[Abby Justa Colon]

About a year or so ago a fellow stoolie posted a chart showing how the Dow fell when the price of oil went up and vice versa. I'm sure by now everyone who drives is starting to feel the pinch again as gas prices start to shoot upward (about $1.80/gal. here on the North Coast).

Now, just in time for the cooler weather, the price of Natural gas is skyrocketing also. Currently my supplier is charging($8.50/MCF) which is above the rates of the nightmare heating season of 2001. My monthly heating bills alone were up over $100 per month that year over the previous years. A friend of mine actually had a heating bill of over $500 in January 2001!

Anyway, you all know what happened to the markets that year.
Its simple take a $100+ per month away from the economic picture for every house you see. Plus, about $40 per month for every car/truck you see on the road....Get the picture.

No tax package, child credit, rate cut, etc. can come close to the economic impact these two energy forms can.

Unless oil and natural gas cool off and return to lower levels....I think the stock markets might just cool off instead.

Of course Bush could "authorize a release of Iraqi oil" to save his falling ratings and keep the prices in check, but I wouldn't bet on it!

Just some thoughts......

[rayok]

Abby Justa Colon, on Aug 23 2003, 10:33 PM, said:

Its simple take a $100+ per month away from the economic picture for every house you see. Plus, about $40 per month for every car/truck you see on the road....Get the picture.

It's not that simple, unless you assume people in the energy industry never recycle that money back into the economy. They don't eat, sleep, or consume like regular folks, right?

Under investment in commodities leads to higher prices. Over investment in financial assets leads to lower prices. Different goups of people recieving a ROI, at different points in the economic cycle.

[mjkst27]

Right on Rayok. Check this out: Why we need $60/barrel oil

very thought provoking and insightful.

[Captain's Log]

Abby Justa Colon, on Aug 23 2003, 11:33 PM, said:

About a year or so ago a fellow stoolie posted a chart showing how the Dow fell when the price of oil went up and vice versa. I'm sure by now everyone who drives is starting to feel the pinch again as gas prices start to shoot upward (about $1.80/gal. here on the North Coast).

I wonder if the correlation is more towards $ strength. As oil is a commodity it's price is inversely proportional to the strength of the dollar.

If longer trend is $ weakening (which is unwritten US policy) then oil and other commodities, will go up. Also to add some catalytic geopolitical factors and price of energy is looking bullish:

Iraq oil is proving more difficult to get out of the country than what was anticipated. Every week seems to be more sabotage activity and uncertainty in the region.

Opec has no incentive to help to introduce more capacity as US has burned some bridges there especially with the - Saudi's. They are fumming that they are no able to see the evidence presented in the 911 report that the Saudi Royals had a hand in it.

Iran : Similar to Saudi position. They have no desire to help Bush after being tarred as being part of Axis of Evil.

On the home front, Natural Gas seems to be Energy policy disaster waiting to happen. Having added so many power stations built in NG but having the supply dry up can only mean higher prices as that source dwindles. It will also have knock on effect on other forms of energy as we'll have to satisfy that unmet demand with oil, coal on nuclear. Shipping in supplier of NG from other continents is not practical today as infrastructure in form of refridgered tankers is not there.

As an investment position, I currently have pilot positions in CHK (NG) and PHK (Oil).

[machinehead]

From the Andrew McKillop article on Prudent Bear website (posted by mjkst27):

Quote

The US economy attained its highest-ever postwar growth of real GDP ... in ... 1984 [when] the [real] oil price range ... was $57-$65/barrel. Despite this simple fact of economic history, Cheap Oil is still regarded by the uninformed and biased as a passport to economic growth. Almost any fit-to-print analyst or commentator will find the place, in their weekly columns, to repeat the basic myth that ‘High oil prices hurt growth.'

What the rather adamant Mr. McKillop overlooks is that high oil prices act with a lag effect. The strong oil price of 1984 led to a quarter of negative growth in 1Q 1986. The oil price collapse of early 1986 led to strong economic growth in 1987 and 1988. The oil price spike of August 1990 left the economy stumbling for the next two years. And so forth.

I suppose a swaggering armchair poodit with an attitude like McKillop wouldn't bother with the 'simple facts' that emerge from a lagged correlation study. His chest-thumping pronunciamentos are worthless, and it diminishes my opinion of Prudent Bear that they would print half-baked garbage like that.

Quote

Cheap oil necessarily reduces the price, and value of real resources relative to services, information and the ritual forms of ‘wealth’ created and maintained in the old, and aging democracies ...

This is jaw-droppingly idiotic. Cheap real resources - cheap grains, cheap metals, cheap energy -- are exactly how we got rich. That's called productivity. And it's a good thing, McKillop, not a bad thing. A drastic increase in the price of any energy source due to shortage, will cause another energy source to be substituted. It will briefly benefit the supplier, until the rest of the world dodges the bullet by finding a substitute. The transition is usually painful for all concerned. That's why Oil Shocks I and II are remembered as global recessions, global nightmares.

It's too bad Prudent Bear neglected to provide a bio for McKillop. Then we could find out who paid him to write this puerile nonsense. My guess is that he's a sleazeball borker of penny-stock wildcat drillers on the Vancouver exchange, trying to paint a bullish scenario for his cronies, henchmen and promoters.

[mjkst27]

But what about the global effect, MH? I look at it like this - if the price of oil doubled tomorrow, would economic activity drop by half? Of course not. This is a bit of hyperbole, I admit, but the increased dollar velocity would cause economic activity to increase globally. Those dollars "go" somewhere. (of course the US would stand the most to lose as we don't produce oil for export but we do consume a lot of shit.)

[Yoshaviah]

A higher oil price is generally considered to be a "hidden tax" on consumers. But we ought to consider if the higher price comes at a time of increased or decreased demand. If it comes at a time of decreased demand the impact is not likely to be that great as compared to a period of increased demand. There is also the effect of increasing the value of the dollar at the international level if an increase in the demand for dollars is the result of higher prices given that exchange rates remain constant during the price increase. If exchange rates are already trending in favor of the dollar then a higher oil price will have a further strengthening effect on the dollar. We do well to consider that the US might also be in a position to benefit from a higher oil price if it can subsidize domestic consumption at the Federal level (through defense and other government oil requirements) by obtaining "free" oil from Iraq during its occupation. Of course the US will call this "free" oil an entitlement through war reparations. It should also be noted that if other countries have to spend more for oil then they could have less to spend on gold - that barbaric relic - which would otherwise provide them with a hedge against the dollar.

Recall that Sadam rejected the Dollar in favor of the Euro and incurred the wrath of the Texas Oil Man in the White House. Sure Sadam could have sold oil for dollars and then bought Euros. But that is not how the game is played - Sadam was supposed to sell oil for dollars and then buy US bonds to subsidize US debt. Well, now Iraq is subsidizing it anyway, and so is the rest of the world. Gotta keep the game going you know.

[alceringa]

machinehead, on Aug 25 2003, 11:49 AM, said:

His chest-thumping pronunciamentos are worthless, and it diminishes my opinion of Prudent Bear that they would print half-baked garbage like that.

I had much the same reaction. Mr. Tice is entrusted with some of my money and now I'm wondering how wise that is.

Quote

It's too bad Prudent Bear neglected to provide a bio for McKillop. Then we could find out who paid him to write this puerile nonsense. My guess is that he's a sleazeball borker of penny-stock wildcat drillers on the Vancouver exchange, trying to paint a bullish scenario for his cronies, henchmen and promoters.

It appears Mr. McKillop is nothing so august. He seems to be an unemployed energy industry neer-do-well and hanger on, currently looking for a real job.

Andrew McKillop CV

[Yoshaviah]

I've never read the guy myself. Now I probably never will, since you guys have biased me I was even thinking about a few shares in the poo-bear fund, but now I am having second thoughts. Is there any risk in buying the RYDEX funds? I mean they leverage at 100%, i.e. a 10% drop (or gain) equals 20%. Can I lose money in something like a derivatives' thing blow up while I'm riding a RYDEX fund?

[roidrage]

machinehead, on Aug 24 2003, 09:49 PM, said:

I suppose a swaggering armchair poodit with an attitude like McKillop wouldn't bother with the 'simple facts' that emerge from a lagged correlation study. His chest-thumping pronunciamentos are worthless, and it diminishes my opinion of Prudent Bear that they would print half-baked garbage like that.

This is jaw-droppingly idiotic. Cheap real resources - cheap grains, cheap metals, cheap energy -- are exactly how we got rich. That's called productivity. And it's a good thing, McKillop, not a bad thing. A drastic increase in the price of any energy source due to shortage, will cause another energy source to be substituted. It will briefly benefit the supplier, until the rest of the world dodges the bullet by finding a substitute. The transition is usually painful for all concerned. That's why Oil Shocks I and II are remembered as global recessions, global nightmares.

MH - Wow! You're reacting like he's giving you a root canal! Maybe that's because you're in the paper pyramid economy, and not in the real goods economy of pipelines, thumpers, drilling mud, and tankers, which are investments required to give you cheap energy.

It's just a difference of opinion. Read Matthew Simmons to find a similar opinion on proper pricing for energy. His conclusion is that current prices and policy do not answer the question:

What price should we pay for oil and natgas today, so that we can turn on the lights tomorrow?

[machinehead]

roidrage, on Aug 25 2003, 06:09 AM, said:

MH - Wow!  You're reacting like he's giving you a root canal!  Maybe that's because you're in the paper pyramid economy, and not in the real goods economy of pipelines, thumpers, drilling mud, and tankers, which are investments required to give you cheap energy.

What price should we pay for oil and natgas today, so that we can turn on the lights tomorrow?

Hey, I would readily agree that energy prices are low in real terms, and probably must rise.

But McKillop's assertions that higher energy prices are: (1) good for economic growth; and (2) needed to prevent a slide into deflation -- are nuts.

As to (1), the oil shocks of 1973, 1979 and 1990 all led to global recessions. Using McKillop's logic, we could say that high interest rates are good for the economy and the stock market. For instance, the most recent rate peak coincided with stock market and economic crests in the year 2000. What happened after that? Doh ...

(2) Inflation is a monetary phenomenon. A glut of oil can lower its price relative to bread, houses, cars, and hours of labor. But to say (as McKillop does) that weak oil prices could shove us over the edge into deflation is ludicrous.

It's a pity that McKillop wasn't around for the Roosevelt administration. As Minister of Energy within the NRA (National Recovery Administration), he could have presided over the torching of oil and gas wells to reduce the energy supply, so as to engender economic recovery. The more ya burn, the more ya learn. Heh heh heh.

As Alceringa pointed out, McKillop is mysteriously unemployed after a chequered career "advising" NGOs and governments. Oh dear. Well, I see he did a stint at BC Hydro. I assure you, Mr. McK, that your talents -- put to use raising capital for the wildcat exploration industry -- could make you rich, RICH, rich beyond your wildest dreams!

[Abby Justa Colon]

rayok, on Aug 24 2003, 12:37 AM, said:

Abby Justa Colon, on Aug 23 2003, 10:33 PM, said:

Its simple take a $100+ per month away from the economic picture for every house you see. Plus, about $40 per month for every car/truck you see on the road....Get the picture.

It's not that simple, unless you assume people in the energy industry never recycle that money back into the economy. They don't eat, sleep, or consume like regular folks, right?

I realize they all don't just sit on that extra cash (although XOM seems to).

I guess my point is if you take away a few hundred dollars out of my monthly budget for something I have to buy....then something I don't really need has to go....like the Friday night restaurant outing....maybe the movies or the spa...you get the picture, multiply that by millions of consumers and you have drastically falling consumer confidence.

Its hard to think of heating bills when the air conditiong is still on, but if rates stay where they are...it really will be LOOK OUT BELOW for the overpriced markets!

Speaking of XOM, I have been long that stock since the late 70's....looking at the monthly charts it appears it could be ready to run again....is it tryng to tell us something??

Good Luck.....Abby

[rayok]

machinehead, on Aug 25 2003, 04:59 AM, said:

As to (1), the oil shocks of 1973, 1979 and 1990 all led to global recessions. Using McKillop's logic, we could say that high interest rates are good for the economy and the stock market. For instance, the most recent rate peak coincided with stock market and economic crests in the year 2000. What happened after that? Doh ...

Oil shocks cause recessions? What causes oil shocks? If half of the capital that was mis-allocated to internet crap, was allocated to energy, there would be plenty of cheap energy. If the Fed didn't have to create so many dollars, to keep so much mis-allocated debt afloat, hard asset prices would not inflate. But, it's always easier to blame someone, or something else for our own greed and stupidity. Cycles, what was cheap will become expensive, what was expensive will become cheap.

[rayok]

Yoshaviah, on Aug 24 2003, 10:59 PM, said:

A higher oil price is generally considered to be a "hidden tax" on consumers.

I thought monetary inflation was the "hidden tax", and rising commodity prices, usually the effect.