Mexican Jumping Oil

The Daily Reckoning PRESENTS: First the tortilla crisis, now this? Oh Mexico…if only you hadn’t put all your eggs in one chalupa. This week, the Mogambo Guru examines the Mexican peak oil crisis, and (in perfect Spanish) explains why depending on oil exports for 40% of your revenue is “no bueno”. Read on…

MEXICAN JUMPING OIL

Sean Brodrick at Money and Markets writes that it appears Peak Oil has affected Mexico, as, “In December 2005, Mexico sent the U.S. 1.7 million barrels of oil per day (bpd). This past December, Mexico only exported 1.2 million bpd to the U.S.”

He asks, “Why is Mexico sending less oil?” For some reason, I thought that he was really asking a question, so I leap up and say, “Because they are selling it to China and India and everywhere else, but they don’t need the money, anyway, because my appetite for tacos is off the charts here lately, and they are making plenty of money that way! And speaking of tacos, that sounds good! Let’s break for lunch! Your turn to buy! Let’s go! Hup! Hup! Move it! Let’s go, go, go!”

This was, as I interpret the pained and angry look on his face, the wrong answer, probably because it is only 9:30 in the morning. He pointedly ignores me and explains, instead, “Because it’s producing less oil. Total oil output fell to just below 3 million bpd in December 2006. That’s down from nearly 3.4 million barrels at the start of the year, and Mexico’s lowest rate of oil output in seven years.”

This is bad news for Mexico because “Mexico relies on oil exports for about 40% of its revenue.” Notice the complete lack of exclamation points in those four previous sentences. When it is reported in the Mexican newspapers, you can bet your burrito supremo that headlines will have PLENTY of exclamation points all over the damned place. For example (showing off my impressive command of Spanish), “Ustamos Mucho Grande Freaking Doomed, Just Exacta Mundo Para El Mogambo Habla!!!” which got three exclamation marks, since they understand the true significance of, “Mexico relies on oil exports for about 40% of its revenue”!!!

It seems that half of the revenue of the whole economy of Mexico is unhealthily dependent on just one source of revenue! Hahaha! If the Mexican government had taken the time to look, they would have seen that my family is dependent on me as their sole source of revenue, and as I am as similarly corrupt, stupid and worthless as the Mexican government, they should have noticed from the chaos and hostility that it clearly hasn’t worked out here, either! I mean, the parallel is obvious! What in the hell is the matter with those people?

Even worse, “55% of Pemex’s sales revenue went to the Mexican government last year.”

And it is not just the Mexicans that seemed to be gripped by the looming terrors of Peak Oil Syndrome, as “Kuwait’s giant Burgan field has also peaked. Iran’s energy use is rising so fast that its oil exports are being crimped badly. And despite the fact that the Saudis are supposed to be sitting on a thousand years of oil, their oil production declined 8% last year”. Of course, “The Saudis will say they made their cuts to ‘stabilize’ the market.”

Hahaha! “stabilize” the market! I did not realize the generous beneficence of the Saudis! They will sell less oil and make less money, while their competitors wax rich by continuing to pump furiously, so that the cost to the ultimate consumer, mainly Chinese and Western infidels, doesn’t rise! What can I say, except “Thanks, dudes!”?

But the underlying message is that (and pay particular attention here) demand for oil is going up, but supply is going down. And I am sure that something flickered in your Fledgling Mogambo Mind (FMM) about the effect on the price of oil (an absolute energy necessity) resulting from such a falling supply/growing demand imbalance, which is actually getting worse rapidly, and which will continue to get worse for a long time.

And if you are a Junior Mogambo Ranger (JMR), then you are probably salivating, literally, at the prospect of reaping a lot of those enormous oil riches for yourself so that you can easily afford to stretch your Second Amendment rights to include getting some tactical nuclear weapons. That’ll show that pesky Skyview Neighborhood Association who’s REALLY the freaking boss around here, and it will be very educational to see if the threat of imminent nuclear obliteration will make my decrepit hovel seem a little less of an “eyesore” and “public nuisance” to them! I’m betting it will! Hey! I love this investing stuff!

Doug Noland’s Credit Bubble Bulletin at PrudentBear.com starts out this week with some interesting graphs. All of them are bad news, of course, but the one that really grabbed my attention was the one labeled “Balance Sheet of Household Sector”. Going back to March of 1989, the average household had $19,000 in net worth, which was, back then, about the average household yearly income.

Now, as our bloodshot eyes nervously scan across the graph, we see that the average household net worth is about $55,000, which is, again, about the average household yearly income! Hahaha! You are right back where you started, in terms of buying power, and yet you think that the stock market and the housing market and the bond market are going to provide you with a decades-long comfortable retirement? Hahahaha!

I’m laughing so hard that I am actually spitting up blood! Hahaha! I can’t stop! Hahahaha! With a burst of Mighty Mogambo Self-Control (MMSC), I gain dominance over my giddy emotions, and with rasping, gasping breath I say, “If you believe that everyone will make money and retire in comfort by investing long-term in the stock and/or bond markets, then that is the biggest load of hooey that a gullible, dimwitted population has ever swallowed without even gagging.”

The ugly truth is that the majority of investors will not only suffer a loss in strict dollars (“the majority is always wrong”), but even those who manage to get marginally ahead, in nominal terms, will have the purchasing power of the money stolen by the ravages of the inflation caused by the Federal Reserve constantly creating so much money and credit, which is, ironically, where the money came from that enabled them to buy the stocks and bonds!

The bottom line? The best that you can expect to do is to invest one dollar’s worth of buying power to get, in the future, an equivalent amount of buying power. The majority, alas, will lose both nominal money AND the buying power of what’s left!

Until next week,

The Mogambo Guru
for the Daily Reckoning
March 19, 2007

**** Mogambo sez: Oil is getting so cheap that I am drooling at the glaring bargain. And gold and silver? Don’t get me started, as I could go on for hours and hours about why you should buy as much as you can, as soon as you can, turning the exercise into a long, angry harangue which will end with you desperately trying to get away from me. Of course, I’ll be grabbing you by the sleeve and hitting you up to loan me a lousy twenty bucks so that I can save up to buy some gold, too. But you say “no”, you selfish little bastard, and we get into a big fight, and it’s all real, real ugly.

Anyway, like I said, don’t get me started. Just buy the stuff and save us both a lot of hassle.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

“Housing nightmare tarnishes the American dream,” says a report from Reuters.

Meanwhile, the Financial Times quotes Martin Eakes – chief economist at Self-Help, who estimates that 2.2 million Americans could lose their homes to foreclosure.

That’s the general narrative. But now for the plot twist.

What we will soon hear more about is the way that the pain of all this falls disproportionately on Blacks and Hispanics. These two groups already tend to be poorer than white people, which means they tend to suffer more from the slings and arrows that drop down to the bottom of the wealth pyramid. They die younger. They take fewer vacations. And they pay more for credit.

And the reason is obvious. A member the Federal Reserve Bank pays the prime rate for overnight funds, so there is little risk that the money won’t be paid back. But a janitor with an old truck and a new girlfriend is a credit risk, and lenders protect themselves by charging high rates of interest.

Mr. Eakes even tells us that this will become “the largest loss of African-American wealth in American history.”

Indeed, figures that came out last week showed that blacks are nearly four times as likely to get stuck with “high cost” home loans. More than half the loans made to black people in 2005 were subprime. And 80% of them were “exploding” ARMS – adjustable rate mortgages with much higher monthly payments after the initial teaser rate period expired.

Just ask a good lender in a bad neighborhood. He will charge as much as 50% or 100% on a one-month I.O.U. And if you don’t pay on time, he might double the interest…or smash your face

Subprime mortgage lenders typically enticed customers with low initial rates. But after adjustment, the rates often shot up to 10% or more. These were the ‘2 and 28’ mortgages, where the monthly payment was put up sharply after the first two years. This not only put the borrower in a squeeze, it practically guaranteed the lender more fees when the customer came back to refinance.

Still, there is a funny side to this story. For many decades, meddlers have been urging the credit industry to provide more loans and encourage home ownership among poor people. Now they’ve gotten what they wanted. In the last few years, after lenders figured out how to make a buck at it by laying the risk onto other investors, they complied. The poor got home ownership in spades. Bad credit? No problem. Low income? Who asked? No savings? Don’t worry about it.

But now that the industry has done as it was bid, do you think it will get any thanks? Not likely. Instead, the busybodies are likely to come around with a subpoena in their hands…if not a rope.

We have no doubt that a lot of people are going to whine and moan about it. Nor do we doubt that the fools in Congress will rush in with promises of mortgage abatement and other subsidies.

Corrections involve pain…and Americans hate pain. They count on their elected representatives to protect them from it. But not all pain is bad. Suffering the pain of a small correction now, for example, can help prevent the pain of a larger one, down the line.

But who will really suffer from the subprime crisis remains to be seen. People with neither money nor savings to begin with may complain when the houses they couldn’t afford are taken away from them. But they are wiser, and probably not really too much poorer. The real pain will be felt elsewhere…where the lesson will be that much more expensive.

More news:

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Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“You know me… I don’t agree with the results of this data due to the moving goal posts inside the data configuration. And furthermore, I do not care what “core” inflation is. Give me the whole picture, because that’s what I have to live with every day!”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

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And more views:

*** The best bet for long-term profits is grain, argues Mark McLornan, founding member of Argo Terra – a global farming company.

“When incomes rise, so does meat consumption – growth in beef and chicken consumption in China is running at 20% a year. It takes nine kilograms of grain to produce one of beef. Already, 67% of global grains are used as animal feed, so this surge in demand will have a huge impact on the grains market. Demand for biofuels is making matters worse. Corn used in fuel production in America is set to rise from 6.4% of U.S. corn production in 2001 to 30% by 2007/2008.”

McLornan says that stocks of corn and wheat, the main global grains, are at record low levels. And as demand rises, it is getting harder and harder to expand supplies. Fertilizers have added to output greatly in the last 50 years, but additional inputs of fertilizers now produce diminishing returns. Nor is it easy to put new land into production. While land is available, water is scarce. And as populations and human development increases, agriculture has to compete for water with other uses.

“I believe the fundamentals make grains a once-in-a-decade opportunity,” says McLornan.

*** “Mass demonstration to bring back the franc,” says a poster along the road in Paris.

Not everyone is happy with the European money. Many French people think it is just a devious means of raising prices. The cost of living has clearly gone up in France. How much of it, if any, is attributable to the introduction of the euro, we don’t know.

But dissatisfaction with Europe runs deeper than just the new currency. A poll taken across the continent showed that most people thought life had gotten worse, not better, since the European Union was established. And a large minority of respondents said they thought that the major thing the EU had provided was more bureaucracy.

This Sunday marks the EU’s 50th anniversary. The papers are bound to be full of retrospectives, introspectives, and other babble. The EU is one of a long list of things about which your editor has no opinion. Is it a good thing or a bad thing? How would we know?

But it has clearly made a change. It has got people on the move. London is full of Frenchmen. Provence is full of Englishmen. The Swedes and Danes fill the beaches of Spain…while Spanish fruits and vegetables appear on plates all over Europe as commonly as Californian avocados make it to New York.

In some ways it is easier to move around Europe than the United States. The airports are more relaxed and, often, more efficient. The distances are shorter. And in the last few years, a whole group of discount airlines has taken to the skies. They offer flights from Manchester to Marseilles for as little as 29 euros. And if you prefer to stay on terra firma, the trains are much better than in the United States.

All this movement has brought prosperity – especially to the periphery of Europe. Ireland and Spain are the big winners. The heartland countries – France and Germany – have a tougher time of it. They’ve had to deal with new competitors and a more fluid labor market.

*** Our office moved too, but we miss our old neighborhood. Our office in Paris used to be over near the “Marais” – the old Jewish quarter, which had been a swamp. Now, we are in a fancier part of down, near the American embassy, between the Place de la Concorde and the Madeleine. Across the street is a shop that is all white. The floor is white, the walls are white…the two women who work in the shop are dressed all in white…and the clothes the shop sells are all white too. We don’t know what the point of it is, but at least it is clean.

There are a couple of bars catering to a professional class. Last week, we went over for a cup of tea. While we were sitting there, we suddenly noticed that all the other customers were weirdoes. There was a young man whose head and back…down to his feet…seemed to run in a straight line as if he were carved out of a solid block of wood. Strange. And there was another man, short and round, with eye-glasses as thick as coke bottles, who muttered to himself constantly while standing at the bar drinking a café. He was clearly mad.

Another pair were shopkeepers whom we have seen quite often – a couple in their late 70s, who look fairly good from a distance. But get closer and you realize that they must have mortgaged their business to buy surgery and cosmetics. The pair are so done up they look as they if had just climbed out of their coffins and need to have stakes driven through their hearts.

Besides that one place, however, this neighborhood is too ‘normal’ for us. It is full of office workers; merchants; tourists. In short, it is boring.

It must have been a coincidence that such odd-looking people had gathered in that bar at the same time. But it reminded us of our old digs across the Paradis bar. What a pleasure it was to go to work there. The two geriatric prostitutes were always amusing to see – one with her shiny black raincoat and tiny white dog…the other with her huge cavalier boots and very short skirt. Neither one of them could have been mistaken for young or attractive – even on a very dark night. But what they lacked in boudoir appeal they made up in bonhomie.

And there was the Japanese drunk who sang at the top of his lungs and then collapsed on the steps of St. Merry’s church, next to the Paradis. One morning they found him there…as dead and cold as the stone steps themselves.

And who can forget the man who lived in the cardboard box, with his long, flowing beard and his enigmatic responses…

For all we know he is still there muttering in his box.

We’ll have to go by and sell hello to all of them again sometime.