Monday, October 22, 2007

Market Shivers

The one thing that I learned decades ago about markets is that over the long term, the bulls win. The bears may be right on selecting the losers but over time the winners eat up the garbage left over by the losers and the only real losers are those holding stock in the losers. A certain amount of cash is disappeared but the expanding credit system easily produces more.

The tragedy of 1929 is that the banking system did not understand this and over reacted to a bad market break by cutting of credit and savagely reducing the money supply. It took years for the global economy to claw back to the economic levels of 1929 and we have not made that mistake twice.

The difficulty we have today is that our money supply is not a true fiat currency. It is linked inexorably to oil, since oil still represents over ten percent of the global economy. This means that continued economic expansion will be stifled by tight oil supplies. And a real contraction in the daily oil output will have the same massive effect as a contraction in the money supply.

Hello Houston, we have a problem. In this blog we have investigated and discovered alternate strategies to replace this pending oil shortfall. I know and if you have followed my reasoning, you know that we can completely free ourselves of using any geological oil by making agriculture our principal partner in the solution. It will still take time. But once done our economy will never again be dependent on a finite resource and we will be good for a million years.

In the meantime, the market is slowly waking up to the nasty fact that we are unable to expand oil production significantly anywhere in a hurry. After all we have now had almost five years of high prices to encourage expansion and it simply is not happening fast enough. That is why the overall market is starting to adjust downward with a series of 300 point breaks and consolidations. This is a good time to assemble cash and to learn patience.

Right now the market is waiting for the other shoe to drop. That would be a 2,000,000 barrel drop in production somewhere. There are candidates and it is inevitable somewhere. Saudi Arabia would be the most dramatic. It would end all denial.

This type of very bad news will induce a deep market break and take a long time to overcome. As should be clear, however, the probability of bad news like this is steadily increasing while the probability of good news is declining.

In fact the only source of commensurate good news on oil can only come from the drilling rigs out in remote difficult basins. There may be another Saudi Arabia out there that can give us another fifty years to get our energy act together. After all my readers have seen the future. Fifty years of progressive scientific development will make the implementation of these ideas easy.

On an optimistic note, I suspect that the one great untapped trillion barrel oil resource will turn out to be conventional oil in the Mackenzie delta and the Beaufort Sea. Discoveries have been made and anyone who has worked through the geological logic described in my article titled Pleistocene Nonconformity can figure it out. This oil was produced in the last million years and has not had millions of years to escape. At least there is little evidence that it has with the exception of the trillion barrel tar sands.

There may also be others. Most people do not realize how hard it is to understand the geology of an oil basin or how much has to be spent to get lucky. I never forget the 100 hundred dry holes in Alberta before Leduc #1. You look at the map today and you wonder how they ever missed.

In the meantime, there is a real Sword of Damocles hanging over the market and the market will be unsettled for a long time.

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