Black and White

Jim Brown
 
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When a highly respected investment bank with a large research department and strong futures trading division tell us something will happen we normally accept it as a high probability event. That is of course unless we don't want to acknowledge the fact so our worldview remains calm.

I have been telling everyone that reads our newsletters for several years now that peak oil is about to arrive. We got a reprieve in 2008 when demand dropped to decade lows and have yet to completely recover. For the last year I have been targeting the 2012-2014 time frame as the arrival date. If Saudi Does not have as much spare capacity as they claim then 2012. If they can actually pump 12.5 million barrels per day as they claim then 2014. However, I believe most readers accept my words as a modern day Chicken Little proclaiming the end of the world as we know it. They read what I say but never accept it as fact. Some are even less polite.

An email I received last week stated, "You are full of shit. The high oil prices are from the traders on Bankster Street (Wall Street). None of them ever got prosecuted for the money they stole from the Americans for their BAILOUT for the derivatives contracts that they manufactured and then sold to the public. Sometimes when you are not part of the solution you are part of the problem. Today, you are part of the problem and tomorrow you are part of the solution."

When you write articles that go against the conventional wisdom you have to be prepared to catch a little flack from the occasional uninformed and highly emotional reader. Those readers are balanced by the occasional accolades from those who actually subscribe to my publications so they can be informed and prepared.

This one I got this weekend. Just finished your weekend commentary ... You need a Nobel Prize for your knowledge ... Or a bottle of Excedrin for your headache ! You are truly the most informative market analyst on the globe. Thank you for all you do !

Fortunately the two types of readers serve to keep me balanced. However, I am not writing to make friends. I write to inform and hopefully educate investors about the coming disaster and it will be a disaster. There is no doubt in my mind.

So when a highly respected commodity trader like Goldman Sachs goes out on a limb to warn of impending doom I tend to listen. There are some who don't want to listen or feel there is an ulterior motive so they ignore the warnings even when they are in black and white.

Goldman Sachs said last week in Thursday's Wall Street Journal, "oil supplies will become "critically tight" in 2012, largely because production leader Saudi Arabia won't be able to pump as much extra oil as many people believe. Robust global economic growth will continue to drive oil demand that outstrips supply, so "it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand."

Barron's also had an article on oil prices saying, "Despite the recent 20% decline from April highs, new highs on crude, heating oil, diesel fuel, jet fuel and gasoline seem likely over the next 12 months. Following some further easing over the summer, the second leg of the long-term bull market in petroleum?the first occurred in 2007-08?probably will begin this fall. As oil producers' spare capacity gradually declines to worrisome levels, the average monthly price could reach a record $150 per barrel by next spring, with spikes to $165 or $170. With this, $4.50-a-gallon gasoline will become the norm. That will put a huge dent in consumer wallets, while ramping up the desirability of fuel-efficient cars."

Obviously neither Goldman or Barron's are infallible. However there are a lot of other people who have been saying the same thing for the last couple years. Nobody seems to be paying any attention despite the clear black and white description of the crisis ahead.

There is one interesting point. Neither called this impending crisis "peak oil" and in this case they may be right. Peak oil is when global oil production actually peaks and begins a permanent decline that will eventually change life as we know it. This may not happen for a couple more years but we just don't know because we can't get accurate production and reserve numbers from OPEC nations.

The crisis they are referring to is similar to peak oil because demand will increase more than production. There will be an oil shortage and the only way it can be solved is by involuntary price rationing. Those that can afford to pay the higher prices will drive and those that can't afford it will not. It is as simple as that. Prices will rise to the point of equilibrium where demand from those who can afford it equals production.

This shortage will cause oil prices to move higher and higher because if there was any excess production to help moderate prices it would quickly be consumed. Oil at $150 or $175 per barrel will cause some extra capacity to come online but it won't be enough or it won't be soon enough to make any lasting difference.

The fuel recession, and it will be lasting, is just ahead and will probably appear in the summer of 2012. This is not news. I have been predicting it for a couple years. This is what Barron's was referring to in the quotation above.

The US Military expects it. The UK expects it. Kuwait expects it. Macquarie Research expects it. I could go on. The list is lengthy and high profile. Unfortunately the U.S. administration does not expect it. They are blissfully ignorant (or purposefully ignoring it) despite numerous government sponsored studies that laid out the facts. As politicians they don't want to the ones running around the country claiming $6 gasoline is only a year away. It would really hamper their reelection chances.

If you really want to know what is coming you should research these links.

Preparing the Dept of Defense for a Post-Petroleum Era
Link to report in PDF format

U.S. Joint Operating Environment 2010
Key point: "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach 10 mbpd"
Link to report in PDF format

The Oil Crunch
A Wake Up Call for the UK Economy
Link to report in PDF format

Kuwait - Peak Oil 2014
Link to report in PDF format

The Big Oil Picture
Macquarie Commodities Research
Link to report in PDF format

The Peak of the Oil Age
Analyzing the 2008 WEO
Link to report in PDF format

The facts are really available in black and white for anyone that wants to read them.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2013 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?

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