Oil threat to Fire?

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tjscott0
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Oil threat to Fire?

Post by tjscott0 » Mon May 31, 2004 3:41 am

Scott Burns column titled "Facing Oil's Ugly Realities".
http://www.dallasnews.com/sharedcontent ... 6123d.html

the most important paragraph of Scott's:

One message here is very clear: When oil prices rise, stock prices tend to fall. When oil prices sink, stock prices tend to rise.

The S&P 500 had no to little return from 1969 to 1980. The price of oil has an effect on the economy which in turn effects the stock market.

Here is link to oil price chart.
http://inflationdata.com/inflation/imag ... lation.gif
Folks will note price of oil edged up from $4/barrel to $9/barrel from 1973 to 1978. Then price of oil skyrocketed from $9/barrel to $30/barrel over a period of three years.

Intercst has look at the 4% withdrawl in bad times.
http://www.retireearlyhomepage.com/novtips.html
He looked at 1966 to 1996.

the worst 30-year pay out period when you use the CPI to measure inflation is 1966-1996. The effect of the steep market decline in 1973-74 and rapid inflation actually made this period worse than the Crash of 1929 and the Great Depression -- at least for retirees taking inflation-adjusted withdrawals from a portfolio. The chart below shows the performance for the "100% safe" initial withdrawal rate of 4.25% of assets for a 30-year pay out period.

Retirement withdrawals rose to more than 10% assets well before the half-way mark in 1981 and breeched 20% of the portfolio balance by 1990, six years before the portfolio was depleted in 1996 at the end of the 30-year period. Few retirees would sleep well at night at a 10% withdrawal rate knowing they needed their money to last another 15 years or more -- especially if they understood they were testing the outer limits of these historical "safe withdrawal" studies.


intercst manage to save retirement assets in this scenario by the introduction of 30 year TIPS yielding 3.92% real return. Currently 30 year TIPS are no longer issued. A 10 year TIP currently is yielding around 2%. I don't know the TIPS now available would rescue the 1966/1996 portfolio.

There are now new factors effecting price of oil.

1)Mideast is becoming more unstable due to a variety of reasons.
2)Increased demand from Asia. Asia demands are predicted to accelerate.
3)Little new oil is being discovered. The "easy" oil has been found. New oil will cost more to extract.

Thus the future high oil cost of oil will be premanent not just an oil spike. That could very well make future stockmarket returns worst than historical returns.

If the US cannot make the transition from an oil driven economy; future stock returns will be worse than historical returns. That means the 4% draw on retirement asset is out the window.

I thinking of upping the energy component of my portfolio from 5% to 10%.

Thoughts? Comments?

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Post by Mike » Mon May 31, 2004 5:17 am

The big problem in the 1966 to 1982 period was inflation, which was out of control. The oil embargo was one factor, but there were others. Rising government spending because of Vietnam and the Great Society, fed policy that tried to control long term interest rates, and the fed printing way too much money to accommodate the first two goals. Demographics may have also played a role, as the boomers did not yet have enough work experience to keep productivity high, but were demanding products.

Volker reduced inflation by reducing the money supply, which shows that government policy can have a great impact on inflation rates. We have had inflation for most of this century because inflation is a deliberate policy of the federal government. The federal reserve was started with one of its goals being to specifically produce constant inflation. How much inflation we have depends to a large degree on the policies the politicians put forth at any given time, and how much money foreigners are willing to loan to our politicians for their endless spending programs. Inflation is a multi faceted phenomenon, with politics being the #1 causual factor.

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Post by tjscott0 » Mon May 31, 2004 11:41 am

mike replies
The big problem in the 1966 to 1982 period was inflation, which was out of control. The oil embargo was one factor, but there were others. Rising government spending because of Vietnam and the Great Society, fed policy that tried to control long term interest rates, and the fed printing way too much money to accommodate the first two goals. Demographics may have also played a role, as the boomers did not yet have enough work experience to keep productivity high, but were demanding products.

Volker reduced inflation by reducing the money supply, which shows that government policy can have a great impact on inflation rates. We have had inflation for most of this century because inflation is a deliberate policy of the federal government. The federal reserve was started with one of its goals being to specifically produce constant inflation. How much inflation we have depends to a large degree on the policies the politicians put forth at any given time, and how much money foreigners are willing to loan to our politicians for their endless spending programs. Inflation is a multi faceted phenomenon, with politics being the #1 causual factor.


I appreciate the thoughtful reply.

If memory serves, inflation did not become a factor in the economy until 1973 which coincides with energy spike. The Vietnam War was winding down by 1972/1973. I do not dispute the spending on "guns & butter" was a factor but that the increased costs to the economy caused by oil was more of a factor. The link on my post shows price of oil increasing from 1973 to 1981 which coincides with high inflation rates during that time period. I think the unstablity in the Middleeast is a greater danger to stock returns than from gov't caused inflation. That being said; Dubya is following the LBJ "guns & butter" approach. That is the spending on the war against terror & large gov't programs such as presciption drug bill($500 billion plus cost).

So whether one believe my or your cause for poor stock returns for the decade of the 1970's; there well may be reason to believe future returns may negatively deviate from historical stock returns.

One may argue that inflation can be combated by increasing interest rates like Paul Volker. I currently do not see the political backbone in Washington to address problems. For example in the early 1980's SS & Medicare taxes were increased to "save" SS & Medicare. A few months ago Greenspan points out demographic problems SS. Politicians response was SS was in no danger & that benefits would be paid. No sacrifice will be asked to pay for future SS & Medicare or even the war againsr terror.

It will be interesting how events unfold.

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Post by raddr » Mon May 31, 2004 1:31 pm

tjscott0 wrote:intercst manage to save retirement assets in this scenario by the introduction of 30 year TIPS yielding 3.92% real return. Currently 30 year TIPS are no longer issued. A 10 year TIP currently is yielding around 2%. I don't know the TIPS now available would rescue the 1966/1996 portfolio.

Thoughts? Comments?


Hi TJ,

Yes 2% TIPS would make for a lower SWR but an even bigger factor that many over at TMF overlook is that we currently have valuations way higher than even 1966. So the future SWR should be logically be significantly lower than the 1966 version for this reason alone.

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Post by ataloss » Mon May 31, 2004 4:10 pm

Saudi Arabia is like a crack dealer. Price the product too high, and customers won't be able to afford the product and might even kick the habit.

"We've got almost 30% of the world's oil," says Adel al-Jubeir, foreign-policy adviser to Saudi Crown Prince Abdullah. "For us, the objective is to assure that oil remains an economically competitive source of energy. Oil prices that are too high reduce demand growth for oil and encourage the development of alternative energy sources."


http://online.wsj.com/article/0,,SB1085 ... 00,00.html?
Have fun.

Ataloss

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Post by Mike » Mon May 31, 2004 5:00 pm

If memory serves, inflation did not become a factor in the economy until 1973...


Inflation was 1.03% in 1960, and stayed in the same range through 1966. Then in 1967 it jumped to 3.46%, and kept on going up from there. It was not that 3.46% was huge by today's standard, but it represented an increase that alarmed people. By 1970 it had jumped to 6.18%, and in 1974 it was at 9.39%. The steady rise in inflation made people demand more dividend yield from their stocks, and the market made no progress from 1966 until 1982 when people believed that inflation was finally going to go down instead of up.

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Post by SiddFinch1 » Mon May 31, 2004 5:40 pm

Saudi Arabia is like a crack dealer. Price the product too high, and customers won't be able to afford the product and might even kick the habit.


Good analogy. Those #%@#% have us right where they want us. And the sad thing is that if those Saudi Princes fall, it will be far worse.

We need to push for more different energy alternatives even if they are more expensive in the short run.
The only thing necessary for evil to triumph is for good men to do nothing.
-- Edmund Burke

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Post by tjscott0 » Mon May 31, 2004 6:23 pm

Saudi Arabia is like a crack dealer. Price the product too high, and customers won't be able to afford the product and might even kick the habit.

"We've got almost 30% of the world's oil," says Adel al-Jubeir, foreign-policy adviser to Saudi Crown Prince Abdullah. "For us, the objective is to assure that oil remains an economically competitive source of energy. Oil prices that are too high reduce demand growth for oil and encourage the development of alternative energy sources."


Asia is rapidly increasing its demands for oil.That demand will accelerate over time. The world demand for oil is at an all time high.

I don't see Americans willing to give up their SUVs easily. We have wrung pretty much as much fuel efficiency out of the gasoline engine as possible. Hybrid cars do not supply much additional mpg over gas models. As with any new technology, there is a question of reliablity of hybrid vehicle. We have no data of long term use of these vehicles. They, of course, use gasoline. That leaves hydrogen fuel vehicles & fuel cell powered vehicles. They have years & billions of dollars needed to be invested before a viable vehicle can be developed.

Then there is oil demand for industrial uses(mfg of plastics) & for heating buildings & for lubication purposes.

Then there is a question whether Saudi royalty can remain in power & keep muslim fanactics at bay. If a theocracy is established in Saudia Arabia; the mullahs would love $100 barrel oil to bring the" Great Satan" to its knees.

We shall see what the future brings.

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Post by TRyan » Tue Jun 01, 2004 5:21 am

I don't see Americans willing to give up their SUVs easily. We have wrung pretty much as much fuel efficiency out of the gasoline engine as possible. Hybrid cars do not supply much additional mpg over gas models.


A co-worker just took delivery on a Toyota Prius - a hybrid; he's been averaging 50 mpg. My SUV gets 15 mpg (down hill with the wind). Also learned there is an 18 month wait for a Prius ... so they're catching on. Imagine cutting comsumption by 2/3's in this country.

Hopefully even a slight consumption reduction will lead to reduced oil prices (but this sounds too simple).
"Buy Low Sell High"

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Post by BenSolar » Tue Jun 01, 2004 11:15 am

tjscott0 wrote:That leaves hydrogen fuel vehicles & fuel cell powered vehicles. They have years & billions of dollars needed to be invested before a viable vehicle can be developed.


Don't forget battery electric vehicles ... people have written them off, but batteries have continued to improve. The T-Zero gets 300 mile range from off-the-shelf lithium ion batteries. BEVs currently have far better efficiency, performance, and range than fuel cell vehicles can hope to match for years to come. Add a small ICE generator to the design that could burn ethanol or bio-diesel for range extension and you have a petroleum free car with the performance and range of today's cars that is feasible with today's technology.

We're going to be OK. :great: As oil gets more expensive we'll make the moves to reduce consumption. Until then people will burn it like it's cheaper than water, uh, which it is. :)

Regards,
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus

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Post by bpp » Tue Jun 01, 2004 5:22 pm

tjscott0 writes:
Hybrid cars do not supply much additional mpg over gas models.



TRyan replies:
A co-worker just took delivery on a Toyota Prius - a hybrid; he's been averaging 50 mpg. My SUV gets 15 mpg (down hill with the wind).


Here is a more apples-to-apples comparison:

The Toyota Estima Hybrid minivan gets 18.6 km/l. This is a 4WD setup (electric motors in front and rear), so should be compared to the 4WD gas-engine-only versions of the same vehicle. The 2.4 L engine 4WD version of the Estima gets 10.6 km/l, and the 3.0 L 4WD version gets 8.6 km/l. (All numbers from the Toyota website). This means that the hybrid version is getting about twice as much mileage as the non-hybrid versions of the exact same vehicle.

(Should the hybrid be compared against the 2.4 L or the 3.0 L engine? Not sure: total maximum torque of the hybrid system is higher than that of the 3.0 L engine, but total maximum power output is about the same as that of the 2.4 L model. I'm not sure which is the more proper comparison.)

tjscott0 continues:
As with any new technology, there is a question of reliablity of hybrid vehicle. We have no data of long term use of these vehicles.


I have to say that this did concern me a lot when I was car shopping about 4 years ago, but by now the Prius has been in mass-production and on the roads for at least 5 years, so I think we'd have started seeing long-term problems by now if they are going to show up. It'll only take a few more years to get full lifecycle data on the earliest models.

Bpp

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Post by tjscott0 » Tue Jun 01, 2004 6:38 pm

Don't forget battery electric vehicles ... people have written them off, but batteries have continued to improve. The T-Zero gets 300 mile range from off-the-shelf lithium ion batteries.


http://www.acpropulsion.com/tzero_pages/tzero_FAQs.htm

The driving range will vary by about a factor of two, depending on how you drive. With very careful driving, up to 100 miles is possible. Making frequent use of the performance capability of the car can drop the range to 50 miles. The range at a steady 60 mph is 100 miles.

At present, there are no plans to equip the tzero with air conditioning - on warm days, the tzero is best experienced with the side windows off and the wind in your hair!

Pack life is on the order of two to three years, or 15,000 to 20,000 miles. At current prices, a set of new batteries costs about $3,000 from Optima.


I have to say that this did concern me a lot when I was car shopping about 4 years ago, but by now the Prius has been in mass-production and on the roads for at least 5 years, so I think we'd have started seeing long-term problems by now if they are going to show up. It'll only take a few more years to get full lifecycle data on the earliest models.


Ben & Bpp:

I'm still concerned about battery life & replacement cost of a set of batteries. I have always been a late adopter on new technology. We will talk again in 10 years after hybrids have a more extensive record.

Also, even if we manage to develop good dependable alternative powered vehicles. There still the problem of unstability in Saudia Arabia. A Saudi Arabia run by mullahs will really toss a spanner into the works.

Regards

tjscott0--cheerfully spreading gloom & doom!

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Post by bpp » Tue Jun 01, 2004 7:13 pm

Also, even if we manage to develop good dependable alternative powered vehicles. There still the problem of unstability in Saudia Arabia. A Saudi Arabia run by mullahs will really toss a spanner into the works.


On the other hand, if the rest of the world doesn't depend on Saudi Arabia's oil, then their internal situation becomes irrelevant to the outside world (except maybe from a humanitarian perspective if they end up in civil war or something). In particular, I'd be willing to bet that if the "Great Satan" lost interest in the Middle East, that lack of interest would be reciprocated.

Bpp

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Post by ataloss » Wed Jun 02, 2004 2:43 am

Forbes had an article in the 5/24 issue pointing out that electricity in a hybrid costs 60 cents/kwh when generated by the engine vs 8.5 cents for resedential electric and less for off peak (where avaiable) so if configured for home recharging a hybrid could cost less to run and save its expensive power for longer trips

http://www.forbes.com/forbes/2004/0524/106.html

"We now have the sophisticated control systems, power electronics and battery management," says Robert Graham, who studies electric cars at the Electric Power Research Institute. "I don't see any technical hurdles to practical plug-in hybrids coming to market now and displacing very significant amounts of gasoline."
Have fun.

Ataloss

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Post by tjscott0 » Wed Jun 02, 2004 4:17 am

On the other hand, if the rest of the world doesn't depend on Saudi Arabia's oil, then their internal situation becomes irrelevant to the outside world (except maybe from a humanitarian perspective if they end up in civil war or something). In particular, I'd be willing to bet that if the "Great Satan" lost interest in the Middle East, that lack of interest would be reciprocated.

Bpp


Dang it Bpp! I just hate a logical rebuttal.<G>

Forbes had an article in the 5/24 issue pointing out that electricity in a hybrid costs 60 cents/kwh when generated by the engine vs 8.5 cents for resedential electric and less for off peak (where avaiable) so if configured for home recharging a hybrid could cost less to run and save its expensive power for longer trips

http://www.forbes.com/forbes/2004/0524/106.html


Thanks for the excellent link ataloss. This article addresses my concern about long range trips. Also home recharging my very well extend the battery life of a hybrid vehicle.

regards

tjscott0--who admits maybe the sky isn't falling<G>

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Post by BenSolar » Wed Jun 02, 2004 7:01 am

tjscott0 wrote:http://www.acpropulsion.com/tzero_pages/tzero_FAQs.htm

The driving range will vary by about a factor of two, depending on how you drive. With very careful driving, up to 100 miles is possible. Making frequent use of the performance capability of the car can drop the range to 50 miles. The range at a steady 60 mph is 100 miles.


Those specs are for the first iteration of the T-Zero, which had lead acid batteries. Following are some quotes about the Li-Ion version.

Wednesday, August 27th, the Li-Ion tzero was driven for the first time. The 90-mile test drive included climbing to the top of Mt. Baldy road, a 40-mile loop including a climb to 6000+ feet elevation, and a 35-mile highway loop at 70-75 mph. At the end of the test drive less than 1/3 of the measured battery capacity had been used.


A new lithium-ion battery has replaced the lead-acid battery and saved 500 pounds. The whole
car weighs in at 1970 pounds. And despite weighing less, the LiIon tzero carries three times more
energy than before. "The results are staggering"￾ according to AC Propulsion President Tom
Gage. "The LiIon tzero will drive 250 miles in left lane traffic, in LA that means 75-80 mph.
Alan Cocconi (AC Propulsion founder and chief engineer) drove it to San Diego and back
without charging. On any type of standardized drive cycle it will go over 300 miles"￾.
...
AC Propulsion assembled the tzero LiIon battery from 6,800 standard cells. The cells, designated
18650 based on dimensions of 18mm diameter and 65 mm length, are slightly larger than the
familiar AA cell.
...
Specifications have been improving about
every six months.
...
"With 6,800 cells, the tzero is an extreme case"￾ Gage observed, "intentionally so. The whole idea
of the tzero is to shake things up. Most cars would use about half as many cells, but even so,
people wonder how we can even consider assembling so many cells into a vehicle traction
battery. The answer is it's not our first choice, it's our only choice if we are going to build
electric cars people that people want and can afford.

"The market for big cells is small so they cost too much. The small cells for the tzero cost less, in
total, than the nickel-metal hydride battery in the Toyota RAV4 EV, and they hold twice the
energy. We got a quote from one battery company for a Li Ion pack made from 100 much larger
cells. Their price was 10 times higher, and neither the energy or the power were as good as we
get from the small cells. The 18650 is a mass-produced, completely commercialized, off-theshelf
product. It keeps improving and prices keep coming down. If you want to start building
electric cars right now, as we do, you have to have a commercial battery. Right now, 18650s are
the only game in town"￾.



Another AC Propulsion project: Their Tri-Fuel Hybrid.

The AC Propulsion Tri-Fuel Hybrid - The Tri-Fuel Hybrid uses only electric propulsion to
drive the wheels. A lead-acid battery provides 30 to 40 miles of all-electric range and can be
recharged in less than an hour by the onboard 20 kW charger plugged into grid electricity - the
first fuel. An onboard low-emission engine-powered generator can sustain battery charge on long
trips giving range unconstrained except to stop for gasoline - the second fuel. When the vehicle
is parked and plugged in, the generator can send its output back into the grid through the unique
AC Propulsion Reductive bi-directional grid interface. To avoid depletion of the gasoline and
reduce tailpipe and refueling emissions, in this stationary mode the generator can operate on lowpressure
natural gas piped in from the gas main - the third fuel.



Pretty interesting. :D
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus

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Post by tjscott0 » Wed Jun 02, 2004 12:12 pm

Ben Solar sez
Pretty interesting. :D


Agreed. I missed version two of tzero first time around. The only problem now is the light weight of the vehicle(1970 lbs). I would hate to be in one when hit by full sized pick up. <g>I personally would be more interested in the plug-in hybrid pickup talked about in the forbes article. However, I doubt the American public will be attracted to this vehicles in great number until gas hits $4/gallon.

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Post by BenSolar » Fri Jun 04, 2004 5:11 am

tjscott0 wrote:I missed version two of tzero first time around. The only problem now is the light weight of the vehicle(1970 lbs). I would hate to be in one when hit by full sized pick up. <g>I personally would be more interested in the plug-in hybrid pickup talked about in the forbes article. However, I doubt the American public will be attracted to this vehicles in great number until gas hits $4/gallon.

The light weight of the T-Zero would be a problem for a lot of people. But it is a dedicated hard-core sports car. The types interested in those typically don't want excess weight on board for safety reasons. :) I would love to have the T-Zero and would take it to the local SCCA parking lot races and astonish all the gear-heads with it's speed. :D

The plug in hybrid wouldn't demand a big audience right now, I agree, but I think it would find a niche, and as people got used to the idea they would like it. I personally don't much like gas stations and would be happy to plug in the car at night to avoid them most the time.

Regards,
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus

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