A while ago I looked at what the Saudis were doing about their oil production and more recently what Russia has been doing about its energy supplies and I figure that Peak Energy is hitting home everywhere. Everywhere except the share markets.
It is pretty well axiomatic that in a supply-constrained world, any disruption anywhere will affect the prices everywhere. And lately, every hiccup in oil supply, from the major one of hurricane Katrina to minor ones like a spat over prices between Ukraine and Russia, has had an immediate effect on the price of energy in the market.
Markets live by discounting the future value of a commodity into the present, so when an unexpected event occurs, the effect is immediate.
So, when we see markets reacting suddenly to changes in conditions, we can assume that it is being driven by surprise, the unexpected has happened again. Which makes me think that the financial world is in deep denial and total confusion about energy.
On any day, some minor thing is going to affect some energy supply chain somehow; and over the last few weeks that fact has held true, from the Russian and Iranian shenanigans or civil unrest in Nigeria which is hardly new are always with us. Yet every day that something happens the prices skip up, if nothing happens that particular day, they sink again, only to hop up again the next time some energy-related event occurs.
That tells me that the people trading in this market have no coherent, long term perspective, no conceptual architecture into which this stuff actually fits. Every event is an external, unanticipated shock to their assumptions. One of the most dangerous of those assumptions is that price fluctuations are being driven by "speculation". But if the market knows that, and lets face it there are a limited number of people whose "speculative actions might drive the market, it would be discounting that fact.
It isn't. Something happens, oil goes up $2, the market goes down, then the next day nothing happens, and oil falls a bit while the market rises. Rinse, repeat.
So I assume they are still stuck in a model that says cheap, plentiful energy is the normal state of affairs and, every time it can possibly happen they try to drive prices back to the "norm"
But Peak Oil is anathema to that superseded view. The norm is that we have peaked in the access to that easy energy, from here on it gets harder and harder to source the fuel and feed the machine. Until the traders integrate that knowledge into their daily trading perspective, they will continue to be surprised by what is happening in the physical world.
We'll know when they have changed that model when blips in production caused by political and civil disruptions no longer cause swerves in prices because the reality of Peak Energy will have been priced in. Mind you, that price will be $100 bucks a barrel and we'll have bigger problems than the value of our portfolio.
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