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I read this article on FoxNews.com today from “Junk Science” publisher Steven Milloy.  The article is titled “Is T. Boone Pickens ‘Swiftboating’ America?” and basically says that Pickens is lying and that he has his facts wrong.

After I did a bit of research it appears that Junk Science really IS junk science - at least this article - because Milloy just plain has his facts wrong.

For example, in response to Pickens’ claim that we import nearly 70% of our oil, Milloy states Aside from the fact that the Department of Energy (DOE) puts the import figure at a more moderate 58 percent, Pickens gives the impression that imported oil is scary because it all comes from the unstable Mideast.

What are the facts?  Although both numbers are too high for my comfort, there’s a big difference between “nearly 70%” and 58%.  Here are the actual numbers from the DOE site.  In April (the latest month for which numbers are available, the US imported 397.556 million barrels of oil, and produced 154.867 million barrels of oil.

These numbers are straight from the DOE, you can verify them by clicking the links above.  Mr. Milloy doesn’t give his source, other than to say “the Department of Energy”.

I’ll do the math for Mr. Milloy.  397.556 plus 154.867 equals 552.423 million barrels of oil total.  That’s the total amount the US produced and imported in April 2008.

To find the percentage that imports make of the total, you divide the imports (397.556) by the total (552.423).  In my calculator it equals .7196, which I’ll round of to .72, which equals 72%.

So, who is telling the truth about the percentage of oil we import, Mr. Pickens - who said “nearly 70%” - or Junk Science publisher Mr. Milloy - who said 58%?

Round one goes to Mr. Pickens.

Mr. Milloy goes on to say Only 16 percent of our imported oil comes from the Persian Gulf — barely up from 13.6 percent in 1973, according to the DOE. Once again he gives his source as the DOE, but doesn’t provide the data to back up his statement.  But again this is easy to check.

Using the same DOE chart for total imports as above,  we find that the US imported 69.679 million barrels of oil from the Persion Gulf in April.   Divide that number by the total amount imported to get the percentage.  It’s 17.5%, which is actually down from the percentage in March, which was over 20%.

Once again Milloy is just plain wrong.  He either has outdated information, or he can’t do basic math, or both.  It really doesn’t matter because he’s still wrong.

Mr. Milloy’s next statement Imports from OPEC countries are actually down — from 47.8 percent in 1973 to 44.5 percent in 2007. is also easily checked using the same DOE source data, but using the annual view.  In 2007 the US imported 4,905.234 million barrels, of which 2,183.964 million came from OPEC countries.  Do the math and you get 44.5%.

Hey, he got this one right!  (Mr. Pickens never said anything about this - I included it simply to be fair to Mr. Milloy.)

So what’s the final score?  Of the independently verifiable numbers on oil imports that Mr. Milloy uses, he’s just flat wrong on two of the three.

Mr. Milloy gives lots of other oil numbers in his article, numbers like the “hundreds of billions of barrels of oil in the form of oil tar sands and oil shale in North America, not to mention the more than one hundred billion barrels of oil in the outer continental shelf of the U.S. and on public lands like the Arctic National Wildlife Preserve (ANWR)” but these are estimates and not verifiable.

Besides, Mr. Pickens never claimed that we are running out of oil - he simply said “The simple truth is that cheap and easy oil is gone.”  And I don’t know of anyone who has claimed that producing oil from tar sands, oil shale, the outer continental shelf, or places like ANWR is either cheap or easy.

Mr. Pickens has said that we are at or approaching “peak oil” which is a totally different subject - but I happen to agree with him.  I wrote about it a few months ago.

Anyway, it appears the Junk Science publisher Steven Milloy needs to do some fact checking of his own before he starts saying that other people have their facts wrong.  It appears that he really is an expert on junk science, because he’s publishing plenty of it.  Besides, did he really think that Mr. Pickens would get his facts wrong about oil?

gk

The news is full of (no, not that!) stories about Congress investigating the role of oil speculation today.  A CNN story says “Near-record oil prices could quickly fall by half if Congress were to rein in speculators“. 

Sounds good - so what’s the hold up?  If Congress could simply pass a law that would drop oil prices by half, why don’t they? 

After all (the story goes on to say) “The testimony came as Congress, reflecting some sentiment among the public, blamed Wall Street traders for record oil and gasoline prices.”

let’s make sure we have this straight - Congress (and the public at large) are blaming “Wall Street traders” for the record oil and gas prices, and Congress could drop the price by 50% if they wanted to.  Am I missing anything?

Oh yeah, I forgot to mention one little bitty item: OIL IS A GLOBALLY TRADED COMMODITY!

In other words, disregard everything above, because (as the story eventually gets to) if it’s not traded on Wall Street, it’ll be traded in London, or Toyko, or Hong Kong.  The last time I checked, Congress can’t do a damn thing regarding regulating markets in other countries.  Oops…..

If you read to the end of the story, you eventually get to these two paragraphs:

Though many Democratic and some Republican politicians have furiously blamed speculation for driving up the price of oil, many analysts argue that the market fundamentals of supply and demand are the cause of record prices.

“If it is a bubble, then where is the evidence in the actual physical market?” asked Kevin Norrish, a commodities analyst with Barclays Capital in London. “There is an endless list of reasons why this argument is a very, very poor one - it will only make things worse.”

One thing that the idiots in Congress (and elsewhere) have forgotten is that “speculators” are only trading in the futures market - no physical oil changes hands. 

Here’s a quick example if you don’t understand.  Let’s say I buy a futures contract at $135/barrel for July delivery.  What do I do when the producer I bought it from drops off a tank truck full of oil at my front door?  Have you seen any oil tankers on Wall Street?   That’s what I thought.

In other words, if I buy up a bunch of futures contracts, I have to sell them before the contract date - I have no use for the oil!  Remember supply and demand?  If I bought oil for July delivery, I have to sell it before July - what happens to the price of oil if there’s no demand for what I bought? 

It’ll drop, big time.  So “speculators” must sell their oil before it’s delivered - if there’s no demand for it, they’ll have to sell at a loss.  If the demand has gone up, they make a profit. 

So what happens if Saudi Arabia pumps 5 million barrels of oil more in July than they did in June?  Supply has gone up so (assuming that demand has remained constant) the price will drop.  Supply and demand controls the price of oil.

Side note: There’s no way Saudi Arabia can pump that much more oil - I personally think we’re at “peak oil” right now at around 86 million barrels per day.  So with a constant or falling supply, and steady or increasing demand, the price must go up.  It doesn’t matter if we’re talking about oil or eggs or plywood or SUV’s - supply and demand rule.  As they should.

Any questions?

gk

I’ve been reading about peak oil for a few years, and I know that in the US, we reached peak oil production in the early 1970’s, but I was curious about global peak oil production so I looked at some hard numbers.  Here’s an Excel spreadsheet with the latest numbers I could find:

oil-prod-by-year

The information in the spreadsheet is from the US Department of Energy, and I imported it into Excel so I could create some line charts to make the trend easier to view. 

There are two tabs in the sheet, one is the total world production of crude oil, the other includes other petroleum products such as natural gas.  But both show the same trend - global petroleum production has at least plateaued in the past 3 years, and it may actually be declining.

In other words, if we haven’t seen ”peak oil” in the past year, we’re most likely at peak oil right now.

Here’s another way to look at it - we will (most likely) produce less oil worldwide in 2008 than we did in 2007.  Since worldwide demand is still rising fast (mainly due to growth in China and India) what do you think is going to happen to the price?

Hint - no one has managed to repeal the law of supply and demand.  Demand is still rising (even at these rediculous prices) while the supply is falling.  If more people want the same thing, the price is bid up. 

Assuming the data from the Department of Energy is correct, those who are looking for the price of oil to fall long term might as well be looking for a free lunch.  It aint gonna happen.

The price of oil will still fluctuate, but overall the trend will be up.  It might even drop 50% from today, but I don’t think there’s anyway oil will be cheaper 10 years from now than it is today.

Anyone disagree?

gk

Read this.  Please.  It’s the annual report from the Social Security and Medicare trustees, and it has bad news for anyone who doesn’t already have one foot in the grave.

If you pay taxes, you will be paying more - a lot more - sometime soon.  The annual report contains all the numbers in black and white, and all that money has to come from somewhere. 

Medicare will pay out more than it brings in starting this year.  For 2008, Medicare is only projected to be $8 billion in the red, but that translates to a $16 billion increase in the deficit.  Why?  I’m glad you asked!

For years the government has been taking the “excess” revenues from Social Security and Medicare and “investing” them “in special non-marketable securities of the U.S. Government on which a market rate of interest is credited.” 

In other words, the government takes the money, writes an IOU (promising to pay it back with interest) to Social Security and Medicare, and spends it as part of general revenue.

That’s your trust fund.  There’s no money in a bank account drawing interest, there’s no gold in a vault, there’s no stock certificates.  There’s just a huge pile of government bonds (IOU’s) in the administration building.

Maybe that doesn’t make it clear so let me try explaining it this way….  You deposit $500 into an account (let’s call it a trust fund just for the hell of it) then - promising to pay yourself back - you transfer it to another account and spend it. 

You could even print out your IOU to yourself and stick it in a pretty box.  You do the same thing the next month.  And the next.  And the next….

After a year, how much money is in your trust fund?  Exactly nadda, nothing, zip, zilch, squat. 

You can’t take money out of one pocket, put it into the other pocket, and spend it.  Well, technically you can, but you haven’t saved anything.  And there’s no money left (you spent it on other things) to put back into the first pocket.

I hope that clears up the mystery of the Social Security and Medicare trust funds.  To put it bluntly, there’s no money in them.  Zip.

But the government stills owes that money to itself - or more accurately, they owe it to the designated recipients who have paid into the “trust fund.”  That’s you and me.

So where do they have to go to get the money they’ve promised to pay?  There are only three ways for the government to get money; taxes, borrowing, or printing more money - or a combination of these. 

Which one should they use?  Let’s take a quick look at the choices:

1) Taxes.  The government can raise taxes to cover their expenses.  Since we’ve run a deficit for years, I don’t think they’ll do this - which is actually the option which would cause the least pain for all. 

2) Borrow: This simply means they sell more bonds to foreigners.  We get to use their money and simply make payments on our national interest only loan.  Hey, it’s working out great for homeowners!  Right?

3)  Print more money:  Sounds, good - after all, the government makes a profit on each dollar they print.  It costs less than a cent to print a dollar bill, and it’s worth $1 - before inflation anyway.

See, there’s this little thing called supply and demand that refuses to go away.   When you make more of something without a corresponding rise in demand, each one of them is worth less.  Make too many, and each one is worthless.

That’s why we have inflation - we print dollars with nothing standing behind them.  The money supply (the supply part) rises faster than the economy grows - the demand side.   Rising prices for “real” stuff like oil, gold, wheat, and milk don’t cause inflation - they’re caused by inflation.

Read that paragraph again, it’s important.  Most people (even bankers and some of the fed board) don’t “get” this basic fact of life.

Anyway, the government will need to get the money to pay Social Security and Medicare benefits from somewhere, so my bet is that taxes, deficits, and inflation will all be a big part of the years to come. 

And if you think the deficit is big now, you ain’t seen nothing yet.  You can ignore those “pull the numbers out my ass” deficit projections from the government - because they actually assume that the money from the Social Security and Medicare trust funds are there!

I don’t know what “real” stuff will be worth in a week or a month, but gold, oil and silver will be a lot higher 10 years from now.  That’s where my money is.

gk

From the 400 point rally today in the stock market, you’d think that the bulls are running rampant in Pamplona.  And you may be right, however….

Stocks are still down over 10% for the year.  The highly leveraged banks and Wall Street firms are still highly leveraged.  Massive amounts of mortgage backed securities - and their higher default rates coming this year and next - are looming.  When a CDO takes a 10% loss because the home owners can’t make the payments, that translates to a 300% loss on a 30 to 1 leveraged portfolio such as Bear Stearns and Lehman Brothers.  (Citigroup is also highly leveraged.)  The $2/share Fed ”take it or leave it” financed JPM buyout of Bear Stearns still needs to be approved by shareholders.  Hmmm…. How would you vote if you owned BSC?

As I’ve written before, this unwinding of the leverage in the financial markets will take quite awhile.  The longer the Fed props up failing companies, the longer it will take to hit bottom.   JP Morgan is getting a deal only because the Fed is guaranteeing $30 billion of BSC’s “assets.”  They’re not really worth $30 billion, but the Fed took that much risk away from JP Morgan.   That’s $30 billion that US taxpayers will end up spending to finance this bailout - because the underlying securities are “riskier assets.”

 A couple of weeks ago, I thought we were headed for a repeat of the Carter years and stagflation, but it’s beginning to look more and more like we’re repeating Japan’s mistakes of the 1990’s.  Low interest rates, keeping bad debt on the books (instead of recognizing the loss and getting it over with) propping up banks with fake assets on their books, etc. 

Japan still hasn’t fully recovered from the 1990’s.  I sincerely hope that we don’t continue making the same mistakes, but today’s 3/4% drop in both the discount and Fed funds rates isn’t helping.  That only serves to drive up long term inflation, and that (rather than deflation that I’m reading about) is my long term worry.

As regular readers know, I don’t try to predict short term market swings, I simply try to stay on the right side of the market during long term trends.  I don’t know if today’s action signals a turnaround or not; my gut says no - because of the reasons listed above - but my gut doesn’t make the market move.

Regardless, I don’t see any fundamental change in the long term trends of the dollar going down, commodities (especially gold, silver, corn, and oil) going up, and the broad market (especially financials) going lower.

My feeling is that the majority on the street think that the worst news is behind us; that most people are looking for a reason to buy.  They’ve discounted all the bad news and they’re ready for another bull market.  I don’t think they’ll get it just yet.

Too many firms have too much debt.  Too many firms are leveraged enough so that a small change in the base assets (mortgages in most cases) results in a huge change to their balance sheets.  One little piece of unexpected bad news will be enough to cause a dramatic sell off.  I’m talking about a sell off big enough to trigger a halt to trading. 

I think the coming upswing in the foreclosure rate (because of all the ARM’s taken out in 2005 through 2007) hasn’t been fully factored in to the stock prices of the companies that are using these mortgages as collateral on their loans. 

When people realize how little capital is propping up these companies, share prices will drop.  The dollar will drop, and commodities will rise.  Again, I have no clue what the market will be at in a week or a month.  I don’t know if commodities will be higher a month from now or not.  But I’m betting that 10 years from now, you’ll be glad you bought gold at $1000/oz, silver at $20/oz, oil at $105/barrel, etc. 

If we really are following the deflationary path Japan took in the 90’s, the Dow may well be at 7000 10 years from now.  As it stands, buy and hold investors are down from where they were 8 years ago….  How much longer do we need to prolong the agony? Take the losses now, write off the sub prime and alt-a loans, get it over with!

Of course that’s just my opinion, I could be wrong.  :-) 

gk