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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
TUESDAY, 12 SEPTEMBER 2000 

 

Today:  Oil Story

In Today's Daily Reckoning:
*** "Oil at $40" warns the head of OPEC...it's at its 
highest price in 10 years, and still rising
*** Airlines down...utilities up...Big Techs hit
*** Euro falls...is it time to buy euros? Maybe...

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*** Oil was expected to retreat yesterday - following an 
OPEC promising greater production. But it didn't. 
Instead, oil advanced $1.50 on Monday... and then another 
14 cents in after-hours trading.


*** "Fuel stockpiles are running at more than 20-year 
lows," Reuters informs us, "despite refineries operating 
at maximum capacity." 


*** At $35.28/bl, oil is at its highest level since Iraq 
invaded Kuwait in 1990. Europe has already been rocked by 
truckers' and taxi strikes - in reaction to high gas 
prices. 


*** Britain is now preparing for similar trouble. The 
British government took on 'extra powers,' says the 
Reuters report, to deal with the expected problems. More 
below...


*** How is it that in this great new digital era - where 
information is freely available - that no one seemed to 
notice we were running out of gas? How is it that the 
people who check the nation's gas gauge failed to say 
'fill 'er up' at the appropriate moment? 


*** Gary North quotes Paul Erdman on the wonders of the 
New Economy: "In this information age," writes the former 
novelist and end-of-the-world herald, "we live in a new 
world in which decision makers are immeasurably better 
informed than ever before and where response times are 
but a fraction of what they were just a generation ago."


*** Ahem...if that is so...how come the decision makers 
missed what might be the biggest single threat to global 
growth of the year... and now are powerless to do 
anything about it? "We are approaching a crisis of great 
proportions," commented OPEC chief, Rodriguez. "Depending 
on the winter," the oil price could hit $40 as 
"production capacity is reaching its limit."


*** Mr. Bear, no doubt with an amused eye on the oil 
price, stopped by Wall Street and left his calling card. 
The Nasdaq fell 82 points. The Dow dropped 25. The Big 
Techs were, once again, the targets of selling. Cisco 
fell $2.70. Sun Micro lost $5.50. Juniper Networks got 
whacked for $14.25. Ciena lost $15.60. Qualcomm was off 
$3.40.


*** "A report by the bureaucracy that controls 
California's ailing electricity grid, says what we've 
been saying all along..." writes Dan Ferris of Real Asset 
Investor. "And that is... price caps don't work. The 
price caps cut wholesale prices by two-thirds as of 
August 7, from $750 per megawatt to $250. But less than 2 
months later, the report affirmed that the laws of nature 
are still valid... the total cost of electricity consumed 
was higher during the period of lowest prices. In other 
words, lower prices led to higher demand." (see: The 
Limited Effectiveness of Doing the Wrong Thing 
http://www.dailyreckoning.com/body_headline.cfm?id=457)


*** Meanwhile, the airlines - which are energy consumers 
- lost ground. And utilities, also gas-guzzlers, rose. 
But utilities pay dividends. And the smart money has lost 
confidence in Wall Street's ability to produce capital 
gains. Both the Dow and the Nasdaq are down for the year. 
So, the investment pros are looking for a return on their 
money in the old familiar places.


*** But the public continues to be as confident as ever. 
Advancing stocks outpaced declining ones yesterday - 1522 
to 1295. 208 issues on the NYSE hit new highs - only 42 
hit new lows.


*** The National Ass'n of Business Economics - a group of 
3,000 economists and corporate executives has raised its 
GDP forecast for this year from 4.9% to 5.2% - the 
highest in 16 years.


*** The group also collectively opined that inflation 
would moderate next year...and that the productivity 
surge, the collective delusion and statistical mirage 
which has so delighted the hearts of American investors, 
will continue. (see: The Cult of Productivity 
http://www.dailyreckoning.com/body_headline.cfm?id=453)


*** And the U.S. trade deficit? The gaping hole in the 
hull of the U.S. economic ship, currently taking on water 
at the rate of $1 billion per day, is only of "mild 
concern" to the NABE.


*** Cash, measured by MZM, rose at 8% over the last 2 
months. M3, a different cash measure, has been going up 
at a 10% rate year to year. This is a lot of extra buying 
power. Prices are bound to rise. But what prices?


*** Debt levels keep rising too. In the popular 
imagination, Federal debt is falling. Yet, it rose $25 
billion last year... about $500 million per week. 


*** And the euro fell again. The Esperanto Currency is 
showing the structural weakness I warned about a year 
ago. Some currencies are backed by guns...some by 
gold...but the euro has neither. But neither is Euroland 
running a $1 billion/day current account deficit, which 
economist Joan Robinson described as "the road to ruin." 
Stay tuned...


*** Leaving nothing to chance, Wall Street is showering 
Republicans and Democrats with campaign cash. "Just more 
than half of $45.6 million donated by the securities 
industry through Aug. 3 went to Republicans," says a 
recent Reuters report. "The Street's most powerful 
companies," the article continues, "give almost equally 
to both sides of the aisle, according to analysis by the 
nonpartisan Center for Responsive Politics." Political 
scientist, John Green, notes that for such large donors, 
giving money is "an investment."


*** Another Reuters report: "Each athlete at the Sydney 
Olympics has been supplied with 51 condoms." To use all 
the condoms, Olympic athletes would need to have sex 
three times a day for 17 days to use up their condom 
quota. "These people are very optimistic," says the Thom 
Bomb. 


*** And William Fleckenstein, SiliconInvestor.com, 
provides more evidence of a tight job market - a 
complicated sentence from the Austin American-Statesman: 
"Last month, a job fair was held at the Travis County 
Community Justice Center, a state jail, that attracted 
headhunters who pitched jobs paying as much as $25 an 
hour, plus benefits that included retirement plans, 
company cars and the promise of career advancement, to 
many of the inmates scheduled to be released in the next 
two months..."


*** Today in 1880, H.L. Mencken was born in Baltimore.


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OIL STORY


Not since the Carter Administration has oil been so much 
in the news. The chattering classes, then as now, have 
begun using the word 'crisis' in the same sentence as the 
world 'oil.' Lester Brown - now so worried about what an 
over-abundance of oil consumption might do to the planet, 
fretted, back then, about the lack of it. 


The newspapers and TV newscasters just report the facts: 
there is a problem with the world's oil supplies. Too 
many people. Too many cars. Not enough oil.


The leader of the Free World a quarter century ago 
declared an emergency. As incredible as it sounds to our 
sophisticated, jaded and digital ears today - outside 
Christmas lights were banned...and a national 55 mph 
speed limit was imposed...all in the name of a 'crisis' 
that did not exist. 


"What are you laughing about," asked Addison as I write 
these lines. But Addison, born in 1968, is too young and 
too reasonable to imagine the depths of imbecility to 
which popular sensations can reach.


There was, of course, some objective reality behind the 
oil story of 1974. Oil follows the same cyclical patterns 
of other industries - boom to bust...optimism to 
pessimism...expansion to contraction... Since oil 
infrastructure - drilling, shipping, refining - can take 
years to put in place, occasional bottlenecks can cause 
severe price distortions. 


There are also political issues. A lot of the world's oil 
comes from a relatively few places. It is always possible 
for a few of the producers to get together and jimmie up 
prices - for a while, at least. 


If you were cut off from the media, you would take little 
more notice of these price swings than of, say, your 
local town councilor being caught taking a bribe or your 
painting contractor mixing his metaphors. It would be 
outrageous - but not unexpected. You would drive less 
when prices skyrocketed...and perhaps use more gas when 
they fell. But the sensation mongers in the media and 
politics managed to get oil in their grip in the 70s. 
Prices were not allowed to rise sharply enough to clear 
the market. As I recall, we ended up wasting time sitting 
in long gas lines... grumbling about the oil companies, 
the Saudis, or someone.


That was a quarter of a century ago. Now oil is back in 
the news...and once again, on the verge of becoming a 
popular sensation.


Again, there is an objective reality behind the movement 
in oil prices. As I explained a year ago, oil has been 
out of the popular imagination for a long time. While no 
one seemed to notice, it became very cheap. Inventories 
and infrastructure have been allowed to deteriorate. It 
was an opportunity for a contrarian. 


At the turn of the century - 100 years ago - you could 
buy a barrel of oil for about $1. The Dow was about 60. 
As recently as 15 years ago, that ratio was still about 
right. The Dow was about 60 times the price of oil.


But then, the Dow took off...and oil collapsed. Early 
last year, the ratio of the price of oil to the Dow was 
close to 1 to 1,000. And now that the price of oil has 
more than doubled, you can buy the Dow for roughly 275 
barrels of oil. 


"Oil is still cheap in real terms," Dan Ferris reports. 
"$35 oil is equal to $14.10 in 1979 dollars, $8 in 1970 
dollars. We are still well below the (real) price peak of 
$70 reached shortly after the Iranian revolution, near 
the peak of the Great Inflation, in 1979."


No surer proof that oil is becoming a popular sensation 
is the fact that James K. Glassman is writing about it in 
the New York Times. In yesterday's article, the man who 
assured us that the Dow would go to 36,000, explains why:


"The new economy," he says, "is creating wealth at an 
unprecedented rate..."


But then, we discover what this means for oil: "...and 
the newly rich want cars, air conditioning and other 
comforts that consume lots of energy...and high-
technology itself is surprisingly energy-intensive."


Glassman has discovered the "Internet's dirty little 
secret." And now...after the Internet, the New Economy, 
and the Big Techs...is it energy's turn to be a popular 
sensation?


Glassman cites the work of Peter Huber and Mark Mills who 
wrote the Digital Power Report: "The digital economy," 
they wrote, "is completely dependent on the big central 
power plant." They also explain that companies such as 
Sun Microsystems consume as much power as a small steel 
mill.


"My guess," writes Glassman, whose business is minting 
popular sensations, "is that investors are 
underestimating the importance of energy."


Perhaps not for long. "It is difficult," he warns, "to 
pick the energy winners," reminding us of how much money 
we might have made on the Big Techs if we had bought them 
before anyone ever suggested doing so. "Picking winners 
in this sector is nearly impossible for amateurs..." he 
points out, but then suggests a couple of possibilities.


Among them is Dan Ferris' favorite - Enron. "The stock 
has risen 346% in the past 3 years, but many who follow 
energy companies say it is still undervalued."


Maybe it is. And maybe, if the popular sensation keeps 
building, Enron will rise in price even more. 


But popular sensations are dangerous - whether political 
or financial. People surrender their own individual 
judgment and personal knowledge to a kind of mass, herd-
thinking. The key to making money is no longer being able 
to anticipate the cyclical trends of the oil market, or 
to buy good companies are low prices - but being able to 
anticipate the episodic waves of crowd psychology. Those 
who make money are not analysts with sharp eyes and sharp 
pencils...but those who can spot a fashion trend. 


The energy fad could follow the same sort of pattern of 
the Internets - working its way from one sector through 
another as the story develops. The key will be to stay 
ahead of the stories.


"The real news," writes Dan Ferris, who has so far been 
ahead of the fashion scene, "isn't oil. It's natural gas. 
We are headed for a major supply shock this winter. We 
have 15% less gas in storage than we did last year at 
this time, and there's not enough time to make up the 
difference. Last year's winter, the mildest winter in 105 
years of record keeping, kept natural gas prices-and 
therefore supply-low." 


All we need is a normal winter," he continues, "and my 
natural gas stocks are going to fly even higher than they 
already have."


We will see.


Your correspondent, 


Bill Bonner
 
 
 
 
About The Daily Reckoning:
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Last modified: April 01, 2001

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