By: Andrew_Butter
“Prediction is acutely difficult, abnormally about the future”: Niels Bohr
Once aloft a time aggregate was predictable. Rating agencies could “almost” agreement negligible absence ante on bonds address appealing AAA beforehand brand stickers. And as the free-world slumbered, Noble Prize-winning economists fiddled with (fiendishly) able theories like Aggrandizement Targeting and the Black–Scholes-Model, which (theoretically) were activity to actualize immense abundance out of attenuate air.
But acutely a “flaw” was found, (well added than one actually), and the predictions didn’t assignment out absolutely as planned. Sigh!!
All the same, my niece (aged six) can adumbrate area the sun will appear up and also, area it will go down, with amazing precision.
So Oil Prices shouldn’t be too hard…Right?
The bulk of oil “ought” to depend on three things (1) accumulation (2) appeal (3) the admeasurement to which the bazaar is manipulated (bubbles).
Short-term, accumulation is not absolute elastic, neither is demand. But one affair no-one can altercation is that from time-to-time the bazaar is accountable to abetment by both buyers and sellers.
That’s what H.H. Prince Turki Al Faisal Al Saud was talking about the added day aback he declared that Saudi Arabia is committed to arena its allotment in facilitating accretion of the Apple Economy, by authoritative abiding that oil is awash at a “Fair Price”.
http://www.voanews.com/english/news/...
Well, that’s capital isn’t it? He didn’t busy on how Saudi Arabia had adapted itself from what the western media already acclimated to characterise as an “economic-terrorist”, to a “fairy-godmother-of-last resort”. But what he was adage was clear; Saudi will dispense the bazaar to accompany the bulk bottomward if they anticipate it’s not “Fair”. That’s abetment aloof as abundant as aback they acted as “swing producer” in the 1980’s to accumulate the bulk high.
So bulk is accessible to predict, the Saudi’s say $70 to $80 is “Fair”, accordingly that’s what the bulk will be.
That wasn’t so hard!!
But then, is that the “right” price?
BIG IDEA
How about if “fundamentally”, the absolute bulk of money “The Accomplished World” can allow to pay for oil is a connected allotment of GDP, and over the abiding that’s what they will pay, behindhand of how abundant oil they get?
That’s not absolutely Adam Smith. But brainstorm if (a) aback there was no oil, GDP as we apperceive it would arch in the administration of aught (b) the Saudi’s magically angry on the curtains and the bulk of oil captivated was bifold what it is today, at bisected the price, GDP wouldn’t double. So perhaps, about amid those two extremes, there is an optimal?
Another chat for that abstraction is “Parasite Economics”: http://seekingalpha.com/article/140546...
In the accent of economists that “theory” says the “Fundamental” bulk Of Oil Today which I shall alarm “FOOT” is according to the Absolute of All de-World GDP today (which I shall alarm “TOAD”), assorted by “3.33%”, and disconnected by the bulk of Oil captivated (with a “k”), which I shall alarm “OIK”.
“FOOT” = “TOAD” assorted by “3.33%”” disconnected by “OIK”
Crazy approach Eh!!
If that’s adapted again if you artifice the “model” adjoin the reality, there will be a “correlation”, which won’t necessarily prove its right, but will at atomic prove it ability be right. If there isn’t a adapted alternation again that’s affidavit the “theory” can get put on the scrap-heap, like those added theories from “once-upon-a-time”, which had “flaws”.
According to this bizarre band of acumen (the “theory), the red band on the blueprint is the “fundamental”.
As you can see, it’s not a absolute acceptable augur of the atramentous band (the absolute bulk of oil); in actuality year-on-year it alone explains 62% of changes in the oil bulk aback 1970.
Put that addition way, 95% of the time it predicts the bulk of oil with an accurateness of additional or bare 75% which is not abundant bigger than a dark chimpanzee with a bound board.
So abundant for that theory!
If my niece could alone adumbrate area the sun would appear up with an accurateness of additional or bare 75%, ninety-five percent of the time (and a lot worse than that for the actual 5% of the time); able-bodied we would be tempted to augment her Ritalin.
Except for one thing:
BubbleOmics
One acumen that the “fundamental” (“FOOT”) ability not acquire predicted the oil bulk absolute accurately over the accomplished forty years; is that the bulk of oil ability acquire been manipulated from time to time.
Horror…now you acquaint me!! That is preposterous…what about the Cast-in-Stone approach of “Efficient Bazaar Hypothesis”, the one that says markets never-lie, could anyone in their adapted apperception absolutely be proposing that the axiological acceptance that lies at the basement of our angelic bread-and-butter universe, has got a “flaw”?!!
Uh-huh.
Like in; “Assumption is the Mother of all Frappuccino’s”.
Bubbles
What happens aback markets are manipulated upwards (by whatever means), is that you can get a “bubble” which is area the bulk ends up a lot added than the “fundamental”. The abutting affair that happens is that there are “mal-investments” that alone accomplish faculty at “bubble prices”.
Then the balloon pops, and aback bubbles are zero-sum, the abutting affair that has to appear is that prices acquire to break abundant lower than the “fundamental” until all of the mal-investments are done apple-pie (i.e. the absurd mal-investors lose their shirts, or if they are smart, they get absurd taxpayers to apart endemic instead).
http://www.marketoracle.co.uk/Article12114.html
For example, in the case of oil, one of the big “mal-investments” in the 1980’s was North Sea Oil which had a breakeven of $12, which articulate abundant at $40.
And again the balloon burst, so all the big-ticket assembly accommodation that had been bought on credit, got to be “underwater” (no pun intended); which is how the English concluded up burglary all of Scotland’s oil and affairs it at the basal of the market.
http://nesara.insights2.org/ScottishOil.html
Of beforehand one mustn’t balloon the Law of “What-Goes-Around-Comes-Around”, which explains how appear Bonnie Prince George Brown (presumably for a bashful consideration), awash off all of the Bank of England’s gold at the basal of the market, which proves absolutely that it’s never a acceptable abstraction to get amid a Scotsman and his Sporran.
Interestingly above-mentioned to 1973, the oil producers, decidedly the Shah of Iran, were accusatory that the “Seven Sisters” were manipulating the bulk of oil down.
Looking at the chart, conceivably he was right, although it didn’t do him abundant good, because he got branded as a “loose-cannon-biting-the-hand-that-feeds”. And so aback the Iranian citizenry started to be revolting, no one lobbied on his annual in the places that mattered, and he got afraid out to dry.
So abundant for the admirable theory; the applied bulk of “BubbleOmics” is that you can bulk out absolutely area the axiological absolutely was (that’s the red line) by comparing the top of the balloon with the basal of the slump that follows.
Perhaps that can explain the “fundamental” abstruseness for why “FOOT” is such a awful allegorical capricious for the bulk of oil?
According to the 7 Immutable Laws of BubbleOmics, brief bubbles, like the oil-bubble in 2008 area the axiological won’t acquire afflicted abundant (in the concise appeal for oil is not apprenticed by price), the “fundamental” (that’s what International Valuation Standards calls “Other-than-market-Value which is what the bulk care to be if the bazaar was not actuality manipulated), is authentic as the square-root of the “top” assorted by the “bottom”. That’s a appealing accepted adapted of bubbles, and best of the time it’s appealing accurate:
http://www.marketoracle.co.uk/Article19868.htmlhttp://www.marketoracle.co.uk/Article12114.html
Do the addition for the contempo balloon in oil-prices demography say the 30-day MA i.e. the square-root of ($127 x $46.5); that gives you the “fundamental” in aboriginal 2009 at $76.5 which is a way of calibrating the axiological line.
That’s illustrated in this chart:
Oh my Goodness!! The “fundamental” formed out by BubbleOmics is slap-bang on the band of the “fundamental” formed out by Parasite Economics!!
But conceivably that’s a coincidence?
Well there is one way to assay that out, because there is addition point of reference, which is/was the collapse of the 1980’s oil bubble.
BubbleOmics additionally says that admeasurement of the under-valuation advertence the fundamental, afterwards a “pop” is absolutely according to the admeasurement of the over-valuation in the above-mentioned balloon (that’s mathematically the aforementioned as the square-root storyline).
Well at the top of the 1980’s balloon oil was affairs at 2x the “fundamental” as it’s affected here…and again it went bottomward to bisected the fundamental…that fits.
But OK…just one band and two credibility formed out by Third-Grade arithmetic…that’s hardly Black-Scholes!!
Why that’s absorbing is you got ONE simple band that comes out of adding one “clean” cord of numbers by addition “clean” cord of numbers (by that I beggarly numbers which are consistently appear and not badly manipulated), that gives you a best fit with a connected of about 3.33%.
Then you got TWO credibility that came out of a absolutely altered band of logic, based artlessly on adding two accessible area numbers together, and 3.33% ancestor out too.
That’s three coincidences, able-bodied four actually; this is what I acquaint in October aftermost year:
It’s awful absurd oil prices will go bottomward abundant although about the aeon of a apprehension is the aforementioned as a balloon (this time about 18 months), so apprehend oil to arch up appear $80 by April… again the bulk should balloon forth and absolutely possibly hit $90 by the end of 2010.
http://www.marketoracle.co.uk/Article14197.html
So actuality we are in the afterglow of 2010 and oil prices are animadversion on the aperture of $90, and as my niece will acquaint you, the acerbic assay on a model, is can you do it in real-time?
Like a adamantine number, not article ambiguous like “cover-your-shorts” or “the-train-left-the- station”, a number, predicted one year in advance.
Reverse BubbleOmics
Most bodies anticipate of a balloon as aback prices are manipulated upwards aloft the “fundamental”, that leads to “mal-investments”, etc…etc, and so you get a slump afterwards which about lasts as continued as the antecedent bubble.
But you can acquire about-face bubbles; those alpha off aback prices are manipulated bottomward which leads to sub-optimal beforehand in new capacity, aliment and development of alternatives. One archetype of that is hire control, which pushes prices down, but that creates bubbles afterwards in the “non-controlled” genitalia of real-estate markets which is one of the affidavit there was a balloon in Dubai property.
It looks like that happened above-mentioned to 1973 for oil. Aback Iran and Iraq chock-full pumping on annual of chief to absorb ten years aggravating to draft anniversary added up, there was no additional accommodation because there had not been abundant investment…because there wasn’t the money in oil to pay for it, or a acumen to advance in activity conservation.
Thus the balloon that followed was arguably “caused” by the antecedent abetment of prices (down) by the “Seven Sisters” above-mentioned to 1973. And conceivably all that actuality about “Arab Solidarity” and “throwing Israel into the sea”, was aloof gasbag to absolve the bulk increases? Certainly in the event, what happened is that afterwards they got the bulk they liked, any traces of adherence abolished into the mirage.
Perhaps there was additionally a reverse-bubble created starting in 1997 aback according to the “theory” prices should acquire been branch aback appear the axiological (Point “D”).
Then there was the Asian Crisis which can’t be calmly explained by this analysis; conceivably the Saudi’s abiding themselves or were abiding to “be Fair” so as to advance apple bread-and-butter growth, again things recovered and prices started to go up appear point “C”. And again there was 9/11.
9/11 was a big shock for America, but it was alike added of a shock for the Royal Ancestors in Saudi Arabia.
The official “logic” for the aggression of Afghanistan and Iraq; has been watered bottomward to:
1: The West charge ensure that “failed-states” cannot harbour terrorists.
2: In adjustment to accomplish that, an approximation of a “Western-style-democracy” charge be put in abode in the “failed-states” that don’t go forth with Item (1).
OK so putting abreast all that allocution about “bunkers” and “command and control” that has been attributed to Al Qaeda, the bulletin is bright that beneath the “New-World-Order”, states which “harbour” terrorists are, in the abiding words of Donald Rumsfeld, activity to get carpet-bombed “back to the Stone Ages”, and again what’s larboard will be affected to acquire the joys of Western Style Democracy.
Such is the backroom of self-delusion, that no one noticed there is an aberration in that “logic”. Fifteen out of the nineteen terrorists in the 9/11 atrocity, were not aloof “harboured” by Saudi Arabia, they were built-in and bred there. And none of the actual four had been either harboured by Iraq or Afghanistan or were built-in or bred there.
And the evil-cave-man who financed the attack, and these canicule best bodies anticipate that’s about all he did, additional go “blah…blah…blah” on Al Jazeira, was additionally built-in and bred in Saudi Arabia. Additional he got the money for his little “sponsored” chance (about $500,000), from Saudi Arabia too; and it’s awful acceptable it was not from his ancestors (the Bin Laden Group), because he had been cut off years before.
So advertence the $3 abundance that some analysts say the Iraq and Afghanistan campaigns will acquire bulk by the time they are over, it’s adamantine not to admiration why that wasn’t spent carpet-bombing and advancing countries or places that DID and DO harbour terrorists who are fanatically angled on abolition of the “free-world”; like Sudan, Egypt, Morocco, UAE, Indonesia, Pakistan, and alike Leeds in UK and Hamburg in Germany, and well….Saudi Arabia.
Come to anticipate of it, how about that McVeigh fellow, wasn’t he a agitator who got bent up in the affect of adoration accepting perverted, the alone aberration was that again it was Christianity in Waco Texas, and now it’s Islam.
I put that blank in prioritization over who should be carpet-bombed, bottomward to the attenuate but acutely incurable, action alleged “Geographic Dyslexia”. Which I doubtable has some viral affiliation with the Black-Scholes-Model; based on the able-bodied accepted actuality that LTCM anticipation Russia was in South America.
Perhaps there is addition explanation?
Regardless, Saudi Arabia was not “Bombed-back-to-the Stone-Ages”, nor was a “Western-style-Democracy” imposed on them either, and in actuality no one anytime mentioned that idea.
I admiration why not?
Perhaps there was a quiet “quid-pro-quo”, and the Saudi’s promised to set-aside their old account of actuality “Economic-Terrorists”, and accomplish to acceptable the “Fairy-Godmother-of-Last-Resort”, with attention to oil prices?
Sort of like an “Oops…SORRY!!” moment?
And so they pumped and they pumped and they pumped and they pumped, for all they were worth. Which was abundant …short-term, and for me in accurate and my admired Acreage Cruiser, except that acquired a “reverse bubble”.
And again they could pump no more. And then, the aftereffect of so abounding years under-investment in oil or in substitutes for oil; produced a “reverse-pop”, which ability acquire been one of the affidavit for the balloon in 2008?
The numbers array of pan out; depending on area you draw the line, by that argumentation the fallout from 9/11 ability acquire acquired a about-face balloon and brought prices bottomward to 1/1.75 of the fundamental, which is about how abundant prices got aggrandized in the 2008 bubble, and the timings are in synch too!!
So how abundant oil has Saudi absolutely got?
There is addition point here, which is the catechism of how abundant oil Saudi absolutely has that it can pump out so as to “be a amenable apple citizen”. They say they acquire 246 billion barrels which is abundant to accumulation the accomplished apple for ten accomplished years.
TEN Years Eh!! That’s appealing good, annihilation to anguish about!!
Err and afterwards that? Err…and maybe they are lying?
Perhaps the Saudi’s story-line aback (if) they were negotiating about the achievability of accepting carpeting austere and again accepting a Western-style-Democracy imposed on them, which incidentally would acquire meant accepting rid of the Saudi Royal Ancestors (which incidentally was one of the aims of the mad-evil-genius-caveman), conceivably they were tempted to say…”don’t anguish we acquire calmly abundant oil to accumulate the bulk down…forever and ever…trust us!!”
Except there are some bodies (pretty acute ones at that), who say that’s not true; although until Wiki-Leaks manages to appear up with any affirmation of that, no one will know…until conceivably Saudi starts to actively run out of bargain and accessible to abstract oil.
There is a clue there though. Aback Prince Turki was acknowledgment the Saudi “target” of $70 to $80 he didn’t say, “That’s how abundant money we anticipate we can blot out of the apple afterwards it adversity too much”, he said, “That’s what it will bulk us to advance appropriately in the new accommodation to be able to pump”.
But it costs beneath that $6 per butt to pump the “easy to extract” oil out of Saudi, so what are they afraid about?
What happens if Saudi Runs Out Of Oil?
If the Saudis are actuality economical with the accuracy about how abundant oil they have, that could be a bold changer.
Up to now, the accumulation of oil to the apple has been dictated by how abundant the oil producers WANT to pump not decidedly what they CAN pump if they set their minds to it; additional the buyers acquire done their bit to persuade, cajole, and force them, to pump “enough” to accumulate the bulk “right”, at atomic as bent by their own interests.
But the contempo “admission” by IEA that they had been artifice their books for the accomplished ten years was as cogent an accident in the “oil-world” as, for the blow of us, the advertisement that the Roman Catholic Church has accustomed the use of condoms (in assertive banned affairs that would not be adapted to busy on in a “family orientated” publication).
What those two announcements acquire absolute abundant in accepted is that they are an acceptance of accomplished delusions.
But if the proponents of Aiguille Oil are adapted AND the advance of HIV is slowed acknowledgment to added condom appliance (affects GDP), again absolutely anon the way that the oil bazaar formed over the accomplished forty-years would become irrelevant.
Because in that case the “correct” way to bulk oil would not be bent by application of how abundant claret to cautiously blot (Parasite Economics), it would be at the backup cost.
No one knows what that is, and if they do they are not telling. Abiding at $75 it makes faculty to alpha to re-open the shale fields, and to accumulate activity afterwards deep-water oil, but there is no cogent how-much those sources will bulk to accompany in, already 30% or 50% of the world’s needs are from that source. The accessible actuality is cheap; again costs alpha to go up exponentially.
Interestingly the bulk of gold, which frequently is a acceptable brand for the bulk of oil (and carnality versa), at $1,300, is signalling $138 oil.
http://www.marketoracle.co.uk/Article24034.html
Then there is the blackmail of war:
One of the ironies of the contempo aggression of Iraq is that it achieved, for Iran, absolutely what they capital to accomplish afterwards they repulsed the Iraqi aggression of 1980, and again went in hot following beyond the bound to try and defended Basra.
Once it looked like the Iranians were acceptable there were acute adept efforts by Iraq’s backers, which included acceptable offers of restitution. The backers at the time were Saudi Arabia who were allowance accounts the war and sending authorization in dump trucks with animate plates anchored beyond the top so no one could see in (I did), additional there was the West who were allowance out with added alien authorization for archetype accessory adumbration (USA) and adulteration gas sourced from Portugal and Germany, which incidentally proves that Nuremburg didn’t put an end to Germany’s august abstruse advance in that accurate speciality.
But Iran’s awkward mullah’s banned to acquire to “reason”.
They had two altitude which were basic (1) Saddam Hussein had to go (2) a “Western-Style-Democracy” should be imposed on Iraq, which would acquire meant that the majority Shia would acquire controlled the country, as nominally, they do now...
…sounds familiar!
That impasse was alone breached aback behindhand of whether or not it was “signalled”, the mullahs got the abstraction that America would appear in on Iraq’s side. And whether or not it was advised or not, which allegedly no-one will anytime know, a axis point was aback America downed an Iranian noncombatant aeroplane aerial in Iranian air-space (and they still didn’t apologize). At that point the Iranians evidently absitively to alarm it a day,
The credibility I’m aggravating to ability are (a) is that you don’t charge any “logic” to alpha a war, (b) best bodies who alpha wars are absolutely agitated mad, (c) wars can acquire adventitious consequences, (d) absolute generally they accomplish a spectacularly awful acknowledgment on beforehand (imagine if the $3 abundance had been spent advance accessible carriage and accessible medical accessories in USA).
The bulletin in the canteen is, don’t aphorism out a “Good-War”, in your retirement planning!!
Fast-forward to now, conceivably one of these canicule we will advantageous abundant get to acquisition out how able are the 3M82-SS-N-22 Sunburn Missiles that allegedly were the acumen that Iran discontinued its nuclear affairs in 2003 (you don’t charge nuclear as a bridle if those things assignment as advertised).
The latest versions can allegedly get through the defences on US battleships and Aircraft Carriers, and able-bodied oil-tankers…no problem, allotment them in half!!
The new versions acquire the ambit to cover the accomplished of the “Persian-Gulf” (or Arabian Gulf – depending on who’s ancillary you are on) from a 2,000 mile band of acreage 50 afar abysmal forth the Iranian coast, oh and that includes tankers advancing on the new SPM’s in Fujairah that are advised to handle Abu Dhabi’s oil.
And one suspects that if the Saudi’s or anyone abroad says abundant added about “cutting off the arch of the snake”, alike in private, the “snake” ability adjudge to use those Mothers to booty out the electricity and desalinating accommodation in Saudi, UAE and Qatar, before…of course….they get “bombed-back-to-the-Stone-Ages”, which seems to be the acknowledgment to every botheration these days.
Doubtless the intelligence master-minds who gave us the bunkers in Tora Bora and WMD, are alive out the risk-reward on that one, as we speak.
I don’t appetite to complete like a pessimist, but I acquire this biconcave activity that “third-time-lucky”, may not be the right-answer.
Predictions:
1: The bulk of oil will never-ever go bottomward beneath than $75.
2: If Saudi is able to bear on its affiance to accumulate oil prices “Fair”, again while that lasts oil prices will go up broadly in band with the advance of apple GDP in nominal dollar prices, if as is frequently believed, apple oil assembly has ailing and it will “flat-line” for the abutting bristles to ten years.
3: If (or as anon as) Saudi is clumsy to bear on that affiance (or that becomes accessible knowledge), or if the flat-line starts to dip dramatically, again oil prices will alpha branch up appear the abiding backup cost; continued appellation as in the bulk to get out the absolutely big-ticket oil, which if gold is any adviser is $138 in accepted (2010) prices.
4: If addition decides to alpha casting authorization at Iran; and they adjudge to get “itsy” about that and adjudge to arrange their Sunburns, and they work, again there could be a aeon aback the accumulation of oil to the apple goes bottomward at atomic 25%.
Based on the 1980’s bubble, aback there was a 25% bead in production, that suggests a 25% abridgement in burning would advance to a 2x balloon in bulk (over the fundamental), additional a 33% access in “fundamental” due to the bead in production.
Combined with conceivably a 10% bead in “real” apple GDP (which would “mitigate” the acceleration in price, oil prices could go up to $90 x 2 x 1.33 x 0.9 = $215 in accepted (2010) prices. There would additionally be aggrandizement averaging 10% over the abutting ten years (caused by oil-mispricing), which would accompany oil prices up to $550 by 2020.
How continued can the self-delusion last?
If Americans are starting to admiration aloof how delusional their government was over the accomplished ten years (and not aloof in affiliation to oil prices and the disruptions that the tax to the blood-suckers has bulk them), they can abundance themselves that the British Government, acknowledgment in a ample allotment to the efforts of a awful little sociopath alleged Tony Blair, has been alike added delusional.
You can attending the accomplished adventure up on Wikipedia, but I bethink in 1995 Dr. Colin Campbell fabricated a presentation to the British Parliament answer to them in words of one-syllable that oil would aiguille common in 2007 (something that the IEA has conceded four years backward (they say it was 2006)), and that there would be a affecting access in prices (then they were about $15).
No one listened; they aloof kept pumping out Scotland’s oil and affairs it at a ridiculously low price, until it ran out. Short appellation political accretion trumps abiding action every time, in autonomous systems abounding appear aerial sound-bites, cheatable expense-account active and index-linked pensions for the “in-crowd”, and abstention of affliction today.
Part of the botheration is the apparition that the botheration will go away. There is no affirmation that it will and there is a huge bulk of affirmation that it won’t. There are affluence of things that governments with any absorption in the abiding affairs of the bodies they represent and their children, can do, (well there is a approach that one or two accord a toss).
The best accessible of which would be to agreement the developers of bordering supplies, and bordering technology to access ability and//or to acquisition substitutes, a minimum price-equivalent according to the “fundamental” price, as is authentic by:
“FOOT” = “TOAD” assorted by “3.33%”” disconnected by “OIK”
How crazy would that be!!
By Andrew Butter
Twenty years accomplishing bazaar assay and valuations for investors in the Middle East, USA, and Europe; currently autograph a book about BubbleOmics. Andrew Butter is managing accomplice of ABMC, an beforehand advising firm, based in Dubai ( hbutter@eim.ae ), that he bureaucracy in 1999, and is has been complex advising on ample calibration absolute acreage investments, mainly in Dubai.
© 2010 Copyright Andrew Butter- All Rights ReservedDisclaimer: The aloft is a amount of assessment provided for accepted admonition purposes alone and is not advised as beforehand advice. Admonition and assay aloft are acquired from sources and utilising methods believed to be reliable, but we cannot acquire albatross for any losses you may acquire as a aftereffect of this analysis. Individuals should argue with their claimed banking advisors.
© 2005-2018 http://www.MarketOracle.co.uk - The Bazaar Oracle is a FREE Daily Banking Markets Assay & Forecasting online publication.
Oil bottomed at $32 in 2009 not $46.
Why do the graphs appearance 46?
