As mentioned last week, this is our last bulletin. If you would like to receive future bulletins please follow the instructions at the end of this report.

Today, we are revisiting two issues: Peak Oil and Bolivar FX Strategy. On the first subject, we found the one picture that says more than one thousand words. On the second subject we are suggesting you execute your 2006 and 2007 Bolivar FX strategies together.

The graph below shows oil production (green) and real oil prices (plum) since the beginning of 1989 until today. You can see that there were three production peaks (marked by the blue rectangles) in 1991, 1998, and 2001, before the current one. Although they were each caused by completely different market events, they were all preceded by an oil-price peak (marked by the red lines). The 1989-2001 market behavior reproduces oil markets dynamics in place since 1859, when Colonel Edwin Drake drilled the first oil well in Titusville, Pennsylvania. However, the current production plateau (2004-2006) would be unprecedented in that it is happening before oil prices peak (notice that no red line precedes the last blue rectangle).
So, unless prices are about to drop abruptly, for the first time in history, high oil prices dont incentivate suppliers to pump more oil. Could this behavior be voluntary? No! But if it isnt, why arent oil prices going wild? The explanation, as in the Butterfly Effect, may be coming from China:

As oil production plateaus, we are missing the symptoms of an oil crisis: skyrocketing oil prices; a world economy slow down, the arrival of hyper inflation, etc. One possible explanation for this is coal. Believe it or not, Chinese coal has been literally the engine of the world economy for the past three years. Chinese total energy production growth has supplied almost half of the growth in world energy supply from 2002 to 2005 (450 Mtoe of 1010 Mtoe growth). Chinas average electricity generation grew 44% from 2002 to 200, and Chinese coal consumption grew from 67% of primary energy in 2002 to 70% in 2005. At this pace, by 2010 the Chinese will produce more electricity than the US, while the Chinese industry sector will consume as much energy as the US and the EU industrial sectors put together.

All this time, we thought low wages were the main reason for production moving to China, but the industrial growth there would have been impossible without the huge growth in domestic energy production. This Is probably one of the biggest “energy surges” in world history. However, China is starting to meet the physical limits to carbon production growth.  As pointed out by the first article below, atmospheric contamination has become one of Chinas major social issues, both domestically and internationally. What will happen when the growth engine of the world economy stops? One possible outcome is that you will see oil prices skyrocket to where they would have been, where it not for the role Chinese coal has played in the worlds energy growth over the past 4 years.

I have included below an article from the WSJ on how rising domestic consumption at the oil-exporting countries works against net exports. The article implies that net export capacity is disappearing at a rapid rate, while demand in energy importing areas like India and China continues to grow. As pointed out in TO LEAVE OR NOT LEAVE, this all works in favor of the oil-exporting countries. We are probably going to see a worldwide population shift to areas that have surplus energy to export. Not only will this change the economic balance of power between OECD countries and oil exporters, but it will definitely make owning a piece of the real economy (real estate, businesses, fixed assets, etc.) in any oil exporter a very valuable possession. In other words, dont sell your Caracas house yet, buy another one!

Based on the news article below confirming that PDVSA will issue dollar-denominated bonds payable in Bolivars, we designed an FX strategy to help you hedge 2007 Bolivar Receivables from $100K up to $2million per transaction at what may be the lowest possible price attainable this year. However, to obtain this information, plus Part III of PROTECTING YOUR NEST EGG and several other market reports, you will need to follow the instructions below.

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