Sunday, June 29, 2008

Oil and the mother that bore him

David Seaton's News Links
One of my oldest customers is an energy derivatives brokerage, for whom I provide selections of articles and commentary for their webpage.

Thus, for many years now, every week of the year except August, I have had to read dozens of articles about oil.

I don't consider myself in any way an expert on oil, but I read and have read a lot of experts. I have been following oil since when it was absurdly cheap till now, when it is frighteningly expensive.

I would compare myself to a Moroccan cleaning lady in Madrid's cathedral, I know the difference between a priest a sacristan and a bishop and a cardinal, between a choir boy and an alter boy, but at bottom what they are all doing and why remains a mystery to me and I never forget my granny's words, "Be careful Fatima, they may all seem very nice, but never forget, that when that little bell rings they eat human flesh!".

What have I learned?

First, this is a huge question, it is a perfect example of the blind men feeling their way around an elephant.
There are so many factors involved in the price of Oil that chaos theory kicks in rapidly in any analysis. Nobody has the complete picture. In some ways I think even Jim Kunstler is too optimistic, romantic, really.

One thing I am sure of is that future archaeologists digging over our detritus will baptize us the "oil civilization". Our world revolves around oil, first for objective reasons, but then because of its power, magic enters into it too.

There is much argument as to if we are rapidly running out of oil or if there is plenty left. Most of these arguments are magic ones. There are so many sound and reliable experts on either side of the question that I am tempted to say that the "magic quotient" is having a disproportionate effect on the present crisis.

My feeling (this is a blog and not a report) is that what is in crisis at this moment is value itself.

Value is in some sense dissolving and those who hold value are frantically trying to put whatever value they possess somewhere safe. Like a drowning mother throwing her child to a stranger.

This is no longer really about making money, this is about not losing shirts. Oil being the center value of our civilization its paper value is soaring, just as the paper value of gold and wheat. This is not "speculation", this is panic.

Here is a little quote from Nouriel Roubini, to keep my readers busy while I go off to watch the European Nations Football Cup finals. DS

Nouriel Roubini: The delusional complacency that the “worst is behind us” is rapidly melting away…
Abstract: Those of us who had predicted this economics and financial mess (the worst housing bust since the Great Depression, the subprime and mortgage meltdown, the bust of the credit bubble, a nasty liquidity and credit crunch, high and rising oil prices, an ugly recession) well before (in the summer of 2006) 99% of the world had even heard the term “subprime” held to our sound and analytically grounded views that: this would be the housing was not bottoming out, that this would be the worst housing recession since the Great Depression and that home prices would eventually fall 30% plus, that millions of underwater households are at risk of walking away from their homes (“jingle mail”), that the we were in the eye of the financial storm (rather than past it) and this would be the worst U.S. financial crisis since the Great Depression, that credit losses would mount over time well above $1 trillion, that we would have a systemic banking and financial crisis with hundred of institutions going belly up, that the stock market would fall back into serious bear territory after another and last sucker’s rally, that the recession would be deep and protracted (12 to 18 months and U-shaped rather than V-shaped), that the Fed would stay on hold (or even cut rates further by year end) as the economic and financial crisis becomes more severe, that the world would not decouple – financially and/or economically – from the U.S. contraction, that the exchange rate policies of the BW2 countries (partially sterilized intervention creating easy monetary conditions and excessive credit growth) would lead first to asset bubbles and then to rising inflation as the needed real exchange rate appreciation would occur through a rise in prices if the nominal appreciation would be prevented, that BW2 would come under severe strain once this asset bubble would go bust and inflation rose.(...) Certainly the rising financial tsunami ahead as the economic contraction gets worse, the financial/credit losses mount, the credit and liquidity crunch gets worse will test both the ability and the political willingness of the Fed to further bail out major financial institutions that are in serious trouble. So the worst is well ahead of us – not behind us – for the real economy and financial markets. READ IT ALL

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