NABE Silicon Valley RoundTable

NABE Silicon Valley RoundTable

Investment Outlook for 2005

Author:  Bud Conrad
Publication date:  Jan 31, 2005

The two key drivers of financial assets, the value of the dollar and the interest rate look to be heading higher. Their effect will be to slow the economy, dampen stocks and earnings, lower house prices, slow consumer spending and keep employment sluggish. World traded commodities will increase in dollar terms. A slow economy will mean few new jobs or raises, slowing consumer spending, and that will keep profits low stocks sluggish and the problem feeds on itself. The trigger I am watching is foreign Central bank slowing purchases of our government debt. These changes have been starting, but have not yet become a sweeping collection of self destructive forces, because the world institutions have been providing liquidity to keep spending increasing through Debt. How these forces unravel is debated, as one opinion is that the squeezed debtors may turn to default and bankruptcy destroying credit, as in the 1930 and in Japan after 1989 leading to deflation (lower prices and higher dollar value). But I see a greatly expanded credit creation by all the world Central Banks and government deficits, leading to printing more money for every problem, leading to a scenario more like a Latin American country that has deficits it can never repay. The easiest path for the powers of our government is to print more money, making themselves and their related banks and business wealthier, and that is what I expect them to do. Federal Budget deficits will not be cut in half as promised, but will be dragged higher, all by apparently justified expenditures for everything from bailing our airlines, supporting old people, war and natural disasters; to providing tax cuts for important constituents, and buying votes with special welfare programs.

$80 Oil

After our last meeting, I took issue with Bud Conrad's forecast of $80 oil. I recounted a memory of hearing my Mechanical Engineering Professor in 1950 saying that we would soon run out of oil. It hasn't happened yet and it probably won't happen for quite a while.

Like other mineral resources, the amount of oil available is a function of how much effort you are willing to spend to get it. Hal Nissley pointed out that the Alberta Tar Sands could be converted to a huge petroleum reserve at prices well short of $80. The history of oil production is full of technological innovations such as recovery techniques and drilling capabilities that have allowed us to keep producing it, albeit at incrementally higher prices.

That said, $80 oil is not such a dream when looked at in current dollars. Right now, oil is priced in dollars, but I have to believe that those who control the reserves in the Middle East, Russia, and the North Sea are looking at the relation of the dollar to other currencies and pricing accordingly. A lot of the stuff that they buy is priced in Euros.
So, even though oil at eighty 2005 dollars is pretty far off, $80 oil isn't.

Still closer to home, we may see gasoline prices rise a lot faster than the price of the feedstock. It would make a good headline to say that $80 gasoline would be here before $80 oil, but not much. I lay that at the feet of California's regulators.

-- Al Moon, February 22, 2005  Reply
Another Look at $80 Oil

Earlier in the year, we had a discussion about the possibility of $80 per barrel oil. Those of us who argued against it pointed to the possibilities of alternative sources of oil that become economical to recover at prices well below that figure. One of those alternative sources mentioned was the Alberta Oil Sands, another, oil shale.
This morning I heard someone on CNBC talking about the possibility of recovering oil from oil shale deposits in Colorado, Wyoming, and Utah at prices of about $40 per barrel, which adds weight to the earlier argument. Reserves from those deposits are equivalent to trillions of barrels of petroleum.
However, I didnít think oil prices would increase as fast as they have and I certainly would not have predicted $70 oil by August. The rate at which they can go up is a lot faster that the rate at which we can develop alternatives. This morningís expert estimated that the first commercial production of oil from shale could not be accomplished in less than about 12 years and full production to meet 25% of domestic demand would not occur before about 25 years.
Other reserves can be developed more quickly, but not tomorrow. There are a lot of environmental and political problems associated with further development of Alaskaís north slope and these will take time and money to remediate and avoid.
Other deep water reserves can be developed in the China Sea and Indonesia, but not next year.
So in Lord Keynes long run, there are factors to operate against $80 oil. At the rate of recent increases, the prices can probably go a lot higher that $80 before these other sources can be developed in competition.

-- Al Moon, September 1, 2005  Reply
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