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Peak OilCraig Harris This article is part of a series of questions and answers. To catch up on questions already answered please refer to my archives. Question 12: "When, if ever, will longer term issues like "peak oil" and global warming begin to affect the commodity markets?" Question 12A: Given the ideas of peak oil and the current geopolitical climate, where is the price of oil going and how will that effect the dollar, the balance of trade and interest rates?" First I'm going to tackle this issue called "peak oil." What is "peak oil"? A comprehensive background on this question is larger than the scope of this answer. So, I'm going to net it out and then suggest that you search the Internet using Google for the term "peak oil" if you want to do further research on your own... and if you are investing in the energy sector or the products I would recommend that you do that. Here's the basic issue. It took about sixty million years to create it and we've burned through at least half of the supply in the last 100 years. I wish I had a chart of that. I'll do it mentally though. Picture a timeline 60 million years long. Now picture 100 years (which is .00000016% of the timeline) , the y axis going from 0 to 50%... and mentally complete the chart (you'd see a vertical line going from 0 to 50). Back in the 70's, there were a lot of people talking about the idea of running out of oil... and new exploration methods and improved technology found more... but the problem hasn't gone away, we just bought a 30 or 40 year extension. Before the end of this century, by any reasonable calculations, the planet will be unable to ration the remaining oil supplies at any sort of reasonable price. Unless viable and cost competitive alternative energy sources have been developed, the world will face a crisis. When exactly? Do some research. When you search the web for "peak oil," you will find that estimates range from around now to 2020 as the time period from when we approach the top of the bell curve of oil supplies. The downside slope of the curve begins rationing available supplies to meet demand, which means higher prices. A lot of money is going to be made as these alternative sources are developed and come on line. Maybe it's time to sell your SUV? Here is one of many sites with a good chart. So my summary of "peak oil" is that this is a real issue. It's one of those longer-term ideas that is important to keep in the back of your head for your big picture view, but it's difficult to translate into any kind of reasonable time frame for trading. Now on to oil prices in general. First a little background. Understanding the issues of peak oil and knowing that we have an administration of oil men, it isn't surprising that they would attempt to secure 25% of the worlds known oil reserves with a peak oil issue looming. There is a lot of debate about whether or not oil was one of the real motivations to go into Iraq, but for me, when I saw this below, it pretty much eliminated any remaining doubts in my mind about the oil part of the equation. JudicialWatch.org The thing I have been surprised about is the difficulty that they are having bringing the output up to where I expect they thought they would have it by now. If you remember, I was actually long crude oil before the invasion, back before the rest of the world thought it would happen, then sold out just before thinking that they would quickly ramp up production and that could drive the price through the floor... because that was the plan the way I saw it. It didn't happen that way though... after a brief post invasion dip, prices began moving higher... because first questions emerged... then it became clear that output was going to have difficulty climbing and the resistance didn't "collapse at the first whiff of gunpowder" as we were all assured it would by unelected yet highly influential policy making individuals with sci-fi-ish handles like "The Prince of Darkness." It's enough to make you feel like you're living through a bad B movie. As IRAQ becomes mired in a civil war, I don't see hope for short term optimism that production capacity will be significantly ramped up there any time soon. Russian troops not to be sent
to Iraq in any circumstance - Ivanov So do I. Then there's also the effect of the US dollar decline. It's almost unbelievable to me that supposedly smart "crude oil analysts" and other highly-paid people that make their living analyzing the crude oil market can do so without examining exchange rate differentials. I mean, if you are trying to figure out the crude oil market and you are ignoring the USD slide, then you might as well break out your Ouija board to try and predict prices... and yet analyst after analyst you see fails to include this most basic and fundamental force in their analysis. So... my point is this. If you hear someone analyzing the crude oil market and they are not discussing exchange rates, fade everything they say because they have immediately disqualified themselves due to a severe case of ignorance. The problem for OPEC is that oil is still priced in US dollars, so while the dollar price of oil is high, the translation into local currencies is lower. In other words, look at it this way. If the USD index was 110 and crude was $30, and now the USD index is 86 and crude is still $30, it is now effectively worth only $23 in the basket of currencies. Looked at the other way, the new equivalent $30 price is about $38. One of these days, if relations sour enough between the US and the Saudis, oil is going to be priced in Euros. I have been saying for a long time now and I discussed that in my "World's Reserve Currency" answer. So where are prices headed? I don't know or else I would have a position on. What I do think I know is that the answer depends on three fundamental things. 1.) the fate of the US dollar Next, there is this issue of global warming. To be honest, this is one of those issues that I have been skeptical about, since as we all know it's so easy to twist data to make it come out the way you want. I would like to make sure that everyone is familiar with this study however... Now the Pentagon tells Bush:
Climate Change Will Destroy Us -Secret report warns of rioting
and nuclear war A secret report, suppressed
by US defence chiefs and obtained by The Observer, warns that
major European cities will be sunk beneath rising seas as Britain
is plunged into a 'Siberian' climate by 2020. Nuclear conflict,
mega-droughts, famine and widespread rioting will erupt across
the world. So there you go. Now... I am the world's biggest skeptic. So when I read this I was thinking is this for real, or could there be some other reason why the Pentagon would want to scare people into believing this? I've thought about this a lot, and if there is a reason, I can't think of it. So I'm going to conclude, at least for now, that at least the authors actually believed the conclusions that they reached. Now... I am taking this with a grain of salt because they work in the same building with people that "Knew where Saddam's WMD were," so they obviously can reach erroneous conclusions, but the depth of the conviction and the conclusions reached are ominous. Furthermore, the current administration wants to avoid environmental issues... so that gives this study more credibility in my opinion. If this "secret report" (which is anything but secret any more) is even remotely close to true, it is certainly cause for concern. For me, it always gets back to trading. What would the impact on the markets be? In this case, I think that you could argue that the physical commodity markets would be roiled. For most agricultural commodities, they can only grow in certain climates and at certain latitudes and altitudes. The global commodity markets have evolved such that certain crops are produced only where they grow best. It's relatively easy for a North American farmer to change from say corn to soybeans, but to cocoa or coffee or Orange trees? Difficult if not impossible depending on the crop. If these climate changes come to pass, affected commodities will go sky high. With all that said, how am I going to play this? Well, I'm waiting for more evidence. The "freak heat wave" last year in Europe was called... well, it was called a freak heat wave, but maybe it was a sign of these climate changes the Pentagon is so worried about? I'm watching for more "freak" weather events. I will invest accordingly. I think the bottom line on this question is that "global warming" is an issue that may be moving from the realm of theory to actual tangible events. The world's second-largest reinsurer, Swiss-Re agrees. Time will tell. Insurer warns of global warming
catastrophe Craig Harris Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004
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