Has Mexican Oil Peaked?

We always enjoy featuring the insights of Byron King and have benefitted from his expertise on CARE’s Monthly Conference Call. This piece caught our attention because of the title. Of course the word ‘oil” was a trigger, but “crashing” was more the hook.

The debate about so-called “peak oil” is ongoing and we’ve generally taken the side of “Yes, the low hanging fruit is gone, but there are so many new discoveries and resource expansion that we have enough oil for a hundred years at least.” So, “crashing” definitely got our attention--hopefully yours too!

Fortunately, this piece didn’t change our view, but unfortunately for America, who uses a great deal of the Mexican resource, they have not managed their industry well. Byron writes for an investment newsletter called Whiskey and Gunpowder and while we do not even pretend to give investment advice, we always find his perspective worthy of note.

Mexico’s Crashing Oil Industry
Mexico is a critical oil supplier to the United States. But Mexico’s ‘s oil industry is in crisis. Indeed the grim numbers come from no less a source than the Mexican Energy Ministry. Production statistics make it clear that Mexico’s overall oil output is declining rapidly--with the word “crashing” coming to mind as one views the chart.

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.

Byron King earned his Juris Doctor from the University of Pittsburgh School of Law, graduated cum laude from Harvard University, served on the staff of the Chief of Naval Operations, and is a regulator contributor to the Whiskey and Gunpowder investment newsletter.

Dodging Crucial Energy Choices

You know the adage, "Follow the money." When looking at energy issues, we like to pay attention to what the money people are saying--specifically the investment types. Their insights provide an interesting view into America’s energy situation.

Our favorite energy investment advisor is Byron King whose work is published in the Whiskey and Gunpowder Newsletter and the subscription newsletter he edits, Outstanding Investments. (If you have not read any of his previous postings here, we encourage you to check them out too.) For our purposes here, we have edited out all of Byron’s investment advice as we have no business offering such information. However, we do believe you will find his review of history and energy to be very helpful to your understanding of today’s energy situation.

This posting is a bit longer than what we typically post here. You may need to print it out to read at your leisure. Whether you read it here or on paper, we do hope you’ll post your responses. Do you agree with Byron’s assessments? Is his history correct? We always enjoy Byron’s input. We hope you do too!

Will Americans have to read by candlelight and bike to work?
We will if the country dodges crucial energy choices--and time is running out
Remember how President Obama bowed to King Abdullah of Saudi Arabia? That was bad enough. This is worse: Abdullah is playing Obama for a fool.

That bow Obama made to Abdullah at a summit in London says everything about how the Saudis have made us their oil slaves. Think about it, the American president, bowing and scraping to a foreign monarch--the king of a country where women can’t drive and criminals are beheaded in public. Worse, we’re becoming more dependent on the Saudis for energy, because Obama wants to close off even more of the USA to oil exploration.

If some well-informed experts are right, Saudi Arabia's oil reserves are a fraction of what they've been telling us. Why does it matter? Because everyone has believed for decades that Saudi Arabia's oil supply is virtually unlimited. That's what the Saudis have said over and over again for more than 30 years. If an oil shortage threatens to cause a recession or a market crash, we can count on the Saudis to come through. So people think. But one of America's top oil experts warned that the Saudis don't have anything near the oil reserves they claim. They already pump less oil than most "experts" think. Here's the real kicker, Saudi oil production is about to drop sharply. And it will keep going down for good. Other experts have analyzed the numbers and come to the same conclusions. If the charges are true--and I believe they are--we could be facing oil at $150 per barrel and gasoline at $6 a gallon or more. The oil is running out. It's as simple as that.

That's not what you hear from so-called experts. If you ask government officials, our intelligence agencies and even powerful Wall Street financiers, they tell you the opposite.
They say the Saudis could quickly double their oil production from the current level if they wanted to. And given a few years, they think the Saudis could produce four times as much oil as they do now.

The intelligence agencies and the conventional "experts" are dead wrong. The oil isn't there. The oil and gas shortages we've seen lately are nothing compared with what's on the way.
When the truth comes out, it will send shock waves through the world economy. Everyone will find out too late--when gasoline soars to $5 or $6 or more per gallon.

Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted us out and took over. And then a funny thing happened, The Saudis started keeping everything a secret. No one knows for sure how much oil they've got in the ground, or how much they produce each year or how much they could produce if they wanted to push it to the max. It's all secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world's ports. That's how little we know for sure.

After the Saudis took over, their figures for proven reserves kept going up and up and up--even though they didn't find any major new oil fields! In 1979, the Saudis adjusted proven reserves upward by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels. Their estimated reserves increased by 150% in nine years--to a total of 260 billion barrels. And they didn't find a single major new oil field!

For 16 years, from 1979 through 2005, they've claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they pumped out 46 billion barrels during that period. Let me see...260 minus 46 equals 260. Saudi math!

Based on these bogus figures, the Saudis claim they can produce as much oil as the world wants for the next 50 years. As recently as 2004, they claimed their reserve estimates are actually conservative. That's why most of the world's governments and intelligence services believe the Saudis could pump 20 million barrels of oil a day if they wanted to. Trouble is, we've got no proof except their say-so. If it were true, we wouldn't have a thing to worry about. But it's not.

Before Aramco's American owners were shown the door in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. There have been no major new discoveries, so 110 billion barrels was probably about right. And since then, about half of that has been used up. So why do the Saudis insist everything is just fine and they have 260 billion barrels of reserves? One reason is they wanted to discourage non-OPEC nations from looking for more oil or switching to alternatives. It was a devious plan, and it worked perfectly.

But that wasn't the only reason the Saudis lied about their reserves. They did it because everyone does it! Everyone in OPEC, that is. In the 1980s, OPEC's claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war. You see, OPEC had to limit how much oil each member could sell, because prices were too low. The quotas were based on... each member's oil reserves!

That's right: The amount of oil OPEC would let a member pump depended on how much that member had in the ground. So it paid for OPEC members to claim the biggest reserves they could. And that's what they did.

The Saudis alone jacked up their estimate by about 100 billion. Kuwait added 50% to its reserves in one year, 1985. Venezuela doubled its reserves in 1987. Iraq and Iran doubled their estimates, too. What's more, OPEC members did like the Saudis and kept their reserve estimates the same year after year, as if no oil were being pumped out and sold. Everyone claimed to have a bottomless well.

Now, if you're like me, you believe America should base its energy decisions on the real world, not on a fantasy.

Let's Look at how Much Oil There Really Is
In the 1970s, when Western managers were still in charge, they believed for a time that Saudi output could reach 20 million barrels a day. But by the time the Americans lost control in 1979, they figured the peak would be 12 million. They also predicted that peak production would last only 15–20 years. 1979 plus 20 is 1999. We're past the peak, if these men were right. But we already know they were too optimistic. The truth is that Saudi production never got to 12 million. "In all probability, output peaked in 1981 at an unsustainable level of about 10.5 million barrels per day," according to Matthew R. Simmons, a leading oil industry authority.

In 2004, Saudi officials claimed they boosted production to 9.5 million barrels per day and maintained that level for five months. It's almost sure they were lying. The International Energy Agency is the group that keeps an eye on these things for the developed, oil-importing countries. The IEA could find no sign the Saudis were selling more oil. As far as anyone can tell, they pump only around five million barrels a day, and that's all they've pumped for years.

In spite of being lied to at least once, the IEA, the US Department of Energy and other forecasters believe the Saudi claims. ALL their projections of our energy future ALWAYS assume the Saudis could produce 15–20 million barrels a day.

The lies have worked. Not only do Western politicians believe them, but so do many oil industry experts and investors with huge amounts of money at stake. They've been had.

Our whole economy is at risk. America was so prosperous the last couple of decades, a lot of people forget what the energy crisis of the '70s was like. Let me remind you: The price of a barrel of oil shot up 400%. Long lines formed at gas stations practically overnight. Folks had to pay four times as much for a gallon of gas, and there came a week when one out of every five gas stations in the United States had no gas to sell at any price. The US had three major recessions within 10 years after the first oil crisis in 1973. And those recessions were deep, with double-digit unemployment, double-digit interest rates and double-digit inflation. Think 10–12% unemployment. Think 15–18% mortgage rates. Got the picture? That was the ‘70s. Not fun.

My take is that a similar crisis will rock the nation before we solve our problem with clean coal, liquefied natural gas, oil from tar sands, high-mileage cars and safe nuclear plants. More than likely, the politicians will quarrel for years before they do what has to be done.

The Great Coal Rush
While the oil runs out, there's still plenty of coal. The world has enough coal to last for 300 years at current rates. Coal already accounts for more than half of our electricity. But coal is dirty, right? And there's no way it can power cars, right? Wrong, and wrong again. Coal can be cleaned up AND it can power your SUV. However, it's not cheap to do. It's only worthwhile when a barrel of oil costs more than $30.

The US and China both have a growing problem with the price of oil and with the unstable countries they have to buy it from. Meanwhile, the US and China both have HUGE reserves of coal. Add in Australia and Canada and you've got four countries that you could call the OPEC of coal. They own just about all the coal there is.

The US alone has 254 billion tons of proven coal reserves, or about 25% of the world total. Compare that to Saudi Arabia, with 24% of the world's oil (if you believe it).
Meanwhile, the Chinese economy is doubling every 10 years and has a lion's appetite for electricity. The Chinese will have to give up that growth rate or build hundreds of new power plants, one or the other. They have no choice.

Electricity could be China's biggest roadblock to growth. Already, blackouts and brownouts happen every day all over the country. Factories by the thousand are forced to shut down from time to time. Many are allowed to operate only during off-peak hours. Children in some cities do their homework by candlelight. With an economy that grows 8% or 9% every year, and electric usage soaring at the same rate, the Chinese have no choice but to build hundreds of new power plants. And most of those plants are going to run on coal.

In the United States, we have a power crisis of our own. We're at the limit of our generating capacity. We have our own brownouts during peak-demand times. We, too, need to build hundreds of new power plants. Yet the public still doesn't want nuclear power.

You do the math: We face a crude oil shortage, nuclear power gives people the willies, we've got plenty of coal in the ground, we've got a choice between more power plants or deep recession and unemployment. Everything points to coal.

How Oil Could Go Beyond $150 in 24 Hours
If you want to bury your head in the sand and pretend Saudi Arabia has plenty of oil, be my guest. However, very shred of evidence points to no Saudi buffer for world oil markets. And that's a real problem because oil consumption soared from 52 million barrels a day to 82 million in the last 19 years, and it's expected to grow to 120 million in the next 20--if the oil can be found. Very doubtful.

There are three ways oil could race past $150 a barrel: It may get there gradually, or on a faster pace of a year or two, or overnight, literally within 24 hours. Pick any one of the three. No matter how you look at it, it's a sure thing the days of cheap oil are over. We're never going to see $30 oil again, and we may never even see $50 oil. Soon oil in the $100s may very well return to stay.

"You never really run out of oil," says a Houston energy consultant named Henry Groppe. "But many years ago we ran out of $2 a barrel oil, then we ran out of $25 oil, and now we're running out of $40 oil."

Saudi production could fall over a cliff almost overnight. There could be a deep, sharp reduction in Saudi oil production literally any day. It's guesswork, but energy expert Matthew Simmons says, "It will take energy forecasters and policymakers by total surprise. Not a single serious energy plan devised in the past three decades has envisioned such a scenario." He's told interviewers that Saudi output could drop 30–40% from the already low level of just 5 million barrels. Simmons doesn't claim to know for sure, but I believe he's right.

In the big oil crisis of 1973, oil went to $100 in current dollars. Back then, the problem was just political. Angered by US support for Israel, the Arab oil producers cut our supply. After things calmed down, there was plenty of oil. This time the problem is real and there's no quick fix. There's a sword hanging over our heads, and most people don't even know.

I've spotted three trends to watch that could crash markets and cause a recession.

Hurricanes
You already know that the 2005 hurricane season was the worst on record, and the one before that was almost as bad. In 2005, there were 27 tropical storms. Weather experts could hardly believe it, but the last one formed in December, a month after the "end" of the hurricane season. It's not as weird as a blizzard in July. But it's close. Worse, the storms are more powerful than ever before. It seems that a tropical storm is more likely now to become a deadly Category 4 or Category 5 hurricane.

Two reasons for the monster storms: The first reason is there's a normal cycle of low hurricane activity followed by a period of high hurricane activity. Each phase can last for several decades. Clearly, we're in the high phase, and it will probably go on for years. That's bad enough, but it's normal. But now you have to add the danger of climate change.

Bear in mind that climate change can be caused by either human activity or natural causes. And either way, the jury is still out. Despite what you may hear from the mainstream media, the case for global warming is far from closed. But global warming believers are already blaming the monster hurricanes on climate change. They may be right. The level of hurricane activity we're seeing has no precedent in the hundred years or so that scientists have been counting and categorizing storms. Meanwhile, a big chunk of our energy industry is located in the worst possible place.

Americans have largely banned oil and gas drilling and liquefied natural gas ports from the Atlantic and Pacific coasts. They don't like oil refineries, either. Plus, it's well known that the Gulf of Mexico is energy rich. So America ended up with a huge part of its energy infrastructure located on the Gulf Coast. A lot of it was knocked out by Katrina and Rita. As I write this, the Gulf coast energy industry is still not back to normal.

If there is a hurricane season like 2005, it could be the end of some 20% of America's oil and gas industry. And it could all happen in 24 hours.

It's hard to picture that oil companies are going to keep on investing in a region where they get knocked out every year. And the onshore plants can't be moved to Boston and San Francisco, where they're not wanted anyway. We could be staring at a permanent loss of a large part of our energy industry.

War and Revolution at the Chokepoints
World oil supplies are so tight the price could go through the roof if we lose just a couple of million barrels of daily production out of the world total of 82 million. Production is running full tilt and consumers snap up every barrel that comes out of the ground. There's no buffer (despite what the Saudis claim). A sudden leap to $150 a barrel, not to mention $150+, could tip us over the edge--and into a deeper recession. The immediate cause could be war or revolution in an oil-producing country.

Toss in another bad hurricane season at the same time and it could be the end of our way of life.

Saudi Arabia itself is a prime candidate for revolution. You might think al-Qaida's main target is the United States, but in fact the main target all along has been control of Saudi Arabia. The World Trade Center was just a stop on the road to Riyadh, as al-Qaida sees it.
But my own pick for disaster is Nigeria. This African country is the world's No. 12 oil producer, and a big supplier to the United States.

Nigeria is seething with revolution. The government--if you want to call it a government--admits that thieves steal as much as 200,000 barrels of oil a day and sell it on the black market. Off the record, experts put the bootleg oil as high as 650,000 barrels a day. That kind of oil generates huge sums of cash, and a lot of the money is plowed into arms for the rebels. There's no shortage of poor, hopeless young men willing to use the weapons. Three Nigerians out of five live in poverty.

Caught in the middle of all this are big oil companies like Shell and Chevron. In some parts of the country their facilities have been shut down and they've been kicked out. If you want to get punched in Nigeria, just tell a native you work for Shell.

Terrorism
You won't be surprised to learn terrorism is the third wild card that could create an instant crisis. In fact, a former CIA director recently joined some former oil executives and government experts in a risk-analysis exercise. They forecast three very likely events that could bring the roof down on our heads. One of them was civil war in Nigeria. The other two were both terror incidents.

Intelligence agencies know the terrorists have especially targeted oil facilities and infrastructure. It's an international game of cat and mouse in which the terrorists are looking for a weak point day and night, high and low, while we try to find them and stop them in time. It's only a matter of time until they succeed. It's like a thief checking every door in the neighborhood every night. One night, he'll find a door that's not locked.

Are you getting the picture? The good scenario is that the oil price will merely hover around $150 over the next few years. The worst scenario is that it will go there--then much higher--next week, or next month or next year.

The Natural Gas Bottleneck
When oil started getting pricey during the 1970s, America switched to natural gas in a big way. Natural gas now supplies about 24% of our total energy needs, including a big chunk of our electricity. The move made sense. We had plenty of natural gas, and what's more, it's a clean-burning fuel that cuts down on pollution. But like any kind of fossil fuel, there's only so much of it. Now we're running out.

After the big hurricanes of 2005, everyone can see the US is vulnerable. We didn't have the gas supplies we needed when we needed them. That was a cold, expensive winter for a lot of Americans.

America has placed vast areas off limits to drilling. Not only millions of acres of federal lands, but also most of the offshore areas on the Atlantic and Pacific coasts. These gas-rich regions are off-limits even though natural gas doesn't create spills. If there's an accident, it just escapes into the air. And drilling rigs are mostly out of sight of the resort properties on the beach. The regulations have left only the Gulf of Mexico, aka hurricane alley, for offshore drilling and natural gas production.

If you saw your heating bills shoot up this winter, you'll be frustrated to learn there's plenty of gas worldwide. It's a byproduct of oil wells, and if an oil field isn't close to a big population center or a pipeline, the gas is just flared off. The rest of the world burns off as much as 2.5 trillion cubic feet of what is called "stranded" natural gas. That's equivalent to 1.7 billion barrels of oil totally wasted every year! The problem is that gas, unlike oil, is hard to transport. You can't build pipelines across oceans. And big oceans separate North America from the cheap gas that's now going to waste.

Because of the bottleneck problem, the price of natural gas is much higher in North America than in the countries that are swimming in the stuff.

There's an easy solution to our natural gas shortage, and it's been around for years. It's called liquefied natural gas, or LNG. If you turn natural gas into a liquid by supercooling it, you can transport 600 times as much gas in the same space. One LNG tanker can carry as much as 600 ships hauling natural gas in vapor form. And despite what you may have heard, LNG is safe. With 40,000 LNG tanker voyages spanning the last 45 years and crossing 60 million miles of ocean, there hasn't been a single major accident. Not one. No explosions, no fireballs, no gruesome casualties. Sorry, Hollywood.

As things stand now, the US gets only 1.5% of its natural gas in the form of LNG, but with the energy crunch, things are going to change. The government's Energy Information Administration believes LNG will provide about 17% of our total gas supply by 2030. That means a 11-fold increase in LNG. Better yet, that's going to be a higher percentage of a bigger market, too. The EIA projects total gas consumption — LNG and vapor combined — will boom 30% in the next 10 years. And meanwhile, a fierce bidding war has broken out among Europe, Asia and the US for every available ounce of LNG.

The boom was actually under way before the current energy crunch hit. LNG trade soared 55% in the 10 years ending in 2004. This little market is growing like crazy. Some analysts even predict LNG will surpass King Crude to dominate the world's energy markets. The CEO of Shell says within 10 years, gas will be a bigger part of the company's business than oil. Natural gas is quickly becoming the energy of choice internationally. Natural gas demand will also become a cheaper and more viable energy source.

The Worldwide Boom in Nuclear Power
After a couple of freak accidents several decades ago, Americans decided they wanted nothing to do with nuclear power ever, anywhere. The accidents at Chernobyl and Three Mile Island killed nuclear power in the United States. We're just about the only people with that attitude. The rest of the world took a look at the safety problems, solved them and forged ahead. France now gets 77% of its electric power from nuclear plants. Japan and South Korea get 39%--and the two of them have more than 20 new plants on the way.

Belgium, Sweden, Finland--they've all gone nuclear. It seems like everyone but us is building nukes.

China plans to boost its nuclear power capacity by 500%. In fact, for the past 40 years, nuclear has been the fastest-growing power source in the world. And now it's really taking off. What's more, all the hundreds of plants worldwide have logged thousands of reactor years without a single accident. You see, Asians and Europeans have discovered something Americans refuse to see: Nuclear power is safer, cheaper and cleaner.

The Chinese are charging ahead with a new type of nuclear power plant. I predict utilities will build hundreds, and maybe thousands, of these new plants all over the globe. Electricity will become super-cheap. And eventually we'll see an economic boom worldwide like we've never seen before:
*The new plants will be walk-away safe. A meltdown is not just unlikely, it's impossible.
*There's no danger of radioactivity venting into air or water.
*There's no chain reaction involved.
*No need for huge cooling towers or water. No billion-dollar pressure dome.
*Almost no waste, and what waste there is can be stored safely on the premises.
*No need to fear a terrorist attack.

The technology uses an alternative way to harvest the energy of the atom--a way that Americans discovered and then rejected decades ago. The Chinese plan to mass-produce the reactors. The plants will be modular and factory made, built to last 40 years, ready to ship anywhere in the world and assembled like Legos. A Chinese scientist boasts, "Eventually these new reactors will compete strategically, and in the end, they will win. When that happens, it will leave traditional nuclear power in ruins." The man has reason to be cocky. They've already tested the prototype by turning off the coolant and letting the plant cool down by itself. That would be totally unthinkable with a conventional reactor.

Byron King earned his Juris Doctor from the University of Pittsburgh School of Law, graduated cum laude from Harvard University, served on the staff of the Chief of Naval Operations, and is a regulator contributor to the Whiskey and Gunpowder investment newsletter.

Will America Run Out of Oil?

Most Americans live hectic lives and don’t have time in their day to pay attention to news reports about “peak oil”. But would more people pay attention to the supply of oil if the price for a gallon of gas at the pump skyrocketed in the near future? You bet!

Is there an oncoming energy crisis to be caused by peak oil production? Will global oil production become stagnant due to international political strife? Will humanity experience a global oil shock by the year 2012? Our CARE blog contributor and former conference call guest Byron King from the Whiskey and Gunpowder (an investment newsletter) thinks so. While we at CARE don’t necessarily agree, or disagree, with Byron King’s viewpoint on "peak oil," he offers a noteworthy perspective on the situation. You’ll want to note that he writes from an investment perspective.

Peak at 85 Million Barrels of Oil a Day
Eighty-five million barrels a day. That’s the most that can be produced. So when recession causes a temporary decrease in world consumption, it can seem like those 85 million barrels are enough. But consumption is bound to resume its upward climb, while those 85 million barrels a day are all we get. The day of reckoning has just been delayed for a little bit.

"Can’t we get more than 85 million barrels?" some folks are bound to wonder. Let’s look into that.

Those Stubborn "Peak" Curves
This week I was in Denver, attending the 2009 conference of the Association for the Study of Peak Oil & Gas (ASPO). Despite all the happy talk in the Big Media about how the oil situation is under control, I assure you that the oil situation is NOT under control.

The market meltdown and world recession of the past year has bought some time, or stolen some time may be a better way of saying it. All the "peak" curves are still out there, but are merely adjusted a bit to the right on the timelines.

As Marine Corps Gunnery Sergeant R. Lee Ermey likes to say on the television show Mail Call, "Wipe that smile off your face." We’re staring at an energy problem that’s coming down the tracks like a runaway freight train. It’s just astonishing that more people don’t appreciate the looming impact of Peak Oil.

Meanwhile, the politicians are fooling around with the health care issue. Hmmm... I have some news for them. If you screw up energy, health care isn’t going to matter very much.

Oil Output Not Increasing
It might be a comforting thought to believe that world oil output can increase. Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day — "if only the world oil industry were more efficient."

Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil’s Petrobras and Norway’s StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world’s pipelines and tankers filled.

But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela’s oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

Mexico’s national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

Iran’s oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development. Apparently, there’s a "Twitter Revolution" going on in Iran that includes people at the grass roots impeding the oil industry. Well, it worked to depose the Shah back in 1979. Perhaps the Iranians can rid themselves of their mullahs in a similar way.

Next door in Iraq, chaos reigns. According to Matt Simmons, the Iraqis "are in the dark about how to run their oil industry." The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won’t invest in your oil fields, there MUST be something wrong.

And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. It should go without saying that despite any calamities that may come from such a thing, you would be very happy if you’d taken advantage of lower oil prices to stock up.

Byron King--Prior to joining Whiskey and Gunpowder, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

Technology and the Peak Oil Myth

What a treat it was to read this piece by Byron King. His comments about the advancements in technology echo some of those made by CARE’s Executive Director Marita Noon at the Mount Taylor hearing May 15th in Santa Fe. But Byron’s comments are based on his fresh experience examining the new technology at the Offshore Technology Conference. It is exciting to hear about the new technology that is available to add hydrocarbon resources to the ever-increasing demand. That, too, is something we’ve been saying here at CARE regarding those who argue that we are going to run out of oil. Yes, the low hanging fruit has been picked. But through advances in technology, more and more keeps be found and being more easily recoverable.

Additionally, Byron artfully addresses America’s political climate and how old fears are allowing other countries to take the lead that used to be America’s.

As Robert Bradley addressed in his CARE Conference Call in December, the more of us that draw attention to these issues, the higher the likelihood of being heard. He called it the echo effect. Thanks to Byron King for shouting from a different roof-top, the roof-top of energy investments. Maybe he will reach a different audience.

Don’t forget, Byron is the CARE Conference Call guest this week: May 27, 2009--11:00 AM ET, 10:00 AM CT, 9:00 AM MT, 8:00 AM PT. E-mail info@responsiblenergy.org to participate.

Oil Don’t Come Easy
I was in Houston this month, attending the Offshore Technology Conference. I have to confess that I’m humbled. Really, for as much as I think I know about the energy biz after a mere 30-plus years… a walk (a LONG walk, to be sure) around the packed floor of the immense Reliant Center AND the massive Reliant Stadium reveals how much I have left to learn.

In previous years, I’ve attended the OTC on my own, or as a representative of Agora Financial. This year, the American Petroleum Institute paid for my trip to Houston and to the OTC. I extend my thanks to the API. I am, of course, free to report on anything that I believe is of interest. API has NO editorial control over what I report to you. As always, I observe, follow the facts and draw my own conclusions.

Wrapping Your Brain Around the OTC
Sometimes when 70,000 people head to Reliant Stadium, it’s to watch the Houston Texans play football. The spectators understand what’s going on down on the field. In true Texas fashion, they know the rules of football. There are 22 players moving back and forth, with the rest of the two teams and coaching staffs on the sidelines. It’s something around which you can wrap your brain.

But the OTC? How do you wrap your brain around the OTC, its several thousand exhibitors and many dozens of speakers?

Do you want to know how to do seismic work on the other side of the world? How to build work ships the size of aircraft carriers? How to anchor a 75,000-ton rig in swift-moving water, while dangling a 20,000-ton riser-string that’s nearly two miles deep? How to drill oil wells 250 miles out at sea? In 9,000 feet of water? Through 14,000 feet of rock? Through 8,000 feet of salt? Into fluids with pressures of 25,000 pounds per square inch? (By comparison, your household water pressure might be about 40 psi.) Into super-heated oil filled with poisonous gases? How to move that super-heated oil to the seabed from beneath four miles of the earth’s crust? Then how to move that oil across hundreds of miles of ocean bottom, and do it in the freezing waters of the deep ocean, even at the equator and, of course up in the Arctic? Do you know how to do that?

Where does the technology come from? Who builds the equipment? How do you pay for it? Where is the work force to accomplish these tasks? What about the government policies that influence it, for better and worse? How do you make 25- and 50-year plans — yeah, it takes THAT long — in a world where prices and policies change by the month? How about the national cultures that nurture (or suppress) the whole process?

Which Battle? Which War?
Let’s look at things from the standpoint of national cultures. When I attended the Naval War College a few years ago, going through a course for senior officers, one professor said something that stuck with me: “Your job is not to fight the last battle of the last war. It’s to fight the first battle of the next war.”

“The first battle of the next war?” Damn right. Sure, you’re going to study history. Sure, you’re going to read about the last war and its last battles. But you have to understand that things change. You have to realize that everybody else is studying the last battle of the last war. So you probably have no real advantage going into the next great effort. The other guy has read the same book.

Thus, if you want to succeed, you have to get ahead of the future. You have to write a new book. It’s YOUR book. Indeed, you have to invent that future. You have to decide what you want to do, and then acquire the people and equipment to get it done.

Brazil — Gearing up for the First Battle of the Next War
Where am I going with this? Let’s look at Brazil, for example. The Brazilians are gearing up for the first battle of the next war, so to speak. They intend to survive as a prosperous, industrialized country in the 21st century, despite intense future competition across the world for energy fuels and other natural resources.

Down in Brazil, they’re in something like national rapture at the prospect of drilling up the deep pre-salt hydrocarbon plays in the offshore basins. The estimates are that the deep basins off Brazil hold between 20-100 billion barrels of oil. Maybe more.

The entire nation of Brazil, apparently, revels in the prospect of investing over $120 billion in offshore development in just the next eight years. They have a plan. It’s their moonshot. The Brazilians believe that the offshore environment will bring their industries firmly into the modern era. Brazil wants to be a world power in the 21st century. And the oil? Well, of course they have plans for that oil.

As a nation, Brazil cannot wait to move ahead into its offshore realm. Just Petrobras, the national oil company, wants 40 new drilling rigs, each over 60,000 tons; and 32 new production units, each near 100,000 tons; and about 130 large supply vessels, each over 100,000 tons.

Petrobras has plans to emplace HUNDREDS of subsea systems on the deep ocean bottom to bring that oil into production. The Brazilians will lay thousands of miles of underwater pipeline, with all the associated ship-support and other equipment that entails.

The Brazilians are not living in the frozen past. They’re not hostage to paralyzing myths. The Brazilians envision a future for their nation, and they’re acting on it. They see hundreds of deep-water oil wells pulling petroleum out of the crust from many miles down and piping it ashore to their refineries and industries. Indeed, Brazil plans to win that first battle of the next war. And it’s cutting the steel with which to do it.

Meanwhile, Back in the US of A…
Meanwhile in the U.S., the policy battles rage endlessly over offshore development. Authorize? Don’t authorize. Explore? Don’t explore. Lease? Don’t lease. Drill? Don’t drill. Produce? Don’t produce.

Whenever the proponents of offshore development score a win, the opponents take it all to federal court for years on end. Years later, some judge makes a decision. Then comes the inevitable appeal. And then everyone goes back to litigate some more after the appeal. There’s no end. I’ve spent my adult life watching this ping-pong match play out.

What’s at the heart of the issue? A broken political process. Or you might call it a political “process” that works too well. Really, it seems that much of the U.S. energy mind-set is stuck firmly in the past. In essence, the debate is over how to fight the last battle of the last war.

Living in a 40-Year-Old Past
For example, again and again, the opponents of offshore development in the U.S. summon up their favorite bete noir — the images of the Santa Barbara oil spill of 1969. An event from four decades ago — before most Americans now living were even born — has become the iconic reason not to develop, say, offshore California. And this is despite the fact that the exploration, drilling and environmental technology of today is far advanced from what existed 40 years ago.

Think about it. Do you have a better computer today than 40 years ago — if you even used computers back then? A better television? A better car? Are there better airliners? Better heart transplants? You get the idea. But some people learn something and never let it go.

Along those lines, the other day, I visited the facilities of Cameron Intl., here in Houston. Cameron makes blowout preventers for deep-sea drilling, and a large host of other drilling-related equipment. Having been around the oil industry for over 30 years now, I can say that the new technology for safe drilling is beyond astonishing. Just the quality control alone is awesome. For example, EVERY HEAT of steel that goes into certain of Cameron’s subsea products goes through a rigorous quality-assurance check. Every heat.

Meanwhile, it’s not just California where the offshore is off-limits. Most of the rest of the U.S. offshore is locked up as well, except the western Gulf of Mexico and (grudgingly) some of northern Alaska. As one wag has put it, when it comes to offshore development, much of the U.S. political class is living in “The No Zone.”


The Future Is Right Now
But the last battle of the last war — the Battle of Santa Barbara — is over. The images of oil on the beaches led the U.S. to shut down much of its offshore drilling effort, and for many decades. Meanwhile, the mess got cleaned up. It’s history. The energy industry figured out what happened and fixed a lot of problems. Now where do we go? Because you have to go somewhere, sometime. You can’t live in the past — at least not for too long. Or can you? Well, you can try to live in the Good Old Days, but eventually, the future will overtake you. And in the world of energy, the future is right now.

Welcome to the Future
A year ago, the price of oil was $120 per barrel and rising. Indeed, by last July, the price was $147 per barrel. And when that happened, you might recall that the world economy didn’t work very well. It was oil prices; it was bad banks; it was a lot of things that went wrong. And then the economy cratered. That took down the oil price. So now the price of oil is in the $50s.

Look back. How did oil ever reach $147 per barrel? Was there really not enough to go around? That’s what some people thought. But then why did the price suddenly tumble, if not just plain drop off a cliff? Did people anticipate a demand crash? Again, that’s what other people thought.

Now we have oil in the $50s. What does that mean? With oil in the $50s, does it mean that the world has “too much” oil? Or not enough? Well, what’s your time frame? A day? A week? A month? A year? Five years? Fifteen years?

With oil in the $50s, yes there will probably be adequate supplies for the next few months. You can calm down. The oil you’ll burn in September is being loaded onboard distant tankers right now.

But with oil in the $50s, will there be adequate oil supplies in, say, 2012, if not 2020? I doubt it. At least not for the U.S. Because with oil in the $50s, some of that 2012 oil — and much of that 2020 oil — won’t see the light of day. There’s just not enough cash flow for the energy business to do its thing — like drill enough wells. Hey, the future is now.

Future oil production requires current exploration and development. Except we’re not drilling. We’re not developing. So welcome to the future. With oil in the $50s, it’s a no-brainer to predict future shortages.

For Now, Keep Drilling
One thing is certain. If the energy industry does not stay focused and capitalized, we’re in a lot of trouble — and I mean sooner, rather than later. That’s why a big trade show like the OTC is so important. The OTC embodies the new developments in offshore technology. It gets right into your face.

Almost every booth at OTC has some item on display that’s better than what used to be on display. Yesterday, for example, I saw a remarkable new invention from FMC Technologies that dramatically improves the safety and efficiency of the “fracturing” process (“frac-ing”) by opening up shale beds to yield natural gas. It’s what the late efficiency guru Edward Deming would have called an “incremental improvement” to an existing process. But it’s brilliant and elegant. And when this new equipment goes into widespread use, it will offer a dramatic improvement.

Ideas and improvements like this from FMC Technologies — and countless more on display at the OTC — will allow the energy industry to keep providing hydrocarbon molecules to us earthlings for as long as we want to burn them. (Burn them? That’s another story entirely.)

The OTC shows off what the U.S. has at its disposal, if it chooses to develop its offshore energy resources. Here are the tools with which to fight the first battle of the next war.

And the OTC also shines a light on how many U.S. policymakers and opinion leaders are living in the past, patting themselves on the back as they fight that last battle of the last war. Meanwhile the energy clock is running down, and other nations and cultures are shopping their wares.

Prior to joining Whiskey and Gunpowder, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

Trust us, We’re Experts from the Government

Not often enough, we feature a posting from Byron King, the resident energy and oil expert for the invest newsletter Whiskey and Gunpowder. His light-hearted approach to a serious subject makes his writing enjoyable reading. Different from our other contributors, Bryon emphasizes energy investments. In this posting, he postulates that the current trend of bailouts and consumer economy is unsustainable. He recommends investments in gold and energy plays. Read on as he explains why.

We at CARE picked up on this posting from Byron King because of his comments about the “government knows best.” If you read our monthly newsletter, the PowerLine, you read Marita Noon’s commentary on Energy Socialism. While their expertise differs, clearly they are coming to some of the same conclusions.

Please note: Byron King is scheduled to be the featured guest on CARE’s monthly Conference Call in May. The exact time and date is yet to be determined. If you subscribe to CARE’s e-newsletter, you will get the invitation to Byron King’s Conference Call.



Unsustainable
Can you believe that winter is officially over? Wow, it was a cold couple of months. Makes you want to say, “So much for global warming.”

Except it’s not global warming anymore. Now it’s called “climate change.” Y’see, the cold winter wasn’t a sign of warming. It was a sign of global climate change. Got that? Mankind is burning too much fossil fuel, goes the thesis. So the cold gets colder. The hot gets hotter. The wet gets wetter. The dry gets dryer. And the confusion gets what? More confusing?

So is this game rigged? No matter what the evidence is, goes the argument, just pay no attention to the man behind the curtain. It’s all climate change. And that, of course, means that the government knows best. Especially when a certain class of people--with the right policy credentials--are running the government. As in the expression, “Trust us. We’re experts from the government. We’re going to help you.” Or as the narrator used to say at the beginning of the show The Outer Limits, “There is nothing wrong with your television set.” Or as the cops say as you drive past a crash scene today, “Move along, folks. There’s nothing to see here.” Yep. No looky-loo. Just climb aboard the Climate Change Railway Express. No peeking while we raise your taxes.

Decades of Malinvestment Become Apparent
Meanwhile, over the past winter, the economy was in the tank. The deep troubles got deeper. It makes me recall many of those hard times stories I used to hear from family and friends about the Great Depression. It makes me glad I listened.

This past winter, it seemed like all those decades of what the Austrian economists call malinvestment finally found a place in the light of day. But it’s not as if the whole tale were some sort of state secret, like the Venona files at the National Security Agency or something. Really, the nation’s industrial and productive decline was fairly clear all along if you knew what you were seeing. The problem has been hiding in plain sight since August 1971, when President Nixon killed any semblance of a gold-backed dollar.

Or it’s kind of like Peak Oil. M. King Hubbert drew the fundamental Peak Oil graph back in the 1950s. Heck, I heard Hubbert give his speech in fall 1977. I saw Peak Oil in action back when I was working at Gulf Oil Co. in the late 1970s. It was no shock to me, at least, when the world’s crude oil output curve finally maxed out in 2006.

What? Nobody told you that the crude curve maxed out? Hey, the world’s marginal oil output is now mostly natural gas liquids. It means that we’re blowing down the gas caps.

It’s why I like resource and energy companies, companies that bring real stuff to the surface. It’s why I’ll keep writing about energy and resources in a publication like ESI.

Obama’s Economic Policy
I try to avoid getting too “political” in these pages, aside from my rants about issues affecting energy policy, resource policy and the like. So today I’m just going to quote my friend James Howard Kunstler, a longtime Democrat and supporter of Barack Obama in the recent election.

Kunstler just published his comments on the Obama appearance on the CBS News show 60 Minutes on Sunday, March 22. According to Kunstler, Obama “may perfectly represent the majority who elected him…because he also appears to be in full-commanding denial of the realities overtaking our American experience. Those realities include the fact that we can't possibly return to the easy-credit and no-money-down ‘consumer’ economy, no matter how many nominal dollars get shoveled into the fiery furnaces of banks too big to fail.”

After describing the economic policies coming out of Congress and the new presidential administration, Kunstler continues: “Lending on the scale that became normal over the last decade is, for sure, the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can't process this reality, and the president, for all his relaxed charm, is either not ready to articulate it, or can't process it himself.”

Kunstler describes the process of the Fed releasing new currency--created out of thin air--to buy up Treasury debt. He comments: “It would be sententious to explain how this destroys currencies, but wherever ‘monetizing debt’ has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.”

In my view, Jim Kunstler is exactly on target with his comments. I’m watching the shenanigans in Washington with something approaching utter fear. It’s why I’m recommending investments in gold and energy plays.

Spend, Borrow, Tax, Inflate
I’m truly worried about our future. The things that are going on in the U.S. economy are not sustainable, and I don’t just mean “happy motoring” into the Peak Oil future. The whole economy is on the edge. I don’t see anything on the political or policy horizon that offers any semblance of hope. Nothing. It’s just spend, spend, spend. Borrow, borrow, borrow. And tax, tax, tax.

What’s in all of this for you? What’s in it for me? A lot of inflation, most likely. That’s why you need to buy gold with 5-10% of your portfolio. And have more of your portfolio in good, solid mining firms.

Building on Kunstler’s comments just a bit more, the Obama economic policy assumes that someone out there will still buy U.S. Treasury paper. But will that happen? The best customers for U.S. debt are distinctly unenthusiastic about adding to their holdings.

The Chinese already own a trillion dollars or so in Treasury bills that are depreciating in value. Besides, China needs a continent full of new infrastructure, plus social spending for 1.3 billion people. And don’t forget the new navy China is planning, with which to police its interests from Africa to the central Pacific Ocean and onto South America. All of this will sop up funds China once used to buy U.S. securities.

Another large traditional customer for U.S. debt is Japan. But Japan is running a current account deficit. It lacks the large numbers of dollars to recycle.

In the Middle East, the petro states are no longer receiving a flood of dollars from high-priced oil ($147 per barrel last July). Don’t count on them to buy up U.S. Treasuries.

The bottom line is I don’t know--and I don’t know anyone else who knows--where the buyers will come from to absorb all the new debt that the Obama and congressional spending plans are going to generate. Something has to give. It’s going to be the long-term value of the dollar. I expect to see a lot of fuel poured onto the fires of inflation.

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

Speculators: The Scapegoats For Our Energy Concerns

Everyone is looking for someone to blame for the current energy crisis. Surely there is one single entity that is causing all of us to suffer—a mastermind like in an Austin Powers movie. This is at least what some members of our Congress believe. Oil speculators have become the villains in this tragic tale.

It has been awhile since we’ve featured the insights of Byron King from Agora Financial--he is one of the contributors to their Whiskey and Gunpowder Newsletter. (If you enjoy this posting, please check out Byron's previous posting on CARE's Blog.) But we at CARE have been looking for some good commentary on the “speculators.” You can expect some more interesting posting on this topic as we are on the lookout for them. While oil speculation certainly is an important and influential area of our economy, Byron doesn’t think these speculators should not be painted with the brush they have been. Do you think speculation is to blame, or could there be other reasons for the tremendous price-rise?

It’s the Energy, Stupid
With the price of oil doubling in the past year, there are more fingers being pointed than solutions being offered. Unfortunately, one of the biggest “culprits” garnering much of the blame has been the oil speculators. Congress has decided to make them the scapegoat for our energy concerns, and unfortunately many under-educated members of the public are beginning to lap it up.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Byron King is editor of Outstanding Investments, a publication of Agora Financial, LLP. He studied geology at Harvard, where he graduated with honors. He also holds advanced degrees from the University of Pittsburgh and the U.S. Naval War College.

The Evolution of Fuel

The 1940’s movie The Proud Valley—starring Paul Robeson, depicts a community in South Wales whose economic sustenance depends on coal. Set in the depression era, the film echoes the declining need for coal worldwide. At the time, England was accustomed to being one of the leading providers of coal despite the fact that she occupied only .04% of the world’s land mass.

Long before The Proud Valley story was conceived, Stanley Jevons’, in his book The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal Mines, predicted the fall of England’s industrialism and global might due to a limited supply of coal. With the benefit of history on our side, we can see that while economics did shift over time, England has hardly lost its place as a world leader.

Despite the fear that England would run out of coal—causing its ruin, more than 100 years after Jevons’ pronouncement, England has yet to run out of coal. It is still being mined and used in the UK today. The World Coal Institute says, “The UK has proved coal reserves of around 220 million tonnes however total reserves could be well in excess of 1 billion tonnes.”

What happened to coal in England? How was Stanley Jevons—and other notable thinkers of his day, and Robert Malthus of days past—so wrong? Other fuels emerged and began to replace coal for industrial boilers and electricity generation—stretching its supply. Additionally, advanced technology allowed for the discovery of new coal reserves.

Like Jevons in the mid 1800’s, we have our own doomsayers today. Just this morning a link to an article in the June 25 issue of Business Week landed in CARE’s “inbox.” The article, titled From Peak Oil to Dark Age, declares that “peak oil represents a mortal threat to the US Economy.” The author, Eugene Linden, goes on to say, “Alternatives are still a decade away from meeting incremental demand for oil. With nothing to fill the gap, global economic growth would slow, stop, and then reverse; international tensions would soar as nations seek access to diminishing supplies, enriching autocratic rulers in unstable oil states; and, unless other sources of energy could be ramped up with extreme haste, the world could plunge into a new Dark Age.” He concludes the article by suggested a new oil tax.

However a quick review of the history of fuel leads to the conclusion that just as Jevons was wrong, so is Linden and the cadre of other modern-day pessimists. The missing link in the evolution of fuel is human ingenuity.

In his 29 page article in The Review of Austrian Economics, CARE’s Energy Council Member, Robert Bradley, offers an insightful view of various economic models as they relate to the fuel supply. In reading this historical look, one cannot help but to go back to fuel’s ancient history.

Fire was one of man’s earliest inventions. With the thinking capacity that is unique to mankind, early humans discovered that wood would burn—generating heat to stave off the cold and to allow for cooking. Later, man discovered the whale as a source for oil with which he could generate heat and light. Taking a quick jump though history, American settlers had nearly stripped the local forests of wood in their attempts at heating and cooking. Coal was discovered in the 16th century, saving the forests. The whale was nearly extinct when oil from the earth was found and used to light lamps. These are just two examples of orderly transitions between primary energies in world history.

Moving back to England, the starting point of this progression, there was wide-spread and well-founded fear that coal would run out. But before this prediction came true, a new fuel source was developed: oil and gas—allowing the life of the coal supply to be extended (something Jevons could not have imagined). Additionally, as previously mentioned, technology improved to discover new reserves. What we see in this brief history is “resource expansion,” new resources are developed and new techniques created to allow us to make better use of known supplies.

Looking at history, we can assume the same will happen. Despite Linden’s gloom and doom, he suggests that the wide scale use of alternative fuels is ten years off. With human ingenuity, chances are very high that we have ten years worth of oil and gas available. We have time for whatever “the alternative” becomes to be developed. Linden says, “Policymakers can hide behind the possibility that vast troves will be available from unconventional sources.” It is not just policymakers who may cling to that belief, but anyone who studies history. Linden apparently holds to the fixity/depletionism model, believing that there is a limited supply that will run out. On the flip side is mineral resourceship, which is much like manufacturing—the making of capitol goods; the distinction between depletable and nondepletable resources for the sciences of human action.

In its short life (three years) CARE has seen this first hand. We have seen both human ingenuity and the development of new resources come together. Canada’s tar sands and Shell’s oil shale project are just two examples of new resources—both of which required human creativity. Interestingly, exploiting fixed resources promotes future progress because wealth is created from present usage. Higher prices signal the market to develop substitutes. Enforced conservation in ages past would have held back the progress responsible for today’s high standards of living and the capacity to mine new resources. (Industrial development would have been greatly retarded it sixty or eighty years ago the warning of conservationists about the threatening exhaustion of the supply of coal had been heeded.) Again, we have seen this principle ring true at CARE. One of our members has been working on entering old, abandoned wells. These wells once produced oil but were closed when the easy oil was obtained. With modern technology, this group is able to reenter these wells and reap the rewards that higher prices make cost-effective. The tar sands, the oil shale and the reentry of previously mature wells are simple examples of how modern technology, through improved geological techniques and through the incentive of the market, has been finding new petroleum reserves at a rapid rate. Each invention gives rise to numerous others—though the sister resources that can perform the same or similar function may be at a higher cost (at least for the transition period).

In creating the better, we must often destroy the good. Look at history, you’ll see that the bulk of man’s resources are the result of human ingenuity, aided by slowly, patiently, painfully acquired knowledge and experience. The constraints toward particular resources are overcome by the propensity of human capitol to expand the family of resources. If we exhaust creative imagination, we will exhaust resources. However, this is where America leads! This is the vital role of capitalism: the savings and investment generated by a market economy to locate and produce new deposits at stable or declining cost. The countries rich in oil, are not rich in human ingenuity. They are not rich in creativity.

One must acknowledge that the total supply of any mineral is unknown and unknowable because the future knowledge that would create minerals cannot be known before its time. Therefore the distinction between renewable and non-renewable resources is tenuous.

The resources of the future are waiting for us. They are waiting for the forces of economics to come together with human ingenuity. We have the creativity, we have the energy, to again make America great—a leader in mineral resources. America can once again be a world leader. Do we need to worry about peak oil? What does history tell you? The future is likely beyond your imagination!