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by Greg Macdonald

Why It’s Now Easier to Predict the Outcomes of the Coming Recession

by Gregor Macdonald, contributing editor
Monday, December 19, 2011

Executive Summary

  • Western economies are more sensitive to oil prices than the developing world.
  • Global oil supply is extremely tight by historical measures.
  • Oil prices will likely not go much higher in 2012, due to the failing global economy.
  • The next oil-price induced recession (coming ASAP) will have predictable outcomes on the economy and its key sector.
  • Understanding these predictable economic outcomes resulting from oil supply dynamics
  • Prediction offers more value to the investor than simply betting on oil prices (which will likely be extremely volatile).

Part I: Why Oil Prices Are Killing the Economy

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why It’s Now Easier to Predict the Outcomes of the Coming Recession

The Oil-Sensitive West

Consumption of oil in the West started to flatten out as early as 2004. And readers of my previous essays know that after the crisis started in ‘08, both Europe and the US shed even more oil demand. Let there be no doubt: Oil demand in the OECD has been highly elastic (responsive) in the face of oil prices above $80. In the data, you could even see some early signatures of reduced demand coming in 2004, when oil prices rose above $40.

One of the paradoxes that repeatedly trips up analysts, because it’s so counter-intuitive, is the fact that the wealthy Western countries are hurt more by high oil prices than the poorer, emerging market countries.

Your average Westerner is consuming quite a lot of oil, per capita. It’s embedded in shipped goods and in shipped foods, and also comes via high penetration of automobile ownership. Westerners drive lots of miles, comparatively. But people in emerging markets have only just begun to use oil. It hardly matters whether petrol is $4.00 per gallon or even $8.00 per gallon if you have just upgraded from a rural existence, and for the first time ever your family is consuming 4-6 gallons of petrol per month (enough to power a motorbike each day for a short distance). This is precisely what Bernanke is alluding to, when he allows that we have no control over emerging market oil demand.

More vexing is that emerging market economies are primarily running on coal, so they are able to produce and align their consumption with the power grid, while being more discretionary about liquid fuel use for mobility. This is really perplexing, as I said, to Western analysts but I do want to point out that its empirically true (see Stuart Stanford’s post on the subject, Wow, Just Wow, from earlier this year).

Why It’s Now Easier to Predict the Outcomes of the Coming Recession
PREVIEW by Greg Macdonald

Why It’s Now Easier to Predict the Outcomes of the Coming Recession

by Gregor Macdonald, contributing editor
Monday, December 19, 2011

Executive Summary

  • Western economies are more sensitive to oil prices than the developing world.
  • Global oil supply is extremely tight by historical measures.
  • Oil prices will likely not go much higher in 2012, due to the failing global economy.
  • The next oil-price induced recession (coming ASAP) will have predictable outcomes on the economy and its key sector.
  • Understanding these predictable economic outcomes resulting from oil supply dynamics
  • Prediction offers more value to the investor than simply betting on oil prices (which will likely be extremely volatile).

Part I: Why Oil Prices Are Killing the Economy

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why It’s Now Easier to Predict the Outcomes of the Coming Recession

The Oil-Sensitive West

Consumption of oil in the West started to flatten out as early as 2004. And readers of my previous essays know that after the crisis started in ‘08, both Europe and the US shed even more oil demand. Let there be no doubt: Oil demand in the OECD has been highly elastic (responsive) in the face of oil prices above $80. In the data, you could even see some early signatures of reduced demand coming in 2004, when oil prices rose above $40.

One of the paradoxes that repeatedly trips up analysts, because it’s so counter-intuitive, is the fact that the wealthy Western countries are hurt more by high oil prices than the poorer, emerging market countries.

Your average Westerner is consuming quite a lot of oil, per capita. It’s embedded in shipped goods and in shipped foods, and also comes via high penetration of automobile ownership. Westerners drive lots of miles, comparatively. But people in emerging markets have only just begun to use oil. It hardly matters whether petrol is $4.00 per gallon or even $8.00 per gallon if you have just upgraded from a rural existence, and for the first time ever your family is consuming 4-6 gallons of petrol per month (enough to power a motorbike each day for a short distance). This is precisely what Bernanke is alluding to, when he allows that we have no control over emerging market oil demand.

More vexing is that emerging market economies are primarily running on coal, so they are able to produce and align their consumption with the power grid, while being more discretionary about liquid fuel use for mobility. This is really perplexing, as I said, to Western analysts but I do want to point out that its empirically true (see Stuart Stanford’s post on the subject, Wow, Just Wow, from earlier this year).

by Chris Martenson

How To Position For The Next Oil Shock

Friday, May 27, 2011

Executive Summary

  • Saudi Arabia’s reserve capacity is a myth
  • World oil demand is increasingly overwhelming supply
  • Why exports matter more than total world production
  • What the next oil shock will do to stock, bonds, commodities, precious metals, and real estate
  • What you should do to prepare

Part I: Past Peak Oil – Why Time Is Now Short

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How To Position For The Next Oil Shock

Putting It All Together

Let’s review the situation in the KSA:

  1. Despite assurances of 12.5 mbd of total capacity, the KSA has not yet produced more than 9 mbd on a sustained basis in 2011.
  2. The IEA is begging the KSA to pump more.
  3. The KSA has turned to outside companies to help it begin to unlock heavy oil reserves that will take a lot of time, energy, and money to prosecute.
  4. The KSA has a vastly expanded rig count as they expand drilling operations to produce more oil (odd behavior for a nation with an alleged 3.5 mbd of spare capacity?).

The simplest and therefore most likely explanation for all of this is that the KSA does not actually have 12.5 mbd of total capacity, it is already at peak, and it’s now struggling to maintain even 9 mbd of total output on a limited basis.

Of course, there are other possibilities, but since those will not shake the world to its bones if they happen to be true, the safe course of action here is to go with the ‘KSA is at peak’ story.  Sooner or later it will be true, so there’s not a lot of harm in being early to it, while being late could be costly.

Now let’s move onto the last part of this puzzle: demand.

How To Position For The Next Oil Shock
PREVIEW by Chris Martenson

How To Position For The Next Oil Shock

Friday, May 27, 2011

Executive Summary

  • Saudi Arabia’s reserve capacity is a myth
  • World oil demand is increasingly overwhelming supply
  • Why exports matter more than total world production
  • What the next oil shock will do to stock, bonds, commodities, precious metals, and real estate
  • What you should do to prepare

Part I: Past Peak Oil – Why Time Is Now Short

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How To Position For The Next Oil Shock

Putting It All Together

Let’s review the situation in the KSA:

  1. Despite assurances of 12.5 mbd of total capacity, the KSA has not yet produced more than 9 mbd on a sustained basis in 2011.
  2. The IEA is begging the KSA to pump more.
  3. The KSA has turned to outside companies to help it begin to unlock heavy oil reserves that will take a lot of time, energy, and money to prosecute.
  4. The KSA has a vastly expanded rig count as they expand drilling operations to produce more oil (odd behavior for a nation with an alleged 3.5 mbd of spare capacity?).

The simplest and therefore most likely explanation for all of this is that the KSA does not actually have 12.5 mbd of total capacity, it is already at peak, and it’s now struggling to maintain even 9 mbd of total output on a limited basis.

Of course, there are other possibilities, but since those will not shake the world to its bones if they happen to be true, the safe course of action here is to go with the ‘KSA is at peak’ story.  Sooner or later it will be true, so there’s not a lot of harm in being early to it, while being late could be costly.

Now let’s move onto the last part of this puzzle: demand.

by Dutch John
Wood Gasification
by Dutch John
by Chris Martenson

Important note: 

It is with a heavy heart that I am now issuing the highest level alert to my readers than I have to date. The threshold for an alert is one or more world events that personally cause me to take action.

I’m making this alert publicly available less than 36 hours after releasing it to my enrolled subscribers given its importance and the speed at which events are accelerating.

The substance of this alert centers on the unknown aftershocks that may result from the world’s third largest economy, Japan, rapidly shifting from an exporter of funding to a consumer of it. In situations like these, we are by definition operating with incomplete and often confusing information, and events are developing more rapidly than they can be fully analyzed and internalized. We regret in advance any mistakes that we might make due to making calls and decisions in this highly fluid environment.


This alert warns you that major world-changing events are now underway and that your personal preparations for an uncertain future should either be completed or take on a new sense of urgency. On the basis of the information contained here and in the past two days of posts, I am personally ratcheting up my preparations, making purchases, and topping off what needs to be topped off.

Important caveat:  At this point in time, I cannot fully support 100% of my concerns with hard data and evidence. Some of what has tipped me into this state of urgency is data, evidence, and stories that I can point to. Some is due to the absence of data or information, the remainder results from watching market gyrations and correlations shift into new patterns, which tell me something is afoot.

I have not been this concerned since October of 2008.

Alert! – Nuclear (and Economic) Meltdown In Progres
by Chris Martenson

Important note: 

It is with a heavy heart that I am now issuing the highest level alert to my readers than I have to date. The threshold for an alert is one or more world events that personally cause me to take action.

I’m making this alert publicly available less than 36 hours after releasing it to my enrolled subscribers given its importance and the speed at which events are accelerating.

The substance of this alert centers on the unknown aftershocks that may result from the world’s third largest economy, Japan, rapidly shifting from an exporter of funding to a consumer of it. In situations like these, we are by definition operating with incomplete and often confusing information, and events are developing more rapidly than they can be fully analyzed and internalized. We regret in advance any mistakes that we might make due to making calls and decisions in this highly fluid environment.


This alert warns you that major world-changing events are now underway and that your personal preparations for an uncertain future should either be completed or take on a new sense of urgency. On the basis of the information contained here and in the past two days of posts, I am personally ratcheting up my preparations, making purchases, and topping off what needs to be topped off.

Important caveat:  At this point in time, I cannot fully support 100% of my concerns with hard data and evidence. Some of what has tipped me into this state of urgency is data, evidence, and stories that I can point to. Some is due to the absence of data or information, the remainder results from watching market gyrations and correlations shift into new patterns, which tell me something is afoot.

I have not been this concerned since October of 2008.

by Amanda Witman

 

If you are short on time and want a quick list of tips, click here for Ten Free Things You Can Do Right Now. Otherwise, read on:

How to Prepare When Times Are Already Tight

Here at PeakProsperity.com, I manage correspondence and respond to most incoming email from users, among other things. We sometimes hear from people who complain that our site is not relevant to their situation because they have no extra funds to invest or put toward preparedness.

Let me be the first to say that there is something here at PeakProsperity.com for everyone, and there absolutely are meaningful ways to improve your situation and outlook even if you don’t have “extra money.” The good news is that there is still time, and with a little creativity and awareness, you can also be among those who feel more securely prepared for the very different future that we are facing.

Prepping on a Shoestring
by Amanda Witman

 

If you are short on time and want a quick list of tips, click here for Ten Free Things You Can Do Right Now. Otherwise, read on:

How to Prepare When Times Are Already Tight

Here at PeakProsperity.com, I manage correspondence and respond to most incoming email from users, among other things. We sometimes hear from people who complain that our site is not relevant to their situation because they have no extra funds to invest or put toward preparedness.

Let me be the first to say that there is something here at PeakProsperity.com for everyone, and there absolutely are meaningful ways to improve your situation and outlook even if you don’t have “extra money.” The good news is that there is still time, and with a little creativity and awareness, you can also be among those who feel more securely prepared for the very different future that we are facing.

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