Peak Oil as a Direct Result of Misallocation of Funds

by: Francis Schutte July 24, 2008 | about stocks: USO

Francis Schutte

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Unemployment is up, banks are going under, the trade deficit for the US looks nasty, the economy is down, inflation is up, investors are licking their wounds, oil has become so expensive airline companies have to park part of their fleet and let planes fly slower, but talking heads try to get the investor back into the stock markets…and yet, we have only seen the tip of the iceberg of the crisis, the credit crunch and the garage sale.

The risk that inflation may push up interest rates in the US this fall is growing by the day. The ECB already hiked the EU interest rates and has planned more before yearend. Europe doesn’t have the current account deficit the USA has and this offers the luxury to fight inflation.

Oil is easing somewhat, however because of peak oil, we will probably never see back a price level of $ 100 or lower. Even not if the economy falls into a huge depression. In other words, over the last years, the price of energy has increased by a fivefold ($ 20 to $ 100). Slowly but surely, the expensive oil is and will work its way through the system and prices of food and other consumer products will increase even more than they already have.

As people start to bunker oil for the winter, I expect a huge run up of the oil and natural gas prices towards the end of the year. Next we will have to see how cold the coming winter will be…

The American current account deficit of bn $ 700 doesn’t get solved and bringing down the huge amount of oil that is imported will take either a war or another 7 years. What we have here is a deep fundamental problem.

Politicians and bankers would love to inflate another bubble, however there is nothing left to make such a bubble.

We have, for the first time, entered an era where demand for oil is larger than supply. Crude oil prices are in a secular uptrend as the shortage between supply and demand is compensated by stocks. But the day is close these stocks will be depleted, prices will edge up again and demand will somehow have to give in. The Western world is already burning less liquid energy. The Far East is over happy to be able to use the difference.

Talking heads still don’t seem to understand that the oil prices ain’t rising in a context of falling demand and rising supply and higher stocks. What we see for oil is exactly the opposite. Those waiting for a credit bubble, a housing bubble and/or a real estate bubble are going to be deceived.

We have a paradigm shift. The misallocation of funds that are the result of Fractional Reserve Banking and creation of money out of thin air are the motor behind the actual and future shortage of liquid energy. Instead of allocating funds to new exploration, drilling and the modernization of refineries, the funds were used to fuel the worldwide bubbles in real estate. Because of an oversupply, real estate prices are going down…and ironically, because of an undersupply, oil and gas prices are going up.

As usual, the political rulers have made it worse than it already was: no licenses were given to built nuclear power stations and new oil refineries. They simply refused to accept the reality that one needs to break eggs to make an omelet. The harm has been done and it will probably take some years before the problem is solved.

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This article has 30 comments:

Jul 24 08:29 AM
I switched vehicles when it was $2.75/gallon and saved over $200 month in gas then. SUV sits and is only used to haul large loads now. The demand destruction has started and tough to reverse that now. Speculators have built the bubble, and now it seems to be popping. Yet the bulls are still trying to lure us in by calling it an adjustment.
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Jul 24 08:39 AM
speculators who were in houses (bubble up) and then moved to oil (bubble up) are now moving their hoards of cash to banks (bubble up).
> jack
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Jul 24 09:12 AM
Yes, inflation is rampant. The removal of energy and food from the core inflation figures is absolutely moronic.
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Jul 24 10:34 AM
true true true... I think by years end Oil will be back up there doing its peak oil dance again and the US stock Market could well be tanking by another 20%. 80% of the stock market are business models built on the premis of abundent cheep energy for ever. Once this goes out the window then they are all over valued.

Ironically banks may be a good investment now as they have had their spanking and are not energy dependent. So as of now I would do 70% enegy stocks (oil, gas, coal, alt en), 20% banking and 10% gold + silver. Build that up, sit back and wait for the enevitable.
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Jul 24 10:38 AM
The author is absolutely correct! If you don't believe this, re-read his opening paragraph about America's growing economic woes and tell me which you think are incorrect.

Oil, gasoline and heating oil are taking a short price "pause" here due to annual seasonal factors, as domestic supplies have temporarily caught up to modestly reduced demand, and NG is following along for the ride.

But don't be fooled! Don't get lulled into somehow believing that oil prices will retreat over time, and there was an "oil bubble." Oil is now a GLOBAL commodity, and its price can only go up as the demand for Black Gold continues to increase throughout the world.

And this NEW demand is permanent. TENS OF MILLIONS of people across the globe are buying cars for the first time. So there's nothing "temporary" about this oil use, it will only INCREASE day by day. (No offense, but we can park ALL our SUV's, and this won't make a whit of difference as time goes on.)

So forecasting this pleasant break from ever higher oil prices was a good call. But you will need to get long again by the time you feel the first chill in the air. Between higher fuel prices and our resulting economic malaise, to do otherwise would be folly!

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Jul 24 10:51 AM
Mark,

I believe it is fair to say you and I agree about our nation's (...short term, I hope) economic prospects. But I don't understand your take on bank stocks, then. Other than their current "dead cat bounce," I can't imagine them being a good investment. If people are unemployed, they cannot grow a bank's asset base, much less take out loans for houses, remodeling, boats, R/V's and vacations.

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Jul 24 11:00 AM
PAUL8756 i know you and most of the posters(no matter your political views) are sick of corruption and having to choose between the lesser of two evils. who wants to vote for evil? please read THE BATTLE OF ATHENS. IT IS A TRUE STORY. ATHENS TENNESSEE NOT GREECE. the author set out to discredit the participants but ended up siding with them. i know it is a fairly accurate account because my father and some uncles had a small hand in it and as a teenager i dated the daughter of the youngest kennedy brother. see how ww2 veterans reacted to corrupt county politics when they returned home. the governor was afraid to call in the national guard because he knew they would side with the veterans. and the state troopers refused to act against the soldiers. as my old dad often commented, THRICE ARMED IS HE WHOSE CAUSE IS JUST. pickens is setting a great example. we all agree whether we are in total agreement or not with him, he is doing something and i know we admire that. if nothing else it is an interesting little piece of american history.
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Jul 24 11:05 AM
As I said before, "don't cream your jeans just because oil is down to $127. IT WILL rise to $180 by year's end and $200 by next summer. It's laughable watching the "money" guys on cnbc cream about the drop in oil and how the DOW gained about 400 points in a few days!!! WHOOOPEEE DOOO - IT WON'T LAST. We'll see the DOW down to about 10,200 by December or January.
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Jul 24 11:07 AM
FRANCIS thank you, good article. this seems like a good time to get positioned for the long view. MARK i have to agree with PAUL about financials. it is probably a short term trade unless you are taking a 3? 5? 7? year view?
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Jul 24 11:53 AM
Francis,

An altogether accurate and prescient post detailing our present economic circumstances. Thank you!

So let me ask you, what if the U.S. defies logic and continues its current embargo of its domestic energy resources? After all, our present political leaders have shown little interest thus far in doing otherwise. And the likely outcome of our coming November elections only promises more of the same.

My own opinion is we risk becoming a second-class economy, much like Europe's. (Of course, even the Europeans have demonstrated better sense than us in developing their energy reserves, which is a sobering thought.) It's funny, but I laughed for years as the Greens did their best to stall Europe's economic growth. I'm not laughing now, however, as they've succeeded in strangling ours.

I say this although opinion polls show that 75-80% of Americans now believe it's time for us to utilize ALL our domestic energy resources to revitalize our declining economy. You know, it's one thing to be asleep when the wolf comes to your door. But to invite him in when you hear him howling is something else again entirely.

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Jul 24 12:05 PM
Still think it isn't a bubble? Energy company stock prices are down to levels below where they were at the beginning of the year.

Oil is on the way down further.

The large recent runup had more to do with shorts getting squeezed (Google Semgroup) than it did with anything relating to fundamentals.

Sure, the US Dollar is not gonna do well over the long term, we have too much debt, but this energy situation is NOT based on fundamentals it is about 60% speculation and 40% US dollar issues.

HK and CHK "investors" are a lot poorer for all the hype.
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Jul 24 12:06 PM
Yes, what we have with the Pickens Plan is a solid LEADER who the politicians can't intimidate or cower. And it doesn't hurt that he's already begun to put the necessary pieces in place on his own, by putting his "money where his mouth is," so to speak (...ha, ha!). It remains to be seen if he can turn the political tide in Washington, however. That's up to us!!!
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Jul 24 12:07 PM
over 2 centuries ago we were warned not to allow a national bank. anyone ever heard of devvy kidd? or why a bankrupt america?
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Jul 24 12:21 PM
Jcrash,

I don't know, my friend. My energy stocks (Bakkens and new NG related, mostly) are still up about 100% this year, and utilities are about even although the Dow and S&P have suffered 20% declines. I'd say shorting oil is a classic "bear trap" here for the reasons aforementioned. So stay tuned, one of us will likely be right.
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Jul 24 12:40 PM
Let me see.... Right now the world PRODUCES about 85 million barrels of oil a day, and CONSUMES 85 million, as well. Despite any effects of the OPEC cartel, is there MORE OIL out there somewhere that someone's stashing away? If not, then the FUNDAMENTALS are governing the oil markets, just as SUPPLY AND DEMAND always have. Which of these economic principles is it that you wish to take issue with?

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Jul 24 12:51 PM
Sooo, just wait until the next time something occurs somewhere that curtails our daily oil imports, even temporarily. And let's hope it's VERY temporary, because, if not, gas lines are next. I'm not sure you fully appreciate the precarious nature of our present dilemma here, and how it can ONLY grow worse!
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Jul 24 12:54 PM
And that's not to mention the TRILLION PLUS dollars we're now sending overseas each year for gas and toys!
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Jul 24 01:06 PM
Speaking of which, I saw Hillary last evening giving a speech on the Senate floor. A Red-Green to the end apparently, there's NOTHING wrong with the U.S. economy that GW didn't cause and the D's can't fix. Oh, and the LAST thing we need to do right now is end our Congressionally imposed embargo of our own domestic energy resources. God help us all!

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Jul 24 01:12 PM
So, you have to ask, can New Yorkers REALLY be so dumb as to repeatedly elect such flailing idiots to represent them in Washington? Over the 60 years of my lifetime, at least, apparently so.
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Jul 24 01:12 PM
Well written article!! The oil is out there we need to have the will to get it. Heaven forbid that we get the material need to run our economic engine. Global warming is much more important than jobs. Give me a break. Lets go back 200 hundred years and burn wood and coal, well maybe that is not so good, lets use solar or wind. Let see I will not be able to use a car or get goods to market. Lets face it we need oil, cheap oil until the development comes online with the many alternatives. Those who think high oil is a Godsend will be out of a job soon and complaining about that as much as they were about oil. There has be BALANCE! you can not have this continue and think the world will not be in a World Wide Depression sooner or latter this will make trade harder with will cause a depression. High oil price lovers wake up. Let us drill!!!!! By the way, nice job identifying fractional reserve banking for the cause, it is a very bad system that causes currency to collapses it is only because the world is invested in the US that it has not happened but the day is coming. FRB does not last with out hyper inflaction or collapes. We will recover form this downturn but we so need to right ourselves, and we will not do it because it will require us to pay some debt, drill and get cheap oil and develop a meaningfull energy plan, and not the greenest one but one that works not only in the future but today! We will not do it because movies, games, and TV are taking our time. Most do not see what is comming and those who do are just dismissed. I hope we will change but I do not see it! Fast and now is the rule of the day.
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Jul 24 01:41 PM
Here, here, User. Well said!

Hmm, trade wars. I hadn't thought of that. But it's the next logical step before the REAL WARS. Perhaps, we're beginning to see the signs of this already.
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Jul 24 01:50 PM
waw...so many questions. Impossible to explain and answer all of them on this Forum. Why not spent some time on my site: goldonomic.com . Look for Academics, Peak Oil and others...check the site map...and PLEASE be informed that remarks and questions are more than welcome.
1. We have PEAK OIL...Supply is smaller than Demand (the balance comes out of the stocks). It takes 7 year to bring fresh supply. The East buys whatever amount the West doesn't burn.
2. We had problems (Tainter) moving from Wood to Coal, moving from Coal (steam) to Oil, ...and we shall have problems moving from Oil (explosion engine) to ??? . Each time there was a major War.
3. Rising Energy and Food prices are the canary in the cage for Hyperinflation (Von Mises).
4. Politicians use well managed marketing to get elected. Bet Hillary will run as vice-president with Obama. They answer only to the emotions of the Herd in order to maintain their position. Better read what Thomas Jefferson said about politicians..not nice.
5. The Herd always wakes up when it is too late. Then the politicians are beheaded (Louis XVI and Marie-Antoinette)
6. We have a paradigm shift and few people see it.
7. The present monetary inflation policy can only go on if the politicians and talking heads pretend there is NONE and even that we risk Deflation (Hyperinflation is sociology and psychology)
8. NEVER compare commodities with Stocks, Bonds, currencies, real estate. Be cautious about commodities with falling supply (like Oil).
9. The american leaders only start to understand the problem. The risk to see a depression in the US is larger than to see one in Europe because the savings are negative (still + in Europe) and the Dollar is still a reserve currency. Having said that, if politicians are not making a depression from de recession (they normally do), the USA will come out of the depression faster than Europe.
10. Go to the web site for more...don't hesitate to make remarks and ask questions.

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Jul 24 02:21 PM
USER232153 and PAUL8756 you are right on target. i am used to paul and his grasp of the big picture. time to toss gorbys watermelon movement on the trash heap. how do we fight these huge tax exempt foundations, bad government school programing, religious zealism over mother earth, and yes paul hillary and schumer are in office? what is wrong with the people in new york? starving people do not care about the ecology but they will do as they are told for food. i am afraid it is about command and control of centralized population centers where every act can be monitored and controlled. schumer is the greasiest most disgusting twisted creature i have ever layed eyes on. yet people vote for this filthy pig. sorry pigs. our country is literally being destroyed before our eyes. it seems like those that are caught up in the red-green movement are in a trance. global warming is bahahahahahd, baaahhhhd, baaahhhhd, no matter what science is put in front of them. the programed response leaves them deaf to reason. such as let us get the alternatives working so they are financially sustainable then start cleaning them up. baaaahhhhd. we all want clean air, land and water. honest people are now resorting to stealing gas and food because they are already desperate. but congress is debateing raising taxes on gas because it is green. the television is now a constant bombardment advertising and programing of this green cult movement. we know our esteemed public servants are going to continue down the path of destruction. now even bob barr is endorsing algore? i almost went shooting with him a decade back while i was working in atlanta but i was to busy with work. i was seriously considering voting for him until he to for political expediancy endorsed this insane crap. paul you need to consider running for office. you are well spoken and you understand the problems. i will get a better alarm system installed and come to (texas?) and at the least be a bodygaurd. i would run but i know there are to many shenanigans in my past. if the people do not bring this beast under control it will be worse than becoming a second rate nation. user you too should consider it. paultaut needs to consider it. i would not wish political office on my worst enemy but as burke said, all that evil needs to triumph is for good men to do nothing. i do not want to leave my home, my comfort, my peaceful existance but to keep it it may be time to give it up. pickens may be the catalyst that will unseat these idiots who have come to see themselves as royalty.
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Jul 24 03:20 PM
FRANCIS you look fairly young. have you ever considered that you are light years ahead of your representatives? i do not even know why we pretend and call them that anymore. we are all on the hook here if we want to change the bleak looking outcome. i will steal a term from an author i do not remember, congress critters seems more apropriate. there is a lot of harm to be undone. my only fault in the pickens plan is that in the adds i have seen and heard he wants to disregard oil. i feel that it is a very important prong in the many energies we should be going after. if we have a great breakthrough on a better fuel we can sell it to china and india and reduce our bottomless pit of debt. guys i know you do not want to hear it but your country is calling and her voice is getting weak.
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Jul 24 03:55 PM
Fireball,

I know you feel better after a rant. I do, too.

Actually, it's Louisiana, next to Texas.

And, NO THANKS. I did my time in Washington, so long ago now it seems like a previous life.

Our best bet is Pickens. He has enough money and brains that they can't bully or cower him. But it can only work if we get behind it!!!

Alternatively, maybe we can get a job putting his wind turbines together.

If you can, you should consider coming this way. Texas is a great place to live and it's booming. It's also in the rapidly dwindling part of the U.S. that can still be called America!

It's not an accident that Pickens lives there, either.
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Jul 24 04:18 PM
You know, but for ONE VOTE on the Supreme Court on the DC gun law, Montana almost made it out of the Union earlier this year. They had a written contract when they joined that stated they could leave if their gun rights were ever abridged by the federal government. And their state legislature had already voted to pull the plug just in case.

This may sound ridiculous to you, but I see these types of efforts expanding after Obama's elected and the Greens are in full control. All they'd have to do is tell Louisiana and Texas they have to shut down their oil and gas production, or, alternatively, give it to them for free, and we'll opt out in a (pardon the pun) New York minute.

That could get interesting. And we won't have to worry about them sending troops, because the pacifists won't let them send them here or anywhere else, either. Besides, what's left of their military will be busy fighting wars over oil in some foreign country.

One thing I know for sure. It won't be ANYTHING LIKE what happened to the sheep in Europe when the European Union came calling.

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Jul 24 04:28 PM
PAUL8756 o.k. my friend. i lived in texas and worked out of houston for several years. i do love those texans. tennessee is drowning politically but in east tennessee a lot of that old individualist spirit remains. however as much as i love it here you may be right. do you have a line on how to invest directly with pickens? i wish i felt better my friend but i am worried about our future. i loved what you said to the guys ready to quit driving. it reminded me of that much needed reagen optimism. i am semi retired but have to go in to work for a little while tonight. i need to get to pickens website. if he is taking direct investors that would be the place to find out. paul i dont always recognize evil when i first see it but i do usually recognize a good man. that is why i suggested such a course. i know it is distasteful. i just want to see some good men in office. i wont bug you about it anymore. if you get access to it the book i suggested is not long and it is an uplifting read. got to go.
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Jul 24 04:30 PM
if we get that far i and many others will be headed that way. see you buddy.
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Jul 24 06:01 PM
I know a bit about TN-- I used to do some business there years ago. I've spent time in Knoxville, Chattanooga, and I especially liked Tri-Cities, which sounds like your part of the state, I think.

So, tell me, buddy, what happened to good ol TN? Last I checked you were electing terrific Senators and were still pretty much a bastion of personal freedom. Has something happened to change that?
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Jul 24 09:34 PM
Excellent article - I am very pleased how you covered all the bases about the effects of Peak Oil in this article. I agree with everything you said but I will add that the dollar will eventually go to nothing. Yes nothing 0/$
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