The Aussie dollar, for example, tacked on 4.5% against the greenback last week. The Aussie is now at a seven-month high against the USD. You could be tempted to say the "carry trade" is back on. That's where investors borrow in Yen or U.S. dollars to buy higher yielding currencies like the Australian and New Zealand dollars. But we don't think that's the case. Why?

The "carry trade" was popular over the last few years when appetites for risk were healthy. They aren't so healthy right now. U.S. stocks and bonds are falling. Interest rates are creeping up.

What's more, the green shoots of economic recovery have been nearly blown away in the last week of negative economic news (mostly concern about America's credit rating). Australian stocks are set to open lower today as well, following Friday's down day on the Dow. It could be quiet in Asia today with American markets closed on Monday for the Memorial Day Holiday (which also kicks off the summer driving season, whatever that actually means). Also, keep in mind that the big rally since mid-March may simply have run out of steam.

But if the "carry trade" isn't carrying the Aussie dollar higher, what is? Well, it could be the appeal of a "commodity currency." Gold closed over seven bucks higher in Friday trading to close at $958.90. Oil was up one percent, too, to $61.70. Saudi Arabian oil minister Ali al-Naimi told reporters in Rome that oil would hit $75 when global demand picks up. Perhaps the minister has read our "Long Aftershock" report!

"We'll get there eventually," al-Naimi said. "The trick is keeping it between $70 and $80. It will be achieved as demand rises and the fundamentals are better than they are now." We're not exactly sure what 'fundamentals' al-Naimi has in mind. The one we have in mind is supply. Don't be surprised if global oil demand rises a lot faster than the capacity of oil companies to increase supply.

Some national oil companies-especially PEMEX in Mexico-are watching their major oil fields experience big declines in production. The Cantarell field, for example, used to pump out around two million barrels of oil per day in 2004. Today, it's just 700,000 barrels per day. That decline is a result of under investment by PEMEX and simple resource depletion.

When you combine the huge fall-off in capital spending by the oil companies with declining production from the world's major fields, and then add in the possibility of a swifter recovery in demand than investor's expect, you get a higher oil price. And don't forget inflation. The weaker U.S. dollar will put a little in wind oil's sails as well.

Dan Denning
for The Daily Reckoning Australia

• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• Higher Oil Prices, the New Normal
• Oil Prices Under $70
• Peak Oil: Supply Data Doesn’t Lie
• Peak Oil – The Rewards

What's he talking about? Mexico has just over 12 billion barrels of oil reserves, or ten percent of the world's total. It exports 1.5 million barrels per day to the U.S., putting it third behind Canada and Saudi Arabia, and just ahead of Nigeria and Venezuela.

Source: U.S. Energy Information Administration

The trouble is that Mexico's government has been using the state oil company, Pemex, like a cash machine that never runs out. Pemex contributes 40% of the total tax revenues of Mexico's Federal Government. It's a resource of the people, for the people, and by geology. But you cannot print oil on a printing press. There is no such thing as "just in time" energy resources.

Mexico's government has not been investing enough in exploration or new production to top off Pemex's reserves. Those reserves are being depleted. What's more, its largest oil field Cantarell, is in an alarming state of decline. Cantarell was discovered in the Gulf of Mexico in 1976 by a fisherman. Estimates are that it was a 20 billion barrel discovery.

Mexico has been producing from it ever since in huge numbers. But those production numbers appear to have peaked in 2004 at around 2 million barrels per day. Today, Cantarell produces just 1.4 billion barrels per day-a loss of 600,000 barrels a day in four years. Overall Mexican production peaked at 3.4mbpd 2004 but is now under 3mpbd. In the first two months of this year alone, Mexican oil production fell 6.4% compared to the same time last year.

Enjoy the oil while it lasts folks. Of course, it's going to last for a very long time. Peak oil doesn't mean that all the world's oil will be gone. It means that all the world's cheap oil will be gone.

That loss will have a radical effect on economic and social arrangements that were built on cheap energy. And for nation states like Mexico (and Venezuela, and Saudi Arabia) that finance welfare states with oil revenues, it will be a disaster unless oil profits are turned into income producing capital assets-instead of merely redistributed as transfer payments...or tuned into new Towers of Babel.

"We should leave oil before it leaves us," said International Energy Agency chief economist Faith Birol in an interview with German monthly journal International Politics. There's an idea.

Birol says the world has time to make other energy plans, but not much. The rise in the oil price will be gradual he says, as a function of declining production and growing demand. "But looking at this long-term, it becomes clear that nothing changes whether oil runs out in 2030 or 2040 or 2050."

We are assuming he's referring to cheap oil and not the world's total supply of oil. Either way, the warning is unambiguous. "One day it will definitely be finished. And I think we should leave oil before it leaves us. That should be our motto. We should prepare for that day with research and development, how we can replace oil, what kinds of living standards we will be able to maintain, what alternatives we can develop."

Here here. Finding the commercial alternatives to oil is mainly what we're up to in the Australian Small Cap Investigator.

Dan Denning
The Daily Reckoning Australia

• Higher Oil Prices, the New Normal
• Dollar’s Demise Has Started a Chain Reaction in Currency and Commodity Markets
• Peak Oil – The Rewards
• Peak Oil: Supply Data Doesn’t Lie
• A Look at Strategic Oil Reserves – Who’s Buying Oil?