When Debt comes calling by Sarel Oberholster

[Sapiens]

http://www.mises.org/journals/scholar/oberholster.pdf

When Central Banks create money, banks lend it out. When Central Banks recklessly crate money, banks recklessly lend it out. When Central Banks flood the markets with liquidity, then bankers flood the markets with debt. It is an economic miracle until Debt comes calling.

...snip...

The world will have to deal with the debt; save or suffer the consequences. The world needs to deal with the export-on-credit policies or the distortions in the world economy will self destruct. Alternatives to the Yen carry trade and Japanese bank rescue-by-stealth must be found. For now, we are living a systemic episode with all the hallmarks of an epic event and the policy response will ultimately decide our economic fate. Early devaluations helped countries in the past to relocate some of the pain to lenders, it may become an attractive policy option again. The devaluation of the USD may well become the chosen path of least resistance for the current monetary and fiscal authorities of the USA.

No amount of monetary resuscitation will restore consumer spending or aggregate demand, the term used by the FED, when debt saturation prevails. Further ruthless debt stimulation via monetary policy will end in currency failure. Currency failure can manifest in hyperinflationary payment mechanism failure (Weimar Germany 1923); or deflationary payment mechanism failure (USA 1929); or in deflationary stagnation (Japan 1990-2007). That is the message form history.

A superb 15 page .pdf paper from Sarel, excellent analysis and fast read.

[FRED]

Re: When Debt comes calling by Sarel Oberholster

http://www.mises.org/journals/scholar/oberholster.pdf



A superb 15 page .pdf paper from Sarel, excellent analysis and fast read.

EJ writes in. This will be posted later as a Quick Comment. Thanks Sapiens for eliciting the response.

Oberholster's is a good analysis. However, the writer does not have the advantage we have in making the mistake in 2000 of underestimating governments. We have also over the years corrected our misunderstanding at the time of how the economy actually works.

The essential weakness in any Mises analysis is that it is out of date. The analysis does not distinguish between the Production/Consumption and FIRE economies, and credit and asset prices within them. They do so because the economist Dr. Hudson who describes these discrete economies best is easily dismissed by monetarists and hard money economists alike as Leftist. In my view, the Left has always been the most cogent critic of the excesses of capitalism, while lacking viable solutions that enhance market competition and reduce economic dependence on the state. Hudson's criticism of the economics profession is valid: most economists do not understand enough about finance to see how modern economies function.

We made that error in 2000 in our forecast of a recession in 2001 and Oberholster is making it here. We expected reflation to fail via runaway inflation. We did correctly forecast the recession, however, even though at the time the consensus of economists was 95% against us. Now the consensus is with us predicting a 2008 recession which, from a real growth standpoint, started in Q4 2007.

We have since 1999 discounted the prospect of a US 1930s or Japan 1990s currency strengthening and commodity, goods, and services price deflation scenario as an impossibility for the eventual US debt deflation. The reason is that the US is a net debtor (see "Debtor Nations Dream of Deflation) versus a net creditors as in 1930s, or as Japan was in the 1990s.

Since 2006 we have also discounted the possibility of a hyperinflationary outcome as such requires 100% political repudiation of the US by its trade partners–virtual abandonment of the US dollar. While the US has not been a "good actor" on the geopolitical scene, abandonment is highly unlikely on the scale experienced by post WWI Germany in the 1920s; Japan, Greece, Hungary, and China in the 1940s after WWII; and globally irrelevant economies where hyperinflations have occurred over the past century, i.e., Peru, Argentina, Brazil, Chile, and Bolivia.

The US stalled a runaway 2000 - 2001 debt deflation process ("Ka" in iTulip terminology) with a combination of credit expansion and debt deflation via currency depreciation ("Poom"). In the process it launched the housing bubble and other asset inflations within the FIRE Economy. Now, as the asset price deflation reinforces the credit contraction in the FIRE Economy, central banks use liquidity to once again prevent a run-away debt deflation.

The process is not going as policy makers hoped. The belief among CBs in the 2003 - 2004 was that by now the economy would be self-sufficient and expanding without additional credit infusions from central banks by 2006 at the latest, that the economy would be producing it's own credit, and deficit spending could be withdrawn along with monetary stimulus. The extension of the reflation process is now accelerating commodity, goods, and services price inflation that started in 2004. In fact, wage inflation is starting to pick up, with a reading of 6.2% Y-o-Y in November 2007.

At this point there is no short term solution to the conflict between the Fed's need to prevent a runaway debt deflation and the need to suppress commodity, goods, and services price inflation. We continue to forecast a period of above average inflation is the optimal policy solution. We describe this as similar to the Japanese debt deflation period since 1990 but modestly inflationary versus deflationary, with CPI-U inflation (as measured via 1983 methods), running between 7% and 12%, with official CPI-U inflation running between (See Recession without Romance). No telling how long it will last, but likely at least as long as it takes to get the Next Bubble off the ground.

This has been our position since 1999, and have over the past year started to see many commentators, such as Peter Schiff, adopt this perspective. Eventually they will adopt our latest forecast, as well: For political reasons, high energy prices, not central bank efforts to deflate debt, will be cited as the cause of the price inflation.

Readers can also expect other commentators to adopt our forecast that a new asset inflation in energy and infrastructure development related industries will be developed over the next decade to expand the economy and cope with the debt deflation. What others who are new to this story do not understand is that asset price deflations can be arrested not by direct efforts to reflate the deflating assets, but by creating a new asset inflation entirely. For details, see my article The Next Bubble the upcoming issue of Harper's Magazine, on the stands in January 2007.

If you are an iTulip Select subscriber* as of January 15, 2008, and provide us with a mailing address, we will send you a copy of the magazine for free.

* You must be either subscribed for 1 year or subscribed as a 3 months recurring subscriber.

[bart]

Re: When Debt comes calling by Sarel Oberholster

Eventually they will adopt our latest forecast, as well: For political reasons, high energy prices, not central bank efforts to deflate debt, will be cited as the cause of the price inflation.

Big http://www.nowandfutures.com/grins/timgrunt.wav of agreement.

What others who are new to this story do not understand is that asset price deflations can be arrested not by direct efforts to reflate the deflating assets, but by creating a new asset inflation entirely. For details, see my article The Next Bubble the upcoming issue of Harper's Magazine, on the stands in January 2007.

Poetry in motion and very well and concisely expressed. I'm very much looking forward to reading the article.

[Spartacus]

Re: When Debt comes calling by Sarel Oberholster

do you have any notion on how one might assign numbers to the Social Security Captive bid on treasuries?

Something like "if the captive bid were not there, bond prices would likely be xxx% higher/lower" ?

In commodities it often happens that a 10% drop in demand could depress the price by much more than 10%, but commodities and paper (especially paper with extremely liquid markets) probably behave differently.

Big of agreement.


Poetry in motion and very well and concisely expressed. I'm very much looking forward to reading the article.

EDIT : I'm thinking of this because this mentions one of the big iTulip learnings, which include FIRE, no Eurobond market, sweeps, SecLend and the captive bid.

[bart]

Re: When Debt comes calling by Sarel Oberholster

do you have any notion on how one might assign numbers to the Social Security Captive bid on treasuries?

Something like "if the captive bid were not there, bond prices would likely be xxx% higher/lower" ?

In commodities it often happens that a 10% drop in demand could depress the price by much more than 10%, but commodities and paper (especially paper with extremely liquid markets) probably behave differently.



EDIT : I'm thinking of this because this mentions one of the big iTulip learnings, which include FIRE, no Eurobond market, sweeps, SecLend and the captive bid.

I agree on the general area of captive bids affecting markets, but don't know what you mean by the "Social Security Captive bid".

All the actual money that is paid into Social Security goes into the general fund and is spent - since the Johnson administration if memory serves me. The Social Security "fund" is a vapor fund - aka, an accounting trick.

[Guest]

Re: When Debt comes calling by Sarel Oberholster

... CPI-U inflation ... running between 7% and 12% ... to get the Next Bubble off the ground. ... high energy prices, not central bank efforts to deflate debt, will be cited as the cause of the price inflation. ... a new asset inflation in energy and infrastructure development related industries will be developed over the next decade to ... cope with the debt deflation.

I've come a across a very simple, yet awkward prediction this evening reading elsewhere, that I'd like to put to the iTulip editors - it's a prediction for 2008:

"Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply".

Can I assume the editors already track and take note of these sets of data? If they should in fact observe it occur, would this in any way lay some valid questions at the doorstep of the theory implied in the post above, that rising energy prices will prove out as being in the full course of time a mere corrolary or "product" of the fiat efforts of central banks?

Or does the post above implicitly acknowledge that CB's may "appropriate" this issue as a cover for inflationary money, yet the runaway oil prices will also have a quite real internal dynamic of their own pushing prices sharply up, deriving from a genuine resource premium?

If this really does occur - "higher oil prices neither reduce demand nor increase supply" - and we observe these prices proceed to rise quite sharply in coming years, my sense is that what iTulip is building here is a hermetic thesis wherein those future very sharp price rises have a receptacle and explanation ready built for them - the "energy and infrastructure bubble" - a construct of central banks, rendered necessary to counteract deflation. The unspoken implication being that in the absence of central bank reflation interest, this phenomenon would cease?

The "energy and infrastructure bubble" seems to reject or exclude (or that is my perception, which may be incorrect) that such price rises in energy can or will have any significant extraneous contributing factors beyond FIRE economy bubble dynamics. Therefore if we see some really shocking energy price rises, the pigeonhole into which this is to be put has already been constructed, and it's been designated a "bubble", i.e driven by extraneous phenomena, and lacking fundamental internal drivers. That can't be right, can it?

Is this "energy and infrastructure bubble" that will account for future soaring energy prices going to be a FIRE economy dynamic shared by the entire world, or does this remain an America driven event? Are other countries who will be paying $250 dollars per barrel in a few years going to be merely paying that in as participants to an American infrastructure bubble, or will this coming energy and infrastructure bubble be of global participation? If it's global, how did the "energy and infrastructure bubble" desired by central banks go global?

I've read elsewhere that central banks today have "lost control of long rates", because that market's size and depth has simply outgrown their ability to manipulate. How then can the central banks be expected to have maintained the size and heft to push into existence this "energy bubble" outcome rolled out on a global scale? In the market of tomorrow, as oil rises to $250 per barrel but we continue to see that "higher oil prices neither reduce demand nor increase supply", I have difficuty believing that the only thing holding those soaring prices aloft, let alone driving them to further bubble extremes will be central bank action? Does anyone at all share my skepticism?

[FRED]

Re: When Debt comes calling by Sarel Oberholster

I've come a across a very simple, yet awkward prediction this evening reading elsewhere, that I'd like to put to the iTulip editors - it's a prediction for 2008:

"Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply".

Can I assume the editors already track and take note of these sets of data? If they should in fact observe it occur, would this in any way lay some valid questions at the doorstep of the theory implied in the post above, that rising energy prices will prove out as being in the full course of time a mere corrolary or "product" of the fiat efforts of central banks?

Or does the post above implicitly acknowledge that CB's may "appropriate" this issue as a cover for inflationary money, yet the runaway oil prices will also have a quite real internal dynamic of their own pushing prices sharply up, deriving from a genuine resource premium?

If this really does occur - "higher oil prices neither reduce demand nor increase supply" - and we observe these prices proceed to rise quite sharply in coming years, my sense is that what iTulip is building here is a hermetic thesis wherein those future very sharp price rises have a receptacle and explanation ready built for them - the "energy and infrastructure bubble" - a construct of central banks, rendered necessary to counteract deflation. The unspoken implication being that in the absence of central bank reflation interest, this phenomenon would cease?

The "energy and infrastructure bubble" seems to reject or exclude (or that is my perception, which may be incorrect) that such price rises in energy can or will have any significant extraneous contributing factors beyond FIRE economy bubble dynamics. Therefore if we see some really shocking energy price rises, the pigeonhole into which this is to be put has already been constructed, and it's been designated a "bubble", i.e driven by extraneous phenomena, and lacking fundamental internal drivers. That can't be right, can it?

Is this "energy and infrastructure bubble" that will account for future soaring energy prices going to be a FIRE economy dynamic shared by the entire world, or does this remain an America driven event? Are other countries who will be paying $250 dollars per barrel in a few years going to be merely paying that in as participants to an American infrastructure bubble, or will this coming energy and infrastructure bubble be of global participation? If it's global, how did the "energy and infrastructure bubble" desired by central banks go global?

I've read elsewhere that central banks today have "lost control of long rates", because that market's size and depth has simply outgrown their ability to manipulate. How then can the central banks be expected to have maintained the size and heft to push into existence this "energy bubble" outcome rolled out on a global scale? In the market of tomorrow, as oil rises to $250 per barrel but we continue to see that "higher oil prices neither reduce demand nor increase supply", I have difficuty believing that the only thing holding those soaring prices aloft, let alone driving them to further bubble extremes will be central bank action? Does anyone at all share my skepticism?

The author of the phrase "Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply" ought to visit this site for an Econ 101 refresher on the laws of supply and demand.

The falling cheap oil supply, rising price, falling demand process we call Peak Cheap Oil may already be occurring, or may be created by government via a floating tariff on imported oil, as most European nations have. Local demand in oil exporting countries also appears to be contributing.

But the price of oil cannot rise per falling cheap oil supply and demand alone. Someone has to print the dollars to pay for the oil, and that same money as the medium of exchange used to purchase everything else. Thus you'd expect a lot of other prices to rise irrespective of supply/demand dynamics for those items, thus the money supply impact on all commodity prices over the past few years.

Central banks know how to stall debt deflations that attend the collapse of asset price inflations: keep real interest rates low. But they do not know how to prevent the new asset price inflations that result.

[Sapiens]

Re: When Debt comes calling by Sarel Oberholster

At this point there is no short term solution to the conflict between the Fed's need to prevent a runaway debt deflation and the need to suppress commodity, goods, and services price inflation. We continue to forecast a period of above average inflation is the optimal policy solution. We describe this as similar to the Japanese debt deflation period since 1990 but modestly inflationary versus deflationary, with CPI-U inflation (as measured via 1983 methods), running between 7% and 12%, with official CPI-U inflation running between (See Recession without Romance). No telling how long it will last, but likely at least as long as it takes to get the Next Bubble off the ground.


..... What others who are new to this story do not understand is that asset price deflations can be arrested not by direct efforts to reflate the deflating assets, but by creating a new asset inflation entirely.

This has captivated my attention. If I understand this correctly, Oberholster states that debt saturation is the problem central banks will have to deal with, and the consequences will not be pretty.

On the other hand, you claim that central banks have an alternative solution to debt deflation by creating an alternative bubble.

The problem I see with the hypothesis of an alternative bubble is that the Housing bubble created massive amounts of credit to be used as medium-of-exchange, while the Tech bubble did not. In other words, it seems to me that this next bubble will have to be proportionally much larger than the Housing bubble if the system is to survive.

I see opportunities, many, many opportunities. Thanks for the brain teaser.

[Rajiv]

Re: When Debt comes calling by Sarel Oberholster

The author of the phrase "Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply" ought to visit this site for an Econ 101 refresher on the laws of supply and demand.
.

The original prediction was I believe only for 2008

Energy prices will continue to rise. We should finally see oil hit triple-digits ($100 and more), and a decent recovery of the natural gas market with inventory level declining. Against popular opinion, higher oil prices will neither reduce global demand, nor increase global supply. Alternative energy is more a dream than reality. Oil from tar sands is not only costly, but also faces environmental challenges. Biofuel not only drives corn prices sky high, but also reinforces the public's perception that biofuel takes poor people's basic need for food (corn) away to pay for rich people's gas-guzzling SUVs.

What I took away from that is that in the one year time frame -- global supplies will not decline -- and that only a small amount of demand destruction will occur -- because of inability to adapt fast enough to the increased oil price

This leads me to the conclusion that inflation will be rampant in the coming year -- will the US public take on more debt to keep their consumption at the same level -- or will consumption drop? What will the CBs response be to the increasing inflation?

[Guest]

Re: When Debt comes calling by Sarel Oberholster

FRED -

You clarified the following for me :

<< The author of the phrase "Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply" ought to visit this site for an Econ 101 refresher on the laws of supply and demand. >>

Here's my take on the inevitability of this "ECON-101" axiom (swiss cheese):

( you posted yesterday here http://www.itulip.com/forums/showthr...23138#poststop )


<< As for oil demand rising, that's a common fallacy we are going to try to dispel. It was true for the banner post-recession oil demand years of 2003 and 2004, but not after. Somehow the news from 2003 - 2004 got stuck in everyone's heads and was never revised. From an oil piece we're working on for next year, first of all it isn't easy predicting and measuring world oil demand. The Organization for Economic Co-operation and Development, International Energy Agency has an especially hard time forecasting when a US recession is coming. Notice the forecast in red and the actual in green, below. Way off in the recession year of 2001. This year they predict oil demand to rise 2.5% in 2008. Our guess? Less than 0.5%. >>


AND THIS:

<< Then there is the fiction that oil demand has been driving prices. Oil prices have increased an average of 27% a year since 2004 while global oil demand has increased only 1.2% a year. That includes the blistering 16% a year oil demand growth in China. OECD countries have seen falling demand that more than compensates for the increases in China and India. >>

QUESTION: - What about the conundrum that fiat petro-dollars have only debased 40% in seven years and yet the petroleum price has risen hundreds of percent. How do we nail the significance of these leveraging discrepancies to the floor in any meaningful way?

QUESTION: -the oil demand decline evidenced in the iTulip posted IEA chart, evidences RATE OF CHANGE, not any actual decline in demand.

ITULIP CHART DEMONSTRATES FALLING OIL DEMAND VS SOARING PRICE.gif

In the context of the data posted in the excerpts below, it is not just the IEA that is expressly pointing out that oil demand growth continues to rise, and is anticipated to continue to rise next year. Global spare production capacity in an 80-90 MBPD world, is a measly, razor thin 2 MBPD, which is one analyst's statistical projection error away from an annual shortage.

Why post this declining rate of change chart to illustrate that global oil demand is "falling" while prices soar, when that is in fact not the case? Oil demand is not falling, it's growing. More to the point, regarding what you interpret as an incommensurately soaring oil price relative to real 1.04% global per year demand growth, the really significant point which refutes that"demand destruction" nearing, is that spare capacity continues razor thin.

Production growth is stagnant. Further, production growth is flatly stated as going into non-OPEC decline starting in two years, by a host of entities whose own charts you also use. This refers to 60% of global production - anticipated to transition into "decline" in a mere two years, and yet the below texts evidence no trace of even perceptible beginnings of demand destruction, but rather, are evidencing continuing consumption growth?.

This is a superb, peerless community for producing really rich, accurate, downright prescient analyses in so many different directions. This one direction is perhaps the sole exception.

There exists a real risk of misapprehension reading iTulip's estimation / explanation of this issue. There is a misapprehension risk, because what iTulip's summation of the drivers in this petroleum bull market accomplishes, is to draw attention away from a considerably larger issue - it's not exponentially rising monetary abuse that will be the big driver of the bid on petroleum (forget the more academic analysis of pure price action).

Put aside the "what is inflation" boondoggle for a moment. In five years - the "big issue" may very well not be "combatting massive global deflation with oceans of fiat" - because empirical data on the ground, is flatly stating the world's problem with sourcing enough petroleum to meet global growth - after non-OPEC supply tips into decline after 2010 - is right on schedule - and it's kickoff date is a mere 2 years away?!

I read these editorial posts, and I see iTulip is already constructing a thesis which will encompass soaring petroleum prices thereafter as a factor of monetary abuse alone? What about the all important question of the BID on petroleum?? We even are having the theoretical structure to pigeonhole future soaring petroleum prices constructed today as a fiat currency corrolary, in anticipation of that runaway price trend!.

Where is the substantive story hiding behind this? Will the real story in five year's time be what's happening at the central banks, with their ability to keep massive deflation at bay through continuing inflation, or what's happening on the ground in hydrocarbon reserves thereafter, to keep the wheels of global GDP from locking up?

All it takes is a 1% supply / demand SHORTFALL at the global level to send petroleum prices shooting up $50 - $100 per barrel. What is your fiat currency driver of petroleum prices doing in that eventuality? Is it scurrying like hell to catch up to the price, which just shot up $100 because OPEC finally admits to the world they can't, or won't, increase capacity further in 2012? We've never seen a 1% global supply / demand shortfal before. It is a "theoretical event". Why is this point overlooked in the emphasis on soaring oil price relative to modest global demand growth being a wholly owned subset of fiat money, where "demand destruction" and ECON-101 will inexorably impose equilibrium??

To my view, discerning "clear evidence of emerging global demand destruction" as occurring from rate of change charts spanning two or three years does not seem a robust method of extrapolating global trends, or even of tabling those as trends at all yet - and the excerpts below suggest even that rate of change chart does not accurately portray the persistent growth of global demand.

This was the quote you regarded as naive and preposterous: "Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply"


STEP ONE: STUBBORN PERSISTENCE OF FLAT ENERGY LIQUIDS PRODUCTION GROWTH (FOLLOWED BY DETERIORATION AFTER 2010) - THIS FACTOR DOES NOT RESPOND BY DELIVERING IMPROVED PRODUCTION NUMBERS TO RISING OIL PRICES. (THAT MEANS "ECON 101" TRUISM - WHERE A RISING PRICE "MUST" PRODUCE RISING PRODUCTION - FAILS).

STEP TWO: IEA AND EXXON MOBIL, PLUS BP, SHELL & OTHERS, UNAMBIGUOUSLY PREDICT A "FLAT TO DOWN" NON OPEC PRODUCTION WILL COMMENCE AT, OR SHORTLY AFTER 2010 (TWO YEARS FROM NOW)

____________

WHERE IS THE SUPPLY GROWTH HERE RESPONDING TO HIGH AND RISING PRICES?

QUOTE :

Every year, baseball starts up in the Spring and there are rosy forecasts for supply growth in the non-OPEC oil supply. 2007 is no exception. Wood Mackenzie's Non-OPEC Increases to Continue in 2007 announces the good news.




The strong upward momentum for non-OPEC supply, seen in the fourth quarter of 2006 [when Dalia in offshore Angola came onstream] is expected to be maintained in 2007. The rate of increase is likely to accelerate in the fourth quarter of the year, when production is expected to be 1.6 million b/d higher than in the fourth quarter of 2006.

The putative surge in new non-OPEC production in the 2007 -- 2009 period is crucial to the world oil supply. ExxonMobil's 2005 Edition of The Outlook for Energy -- A View to 2030 forecast that the non-OPEC share of world supply will plateau after 2010. (snapshot shown left).

END QUOTE.

exxonmobil_non_opec_2.jpg


COMMENT - Please note in the above EXXON MOBIL chart, the "GAP" between production and consumption expands from 30 to 37 in a single decade 2010 - 2020 - that is a 25% increase in shortfall in the next twelve years. Then remember we've never even witnessed a 1% shortfall in net annual terms between supply and demand in the world. This chart is flatly predicting that 1% gap between supply and demand will occur between 2010 and 2020 - which then implies an easy, efortless leap in petroleum price upwards in a week, or a month or two, of $100 or more.

Now where or how exactly, in the above scenario, does iTulip posit that the fiat currency is going to be DRIVING the price rise so suggestively indicated in the above supply chart? It seems to me all objections that the "price (or inflation) cannot rise without fresh infusions of fiat currency" if the world goes into negative spare petroleum capacity, is a somewhat academic observation, which is refusing to allocate any significance to the substantive driver of the event??

I sure don't see a lot of iTulipers doing much independent thinking on this topic. Maybe the old "group reaffirmation of accepted ideas" is kicking in here?

The IEA's World Energy Outlook 2005 made a similar prediction. Any increases made between now and 2010 will most likely determine the high-water mark of non-OPEC oil production forever. And forever is a real long set of subsequent data points to establish the "latter day trend"...


QUOTE :

The apex of non-OPEC production may not be the global peak yet, but the importance of this event can not be overstated. From that point forward, the "Call on OPEC" must increase if world oil production is to show any net gains. Consequently, the security of the world's oil supply is in greater jeopardy should OPEC production falter for any reason. Given ongoing events in Nigeria, Iraq and Iran, along with declines in Venezuela and Indonesia, there are plenty of reasons to worry. As usual, Saudi Arabia is the wildcard. A future column will address the OPEC issues.

While there is no doubt that the industry is working flat out to expand its production capacity in response to high oil prices, the problem is that new projects must first compensate for output declines at existing fields before they can add to overall capacity. With underlying oil well productivity declining at an average rate of 5% worldwide, the industry needs to drill enough wells to replace more than 2 mbpd of ageing non-OPEC capacity every year just for production to stand still. Any delay in starting up a new project therefore widens the gap that needs to be filled before overall non-OPEC production can begin to rise.

The world is fast approaching a monumental historical shift. The impending peak of the non-OPEC oil supply circa 2010 illustrates the Red Queen Problem as posed in Lewis Carroll's Through the Looking Glass and illustrated by last week's Gator graph — one must run faster and faster merely to stay in place, let alone increase production.

As CGES points out, and as we have shown here, there is no longer any historical basis for using a "rational" approach to estimate new capacity additions. Wood Mackenzie's rosy forecast does not take the full power of declines in existing production into account. In so doing, they have sent an unrealistically reassuring message to the policy-makers and the public that peak oil is not a clear and present danger to the health of the world's economies.

END QUOTE .

____________


AND WHERE IS THE DEMAND DESTRUCTION HERE RESPONDING TO HIGH AND RISING PRICES?

Where is iTulip's reported global energy consumption demand destruction going on? If there is no evidence that demand destruction is evident. In the face of $100 oil and rising, this in fact suggests that apparently self evident "ECON-101 truisms, where a rising price "must" produce falling demand, in fact have failed yet to materialize. You may be anticipating this to materialize, but you apparently don't have it yet.

THIS - FROM IEA MARCH 2007 REPT. -

WHOLE ARTICLE HERE: http://omrpublic.iea.org/omrarchive/13mar07full.pdf

QUOTE :

Global oil product demand remains unchanged at 84.5 mb/d in 2006 and is seen growing by 1.8% to 86.0 mb/d in 2007. Weather-related adjustments to OECD data in Europe and the Pacific were largely offset by US demand strength and upward changes to China, FSU and India.

END QUOTE.

This is from the IEA - DECEMBER 11TH 2007 global overview -

QUESTION - Where is iTulip's anticipated global energy consumption demand destruction appearing, in this data? If there is no evidence that demand destruction is evident, "ECON-101 truisms, where a rising price "must" produce falling demand, in fact have failed yet to materialize. You apparently don't have it yet.

WHOLE ARTICLE HERE: http://www.eia.doe.gov/steo

QUOTE :

1) Global oil markets will likely remain tight through the forecast period. EIA projects that world oil demand will grow much faster than oil supply outside of the Organization of Petroleum Exporting Countries (OPEC), leaving OPEC and inventories to offset the resultant upward pressure on prices.

2) Expectations that tight market conditions will persist into 2008 are keeping oil prices high. Despite the OPEC decision last week to hold production quotas steady and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations.

3) China, non-OECD Asia, and the Middle East countries are expected to remain the main drivers of higher world oil consumption through 2008. World oil consumption in the fourth quarter of 2007 is expected to rise by 1.7 million barrels per day (bbl/d) above fourth quarter 2006 levels and total oil consumption in 2008 is projected to rise by 1.4 million bbl/d over 2007. Both projections are slightly lower than last month’s assessment.

4) USA - Total domestic petroleum consumption is projected to average 20.8 million bbl/d in 2007, up 0.4 percent from the 2006 average (U.S. Petroleum Products Consumption Growth). A further 1.1-percent increase to an average of 21.0 million bbl/d is projected for 2008. Motor gasoline consumption is projected to increase by 0.6 percent in 2007 and 1.0 percent in 2008. Reflecting moderate economic growth and assumptions of normal weather during the upcoming winter season, total distillate consumption is projected to increase by 1.8 percent in 2007 and 1.4 percent in 2008.

5) USA - Natural Gas: Total natural gas consumption is expected to increase by 5.0 percent in 2007 (Total U.S. Natural Gas Consumption Growth), largely driven by increases in the residential, commercial, and electric power sectors that occurred earlier this year. The projected return to near-normal weather in 2008 is expected to increase total consumption by 1.1 percent. ...

6) Global demand for natural-gas-intensive goods produced domestically are expected to contribute to a 0.8-percent increase in industrial sector consumption in 2008.

7)USA -Total electricity consumption in 2007 is projected to increase by 1.9 percent over last year (U.S. Total Electricity Consumption).

8) USA - U.S. residential electricity prices are expected to average 10.6 cents per kilowatthour in 2007 (U.S. Residential Electricity Prices), 2.1 percent above prices in 2006.

END QUOTES.

______________

I therefore reiterate my question. What if you do in fact proceed to observe this in the next 2-3 years? A) No reduced demand. B) No increased supply. C) Rising Prices. iTulip must adopt a contingency response to that potential new hard data eventuality if it occurred also, no? If you see this occur, will your view of the exclusivity of fiat currency as the prime driver behind petroleum prices be modified? If not, why not?

<< Against popular opinion, high oil prices will neither reduce global demand, nor increase global supply >>

[c1ue]

Re: When Debt comes calling by Sarel Oberholster

Once again, you confuse economic time scales in iTulip and other's views.

If a recession has begun in October 2007, the effects (indeed, the consensus of its existence) will not be visible until at least 6 months later.

This in turn affects present behavior vs. projected behavior.

Yes, data to date (date being some time in the past as all measured data requires collection, analysis, and dissemination time) would seem to indicate a growth in demand.

By the data you posted, the growth appears to be 1.7 MB/day vs. global aggregate oil demand of 80-90 MB/day.

So what?

Until we know what the actual effect of a US recession is (real or doomer imaginary), this information is not useful for predicting the future.

A 10% drop in US gasoline consumption along with a concomitant drop in overall consumption would more than compensate for such a 'growth'; indeed, 1.7/80 = 2% which could just be a function of US population growth.

[Guest]

Re: When Debt comes calling by Sarel Oberholster

Once again, you confuse ... So what? ... Until we know what the actual effect of a US recession is (real or doomer imaginary), this information is not useful for predicting the future.

C1ue -

I suggest you incorporate all the data inputs I provided and dial your analysis out to a one or two decade level to discern "relevant trend". All the rest of your minutiae are just parsing the effective present tense.

[FRED]

Re: When Debt comes calling by Sarel Oberholster

Once again, you confuse economic time scales in iTulip and other's views.

If a recession has begun in October 2007, the effects (indeed, the consensus of its existence) will not be visible until at least 6 months later.

This in turn affects present behavior vs. projected behavior.

Yes, data to date (date being some time in the past as all measured data requires collection, analysis, and dissemination time) would seem to indicate a growth in demand.

By the data you posted, the growth appears to be 1.7 MB/day vs. global aggregate oil demand of 80-90 MB/day.

So what?

Until we know what the actual effect of a US recession is (real or doomer imaginary), this information is not useful for predicting the future.

A 10% drop in US gasoline consumption along with a concomitant drop in overall consumption would more than compensate for such a 'growth'; indeed, 1.7/80 = 2% which could just be a function of US population growth.

Good points. It is a fact, using OECD/IEA data, global oil demand as been growing at an annual rate of less than 2% since 1990, while prices have greatly increased. The pattern of the impact of recession on all-goods prices has been consistent: they tend to peak in the middle of the recession then fall afterwards. So-called "stagflation" has in the past been an intermediate condition when inflation is still rising as falling demand and velocity of money has not yet caused prices to fall. However, an extended stagflation is possible this time around.

Our observation is that inflating wages are leading consumers to spend. Our quote of the week:

Nov. Spending Hot, But So Is Inflation; U.S. Outlook Cloudy
Dec. 24, 2007 (Investor's Business Daily delivered by Newstex)

Americans spent at their fastest pace in two years in November, the Commerce Department said Friday, easing concerns about a near-term recession.

Spending jumped 1.1% from October, the biggest gain since July 2005 and easily beating forecasts.

Incomes rose 0.4%, below the expected 0.5% rise. But wages were up a healthy 6.1% from last year.

The "healthy" 6.1% wage inflation is not necessarily an indicator that the recession is not here, but does lend credence to our Dec 2005 hypothesis that that wage inflation might be allowed to rip to forestall the post housing bubble recession.

[Sarel]

Re: When Debt comes calling by Sarel Oberholster

Thank you for appreciating the essay and your kind comments. I am still searching for answers and a debate is great for opening new thought patterns. I wear my trading scars from underestimating the powers of government. I also believe that intervention will increase rather than decrease. Creating new asset classes to inflate would certainly be an option and it will no doubt be effective. What I did find is that the ability of the markets to absorb more debt has an absolute nemesis in credit quality. Liquidity creation will not stimulate unless a debtor of quality can be found. The next condition is that the collective effect of the sum of new asset inflations must exceed the collective effect of the sum of old asset deflations. The monstrous size of the housing market will not be easily counteracted. I am a bit uneasy to make predictions during the current phase which I perceive as an aggressive high intervention phase. I do expect this phase to be followed by a more defensive phase in which damage control will become more important. My essay was meant to stimulate speculation on the outcome scenarios of the intervention phase, which I personally believe is undecided at this point and subject to the intervention routes to be adopted. It is in the cause and effect nature of those choices that the outcome will be decided. In this I also found that the depression in the highly indebted ffice:smarttags" />Germany after 1929 was certainly a match and more for the depressions in other economies. It was thus not prudent in my analysis to conclude that the debtor nation (importer-on-credit) will never be faced with the depression outcome. I will most certainly get a copy of “The Next Bubble” as this subject is close to my heart.

[Sapiens]

Re: When Debt comes calling by Sarel Oberholster

Sarel,

Welcome to iTulip!

It is magnificent that you share your knowledge, research and analysis with us. It is truly my pleasure to welcome you into our ambit.

-Sapiens