Why the end of “cheap oil” has nothing to do with supply
Ooowee…ain’t the mornin’ light pretty
When the dew is still heavy
So bright and early
My home on the range
It’s a one-horse town
And it’s alright with me
– Greg Brown, “Early”
We are flying over western Canada, on our way back to Paris. We already crossed the Rockies. Below us now is a patchwork of rectangles and squares. They are either light green…some more blue-green…or pale greenish yellow. Dotted with lakes and crossed by roads, the place looks flat and forlorn.
What do people do down there? They are farmers, of course. But do they live in those tiny boxes on the edges of the squares? And do they get in their pick-up trucks and drive somewhere? Where do they get supplies? Where do they go to restaurants and bars? We see no sign of any towns…just long lonesome roads leading as far in the distance as we can see.
There are no trees. No hills. No parks. No towns.
We’ve been flying for about half an hour over this section, at more than 500 miles per hour. Down below is an area still laid out in squares…but with no sign of any crops. It looks like a wasteland. Still no town. Where do they shop? Where do they get their trucks fixed? How do they keep from going mad?
How much money do they make? Do their wives leave them for fertilizer salesmen? Do their daughters run off to Winnipeg?
Maybe they make so much that they don’t mind the isolation. They plant; they harvest; and then they go back to Miami for the winter months. Or maybe they get together with neighbors and carry on a lively social life…with local bands, dancing ’til midnight, champagne breakfasts and wife-swapping? Who knows.
Wait…maybe that’s a town. Or a junkyard. Or a graveyard. We can’t tell. A collection of shiny things…maybe 5 or 10…
Nothing is moving. In fact, we haven’t seen a single automobile or tractor in motion. It looks to us as if there is nothing to do down there but get in your car and drive around, but no one is doing even that. Alert the Mounties. Something funny is going on down there….
Maybe the whole area has been taken over by zombies.
But we’re going to have to interrupt our travelogue and get back on the job. Our beat is money. Economics. Finance. On Friday, stocks went up another 102 points on the Dow. Gold dropped $7. Oil finished the day at $78, about where it began. Many analysts think they see the end of the stock market’s funk. Others think this is just prelude to another drop.
We spent the last week listening to Marc Faber, Chris Mayer, Doug Casey, Porter Stansberry, Eric Krause and others in Vancouver.
(What a nice city. Snow capped mountains. Beautiful harbor. Clean. Lively. Attractive. You’d hardly know it was North America.)
What did we learn?
Probably the thing that made the most impression on us was the discussion of the oil market. The facts are fairly obvious. The world is producing less and less oil. Meanwhile, it is consuming more and more oil. If the law of supply and demand is still the law of the land, the price of oil will rise.
This was the point made by Byron King, Rick Rule and Marcio Mello. We analysts may not know much – or be able to forecast very accurately – but unless some ‘unknown unknown’ appears, we’re going to know higher oil prices in the future.
“We will never again see oil in the $70-$80 range,” said Mello several times.
“It’s not that we’re running out of oil geologically or physically,” Rick Rule added. “It’s just that we’re out of $40 oil. The cheap oil has been pumped. Now we’re forced to go deeper and extract oil under more difficult, more expensive conditions.
“It’s the $40 oil that is disappearing. There’s still plenty of $200 oil.”
Eric Krause made the point that the news media has been brain dead about oil for years. He showed a cover of The Economist from about 10 years ago. It predicted a “flood of oil”…back when oil was priced at $10 a barrel.
“The next week, oil dropped down to $9.95…then, it headed up. It hit $150 a barrel just two years ago.”
There are two major schools of thought on what is coming next…and two renegade, home-schools too. There are those who believe we have a recovery…though weak…that will continue and eventually bring the economy back to health. This is the line of the Obama Administration and most mainstream economists.
Then, there are those who think the recovery will not come as planned…and that the feds’ efforts to spur a recovery – along with strong demand from Asia and the emerging markets – will lead to higher levels of inflation, destroying the dollar and bonds. This is what Marc Faber expects. He urges listeners to avoid going too heavily into cash, since it might be the number one victim of inflation. Instead, you’ll do better in stocks and real estate, he says.
A third line of thinking is what Faber calls “hard core deflationism” – typified by Robert Prechter and Gary Shilling. They think the de- leveraging trend will be catastrophic – leading to outright deflation, taking the Dow down below 1,000, for example.
Then, there’s Markets and Money line. You can call it “soft-core deflationism”:
- There is no recovery; there won’t ever be a recovery
- The de-leveraging period will be longer and harder than people expect…leading to spells of deflation and double…triple…dipping
- The feds will fight it with every weapon available
- However, they will not push the ‘nuclear button’ – wanton, reckless money printing – until the bond market cracks
- It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation; at least, not soon.
- The dollar will remain strong. Bonds will go up…for now…
- The Dow will fall…but not below 1,000…probably not below 5,000
What does that mean for gold? Well, it means gold won’t do spectacularly well. It might decline…say, down to $850 or so.
Eventually, the bull market in gold will resume, however. You can’t keep a good metal down. Just don’t expect it to go up dramatically while the private sector is reducing its debts in an orderly fashion.
Does that mean you should sell your gold? We wouldn’t if we were you. Because something could go very wrong. Another big bank failure. A blow-up in China. It wouldn’t take much to cause a panic. Investors could turn to gold for security.
Or, maybe the feds will panic…and dump dollars from helicopters as Ben Bernanke threatened.
Besides, we could be wrong. Predictions are always difficult to get right. Especially when they’re about the future.
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