Today's Tidbits

Peak Oil Summary
From The Independent: “Scientists have criticised a major review of the world's remaining oil reserves, warning that the end of oil is coming sooner than governments and oil companies are prepared to admit…scientists led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives. According to "peak oil" theory our consumption of oil will catch, then outstrip our discovery of new reserves and we will begin to deplete known reserves. Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone." Dr Campbell, is a former chief geologist and vice-president at a string of oil majors including BP, Shell, Fina, Exxon and ChevronTexaco. He explains that the peak of regular oil - the cheap and easy to extract stuff - has already come and gone in 2005. Even when you factor in the more difficult to extract heavy oil, deep sea reserves, polar regions and liquid taken from gas, the peak will come as soon as 2011, he says. This scenario is flatly denied by BP, whose chief economist Peter Davies has dismissed the arguments of "peak oil" theorists. "We don't believe there is an absolute resource constraint. When peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies as from production peaking." In recent years the once-considerable gap between demand and supply has narrowed. Last year that gap all but disappeared. The consequences of a shortfall would be immense. If consumption begins to exceed production by even the smallest amount, the price of oil could soar above $100 a barrel. A global recession would follow…In 1999, Britain's oil reserves in the North Sea peaked, but for two years after this became apparent… it was heresy for anyone in official circles to say so. "Not meeting demand is not an option. In fact, it is an act of treason," … One thing most oil analysts agree on is that depletion of oil fields follows a predictable bell curve. This has not changed since the Shell geologist M King Hubbert made a mathematical model in 1956 to predict what would happen to US petroleum production. The Hubbert Curve shows that at the beginning production from any oil field rises sharply, then reaches a plateau before falling into a terminal decline. His prediction that US production would peak in 1969 was ridiculed by those who claimed it could increase indefinitely. In the event it peaked in 1970 and has been in decline ever since. In the 1970s Chris Skrebowski was a long-term planner for BP. Today he edits the Petroleum Review and is one of a growing number of industry insiders converting to peak theory. "I was extremely sceptical to start with," he now admits. "We have enough capacity coming online for the next two-and-a-half years. After that the situation deteriorates." What no one, not even BP, disagrees with is that demand is surging. The rapid growth of China and India matched with the developed world's dependence on oil, mean that a lot more oil will have to come from somewhere. BP's review shows that world demand for oil has grown faster in the past five years than in the second half of the 1990s. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030. Two-thirds of the world's oil reserves lie in the Middle East and increasing demand will have to be met with massive increases in supply from this region. BP's Statistical Review is the most widely used estimate of world oil reserves but as Dr Campbell points out it is only a summary of highly political estimates supplied by governments and oil companies. As Dr Campbell explains: "When I was the boss of an oil company I would never tell the truth. It's not part of the game." A survey of the four countries with the biggest reported reserves - Saudi Arabia, Iran, Iraq and Kuwait - reveals major concerns. In Kuwait last year, a journalist found documents suggesting the country's real reserves were half of what was reported. Iran this year became the first major oil producer to introduce oil rationing - an indication of the administration's view on which way oil reserves are going. Sadad al-Huseini knows more about Saudi Arabia's oil reserves than perhaps anyone else. He retired as chief executive of the kingdom's oil corporation two years ago, and his view on how much Saudi production can be increased is sobering. "The problem is that you go from 79 million barrels a day in 2002 to 84.5 million in 2004. You're leaping by two to three million [barrels a day]" each year, he told The New York Times. "That's like a whole new Saudi Arabia every couple of years. It can't be done indefinitely." The importance of black gold A reduction of as little as 10 to 15 per cent could cripple oil-dependent industrial economies. In the 1970s, a reduction of just 5 per cent caused a price increase of more than 400 per cent. Most farming equipment is either built in oil-powered plants or uses diesel as fuel. Nearly all pesticides and many fertilisers are made from oil. Most plastics, used in everything from computers and mobile phones to pipelines, clothing and carpets, are made from oil-based substances. Manufacturing requires huge amounts of fossil fuels. The construction of a single car in the US requires, on average, at least 20 barrels of oil. Most renewable energy equipment requires large amounts of oil to produce. Metal production - particularly aluminium - cosmetics, hair dye, ink and many common painkillers all rely on oil.”

MISC

From Dow Jones: “Investors lifted Treasury securities back out of the hole they had appeared ready to bury them in earlier Thursday morning, as technical forces helped move some prices back into positive territory by midmorning. The gains were not large, but they lifted part of the yield curve to price gains and helped wash away bigger losses seen at the start of the session…The dollar is split, still up against a beleaguered yen but little changed against the euro as investors remain on hold ahead of Friday’s CPI report….A report of tame wholesale inflation helped stocks rise Thursday, as the markets
shook off disappointing earnings releases from Wall Street banks Goldman Sachs and Bear Stearns as well as pressure from rising oil prices. Stocks continued the rally that started Wednesday, when the Dow posted its biggest point gain of the year, as bond yields pulled back from multiyear highs after an anecdotal economic survey suggested moderate growth and little inflation…Crude oil futures climbed to a two-and-half-month high of more than $67 a barrel Thursday, boosted by worries about tight summer gasoline supplies. The Department of Energy on Wednesday reported an unexpected drop in U.S. refinery utilization and said gasoline stocks remained unchanged last week, sparking a sharp rally that deepened Thursday morning as the front-month July crude contract smashed through key technical resistance.” {10y Treasury up 2.5bp to 5.22. Dow up 71 to 13,554}
From CNN: “The average rate on 30-year fixed-rate loans climbed to 6.74 percent for the week ending June 14, from 6.53 percent the previous week. That marked the biggest one-week increase since July 2003…The 0.59-percentage point increase since May 10 represents a jump of $115 a month on a $300,000 loan…The rate on 15-year loans averaged 6.43 percent, up from 6.22 the previous week…Five-year adjustable-rate mortgages rose to 6.37 percent …One-year ARMs averaged 5.75 percent…”
From Morgan Stanley: “Global growth is currently strong and looks sustainable. But if it were to slow, it could depress US business conditions and earnings, while a prolonged spike in gasoline prices or a deeper housing recession could force consumers to retreat.”
From UBS: “The Swiss National Bank said they still fear a spillover of US housing weakness into the global banking industry and credit…”

From Citi: “The bond market is leading Equities and FX these days with a sell-off that we haven't seen for years. In the last 18 years (using monthly data) we counted only 10 occasions where the bond market reacted in such a way in both magnitude and speed.”

From the Los Angeles Times: “The California Public Employees' Retirement System is considering using derivatives to speculate on declines in the creditworthiness of corporate bond issuers. The pension agency would start with a pilot program in which the derivatives, known as credit-default swaps, would be limited to a small fraction of its $49-billion fixed-income portfolio… CalPERS currently gains from its recognition of "overvalued" bonds only by not investing in them… The new program would provide another way of profiting "from a decline in the price of an issuer or instrument." Credit-default swaps, which act like insurance, are bought by bondholders to protect themselves from default. The market value of the swaps rises as the bond issuer's financial health declines. CalPERS, however, would be buying the derivatives without holding the bonds they cover, so it would profit from a decline in the market value of the bonds. CalPERS, with $240 billion under management, is looking at generating greater returns as the cost of covering retirement and healthcare benefits for public workers grows.”
From Bloomberg: “Freddie Mac, the second-largest source of money for home loans, lost money for the third straight quarter because of a decline in the value of derivatives used to hedge against swings in interest rates. Fees from guaranteeing mortgage bonds surged as it increased market share. The net loss was $211 million, or 46 cents a share, compared with net income of $2 billion, or $2.80 a share, a year earlier…Freddie Mac, which ranks behind Fannie Mae in the $10.9 trillion U.S. residential mortgage market, said growing concern about mortgage credit risk drove down the value of some assets. Smaller swings in interest rates created losses on derivatives used to hedge against the cost of borrowing. The mortgage portfolio, which grew at a 6 percent annualized rate, limited declines…The report is the first regular quarterly report by the government-chartered company in five years. “