What comes after the title…anyone…yes inflation.

I could not find an article, but Bloomberg has reported that the FED and the BoE have decided not to lower interest rates in order to combat inflation. The ECB also commented that they had no room to lower rates.

Not only do we have demand pull and cost push factors, but of course the increase of money supply has contributed to inflation.

http://www.investopedia.com/articles/05/012005.asp 

I might be going out on a limb here, but it would seem that Bernanke might have been to aggressive with interest rates. This reaction was of course to prevent widespread bankruptcies across the financial industries.

I say this after reading an article lost to the flurry of articles written.

http://www.nytimes.com/2005/10/25/business/25econ.html

At any rate, we can hopefully look forward to inflation not being created by the lowering of interest rates. Dealing with the other two factors is another question.

When reviewing all the factors, one of two things must happen. Either there will be a global slowdown that will eventually tame inflation or global growth will continue to create and fuel inflation. Either case leads to a period of stagflation or deflation. If left unchecked these situations can lead to deep recessions or even depression.

Very simply, investing is not a game, the market is indicating a hopeful end to the housing crisis and the liquidity crunch. If history serves as any reference then no matter what the scene was in history we consistently see time being a constant element.

Yes it is true that recessions have decreased in duration as history writes itself into the books, but time in regards to correcting dis locations in the market has not decreased. Many years ago economies had to react largely to what is occurring within its own borders. Today we must coordinate and react to what is occurring globally.

In conclusion it is really a dice roll as to where we end up. This is predicated by Greenspans recent comment that if analysts could be correct , with regards to prediction models, 60% of the time then we are doing a fantastic job.

So even though the markets are on the precipice of a full on break out you should tread very cautiously at what might be another high point in the market place. Employ risk management strategies to protect your down side.

 As I write this oil is breakingto new highs. Remember Bernanke said  last April that the FED expected inflation to subside, but that is the point: lots of things are said.

http://www.let.leidenuniv.nl/history/RES/Eco/evhgame2.html

GLT

by Green Writer

The Jump Off

One of the world’s largest oil producers announced yesterday that it is planning on increasing it’s production this year.  Russian leaders pledge to stimulate oil production:

“You think oil production is declining?” Sechin said during an interview with Interfax on Wednesday, a first for the secretive former Kremlin insider who was thrust into the spotlight with his cabinet appointment this week. “Let’s wait until the end of the year. I’m sure there won’t be a decline, but an increase instead.“

After growing by just 2 percent in 2007, oil production here has been sinking since the start of the year. Most of Russia’s oil comes from Soviet-era fields in western Siberia, which are reaching the end of their natural life spans.

Putin said he expected oil production to increase by 1.3 million barrels a day by 2015. That figure represents over 13 percent of the country’s current oil production, which was nearly 9.9 million barrels a day last year. 

[The essential problem with Russian oil production is that the two exporters are both subsidized by the government and that fractures their cabinet’s means of coming to a consistent export policy. I am beginning to suspect that the issue is not so much the decline in the oil fields in Russia but the political instability as Putin and company attempt to wrestle order out of the chaos that country barely keeps at bay. With two competing interests - don’t expect Russian production to improve dramatically for a while]

Next the FAO testified before congress that Oil to stay in $100 range for next decade:

 The FAO, which is putting the finishing touches on new 10-year forecasts for commodity prices, expects crude prices of $104 per barrel in 2017, Ali Gürkan, chief of the agency’s trade and markets division, told a Senate committee today.

FAO economists, who predicted at average price of $94 per barrel in 2008, are struggling to understand why prices have surged to that level.

Mr. Gürkan said prices would have to soon drop to about $80 a barrel to make the $94 per barrel prediction come true.

“This is no longer valid,” Mr. Gürkan said of the FAO’s 2008 estimate.

[It’s at $125 now, a drop to $80 would seem reasonable only for someone who believes Taleb’s assertion that “The market takes the path that causes the most amount of pain to the largest amount of investors”.  (DUG: 27.85 -3.27%) is starting to look very cheap to me right now]

Oh yeah. Congress also is forcing the US Govt to stop stockpiling the reserves as they are already at near 100% levels. That’s bound to have an effect on the commodity pricing.

And Big Oil firms aren’t the bandits here? From today’s Globe and Mail:
Well, the world is quickly running out of oil, right?

Not really. The U.S. Energy Information Administration calculates that the world’s proven reserves of oil will last for 50 years at current rates of production but notes that proven reserves are still increasing year over year – as they have for more than 25 years. In the early 1980s, the world’s proven reserves would have lasted for only 30 years at the 1980s rate of production.

[Simple technology in action. Consider this to be an analogue to Moore’s Law for the oil drilling industry]

The Takeaway

With (PBR: 70.09 +2.67%)  hiring 80% of all Deepwater rigs, we find that there is about to be a surge in the supplies coming from sources outside of the Middle East that’s not been seen for probably any point in the known history of this commodity:

Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico’s 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, Gabrielli said.

It will take at least a year of additional drilling for Brazil to get a good picture of how much oil there is in an offshore region that includes Tupi, Carioca and other fields, said Lobao, the government minister. Petrobras and other producers have drilled only 15 wells in the region, he said.

Executive summary for the Attention Deficit:

(DUG: 27.85 -3.27%), (PBR: 70.09 +2.67%) seem reasonably priced for the next 10 months. (DUG: 27.85 -3.27%) will need to have the investor withstand some amount of pain as the “volatile price” of oil will claw it’s way up before the big fall.

This is my opinion and it’s for information purposes only. Any sensible investor does their own homework and doesn’t listen to a commentator who comes in last in internet elections on market blogs.

(RSX: 58.25 +1.75%) looks fantastic.

Oil prices have increased, foxing even Mr T.Boone Pickens. Common wisdom dictates that in a recession, consumption falls, to date that has not been the case.

Production levels are part of the problem, and this ties directly into peak oil.

As can be seen, production is static, even falling in key areas, in the face of record prices, even after adjusting for inflation.

Under normal circumstances, the rogue states, Nigeria, Russia, and Venezula, amongst others, due to their cash starved governments tend to increase production when prices are high, to capitalize the windfall profits.

Their greed however, has done them in. By increasing their tax rates, seizing control of assets, and generally being short-term in their outlook, they now find themselves in the interesting position of having overproduced their existing fields, and lacking the expertise and cash to bring on line potential new fields.

Some examples from J.Jubak;

Russia’s older west Siberian fields are in decline, following the path of such fields as the North Sea. Russia has promising fields in eastern Siberia, but developing those is expensive. The fields are hundreds of miles from anywhere, making it costly to get workers and equipment to the fields and then support them in one of the world’s more hostile climates. And then there’s the additional cost of getting the oil and natural gas from remote wellheads to market.

How expensive is expensive? Leonid Fedun, the vice president of Lukoil (LUKOY, news, msgs), Russia’s largest independent oil company, recently estimated that Russia needs to invest $1 trillion over the next 20 years to keep production in the range of 8.5 million to 9 million barrels a day.

It’s never easy to find $1 trillion in investment capital, but the Russian government has made it hard for its oil industry to attract even a small part of that capital. The Kremlin has structured taxes so that most of the extraordinary rise in oil prices flows into government coffers, not oil-company profits.

When oil rises above $27 a barrel, the Russian government takes 80% of any additional revenue in taxes. That means at $67 a barrel, an oil company gets just $8 more a barrel in revenue than at $27. If the price climbs to $107 a barrel, the oil company’s revenue increases by just $16 a barrel from what it was at $27 a barrel.

In Nigeria, a third of the country’s oil output by 2015 is at risk, energy advisers to Nigerian President Umaru Yar’Adua have warned, because the government hasn’t been paying its share of the costs of joint ventures — about $3 billion to date — with Royal Dutch Shell (RDS.A, news, msgs), ExxonMobil (XOM, news, msgs), and Chevron (CVX, news, msgs). If the government’s failure to pay jeopardizes the joint ventures, Nigeria can kiss plans to double its production goodbye. Instead, total oil and gas production will fall 30% by 2015.

Where has the money gone that was supposed to go into the joint ventures? It’s in the pockets of just about any Nigerian government official with any clout.

Mexico faces a similar shortfall in investment capital. The country’s massive Cantarell oil field in the Gulf of Mexico is dying. Production fell 12% in 2006 and 18% more in 2007, according to data from the national Energy Ministry.

Mexico’s total oil production, which peaked at 3.4 million barrels a day in 2004, fell to 3.08 million barrels a day in 2007. If trends continue, Mexico, the fifth-largest oil exporter in the world, exporting 1.9 million barrels a day, could become a net oil importer within 10 to 20 years.

Mexico does have ways to replace this production, but it will take money and technology. Developing the massive Chicontepec onshore field in eastern Mexico will require drilling 13,500 to 20,000 wells at a cost of $30 billion to $38 billion over the next 15 years, according to Pemex, the Mexican national oil company, because the oil occurs in isolated pockets

In the meantime, China, and increasingly India, continue to require ever increasing amounts of an increasingly limited resource.

Declining production rates coupled with spiraling industry-related inflation curbing real investment could not come at a worse time. The IEA now expects global demand growth for crude oil to rise 2.0% in 2008, that despite a slowdown in the U.S. The following figure below shows that Asia’s 2008 demand growth exceeds the demand decline in North America by an 8.8 ratio, indicating Asia’s is consuming 8.8 barrels more for every one barrel less coming from North America. What is also astonishing is the rapid growth in oil consumption in the Middle East, with the Middle East consuming more than four barrels for every one barrel decline in North American consumption

The Middle east is also one of the largest investors in alternative energy. Now, when the worlds marginal oil producer sets this course…what should that imply to the rest of the world?

France, is energy independent.

Thats right, the damn Frenchies have broken the OPEC cartel monopoly and are energy independent, basing their supply on reuseable nuclear fuel. As soon as the electric car, or whatever is next, the French will be out from under the rock.