What they’re missing is real simple: peak oil means no more ability to service debt at all levels, personal, corporate, and government. End of story. All the other exertions being performed in opposition to this basic fact-of-life amount to a spastic soft-shoe performed before a smokescreen concealing a world of hurt. If the “quantitative easing” (money creation) and fiscal legerdemain (TARPs, TARFs, et cetera) happen to jack up the “velocity” of the new funny-money, and the world resumes its previous level of oil use, the price of oil would rise again — this time astronomically because the previous crash of oil prices crushed the development of new oil projects to offset depletion — and the global economy will crash again. Only the next phase of the disease is liable to move beyond the financial and into the social and political realms. Disorder of various kinds will rule — toppled governments, civil unrest, international tension and conflict.

The US is doing everything possible to avoid these awful realities, but probably the worst self-deception is the idea that everything would be okay if we could just “re-start lending.” That’s just not going to happen. There is no more capacity to service the debt we’ve already piled on. Americans borrowed too much, and the bankers who made obscene fortunes in fees and bonuses in fraudulent lending managed to leverage this unpayable debt into the greatest collective swindle the world has ever known. The swindle has sent poison into every cell of the macro socio-economic organism, and further swindles are unlikely to revive it.

The rally in stocks, the financials in particular, could go on for another month or two. In the meantime, banks are striving desperately to avoid calling in more bad loans — especially in commercial real estate, malls, strip malls, Big Box power centers — because they don’t want any more losses on their balance sheets. That can only go on for so long, too. Sooner or later the daisy chain of credibility in the fundamental transactions of business lose legitimacy and something’s got to give.

My guess is it will first take the form, sometime after Memorial Day (but maybe sooner) of wholesale liquidations of everything under the North American sun: companies, households, chattels, US Treasury paper of all kinds, and, of course, the S & P 500. We’ll soon find out whether an organism the size of the United States can run an economy based on one family selling the contents of its garage to the family next door. My guess is that this type of economy won’t support the standards of living previously enjoyed in places like Dallas and Minneapolis.

The socio-political fallout from the inherent anger and disappointment in all this is liable to be severe. The public is already warming up for it, with cheerleaders such as Glen Beck on Fox TV News calling for the formation of militias, and gun sales moving out-of-sight. One mistake that the banking elite and their lawyer paladins made the past decade was their show of conspicuous acquisition — of houses especially — in easy-to-get-to places where anyone can see them, for instance an angry mob in Fairfield County, Connecticut, or Easthampton, New York. Unlike the beleaguered elites of South Africa (where I visited recently), who live behind layers of fortification, the executives of Citibank, Goldman Sachs, J.P. Morgan, and a long list of hedge funds, will be found cringing in their wine-lockers behind a measly layer of privet hedge when the tattooed minions of Glen Beck come a’calling.

This could perhaps be avoided if someone in authority like US Attorney General Eric Holder took an aggressive interest in the multiple swindles of the decade past, and commenced some prosecutions. But the window of opportunity for this sort of meliorating action may close sooner than the government and the mainstream media believe. Social phase-change, as in the formations of mobs, is nothing to screw around with. Once the first window is broken, all bets are off for social stability. My guess is that the various bail-out gifts to the bankers are long past having gone too far in the eyes of this increasingly flammable public.

We have no previous experience with this type of social unrest. The violence of the Vietnam era will look very limited and reasonable in comparison — in the sense that it was an uprising on the grounds of principle, not survival. And the Civil War was a wholly regimented affair between two rival factions. This time, people with little interest in principle beyond some dim idea of economic fairness, will be hoisting the flaming brands out of sheer grievance and malice. By the time Lloyd Blankfein sees the torches flickering through his privet, it will be too late to defend the honor of his cappuccino machine.

As I’ve averred more than a few times in this space before, the standard of living in America has got to come way down. We mortgaged our future and the future has now begun. Tough noogies for us. But the broad public won’t accept the reality of this as long as the grandees of finance and their myrmidons appear to still enjoy the high life. They’ve got to be brought down hard, perhaps even disgraced and humiliated in the courts, and certainly parted from some of their fortunes — if only in lawyer’s fees. Mr. Obama pretty much served notice to this effect last week, telling a delegation of bankers in the White House that he was the only thing standing between them and “the pitchforks.” It’s possible he understands the situation.

Regards,
James Howard Kunstler

April 7, 2009

Strange Days of Debt, Peak Oil and Stock Rallies was originally featured on Whiskey and Gunpowder

By artificially raising the price of gasoline, the net-zero gas tax uses highly effective market forces to channel usage and investment away from oil and toward alternative sources of energy.  This market-based approach demonstrated its effectiveness in response to the surge in oil prices last year:  gasoline consumption subsided and gasoline prices plummeted.  During the surge, it was the Saudiís pocketing the dough.  Net-zero puts the dough back into U.S. taxpayersí pockets.

The most compelling reason for a net-zero gas tax was neglected by Lugar and Krauthammer, though.  The fact is that, on a household-by-household basis, net-zero is actually ìnet-positiveî, and progressive.  This is because there is a strong positive correlation between household income and household gasoline consumption .  Thus the net-zero tax gives a net positive financial benefit to a significant majority of households, because households with the greatest income tend to be extravagant while households with the least income tend to be frugal.  The result is a financial windfall for a substantial majority of taxpayers, especially those with the greatest need.  This will then also serve as an added economic stimulus, with immediate and continuing benefit to the economy.

There is urgency in implementing this net-positive gas tax idea, however, because of accelerating declines in global oil production .  Oil prices (and political tensions) will escalate in response to the inexorable increases in the global demand for oil, most notably in China and the developing world.  Thus if a net-positive gas tax is to be imposed it must be done now, before natural free-market forces drive the price beyond our ability to bear an additional tax.  This in fact already happened, last year.  Fortunately, the current recession has given us a reprieve, one final window of opportunity it seems.  But we must act immediately to hold down the price of oil, or else prepare to open our wallets to OPEC.

Dr. George Doddington

A Net-Positive Gas Tax was originally featured on Whiskey and Gunpowder

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

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