The Ambiguity of what's happening in Oil vs. Inflation

[jk]

Re: The Ambiguity of what's happening in Oil vs. Inflation

grg55,

i'm curious about your thoughts on peak oil and its implications. do you see a severe, sharply focused crisis with a huge spike rise in price that doesn't correct much, or a protracted and more gentle rise in price [i'd include a stair-step rise spread over significant time in the latter]? what are the investment implications? how are you allocated to energy investments?

[GRG55]

Re: The Ambiguity of what's happening in Oil vs. Inflation

grg55,

i'm curious about your thoughts on peak oil and its implications. do you see a severe, sharply focused crisis with a huge spike rise in price that doesn't correct much, or a protracted and more gentle rise in price [i'd include a stair-step rise spread over significant time in the latter]? what are the investment implications? how are you allocated to energy investments?

Here's my current view on peak oil:
http://itulip.com/forums/showthread....16855#poststop

To this I will add the observation that, although I agree with EJ that the market pricing mechanism is the best way (not necessarily the "fairest" way however) to ration consumption and promote alternatives, I have absolute confidence that if/when there are manifest supply constraints governments of all political pursuasion will be unable to resist meddling in the markets, and will undoubtedly make the situation worse.

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Apologies to EJ if my comments about iTulip's stated views seem overly contentious. My perhaps overly blunt response was prompted by reading that the concern over flat production growth in the petroleum market might be comparable to previous irrational fears regarding Y2K.

EJ dreamed up this community, built it, and funded it. He has created a focal point for all those who know there is something quite wrong in the big picture, and these concerned people are scattered all over the world. We benefit and become more grounded and properly armed in our foreknowledge by coming here to read the insights of many intelligent and like minded people.

EJ does not require me to reiterate full and due respect for his work or this community. It has been openly expressed several times before. I hope therefore it's OK for people here to openly question whether iTulip is fully appraising the scope one or two specific issues from time to time.

Now if Fred wants to change my moniker to "biggest pain in the ass" that's OK with me too. I'll wear the moniker comfortably and even perform a virtuous public service, as it always makes everyone else feel good vicariously to call someone else the biggest pain in the ass.

[GRG55]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Apologies to EJ if my comments about iTulip's stated views seem overly contentious. My perhaps overly blunt response was prompted by reading that the concern over flat production growth in the petroleum market might be comparable to previous irrational fears regarding Y2K.

EJ dreamed up this community, built it, and funded it. He has created a focal point for all those who know there is something quite wrong in the big picture, and these concerned people are scattered all over the world. We benefit and become more grounded and properly armed in our foreknowledge by coming here to read the insights of many intelligent and like minded people.

EJ does not require me to reiterate full and due respect for his work or this community. It has been openly expressed several times before. I hope therefore it's OK for people here to openly question whether iTulip is fully appraising the scope one or two specific issues from time to time.

Now if Fred wants to change my moniker to "biggest pain in the ass" that's OK with me too. I'll wear the moniker comfortably and even perform a virtuous public service, as it always makes everyone else feel good vicariously to call someone else the biggest pain in the ass.

Well on another thread earlier today jk was suggesting we needed more disagreement around these parts...

[EJ]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Here's my current view on peak oil:
http://itulip.com/forums/showthread....16855#poststop

To this I will add the observation that, although I agree with EJ that the market pricing mechanism is the best way (not necessarily the "fairest" way however) to ration consumption and promote alternatives, I have absolute confidence that if/when there are manifest supply constraints governments of all political pursuasion will be unable to resist meddling in the markets, and will undoubtedly make the situation worse.

Markets are short term unfair, long term fair, if left alone. But since they never are left alone because of the political consequences of short term unfairness, you can absolutely count on government making any problem worse.

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

JK is a mixed up guy who rarely makes any sense?

Well on another thread earlier today jk was suggesting we needed more disagreement around these parts...

:rolleyes:

[EJ]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Well on another thread earlier today jk was suggesting we needed more disagreement around these parts...

I agree with JK. At this point, with so much past prognostication confirmed by events, we need to refer only rarely back to what iTulip has established and venture out into the realm of the unexplored and unknown. There will be plenty of room for disagreement and argument, and that is how we learn. I talk about this in my letter to readers here. I learn a lot from your expertise in the petroleum industry as I have from Sean O'Toole's in the real estate industry. Thanks.

[EJ]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Apologies to EJ if my comments about iTulip's stated views seem overly contentious. My perhaps overly blunt response was prompted by reading that the concern over flat production growth in the petroleum market might be comparable to previous irrational fears regarding Y2K.

EJ dreamed up this community, built it, and funded it. He has created a focal point for all those who know there is something quite wrong in the big picture, and these concerned people are scattered all over the world. We benefit and become more grounded and properly armed in our foreknowledge by coming here to read the insights of many intelligent and like minded people.

EJ does not require me to reiterate full and due respect for his work or this community. It has been openly expressed several times before. I hope therefore it's OK for people here to openly question whether iTulip is fully appraising the scope one or two specific issues from time to time.

Now if Fred wants to change my moniker to "biggest pain in the ass" that's OK with me too. I'll wear the moniker comfortably and even perform a virtuous public service, as it always makes everyone else feel good vicariously to call someone else the biggest pain in the ass.

I have two roles here: to lead and to provide expertise. In the leadership role, I encourage members to question my positions. It's the iTulip equivalent to my open door policy as CEO of high tech companies: if I'm not listening, I'm not learning and the community suffers.

That said, on topics in which I have decades of expertise, I am not inclined to debate members unless they have a similar level of expertise developed independently. I will debate Warburon or Mayer or Hudson or anyone else on banking, finance, and markets who has a solid 10+ year published track record, but not others. It's not constructive.

I'm telling you there will not be a Peak Oil economic crash with ox drawn cars. A series of lesser crises? Yes. But not the end of the world. If there is an end of the world event it will be random, not broadcast for decades. That's not how markets work. Y2K and Peal Oil is how the imaginations of non-experts work.

I'm trying to teach you something. You may decide you don't want to learn it, but that's up to you. The vast majority of visitors stopping by iTulip over the years chose not to learn in Dec. 1999 that Y2K was going to be a non-event, in Q1 2000 that the tech stock bubble was going to pop, in 2001 that the gold market had bottomed, and in 2005 that the housing market had topped. Those who did choose to learn sold their tech stocks in 2000, bought gold in 2001, and sold real estate in 2005. I will gladly debate anyone on these issues who has a similar record.

You are far from a pain in the ass. Your contributions are highly valued.

[jk]

Re: The Ambiguity of what's happening in Oil vs. Inflation

ej,

i have one cavil re: your comparison of peak oil and y2k. the y2k scare led to enormous expenditures by business to rewrite and update software that might have been susceptible to the bug. it created a mini-industry. and we don't know what might have happened had that preparation not occurred. i don't see something similar happening with regard to peak oil.

i think the energy shift preparation effort is harder to evaluate than that for y2k, because the threat is both less well defined and less certain in its timing. nonetheless, it seems to me that, for example, there will have to be a major re-organization of housing and commuting patterns that i don't think has begun at all, and is in fact likely to be retarded by the housing bust.

in general, it is the warnings of the people who are truly concerned [about whatever coming crisis you name] that alerts others and causes the preparations that ultimately soften the event. perhaps if crude stays in its current range, say above 75, we will start to see some shifts. but for now i don't see much happening. do you?

[Rajiv]

Re: The Ambiguity of what's happening in Oil vs. Inflation

See my post THE CLIMATE CRUCIBLE

I think something similar may happen on the peak oil front

[EJ]

Re: The Ambiguity of what's happening in Oil vs. Inflation

ej,

i have one cavil re: your comparison of peak oil and y2k. the y2k scare led to enormous expenditures by business to rewrite and update software that might have been susceptible to the bug. it created a mini-industry. and we don't know what might have happened had that preparation not occurred. i don't see something similar happening with regard to peak oil.

i think the energy shift preparation effort is harder to evaluate than that for y2k, because the threat is both less well defined and less certain in its timing. nonetheless, it seems to me that, for example, there will have to be a major re-organization of housing and commuting patterns that i don't think has begun at all, and is in fact likely to be retarded by the housing bust.

in general, it is the warnings of the people who are truly concerned [about whatever coming crisis you name] that alerts others and causes the preparations that ultimately soften the event. perhaps if crude stays in its current range, say above 75, we will start to see some shifts. but for now i don't see much happening. do you?

Y2K was the perfect doomers hook. It had two primary elements of all doomer prophecies: 1) technical causes that made the risks indeterminable to non-experts, and 2) a hard deadline. Think of these as inverted bubbles or, to use Warburton's language, mists–except that exert undue negativism versus euphoria.

Energy supplies are similarly technically inscrutable to the average Joe. (After a number of lectures over the years from my cousin who has spend his whole life in the petroleum industry, I always leave the discussion thinking I understand less than when I started.) As for the Peak Oil doom deadline, this was invented by the Peak Oil crowd itself and has been moved at least once that I'm aware of. As tech stock and housing market doomers, we've never had to move our tech crash market curve except to acknowledge that it was optimistic. Possibly our housing chart will be optimistic, too. (Our post-mean reversion estimate still leaves pricing skewed above the long term inflation rate.)

A huge and complex energy supply and demand system that took a century to evolve may undergo relatively rapid change, but "rapid change" means on the order of a decade or two. Think of how your neighborhood might change if gasoline rose to $10. Where I am, I can imagine the obvious initial reaction: switching to small cars and more people working at home, more people in less space (to save on heating and cooling), etc.

An energy emergency is more likely to be created by war than from global supply falling off a cliff. Then a government energy "crash program" is possible. The development and dissipation of these negative mists is similar to the euphoria generating mists as in stocks and housing. It usually goes like this: deadline passes, nothing happens, doomer faithful fall into despair and confusion then head their separate ways. Positive mists end in a market crash, the euphoric faithful fall into despair and confusion, then head their separate ways.

It appears that consumer credit is expanding at more or less the same rate as oil prices are hitting households. The economy is adjusting to higher oil prices, if we call creeping inflation "adjusting." No telling where threshold is, where expanding credit can no longer compensate for consumption of disposable income due to rising energy costs but that's what we need to watch out for.

[GRG55]

Re: The Ambiguity of what's happening in Oil vs. Inflation

ej,

i have one cavil re: your comparison of peak oil and y2k. the y2k scare led to enormous expenditures by business to rewrite and update software that might have been susceptible to the bug. it created a mini-industry. and we don't know what might have happened had that preparation not occurred. i don't see something similar happening with regard to peak oil.

i think the energy shift preparation effort is harder to evaluate than that for y2k, because the threat is both less well defined and less certain in its timing. nonetheless, it seems to me that, for example, there will have to be a major re-organization of housing and commuting patterns that i don't think has begun at all, and is in fact likely to be retarded by the housing bust.

in general, it is the warnings of the people who are truly concerned [about whatever coming crisis you name] that alerts others and causes the preparations that ultimately soften the event. perhaps if crude stays in its current range, say above 75, we will start to see some shifts. but for now i don't see much happening. do you?

A cottage industry of books and lecture circuit semi-celebrities has already formed around peak oil (and more recently around "peak everything"). I read Matt Simmons book when it came out, and that's the only one I'll ever read I suspect. And there's the Y2K analogue websites (a few of which frequently have some interesting, thought-provoking information and ideas).

I think the acceptance of, and response to energy prices likely staying elevated for an extended time is beginning to occur. The problem is it will be difficult to isolate what part of the decision making and any behaviour change is due to concerns about future oil supply availability, versus reduced capacity to access credit and responding to the climate change agenda. Hypothetical examples: What is the reason your neighbour purchases a new, smaller car than his trade-in? Or why is a utility like FPL putting in wind farms?

In my own case I am evaluating a ground source heat pump for the retirement cottage I hope to build one day. Natural gas is the usual heating fuel, and I am quite sure it will always be available at some price, but I like the idea of not being dependent on an outside fuel source that will undoubtably increase in price at least through the coming inflationary period. When I built my last house natural gas was 80 cents and falling, and I didn't even bother upgrading to mid-efficiency furnaces. Converting a good portion of the housing stock to ground source heating and cooling (if it was practical to do so) could save a lot of fossil fuel consumption.

[Spartacus]

Re: The Ambiguity of what's happening in Oil vs. Inflation

Y2K was the perfect doomers hook. It had two primary elements of all doomer prophecies: 1) technical causes that made the risks indeterminable to non-experts, and 2) a hard deadline. Think of these as inverted bubbles or, to use Warburton's language, mists–except that exert undue negativism versus euphoria.

personal Side note: I'm surprised Gary North is not spreading paranoia about another possible armageddon, as he did the Y2k and with AIDS before that

I did not bother with Y2k at all, even though I was a programmer at the time.

A couple of years later I had become very interested in economics and found Gary North to be a very informative source (and never connected him to Y2k)

around 2005 I went and did some research on y2k and surprise, surprise, my fave economic writer turns out to have been the biggest pusher of the scare tactics. That was when I discovered GN's activist religious background.

I always read authors with a grain of salt, but now I apply generously more salt whenever I read Mr. North. And it spilled over. To the point where I now routinely find myself inventing reasons why some Libertarian POV is wrong, something I had only routinely done with right and left wingers before.

[Guest]

Re: The Ambiguity of what's happening in Oil vs. Inflation

That said, on topics in which I have decades of expertise, I am not inclined to debate members unless they have a similar level of expertise developed independently. I will debate Warburon or Mayer or Hudson or anyone else on banking, finance, and markets who has a solid 10+ year published track record, but not others. It's not constructive.

EJ - It's important to set this record straight - my comments were not contributed to solicit a personal debate with you. They were contributed to merely add a dissenting opinion, which you also note is one of the essential functions of a healthy questioning community. If my points provoke any further small bit of reflection, that may then "trickle" into your future commentary collectively with many other contributed posts, that's all to the good. No personal reply from you was required or expected.

I'm telling you there will not be a Peak Oil economic crash with ox drawn cars. A series of lesser crises? Yes. But not the end of the world. If there is an end of the world event it will be random, not broadcast for decades. That's not how markets work. Y2K and Peal Oil is how the imaginations of non-experts work.

Truthfully, this interpretation is nowhere to be found in what I've posted. If you percieve the issues I posted to be embellished with descriptions of ox drawn carts you may be imagining (seems JK did also) a level of fantasy or agitation in me that is manifestly not there. Nor has the smallest overt suggestion of brain-fevered comic book scenarios ever come from me if one reads my comments to scrutinize for such a reference. The questions I asked certainly might raise doubts about an orderly transition from fossil fuels, but I leave any conclusions strictly to the reader. Maybe that sobriety was missed?

If anyone here genuinely percieves my suggesting "ox-drawn" scenarios, rather than my openly referring to them in jest, there is a risk that this mis-perception can fog up any valid point I may have made. It sould be recognized also that I was not professing my (as you well note - unqualified) own opinion, but rather calling to attention the straightforward discrepancy between the unequivocal opinion of a well qualified Saudi oilman and some very long term charts scaled back to 1965 for a reasonable future projection. These references, and their simple juxtaposition do not constitute fluff. With a bit of luck they will find their way into the general suggestion box.

My intent in the posts above was that by noting the gap in scale between petroleum analysts statements on production growth, and the implied trajectory of 50 year charts of global oil consumption, this limited set of data might then be worth your adding to the "non-specialist" message box at iTulip. Do you grant even lay observers can put two simple and verifiable pieces of confirmed data together and discern the same conclusions as would the specialists?

Again to clarify - I do not profess ox drawn bentley stereotypes seriously anywhere, so the fact they are being percieved fogs the issue.

I'm trying to teach you something. You may decide you don't want to learn it, but that's up to you. The vast majority of visitors stopping by iTulip over the years chose not to learn in Dec. 1999 that Y2K was going to be a non-event, in Q1 2000 that the tech stock bubble was going to pop, in 2001 that the gold market had bottomed, and in 2005 that the housing market had topped. Those who did choose to learn sold their tech stocks in 2000, bought gold in 2001, and sold real estate in 2005. I will gladly debate anyone on these issues who has a similar record.

I was entirely receptive to the stock market 2000 bubble warnings from other sources at that time, and four years later I very promptly took Peter Schiff's advice to sell a home and rent in 2004. I am demonstrably quite open to learning in fact. The fact Peter Schiff has considerably less depth than you and I am aware of that, should alert you that I by no means miss the significance of much of your other warnings and commentary.

I took your advice to sell all stocks at a time this summer which personally cost me tens of thousands of dollars, and have remained within that stance consistently since. This should be sufficent to suggest that if I disagree with you on the scale and implications of this one issue regarding petroleum, you can hardly say it's because I'm too recalcitrant to be receptive to many other warnings and issues you've raised.

Once again EJ, you are concluding my post was intended to elicit a personal debate wth you. This may be the mistaken impression given, because my posts on this topic openly challenge whether iTulip's permanently finance based view of energy can be the whole picture, when we read oilmen talking consistently about flat production growth.

Further, I am entirely on board with 95% of iTulip's theses on all other topics, and I am indeed learning from those themes. I express my very sincere appreciation for that. However you might agree that leaving a very small margin of 5% disagreement across the full spectrum of iTulip positions, to the discretion and even to the open disagreement of your readers is probably a healthy sign they are thinking for themselves, right or wrong. This does not mean you are dealing with a blockhead here to whom instruction in other matters is a lost cause.

You are far from a pain in the ass. Your contributions are highly valued

Thank you - given I'm bugging you so notably at present, that's magnanimous.

My sole issue with the views of this community is that the fundamentals you acknowledge regarding the energy supply demand picture are not anywhere "officially" factored into your monetary inflation picture, with no indication you plan to formally include them going forward - and we'll be going forward into a period where everyone acknowledges oil will become ever more a factor.

I note that you wrote some early posts about the 1970's which openly acknowledged the primary role of oil in causing inflation. This has been culled entirely out of present stated positions. Charts evidence no anomalous price action in petroleum relative to other commodities, but the local evidence of strategic jockeying for this resource worldwide, and all components to do with food inflation speak loud and clear at the local level that there is an underlying issue in petroleum not encompassed by inflation alone.

Is it possible for iTulip to set some kind of benchmark - perhaps a number, or a chartable ratio - whereby you do a location check in 24 or 36 months, to discern whether the problems (you also acknowledge) in petroleum begin to exert the same major effect upon inflation which you ascertained in previous commentary about the 1970's? To my view, those petroleum derived inflationary effects are already manifestly here. If you have already factored this, I have not seen clear reference to it.

Finally regarding your reference to oil production"falling off a cliff". My entire post above was expressly to point out this was not the thesis. The thesis was the implications of the scale up of SE Asia petroleum demand.

But nonetheless, with regard to production falling off a cliff, I will attempt to dig up some bell curve charts showing various oilfield production growth and decline. ALL of them describe a classic bell curve, with a moderately sharp top. There is no such thing as an "undulating plateau", despite Daniel Yergin's outfit CERA have gone to great trouble to write an entire report about undulating plateaus in oil production. This dynamic is very similar to the trajectory of economies. They are either in expansion, or in decline in net terms - but the flat plateau of prosperity as you note elsewhere does not exist. Any assumption that net global oil production will buck this law may be mistaken.

If you conclude on your own account at some point in the next two, three or four years that "flat oil production growth" is demonstrable, then it would be a very large geologic anomaly for global net production to not commence decline shortly thereafter. The bell curve charts plotting production of major fields should do all the talking required on that account. Factor in SE Asia's secular growth trend and it may be a topic here worthy of careful examination.

No reply is necessary. Thank you for your personal response.

[c1ue]

Re: The Ambiguity of what's happening in Oil vs. Inflation

This has been an interesting discussion.

Lukester, you are correct in your assertion that Asia will consume all possible present and future oil production should existing rates continue in any fashion whatsoever.

However, I've noted before that China's elite are already well aware that it is physically impossible for all of China to enjoy the standard of living that the US has now.

Furthermore, while China is growing, nonetheless the Faustian bargain they have is that they must create organic growth in order to progress beyond a certain point. This growth is still not there, but fortunately China is not at this inflection point yet. Perhaps closer than most would think, though...

Thus it is a highly complex situation where the source of new demand (China and other developing countries) is still highly dependent on the existing capital/consumption sources (US/EU) with a 3rd wild card - the oil producing nations who have capital but don't have organic growth or non-commodity production.

I have been looking at this situation with a different viewpoint as I've consistently noted.

1) Should demand organically overcome supply, we'll get a world similar to what you saw in Mad Max: cutthroat tactics to secure what little there is of a dwindling resource. Up to and including all out war, occupation, and re-population of vital resource areas

2) Technological solution: Fusion power or some such

3) Muddle-through - US and EU standards of living fall significantly, China and 3rd world nations rise significantly, but the two are still far apart.

Unlike Rube Goldberg nor perpetual motion machines, you cannot as a nation have more than the sum of your customers unless you have some type of monopoly and a strong defense - especially not if you have more people. China cannot go Japan's way - as a remora on the US' backside.

China's labor is ultimately NOT necessary for survival, thus at the end the US could just stop buying from China and regrow all of the industry that was outsourced. A long and painful process but do-able.

Thus it may be possible that oil will hit $1000/barrel or some such, but as a strategic resource of such ubiquitous impact on all stages of economic activity, I see neutron bombs being used before that much money changes hands for a barrel of oil. This is, of course, assuming no hyperinflation in the US