It was really quite something to be in a fully equipped broadcast studio, surrounded by live feeds from major networks and many other forms of information. I could see the entire storm system develop in living color, both from radar pictures, satellite imagery and on-the-ground video.

And there I was, sitting at a desk in front of a battery of cameras, addressing the unfolding drama of a massive storm bearing down on the spot that produces 25 percent of U.S. oil output. It was like being Howard Cosell on energy, instead of sports. Aside from getting up at 3:45 a.m. to get to the studio on time, it was great.

Big Storm, Perfect Strike, Pins Still Standing!

Make no mistake. Hurricane Gustav was a big storm. Heck, Gustav was 400 miles wide, so it covered a lot of area. And Gustav bowled a perfect strike, moving northwest across the Gulf, right down the center of oil-patch alley below Louisiana.

But despite the evident power of this meteorological bowling ball, Gustav didn’t knock down any pins! As I write this, the Gulf of Mexico oil infrastructure seems to be intact. Gustav passed over, under and through literally thousands of offshore structures. And none of them appear to have been damaged, or at least not very badly.

Gustav weakened a bit as it approached the shore. So it seemed like the storm was bleeding down during the final approach. But the key “energy” point is that the oil industry has spent the past three years beefing up its infrastructure against wind and waves. And so we saw a strong storm pass right through, with almost no damage. Wow.

Onshore, the media were looking for the “human interest” angle. The “big story” was whether or not we would see a repeat of the 2005 hurricane debacle, with massive flooding in New Orleans and the associated human misery.

Well, the levees in New Orleans held up. Of course, there was flooding due to Gustav. Power lines went down. The high winds caused lots of damage. That was my next “energy” point. If the offshore oil and gas facilities made it through the hurricane, what was going to happen to the electric power?

Without electric power, the pumps can’t work. The refineries are down. The pipelines can’t move product. But again, it seems that damage was not as bad as it could have been. So the pumps and pipelines are still up and running. And it means that refiners like won’t have to rebuild parts of their refinery complex.

Remember Katrina in 2005? We all knew Katrina. And Gustav was no Katrina.

Oil Went Up Then Oil Went Down

Leading into Gustav, there was a special electronic trading session on Sunday, Aug. 31. Oil prices traded up around $118 per barrel. By Monday morning, Sep. 1 — and as Gustav was making landfall south of New Orleans — oil traded down toward $105 per barrel on European exchanges.

Sure, the markets were happy that Gustav didn’t knock out any significant oil infrastructure. But it was not just oil that was down. Gold tumbled. Other commodities and resource plays were down. And through it all, the U.S. dollar was up. In fact, the dollar was setting records against the likes of the British pound.

There was something going on out there besides Gustav sparing the oil patch of the Gulf of Mexico. What was it? Well, the dollar is strengthening. This was another of my topics on the Fox Business broadcasts. The producers wanted me to discuss the “oil story.” But I worked at steering the discussion to the “rising dollar” story. And Fox was good about airing the discussion.

By the Tuesday morning broadcast, Fox Business led with a story — and my commentary — not about the hurricane but about how the dollar has been strengthening for about eight weeks. That’s the REAL story.

I discussed how back in mid-summer, oil approached $145 per barrel. People were asking whether or not oil was in a bubble. Well perhaps it was the “froth on the beer,” but not a bubble.

And oil was rising as the dollar was falling. In fact, oil has been rising for well over a year, as the dollar has tumbled. For the currency traders, life was easy. Bet against the buck, and the Euro would rise. You saw this in gold and other precious metals as well.

Then in mid-July, it all changed. Overnight. There was no big announcement from the Federal Reserve or the European central bank. Nobody said “We’re Tanking the Euro.”  But it’s pretty clear that they decided that enough was enough. The falling dollar and rising Euro was killing exports from European countries. It was putting Germany and France into recession.

So the central banks of the world started buying dollars. The U.S. buck strengthened. Oil fell from $145 into the $115 range. And even the Russian invasion of Georgia, or Hurricane Gustav, could not cause oil to rise. Stay tuned as this drama unfolds.

And while you are tuned-in, don’t give up on the long-term prospects for energy, precious metals and resources. The dollar is rising? This too shall pass.

Really, is the U.S. economy strong and getting stronger? No. Is the U.S. tax code becoming friendlier to investment and long term capital creation? No, again. Are the demographics of the U.S. labor force changing towards a long period of increasing productivity? Nope. Has the U.S. solved its problems in banking, finance, housing, energy, trade deficit, government spending? No, no, a thousand times no.

So it’s frustrating to watch as falling oil prices, falling gold prices, falling other things take down many companies. But have faith over the long haul.

Over the long haul, go with companies that own real stuff. Like oil reserves, or mine reserves, or critical technology in advanced resource industries. Go with the hard-stuff. Avoid the fluff. Or come the next financial hurricane, you might get blown away.

Until we meet again,
Byron W. King
September 12, 2008

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

But before I tell you what it is, I want to give you a sense of how big this really is: It’s exactly like being there for the birth of the offshore oil and gas industry.

This industry, born of the 1970s energy crisis, now produces about a third of the world’s oil output. But back in the ‘40s and ‘50s, it was still a frontier…a pipe dream, to many.

Geologists today know of some 115 billion barrels of oil and 633 trillion cubic feet of natural gas reserves in the Outer Continental Shelf surrounding America’s coastlines alone. There are some 450 operating platforms in the North Sea today, and several thousands in the Gulf of Mexico. It is a trillion-dollar-per-year industry, plus or minus.

Thanks to the mother of inventions, offshore drillers have overcome many obstacles (mostly political). And in the process, they have unwittingly laid the technical and legal groundwork for a whole new industry…

Until recently, offshore drilling had gotten a bad rap from both political parties. The ban on drilling was first made by George H.W. Bush and has stood until his son recently proposed repealing the ban.

Both candidates in the upcoming presidential election had been opposed to offshore drilling but have changed their stances in the recent weeks. Republican John McCain has stood by the president and called for an increase in offshore drilling. McCain attempted to drive yet another wedge between himself and his democratic rival.

But even Democratic Sen. Barack Obama has eased off his stance against drilling. Obama stated last week that he would support offshore drilling as part of a comprehensive energy plan. It seems that both sides of the aisle have felt the pressure of rising fuel prices. The winner in these new political concessions will clearly be the offshore drillers themselves.

So while the toughest obstacle is finally cleared for drillers, there could be a flood of opportunities made for investors.

There is one company I’m looking at. It is this industry’s leader. Its founder led the group that co-discovered the 40 million ounce Lihir gold mine in Papua New Guinea (put into production during the late ‘90s). He is still a founding director of Lihir Gold and a fellow of the Australasian Institute of Mining and Metallurgy. He surrounds himself with old mining hands, including former Placer Dome and BHP executives.

I bet you’ve already figured out that we’re talking about a mineral deposit.

What’s so new about that, right?

Get this: It’s under the sea. Yes, we are about to see the first major startup in the deep-sea mining industry. If it’s anything like the boom in offshore drilling, you’ll want to be there.

The world’s largest gold companies together own over one-third of this company.

These players are so bullish on the prospects of this industry they all entered into non-competing and anti-dilution clauses just to get a tiny foothold… Teck Cominco and Anglo American have paid millions of dollars for a mere option to participate in a potential future joint venture. And millions more in direct investments.

Anglo and Teck’s investments total more than $50 million.

Placer Dome alone spent more than $13 million earning a joint venture interest with this company.

And in 2006, shortly after Barrick took Placer Dome over, it decided to convert Placer’s JV interests into a 9.6% equity interest (which has since diluted to less than 5%) at a deemed price of $2.86 per share.

But wait, you may wonder, just how new is this?

Outside of a few dredging operations for diamonds off the African coast in recent years, the extraction of minerals from the seafloor is virtually untapped. No one has mined the seafloor, though geologists have long known of its potential…

For a long while, they thought that these minerals were deposited as sediments from eroding deposits on nearby land. But it was later realized that the source of massive sulfides on land was the ocean, and that hydrothermal events beneath the ocean seafloor precipitated into a mineral deposit upon contact with the water. In fact, in 1985, seafloor massive sulfide systems were discovered off the coast of Papua New Guinea by a research vessel at a site claimed by our company.

Given a few modifications to technology produced by the offshore oil industry over the last few decades, the outcome of a new international treaty on deep-sea mining in the ‘90s, advances made by our company toward the establishment of the first-ever deep-sea mine this decade and the growing worldwide demand for scarce mineral resources, the time is right for this industry to emerge…and the deep sea mining profits should follow!

Regards,
Ed Bugos
August 13, 2008

P.S.: Advances in the offshore oil industry have aided operations for deep-sea miners. But these technological and political advances aren’t the only factors aiding the mineral mining industries. There are several economic reasons why mining stocks are set to soar. Readers of my Gold & Options Trader service already know this.

Deep-Sea Mining was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

From Melissa, “somewhere in the tundra of Alaska”:

“I just wanted to express how much I enjoy reading Mr. King’s articles about Peak Oil. I’m formerly a resident of Pittsburgh’s North Hills and love how I can relate to his experiences in the city.

“I also wanted to comment on a particular part of yesterday’s piece. Byron commented, ‘The oil industry cannot get any credit in the public mind for anything, no matter how far it goes or how deep it drills.’

“I recently graduated with a bachelor’s in engineering, and before I took my current job, I held the same opinion as most of the public — that oil companies were a necessary evil. Perhaps it was growing up with people or the media constantly reminding you of all the disasters caused by them. I now work in Prudhoe Bay as a field engineer for [a major oil field service company] and can honestly say I do receive some light hostility from other younger people, mostly friends jokingly asking how many animals I’ve murdered or how successful I was at raping the Earth today.

“For the most part, the people of Alaska work well with the oil industry; it brings in most of their tax revenue, after all, and a large portion of the population works for BP, Conoco, or the service companies like Schlumberger, Halliburton, Baker-Hughes, Veco, Nabors, or Doyon. But they don’t forget past transgressions. Almost everyone likes the state as it is, one of the last wildernesses in the world. Because of that, I’ve noticed, on the North Slope at least, that everyone takes more precautions to make sure things are done right the first time and are completed safely. In fact, a few of the older hands complain about how many new safety and environmental regulations have been enforced by BP and Conoco in the past few years.

“Not that we don’t have our fair share of problems, for example, last year’s pipeline spill comes to mind. But things are constantly improving. [Still], no matter how many new standard operating procedures (SOPs) are written and performance improved, it seems you can never shake the image of oil-covered animals. Sometimes I wish more people from the lower 48 would come here to see that not everything is like you see on television.”

Byron Replies to Melissa:

So you have moved from Pittsburgh to Prudhoe Bay? That is quite a journey. Congratulations on your new job with a company that is truly a world-class outfit. From Steelers black and gold to your current employer’s well-known blue and white, it is always a pleasure to learn that a hometown Pittsburgh girl has made good. Yours is a rare opportunity, so keep your eyes and ears and mind wide open, Melissa, and you will learn a lot up in Prudhoe Bay. You will learn a lot about oil and gas, and the oil industry, and on those long shifts at dark-thirty in the morning, you will learn a lot about yourself.

Your letter caused me to recall a similar moment in my own life. I do not usually get too touchy-feely personal in these Whiskey articles, except for the one about my cardiac event back in February. But then again, even that article was also intended to motivate our readers to get their physical exam, including a cholesterol check. (And many of you wrote to say that you were going to schedule a medical checkup. Have you done so? Back to business.)

Melissa, you have dredged up an incident from my own life long ago. It is an incident that still resonates, and now is as good a time as any to tell the tale. There I was, way back “before you were born,” as the saying goes, graduating from Harvard with a degree in geology and a job offer in my hand from the former Gulf Oil Co. I enjoyed studying geology in school. I was interested in petroleum geology and engineering, to the point of being immersed in the oil and gas side of things. And I was feeling pretty good about being offered a job with a major international oil company like Gulf.

A few days before graduation, I was running some errands on the Harvard campus. I had occasion to drop off some papers at the office of some Dean of Something-or-Another. I walked into the dean’s office, and handed an envelope to the assistant. There were several other people in the office as well, mostly graduate students at Harvard, filling out forms and completing the typical kind of paperwork that requires the great mind of a university dean to review and approve. The dean’s assistant took my envelope and asked something like, “So Byron, what are you going to do after you graduate?”

I replied, “I have a job, working with Gulf Oil Co. I’m going down to Texas.”

“How Can You Live With Yourself?”

The other people in the office all turned quickly and stared at me, with something like shock and horror in their eyes. I was going to Texas, to work for an oil company? I may as well have said that I was going to Texas to perform chainsaw massacres on college coeds.

One of the people in the room puffed up her chest, looked right at me and asked, “How can you live with yourself, working for an oil company?” She practically spit the words out of her mouth. Her tone of voice was dripping with self-righteous, smarmy condescension. My inquisitor was an individual with a well-honed sense of moral rectitude pumped up with a thick, gooey level of snotty arrogance. You probably know the type.

I think that I can say about myself that I have never been one to go around just looking for a fight. “A kind word turns away wrath,” says the Bible. “The dog barks and the caravan moves on,” say the Arabs. So there I was, standing in the office of the Harvard Dean of Something-or-Another, being insulted by some stuck-up graduate student about my choice to accept a job offer from a particular employer, and calling into question my decision to take a job working in the oil industry.

“I Live With Myself Just Fine”

I decided to reply to the snotty question, even if it may not have deserved any answer whatsoever.

“I live with myself just fine,” I said. “I studied geology here at Harvard, and did real well, in case you are wondering. I like the physical and intellectual challenges offered in the oil and gas industry. The oil and gas business is a critical part of the economy. And if you don’t like oil companies, then maybe you ought not to drive a car, fly an airplane, or heat your house in the wintertime. Maybe you ought to study some geology, too, and learn something about the oil industry before you make any more ignorant comments and bad-mouth people you don’t know, and say stupid things about subjects that you obviously don’t understand.”

Whoa! People are not used to getting talked to like that up at Harvard. After I said my piece, the room was quite silent. Everybody was just staring at me. Finally, the assistant to the Harvard Dean of Something-or-Another spoke up and said, “Byron, I am sure that she did not mean to insult you,” referring to the woman who had asked the first question, which was, in fact, quite insulting.

“No,” I said, “people never mean to insult you when they ask questions like, ‘How can you live with yourself,’ as if you are some sort of war criminal or something just because you are going to work in the productive part of the economy. But I have other things to do, so let’s all just get back to whatever we were doing.”

I said goodbye, and left. Yes indeed, the dog barks and the caravan moves on.

So Here We Are, 30 Years Later

So here we are, Melissa, 30-some years later, and people are still saying pretty much the same things to you that they said to me. “Raping the Earth,” huh? Nothing much changes, does it? Except that now we are 30 years closer to Peak Oil.

Let’s think back over the past 30 years or so. The world has pumped and burned a heck of a lot more oil in the past 30 years than it has found. Numbers vary, depending on the source, but I kind of like the statistic that indicates that the world has “discovered” only one-fourth of the oil that it has extracted in the past 30 years or so. And for much of the past 30 years, oil was rather cheap, down below $10 per barrel in the mid-1980s, and close to that low, low price during the 1990s. In consequence of cheap prices for oil, entire segments of the oil industry went out of business, to include hundreds of thousands of old stripper wells in the U.S. that were plugged and abandoned. Much of the industrial infrastructure languished, leaving a legacy of decades of underinvestment in things ranging from drilling rigs to pipelines to pumps and, of course, the labor force.

Work Force Issues

In the past 30 years, well over a million people, cumulatively, were laid off from the U.S. oil industry (and even more from the world industry total, as well).According to figures published by the U.S. Department of Labor, more people were laid off from jobs in the oil industry than lost their jobs in the U.S. automobile and steel industries combined. This has left us, in the U.S. but also in the world, with a remarkably precarious work force demographic, in which something like 50% of the industry’s skilled professionals will be retiring within the next 15 years or so. The age cadre just behind the group that will be retiring is distressingly small, in that an entire generation of oil industry workers were either laid off or never hired in the first place between about 1985-2005. And then, Melissa, we have the “under-30” folks like you, fairly new out of school, but with years of learning ahead of them before they really get their arms around what goes on in the oil patch. Whatever you think you have seen, you ain’t seen nothing yet.

I am glad that you are part of the oil industry, Melissa, but here is the problem. The industry needs you, and in fact, for every person like you, it could use several more just like you, but with what the human resource people refer to as “more experience.” Looming, right now and into the foreseeable future, is the requirement for the world’s oil industry to rebuild much of the existing extraction and transmission infrastructure that is old and rusty due to the underinvestment of the past. Also looming is the requirement to build out new infrastructure in exotic, distant, and dangerous places.

As you know from working up at the North Slope, Melissa, the oil industry has to find and lift immense quantities of oil and gas from somewhere. For example, you are helping to lift product from the Prudhoe Bay oil field, which was discovered in 1968. And according to the CEO of Chevron, Dave O’Reilly, you are pumping what he calls “the easy oil.” Tell me, Melissa, how “easy” is it to work the North Slope in February, when it is dark as pitch, the temperature is minus 80 degrees, and the wind is blowing 60 miles per hour? I’m just curious.

And so much for the storied past of the oil industry. From where will the future hydrocarbon product come? Much of the hydrocarbon that the oil industry will lift in the near term and intermediate years will come from “reserve growth,” as people like you, working for your current employer, find more oil and gas in extensions of known fields. And much of the rest of the hydrocarbon product will come from finding conventional oil in unconventional places, like deep under water and in the frozen Arctic, where, as I am sure you have noticed, it gets really, really cold outside. And beyond that, there are immense, mega-industrial projects afoot to recover hydrocarbon resources from heavy oil, tar sands, and oil shales. This does not even touch at the problems of energy return on energy investment (EROEI) in all of this, or the whole “greenhouse gas” issue. We are not even going to start down those rocky roads just now.

“Even if We Could…”

The issue to highlight in this article, Melissa, is that even if public policy would allow the oil industry to drill where it wants to drill, or build whatever other projects need to be built, are there enough skilled people in the work force to accomplish the tasks? And the next question is whether or not there is enough basic industrial capacity and work force out there to supply the steel, the cement, the valves, the pipe, the pumps, the electronics, and other essential equipment? Some of the largest, most expansive and expensive energy projects in human history are about to be built, and the question is whether or not there are enough skilled people out there to put them all together. If not, then some projects just won’t get built. And some energy resources will remain unavailable, while demand just keeps growing and growing. And if things get bad enough, we might all live to see whether or not the dire predictions of my good friend James Kunstler, author of The Long Emergency, will come true.

The Critics

These questions get us back to some peoples’ basic attitudes, not to mention the folk tales and false myth that inform their worldview. It goes back to the snotty comment that I heard at Harvard, long ago, from some graduate student who, I hope, has learned something in the course of her life and knows better by now. If people want to live this nice, comfortable, cozy existence that we have created for our society and our civilization, then they had better understand that somebody has to go out into the field and do the hard work of bringing home the energy supply. Somebody, like you, Melissa, has to take the job that puts her on the North Slope of Alaska, far from her original home in the very pleasant North Hills of Pittsburgh.

There is nothing wrong with being part of the oil industry, Melissa, nothing at all. Do your job, do it safely, and do it right. Don’t let people talk smack to you about “raping the Earth” or any of that crap. To paraphrase the great Mr. T. on this, “I pity the fool” who thinks that there is something wrong with working in the oil industry.

The critics, then and now, are suffering from a cognitive dissonance. They have a certain lifestyle to which they have become accustomed, but at root, they do not know what they want out of life. Melissa, if the critics did not really want you, and people like you, to drill holes in the North Slope, they would not be driving cars or flying in airplanes. They would not be eating lettuce that was trucked in from across a continent, let alone eating salmon from Chile or Norway. The critics would be riding the electric streetcar to work every day and growing their own root vegetables in their backyard victory gardens. But the critics are not doing that, are they?

The critics just take whatever they can take and carp about it, and take some more. Cheap energy is their birthright, they believe, and the critics expect it all to be there when they want it. Unless, of course, they get their wish. Then there will come a time when all that nice energy supply will not be there. Then the critics will find some way to blame you for that as well.

So when you encounter insufferable ignorance from people who disparage, let alone take for granted, what you do for a living, just stay on track and do what you have to do, and do your best. The critics? Hey, screw ’em. “The dog barks and the caravan moves on.” Be with the caravan. Leave the dogs behind, barking and howling at the moon.

Until we meet again…
Byron W. King

May 31, 2007

Letter to the Editor: A Man in the Street was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.