Bakken, oil, crisis, & prudence

This is an exchange between myself and “DK.” She sent me a broadcast email with a subject like this: “OIL - You better be sitting down when you read this !!!!!!”

Her email is about the Bakken oil field in the US. Her email referenced two figures as the total estimated amount of oil there: 503 billion barrels and 2 trillion barrels. She cited an article from the USGS indicating that the accessible, useful oil was more like 3-4 billion barrels: 


Image via Wikipedia

Here was my initial reply:

According to the USGS article that you cited at the bottom, only a few
billion barrels are currently classified as recoverable, or less than
1% of the 503 billion barrels referenced elsewhere.

Let’s put that in perspective. 3 billion barrels of oil is
approximately an extra 16 months of oil at the current rate of
production in the US (which has been near 6 million, but may have gone
up in recent years).

So, if oil production is up in the US already and even if the US
doubles production for 16 months, yes that will be a[n]… increase in
the global economic balance of affluence. 3 billion barrels of oil
does correspond to an extra 300 billion dollars or so of value.

However, what was the US government‘s spending in 2011? $6 trillion,
as in 20 times as large as the extra 300 billion dollars of economic
affluence represented in the USGS article.

Is that 300 billion dollars of value trivial? No! Does it
fundamentally change ANYTHING long-term? Not yet!

DK replied back to me:

Thanks for your insight.
What can the average person do to pressure them to do the right thing?

Hi DK,

Respectfully, I do not know who you mean by “them” (or what you mean by “the right thing”). [I now presume that she meant the US government.] Let me give you some of my perspective on the general subject.

Starting in early 2003, I have invited people to consider the actuality of trends and to adapt to those actualities, such as the shift in the long-term price of fuel. For the last several centuries, fuel prices have dropped dramatically (in “real” terms as in after adjusting prices for the fluctuating purchasing power of currency).

One of the ways that economists (as distinct from accountants) have measured the cost of fuel is this: how long does it take the average person to earn or produce the capacity to produce an hour’s worth of candlelight? You may have heard of measuring the brightness of light in “candles” and that is what I am referencing. The time-cost of producing an hour of one candle worth of light has gone from a large fraction of an hour centuries ago to under one minute and finally to under one second. The same kind of measurements can be done in regard to one unit of “horsepower.”

Human civilization has radically altered in recent centuries with the collapse in the cost of energy (fuel). Amish people and others have not participated much in the “boom” related to the huge decline in energy costs, but the huge ballooning of human population in recent centuries is the direct result of the huge decline in the cost of energy/fuel.

So, in 1999, that multi-century trend of declining cost of energy may have reversed. Starting in 2004, I wrote and published articles referencing the reasons that energy costs were rising and the predictable consequences of any continuing rise, which I did predict would continue.

I have noted that the average decline of 40% of the stock prices of the US airline industry in several months in 1999 [red line above] went along with a quick doubling of global oil prices [blue line above]. [Also, the green line above shows the simultaneous decline of the financial sector of the US stock market.] Further, I have consistently documented the general shift in the economies of Japan, Europe, and the US toward the economies of OPEC and other oil-producing regions (including places like Alaska, North Dakota, and the province of Alberta).

Japan’s decline started in 1989. The USSR, which was the #2 oil-producing region on the planet (and still is), has also collapsed politically since then (dissolving in to smaller political units). The EU (including the UK and Germany, etc) as well as the US have been declining now for over 10 years at least, depending on the exact measures used. [Below is a long-term chart of the UK stock market, which peaked at the end of 1999.

My assertion is that the global political history of the 20th century can be summarized in a few words: the rise of oil. Next are a few paragraphs summarizing the 20th century:

The prior two major powers, Great Britain and Germany, fought two massive wars against each other (world war one and world war two). In ww1, Britain won. In ww2, Germany lost.

But who won world war two? The USSR and the US did. In WW1, those two countries were not even major powers. However, after ww2, those two countries dominated much of the world and they even split Germany right in half between those two allied victors.

Britain did not get occupied like Germany did, but Britain did not get a portion of Germany either: just the US and the USSR. Britain did not win ww2. Germany lost (along with Japan and Italy) and the winners were the US and USSR. Further, lots of other folks (France, Poland, etc) could also be said to have lost or at least not to have won.

So, those two "superpowers" of the US and USSR had very different political systems and very different cultures, but those two nations rose from relative obscurity in the 19th century to become the top two global powers in the 20th century. What did they have in common was oil. In the 20th century overall, the US led the world in oil production (and consumption). In the early 1970s, the USSR surged past the US in oil production, leading to a significant power shift and the rise of OPEC to prominence.

In the latter decades of the 20th century, as the USSR and US slowly fought over regions like Afghanistan and Central America, the USSR eventually lost and crumbled. One of the most devastating economic events for the USSR was the joint effort by the US and OPEC to drive down global prices of crude oil, which was the main source of revenue for the oil-exporting USSR.

Normally, when a company produces something, then want to sell it for maximum profit. However, with the US and OPEC colluding to drive down oil prices, US and OPEC companies (like Aramco, the Arab American Oil company which controls much of the oil industry in the Middle East) sold oil for much lower prices than they could have. Governments may even outright subsidize oil production so that private companies can sell oil at a loss, but still receive tax incentives or other incentives so that the governments can drive down international prices of oil for political purposes.

American International Group

Image via Wikipedia

So, what is there to do about any of this? Recognize it. Adapt to it. Benefit from change. Reduce exposure to risk (like protecting assets using the fullest extent of the law while those laws still exist, settling debts rigorously, and investing wisely).

This is a time of unprecedented opportunity. Why? Because so many people who are currently so wealthy (in the US and EU) are so naive (if not arrogant) in regard to what is happening.

The mainstream middle class (not just in the US) have been taking immense financial risks with no appreciation for the basics of economics or investing. Most people do not understand the simple ponzi scam of the insurance industry and thus consider casino gambling and state lotteries to be less risky than their investments in ridiculous long-term annuity contrasts. There is nothing as risky as the global insurance industry, which is the largest concentration of financial risk in human history. AIG was not a fluke. The 2008 financial crisis in the US and EU was not a fluke. Myself and many others predicted it. People see the financial issues with the government of Greece or of the US, but a glance at most any insurance company might reveal a much less favorable long-term financial stability.

So, The investments that will be most valued in the next few years are almost completely ignored by the mainstream as of now. That will change and suddenly, which can produce huge increases in price.

By huge, I mean larger than the 1200% increase in the price of oil from 1999 to 2008. I mean larger than the 1600% increase from 2000 to 2010 in the stock prices of the HUI index of 15 conservative gold and silver mining companies. Those were certainly quite large gains. Some gains, however, are huge, like historically unique.

So, I am not especially interested in speculating as to what is they right thing that other people could do (such the US Congress or the leaders of OPEC or AIG or NATO). I am interested in identifying what I could do, in what results I can help individuals to produce with me, and in then producing the results that I value.

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4 Responses to “Bakken, oil, crisis, & prudence”

  1. jrfibonacci Says:

    DW replied:

    Thanks for sharing your insights!”

  2. oil price chart 2011 Says:

    oil price chart 2011…

    [...]Bakken, oil, crisis, & prudence « JRFibonacci's blog: partnering with reality[...]…

  3. Franco Guerri Says:

    Did I miss something? What is your conclusion as to this coming surge? What sector or specific industry or commodity are you predicting will dramatically multiply?

    • jrfibonacci Says:

      Hi Franco,

      Thank you for your interest. The first stage of the surge was 1999-2008, with oil prices rising over 1200% from $11 to $148. Oil-rich nations such as those of OPEC (and to a lesser extent, the US) may be expected to thrive at least relative to places like Greece and Ireland and Japan, where the dependency on the importing of fuel is rather extreme.

      Within the US, of course there are sectors that will predictably outperform the worst, such as new construction and housing. With fuel prices increasing, people may continue to flee the sprawling suburbs for dense urban areas as well as inexpensive rural communities.

      I could freely list some sectors that I expect to grow most, but why would I do that? ;) If you are interested in a conversation, let me know.

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