Thursday 23rd June 2005AD
BUYING CHEAP GASOLINE WITH CHEAP DOLLARS

To understand where we are today and heading tomorrow, we have to first understand from where we came yesterday. 

There is no question that the world's demand for fossil fuels has been growing at a rate far exceeding the rate of newly discovered reserves, and exceeding economic & population growth. 

The mid 80's to late 90's was an era fraught with confusing and deceptive signals; 

i) From all appearances the global economy was booming, 
ii) Stock markets and property prices were soaring, 
iii) It was a sustained period of cheap credit and cheap energy, 
iv) The prices of essential commodities (including energy) were steadily sliding into oblivion. 

These factors, amongst others, were setting the stage for future market dislocations. The western world was being gently lulled into a "false sense of economy", a "false sense of wealth" and a "false sense of security" on many levels. 

In the past we have given examples of how "credit expansion" leads to "mal-investment". During the "boom" in high tech shares in the 90's, anyone investing in the exploration and development of natural resources (what we like to call "products of the earth") including oil and gas, were considered to be slightly insane.

The world's reserve currency, the US dollar, was being printed at ever-faster rates (inflation) and then being sent from the West to buy cheap oil from the Middle East.

By the late 90's the oil price had collapsed all the way to $12 pb. Energy exploration reached an all time low, while the discovery of new oil and gas reserves bottomed out.

This unsustainably low energy price was giving way to a heavy and unsustainable appetite and reliance on oil and gas in the west. The timeless principle remains; to artificially under price something of value (in this case energy) leads to the careless disregard and misuse of the same. 

Today the United States makes up less that 5 percent of the world's total population, yet each day it manages to consume upwards of ¼ of the daily global oil production. 

A large portion of oil consumption in an economy has traditionally been from manufacturing and heavy industry. One could almost overlook this huge and disproportional rate of energy consumption if it was the manufacturing giant it once was, however we need to remember that the USA lost its manufacturing to the East decades ago. 

The 80's and 90's helped set the stage, but the market dislocations resulting from years of buying Cheap Gasoline with Cheap Dollars has only just started and will continue to be played out in the years ahead, and in the meantime, we will continue to dig into the geo-political shifts and economic ramifications. 

Best Regards 
Philip Judge
pjudge@anglofareast.com