Rapidly Receding Reserves

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The recent surge in global oil supplies, coupled with sluggish global demand, has sent oil prices to a multi-year low and generated a gusher of thinking about oil prices. Some commentators (click HERE) suggest that the price plunge will continue until oil reaches its marginal cost, approximately $20/barrel. Others (click HERE) see oil prices rebounding in 2015 on the back of a stronger global economy. Ask five economists or investors about the future price of oil and I suspect you’ll get seven different answers…but virtually everyone will agree that understanding the cost of production is critical.


So what? The laser focus on production is missing an important underlying dynamic. To better grasp long-term oil price possibilities, we need to think about reserves, a topic that receives inappropriately little attention. Even those focused on reserves tend to analyze only where they are located and fail to incorporate that reserves are price dependent.  In fact, the Society of Petroleum Engineers defines “reserves” (click HERE) as oil that is “commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations.”  Wouldn’t current economic conditions include current oil prices?

Yet mainstream analysis fails to consider oil prices in calculating reserves. Run a quick Google search of “global oil reserves” (click HERE for current search results) and you’ll find plenty of information, graphs, and interactive maps. Not one of the hundreds of links that I clicked discussed oil reserves evaporating during the second half of 2014. Yet we know with reasonable certainty that projects exist that are no longer commercially viable at today’s prices. Given the large drop in price, billions and billions of barrels of oil reserves have disappeared.

To understand the impact of this reframed perspective, imagine how you might react if media headlines were “Global oil reserves plunge, accelerating fears of forthcoming supply pinch” instead of “Surging production sends oil price plunging.”   These two statements are effectively two sides of the same coin. Time to flip the coin.


Egg Supplies (and Prices) Scrambled by California Regulation


On January 1st, California’s Proposition 2 and Assembly Bill 1437 related to egg production go into effect. The regulations mandate that egg-laying hens be given adequate space to lie down, stand up, extend their wings, and turn around. 116 square inches—the approximate footprint of a MacBook Air—is apparently adequate to do so, ~75% greater than the current standard which provides for the ground space equivalent of an iPad. The regulation only applies to shell eggs sold in California and does not apply to liquid eggs or egg products.


So what? Research conducted at California Polytechnic State University (click HERE) suggests that the new regulations imply a 40% reduction in birds within existing facilities (click HERE). Given that California imports more than 30% of its shell eggs, the regulations are likely going to impact the entire US egg industry. According to Bloomberg (click HERE), there are approximately 303 million egg-supplying hens in the United States. Experts estimate that at least 10 million hens will need to be culled immediately, generating a large and powerful supply shock. If every state adopts comparable regulations and if every facility is like those at Cal Poly’s Poultry Center (granted, these are two VERY BIG “ifs”), the industry would need to cull more than 100 million hens. Yikes!

On the demand side, animal protein consumption continues to boom (see my comment “King Morocco” HERE), making eggs an attractive alternative to increasingly expensive beef, pork and even chicken. In emerging markets, egg consumption has increased sevenfold over the past 40 years. The Egg Industry Center estimates that Americans will consume 266 eggs per capita next year, up from ~261 this year. Projections for emerging market demand indicate continued growth.

While higher egg prices seem virtually certain, there is the possibility that the egg industry opts to simply redirect supply to states other than California, creating a supply surplus and lower prices for consumers in other states. Or what if liquid eggs become the norm in California, allowing producers to avoid the costly regulations?  And even if prices do rise suddenly, won't the industry quickly adjust to meet constantly rising demand?  Pardon the pun, but it's not clear that price dynamics are what they’re cracked up to be!

The Mirage of a Miracle: Revisiting the Asian Financial Crisis

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I’ve received dozens of inquiries about the Asian Financial Crisis and its relevance to current market volatility, especially given recent Russian developments.  As a result of this interest, John Wiley & Sons has graciously released an electronic copy of my chapter about the 1997-1998 crisis.  Click the link below to download the PDF:

"The Asian Financial Crisis: The Mirage of a Miracle"



Revisiting the Asian Financial Crisis


I’ve received dozens of inquiries about the Asian Financial Crisis and its relevance to current market volatility, especially given recent Russian developments.  As a result of this interest, John Wiley & Sons has graciously released an electronic copy of my chapter about the 1997-1998 crisis.  Click HERE to get a complimentary copy of "The Asian Financial Crisis: The Mirage of a Miracle."

Please also note that I continue to post a weekly comment each Wednesday on my website.  I will continue posting those comments on LinkedIn, Google+, and Twitter each Wednesday as well.  I also publish a newsletter approximately every six weeks that will include a summary of this commentary.

Finally, I encourage you to forward this email to anyone who may enjoy reading about the Asian Financial Crisis. 

Best wishes for a festive holiday season!

Oil Plunge! Pondering Possible Winners and Losers

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Very few asset markets have escaped the recent oil price plunge unscathed. The African growth story now seems suspect and countries such as Russia and Venezuela appear on the verge of economic collapse (see my October piece “Saudi Sows Budget Busts” HERE). Is it possible that a currency crisis snowballs into an emerging market meltdown? Let’s not forget that the Asian Financial Crisis began with currency mismatches in Southeast Asia. Just as the Thai entrepreneur who earned in Thai Bhat but took on US Dollar debt suffered in 1998, so too are today’s Russian companies with US dollar debt feeling the pinch of a Ruble in free fall. (See chapter 9 of my book BOOMBUSTOLOGY).   Norwegian and Nigerian businesses are likely also feeling the pain of falling local currencies.

Global credit markets have also reacted, with investors (suddenly) noting the heavy issuance of junk bonds by speculative oil and gas companies (see HERE). Then there is the obvious slowdown coming in oil and gas construction and its corresponding economic impact – which will affect almost every hydrocarbon producing geography on the planet. The list of potential losers is long, ranging from banks and home-builders exposed to the Dakotas to Norwegian oil service companies supporting Brazilian exploration projects (see HERE).


Within this oil slick, however, there are also numerous winners. It’s not unreasonable to think about plunging oil prices as a global ‘tax’ cut that benefits every user of oil. At the country level, the largest importers of oil clearly win…and at the top of that list is China. Is it conceivable that lower oil prices can help stimulate the much-anticipated Chinese consumption boom? Europe may get the double benefit of lower oil prices as well as a stronger Chinese trading partner.  A conscious Saudi plan to help restore the economic health of key long-term customers?  Industry winners include transportation (airline stocks have definitely taken off!), retail (consumers have more money thanks to the ‘tax’ cut), etc.

Lest you think picking winners is easy, consider the fact that we’ve effectively just suffered a massive deflationary shock – not exactly the prescription a global economic doctor would order for today's debt-laden world!  But then again, if the strongest wage pressure in the US was in tight labor markets around the North American oil and gas boom (see HERE), then might the energy slowdown remove inflationary pressures, allowing the Fed to keep rates lower for longer?  Or could the lower energy prices sentence Japan to another deflationary decade? Or might lower oil prices curtail Mexico’s attempt to privatize its energy industry?

Amidst these uncertainties, one thing seems crystal clear: plunging oil prices are generating a gusher of questions for which there may only be cloudy answers.

Fringy Folks Fiddling with Flammable Ice


A mere ten years ago, very few professionals paid meaningful attention to energy’s fringy folks fiddling with hydraulic fracking technologies. It’s too bad more of us didn’t, because the US energy renaissance unleashed by the fracking revolution has had global ramifications that continue to be felt from Houston to Riyadh and from Moscow to Caracas (see my piece “Saudi Sows Budget Busts” HERE). At least in the short run, the world has more than adequate oil to feed the voracious energy appetites of the emerging market’s middle class consumers. Might this fact have been visible to those focused on the fringe?

What are the fringy folks fiddling with today? Methane hydrates! This flammable ice is effectively gas trapped by water crystals under the seabed (see a short primer from the US Geological Survey HERE). The magnitude of the hydrocarbons contained in these resources is also enormous: methane hydrates are believed to contain between 100 and 3 million times more energy than America consumes annually. It’s also global, with deposits near some of the world’s largest energy importers (see map below). Harvesting flammable ice is no trivial undertaking and has yet to be perfected…but then again, nor was fracking 15 years ago.


Methane Hydrate Crystal

So what?
The global distribution of flammable ice also offers the prospect of significant geopolitical disruption. Meaningful volumes of methane hydrates are believed to be near China, Japan, India, Indonesia, Pakistan, and Turkey, for instance. How might energy independence embolden these currently energy-dependent countries? It’s not surprising to me that energy-deficient Japan has been a leader in developing methane hydrate production capabilities (see HERE). How might $40 oil change Russia, the Middle East, or the US consumer?




Today’s wild and wacky ideas contain tomorrow’s obvious needle-movers, so it’s worth paying attention to the fringy folks fiddling with flammable ice!  They must just make today's energy shale revolution look like a warm-up act for the main event: lighting ice on fire!


Going Green, Collapsing Citrus, and Blood Avocados


For decades, Florida was the undisputed citrus capital of the world. The state’s groves produced copious amounts of orange juice. At one point, more than 75% of American refrigerators contained orange juice (click HERE). Florida orange juice was marked as “liquid sunshine” and was to breakfast what fireworks were to Independence Day.

The citrus industry in Florida today is on the verge of complete collapse. A 2005 outbreak of a bacterial disease known by its Chinese name Huanglongbing has spread like wildfire through the sunshine state and now infects almost all citrus groves. Known more commonly as “citrus greening disease,” the bacteria begins in a tree’s roots and slowly chokes off nutrients from reaching the fruit. Leaves wilt, the fruit turns green and sour, and eventually the tree dies. It is transmitted from tree to tree via the Asian citrus psyllid (click HERE), a small insect that specifically targets citrus.


Most attempts to roll back the disease within an infected tree have failed. Thermotherapy that heats the trees in tents to 100 degrees for several days merely extends the tree’s life by a few years. Scientists are now focusing on the next generation of trees. Efforts include raising genetically modified citrus trees (click HERE) and even the introduction of parasitic Pakistani wasps that target the disease transmitting psyllid (click HERE).

So what? Given that America’s love affair with orange juice was already waning (concerns over sugar, changing breakfast habits, and lots of competitive offerings) before citrus greening (click HERE), might Florida’s greening be an opportunity? Consider that while orange juice consumption plunges, avocado consumption is skyrocketing. In the last 10 years, America’s per capita consumption of avocados has almost doubled to ~2 pounds per year.

Given adequate local water supply, developed infrastructure, and the cooperative climate, could avocados save Florida's agriculture industry?  Granted, Florida’s avocados are not as fatty or creamy as the Mexican Haas variety, but they're also not generating gang warfare.  The US imports more than $1 billion of Haas avocados from Mexico's Michoacán, a state plagued by gang warfare over the revenues generated by what locals call "oro verde" (green gold).  Might Americans willing forgo "blood avocados" (click HERE) in favor of supporting Florida?

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