The Day the Oil Stopped Flowing

Reddit

And on the 85th day, after vomiting 184 million gallons of oil into the Gulf of Mexico, British Petroleum finally capped the oil well drilled by the Deepwater Horizon drilling rig under one mile of water. Thank goodness.

You can see from the chart below that uber contrarians and bottom fishers already began taking a punt on BP in late June. They must have reckoned the capping of the well was the beginning of the end of BP’s tribulations. And it IS a big company with a worldwide portfolio of upstream and downstream assets, presumably with the backing of the British government (with nearly 18 million Britons owning BP stock in their pensions).


Click here to enlarge

It is also true that, in the words of our friend and resource guru, you’re either a victim or a contrarian as a resource investor. Victims buy resource stocks when it’s safe to do so because they’re on the front page of the paper. Contrarians do so when no one wants to touch them.

That said, BP would have to be viewed as short-term speculation right now. For one, it’s not certain the leaking oil has actually been stopped. It’s just been stopped from the top of the well. If the well is ruptured in other places, more leaks will emerge. This could be just the end of the beginning (rather than the end of the end).

The larger question, in our mind, is how long it might take be BP to be litigated out of existence. A complete speculation on our part is that the British government will be forced to take over the company to protect from legal threats. But that’s just wild speculation.

For energy investors, the other issue is how much the ecological catastrophe in the Gulf will affect the willingness of publicly listed companies to drill for oil off shore. It’s a difficult dilemma. If you’re a major oil produce and you’re not adding to your reserves, you’re not going to be punished by shareholders. You’re also going to produce more oil than you find and replace, which is not a long-term survival strategy for a going concern.

But you have to balance the imperative for finding new reserves with the legal risk of another deep water drilling accident. If that kind of accident, no matter how low the probability, represents an existential threat to your business, and you’re the director of a publicly held oil company, can you permit more off-shore drilling?

We wrote about this in the last monthly report of the Australian Wealth Gameplan . Our tentative conclusion – to be followed up with recommendations – is that the BP spill favours National Oil Companies (NOCs). The NOCs are the only institutions that aren’t going to be sued out of existence if they run into drilling accident.

Is it hard to be a contrarian here in Australia, though? After all, commodities are on the front page of the paper every day. It’s the bread and butter of the export economy. Or the iron and coal if you prefer. Does the fact that these things are on front pages of the paper mean you’re already a victim?

Well, not necessarily. In our five years here, we’ve come to be wary of news that celebrates high prices. Anytime those high prices are figured into government revenue projections and make nice pretty graphs on the front page of the paper, you should be cautious.

On the other hand, we find ourselves more and more attracted to picking over share market road kill. You want firms with decent assets, but perhaps hitting a finance hick up. The other real allure for us is finding a commodity that’s fallen so much the momentum chasers can’t be bothered. That’s when you find things very cheap.

Speaking of not cheap, the July 10th edition of The Economist has again called out Australian housing as being the most over-priced in the world. The magazine reports that, “House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009.” That’s not so bad if you already owned a house and bought for the purpose of making a quick capital gain.

But not so fast!

“More concerning,” the magazine continues, “is our analysis of ‘fair-value’ in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track.” How overvalued? By 61.1% to be exact.

As far as we can tell, the usual suspects spruiking property in Australia were not as quick to rubbish the article as you might expect. Hmm.

To be fair, the same issue of the The Economist had a dreadful article about gold. It goes to show you that credibility does not come from authority but from a well-made argument. This is a variation on the conclusion Boethius made in The Consolation of Philosophy that reputation doesn’t matter. What other people think of you will be fair or unfair by turns. And it is beyond your control. All you can control is the integrity of your own actions.

But back to the Economist. In its article on gold it concluded, “As the world economy returns to business as usual, the gold market may also return so some semblance of normality…As long as the world economy remains uncertain and investors fear inflation and sovereign default, gold will keep its allure. Eventually, however, the price will weaken: it is even possible that the recent slide to below $1,200 marks the turn. And investors may look back on the bull run of 2009-10 or 2009-2011 with the sort of wonder that humanity has too often reserved for the yellow metal itself.”

As pithy and superficial as that analysis is, it hardly compares to the comment of Citigroup chief economist Willem Buiter. He says that gold is, “the longest lasting bubble in human history” and that he would not put any of his wealth into “something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”

Sigh. How snarky can you get? It is quite possible that investors are going to make a lot of money speculating on gold shares leveraged to the gold price in the coming years. Gold is not anyone else’s liability. That alone gives it intrinsic value as money, not to mention the physical qualities it possesses which make it a very stable medium of exchange.

But we view gold, fundamentally, as catastrophe insurance against the crash in asset values from a highly leveraged economy. It’s not gold moving up or down versus the dollar. It’s the dollar moving up or down versus the gold, depending on the relative degree of currency mismanagement and money printing by the Fed.

Besides, after the last three years, if you don’t think financial catastrophes are made more frequent and more probable due to the intervention of the banksters and the State in the free market, then you aren’t living on the same planet. Since 2008, we’ve been in a reflationary period in which the most inflationist policies of the world’s central banks have barely managed to keep asset prices moving higher.

Without those policies, asset prices would already be much lower. Recovery to a new production possibilities frontier would also be a lot closer. Bad investments would have been liquidated and the people who wasted capital would have had that money removed from their mismanaging hands.

Instead, we have governments perpetuation the money, power, and mistakes of bankers. To the extent it keeps households happy because it keeps asset prices high, it’s perceived as having a bad odour about it, but somehow necessarily.

Well, that odour is the rotting carcass of a corporatist alliance between big finance and big government. It’s not doing anyone any favours. And it’s smelling up the joint. And it’s certainly not alive, despite the attempt to pump new credit into it. Credit is the lifeblood of an economy addicted leverage and asset growth.

Our view? Phase one of the great credit depression is over. It caused a massive transfer of liabilities from the private sector to the public sector and concentrated those liabilities in a handful of firms that are now considered too big to fail. But if the whole system is a failure, what then?

In PhaseTwo, the Welfare State’s 300-year old model of funding deficits will be stress tested. And what happens when the stress is too much…when a mountain of debt is supported by an anthill of real tangible equity? You’ll read about that in the Economist too, but only after it has happened, and it’s too late for you to have protected yourself from it.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Leave a Reply

46 Comments on "The Day the Oil Stopped Flowing"

Notify of
avatar
Sort by:   newest | oldest | most voted
Coffee Addict
Guest
Yes but there is still oil & gas flowing on-shore USA and my what competition there is to by some of the shale leases. I am multibagging it ATM with almost zero risk. And they are plenty of follow on plays in the making out there for those who may be interested. You may wish to read what Terry Barr, CEO of ASX listed SSN has to say about BP. If what Terry says is factual, the problem lay not with standard industry practice but with a rogue operator that was well known by the regulators to cut corners and… Read more »
Ross
Guest

If you have that desire to read propheses more extreme than those of Mogambo Guru then try this … http://www.globalresearch.ca/index.php?context=va&aid=20131 We’re all what?

watcher7
Guest
The bottom line is today’s cyclical stock bull is very much alive and well. At barely a year old, it is far too young yet to give up its ghost. The recent big correction changes nothing, such events happen from time to time even within healthy ongoing cyclical bulls. And the SPX not only remains low within its secular trading range, but it is still trading in irrational panic territory. This is an anomaly that cannot persist. So not only are the stock markets likely to continue rallying for the rest of 2010, but their gains should be strong. In… Read more »
Dion
Guest

Watcher7,

I think time will prove you wrong, a crash is coming in 2010 in my humble opinion.
I’m looking for a game changing event. Possibly a terror attack the magnitude of 9/11.
Obama’s approval ratings are under 50% and a ex-Clinton official said something like “All that can help Obama get the American public back on his side is another OKC Bombing or 9/11 magnitude attack.”
The game changer will come before the US Congress in December.

Blessings.

Ross
Guest
Watcher, as you know I am with Dion. For the goldphiles too last night was yet another lesson in what will happen in a deleveraging. The hedgies got pasted in equities at the end of their period and it again appears that they were forced to liquidate gold positions. Their margin call rate gives them no wiggle room. If you think gold has real instrinsic value, sufficient demand and are optimistic on the future of its sustainability you will at least need to start thinking about whether your position will survive the price fall off the cliff of deleveraging. And… Read more »
Ross
Guest

I have another reference of interest. Explicit alliances are a funny thing and so too trust. It is not unreasonable to consider the possibility of one or all of the US’s Asian alliance partners changing sides. Even the Americans know this as evidenced here.

http://www.nytimes.com/2010/07/14/world/asia/14seoul.html?hpw

Stillgotshoeson
Guest

Gold may retreat more but the medium term outlook for Gold is up.

Lachlan
Guest

Unreasonable no. Inevitable at some point. As the red haired rock star sungeth, “nothing lasts forever,and we both know hearts can change”
and “we’re all freakin doomed” said the Guru.
Night all :)

Ned S
Guest

I find it a bit difficult to imagine the ‘slav hordes’ rolling west out of Russia to pinch everyone else’s oil and gas and iron ore. Or the ‘yellow peril’ nuking North America to kill off all the waiters and financial engineers who’d prefer go back to competing with them making levis and mobile phones. Although yeh, I wouldn’t put it past Uncle Sam to bring a bit of military pressure to bear to maintain his position in the world. But only for our own good of course! :)

Ross
Guest
Ned S., of Australia’s politicians remember only Billy Hughes. He spoke of the yellow terror for the unions before they got rid of him, he as Wilson’s “varmint” spoke for 60,000 dead in Versailles and did more pulling above Australia’s weight in demanding Germany pay war reparations beyond their ability to exist into a future (when the Brits wouldn’t cough up for what we had provided by way of man and money for WWI), and while he didn’t have a relationship with Wilson he still opposed Britain’s transfer of the German Pacific colonies to Japan, and his interests white anted… Read more »
Stillgotshoeson
Guest

Comment by Stillgotshoeson on 17 July 2010:

Gold may retreat more but the medium term outlook for Gold is up.

Further to that, there will be money to be made in Gold, be greedy thought and you could well lose it as well..

Set a sell point and sell.. Gold falls can be sharp, sudden and severe…
The fundamentals for gold to rise are good.. I can not see that changing medium term. Gold is not a buy and hold though..

Justin
Guest

How about that CTO though!?

Ned S
Guest
I’ll have a bit more of a read on Billy Hughes then Ross. My only real knowledge of him is that he did make a fair bit of noise about Oz’s 60,000 war dead when the Allies sat down at the table to divvy up the spoils of WWI; And managed to get Oz into the colonial masters seat re what had until then been Germany’s bit of PNG (the northern half – with Wilson being keen to give it to Japan.) It’s a brave man who’d just parrot off any of his nation’s rhetoric re history and geopolitical events… Read more »
Lachlan
Guest
Theres now a hacked US gold chart where a parablic spike should have been. Most breakouts successfully capped. Maybe the paper gold market is going to collapse due to the manipulation at some point. Maybe paper longs will flee. Maybe discounts on gold are coming. Maybe this is all garbage. Hope theres some physical to be bought. Seems you can have physical almost unavailable and little price increase. Thanks bullion banks. But gold is the best store of value (money not nutritional value) and our currencies are increasingly abused. If war breaks out that will worsen abruptly. The pressure on… Read more »
Ned S
Guest

“at which point I’ll buy land” – Land’s where it’s at Lachlan. They aren’t making any more of it as my granddad used to say. Gold, ivory, slaves and land – Yep, it’s obvious where the real long term value is – Providing one can cause the slaves who know same to cease and desist from pinching his land! :) :) :)

Lachlan
Guest

You can even drop a bomb on a piece of land Ned and its still a block of land eh No worries Ned I want my land….often window shopping.

Ned S
Guest

Good for you Lachlan – At least you aren’t too bound up in fools gold or ivory or stocks or bonds then … :)

Lachlan
Guest
Nah Ned this bitch about gold and property is only a short term abberation in my view. If I had more dough Id own plenty of both and forget about short term gyrations in the markets. Theres been excessive speculation on property lately which means people should keep leverage under control. And maybe larger holders should be selling on net but thats about all imo. Any hard asset including gold can be overvalued at times (eg gold in 1980). Longer term such hard assetts/tangibles are the things that always hold value so if you own them outright or mostly so… Read more »
Ross
Guest
Ned, I had that opportunity to get to China and Eastern Europe before my political views were formed solidly and can see only good in your idea. I tried in vain to have Australia business and trade get involved in the Russian railway freight scene just at the turn into the Gorby years and hence didn’t get there. We could only have learnt on the infrastructure side because they were just so much better than us, but we could have contributed on the commercial side and opening of access to unit load competition. It was a missed opportunity and it… Read more »
Davo
Guest

Hi Ross,

Wouldn’t put anything past the yanks, but why would it be in US’s best interest to take out China?

Biker
Guest

Davo: “…why would it be in US’s best interest to take out China?”

You’d think that North Korea and Iran would fully occupy their strategic military planning, wouldn’t you, Davo? (Not forgetting Iraq and Afghanistan, of course… .)

Davo
Guest

Hi Biker,

Seems like a helluva way to not pay back the $900B they owe the Chinese, when a phone call would do the job. Suspect it would cost them more than that to fight the war.

Cheers

89peterg
Guest

we’re all what?
when the air sea and land is poisoned and we all have to create vast environmental shields over the cities, we’ll all be
freakin domed (sic)… like in Logan’s Run.

keep in mind the false flag theories (that the black swans are not accidents) when looking at ‘who gains’ and how shares and investments magically occur just before such events.

(quick search reveals)
http://hubpages.com/hub/BP-CEO-and-Goldman-Sachs-sell-BP-shares-before-oil-spill

which company had security for 911. madrid, london etc?

I wont go on, we’ve all got the internet too look it up, and I DONT KNOW.

Biker
Guest

Gotta agree, Davo. Consider Obama’s situation… . What does he need _less_ right now than another horrifically expensive, unwinnable foreign war?!~ Enough problems at home and abroad without five million more warriors in body bags being shipped back to the US, to a politically media-frenzied public…

I worry, at times, that _extreme_ views seem to be required, for gold to reach its zenith. This link touches on that phenomenon:

http://news.smh.com.au/breaking-news-business/talk-of-double-dip-recession-a-mistake-20100716-10dqi.html

Ned S
Guest

It’s all a bit strange Lachlan when with both ‘hard’ assets like property and bullion, one licks his finger and waves it in the air and says With luck I doubt prices would drop much more than 40% on either of these – So they seem like reasonable investments – Compared to the alternatives. But I don’t feel real comfortable sitting in cash either! :)

Biker
Guest

“But I don’t feel real comfortable sitting in cash either! :)”

Caution is recommended, but pessimism, hypochondria and paranoia are all key indicators along the low-to-high-risk continuum, Ned… and they’re all infectious. :) Your cash is fairly safe in Oz. Inflation is the pacman of _all_ asset classes, no matter how crispy, shiny, or sandy… . ;)

Ross
Guest
Favo/Biker, for two reasons. US domestic political control and future private profitability both as seen through the eyes of the crony elite. When Volcker and Reagan killed off the brown belt rather taking the hard decisions to reform it, and they spent into the military industrial estate (with the spill over into commercial aviation & communication/satellite) like never before the outcome benefit for the crony elite was two fold. First the creation of an import consumer economy where the elite own the brands and increased the corporate profits derived from cheaper offshore production. And next the creation of a job… Read more »
Ned S
Guest
One big worry with America is that they are a major power that persists in maintaining the concept of having ‘enemies’ as part of their national mindset and political rhetoric. No-one else much talks like that do they? Everyone else seems to be able to get their heads around the ideas that they have competitors and that there are a few extremists out there who actually dislike them enough that they will actually do some extreme things occasionally – With an appropriate response presumably being to do some extreme things back occasionally – But without wanting to turn it into… Read more »
Stillgotshoeson
Guest

Comment by Justin on 18 July 2010:

How about that CTO though!?

CTO Could fail regardless of what gold does..

100’s of gold mining exploration companies.. many will amount to nothing..
High gold price will not guarantee CTO’s success.. Greatly improves their chances in getting a JV happening of financing operations

I personally have sold out, they hit my stop so they got sold, I am down brokerage only. Still have them on my watch list..

Ross
Guest

Ned, if the US can retain their pre-eminence and profits I am sure they would like it to remain that way. If the numbers say that isn’t a possibility I believe they will act as threatened empires have always been inclined to do.

I agree with your statement on the rhetoric of enemies vs rivals. Apart from Ron Paul and the GOP “conservative conservatives” (as opposed to the radical & christian conservatives) I don’t think there are many in US polotics that see it that way. Certainly not among the Democrat Rockefeller & bankster backed factions anyway.

Ross
Guest

Shoes, have been watching your IMP. An interesting ride. MAQ equity and funding intriguing. Inching up despite dilution anyway.

Biker
Guest
“…a major power that persists in maintaining the concept of having ‘enemies’ as part of their national mindset and political rhetoric. No-one else much talks like that do they?” Well, Iran and North Korea certainly do, Ned!~ “A restart of industrial America without war mobilisation is impossible due to the capital base erosion.” I’ve no doubt a few of the hawks would countenance a war of attrition with China to turn US industry and influence around, Ross. However America’s current situation might be so stretched at present that it could drag its economy further into the mire. They couldn’t be… Read more »
Ned S
Guest

“Iran and North Korea certainly do” – I was trying to be fair and reasonable and charitable to America in avoiding making any obvious comparisons in that regard to some nations they mightn’t like being compared to Biker … :)

Ned S
Guest
I hope you are wrong too of course Ross. But unfortunately the approach of trundling off to war regularly without any really good apparent reason does seem to have become part of the American way of doing things. And yes, I suppose there could be something in it for them even if they didn’t win as such – Providing the game wasn’t played at home. And it presumably wouldn’t be. Doubt they’d actually want to ‘win’ as such in fact – Lordy, imagine them trying to occupy a country like China or Russia while they reconstructed according to America’s criteria.… Read more »
Biker
Guest

“….imagine them trying to occupy a country like China or Russia while they reconstructed according to America’s criteria… ”

Yep. Unimaginable, inconceivable lunacy*. Wouldn’t _entirely_ rule it out though!~ ;)

* Apparently it’s also infectious… :)

Lachlan
Guest

Maybe US civil violence might put a spanner in that outcome (war with China) Ross? Not that I know much but seems to be a lot miffed people over there with lots guns n bullets.
Seems a sad outcome for what was the land of the free (relatively free anyhow), but I guess its just the way of the world.

Ross
Guest
Ned, do you remember Brzezinski’s “The Great Game”. Well he nicked it from 19th century “history”. http://sandiego.indymedia.org/media/2006/10/119973.pdf The trouble is that real history had never heard of it. Certainly not Russian history, those who were supposed to be Britannia’s adversaries in “The Game”. Apparently Fleet Street came up with “The Great Game” after their Afghan opponents turned up with some Russian rifles. Hence you have the US brains trust coming up with the Central Asian adventure on the basis of an historical lie (admittedly they had dabbled in on a soft dimplomacy basis back in the 50’s). In a twist… Read more »
Ned S
Guest
Thanks Ross – I’d never heard of Brzezinski – Nice of him to document his thoughts for all and sundry to have a read of though. (Although I did take the shortcut of looking at some wiki references on him rather than reading his book.) I’d just been reading stuff like the US is putting missiles in Poland to counter the threat of Iranian attacks on America’s Allies in Europe? And saying I’m not sure that has a fundamental ring of truth and honesty about it. Plus reading about stuff like American military advisors in Georgia (the one Stalin grew… Read more »
Stillgotshoeson
Guest

Comment by Ross on 19 July 2010:

Shoes, have been watching your IMP. An interesting ride. MAQ equity and funding intriguing. Inching up despite dilution anyway.

Continual growth through aquisitions look promising, or they will get swallowed by a bigger fish.. either way looks profitable I think.. Still only have a nibble on them at 20000 shares
It will be some time before they are big enough to list on a stock exchange in the US.. Watching them a bit longer until I decide to add more to the portfolio..

Ross
Guest
Ned, on Brzezinski. The following is alarmist and is taken from the fears of the time. I marries with what you have read from Brzezinski’s own words. The Russians decided to take a stand and so the coloured revolutions came to meet resistance. Since then Ukraine has turned and you have send Kyrgistan. http://www.rense.com/general82/indt.htm if you are interested in what happened search for “Places that time forgot” South Ossetia on the BBC website. The TV show’s narrative is there and it might even have a video stream these days. It tells of the time that the Brits (on behalf of… Read more »
Ross
Guest

One last reference on ZBIG Ned. I don’t find this site trustworthy on current events but what they have done is to bring together references and testimony from the public record. That, rather than opinion, is what I am mostly interested in when interpreting events.

http://www.oilempire.us/zbig.html

Ned S
Guest
Ross, I went through Obama’s inaugeration speech fairly thoroughly at the time and recall reading the bit where he said “we are ready to lead once more”. And thinking I don’t actually recall voting for you lot to lead the first time round? OK, so one knows their game. But there isn’t much one can do about it that I can see. Like you, I actually have a few doubts about their ability to ‘win’ any major conflict these days. Which could certainly leave Oz in an unenviable situation if our major ally stirred up the wrong hornets nest and… Read more »
Ross
Guest
What bothers me Ned is that in the 70’s & 80’s we did nuance. The Chinese believed that we wanted them to succeed even if we worry about the overseas Chinese, and especially in those days those in Indonesia. We don’t do nuance anymore. We have reverted to all the way with LBJ. As for the Indians we were closer to the non aligned movement and ex colonies like Malaysia at the time of the NPT than we are now. We really did try to do something positive with the Colombo education programme. Sure Lee and Mahatir spat in our… Read more »
Ross
Guest

On the differences in sovereign rents for the extraction of oil.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a_3dutni49MI&pos=6

The more vulnerable sovereign the cheaper it is. Brazil must be feeling quite safe as they are talking up to $5/barrel for Petrobras having to pay for the deep sea licences and that is delaying the capital raising.

Ross
Guest

On Japan. Even thought they got humiliated when forced to accept the retention of US forces on Okinawa they are expressing themselves otherwise. The US/EU economic blockade and Russian effort at containment will be harder to enforce now. http://www.presstv.ir/detail.aspx?id=135619&sectionid=351020104 Japan is only doing what Australia’s long term NPT policy should also have us do.

Ned S
Guest

I’m still working through my thoughts on a lot of it Ross. I’m a slow learner I guess, but stuff like Mujahideen freedom fighters morphing into Taliban terrorists, and following through the various Iran/Iraq sagas over time, plus it becoming obvious that the greatest real threat to world peace in my lifetime to date just may have been some Yank banks and bankers setting the global economy up to self destruct, and I’m reasonably open to ideas.

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au