Sunday, April 8, 2012

China vs. Saudi Arabia

Click to enlarge.

This trend is dead. Stick a fork in it. It can still grow, but I do not believe that it can grow at the 13.8% pace it once grew at. If nothing else, there will never come a time when 100% of our wages are used to buy imported Chinese goods. This seemingly stable exponential trend was therefore guaranteed to fail at some point. I strongly believe that it happened a few years ago.

Click to enlarge.

If the oil story is dependent on the China story, which I am fairly sure it is, and the China story sits on a shaky foundation (for a variety of reasons), which I am fairly sure it does, then betting on rising oil prices from here would seem to be quite risky.

Also keep in mind that the long-term trend for Saudi Arabia has been pulled higher by one confirmed bubble. That bubble is therefore distorting the true picture. If we are experiencing an echo bubble (which is not confirmed) then that would be adding additional distortions. In other words, what would the long-term trend look like *if* the confirmed bubble and the potential echo bubble were removed?

That's a big if of course. It might not be an echo bubble. Is there any additional evidence? I think there is. You decide.

Click to enlarge.

Look how expensive oil has become relative to natural gas. It's gone parabolic. Can it continue? Maybe. Can it continue forever? Probably not. When will it experience an exponential trend failure? You tell me and we'll both know. As a side note, this era seems to have an exponential trend of exponential trend failures. I can barely keep up, lol.

March 6, 2008
"Parabolic" commodities raise eyebrows

The more commodities rise toward the heavens, the more skepticism emerges from anyone who distrusts the look of parabolic graphs.

This is not investment advice. If was investment advice I wouldn't even know what to tell you. I have never shorted an asset. Oil is a particularly dangerous place to start. We do need it and as they say, "@#$% happens." I prefer instead to find assets that I would prefer to own. So what would I choose now? Toilet paper still seems safe. If nothing else, it is particularly good at cleaning up @#$%.

On that note, Happy Easter! :)

This post inspired by Troy who compared the growth in our trade deficit with China to the growth in our GDP.

Source Data:
U.S. Census: Foreign Trade
St. Louis Fed: Wage and Salary Disbursements
St. Louis Fed: Oil to Natural Gas Price Ratio


Who Struck John said...

There's a couple of things that distort the oil/natural gas ratio. First, natural gas is still largely a regional, rather than an international, commodity - not much moves outside of pipeline networks, so you don't get a global market like you do with oil. Second, fracking is delivering a lot more natural gas than oil - hence, what you are seeing is more of a collapse in natural gas price than a spike in oil price. Lastly, there's a war scare on. Various indicators (Saudi VLCC contracts to move their stockpiles into floating storage, deployment of US minesweepers to the Persian Gulf, timed to arrive in June) suggest war this summer, and the prices are reacting accordingly. It's noteworthy that if you want to hit bunker ventilation shafts rather than buildings, you need laser targeting rather than GPS. Coincidentally, the weather over Iran clears in June ...

Mr Slippery said...

Who Struck John makes good points on oil vs. gas. I'd also mention that the oil bubble in 2008 might have only been partially due to financial specs. I am a believer in oil depletion, or peak cheap oil, so the long term trend for oil should be increasing based simply on supply/demand. The financial specs will just make it more volatile.

I think some interesting dynamics are going to arise once oil exporters figure out they need their oil for internal consumption. That could play out in various ways.

I also think we are going to see more and faster bubbles and busts as the financialization of the world economy heads toward some kind of adjustment/reckoning. But I could also be completely wrong. :)

Stagflationary Mark said...

Over the long-term, I would expect the massive gap between oil and natural gas to close, if for no other reason than the physics of BTUs.

6-1 Rule

6-to-1 rule: Another common rule of thumb for the relationship between gas and oil prices reflects the energy content of the two commodities. Since one barrel of oil contains the energy equivalent of the 5.825 million BTU of natural gas, the 6-to-1 rule was developed. Applying this rule, should oil prices trade at $50 per barrel of WTI, natural gas should trade at $8.58. Brown and Yucel observed that although the 6-to-1 rule is less accurate than the 10-to-1 rule over long observation periods, in times of rising gas prices, the 6-to-1 rule is a more accurate predictor of natural gas prices. In periods of declining natural gas prices however, the 10-to-1 rule is a more accurate predictor.

And yet here we are at 50-1. Oil prices way up. Natural gas prices way down. If I had to guess (just a guess mind you), I expect natural gas prices to rise and oil to come back down.

If I could collect natural gas in a bag and store it for future consumption (to heat my home), then I would lock it in right now. No doubt about it. Similarly, I would not store oil in a barrel if given the choice between the two.

I thought Mr. Fusion was a primary risk in peak oil theories. Add Mr. Natural Gas to the list. It's not like we don't have the technology to do it. The first natural gas engine was built before the first gasoline care was even invented.

Steam Powered Car

In 1769, the very first self-propelled road vehicle was a military tractor invented by French engineer and mechanic, Nicolas Joseph Cugnot (1725 - 1804). Cugnot used a steam engine to power his vehicle, built under his instructions at the Paris Arsenal by mechanic Brezin. It was used by the French Army to haul artillery at a whopping speed of 2 1/2 mph on only three wheels. The vehicle had to stop every ten to fifteen minutes to build up steam power.

First Gasoline Car

The first gasoline car was invented in 1870 by Austrian inventor Siegfried Marcus. The first Marcus car was more like a 4-wheel handcart for moving people and objects around.

Natural Gas Vehicles

The first natural gas engine was built in 1860, before the development of the gasoline engine. Natural gas vehicles have been used with much success in the United States since the 1960s and in Europe for nearly 50 years. In fact, there are currently more than 30,000 natural gas vehicles on U.S. roads and over 700,000 worldwide.

Stagflationary Mark said...

"gasoline care" = "gasoline car"

A silent "e" somehow snuck in there, lol. :)

Stagflationary Mark said...

Here is a trend that we should all enjoy seeing.

2009's U.S. Dry Natural Gas Proved Reserves were 272.5 trillion cubic feet. That was 11.4% more than the proven reserves in 2008.

That parabolic trend starts in around 1998 which was also the same year that oil's price started turning parabolic.

I doubt it is a coincidence. As oil's price rose, more people started thinking about natural gas.

Stagflationary Mark said...

Here is a chart of oil's price since bottoming in December of 1998 at $11.28 per barrel.

Oil is now at $100+ and is looking for an excuse to stay here. I'm not convinced that it will find an excuse big enough.

So does that mean I'm bullish on our economy? Hardly.

What will happen to oil *when* we slip into a recession again? I can't say when that will be, but the employment report was certainly ugly.

Unless the Fed has permanently removed the possibility of another recession (yeah, right!), I'm going to stick with *when* over *if*.

And what would another recession to us do to China? Well, we are a top customer of theirs. I could definitely see a Die Hard landing.

Just opinions!

Troy said...

And what would another recession to us do to China? Well, we are a top customer of theirs.

Thing is, we need them more than they need us.

What profit do they get with their $30B/month trade surplus against us? They've got $3T of reserves already, if I were them I'd deploy that wealth before we print it out from under them.

I don't pretend to understand China at all but I do think they need to transition their economy to something more on the order of Korea and Japan's somewhat flatter Gini wealth distribution.

It's impossible really for me to see how a nation that's going to top out at 1.4B people evolve this century, but it does look like they're finally entering a reversal of their previous demographic expansion. shows how their age 20-29 population is going to fall from 220M (!) to ~180M this decade. 40M less people is just what the doctor ordered AFAICT.

As for our recession, we're still in the 2007 recession. We've got $1T/yr+ of deficit spending, but this is just running the bilge pumps on the Titanic.

Just repeating the 2003-2007 good times is easy enough -- mail $2000 checks to 50M households chosen randomly every month for 5 years, this would be a close simulation of the home mortgage craziness that saw us push CMDEBT up $6T to get out of the 2001 recession.

But that is not an actual fix, just a better pumping strategy. The core problem is that we've made a commitment to a future trend that our present distribution of wealth, pricing powers, and tax levels isn't going to be able to fund.

We've got several inter-locking problems with no easy (political) solutions. 90% of politics today is kabuki about avoiding getting stuck with the $20T in promises that are coming due as the baby boom enters retirement.

I was just thinking about this again today, it's going to be a weird economy with 80M retired people and ~130M workers -- 1.6 workers per pensioner, around a $20,000 pension burden per worker . . . but this $20,000/yr isn't going to be incinerated, it's going to command labor and goods in our economy.

I remember when Buffett bought that RV company in 2005, I was thinking how smart he was positioning his portfolio for the demographic change coming.

Convert those RVs into natgas burners, and Uncle Warren will be all set!

Stagflationary Mark said...


"I remember when Buffett bought that RV company in 2005, I was thinking how smart he was positioning his portfolio for the demographic change coming."

In hindsight, I think the gasoline change more than offset the demographic one.

2005 wasn't the best point to back up the truck on AnnWinnebago. I doubt it was an exception.

Stagflationary Mark said...

But like you say, maybe natural gas will save these homes on wheels. I'm skeptical though. I sense more belt tightening in our future.

Stagflationary Mark said...

The paste on the PS3 can be a bit buggy when creating a link. It doesn't paste properly immediately following the greater than symbol (needed to make a link). I didn't spot the extra "Ann" until after I posted.

I no longer have the brand loyalty to Sony that I once had. It is one buggy browser on the PS3. Doesn't help that my first PS3 died just out of warranty (as did a friend's).

AllanF said...

RE: Nat Gas

No one (I've seen) seems to mention the record breaking warm winter across the nation (well record breaking except for us poor fools in the PacNW, and to a lesser extent Cali) when discussing NG. That and a lot of producers forced to produce regardless of price because of fixed debt costs and ugly capital structures makes today's rock-bottom prices somewhat rational. If record breaking warm summer weather were to follow record breaking warm winter weather, and if some of those producers restructure their debt, and even better (for them) the industry consolidates, and the large integrateds finish building their NG->diesel plants... well, Mark will be feeling pretty clever for filling all those plastic garbage bags with NG.

AllanF said...

FWIW, Half Sigma repeats his video game for welfare bit today:

It includes a link his earlier one on the topic. A few posts before that is this one that sort of states the problem:

If you think about it, it is an interesting problem. What does one do about a labor surplus when --

1) our society won't conscience too large a standard of living disparity between the middle and lower class (all bets off for the 1% that try to remain out-of-sight if not out-of-mind)

2) in a post-industrial society the bottom 20-30% in IQ are economically unemployable; they might be worth $4/hr cash, but that is not enough to pay for their basic living expenses so govt steps in because of 1)

You must have the proper incentives:
a) smart and industrious people must still be motivated to put in real work
b) dumb people must believe their make-work is real-work (or fun work? ie. video games) or they will stop going or otherwise adversely game the system
c) the system has to dynamically adjust to allow people on the border to transition between real work and make work as economic conditions change

Maybe the problem itself can be a game? ;-)

Stagflationary Mark said...


...well, Mark will be feeling pretty clever for filling all those plastic garbage bags with NG.

What a thought. Very amusing.

I do think something will give eventually though. The 50-1 ratio seems a bit much (over the ultra long-term).

Put another way, if the 50-1 ratio was guaranteed to hold well into the distant future then I would definitely want to drive a natural gas powered car. No doubt about it.

Stagflationary Mark said...


Your last comment was a very deep thought and is similar to a recurring thought of mine.

September 25, 2007
Automation and Inequality

If one was to keep extrapolating this trend to its logical conclusion, at some point there will be just one farmer. He'll have all the wages and will simply press the "harvest" button on his desk.

I posted that when unemployment was 4.7%. Sigh.