Warren Buffet asked about the future for this country

[Fredledingue]

Back to Warning Buffet, what I don't like is that he (and others) are talking gloom and doom about the future of the economy without explaining why.
They don't give a clue.

Of course for the man of the street, inflation, less jobs, homes for sale etc is already giving a atmosphere of recession.
But will it last? Will the US fall into poverty?
I don't think so. Maybe it's just time for poeple to spend less, to stop "using their house as an ATM machine", to realize that renting a 3 rooms flat is more within their budget than buying a house.

[Airelon]

(SUCK! It won't let me resize the pics)

I love the dialoge and interchange, but respectfully, I believe there is a few pieces of data you may be overlooking.

1) Demand. Demand has literally, gone through the roof. And it's gone through the roof the country with the largest population on the planet. China. Rather than just 'wonder' about what the demand actually is? Let's look at the data.

Now just look at those numbers. The two countries with the largest populations, are seeing the biggest increases. China and India nearly have 2 BILLION people. If they see just a 2% increase in demand? We're screwed as far as demand goes, without even considering our own growing demand. And it's already occured.

This isn't about cars. Oil runs civilization. Oil produced the computer you have, the wallpaper or paint in your room. It's on the road that you drive on. Oil is in everything. And the more the infrastructure of a country grows, the more oil it needs. This has very little to do with automobiles (as far as demand goes)

2. Inflation - Here too, you're forgetting something. Interest rate cuts fuel inflation. A weaker dollar, means your dollar is worth less. Go back and look at what happened to the price of oil the day of each interest rate cut. In fact, look at all of the commodity prices on the days following interest rate cuts. It's just economics 101. A weaker currency can't buy as much. The Fed had to weaken the dollar, in order to get out of crisis (You have no idea how many people I meet that do not even know what an "Interest Rate Cut" is. They honestly reply that it's something that makes the stock market go up - I kid you not. ) Unfortunately, that means that everything becomes more expensive.

3) Geopolitical scene. Go back and listen to FRO's latest shareholders presentation. These are the guys shipping the oil. Venezuela refuses to even ship to the U.S. any longer. Incentives are being given to the shippers, to ship to the east (China and India), rather than the west. Nigeria is a mess (Trust me, I'm viewing that situation closely, as I was supposed to go to Kenya in 2009). And Iran . . . is well . . . Iran. This entire situation is why the U.S. is just getting away from OPEC dependence. But that process is slow.

4) Peak Oil Theory. Now the frightening thing about Huberts work? Is that to date? It's been uncannily accurate. (if you're not familiar with it, I'll include a picture below, along with actual data)

The U.S. peaked in 1970.

Now the real problem, is the infrastructure growth continues forward. Exactly as Hubert predicted. Almost to the penny. It's eery.

As far as speculation?

The above is actual data. It's the economic fundamentals. People hear antectodal stories about "All the oil that's out there that hasn't been tapped yet", but they never see hard data. The above is hard data.

I cannot believe how many people I've met in the past week, that honestly believe that speculation consists entirely of buying, hoping the price will rise, and selling later for a profit. They truly believe that's what speculation consists of. That's why they believe that oil is due to speculation. When in actuality, speculation is keeping the price down. That's economics is as basic and fundamental that goes back to the days of Adam Smith and "The Wealth of Nations"

[Novice Investing]

Hi, Airelon:

There might be a slight correction on the graph of the US Oil production. EIA website shows the US producing ~ 8 Million bpd while your graph shows downward trend.

http://www.eia.doe.gov/emeu/internat...relsperDay.xls

Anyway, very good discussion on oil. I would like to add a minor thing about geopolitical. Current administration stance on playing hardball to several rogue contries is applaudable but this contributes to a higher oil price as well. In the logistic industries, it is most efficient to consume matters (oil, wheat, gas, other commodities) closest to you. By playing hardball with Venezuela for example, we need to import oil further away, say in Middle East. What is the freight difference of ME-Texas and Venezuela-Texas? If you took the weighted average out, considering that Venezuela used to supply 14% of our oil, it may give you a figure of $ 5-$10 per barrel of additional cost.

Same thing with Iran. While it used to supply say our allies in Europe (I don't have data in this. Just a thought), it now has to sell its oil to say China which adds additional cost for the Chinese as well. Both producers and consumers are incurring additional cost. As a result, Iran would need a higher price to gain incentive to produce more, etc. etc.

If anyone have any data the cost of shipping this oil from various region, we may get a bigger picture how much of the US international policy affects our price of oil.

[Airelon]

Yeup. Enjoying the interchange all around, and hey - differences are what makes the market interesting eh?

Honestly, I try to steer clear and stay out of politics. But you hit on something that I agree with, and I just can't wrap my head around. Oil is at $135.00 a barrel. Ok, so Chavez is just absolutely insane. Guy outright nationalizes .... excuse me, did I say nationalizes? I meant steals companies from countries like Mexico. So he's obviously insane and is just a thief, and there's not a lot you can do with a nut like that.

So that takes one huge supplier (Before Canada came along, they were our #1 supplier of Oil) in OPEC, pretty much out of the picture. Not a lot can be done with people who are delusional like Chavez. Besides, Venezuela peaked and has been producing less and less since 2001. But why in the name of God would you do everything to piss off the rest of OPEC?

Then I hear people say: "The U.S. is just over there [the war] for the oil"

What? If they were so concerned about the oil - they wouldn't be agrivating a country like Iran whose religious clerics try to teach people (they still do this) that we are the Great Satan; who also by the way - truly rule the country (The Supreme Leader in Iran is a religious cleric. The President pretty much is the Supreme Leaders puppet). The Iranian people, left to their own, has no problem with the U.S. They're a fantastic people, with an unbelievable cultural heritage. So here's an idea - let's just piss them off at every turn, and talk to them like dogs with Oil at $100 a barrel?

What? Am I the only one that doesn't see that logic?

Then Nigeria literally BLOWS up. A country that was once the picture of what stability could be in Africa. All of a sudden (TIA) they just lose their minds. And the only help they receive is a few words in what is almost a by-line? This is a major player in the world Oil scene. And they are not given that respect.

I have to thank you for that spreadsheet, and I'm going over the data now. Just on a cursory glance though, the first thing I notice is that we're still past peak. By the data on that spreadsheet - our peak was in 2000, at 9,057.78 (thousand barrels per day)

Here's the problem once you hit peak. It's not that there isn't new oil out there to be discovered. I often wonder what's truly in the arctic and elsewhere. The problem, according to Hubert, is that it isn't discovered yet. But the infrastructure continues to grow. And grow. So we discovers 2 to 4 trillion barrels in Canada in the pits. More than the Middle East ever had. But there's a problem

It was recently discovered. And infrastructures, worldwide - continue to grow. And then they have to survey what's there. And the demand is still growing. And then they have to open it up to companies to extract it. And demand is still growing. Then the company has to decide what technology to use, to get it out of the sand. Demand? Still growing. Then the company gets onsite, and starts building extraction facilities. Still no oil out of the ground yet. But demand? Still growing.

The problem, is that it takes so long to get up and running when new oil is found, and according to Huberts work, a point is reached where no matter what Oil is found - it'll never be able to catch up to demand. Then when it finally does - the demand only increases.

I don't think man has the smarts to effectively manage his own problems. That's always been our downfall. We then try biofuels. Which only exacerbates the inflation with food. Which causes further inflation. It's like a spiral.

What might help - is technology that helps reduce the dependence on oil for everyday infrastructure growth. Everyone looks at the automobile. But the automobile is just one aspect of oil dependence.

[Fredledingue]

Airlon,
Did your Hubert predicted when oil price will become so prohibitive that demand for it will decrease? No, but I did and I say it's now.

If I started to be careful at how much I drive, if truck traffick is already down 13% (yoy) in the US, then... what about the Chinese?
If it's too expensive, they will cut it, and it's valid for asphalt and linoleum too.
The only reason why oil stands at these price levels is that those who use it can afford it. Once they can't afford it anymore they will be forced not to use it.
Chinese will take their old bike and europeans will take the train (on electrified lines).

[Novice Investing]

In general, the cost of producing something should go down over time. (Inflation-adjusted). This holds true for oil. We didn't have the technology to drill offshore. Now, we do. Oil sand? Still too expensive too extract. It will be cheaper sometime in the future. True, oil price needs to go up to provide incentive for this kind of research but even without the oil spike, this level of efficiency will continue, albeit slower.

Energy is abundant. It cannot be destroyed nor created. It just exists some form or another. To satisfy for all of human kind electricity consumption, it takes only 7% of all of europe continents to be covered with solar panel. Once the technological breakthrough is obtained, the cost of energy from solar will go down. Same thing with wind. The problem with oil is that it is limited. Thus, while the cost of extracting oil becomes cheaper, those cheaply-located oil is gone. As a result, I suspect that in the long run the cost of extracting oil merely keep pace with inflation, as opposed to going down. Same thing with infrastructure. Cost of transporting oil should go down over time. But as we drill further through the offshore and arctic, the cost of transporting & distributing oil should stay constant inflation-adjusted.

Having said that, let's look at oil at $ 20 in the 2000s and $ 130s now. Does that translate into fair value? I don't have the demand picture with me. The one spreadsheet reference I had merely mention supply. But let's assume demand ~ supply. This is based on the fact that if supply < demand, we would have physical shortage of oil throughout the intended period. The intended period here is 2000-2007 and I don't see any oil shortage for the past 7 years. Supply has grown from 77.76 M BPD in 2000 to 84.6 M BPD in 2007. An increase of 9% over that period of time. Let's say that demand is much much bigger than that and the world is replenishing its oil inventory through out this 8 years. I would put 20% growth during that period.

Now, correct me if I am wrong, but in the long run, supply-demand curve will be elastic. Does 8 years is a long enough period? I don't know, perhaps it is not long enough and we need to wait for say 10 year period. But if supply-demand curve is elastic, then oil price should at least be 20% higher instead of hundred of percent higher. Add in our dollar depreciation of 60% (from EUR:US = 1, to EUR:US = 1.6) currently. Further, Adjust inflation during the 8 year period (say 4% per year compounded), then you add another 37% price to oil. Where would oil be?

2000: $ 20 per barrel
Demand increase: + 20%
Dollar depreciation: + 60%
Inflation: + 37%
2007-2008 = $ 52.6 per barrel.

[Airelon]

Actually, Hubert did already speak to all these subjects. And again, it's frightening how accurate he was. In the 1970's he mentioned that OPEC would try to delay peak oil, by claiming that they felt that no further increase in production was really necessary to try to delay the peak moment. Sound familiar? He proved that once oil is discovered, and considering the Energy Invested to Recover Energy (how many barrels of oil do you have to spend to extract oil) - it takes about 25 years for newly discovered oil to really make a difference in the world economy.

This isn't about the cars you drive. That's just the most immediate thing we see on a day to day basis. This is about running our factories. Heating our homes. Creating and repairing roads. This is about running civilization. And time is the one thing that we dont have.

[Fredledingue]

Airlon,
I don't think our civilisation should be based on oil.
If we don't find replacement for oil for most of its current use (car spend 70% of global oil) that will bethe end of us.