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One of the joys of interviewing
some of the best brains in the world of finance and economics is that they
alert you to important factors that perhaps you haven’t fully considered.
This was my experience with Chris Martenson in
Madrid last week (the interview will be posted on the GoldMoney
website in the coming weeks). He reminds us that the availability and price
of oil are central to our economic future.
The basic argument is this: very
little can happen in our lives without oil. It is required for mining,
agriculture, manufacturing, transport and distribution. Global consumption is
rising, and extraction has levelled off.
Oil-exporting nations are consuming more, leaving smaller balances for those
with oil deficits. The cost of extraction is rising sharply: whereas fifty
years ago it cost one barrel of energy to extract a hundred, we are moving
towards new fields where the rule is one barrel for three. We face a
train-wreck between the increasing rates of global consumption and the
declining rates of net exportable production.
We are familiar with this story,
but most of us underestimate its importance, so it is worth repeating. The
chart below (which is based on statistics from BP’s Statistical Review of World Energy
2011) sums up
the problem.
 
The black line is the five-year
moving average of the balance between annual production and consumption,
represented by the black columns. The last year of production surplus was
1981, thirty years ago, and since then the world has drawn down on strategic
stockpiles and inventory to meet consumption demand, at a trend rate that is
now accelerating. The blue columns represent the European balance, which has
benefited from North Sea oil and which is now running out. The red columns
represent North America and Mexico, whose production has been deteriorating
since 1984. But most frightening is the Asia/Pacific deficit, the yellow
columns, which has soared over the last twenty years.
The chart clearly shows a picture
of an imbalance between production and consumption that cannot continue much
longer. The world is now caught between inflexible demand
– because oil is vital to our very existence – and declining net
production. This explains the oil price, which is the blue line in the second
chart (I shall comment on gold in a moment).
There have been three phases:
the first, when OPEC jacked up the price of oil; the second when more
expensive non-OPEC fields came on stream putting a cap on prices, and finally
the third, where prices have increased seven times so far. It is this third
trend, from which there is no apparent escape. The chart is on a logarithmic
scale, which means that prices have been rising at an exponential rate since
1998.
With the production/consumption
imbalance set to deteriorate further, there can be only one result, and that
is considerably higher prices. Based on BP’s statistics, which show
that the world’s most vital commodity has been in a supply deficit for
the last thirty years, the logical outcome is a price explosion. And with
quantitative easing in the markets there will be extra money to pay higher
prices, the consequences for global price inflation do
not bear thinking about. On this evidence we can therefore confirm Chris Martenson’s analysis.
Living with an energy supply
crisis will require a radical change in our lifestyles – downwards. The
best financial protection from this event appears to be physical gold, which
has tracked the price of oil reasonably well over the years as shown in the
second chart, and can be expected to continue to do so. After all, the
combination of the most rapid global monetary expansion in peace-time history
and soaring oil prices is an inflationary disaster in the making.
Orinally published at
GoldMoney
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