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Latest Comments58 Comments
Food and Energy Prices: Lessons From the '70s
That's not so inconceivable when you consider that oil tends to lead commodity movement, and oil will probably be working its way much higher over the next 2 to 4 years.
The Crude Oil Price Disconnect
For example, there is the math of net energy. Even much of the oil bear contingent accepts that we are at or near the global peak for the old fashion conventional oil from easy to extract fields. They say we are nowhere near an oil problem though because of the flood of new unconventional oil on the way. However, if you look at the new oil we are depending on over just say the next 3 years, you see that about half of it is the rampup in deepwater and tar sand oil. These two sources have EROEI (energy returned on energy invested) estimated at around 3-4 with the old declining conventional field production EROEI at about 10 or better. Comparing these two values on the EROEI oil displacement curve means that it is taking 3 barrels of this new production to offset each barrel of declining conventional production! This amounts to about 7 mbpd in 2010 production that will be missing from the physical barrel to barrel accounting of new replacing old - 7 mbpd missing in action from the globe's net energy supply. This one factor alone completely does away with CERAs wall of excess oil by 2010.
Also consider the ELM (Export Land Model), which tabulates the effects of internal oil consumption increases by the enriched oil exporting nations. In the model, if exports are half of total production and conventional production is near peak (roughly the global case) and assuming conservative figures for existing production decline rate, internal consumption increase rate (about half of what is actually occuring in many major exporters), the amount of oil exported post peak winds up being just 10% of the total exporter's post peak production! A full explanation of ELM is at theoildrum.com. This causes much of the forthcoming wall of oil in the future to fall somewhat flat.
Don't Shoot the Speculator for Commodity Prices
The hungry people rioting all over the world are no more alone in their responsibility for higher prices than the investors are.
Why New Oil Price Highs?
12 Potash Companies Sprinting Ahead
Many Investors Seem To Think the Worst Is Over
Technically, the major indexes are still in dangerous bear mode, but right at the turn point where either the bear trap will be sprung or a technical break from the decline will happen.
The Coming Commodity Correction: Hedge Your Downside Risk
As for agri commodities, there is much more of a physical shortage than in the 70s on crops needed for emerging market food need and the explosion of ethanol use.
As for the rotation of the world's investment money between the stock market and commodities, you probably have a stronger version of that in this cycle too. Think of all that fiat money that has been created out of thin air since the financially staid 70s. There's much more investment money to rotate this time around.
The physical need for commodities being stronger will probably tend to make the corrections more muted than in the 70s, but the attraction of more investment money into the space will probably aggravate the corrections. So they will be an unpredicatable, necessary evil as usual if you are to participate.
Commodities Boom and Rotation
Brother, Who Can Spare Another Dime for Oil?
There are two types of explainers to keep in mind when it comes to what's happening with oil. First, there are geophysical types, the followers of Marion Hubbert who look primarily at the oil situation in the ground - the Marion Independent Nonaffiliated Deducer types or MINDs for short. This type has been writing The End of Cheap Oil and other science oriented works since oil was $12/bbl in the late 90s (Deffeyes, Campbell, etc.) Hubbert himself explained clear back in 1956 that the U.S. production would peak by the early 70s and he explained that by the early 2000s global production would be peaking. Then there is the second type of explainer, the economist types who look primarily at some soap opera of above ground intrique - the Market Oriented Reporters Of Nonsense or MORONs for short. These people have been publishing errant projections on oil for many moons. Just go back over Valueline's price range predictions on microfilm for the last 20 years or so (I have). Nearly every projection was wrong, both for up and down ranges and they totally missed the rise in oil of the last 5 years. You would have done very well investment-wise doing the exact opposite of their projections.
The MINDs, on the other hand, have been right all along. Hubbert was about the only human on the planet who knew U.S. oil would peak in 1971 and that global peak is happening very close to now. The End of Cheap Oil has indeed arrrived. And I really don't think it's just a speculation.
Chance This Is The Bottom? Zero.
You can hold the good stocks in the time it's going to take to unwind the problems (a lot of them will climb), but bear markets typically have sudden, hard to predict sell-offs that grow in intensity gradually dragging even the strongest areas of the market into them untill a capitulation phase is reached. It's going to get more and more dangerous both long and short stocks. The Fed will continue to throw bail-out money making a short portfolio a mine field, and sudden fits of market anxiety over debt's lack of visibility will probably make a long portfolio a constant struggle.
A commodity portfolio may be the best area as it will benefit from the flooding of the money supply no matter what kind of problems are created or solved in the stock market. You won't have to be right about the next big gyration of stocks. We are likely into a long market cold spell like '68 to '82 associated with the mega financial/hard asset inflation cycle where commodities will be outperforming a dangerous stock market for quite awhile as we are only about 4 years into the upswing of the hard asset bull market, not even reverted to the historical mean yet (not really "bubble" territory).
4 Factors Fueling Oil Prices Higher
When oil was extracted decades ago, it took about 1 barrel of oil energy to hand us each 80 barrels of net energy from shallow, naturally pressurized reservoirs. Now it's about 10 to 20, depending on location. This figure is dropping faster and faster as the "hanging fruit" has already been exploited. There is a simple math fact about EROEI that dictates a rapidly collapsing net energy supply to the economy as you go below an EROEI of around 3 to 4. If you go from an energy source with an EROEI of 20 to a source with an EROEI of 1.3 (the most agreed upon figure for corn ethanol), YOU MUST MAKE 60 TIMES THE AMOUNT OF THE LOWER EROEI SOURCE TO GAIN THE SAME NET ENERGY AS GIVEN BY THE HIGH EROEI SOURCE. That means to displace one barrel of oil, you must make 60 barrels of ethanol. Most all of the manufactured fuels have EROEI of less than 3 making them nearly useless in displacing foreign oil, but very usefull in causing catastrophic food inflation.
EROEI makes our true energy supply not the total liquids curve commonly accepted but something much closer to conventional crude plus condensate, which is falling behind the total liquids curve at a quickening pace (it peaked in 2005 and hasn't made a new high since, although it nearly did this past month).
What's left of the big reserve amounts of oil has big EROEI issues and a large amount of it is going to take more energy to extract than the oil will supply. The rapidly declining EROEI curve is going to make the energy world going forward much different than what we've been spoiled by in the past. For some charts on this and a good overview, see the current EROEI story by Robert Rapier at theoildrum.com
Burst Bubble? Commodities' Long-Term Story Remains Intact
As for the volatility that goes along commodities, you can either be the fast trader and try to anticipate each gyration and buy and sell around them (good luck with that) or you can dollar cost average into a line-up buying more aggressively after the corrections and adjusting the line-up only if the good areas of sector warrant it. You pretty much have to make up your mind which approach suits you and stay with it.
It seems to me that most fast traders anticipate 4 or 5 phantom corrections for each real one and wind up rotating in and out too much and being on the sidelines when a lot of the quantum surges happen when they least expect them. They chop the bull climb into bitty pieces of small gains to mix with small loses, which typically results in underperforming a more stable strategy. Not that there aren't traders who can do better with faster trading, but averaging better long term results this way is precarious to say the least.
Commoditizing the 'Decoupling Theory'
Short Covering Helps Boost Stocks
Short Covering Helps Boost Stocks
Technically (which efficient market theory says is "all things considered") we have the leadership areas that have lead the start of the bull and the roll over process into the bear being the small cap and value end of the spectrums, and they have already thoroughly broken lower than their January lows (look at $RUT, $RUV, $IJE, etc.). The broader market has been very faithfully following the lead of these groups, which strongly suggests that, after some bouncing, the S&P 500 will take up residence below its January low.
This whole market condition in '08 is remarkably similar to the 70s. After the 70s, every economic downturn has been countered with a Fed loosening. This brought the investment money on the sidelines back into the stock market because there was no problem inflation. But now we have a downturn CAUSED by loose money and the Fed must fight loose money with still more loose money. The mounting inflation caused by this is causing the money on the sidelines, which stands at high levels seen at stock market bottoms, to choose commodities over stocks, which causes still more inflation! It's a cycle that feeds on itself somewhat.
We had this in the 70s where the stock market made no progress for the 15 years from '66 to '82, but a 15 year commodities bull raged. The 70s version was defused by, among other things, a quick return to very cheap oil in the mid '80s. But in our current version, we are going to have very much more expensive oil. The defusing of this investment money inflationary spiral effect may be tough this time. If you look at a chart of paper vs hard asset investing over the decades, you see a clear and powerful cycle at work and where we are now in that cycle. I posted this chart at www.theoildrum.com/nod...
If this doesn't link directly, go to "Drumbeat" for March 9 and scroll down to near the bottom of comments for the chart - posted by "netfind". It clearly shows where we are on the issue of over/under valuation of commodities.