Checking In on Oil's Head-Fake   (September 18, 2008)

Oil leaped $6 to $97/barrel in the frantic search for repositories of value in an imploding financial doomsday scenario, but this long-term view will be of interest to those looking ahead.

Be wary of pronouncements the global markets are now "all better."

Back in May I proposed that oil would plummet in a giant "head fake" which would be followed by a turn-around ascent as Peak Oil struck with a vengence. Since we seem to be in the midst of that head-fake, let's take a long-term look at a few charts of oil, courtesy of frequent contributor Harun I.

Now before we begin, please read the HUGE GIANT BIG FAT DISCLAIMER posted below. This is not investment advice, just some charts and my commentary based on my own limited knowledge.

My thesis is that oil will fall dramatically in a "head fake" which supports a false confidence that peak Oil is far in the future. To the punditry's surprise, supply constraints a.k.a. Peak Oil will reveal the price decline as a "head fake" as oil prices begin a spectacular climb to $300/barrel and up.

(Please refer to my new "little book of big ideas" Weblogs & New Media: Marketing in Crisis for more on the fundamental trends which are firmly in place globally. (Only $10.99, such a deal! Only 70 pages long, it's perfect for a few hour break from your usual toil.)

To check in on this thesis, I asked frequent contributor Harun I. for some charts which he has graciously provided along with some technical comments. Please note that I have trimmed the charts in size and added comments which are my own interpretation.

There are several fact-based trends which support the "head-fake" scenario. I have covered each of these in more depth in dozens of entries over the past two years.

1. oil supplies are heavily dependent on supergiant fields which are in decline. You can check this for yourself by reading the oildrum sites: Oilwatch Monthly (Europe) - August 2008

The Oil Drum (U.S.)

Knowledgeable correspondent Jose Freitas recently made these very astute and telling comments about Peak Oil and the fantasies that it is a chimera we can ignore:

Missing from nearly all these lists, however, is the simple geological reality that there's only so much oil in the Earth's rocks, we've pumped out most of the really large and easily accessible deposits, and it's becoming increasingly difficult to maintain current production levels – much less increase them – by drawing down the smaller and less accessible deposits that remain.

It's not hard to show that this is a major factor in the current energy crisis; when a commodity's price doubles in a year, but the production of the same commodity fails to budge outside of a narrow range, it's a reliable bet that physical limits on the supply of the commodity are to blame.

The difficulties with this otherwise sensible observation, of course, are twofold. It offers no easy answers; if we've reached the physical limits of petroleum production, that's a fact we have to learn to live with, no matter how inconvenient or uncomfortable it may be.

At the same time, it offends against a common assumption of modern thought, the belief that human beings – and only human beings – play an active role in history. Older civilizations understood that nonhuman forces shared in the making of history, and there's a fine irony in the way that our civilization, having rejected the nonhuman world as a historical agent, now finds its own history being shaped by a nonhuman reality with which it steadfastly refuses to come to terms.

2. The Export Land Model reveals that the rising consumption by domestic populations in oil-exporting countries provides a "double whammy" to oil exports: not only is oil set to decline in total production, the amount available to export will be falling even faster.

As just one example, some published accounts suggest that Saudi Arabia will need to burn 1 million barrels a day just to desalinate seawater to serve its populace with fresh water in the amounts they expect. That's 1 MBD that won't get shipped to the West.

3. The cheap oil is gone. All the buzz about "unlimited oil" in shale oil and tar sands breezily fails to note that extracting this oil from such unpromising sources requires stupendous quantities of energy (currently natural gas) and moving horrendously vast quantities of earth, sand, shale, etc.

So the "unlimited" oil ends up costing $80+/barrel before taxes, transportation to markets, wholesale costs and retail profits--not cheap. If the energy needed to extract and refine it shoots higher, then this oil quickly gets ever more expensive.

4. There are physical constraints on all fossil-fuel based fuels. Natural gas is facing its own declines in North America, and it is costly to ship it overseas. Much of the world's natural gas is in the Middle East and Russia. Even at peak production, the shale oil fields of Canada can produce about 2.5 million barrels a day-- not much more than 10% of the U.S. daily consumption.

Ok, on to the charts.

Here are Harun's technical analysis comments:

At the primary level (monthly) there has been 3 consecutive down months. The character of the bars (long bars) and the amplitude of MACD’s major histogram suggest this downturn may have more to go. But there is some evidence that a shorter-term reversal may occur. The confluence of the super-long and long term retrace levels, price support and rapidly converging middle band support may be enough to halt the down move.

At the intermediate level, LT net percent OI (open interest) continues to decline but overall OI has risen. This means that while the number of contracts outstanding has risen, these contracts have been added to the short side which in effect would reduce the net percent of longs. This week LT’s decreased net longs to 194081 down from 197124 while they increased shorts to 131281 up from 122837. The Volume Oscillator continues to indicate a low level of volume.

At the short-term level MACD and r-squared indicate that a bottom may form and price may consolidate or continue in the direction of the primary trend. (Chart not shown.)

Here are a few of my observations.

1. It certainly looks possible that oil will form a "head and shoulders" pattern before the head-fake is done. The 2006 high might be the left shoulder, and the right shoulder might form if oil bounces off the neckline.

2. Alternatively, oil may descend to support levels around $87 or $77 and then stabilize. These are fibonnaci retracement levels, as well as channel support/resistance. (Note that the fibonnaci projections are in two different time frames, hence one in red and one in blue.)

Markets have a way of overshooting to both the upside and downside, so it is also possible that oil will fall to the 61.8% projection around $65--a number often bandied about as a "natural" support level.

A deep global financial meltdown could even cause oil to fall to the "neckline" around $50--a roughly 2/3 decline from its peak.

No one knows where oil will settle--$85, $75, $65 or $50, but regardless of future price action the reality is that the easy-to-get, cheap oil is about gone.

As you do your own research on The Oil Drum websites and elswhere, pay close attention to how much technology the Saudis must now deploy to keep their production up. It isn't gushing out of the ground any longer folks, and it never will again.

More to read:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The End of Oil: On the Edge of a Perilous New World

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

New essay on leadership by Chris Sullins: First, Do No Harm

Reader Comments

Harun I.

Now all the pundits are trotted out to tell us that we are 85 billion more in debt and that it is for our own good and the legislators appear in the media with mock indignation and calls for laws so that this "never happens again." And the American people will hit the blogs and express their anger in talk backs. But when it comes time to go to the polls I wonder will they vote out the incumbents? Will they throw the bums out sending a clear signal that we won't stand for this anymore? Perhaps I am cynical but history is a great teacher and its lesson says, no.

All of this will fail in grand fashion in its own time. Every action has an equal and opposite reaction. All the money pumping will, at some point, have to go in reverse.

Without the abolition of the Fed and fractional reserve banking we are just hitting the reset button for the next 70-80 years.


Charles: Thanks for putting into words what a lot of hard-working folks have felt inuitively. That we're all involved in this sham of a financial system is something that eats away at regular working folks. To keep a Family going, you're sort of forced to play along in the hollow system of lies. In my case, I get the "trickle-down" (or as Jim Hightower calls it, "tinkle-down") income from paint contracting and I also have a second income as a musician. Both of these "careers" require much hard work, and I can't keep up with it all. The fees, liability and medical insurance, equipment costs, etc...are making it so I'm looking for a third job! And I rely on the rich man/corporation with questionable income to keep hiring me!! When his house of cards falls, there goes the trickle.

At least I know how to grow a large portion of food for me and my Family, but it won't keep me medically insured. But this is exactly where change happens: in your own house! We'll probably have to alter our diets a bit, ie: quit eating flesh: meats, pork, chicken, fish, and become vegetarian. It is much less expensive, and healthy to boot. People have survived worse times than we Americans, but the future doesn't look too rosy as we hard-working people fork out another bail-out to the bankers and wall street. The Bush financial thieves have done it again. Remember and spread Kunstler's mantra: The Republicans are the party that wrecked America!!


I thank you for your many articles. One seeking truth must find the "buried treasure". Your web-site is one of the treasures I have been blessed to discover.

Your article today struck the chord that vibrates deep within me; an ever- present reminder of the past. "Don't lie, even if it means saving yourself. Truth will always defeat lies." This I was told by my grandmother and mother on the day I was caught in a lie. I was a small child at the time, but I will never forget the shame I felt.

Why do people lie? The simplest answer is that people are not perfect. People have lied, do lie and will continue to lie as long as there is flesh and blood. We expect more of our leaders, especially those who claim to be speaking in "the name of the Lord". Truth is, they are human too.

You ask, "What causes people who claim to be infused with deep religious beliefs to lie, not just once but habitually, as a matter of course, even founding their immensely profitable business on the constant shading, cloaking and manipulation of the truth, without any qualms? "

I'll give you an answer straight from the "Word " they claim to represent:

2Th 2:10 "....because they received not the love of the truth..." Why? Mat 13:11 "...Because to you it is given to know the mysteries of the kingdom of heaven but TO THEM IT IS NOT GIVEN."

That is it in a nut shell [ pun intended]. They are not able to obey the very laws of God that they profess.

Romans 8:7 "Because the carnal mind is enmity [Greek; ekh'-thrah :hostility, opposition, hatred] against God: for it is not subject to the laws of God, neither indeed can be".

Just my un-adjusted for inflation 2 cents.

Bill Murath

The other day's post about a country of liars was great! I could feel how pissed off you were/are. Then the divine intervention statement from today is spot on because it is coming. Looking back I could have made a shitload of money putting my knowledge that I gained from You, Mish George Ure etc.... But I realized tonight that I would not have filtered you three, in my opinion as the most spot on, if my interests were not purely altruistic. I will make the big money on the eventual upswing. People are now believing all the "BS" that I have been spewing for years and now I can offer insights, Thanks to you and others. The general population is beginning to freak out this week. I asked friends and family in Jersey about the mood and the general answer was worried. I figure this is a good gauge since they are tied to this crap economically. I feel bad for the folks in Hawaii because I think this is going to really really crush tourism and the economy there. The middle/lower middle class doesn't seem to be freaked yet so there is plenty of room to go but the upper middle class as far as the people I know are starting to freak. The change for the better is at hand. I am so glad my oldest is only going on 13 so by the time my kids are old enough we will have a different and better world!

Thanks for all the years of insightful essays!

David V.

These Corporations are so incestuously co-mingled through derivatives and debt instruments, that when the government thinks it is taking a corporation into conservership, it discovers it has one toe on a thousand-legged octopus.

Paul G.

Your postings are excellent. I am not sure how you find the time to put out so much info day after day. I doubt many university professors maintain such a pace, esp. considering the quality and information density.

In today's post, the graphic "Dow Jones Industrial Average (log) 1900-2008 really catches my attention. If the DOW were to sag to 6000, I am sure there would be much wailing and knashing of teeth, esp. considering that baby boomer's are hoping to retire via stock investments. And the log curve shows how easily the DOW could sag, and still being in trend.

Prices are set at the margin, so I don't know how very many boomer's will be able to withdraw anything substantial without the market sagging for everyone. I own a portfolio of individual stocks, and some days I watch when every single one of them is red (ie. down), and some days, everything is up. So its not about the stock per se, but aggregate money flow.

I recall back when they were talking privatizing social security. People treat the stock market as a bank account. But I am not sure what happens when a corporation gets over-capitalized from what I think of as zombie investors (ie. 401k index funders). I imagine in that case, the corporate elites just give themselves ever bigger bonus's for lack of anything better to do. Maybe they just print more shares (like fiat currency) giving themselves the options, and the stock still goes up, thanks to zombie investors.

Anyway, I guess there is plenty more derivative fireworks in the pipeline. So things should stay interesting. But even then, armies of zombie 401k investors will be "dollar cost averaging".


Your essay on the lying elites is still with me. I think you have identified the fundamental cause of why corruption is so rampant in our culture and why it is not objected to with more fervor.

Too many of us lie. Not just the elites. Not just the criminals and swindlers. Almost everybody lies. People lie when they pay their taxes. People lie when they fill out forms to receive welfare checks. They lie when they fill out their unemployment forms ("Did you look for work this week? Where....") They believe that they have to lie in order to receive benefits. In most cases, they are correct.

Lying is supported by the programming on television. Almost every situation comedy is based upon the tight situations people get themselves into when they lie or discount the truth. The tension is interpreted as funny. The damage that it does to a person's self esteem and to relationships is laughed at and accepted as "normal."

Lying is especially fostered by policies that make telling the truth impossible or so injurious that it is almost out of the question. It can begin at a tender age if one's parents are overly harsh and minor infractions are punished out of proportion to the misdeed. If children are terrified out of telling the truth, they will lie to protect themselves. And, the damage that is done is almost irreparable.

This will evolve as the person grows older to feeling as though they "have to" lie in other situations where authority figures hold immense control over their lives and consequences can be unbearable - the courts, for instance. People lie because they are terrified of telling the truth. They may lose their jobs, their health insurance, it may cause a loved one to suffer.

Have you noticed that the words "honor" and "disgrace" have almost disappeared from the collective discourse? I contend that the majority of us have dishonored and disgraced ourselves by repeatedly lying. Since we are a nation of lairs, we are not outraged by others who lie. It is almost comforting to know that others do it too, I think. We seem to vote them into office time and time again. In fact, if one is "too" truthful, they will often be rejected and ridiculed, especially by the media, who are professional liars.

We live in a toxic stew of lies. The government lies, the press lies, the agencies that are supposed to protect us lie, the pharmaceutical companies lie, the generals, the financiers, the contractors, the boyfriends, the priests. Liars. Liars. Liars.

I was lucky. I broke a contract once when I was a young woman. I agreed to a rule, and then I broke it. I didn't think they actually meant it. But they did. I was so humiliated that I had, in effect, lied to these people whom I really respected, that it had a profound effect on me. I have made a sincere effort to not lie and to keep my word ever since. It is probably the single best decision I have ever made.

But, in this culture, it has not been easy. There have been consequences for telling the truth. And, I have to admit, that I have not been perfect. But, I know that what goes around, comes around. This maelstrom of lies that the majority of us has been spewing comes back to us and cripples and damages the fabric of our society.

On so many levels, we deserve the shit storm that is headed our way. Maybe it is silly of me, but I believe that eventually, truth and justice will be served. God help us.

Here is my letter to my senators and Representative:

Dear Senator: Outrage is a word which does not do justice to my sense that the Federal government has poured $1 trillion+ of our taxpayer money (or money we borrowed from abroad) to bail out multi-millionaires, many of whom have paid no tax due to the "help" of the very investment bankers we are bailing out.

I have read all the positions papers about the horrible consequences of letting Fannie, Freddie, Bear Stearns, and now AIG go under--"too big to fail," blah blah blah. But the system is freezing up anyway, so what did we get for our $1 trillion? Nothing!

I demand a stop to the bailouts and a selling off and liquidation of Fannie, Freddie, and AIG ASAP. Let the crisis come--it's already here, so all that money was squandered.

I cannot support you or any Democratic candidate in the future if you cannot provide leadership to rid us of these financial cancers once and for all. I cannot support the Repubs, either, of course--both parties have failed the American people, completely, utterly, totally.


charles smith

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on for $10.99.

"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

An excerpt from Weblogs & New Media: Marketing in Crisis :

3. The Kondratieff Cycle suggests that the global asset bubbles which are just starting to deflate have a long way to go before the next cycle of financially healthy/stable growth can begin.

(Those who seek evidence of a global explosion of debt which marks the Kondratieff Cycle's peak, please examine the charts to the right.)

The Kondratieff Cycle captures the cyclical nature of debt accumulation through excessive borrowing, and the inevitability of debt repudiation as the end-state of that extreme leverage/euphoria, which is then renounced in a lengthy crash/depression that lays the foundation for a new cycle of productive growth.

What is truly unprecedented is that this low point (which typically corresponds to global depression) coincides with a global crisis in energy supply and a demographic time-bomb in which the retired/elderly are so numerous that there will soon be only two or three workers for every retiree in an era of double-digit growth in healthcare costs.

No asset class which has experienced a bubble--real estate, stocks, non-energy commodities and even bonds--will be spared from severe depreciation as assets are sold to fund retirements and as the global "glut of savings"/low-cost lending of surplus dollars dries up in a global consumer recession/depression.

Pensions both public and private which were once considered well-funded will be revealed as woefully underfunded and unable to pay out the benefits and pensions which were expected.

As capital pools and consumer spending both contract, government's ability to borrow or raise ever-larger sums from taxation will decline even as demands for promised entitlements increases sharply in both developed and developing nations.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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