Monday, July 7, 2008

Katie says...

Oil is in the mother of all bubbles prediction and will crash. Still sticking to that prediction. I bet on it crashing by late July. So far that bet has been a bad one, and I will lose some money. No, I take that back, I will lose a lot of money. Can't win 'em all and what the hell, you need a nice solid kick in the ass every now and then just to keep you humble. Oil, you have kicked me and kicked me hard. Thank you sir, may I have another? And just to show that I am just a little loco, I have more or less gone double or nothing on oil crashing by buying October puts.

I have also been buying up some SPY and QQQQ. These indexes have been whacked badly. I've been buying this stuff into my IRA and SEP. So it's long term. I may well miss the bottom but I figure 20% down is good enough for a 25 year horizon. And it's also part of the 'if they say sell I buy and vice versa' strategy that's been working fairly well for me over the past couple of years.
For housing that capitulation has not come yet. The so-called experts have been calling bottoms forever. I have yet to see a consensus that buying real estate is a bad idea, period. That is kind of the consensus now with equities. Not universal, but the MSM is saying it and that's good enough for me. Juan 6-pack listens to what Katie Couric tells him. And right now Katie is very bearish on stocks. Katie however still thinks housing is the greatest investment ever, and hence I am still not ready to buy real estate. Probably another 9-12 months until Katie gives me the green light to buy, buy telling Juan not to buy.

2 comments:

Anonymous said...

I'll not say that you're wrong, but rather will ask you to look at the other side of the oil issue. Currently the world is producing less oil than it did in 2005. In 2005, world oil production peaked according to the numbers. The reasons are many-fold, however the single largest reason is aging super-giant oilfields in the Middle East. The amount and size of new fields being found is not enough volume to replace the current usage. When you have a product that is in high demand and production is unable to keep up with that demand, the sell price goes up (unless the government regulates it).

There is only one thing that can cause this bubble to pop: demand destruction. In order for that to happen, the economies of many countries have to shrink by a large margin (because in today's world, the ultimate worth of an economy is based on how much natural resources it _consumes_).

Much of this view depends on if you think the oil companies are purposely holding production low. After a few years of analyzing the production data from fields, I do not see this in any way, shape, or form, but then again I'm not omnipotent.

We've just about used up all the good high quality oil that's easy to get. Nearly verything that's left is heavy or sour (lots of undesirable chemicals). It takes more energy to refine those heave and sour crudes, which means there is a fraction less usable output (with the same amount of energy input). The ratios are also different. You get more diesel from a light, sweet crude than from a heavy or sour crude. Most refineries are well fitted for light, sweet but not for heavy, sour (requires cracking capacity). The gas prices have steadied because people are driving less. The diesel prices, however, are still going up. The percent increase of gasoline versus diesel is quite a bit different. There is more inflexibility with diesel than there is with gasoline, meaning demand has lessened somewhat for gas, but very little for diesel. And since the capable refineries use heavy/sour crude when they can (costs them less, makes almost the same amount of gasoline, they make more money, but at the same time they produce less diesel per barrel of oil) that means that the production rate of diesel is not tracking exactly the production rate of gasoline. The inflexibility of diesel demand then is doubly hard to swallow.

Oil is interconnected with everything we do. The production and refinement of oil is a complicated process with all kinds of inter-related variables. Pointing the finger at one small aspect of the overall picture does not mean the whole situation is bad. What's the result of high oil prices? Conservation, or at least no longer blindly consuming more because it's so cheap. Now you _really_ have to weigh the costs into your business plan. And that, IMHO, is a good thing.

I hope I'm wrong. I hope that production can be increased (sucks to be our kids though) and our world of easy living and burn anything that used to move or grow will continue...for a few more years.

Anonymous said...

Oil was $10 in 1998. It is $140 10 years later. Supply didn't shrink 1400% and demand didn't increase 1400%. Something else is causing the price spike and whatever that something is (Iran, Iraq, $US devalued, etc) is a temporary situation that does not warrant such high oil. What you're describing is the justification for $70 or $80 oil, but not $140.