Our oil "savings account" is dwindling rapidly, more oil price spikes likely

In the coming weeks readers will increasingly see two rarely used phrases in stories covering our dwindling worldwide oil inventories: "operational minimum" and "tank bottoms." The phrases more or less signify the same thing, though the former is more abstract and precise, while the latter is more visual. They signify rapid depletion of existing oil inventories and presage price spikes to come due to the loss of oil supplies from the Persian Gulf because of Iran's closure of the Strait of Hormuz, the maritime artery through which 20 percent of the world's oil previously flowed.

Think of it this way: Let's say you are currently spending your entire weekly salary for living expenses. Then, you suddenly have your salary cut by 20 percent. Believing that the cut is temporary, you dip into your savings account to make up for the loss of income. At the current rate of withdrawal, your savings will last four months. As the weeks go by, your savings account balance dwindles as you continue to live in the style to which you were accustomed before the salary cut. Your boss tells you (frequently!) that your full salary will soon be restored. So rather than cut back on your expenses, you keep spending down your savings believing that all will return to normal before you exhaust your bank account.

That's what is happening in the global economy which had about four months of buffer stocks—essentially, an "oil savings account"—to draw from at the beginning of March. We are getting closer and closer to using up those savings which are in the form of commercial inventories. We are rapidly drawing down those inventories to make up for the loss of oil and oil products from the Persian Gulf.

In fact, a recent analysis suggests that the world oil system will start to experience "operational stress" sometime in June. Operational stress "is the point at which the system begins to experience significant functional strain: price volatility becomes extreme, rationing of refined products begins in the most exposed markets, and the margin for error in supply chain management drops to near zero." This analysis takes into account ongoing strategic petroleum reserve releases around the globe and states that "[e]ven full deployment of strategic reserves buys weeks, not months, at current drawdown rates."

Taking a break - no post this week

I am taking a break this week and plan to post again on Sunday, June 7.

South by Southwest: Water crises hit America

Policymakers, politicians and the media have been talking about the need for better water policy in the desert southwest of the United States for decades. As the Colorado River, a major source of water for much of that area, continues to shrink, policymakers are having a hard time keeping up with nature. A new 10-year plan contemplates cutting water supplies for Arizona, Nevada and California by up to 40 percent depending on availability. Not surprisingly, these states don't like the plan that the Trump Administration said it will impose on the states since they have been unable to come up with an agreement.

The century-old Colorado River Compact governed water allocations to the upper and lower basins of the river. But the compact overestimated water flows and the states along the Colorado have been dealing with that error ever since. Now, a drought that has spanned more than two decades has made matters worse.

I can remember flying into Las Vegas in 2009, looking out my window and seeing the so-called "bathtub ring" around Lake Mead, the lake created by Hoover Dam. The top of the ring indicated where the water level had previously been before the ongoing multi-year drought noticeably lowered the lake level. Las Vegas was at the time involved in what was essentially an emergency project to build a water intake at a deeper level for fear that the surface of Lake Mead would fall below the current intake and deprive the city of 40 percent of its water.  The water authority succeeded in building the intake, but, of course, that didn't do anything to increase water supplies from the Colorado River.

Fertilizer, Energy and Liebig's Law of the Minimum

The loss of fertilizer shipments coming from the Persian Gulf as a result of the Iran war got me thinking about the chemist Justus von Liebig, a prominent 19th century proponent of the mineral theory of plant nutrition. Liebig is the popularizer of what is now known as Liebig's Law of the Minimum. The law states that the least available essential nutrient limits the growth of plants. This means once a grower runs out of one essential nutrient, adding extra of others will not make up for the lack of the one that is limited.

Liebig's eponymous law is about to assert itself in a big and distressing way in the coming growing season. That's because the Persian Gulf region supplies 36 percent of the world's urea (a form of nitrogen fertilizer), 29 percent of its anhydrous ammonia (another form of nitrogen fertilizer), 26 percent of diammonium phosphate and 13 percent of monoammonium phosphate.

Just to review a little high school biology, nitrogen, phosphorus and potassium are primary nutrients that cannot be obtained from the air or water and must come from the soil. (With regard to nitrogen, legumes such as soybeans are an exception in that they can fix nitrogen from the air for use in the plant.) Adding these primary nutrients to the soil improves the quality and quantity of plant growth. Huge of amounts of two of the three primary nutrients mentioned above are no longer flowing out of the Persian Gulf.

Chinese ag theft, pathogen research only point up dangers of GMO crops and monoculture

I'm shocked, shocked, to find out that the Chinese are stealing America's agricultural technology!

It can hardly come as a surprise that the Chinese government actively encourages and organizes the theft of intellectual property from other nations and their companies, in this case, agricultural technology in the United States. College students are some of the most active players in these thefts as between 250,000 and 300,000 routinely attend U.S. colleges and universities in any given year, most of them studying in scientific and engineering fields.

Not only is the theft of proprietary seeds an issue, but also research on and transportation of plant pathogens. No one has been accused of actively introducing pathogens into America's farm fields so far. But the combined problems of theft and possible biological attacks on crops merely lays bare the bankruptcy of the modern conventional agricultural system.

Will the U. S. curtail oil exports as fuel prices rise?

President Donald Trump may soon feel the need to "blockade" U. S. crude oil exports after those exports hit a record high recently, a trend which, if it continues, will increase the price U. S. consumers pay for gasoline, diesel and other petroleum-related products.

Nations around the world are scrambling to secure oil supplies that have been dramatically reduced by Iran's closing of the Strait of Hormuz to oil tankers of "hostile" countries which include major oil exporters such as Kuwait, Saudi Arabia, and the United Arab Emirates. In addition, the U. S. Navy has placed a blockade on ships from Iranian ports leaving the Strait of Hormuz, though the effectiveness of the blockade is in dispute.

In an April 1 televised address Trump said: "To those countries that can’t get fuel — many of which refused to get involved in the decapitation of Iran, we had to do it ourselves — I have a suggestion. Number one, buy oil from the United States of America; we have plenty. We have so much."

The Iran conflict and our Wile E. Coyote moment

I believe the global financial markets are now in what I would call a Wile E. Coyote moment frequently depicted in the old Warner Bros. animated series called "The Road Runner Show."  In this cartoon series a coyote while pursuing a roadrunner would inevitably end up running off a cliff and be suspended in mid-air until he looked down and hurtled to the bottom.

I say this because in case you didn't notice, last week we had the first public admission that fear is starting to grip monetary officials as a result of the Iran conflict. The United Arab Emirates (UAE) asked the United States government for a currency swap line, essentially a loan in dollars collateralized by the UAE's own currency.

I believe this event could be the leading edge of a financial panic that will ripple through the global financial system in the coming weeks, one that will bring various markets back into alignment with physical reality. That physical reality consists of an ongoing serious energy shortage and badly broken supply chains which are only getting worse as Iran continues to prevent critical energy and chemical supplies from exiting the Strait of Hormuz (except for its own).

Taking a break - no post this week

I am taking a break this week and plan to post again on Sunday, April 26.

Why most economists vastly underestimate the economic damage of the Iran conflict

A priest, an engineer and an economist are stranded on a desert island. The first order of business is to get some food. The priest suggests that they all pray. The practical-minded engineer suggests that the three men make a net to catch some fish. But where will they find the necessary materials? The priest and the engineer turn to the economist and ask him if he has any ideas. The economist replies, "Assume a fish."

This well-worn economist joke summarizes one of the chief flaws in contemporary economic theory. That theory almost completely ignores the role of physical resources, assuming they will always be available in the quantities we need at prices we can afford at the time we need them. When those resources aren't available, that theory begrudgingly accepts that there will be some damage to economic activity, but tends to greatly underestimate the impact. This conceptual flaw explains why economists in most financial institutions and governments and thus investors are not especially alarmed at the loss of energy resources as stock market indices remain not too far from their recent highs.

For a good summary of how contemporary economic theory goes off the rails, Australian economist Steve Keen offers a mercifully brief and comprehensible explanation. Here I will relate one critical part of that explanation. About 5.7 percent of U.S. GDP is devoted to procuring and distributing energy. Most economists will tell you that a 10 percent decline in energy availability would have a small effect on the U.S. economy. They would take the percentage of the economy devoted to energy, in this case 5.7 percent, and multiply it by 10 percent to arrive at a 0.57 percent reduction in economic activity.

Martin Act to the rescue: Insider trading on Trump reversals in the legal crosshairs

Currently unknown investors netted tens of millions of dollars in profit by placing huge trades in the oil futures markets just 15 minutes before President Donald Trump announced he was extending the deadline for strikes on Iran's energy infrastructure by five days to allow for nonexistent "negotiations" (which then turned into an additional 10 days—which meant little since U.S. and Israeli bombing simply continued). Because these investors bet on a fall in oil prices, they made money when the price of oil dropped sharply after the announcement.

The same or other investors traded heavily in stock index futures before the Iran announcement and profited handsomely as stock futures soared. All these investors could end up in legal jeopardy for engaging in insider trading if they were somehow given a heads up about the announcement. Were their trades just coincidental to the announcement? It seems unlikely, but that's the big question an investigation would answer.