Some questions about Peak Oil from a reader. And by the way, while we don’t always have space to publish your questions and comments in the e-mail edition of the Markets and Money, there is plenty of room in the comments section under any post on the website. You can respond directly to other readers, too. Here’s a question:
“Are we really running out of oil? Greg Palast discusses this at length in ‘Armed Madhouse’ and I’m inclined to agree with his assessment. We are running out of “cheap” oil i.e. it don’t [sic] cost much to pull it out of the ground but at the same time the high price of oil has made the harder-to-get-at oil economically viable and profitable. Enter Venezuela with 1.36 trillion barrels of heavy oil that is now worth pulling up not to mention Canada with significant oil reserves in tar sands. It’s not a supply problem in the sense that the Earth is running on empty. It’s a supply problem in the sense that production is limited in the pursuit of higher prices. Oil reserves are a measure of oil you can pull up at a certain price, the higher the price the greater the level of world reserves. At US$15 a barrel oil reserves are small indeed. At US$70 it’s a whole new ballgame.”
We sense some circularity in this logic. Do oil reserves really expand as oil prices go up? Well, rising prices do make previous projects economically viable. Projects with high costs make more economic sense when you can sell the finished product for more. But here’s an important point: the total energy return on energy invested tends to get much lower in the further you get away from high quality high oil reserves.
The real issue is that most of the high-quality cheap oil that’s powered the world for the last 50 years has already been produced. “Peak Oil” doesn’t mean the world is going to run out of oil. That will never happen. But oil will cease being the cheap, abundant, dominant fuel of the industrial world.
Peak Oil really means the cost of energy as an economic input is going to rise for a very long time as the world struggles to produce more and more oil from more remote and costly locations. High prices are not a sign of impending abundance. They are a sign of economic scarcity. They are also, of course, a sign of emerging opportunity for other fuels and energy technologies that can replace the work oil does.
“It was with fascination that I read your newsletter and contrarian views. Pardon my ignorance, but all this money supply and high asset prices… and the printing of money… what sort of things could happen that stop this merry go around?
“What are the potential shocks? My concern is that for those of us that are getting wiser reading your email, what do we do? Stay in cash? We do not want to miss out on the boom either? If you have the time, your reply will be most appreciated.”
Ah yes, a great series of questions. Those are the ones that keep us up at night, too. That and our brother’s 5-year old African grey parrot named Albert.
Two things happen at the end of every bubble: credit tightens…and investors return to their senses.
The re-rating of subprime risk has the potential to return investors to their senses AND tighten the availability of global credit, all at the same time. That’s why markets are so nervous about it.
In the broader sense, the decline of the world’s reserve currency means massive falls in dollar-denominated stocks and bonds. Just what will happen to cash, precious metals, and the stocks of firms that produce tangible assets…is unknown. That’s why it’s worth reckoning every day. More on this next week.
More mail. And by the way, we’re happy to publish the critical e- mails too. We just haven’t been getting many of them lately. All you malcontents out there, don’t be so shy.
“I just subscribed to your fantastic comprehensive and eye opening truly “Markets and Money” just a few days ago and I really loving it. [Thanks. Glad to hear it.] One question: if the demand in China drops once a major slow down occurs in US, which is possible considering what is going on with their housing market, then what do you think would happen to Australia which is supplying the raw material such as iron that you have talked about just recently? By the way do you see a come back for US dollar or is this time it is the real crunch time and there she goes?
“Regards, Tony B.”
A big picture question. In the larger historical scheme of things, the age of American economic ascendance is over. That is, America can no longer afford to be the engine of global growth. The US economy has been red-lining it on debt for far too long.
Who will replace the American consumer as the chief source of global demand? Well, no one is ready to step in and take that role right now. The Euro is enjoying a great run because investors correctly identify Europe as a high-savings, decent-growth region to own while the greenback implodes. But the next 50 years belong to the Far East.
Eventually, the great source of new consumer demand in the world lies in the Middle Kingdom and India. Right now, all the investment opportunities from Asia’s rise are in resource-intensive industries and infrastructure. This explains Australia’s golden age. In the next few years, you’ll see a gradual shift to retail and consumer opportunities in Asia’s vast domestic markets. It will be time to buy Chinese stocks. And the next Warren Buffett will spend his time sifting through the 7,000 publicly listed companies in India, 6,500 of which are covered by one analyst at the most, and usually none at all.
But before that happens, the whole global economic growth model has to reorient itself away from America. Asia has to stop gearing its currency and growth strategies through exports to the United States. That’s been an extremely useful and profitable strategy, however, for the last 50 years. No one is going to change until they are forced to. The dollar’s steady deterioration is doing the forcing.
Don’t expect a seamless transition, though. Imagine changing the engine in your car while going full speed down the free way. You couldn’t do it. There would be a wreck and all sorts of twisted metal.
Markets and Money