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Yes, and the people who shorted the Hong Kong market made a lot of money.
The counterparty risk is negligible. If you own a future contract, you are automatically leveraged, but if the price moves against you, you are required to come up with more money or the contract is sold. It's not like the markets just trust you to pay up on big losses.
Here is the thing to be aware of when you're considering using investments to help hedge against the difficulties of peak oil.
The peak oil investment decision is essentially a classic gambling decision, and people are hard-wired to make the wrong decision in this situation. There is an entire field of neuroeconomics that has looked into the propensity of people to make the wrong decision in this situation.
What that means is that the correct thing to do is going to be the extremely scary thing. And people will find all kinds of ways to explain this fear to themselves and rationalize making the wrong decision.
In poker tournaments, there is a predominant type of amateur player that I've come to think of as the Scared White Guy. These tend to be well-educated types--doctors, lawyers, accountants, engineers--who are all afraid to take risks and who tend to sit there waiting for "strong cards". They know just enough about the math and odds to be able to talk themselves out of any moves that would actually give them a prayer of winning.
In the current economic situation, these guys are the ones with all their money in T-bills, getting slowly eaten away by inflation as they wait for deflation to bail them out. They are going to believe anyone who tells them it's not safe to invest in oil, or that the recession will bring oil prices down, because the reality is they just don't have the nerve for anything but T-bills no matter what is going to happen. And it's not really their fault: They are making the bad gambling decision their neurons are hard-wired to make.
People who understand peak oil should get hedged for it. You can hedge with a big garden in a good location with good water, or you can hedge with financial instruments, but you had better get hedged.
Yesterday, I posted that yesterday was not the time to buy--that we'd want to see a better set-up. There is no change today. If you're not already in, I'd advise you to continue to wait for a better set up.
Moe
The recent spike due to bombing in Iraq indicates to me a nervous tight supply. With this in mind I predict a lot of upward pressure in the couple on months receding the Olympics. I may be completely wrong but I get the impression that the Chinese have been buying cheaper sulfurous crude but when they are "on show" they will want to clean up their act. Maybe somebody in the refining industry could educate us on the differences? Can you simply push sour crude through a refinery not designed for it and suffer the consequences, This also raises the question as to what the global impact of the ever increasing sour/sweet crude split is going to go (in terms of refinery upgrades), sweet crude is declining more rapidly, not plateauing at all
Neven
Loooong time lurker, first time poster. Awesome website, great information, and writers. It is my go-to site for PO.
I remember when I bought my first crude contract back in May 2004. I wanted a Dec 2008 contract, which was $29/bbl, because I was pretty convinced that oil would hit the unheard of price of $80/bbl before Dec 2008. The broker asked why I was getting such a long term contract, and I told him that it would hit $80 because oil production would fail to meet demand. He was flabergasted... "but sir the experts say that oil is going back down to the low 20s, you will just be throwing your money away. I am not going to enter your order, you need to think about this sir". And he hung up.
I should have called back immediately, but I waited until the next day. Now the Dec 2008 contract is $29.50/bbl (asking price). Again he balked, this time I told him to either enter the order or I give me his supervisor. Well, I got my Dec 2008 contract at $29.50... and I still have it, along with another I bought a few months later at $35.50/bbl. Unfortunately, he was fired around the time oil hit $60/bbl, so I couldn't have a followup conversation with him.
Oh yeah, I am an engineer (ChE) who doesn't mind taking risks. However, most of my engineering friends are in mutual funds.
Keep up the great work.
One of the advantages of online brokers like Interactive Brokers (which also does futures) is that you don't have to talk to a person, and thus there's no emotional consideration of what they're thinking. This is especially true for amateurs who feel that the broker (a full-time professional) knows more than they do.
I guess 'scared white guy' labels me pretty well. I started becoming peak oil aware in early 2006, and although I've made a lot of little household changes to mitigate coming problems, I've been very cautious about making changes to my investments (401k & IRA). I am overweight energy, particularly in oil services, but this level of hedge is not really proportionate to my level of confidence that big energy problems are coming soon. I don't really know what's holding me back. I guess it's very hard to pull one's self out of what Kunstler calls the 'consensus trance.'
A question to those who have hedged with a robust Plan B:
It occurred to me that at some point a Plan B will turn into a defacto Plan A if planning for a post-peak world becomes one's primary blueprint. Even if you expect that a near peak is a foregone conclusion, do you then hedge that expectation with a new Plan B in case by some miracle the cornucopians turn out to be right?
As a product of my times, I am a techno-cornucopian at heart but I am preparing for the worst and preparing for the best simultaneously.
As Dickens famously put it,
"It was the best of times and the worst of times."
My first priorities are physical hedges of the basic requirements to not only survive but to thrive in a post-peak environment. I think moe is imparting some excellent observations on financial hedging but as he indicated, financial hedges are only part of an overall hedging strategy. One cannot eat digital money or specie and one must be nimble to escape the just-in-time-collapse of financial structures.
IMO we are entering into terra incognita at the end of an age here.
We have scenarios of what the end-game might look like but
no one can predict the twists and turns of how it will play out.
I am reminded of a sticker a student had plastered on her laptop:
"Blessed are the flexible for they shalt not get bent out of shape"
"It was the best of times. It was the worst of times."
A Tale of two Crises..
I think rather than being hard wired to make the wrong decision most people are trained to do it. it's IMO a form of social conditioning heavily exercised in public schools and religion, the fact that the human species has been so successful tends to suggest (at least to me) that it's not hard wired.
My own experience has been that I knew what decisions to make and would make exactly the wrong one, in a win, lose, draw situation I was losing far too frequently for it to be coincidence.
imo, the other type of guy you can beat in poker is the one who has it all figured out.