Fuel - The Catalyst

The Daily Reckoning PRESENTS:Today, the price of crude oil rose to $62 a barrel – even though inventories have risen higher than where they were a year ago? What’s driving up the price? Puru Saxena explains…

FUEL – THE CATALYST

Whether you are aware of it or not, we are living in a highly inflationary war cycle. The money supply is surging at an alarming rate and nations continue to out-bid each other for natural resources. In a nutshell, the mad scramble for commodities is on. Unfortunately, this dangerous fight may only get worse in the future…glimpses of this are already unfolding with the geo-political unrest brewing in the Middle East.

Today, our world faces a unique scenario – the enormous appetite of China and India. Both these gigantic countries have been shopping around the world securing their supplies of natural resources to meet the needs of their 2.3 billion people. Recently, China and India formed a strategic alliance to bid for major oil-interests in the world and acquired interests in Kazakhstan, Nigeria and Syria. Saudi Arabia also seems very keen to tap into this growing market, as demonstrated by Saudi King Abdullah’s recent visit to both these countries. And this insatiable hunger doesn’t just stop with oil. Over the past couple of years, Chinese leaders have been busy purchasing all sorts of metals and minerals from Australia, South America and Canada.

Believe me, all of the above has not gone unnoticed and the leaders in Europe and America are getting nervous. For decades, these developed regions have enjoyed an endless supply of cheap natural resources. However, this has now changed due to stiff competition from the highly populated emerging economies where demand is growing fast and per-capita consumption is amongst the lowest in world. Despite all you hear, I can assure you that the officials in Washington, Paris and London are not happy with the fact that the emerging nations now consume more oil than the developed ones.

To complicate matters even more, Iran plans to launch its oil bourse in March 2006, where (for the first time ever) Iran will sell its oil to any country who is willing to pay for it in Euros. For a long time now, oil has only been sold for U.S. dollars – a big advantage for America and its currency. You see, every nation depends on oil and if payment for it can only be made in U.S. dollars, it creates artificial demand for the American currency. In my opinion, this is one of the main reasons why (despite record-high deficits) the U.S. dollar has not yet collapsed. Now, if Iran manages to set-up its oil exchange, countries around the world may not need to hoard so many dollars, which will seriously undermine American supremacy.

You may want to note that a few years ago, Iraq stopped selling its oil for U.S. dollars. Once Saddam was removed by the United States, Iraqi oil started flowing (once again) in exchange for U.S. dollars. Are you surprised then by the fact that the “guardian” of our world is now building a case against Iran’s nuclear program? Perhaps it has now given up trying to look for the “weapons of mass disappearance” in Iraq and wants to find them in Tehran.

History has shown that each commodities bull-market in the past 200 years has coincided with a major war, without a single exception. So, now we are left with two choices: Either we learn from history and protect ourselves – or we continue to live under the illusion that everything will be okay.

“But how do I protect myself?” you may wonder. All I can say is that commodities will surely help you to safeguard your wealth. During periods of conflict, countries always embark on the road of massive money printing in order to finance their efforts. Already, America has spent billions of dollars in Afghanistan and Iraq. I hope I am wrong in my assessment, but if the conflict in the Middle East escalates, you can be sure that nations will print a blizzard of paper money. All this money printing and liquidity will cause the price of commodities to go sky-high.

Back in November, I had advised my readers to get back into the energy sector. Since then, oil has risen steadily and surprised most analysts and investment “gurus”. For sure, this rise may have been helped by the situation in Iran, but our world faces a much bigger energy problem today. Most of the world’s oil provinces are in decline, and not a single gigantic oil field has been discovered over the past 35 years!

Let’s review the daily output of some of the largest producers in the world. Saudi Arabia is at the top of the list, producing roughly 10 million barrels daily, followed by Russia – a close second. What is ominous is that each of the top five oil-producing nations (with the exception of China) still produces less oil today than it did in the past. In other words, (despite claims of endless reserves) Saudi Arabia and Russia have failed to match their record production levels recorded in the early 1980’s! The proof is, more often than not, in the pudding. If our world is really awash with an endless quantity of crude oil, why are these nations not increasing production to meet the growing demand? Is it that these nations are not in a position to increase production much further? The consensus view is that lack of refining capacity is to be held responsible for soaring energy prices.

But the real reason the price of oil continues to go up is because our world is not able to pump enough crude oil from the ground to meet the rising demand. The global oil-production peak is upon us and investors must take action now in order to avoid financial pain.

Regards,

Puru Saxena
for The Daily Reckoning
March 2, 2001

Editor’s Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication. An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

The above is a FREE segment from Money Matters. The entire report is available only by subscription – available at www.purusaxena.com

Like high-wire artists, Americans are teetering on a thin line. They dare not make a false move, or they’ll topple over. But unlike high-wire artists, Americans have no net under them. When they tumble, they’ll smack into the ground…hard.

If consumers stop consuming, the air goes out of the bubble and the economy falls into a sharp slump. Consumption makes up 70% of the economy. Without rising consumption, there can be no more growth and without growth, there are no new jobs, and no new consumer income. There is nothing for consumers to spend, and no way to boost consumer spending.

But, too much consumption can be fatal, too. If they spend too much, too fast…they set in motion another dreadful scenario. Prices will rise, forcing them to desperately spend even faster to get rid of the depreciating money. Inflation will force the Bernanke Fed to clamp down on interest rates – bam! – pop goes the bubble economy.

As the debt on their shoulders becomes heavier, walking the line steadily becomes harder and harder. Consumers stagger; they threaten to fall face down any moment.

That’s why we keep a close watch on this bubble heart of ours. We keep our eyes wide open all the time.

In yesterday’s news came word that consumer incomes were up more than expected in January: plus 0.7%. This good news was followed by a headline: “Inflation eats up most income gains.” And then, we read an article explaining that consumer spending rose 0.9%.

What keeps consumers going is not more income, but more debt. Even when incomes go up “more than expected,” they don’t go up fast enough to keep up with how much consumers want to spend.

What has kept money flowing for the last five years has been the real estate market – the real black heart of the bubble economy. Without all the concrete, plastic, granite counter-tops, sales agents, home equity lines and mortgage brokers, the imperial economy would already have keeled over exhausted. And the longer it goes on, the further in debt people get, the more expensive houses become and the more uncertain the poor householders’ steps become.

So, we keep a close eye on the real estate market, which is hardly necessary because everyone else seems to be watching, too. We only have to listen to what they’re saying to figure out the way the story is going.

From California comes news, courtesy of CNN, that house sales went down 24% in January, and on the other coast, the Boston Globe tells us that “Mass Home Sales Plummet 21%.”

Meanwhile, USA Today adds its bit: “Real estate continues to cool.”

Patrick Newport, the U.S. economist for Global Insight, even has a diagnosis: “January’s weak existing- and new-home sales numbers are the strongest evidence yet that after five remarkable, record-setting years, the housing market is in decline.”

Adds USA Today: “The drop in home sales defied unseasonably warm weather and cash and give-away incentives from builders that had raised hopes for a brighter showing.”

“Imagine if the weather had been terrible,” said Phillip Neuhart, economic analyst for Wachovia.

Sales of existing houses fell in January, for the fifth month in a row. The number of late mortgage payments is rising. Borrowers in the “subprime” category, usually people without much money, which is to say, those most affected so far by the Exodus of wealth and power from West to East, are having trouble paying. Delinquent subprime loans are up 10%. Housing loan applications are down, despite lower mortgage rates.

“We’ve got a ton of inventory,” said one real estate agent in Wisconsin, perhaps speaking for the entire brethren of house mongers nationwide.

So, we’re waiting, watching, and wondering. How long can American consumers keep doing their balancing act? And what happens when they can’t anymore?

The ripples will be felt through the entire economy – and it’s not going to be pretty.

More news from Aussie Joel and The Daily Reckoning…

————–

Eric Fry, reporting from Manhattan:

While visiting Miami’s South Beach last week, your editor did not make the rounds of late-night hot spots like he did last year…mostly because he was not in the company of ‘connected’ individuals like he was last year. Being neither a male model nor a multi-millionaire, your editor cannot easily stroll past the velvet ropes at ‘Mynt’ without a bouncer grabbing him by the collar…”

For the rest of this story, see today’s issue of The Rude Awakening.

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Bill Bonner, back in Paris with more commentary…

*** Recent government data shows that crude oil inventories have risen 9.1 % above the year-ago level. However, crude futures rose today, up to $62.70 a barrel, supported by quite a few geopolitical factors.

“With Nigerian problems, uncertainty about the Iran nuclear program before the IAEA (International Atomic Energy Agency) meeting next week, and the overhang of the Saudi attack and an OPEC meeting on the 8th, we are in for a lot of volatility in prices,” said James Williams, an economist at WTRG Economics.

Although six of the nine foreign oil workers that had been taken hostage were released yesterday, the Nigerian militants threatened new attacks that aim to cut off all oil production in Nigeria.

“The inventory numbers continue to point to lower prices, but the lack of spare capacity and increased risk of supply interruptions continue to support the price of crude,” continued Williams.

[Ed. Note: These geopolitical tensions will continue to put pressure on this market – but there is a way you can profit from this. Outstanding Investment’s Justice Litle details eight specific energy and resource plays that are sure to pay off…regardless of which way the world’s political winds blow.

*** We were in Germany, yesterday, wondering how smart, industrious, educated, civilized people ever allow themselves to get into a jam. There was no country more dynamic, or more advanced, than Germany in the early 20th century. Who were the world’s top philosophers? Germans! Who were the world’s top mathematicians? Germans. Who were the world’s top physicists, doctors, technicians, and strategists? They were Germans, too. Even the top economists were Germans (or Austrian). In the arts, the sciences and in commerce, Germany led the world. And where it was not clearly in the lead, it was giving the leader a good race.

But little by little, the Huns began to toy with their own good fortune. They began to forge their own chains. At first, they were so comfortable, so light and so reassuring, that they could not be felt. They could almost be trinkets or jewelry. Many thought they were. Later, after more and more links had been added, the trinkets became so strong they could not be broken.

Even toward the end, when Hitler was foaming at the mouth like a madman and his top officers met with him with guns at their hips, not one of them unpacked his heat and let der Führer have it. Who would have deserved it more than Hitler? How could a man have done the world – or Germany – a bigger favor? And yet, by then, the chains had become so heavy, even the toughest, battle-hardened officer could not raise his hand.

*** We’re thinking now of our own knuckle-headed Homeland. There too, consumers are hammering out their tinkling little chains of debt. So far, the chains are light and so smooth, they almost feel like a soft, gauzy net protecting them from that unreal world outside. But the world outside will not disappear; instead, it gets more ugly and more real. As debt builds up, the slim little chains get fatter every day – chains that this generation and its children and their grandchildren will have to drag around for a long time…chains that will only grow heavier with every year.

A Polish friend told us the national debt in Poland was 40% of GDP. “Shameful,” she said.

But the official national debt in America is nearly 60% of GDP and rising faster under the Bush administration than under any administration America has ever seen.

Clang. Clang. The hammers come down on the anvils, day after day, beating out more chain links. These are not just chains of debt, but iron manacles of servitude and blinded obedience.