Monday, March 16, 2009

An Oily Mess

FYI, I will be traveling this week for a nuke conference and other business, so posting will be sparse. I still think we have a serious bear market rally ahead for near future (but could be, and have been in the past, very wrong - this is not investment advice and if you do choose to trade financial instruments based on a blog post from FutureJacked a puppy will spontaneously combust - and you might lose money), so enjoy the ride. That said, many bright minds disagree with my count that we are going to have a significant rally here, so take it for what it is worth.

I do want to leave you with a thought/concern about the Peak Oil meme.

Peak Oil and the meme associated with it, in my opinion, will be a key excuse/driver for the Long Bear we are facing. If the bright folks at Elliott Wave International are correct, we are in the early days of a huge downturn in mass social mood not seen in nearly 300 years.

The Facts on the Ground

I personally regard the geologic and political aspects of Peak Oil to be beyond dispute. All that means is that the easy, cheap-to-drill oil has been found, that the earth is at, or has already passed, the maximum flow-rate of oil that can be extracted. It is all downhill from here as far as oil production. The U.K. has proven to be a great case study in Peak Oil. Mexico will be the next great case study in Peak Oil and serve as a poster child for the Export Land Model as well as serving as the next great Collapse State. You folks down in the Soutwest - good luck with all that.

Mood Makes Markets

In my opinion, the geologic facts of Peak Oil serve as a backdrop upon which society projects its mass mood. Remember, according to the socionomic model, mood is endogenous - it is the primary driver of mass activities like politics, entertainment and investment.

In a time of positive mass mood, Peak Oil would be seen as a great challenge to be overcome (in my interpretation). Massive resources would be marshalled, the brightest minds of a generation would come together and some new fuel or new way of ordering society would be developed in the face of Peak Oil.

However, with Peak Oil arriving at the cusp of a Supercycle Degree downturn in mood, I think Peak Oil will be seen as the Great Excuse to help tear down the infrastructure labored over during the Great Bull Run of the 20th Century. Check out the graph from Calculated Risk below and extrapolate the trend in oil sector invesetment. Is that what you expect in a world facing a catastrophic decline in production capability five years hence?

Even with prices collapsing, industsry experts know how ugly the decline rates of existing fields are. But with the combination of low prices and negative mood, we get the "magical thinking" that something will come along and bail us out.

I think Peak Oil will be one of the Great Excuses for resource wars, for "dropping out" of mainstream society and as a wonderful descriptor for the angst and anger that will swamp the West in the near-term as the scene is blasted clear to make way for What Comes Next. The Peak Oil meme is dystopian, is Malthusian, is catastrophic and, I think, will fit the coming mood to a T.

I guess what I am trying to say is that always remember that there are two components to whatever fact-based argument or assertion people make. There are the basic facts - the stuff engineers worry about - and then there is mood - which drives how resources will be allocated, how projects will be planned or how responses to challenges will be made. Mood trumps facts in the sense that a herd of stupid folks can drive a society to make very bad investments and very poor choices not in line with the facts, or it mood can drive men and women to band together and use reason and hard work to overcome most any obstacle. It depends on where you are in the wave.

Mood can drive societies to essentially "give up" and NOT address facts on the ground in any sort of way. I think we facing the latter as regards topics such as Peak Oil, education and infrastructure. Yes - there are many voices clamoring for change and reform. However, the ability to mobilize society to address them in an efficient and positive way is missing as we slip into a long sunset, which we must endure before the coming Renaissance.

As Christopher Marlowe put it, writing as Shakespeare:

There is a tide in the affairs of men,
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.

Waves makes these tides. Know where you are on them.

There is much more to say about the intersection of mass mood and the types of investments societies make. I'll try to cook up a post on that topic this week while traveling.

Best of luck to you and yours.


cjb said...

When is the Renaissance to occur, at the end of the super cycle bear or the current cycle degree bear? Since we'll still have "plenty" of oil at the end of the current cycle wave, the Renaissance will come many, many years from now? I'm trying to gain an understanding of what life will be like in the (b) supercycle wave when we have a cycle-degree bull market within a supercycle bear market.

Flagg707 said...

Hey cjb, my guess/hope is that we'll see the foundations of the hoped-for Renaissance laid at during the "B" of the Supercycle correction (if I read it right, this is all part of the big A wave down) - assuming the count EWI is using is right (and I hope it is). My guess is we rebuild some after this cycle is done with its 5 waves, we repair some of the political institutions and the B wave takes us up for several years (a decade?) before being slammed down again. But that is just speculation on my part.

cjb said...

I don't see how the count could be wrong unless the theory breaks down. We have super cycle I coming out of the Middle Ages. The Middle Ages was so extreme that the end has to mark the beginning of a very large wave up. I'm not sure if the fall of Rome was the same degree as the Middle Ages, however. Wave II was from 1720 to 1787 (US constitution and French Revolution). Wave III from 1787 to 2000 and we are now in Wave IV. Wave IV could be an ABCDE or an ABC and we are only in A now. If wave IV is an ABCDE it's hard to say when renaissance starts. Any seeds planted in B may not survive the DE.

I'm new to this theory, but it puts a lot into perspective. I occasionally bewildered that I'm going to live through this.

When I talk to other people about this I jokingly throw in that this will be worse than the great depression but not as bad as the fall of Rome or the Black Death. I guess that is a little reassuring.

Flagg707 said...

@: "When I talk to other people about this I jokingly throw in that this will be worse than the great depression but not as bad as the fall of Rome or the Black Death. I guess that is a little reassuring."

Well, there is that. And yeah, it is amazing that we are living in the early stages of something this huge, this historic.

Stephen said...

March 2009 issue of Elliot Wave Theorist, written by Prechter, suggests Oil will fall to $20/barrel, bounce, and then break to downside. The $20 target is the Two-Four Line of channel. See Figure 8 - Long Term Waves in Crude Oil in EW Theorist. I am not sure how you reconcile Prechter's forecast with Peak Oil Argument.

Flagg707 said...

@Stephen: It would not shock me in the least if oil collapsed into the $20's.

My main thrust is that we are bouncing around on a production plateau already. Depletion rates at existing fields are high and rising due to the aggressive secondary and tertiary recovery methods being employed.

Now, with a collapse in oil prices, the money to fund continued investment in new fields and to upgrade recovery at old fields will dry up. Depletion will continue at existing fields. New ones won't be brought online.

Oil will probably go lower and stay lower for awhile. It is when the recovery comes along that my view of Peak Oil really sinks in - the oil won't be there in the quantities we need to run the existing infrastructure. And every year there will be less. There will still be vast quantities available, but not enough to meet demand and every year, this vast pool will shrink a bit nmore.

Once society returns to a general positive mood, we'll find ways to manage and even thrive, but it will be in a vastly different economic system, in my opinion, and one that doesn't rely nearly as much on oil as it does now.

But, like I have said many times, I could easily be wrong - it is just that the way the numbers and trends are stacking up for oil, the future looks bleak.