Buying OIL to protect wealth

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  • Tue, Dec 22, 2015 - 03:35pm

    #11
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

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    In answer to oil investment

My thoughts on why I invest in energy. This is from Nate Hagens of the oil drum. Why is the price of oil down. Maybe this is part of the answer. My portfolio has dropped over 60% in value(not that its that big). It has generated over $5000 in dividends over the last year. The beauty of energy slaves is that you don't have to feed them.

11. Energy measured in energy terms is the cost of capital

The cost of finite natural resources measured in energy terms is our real cost of capital. In the short and intermediate run, dollars function as energy, as we can use them to contract and pay for anything we want, including energy and energy production. They SEEM like the limiters. But in the long run, accelerating credit creation obscures the engine of the whole enterprise – the ‘burning of the energy’. Credit cannot create energy, but it does allow continued energy extraction and much (needed) higher prices than were credit unavailable. At some point in the past 40 years we crossed a threshold of 'not enough money' in the system to 'not enough cheap energy' in the system, which in turn necessitated even more money. After this point, new credit increasingly added gross energy masking declines in our true cost of capital (net energy/EROI). Though its hard to imagine, if society had disallowed debt circa 1975 (e.g. required banks to have 100% Tier 2 capital and reserves) OR if we had some natural resource tether – like gold – to our money supply since then, global oil production and GDP would likely have peaked 20-30 years ago (and we’d have a lot more of the sub 50$ tranche left). As such, focus on oil and gas production numbers isn't too helpful without incorporating credit forecasts and integrating affordability for societies at different price tranches.

An example might make this clearer: imagine 3,000 helicopters each dropped a billion dollars of cash in different communities across the country (that’s $3 Trillion ). Citizens that get there first would stuff their backpacks and become millionaires overnight, lots of others would have significant spending money, a larger number would get a few random hundreds stuck in fences, or cracks, and a large % of the population, not near the dropzone, would get nothing. The net effect of this would be to drive up energy use as the new rich would buy cars and take trips and generally consume more. EROI of the nations oil fields wouldn’t change, but oil companies would get a higher price for the now harder to find oil because the economy would be stronger, despite the fact that those $3 trillion came from thin air (or next to it). So, debt went up, GDP went up, oil prices went up, EROI stayed the same, a few people got richer, and a large % of people got little to nothing. This is pretty much what is happening today in the developed world.

Natural systems can perhaps grow 2-3% per year (standing forests in USA increase their volume by 2.6% per year). This can be increased via technology, extraction of principle (fossil carbon), debt, or some combination. If via technology, we are accessing energy we might not have been able to access in the future. If we use debt, we are diverting energy that would have been accessible in the future to today by increasing its affordability via handouts/guarantees and increasing the price that energy producers receive for it. In this fashion debt functions similarly to technology in oil extraction. Neither one is 'bad', but both favor immediate consumption on an assumption they will be repeated in continued iterations in the future.

Debt temporarily makes gross energy feel like net energy as a larger amount of energy is burned despite higher prices, lower wages and profits. Gross energy also adds to GDP, as the $80+ per barrel oil extraction costs in e.g. Bakken Shale ends up being spent in Williston and surrounding areas (this would be a different case if the oil were produced in Canada, or Saudi Arabia). But over time, as debt increases gross energy and net energy stays constant or declines, a larger % of our economy becomes involved in the energy sector. Already we have college graduates trained in biology, or accounting, or hotel management, working on oil rigs. In the future, important processes and parts of non-energy infrastructure will become too expensive to continue. Even more concerning is that, faced with higher costs, energy companies increasingly follow the societal trend towards using debt to pull production forward in time (e.g. Chesapeake, Statoil). In this environment, we can expect total capital expenditure to keep pace with total revenue every year, and net cash flow become negative as debt rises.

In the last 10 years the global credit market has grown at 12% per year allowing GDP growth of only 3.5% and increasing global crude oil production less than 1% annually. We're so used to running on various treadmills that the landscape doesn't look all too scary. But since 2008, despite energies fundamental role in economic growth, it is access to credit that is supporting our economies, in a surreal, permanent, Faustian bargain sort of way. As long as interest rates (govt borrowing costs) are low and market participants accept it, this can go on for quite a long time, all the while burning through the next tranche of extractable fuel and getting reduced benefits from the "Trade" creating other societal pressures.

Society runs on energy, but society thinks it runs on money. In such a scenario, there will be some paradoxical results from the end of cheap (to consumers) oil. Instead of higher prices, the global economy will first not have the juice to continue to service both the principal and the interest on newly created money, and we will probably first face deflation. Under this scenario, the casualty will not be higher and higher prices to consumers that most in peak oil community expect, but rather the high and medium cost producers gradually going out of business due to market prices significantly below extraction costs. Peak oil will then come about from the high cost tranches of production gradually disappearing.

I don't expect the government takeover of the credit mechanism to stop, but if it does, both oil production and oil prices will be quite a bit lower. In the long run it's all about the energy. For the foreseeable future, it's mostly about the credit

But why do we want energy and money anyways?

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