"WHAT OUR READERS SAID"

Friday 1st September, AD2006

In Yesterday's Daily Dig we looked at 'Demand Destruction' and particularly as it relates to today's energy markets. 

1) "Sure oil prices are higher, but isn't that more to do with the global effect of inflation, particularly in the US dollar?" asked one reader. Good point, today's oil price should be hundreds of dollars a barrel when taking into account inflation in the dollar since the 1970's. Oil is in fact much cheaper today than it was in the 70's in constant dollar terms. 

On 'inflation', we always have to remember what it is; Inflation IS an increase in money supply. Inflation IS NOT an increase in prices. It is a simple matter of 'cause' and 'effect'; increasing prices is the RESULT of more money in circulation (inflation) buying the same number of goods and services. 

Unquestionably, more US dollars sloshing around in the world economy means it is going to take more dollars to buy everything, including a barrel of oil. 

2) Yesterday we said, "If supply cannot be brought up to demand, then either alternatives must be found or demand reduced." "Not a problem" responded another, "we already have the alternatives to fully replace our oil dependence, its only a matter of bringing these new sources and technologies to the market." 

Well lets all hope so! Nothing divides a room faster that the subject of energy alternatives; 
a) many will claim, like our reader, that alternatives are already there ready to go, 
b) others will cautiously agree, but argue that implementation on a global scale is more difficult, 
c) yet others will right off alternatives completely as unproven or currently unfeasible. In reality, the truth may be somewhere in the middle, time will surely tell. 

3) "Future oil supply in not a problem, its only big business and government manipulation to increase prices by restricting supply" writes a reader from the UK. 

Again, a popular but controversial subject. Many analysts will argue that the geological evidence and global known and proven reserves data simply do not support that theory. 

The economics of large petroleum companies are fairly simple. They are completely focused on managing their share price. For the big guys, today's share price is far more important than today's price of oil. 

So how do they manage their share price? Strategy Number One is by 'booking proven reserves'. Proven reserves relate directly to current and future supply. Proven long-term reserves on the balance sheet of a Shell Oil or British Petroleum in far more important to their current share price 
than higher earnings through a higher oil price. This is why all the majors are scrambling and competing against each other to find, prove up and book future oil and gas reserves. Interestingly, this process of new reserves discovery is proving to be far slower and more difficult than depletion of current reserves through global demand. 

In my opinion, it is not consistent for the multi-national energy companies to secretly "withhold supply" and not report reserves. Such action simply hurts their share price; which we agree is their number one focus. 

Next week we will continue the 'Demand Destruction' theme. "Are the Central Banks and their respective governments trying to Destroy Demand?" writes Anglo Far-East's Simon Heapes, "I have quite often stated that Precious metals prices should be well in excess of US$1,000/Oz. The evidence is building as to whether our Central Banks & Governments are in a concerted effort to Destroy Demand by selling their reserves into the free market!" More from Simon next week. 

As Individuals - our job is to equip ourselves with the knowledge that will help us survive and prosper in our changing world. At Daily Dig - our job is to dig up the relevant information that will provide you, our valued readers, with this knowledge.

Sincerely - Philip Judge pjudge@anglofareast.com