The False Sense of Security Discount

Smcp Value
05/03/06 08:12 pm

Location Unknown - I have believed for 2 years that instead of a 10-20 dollar terror premium on oil prices that instead we have a false sense of security regarding supply of oil. This false sense of security, based on historical availability, will eventually be replaced with a new understanding of world wide demand being larger than world wide supply and short term availability is a luxury and not an entitlement.

I have no numerical formula to value this false sense of security discount. I do know that I would be happy to pay twice what I'm currently paying for energy to insure availability. Since the Chinese government has lots more money than I have and growing needs(while mine are constant) I am guessing they would be willing to pay twice what they are currently paying for energy for reliable supply.

Since this false sense of security discount is priced in and may be as much as 72 dollars a barrel (in my subjective opinion) the timing of peak oil becomes all important. As peak oil becomes a reality and more of us realize it is not just a theory but a reality I believe this discount goes away.

This discount will evaporate quickly as the need to secure supply becomes urgent. Some examples would include the politicians not messing with SPR because the military would require a full SPR to help insure our national security. Also you may see commercial supplies build even more as refiners would want to have product to deliver. I think inventories would build all along the demand chain. The Chinese may or may not be filling their SPR now but in the event of peak oil certainty their military would demand a full SPR.

I posted this because I believe we have peaked. I believe the government, the G-8, Iran, China, Venezuela, Bolivia are behaving as if they believe we have peaked.

If we have peaked a world wide recession is the only way to slow demand. I have written here before that to have a world wide recession(including China) may mean depression in the US and Europe. I don't think the policy makers have the stomach for this.

More likely prices will continue to rise, demand will be destroyed at the margins and central banks will continue to inflate.

I'm long oil, gas, uranium, coal, copper, nickel and water. Silver and gold represent about 15% of my assets.

Political stability of the home countries is most important at this time. We need to pay close attention to this as the Bolivian silver miners found out yesterday.

Thanks to so many of you for your insight and effort on our collective behalf.

I read earlier today that Warren Buffet is up about 30 times since the end of 1987. I'm up, even after today's plummeting, about 53 times in the same time frame. No leverage, no options. What a great time to be alive.