Where Crude Oil Heading For?

Hantu Laut

Have we reached 'peak oil'? Would the world's industrial output come to a grinding halt when we ran out of fossil fuel.

Peak oil is not about absolute depletion of crude oil and the world running out of it.It is a theory of whether oil extraction have reached its peak and in terminal decline as featured in the 'Hubbart Curve'.

Below is Hubbart's theoretical chart

Click to read:

From the said chart he theorised that oil extraction would decline to zero by the year 2200.

Will it happen? I would think so, maybe, not on the exact Hubbart's time frame, but the day would come when mother earth would run out of fossil fuel. I am also optimistic that by then humans would have found abundance of alternative sources of energy through technological advancement and new inventions capable of mass production of energy producing substances.

The recent high oil prices we saw this year was not the consequence of the law of supply and demand but has an added element of human greed in the form of speculation of oil futures.Again greedy speculators took advantage of this forward and futures contracts and took it to the casinos.

In 1972 the price of crude oil was around US$3.00 a barrel.During the Yom Kippur War or the Arab Oil Embargo in 1973/74 the price of oil quadrupled to US$12.00, not because of shortages but because of Arab's anger at America and the West for having sided with Israel.The Arabs put a brake on productions that increased the price.This year we saw the highest price of over US$150 per barrel fuelled by rising demands and needless to say price highly aggravated by speculations.

Prices have begun to fall over recent weeks as speculators moved out of the market in anticipation of the financial market collapse.The crude oil market is now finding its own price level.

Below is a chart showing the prices of crude between 1947 to May 2008:

Click to enlarge

With increasingly high unemployment in the developed economies, industrial outputs are going to plummet to a low level and consumption of energy would likewise follow.

As more people lose their jobs, businesses going into bankruptcies and reduction in global industrial outputs the demand for oil would show a sharp decline.Consumption would continue to decline as long as the global economy continue to shrink which is expected to continue well into 2009.With reduced global demand prices are expected to fall below US$50 a barrel before the year end.

If the global recession become hard-headed and carry on without any sign of recovery than prices may even drop below US$30 per barrel by the first-half of 2009.

It may sound like good news but it is not.In fact it is a scary scenario, it means the global economy is in the doldrums and there would be widespread hardship among the populace of the world.

Those who have cash are kings and can go bargain hunting.

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Derivatives:Hantu Was Right

Hantu Laut

On 2nd October I wrote about the state of the American economy and the likely causes of the financial meltdown in America under my posting "American Get Screwed".

One of the reasons leading to the financial crisis was the use of financial derivatives. These are very complex financial instruments that not many investors understand the workings and risk involved.They are supposed to reduce risk but in the wrong hand,greed and overexposure could be disastrous.

There are wide range of derivative contracts traded on the financial markets based on different kind of assets and indexes.You can even have derivatives on the weather.How all these different instruments work you may have to visit the investment gurus on Wall Street(where it was invented) to explain to you.

Below is a paragraph of what I wrote on 2nd October:

"Much of the troubles started from highly innovative and risky financial derivatives, over-extended credit,over-speculation of trading in stocks and bad financial management.Some of the top CEOs in America are undeservedly overpaid with some having pay packages running into hundreds of million.Their over-indulgence in highly speculative financial derivatives were the cause of the meltdown"

Many of you would still remember Baring Bank and its rogue trader Nick Leeson who speculated in derivatives trading that brought the centuries- old bank to its demise.That's what derivatives can do to banks,corporations or anyone who are greedy,careless or have no understanding of the mechanics of these complex instruments.Former Federal Reserve Chairman Alan Greenspan was a great believer and supporter of these beastly business tools.

Lehman Brothers and Merrill Lynch were creators of credit derivatives.These derivatives are the sweethearts of investment banks and brokerage houses by selling them and making huge upfront fees and premium payments.Another victim,AIG jumped on the bandwagon and went overboard in derivatives involving the sub-prime market.

Below is an article on the subject that appeared in the New York Times yesterday, 8th Oct:

By PETER S. GOODMAN

Published: October 8, 2008

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Read more....

The Asian markets are going to take a big tumble today because of what happened on Wall Street yesterday.The Dow was down 7.3% in yesterday's trading.

The whole world is in financial turmoil.Malaysia is still in a slumber.More concerned with politics than state of the economy.The KLSE is the only exchange that is not in sync with the other markets.Are we fundamentally strong or are we living in a state of denial.Watch the market next week.

Next post:'Where Crude Oil Heading For'

Bad News And Good News:The World In Turmoil

Hantu Laut

The Asian stock markets tumbled yesterday .The Japanese Nikkei went down 9.38% ,Hong Kong's Han Seng down 8.17% and the biggest fall was Jakarta with over 10%.

Surprisingly, while all other Asian markets went down quite substantially the KLSE went down only 2.71%.Is our fundamentals really that strong and investors confidence unshaken in spite of all the bad news on the global financial markets? Is the government trying to prop up the market to avert panic selling? If that is the case how long can the government continue to do so and where are the funds coming from? Let's hope it is not our money or worse still the EPF money.

In spite of interest rate cuts in most major markets the world's stocks markets continue to tumble.The Dow was down 2% yesterday.The Dow has now fallen 35% from its highest level a year ago.The US rescue package will take some time to make an impact on the market.The Moscow stocks market went down 14% and suspended its trading.

Iceland says the government is bankrupt.It got US$5.4 billion loan from Russia and blamed hedge funds for its financial woes.Sounds familiar.

So Mahathir wasn't wrong back in 1997 when he blamed the hedge funds especially George Soros for the Asian financial crisis.There is one thing we must all know, the capitalist world is greedy,competitive,cruel and sad to say, have no space for social conscience.What happened in America and the resulting crisis is because of freedom and laissez-faire gone amok.De-regulation of the financial system and businesses because the Westerners think they are more responsible,therefore, need not be regulated.

I must say again Mahathir was ahead of his time when he said" the Jews used proxies to fight their wars".Take a look at the 2 presidential candidates' campaign in America, how both of them clamoring to suck up to Isreal by refering to it as their main and strong ally in the Middle East.

There is 50/50 percent chance George Bush will bomb Iran before he leaves office in January 09, especially if Obama won the presidential election, leaving him to pick up the pieces.

Due to high volatility and high risk of the markets investors are expected to dump more stocks and move to safer low-yield government bonds and probably gold.

Among the waves of bad news coming from every corners of the world at least there are two good news for Malaysians, the prices of crude oil have tumbled to below US$90 a barrel and Prime Minister Abdullah Ahmad Badawi has confirmed not contesting the Presidency of UMNO in March 09 meaning he is giving up his premiership.

Now, suddenly the politicians are full of praises and accolades for the Prime Minister on his act of courage and responsibility ??

As usual the oppositions never had anything good to say concerning him of the good news or bad, especially those coming from the Indian community, who probably are still sore with him for locking up the Hindraf's activists.Here's what Perak DAP Vice-Chairman M.Kulasegaran said "what surprises me is why he is waiting till March to quit". Give him a break! Haven't you guys given him enough bashing already.

Most Malaysians are only interested in two things, politics and price of petrol.Others, including the world financial crisis, which can make their lives even more miserable can take a back seat.Oh! One more thing Malaysians also love English and European football, the bad news is, you may soon not be able to watch your favourite teams if they fall victims to the global financial meltdown.The hottest team and favourite with many Malaysians, Manchester United owed the bank a whopping RM4.6 billion.

Let's watch the KLSE today whether it will behave abnormally from other markets. If it does than you know for sure who is throwing good money to chase bad money.

Bush's America Busted The World

Hantu Laut

As I have said earlier in my article 'American Get Screwed' it is still a big question mark whether the US$700 billion is sufficient to bail out the sick US economy and predicted that the shock waves would hit the shores of other countries soon.It has begun and is only the beginning.The real tsunamis have not started yet.

The domino effect will certainly take place as many of the markets are indirectly links through many of the huge hedge funds that placed their portfolios in the global baskets. Wall Street has always, for some unknown reasons, been the barometer for other markets to follow. It's the triggering mechanism for boom or bust.

It is not the collapse of the stocks markets that is most worrying and one that could cause major catastrophe, it is the banking system that would decide whether we would go into a major financial disaster or not.As long as the banking system is sufficiently liquid the world major economies would be safe.If it is not than a major catastrophe is not a figment of one's imagination.

The collapse of Lehman Brothers was most unexpected and the US government has allowed it to be the sacrificial lamb and sent it to the grave to save some other bigger monsters. The unprecedented major equity taking in AIG by the US government could be a trend of things to come as it implements it rescue plan.The government could end up becoming reluctant shareholders in many major corporations.

In 1979 when the US Congress agreed to bailout Chrysler there were major outcry, protest and objection from the business community and Lee Iacocca ridiculed by the press for his effort to convince Congress.The rescue package was only US$1.5 billion then, not in cash or equity, but in loan guarantees and was paid back by Chrysler ahead of schedule. Today the enormity of the rescue package and the number of companies to be rescued is mind-boggling and nobody blamed or ridiculed George, his Treasury and Federal Reserve for the failure to regulate the banking system.Because they all wanted George Bust to get the money for them so they wouldn't go bust.

The man who now handles the rescue package is Henry Paulson the Treasury Secretary who gave the US$700 billion to a 35-year old wiz-kid from Wall Street to head and manage the rescue plan.

The de-regulation of the of the financial system was the biggest culprit to this messy affairs for which the Bush Administration and his financial regulating arms should take full responsibility.As President he had failed to take action to reverse the laissez-faire and take immediate action to regulate and stop the greed and excesses in the system.

Although it may be too late to lay the blame, the American people should be made to know that they have a President who are more prepared to show the world the military might of the nation by going to wars at the expense of the American taxpayers and the innocent lives of non-American people abroad.

The next US President that carry on the same policy would also fail to arrest the economic problems as what had happened under Bush's policies.He spent more time with the generals than with the economists and failed to see the even bigger danger than Osama Bin Laden and his band of terrorists, the internal threat of a failed economy that can bankrupt the nation.

With banking failures occurring in almost every major economies the doom scenario could only be averted if those governments took immediate measures to save the financial system from breaking down.

The financial meltdown in the West may not necessary affect the Asian financial markets in the presence but would certainly affect the GDP growth in most Asian countries that have huge export bills to the West.The problem that can eventually affect Asian major economies is if the West is unable to recover and its recession turned to depression.

A loss of confidence in the banking system and attempts to taking money out of it by panicky depositors causing serious run on banks in any of the major economies could contagiously spread panic and run on the entire banking system of the world.

By then,the US Government can keep on printing the worthless 'greenback' and bankrupt every nation on this earth.

When that happened, only God and Robert Mugabe can help us.