Sunday, May 11, 2008

Glaringly Wrong, Or ..?

The post's title refers to an article in the January/February 2000 issue of Foreign Affairs about the price of oil.

But before delving into that, a current Reuters news story about GE Money ceasing to finance motor homes and recreational boats. Sales of such pricey toys have collapsed: year-to-date motorhome shipments are down 24% and sales at the nation's largest boat retailer are down 28% in the first quarter. Along with Starbucks overpriced lattes, these are additional signs that the US consumer is hitting the brakes hard.

And while peripheral, highly discretionary items are feeling the impact hardest, overall spending is down significantly, too. According to SpendingPulse, retail sales excluding gasoline and autos were down 0.7% in April versus March.

OK, back to the Foreign Affairs article from 2000. You can read a 500 page preview here (or the entire article if you are a subscriber).

This is a part of the first paragraph:

But contrary to much received wisdom, the energy problem looming in the early 21st century is neither skyrocketing prices nor shortages that herald the beginning of the end of the oil age. Instead, the danger is precisely the opposite; long-term trends point to a prolonged oil surplus and low oil prices over the next two decades [emphasis added].

The writers predicted oil would remain in the $12-20 range for another 20 years.

Instead, we got this:

The purpose of this post is not to scoff at a glaringly wrong prognosis by two experts - anyone can make a mistake. Indeed, it is sometimes far easier for "experts" to make mistakes than rank novices (ever heard of beginners' luck?). Instead, this post is about a different interpretation of the what, why and when of the article, one that may also shed some light at current oil prices.

First, some background: by 1998-2000 oil prices were scraping the teens and low twenties for over a decade. The national economies of crucial Arab allies like Saudi Arabia, plus Russia (a.k.a. "Upper Volta with nukes") were essentially bankrupt. Populations in Arab oil producing nations exploded upwards while oil income collapsed, threatening the socio-political stability of the authoritarian regimes. Massive subsidies for everything from food, fuel and higher education, medical care and even wedding dowries were no longer possible. Agitation by young, restless populations was on the rise...

I remember reading the article when it first came out. My first reaction was surprise at the truly parlous state of finances in the Gulf region. In Saudi Arabia alone, real GDP per capita had slumped from $11,450 in 1984 to $6,750 in 1994. The country's budget had swung from $140 billion in surplus revenue in 1982 to consecutive deficits that eventually ran up a national debt of $130 billion. Other oil producers - most obviously Russia - were in even worse shape.

My second thought, then, was that "they" wanted oil prices to go higher in order to prevent major geopolitical upheaval ("they" being the loose term employed when referring to the US establishment, for which Foreign Affairs is the recognized house organ). The article's purpose, therefore, was not to predict low oil prices but to warn that low prices were dangerous and no longer desirable. Indeed, after a brief pause due to the shallow recession following the dotcom bubble, prices climbed inexorably higher.

Well, things have now come full circle. The latest issue of Foreign Affairs carries an article ("Blood Barrels") that is in the exact opposite direction of the one that appeared eight years and $100 ago. The summary reads:

Oil wealth often wreaks havoc on a country's economy and politics, helps fund insurgents, and aggravates ethnic grievances.

From cursing very low oil prices in 2000, "they" have now gone to "..the so-called oil curse", "Dutch disease" and armed conflict by internal insurgencies. In the 3,000 word article "conflict" appears 17 times, "war" 11 times, insurgent/insurgency 7 times and violent/-ence 4 times. Get the message?

Now, all of the above is not meant as my prediction that oil prices will move lower - I am just pointing out the ebb and flow of the establishment's views on the subject. In any case, readers know that I prefer pricing energy on a like-for-like basis (EROEI), instead of artificial dollar terms that can expand or contract with monetary policy.

One final observation.

President Bush is to visit Israel, Saudi Arabia and Egypt between Wednesday, May 14 and Sunday, May 18. This is the schedule:

Wednesday - Israel
Thursday - Israel
Friday (until abt. noon) - Israel
Rest of Friday - Saudi Arabia
Saturday - Egypt
Sunday - Egypt

If you are familiar with diplomatic protocol you can immediately "read between the lines". A visit to Saudi Arabia lasting just a few hours scrunched between Israel and Egypt is the equivalent of expressing severe displeasure, i.e. the White House is flipping Saudis the finger (or is it the other way around?). The cause for such displeasure is easy to guess: despite repeated US entreaties to raise oil production and lower prices, the Saudis are staying put. They blame record prices on the lower dollar, speculative frenzy in futures markets and high demand from Asia, but the US administration is clearly not satisfied.

There are more aspects to this story, most prominently the possibility that Saudi oil production has peaked (see Simmon's Twilight In The Desert). But "they" are very far from acknowledging any such possibility, at least publicly, choosing instead to view high oil prices as a deliberate choice by Arabs bent on maximizing current gain and "buying up the world" through sovereign wealth funds.

My view is that we will find out very, very soon what is really going on.


  1. The Saudis are annoyed at a weak dollar (Bretton Woods II reluctance?) and as well as being solely blamed when our home grown speculators are adding quite a lot to the barrel of oil - the new bubble is commodities folks. Wall Street financiers will bleed us once again. See this 2006 report:


  2. Let us be straightforward.

    In view of the massively negative returns of the "reserve currency" sic (excuse my coughing), I wonder why any oil would still be produced to-day.

    At any price, if you do not have a decent store of value, oil extraction is a bad decision.

    On top of below-inflation real returns, we now have a chance of accross-the-board financial defaults

    Possibly some oil producers are not that kind of short term greedy hedonists that Wall Street nurtures in droves.

    The only long term view is: Oil left in soil and a strong army at the borders.

    This is politically incorrect but has to be said.

  3. Let's see. "They" (Americans own elected representatives) told the American worker whose job was outsourced that "it's the global economy" - deal with it.

    Now that oil prices are hurting the profits of "their" big business campaign contributors "they" are whining about this particular aspect of the global economy. Sounds hypocritical to me.

  4. Hell:
    You've got it about the real purpose of these articles. All of a sudden our Goldman Sachs "friends" say oil may go to $150-$200. Why? What is GS really signalling? To whom?

  5. So...does a pending change in administrations (and a change in who gets the phone call at 3am) have any impact on the direction vector and velocity of where this is going?

  6. Hell, that was a VERY good post

    Independent accountant, would you hum a few more bars, I do not follow.

  7. "My view is that we will find out very, very soon what is really going on."

    Agreed. This is going to be a very interesting year, in more ways than one.

    Idependent accountant, GS had predicted the rise to $105 more than a year ago. It isn't that the recent prediction is "all of a sudden". It is that their earlier predictions of oil price rises weren't taken seriously. They're being taken very seriously now. Being right may not buy you much credibility in politics, but it does seem to in the financial world.

  8. "Friday (until abt. noon) - Israel
    Rest of Friday - Saudi Arabia
    Saturday - Egypt"

    I wonder if the Saud family was at Jenna's wedding?

  9. If you were Saudi royalty would you be pleased with Boy George's Awesome Adventure?

    Osama (a real existential threat to Saudi power)running loose in the Afghanistan Pakistan border region, Shiites in Iraq teaming up with the powers in Iran, enabling Israel to maintain its Draconian measures against the Palestinians, stirring the pot in Lebanon, and the pimping of the dollar beyond useful reserve status.

    You think they view the "enlightened one" as an ally?

    I wonder how much of the capital lost by the Bush Ponzi scheme (AKA Carlysle Capital Corp.) was of Saudi origin?

  10. Give me a break Hell. Do you know how many US newspapers will start calling Bush anti-semitic, if he spent 3 days in Saudi and one in Israel?

    "My view is that we will find out very, very soon what is really going on."

    Peak oil is here. WTIC is going to see $40 soon.

  11. I wouldn't leap to the conclusion that Bush is pissed at the Saudis for not ramping up production -- there's no evidence that this administration has ever done anything to lower oil prices. In fact, higher oil prices forces foreign govts to hold more dollars, and those petrodollars get recycled back into US banks (or, at least, that's supposed to be the arrangement...)

    I'm not suggesting that high oil prices will recapitalize the banks, only that BushCo cares about oil companies and not commuters.

  12. The issues are many, I imagine, the dollar, and U.S. military designs on Iran to name a few. Regarding pumping more oil, even if they can't the Saudis will never admit to their fields being in terminal decline. Needless to say, none of these issues will be settled in a satisfactory way in a brief meeting.

    As for oil's prospects going forward. Goldman Sachs, the biggest criminals on the street, with
    the possible exception of JP Morgan, are amongst those with the highest projections for oil. Their public stance should be a huge caveat to those who are expecting $200 dollar oil anytime soon.
    They are not in the business of doing the public a favor, but rather making money, and that is best done, in their experience, at the public's expense.

  13. H, or anyone with the relevant info. How much 'oil' does Israel have - and Egypt?

    Why is Egypt of such strategic importance to the US? Would there be a 'problem' if the Muslim Brotherhood got a significant measure of control?

    Brian P


  15. Brian,
    Egypt has a small amount of natural gas and even less oil but that's not the reason it is important. The Camp David treaty signed under Carter is why Egypt has to be kept stable.

    If the Brotherhood took over that treaty would be frozen (Isreal hasn't fulfilled all the terms) and the US would no longer be able to use Egypt to pressure Syria and maintain the blockade on Gaza.

    Without Egypt as its local enforcer in the mideast the US would have less leverage with all the others, even supposed allies.

    You might want want to check out Michael Klare's latest article on oil politics and how it affects military operations:

    According to Klare it is the Saudis who are flipping Bush the bird for the reasons that Francois outlined.Both Francois and I touched on this on "The Real Cost of Black" thread. How will the US react to the prospect of exporters (of oil or anything else the US wants) not accepting dollars as payment.

    In Hel's words:

    "...the ultimate endgame is synopsized thus:

    Foreign lenders have money, Americans have guns."

    If the US begins to feel that it is losing control of its clients, will it risk drawing China and Russia into a confrontation by instigating another war?

    Right now neither China nor Russia is supplying resistance fighters in Irag or Afghanistan with sophisticated weapons. If the US threatens their interests in Iran, Sudan or even Latin America they could do to the US what the US did to the Soviets back in the 80's.

    With shoulder fired missles in the hands of the resistance the US troops can kiss their air cover good bye.

  16. Being somewhat of an amateur conspiracy nut, I would go so far as to posit that the Council on Foreign Relations and writers for their journal such as Amy Myers Jaffe, might just have a pretty fair idea of where energy prices were/are headed. Ms. Jaffe, after all, is employed by the James Baker institute. Mr. Baker is himself a great friend of the Saudi Royals, and might just have a bit better handle on remaining kingdom reserves than say, oh, Matt Simmons.

    That being said, in 2000 there was absolutely zero upside in sounding the energy alarm bells, especially if you're representing the World's financial elite, and are about to implement a "Project for a New American Century" using a "New Pearl Harbor" to catalyze public opinion in favor of said project. In fact, the Iraq "disaster" may look quite appealing when seen through the lens of ten dollar gasoline. We shall see.

  17. Thanks anon, I was worried I was the only one being controlled by the CIA thru the transitor they implanted in my teeth

  18. Shargash:
    I was aware of GS $105 prediction and commented on it when it was made at my blog. This may surprise you, but I am a wild commodities bull. I own many oil and oil field service stocks. That said, I have followed GS man in London, Jeffrey Currie and at best, think he is is incompetant. I may agree with his conclusions but disagree with his reasoning. That GS decides to increase its oil price predictions makes me uncomfortable. I don't want to be in the same room with GS. I read newspaper accounts of GS $150-$200 prediction and again don't know what GS is basing it on.
    Therefore I conclude GS had a political motivation for the prediction. What? I don't know. Stay tuned.
    By the way, I expect $150-$250 a barrel oil by 2012. I wouldn't be surprised to see commodities triple on average from current prices by 2015. In real terms, commodities peaked in 1973.

  19. Yoyomo,

    Thanks for the update. I concur. Though I am considering the water/food problem, rather than the oil/energy problem with respect to the mid-east region.

    Petroleum products may be necessary to maintain the status quo, but water is essential to maintain human existence; so where will the increasing populations of mid-east get their drinking water from?

    I sense an advent of the end-game for this region.

    Brian P

  20. Iran is the only country in the region to recognize the danger of population growth. After Khomenie (who was for pop.gro.) died the govt instituted a crash program of population control where no marriage license will be issued until the prospective couple has obtained a certificate from birth planning program that includes instruction on birth control methods and population pressures.

    The other countries in the region are counting on revenue from their sovereign wealth funds to buy food from abroad and pay for desalination plants. It's doutful this will work for long.

  21. François said...
    Let us be straightforward.
    The only long term view is: Oil left in soil and a strong army at the borders.

    This is politically incorrect but has to be said.


    Well, yes, but were the Saudi's really envisioning that the strong army at their border would belong to the US?

    If not, where will they rent one?

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