2010 Energy Update

This is an update to my post in June of this year, entitled "It's all about Energy".

In that post I outlined my reasons for believing that an average price of oil of $85 per barrel over a 10 week period (50 trading days) would be enough to send the American economy into recession.  Well, we're there, boys and girls.  In the chart from stockcharts.com below you will see the 50 day moving average (blue line) closed at $86.06 today.  Click on graphic for sharper image.

 But could I be wrong?   All the news out of Fraud Central (aka USA) states that things are much better, and the markets are going up. 

Of course I could be wrong, but hopefully never so much as a central banker like Alan Greenspan or Ben Bernanke who repeatedly failed to identify economic problems they had created, as in this clip.  

In May of this year we had a stock market pullback accompanied by a pullback in commodities prices.   My 50 dma oil price peaked at about $83.  In August Bernanke stated at the Jackson Hole summit that he would do whatever it took to support the economy, which was not performing as well as he had previously predicted.  This was widely interpreted as a promise to inject more liquidity into the financial sector, and the Banksters were off to the races once more.  

In November he announced his plan to inject $600 billion of "quantitative easing", between November and June, 2011.  And he would top that up with about $300 billion more from mortgage-backed securities held by the Federal Reserve as they matured.  The end result is a plan to inject about $7.5 billion per day into the economy, which he interpets as the Wall Street Banksters.  

And about a week before Christmas President O'Bomber announced a deal he had made with the Republithugs to extend "temporary" low tax rates for another two years, accompanied by an extension of unemployment benefits, and a few other tax reductions for a total of about $858 cost to the taxpayers over two years.

Now, out in the real world where central bankers and Washington politicians spend little time, people around the world didn't like these plans.  It looks like the United Subsidies of America is happily continuing down a debt spiral to oblivion.  

The people I call the commodity vigilantes bid up most things that had real value.  Oil, corn (and other grains), copper, cotton, gasoline and others have been going up.  Copper recently set a new all time high.  

My take is this.  Anything that is widely needed will be bid up in price, things like food and energy which are the first to increase in price in an inflationary cycle.  But things that are not needed will go down in price, like electronics and housing.  Earnings are not going up in real terms for the lower economic classes, while they are for the top few percent.  In fact, the largest private employer in America, Wal-Mart is removing its $1.00 per hour Sunday premium for new employees.  Why?  Because it can.  I use Wal-Mart as an example of overall wage suppression.

But surely housing is a need?  Nope.  Shelter is a need.  Housing is a lifestyle choice.  Most of the housing space in North America is not a need -- it is a luxury, so it will continue down in price in the US, and begin the descent in Canada in 2011. 

Two things have backfired on Bernanke so far.  Commodity prices have risen.  This results in one or both of two consequences:
  1.  Higher prices of consumer goods if the price is passed on; or,
  2. Lower profits for businesses if the cost is not passed on.
 The second thing that backfired recently is that long bond rates have risen, the opposite of Bernanke's intention.  American 30-year mortgage rates tend to follow the long bond rates.  In the chart below divide the rate by 10 (44.30 is 4.43%). I guess the bond vigilantes are still around.  We'll see in the new year whether Bernanke can manipulate the rates down again.  If not, watch the American housing market lose another 10% in 2011.

 While we're at it, let's take a peek at a 6-year chart of American national average gasoline prices (regular unleaded), from gasbuddy.com. 
 Gasoline prices are back in the same range they were at near the highs during 2005, 2006, and 2007 when Bernanke was unaware that house prices could fall on a national basis.  Forget 2008 because that was the speculative blow-off in commodities, and (in my opinion) is unlikely to happen again for several years.

 After all the above bafflegab, here's my thesis.  We're at the point where commodity prices cripple the economy.  I use oil as my indicator, and more precisely the 50 dma of oil prices.  Oil price feeds into the cost of almost every undertaking.  The money Bernanke is injecting is going mostly into stocks, commodities and emerging markets. 

There is an undeclared economic war going on between America and China.  Inflation is high in China due to "hot" American money flowing in, and the Chinese are some PO'd.  This is an attempt to get China to increase the value of the Yuan, so Bernanke can continue taking the US dollar down.  But as the US dollar decreases in value, things priced in USD go up (like oil) which is a tax on the lower economic classes in America.  But the Banksters make out like the bandits they are.  It's all part of the plan to accelerate the transfer of wealth from the working class, and what's left of the middle class, to the wealthiest members of society.  

Don't listen to stated intentions. Look at what actually transpires (and has transpired) as governments and Banksters manipulate currencies, markets, and laws.

 Be aware that most economists and Wall Street analysts think that it takes about $110-120/bbl oil price to drop the US GDP to zero.  Really?  Maybe that's why many of them are predicting $150 to $200 oil price in 2011, and gasoline up to $5.

That is extremely unlikely, and if it does happen it will be for a very short period.  If the O'Bomber stimulus and the Bernanke "quantitative easing" were stopped tomorrow, next week we would see a crash in stock markets and commodities.  At least 10% of US Federal government spending is borrowed money, adding to the debt.  Take that away, and the economy is instantaneously in deep recession.  

 Europe is in worse shape economically than the US, and China is hard to read.  I expect China to exhibit major social and economic problems in 2011 as their bank debt and huge housing bubble finally cannot be expanded more. If China doesn't crash first, they will continue driving up the price of commodities until Europe or the US (probably Europe) take a dirt dive.  In the end it doesn't matter who is first.  Those three major economies are linked like Siamese triplets, so damage to one tends to inflict pain on the other two.

 The minimum wage in Bejing is rising 21% next week.  Bejing is also severely cutting back on the number of permits for new cars in 2011, due to traffic jams and lack of parking space.  Duh! Who woulda thunk?  Maybe they could have looked at some North American cities traffic problems before re-creating the same thing.  It just shows people don't learn from others' mistakes; another example is financially over-extended Canadians who learned nothing from their American friends and relatives.  It's always "different here".

China is producing about 17 million vehicles this year and most of them are for new users.  Every new user adds to fuel consumption, as well as the materials used in automobile manufacturing.  In North America, most new vehicle sales are at about the same rate that older vehicles are being scrapped, so there are not many new users, and there is some salvage from scrapped vehicles.  And the newer vehicles are usually more fuel efficient than the older ones, so it is possible for there to be a reduction in fuel consumption.

That is not possible in China.  Vehicle sales and fuel consumption continue to rise. The same applies to all developing countries.  At some point their demand drives energy and other commodity prices to a point where growth in developed nations ceases (because our economies are much more dependent on low energy costs, due to our huge per capita energy consumption).  I'm thinking we're already there.

The bright spot on the energy scene is natural gas prices.  At $4 this is a bonus for consumers.  It is also a bonus for the Canadian bitumen producers, since their operations are basically an arbitrage on natural gas and oil prices.  This article states the Fort McMoney boys use 20% of Canadian natural gas consumption.

This price is too low for gas producers to make money.  It is a result of companies staking out positions in shale gas plays, and then having to do a certain amount of drilling and production to hold their land positions.  They know they are over-producing but it's basically a war to see who survives and who goes under.  In 2009 there was a big enough contango in natural gas futures prices (higher prices for longer dated futures) that many companies could hedge some of their 2010 delivery prices.  For instance, Encana hedged something like half of its 2010 production at prices around $6.  That's still not good, but better than the $4 they're getting for the other half. 

The chart below shows the futures strip price for natural gas for the next two years.  A producer could lock in delivery price for next December for $5.02 and for December 2012 for $5.42.  That's a real gamble because it's not much above current prices, and if spot market prices are higher then, they will have hedged below market prices.  If there is no price spike this winter there will be no opportunity for producers to hedge some future production at significantly higher costs.  2011 will likely be the year that many under-capitalized producers go out of business.  Chart is from metalprices.com.

 I think we are near the end of this current rise in energy prices, and many other commodities as well.  In my previous post I indicated that I thought prices would stay between $60-90 with only brief spikes outside that range.  For the next six months I'm raising that range to $65-95.  

If there is an oil supply scare (due to real or imagined issues) there could be another price spike like in 2008, but I would expect the spike to be lower, and of shorter duration.  The entire consumer psychology has changed and people will change their habits by cutting consumption quickly.  They have no choice; they no longer have credit available.  The mutterings are already beginning about $3 gasoline, and the usual conspiracy theories about price rises are being dusted off and plopped into reader comments on the blogs.

 Bernanke & O'Bomber may provide enough liquidity to get oil prices past $100, but I think this will be self defeating and self correcting.  It is not their purpose to do so, but the commodity vigilantes will not let them depreciate the dollar and/or increase the money supply without driving up commodity prices of all kinds, especially oil.  I expect the American economy to re-enter recession in the second quarter of 2011 (although many knowledgeable people whose opinions I respect disagree), and Canada will follow by the end of 2011.  You can't cure a debt crisis with more debt.

Our North American lifestyle is dependent on cheap and plentiful energy.  Watch the price of oil, as it is the most important energy source.  The higher oil price goes, the sooner we approach the next economic downturn.

American News Quiz

It's time to warm up the old keyboard before getting into some end-of-year posts.

If you haven't seen my second YouTube fun video, go here.  In this one I used old radio and TV ads and public service announcements and applied them to mostly newer images.  Just my bizarre sense of humour.

Today I filled out a quiz on current affairs conducted by the Pew organization.  It was designed for Americans, but I follow American news regularly, so I decided to give it a whirl.  It had 12 questions, and I got all 12 right.  Some of them were ridiculously easy.  See screen shot of my results below.  Click on image for sharper pic.
 Apparently less than 1% of 1001 Americans got 12 right, and about 1% got 11 right. 

But I am puzzled by the distribution in the above chart.  How can 4% get all 12 questions wrong?  As I recall the quiz (I'm too lazy to go back and check) there were 4 options for each question.  Even if you guessed at random, should you not get 3 out of 12 right (on average)?  What are the odds that someone could guess all 12 questions wrong?  Again, I'm too lazy to go back to basic probability theory and work it out.  Maybe one of the Ph.D. candidates in the family can help? (I know you do this type of thing on a daily basis.)

At first I thought the 4% must be Fox News viewers.  But then I glanced through the analysis and noted that Republithugs, the Fox demographic, got an average of 5.5 questions right while the Dummycrats only got 5.0 right.  

There were three easy questions dealing with the results of the mid-term elections last month.  Apparently this poll was done November 11-14, and the Nov. 2 election results were widely publicized around the world, not just in America.  How can any American not know what happened in their recent election?  Un-be-friggin-believable!  And how can anyone not know the current unemployment rate, which is in the news every day, especially when there is only one answer that makes sense?  And still people can get 0 out of 12?

Apparently Americans are poorly educated not only in math and sciences, where they rank in the bottom third of developed nations, but in their own current events as well. 

To take the quiz, go here and click on "Take the Quiz".

In the quiz only 15% of Americans picked the Prime Minister of Great Britain out of a list of 4 names, the same percentage who picked the CEO of British Petroleum (thinking he was PM).  Of course this isn't news to Canadians who are  bemused every four years by the number of American presidential candidates who don't even know who the current Prime Minister of Canada is, despite the fact that most of the presidential candidates are incumbent congressmen, senators, or state governors.

Rick Mercer used to have fun with this theme in his series "Talking to Americans", as in this one (poor quality video, audio is funny). 

For a more serious informative clip with much better quality, I like this one from Tom Brokaw, which I think was a prelude to the 2010 winter games.  Good video quality here.  I think he was subtly making the case to Americans that if they attended the games they wouldn't have to reserve an igloo.



When did we stop being citizens, and start being consumers?  I must have missed the memo.

It may have started with Edward Bernays who made a huge fortune teaching merchandisers how to sell things to people who don't need them.  Adam Curtis' production of The Century of the Self is on YouTube, profiling Bernays' methods.

I find the term consumers somewhat offensive.  When I think of consumers I think of cattle in a feed lot.  Perhaps the comparison is apt.  (See my YouTube video production link at the end of the post.)

There is no doubt Americans are "the biggest winners" when it comes to packing on the pounds.  It is regularly reported that one third of the population is overweight and another third is clinically obese.  Charles Hugh Smith had a neat graph depicting this situation in his blog today (reproduced below, click for clearer image).

 But this post is more about our general spending habits, not poor dietary choices.  It would appear that Bernays and his followers have been remarkably successful in getting us to confuse wants with needs, to the point where we have gone deep into debt to purchase nonessentials. 

Just before the last recession rental storage units were popping up everywhere like mushrooms after a summer rain.  People just had too much stuff, as George Carlin used to talk about in his stand up comic sessions.

So now that we've "pigged out" on credit and simply can't eat any more, it's time for our owners to send us to the slaughter house for debtors.  But not before force feeding us more debt.  The private sector is in the process of transferring its debt to taxpayers via increasing government indebtedness with help from the Federal Reserve Bank.  

When the system collapses the top few percent of society will be relatively unaffected while the large majority, the working class who like to think of themselves as "middle class", will be wiped out financially.  This game has been played out all over the world, particularly for the last 40 years.  The latest victim is Ireland; I expect America's economic collapse will be within 10 years.

I posted a YouTube video slide show entitled "Stampede" which shows my morbid sense of humour with respect to consumerism. 

Corny Math

I have always had admiration for those both audacious enough and skilled enough to hide a scam in plain site, undetected.  That's what I view the US ethanol blenders tax credit as.

The credit is $.45 per gallon of ethanol blended into gasoline, and should not be confused with any of the numerous subsidies for agriculture.  This credit amounted to $7.7 billion in 2009.

While the blender credit is controversial, almost no-one ever calculates the true cost of the credit for each gallon of new energy produced and blended.   I don't think I have ever seen such an analysis.

To calculate the true cost of the blending subsidy for new energy produced you need to apply the realities of energy return on energy invested (ERoEI) to the stated tax credit.  

It takes considerable energy to produce a gallon of ethanol.  There is energy embedded in the fertilizer and pesticides applied to the corn crop, energy to run the machinery to fertilize, plant, spray, harvest, and transport the corn to the ethanol plant.  Then there is the energy to process the corn through the fermentation stage, and more energy to evaporate most of the water.  Finally there the energy used in shipping the ethanol to the blending site.  There is a byproduct called distillers' grains which can be sold as animal feed to help offset input costs.

Estimates of ERoEI for corn ethanol vary widely.  Naturally people in the industry tend to have higher estimates than those who aren't.  There are credible university research papers that calculate there is a net energy loss in the production of corn ethanol.

For our purposes, let's examine two possibilities.  The first would be an ERoEI of 1.5, which would mean 3 units of energy out for 2 units of energy in.  This is on the high end of credible efficiency reports.  The second possibility is an ERoEI of 1.1, or 11 units of energy out for 10 units in.

If you haven't unravelled the scam yet, I'm getting to it.  In the first situation you pay $.45 for each of 3 gallons of ethanol.  But only one of those gallons is new energy.  The other two gallons were inputs of existing energy such as electricity (coal, natural gas, nuclear, etc. as energy sources), diesel fuel, gasoline, natural gas used directly or embedded in inputs such as fertilizer and pesticides.  The process produces one unit of new energy and converts two units of existing energy.

So the taxpayer is paying $.45 for the blending of one unit of new energy and an additional $.90 for the blending of two units of energy that existed before, probably mostly as coal, natural gas, and diesel fuel.  In essence, the taxpayer pays $1.35 per gallon of new ethanol energy just for the blending credit.  This doesn't count any other subsidies to the farmers or ethanol plants, or the cost of the ethanol itself, just the blending credit.

Now you can see where I'm going with this.  For the 1.1 ERoEI scenario, taxpayers would pay 11 x $.45 = $4.95 per gallon of new ethanol energy just to mix it into the gasoline.  This does not include the cost of the ethanol itself, just the blending credit.

This is why it is critical to do some real science when introducing new energy options to get a true analysis of costs and benefits.  It may make sense to convert coal and natural gas to ethanol via corn farmers.  Then, again it may not.  As more corn is used for ethanol production, the price of corn goes up for all other users of corn.  (No ethanol producer ever puts that cost into their calculations.)

My personal feeling is that the ERoEI is closer to the 1.1 number than the 1.5 one (based on credible analyses I have read), which would make corn ethanol a huge boondoggle.  (If the ERoEI were 1.5, why would there be a need for any subsidy anywhere in the system?  Corn ethanol would be highly profitable without subsidies.)  The fact is that the US government has no credible energy agency that compares various energy sources and the true costs of delivery of each to the end user.  Without such analysis there is no way of developing a rational energy policy.

This is just one small example of what I believe is unproductive economic activity adding to the decline of the American Empire.