Is $100 Oil Cheap

“Remember when most professional investors griped that $40 per barrel crude was ‘overpriced’ and then that $60 crude was ‘unsustainable,’ and then that $80 crude would ‘never happen.’ But here we sit with oil soaring past $90 and looking like it wants to take out $100.

“We think crude oil will take out $100, and then continue higher from there. Sure, crude may decline in the short term, but the destination is clear: much higher prices. That may be bad news for the U.S. economy, but need not be bad news for you, assuming your money is in the right place. So what’s the right place? Let’s start with the big picture…

“Simply put, the Earth is running out of that magic combination of oil that is both high quality and cheap to extract.”

Now over to Short Fuse with some more views from Baltimore…

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Views from the Fuse:

“The wars in Iraq and Afghanistan have been estimated by Democrats in Congress to cost $1.6 trillion – more than double the amount the White House has requested to pay for them,” write Addison and Ian at The 5 Min. Forecast today.

“To arrive at the $1.6 trillion figure, Chuck Schumer and Friends extrapolated the entire cost of oil to Americans as the price rose from $37 to $90… and attributed it to the war. Their report, says CNN, “estimated that high oil prices transferred ‘approximately $124 billion from U.S. oil consumers to foreign [oil] producers’ from 2003 to 2008.

“Paying lip service to other factors in the rising oil price, they then go on to surmise ‘the sum of interest paid on ‘Iraq-related debt’ from 2003 to 2017 will total over $550 billion’… including the rising cost of oil.

“We pointed out which foreign governments were the recipients of these oil rich proceeds yesterday. But we’d hardly attribute the high price of oil exclusively to the war. Not even considering the declining reserves of easy to reach oil, Chinese demand alone has risen by more than 2 million barrels per day from 2003 to 2007. Total world demand has jumped from 79 million to over 84 million barrels per day.

“We have a profligate warmonger in the White House. Must Congress also mangle facts?”

Here’s a head’s up for everyone planning to pack up the minivan and head over the river and through the woods for Thanksgiving: it’s going to cost more to fill up your tank.
Guy Caruso, the head of the U.S. Energy Information Administration, said that the price of gas could climb another 20 cents over the next few weeks, which would put the projected price at levels unseen for this time of year.

“We haven’t seen the full pass through (of high oil prices) yet,” Caruso told reporters at a briefing on oil market conditions held at the Energy Department headquarters.

“There’s very little cushion in the market…consumption outpacing production,” he continues. “We’ve seen steadily declining inventories.”

Even so, “OPEC rejected a U.S. appeal to boost output sooner than the producer group’s meeting next month,” says a Reuters article.

Secretary General Abdullah al-Badri said, “there was no reason for oil to reach $100,” as it almost did last week, and continued to blame refinery bottlenecks, geopolitical issues and the weak U.S. dollar for oil’s ascent from below $70 a barrel in mid-August.

“As far as we’re concerned, as far as fundamentals are concerned, there is really no reason for prices to go to $100.”

The fact remains, however, we are consuming more oil than we are producing – and simple laws of supply and demand dictate the rest.

The obvious next move is to turn to alternative energy and new technologies that can help move us from our costly dependence on foreign oil. This is precisely why Byron King, who our long-time DR sufferers know as our intrepid energy correspondent, has launched his newest service: Energy & Scarcity Investor.

“In the pages of Energy and Scarcity Investor, I will look for investment ideas in every nook and cranny of the energy arena. This includes everything from fossil fuels trapped deep within the Earth to renewable energy sources at the surface and above,” Byron tells us.

“I will also report on opportunities in the transmission and distribution of these resources. We will go wherever the opportunities lead. There is no limit to the scope of this service – except of course the dwindling supply of many conventional resources. That brings me to scarcity.

“Energy and Scarcity Investor believes that in this fast-evolving world, some of the basic economic assumptions of the past may be breaking down.

“No, we are not saying that markets and market mechanisms do not work. But we are wondering if we can continue to rely only on the price mechanism to bring forth an eventual abundance of any given item. For some things, you do not want to be a buyer because there are no options for ‘shopping around.’

“That’s scarcity in action. For those scarce things, you just flat-out want to own the mine or the mill if possible. So we will look for ways to buy into that mine or mill, however remote.”

The stock market came back so strongly yesterday it sent us into depression.

We had it all figured out. Finally, we said just 24 hours ago, ‘the tide has turned.’

We liked the sound of it. A nice Shakespearean ring to it: “There are tides in the affairs of men…” And it has a no-nonsense certainty about it too. Once the tide has turned, there is no point in arguing with it…or even analyzing it. The liquidity is going the other direction; that’s all there is to it.

So what happened? The Dow rose 319 points….

Either we are wrong; or 10 million investors have no idea which way the tide is running.

Here at The Daily Reckoning , we are rarely wrong…but often incorrect. Something that ought to happen usually does happen, but not necessarily when we expect it. The dollar ought to go down. Stocks ought to go down. Savings ought to go up. The average house ought to go down. The average householder ought to stop spending so much money. Our latest book ought to win a literary prize. These are things you can count on, dear reader. But don’t hold us to a schedule.

There is, of course, more under Heaven and more on Earth than is contained in our philosophy – but not much! So, if we think stocks ought to go down…they darned well ought to go down…if not sooner, then later.

According to our view of things, the great credit bubble is losing air. We reported an estimate that the subprime crisis might end up costing as much as half a trillion dollars. Yesterday brought more estimates – one at $200 billion. The other at $400 billion. Whatever the final tab, a hundred billion here…a hundred billion there. Pretty soon, you’re talking real money. And when this money disappears, you have to expect that people will have less money to throw around.

“The bloodbath in credit and financial markets will continue and sharply worsen,” writes Nouriel Roubini.

Roubini says that banks have only fessed up to their losses through the third quarter of 2007. But remember, the problem with these subprime loans is that the collateral – housing – is losing value. The more value it loses, the worse the crisis gets. We won’t know the scope of losses for 2007 until the annual statements come out in the spring of 2008. And then, losses for 2008 could be even worse.

Meanwhile, a report on CFO.com cautions investors:

“Don’t expect fallout from the subprime credit crisis to ease anytime soon…”

But, yesterday, Wall Street acted as though it were already over.

Corrections, corrections, corrections…

The slide in stocks is correcting…the aforementioned 319-point rise in the Dow is probably a correction in what will eventually be seen as a bear market. Gold is correcting too. It fell more than $8 to under $800. Oil is correcting…down to $91. Commodities – notably copper – are correcting too.

The only thing that is not correcting, yet, is the dollar. The dollar index fell again yesterday, with the yen (JPY) up against the greenback. But the euro (EUR) did not rise against the buck yesterday, so that was at least a bit of a correction.

Corrections, corrections, corrections…or does this mark a new phase? Has the generalized deflation we’ve been warning about arrived already?

Probably not. So far, these are small corrections…mostly overdue. Remember the basics…

…housing is going down because it is not affordable…

…the financial industry is going down because everyone already has more than enough debt….

…stocks are going down because earnings – mostly from finance and debt – have peaked out…

…the dollar is going down because there are too many dollars and not enough real goods and services to buy with them…

…gold is going up because it is the natural, traditional refuge in times of monetary crisis…

So, let’s stick to the formula, at least for now – sell dollar assets on bounces…buy gold on dips. It looks as though an opportunity is coming our way…

The Shanghai stock market is off about 15% from its peak. Another correction? Or has the tide turned in the East as well as the West?

Colleague Porter Stansberry sends this note:

“I think China is going to be the largest economic pile-up ever witnessed by mankind.

“Reason: they have no legal foundation of common law. They have no experience with capitalism. No accounting standards. Mal-investment all over the place. Their castle is based in one part on pieces of paper issued by the most heavily indebted, bloated, derailed government ever conceived and another part on inflation-induced consumption by Americans. Then there’s the demographics idea and a country full of angry young men who can’t [find wives…China lacks women]. They will agitate.

“All the ingredients are in place for a monumental stock bubble followed by a monumental collapse…”

Yesterday, we recalled a conversation from the weekend; the subject was rabbits.

We were sitting in a café in London, watching a group of old men walk by. It was Remembrance Day, the 11th day of the 11th month…the day WWI stopped. The men were wearing their service medals; some had so many they practically stooped from the weight of them.

“Of course, they should be proud of the time they spent in the army,” we were telling Elizabeth. “But there’s more to it. I watched a bit of the ceremony – commemorating those who died in WWI. They wheeled out one of the last veterans – Harry Patch, who served in the trenches. He’s 109 years old.”

“Yes, even I feel proud of them…and I’m not even British,” said Elizabeth. “It’s part of what holds a group of people together…it’s what gives them a sense of identity and what makes a nation work…a shared history…a shared sense of commitment and sacrifice…”

“Yes, but it is also stupid…and often fatal. Remember, that rabbit?”

We had a particular rabbit in mind. The one your editor ran over when he was driving on the rural roads of France. The rabbit feinted and dodged. The tactic might have worked against a wolf. But our Renault minivan was indifferent to feints and dodges. It simply crushed the poor animal.

“Not all our instincts are suitable to modern life,” we observed. “We tend to eat too much…because some instinct tells us to load on calories when we have the chance…probably an instinct developed over thousands of years of living on the edge of starvation.

“And instinct to fight wars too…that is even more dangerous than hamburgers. When WWI began, millions of young men answered the call. They stood up…got their guns…and went over to defend the Empire. It was not a logical, well-considered response. It was an instinct…a deep instinct that made men who didn’t sign up feel like cowards.

“The instinct was a good one – thousands of years ago. Then, men needed to defend their villages and tribes. If they didn’t, their genes probably wouldn’t have survived into modern populations. But now, they rush into the trenches of WWI…or into Iraq today…and what’s the point? In WWI, the Europeans spent four years killing each other – for no apparent purpose. Germany never had any intention of invading England. The soldiers’ wives and children were never in danger. Even as a territorial dispute, the issues were trivial…and usually fraudulent. Nobody knew or really cared whether the Alsatians wanted to speak French or Germans. Then, at the end of the war along came the Americans with the doctrine of “self-determination,” the idea being that people should be free to decide for themselves which government ruled them. The Europeans practically laughed at Wilson when he came up with that one. Even the Americans themselves had already decided against it. The ‘War Between the States’ settled the matter; despite the declared intentions of the southern states, Lincoln’s army forced them back into the union.

“The wars usually don’t make any sense…but the instinct is still there. So when the cannons warm up, men still grab their shields and their spears. The result: many of them get killed. The instinct proves fatal…just as it was for the rabbit. And then, both the dead and the living are hailed as heroes…that’s an instinct too…as if they really had defended their homes and families.

“That’s true in Iraq today too…we praise the soldiers as heroes…even if we think the war is a humbug. And if you dare to point out that the war is a fraud…or even that it is probably a mistake, you’re called a coward. Of course, it’s preposterous. Logically, it takes no more courage to send someone else out to fight a war than it does to oppose it.”

“Yes…but you wouldn’t want to deny all instincts,” said Elizabeth. “Love…faith…hope…charity…those are instincts too.”

Until tomorrow,

Bill Bonner
The Daily Reckoning