Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
This is the Next “Big Thing” in Energy - 24th Apr 14
Rome Wasn't Burnt In A Day - 24th Apr 14
When Does Government Policy Become Criminal Behavior? - 24th Apr 14
The Great Recession Grinds On - Measuring Misery around the World - 24th Apr 14
Apple, Facebook Beat Expectations - Stock Markets Long-term Recap - 24th Apr 14
Broad Stock Market Situation on the Remains Tense as Companies Release Quarterly Earnings - 24th Apr 14
How High-Frequency Traders Use Dark Pools to Cheat Investors - 24th Apr 14
Stock Market Bears Wrong Again, Apple to Push Dow to New All time High - 24th Apr 14
Gold Prepared for the Attack of the Short Sellers - 24th Apr 14
Weak U.S. Housing Data Supports Euro - 24th Apr 14
Killing the Maximum-Wage Myth - 23rd Apr 14
U.S. Quarterly Economic Review - Optimism at the Fed - 23rd Apr 14
Why Mohamed El-Erian Left Pimco - Video - 23rd Apr 14
QE Is A Fraud Perpetrated By Made Men - 23rd Apr 14
Gold and Miners Outperform Once Again - 23rd Apr 14
G-20 and the US Tell the Bank of Japan to End Quantitative Easing - 23rd Apr 14
How to Get in the Trading Game and Profit - 23rd Apr 14
Fed Follies, U.S. Housing Market Fiasco - 23rd Apr 14
What Will December 31, 2014 Financial Headlines Look Like? - 23rd Apr 14
Why Gasoline Prices are Surging Again - 22nd Apr 14
Cold War 2.0 - 22nd Apr 14
The JIS – Junk Ideology Syndrome - 22nd Apr 14
How to Avoid Losing All Your Money - 22nd Apr 14
Silver Up, Stocks S&P Down - 22nd Apr 14
U.S. Mainstream Media Propaganda Setting the Stage for War With Pakistan - 22nd Apr 14
U.S. Interest Rates are NOT Rising! - 22nd Apr 14
A Crisis vs. the REAL Crisis: Keep Your Eye on the Debt Ball - 22nd Apr 14
Bitcoin Implications of Lack of Price Action - 22nd Apr 14
Japan - The Twilight Of The Rising Sun - 22nd Apr 14
Is This What a Credit Bubble Looks Like? - 22nd Apr 14
The Dark Side Of The Silver Mining Industry - 21st Apr 14
Strong U.S. Dollar Rally Could Pull Rug From Under Gold and Silver - 21st Apr 14
Silver Feeble Rally Fails to Hold Breakout, Falling Back Towards Support - 21st Apr 14
Stock Market Smart Money – All Out or More to Go? - 21st Apr 14
Fast Rising Pump Prices Counterattack - 21st Apr 14
Extreme Climate Change And Life On This Planet - 21st Apr 14
Gold and Silver Stocks Sitting Tight - 21st Apr 14
Stock Market Minor Correction Imminent - 21st Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Crude Oil Prices: Now for Something Really Scary

Commodities / Crude Oil Mar 29, 2012 - 01:23 AM GMT

By: Andrew_Butter

Commodities

Best Financial Markets Analysis ArticleIf oil prices don’t crash down to $67 within the next two months, that means for sure the evil one-eyed-drooling-spirit of Peak Oil, which everyone has been studiously trying to ignore for so long, has finally arrived.


The dotted red-line on the chart is the “fundamental” or if you use International Valuation Standards, the other than market value.  That roughly follows the algorithm:
FOOT = 3.3% TOAD/OIK

That basically says the whole world can afford to spend 3.3% of the whole world’s (nominal) GDP buying oil, so the price is that number divided by supply (or consumption – same thing). That’s also called Parasite Economics insofar as the seller of oil needs to judge it right so that he sucks just so much money out of the golden cow (Daisy) so that she stays healthy, it’s a delicate balance, suck too much and Daisy can get mastitis.

http://www.marketoracle.co.uk/Article30202.html
http://www.marketoracle.co.uk/Article24849.html

The Parasite Economics line can be calibrated using the algorithm:

E2 = MC

That’s The General Theory of the Pebble in The Pond which is another way of saying “what comes around goes around”; it allows you to figure out where the fundamental was after a bubble/bust cycle, so that way you have two independent ways of working out other than market value, or in other words Daisy’s mastitis threshold.

http://www.marketoracle.co.uk/Article33780.html

That’s all very well, except there is another way to value oil in the ground, if you are a seller.

That is to let some of the less productive Daisy’s keel over and die in the knowledge that the Daisy’s that survive will be the strong ones, and they will produce baby Daisy’s who will be more productive in terms of delivering the golden milk, when they grow up.

That’s called “Survival of the Fittest”. The idea there (if you have oil) is that you need to price it according to what other people (your future competitors) are going to have to pay to find, develop, and ship to market, oil that so far hasn’t been found or developed.

That’s called the replacement cost, and if you judge that will be more than the cost to you of foregoing income today, and then making 2% a year parking that in U.S. 10-Year Treasury bonds, and instead just waiting, for the price to double, in ten years, and selling it then.

And here’s the rub, the longer Ben manages to duck and dive to keep the yield on the 10-Year at or around 2% to “stimulate” bankers and to help USA to pay the interest on their mountain of debt, the more attractive the idea of just sitting looking at your oil, rather than selling it, becomes.

That sounds as if the Big Idea behind letting all the morons who can’t pay their debts off the hook; might have some unintended consequences.

So which Daisy is going to get the bullet in the head first?

Not many people know this, and those who do would often prefer not to know it, but the way that America finances her current account deficit (that’s basically the balance on goods and services), is by selling securities.

Those come in three main flavours, from the BEA numbers on International Transactions, Line 58 is US Treasuries sold to foreign governments (net), Line 65 is Treasuries sold to anyone else who is foreign (those are the guy who have to queue up under a big sign that says “aliens” at Miami Airport), and then there is Line 66 which is “Securities Other Than US Treasury Securities”, commonly referred to as Toxic assets. Those sold great up to 2008, but the sparkle has kind of dropped out of that market. Add all those together and you get to the amount of money from foreigners that can be used to buy foreign stuff…a lot of which is oil.

This is the rub, when the amount of money coming in from selling the birthright of America to foreigners, so that everyone in America can drive SUV’s and the politicians can boast about how they are committed to keeping gas prices less than $4 a gallon, which makes it cheaper than gasoline in Saudi Arabia, and is an explicit subsidy…when the amount of money America can borrow to pay for that luxury…is not enough to pay for it (that’s when the orange line in the following chart goes below zero)…there is trouble in store.

Oh My!! When oil prices go up above the “fundamental”, look-see, America IS IN TROUBLE, as in they can’t even borrow enough to support the lifestyle that they have become accustomed to.

Looks like Daisy will have to start producing more milk, or she might not be getting her feed tonight!!!

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.

© 2012 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014