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Higher Oil Prices, the "New Normal" |
Eric Fry, reporting from Laguna Beach, California...
Contrary to popular mythology, we Californians do not live merely on love,
sunshine and granola.
I mean, sure, we've all got our yoga mats, our quartz crystals and our
"life coaches" (who doesn't?), but life is just so much more than "namastes"
and positive energy. Life is also about building enough windmills
(somewhere else) and installing enough solar panels (somewhere else) to
keep our yoga studios air-conditioned.
And, yeah, I guess we need SOME crude oil, cause our Priuses cannot ALWAYS
run on electricity. So I guess its fine to use crude oil if we have to, as
long as we can obtain the oil in an ecologically friendly way...like
getting it from somewhere else. (OMG, remember the Santa Barbara oil spill
in 1969? That was a SERIOUS bummer!)
So, yes, we Californians certainly understand that we cannot break our
dependence on crude oil overnight. At least not until some "next
generation" process comes along that can convert text messages into jet
fuel. And even if we Californians use less crude oil, someone else is
bound to use more of it...like all those reckless industrialists in the
Developing World. Don't they know how bad crude oil is for the
environment?
But I guess there's just no reasoning with these people. So I guess we'll
just have to keep finding and pumping crude oil for a long time to come.
Hmmm... I'm not sure how easy that's going to be. When I was out recycling
newspapers the other day, I saw an old headline that said crude oil is
becoming much harder to find...and that oil production is falling off
rapidly at many of the world's largest fields.
So I did a little research and - would you believe - it's true. Crude oil
is becoming much harder to find and much more expensive to produce.
In today's edition of The Daily Reckoning, our friends over at
the US Global Investors Global Resources Fund shed a bit more light on
this frightening truth.
But first, let's hear what Dan Denning, our correspondent in
Melbourne, Australia, has to say about yesterday's surprising disclosure
that India snapped up $6 billion worth of gold from the International
Monetary Fund:
Well how about that! India pipped China at the post to walk away with 200
tonnes of IMF gold. Granted, India had to pay US$6.8 billion for the
yellow metal. But with China steadily accumulating gold as a reserve asset
(at the household AND central bank level), everyone thought China has this
one in the bag. Not so!
Something more than meets the eye is going on here. The IMF sale was part
of a plan to unload 403.3 tonnes of gold. It's halfway there, and will use
the proceeds to fund itself and loans to the developing world (or perhaps
Britain and America when they go broke). But what else is going on?
In the past, large sales of gold - mostly by European central banks -
swamped the gold price and kept it in check. Why did they sell?
The central bankers believed they had too much gold on their balance
sheets doing too little work. In other words, these thoroughly modern
bankers would explain, "Gold pays no interest." So they thought it
"prudent" to exchange their gold reserves for interest-bearing assets like
Treasury bonds. So far, that's been a horrible trade...and it is becoming
an even more horrible trade as gold advances from record high to record
high.
Nevertheless, the central bankers of the West continue to unload their
gold reserves to the central bankers of the East....
India's central bank is now the proud owner of 557 tonnes of gold. That
gives it the tenth largest gold holdings among central banks. But it
probably isn't finished. Gold makes up just six percent of India's foreign
exchange reserves. There's plenty of room for that to grow.
But don't forget China. China has $2.3 trillion in foreign exchange
reserves. But 70% of those - or $1.6 trillion - are in US dollars. It owns
over just 1,000 tonnes of gold. That makes up less than 2% of China's
reserves and makes China the seventh largest holder of above ground gold.
In fact the gold exchange traded fund (NYSE:GLD) owns
more gold than China. France, Italy, the IMF, Germany and the United
States round out the top five (from fifth to first).
What this tells you is that China could double (and then double again) its
gold reserves and gold would still make up less than 10% of its total
forex reserves. Compare that to 66% in Italy, 69% in Germany, 70% in
France, and 77% in the US, according to official numbers. So what's the
big deal?
There will always be a threat that European Central Banks release gold
supply on to the market. In fact, European central banks just renewed a
five-year agreement (including the IMF) to sell down a maximum of 400
tonnes of gold per year from their holdings. They've agreed to this to
disgorge their gold in an orderly fashion.
But it would not surprise us to see the Europeans fail to sell the gold
they're allowed to sell under the agreement. Our old desk mate in London,
Adrian Ash (now with Bullion Vault) is at the London Bullion
Market Association's annual meeting in Edinburgh. Word from UBS analyst
John Reade, also at the meeting, is that European Central Bank official
Paul Mercier reckons that official holders of gold will, "no longer be net
sellers of gold."
As we predicted earlier this year, the European central banks would rather
hoard their gold than sell it in a rising market. There may be a price at
which they do sell it, in order to pay down sovereign debts. But
psychologically, the fact that central banks want to own gold and not sell
it is pretty important.
Also, it shows you how the balance of economic power in the world has
shifted East. True, the European banks can still dump gold on to the
market to drown the price. But between the ETFs, central bank buyers in
India and China, and the average man on the street in Beijing, Mumbai, and
elsewhere, there are more buyers of gold now than sellers.
And if we were right yesterday that the GFC is slowly morphing into a
sovereign debt crisis, then the case for gold is that much stronger. This
explains why gold futures were up by nearly 3% overnight and Old Yeller
hit a new high at US$1,084.90.
The only worry? So many hedge fund managers and pundits are singing the
same tune: long gold and short US Treasuries. These feel like "crowded
trades." So as a contrarian, you've got good reason to be a little worried
about becoming a victim right about now.
Nevertheless, in the long term, the end of the Super Cycle in fiat money
results in the re-monetisation of gold. That is what you're seeing now.
And it's probably what you'll see for a few more years. It also ought to
benefit other precious metals, and of course, precious metals shares.
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Give me the next four minutes and I'll show you how...Continued
Here.
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The Daily Reckoning
Presents: |
Last week we brought you a couple of "Peak
Oil" crisis and opportunity columns. Today, our guest editors dig a
little deeper into the figures with depletion rates of the world's
leading projects and what it portends for energy investors over the
coming months and years. Please enjoy...
Higher Oil Prices, the "New Normal"
By Evan Smith and Brian Hicks
Co-managers, Global Resources Fund (PSPFX)
San Antonio, Texas
Oil prices have bounced more than 150 percent off their December 2008
lows, despite the fact that inventory levels remain at historically high
levels. Does that mean the oil price is out of whack? Not necessarily.
According to Goldman Sachs, robust 2010 oil demand growth will deplete
these inventories over the next 12-to-18 months and diminishing
production rates in key areas around the world will create a
supply/demand imbalance.
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The top portion of the nearby chart shows the decline in production from
the world's top 230 projects. After peaking in 2009, production from these
projects is set to fall for the next several years. Excluding OPEC
countries (bottom portion of the chart), the decline rates will likely
quadruple from 2007 to 2012.
Over that time period, non-OPEC production is expected to fall by 2.5
million barrels per day. Only Brazil, Canada and the former countries of
the Soviet Union are expected to see production growth.
One of the largest contributing factors for this is chronic decline rates
from some of the world's top mature fields. Mexico's Cantarell field, one
of the largest oil fields in the world, produced 30 percent less oil in
2008 than it did in 2007 - a trend that's expected to continue.
Norway, the world's 11th largest oil producer in 2008, saw its oil
production peak in 2001 and is down 27 percent since. Another big
producer, Venezuela's state-owned oil company PdVSA has seen annual
decline rates of more than 25 percent in certain fields according to the
Energy Information Administration (EIA).
Adding to the dilemma, many countries without decline-rate issues have
been holding out production increases until projects become more cost
effective; this is why we recently saw Russia overtake Saudi Arabia as the
world's largest oil producer.
The Saudis have been content to sit on the sidelines while awaiting the
return of higher prices. The same goes for other OPEC countries; PIRA, an
oil-industry consultant, says the cost of oil will have to rise above $80
per barrel in order for the cartel to increase production.
With oil prices currently hovering around that $80 level, OPEC officials
have recently hinted that production increases aren't off the table for
the cartel's upcoming December meeting.
But even if we see a production increase out of OPEC, decline rates from
maturing fields and high barriers of entry to bring new fields online
should keep the supply/demand balance tight for years to come.
Regards,
Evan Smith and Brian Hicks
for The Daily Reckoning
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