Caught Between a Rock and a Hard Place

So, the Fed has cut interest rates again… this time by a quarter-point. This isn’t surprising to anyone, I think. The housing market is continuing to slide along with the Dollar, and Monsieur Bernanke was faced with only one realistic option, namely to cut, but not cut too much. Failing to cut rates would simply accelerate the implosion of the US housing market whereas cutting too much would give foreign holders of US dollars their signal to start dumping Treasury Bonds in earnest. The best decision was to cut just a little bit, which is what Bernanke & crew did. This move gives US homeowners a potential safety valve/reprieve on their ARM mortgages, while not sowing panic among overseas central bankers.

Wall Street had been forecasting such a cut for a while now, which is a good chunk of the reason oil is now within spitting distance of $100 and gold has been marching close to $800. There may be some ‘fear premium’ in oil pricing, but a lot of it simply reflects the reduce purchasing power of the US Dollar. If you follow business news at all, you’ve noticed the phrase ‘strong dollar’ uttered by the President, Treasury Secretary Paulson and others. This sounds good, and seems meant to soothe holders of Treasury Bonds, but it’s also a snow job. The US appears to be committed to the ‘strong dollar policy’ in the same way I’m committed to improving my financial security by winning the lottery. It’s wishful thinking at best, and an outright lie at the worst. Take a quick look at the US Dollar Index and see how good our ‘strong dollar’ policy has been working. For what it’s worth, the Dollar is testing record lows right now, and this is only the start of things.

We’re entering unknown territory and are increasingly at the mercy of our creditors. The USA has generated a massive amount of debt over the last decade or two, and other nations are starting to sell, rather than buy that debt. We have gutted our manufacturing base, so I’m having trouble seeing how a falling Dollar will jump-start US exports. We have opened Pandora’s Box, and I can’t see how we’ll close it again without some sort of financial ‘correction.’ How long and nasty that correction is remains to be seen. I for one am becoming less optimistic as time goes on, though.

Peak Oil Update

I’ve been pretty busy with things in recent weeks, and have not posted on a number of excellent peak-oil related stories posted at the Oil Drum and elsewhere. One nice story that jumped out at me was Tom Whipple’s latest article on peak oil in the Falls Church News-Press. This is a small suburban newspaper similar to many others across the nation. What makes this one different is that the readership contains a large number of legislators, bureaucrats and technicians for the national government, and Mr. Whipple’s columns on peak oil have been running in that paper for several years now. A former CIA analyst, Mr. Whipple’s stories contain many insights into our predicament while maintaining as neutral a bias as possible. Another good wake-up call that deserves your attention… five years is not much time at all, especially for changes of the sorts that an energy transition will demand.

Combine Whipple’s warnings with ones from Kenneth Deffeyes, Chris Skrebowski (two good years left… maybe), Fatih Birol (IEA chief economist) among others and the picture is starting to get darker. Supplies are still relatively abundant, and demand is still close to supply… for now. How much longer that remains the case, we’ll see. If you haven’t started thinking about longer-term plans for living, I’d do so soon. We’ll still be pumping a lot of oil in 2020, but it’ll be a lot less than we’re pumping now, and that will make living in some places untenable.

The warnings are starting to come out slowly. It’s still mostly buried in the business pages, but it’s getting louder as months pass.

I live close to one of the major refineries in the Twin Cities and happen to have a number of neighbors that work there. I was outside enjoying one of the last pleasant evenings of the year earlier this week playing with the kids when my neighbor came out with his children. The kids started playing together and I had a few minutes of conversation about the oil business. My neighbor works as a plant engineer of some sort. I didn’t pry too closely, but his job is basically to troubleshoot and fix a variety of production problems. We started chatting about oil prices, supply issues and whatnot, and he had a few points that I thought were interesting…

  • Higher oil prices aren’t always reflected in gasoline prices at the pumps due to several reasons. There’s a web of petroleum distributors out there, and if one supplier starts running low on inventory, the distributors will shift to the next one. There’s a minimum inventory that the plants need to keep on hand, and if supplies start dropping towards that threshold, the refinery will raise prices in an attempt to slow the draw-down. This is one reason why oil prices may drop at the same time gas prices are rising. It’s confusing, and I probably didn’t understand things totally, but it’s interesting. This is why we had the gas spike here in the cities earlier this year when that refinery in the Kansas/Missouri area shut down… Distributors started reaching into the upper Midwest gas market looking for supplies, and the refineries raised prices in part to make more money, but also to avoid hitting the minimum operating level.
  • This particular refinery is owned by Marathon, who also is part of the SuperAmerica/Speedway chain. They are obligated by contract to supply their branded stores first in case of a supply crunch, so independent operators would get shafted. A first sign of a real supply crunch would be a surge of ‘no gas’ signs coming from the mom & pop gas stations that lasts for a while.
  • My neighbor was unimpressed by environmentalist claims about the evils of oil drilling. He’s spent time on Alaska’s North Slope, and the oil wells are so scattered there that once the companies are done with a well and pack up, it takes relatively little time for nature to cover up the scars in his opinion. He also felt that the Canadian tar sands aren’t as bad as some people make out, but that it’s an energy-inefficient way of getting at oil, and that it has limitations. These are his opinions, not mine…
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