Interest Only Mortgage, Train wreck coming

Excerpts from latest peak oil review

During their meeting in Nigeria last week, OPEC oil ministers compromised on a second production cut of 500,000 b/d that will not become effective until February 1st. Preceding the meeting, there were many warnings that a second production cut was not needed. The November 1st production cut was indeed taking hold; oil prices were back above $60 per barrel; and the IEA reported that stockpiles held by OECD countries had dropped by 40 million barrels in October. The EIA is projecting that the US stockpiles alone will drop by 82 million barrels during the fourth quarter.

Unless the cuts are totally ignored, a case can be made that significantly higher oil prices are coming in 2007. A recent analysis by the EIA projects that world demand will grow by 1.5 million b/d during the year and that non-OPEC supply will grow by only 1.3 million b/d. If these numbers prove out, the EIA concludes that OPEC needs to be increasing not decreasing its production.

There is still no definitive word on why the Saudi's pushed through a second production cut in the face of considerable evidence it was not needed. The Saudis maintain that high inventory levels are a threat to market stability and suggest that a coming general slowdown in world economic growth make a production cut necessary. Some observers, of course, remain suspicious about the Saudi's ability to continue producing above 9 million b/d.

Goldman Sachs takes on Amaranth traders

System rewards the corrupt, reckless and losers

Goldman Sachs, the American securities firm, has hired 17 traders from Amaranth Advisors, the hedge fund that imploded this year after losing $6.5 billion (£3.3 billion).

The loss was down to a team of energy traders in Canada, whose bets on the direction of natural gas prices went awry. Amaranth turned its trades in natural gas, oil and power over to JPMorgan and its hedge fund rival Citadel. Both reaped tidy profits from their investments within a matter of weeks.

http://business.timesonline.co.uk/article/0,,13129-2498075,00.html

America's Bubble Economy

It is always Christmas Time

Watch the animation, click here

For Data Junkies

Chart created using EIA data. Quarterly averages of daily production of Oil+Liquids. Cick on the image to see a larger & clearer image.

Are we at peak oil ? Production didn't drop because of rock bottom prices. Q2 of 2006 saw prices hit an all time high. A natural free market response would have been to bring more supplies. Did not happen.

A Tale of Four Predictions—Hubbert, Deffeyes, Yergin & Jackson

Following is from ASPO-USA peak oil review :

• In 1956, M. King Hubbert, a well-known geoscientist, predicted that US Lower-48 oil production would peak and start an irreversible decline between 1966 and 1971. Lower 48 production peaked in 1970, 14 years after Hubbert’s prediction.
• In a book published in 2001, Kenneth Deffeyes, an associate of M. King Hubbert, predicted that world oil production would peak between 2004 and 2008. He later stated that the most likely peak was late 2005. Two measures of world oil production, Crude + Condensate and Crude + Condensate + Natural Gas Liquids (NGLs), are both down or flat relative to December, 2005, according to the US Energy Information Administration (EIA). Total Liquids, which is all of the above plus such things as refinery gains, bitumen/water blends and ethanol, are up slightly from December, 2005.
• In a column published in Forbes Magazine in November, 2004, Daniel Yergin, an historian and chairman and co-founder of Cambridge Energy Research Associates (CERA), in response to a question regarding future world oil production and oil prices, predicted that world oil production would surge, driving oil prices down to $38 per barrel by November, 2005. In fact, oil prices have traded in a range about 50% to 100% higher than Yergin’s predicted long term index price, as flat to falling oil production has forced oil prices higher in order to equalize supply and demand.
• Last week, Peter Jackson, an associate of Daniel Yergin, offered a critique of the Peak Oil theories outlined by Hubbert and Deffeyes and, like Yergin before him, predicted rising world oil production, with the world not showing any real decline until the 2040 to 2050 time frame.
• In the past, Hubbert was right and Yergin was wrong. Now, their respective associates are making similar predictions, using similar methods.
  

It is pretty clear the track record of CERA and Daniel Yergin when it comes to energy production.

• Deffeyes uses a method that is now commonly referred to as Hubbert Linearization (HL), which involves plotting annual production (P) divided by cumulative production to date (Q) versus Q to estimate the Ultimate Recoverable Reserves (URR) for a region, which Deffeyes calls Qt. Regions, in the absence of political and/or technical problems, tend to peak and start declining shortly after reaching the point at which they have produced 50% of Qt, i.e., half of their recoverable reserves.
• The following regions have shown lower production after crossing the 50% of Qt point: Texas; Lower 48; Total US (after a secondary lower peak following the beginning of North Slope production in Alaska); Russia; North Sea; Saudi Arabia; Mexico and most recently the world (except for Total Liquids).
• I should be clear that the HL method applies to conventional oil production, which I define as oil production that will move to a wellbore without the application of heat energy. The two largest concentrations of unconventional deposits are the large bitumen deposits in Canada and Venezuela. There is also considerable research being done on oil shales, which are really kerogen deposits, a precursor to bitumen. Deffeyes’ opinion is that unconventional sources of oil will most likely serve to slow, but not reverse the decline in aggregate world oil production. Recent reports from Canada and Venezuela support Deffeyes’ view. In any case, the bottom line is that all of the unconventional sources of oil are hugely expensive, energy intensive and are very slow to ramp up production rates.
• Jackson is asserting that better technology and the exploitation of unconventional sources of oil (plus gas-related liquids, which aren’t considered here) will permit the world to have several decades of rising, or at worst, flat production.
• First, consider the Lower 48, where the industry has tried virtually every new technological innovation known to the industry, and production has fallen fairly steadily, now down more than 50% since peaking in 1970.
• What about more recently developed regions? Haven't they done better than the Lower 48? Let’s consider the North Sea, which peaked in 1999 (crude + condensate) and started a very rapid decline. It is compelling that two vastly different producing regions-- the Lower 48 and the North Sea, with the North Sea being developed with vastly better technology than the Lower 48—peaked at the same 50% point, relative to their Qt estimates (for both crude and condensate.)
• The basic premise of the HL method is that the first half of the production for a region is a good predictor of the second half of production. “Khebab,” a contributor on The Oil Drum blog, has demonstrated this mathematically. He took the production data only through the 50% of Qt mark for the Lower 48 and Russia (1970 and 1984 respectively) and predicted the post-50% of Qt cumulative production for the two regions, again using only production data through 1970 and 1984 to generate the model. The post-50% of Qt cumulative production through 2004 for the Lower 48 was 99% what the HL model predicted, and the post-50% of Qt cumulative production through 2004 for Russia was 95% of what the HL model predicted.
• Today, we have the same amount of production data for the world that resulted in the highly accurate post-50% cumulative production predictions for the Lower 48 and Russia.
• Peter Jackson is asking us to believe that we are going to see what we have never seen before—conventional oil production rising for decades after crossing the 50% of Qt mark. This prediction is especially remarkable given the near certainty that all four of the current super-giant oil fields producing one million barrels/day or more are in decline or crashing, while there is only one new super giant field being developed, the problematic Kashagan Field that won’t reach peak production, at the earliest, until 2020.
• In conclusion, according to the EIA the world through August 2006 has produced roughly 100 million fewer barrels of crude + condensate than if we had simply maintained the December 2005 production level. This is consistent with the Hubbert/Deffeyes model. It is not consistent with the Yergin/Jackson model. The early data suggest that Deffeyes is correct and that Jackson is wrong, but we can't yet say with certainty who is correct.
• Regardless of whether the Hubbert/Deffyes or the Yergin/Jackson model is correct, we need to start as soon as possible to fundamentally change the way we use energy in the United States. My personal opinion is that we need to tax energy consumption to fund Social Security/Medicare, offset by cutting or eliminating the Payroll Tax.

click on the image to enlarge.

Author: Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail is westexas@aol.com.

San Francisco Bay Area Rent vs Buy ?

Median single family home in Bay Area costs well over 700,000 dollars. San Francisco has the ignominy of being arguably the most expensive metro to live in USA. What makes more financial sense - rent or buy ? Let us look at some examples:

I know a friend of mine who rents a home for $2100 a month and a similar house in the same neighbourhood is listed for sale at $950,000. Let us analyze the costs

Rent

Total monthly cost = $2100/-

Buy

Buy price = $900,000/-
Down Payment =$180000 ( 20% )
30 year fixed rate = 6.25%
Monthly Mortgage payment Principal =$683
Monthly Mortgage payment Interest =$37503,750
Property Taxes=937.50
Sub Total ( Monthly Expenses ) = $5370.5
Tax Savings ( Assuming a 28% rate ) =1312.5
Net Total ( Sub Total - Tax Savings ) =4058
Maintenance=$150
Total Expenses of owning =$4058+$150-$683=$3525


Now Imagine, if the housing prices fall instead of staying steady.

Missing interest on $180,000 at 5% a year ? How about compound interest on the differnce between monthly cost of Buying versus Renting ?

$180,000 initial deposit + $1425 contributions everymonth at 5% interest for 1 year will leave you with 26726 extra dollars in your savings ( $9626 in interest )

It doesn't take into account the inflationary effects of Fed's monetary policies.

An after thought: I am in the inflationary camp when it comes to the future of the U.S economy. When backed against the wall, democratic governments and central bankers have always opted in favor of inflation rather than deflation. So if you can still afford to make payments and can still leave a cushion of 6 months expenses as savings in the bank, I still think buying a home would win in the long term compared to renting - even at these elevated prices.

In Debt We Trust

In America's earliest days, there were barn-raising parties in which neighbors helped each other build up their farms. Today, in some churches, there are debt liquidation revivals in which parishioners chip in to free each other from growing credit card debts that are driving American families to bankruptcy and desperation.

IN DEBT WE TRUST is the latest film from Danny Schechter, "The News Dissector," director of the internationally distributed and award-winning WMD (Weapons of Mass Deception), an expose of the media's role in the Iraq War. The Emmy-winning former ABC News and CNN producer's new hard-hitting documentary investigates why so many Americans are being strangled by debt. It is a journalistic confrontation with what former Reagan advisor Kevin Phillips calls "Financialization"--the "powerful emergence of a debt-and-credit industrial complex."

http://www.indebtwetrust.org/aboutthefilm.html

Housing Bubble vs. Great Depression

Inflation is more likely

Consequences of a deflating housing bubble are immense for the US economy, just recovering from the aftermath of a techbubble implosion. Imbalances in the economy here and internationally are huge, debt burden on households, federal and local goverments are enormous. An implosion in housing is something Federal Reserve would try to avoid at any cost. I sense that we are at the cusp of a major inflationary bust for the U.S economy. Fed has a natural inflation bias - not when it comes to fighting it, but when it comes to causing it.

Source: Minyanville

Everything is well orchestrated right now, the boom in stocks, the hammering of commodities, publishing of doctored data with a deflationary bias, disappearing of M3, Fed & Treasuries operating clandestinely in the repo market ( repos were part of the M3 that disappeared as of March 2006 ). I believe deflationists might be completely wrong, but that doesn't mean I am bullish on US economy.

Consumers are burried in debt and they can't even file bankruptcy under the new laws. Imagine if china stops financing our deficit, it will cause U.S goverment to go bankrupt. The trillions of U.S debt they are holding will become worthless. Just like Chinese have backed themselves into a corner, lenders to american lumpen householders have backed themselves into one. They have to keep lending to the zombies to prevent the house cards from collapsing.

These lenders are hardly interested in collecting the principal back. They just want to collect interest from here to eternity. Not that scam will go on for ever.

You can take it to the bank that Fed is not going to repeat year 1999-2000. Will they succeed ? Money is still plenty. Inflation, Inflation and more inflation. Have you given it a thought.

Do recessions do any good ?

An economic boom based on relentless credit expansion create mal-investments. A recession is a natural mechanism of the free market to wipe out these mal-investments/over-investments. But it is very unpopular amongst politicians to have to deal with a recession, especially when it is their turn to sit on the throne. So John Maynard Keynes came with a political solution to what is an essentially economic problem - goose up money supply and increase goverment spending to compensate for the lack of spending from business/consumers. What this lopsided thinking amongst the so called economists have caused is to never let the recession run its natural course. So the work that a recession was supposed to do gets postponed for a later date. The imbalance continues to build up and it all has to blow up one day in the form of a depression or hyperinflationary end game for the currency. Given the inclination of current crop of politicians and central bankers towards inflating, I expect that latter to happen rather than the former.

A hang over is to be expected after a long night of partying and drinking binge. Hang overs are never pleasant to deal with but best thing to do is to deal with it and get it over with. The cure suggested by Keynesian economics is sort of like an alcoholic going on a non-stop drinking binge to avoid having to deal with a hang-over. Consequences of such irresponsible actions are invariably devastating. Cure is obviously worse than the disease.

If you have read the book "Collapse" by Jared Diamond, he talks about how well intentioned efforts to prevent natural forest fires in Montana have caused fuel build up, eventually causing a much larger conflagration that ultimately guts millions of acres of forest. Free market and nature have many parallels.

Current interventionist tilt among economists have consistenly stopped market from doing what it really wants to do. Market will one day come back with vengeance, and it will not be a pretty site.

"The force of a correction is equal and opposite to the deception and delusion that preceded it." - Bill Bonner of the Daily Reckoning