger-muggers, bezels, shucks, jives, and enough monkeyshines to make Lord Greystroke cry for mercy — apart, in other words, from business-as-usual, such as it is these days, on Wall Street, there is a rising collective sense of anxious expectation that things are about to shake loose in the sad-ass shell of what remains of our economy. And the most perplexing part is that there hardly seems any safe place to preserve one’s savings.

The showmen over at the Financial Sense website, have put on an excellent month-long series of interviews and debate podcasts between leading inflationistas and deflationistas — Daniel Amerman, Peter Schiff, Robert Prechter, Mark Faber, Michael “Mish” Shedlock, Harry Dent — and after weeks of sedulous listening I still remain flummoxed as to where to stash the dwindling cash.

Harry Dent was a curious case in point this week. He has made some howlingly wrong calls before (e.g. in 2006, predicting a Dow 40,000 at the conclusion of the post-2001 bubble). Perhaps he missed the crack-up aspect of the most recent boom. He did not foresee the long gruesome meltdown of late 2007 to March 2009, or rather, his timing was off, since he called for the commencement of a new Great Depression in 2010. (And I hasten to insert here that my own timing of events has not been so great either.) Anyway, Dent sees a “winter” of finance and economy looming from here forward, characterized by extreme deflation, based on his view that the amount of private debt going bad (est. $40 trillion) far outweighs government’s ability to create new “money” (a few measily trillion) and hence that there is no chance in hell we’ll find ourselves in an inflationary situation for some time ahead. The private debt workout has to be completed first.

Most curious, though, was when the interviewer, Jim Puplava, probed Dent about his views on Peak Oil. Dent said he didn’t believe in it; that when he was in college in the 1970s (remember the OPEC oil embargo of ‘73), he learned to disregard any suggestions that we are “running out of oil.” He stated this, by the way, as a simple assertion, without any further explanation, and Puplava didn’t belabor him with arguments. But it was a weird moment. Of course, it hardly need be said that Peak Oil story has never been about “running out of oil” per se, but rather about declining flows, geopolitical management of flows, and the effects of depletion on industrial economies — in particular the effect on regular, expected, cyclical “growth” of the type that financial markets utterly depend on to power the trade in investment paper.

It is exceedingly odd that this does not factor into Dent’s thinking, because what Peak Oil inescapably does is introduce the very sobering idea of discontinuity — that is, that the game has changed radically, especially where all our assumptions about continued “growth” are concerned. In that brief exchange on Peak Oil, Dent seemed to take the position that the “winter” part of any historical financial cycle always produced “new technology” that invariably saves the day, putting this seemingly very smart man in the camp of so many techno-cornucopian triumphalists all wishing for the same outcome: that some mythical “they” will “come up with” a set of rescue remedies to keep all the cars circulating on the freeways, and all the WalMarts groaning with swag.

Like so many major league prognosticators, Dent arrives at his ideas by building models of reality, assembling “data” to create charts of trends in prices, interest rates, and especially demographics – what age group of people are buying a lot of what in which stage of their lives. The whole business seems very rational and reasonable except when you realize that it is just another “narrative” — to borrow one of Nassim Nicholas Taleb’s terms — girded with statistical justification. One can hardly fault it from a strictly procedural point of view — since, in our culture, conclusions ought to proceed from evidence — but one can’t escape the feeling that it amounts to little more than old-fashioned augury… that someone examining the entrails of a dead chicken, spread over the front page of The Wall Street Journal, might arrive at very similar conclusions. All that said, Dent was an appealingly confident personality on-the-air, the kind of authoritative voice you’d like to believe, if only it were possible.

Prechter was much the same a few weeks earlier, and he, too, foresees a darker American future, based on a different set of models called Elliot Wave principles. His forecasts derive from a picture of “social mood” as much as economic data flows. He, too seems to disregard the Peak Oil story and its implications as the master resource driving growth in industrial economies.

Personally, I am not at all sure that the Peak Oil story, or its associated general resource scarcity story, will shed a whole lot of light on the question of inflation-or-deflation. I say this because I think it is a short way down the road of depletion-and-scarcity before the major complex systems we depend on for daily life become so unstable that general socio-economic collapse ensues. After all, capital finance is only one of these many complex systems — some other biggies being food production, trade and manufacture, transportation, electric power distribution, infrastructure maintenance, the military, and governance. Inflation-or-deflation will only be symptomatic of larger failures and instabilities in these systems necessary for modern, civilized life.

All of it begs the question not only whether you or I will have two nickels to rub together, or two gold eagles, or a bundle of six month US Treasury bills, or a zillion shares of Apple (NASDAQ:AAPL), or a gainful vocation, or a roof over our heads, or a hot meal at the end of the day, or a safe place to sleep, or a country we can recognize. I’ve done my share of forecasting, with some episodes of notably bad timing. I don’t do it for grandstanding effect but to provide some basis for knowing what to do in the years directly ahead, so we can hope to construct lives worth living. I’m impatient with models, charts, and statistical analysis. Perhaps this is childish. I’d rather tell a story or paint a picture. So, I’m going to spend the rest of the week finishing the last chapter of World Made By Hand Two: The Witch of Hebron while the US economy wanders where it will.

Regards,
James Howard Kunstler

Source: Inflation, Deflation, Peak Oil and Complex Systems

It’s odd, that in his otherwise excellent blow-by-blow account (”Eight Days,” in the Sept 21 New Yorker Magazine) of the September 2008 Wall Street meltdown that left Lehman dead, and AIG croaking in a ditch, and the banking system in general functionally crippled, reporter James B. Stewart never got around to really describing the cause of it all — namely, the on-the-ground material catastrophe of American suburbia.

It was the worthlessness of the tradable securitized debt associated with all those overpriced (and overvalued) chipboard and vinyl houses, smeared recklessly over the American landscape, that started all the trouble in the first place. And it is our inability to come to grips with that underlying catastrophe that prolongs the resolution of the still-florid banking crisis — since the federal government is doing everything possible to prop up the failed capital equation of terminal suburbia, and to deny the obsolescence of that version of the American Dream and all the mechanisms for delivering it.

The suburban project was not a conspiracy by the likes of Robert Moses, Walt Disney, Frank Lloyd Wright, and President Eisenhower to produce a living arrangement with no future. It was the emergent, self-organizing result of special circumstances in a particular time and place: post World War Two America, with an immense supply of cheap oil, cheap land, and the industrial capacity to churn out all the necessary components for a car-dependent development pattern. Suburbia was spawned out of a couple of persistent themes in American cultural history: 1.) that cities and city life were no good; 2.) and that the romance of settling the wilderness could be reenacted, at great profit, in all that space beyond the towns and cities. It would be silly to deny the appeal of this arrangement at its inception. By the end of WW II, city life in the popular imagination was reduced to one potently awful image: Ralph Kramden’s apartment in “The Honeymooners” TV show.

There had to be something better than that. Suburbia was engineered as the antidote to the Kramden’s apartment: country-living-for-everybody. The evacuation of the cities to the new outlands proceeded as relentlessly as the landings at Normandy. It wasn’t until the program was well underway that the self-destructive essence of it became obvious — that every new housing subdivision killed the original rural character of the land, with the result that suburban life quickly became a cartoon of country living in a cartoon of a country house in a cartoon of the country. With additional layer-on-layer of, first, the shopping in the form of highway strips, then malls, along with the office “parks,” these places elaborated themselves into a kind of cancer-of-the-landscape, a chronic and expensive condition that Americans had no choice but to live with, because of the monumental investments they had already made in it. The discontents it produced lent it to psychological depression and dark humor, just as chronic illness does. But we were stuck with it.

Meanwhile, all the machinery of culture and politics made it impossible to construct anything differently. The exquisitely fine-tuned planning-and-zoning codes generated by the thousands of town boards mandated a suburban outcome everywhere — with plenty of help from the DOT traffic engineers, the fire marshals, and the even the mandarins of academia who trained all these professionals. As a natural consequence of all this, the disinvestment in cities — especially the older cities of the industrial heartland — continued remorselessly until it seemed as if the Second World War had taken place in St. Louis and Cleveland.

This mode of behavior persisted through the first, short-lived oil scarcity tremors of the 1970s. It was so completely embedded in the popular imagination that it had become the baseline American identity. The suburban project caught a second wind in the 1990s, when the last great non-OPEC oil fields of the North Sea, Alaska, and Siberia nullified the grip of the Islamic cartel for while, and sent the price of oil down to $11-a-barrel. Ironically, it was during those years that the warnings of “peak oil” first circulated beyond the geology offices, and it was clear to anyone who reflected on the connections that the project of suburbia was doomed.

It was also ironic, tragically so, that during this same period Wall Street began to seek some new way to make real money beyond stock and bond markets, which didn’t seem to produce wealth at all for more than a decade when inflation was factored in. By a fortuitous coincidence, the revolution in computers enabled Wall Street bankers to concoct abstruse new species of tradable paper securities based on bundles of debt that seemed to produce miraculous earnings. It had the added advantage of being inscrutable to both investors and financial regulators. Due diligence became impossible and moral hazard spread like ringworm in a dormitory. The bulk of the securitized debt originated in home mortgages and the larger result was a gigantic racket ramped up between Wall Street and the US government to conceal all the structural weaknesses of a de-industrialized US economy behind a hyperbolic commerce in the very thing that the American public cherished most: their houses, which, understandably, everybody had come to call “homes.” Wall Street might as easily have commoditized mother and apple pie – if you could sell each one for half a million dollars.

The banking fiasco still underway is at once a proxy for the larger failure of the American economy and the greatest fissure in it. Put as simply possible: we can’t service our debt, we can’t generate more debt, and the notional “capital” we thought we possessed is dissolving into nothingness. The federal government and Wall Street remain committed to supporting all the rackets associated with a suburban sprawl economy that has entered its own zone of remorseless failure. It is failing as a capital investment first, and is secondarily failing as a practical living arrangement. The two failures will continue in a close race toward terminal entropy.

The dirty secret all along was that by 2005 there was no economy left in the USA beyond the suburban sprawl economy with its so-called “consumer” nexus — largely devoted to the outfitting of suburbia. More mortgage debt (and credit card and car loan debt) will go bad and the investment paper that represents it will go bad and it will eventually destroy our current system for accumulating, valuing, and deploying wealth. It will not destroy the function of capital — no matter how many angry intellectuals inveigh against the straw man of capital-ism, as if it were merely a belief system – but it will be a long long time before anything sturdy or credible in the way of banking will be reconstructed out of the wreckage.

Regards,
James Howard Kunstler

Source: Ruinous Debt to Create Futureless Suburbia

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

Source: Natural Gas’ Triple Could Give Us a 416% Gain by Year-End

Walking the long, windy road toward the demise of the dollar, we spy another mile marker today: China is officially putting their money where their mouth is.

After clamoring for a reserve alternative all year, the Chinese government agreed to a $50 billion currency-diverse deal with the IMF today. Back in June, the deal seemed imminent. This morning, it finally came to fruition.

In their deal with the IMF — the first of its kind for any nation, ever — China buys $50 billion worth of bonds denominated in Special Drawing Rights, which will represent a basket of global monies. (That basket will be a split between the dollar, euro, pound and yen… not exactly the gems of the global currency batch.)

Still, it’s probably a win for China on several fronts: They get to ditch the dollar (sort of) without making a big geopolitical stink. In fact, since their funds will prop up the IMF’s rescue coffer, China gets to play the global good guy for once — while also purchasing some political influence over the IMF.

Russia and Brazil have each promised to buy $10 billion of these bonds, as well.
The U.S. dollar has already given back gains made earlier this week. The panic on Monday and Tuesday helped bump the dollar index up to just shy of 79. But the buzz has worn off, and the DX is right back to where it started the week, around 78.3.
Gold, on the other hand, has done nothing but rise this week. The spot price inched up, thanks to its “safe haven” status, and then accelerated skyward as the dollar fell. The spot price is up to $985 this morning, from $950 and change on Monday. That’s a three-month high.
“Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation,” Frank Holmes reminds us in his latest Daily Reckoning essay. “You can see this on the chart below — in a typical year, the price of gold in September rises 2.5% above its August price. The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

“What accounts for this predictable trend?

“September kicks off several of the planet’s most potent gold-demand drivers:

• The post-monsoon wedding season in India and Diwali, one of the country’s most important festivals
• Restocking by jewelry makers in advance of the Christmas shopping season in the United States
• The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift giving
• And in China, the week-long National Day celebration starting Oct. 1 and the run-up to the Chinese New Year in early 2010.

“Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.”
For stocks, traders took a breather after Tuesday’s sell-off and finished yesterday around break-even. This morning, the S&P 500 opened just a bit higher, thanks mostly to this:
Chinese banks lent more money in August than many had anticipated, the China Securities Journal reported this morning. At $24 billion, that’s right around July’s level.

If you recall, it was a rumor that Chinese lending had slowed even further in August that sent stocks around the world plummeting Monday. Thus, this “not so bad” report shot the Shanghai Composite up 4.8% today, and has helped other worldly indexes start off in the black. (Whether more easy money in China is a good thing… well… traders can save that for another day.)
“Market prices should reflect underlying demand and supply,” notes Chris Mayer. “As in a vegetable stand, the prices come from the buying and selling of people in the market.

“But with all the artificial stimulus money floating around, here and abroad, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing, will the recession get worse?

“CNN’s bailout tracker reports that U.S. government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (“cash for clunkers,” for example).

“That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

“Take a look at this next chart, which shows you how the stimulus spending reaches a peak sometime in early 2010 at $57 billion and then takes a dive.

“Of course, the government can always decide to spend more. But as it is now, this is a pattern of spending we can expect to distort the various sectors it flows to. You can see also on the chart where the money goes, including that big red layer that goes toward highways and transportation.

“We may yet see a surge in business activity as we get to 2010. But after that, we’ll see if this seeming recovery in the making is real or manufactured by funny money.”

If the latter scenario occurs, wouldn’t you want a portfolio full of companies in essential industries… like water, food and energy? That’s part of the reasoning behind Chris’ latest project: The Primeval Portfolio. Check it out here.
Whether real or artificial, hopes of recovery got a firm slap this morning, courtesy of the data patch. Here’s the quick and dirty:

• The U.S. service sector contracted for the 11th month in a row, the ISM said today. After Monday’s ISM manufacturing gauge, which showed surprise growth, traders had their fingers crossed for a score above 50 in today’s ISM service sector reader. Not so, said the group. Their index stood at 48. In other words, 70% of our economy was still shrinking in August
• Retail sales fell 2.9% in August, the 12th straight month of decline. Despite of the “back to school” rush, only low-cost brands showed signs of life last month… Costco, BJ’s, Gap, Aeropostale, Target and T.J. Maxx all outperformed
• Jobless claims from last week came in at 570,000, worse than the Street expected. Coupled with yesterday’s worse-than-expected ADP jobs report, the outlook is none too rosy for tomorrow’s government employment data
• Personal bankruptcies shot up 24% in August, year over year, putting the U.S. on track for over 1.4 million filings this year.

And here’s the one statistic that troubled us the most this morning: Student debt grew 25% in the 2008-2009 school year, says the latest from the Department of Education. So much for “the great deleveraging.”

Total student loans outstanding exceeded $75 billion during the period, up from roughly $60 billion the year before. An estimated 66% of U.S. college students borrow money for school, with the average individual debt load of $23,186 by graduation.

So let’s get this straight… the next generation is borrowing more than ever, at a faster rate then ever, during extremely worrisome credit conditions, heading into the worst employment environment in recent history, while on the verge of inheriting the biggest federal debt burden the world has ever known?
“Don’t let the recovery pundits fool you,” urges our currency adviser, Bill Jenkins. “As just about everyone knows, the stock market crashed in a big way in 1929. What most don’t realize is that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

“And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a ‘buy-and-hold’ investor, you MUST account for inflation. It is the single biggest ‘invisible’ tax in our wonderful Fed-managed economy.)

“But before people could get too happy with making money again, along came President Johnson and the ‘Great Society.’ I don’t know who it was so great for — the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to break-even for another 30 years.

“So 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines.

“We are now in just the second year of this disaster. We are witnessing an almost-perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

“At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 — and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

“So don’t let the recovery pundits fool you, even though they’re out in force.”
“I’ve recently moved to Florida from South Carolina,” a reader writes, “and we decided to rent the first year here, for several reasons. But now that we’re here, we’re thinking of staying renters for a while. My wife and I realized that by living in Florida and — here’s the key part – renting, we’re saving about $15,000 per year.

“After we read the news about Florida losing population for the first time in 50 years, it got us thinking — what are the prospects for Florida? I don’t think they’re as sunny as they used to be.

“Here’s how our savings add up:

• Don’t have to pay property tax, which is 2% of the purchase price where we are (Palm Beach County) — so that’s $10,000
• No homeowners insurance in Hurricane Alley, which saves us another $2-3,000
• No homeowners association fees, which are $3000 per year in the neighborhood we’re currently residing. Many neighborhoods are higher.

“Add it up and we’re saving $15,000-plus as renters. I don’t think we’re missing out on any home price appreciation, so tell me, why do I want to own a home in Florida?”

The 5: We’re not the right people to ask. This editor’s been renting a condo in one of Baltimore’s more swanky/artsy neighborhoods for over two years now. It’s close to the city — but quiet — with a great park in the backyard and the sexiest pool in Baltimore. It’s not without faults, but we really like it.

Despite it being one of the city’s finer locales, the condo’s owner — who got together with some friends and made an investment in the building during the bubble — hasn’t rented the apartment at a profit for years… if ever.

The idea of owning a home has its merits, but watching him sink underwater on this place has been tough (he’s a really nice guy) as well as educational. Of course, we don’t have “a place of our own,” and we’re not “building equity,” “establishing credit” and all the other mortgage broker sales pitches. But after watching all this go down, that seems like a risk worth taking.

Source:  China’s New Investment, Student Debt, The Faux Recovery and More!

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

Source: Washington Capitulates: Peak Oil Is Real

According to the US Department of Energy, liquid fuel demand in the developed nations peaked in August 2005 at 41.89 million barrels per day. Since then, it has plunged by 3.6 million barrels per day to 38.27 million barrels per day. However, you may want to note that despite these tough economic conditions, consumption has been extremely resilient in the emerging world. For instance, demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only 0.36 million barrels per day! I am amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. Whilst this is wonderful news for the energy investor, it is a terrible sign for society.

At present, our world is using up roughly 84 million barrels of liquid fuels per day and for the moment at least, there is sufficient supply to meet demand (Figure 1). However, when economic activity picks up, it won’t take much for demand to zip right past supply. Remember, it is much easier to increase usage, but it takes a long time to ramp up production. So, unless this is a permanent global recession (which I doubt), it is inevitable that the price of oil will go up significantly over the medium to long-term.

Figure 1: Supply and demand – balanced for now

Source: www.yardeni.com

On the supply side of the equation, let me be clear. If I was asked to pick the biggest threat to a sustainable economic recovery, Peak Oil would top that list. Remember, Peak Oil doesn’t mean that we are running out of oil reserves, crude will be around for decades. However, ‘Peak Oil’ does imply that we are dangerously close to peak global oil production. ‘Peak Oil’ also means that rather than experiencing a burst in oil supplies as many expect, from here onwards, we will witness sharp declines in global flow rates. In a nutshell, the era of cheap energy is over and the price of crude oil will rocket higher over the coming decade.

Now, many skeptics will argue that if Peak Oil was real, the price of oil wouldn’t have dropped to roughly US$30 per barrel in last autumn’s stunning crash. Valid point; but let us not forget that the spectacular plunge occurred at a time when global economic activity virtually came to a standstill. Let us also keep in mind that last autumn’s crash in asset prices was caused by a total freeze in credit and the associated asset liquidation. Whilst I agree that the final action in crude oil’s parabolic blow-off last July smacked of speculation, I can assure you that speculation alone couldn’t have created a multi-year boom whereby the price of crude oil went up by almost 1500%! As you can see from Figure 1 above, supply clearly fell short of demand between 2005 and 2008, and this is why we had a magnificent bull-market in crude oil.

Make no mistake, global demand for liquid fuels will rise again – and if my homework is correct, supply won’t be able to keep up. If you ignore the noise and review hard data, you will observe that the vast majority of the world’s most prolific oil provinces are now past peak production and in a state of permanent depletion. According to the BP Statistical Review of World Energy, out of the 54 oil producing nations and regions in the world, only 14 are still increasing production. Alarmingly, 30 oil producing nations and regions are definitely past their peak output and the remaining 10 appear to have modestly declining production rates. Put another way, when weighted by production, Peak Oil is already a grim reality in 61% of the oil producing world!

Still not convinced about Peak Oil? Then review Figure 2, which charts the expected combined flow rates for crude oil, lease condensates and Canadian Oil Sands. As you can see from the grey shaded area, production is about to decline by roughly 5 million barrels per day by 2012.

Figure 2: Has crude oil production peaked?

Source: The Oil Drum

Ironically, Figure 2 also plots the optimistic (almost laughable) forecast made by the International Energy Agency (IEA) in its “World Energy Outlook 2008”. Interestingly, in last year’s “World Energy Outlook”, the IEA stated that in order to fulfill its optimistic projections, the world had to install 64 million barrels per day of new supply by 2030 or the equivalent of six times the Saudi Arabian output! Furthermore, the IEA declared that the energy industry had to invest hundreds of billions of dollars every year to achieve this favorable outcome.

Now, I can understand that the IEA is a government-funded agency so it has to paint a rosy picture, but it is ominous that the energy watchdog failed to mention where this surplus oil would come from!

Well, I guess you get the idea. Global crude oil production has probably peaked, new discoveries have dried up and there is a shortage of capital for investment purposes. Apart from these factors, if you believe the energy optimists, all is well in the energy industry and the price of oil is about to drop to zero!

After years of extensive research, I have no doubt in my mind that unless global demand stays weak forever, we will see supply shortages in the not too distant future. And before that occurs, the price of crude oil will stage an explosive rally. Accordingly, I suggest that all my readers allocate a large proportion of their investment portfolio to upstream energy companies and to businesses in the energy services sector.

Finally, in the energy complex, the price of natural gas is still scraping along its recent crash low and this is a fantastic long-term investment opportunity. As we approach winter in the Northern Hemisphere and heating demand picks up, we are likely to see a big rally in the price of natural gas. So, investors may want to allocate capital to this unbelievably inexpensive commodity.

Regards,

Puru Saxena

Source: Peak Oil: Supply Data Doesn’t Lie

The trip was sponsored by the American Petroleum Institute (API), which paid for the airfare and accommodations. Managers at both Syncrude and ConocoPhillips granted me access to any parts of their operations I wanted to see (within allowances for safety). And everyone answered any and all questions I asked.

Post-trip, I have complete editorial freedom to write about what I saw and learned. And I learned a lot. So this is Part I of a two-part series. Watch for Part II.

The Past and Future of Oil and Oil Sands

The first thing that struck me about visiting the oil sands of Alberta was how much geological and social similarity there is to the oil patch of Pennsylvania.

Geologic similarity? Yes, because the reason that the hydrocarbons are so near the surface in both areas — Pennsylvania and Alberta — is that the Pleistocene glaciers scraped off much of the overlying rock. When the glaciers retreated about 10,000 years ago, they left hydrocarbon-bearing rock formations exposed near the surface, or buried not too deep. This led to oil seeps, which led to people being curious about the black, gooey stuff.

To be sure, the hydrocarbon resource is quite different between the two places. That is, in Pennsylvania, you have light, sweet crude oil that flows easily and is soft and smooth to the touch. Indeed, Pennsylvania crude feels like hand lotion. (It’s the origin of Vaseline, for example. And some people use it as the basis for a shampoo.)

While in Alberta, the “bitumen” from the oil sands is as thick as cold molasses, and very sticky. It’s got some sulfur in it as well.

On a warm day in August, oil sands have the consistency of really stiff, dry oatmeal. Bitumen is a far cry from hand lotion.

And as for social similarities? Well, the Indians of old used to skim the oil from streams near Titusville, Pa. So did people of the “First Nations” of Alberta, who used to recover the tarry bitumen from the rocks along the Athabaska River of northern Alberta. Thus both oil and oil sands have been around for a long, long time.

Early white explorers in both Pennsylvania and Alberta noted the oil seeps. They wrote in journals and logs that eventually somebody could do something with the substance.

Eventually, both Pennsylvania and Alberta had their oil booms. In fact, we’re soon coming up on the 150th anniversary of Col. Drake’s oil discovery at Titusville, Pa, on Aug. 27, 1859. Pennsylvania’s oil boom is colorful history at this point (although Marcellus Shale development will soon change that).

Whereas Alberta is still in the midst of its oil sands boom. It’s a boom that’s going to last for quite some time, I believe.

“Easy” Oil Versus Heavy Oil and Bitumen

There’s a reason Col. Drake started an oil boom in Pennsylvania more than a century before Alberta enjoyed the same thing. Col. Drake found some of that so-called “easy” oil. No, it’s not easy to find. It’s that Col. Drake’s oil flows easily from a well.

That is, for all the oil that mankind has pumped out of the ground in the past 15 decades, almost all of it has been the light, sweet stuff that flows easily. Generally, when people looked for oil they bypassed the heavy oil and bitumen. Until lately, of course.

When we think about the concept of “Peak Oil” today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the “old fashioned” kind of oil deposit that Col. Drake was drilling. The light, sweet, easy-flowing oil is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be “heavy,” with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

It just so happens that most of that Canadian bitumen is located in Alberta (with some is in Saskatchewan). And Fort McMurray, about 250 miles north of Edmonton, is the heart of the development process.

Oil Sands — Surface Mining

Large-scale oil sands development began in the 1970s. It took gigantic levels of capital investment, like tens of billions of dollars. That’s not pocket change. So a group of lease-owners got together and pooled their capital to form privately held Syncrude Canada, a joint venture. First mining started in 1978.

The way Syncrude operates, it’s not really “mining.” It’s landscape architecture. Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle. It’s quite a farsighted model for long-range resource development.

Thus for much of the 1970s, Syncrude performed baseline environmental studies and data gathering. It started digging in 1978. At first, the pit looked like a moonscape of open-pit mining. See the photo below. It looks like a mess, right? Well, there’s more to the story.

The mining process is fairly straightforward. Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.

The loaders haul the rock to a crusher. The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building. The Syncrude operation washes the bitumen off the sand using naphtha. Then it separates the bitumen, recovers the naphtha for reuse and takes the clean sand (and it’s clean) and replaces it in a previously mined pit.

The process uses a lot of water, but not as much as the horror stories you might hear about “draining the rivers” of northern Canada. Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like “all the natural gas of northern Canada”). Pretty much everything about the operation is built with cogeneration in mind, so the company continuously recovers the heat at each stage. That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, and then it may take five or more years to fill it back up with sand during the restoration process. Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although the company has some artistic license with the contours. It covers the land with the original topsoil, which has been in cold storage (northern Alberta… it’s cold up here for 10 months of the year). Then it replants trees, and that’s saying something, because the growing season is under two months. It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day. It takes the 8-API bitumen and upgrades it to oil that’s competitive with West Texas Light. Then it delivers it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur free (refiners like that). In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the step pyramid at Saqqara, Egypt. And along the way, Syncrude sells the sulfur to the chemical industry.

The former Syncrude mine that I visited is about 3.5 miles square, and formerly about 200 feet deep. Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.

For the cynics out there, I’d say that it’s not some environmental Potemkin village, because you can’t fake a replanted forest of 25-year-old trees. You can’t fake a 300-bison herd. Not on a former mine site 3.5 miles square.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the “other” issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the U.S. wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

That’s all for now. In Part II, I’ll discuss the in situ process that I saw at the ConocoPhillips Surmont site.

Until we meet again,
Byron King

Source: Update on Canada Oil Sands, Part I

When we think about the concept of ’Peak Oil’ today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the light, sweet, easy-flowing oil that is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be ’heavy,’ with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the ’other’ issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the United States wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

Source: The Saudi Arabia Next Door

It doesn’t matter whether you believe in “Peak Oil” because this isn’t about Peak Oil coming to fruition. Peak Oil believes that oil discoveries have peaked leading to oil production’s inevitable decline.

This crisis will be strictly man-made. Governments and oil companies have already planted the seeds of the next great energy crisis. And there’s nothing anybody can do to prevent those seeds from sprouting.

The U.S. government got its religion late. But it’s now following the lead of European governments in limiting the use of fossil fuels through taxes and restrictive regulations.

That’s bad enough in itself. But then there’s the roller-coaster ride which oil prices have taken. The price of oil fell more than $100 from over $140 to under $40 (before going back up again).  Oil companies everywhere had the same response. They all cut back on oil spending and production…

•    OPEC has cut back production by 2.2 billion barrels a day.
•    UAE has put off plans to expand oil production by 1 million barrels a day.
•    Saudi Arabia has delayed two $10-$20 billion refining projects (and may cancel them altogether).
•    Russia’s biggest oil company, Gazprom, has slashed production spending by 24 percent.
•    Venezuela, Nigeria, Malaysia and other national oil companies have cut back on their capital spending.
•    Statoil, EnCana, Petro-Canada, Suncor, Imperial Oil, and Royal Dutch Shell have all delayed or cancelled major        projects in Canada’s vast but expensive-to-produce oil sands.

How bad are these cutbacks? Just ask the widely respected oil consulting agency, the International Energy Agency. It recently warned of a “second capacity crunch” causing widespread underinvestment in the oil industry.

Oil’s recent price rise could have loosened up oil producers’ purse strings. But oil companies are facing increasing disincentives from a government trying to replace fossil fuels with renewables.

If you want to know how the CEOs of Big Oil feel about the Obama administration’s energy policy, just ask Jim Mulva, head of ConocoPhillips.
This global oil company has operations in more than 30 countries. Mulva said last week that government intervention in the energy market “has an impact on the willingness of companies to pour billions into the development of new projects.”

In the meantime, the Obama administration is spending hundreds of millions of dollars on renewables, like the $467 million to encourage the development of geothermal and solar energy.|

The result? Geothermal and solar energy will have slightly bigger pieces of the energy pie. But oil priced at over $150 per barrel will kill the U.S. and global economic recovery in its infancy.

The cost of plastics and resins will go way up. Gas prices will surge over $5/ gallon. New highs in jet fuel will crash several airline companies. Actually, practically everything will cost more. I don’t think that’s what these governments have in mind.

And even with ample government support you shouldn’t invest in geothermal or solar companies. They will still depend on government subsidies to compete with the price of electricity generated by – take a guess – fossil fuels.

Instead you should invest in oil producers but not just any oil producer. Thanks to vast underinvestment and government policies, the price of oil will sky rocket. The only thing keeping the price of oil from going higher right now is that we’re still in the middle of the worst recession in seven decades.

But once demand returns, watch out.

Total’s CEO Christophe de Margerie says that a rise in demand while supply is constrained will unleash oil prices again.
And Mitsubishi warns that spare capacity will quickly disappear when oil demand picks back up.

But, as I said, most oil companies have cut back production and spending. That’s going to prevent them from getting windfall profits from soaring oil prices.

But four of the world’s major oil companies haven’t cut back on spending. Three of them are Exxon Mobil, Chevron and Thailand’s PTT Exploration & Production. But by far the best oil investment you could make is in a fourth big oil company.

Last year it spent 34 percent more on drilling for oil. And this year it’s spending 19 percent more. While the other oil majors are cutting back on spending and facing stagnant output, this company plans on raising production by 7-11 percent a year. I’m predicting its shares will go up at least 80 percent over the next three years, and the gains could be much bigger than that.

I’m sorry but I can’t give you the name of the company because it’s my latest recommendation to readers of my INCOME service. They deserve first crack at this company, especially since its price is so cheap at the moment. But if you’re interested in this company, just click here for more information, including how to sign up in order to get this company as your first recommendation.

Source: The Coming Global Blackout

]]> http://www.contrarianprofits.com/articles/the-coming-global-blackout/18794/feed 0 http://www.contrarianprofits.com/articles/the-next-saudi-arabia/18491 http://www.contrarianprofits.com/articles/the-next-saudi-arabia/18491#comments Mon, 29 Jun 2009 20:45:14 +0000 Byron King http://www.contrarianprofits.com/?p=18491 The oil resources off Brazil are in the same scope as those of Saudi Arabia. The oil potential is huge. Beyond huge. It’s a game changer for the world of energy. No, the Brazilian resource doesn’t mean that Peak Oil is history. But it does mean that history is about to change. Indeed, the angel of history is favoring the nation of Brazil.

The problem with the oil offshore Brazil is that the hydrocarbons are far out — up to 200 miles into the open ocean. They’re under one-two miles of seawater, and then buried under three-four miles of rock and salt. It won’t be easy to define the resource, or to extract it. Still, the investment opportunities are there.

One of…