THE COMING OIL CRISIS
THE COMING OIL CRISIS
By Dan Ackman
Forbes
January 13, 2005
The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?
That's what the future holds according to Stephen Leeb, president of Leeb Capital Management and author of *The Oil Factor* (Warner Books 2004). The result, Leeb says, will be double digit inflation -- if we're lucky. If we're not, it will be a severe depression. We asked Leeb to explain the gilding of black gold.
YOU SAY THE PRICE OF OIL WILL RISE MUCH HIGHER THAN IT ALREADY HAS. WHY?
"The problem we have is that there are 2.3 billion people in Chindia," Leeb says, using shorthand for a combined China and India. "Today, China and India use the energy-equivalent of 5.5 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."As China and India become rich nations, the demand for oil could grow at 6% per year, compared to 2% recently. Currently, the world has almost no excess supply. The planet is operating at anywhere from 95% to 99% capacity, Leen says. "There is no margin for error." The only way the system can respond is continued price increases.
HOW BAD WILL IT GET?
At the end of 1999, oil was trading for around $10 a barrel. Since then, it has risen by about 29% per year. Simply extending the trend line means that oil will be at $100 a barrel in about three years and at $160 in five years, Leeb says. If prices rise the way they have in the last year, the resulting levels will be even higher, and that's without any major geopolitical crisis in the Persian Gulf or anywhere else. "It's not a heroic position," Leeb says. "But I don't know how you avoid it."
WHAT WILL THE RESULT BE?
We'll see historically high inflation of 11% to 15%, according to Leeb. "That's not even so unusual," Leeb says. He notes that the U.S. has had bouts of inflation at that level during the two world wars and in the 1970s at the tail end of Vietnam."We're kind of overdue," he says.Economically, the U.S. is already on a kind of war footing, with the war on terror, Iraq, massive military spending and a shortage of a key commodity, specifically oil."I hope I'm wrong," he says. "I've never wanted to look more like an idiot than I do right now. But I don't see it."The "optimistic" side of the scenario is that you can live with high inflation, and even make money with the right investment strategy. Leeb favors oil stocks like ExxonMobil and BP and traditional hedges like real estate, and is especially high on oil service stocks like Schlumberger and Transocean.
WHEN AND WHY WILL IT BOTTOM OUT?
"I don't see it bottoming out soon," he says. "I think it's a decade- or generation-long problem. A depression would stop it. But as long as the Federal Reserve keeps real interest rates negative, that can be avoided."The better outcome may be that "as energy prices continue to rise, we'll organize a worldwide effort to develop alternative energies," Leeb says. "Maybe that will even bring the world together."
http://www.forbes.com/business/2005/01/10/cx_da_0110doomoil.html
DOOM FOR THE DOLLAR AND EVERYTHING ELSE
By Dan Ackman
Forbes
January 10, 2005
NEW YORK -- The stock market is up and economic growth has been steady, if unspectacular. But, an increasing number of economists are seeing serious storms build on the horizon. They point to ever-growing federal budget deficits, a record current-account deficit, increased consumer debt, a real estate market that looks like a bubble ready to burst, a surge in personal bankruptcies and the prospect of inflation.Meanwhile, interest rates are on the rise, and if they increase much more, many of these problems could get dramatically worse.Doomsayers tend to be ignored -- until it's too late. This week, we give voice to five prophets of doom, starting with Peter Schiff, CEO and chief global strategist of Euro Pacific Capital.Could the falling dollar mean we're in for a major financial disaster? He thinks so.He has been warning about the currency's fall for a while now. Even though it lost a third of its value in the last two years against the euro, he believes it will decline even further. But, the dollar's fall is more a symptom than a cause. The real problem is that the U.S. is producing too little -- and spending too much -- and the result is likely to be far worse than the happy-talkers on Wall Street will ever let on."We are going to go through one of the most trying financial times in U.S. history, including the Great Depression," Schiff says.
WHY SHOULD WE CARE ABOUT THE FALLING DOLLAR?
"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.As American industry has lost productive capacity, it has become increasingly difficult for the U.S. to produce enough -- and sell enough -- to reduce that debt. The massive U.S. trade and current-account deficits, now at around 6% of the gross domestic product, mean that non-Americans are exchanging consumer goods today for consumer goods they will obtain in the future.The U.S. doesn't have the ability to supply those goods, Schiff says. "We are using dollars that we print to exchange for goods that we don't produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars will continue to fall."
HOW BAD WILL IT GET?
"Very bad," Schiff says. The dollar will fall a lot lower than it already has -- dropping by perhaps 50% against the Japanese and Chinese currencies. How will the government respond? Could efforts to forestall the currency decline have a perverse -- and ultimately negative -- effect? No matter what the outcome, Americans will have to consume a lot less and save a lot more. Spending on cars, clothing and electronics will all drop dramatically -- perhaps right out of the economy.
WHAT CAUSED IT?
"We are a society that has lived beyond its means for a long time," Schiff says, adding that while the trend has been evident for two or three decades, "in the last five years, it has gone off the deep end." Americans are relying on foreigners more and more to produce goods, rather than producing them themselves.
WHAT WILL THE RESULTS BE?
Americans will have to restrict future consumption or default on debt, whether directly or indirectly."I think something in the near future -- maybe early this year -- will make us realize the error of our ways," Schiff says. "Our creditors are going to stop. They are going to bite the bullet," which means realizing we can't repay them in the way they want and expect.They will take a huge loss, but it will be necessary to check an unsustainable process. At that point, the people of Japan and other Asian nations will be able to consume a lot more, because they will send less of what they produce to the U.S."They will not be producing for us; they will be producing for themselves."Meanwhile, to attract savings from abroad, the U.S will have to increase interest rates into the double digits. This will cause a serious wave of defaults in the real estate market and elsewhere."The further into the future this starts, the worse it will be for Americans," Schiff says.
WHEN AND WHY WILL IT BOTTOM OUT?
"I don't know. A lot will depend on the government," Schiff says. The debt to Japan, China and others has been building for a long time. The process will also take some time to reverse. But, the analysts on Wall Street don't want to say this."They pull their punches, because they don't want to be marginalized. But, the fact is we owe Japan a fortune; it's not the other way around." And that, Schiff says, means the dollar will be heading south for a while.
http://www.forbes.com/home/economy/2005/01/10/cx_da_0110doomdollar.html
In late October, a study was published in the *Lancet*, a prestigious British medical journal, concluding that about 100,000 civilians had been killed in Iraq since it was invaded by a United States-led coalition in March 2003. On the eve of a contentious presidential election -- fought in part over U.S. policy on Iraq -- many American newspapers and television news programs ignored the study or buried reports about it far from the top headlines. [NOTE: The study in its entirety was posted immediately on the UFPPC web site:
(http://www.ufppc.org/content/view/1656/)]
By Dan Ackman
Forbes
January 13, 2005
The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?
That's what the future holds according to Stephen Leeb, president of Leeb Capital Management and author of *The Oil Factor* (Warner Books 2004). The result, Leeb says, will be double digit inflation -- if we're lucky. If we're not, it will be a severe depression. We asked Leeb to explain the gilding of black gold.
YOU SAY THE PRICE OF OIL WILL RISE MUCH HIGHER THAN IT ALREADY HAS. WHY?
"The problem we have is that there are 2.3 billion people in Chindia," Leeb says, using shorthand for a combined China and India. "Today, China and India use the energy-equivalent of 5.5 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."As China and India become rich nations, the demand for oil could grow at 6% per year, compared to 2% recently. Currently, the world has almost no excess supply. The planet is operating at anywhere from 95% to 99% capacity, Leen says. "There is no margin for error." The only way the system can respond is continued price increases.
HOW BAD WILL IT GET?
At the end of 1999, oil was trading for around $10 a barrel. Since then, it has risen by about 29% per year. Simply extending the trend line means that oil will be at $100 a barrel in about three years and at $160 in five years, Leeb says. If prices rise the way they have in the last year, the resulting levels will be even higher, and that's without any major geopolitical crisis in the Persian Gulf or anywhere else. "It's not a heroic position," Leeb says. "But I don't know how you avoid it."
WHAT WILL THE RESULT BE?
We'll see historically high inflation of 11% to 15%, according to Leeb. "That's not even so unusual," Leeb says. He notes that the U.S. has had bouts of inflation at that level during the two world wars and in the 1970s at the tail end of Vietnam."We're kind of overdue," he says.Economically, the U.S. is already on a kind of war footing, with the war on terror, Iraq, massive military spending and a shortage of a key commodity, specifically oil."I hope I'm wrong," he says. "I've never wanted to look more like an idiot than I do right now. But I don't see it."The "optimistic" side of the scenario is that you can live with high inflation, and even make money with the right investment strategy. Leeb favors oil stocks like ExxonMobil and BP and traditional hedges like real estate, and is especially high on oil service stocks like Schlumberger and Transocean.
WHEN AND WHY WILL IT BOTTOM OUT?
"I don't see it bottoming out soon," he says. "I think it's a decade- or generation-long problem. A depression would stop it. But as long as the Federal Reserve keeps real interest rates negative, that can be avoided."The better outcome may be that "as energy prices continue to rise, we'll organize a worldwide effort to develop alternative energies," Leeb says. "Maybe that will even bring the world together."
http://www.forbes.com/business/2005/01/10/cx_da_0110doomoil.html
DOOM FOR THE DOLLAR AND EVERYTHING ELSE
By Dan Ackman
Forbes
January 10, 2005
NEW YORK -- The stock market is up and economic growth has been steady, if unspectacular. But, an increasing number of economists are seeing serious storms build on the horizon. They point to ever-growing federal budget deficits, a record current-account deficit, increased consumer debt, a real estate market that looks like a bubble ready to burst, a surge in personal bankruptcies and the prospect of inflation.Meanwhile, interest rates are on the rise, and if they increase much more, many of these problems could get dramatically worse.Doomsayers tend to be ignored -- until it's too late. This week, we give voice to five prophets of doom, starting with Peter Schiff, CEO and chief global strategist of Euro Pacific Capital.Could the falling dollar mean we're in for a major financial disaster? He thinks so.He has been warning about the currency's fall for a while now. Even though it lost a third of its value in the last two years against the euro, he believes it will decline even further. But, the dollar's fall is more a symptom than a cause. The real problem is that the U.S. is producing too little -- and spending too much -- and the result is likely to be far worse than the happy-talkers on Wall Street will ever let on."We are going to go through one of the most trying financial times in U.S. history, including the Great Depression," Schiff says.
WHY SHOULD WE CARE ABOUT THE FALLING DOLLAR?
"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.As American industry has lost productive capacity, it has become increasingly difficult for the U.S. to produce enough -- and sell enough -- to reduce that debt. The massive U.S. trade and current-account deficits, now at around 6% of the gross domestic product, mean that non-Americans are exchanging consumer goods today for consumer goods they will obtain in the future.The U.S. doesn't have the ability to supply those goods, Schiff says. "We are using dollars that we print to exchange for goods that we don't produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars will continue to fall."
HOW BAD WILL IT GET?
"Very bad," Schiff says. The dollar will fall a lot lower than it already has -- dropping by perhaps 50% against the Japanese and Chinese currencies. How will the government respond? Could efforts to forestall the currency decline have a perverse -- and ultimately negative -- effect? No matter what the outcome, Americans will have to consume a lot less and save a lot more. Spending on cars, clothing and electronics will all drop dramatically -- perhaps right out of the economy.
WHAT CAUSED IT?
"We are a society that has lived beyond its means for a long time," Schiff says, adding that while the trend has been evident for two or three decades, "in the last five years, it has gone off the deep end." Americans are relying on foreigners more and more to produce goods, rather than producing them themselves.
WHAT WILL THE RESULTS BE?
Americans will have to restrict future consumption or default on debt, whether directly or indirectly."I think something in the near future -- maybe early this year -- will make us realize the error of our ways," Schiff says. "Our creditors are going to stop. They are going to bite the bullet," which means realizing we can't repay them in the way they want and expect.They will take a huge loss, but it will be necessary to check an unsustainable process. At that point, the people of Japan and other Asian nations will be able to consume a lot more, because they will send less of what they produce to the U.S."They will not be producing for us; they will be producing for themselves."Meanwhile, to attract savings from abroad, the U.S will have to increase interest rates into the double digits. This will cause a serious wave of defaults in the real estate market and elsewhere."The further into the future this starts, the worse it will be for Americans," Schiff says.
WHEN AND WHY WILL IT BOTTOM OUT?
"I don't know. A lot will depend on the government," Schiff says. The debt to Japan, China and others has been building for a long time. The process will also take some time to reverse. But, the analysts on Wall Street don't want to say this."They pull their punches, because they don't want to be marginalized. But, the fact is we owe Japan a fortune; it's not the other way around." And that, Schiff says, means the dollar will be heading south for a while.
http://www.forbes.com/home/economy/2005/01/10/cx_da_0110doomdollar.html
In late October, a study was published in the *Lancet*, a prestigious British medical journal, concluding that about 100,000 civilians had been killed in Iraq since it was invaded by a United States-led coalition in March 2003. On the eve of a contentious presidential election -- fought in part over U.S. policy on Iraq -- many American newspapers and television news programs ignored the study or buried reports about it far from the top headlines. [NOTE: The study in its entirety was posted immediately on the UFPPC web site:
(http://www.ufppc.org/content/view/1656/)]
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