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Stuart's 2006 predictions
Posted by Stuart Staniford on January 2, 2006 - 7:24pm
Topic: Miscellaneous
Tags: oil prices, peak oil [list all tags]
Having been reading around the web what everyone thinks is going to happen this next year, here are my takes, below the fold. My chance to be grossly in error! Overall, I think 2006 is going to be like 2005, but a bit more negative.
Oil Supply
85mbpd +- 1 mbpd. I'm anticipating basically flat production, give-or-take. Efficiency gains in western economies and fuel switching away from oil to coal for power production will compensate for continuing increased driving in the wealthier developing countries. SUV sales will continue to be poor, and sales of smaller vehicles and hybrids will gain momentum.Oil Price
$65 +- $20. I think we'll see high volatility, with the overall average a little higher than in 2005. I expect the average pace of price increase of the last few years to drop off a little as demand-side responses really start to take hold.Natural Gas
NG will continue to have increasing price and increasing price volatility. US production will continue slight decline despite herculean efforts at drilling. Gas-to-liquids for transport fuel is going to start to look like a bad idea, because we're going to need all the gas we can develop for the current uses of natural gas. I do not anticipate actual delivery interruptions to end-customers in the US (nor even in Europe, though the chances there have to be somewhat higher given the Russia-Ukraine wildcard).US Housing Market
I think we'll continue to see slowing in the housing market, and more stories like this one:When she bought her two-bedroom condominium in Mira Mesa in mid-2004, Elizabeth Eure didn't envision herself one day sleeping on an egg-crate mattress in an empty unit. The furniture was gone in December because Eure was preparing to move, awaiting the close of escrow. After living there less than a year and a half, she had sold her home to cut her losses. Her monthly mortgage payment of $2,500 was too much for her to handle.There are $2.5 trillion in creative loans that start to increase payments beyond the initial teaser rates by the end of 2007. I expect to see further gradual slowdowns in the housing market in 2006, but real pain only appearing from 2007 onwards. I rent my house currently and I don't anticipate making any effort to buy a house again until the 2009 timeframe at the earliest. I think the US housing crash will occur in slow motion over 5-10 years. Young real estate agents should start working on plan B."It was a mistake," Eure, 29, said of the purchase. "If I could do it all over again, I would have rented an apartment."
Overall economy
I expect worldwide economic growth to slow in 2006, but probably not to go into outright recession (I think the latter is pretty likely by 2007). Rural economies will hurt earlier and worse than urban economies (something those of you planning on "going local" should bear in mind).Auto Companies and Airlines
At least one major US automaker will go into Chapter 11. At least one major airline will go into Chapter 7. In general, these and other corporate sectors will continue to shed their pension and health care obligations to employees and retirees.
Stock Market
Dow at 9000 +- 1000 by December 2006.IT sector
I think the IT (information technology) sector will do better than most sectors other than the energy sector. There will be a gradual shift to using IT to save energy that will start to become more evident in 2006 but will not hit full stride for several more years.Immigration
Conditions will continue to deteriorate for the poorest of the poor in developing countries. This will lead to further increased attempts to immigrate illegally to wealthy countries, adding to the political tension we saw over this issue in 2005 (eg the riots in Paris, and the Minutemen taking matters into their own hands in the US).Climate
2005 was either the hottest or 2nd hottest year on record, depending on who does the analysis (check out the RealClimate coverage). I'm sure 2006 will be hot too. I expect several landfalling hurricanes in the US. I don't anticipate quite the level of hurricane damage of 2005 though - some reversion to the mean is in order. I expect evidence to continue to emerge that the climate situation is a little more urgent and alarming than the 2001 IPCC consensus suggested, particularly with respect to ice-sheet changes and positive feedback loops in the climate system. I don't anticipate much political progress in addressing the issue, however.Iraq
I think we'll see the US declaring victory and withdrawing some, but not all, troops for political reasons before the US election and we'll see Iraq run by an increasingly barbaric Shiite theocracy with de-facto Kurdish autonomy continuing, and worsening insurrection by the Sunni minority. Oil supply from Iraq will not improve.Iran
Allah has not chosen to share his mind with me here. Almost anything could happen between the idiot they elected for President, the idiot we elected for President, and trigger-happy Israelis.US Politics
Lord Acton's law that "Power Corrupts. Absolute power corrupts absolutely" is alive and well in the Republican party. The explosion of scandal will continue and grow. However, Democrats will struggle to take advantage of it as they still lack any coherent political theory of what they should be doing. I do not anticipate true resurgence of the Democratic party until the country is in deep crisis.Geopolitics
I'm bullish on Russia. Geopolitical power is going to shift away from consuming countries like the US and towards Russia, Venezuela, etc. I don't foresee open warfare between the great powers any time soon - nuclear war looks no more like a useful policy option now than it did fifty years ago.Civilization Collapse, Rapture, Alien invasion, etc
I estimate the probability of any of these events in 2006 as being negligibly small.Wild Cards
These are long shot but possible events that could change everything:
- Saudi revolution leading to massive oil shock. Alternatively, Venezuelan civil war.
- Ultra cheap nanotech solar panels
- Cold fusion becomes reliable energy source.
- Coup in China
- Al-Qaeda pulls off another major attack. I think those guys have been slow to recognize the potential for cyber-attacks on western interests, but it's hard to predict when they'll get around to it.
- Bush forced to resign after losing support of Republican senators in worsening scandals.
Politically, after the slime dissapates from lobby-gate, we are going to see new battle lines. We are overdue for a green movement. The need to further exploit coal combined with the reality of tar sands and oil shales will disturb everyone.
Russia just did us a big favor flexing muscle in Ukraine. Otherwise, I think we'd see significant pressure on the dollar. Still might.
In general I think Stuart is right on the money. I expect to the IT sector picking up the slack a little quicker than he does, and I'm not convinced any US carmaker will go into bankruptcy. Although if it happens, I'm betting it will be GM, who is showing yet more signs of being so utterly frickin' clueless as to be beyond parody. (See the GCC article http://www.greencarcongress.com/2006/01/gm_will_showcas.html#more for news about GM's incredibly lame efforts in hybrid technology.)
I notice that Stuart seems to be expecting that energy prices will be more notable for their volatility than absolute level, another detail I agree with. The energy markets will be strung tighter than piano wires throughout 2006, and every little blip will send prices on another wild ride. (In terms of giving people an incentive to be more energy efficient, this is almost as effective as high prices; volatile prices will induce a lot more uncertainty into energy costs, something people, institutions, and companies most definitely don't like.)
This will represent a moment of painful clarity for market professionals, as they realize that an industrial economy and the finance that serves it must be based on the expectation of generating real future wealth, not on zero-sum rackets, games of monetery musical chairs, or casino legerdemain.
Hah. If the dot-com bust didn't teach them that, nothing will.
I predict we will limp along for years, if not decades. Tinkering with interest rates, tax laws, federal programs, etc., wondering why nothing seems to work.
Though if things get really bad, I could see the GOP looking for any excuse to use Bush as a scapegoat and throw him overboard. And there sure are plenty of reasons they could use. Looks like Abramoff is going to sing...
The economic decline should last long enough to take out the Democrats as a party as well, remaking the political landscape entirely over the next decade or so. After all, with so many grossly unrealistic expectations to be shattered (to put it mildly) no matter who is in power, it would be naive to assume there would be no political upheaval as a result.
Take a look at Dick Morris' analysis - you seem to be in the same self-delusional bubble that many Democrats have created for themselves the last few years:
http://www.nypost.com/postopinion/opedcolumnists/60838.htm
Remember that Dick Morris was, roughly, Bill Clinton's Karl Rove for many years. He's got a hard-boiled understanding of real world politics. He's not very likable but he usually has something cogent to say.
Frankly, it's the Democratic Party that is risking irrelevancy although I'd think that premature to assert dissolution or replacement of either party.
I agree with your general prediction that the political center will shift away from liberalism, political correctness, and multiculturalism as the challenges to the American way of life grow stronger and more visible. The Democratic Party seems to want no part of that shift and so will be the relative loser. We are in for a period of political turmoil but politicians are either adaptable or become FORMER politicians quickly in a democracy.
However, your use of the word "fascism" is inappropriate. Suggest you read Boswell's recent biography of Mussolini to see why.
Democrats - tax and spend and regulate
Republicans - let the market work
Of course, in power neither would be able to implement a purist approach but I'd think they will follow these general approaches.
In this case, I'd argue that the Republican approach would be more effective in allowing the economy to adapt with the least pain. We have the experience of the Carter years to show that the Democratic approach certainly has its problems.
I will agree in advance that even the Republican approach will still require a reduction in standards of living and a lower economic growth rate. However, the central planning approach of the Democrats would surely lead to maladaptations and snafus at the system level. I think American voters understand that.
As for what the voters will think...Stoneleigh's right: they will support whoever is NOT in power. Whenever times are bad, they "throw the rascals out."
Based on what has happened in other collapsing societies, I expect taxing, spending, and regulating to increase no matter who is in power. The government has grown more under Bush and a GOP congress than it has since FDR; the GOP has not had real Libertarian leanings since Newt Gingrich was ousted.
People and corporations say they want less government, but it's not true. They want government programs, especially when times are bad. They want their jobs and markets protected. They want infrastructure built, to generate jobs and help business.
The Great Depression resulted in the New Deal, and I'd bet the farm something similar will happen again.
Of course, it won't work this time, but I seriously doubt any party that tries to "let the market work" will gain any traction when "the market" is letting children starve and little old ladies freeze to death.
For instance, I don't think Herbert Hoover deserved the reputation he ended up with for presiding over the Great Depression. He couldn't prevent it, but no one else would have been able to do so either. It was the inevitable aftermath of the roaring twenties. In the current case, the party in power has acted as the aggressor in a 'pre-emptive war', disregarded the Geneva Conventions and undermined the rule of law, among other dubious activities. They seem far more deserving of their fate than Hoover.
Neither party has a viable strategy to address the coming crisis. Both are completely out of touch with reality in my opinion. Both are likely to try and fail in turn, and both will probably disintegrate. My fear is that a vengeful electorate determined to blame the rest of the world for their continuing misfortunes (probably not realizing that others are sharing in those misfortunes) may eventually chose a complete maniac - some sort of populist strongman bent on maintaining American hegemony at any cost. It's hard to imagine a rational Powerdown scenario under those circumstances.
The Dow Jones index was at 4,000 only 10 years ago, in 1995. Assuming that the stock market reflects the estimated discounted present value of profits, what happens to those profit estimates as energy costs continue to increase?
Also, consider the fact that we have a net negative national savings rate. The American consumer is facing higher energy costs, higher health care costs, greater competition for jobs and higher interest rates. What effect will forced reductions in consumer spending have on corporate profits?
...Wow, dad....a tahoe!.. can we get one?
Statistically, the safest bet would be to say that next year will be a replay of the last, with minor changes. That's the case most of the time.
The trick is predicting the game-changer, the 1929, or as a closer parallel to oil, the 1973 or 1979.
I think such things are unpredictable, but that you can make a perfectly good living by predicting them ;-)
Plus stories like this one:
I am proposing that my firm proactively reevaluate our insulation practices now, before all our clients ask for more insulation.
Yeah, I am kind of bummed about that. It was a good airline and I flew them a couple of times.
I am figuring it will be one of United, American, Delta, or Northworst that will die. Several of these are already in chapter 11, but the purpose is mainly to allow them to renegotiate the labor contracts and shed the pension obligations.
I will be interested in seeing how the sales of the new Airbus behemoth actually go. The Boeing dreamliner seems like a better bet in the short term. In the long run who knows. I used to have a professor who would say "In the long run, we are all dead".
But we will have the awesome power of COAL PARTICLES COVERED WITH WAX!
Don't you feel safe now that you know we will be protected by waxed coal particles?The link you provide is for a coal upgrading technology. It reminds me of my graduate thesis which was all about drying high moisture coals. It may be useful for coal companies if the economics are right, but it will not produce transportation fuels.
Nuclear-power rail transport is used in the San Francisco Bay Area and elsewhere when one electrifies the railways. The nukes contribute to the electric power supply.
http://www.prosefights.org/larryeverest/larryeverest.htm
regards
http://www.prosefights.org/buehlerpayne/buehlerpayne.html
billions of U.S. dollars. How long will
they continue to accept our dollars?
2006 may be the year that we see one of
these countries start asking some
difficult questions.
For those who like to wallow in numbers (and who doesn't?), here's the US Treasury page that shows the monthly totals of US securities held by various countries: http://www.ustreas.gov/tic/mfh.txt
(Notice that Japan's holdings have hardly changed through October 2005, and China's have grown about 10% in the same period, while the UK's have grown about 85%.)
http://www.financialsense.com/Market/willie/2004/0621.html
There has been considerable debate over what certain of the TICs data actually reflect. One general consensus is the increase in UK holdings is due to it acting as proxy for excess oil revenues, mostly Middle East. Perhaps more contentious is the Caribbean whose holdings have almost doubled in 2005 - hedge funds and possibly the Fed indirectly purchasing its own debt have been suggested. UK and Caribbean account for well over 50% of additional foreign holdings in 2005, unusual to say the least.
Little countries like Venezuela can get away with it. China and Europe hold far too much debt.
My guess is that other countries will try and apply increasing pressure for the U.S. to get its act together in order to defuse the situation. I don't know offhand what sorts of pressure they could apply that would be effective. Given the stubbornness of the Preznit, we would probably have to wait until 08 before anything of substance happens. Either this or we Chimpeach - not terribly likely this year.
I'm not so sure. A lot of countries cannot be bullied around. Remember the controversy in Europe before the Iraq war started? A number of European allies in the Iraq war have bailed out by now, and I assume 'learned a valuable lesson'.
IMHO, a big army doesn't buy you much outside your own border. This is also in line that most actions involving military force 'go wrong' in the medium/long run. The history of military conflict is very long and very clear on that: I rarely works. Especially in todays timeframe: a lot of people do not think that resolving a conflict by military force is a viable option.
Large war machines intended for war between states are dinosaurs. They reflect the realities of wars of the relatively recent past (like the two world wars) as the generals are always fighting the last war. Modern armies are far too expensive, cumbersome, inflexible and technologically dependent to face a determined but amorphous insurgency for any length of time without crumbling. The morale of their own troops is inevitably destroyed in the process.
When the classical period ended the Roman Legions made a strike because the Emperor stoped to pay them the wages and the barbarians were free to use the roman's roads (built to make the Roman Legions have easy and fast access to any portion of the Empire) to pillage all non-protected cities they found and Rome itself.
And the economic factor can be more important to the military power's mantainance at the modern times than at the ancient times. The Roman Legions lost a lot of military power because the Empire not had money to buy better equipment to the legions long before the Empire finally fall (the legions's armor were worse at the 2nd and 3thr centuries than the armor they used at the Caesar's time), but this time the things can go faster becasue now there is two new factors:
1- the natives don't use spears, they use AK47 - the not so advanced thecnology is disponible to rich and poor countries and that make a great leveling factor, see you if the zulus used rifles and not spears the British Empire's army had no chance at that distant bridge construction's site and if the American Natives had guns the "west" never was to be conquered by the US Army;
2- the modern weaponry waste a lot of money, so any economic problem can simply stop a modern army that relie strongly at advanced thecnological weapons.
Look at these two factors and you see why Iraq is a qaqmire for the US Army and you will see why if an economic crisis happen (for example, the dollar hard landing that a lot fo economists think will happen) that qaqmire will be worse.
By the way, sooner or later the shia will want the oil profits for themselves and not for the US companies...so, I think that we will see the Theocratic Shia Iraq's government demanding that the US troops get out and the Ayatolah Sistani writing a "fatawah" with the same demand maybe now at 2006. I guess that if 20% of the Iraq's population (the sunni) fighting the US troops is bad, 60 % of the popul