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(2008-07-05 09:51:17) 下一个


Peak Oil (1) - where are we heading?

The recent sharp rise in oil prices shocked many people, however, if you had followed Peak Oil theory, you should not be surprised at all. I have been studying Peak Oil for 4-5 years, and $150-200/bbl price was long predicted. Similarly, many people were surprised by the sharp rise in food prices at the end of last year, but again it was long expected. It is very hard to predict short term market movements, but it is not that hard to expect long-term trend changes.

I will start to write a series of short messages on Peak Oil following zeng xiong, huban xiong and other XDJM's suggests. However, this is too big a topic. Everyone please chip in. I was originally planning to write a formal report (I already wrote 100+ pages), but I guess it is probably better to do this with short essays with one question/answer at a time.

There are many writings on Peak Oil on the web, with many debunkers as well. Many of believers' writings are too pessimistic overall, including those who hope-the-world-will-end-tomorrow types. On the other hand, many disbelievers or debunker' writings are just jokes with no physics/chemistry background whatsoever. Even this morning when I was driving and listening to Bloomberg radio, one guy being interviewed said that he thought oil will not peak till his daughter, grandchildren, and grand grandchildren's time! There are many many disbelievers or deniers out there.

Question: So where is oil price heading?

Answer: Oil price will go to much higher prices, higher than anyone predicted today in not far future! That's my prediction. Even though I am optimistic in general, the oil price itself will be much higher. No question about it.

Peak Oil (2) - Timing of Peak Oil
This is a time table modified from the Hirsch Report. There is a wide range of predictions on the timing of Peak Oil. My own prediction is 2008-2010, which was made a few years ago. Again, proving it needs a lot of detailed and boring numbers, but most people here shouldn't worry about the exact time. A year or two difference is no big deal. Some official organizations are still denying or delaying the peak time, largely because this might cause worldwide panics. Please keep all Peak Oil related discussions within this group. My own experience with this topic is that people either disbelieve you (calling you stupid or dumb) or deny the facts completely with fear.

Table. Projections of the Peaking of World Oil Production
Projected Date Source of Projection Background & Reference
2006 Bakhitari, A.M.S. Iranian Oil Executive11
2007-2009 Simmons, M.R. Investment banker 12
After 2007 Skrebowski, C. Petroleum journal Editor 13
Before 2009 Deffeyes, K.S. Oil company geologist (ret.) 14
Before 2010 Goodstein, D. Vice Provost, Cal Tech 15
Around 2010 Campbell, C.J. Oil company geologist (ret.) 16
After 2010 World Energy Council World Non-Government Org.17
2010-2020 Laherrere, J. Oil company geologist (ret.) 18
2011-2016 EIA nominal case DOE analysis/ information19*
After 2020 CERA Energy consultants 20
2025 or later Shell Major oil company 21
No visible peak Lynch, M.C. Energy economist22

* EIA has admitted in its recent quarterly report that the world supply might not meet the world demand by 2011
11Bakhtiari, A.M.S. "World Oil Production Capacity Model Suggests Output Peak by 2006-07."OGJ. April 26, 2004.
12Simmons, M.R. ASPO Workshop. May 26, 2003.
13Skrebowski, C. "Oil Field Mega Projects - 2004." Petroleum Review. January 2004.
14Deffeyes, K.S. Hubbert’s Peak-The Impending World Oil Shortage. Princeton University Press.2003.
15Goodstein, D. Out of Gas – The End of the Age of Oil. W.W. Norton. 2004
16Campbell, C.J. "Industry Urged to Watch for Regular Oil Production Peaks, Depletion Signals." OGJ. July 14, 2003.
17Drivers of the Energy Scene. World Energy Council. 2003.
18Laherrere, J. Seminar Center of Energy Conversion. Zurich. May 7, 2003
19DOE EIA. "Long Term World Oil Supply." April 18, 2000. See Appendix I for discussion.
20Jackson, P. et al. "Triple Witching Hour for Oil Arrives Early in 2004 – But, As Yet, No Real
Witches." CERA Alert. April 7, 2004.
21Davis, G. "Meeting Future Energy Needs." The Bridge. National Academies Press. Summer 2003.
22Lynch, M.C. "Petroleum Resources Pessimism Debunked in Hubbert Model and Hubbert Modelers’ Assessment." Oil and Gas Journal, July 14, 2003.
Peak Oil (3) – How many farmers will we have in the US 
Question: How many farmers will we have in this country in 10-20 years?
Answer: 10 - 30 Million.

“Are you kidding?” you might say. You might also say “That’s ridiculous, LaoZhou!” No, I am not kidding. That’s my prediction for the next 10-20 years. And I have seen even larger numbers, such as 50M, i.e. 15+% of population will be farmers in 20 years. The US currently has only about 1M farmers, so that’s a 10-30 fold increase in my estimate. It is indeed a dramatic and revolutionary change in the human history, and it is going to have daunting impacts on our society, our life, and of course, our investment strategy.

Modern agriculture is essentially a “manufacturing industry” (not the traditional agriculture) which converts fossil fuels into food through soil. For every calorie of food, it needs ten calories of fossil fuel energy to produce and transport. Modern agriculture is no longer the traditional papa and mama backyard farms, but has evolved into a business with heavy machinery operations and heavy use of fertilizers, pesticides etc. in the last 50 years, largely thanking to the cheap and abundant oil. On average, food items in the US have traveled more than 1000 miles to reach your dinning table (this distance is 1500 miles in Canada). So now, let’s imagine if you don’t have cheap oil anymore, what will happen? The cost of big industrial farms will skyrocket due to the direct connection with fossil fuels. Therefore, food produced by big farms in far distances will no longer compete favorably with local foods. More and more papa and mama backyard farms will flourish again. Meanwhile, we will have tons of people looking for “jobs” due to the collapse of auto industry, airline industry, retail industry (e.g. WalMart), and many other services (such as law firms).

By the way, the current US farmers have an average age of 55+, and being a farmer is the least fashionable profession among youngsters, so there will be plenty of opportunities for those who are well informed and prepared.

Again, as always, I am an optimist – I believe that foreseeing some big trends and preparing for the long side is better than panickily reacting in the short side. It is just easier to accumulate wealth in the long side than the short side. Also, a positive attitude is better than a negative attitude to any crisis. Stay tuned and balanced (it is very important to have a balanced portfolio even if you believe something overwhelming is coming. Of course, if you are like Boones Pickens, who can sustain short-term 20-30% paper loss, you can raise your energy holdings to 95% - I just can't.)

Peak Oil (4) – What kind of primary residence should you have?

Question: What kind of primary residence should you buy?
Answer: A suburb house with ideally 1+ acre land capable of drilling a well if needed.

I will start with my own story. I used to live in an apt building (17th floor out of a 26-floor complex) overseeing the entire Manhattan. I watched the collapse of World Trade Center on 9/11 2001 from my own balcony – it was a moment never forgotten. At the end of 2002, I was planning to move out of the apt building and looking for a land to build my own house. At that time, I was not fully convinced by the Peak Oil theory yet, but thought I should pay some respect to these independent experts, such as Dr. Ali Bakhitari, Dr. Colin Campbell, Dr. Richard Duncan, and of course the founder of the Peak Oil theory Dr. King Hubbert, who had been studying the subject for their whole life. The severe 2003 Northeast Blackout, which affected 1/3 Canadians and 1/7 Americans on August 14-16, 2003, finally made up my mind (in case you don’t know, there was another devastating blackout in Italy in the same summer affecting the entire Italy).

I bought a 2.3 acre land and built a house through Toll Brothers in 2003-2004, even though I still thought the blackout could just be a single event and Peak Oil might be many years away. But nevertheless, I proceeded with my plan. Now looking back, I am very glad with the decision I made then. It is a kind of ideal residence location for Post Peak Oil era, one hour drive to NYC (so close enough to the City for teaching, entertainment, museum, etc.), near mountains (so natural, clean water supply is guaranteed), 1.5 acre arable land (so I can be a farmer too if needed), 0.5 acre woods linked with hundreds of acres of woods (so wood heating is possible). Therefore, even though I was not fully aware of these benefits back then, my gut feeling played a right direction. After I study Peak Oil more and more, I believe this is something not seen ever in human history. We better be prepared as a community, an individual, and an investor. Of course, I don’t want to say the four infamous words here “This time is ***” :-).

Some Peak Oil advocators are recommending people moving back to the cities since there are no fuels left for you to drive to work if you live in suburbs. I don’t agree with this advice at all. It is true that cities have subways, buses, light rails, and other public transportations, so people can move around easily. However, without a job, living in the inner cities can be very difficult (想想中国的下岗工人), to say the least. When more and more blackouts or brownouts come, the consequences could be devastating - just imagine how many days you can survive in a highrise building apt if you don't have electricity and water. Our nationwide (worldwide too) power grids are very old, heavily overloaded, and extremely vulnerable (if you don’t know, our “stupid” President Bush has long planned his Texas ranch off any public power grid). One unusual hot summer day can potentially do the damage, like the 2003 Northeast Blackout or the 2003 Italy Blackout (the exact causes are still in debate). If you think the threat of power grids failure is less imminent than the oil peaks, I agree. However, the damage from a power grid failure is way more devastating. If you think long power blackouts won’t happen, you need to think twice. The total energy per capita peaked long ago, in 1979, and power shortages and brownouts are showing in many countries all over the world. We are just lucky to be in this country, which doesn’t have many blackouts or brownouts (those who were advocating sending their kids back to China or India in TZLC forum have no clue what’s coming). Some people, like Richard Duncan, who holds a PhD in System Engineering and has worked in power system engineering for many decades, even predicted that the worldwide PERMANENT blackouts will start in 2011. I don’t think permanent blackouts will start that early due to the increase in coal exploration, more tolerance to nuclear power, and emergence of wind powers, etc. And I believe the human wisdom is high enough to RAISE the oil/coal prices high enough to damp the short-term demand, and thus buy us time for long-term solutions. My own estimate for the coal peak is 2015-2018, so the permanent blackouts, if any (hope not), will come after that.

If you are still living in an apt in a big city, don’t panic. There is still time - we are talking about very long-term trend here. If you happen to live in a very cold and rural area, I recommend you move closer to the city (warm ones better) as well.

I probably shouldn't have initiated this series of writing on peak oil, and I will stop here. I am sorry if these short essays make some of you uncomfortable - but trust me these images and thinkings will help you in the long run in terms of investing.

Peak Oil (5) - If PO is upon us, what will happen?

大家可不能骂我神经病或唯恐世界不乱啊. 最好把它们当作科幻读物, 纯粹科学假想.

Peak Oil (5) - If Peak Oil is upon us, what will happen one by one?

Oil price is hovering around $138. Uneasiness is spreading. Peak Oil might be already with us – the truth is just too inconvenient. For Peak Oil, there should be really no argument on whether it is true or not, the only argument is when. Dr. al-Hussenin thinks it is 2004, and Dr. Bakhtiari (passed away last year) thought it was 2006. I originally thought it is 2008-2010, plus 3-4 years plateau time. The current production data seems to support a later date, but the oil trading data (the total crude oil traded is decreasing since 2005) certainly supports both al-Hussenin and Bakhitari’s views – we might have already peaked.

Here are what I think might happen if Peak Oil is upon us. Please note many of these conclusions were reached long ago. Some of the conclusions are also proposed by many other researchers, such as Prof. Ken Deffeyes at Princeton, and Dr. Richard Duncan.

1. Oil price up. Natural gas price up. Coal price up. Food price up. People are confused with why they are all up, and they look for reasons, and come up with speculation, EM boom, bad weather, stupid FED, etc. etc. No panic yet. (sounds like 2006-2007)

2. Poorer countries and politically or militarily weaker countries will be out of bid for oil. Chaos, riots, and strikes start to surge in these countries, with some people starving. (late 2007)

3. Oil price and food price skyrockets with no obvious direct reason, and price volatility increases sharply as well. People start to question earlier reasons, and some anger grows. (early 2008)

4. Emerging international summits, urgent Congress testimonies, and bilateral secretive negotiations, will be called, and some never-wake-up politicians finally believe in what scientists have been saying for years. But not much can be accomplished. <== We are probably here now.

5. The financial industry will be hit first, with many emerging markets losing 50% in a very short period of time. The developed world will follow, though much milder in the beginning. Prestigious investment bankers start to lose jobs, and some dumb/jealous people start to cheer without knowing the danger is coming to them as well, fast.

6. Retailers, services (e.g. Starbucks Coffee), and non-necessity goods producers, including most high-techs, will be hit afterwards (autos, airlines will be murdered earlier along with financials). More people will be out of job. People start to blame governments. Social uneasiness, chaos, and crimes start to rise in the US.

7. Rationing system will be put in place for gasoline (some countries already doing it). Truck drivers start to strike, and the strikes quickly spreads all over the world (UK, Spain, France, South Korea already saw this), which affects the food distribution system. People start to shoot/beat others in order to get in front of the line for oil.

8. Food will be put on ration system soon after oil rationing (some countries already doing it too). More thieves are found stealing or robbing neighbor’s food or vegetables in garden. People living in high-rise buildings in the cities start to rush to suburbs. Tension between citizens from nearby cities and local people increases.

9. Governments step in to prioritize the oil usage. Military gets the highest priority, followed by homeland security, strategic transportations, national power grids, Federal and State prisons, heating oil, and then fertilizers (so be careful with your MON, POT, MOS etc). Immigrants start to become targets. National fascism will rise. Leftist President, Congressmen will be in charge.

10. Brownouts or blackouts become common partly because natural gas (currently 22% of electricity source in the US) is converted to NGL for fuel, and partly because not enough trucks moving coals around and from train stations to the power plants. More people will be shut off utilities because they are falling behind bills. Modern civilization starts to see its fatal threats the first time ever in history.

11. Even more people are out of job, and economy starts to free fall. Those people living with food stamps rise to 50-100 M in the US (currently 28.3M, 9% of population). FED will print more money like crazy. More people realize that there is no light at the other end of the tunnel - new technologies and new energy programs are quickly falling apart due to the lack of funding and not enough time. Oil is not going to come back, and renewable fuels, like biodissel, ethanol, will not be enough.

12. Immigration policy will become so tough that almost nobody can land into this country legally anymore. Illegal immigrants from Canada and Mexico boards flood in. The hundreds, hundreds miles of American “Great Wall” built along the US-Mexico border will become a modern holocaust. Those secretly built massive camps will be in use finally.

13. A similar New Act (to FDR’s) will be proposed by the President, and the Congress will quickly approve it. The government will release its own lands and also buy lands from private landlords. People start to learn to become farmers to grow their own food involuntary. More and more people are forced to move into State owned farms or private farms – there is not much alternative left (now you see why 10-30 million farmers will emerge in my earlier prediction).

14. Worldwide population shrinks dramatically, partly due to war, partly due to starvation, pandemics and hyperthermia. It will be indeed lucky to pass all these horror stages to get here, but those well prepared might have a better chance.

15. The 100 year industrial revolution (1930-2030) ends. The Olduvai Theory is finally proved to be true. No arguments anymore. We go back to a sustainable population base, which is estimated to be at most 2-3 billion without fossil fuels.

16. People become friendly to each other again, since those survivors finally understand they need each other to survive. Local self-sustainable communities emerge. Human society moves on.

To be honest, this is the most difficult writing I have ever done so far. Also, as a teacher for many years, I know what things can be said in public and what things should not be said in public. However, for the sake of a good citizen and a scientist with heart, I feel obligated to tell you what I am seeing. You don’t have to believe it, but I hope you can start thinking along these lines seriously. It might be helpful when you make important investment allocation decisions.

Peak Oil (6) - What's the best and worst scenario?
Again, 大家最好把它们当作科幻读物, 纯粹科学假想 ....

Peak Oil (6) – What is the best and worst scenario?


I know what I am going to say is politically incorrect, but if you are objective, the problem we are facing can be reduced to one word – overpopulation. The current worldwide population is not sustainable, and the sharp rise in population starting 1930 is directly proportion to the abundant and cheap oil available to humans. So a final die-off is inevitable. This has been known, with strong scientific backups, for a while, but most scientists and politicians do not want to say it in public. To some extent, our mother nature is already doing it silently -- the abnormal weathers caused by global warming, and the spread of HIV/AIDS, avian flu, and SARS, etc. However, the Peak Oil will be by far the most serious. So what is the best and worst scenario?

The Best Scenario: The Cuba Model. Cuba had a localized Peak-Oil crisis in early 1990’s due to the collapse of Soviet Union and thus the cut of oil supply. The US Embargo also helped worsen the situation. People involuntarily reduce consumption (eating only two meals every day), plant food in backyards and rooftops, and abandon almost all cars. The average Cubanian lost 20 lb in a very short period of time. The good thing is that most people keep their lives. I don’t think we will be that lucky at worldwide level, but the US has the best opportunity for a self-sustainable life with its abundant arable lands. The worldwide population will increase to 7.5B by 2015 or so, and then gradually decrease, with somewhat peace and order, to 3-4B in 2050.

The Worst Scenario: NO Role Model to Follow. Panics after Panics. Wars after Wars. The worldwide population shrinks dramatically in a short period of time, partly due to war, partly due to starvation, and more due to pandemics and hyperthermia. The developing world will lose 2/3 of population, and the US will lose 1/3. The total population will reduce to 1.5-2B in 2030.

I certainly hope our human wisdom will choose the Cuban Model. Either way, the reduction of human population is almost inevitable – our Earth just can’t sustain so many people. Even without oil shortage, the water crisis alone is going to put constraint on this. These conclusions have been known for a while actually, and I believe Bush and Cheney all knew this, but no one wants to talk about it because it is politically incorrect.

Peak Oil (7) –What can you do now? 
I  did write “Peak Oil (5) – If PO is upon us what will happen one by one?” and “Peak Oil (6) – What’s the best and worst scenarios?”, the night I promised to write them last week. But I decided not to publish them (no need to scare people more). If the Peak Oil is indeed upon us, we will have more hardship down the road (and $140/bbl oil might seem very cheap later on). The 10-30M farmers in the US that I predicted earlier are no joke at all.

There are still a few things you can do, even though not whole a lot as I mentioned before.

1. Own more strategic natural resources. I mentioned before that it is the bear market that distinguishes the rich from the poor (in bull markets, every one is making money, so your relative wealth is not increasing at all). Now it is THE time again.

Buy more food (DBA), buy directly oil (USO), natural gas (UNG), and uranium (CCJ). Then buy some SU (largest oil sands), RIG (largest offshore drilling), in addition to ECA (largest Canadian oil/NG reserve) and COP (best price/reserve), as well as many other names zeng xiong, xiaohan and others have mentioned.

Buy some silver - silver is much better than gold IMHO. Gold has no supply/demand issue as I detailed before, so the only hope is that gold returns to the monetary status, which is going to have huge battles with central banks and governments (b/c they can no longer print free money from thin air). On the other hand, silver is in great shortage due to heavy industrial usage. IF, indeed, gold becomes money again in the future, then silver will fare even better, since silver will become money too along with gold, and historically gold/silver price ratio is about 15:1 - currently the ratio is 55-60! So you win both ways.

I myself have 60% weighting in this category. Once you have too much of them, you can consider some hedging too (casinos can be another hedge too which we didn’t discuss before).

2. Reduce your debt level. This might seem contradictory, but it is absolutely critical to maintain a manageable D/E ratio for survival. I was surprised to see so many people in TZLC forum having such a high D/E ratio (some higher than 200%), as they revealed during the “Wealth Exposure” activity early this year. Consider the possibility that you might lose your job and meanwhile your house value drops 30-50% -- your mortgage bank is going to take away your house. People often mistakenly think banks lose more in these kinds of situations. Think again – you think the Morgan Family, Rockefeller Family lost more than average Americans in the 1930-1934 Great Depression? Don’t think bankruptcy will help you or will be that easy, when everyone else is trying to do the same thing at the same time. On the other hand, if you have no debt or very low debt, then get a high HELOC line. The interest rate now is still very attractive.

3. Raise your cash level. There will be dirty cheap deals down the road. I don’t need to elaborate on this one.

4. Several XDJMs here also have rental properties or are thinking buying them. My suggestion is to buy near top private universities (I was looking near Columbia, but so far the price is not attractive), since these kids’ parents will still be able to pay you. When Peak Oil kicks in with its full force, more and more people will be out of workforce, and paying rent will quickly recedes to a very low priority for many people.

5. A special note on fertilizer companies since many XDJMs here own them. True, food is going to be more and more expensive. However, I would be cautious with MON, MOS, POT etc. from now on, not only because their discounts from DCF are negative even with most optimistic estimates, but also because their priority to gain on hold of oil/NG will be very low once governments wake up on PO -- only after military, homeland security, national power grids, strategic transportations, Federal/State prisons, heating oil, and so on. So the supply of fertilizers can not grow 20-30% every year. In other words, the terminal growth rate in DCF model for these fertilizers will have to shrink dramatically. The food will have to be grown with man power. I will own DBA or farmlands directly.

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