Nearly four years on the country finds itself in the midst of difficult times that have taken their toll on millions of Americans through job losses, home foreclosures, unserviceable debt, and ever dwindling retirement savings. By all accounts, Americans are worse off today than they were ten years ago, and the state of our nation, despite what Washington’s media masters report, is fiscally, economically, and socially dire.

With an estimated national debt that will approach $20 trillion in just a couple of years, some $200 trillion in unfunded liabilities over the next twenty five years, scores of millions of Americans dependent on overburdened government safety nets to survive, and a rapidly shrinking domestic economy, the key question becomes,”what is America’s economic breaking point?“

The answer to this question becomes apparent in a recent documentary from Future Money Trends, which suggests that the breaking point for the U.S. economy comes when the cheap energy we have enjoyed for the better part of a century finally dries up.

Future Money Trends is expecting the U.S. to face the perfect storm of events that, when combined, will send gas prices past the breaking point for the average American.

There are three major catalysts that will cause gas prices to reach this breaking point.

Number one, the dollar is in a state of collapse caused by a continuous increase of the money supply by America’s central bank.

Two, instability in the middle east and a potential war with Iran would great[ly] disrupt the supply of oil.

Three, the supply of cheap, recoverable oil is dwindling along with a major increase in demand.

…

America is built for $50 oil and $2 a gallon gasoline. The seriousness of our situation should not be overlooked. We have multiple forces that will drive gas prices past America’s $5 per gallon breaking point… Rising gas prices caused by these three catalysts will break the backs of the American consumer, spiking prices to the point where present day normalcy is no longer the reality.

Via Future Money Trends

Though there is evidence that the peak oil theory of physical shortages is accurate, it’s not even so much that the world will run out of oil per se, as it is that we simply don’t have the technology to extract that oil at a cheap enough cost to maintain our current way of life.

If you consider the significant pressures currently facing the United States financial and economically, it’s not too much of a stretch to suggest that even a minimal rise in the price of gas could seriously hamper the consumption habits of the majority of our population, which in turn will further reduce economic growth. As Future Money Trends‘ Daniel Ameduri notes, even a $1 gas price move has a significant impact with the potential to extract $100 billion from the broader economy.

With gas prices at or above $4 in most parts of the country, we’re quickly approaching 2008′s breaking point. And for those who don’t think prices could exceed those historic highs of 2008, consider that most Europeans are already paying nearly $10 per gallon.

With rising demand from BRIC nations like China and India, tensions in the middle east and unprecedented monetary expansion, ten dollars may very well become a reality. Such a swing in prices would immediately shave some $600 billion in direct consumer consumption and shrink our economy by 5% almost instantly. And that doesn’t even include the consequences that will inevitably hit small businesses and their employees in the months following.

Going into 2008 Americans felt fairly confident about their savings, their ability to find work, and their overall outlook. After four years of malaise, the majority of Americans have lost that confidence, as their ability to maintain the standard of living to which they became accustomed over decades of rampant government spending and easy money has been seriously undermined.

At this point, as suggested by Ameduri, even a one or two dollar increase in the price of gas could be the breaking point that sends our economy and global financial markets into an unrecoverable tailspin. The psychological impact of $5 or $6 gas may cause more of a panic than the price itself, because the only thing keeping the system afloat at this point is confidence in our leadership and that the best-and-brightest will be able to mitigate the crisis.

We were able to suspend the worst when governments around the world stepped in previously and let loose everything in the quiver to abate a collapse. This time, however, with our debts piling up at unsustainable levels and our lenders rapidly diversifying out of U.S. based assets, we will not be so lucky.

Whether the breaking point has been breached is up for debate, but there’s a strong possibility the die has already been cast. With trillions of dollars in capital flows, government intervention and financial machinations behind the scenes, it’s impossible to predict the exact timeline or occurrence of events, but we may well have already crossed the Rubicon.

Assuming that a breaking point is inevitable simply because of our failure to fundamentally change anything since the original crisis took hold in 2008, we should look to history as a guide as a way to anticipate the consequences that follow unsustainable governance and monetary policy.

If history surrounding such events has taught us anything, it’s that we must presume whatever is coming will be brutal, violent and it will transpire so quickly that most people won’t realize what happened until they’re walking the streets with worthless paper money in their pockets looking for morsels of food to stock their pantries – we’re talking end of the world type stuff.

The collapse of nations and conventional paradigms is never an orderly thing.

Regards,

Mac Slavo

What Is America’s Economic Breaking Point? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In my younger days I, too, dismissed environmental concerns such as air pollution and overfishing, because in the back of my mind any acknowledgment of such would seemingly destroy the validity of the free-market. Only after having missed many opportunities with environmentalists did I finally discover a way to reconcile free-market economics with the environment. The same can be said for many Austrian economists who fail to acknowledge the validity of Peak Oil Theory.

One recent example of Peak Oil Theory denial is a piece written by David Deming and published by LewRockwell.com. To be sure, I am not familiar with David Deming or his economic background. My apologies to Austrians if David is not a student of our school. This attack on Peak Oil Theory, among other articles, having been published by LRC and Mises.org does demand a response from at least one student of the Austrian School and proponent of Peak Oil Theory. I will now go line by line of David’s article and pick apart his faulty logic.

*********************

Peak Oil is the theory that the production history of petroleum follows a symmetrical bell-shaped curve. Once the curve peaks, decline is inevitable.

True. For anyone who studies math, physics, or pretty much any other type of statistics or science, you’ll find that the nature of systems commonly take the form of a Gaussian(bell-curve). Although, it doesn’t have to necessarily be symmetrical.

The theory is commonly invoked to justify the development of alternative energy sources that are allegedly renewable and sustainable.

This is a loaded sentence. Whether or not the proponents of Peak Oil Theory advocate the use of renewable energy sources is moot. It has nothing to do with the validity of Peak Oil Theory. This is a smear attempt. Furthermore, he throws in the word “allegedly” as if solar, wind, and hydroelectric power are “allegedly” renewable. They are renewable. I don’t think there is any disputing that.

Peak Oil theory was originated by American geologist M. King Hubbert. In 1956 Hubbert predicted that US oil production would peak between 1965 and 1970. When production peaked in 1970, it was interpreted as proof that Hubbert’s model was correct and that US oil production had entered a period of inexorable and irreversible decline. Unanswered was the question of whether or not US production had declined simply because it had become cheaper to purchase imported oil.

True.

Peak Oil is a theory based upon assumptions.

False. The theory does not rest on any assumptions about future demand. Regardless of whether demand skyrockets or plummets, the rate of production is destined to decline at some point. It is not a matter of if, but when.

Like other scientific theories, it is subject to empirical corroboration or falsification. Although Hubbert correctly predicted the timing of peak US oil production, several of his other predictions based on Peak Oil theory were wrong.

He is being extremely deceptive here. First, he writes about theories and empirical evidence, which is fine. But then he writes about false predictions. Predictions and theories are two totally separate beasts and he is trying to attack the theory of Peak Oil by way of false predictions. Example: Everyone on Earth will die(theory). Tomorrow, everyone will die (prediction). Two days from now when it is proven that not everyone is dead, will the theory then be proven false? The answer is no. Poor example, but you get the point.

Hubbert predicted that the maximum possible US oil production by 2011 would be one billion barrels. But actual production in 2011 was two billion barrels. Hubbert predicted that annual world oil production would peak in the year 2000 at 12.5 billion barrels. It didn’t. World oil production in 2011 was 26.5 billion barrels and continues to increase. Hubbert was grossly wrong about natural gas production. In 1956 he predicted that by 2010 US annual gas production would be 4 TCF. But in 2010, US wells produced more than 26 TCF of gas.

Mere false predictions that add nothing of value to his claim that Peak Oil Theory is false.

The flaw of Peak Oil theory is that it assumes the amount of a resource is a static number determined solely by geological factors.

Is oil a static resource or is it not? If anyone can prove that oil is regenerated at a rate of any significance for human consumption then I will admit that Peak Oil Theory is wrong. But that hasn’t happened. By all accounts the reserves (including undiscovered) of oil within planet Earth are understood to be finite. This fact alone shoots dead his entire argument.

But the size of a exploitable resource also depends upon price and technology. These factors are very difficult to predict.

How much oil can be exploited has nothing to do with the finite amount of oil that exists in Earth. The amount of oil that is exploitable in the future may change one’s predictions when Peak Oil hits, but it does nothing to disprove the Theory of Peak Oil.

The US oil industry began in 1859 when Colonel Edwin Drake hired blacksmith Billy Smith to drill a 69-foot-deep well. Subsequent technological advances have opened up resources beyond the limits of our ancestors’ imaginations. We can drill offshore in water up to eight-thousand feet deep. We have enhanced recovery techniques, horizontal drilling, and four-dimensional seismic imaging. Oklahoma oilman Harold Hamm is turning North Dakota into Saudi Arabia by utilizing hydraulic fracturing technology. US oil production has reversed its forty-year long decline. By the year 2020, it is anticipated that the US will be the world’s top oil producer.

A nice history lesson that has nothing to do with disproving the Theory of Peak Oil.

For at least a hundred years, people have repeatedly warned that the world is running out of oil. In 1920, the US Geological Survey estimated that the world contained only 60 billion barrels of recoverable oil. But to date we have produced more than 1000 billion barrels and currently have more than 1500 billion barrels in reserve.

Again, these were predictions about what would be recoverable. The predicted amount that is recoverable has nothing to do with the amount of oil in existence.

World petroleum reserves are at an all-time high.

This is likely bullsh!t. I write “likely” because few people know for sure. There are only a handful of entities that have a true stock of global reserves. For example, there are many who believe that Saudi Arabia(the most productive OPEC nation by far) falsifies the true amount of reserves that they have. There is speculation that they overstate their reserves so as to intentionally keep the price of oil low. While one might think that Saudi Arabia would benefit from higher prices one must realize that the Saudi puppet King is beholden to the U.S. And the U.S. Federal Government does not want skyrocketing oil prices.

There are also many other political considerations concerning the amount any OPEC nation may produce relative to others. In other words, politics are likely hiding the true quantity of global reserves. Even if petroleum reserves are at an all-time high it says nothing about the future of reserves. It is false logic. Example: Home prices are at an all-time high. We have nothing to worry about. Crash!

The world is awash in a glut of oil.

Bullsh!t. Even by official reports the amount of oil that has ever been discovered in Earth is equivalent to three Lake Tahoes. And half of that has already been consumed. I would not call that awash. Would you?

Conventional oil resources are currently estimated to be in the neighborhood of ten trillion barrels.

Deception. Notice he uses the word resources here. There is a huge difference between sweet crude oil and oil shale, for example. Sweet crude can be easily extracted and yields a very high EROEI. Oil shale on the other hand is extremely difficult to extract. The amount of energy required to extract and produce usable oil from shale is relatively low to other forms of oil.

The resource base is growing faster than production can deplete it.

The resource base has not been growing at all. Oil is finite for all intents and purposes.

In addition to conventional oil, the US has huge amounts of unconventional oil resources that remain untouched. The western US alone has 2000 billion barrels of oil in the form of oil shales.

And we’ll be lucky to net 200 billion of that.

At a current consumption rate of 7 billion barrels a year, that’s a 286-year supply.

If we are lucky to net 200 billion barrels of oil it would mean a thirty year supply for the United States. This is also assuming the current consumption rate remains stagnant. I will admit, however, that in this regard one could count this as increased oil production. But it does not take into account the amount of oil necessary to extract oil shale. The net aggregate of produced oil will, at some point, decline.

Nine years ago, I predicted that “the age of petroleum has only just begun.” I was right. The Peak Oil theorists, the malthusians, and the environmentalists were all wrong. They have been proven wrong, over and over again, for decades. A tabulation of every failed prediction of resource exhaustion would fill a library.

Notice how he throws the Malthusians in with Peak Oil theorists? It is clear to me that there is a very large difference between food production(renewable) and oil production(non-renewable).

Sustainability is a chimera. No energy source has been, or ever will be, sustainable. In the eleventh century, Europeans anticipated the industrial revolution by transforming their society from dependence on human and animal power to water power. In the eighteenth century, water power was superseded by steam engines fired by burning wood. Coal replaced wood, and oil and gas have now largely supplanted coal.

Sustainability is a chimera? And this gets a pass from the Austrian School economists? Krugman would be proud! Not only does this line of thinking promote high-time preference but I find it laughable that he could write that “no energy source has been, or ever will be, sustainable.” Unless he wishes to employ the strawman argument, I think it’s safe to say that solar energy is an inexhaustible resource.

In the far distant future we will probably utilize some type of nuclear power. But for at least the next hundred years, oil will remain our primary energy source because it is abundant, inexpensive, and reliable.

This is another prediction which has no bearing on the legitimacy of Peak Oil Theory. And as far as his prediction is concerned, if oil is our primary fuel for the next century it will not be because of its excellence as a resource, but because humanity is still burdened by the regressive beast called The State.

Petroleum is the lifeblood of our industrial economy. The US economy will remain stagnant and depressed until we begin to aggressively develop our native energy resources. As Harold Hamm has said, “we can do this.” What’s stopping us is not geology, but ignorance and bad public policy.

Finally, something I can agree with!

To conclude, Peak Oil Theory is real. Many libertarian types are guilty of attacking predictions made by proponents of Peak Oil Theory instead of the theory itself. While I’m all for attacking predictions made by Peak Oil Theorists and their naive(or sinister) calls for government intervention, the refusal to acknowledge the theory of Peak Oil automatically disqualifies libertarians from the discussion table. A strong case can be made that much of what governs United States foreign policy and global finance is a result of Peak Oil Theory. It behooves libertarians to study Peak Oil Theory in earnest and steer the conversation towards free-market problem solving instead of turning a blind eye to the theory altogether.

Regards,

Seth King

The Daily Anarchist

California native Seth King created the Daily Anarchist in March 2010 in an effort to recruit citizens to exercise their liberty irrespective of government regulations. The ultimate goal of the Daily Anarchist is to de-legitimize state interference by the outright refusal to obey all laws that are unjust, aggressive in nature, and violate the libertarian ethic. Rapid and thorough understanding of the philosophy of freedom coupled with strategic non-violent, non-cooperation on the part of citizens the world over, can and will ensure genuine, lasting reform.

It is the position of the Daily Anarchist that there exists no political solution to our current socio-economic and environmental problems and that the only legitimate interactions between and among people are those freely assented to by all parties concerned.

Many Austrians Are Wrong About Peak Oil Theory was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And they ain’t lyin’!

Writing for Forbes Louis Woodhill gets this seeming contradiction right. He views the price of gas not in terms of the depreciating monopoly money issued by the politically-empowered central bank…but in terms of the market’s favorite money: gold.

When viewed in relation to gold, gas prices are low…only 82% of their average over the past 41 years.

Gas prices aren’t high. The dollar is just falling, its value being undermined by politically-driven over-issue. So if you count the Fed-issued dollars as money — and are actually using it as a savings vehicles — then your world is being rocked by rising gas prices (and rising prices in everything else, too, except for computing power).

But it’s not just the rising prices of everything that threaten all of us. In his article Mr. Woodhill reminds us:

“Right now, the threat posed by rising gasoline prices is not just to family budgets. An even greater danger is that the government will use escalating oil prices as an excuse to do something stupid.

“After President Nixon abrogated the Bretton Woods monetary arrangement in stages starting in September 1971, both gold prices and oil prices started to rise. The government responded by imposing wage-price controls. This made a bad situation much worse.

“This time around, the stupid policies being considered to ‘deal with’ rising gasoline prices include additional cuts in payroll taxes and higher taxes on energy producers.

“During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.”

Source

It amuses us that the “gold is for nutters” crowd loves to point out when a mere 250 of their beloved dollars could acquire the gold they hate so much. Yet they seem to forget that their dollars could buy more than ten times as much in the past — back before the Federal Reserve was established.

They also write off those times when gold reveals the inherent weakness of their treasured paper currency…like when the gold price surged to $850 in 1980…and now as the price of gold hovers near $2000 thirty years later.

If you look at it the right way — in terms of the eternal golden money — it’s the dollar’s periods of strength that are the aberration.

It’s not gold and silver prices that are volatile. Those have been incredibly consistent for thousands of years in terms of commodities they could buy. And because of the increasing standard of living being raised by free market economies, in a very real sense these eternal monies actually buy more. It’s the dollar that has been erratic in its overall declining trend ever since it’s been cut loose from gold (and silver).

Again, people looking at the cost of a gallon of gas, or of milk, or the cost of a nice suit, or rent from behind their piles of gold and silver are finding very little to worry about. In fact, to them, prices are lower than normal and declining.

Also the price of oil has tended to track the price of silver awfully closely for about as long as oil has been industrially useful. And so it’s no mistake that you can still get a gallon of gas for about about $0.20…as long as that $0.20 is composed of a pre-1964 90% silver dimes.

Or you could use a pre-1964 90% silver quarter for that gallon of gas and get back some change.

You see, the pre-1965 quarter is worth $6.38 as I type this. The pre-1965 dime is worth $2.55. These coins hail from a time when the dollar was still tied to gold (at the official price of $35 per ounce prior to Nixon nixing the gold standard). The dollar was still as good as gold — even though Americans themselves were forbidden to own gold bullion from 1933 till 1974 — and there was actual silver in the coinage until that content was reduced in 1964 and eliminated in 1965.

Those old silver coins shine the harsh light on the strength of the currency and the abuse that currency suffers from the feds and the Federal Reserve.

If you’d been saving in gold, then from your point of view gas prices have been coming down for the past few years. If you’d been saving in that old “junk” silver (pre-1965 quarters, dimes and half dollars), then gas prices are a downright bargain, too.

(In fact, we strongly believe that silver is still severely undervalued. While gold is more than twice its 1980 high in terms of dollars, silver still hasn’t quite hit its 1980 all-time high when less than an ounce of silver could buy a barrel of light sweet crude. Silver may be more expensive in dollar terms than it was ten years ago…but it’s still incredibly cheap in terms of both gold and in terms of oil…

…Back in 1980 at silver’s peak it took less than one ounce of silver to buy a barrel of oil. Oil is going higher…and silver is likely to try to play catch up and outpace both oil and gold. Silver is just as much a monetary metal as gold…and just as much a vital industrial commodity as oil. Yet again, silver is severely underpriced in relation to both gold and oil. And it stands to gain more than both as both climb higher. So physical silver has been and continues to be our favorite, simple way to hedge against the demise of the dollar.

We turn now to the Wall Street Journal where they find U.S. monetary policy more than a little at fault for the rising dollar cost of gas…

“Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama’s appointees who are now a majority on the Fed’s Board of Governors.

“Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he’s betting on gold, the ultimate hedge against a falling dollar.

“Fed officials and Mr. Obama want to take credit for easy money if stock-market and housing prices rise, but then deny any responsibility if commodity prices rise too, causing food and energy prices to soar for consumers. They can’t have it both ways, as not-so-stupid Americans intuitively understand when they buy groceries or gas. This is the double-edged sword of an economic recovery ‘built to last’ on easy money rather than on sound fiscal and regulatory policies.”

Source

It seems so simple to us. The politicians want to prop up certain markets with inflation from the central bank…while keeping it easy for the government to borrow. But like any man-made abomination worth its salt, those newly created dollars don’t ever behave exactly how their creators want.

Stock and house prices are mostly flat or outright falling. The dollars meant to be puffing them up are instead spilling over into everything else.

The housing market is like a sad, burst balloon. Air just flows in and right back out. The stock market seems to be filled to capacity, its size delineated by annoying fundamentals like earnings. The price for these earnings is just too high right now and more new money in the economy just can’t drive those stock prices much higher.

That new money — the various QEs — is having an affect on other prices though. All the stuff you use to live. If you insist on believing in the dollar — and writing gold and silver off as barbaric nonsense — then you will be able to afford less and less of the life you want and to which you’ve become accustomed. Further if the history of paper monies is any kind, you could find yourself completely wiped out if you store your wealth in dollars or euros or pesos or whatever other paper lie is set to unravel next.

They will tell you that creating new money is necessary to keep the economy growing, to fight unemployment, to promote the general welfare, etc, etc.

But all it does is destroy your savings and make it easier for the feds to keep on borrowing to pay for welfare and wars. If you want to make sure the dollars you earn today can pay for the same amount of food and energy down the pike, trade those dollars for something of real value right now. We heartily recommend the type of money that actually fulfills that “reliable store of value” function.

Regards,

Gary Gibson

Why Gas Prices Are Actually Falling was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Let me make a secret confession right here. For years, the producer of my radio talk show and I would draw straws each January to see who would “have the high privilege and distinct honor” of watching the president’s State of the Union address.

Do I have to clarify that the loser had to watch?

In case the president said something important – which almost never happened – I felt an obligation to play some audio clips and talk about it on the show the next morning. But, personally, watching Republican and Democrat presidents recite their laundry list of promised giveaways for the year ahead was more than I could bear.

I learned early on that I could avoid all of the ovations and applause, save time, and still capture what substance there might have been in a written paragraph or two. Soon, I’ll give you such a written account, a perennial synopsis that will allow you to watch something else – like American Idol – and still have a handle on what the president says.

And you might even have time left over to keep an eye on the real news.

While We Were Watching…

The State of the Union is treated with utmost seriousness by the dominant news media. All four major TV networks and the cable news channels carry the event. My local newspaper devoted most of the front page and big chunks of the inside pages to its coverage: photos, accounts, sidebars, response, and analysis.

But it’s actually a spectacle that crowds out the real news. News about the impact American diplomacy is having on our future standard of living. News about the U.S. dollar’s reserve status winding down.

On the day of the State of the Union address, news flashed around the world – but not on your favorite network or in your morning paper – that India and Iran have agreed to end-run the U.S.-imposed sanctions on Iran.

They will use gold to do so.

Those [U.S.] sanctions, which have now been agreed to by the European Union as well, will ratchet up in July. Their enforcement means that banks and financial institutions involved in oil transactions with Iran will be barred from doing any business with financial institutions in the United States and Europe.

According DEBKAfile, a news source based in Israel, Iran has taken steps to bypass American and European banks and their currency desks altogether, agreeing instead to sell its oil to India for gold. China is expected to soon agree to use gold in buying oil from Iran as well. It’s a move that would leave the long-standing global dollar pricing of petroleum in tatters.

The gold-for-oil agreement means a three things:

1. It hastens the unwinding of the U.S. dollar’s global reserve currency status.

The rest of the world is actively developing alternatives to the U.S. dollar. Although it will mean a falling standard of living for the American people, U.S. policies and secretaries of state, like Condoleezza Rice and Hillary Clinton, have spurred what will become a stampede away from the dollar. DEBKAfile also reports that both China and Russia have secret mechanisms already in place to pay Iran in non-dollar currencies for its oil. And only a month ago, China and Japan, the world’s second- and third-largest economies, agreed to develop direct yen/yuan trading, forgoing the dollar as the reserve currency intermediary.

2. It accelerates the global monetization of gold.

Both China and India have been aggressively adding to their gold reserves. Other countries are following suit. The Keynesians, who have been in charge of American monetary policy, having destroyed the value of the dollar and enabled our ruinous debt, may actually believe that gold is a “barbarous relic.” But it is clear that their opinions have little functional value in the real world. The world is turning to gold more and more as U.S. debt continues to mount. Indeed, is there a better alternative monetary unit to be found? Certainly, it’s not the euro. Jim Grant of Grant’s Interest Rate Observer says gold is the only answer to the question, “if not the dollar, then what?”

3. It reveals the growing global impotence of the U.S.

Long able to enforce reluctant countries to adhere in its missions and embargoes around the world, the U.S. is finding its will frustrated. Nations that once had to weigh the favor of the U.S. against their own commercial and domestic political interests are increasingly ignoring the global dictates of the U.S. State Department. In 2003, Turkey, where the prospect of a U.S. invasion of Iraq was wildly unpopular, refused even bribes to allow the U.S. to stage the invasion from its soil. Today, the threat of a U.S. or Israeli strike on Iran is meeting with growing disapproval, especially from countries like China and India which rely heavily on Iranian oil.

Routine. Tired. Repetitive.

It may be that the State of the Union’s falling ratings – Obama’s speech the other night was down 12 percent from the year before, and was down 21 percent from 2010 – are a sign that people in large numbers have discovered there are better sources of important news than network television and Washington’s lapdog press.

Or, even better, maybe they’ve had about enough of the Washington party.

Or, maybe it’s simply because it’s all so routine, so tired, so repetitive. Even American Idol, entering its 11th season, has more surprises than the State of the Union. Consider:

Obama, who clearly doesn’t understand anything about markets, offered to have the government interfere with the real estate market in brand new ways in 2012. What could be more predictable than some president announcing a scheme to screw up the real estate market again in the new year?

It’s so routine. So tired. So repetitive.

And while the contestants on American Idol are fresh every year, the promises that make up the State of the Union are just reruns, season after season.

Now, if you’d like to be free to pay attention to the real news that actually affects your freedom and prosperity, let me provide you the following short, beginning-to-end account of this year’s State of the Union. You’ll be able to refer to it year after year, so that while you’ll still be informed about the president’s address, you can skip the show and save yourself time.

Time to follow the real news. Or to watch American Idol.

“Thank you so much. Thank you very much. Thank you. Thank you.”

The president agreed to do something for (to?) homeowners. He also has decided to help teachers. And students. And women. Workers, too. The president wants to help workers, for sure. And jobs galore. The president is all about creating jobs in 2012. And more jobs in energy. Oh, they’ll be clean ones for sure!

Plus, he’s going to reform regulations so that regulators will be able to regulate better. And he wants to get a handle on the bureaucracy. And he wants to reform education. And both make government more effective and still grow the economy. Did he forget men and women in uniform? The president most certainly did not!

“Thank you, God bless you, and may God bless the United States of America.”

Regards,

Charles Goyette

Source

The State of the Union, Just Another Reality Show was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I’ve given it a lot of thought, drawing on my decades of market-watching experience. In the end, I came up with three predictions for 2012, one of which I will talk about in today’s article.

[ Michael also tied these predictions to three new trade recommendations, currently only available to Agora Financial Reserve members, but which we are working on making available to Whiskey Shooters for an unbelievable discount. More on this later in the week. Keep an eye out of it. -- Ed.]

But be warned: While I believe these events have a very high probability of occurring next year, the mainstream media will likely disagree. Expect them to say I’m being absurd, or at the very least ascribe to them a very low probability of happening.

Let them whine — they were wrong in 2011, and they will be wrong in 2012. So these predictions will catch most investors off guard [...which means you have an opportunity to buy into the matching recommendations for a relatively low price. -- Ed.]

And remember, I’m not a “doom and gloom” guy. In fact, I actually hope all of my predictions do not come to fruition, as they will prove yet more detrimental to this already-anemic economy and country.

But I can’t ignore what I see…and it is my charge to find a way for you to prosper amid the coming chaos. Even if what I see isn’t 100% on the money, the plays I’ve selected should still do all right.

So sit down, strap in and prepare to be surprised, starting with my first recommendation.

It’s pretty clear that we’re going to see some sort of military action against Iran’s nuclear infrastructure, either by Israel, the United States or even NATO. Recent words from Israeli policymakers, U.S. military action and even signals from the markets made that abundantly clear.

In a pre-Thanksgiving interview on CNN, former prime minister and current defense minister of Israel Ehud Barak spelled out his country’s position:

“People understand now that Iran is determined to reach nuclear weapons. No other possible or conceivable explanation for what they have been actually doing. And that should be stopped. And under nuclear Iran, the whole region will turn nuclear — Saudi Arabia, Turkey, Egypt will have to turn nuclear. The countdown toward nuclear materials in the hands of terrorists will start, even if you take out the generation. But more than this, they will use the nuclear umbrella to kind of intimidate neighbors all around the Gulf, to sponsor terror. Try to think what happens if at a certain moment you wake up after Iran turns nuclear, three years down the stream, and you end up with a Bahrain overwhelmed by Iran — who will come to rescue? Who would have come to rescue Kuwait when it was taken by Saddam Hussein 20 years ago, if Saddam could have said credibly enough that he had three or four crude nuclear devices?”

The defense minister continued:

“It’s true that it wouldn’t take three years…probably three-quarters, before no one can do anything practically about it because the Iranians are gradually, deliberately entering into what I call a zone of immunity, by widening the redundancy of their plan, making it spread over many more sides.”

He then reiterated the time frame in which Israel has to take military action: “I cannot tell you for sure, nor can I predict whether it’s two-quarters or three-quarters. But it’s not two or three years.”

In case you couldn’t read between the lines, Mr. Barak has given us a time frame for a pre-emptive attack — sometime within the next nine months!

And that’s overt military action. The covert options may have already begun… with the United States providing a hand.

The Drone Wars

You’ve probably heard about the RQ-170 unmanned American spy plane that Iran claims to have shot down. After weeks of denial, the United States has admitted it was hunting suspected Iranian nuclear sites.

Now Iran has claimed it was able to take control of the drone during its flight, forcing it to land exactly where Iran wanted it.

Spy flights are one thing. Actual hostility would be something completely different. But the fact is that might have already started too.

Israeli newspapers declared that Israel’s war with Iran already had begun, in the form of covert action in cooperation with other groups. The Miami Herald has information backing this up.

It reports that there have been a series of “mishaps” at Iranian nuclear facilities and weapons sites. They may be part of a covert organized attack on Iran’s nuclear weapons program, according to the paper.

A recent occurrence outside Iran’s third-largest city, Isfahan, is thought to be the most-recent strike, though details on the intended target are still unclear. Intelligence officials across the Middle East say there is strong evidence that an explosion at a sprawling military base and nuclear facility outside Isfahan had done some “significant structural damage.”

But it’s not just the promises from Israel, scattered newspaper reports or signs of U.S. surveillance that indicate an attack on Iran is imminent. It’s the market indicators as well.
Consider oil prices. Logic dictates that if the global economy were slowing, the demand for oil would drop, along with its price. In fact, that’s what has been happening with most industrial commodities. But oil remains a glaring exception.

Take a look at the following charts:

The first shows the year-over-year change in oil and copper prices, and the second shows the change in both those commodities over the last 30 days.

We can see that oil prices are up 12% over the last 52 weeks and have surged 13% in the last month. But copper prices are down nearly 10% YOY and have dropped about the same amount in just the last month. As I alluded to in the last issue, falling copper prices are a signal that a global recession is just around the corner. However, oil prices are telling us that something other than just a global economic funk is in the cards.

I believe oil prices have begun to factor in the removal of the world’s third-largest exporter of oil from the market. But I think the markets are actually being too optimistic. There is much more at stake here than the 2.2 million barrels of oil that Iran exports each day.

If you know Middle Eastern geography, you know Iran sits alongside the Strait of Hormuz, a narrow body of water that connects the Persian Gulf to the Arabian Sea and, ultimately, the Indian Ocean.

Oil tankers from Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates all travel through the strait. In fact, 33% of the world’s tanker traffic and a mind-blowing 17% of the world’s oil pass through the strait.

So with just a little effort, Iran could effectively block nearly one-fifth of the world’s oil supply. And the country knows it.

This is not speculation. This is 100% fact. As Fox News reported, Parviz Sarvari, a member of the Iranian parliament’s National Security Committee, recently warned, “Soon we will hold a military maneuver on how to close the Strait of Hormuz… If the world wants to make the region insecure, we will make the world insecure.”

Wall Street cannot ignore that threat much longer. The increasing likelihood of an overt attack on Iran will not make the situation any better. Remember that when Saddam Hussein invaded Kuwait in 1990, oil prices doubled. And that was just a fraction of the world’s oil at stake, compared with what closing down the Strait of Hormuz could mean.

But even if the world manages to avoid a confrontation with Iran, there are other reasons to have exposure to rising oil prices in your portfolio next year.

For one thing, there’s still the ever-present proclivity of global central bankers to print unlimited amounts of money. After all, oil has traditionally been a fairly good hedge against inflation. Remember back in the late ’70s when gold and oil prices soared together when the Fed under Arthur Burns sent inflation to 15%.

But couple Fed chief Ben Bernanke’s love affair with counterfeiting, er, creating new cash with the credible threat of oil shortages, and you can clearly see why owning oil-producing stocks may be a great asset in 2012.

Regards,

Michael Pento

Iran’s Desperate Gamble to Push Oil Up to $200 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Yet this is not unusual for Big Oil these days. In fact, most are making big bets on natural gas.

Exxon Mobil completed eight projects last year. Seven of them were for natural gas projects — not oil. Of the three scheduled this year, two of them are gas. ConocoPhillips paid $5 billion for Origen, an Australian gas company.

Meanwhile, Chevron hammers away at its mammoth liquefied natural gas plant off the coast of Australia, at a total cost of more than $40 billion. (Liquefied natural gas, or LNG, is easier to transport.) Most of the oil giants are also slamming billion-dollar fistfuls to pick up shale gas acreage in places such as the Marcellus in Appalachia.

This shift creates new opportunities for investors. But before we get to those, let’s try to understand what’s happening.

There are several things at work here. One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget. Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.

By contrast, natural gas deposits are more plentiful. They are also getting cheaper to develop. The cost to build an offshore LNG terminal is about half of what it was only two years ago. The big LNG plants can be just as expensive as anything in the oil world, but — unlike oil — these projects don’t usually go forward unless there are long-term contracts in hand to support them. Some of these contracts go for 20-year terms. This makes the business more appealing to the majors, who don’t have to sweat the huge ups and downs they endure in the oil markets.

With contracts in hand, the gas business is just one of putting together an Erector Set. As The Economist notes, “The gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits.”

But there is more. The world’s use of natural gas is growing faster than its use of oil. The IEA’s guess is that oil consumption grows half a percent a year. Natural gas consumption, by contrast, should rise more than 50% in the next 20 years. Total, the big French oil company, is even more bullish. It estimates that China will use much more natural gas than is commonly assumed. Only a lack of infrastructure keeps China’s appetite for natural gas under wraps. But China is in the process of building that infrastructure today. It is only a matter of time before the nat gas markets feel its impact.

Finally, natural gas is cleaner burning. There is a lot of talk of carbon taxes of one kind or another, not only in the U.S., but abroad. I believe it is matter of when, not if, governments punish dirtier fuels. Natural gas will benefit.

However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it. Natural gas producers are all expanding production. Most are spending more to expand production than their cash flow supports. This is happening even though most look like they don’t make any money at $4 nat gas. (A recent survey put the industry average at $5.74.) This doesn’t bode well for the price of natural gas in the short term. As beaten up as it is, it could stay here for a while, or even go lower.

And so we hold only one pure play on natural because it is a low-cost producer with no debt, so it can still create shareholder value in a low-price environment.

Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.

The following chart shows the cost curve for the lower 48 states in the U.S. These producers need $7 gas to make money. If this is right, then our pure natural gas company in Capital & Crisis will make a lot of money.

This is because logic dictates that we should expect the price of nat gas to gravitate toward the cost of the marginal producers. (And since our company’s costs are under $2, it stands to make a lot of money when gas turns around. I’m content to wait it out…and buy more).

But let’s get back to natural gas in broad terms. Even though pricing looks unexciting in the near term, demand looks healthy long term. The world will burn more natural gas in cars and buses of the future than it does today. It will burn more natural gas to heat and cool homes than it does today. It will rely more on natural gas to provide electricity.

Long-term investors should treat these things as inevitable. Big Oil certainly is. And we are already building the infrastructure to support all of that future growth today. The best way to play this latter trend is in another idea we already own.

Regards,
Chris Mayer
Whiskey & Gunpowder

September 20, 2010

How to Profit When Big Oil Bets on Natural Gas was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

One particular oil field is central to the problem. It’s called Cantarell. It’s a super-giant, offshore oil field that was discovered in 1976 — based on a natural oil seep under about 150 feet of water, by the way.

After decades of production, Cantarell is getting long in the tooth. Oil output from Cantarell, is declining rapidly. Cantarell is depleting at an astonishing rate. Meanwhile, the yield from new Mexican oil fields is simply not making up the difference.

The Mexican government obtains about 40% of its national receipts from oil-related revenues. Yet due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015. This looming problem holds dire implications for the national balance sheet of Mexico, as well as — by implication — for U.S. energy and national security.

One obvious question is, Can Mexico rebuild its oil industry? Right now, there’s not nearly enough internal Mexican investment in exploration and new oil development. It’s quite evident that Mexico has under-funded what’s called “maintenance capital,” the funds necessary just to keep the day-to-day operations and equipment working.

Another problem is Mexico’s lack of success in discovering and developing new oil resources, despite its national jurisdiction over a large slice of the oil-rich Gulf of Mexico.

One major element of this lack of exploration success is that Mexico’s constitution severely restricts foreign participation in Mexico’s energy development. That is, foreign oil companies are banned from exploring for and drilling for oil in Mexico. Considering Mexico’s crashing oil output, it’s fair to ask if Mexico should change its approach to development.

Recently, I discussed these important issues with Ali Moshiri, President of Chevron Africa and Latin America Exploration and Production Company.

Here’s what I asked Mr. Moshiri about Mexican oil development, followed by his reply.

BWK: In the U.S. we’re seeing remarkable discoveries in the deepwater Gulf of Mexico (GOM). Could you share your views about what’s happening across the GOM, down in Mexico? Is there hope for deepwater oil helping Mexico reverse it’s decline rate for oil production?

AM: With Mexico, the new government reforms are in a positive direction. The fundamentals have to be decided by the Mexican government, which has to decide how they want to risk exploring their basin.

The Mexican government has to decide if they want to risk future exploration via Pemex (Petroleos Mexicanos, the Mexican national oil company — NOC), or via the private sector. They need to recognize that if the private sector is going to get involved, it has to be via a meaningful way. A meaningful way would be via sharing the risk and the upside.

BWK: Do you think we’ll ever see large, new discoveries in the Mexican GOM areas?

AM: I personally believe that Mexico is under-explored. They’re lagging behind on exploration offshore, and they underestimate the complexity and what is required. It all needs to be reassessed.

If you look at the U.S. deepwater GOM, there was a long era (to get to) where we are today. And you cannot look at today, and say you are going to take the U.S. GOM and image it into the Mexican area.

BWK: So what do you think it will take for Mexico to accomplish the exploration, and find the potential resources that are out there?

AM: Number one is that (Mexico needs to allow) the flexibility that is required for private sector, for IOCs (international oil companies). It’s IOCs that are the ones who really know how to go from phased exploration into development.

Yes, you can find companies that can explore. But when you explore, and then you find hydrocarbons in 8,000 feet of water, the next step is how you can develop it. How much money do you need? You can say, well, you need X-millions of dollars (to) develop it. But how do I finance it?

It gets into capital efficiency. Capital efficiency would be, how do I go ahead and finance this project? By production sharing? Finance it by myself? Some other way? How do you finance the development? Those are things that we think need to be addressed in Mexico.

BWK: What about contractors? Do you think Mexico could accomplish its energy goals by hiring, say, service companies, or using large oil companies as contractors, to do the exploration, the seismic, the drilling and such?

AM: The IOC has to be perceived as a partner. You cannot perceive the IOC as a contractor. This is my personal opinion.

Working with the IOC as purely a contractor will slow down the process. You have to look at the IOC as a partner, and a partner meaning sharing the risks as well as the rewards.

If Mexico gets this concept, and understands it, I think the progress and the basin is good enough to do things in the right way, and (Mexico) can be able to catch up the U.S. GOM and the U.S. sector.

So according to Chevron’s Ali Moshiri, there’s hope the Mexican energy sector. If Mexico opens up to foreign risk-sharing, and makes a good use of the expertise of international oil firms, then the nation can increase its future oil output.

But Mexico needs to permit outside, independent oil companies to participate as partners in exploration and development. That means to share the risk and rewards. In other words, Mexico should leverage foreign capital and technology, while sharing the eventual oil production in an equitable manner.

Even then, if everything goes right, it’s going to be a multi-year project to restore Mexico’s oil output to what we’ve seen in previous years. From where things are now, it won’t be easy.

The Overall Strength of Chevron

Chevron is one of the world’s largest and most capable independent oil companies. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its many highly skilled and talented people.

I can say these good things about Chevron based, in part, on my first hand knowledge. I’ve had the opportunity to visit a Chevron deepwater drilling project in the GOM. From what I’ve seen, Chevron exhibits a strong culture of safety and technical excellence.

Other Investment Opportunities in Deepwater Energy

There are, of course, other companies working on deepwater oil exploration and development projects across the world. If you’re interested in learning about another deepwater development, I can tell you about a small, Canadian company that has acquired a remarkable play offshore Africa. Just follow this link and listen to a presentation on this investment idea.

Until we meet again,
Byron W. King
Whiskey & Gunpowder

August 9, 2010

Mexico’s Crashing Oil Industry was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In our talk, Mr. Moshiri and I looked at the future of offshore oil and gas exploration and development. Here’s part of what we discussed, with more to come in future articles.

BWK: Mr. Moshiri, you run a division of Chevron that includes Africa and Latin America. How much oil and gas do you pull out of the ground every day?

AM: For Africa and Latin America, on a gross basis, Chevron is producing somewhere around 840,000 barrels per day.

BWK: That’s about 1% of all the oil that the world uses every day, at 85 million barrels per day. Can you say some more about what’s happening in the areas with which you deal?

AM: (My area is ) the Atlantic Basin. … If you look down at the southern part of the Americas and Africa, people are ignoring the contribution it’s making worldwide.

The basins in this area are different. It’s not necessarily like the Middle East, that they are huge fields. But there are many accumulations. On the aggregate, they’re significant. Not only to the Chevron portfolio, but overall to the supply of oil to the market.

If you look at this area, they’ll always be a net exporter. They’ll always produce more than they can consume. My personal view is that if they continue their level of economic growth, that they assume is going to be above global, they’ll still be an exporter.

It creates an environment for industry to include them as part of the energy equation. The barrels can move to other locations where they don’t have that balance.

BWK: Are you only looking for oil? What’s the larger hydrocarbon picture?

AM: The (Atlantic) basins have similarity, but at the same time the basins have both oil and gas. It’s not just oil. At the moment, the focus has been tremendously towards oil. I believe that both basins in West Africa as well as in Latin America have tremendous potential for gas for the future. But because of lack of infrastructure, they haven’t got to the point similar to Asia Pacific of the Middle East yet.

But if you look ahead 15 years, they’ll get to the point of contributing natural gas, through LNG (liquefied natural gas) or pipeline. … That’s the next phase. Today it’s very much focused on the oil side.

BWK: In the Middle East, you’re looking at a mature, 60-70 year old concept of exploration. Also, culturally, you’ve got similarities of climate, ethnicity to some extent, religion too. Not that everybody’s the same. But by comparison, if you’re moving from the Caribbean Basin to West Africa to Brazil to Angola, you’re going to see a lot of different people and different governments and different cultures that you’re going to have to work with. Can you comment?

AM: Absolutely. If you look at the Chevron operations, we deal with ten different countries. Three of them are in OPEC. Two of them are observers in OPEC. Therefore five of them are very much within the framework of the OPEC community. That shows that each of them have (their) oil policy and different view compared to when you look at places like the US, Australia, UK and Europe.

For that matter, you have to deal with each country separately. You have to understand, first of all, the geology, the technical aspects of it. And also the policies. The policies vary.

I’m not saying it’s good or bad, whether it’s in the hands of the government or the private sector. That’s what we deal with in this area. Not only do we have to worry not just about the technical side, but about the fiscal, commercial aspects of it as well.

BWK: Can you comment about what you’ve seen over the past 20 years, with the rise of the national oil companies (NOCs) in these regions, and how you’ve had to adapt from the way you used to do business to the way you have to do business now in the NOC environment?

AM: The reality is that with the truly conventional aspects of oil and gas, the technology is there. The know-how is there. Whether or not we have it, or a service company has it. It’s there. So the view of the NOC is that they have more than one option on just the conventional (development).

For example, (what) if you discover an oil field on land, say light oil? Then building it, developing it, putting it into the market is relatively conventional. So what we would focus on is increasing the recovery factor. We focus on getting more out of the ground.

The next phase is what I’d say depends on technology. You get into deepwater. The technology is different. The incremental cost is significant. Room for efficiency becomes a greater part of how we develop things. Yes, everybody (says that they) can develop deepwater. But how you manage expensive wells that you’ve got to drill? How do you test the basin? How do you commit to the investment? Those are significant.

As you see in the market today, it’s almost becoming like there are a lot of people who can explore. But there are not a lot of people who can develop deep water.

BWK: I had a chance to visit a Chevron operation in the Gulf of Mexico (GOM) in March. Chevron had the Transocean vessel, Discoverer Inspiration, drilling in over 6,700 feet of water, about 200 miles off the Louisiana coastline. The target depth was over 30,000 feet. It was quite an operation.

AM: I’m glad you took a visit to some of our operations. (You should see) some of the other remote places like offshore, deepwater off Nigeria. You can see how those places are highly technically driven.

And for as much as we’ve gone so far into developing these (deepwater) fields, the technology is not there to work over the wells when there are problems. The technology is not there to create efficiency for working over some of these wells. For example, if a well goes off production in West Africa, and it’s in the swamp, or in Block Zero, off Angola, in shallow water, we move a rig in and we know how work over the well.

But if a well goes off production and it comes to a work-over, if it’s in deepwater, in say 8,000 feet of water, then you almost have to spend as much to work over a well, as you spent to drill the well. Therefore we are looking for the technology, and expanding our expertise, how to go back and do some of that work. To work those kinds of wells over.

BWK: Can you describe how Chevron’s relationships are changing over time, with the NOCs?

AM: Yes, our relationship with the NOCs is changing, moving to a different direction. The next phase goes several years down the road, gets into the non-conventional hydrocarbons. Like tight sands and shale gas. I always use the U.S. as the base, where we started.

I’ve been in this business 32 years with Chevron. I remember when 500 feet of water was deep water. But now 500 feet of water is a conventional development, or work-over, with high recovery factor. And I think we need to expand that one all the way.

In some of the other regions, especially my region, we are not to that point yet. Again, it’s because some of these basins have not matured yet.

BWK: Can you elaborate on that concept of maturity? How are things different between, say the U.S. and further south in the Atlantic Basin?

AM: (The U.S.) Gulf of Mexico shelf is mature. But if you look at it south, from Mexico down to Argentina, or West Africa or sub Sahara or East Africa, we are still at the first phase of understanding the basins, understanding the potential, developing the technology around it, and being able to transport it.

Some of the discoveries (that) some of the companies have, in sub Sahara Africa, the transportation is going to be the issue. That region is going through a different phase. The transportation is about one phase behind where we are in the U.S.

According to Chevron’s Mr. Moshiri, there’s great potential for future energy development in the Atlantic Basin. The hydrocarbon resource is there — both oil and natural gas — and development is at an early stage.

The future will see more exploration and development, moving from oil into gas. The local markets will doubtless expand, but there’s still quite a bit available for export. But to accomplish this, the transportation infrastructure needs to expand. In short, there’s much left to accomplish in an immense swath of the world.

The Future Challenge of Energy Development

There are great opportunities for future exploration and energy development in Latin America and Africa. This will require trillions of dollars of capital over many years. That, plus world-class technology, superb and skilled people, as well as close coordination between developers and the national host governments.

Chevron, the subject of this article, is one of the world’s best independent oil companies. From its roots in the California oil patch of more than a century past, Chevron has a solid record of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its highly skilled and talented people such as Mr. Moshiri and the many members of his extensive team.

Other Energy Opportunities

There are many other companies working on deepwater oil exploration and development projects across the world. They range from very big to not very big, from independent to nationally-owned and operated.

If you’re interested in learning about another aspect of deepwater development, I can tell you about a small, Canadian company that is developing a remarkable play offshore Africa. Just follow this link for more information on this investment idea.

Until we meet again,
Byron W. King
Whiskey & Gunpowder

August 4, 2010

Africa, Latin America and Energy Development in the Atlantic Basin was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In the three years or so that I’ve been editing Outstanding Investments I’ve tailored the energy side of the portfolio heavily toward deep water oil exploration. And people say well gee, you have an awful lot of exposure for one segment of the industry. Well, that’s because that’s where the oil is.

Gary: Exactly.

Byron: You go where the oil is and the big oil is in deep water. I mean, there’s oil on shore in some parts of the world, but these are parts of the world where most investible plays can’t go. I mean, Saudis, they have lots of oil. Venezuela, they got lots of oil. Mexico, they got more oil than people give them credit for although they’re doing a horrible job of exploiting it. It’s the resource nationalism of the world.

On shore and in many parts of the world — Russia as well as all through the Middle East — the big private oil companies are just publicly owned and other oil companies are just not able to get their foot in the door. Or if they do, it’s under very, very, very limited, very circumscribed procedures. BP bought into the recovery of the rocky oil industry, but they’re getting paid a fee per barrel that they produce.

It’s a pittance really in terms of what’s coming out of the ground and the contribution that they would make towards bringing it out of the ground. So anyhow, where is the big oil in the world? How does a big oil company “move its needle”? How does it move its reserve needle? You go offshore, and you go into deep water, because that’s the last frontier. It’s the unexploited oil deposits. It’s big deposits. You can get these super wells out there where you can make 20,000…30,000…50,000 barrels a day out of one well. Because of these huge volumes and high pressures. Which the flip side of that is that if you blow out your well, which is what we’re seeing you can make a big mess in a fast hurry. That’s what we’re seeing in the Gulf of Mexico right now.

Gary: That can happen on shore as well. But under water, under all that water, that’s the other side of it. That when things go wrong…

Byron: That is the other side of it and I honestly am highly critical of the oil industry and the regulatory side of the house, too, for a distinct lack of imagination over the last 20 years. Everybody was imagining going further out and going deeper and deeper water, deeper and deeper wells. But there has been precious little R&D done in deep water well control, and deep water blow outs. We are watching — say in the last month — 20 years worth of research and development happen inside of a month.

They are literally just taking ideas, throwing them against the wall to see if they stick. You know, whether it’s that big box. Whether it’s the top hat, the top kill, the junk shot, the bridging shot. You know, all these different things that they’re talking about. We’re watching 20 years worth of R&D happening inside of a month and nobody really thought about it. Nobody put any big money into it.

Instead the money went into technology to conduct the operation and in a sense, the idea was that we’re going to put money into building really good equipment, and our technology is so good, and our procedures are so good that nothing bad will ever happen. Well something really bad happened. Now what? I mean that argument doesn’t hold water anymore, which is why at least in the U.S. — and it might be something that spreads elsewhere in the world — the offshore deep-water drilling regime anymore is going to become a much more exclusive club.

Only larger companies with deeper pockets who can afford the regulatory requirements need apply in the offshore deep water drilling space. To the extent that the U.S. government and other governments in the world really permit that kind of deep water drilling. There’s a, there’s a very loud and growing louder, very vocal segment within the political crown out there that just wants to say “see, we told you so.” This deep-water stuff, you should never do it.

To which I say there’s really an element of energy hypocrisy here because the same people who are saying we shouldn’t drill offshore are also the same ones who say we shouldn’t drill on shore. I mean, for the lack of drilling on 640 acres of land in the Arctic National Wildlife Refuge, for example – when I say 640 acres, I mean an acre here and an acre there. I don’t mean like all in one big spot either.

For the lack of drilling in the Arctic National Wildlife Refuge, which you do in the wintertime built on ice pads using ice roads when it’s 40 below 0, and all animal and plant life is in a hybernetic state. And we do understand how to drill in an on shore arctic environment. That is quite doable. And we have existing infrastructure 20, 30, 50 miles away in Prudhoe Bay and a working pipeline, the Alaskan pipeline.

For this lack of drilling in the Arctic National Wildlife Refuge that is all the more incentive for the energy industry to go into the far offshore and drill wells so far away that if something bad happens, it’s almost impossible to conceive of how you could control the problem. You know, in a very perverse sort of way, it’s almost good that the well blew out offshore Louisiana. Not that it’s a good thing because that’s not a good thing.

Gary: Of course.

Byron: But if this well had blown out, or if a well had blown out 8,000 miles away, let’s say 150 miles offshore of some African littoral, that is 2,000 miles away from the nearest serious infrastructure in Angola or South Africa or something like that. You know, I mean, how, how could you possibly begin to mobilize the resources to fight a deep-water blow out similar to what we’ve seen and what’s going on in the Gulf of Mexico. I mean, the Coast Guard and the U.S. government has, and BP of course something like 750 ships under its control right now.

They’ve got hundreds of aircraft flying all over the place, gathering data, spreading disbursements. They’ve got 250 miles of deployed booms in the water trying to keep that oil away from the shorelines and the marshlands. And really, they’ve done a remarkably good job of keeping the oil away from the shorelines and the marshlands. Yeah, there are tar balls here and there, but, you know, the oil hasn’t washed into the marshes yet. You know, they’ve kept the oil out at sea.

Out at sea that oil, you know, at least to the extent it gets to the surface, it bakes in the sun, and it’s a nice warm latitude of sunshine there. And the Gulf waters are warm, and there are oil-eating bacteria that are doing their thing. It’s not a good thing at all to have this happening. I’m just saying that in terms of mobilizing the military and the government and the civilian government and the industrial resources of the Gulf Coast to fight this oil slick. I guess you couldn’t pick a better place to have a deep-water well blow out and I can think of a lot worse places to have a deep-water well blow out.

Gary: There are going to be people who listen to this or read this and say that we were maybe a little callous or flip about it when we say this is the best case scenario for a disaster, that we’re able to control it. But isn’t that the reality of it. I mean, you’re drilling for oil. These things are going to happen. Do you feel that there is an element of inevitability in it?

Byron: Well, I hate to be so fatalistic about it as to say that you’re going to do something that’s ultra dangerous, which is drilling for oil far off in deep water, and say these things are going to happen. I really subscribe to that NASA mission control attitude that Gene Krantz had when he was running things down at NASA: perfection is the price of admission to mission control.

And I don’t think it’s too much to ask of the oil industry that they be perfect in terms of what they do and how they do it out there. I mean, if they can’t do it perfectly, I don’t think it’s too much to ask that they just tie the ship up to the pier and stay ashore and find something else to do with their capital. Because the problem is that a deep water blow out is so — the scope is so vast. These super wells are so prolific.

This blow out is spurting 5,000 barrels a day. That’s because the Cameron blow out preventer actually did work partially. I mean, that well could be blowing out – and I was just on a phone call yesterday listening in with Admiral Mary Landry of the Coast Guard. She said that the absolute worst-case scenario on this well is 55, 000 barrels a day. This well could be 11 times worse that it is, which tells you that the Cameron blow out preventer is doing something. You know, so I don’t want to go through life and I don’t want to write an investment newsletter that says oh, you know, this is just kind of the price we pay to work in these frontier areas.

Well, if that’s the price we’re going to pay to work in a frontier area that’s too high of a price because it’s not just the Gulf of Mexico. It’s the idea that lots of people are going to be drilling offshore. Brazil, the Mexicans want to drill in their deep water… offshore Africa, offshore India, in the frozen arctic ocean, off of Greenland, north of Norway. Things like that. The idea that we can somehow accept a blow out as the price or the cost of doing business…that’s just not acceptable to me.

And yes,, we have to have absolutely incredible technology, and it has to be really good and work real good. And it says something that Cameron and BP, or that Transocean and BP can modify the Cameron blow out preventer and not tell Cameron about it and not have some sort of an approval from the Mineral Management Service in the way that airlines have to keep their jets up to spec under the FAA. You know what I mean? I think there’s something wrong there.

Gary: Well, I certainly want to agree with you. I guess my concern is all those who will come out of the woodwork and decry what’s happened here…and then drive twenty miles to a supermarket and shop for goods brought in from across the country by a fleet of trucks. They just don’t appreciate how necessary offshore drilling is for their way of life to continue. It’s one thing to say BP or Transocean fouled things up royally, but it’s another to say that they shouldn’t be drilling in deep water at all.

Byron: Yeah. But hey, guess what: we’re on the backside of peak oil, or we’re on the backside of the Hubbard Curve.

Gary: Exactly!

Byron: Yeah, that Hubbard Curve thing. Sure, maybe in Saudi Arabia they can still lift oil out of the ground for $5.00 or $8.00 or $10.00 a barrel, but there’s just not that much cheap oil out there anymore. And so $70.00, $75.00 a barrel, $80.00 a barrel oil, there are a lot of people are still making a lot of money off that. And then there are plenty of hydrocarbon molecules out there in other unconventional spots. When we run out of $70.00 barrel oil, I assure you that there’s lots of $200.00 a barrel oil out there. And so companies are going to be making money in different places in different ways.

But right now and for quite awhile, the money is going to continue to be in deep water exploration. These oil companies have to get it right so disasters like the Gulf of Mexico don’t happen, but they also absolutely have to be out there in the deep water.

Byron King and Gary Gibson
Whiskey & Gunpowder

May 25, 2010

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

Everything is about to get more expensive. From gasoline to anti-freeze, life jackets to golf balls, and eye glasses to fertilizer. There are very few things in the modern world that aren’t made from oil, made by machines dependant on oil, or shipped by vehicles powered by oil.

The implications, at first glance, appear to be the opposite of good news. In fact, it’s enough to strike panic in the hearts and wallets of the average consumer.

And that’s exactly why the International Energy Agency just released its annual World Energy Outlook, clearly rejecting the possibility that crude output is now in terminal decline. Their attitude seems to be, what you don’t know won’t hurt you. For now that is.

The truth however, is beginning to surface, and from an investor’s perspective, the truth can mean money in the bank. Right now, the IEA’s claim that oil production will be ramped up from its current level of 85 million barrels per day to 105 million barrel per day by 2030 is receiving harsh criticism.

The Guardian reports, “The world is much closer to running out of oil than official estimates admit.”

This comes from a whistleblower inside the International Energy Agency who states the fear of triggering panic buying has caused them to intentionally underplay the inevitable shortage.

Kjell Aleklett, professor of physics at the Uppsala University in Sweden, and co-author of a new report ‘The Peak of the Oil Age’, states “oil production is more likely to be 75m barrels a day by 2030 than the ‘unrealistic’ 105m used by the IEA.”

According to Professor Aleklett’s research, they are making a dangerous and unjustified assumption. One that is dependent upon the oil industry’s ability to ramp up production to levels never before achieved.

Are you beginning to see the opportunity here?

Whistleblowers and scientists are not the only ones disputing the IEA’s report. The folks who pump oil aren’t buying its rosy scenario either.

·   Total SA, the French oil giant, that is making its move into the Alberta oil sands, doesn’t accept the IEA’s optimistic claims. The company runs on the belief that oil production won’t surpass 95 million barrels.

·   Former chief executive officer of Canada’s Talisman Energy, Jim Buckee, agrees the IEA prediction is nonsense.

·   Sadad al Husseini, energy consultant and the former exploration and production chief of the world’s largest oil company, Saudi Aramco, recently said, “Oil supplies have reached a capacity plateau and will not meet a growth in demand over the next decade.”

The Globe and Mail recently joined the debate stating, “New [oil] fields, generally smaller, are less productive than old ones – note the virtual freefall in production rates from the North Sea fields, which reached peak output in 2000. Another reason [for the decline] is development pace, or lack thereof. The yet-to-be-developed reserves in the WEO report cover 1,874 fields of various sizes that would have to come into production in the next 20 years.”

That works out to almost eight new fields being brought to production each month. A realistic target? Only time will tell. Even if the oil exists, the next question becomes one of money, and where it will come from in order to keep this pace of development on target.

When you add in professor Aleklett’s conclusion that production will shrink to 75 million barrels per day by 2030 — almost one-third less than the IEA’s figure and 10 million barrels less than current production, it’s easy to see why investors need to take notice.

Shrinking supply and ever-growing global demand are creating the perfect storm for oil prices.

The current price of crude could be the bargain of the century. Understand this and every increase at the pump will give you reason to smile.

Regards,
Marin Katusa
Senior Energy Strategist, Casey’s Energy Report

January 19, 2010

Cheap Oil is Gone, and That’s Good News was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.