Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Commodity Prices Will Rise

Commodities / Commodities Trading Sep 28, 2012 - 02:25 AM GMT

By: Fred_Sheehan

Commodities

Best Financial Markets Analysis ArticleThere is not enough money being invested in energy to hold prices at current levels. It costs a bundle to replace depleted sources of oil and gas. The justification for increasing exploration budgets is hard to come by when countries are (effectively) nationalizing companies' projects. There is also the problem of actual production not meeting anticipated levels. And the matter - not, by any means, confined to a single industry or country - of companies not investing at all, terrorized as they are by our stark, raving, mad monetary policy.



Andy Lees, proprietor of AML Macro Ltd., has warned the sky is falling for some time, to little avail. Two years ago, in "How to Look for a Job," I cited Andy's projection that the cost of energy will increase from 5% of the world's GDP to 16% of its GDP. Since then, investment has continued to flow into fun and finance, so both the jobs and financial resources needed to replace energy, at least in equal measure to that consumed, have probably expanded. (Fun and finance make a riveting partnership. From the September 25, 2012, Financial Times: "Wall Street financial engineers have devised... an index to add financial instruments that do not exist." This is where the nation's investment is going.)

A sampler:

Replacing oil and gas deposits demands new capital investment. Exxon plans to spend $37 billion on exploration during 2012. Exxon's oil and gas production fell 5.5% in the first half of the year. Its earnings in the second quarter of 2012 were less than one-half of those in the second quarter 2011. Some of this was due to lower natural gas prices. Ergo, gas prices will rise.

Reuters reports Exxon's costs of exploration are soaring. The weighted price of goods sold is falling. Exxon will cancel exploration. In fact, Exxon decided to forego two of its six Polish shale-gas concessions on September 20, 2012.

This is not much in a $37 billion investment budget, but the burden of costs goes on and on. Quoting myself from 2007: "Cambridge Energy Research Associates (CERA) estimated the worldwide cost to produce oil and natural gas (labor and equipment) had risen 53% since 2004. In some cases the rising costs have led producers to scrap exploration. Exxon estimated the cost of building a gas-to-liquids plant in Qatar at $3 billion in 2004. Current estimates having risen to $18 billion. The joint project of Exxon and Qatar has been dropped." If anyone has seen a recent CERA cost index, please pass it along.

Exxon, of course, is not the only frustrated driller. Quoting Andy Lees from September 20, 2012: "Highlighting the difficulties of Arctic drilling, Royal Dutch Shell announced that it has abandoned any hope of striking oil this year after the ice moved in. Last week it was forced to unhook its drilling vessel from anchors holding it to a drill site just one day after it started drilling the first hole in the Chukchi seabed. Shell's activities in the Beaufort Sea have been hit by similar issues which have also meant they have yet to get a drill bit into the seabed.

The remoteness, the extreme cold, the threat from ice crushing equipment and the shortened season makes the economics shaky. "The Arctic has a high cost of supply and it is going to take a high oil price to keep it competitive until we can drive down the costs" according to ConocoPhilips. Gazprom has also been reported to have shelved the development of the Shtokman gas field in the Arctic because of surging costs. There were also reports that natural gas bearing rock had been found off the Falkland Islands in the South Atlantic raising the possibility of the most remote LNG plant in the world being built if sufficient further gas reserves are found. Whether it is depths, distances, temperatures or darkness, the environments we have to work in are getting more and more extreme to maintain supplies."

There seems to be a consistent tendency for energy exploration projections to come up short. In 2006, Canadian tar sands production was expected to rise from one million barrels per day to 2.8 million bpd in 2012. Output has only risen to 1.6 million bpd. Another example is the large Azeri-Chirag-Gunashil oil field in Azerbaijan. After a new leg of investment was completed in 2008, production was expected to reach 1 million barrels per day (bpd). It peaked in 2010 at 823,000 bpd, averaged 684,000 bpd in the first half of 2012, and is declining at a rate of 10% a year.

All the while, the world's economy is slowing down yet costs are rising. FedEx "an economic bellwether as operator of the world's largest cargo airline, reduced its profit outlook for the second time this year, citing a slower economy." (September 20, 2012) Fred Smith, chief executive officer of the company, said: "Exports around the world have contracted and the policy choices in Europe, the U.S. and China are having an effect on global trade." [Not a good one. My italics. - FJS] Within a day, FedEx announced it is increasing shipping rates an average of 5.9% on January 1, 2013.

The destructive central-banking distortions retard useful investment. This is not an environment in which companies make long-term, capital-investment commitments. Instead, the Federal Reserve has placed a bid under the asset-backed securitization complex in its latest QEEEEEEE. The tapeworms did not need encouragement. International Financing Review reported on September 15: "The US structured-credit market exploded with issuance in the past week, as 24 transactions across ABS, RMBS, CMBS, and CLOs sent investors into a feeding frenzy....Twelve ABS transactions, mostly auto-related (including three sub-prime auto deals), were marketed to investors, with several achieving impressive over-subscription levels and the tightest spreads in five years." On September 7, 2012, Bloomberg posted a headline: "Goldman Sachs, Citigroup Lead CMBS Sales in Most Deals Since '07." We need go no further.

The latest round of quantitative easing flows to Wall Street and feeds anxious hopes of a housing recovery. That will not happen. Prices still have along way to fall, although, in the meantime the perversions are straight out of 2007. From the September 19, 2012, Wall Street Journal: "HENDERSON, Nev.-The latest sign that the housing market is bubbling to life: The artificial waterfall at the entryway to Lake Las Vegas is again flowing. Few developments were hit harder in the real estate crash than this mixed-use project in the desert 20 miles southeast of Las Vegas. While overbuilding caused Las Vegas to collapse during the housing crash, Lake Las Vegas was hit even harder.

At the height of the city's foreclosure crisis, one in every 45 homes received a foreclosure filing, compared with one in every 13 in Lake Las Vegas. .... Hedge-fund manager John Paulson's Real Estate Private Equity Group recently snapped up 530 acres of developable land in Lake Las Vegas for $17 million in cash from lenders.... During a visit earlier this summer, business was brisk at a Ravella hotel bar which has Tuscan-inspired views of manicured hedges surrounding a fire pit, with customers sipping martinis and noshing on pappardelle with veal meatballs."

To quote the greatest perversion of 2007, celebrated former Federal Reserve Chairman Alan Greenspan offered fin-de-siecle advice in May of that year: "Enjoy it while it lasts."

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

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.


© 2005-2019 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

6 Critical Money Making Rules