So we’ve seen quite a tumble, led by declining oil. But then again, oil had quite a run-up. I’ve said before that oil was climbing too far, too fast. And over the past few weeks, oil tested the $150 mark. But like Gen. Pickett at Gettysburg, this charge to $150 failed.

What seems pretty clear is that at $140, a lot of things in this world just don’t work anymore. Airlines are, obviously, one business not built around highly priced oil. Worldwide, 24 airlines have gone bankrupt so far this year.

But there are other parts of the transport system, the food system and the economy that are cratering with the oil run-up.

Sure, a lot of things don’t work well even with oil at $130, $120 or $110. But that’s not the point. It seems that above $140, the developing world just stops developing. We saw pain at $100 and above. We were beginning to see true demand destruction above $140. So oil pulled back, and perhaps for a while.

I should add that the recent rally in financials pulled a lot of money out of oil.

Last week, the U.S. monetary authorities made a fateful decision. Rather than let Fannie Mae and Freddie Mac fail, or take these two horribly mismanaged firms over via receivership, the U.S. Fed and Treasury Department, essentially, nationalized the bad risks and socialized the losses. This is going to come back to haunt and hurt us, like a guy with a chain saw on Halloween night.

Efficient Capital Markets? No Way!

And despite the oil pullback, crude petroleum is still double the price of what it was just two years ago. So we are living with a 100% increase in the nominal oil price.

The oil run-up was not all just insatiable demand meeting flat supply. I’ve discussed this in other articles. The U.S. dollar has been mismanaged for decades, and thus we live in chronically inflationary times. And couple this with the horrid shenanigans of Wall Street and the overall U.S. banking system in this modern era. Ugh!

Remember how some people used to dismiss the fact that the U.S. was deindustrializing? Remember how some people used to praise the so-called “service economy”? They would say things like, “The U.S. capital markets are the most efficient in the world.”

To which we now reply, “Oh, really?”

How could the U.S. banking and finance system ever have gotten so bad? Don’t we have regulators who are supposed to look over the shoulders of the bankers? Don’t they teach people how to be careful in business schools? Heck, here at Whiskey & Gunpowder, we’ve been writing about the looming implosion for several years. It’s not like it was some state secret.

So now we are at the moment of decision. How many billions of dollars does the U.S. banking system have to lose? OK, how many tens of billions? Hundreds of billions? When you add in the toxic derivative instruments, it adds up to trillions of dollars. And it looks like the nation is on the hook for a lot of it.

Where can things go from here, what with all that worthless paper floating around?

I understand that the Fed does not want to raise interest rates. That would just plain hit the economy in the gut with the left fist. The politicians would scream. But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other — a left or a right to the gut — our U.S. economy is getting beat up. I’d prefer it if we just took our own national medicine and stabilized the dollar.

If the dollar stabilizes, oil should level off. And we could see the market begin to recover. So watch the dollar for your signal.

Meanwhile, the gold and precious metals stocks benefited from the declining dollar. Toward the end of June, most gold stocks all had good run-ups as the dollar fell.

You can’t really time these kinds of moves over the short term. But over the long term, the U.S. dollar has been declining in value. And precious metals have been climbing. My colleague Ed Bugos, a true gold bug, foresees gold at $1,200 per ounce by early 2009. Another precious metals trader of my acquaintance is forecasting silver at $26 per ounce. If that happens, the mining stocks will soar.

Until we meet again…
Bryon W. King
July 30, 2008

P.S.: Many precious metal experts believe that gold will be climbing in the long term. With our weak economy and even weaker dollar, we would expect a strong push in the near future. If gold does reach these high levels once again, many investors simply won’t be able to afford to get back in. But there is a way that you can still play the gold market for just a penny per ounce.

Oil Price Retreats was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Speculators are speculating because there is something about which to speculate. (Let me thank my sixth-grade English instructor for teaching me how to compose that sentence.)

Remember when oil ran up back in 1979 and 1980, when the entire Iranian oil industry collapsed in the wake of Ayatollah Khomeini’s Islamic Revolution? About five million barrels of oil per day simply left the world marketplace. It was gone — poof! Not there. No tankers.

Even though five million barrels went away, people could still look to places like the North Sea, Alaska, Angola and elsewhere. And they could feel certain that sooner or later, there would be future oil supplies flowing down the pipelines.

But that’s not the case today. When people look ahead now, they don’t see from where the oil of the future will come. Most of the world’s current large oil fields are in decline.

As for the so-called oil speculators, they are just defending the value of their money. They are looking forward a few years. What do they see? All of the current energy development projects will just barely replace the oil that will NOT be coming from declining oil fields. So peering ahead, there’s no net increase in future oil output. We’re looking at a plateau in output, if not the backside of the Peak Oil curve.

But we are looking at growing energy demand, as well as demand for other resources. So investors have placed hundreds of billions of dollars into energy and other commodity funds during the past two years. They are both hedging against dollar inflation and anticipating future supply shortfalls.

Long term, this is great news for one of my Outstanding Investments recommendations, a Canadian tar sands company. This company is facing higher capital costs, as well as higher costs for inputs like natural gas. And it suffers from a raw political bias (suicidal, in my view) against synthetic crude oil because of the carbon dioxide emissions.

Along those lines, some politicians in the U.S. want to renegotiate the North American Free Trade Agreement (NAFTA) that includes Canada. Word to the wise: Don’t go there!

Really, if the U.S. renegotiates NAFTA with the Canadians, our friends to the north will have some surprises in store. The U.S. will rue the day that it tore up NAFTA with the Canadians, because that will just plain shut off many of the valves on a lot of pipelines.

Seriously, the Canadians have eager buyers for their energy resources, and they don’t need us Yankees. Just keep in mind that downstream, people will demand oil, and companies that have it will make money.

Getting back speculation, those “speculators” are not the problem. Speculators are sending a message that policymakers had better heed. American politicians better get serious about finding pathways through the “energy issue.”

Although I do have political opinions, I try to keep them private, especially careful not to hurt the feelings of any of my readers.

But that does not mean that I don’t have opinions within areas of my own expertise. If you are reading this, you must know that oil prices have doubled in the past year. There are profound supply issues looking forward. (I’ve been writing about Peak Oil and related issues for Agora Financial for four years.) And world demand is still rising, despite the very slight pullback in U.S. oil usage in the first half of 2008.

Whoever wins the race had better be ready to think in terms of energy. And I mean from day one.

Energy is not just “another issue.” It’s not as if a politician could “do energy” and then move onto other important items on the agenda — like appointing your friends federal judges and handing your political donors prestigious ambassadorships.

Energy will be the defining issue of the next president’s term of office. This is already baked into the cake. Nothing will change it, short of a major war. And even fighting a major war will be controlled by the energy issue (as was World War II, by the way — another long story). The U.S. won’t go to war over most things. But we’ll fight over energy. Or where have you been?

Every U.S. president has had something associated with his term of office. It might be good. It might be bad. But it’s the shorthand way in which we remember the guy. When I think of Lyndon Johnson, I think of the Vietnam War. When I think of Richard Nixon, I think of Watergate. When I think of Ronald Reagan, I think of him meeting with Gorbachev and winding down the Cold War.

The next president’s big issue is already on the table. It’s energy. It has been decided.  The gods and fates have so dictated. Everything else is window dressing. Everything else is just the White House Easter egg hunt. Nothing else will control the outcome of the next president’s term of office. Energy, that’s it.

Energy. Take it or leave it. Except you can’t leave it. The nation needs to get energy right. We can have energy supplies for the economy. Or we can just decide to wind down the 232-year-old experiment called the United States of America. We can hop, skip and jump into James Howard Kunstler’s The Long Emergency. It’s that stark.

Here is the slogan for the next White House Situation Room: “It’s the energy, stupid.” Practice is over. It’s game day. It’s time to suit up and play. What’s your plan?

And we can’t just do 20 more years of energy research. Really, suppose that nobody ever filed another patent for a new and better invention in the field of energy. We could spend the next century just rewiring the nation based on what we already know how to do. The future is one of systems engineering. The future is all about taking the ideas and technology that’s already out there. Bring them down off the shelf and make them work to run the country.

So if the next president-elect is not ready to tackle the energy issues of this nation, he just ought to stay home on Inauguration Day. Don’t waste our time.

Until we meet again…
Byron W. King
July 8, 2008

P.S.: It’s become clear that oil and energy have become the dominant issues in this closely contested election. The sky-high prices along with increased media attention mean that solving this problem is paramount to many politicians and innovators alike. That’s why we’ve seen some incredible improvements recently that could go a long way toward solving this problem. One of the best inventions we’ve seen in a decade is finally being released and could be the solution we’ve been looking for.

Oil Speculation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.