So, the markets are falling fast now.  There will be a bounce at some point - probably a sizable one.  But I see no way of knowing when that will be.  It would be extremely foolish to try and catch some profits on that future bounce.  Being wrong in your timing could be disastrous, as we are in a position now where the market can very easily react to some unexpected bad news with a 10% drop in a day (at which point the market is closed).

However, since there is every reason to expect fundamentals to erode further from here - housing prices will fall further, unemployment will rise more, credit will continue to tighten, debt is increasing faster now than ever, consumer spending will fall from here - then it does make sense to wait for the bounce to happen and then sell into it.  If you’re willing to take a short position that is (which doesn’t have to mean shorting a stock, it can mean buying an etf that tracks the inverse of a market index).  Wait for the bounce and then sell it.  It won’t matter a whole lot how you time that bounce, because the market will almost surely thereafter retreat below whatever temporary bottom the bounce starts at.

I believe we are in for a 2-4 year downturn and a grinding market bottom of up to 90% down from the highs is pretty likely.  Once unemployment begins to rise fast, all our debt is going to eat this economy alive, and the debt will be defaulted on person by person, household by household, corporation by corporation, municipality by municipality, and possibly even state by state.  That defaulting on debt will make matters worse each time, exacerbating the feedback effect.  The end result is a 90% downturn (and that’s the good outcome) or hyper-inflation, in which case the economy is just toast anyway and we’ll either be going to war or rebooting the financial system with a new currency and across-the-board debt forgiveness.

I’m having nightmares now about basic utilities being shut down due to lack of credit to pay employees and pay for commodiites (ie, natural gas, water, coal, uranium, etc).  If the credit markets fall apart and paychecks bounce, what keeps people going to work to provide the water, the natural gas, the electricity that comes to my house that is needed for life?  I’m guessing the answer will be a government mandate to go to work possibly enforced by the national guard (are they all back from Iraq yet?  Looks like we might need them).  But I’m having nightmares of keeping my family warm during a cold winter, of feeding them, of feeding my baby megan with formula.  I have some rice and beans stocked up that the rest of us can eat - I think I probably need more though.  I need to update my disaster supply list and get moving in buying some - it could become too late to do so within days.

Well now credit is drying up.  It’s becoming more and more clear to everyone that we are already bankrupt, even before we try any of the above solutions.  Loans and grants for research is going to dry up.  Companies are going to restrict their technology research and development, preferring instead to hold onto what little money they have.  Companies already in a lot of debt will likely go bankrupt, and companies with cash will hoard for their own protection.  A wealthy nation might have been able to mitigate the effects of peak oil.  A debt-ridden bankrupt nation cannot.

Oil and gas have been dropping in price lately, this despite hugely problematic shortages in the SE US, despite gasoline inventories at record lows (in terms of Days of Supply), despite shut-in oil production due to hurricanes Gustav and Ike.  They are dropping in price because of demand destruction due to a faltering economy and because of deflation due to the credit markets drying up.  In the near-term one of two things will likely happen: oil and gas will again shoot up in price in order to rebuild inventories, or demand will drop dramatically (more than it already has) as a result of a severe economic downturn.

Of course, severe economic downturn is inevitable at this point, but I’m just not sure it’s going to happen fast enough to avoid a fast increase in gas and oil prices.  We’ll see.  What I am sure of, however, is that :

1. During this severe economic downturn that will last years, planning for Peak Oil mitigation will be the last thing on anyone’s mind.  The price signal of oil will be buried in an avalanche of more terrible and more immediate economic signals.  Demand destruction will keep the price relatively low most of the time.
2. Few will be making large investments in energy efficient technologies as a result of #1.
3. When the credit crisis finally resolves, or begins to resolve, an economic recovery will immediately slam into a ceiling of Peak Oil.  World production by that time will be considerably lower than it is currently.  The newborn economic recovery will be immediately squashed by a spike in energy costs.

It is sad more haven’t read the Hirsch report, which describes all this in some detail, and which comes to the conclusion that successful mitigation of Peak Oil would require that we start 20 prior to the arrival of Peak Oil.  Oops, it would appear we’re already 20 years late in starting, and on top of that we have to first wait until the distraction of a multi-year recession passes before we’ll again have a chance to address PO.
a

We have been having some problems with his Montessori school lately.  He is in the toddler program (18mo - 3yr), but is showing very clear signs of being ready to move up to the Primary program (3yr-5yr).  He’s bored and is acting out in class, and expresses very strongly that he does not want to be there.  But when you ask him if he’d like to go to the class for older kids, he gets very excited about it.  Some days it gets so bad that he’d rather sit in time out than get ready for school.  Today he got “written up” by the school for pushing other kids and hitting the teacher.

We started talking with the school about moving him up a week ago.  Since then, we’ve gotten a series of delay tactics on the part of the school.  “Give me a couple days to look into it” and then raising “concerns” about his potty training, when they know damn well he’s fully potty trained.  He’s had no accidents in school this year so far.  At home, he takes care of his potty needs himself (he still asks for a diaper for when he wants to poop though, which is usually once a day and never at school).  Now, the school is indicating they’ll be ready to move Jaime up on his birthday - Nov 8th, and that they can’t move him sooner.  But that’s ridiculous.  We know other kids hav moved up prior to their 3rd birthday, and we also know that the toddler class is doing Jaime no good right now, and Jaime is doing the toddler class no good either, so why continue sending him?  I am of the opinion that we should just keep Jaime home until the school is ready to move him to the Primary class.  Vivi thinks the school might kick us out if we do, but I don’t think I’d want to send Jaime to the school if that is their response.  It seems very anti-Montessori for the school to want to keep Jaime in a class that is not working for him.  They were the ones who made it clear when we started that kids are moved up when they show the signs that they’re ready, and Jaime is showing all the signs they mentioned.

Megan is starting to hold her own bottle and feed herself.  She loves to eat too - she loves butternut squash and soups made from butternut ,carrot, and potato.  She’s not very fond of banana or peach, and kind of neutral toward yam.  Not a sweet tooth as of yet.  That will probably change!  She is very interactive - very grabby.  It is hard to prevent her from grabbing anything that comes within her reach, which makes it tough to hold her and eat at the same time, or hold her and sit at the computer, or hold a tv remote.  Everything will be grabbed!  She’s a thumb-sucker, especially when she sleeps, and she’s a very very good sleeper.  She puts herself to sleep with no trouble every time - you just have to put her in the crib.  How different from Jaime!  But, she won’t sleep through the night, as the night hours are apparently her favorite hours to eat - again, how different from Jaime, who slept through the night starting at 3 months.  Megan is 7 months and is always hungry in the middle of the night.

So, gas shortages are here for real in the southeast US.  It is interesting reading the comments on the web about people’s experience with gas.  So far, most of the anecdotes seem to be of the “we were just about out of gas when we finally found a station with a little left” variety.  Also reading about significantly reduced traffic levels in places like Asheville NC, Nashville TN, and in Atlanta Georgia.  Unfortunately, it’s likely to get worse in these places before it gets better because the refineries are still operating at severely restricted levels.  Gas supplies will continue to decrease for the next week and probably for the next 2-3 weeks.  I suspect there will be some very bad trouble spots in some of these areas being hit by shortages.  If only they could raise their prices, those areas might attract more gas shipments, but people are apparently hunting for “price gougers”, and in the process, hurting themselves because gas stations would rather run out of gas than raise prices to $6+ and be accused of price gouging.

And now, in addition to worrying about societal collapse due to peak oil, I have to worry about economic meltdown due to the financial crisis.  Apparently last Thursday we were minutes away from a freeze up of the money markets that could have resulted in virtually all monetary transactions grinding to a halt, since credit cards and check-clearing are usually worked through money-market type accounts.  Yeah, credit card transactions failing by the millions and no checks clearing, including payroll checks.  That would have been fun.  It is apparently why the gov stepped in and guaranteed money market accounts, and that is probably something like the scenario that Bernake and Paulson scared Congress with in the secret closed door session.

So I have been thinking about disaster preparations.

If gas shortages spread, or if financial dislocations become severe, we could see disruptions in shipping that could result in food shortages.  It’s already getting difficult for truckers to travel routes that go through the southeast.  Food has to be number one on the list of disaster preparation.  So far, I have some - some rice, some beans, tuna, cans of corn and green beans.  Not much really.  I should make a list and get more.  Some other thoughts:

• diesel generator for powering important appliances, like a freezer
• gas and diesel fuel
• cash
• gold & silver
• sundries (toothpaste, soap, deoderant, etc)
• canning supplies and appliances
• bicycles in good working order
• bicycle accessories (cart for kids to be pulled in)

I’ll have to think what else I should add to the list and get working on it.

However, writing about globalization, about a “flat earth” and outsourcing, about a post-american world would not have been accepted in the 50’s. Not because they would be wrong - our present shows us how prescient such views would have been - but rather because they’d have been describing things so far off most people’s radar that they would not have been understood. Their profound insight would have been lost on most and thus they would not have been popular. Perhaps respected in certain small circles, but not generally. Most likely they would have been marginalized and considered to be on the “fringe”. But they would have been deserving of my respect had they been writing about these things 50 years ago.

And even now it wouldn’t be so bad if the trends of globalization were set to realistically continue for another 50-60 years. Then we could say these writers were doing a bang-up job of describing the present and extrapolating out a reasonable future. But globalization as we know it is not likely to continue its present course. There are forces set to derail globalization that need to be acknowledged and dealt with, else they will deal with us, and harshly. Energy problems are at the heart of these forces, but it can be generalized to a broader spectrum of resources (mostly those that depend on fossil fuels), whose shortages are going to cause some severe problems. Global climate change is also likely to play a large role, but I will not pretend to understand anything about what it will be.

Of course, it is always hard to identify changes in direction and trends before they become obvious in hindsight. As they say, peak oil will never be conclusively identified except in the rear-view mirror - that doesn’t mean that attempts at prediction are fruitless, though. Peak conventional oil is a fact - oil fields in fact deplete, and, with the best of technologies, show a depletion curve that looks something like a bell curve with a long right-side tail. But this simple fact is obscure for a lot of people nowadays for two reasons: one is the rise of non-conventional oil (ie, tar sands and shale oil), and the other is an overly market-based economic worldview. These represent two veils that are preventing most people today from seeing the underlying realities of oil depletion.

Writers writing sagely about how peak oil will change the world, will derail globalization, will change current relationships forever are out there. Some of them even have a healthy degree of popularity (though, as in the case of Kunstler, it comes more from his style of prose and his background then from being particularly insightful about energy matters - he is a latecomer to it and latched onto it because it meshed well with his hatred of suburbia, which is where he began). But none are as well respected as Friedman and Zakaria who are predicting current trends will continue.

Friedman and Zakaria appear to me especially blinded by a market-based economic worldview that says, in its most simplistic form, that as the price of a commodity rises, more of that commodity will be produced in response, and thus the price will then decline, or, if the commodity cannot be produced, and adequate substitute will be produced, and similarly, the price will then decline for both the substitute and the original. In this worldview, more oil will be found and produced as the price of oil rises. We are having shortages today, not because of a lack of oil, but rather because of a lack of investment in finding new oil - especially from the 80’s and 90’s when oil was very cheap. Too cheap to stimulate much discovery. Of course, discovery peaked in the 60’s for the world, and in the 30’s for the US, and the oil crisis of the 70’s did nothing to change that fact.

However, if confronted with such basic facts about oil discovery and production, most followers of this economic worldview will simply assert that a substitute will be found. For example, it is often heard that OPEC doesn’t want the price of oil to get too high because then research into alternative energies will find cheaper alternatives than oil and OPEC will lose customers. We’d just go solar, or hydro, or biofuel, or wind and solve the problem that way. And so it is with Friedman and Zakaria, who, when not talking about the importance of succeeding in Iraq or about the rise of China and India, can sometimes be seen advocating alternative energies. No mention of the irony that, Iraq being essentially about control of oil, if we successfully developed alternative energies, we’d have no particular need to succeed in Iraq. And since it seems highly doubtful we can afford both strategies, I often wonder why no one is pointing out this basic inconsistency in their writings. Obama the presidential candidate suffers the same inconsistency. And McCain is just insane, but that’s neither here nor there.

But of course, the situation is worse than just an inconsistency of strategy. It remains highly unlikely that any of these alternatives will be able to save us and successfully replace oil. Neither solar nor wind can be built out fast enough or cheaply enough, and neither generate a dependable baseload of power. We can all agree they are wonderful sources of energy, but it is too little too late. Nuclear has the capacity, but it is also expensive and requires an enormous commitment. And still these solutions only solve half the problem - the generation of energy itself. The other part of oil is that it serves as a fantastic store of energy as well as a source of energy. Storing electricity is hugely difficult. Some tout hydrogen, but when you add up all the inefficiencies of hydrogen (electricity to hydrogen, hydrogen loss in transport and storage, then hydrogen back to electricity), it becomes a non-solution - at least for long term energy storage for transportation. It might be useful for on-site short-term energy storage for a solar or wind power plant.

And batteries are heavy and cumbersome, expensive, toxic, and require precious metals in short supply. Still, a better solution than hydrogen, but the cost of moving to an electric/battery world involves the costs of new power plants to supply the electricity, the cost of billions of batteries, and the cost of upgrading our electricity infrastructure to handle the additional load. These are daunting costs that dwarf previous large projects like the Manhatten Project or going to the moon. If you look at the debt we’re in currently, it doesn’t appear that paying for such a large conversion to a substitute for oil is in the cards. It is more likely that an economic collapse awaits that will reverse the trends of globalization and increase the chances of violence and war.

The Green Revolution bound our production of food to our production of fossil fuels - most notably oil and natural gas. Natural gas is used to create fertilizers and oil is used to create pesticides, and both are used for energy that runs our farm equipment, ships our food thousands of miles, and mines the potassium and phosphate that plants need to grow. In the past eight years, our stores of grains worldwide have fallen, and in 2008 are lower than they have been since around 1950 - ie, before the Green Revolution. Increasing population, eroding soils, and weather problems have diminished our ability to produce enough food. Additionally, the use of food to create biofuels competes with the use of food to feed us, and thus we see the prices of food rising dramatically and in parallel with energy. Of course, we are more than willing to fight wars to secure energy supplies. That we would do the same for food goes without saying, though it does need to be said that while we wouldn’t kill our neighbor for energy, we probably would for food.

Even if we find a sustainable way to live, it will involve a return, at least to some extent, to locality - locally grown and made. Less energy intensive, less dependent on distant parts of the world. Globally available products and services will be the province of the rich more and more and the poor and middle class less and less. Possibly we will reinvent things with new sources of energy, like a revamped electricity based infrastructure, but that will take time (our oil-based infrastructure has been over 100 years in the making), and we might emerge 100 years from now with a new globalization, but what that will look like would take more than a special kind of insight.

One thing that confused me was the jump in refinery utilization while gas prices remained relatively low.  I know the refiners aren’t making money on gas, so why would they work at almost 90%?  I learned in the past week that the US exports diesel, which the rest of the world predominately uses (while the US mostly uses gasoline).  That means the refiners are able to make a profit by making diesel and selling it abroad and as a by-product, gasoline is also produced for domestic consumption.  I am glad for this piece of the puzzle because I didn’t understand what was going on, which could have meant my mental model was off.  However, this fact (exporting diesel) clears things up in a way that supports my previous guesses as to what is going on.  Of course, this is rather bad news economically.

So I expect to see more runups in the price of oil in the next few weeks.  $180 was my target price (pulled out of my ass, but we’ll see).  Saudi Arabia is calling for a meeting on June 22.  That should be very interesting, and could change things tremendously.  If they come out of that meeting blaming speculators for the price of oil, I expect a bloodbath to the upside.  If they come out promising production increases, I expect some sell-off, but mostly flat as buyers wait to see if they deliver on their promises.  Some of us don’t believe they can.

But what made the report especially strange is that it included an “explanation” for the 8.8 mb drop in supply: that ships were delayed in offloading supplies in the gulf [of Mexico] ports. All the analysts are citing fog as the reason for the delays. However, there has been no fog in the region in the past week, so it’s a bit of a head-scratcher. On top of that, after the report came out, oil first shot up $3, but ended the day down over $4. I can’t quite figure that, but I suspect a lot of traders are trading on hope - hope that there really was plenty of oil imported and that it was just delayed and hope that therefore next week’s inventory report will show a monster build to make up for it. A build of over 10 million barrels or something like that. Trading on hope - not a good idea.

But more troubling:

Here are the last four weeks of crude oil imports into the Gulf Coast:

6.683 mbpd
6.130
5.173
4.996

(link)

The problem being Mexico and Venezuela primarily, but Nigeria also. This is the net exports problem, explained in the Export Land Model. Mexico’s production is falling off a cliff - 24% in the past year. Exacerbating the problem is that every country that produces oil also consumes oil. And each year most countries consume more than they did the previous year. So, a country like Mexico, where oil production is falling and internal consumption is rising, the remainder left over for oil exports (called “net exports”) becomes less and less at an accelerating rate. Mexico looks to cease being an oil exporter in the 2012-2014 time frame. Canada, often cited as a place where oil production is growing (and it is), is also experiencing declining net exports. Saudi Arabia, often cited as the one place left in the world with excess capacity, is also experiencing declining net exports. Saudi’s oil production ticked up slightly in Jan and Feb this year, but their exports have fallen year-over-year. The problem of declining exports began in 2004, but it may now be poised for a big jump in effect. At some point, it’s likely that exports will “fall off a cliff”, as they say. That point may be right now.

Certainly the problems in Nigeria aren’t helping matters with nearly the entire country’s production shut in by violence for a couple weeks, and even now they are still down a few hundred thousand barrels per day. But Mexico and Venezuela are the real problems right now:

The 2007 Annual Net Export Decline Rates for Mexico & Venezuela (EIA) are as follows, and the recent monthly data don’t look any better.

Mexico: -16%/year
Venezuela: -7.6%/year

(link)

To make matters worse, gasoline hasn’t gone high enough in price yet. Wholesale gas is at $3.40, which translates to about $4.05 in retail gas once it works its way through the system. But, at $3.40, refiners aren’t making much money with oil trading above $120. Therefore, their utilization rates have been very low this year, and in about 45 days, we’ve gone from very high gasoline stocks, to pretty low stocks. Traditionally, refinery utilization at this time of year would be 91-92% in order to keep up with summer demand. The highest it’s been so far is 87.9%. It needs to go higher, or there will be shortages of gas. If it goes higher, it will only be because the price of gas went high enough to warrant the increased costs of overtime, maintenance, etc that such high utilization rates entail. So therefore, if oil stays high, I think we’d see gas go over $4.50 by the end of summer. Possibly $5.

But, crude stocks are also low. This was not the case last year when gas stocks went dangerously low - then, crude stocks were pretty high. If we’re having a net-exports-falling-off-a-cliff problem right now, that’s going to throw all estimates out the window. It will take many weeks to find other exporters to replace Mexico and Venezuelan oil as they are relatively nearby countries. If we have to get more oil from Saudi Arabia than we do now, it will take a while for the extra tankers to get here. And we’ll have to outbid China and India for that oil. In the meantime, we’d probably have to make withdrawals of oil from the SPR (strategic petroleum reserve) to avoid shut-downs of refineries, pipelines, and gas shortages. All this would send the price of oil and gas into a pretty severe spike - maybe up to $180 in a matter of a week or two. Gasoline to $6-7.

And, even after the immediate crisis was over, oil would probably remain above $140 due to the need to outbid others for the oil we’d no longer be getting from Mexico and Venezuela - and there’s no end to the decline in net exports. Soon, these countries stop exporting, and then, they start wanting to import oil. I say “wanting”, because I don’t think Mexico will ever be able to afford to import a drop of oil. Mexican civil war of some sort is probably happening relatively soon (ie, within 10 years).

If it happens like this, we’ll end up with gas at $5+ at the end of summer and only headed upwards from there. The crisis of peak oil could be starting - may have started with this latest odd inventory report. We’ll know within 3 weeks either way, I think. If the things I describe above haven’t started happening by then, then it’s a false alarm.

Happy Hurricane Season!

]]> http://mikeandvivi.org/blog/?feed=rss2&p=232