Mover Mike

Back on October 30th of 2004, I found some analysis by Bridgewater warning us of $100 to $120 oil.

How does Bridgewater arrive at $100 to $120 per barrel? It seems that the demand for oil is inelastic. It causes big increases in price to get consumers to change their behavior. Oil consumption today is about 2.7% of GDP. At its peak in the 1980's it took consumption at 8% of GDP to curb demand and interest rates were 16% briefly. It would take oil at $120 for consumption to equal 8% which would curtail demand (and slow economic activity).

I was reminded of their spot on report when I saw this article on Financial Sense Online,

Whatever Happened to Oil Price Elasticity? by Andrew McKillop. He writes

Getting back to the narrow question of why oil demand (and world gas demand now growing at around 5%-per-year) are much less than unaffected by rising prices, but are directly increased by higher oil and gas prices, we finally call on facts.

Price elasticity of anything has an underlying notion, hard to quantify, of ‘satisfaction’, and another of ‘substitution’. Neither of these have much place for the vast majority of oil and gas users. Nobody uses oil and gas ‘for the fun of it’, or at least very few persons. Equally, the famous ‘hi-tech emerging new energy’ substitutes and alternatives simply don’t exist. They may exist on the Nasdaq or in people’s heads and PCs, and in cute business video presentations, but not in the real economy.

Mckillop believes

When we go back to economic theory notions of ‘elasticity’, as mentioned above, we soon see that they don’t apply in large measure, or any convincing way to explaining what is happening.

McKillop thinks that until and unless interest rates are sharply raised to double-digit rates, oil and gas prices can go on crawling ever up.

Bridgewater thinks the market will take care of itself, thank you very much, if you let the market take its course. My money is on Bridgewater. It would be too bad if politicians short circuited the process with the unintended consequences of delaying alternatives that develop as a result of the high oil prices.

Andrew McKillop Bridgewater Oil+Inelasticity

Glancing through various charts of commodities this evening, I was struck by the chart of Light Crude (see chart). It appears that oil just put in a small flag that may mark the half-way point of this move. The most recent low was $62.40 and the major high was $75.35, a difference of $13. If this the half=way point, and I believe it is then we are looking a target of $84 to $85 before Memorial Day! That may mean gasoline near $4.00.

Light Crude gasoline Finance

I subscribe to the Early Warning Report written by Richard Maybury. Back when oil was $10 per barrel, Maybury was saying that Washington was intent on provoking a war with Muslims. Because of the coming war, he predicted oil would rise to $100 per barrel. In Maybury's latest letter dated May, 2006, he says

$100 was rediculously optimistic. I cannot imagine any realistic sequence of events that could prevent oil from hitting $300 per barrel and gas at the pumpof $9.00 per gallon.

Maybury has been amazingly accurate. Because of his anti-statist approach, he has recommended defense stocks. Since 1991, with a new era of peace after the Berlin Wall fell, he recommended arms maker General Dynamics (GD) - up 1,061% since then; arms maker United Technologies (UTX) - up 1,056%; security equipment maker American Science & Engineering (ASEI) in 1995- up 1,310%; oil driller Helmerich & Payne (HP) in 1996 - up 596%; ammunition maker Alliant Techsystems (ATK) in 1994 - up 846%; metals, energy and gold producer Rio Tinto (RTP) in 1997 - up 227%; Pan American Silver (PAAS) in 1996 - up 192%; and military truck maker Oshkosh Truck (OSK) in 1995 - up 2,496%. Maybury says,

I think the spectacular run-up in investments that do well in wartime falls into the category of "you ain't seen nutin' yet"

With that in mind Maybury is launching a new countdown,

because Washington has narrowed its options in the Middle East to only three: quit the war, revive conscription or use nuclear weapons.

Maybury starts the Countdown at Two (2). At Zero (0) we will have revived conscription or used nukes!

As far as I know, he is not part of the Talking Heads regularly seen on "bubble vision". Nor is he quoted in the MSM. We would have learned a lot, if he were. But then there seems to be a concerted effort to keep the truth from the average American.

Richard Maybury Early Warning Report GD UTX ASEI HP ATK RTP PAAS OSK

Again NewsMax emails us that their Financial Intelligence Report predicts $40 oil in the next 12 months, citing

...the U.S. government admits that crude oil inventories are at 7 year record high – with 343 million barrels of oil stockpiled in the U.S. alone!

The Energy Information Administration (EIA) has a chart based on official statistics gathered from the U.S. government showing, indeed, we do have 343 million barrels of oil stockpiled:

However, I would point out last year at this time, we had about 333 million barrels of oil stockpiled and those stocks moved lower until October. Meanwhile oil prices moved from $57 to $70 in September and back to $56 in November, intuitively opposite expectations based on stockpiles. I am not impressed with that analysis from NewsMax.

I really have to question that statistics. How is it possible that we have been able to build our inventories when so much of our oil production capacity was damaged or destroyed by Hurricanes Katrina and Rita and is still not back on line. Has our government been buying oil on the open market, over and above our lowered production, raising the price of oil and causing gasoline prices to go up?

I don't buy it. How can we have higher oil stockpiles? Didn't we tap into the strategic reserve recently? No, I suspect that the numbers may be wrong. Like so many of the statistics that come from the government anymore, they lie, they spin, they revise later. Why would the government overstate the stockpile? If we knew the real numbers we might conclude that oil prices are going to go to $100, that could filter through the economy, giving us higher inflation numbers, causing long bond rates to rise and force the FED to keep raising short term rates, killing housing and consumer spending.

The EIA's report This Week in Petroleum says three factors influence the price of oil

Demand -

After averaging annual growth of just under 1 million barrels per day between 1991 and 2002 (under 0.9 million barrels per day for 2000-2002), world oil demand grew by 1.5 million barrels per day in 2003, 2.6 million barrels per day in 2004, and at least 1.1 million barrels per day in 2005. This greater-than-historical growth came even as oil prices more than doubled. In fact, some analysts argue that strong growth in the world economy, and particularly in China and the United States, has fueled the need for more oil, thus putting upward pressure on prices. That is, strong global oil demand is one of the factors causing oil prices to rise in recent years.

Surplus Production Capacity -

While some productive capacity has been brought online, it has been insufficient relative to demand growth. As a result, surplus capacity is extremely limited, dramatically reducing the ability to respond to any sudden surges in demand or disruptions in supply.

Weather and Geopolitical Risks - We are about to enter the Hurricane season and the world gets so much oil from unstable areas; Nigeria, Iran, Iraq, Venezuela. The danger is rising not falling.

I said it before when I saw the NewsMax advertisement. We will never see $40 oil again! I hope I'm wrong.

NewsMaxEnergy Information Administration This Week in Petroleum Oil Iran

Update:

Bill Cara carries this 5-minute bar chart of gold. This chart is pre-second session. where gold closed is now $700.50.

I was struck by the charts similarity to Silver daily chart (see chart). It's is scary to be long precious metals in a bull market. That is a scary decline from $14.50 to $11.70 in three days, yet we have broken out again. Looks like next target for Silver is $17 to $19!

While the chart of Light Crude is slightly different and more scary if you are long oil, could turn out the same way as Silver and Gold. (see chart)

Gold Silver Oil

On May 5th I posted about Richard Maybury who writes the Early Warning Report. I wrote:

...Maybury is launching a new countdown,

because Washington has narrowed its options in the Middle East to only three: quit the war, revive conscription or use nuclear weapons.

Maybury starts the Countdown at Two (2). At Zero (0) we will have revived conscription or used nukes!

I am guessing Maybury will say this is another step closer to conscription by the use of the National Guard to guard the Southern border. Estimates are that 3,500 to 10,000 armed men and women will be needed to seal the borders, an additional task for the Guard (along with Afghanistan, Iraq and natural disasters). I am not against the idea, mind you. We need the border secured. However, using the military to secure the border has consequences. We are wearing out our military and more of our kids will be needed for the tasks.

Maybury has written extensively about the coming draft and what you as a parent should do if you have a son or daughter that could be eligible in Will My Son Or Daughter Be Drafted? His website offers this special report at http://www.richardmaybury.com, or call 1-800-509-5400 or Fax 602-943-2363

Richard MayburyEarly Warning Report Immigration