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Deflation and Fossil Fuels

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September 19, 2010 – Comments (0)

Resource Insights has a good post today on the deflationary cycle and fossil fuels

The message on deflation mirrors where my analysis took me, more that the models of what happens to the economy are more like the depression or Japan.  Japan had this huge help of high personal savings rates and a robust export economy, so it seems to me that outcomes could be worse then Japan.

It is well stated here:

The post-Depression generation had learned that too much borrowing leads to tears, and so they were very careful not to take on too much debt. Eventually, the people who experienced these tears died, and others took their place in the economy. The success of those who took on debt for speculative purposes attracted more people who took on debt to do the same in every field of investment. Eventually, too many people borrowed too much, and many of them were unable even to meet their interest payments. That is where we are today. According to Foss, it will be years until that excess debt is either paid or defaulted on. And, that means deflation for several years to come at least.

I don't necessarily agree with her position on oil and gas.  This new fracking of gas wells has opened up massive gas fields and somewhere I have read that there is now about 100 years supply.  The process is also really too new for us to have any real appreciate of what the true costs are and what the range for the break even is on natural gas.  And the other thing is we are extremely adaptive at converting to use natural gas over time, so I disagree on her fossil fuel assessment. 

But then, where I am living is the middle of the gas industry so I am getting a bit more information about what is happening in the gas industry.  I am not sure yet, but I am thinking that it is going to be a good place to be vested.  The price of natural gas may be too low to be profitable at this time and there could be some real changes in the natural gas players and there may still be significant corrections to the prices on gas stocks, but I think this sector is going to sort itself out and sometime over the next couple years it will be a good place to put your money.  It may or may not be now.  I have been wanting to take a closer look at the industry but I have been utterly swamped at work.  

The potential problem with vesting in this industry now is that gas prices reached an enormous bubble price which sets in motion tons of investment strategies which ultimately increases the supply and drops the price.  The price seems extremely low right now and that means some players are going to be hurt but it takes time to go through and figure out who is going to be left standing.  Right now they are fracking all this gas and just capping it and leaving it there to hook into later.  It is an enormous supply just sitting there.

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