The Rude Awakening Wall Street, New York Tuesday, February 8, 2005 ------------------------- The Rude Awakening PRESENTS: The Chinese and the Russians
have embraced one another in a kind of petro-political bear
hug: it is the perfect match of a natural resource consumer
with a natural resource producer…Higher oil prices are
imminent… ------------------------- You are receiving this email as a part of your FREE
Subscription to The Daily Reckoning. Should you wish to
unsubscribe please follow the instructions at the bottom of
this email. ------------------------- IN MEMORIAM: CHEAP OIL
By Eric J. Fry The world will not run out of oil any time soon…just
CHEAP oil… So says a fascinating report that bears the title: "The
Death of Cheap Oil." The report's author, Steve Belmont,
Senior Market Strategist for the Rutsen Meier Belmont Group
LLC in Chicago, lays out a compelling - and somewhat
frightening - case for much higher oil prices. Admittedly, oil prices might retreat a bit over the near
term, as evidenced by yesterday's $1.20 slide to $45.28 a
barrel, but Belmont believes the price of crude oil will be
much higher by the end of 2006 than it is today. He bases
his bullish call on the inevitable - he believes - clash
between shrinking supplies and soaring demand. To preview
his conclusion: Buy long-dated call options on crude oil. In Today's Rude Awakening we highlight the first half of
Belmont's argument: oil demand. Tomorrow we'll examine the
supply side, while also revealing Belmont's suggested
course of action. "Oil prices are vulnerable to a perpetual state of shock,"
Belmont's report begins, due to a 'new era' of soaring
demand, depleting supplies and semi-permanent geo-political
tension, especially in the Middle East. "The $40 per barrel
peaks of the past decade could easily become the floor of
the next," Belmont predicts. "$70, $80 or even $100 per
barrel oil is not only possible, but probable in the coming
decade." As the Asian economies continue industrializing, the report
points out, demand for oil will soar…or at least it
should. "Total global demand for crude oil is currently 80
million barrels per day (MBD)," says Belmont. "Of those 80
million barrels per day, America's population of 293
million people consume roughly 22 MBD. Meanwhile, Asia's
3.6 billion people - well over 12 times the size of the
U.S. population - consumed just 20 MBD. Should Asian per-
capita-consumption rise from its measly 7% of U.S. per-
capita demand to a mere 14%, the market would have to
supply an additional 20 million barrels of oil per day.
This is one-fourth of today's entire global demand…
"Let's look at it another way," says Belmont. "U.S.
consumption of crude oil is roughly 28 barrels per person
per year. South Korea's annual per capita consumption is
17 barrels and so is Japan's. These are both developed
Asian nations. China is rapidly becoming a developed Asian
nation, yet its per capita consumption of crude oil is only
1.7 barrels per year." But Chinese demand is racing to
catch up. Crude oil imports to China jumped a whopping 33%
last year. But, says Belmont, the bull case for oil does not rest
entirely on the magnitude of demand, but also on the
rapidly changing structure of demand. Now that the Chinese
are maneuvering to secure long-term oil supplies, for
example, future supplies available to other buyers will be
reduced. The Chinese are actively negotiating to secure long-term
supplies from countries as geographically and politically
diverse as Canada, Saudi Arabia, Iran and Russia. Indeed,
the Chinese and the Russians have embraced one another in a
kind of petro-political bear hug. "When it comes to the
classic relationship between a natural resource producer
and a natural resource consumer," says Belmont, "no two
nations appear more perfectly matched than Russia and
China. Russia produces far more oil that it consumes.
China consumes far more oil than it produces. Both share a
Communist past, a long border complete with road and rail
links, and a history of uneasy relationships with the
world's largest oil consumer: America." This commercial relationship is spilling over into the
political sphere. For the first time ever, the Russians
recently agreed to hold a large military exercise together
with China on Chinese territory. The exercise will take
place in the second half of the year and will include
'state-of-the-art weapons', according to Russian Defense
Minister, Sergei Ivanov. As these former Cold War allies draw closer politically and
militarily, they will also draw closer commercially - a
trend that is likely to divert a growing share of Russia's
vast oil supplies away from world markets toward the
thirsty Chinese economy. "Now the China has entered the
game," says Belmont, "America will find itself competing
for shrinking supplies at every level. Over the long haul
that can only mean one thing - higher prices." Meanwhile, as China and the rest of the world ramp up their
oil consumption, oil production is peaking. The world has
consumed an estimated 1 trillion barrels of oil since the
drilling of the first well in the mid-1800s - almost half
of known recoverable supplies. And no new giant oil fields
have been discovered recently. In fact, discoveries of new
oil reserves peaked in the 1960s and have been declining
rapidly ever since. U.S. oil production peaked in 1970;
North Sea oil production peaked in 1999. "Given the likelihood that world crude oil production
cannot rise much above 90 million barrels a day," observes
Kevin Kerr, the man behind the Resource Trader Alert, "and
the fact that world demand will easily reach 90 million
barrels per day by the end of 2007, there is little chance
of cheap oil returning. It is unwise to count on sustained
oil prices below $35 to $45 per barrel to ever return
again. You're far more likely to see $100 oil than $35 oil
again." To be continued… [Ed. Note: Kevin Kerr is quoted almost everyday by the
mainstream press as an expert on the energy markets. The
Resource Trader Alert, Kevin's service, has made four
recommendations in the energy sector since July 30, 2004.
All four were winners. The worst trade showed a 72% gain. Resource Trader Alert
http://www.agora-inc.com/reports/RTA/WRTAF105 --- Advertisement --- WANTED: Someone willing to turn $400 into $200,000,000 That's exactly what a pizza delivery boy did with his
proprietary commodity trading system. In this rampaging commodity bull, you can take obscene
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look here now for more info: http://www.agora-inc.com/reports/RTA/WRTAF110 ------------------------- Did You Notice…?
By Eric J. Fry Last Friday, we noted, "The U.S. stock market does a lot of
'saving' for us." To illustrate the point, we referred to a chart that - for
technical reasons - did not appear. So let's try it
again… "The American savings rate has plummeted while stock prices
have climbed. In effect, stocks (as well as home values)
have been compensating for America's lack of savings." 
Our inherently unstable financial structure only works as
long as financial asset prices rise, and/or as long as
foreigners continue providing capital. However, any
reversal - or even moderation - of these trends could
devastate the U.S. economy. In other words, the savings-short U.S. economy is ill
equipped to withstand either a bear market in stocks or
rising interest rates…or, heaven forbid, both at once.
Our financial vulnerability does not guarantee an adverse
outcome, but it does improve the odds. [Ed. Note: We've archived all the back issues of the Rude
Awakening. You can find them on the Daily Reckoning's new
website under 'archives' or use the brand new search
function. Here's a link: Rude Awakening Archives
http://www.dailyreckoning.com/RAArchive.html ---------------------------------------- And the Markets… | Monday | Friday | This week | Year-to-Date | DOW | 10,716 | 10,716 | 0 | -0.6% | S&P | 1,202 | 1,203 | -1 | -0.8% | NASDAQ | 2,082 | 2,087 | -5 | -4.3% | 10-year Treasury | 4.05% | 4.08% | -0.03 | -0.16 | 30-year Treasury | 4.43% | 4.48% | -0.05 | -0.40 | Russell 2000 | 637 | 637 | -1 | -2.3% | Gold | 413.50 | $414.80 | -$1.30 | -5.5% | Silver | 6.54 | $6.67 | -$0.13 | -4.0% | CRB | 281.21 | 281.26 | -0.05 | -1.0% | WTI NYMEX CRUDE | 45.28 | $46.48 | -$1.20 | 4.2% | Yen (YEN/USD) | 104.87 | 104.06 | -0.81 | -2.2% | Dollar (USD/EUR) | 1.2762 | $1.2873 | 112 | 5.8% | Dollar (USD/GBP) | 1.8571 | $1.8757 | 186 | 3.2% |
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