Monday's Open Thread

It's the start of the New Year, may it be Prosperous and Happy for you all, enjoy the discussion.
Greenspan recently said we have a ng problem. Perhaps he looked at figures 11 (US) and 14a (Canada), from 20Production

(14a is mis-labeled)

These graphs seem to show that US ng production is about to collapse. Perhaps this explains the 4x price increase over the past two years, and the resulting shift from 50% US rigs looking for gas to 90%. The heroic production, apparently all from already discovered fields, is so far managing to hold production flat, but for how long? I am reminded of wil-e-coyote running flat out off a cliff, and not falling until he looks down...

LNG is not going to save the day in the near term - Europe is already out-bidding us for the few spot cargos available. This winter looks ok, the next one might be different.

I would like to see other predictions of future us ng production, if there are any.

2006 Financial forecasts

Things will remain much the same until something breaks or some event breaks them. What happens then could be dramatic or could be manageable, that is difficult to predict yet. So far the US Fed, in particular, combined with cooperative and blinkered markets have proven very capable at managing things smoothly. One must remember that such a course is also to the benefit of the major market players, for example, stocks become a safer bet if one knows the Fed will step in to help avoid a serious plunge.

But massive global and US imbalances remain. Can they be managed away before some exogenous events trigger less controllable adjustment? Do the imbalances generate sufficient tension to make drastic adjustment inevitable without exogenous events. I am pessimistic that the status quo is viable much longer and expect at least the first signs of catastrophic change to show in 2006. But the US and global economies have been more stable and resilient in 2005 than I expected so I may be premature on this.

The big winners of the year will continue to be commodities and especially gold. Inflation is seen as a growing problem, much more so than in the last decade, that is a major driving force for gold to increase in value. There has been a significant increase in liquidity (central banks printing excessive money) in the last 4 years particularly but also, especially in the US, over the last decade. So far that has popped up mostly as booms in things like stocks, property, now commodities. Excess money from oil revenues and Chinese trade surpluses must go somewhere and gold looks safer than currency denominated assets. Some central banks have also been diversifying into gold and the central banks which have been selling it in recent years (most developed countries who have held major gold reserves) haven't so much now.

I expect gold to make a jump to near $600 by April before pausing, and to climb above $650 later in 2006 - it could exceed $750 but that would be more dependent on response to unexpected events. The risk of gold dropping below $400 are very, very minimal (say 1%), below $450 is unlikely (10%). With current gold price about $500 I think the bet is straightforward: 10% risk of 10% loss but a 10% chance of 50% gain and 50% chance of 20% to 30% gain (30% probability it remains in $450 to $600 range throughout 2006).

Oil is close to a cusp, I think. It has increased in price by over 30% in each of the last 3 years. That has spurred just about all possible rapidly available production to come onstream. Some biggish new projects are due to come online in 2006 so there is a possibility that there will be a slight oversupply in the near term. The two critical factors are: will decline rates in the current major fields in production (FIP) be higher than current fairly optimistic predictions; will there be a significant reduction in demand (currently expected to be 1.9% increased demand) due to a global slowdown? A few months back I coined "Agric's law of oil price" which is: the average price of oil in a calendar year will be within 5% of the maximum price for the previous calendar year (Nymex light sweet, next month quote). This has been true the last 3 years, I expect it will continue to be so until prices go haywire. That gives an average price in 2006 of $70.

I expect the oil price to creep up to $70 by mid march. Thereafter I predict a spike to about $95 in response to some external event, it could happen by mid April. Will $100 oil happen in 2006? Maybe not based on current supply and demand but there is a significant probability that geopolitical or supply disruption events do cause a $100+ spike. I do not expect the oil price to drop to $40, even $50 is unlikely since a key support level at $56 has held well in recent months.

Silver price is likely to follow gold. Copper is much more difficult to predict. It has doubled in price the last couple of years and is due for a 25% downwards correction. However, there are conflicting reports on whether supply will be above or below demand (much driven by the Chinese building and infrastructure boom). Three to six months ago most industry watchers were saying that supply would be above demand in 2006 and a drop in price inevitable. Since then the price has risen 20+% and people are less sanguine about supply. I think a correction is likely but the general strength in metal prices may make that fairly short lived until an economic slowdown (especially if in China) happens. I expect the price to drop from current level of about $2.00 to below $1.60, probably by March to May, then climb back to above $1.80.

I need to digress about the US Homeland Investment Act, 2004 (HIA).  It gave US corporations a two year window to pay only 5.25% tax on profits repatriated from overseas operations rather than the normal 35%. This provison ends with a company's financial yearend preceding 22nd October 2006 and should be mostly unwound before mid 2006 (dependent on individual companies' financial years, most end 31st December). It is estimated to have created an inflow of $300+ billion into the US economy. In retrospect I think this will be seen to have given a significant boost to US economy and stocks, and its ending may bode ill for them. It may also have helped a little to support the US$.

Currencies. Well, I got this wrong in 2005. In part I think this was due to the HIA and increased price of oil which is traded (almost exclusively) in US$. Also I expected the US economy to be weaker and probably limit the Fed rate hikes. The Fed are expected to have a further 2 or 3 rate hikes, ending in March or May, these should continue to support the US$. But, by mid year, supporting pressures on the US$ are likely to be dissapating, the US economy weakening, and a downwards correction probable. Until then, barring major geopolitical / market events, the US$ should remain in the 88 to 92% range of its index. Thereafter it should decline to about 85%. However, I expect events to intervene and cause some quite sudden drops in US$: down to about 82% in April and, later in the year, (after a recovery to possibly 85%) I expect a dip to 80%.

Can the US economy continue to grow at around 4%? No. OK, how about 3%? Possibly, but the odds are against it. For US growth to stay at or above 3% almost everything has to go right. US consumers must continue to spend money they don't have and further increase borrowing beyond current record levels despite interest rate increases. There must be no significant drop in US property prices. Foreigners must continue to increase investment in US treasuries. There must be no major financial market problems like hedge fund or derivatives domino style collapse. US stock prices need to remain near present levels. I find it difficult to believe that all of these will come true.

I expect US GDP (as currently measured) to drop to 2% growth for the first half of 2006 and be flat in the second half of 2006.

Stocks are likely to take a small battering. I predict a steady mild decline for the DJIA to about 10,000 by mid March, a sudden drop to perhaps 9,000 in April. A deeper low of between 7,500 and 8,500 is probable, most likely in October.  Of course there will be bounces back up a bit, but if the DJIA is much above 8,500 at yearend they will have done well. That would be a 20% drop on the year. Retailers, automotive, financial sectors are likely to be hard hit. Utilities and commodity stocks least hurt.

I've avoided reading much of others' predictions while doing mine, here are a couple  of links, the Morgan Stanley one looks well worth reading even though it is much more optimistic than mine: 59%2DCACD%2D427A%2D8BE3%2DF32C0ABCDE3F%7D&garden=&minisite F4%2D8611%2D4742%2DAEE7%2D80AFD9A56FE3%7D&garden&minisite=

and a more speculative one for 2008, penned before the 2004 presidential election, which may be more accurate than many expect:

I don't pay much attention to gold, but reading the commodity charts provides an interesting comparison and counterpoint to individual predictions. These constitute the consensus of traders in the markets.

December 2006 gold futures are at 541. So this would be the average expected price in a year (50% chance of higher or lower than this).

Looking at the options gives us an error band. Basically there is a 50% chance of it being in 475 - 580 range, with 25% chance of being above that and 25% being below that. The markets see only about a 12% chance of reaching your target price of 650. On the downside the markets see a little more risk than you do, about a 15% chance of going below 450 compared to your estimate of 10%. So overall you seem a bit more bullish than the markets.

The gold market is in much bigger supply deficit than most traders, even professionals, realize. The reason the price has not fully reflected this is that central back sales have supplemented mine supply, and derivative trading on the Comex have created artificial price discovery levels. This has been pointed out for years by people such as Bill Murphy ( Of all the commodities, gold and silver has the potential to spring an enormous surprise on the markets this year as demand increases (peak gold). I will join Halfin in makeing a public prediction, and hang my hat on gold clearing $1000.00 per ounce in 2006 on it's way higher.
Oil: I see the oil price lower at the end of 2006.  Maybe mid-50's but not higher.  When Rita hit the Gulf Coast the oil and gas prices did not move to new highs which is a sign that a top is in place.  70 dollar oil was shown to be the breaking point as Congress started talking about excess profits tax and investigations while doing nothing to downplay demand.  The Caspian pipelines are not being mentioned and that will bring substantial supply to the market next year along with some other projects which will be starting.  Growth in China and India will continue but the last part of oils move up was due to hedge funds not market based mechanisms.  Oil will correct for a couple of years before it starts it's next move up.  I am a long-term bull but in any bull market there are periods of rest and we are in one right now.

Gold: I want to believe Gold will be around $600 by year end but if blue chip stocks come back then gold will fall.  There is an inverse relationship at work there.  

US economy: Bernanke will not raise rates past May of this year if at all.  The first few months will be choppy as earnings get affected by the higher dollar (read between the lines on the earnings misses, a higher dollar will be blamed), Greenspan raises rates one final time, Bernanke testifies before Congress a couple of weeks later, and people focus on 4Q GDP along with 1Q economic statistics.

US markets: Down to start the year with a nice rally taking us through the election with a pullback in December.  Still choppy and you need to be in the right sectors.

Politics: Bush continues to come under fire as has every second term President with the exception of Eisenhower (?) Since Truman.  The Republicans will hold Congress and may pick up a couple of seats but the Democrats come away with victories over major Republican Congressional leaders (Santorum and a few others.)  The Democrats will be focused on winning the small but major races and not trying to retake the Congress and they use the victories to refocus their base and point the way to 2008.

K/R did not spike oil because of releases from reserves, particularly product reserves from Europe, which are supposed to be paid back.  OPEC/Russia will protect $55 NYMEX oil, now the floor - if it was your oil, would you sell it cheap or dear? Iran is at least 50-50 to be attacked, in which case oil will spike.
What was your new year resolution? Here's mine:

First one: Get rid of my car.

Second one: Get rid of my TV and VCR.

 I wonder if we are beginning to see a dawning realization among energy exporters that it may not be in their long term interest to continue producing their depleting energy reserves--which are increasing in value with time--at 100% of capacity.

Our current level of energy usage worldwide--the energy equivalent of a one Gb of oil every five days--simply cannot be maintained.  

I would argue that energy exporters curtailing their exports represents a win/win proposition.  They get more money.  We curtail our energy usage, which is going to happen sooner of later anyway, and alternative energy sources become more attractive.   The longer we maintain the fiction of infinite growth, the harder the fall is going to be.

(Also posted in first Russian gas discussion).  

I'm seeing a new font on the site today (using Firefox). Looks very good, much more readable! I don't know if you made a change or it's something on this end but I like it.
Is anyone building or planning to build a home that is energy self-efficient in 2006?? If so, where are the plans coming from??
The suburb where I grew up was build in around 1970 and most houses have oil as main heat source. Rising oil prices have started to change that. Many households are now installing wooden stoves for heat generation. It also makes sense from security point of view, winters can get really cold and if you would lose electricity you would end up without heating.
A local group in the Dallas/Fort Worth area is building a demonstration project that is near zero energy use.   The construction cost is about $100 per square foot.   The architect gave a presentation last year.   His 3,600 square foot Dallas home had an electric bill of $60 in August.    

Information at:

Heather's Home:
Green, Near Zero Energy, & Affordable

This won't help you much but is related:

"Heat From the Earth to Warm Your Hearth"  (free registraion required).  Summary: The New York Times discovers heat pumps and touts them as an alternative to the fuel oil furnace.  About time.  Perhaps this will be the latest trend in upscale New England real estate:  now that you've got that home theater and indoor pool, how about cutting your reliance on oil and gas?

Also in today's NYTimes:
"A Dispute Underscores the New Power of Gas"
Nice analysis of the politics surrounding the emergance of the global natural gas market.


It's the start of the New Year, may it be Prosperous and  Happy for you all, enjoy the discussion.

There are two comma splices here, giving us three sentences for the price of one.  Is this the English equivalent of multilateral well completions, a technique for growing sentence production as we approach peak grammar?

Recommended links for Heading Out in 2006.

I enjoy the content of Heading Out's posts, but I miss the days of grammar.  Is there a link for donations so that he can fix his semicolon and period keys?

this from the telegraph. i especially liked the last line of the article

While Moscow is moving to reassert its position as a regional superpower, many in the West are growing fearful of the time when Russia's energy dominance becomes so entrenched that it can meaningfully mount a challenge to reclaim its role as a global superpower too. One western diplomat said: "It can't yet, but we may get to the stage when Russia will be able to use energy to hold Europe to ransom if it so chooses."

....oh, so they can't yet, can they??....quick, toto...the ruby slippers!

Jim Kunstler has posted his predictions for ohsix at:

Final paragraph below:

"Political circuses will not completely divert the middle class from its own suffering, as their mortgages devour what is left of their financial lives. But as they sink in fortune and hope, I predict we will see a turning of all the recent celebrity envy -- and the infotainment value spun off it -- into a vicious hatred of the rich and famous and a new desire not to emulate them, but to punish them. Look out, Nicole Ritchie and the Donald Trump. The grandchildren of Ozzie and Harriet will be looking to eat you for dinner starting in 2006."

Jim Kunstler writes well. I've been reading his non-fiction work for years.
But I can't be the only one who finds his hyperbolic -- wishing for doom -- predictions a bit tiresome.
I think Micheal Greer's exposition of the "Long Emergency" - posted on the Energy Bulletin -- is much better reasoned.
"Eat the Rich" is an old neocon metaphor for a progressive tax system.
Thanks for posting this.  I enjoy Kunstler's writing, even if I don't agree with him on everything.

I think he underestimates the power of inertia.  Even if the worst happens, we'll continue on for years.  We've got too much momentum.  We're too large to make sudden changes, for good or ill.

Jim Kunstler says:

"New laws regulating gasoline mixtures will also contribute substantially to higher gasoline prices (perhaps as much as 40 cents a gallon). So I will predict gasoline breaking through the $4-a-gallon mark sometime this year."

Does anybody know what new laws he is talking about and when they would take affect?


I'm aware of such a thing for diesel - it seems that virtually all US states have approved slightly different formulations requiring separate refinery runs and distribution. This is likely to add cost and may cause other inconveniences. I don't think it applies so much to non-diesel gasoline.
You might find this article of interest:

Iraqi oil exports hit new low
Saboteurs target Iraqi oil pipelines
Jan 3, 2006

Iraq's oil exports hit their lowest level since the war, according to new figures, heightening a sense of crisis as fuel supplies grow scarce and political leaders struggle to form a government.

resource wars?
interesting developments.

China-Kazakhstan-Russia energy cooperation - the nightmare scenario of Washington.

Simply put, the United States stands to lose major leverage over the entire strategic Eurasian region with the latest developments. The Kazakh developments also have more than a little to do with the fact that the Washington war drums are beating loudly against Iran.

In addition to this, i am unaware that China and Iraq were working together to secure oil deals, prior to the US invasion of Iraq. It kind of puts things into perspective. Anyone have any info on that?
How sound are your country's buildings?

In addition to the Al Ghaza hotel collapse in Mecca and the Bad Reichenhall ice rink collapse in Bavaria, we saw in the AIA newsletters before Xmas that a Japanese architect admitted to falsifying seismic design reports on almost 40 high-rise buildings to cut costs of reinforcing steel.  We were stunned to read that most of those buildings must be demolished.

Post-peak will not be a good time to repair infrastructure.