The growing global demand for oil, coming as it is against a backdrop of limits being hit in production growth, is a major contributor to today’s big price rises.
The clear and present danger is that we are now using several times more oil than we are discovering. The world currently produces about 310 billion barrels of oilper decade. That amounts to about three times the current discovery rate of 100 billion barrels per decade.
According to the Peak Oil calculations, we have already used about half of the energy stored over the last 100 million years. Against that, we have a steady increase in demand emanating from population growth and economic development, especially in Asia. This, coupled with the dearth of major new discoveries, assures that energy markets will remain at high prices, for the foreseeable future.
Where is the economy going in the next six months?
1. The housing decline is not yet done, because we will need another year to unwind foreclosures in the pipeline. The housing bubble still has another 10% to 20% to go to fully deflate.
2. Consumers in the U.S. are not able to expand credit and are increasingly concerned about the outlook for the economy, so they will slow spending both at home and on imports, which means we are in a recession or about to confirm one.
3. The financial/banking system is weaker than understood. The global system and literally trillions of dollars in derivatives has left the world’s banks teetering on the edge. Don’t jump back into financials.
4. A slowing economy – recession – coupled with inflation, creates a condition referred to as stagflation, as the simulative bailouts compete with the debt implosion of overleveraged financial institutions and real estate, to leave us with stagnation and still high costs.
The result of this is that the inflation rate, interest rate, food, energy, and precious metals are heading higher as the dollar is debased.
Higher rates are not good for housing and stocks.
Finally, it is important to recognize that the world remains in the throes of a deep and serious crisis. While many analysts will express the view that the worst is over or that, after a modest downturn, things will bounce back just like they always have, our view is that what we will actually witness going forward is a fairly steady erosion of paper currency purchasing power and sluggish economic growth. The crisis will accelerate, moving faster, even, than in previous major shifts such as that witnessed in the 1970s.
While history may find we are too pessimistic at this point in time, in our view it is far better to prepare for a worsening crisis and hope that it does not materialize, than to expect business as usual.
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