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by Gregor Macdonald

Get Ready for Oil Price Volatility to Kill the ‘Recovery’

by Gregor Macdonald, contributing editor
Tuesday, March 13, 2012

Executive Summary

  • The market is losing faith in the transportation sectors ability to deal with $100+ oil
  • Why greater volatility in the price of oil is a safe bet in 2012
  • Why oil has a hard price floor and soft price ceiling
  • How greater oil price volatility will (negatively) impact the global economy

Part I: Understanding the New Price of Oil

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

Part II: Get Ready for Oil Price Volatility to Kill the ‘Recovery’

To the extent that the US economy has been redefined as the health of its corporations, rather than the health of its people, it makes sense that many may hold the view that oil prices have an “unclear” effect on the economy.

To be sure, if your corporation is sited in the US and your labor force is manufacturing goods in Asia — which runs on coal — then at least for a while, a shield from rising oil prices can be sustained. However, the 2 mbd taken offline from US consumption and the 1.0 mbd taken offline in Europe over the past seven years have removed about as much discretionary demand as possible. From this juncture, the next layer of demand to be removed will directly impact the industrial economy, especially through its transport and logistics systems.

As we came out of the September 2011 lows in global stock markets and oil once again regained the $90 level, I began to watch the Dow Jones Transportation Index (TRAN) for signs of recovery or recession. As many of you understand, I have been a long-time advocate of rail transport for its outsized advantages compared to trucking and automobile transport, owing to its incredible energy efficiency. And the railroads have indeed thrived in the first stage of Peak Oil, taking share away from trucking.

However, despite strength in the TRAN, largely owing to the representation of railroads, there is still a large portion of the global economy running on airlines, trucking, logistics, and delivery services. Companies like FedEx and UPS use a lot of oil and cannot escape their reliance on it in their mission to connect the world globally through door-to-door services. Equally, it is not just consumer-related demand that drives the global delivery companies. World industry uses FedEx and UPS to ship critical parts throughout the global supply chain.

Here is a chart of the components of the Dow Jones Transportation Index (TRAN).

 align= 

As you can see, while railroads compose 29% of the TRAN, airlines, delivery services, trucking, and other truck and transport services compose 44% of the index.

Now, as I said, I have been waiting to see how durable the recovery in the TRAN would be once we started hitting the wall of higher oil prices. Using the iShare ETF which represents the TRAN, symbol IYT (NYSE), I have noticed the following turn in the chart:

Some of you may be familiar with Dow Theory, which holds that the Transportation Index (TRAN) needs to continually confirm new highs in the broader Jones Industrial Average (INDU) to maintain the prospect for even higher stock prices on the back of a healthy economy. I don’t wish to invoke that particular theory here, as that would over-complicate my analysis and force a digression into the flaws of using the broader Dow Jones Industrial Average (INDU) as a tell on the economy.

Instead, I want to keep it simple: Reflationary policy can keep economies from collapsing, push up the prices of stocks, and ensure that some moderate consumption flows into demand for goods.

But reflationary policy cannot rescue the most energy-sensitive sectors of the economy. As Bernanke himself said: “The Fed cannot create more oil.” Accordingly, what I find in the above chart of the TRAN is that investors are losing confidence that global logistics can keep expanding, now that WTIC oil has been pressing up against $110 and Brent is trading near $125.

Get Ready for Oil Price Volatility to Kill the ‘Recovery’
PREVIEW by Gregor Macdonald

Get Ready for Oil Price Volatility to Kill the ‘Recovery’

by Gregor Macdonald, contributing editor
Tuesday, March 13, 2012

Executive Summary

  • The market is losing faith in the transportation sectors ability to deal with $100+ oil
  • Why greater volatility in the price of oil is a safe bet in 2012
  • Why oil has a hard price floor and soft price ceiling
  • How greater oil price volatility will (negatively) impact the global economy

Part I: Understanding the New Price of Oil

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

Part II: Get Ready for Oil Price Volatility to Kill the ‘Recovery’

To the extent that the US economy has been redefined as the health of its corporations, rather than the health of its people, it makes sense that many may hold the view that oil prices have an “unclear” effect on the economy.

To be sure, if your corporation is sited in the US and your labor force is manufacturing goods in Asia — which runs on coal — then at least for a while, a shield from rising oil prices can be sustained. However, the 2 mbd taken offline from US consumption and the 1.0 mbd taken offline in Europe over the past seven years have removed about as much discretionary demand as possible. From this juncture, the next layer of demand to be removed will directly impact the industrial economy, especially through its transport and logistics systems.

As we came out of the September 2011 lows in global stock markets and oil once again regained the $90 level, I began to watch the Dow Jones Transportation Index (TRAN) for signs of recovery or recession. As many of you understand, I have been a long-time advocate of rail transport for its outsized advantages compared to trucking and automobile transport, owing to its incredible energy efficiency. And the railroads have indeed thrived in the first stage of Peak Oil, taking share away from trucking.

However, despite strength in the TRAN, largely owing to the representation of railroads, there is still a large portion of the global economy running on airlines, trucking, logistics, and delivery services. Companies like FedEx and UPS use a lot of oil and cannot escape their reliance on it in their mission to connect the world globally through door-to-door services. Equally, it is not just consumer-related demand that drives the global delivery companies. World industry uses FedEx and UPS to ship critical parts throughout the global supply chain.

Here is a chart of the components of the Dow Jones Transportation Index (TRAN).

 align= 

As you can see, while railroads compose 29% of the TRAN, airlines, delivery services, trucking, and other truck and transport services compose 44% of the index.

Now, as I said, I have been waiting to see how durable the recovery in the TRAN would be once we started hitting the wall of higher oil prices. Using the iShare ETF which represents the TRAN, symbol IYT (NYSE), I have noticed the following turn in the chart:

Some of you may be familiar with Dow Theory, which holds that the Transportation Index (TRAN) needs to continually confirm new highs in the broader Jones Industrial Average (INDU) to maintain the prospect for even higher stock prices on the back of a healthy economy. I don’t wish to invoke that particular theory here, as that would over-complicate my analysis and force a digression into the flaws of using the broader Dow Jones Industrial Average (INDU) as a tell on the economy.

Instead, I want to keep it simple: Reflationary policy can keep economies from collapsing, push up the prices of stocks, and ensure that some moderate consumption flows into demand for goods.

But reflationary policy cannot rescue the most energy-sensitive sectors of the economy. As Bernanke himself said: “The Fed cannot create more oil.” Accordingly, what I find in the above chart of the TRAN is that investors are losing confidence that global logistics can keep expanding, now that WTIC oil has been pressing up against $110 and Brent is trading near $125.

by Chris Martenson

Preparing for a Future Defined by Peak Oil

Wednesday, February 22, 2012

Executive Summary

  • How the math shows that the Bakken will not make us “energy independent”
  • Why the harsh constraints of Peak Oil are a near certainty for the US and its economic growth
  • What a world impacted by Peak Oil will likely be like
  • Why 2013 looks like the year Peak Oil will become globally acknowledged
  • What you should be doing (with your investments and lifestyle) in advance of the full force of Peak Oil’s arrival

Part I: Dangerous Ideas

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

Part II: Preparing for a Future Defined by Peak Oil

In Part I of this report , we discussed the odd push by some media outlets and Citibank to declare Peak Oil ‘over’ based on the exciting results coming from the Bakken shale oil play. While I, too, think the shale oil plays are exciting, and they certainly will help to mitigate the impact of Peak Oil to some extent, the idea that we can now relegate Peak Oil to the dustbin is a dangerous idea.

Since I have been asked by many of you to analyze the Bakken results, I will do so here with enough context and data to estimate its impact on future oil prices. Then we’ll cover the implications of all this on our responses and actions.

Preparing for a Future Defined by Peak Oil
PREVIEW by Chris Martenson

Preparing for a Future Defined by Peak Oil

Wednesday, February 22, 2012

Executive Summary

  • How the math shows that the Bakken will not make us “energy independent”
  • Why the harsh constraints of Peak Oil are a near certainty for the US and its economic growth
  • What a world impacted by Peak Oil will likely be like
  • Why 2013 looks like the year Peak Oil will become globally acknowledged
  • What you should be doing (with your investments and lifestyle) in advance of the full force of Peak Oil’s arrival

Part I: Dangerous Ideas

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

Part II: Preparing for a Future Defined by Peak Oil

In Part I of this report , we discussed the odd push by some media outlets and Citibank to declare Peak Oil ‘over’ based on the exciting results coming from the Bakken shale oil play. While I, too, think the shale oil plays are exciting, and they certainly will help to mitigate the impact of Peak Oil to some extent, the idea that we can now relegate Peak Oil to the dustbin is a dangerous idea.

Since I have been asked by many of you to analyze the Bakken results, I will do so here with enough context and data to estimate its impact on future oil prices. Then we’ll cover the implications of all this on our responses and actions.

by Chris Martenson

Are You Prepared for $200 Oil?

Wednesday, January 11, 2012

Executive Summary

  • Higher oil prices caused by an Iran conflict could very well be the trigger for the next major economic downturn
  • Where oil prices will likely go, and how quickly, if a conflict erupts in the Persian Gulf 
  • The prudent steps you should take now, in advance of a potential conflict
  • How the financial markets will react, and likely safe havens
  • Why a war with Iran will be much messier than the Iraq war

Part I: Iran: Oh, No; Not Again

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

Part II: Are You Prepared for $200 Oil?

In Part I, we connected a few dots and made the point that Iran remains the last unconquered oil province within the last great deposit fields left on the planet. Perhaps it is coincidence that Iran now finds itself in the crosshairs, but that is unlikely. Instead, the oil treasures of the Middle East remain the last great prize, and Iran is unlucky enough to be standing in the way.

Once one understands where we are in the Peak Oil story, all of these maneuvers make sense and conform to a brutal but coherent logic: If oil supplies are dwindling as fast as the data suggests, then controlling the last, best supplies will be considered essential by every interested party.

While such speculation is interesting to engage in, there’s really nothing you or I can do to alter these events. Instead, our job is to prepare as best we can.

The larger set of world events is grinding inexorably towards a lower standard of living, with the squabbling at present really being over who eats the first sets of losses. However, the next leg of the downturn will be precipitated by some event, and a war with Iran that spikes oil prices would be a perfect catalyst.

Are You Prepared for $200 Oil?
PREVIEW by Chris Martenson

Are You Prepared for $200 Oil?

Wednesday, January 11, 2012

Executive Summary

  • Higher oil prices caused by an Iran conflict could very well be the trigger for the next major economic downturn
  • Where oil prices will likely go, and how quickly, if a conflict erupts in the Persian Gulf 
  • The prudent steps you should take now, in advance of a potential conflict
  • How the financial markets will react, and likely safe havens
  • Why a war with Iran will be much messier than the Iraq war

Part I: Iran: Oh, No; Not Again

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

Part II: Are You Prepared for $200 Oil?

In Part I, we connected a few dots and made the point that Iran remains the last unconquered oil province within the last great deposit fields left on the planet. Perhaps it is coincidence that Iran now finds itself in the crosshairs, but that is unlikely. Instead, the oil treasures of the Middle East remain the last great prize, and Iran is unlucky enough to be standing in the way.

Once one understands where we are in the Peak Oil story, all of these maneuvers make sense and conform to a brutal but coherent logic: If oil supplies are dwindling as fast as the data suggests, then controlling the last, best supplies will be considered essential by every interested party.

While such speculation is interesting to engage in, there’s really nothing you or I can do to alter these events. Instead, our job is to prepare as best we can.

The larger set of world events is grinding inexorably towards a lower standard of living, with the squabbling at present really being over who eats the first sets of losses. However, the next leg of the downturn will be precipitated by some event, and a war with Iran that spikes oil prices would be a perfect catalyst.

by Adam Taggart

[Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It's quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of 'business as unusual' developments to summarize. We hope you enjoy David's colorful observations and insights, which are very much his own. — cheers, Adam]

Background

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year's was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

 

2011 Year in Review: Signs of an American Spring and a Fourth Turning
by Adam Taggart

[Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It's quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of 'business as unusual' developments to summarize. We hope you enjoy David's colorful observations and insights, which are very much his own. — cheers, Adam]

Background

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year's was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

 

by Gregor Macdonald

“Oh, that was easy,” says Man, and for an encore goes on to prove that black is white and gets himself killed on the next zebra crossing.” ― Douglas Adams, The Hitchhiker’s Guide to the Galaxy

 src=Have rising oil prices just put the final coffin nail in the entire 2009-2011 economic recovery?

Given the slowdown in China, the new recession in Europe, and the rocky bottom in the US economy, it certainly seems that way. 

Oil’s Relentless March Higher

Oil prices emerged from their spider hole over two and half years ago. Having fallen from the towering heights of $148 a barrel in the summer of 2008, the early months of 2009 saw a return to prices in the $30s. Interestingly, during that great oil crash, the price of West Texas Intermediate Crude Oil (WTIC) spent only 20 trading sessions below $40. That is the exact price that most analysts only three years prior believed oil could never sustain as the world would pump “like crazy” should prices ever reach such “impossibly high levels.”

Given the enormous debt troubles the West is currently facing and the fact that oil has averaged over $100 during several months this year, it does seem reasonable to suggest that, once again, the economy has been pushed off a ledge by oil. Let’s take a look at oil prices over the past several years.

Why Oil Prices Are Killing the Economy
by Gregor Macdonald

“Oh, that was easy,” says Man, and for an encore goes on to prove that black is white and gets himself killed on the next zebra crossing.” ― Douglas Adams, The Hitchhiker’s Guide to the Galaxy

 src=Have rising oil prices just put the final coffin nail in the entire 2009-2011 economic recovery?

Given the slowdown in China, the new recession in Europe, and the rocky bottom in the US economy, it certainly seems that way. 

Oil’s Relentless March Higher

Oil prices emerged from their spider hole over two and half years ago. Having fallen from the towering heights of $148 a barrel in the summer of 2008, the early months of 2009 saw a return to prices in the $30s. Interestingly, during that great oil crash, the price of West Texas Intermediate Crude Oil (WTIC) spent only 20 trading sessions below $40. That is the exact price that most analysts only three years prior believed oil could never sustain as the world would pump “like crazy” should prices ever reach such “impossibly high levels.”

Given the enormous debt troubles the West is currently facing and the fact that oil has averaged over $100 during several months this year, it does seem reasonable to suggest that, once again, the economy has been pushed off a ledge by oil. Let’s take a look at oil prices over the past several years.

by Gregor Macdonald

How To Position For the Next Great Oil Squeeze

by Gregor Macdonald, contributing editor
Monday, November 14, 2011

Executive Summary

  • Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
  • A breakdown of often-touted ‘new sources of domestic supply’ (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won’t come close to meeting US demand needs
  • How to hedge against the next great oil price spike
  • The wisdom of adopting a slower-based oil consumption lifestyle now

Part I – Selling the Oil Illusion, American Style

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 Great Oil Squeeze

Using the latest data from EIA Washington, I made the following chart of actual imports of crude oil against production. This is a simple and direct accounting of what can become a rather complex topic filled with obfuscation and bad math. For example, by counting biofuels, ethanol, natural gas liquids, and the use of our own natural gas inputs to refine crude oil into gasoline, you can produce rather misleading accounts of net imports, such as this piece from EIA Washington titled How Dependent Are We on Foreign Oil?

Just so that we are very clear on the facts, natural gas liquids (NGLs) contain only 65% of the btu of oil, and, of course, they are not oil. As Jeff Rubin likes to say, “NGLs can go straight to your butane cigarette lighter, not your automobile.” But by adding NGLs and ethanol to “oil supply,” we can delude ourselves into thinking that the US produces not 5.596 mbpd of crude oil, but rather 10.037 mbpd of liquids.

Despite any legitimate conversation we could have about the usefulness of various energy resources, it would be silly to say (for example) that “we need not worry about expensive oil and its effect on the economy, because we can just switch to ethanol.” The vastly smaller btu content of biofuel feedstock makes its inclusion in the accounting unhelpful, to say the least. As one Oil Drum commenter said to my previously cited post:

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can’t project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let’s now look at the chart.

How To Position For the Next Great Oil Squeeze
PREVIEW by Gregor Macdonald

How To Position For the Next Great Oil Squeeze

by Gregor Macdonald, contributing editor
Monday, November 14, 2011

Executive Summary

  • Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
  • A breakdown of often-touted ‘new sources of domestic supply’ (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won’t come close to meeting US demand needs
  • How to hedge against the next great oil price spike
  • The wisdom of adopting a slower-based oil consumption lifestyle now

Part I – Selling the Oil Illusion, American Style

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 Great Oil Squeeze

Using the latest data from EIA Washington, I made the following chart of actual imports of crude oil against production. This is a simple and direct accounting of what can become a rather complex topic filled with obfuscation and bad math. For example, by counting biofuels, ethanol, natural gas liquids, and the use of our own natural gas inputs to refine crude oil into gasoline, you can produce rather misleading accounts of net imports, such as this piece from EIA Washington titled How Dependent Are We on Foreign Oil?

Just so that we are very clear on the facts, natural gas liquids (NGLs) contain only 65% of the btu of oil, and, of course, they are not oil. As Jeff Rubin likes to say, “NGLs can go straight to your butane cigarette lighter, not your automobile.” But by adding NGLs and ethanol to “oil supply,” we can delude ourselves into thinking that the US produces not 5.596 mbpd of crude oil, but rather 10.037 mbpd of liquids.

Despite any legitimate conversation we could have about the usefulness of various energy resources, it would be silly to say (for example) that “we need not worry about expensive oil and its effect on the economy, because we can just switch to ethanol.” The vastly smaller btu content of biofuel feedstock makes its inclusion in the accounting unhelpful, to say the least. As one Oil Drum commenter said to my previously cited post:

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can’t project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let’s now look at the chart.

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