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July 16, 2007

Psychotic Break

A curious phenomenon worth attention from pathologists in the financial press is the now nearly complete de-coupling of the finance sector from the salient ominous trend in the oil sector: the fast-developing permanent oil export shock. By that I mean a severe decline in export ability by those nations currently supplying the US, Europe, China, and Japan -- an export decline that will far exceed actual production decline rates in Saudi Arabia, Russia, Venezuela, the North Sea, Mexico, and Iran.
This story or scenario developed by Jeffrey Brown and statisticians at The Oil Drum.com, is pretty easy to understand: production declines in these nations will combine with greater internal oil consumption to severely curtail exports in a shockingly brief time frame. The populations of Saudi Arabia, Venezuela, and Iran are growing; car sales in Russia are up 50 percent this year; even Norway is using more of its own oil every year. These nations are consuming about 25 percent of their total liquids (regular crude plus natural gas liquids and condensates). Basically, the picture shows that net exports from these nations will run to zero in nine years. And they will be low enough within five years to throw the importing nations into complete economic paralysis.
The situation is even darker for the US because our number three source of imports, Mexico, is showing production declines far worse than the other exporting nations, suggesting not only that the US will receive no oil from Mexico in only two or three years, but also that the Mexican economy is likely to collapse and plunge that nation into political turmoil -- just what we need along our 2000-mile border.
It's against this background that the stock market melt-up of 2007 presents a virtually psychotic picture of disconnection from reality, because the oil story says, essentially, that the global economy as we know it can't possibly continue to operate, and that therefore investment in its future operations is certain to go up in a vapor.
The standard argument against this is that a combination of new "technology" and "new oil" (coming on-line from recent discoveries) will save everyone's ass. Well, the "new oil" is mostly hypothetical (e.g. Chevron's "Jack" discovery in the deep-water Gulf of Mexico). The little real new oil (Russia's Kashagan field) will A.) not come into full production for a decade and B.) not offset Russia's imminent steep overall production decline. The US is hoping (wishing really) that the Alberta tar sands will save our ass, but it is a pathetically delusional hope, since we already import more than 13 million barrels-a-day and the Canadians project maximum tar sands oil production not to exceed 5 million b/d after 2010 -- not to mention the fact that they have already signed long-term contracts with China for substantial amounts of that production, and apart from the issues entailed by the depletion of Canada's natural gas supply, which is crucial to the production of oil from tar sands.
As for new technology saving the day -- apparently even the science jocks in the US have not figured out that technology and energy are not the same thing. Someone should inform them.
The psychosis in the stock markets might be explained by the fact that we are at a peculiar point in history: just coming off the absolute peak of the energy supply wave, which has allowed for a fabulous accumulation of surplus wealth, now sloshing through the markets. This may be so, but unfortunately the surplus wealth comes in the form of "money," and the "money" that is out there is subject to equally fabulous distortions and perversions, due to the fact that it is all leveraged into hallucinated multiples via credit rackets, and, perhaps more fundamentally, pegged to the unreal expectation that industrial economies will continue to grow and thus continue to multiply the value of invested "money."
These two conditions -- the gathering oil export storm and the gathering crisis of capital -- are the reasons why I think 2007 will be a pivotal year. We're at the halfway point. Oil production (all liquids) has not exceeded the all-time peak of a year ago (or the crude-only peak of December 2005). Every day thousands of new driver's licenses are issued to Saudi Arabian men. Every day, thousands of new cars are sold in Russia (and China and India). Every day the price of crude oil on the futures markets creeps a few cents higher. Every day the US version of "money" (the dollar) loses a few clicks of value against other world currencies. The markets and the American public are headed for a collision with reality. When it happens, perhaps this fall, it is not going to be pretty...........