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by Gerald T. Agnew


It is becoming more and more clear that if we have not reached the point of maximum oil and gas production in the world, that we are fast approaching it. While it can be argued that the price of oil can rise, thus creating a favourable arbitrage for oil explorers and drillers, there are many traders and analysts (such as myself) who feel that the US economy, and by default that of The West in general, could not stand a sudden jump in price to $ 45/$60 for crude and $ 7/8 for Natural Gas. Given the degree of leverage in the US financial system (which in turn is concentrated in just one or two major institutions), it is felt that a large element of stability must be maintained to avoid the possibility of “shocks” which could cause unforeseen consequences (to put it mildly!).

I have been in the markets (principally foreign exchange and gold) since the late 1960s, so I have seen a great deal come and go. We have had more crises to beat the band, and yet when the day is done somehow we seem to muddle through. Why should things be different this time around? I feel that the difference this time is that the levels of debt are starting to make themselves felt in debating forums. When one reads that the next major debt flash point may be the First World (instead of the usual basket cases such as Argentina), one tends to pay attention! When one sees the ridiculous ease with which credit can be obtained, we also have to wonder. Lastly, when one sees that incredible sales and revenue assumptions that are routinely made by major corporations (particularly those in the US) and that these are needed to service debts that are larger than many nations GDP numbers, alarm bells should be flashing!

It is said that oil at $ 30 a barrel is enough to tip the US into recession (and this is probably the reason why a major economist said the other day that the top priority for the Bush Administration going into next year’s elections was to lower the price of energy). Indeed, when the current economic morass was taking hold two years ago there were all sorts of learned commentaries saying that oil at this level would take out so much economic purchasing power that a fresh recession (the so called Double Dip) was inevitable. Very possibly the massive degree of deficit spending by the current Administration has managed to monetise this economic shortfall to an extent, but all of this misses the point.

We must consider the supply of oil when this substance is trading at a “cheap” price of $ 30 a barrel. While some may look askance at such a comment, we chose to see what the market is telling us. It shows that despite a so-so economy (at best) the demand for petroleum products is pushing US refineries to an unheard of 96/98% operating rate. We also see that Americans are buying petrol guzzling SUVs and light trucks at a dizzying rate. Clearly the prospect of petrol prices at $US 2 a gallon and higher are not daunting would be drivers of these behemoths! Disposable income is therefore in decent supply and petrol is quite cheap it seems. We have to ask what happens to all of these monsters if petrol goes to $ US 2.50/$ 3.00 a gallon. We have to ask further what happens to the economy as a whole given that vast amounts of produce and foodstuffs, which are shipped incredible distances are now perhaps 25% more expensive. Reverse leverage is a terrible thing to behold in marketplaces!

We also note that Western capitalists, in the most amazing display of short term thinking, are trying to supply China with all sorts of automobiles. Quite how this could happen to a country with a possible market of 300-400 million possible buyers eludes us. It is not the actual delivery of the automobiles that concerns us as I am sure the Japanese will be happy to oblige, it is the question if fuel. We are currently looking at generally tight supplies of oil, and that is with OPEC pumping not that far from capacity. We also note that this state of affairs is taking place even with the US economy not doing that well. Therefore we have to ask two questions. If the US economy starts to pick up as Mr. Bush so fervently hopes, where is the extra cheap $ 30 a barrel oil going to come from to feed the insatiable American appetite for oil? The other question is where is the same oil going to come from if China decides to start buying cars? In all, we have to consider that it argues for considerably higher prices with more to come!

However, it is the food aspects of shortages of crude oil and Natural Gas that concerns us most. I farm 1200 acres of decent land in extreme Northern Alberta, Canada (we have the distinction of being one of the furthest northerly inland farms in the world) and three years ago my inputs were about $Cdn. 30/35 an acre. This year (principally because of considerably higher fertiliser prices - thank you Natural Gas!) we consider ourselves lucky if we can get $ Cdn. 70 an acre. The price of Alberta Barley has collapsed following the Mad Cow scare here a few months ago, and even though Wheat is heading higher, it is not enough to cover these costs. If Natural Gas becomes very scarce in North America (which no less a person that Alan Greenspan, Chairman of the Federal Reserve has alluded to on three separate occasions before the US Congress this year) then we simply will not be able to plant grain.

So what you may say? So Canada cannot produce grain, we can buy it somewhere else or take it from stock. Normally I would have to “reluctantly” agree with this, but not this time. The 2003 crop year world wide (the US Department of Agriculture) has been nothing short of a catastrophe. Drought in Europe and elsewhere has reduced available supplies for the third time in four years. Grain stocks are now at levels not seen since records were first kept in this category some forty years ago. There is no place else to buy grain if a major producer like Canada cannot grow in sufficient quantities next year. The situation is as serious as that. The trouble is that the public will not know about these things until they go to the grocery store and buy a loaf of bread and find that it is 50% higher. Their box of breakfast cereal (which is absurdly overpriced as it is) will go up by a similar amount and then the screaming for someone to “do something” will start. It will be too late!

The fate of the currency market also hangs on this. While China is seeing its Soy Bean crop hit by drought in the northern part of the country, the US is pressuring the Peking Government to revalue the Renminbi (CNY). We mention this because there seems to be an excellent chance that trans-Pacific trade could be disrupted to an extent if a very harsh tariff bill now before the US Congress (can anyone say “Smoot-Hawley revisited”?) and directed at China becomes law. Where the Chinese forced to lose face before the insistent American demands, then we could see a large drop in demand for US farm exports with consequent serious problems for the already strained US balance of trade. A lot of these problems tend to hang together in odd ways we find.

Be afraid for the future; be very afraid.


Gerald T. Agnew