But there’s something else happening: people are getting sick of spending time in transit at all, making city living increasingly attractive. We are now increasingly able to infill “scrap-time” during our days with useful activity, and location-based social networks make it possible to maximize personal connections as we move about. We are engineering our own serendipity to generate real value from every moment. Why would we squander that potential by spending time in transit of any kind?

In the future, I predict:

• Air travel will be reserved for trips greater than 500 miles

• Trains will be used for trips less than 500 miles

• Bicycles, walking, and local transit will be used within cities

• Any local trip longer than 20 minutes will be seen as burdensome

• Cars will be seen as a luxury to be used for road-trips + utility hauling

And again, this will not happen due to fuel scarcity alone – it will happen because people demand it; and I’m not talking about you – but your kids and grandkids.

Regardless of what happens with fuel prices, we know that roads do fill to their available capacity. And then that’s it. Expansion does not help for long, because roads then fill to whatever capacity is available and development occurs until roads are too broken to use.

Roads are also increasingly expensive to build. A major construction project such as the popular-but-doomed Intercounty Connector in Maryland will cost over $2.6Bn to build. Is this a good long-term use of resources? Seems to me we’re throwing a bone to some 55 year-old commuters who have been annoyed with the state of the Washington Beltway since it was built, and this is the only solution they thought could fix it. Enough with the reductionist, idiotic causal thinking already: it’s a dumb idea. I don’t begrudge it, but in the long term, who cares?

The idea-driven creative industries that America has hung its hat on can only thrive in cities, where people can get together and trade ideas freely. Any barrier to that exchange lowers the potential net economic value. Put simply, all of this kind of creative work will happen in cities. Period. Because if we don’t do it in cities, we won’t be able to compete with our peers around the world who will be doing this work in cities.

So, what of the suburbs? In many European cities, the urban centers have been long reserved for the upper-class elites; poorer immigrants, often Turks and other Islamic communities, tend to inhabit the outer rings of the city – denying them crucial access to economic opportunity. This kind of social injustice is baked into many European cultures; in France, you are simply French or not French, and no amount of economic mobility will allow someone who is not of that world to sublimate into it.

This is not the case in America. We are all Americans, and even marginalized citizens are able to fully participate in all levels of our culture – though certainly there is social injustice that must be overcome.

Over the next 50-75 years, there will be a net gain of wealthier people in America’s cities and also a net gain of poorer people in our suburbs. This will be a natural byproduct of an increasing demand to be in cities, and an increasing (and aging) suburban housing stock coupled with roads that no longer function.

To fulfill our challenge as Americans, we must use these dual gradients in our cities – the inflow of the rich and the outflow of the poor – as an opportunity to maximize social justice. By avoiding flash-gentrification and fixing education as we go, we can in a span of 20-40 years (1-2 generations) offer millions of people a pathway into new opportunities that stem from real, sustainable economic growth; all the while realizing this is going to mean more color blindness all around – and that suburbs will generally be poorer than the cities.

In my home state of Maryland, the only foreseeable damper on this force is the federal government and the massive amount of money it injects into industries like cybersecurity and other behemoth agencies like the Social Security Agency.

Because these agencies and the companies that service them generally do not have to compete globally to survive, they can locate in the suburbs and employ people that live in the suburbs – and subsidize all of the inefficiency, waste and boredom that comes with that.

This is nothing but a giant make-work program and its benefactors are little more than sucklings on the federal government’s teat, which is spending money that will likely come straight out of your grandchildren’s standard of living. Right on.

Cybersecurity, for all its usefulness in possibly maybe not getting us blown up by wackos (bored wackos from the European Islamic suburbs, I’ll point out), is nothing more than a tax on bad protocol design. For the most part it doesn’t create any new value. In the end, we’ve got suburban overpaid internet engineers fighting an imaginary, boundless war with disenfranchised suburban Islamic radicals. Who’s crazier?

Lastly, for all of you who think I’m wrong or resist these predictions because you personally “wouldn’t do that” or can produce one counterexample, I ask you: Are you over 35? If so, your visceral opinion may not matter much. I fail this test myself, but I believe my argument is logically sound and is based in the emerging attitudes of young people.

The future will be made by people younger than we, and based on everything I can see, we are on the cusp of a major realignment of attitudes and economics in America.

It won’t be too much longer ‘til active, entrepreneurial creative professionals (black and white) in our cities look at the suburbs (black and white) and decry the entitlement culture of the suburban welfare state.

Regards,
Dave Troy
Whiskey & Gunpowder

November 10, 2010

The Coming Suburban Welfare State was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

There are going to be a lot of disappointed people out there who will be suffering terrible losses and real pain in daily life. Societies don’t do well when the public falls into the broad despair that is the opposite of hope. That’s when the long knives and the tribal animosities come out and things get smashed.

Within the context of conventional party politics – the kind that has been baseline “normal” in the USA for a long time – we see this playing out in two factions that are increasingly out-of-touch with reality.  The Obama government has made itself hostage to a toxic form of pretense and lying. In order to sustain the wish for “hope” – if not hope itself – the President and his White House advisors along with his cabinet appointments, are pretending that the historical forces of compressive contraction are not underway.  They’re flat-out lying about the employment figures issued in the government’s name. They’re willfully ignoring the comprehensive bankruptcy gripping government at all levels. They refuse to bring the law to bear against “the malefactors of great wealth.” They appear to not understand the epochal energy scarcity problem the whole world faces, or its implications for industrial economies. Most of all, they persist in promoting the lie that this economy can return to the prior state of reckless debt accumulation (a.k.a “consumerism”) that has made us so ridiculous and unhealthy.

The trouble with self-delusion, either in a person or a society, is that reality doesn’t care what anybody believes, or what story they put out.  Reality doesn’t “spin.” Reality does not have a self-image problem.  Reality does not yield its workings to self-esteem management. These days, Americans don’t like reality very much because it won’t let them push it around. Reality is an implacable force and the only question for human beings in the face of it is: what will you do?  In other words, it’s not really possible to manage reality, but you can certainly choose to manage your affairs within reality.  We won’t do that because it’s too difficult. This harsh situation leaves the public increasingly with little more than bad feelings of discouragement and persecution

Reality unfolds emergently, and this ought to interest us.  For instance, I have maintained for many years that we are approaching the twilight of the automobile age – and the implications of this for daily life in the USA are pretty large. For a long time, I had assumed that this change of circumstances would proceed from our problems with the oil supply.  But reality is sly.  It has thrown two new plot twists into the story lately. America’s romance with cars may not founder just on the fuel supply question.  It now appears that our problems with capital are so severe that far fewer people will be able to borrow money from banks to buy cars at the rate, and in the way, that the system has been organized to depend on.  Our problems with capital are also depriving us of the ability to pay to fix the hypercomplex system of county roads, interstate highways, and even city streets that make motoring possible. What will we do?

For now, a cashless government gives out cash-for-clunkers, which is basically a self-esteem building program designed to make the government feel better about itself because it is ostensibly taking 11-miles-per-gallon cars off the road and replacing them with 27-miles-per-gallon cars, thus forestalling scary problems with climate change. It’s dumb of course, but the failure of leadership is comprehensive. Even the elite environmentalists at the Aspen Institute are preoccupied with finding new “green” ways to keep all the cars running.  They put zero effort into the idea of walkable communities, or restoring the railroad system, which will be the reality-based remedies for the car-dependency problem.

The extreme right is, if anything, even more childishly delusional. For them it comes down to “drill, baby, drill.”  They know nothing about the geology of oil – they don’t even believe that the earth is more than six-thousand years old, meaning they don’t believe in geology, period – but they are inflamed with the faith of eight-year-old children that we must have a lot more oil in the ground because this is America and God loves us more than people in other parts of the planet so it must be there. As their disappointment mounts, their childish ideas will turn cruel and sadistic. They’ll seek to punish anybody who believes that the earth is more than six thousand years old. The catch is, if they get into power in the election cycles ahead, they’ll be impotent and ineffectual even at persecuting their enemies.

In the meantime, American life will just wind down, no matter what we believe.  It won’t wind down to a complete stop.  Its near-term destination is to lower levels of complexity and scale than what we’ve been used to for a long time.  People will be able to drive fewer cars fewer miles.  The roads will get worse.  They’ll be worse in some places than others. There will be fewer jobs to go to and fewer things sold. People who live in communities scaled to the energy and capital realities of the years ahead are liable to be more comfortable. We’re surely going to have trouble with money. Households will drown in debt and lose all their savings.  Money could be scarce or worthless. Credit will be scarcer.

Both factions of American political life indulge in the fiction of control. History is reality’s big brother.  It is taking us someplace that we don’t want to go, so it will probably have to drag us there kicking and screaming. For starters, both reality and history will probably take us out to some woodshed of the national soul and beat the crap out of us.  That could be a salutary thing, since the crap consists of all the lies we tell ourselves. Once we’re rid of all that, we may rediscover a few things left inside our collective identity that are worth regarding with real self-respect.

Regards,
James Howard Kunstler

November 11, 2009

Hypercomplex Systems Will Fail Due to Scarcity of Energy and Credit was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The published inflation data are surprisingly unsophisticated in so far as they compare current prices with a snapshot a year earlier.

Just over a year ago, oil was every hedge fund manager’s favorite speculation. In summer 2008 a barrel got to well over $140, before falling sharply back.

That summer’s high oil price had the effect of canceling out the deflation which was occurring elsewhere in the economy, as the first phase of the credit crunch started to bite. It helped keep inflation up.

But by summer 2009, after hitting a trough of $30, the price was back down around $65 representing an annual fall in the oil price of over 50%. Now it was keeping the inflation figures down. Oil would continue to be below the price of 12 month previous throughout the period from January ’09 to September ’09.

Now – in the fall of 2009 – prices are more or less where they were a year ago, but 12 months ago they were falling fast, while now they are rising. So for the first time in over a year the effect of oil prices in the inflation figures, in October/November 2009, will be up again. And by January, even if prices don’t continue to rise from here, the low prices of winter 2008/9 will form the base. Oil will again be at twice the price it was a year earlier. This will have a marked impact on inflation data.

It’s not only the energy markets that threaten the “low inflation” data currently encouraging bondholders to continue buying government debt paying little more than 3.0% per year. There are well over two billion Chinese and Indians who used to make the unwelcome but necessary market adjustments on the demand side when world grain prices rose:

Some 30% of the world’s population went hungry.

Until the current decade, that was an important part of how world demand came into line with dips in world food production, before big price rises would cause Westerners to feel the sharp pain of a world food shortage. But this has now changed, and permanently.

The wealth and dollar reserves of the Asian countries are now large, and their people are not going to go hungry in future (and quite right, too). Instead they will be competing on world markets, and the price of grains will start to show the very sharp spikes associated with unreliable supply and a newly inelastic demand in critical commodities.

You may remember the food riots of early 2008, and how they seem to have disappeared. Well, that occurred after a small dip in world grain production in 2007. Fortunately, by its end, 2008 had turned into a bumper year for the global food harvest and a serious crisis was averted. That bumper harvest brought global food prices down again – but for how long?

Rice gives us a hint of the nature of price movements we should learn to expect. From a stable base it spiked viciously upwards (by 300% and more) as it sucked in speculative money during the 2008 panic. But when it fell back as panic subsided, it still remained twice the original base level. It is from here that the next upwards spike seems to be starting.

In a similar pattern sugar has already started to cool off a bit, but pepper is in the earlier stages. At the end of August ’09 it rose 17% in a week on news of a poor crop arising from adverse weather in South East Asia.

Unlike camcorders, food is not a discretionary purchase and under the harsh law of marginal utility – together with the new inelasticity of Asian demand – even modest food shortages will cause sharp price spikes, and maybe more riots, which indeed started to appear in Asia in September 2009, with tragic consequences.

When necessities are in short supply people behave in the opposite way to normal. Instead of reducing demand they tend to panic and stockpile food for safety, perversely increasing demand on those higher prices…

Regards,
Paul Tustain
BullionVault

October 13, 2009

The Price of Oil and the Inflation Time Bomb of Autumn was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

October 8, 2009

Energy, Brazil, Gold: What More Could You Want? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The predicament that the USA finds itself will not be “solved” at the scale of operation that we’re accustomed to, and we should just stop wasting precious time and dwindling resources in the idle hope that it will be. The failure to recognize this dynamic is the most impressive part of the meltdown. The only thing that the federal government is likely to prove in the process is the ineffectiveness of its actions as applied to any of the raging current problems from the killing burden of hyper-debt to the brushfires of geopolitics. Congress will only make the health care system more complex. Both congress and President Obama will do everything possible to keep housing prices unaffordable — in a quixotic effort to protect the collateral of the big banks. Capital will continue to vanish in the black hole of default.

Something’s got to give in the remaining three months of 2009. My guess is that attention will shift overseas for a while. This will not be due, as many probably think, to a cynical effort by the government to divert attention from the financial fiasco, but because the intrinsic tensions in the Middle East are reaching the snapping point. Iran is being called out on its nuclear program. If, from the start, it had just maintained the need for electric generating power in the face of dwindling fossil fuel reserves, they might have gone unchallenged. As it happened, though, the elected leader of Iran made too many intemperate remarks about wiping other nations off the face of the earth, and this has only prompted the leaders of other nations to take his remarks at face value and presume that Iran’s nuclear program was devoted to armaments, not electric power generation.

So, now the USA has picked up the gauntlet. If Iran doesn’t act to demonstrate the de-activation of its bomb-making capacity, then the USA will try to impose sanctions depriving Iran of necessary imported supplies. (Iran actually imports gasoline, due to inadequate refineries.) For sanctions to be effective, support will be required by other nations, including Iran’s chief gasoline supplier, China. What a delicate calculus this will be! I rather imagine that China would not like to see the Middle East blow up. I’m not so sure about the nations of the Middle East though, or at least major parties in certain nations. The rulers of Saudi Arabia would probably enjoy seeing Iran get into big trouble, since Iran is Saudi Arabia’s most active antagonist, working tirelessly to destabilize the Kingdom. Al Qaeda interests dispersed in many nations would certainly cheer any mayhem. The Taliban would love anything that takes the spotlight off them in Afghanistan. The Russians are conflicted between the wish to enhance their own leverage in world affairs and their need to discipline Islamic maniacs along their own borders. Europe is probably scared to death of anything that might threaten their energy lifeline. Pakistan is too tormented to have a position, but its radical Islamist factions are probably on the side of disorder — as the best remedy for the status quo. If any of that spills over on India, as in the Mumbai bombing, then that flashpoint could turn to conflagration very quickly. We forget about Turkey, which was the hegemonic player in the region for centuries until its swift decline after 1914, but it has potent military capability and very mixed feelings about the the Jihad to ruin the West (since it is partly of the West). And finally there is Israel, the object of Iran’s intemperate public statements.

This is a dangerous situation. I’m not so sure that Israel could launch an effective attack on Iran’s nuclear infrastructure, but it might try anyway, especially if a US-backed sanctions effort fails to coalesce quickly. I’m not sure Israel would seek permission from the US to do this, though the US would certainly be tasked with defending the shipping lanes in the Persian Gulf. Iran might succeed in sinking more than a couple of US ships-of-the-line with sunburn missles and other toys, and this would lead to the bigger danger of oil supplies being choked off to the rest of the world. The US air response would be impressive, but possibly not effective against hardened targets. The leaders of Iran might exult even if the Iranian people were swept into a maelstrom. I imagine that what followed would be a very extravagant military frenzy amounting to World War Three, with European air forces and navies dragged in, with Hezbollah and Syria striking back at Israel, India and Pakistan possibly incinerating each other, and mayhem galore among the bystanders in Iraq, Egypt, Saudi Arabia, and Afghanistan. There could easily be internal mischief in the UK, France, and Germany from angry immigrant populations, and “sleepers” could work some overdue hoodoo in the USA. I don’t know what Turkey would do, but it could be the biggest beneficiary of a bad regional meltdown, providing the only effective governance what remains in the region. China and Japan would probably just gape at the spectacle in wonder and nausea from the sidelines as they saw their energy supplies for years-to-come go up in flames.

The G-20 nations would be crippled as global oil supplies were choked off indefinitely. And if anyone — Iran, or its friends inside the Kingdom — managed to pull off a stunt such as blowing up the Ras Tanura oil terminal — then a darkness will spread across places that were used to being lighted and they will stay dark a long time.

I don’t know if any of this will come to pass, but as I said, tensions have reached a breaking point, including the greater tensions of history, which seem to require periodic release no matter how poignant the Pete Seegar songs are. It is perhaps, just another prime symptom of “overshoot,” the world’s way of shedding some of the toxic organisms that are making it so unhappy — Gaia in a really bad mood.

If nothing develops along these lines on the geopolitical scene, the USA is still stuck in its predicament of trying desperately to maintain an overscaled living arrangement, with no coherent public discussion of downscaling, re-scaling, or re-arranging things. My guess is that this kind of restructuring only occurs when all other options have been exhausted. The last time the USA found itself in an intractable economic morass, World War Two came along and it made things all better here (after considerable sacrifice for us and catastrophe elsewhere). After World War Two, we ruled the world for a couple of generations. The outcome of World War Three would not be so favorable for us. At the very least, it would leave us attempting to run things on about one-quarter of the oil we’re used to. That does not suggest a seamless transition between how we behave now and how the future will require us to behave differently.

Regards,
James Howard Kunstler

October 6, 2009

Iran Fidgets in the Middle East: World War III Anybody? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

August 31, 2009

Washington Capitulates: Peak Oil Is Real was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And speaking of colossally stupid government programs, you may have seen the news that the U.S. House of Representatives passed a climate change bill on Saturday by a narrow vote of 219-212. The cap-and-trade bill, otherwise known as Waxman-Markey (for the nominal writers of the bill), mandates that U.S. manufacturers and utilities reduce carbon emissions 17% from 2005 levels by 2020 and 83% by 2050.

Under the sausage making process that is the American Congress, the bill was filled with compromises. Congressmen from coal-producing states or states with lots of manufacturing jobs had to be bribed into supporting it through various means. It must now go the Senate, which must pass its own version of the bill.

If the Senate bill is different from the House bill (and it almost always is, given the different agendas in both bodies and the need for more bribes), the two bills go to “reconciliation.” That’s where a committee made of members from both houses settles on a final compromise version of the two bills and sends them back to their respective bodies to be voted on. Then it gets sent to the President to become the law of the land.

By the way you may have missed an amendment to the bill that’s stirred a bit of controversy. It was inserted the night before among the bill’s 1,200 pages, which you can be sure none of America’s elected officials actually read. The amendment placates Congressmen from Rust Belt states who worry about losing even more manufacturing jobs to the developing world (China). It requires the U.S. President to make a “border adjustment” on goods from countries that do not cap or reduce carbon emissions by 2020. It’s a tariff.

Already President Obama has backed off that particular amendment. He says, “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there.” Very careful, sure. But you already did send the signal didn’t you?

For what it’s worth, we think this was all an exercise in political window dressing to get some version of a bill passed. If the Senate and the House actually agree on a climate change bill that puts a high tax on carbon, then the apotheosis of Obama will be complete.

We will take The One at his word, though. Besides, as everyone knows, the real purpose of the bill is not to start a trade war (although it may do so). The purpose is to make conventional energy more expensive AND—in an era of declining government tax receipts and rising liabilities—to create a huge new source of government revenues by taxing carbon. It’s a revenue and power grab by an institution (the Nation state) that finds itself increasingly off-balance.

It’s also a massive project in socioeconomic engineering that ignores the reality (and physics) of energy generation in an industrial society. It’s true the world could benefit from cleaner and cheaper energy. But cleaner and more expensive energy is a recipe for economic suicide. It’s something Western nations seem particularly keen on committing, although we can’t really figure out why. It could be that the global Left simply finds modern life aesthetically ugly and consumerism (with all that pesky individual choice) a vulgarity that should be destroyed via legislation.

But speaking strictly in economic terms, unless a region or a country has ample hydroelectric or geothermal resources, it’s impossible to meet base load electricity needs reliably with renewable energy. Advocates envision a world full of ultra-long life batteries, windmills, and solar farms. But it’s just a fantasy. If the climate bills become law in Australia and America, it will accelerate the deindustrialising of Western economies and mean the transfer of even more manufacturing jobs to the developing world.

Of course maybe that’s just what the architects of these laws want. Who knows? We know they want to tax productive enterprise and make the bulk of the population dependent on government handouts. That makes people compliant and easily controllable. That is big government Utopia. Advancing the fears of climate change is the easiest way to get more control.

We’d expect to see the construction of a lot more natural gas fired power plants in the coming years in the West (although they are more expensive than coal-fired plants). All those re-chargeable plug-in hybrids have to get their electrons from somewhere. If it’s not going to be coal (which will be taxed out of existence), it’s probably going to be cleaner-burning natural gas power plants, powered by both conventional and unconventional gas.

Right now, global LNG capacity is rising and stockpiles are fairly high. But if you keep your eye on the big picture and we see a transition of the world’s power plant fleet from coal to natural gas, it obviously favours gas producers and explorers. Australia is moving ahead by leaps and bounds in this area with conventional offshore production in the North West Shelf and Timor Sea and more unconventional production (hopefully) from coal-seam-gas in Queensland.

Regards,
Dan Denning

July 1, 2009

Climate Change, Cap, Trade, and the End of the Industrial West was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A new area emerged from the update Rep. Carter sent me, one to be expected:  lo and behold, those poverty-stricken families who make no more than $42,000/year are going to receive “energy stamps” so that only the middle class–which Mr. Obama defined as those making up to a quarter of a million dollars a year–are going to bear the brunt of increased prices.  Fancy that.  What a nifty little dividend for core Democrat voters, new entitlements that tap the public till for gas money and utility bills.  That isn’t going to seem quite as great when they find out that everything goes up when energy does.  Shoes, lollipops, dog food, basketball tickets…

“The debate over this bill is over how much it will raise prices for consumers,” House Republican Conference Secretary Carter said. “Democrats contend the effect will be minimal, so they should have no problem adding these two amendments just to make sure. A vote against either will therefore be a recorded vote to raise energy prices on consumers.”  I would have had a twinkle in my eye if I had uttered those words on the floor of the House because twitting Democrats is always good fun.

Polls from all political angles (Gallup, WSJ, Rasmussen, Fox, CNN, NBC, The Los Angeles Times, USA Today, ABC, Planet Green, Stanford University, and Quinnipiac Universities, among others) are turning against “hope and change” and being force fed socialism like a Strasbourg goose.  They show clearly how many of us want what, and here it is, courtesy of Rep. John Carter:

1. Expanded wind and solar power – 81% public approval
2. No new energy taxes – 74% public approval
3. Lower energy prices – 72% public approval
4. Continue existing oil and gas support – 65% public approval
5. Expanded offshore and Alaska oil drilling – 63% public approval
6. Expand nuclear power – 60% public approval

If the bill that comes out of the Conference Committee is no worse than what has been proposed thus far–and this year all such bills do–what we’re going to get is at least an additional dollar a gallon for gas, and much higher electrical, propane, and fuel oil bills for our homes, in addition to raising prices across the board.  Offshore drilling and that in Alaska will be blocked, and existing drilling taxed.   Expanding nuclear power will be prevented by denying the storage of nuclear waste storage at Yucca Mountain, Nevada, while Congress and the White House carol that our electrical needs will be met by new nuclear power plants and vast fields to harvest solar and wind energy.  Those last two require enormous capital outlays and have their own hurdles, including protests about sullying the sacred desert habitat and the cost of erecting vast windmills that turn only when the wind is at sufficient strength and have to be shut off when there is no “storage capacity” for the electricity generated.  I couldn’t say “demand” because there is always a need for electricity; the problem is the electricity has to have somewhere to go or the mill has to be stilled.  As a technical explanation that leaves much to be desired, but it gets the point across:  this isn’t like a kindergarten class holding pinwheels on a breezy day.  Those multi-million dollar towers are stilled by lack of wind and lack of demand (draw.)  With hydroelectric plants “excess” electricity can be used to pump water back up to the lake or reservoir; obviously, it isn’t feasible to send the wind back whence it came.

Drive by the enormous wind farm outside El Paso and see how many of the massive monoliths stand motionless while others spin on any given day.  We aren’t able to use the capacity available now, and Texas has the only independent power grid in America.

The stage is set to destroy the coal industry which provides fifty per cent. of our power; that diminished capacity is not going to be restored by nuclear power plants which will not be allowed to be built and would require between ten and twenty years between obstructionists, greed, theft, and Cape Cod millionaires who block wind generators because they would block the view from their mansions.  Solar panels are costly and fragile, do not work at night, and have eco-opponents…Tidal and volcanic/thermal proposals look good on paper but they are far from “shovel ready.”

“Renewable” resources are a pretty dream but they are nothing to stake our energy supply on at present levels of technology and political forces.  In my book they aren’t anything suitable for private investors unless we throw a little money in one and see if it returns a profit in about twice the time it takes to cultivate a new truffle field.

Regards,
Linda Brady Traynham

July 1, 2009

The Fate of Representative John Carter’s Proposed Amendments to Cap and Trade was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

An employed Chinese laborer in the manufacturing sector, who makes perhaps $3000 per year, together with an unemployed American consume far less energy than an employed American and unemployed Chinese. Leave aside the staggering wage and standard of living differentials.  The energy cost of transporting from overseas all of the clothes, food, steel and cement that an average U.S. household consumes in a year, presently under $100, is less than it costs the U.S. wage earner to drive to and from work.

Fossil fuel is being squandered, of course. The squandering is exacerbated by trying to avoid unemployment at all costs. Protectionism would increase U.S. energy consumption, aggravating unemployment in the long run. It is simply too costly to keep the U.S. labor force fully employed doing what they did during the last century. It is less costly to modestly feed, clothe and shelter the unemployed. The whole point of employment is to create wealth. If society has to burn its wealth to prop up employment, that’s bad, no matter how sanctified our work ethic.

A subsidized enterprise destroys wealth if it would be unprofitable without the subsidy. Cheap access to a precious, limited resource is a subsidy. It destroys the wealth not only of future generations, which everyone claims to be so concerned about, but of the present one as well, because individual entrepreneurs profit at the expense of the society as a whole. The principle is illustrated by the following toy model:

Suppose oil costs $100 a barrel when 100 consumers each buy a barrel per week. Suppose a 101st consumer comes along, able and willing to pay slightly more per barrel, and the market price immediately goes up to $101 per barrel as a result of the increase in demand. How much does the 101st barrel per week really cost? You could be forgiven for thinking that it costs society $101 per week, but you would be wrong. It costs $201 per week – $101 per week to the 101st consumer, and another $100 per week that the resulting price increase costs the first 100 consumers.

Now suppose a barrel of oil can be used to manufacture $110 worth of goods (to be more precise, $110 above the other manufacturing costs). It can then be assumed that, in a society with a work ethic and a free market, someone will be willing to buy the oil at $101 (always per week), produce and sell the goods for $110, thus making a $9 profit.

The problem: While the individual was profiting the $9, the society as a whole took a $91 loss, having given up $201 for goods that were worth only $110.  Has the 101st individual profited because she has created true wealth or because of a hidden subsidy at the expense of the society? I assert the latter; she has received public wealth for less than its true worth.

Yes, I’ve oversimplified, I’ve neglected the lowered cost of goods manufactured from oil that an increased supply would cause, but the principle is nevertheless a valid one. When unrestrained demand drives up the unit cost of a finite resource indefinitely, the default ceiling on that cost becomes the point of zero profit to the individual, and this may be well beyond the point of zero profit for the society as a whole.

The wild fluctuations in the price of gas in 2008 were triggered, accompanied, and followed by relatively small changes in demand – less than 10% in either direction. This suggests that most Americans willing to pay $2 for a gallon were also willing to pay $4. To this majority, the gasoline is worth at least $4 per gallon. This is hardly surprising. If a typical U.S. worker can save an hour of commuting time by consuming a gallon of gas, and his wages are far more than $4 per hour, then it pays to drive to work himself, even at $4 per gallon. (A Chinese worker who makes less than $2 per hour should probably not drive even if gas costs $2 per gallon.)

If fuel sells for much less than most people value it,  and those same people were the collective owners of the fuel back when it was still underground, then the oil company that drilled for it and sold it must have received it from the public for less than its true worth. That’s a subsidy. When government representatives undersell public resources to their friends in the private sector, no doubt in exchange for favors, it is but one more mechanism by which government confiscates your wealth.

If we are not selfless enough to bequeath our publicly owned fossil fuel to future generations, let us at least be smart enough to sell it to them, or to anyone else for nearly as much as the next generation will eventually be willing to pay. With the revenues, maybe we can retire and enjoy life, and leave the job market open to young people. If there are no buyers at the price I am asking, then I want my share left safely where it is, beneath the Earth’s surface, until I decide to cash it in.

Regards,
David Eichler

June 12, 2009

Wealth and the Rising Cost of Globalism was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold

He said that gold hadn’t done much adjusted for inflation since 1980. What’s more, he said that it’s worth less—adjusted for inflation—than it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We’ve asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year’s Vancouver show next month. The theme of this year’s show is “Ten Years of Reckoning,” Symposium Promo celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 on Tuesday. Bloomberg says the weakness in the U.S. dollar is, “bolstering the appeal of energy as an alternative investment.” Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it’s the smaller-than-expected oil supply growth that will drive the market.

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia’s position is in the developed world. “Even as Australia’s challenges increase, it will still be the envy of the developed world,” writes William Pesek at Bloomberg. “Even in its worst moments… Australia is among the least unsightly economies anywhere,” he adds rather optimistically. We’ll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realize it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Regards,
Dan Denning
Daily Reckoning Australia

June 11, 2009

Last Decade: Buy Gold. This Decade: Buy Energy. was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.