Week of April 7, 2008

Sunday, April 13, 2008, 7:29 AM

Experts Predict Imminent Oil Squeeze


There are lots of opinions on where the price of oil is going. Some
think that it's headed back to $38. Some, like the expert oil analyst
´Zapata’ George Blake, think it's
going much, much higher. Depending on which story you believe, your
likely actions and decisions will be (and should be) vastly different.
Better choose wisely.

I am going to repost the whole article here because it's packed with
very important information. As always, prices are a function of supply
and demand, with excess money creation lurking underneath, creating a
bias towards higher prices.

Experts Predict Imminent Oil Squeeze

London, Apr 3 (Prensa Latina) The oil price could
hit $160 a barrel as soon as next week, says ´Zapata’ George Blake, the
Texan oil analyst quoted by the London-based online newsletter Money

‘Zapata’ George has a habit of making bold calls that often seem to
be proved right. He thinks there’s an imminent supply squeeze ahead,
which will cause the oil price to spike.

But, first, Money Morning dispels a couple of common myths about
oil. Number one, there is a belief that demand for oil will go down in
a recession.

In the last 58 years, according to Worldwatch estimates (based on
sources such as BP and the International Energy Agency), year-on-year
demand for oil has grown every year, except for two brief periods.

Between 1973 and 1975, amidst a global energy crisis, global demand
decreased annually by a whopping 0.01 percent. And between 1979 and
1984 consumption growth levelled, the biggest annual decrease being in
79-80 - down a devastating 0.04 percent.

Thus, demand for oil will not fall by any significant amount, even if the US goes into recession.

Oil myth number two is that increased production will meet demand.

Money Morning reminds those who affirm that, where are the discoveries that will lead to new production?

The last major oil frontiers were discovered as long ago as the
late 1960s – the North Sea, the North Slopes of Alaska and Western

Since then, there has been some reduction in the number of
discoveries, but, more significantly, a huge reduction in their size.
In the 1960s over 500 fields were discovered; in the 1970s, over 700;
in the 1980s, 856; the 1990s, 510.

But in this decade just 65 oil fields have been discovered.

Of the 65 largest oil producing countries in the world, up to 54
have passed their peak of production and are now in decline, including
the USA in 1970/1, Indonesia in 1997, Australia in 2000, the North Sea
in 2001, and Mexico in 2004.

‘Zapata’ George points out that the extreme cold spell in February
in Alberta in Canada meant that the tar sands couldn’t be mined. One
refinery in Edmonton had no oil to refine, while the larger Strathcona
Refinery was running at significantly reduced rates due to ‘operational

He then mentions Australia, where there are currently gasoline
shortages. BP and Shell have apologized, citing ‘constraints on
imports’, leading to ‘unprecedented level of fuel shortages’. The four
biggest oil refineries in Australia are not operational.

Meanwhile, Chinese oil demand went up by 6.5 percent in February,
and their oil imports have risen by 18.1 percent. In brief, the Chinese
are getting the oil, while Canada and Australia are going short.

Bottom line:
Supply is pinched, and
demand for the #1 source of worldwide energy does not ever fall by any
appreciable amount. Meanwhile, the world's money supply is on an
absolute tear as the global central banks lock arms and pump, pump,
pump to try and sustain the unsustainable.

<< Registered content begins here>>

What's going on with the US money supply?
Ever since the Federal Reserve stopped reporting on M3, the most comprehensive official measure of the US money supply we're left with is "Money
of Zero Maturity," or "MZM." Think of MZM as the summation of all the
checking, savings, and deposit accounts that are denominated in US
dollars. Check out this chart taken directly from the Federal Reserve website:

I drew the blue line on there for easy
reference. What we see is that except for the September 11th anomaly,
money supply growth is at a 17 year high. And not by just a little bit
either. By a lot.

All I have to say about this chart is 'wow!' Even as regular
Americans are entering foreclosure and personal bankruptcy at record
levels, those who are more directly connected to the US money spigot
are gaining wealth at the most astounding levels seen in recent memory.
That's what this chart means...all that newly created money is going
somewhere, and it sure as heck isn't 'trickling down.'

Yesterday I posted about food prices going up 8% in a single three
month span. That data and the chart above are consistent with each
other. Oil prices are again heading towards record territory this
morning. That, too, is consistent. In fact, everything I can find
relating to prices of things we need, as opposed to things we want, is
consistent with the graph above. The only things that are badly out of
step are the Fed's preferred measure of inflation (the Personal
Consumption expenditure or PCE) and the US government's preferred
measure (the Consumer Price Index or CPI).

Or, as I like to say, reality and our official story are now so far
apart that our collective story has migrated from farce to tragedy.

Federal Reserve Ignites Food Panic


of articles have recently come out about food shortages, riots, and
rapidly climbing prices. Last August the Federal Reserve and European
Central Bank started lowering interest rates, pouring liquidity into
the world marketplaces, and trading prized treasuries for
near-worthless debt. Food riots and central bank maneuvers are more
closely linked than you might suspect.

Here's a selection of recent headlines about world food shortages,
prices spikes, and hoarding that I've been gathering for a couple of

I want you to think very carefully about how rapidly this food
situation began and morphed into a situation where nations began
hoarding food. I want you to consider this because I have the same
concern about oil. That is, once a slight shortage is openly felt in
the marketplace, the time between normal trading of goods and hoarding
can be a matter of days, if not hours.

Below, in the registered section, I will draw the connections and
make the case that all of this began on August 16th, 2007 with the
Fed's move to cut the discount window interest rate. Meanwhile, Wall
Street parties on.

Rising Grain Prices Panic Developing World (Wash. Post)

(April 4, 2008) SHANGHAI -- A spike in the price of
rice and other food staples is triggering consumer panic, including
food riots in Yemen and Morocco, and hoarding in Hong Kong.

Governments around the world have taken radical measures in recent
weeks to control their countries' supplies of rice. Egypt last week
said it would ban all rice exports for six months. Cambodia has stopped
all private-sector exports of rice, and India and Vietnam also have
imposed restrictions.

Egypt's Rising Food Prices Swell Bread Lines (Bloomberg)

(April 9, 2008) ``We have seen riots around the
world and there's risk that these will spread because of rising prices
in countries where 50-60 percent of incomes go to food,'' Jacques
Diouf, the director general of the United Nations Food and Agriculture
Organization, said in India today.

Record high grain prices have led to strikes in Argentina, riots in
Cameroon, Burkina Faso, Morocco and the Ivory Coast. The World Bank
says 33 countries from Mexico to Yemen may face social unrest because
of spiraling food and energy costs.

Rising wheat prices have far-reaching significance

(March 1, 2008) Food prices, though, reflect more
than just increased demand. Rising prices for other commodities can
have a compounding effect on food. Higher energy prices, for example,
add to production and shipping costs.

That, in turn, can have grave implications for world health. For
example, the U.N. found that the cost of food imported by the world's
neediest countries last year rose by 24 percent, to $107 billion,
raising questions about nutrition.

'Panic' wheat buying across the US

(February 26, 2008)Panic over commodity shortages
continues to emerge as the dominant factor in the global markets, with
both end user and speculative buyers of corn, soybean, cotton, rice and
a host of other commodities taking note of what’s happening in the
wheat pit.

The net result has been declining stocks at the same time that expanding global wealth has demanded more raw commodities.

The net result on Monday was new all-time record high prices for corn, soybeans and wheat on the same day.

Sentiment in the marketplace is changing from, 'buying
just-in-time' to one of, 'buy what you need at any price' and then to
'buy even more to restock the shelves'.

In other words, there’s evidence to suggest that we’re beginning to enter the hoarding phase of the inflationary cycle.

Wheat prices could defy a recession

(February 21, 2008) LONDON The global market for cereals looks well placed to withstand a U.S.
recession, its resistance bolstered by climate change and new dietary tastes in rapidly developing economies.

Declining water tables and unpredictable weather in major
production areas have hit crops, and much arable land has been diverted
to producing biofuels. Meanwhile, consumers in emerging markets like
China are eating more meat as they become wealthier, driving demand for
animal feed.

These factors are not likely to go away soon, even as general economic conditions worsen.

"It is mostly driven by world population growth, which is about 75
million people per year, and also by the more protein-rich nutrition
trend in Asia," said Jochen Hitzfeld, a commodities strategist at
Unicredit in Munich. He predicts a 50 percent rise in wheat, with
prices to average $15 a bushel in 2009.

The trend, in fact, is not a new one. In seven of the past eight
years, demand for wheat has been greater than supply, according to
Unicredit, though so far that demand has been met by drawing down
existing stockpiles.

The poor of the world are getting
increasingly priced out of their daily bread. Literally. For many, this
is a true disaster, and the wealthy nations are largely to blame.

Not because we are consuming any more than we used to, but because
our central banks were scared by what they thought might happen if the
big banks of the world were allowed to take their lumps for making
their ill-advised gambles on the housing market.

There are three dates I want you to remember as you view the charts
below. August 16th, the date of the first Fed rate cut (to the
'discount window'), and January 22 & 30, two sets of cuts to the
Federal Funds rates of 75 and 50 basis points, respectively.

Now, let's look at some charts. To help you out, I've circled those dates for you.

This first chart is of ALL commodities. That's oil, grains, metals,
and fibers. The second chart is wheat, while the third is rice. As you
look at them, notice what happened after each set of rate cuts.

I see a very clear and immediate connection between the rate cuts and
the explosion in commodity prices. Of course, this should not have been
a surprise to anybody at the Federal Reserve, since hot commodity
prices and easy money have a long relationship with each other.

World inflation fuelled by surge in farm, energy prices


Inflation is caused by excess money chasing too few goods and services. A symptom of inflation is rising prices. Separating cause from effect is
very important if your goal is to understand something. Merely being
aware of something is often insufficient to take effective action(s);
it is only through understanding that specific tactics can be
properly assembled into a coherent strategy. So, let's see if we can
move beyond awareness of rising prices and into understanding of the
causes so that we can properly prepare our portfolios, and communities,
for what's coming next.

In this article we're going to dissect, let's begin with the title:

"World inflation fuelled [sic] by surge in farm, energy prices"

Well there's our first problem right there. This title displays a lack
of understanding about inflation on the part of the editor, journalist,
or both. A better title would have been "Inflation reflected by surge in farm, energy prices." The word "fueled" implies causation. As in, "His anger was fueled by the waiter's rude manner."

So I give this article low marks for perpetuating the myth that inflation is caused by rising prices.

Next, prices sometimes rise, and legitimately so, because of a shortage
in supply relative to demand. Certainly there's been a relative
shortage of wheat (bad harvests) and corn (ethanol production), so
we'll have to account for that in our assessment of world food prices.
But can this entirely explain food prices? For wheat and corn, I
suppose it could, but what about all the rest of the grain types?

Let's see how the article 'explains' this dynamic to us (all emphasis below is mine):

PARIS (AFP, April 10, 2008) - A resurgence in worldwide inflation in the past several months has been principally powered by rises in the price of food and energy, exacerbated by galloping demand in fast-growing emerging market countries.

Nope. Again they go with the 'explanation' that inflation is powered by prices. That's like saying a fast car is powered by its speed.

Persistent inflation is, everywhere and always, a monetary
phenomenon. Price spikes rooted in a supply-demand imbalance tend to be
short-lived as new supply comes to market in response to higher prices.
Our food and fuel situation is anything but short-lived at this point,
and so we must look to other causes.


The price rises reflect potent demand in emerging
market nations, where surging economic momentum requires more and more
basic commodities to meet production targets and to satisfy desires of
better-paid workers and consumers.

World-wide supply, hampered by constraints on resources and production capacities, is struggling to meet growing demand, sparking tension on international markets and a rise in prices.

Okay, here we get some explanation in the form of a supply-demand
statement. But, unfortunately, it does not include any helpful data
(such as information that would allow us to assess whether there really
is a shortage of, say, rice) that might help explain a nearly 200% rise
in prices over the past year.

So low marks here as well.

However, they do much better when discussing the impacts of inflation, as seen here:

In general, significant inflation complicates planning by individuals,
business and governments because of the extra difficulty in judging
future values and risk. Consequently it increases the costs of carrying
out transactions and is a disincentive to investment.

Experience shows that when inflation takes hold, consumers and
businesses begin to anticipate future price increases, thereby
accelerating the underlying inflationary pressures.

Monetary authorities fear in particular an "inflationary spiral"
that could have its start in emerging nations, the current drivers of
the world economy and where governments tend to favour growth over the
fight against inflation.

Great stuff there. By acknowledging that inflation is exacerbated
by the psychology of 'expectations,' we finally have an explanation for
why authorities work so hard to understate inflation and misrepresent
its causes. By telling people inflation is lower than it is, and by
offering up symptoms as causes, expectations can be kept "under control." This is actually important work, because o

nce people lose faith in their currency, inflation that was merely painful can rapidly become hyperinflation.

My analysis is that there is still a strong disincentive within the
press to explain the actual causes of inflation. As The Crash Course
makes clear, inflation is not at all hard to understand; it is a
deliberate act of policy. Weak, short-sighted, self-serving policy,
perhaps, but policy nonetheless.

While I am not terribly surprised that the true cause of inflation is
consistently misrepresented in the press, it is not my intent to try
and fix that particular problem. Rather, I simply want you to be aware
of the reasons that we are in an inflationary spiral, so that you can
take steps to protect yourself and your savings.

In brief, those steps are all some version of getting out of a depreciating fiat currency.

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