War and Peace and Bullshit

Two days after the US elections there seems to be some mood of optimism in America, at least in so called Blue America. Trying hard, I can't find much to be optimistic about. The politicians can't seem to decide between not staying the course in Iraq, and not not staying the course. Since when was there a course? The biggest obstacle to admitting that the Iraq war is an utter debacle, is the unpleasant fact that we can't admit what the war was for in the first place: the war was to ensure America's access to Middle East oil. Nothing else. It is about production sharing agreements, oil service contracts, and stationing carrier groups in the Persian Gulf. All of it hiding behind a curtain of stupid rhetoric. Don't tell me about terrorism, or about how they hate our way of life, 9-11, etc.

The troops went in, they seized the oil ministry. Bush declared victory. That was supposed to be the war. Then they noticed that there were 26 million Iraqis living there. Nobody could have predicted that, I suppose. And they discovered that Iraqis are either Shiite, Sunni and Kurd. I mean did they ever give a shit about Iraq? No way. They wanted that oil.

If the now abject Republicans could admit that America is in desperate straits to ensure its oil supply, then at least we'd all recognize the problem. And what to do? Fight for oil, steal it, or change our way of life? This would be the best national debate we could have.

I am not letting the Dems off the hook, they are in as much denial as the Republicans, and more clueless. At least the Republicans understand oil (in secret). What will happen if we can't admit the truth? Well we will stay in Iraq, perpetually baffled at all the senseless violence, oblivious to our own role in it. But of course Americans can't admit any truth as disturbing as an energy supply problem. So, we'll stay in Iraq, and the violence will escalate. We will probably partition Iraq. But it won't do any good! The Shia, and the Sunnis too, will still try to get their oil back. We still won't say what's really going on. We'll call them terrorists.

Iran might see that if America can be driven out, it could benefit from Iraq's resources, and Shia Islam would triumph. Chinese capital could be available to them. The only thing American occupation will accomplish will be the unification of Islam. The Arab world will rally to support Iran and Shiite militarism.

This is the sort of war Iraq can easily escalate into. Of course America has the threat of nukes, as does Israel, its only ally in this fight. But America may find that even "escalation dominance" will not guarantee victory against a unified Islam. And nukes could be used. If anyone thinks common sense will prevail they are deluded.

Save Us, O Great Perpetual Motion Machine

With energy getting more expensive it is not surprising that someone is trying to patent a perpetual motion machine. The company is Ireland-based Steorn. This is how they describe their technology:

Steorn’s technology produces free, clean and constant energy. This provides a significant range of benefits, from the convenience of never having to refuel your car or recharge your mobile phone, to a genuine solution to the need for zero emission energy production. It also provides a secure supply of energy, since the components of the technology are readily available.

The technology is in a constant state of development. The company has focused for the past three years on increasing power output and the development of test systems that allow detailed analysis to be performed.

Steorn’s technology appears to violate the ‘Principle of the Conservation of Energy’, considered by many to be the most fundamental principle in our current understanding of the universe. This principle is stated simply as ‘energy can neither be created nor destroyed, it can only change form’.

Steorn is making three claims for its technology:

The technology has a coefficient of performance greater than 100%.
The operation of the technology (i.e. the creation of energy) is not derived from the degradation of its component parts.
There is no identifiable environmental source of the energy (as might be witnessed by a cooling of ambient air temperature).
The sum of these claims is that our technology creates free energy.
—Steorn.com

Well, if you are going to defy the laws of Isaac Newton, you'd better have your shit straight. If you are cagey and making big promises and seeking investors, people will get annoyed.

Newton's laws are not eternal, Einstein showed that. And Einstein's theories are not the end either, as quantum mechanics and string theory show us virtual worlds beyond our imagining. But as for the way we live, and the way the “real” world works, I mean down here on earth anyway, where such things as money and food and clothing make a difference in our lives, then Newton still rules. Newton may not explain love and death and the afterlife, but for such issues as how to get to work on time, Newton is still king.

Mankind's problems in this age, on the cusp of catastrophic change, as our huge energy sources fail us one after another, will mainly be the scourges of war, famine and disease. Pretending that Newton was wrong, with such nutty ideas as corn-based bio-diesel, or hoping for perpetual motion machine solutions, can only be a fantasy. Newton showed us how the world worked 400 years ago, but we still haven't come to grips with the reality he showed us. At least we should be glad that it is simple, logical and fair. And when the shit hits the fan, we'll probably remember that exponential growth does not proceed indefinitely. Newton probably would have said “DUH”!

Sticking Up For Conspiracy Theorists

My bother sent me this link: Professors of Paranoia?

This article, by John Gravois, staff reporter for The Chronicle Of Higher Education, won't remain online without subscription for long, but I linked anyway. It is a philosophical debunking of conspiracy theorists, basically painting them as tinfoil-hat nutjobs. This quote sums up the author's primary objections to conspiracy theories:

"One of the most common intuitive problems people have with conspiracy theories is that they require positing such complicated webs of secret actions. If the twin towers fell in a carefully orchestrated demolition shortly after being hit by planes, who set the charges? Who did the planning? And how could hundreds, if not thousands of people complicit in the murder of their own countrymen keep quiet? Usually, Occam's razor intervenes."

I simply approach 9/11 conspiracies from an opposite direction. Broad theories about what happened are not needed. But glaring holes in official explanations still need to be exposed. Not all these conspiracy theories have equal merit. The evidence that explosions brought down the twin towers seems weaker than the evidence that a cruise missile hit the pentagon. This particular theory is at least worth debating. Watch Loose Change for some highly disturbing evidence.

However, I also disagree with the above quote. I think "complicated webs of secret actions" are not so uncommon among business tycoons and governments. How did Hilter rise to power? Certainly complicated webs of secret actions (combined with demagoguery) were his method. All would-be authoritarians, in nations in every continent, are forever conspiring. The CIA, Kissenger and Pinochet conspired to take over Chile. And they did, commiting unspeakable evil in the process. For decades afterward, if you said the CIA was involved, people would think you were a nut. As for the legions who would be required to keep their mouths shut, they can be made to do only the smallest part of the plan, and so are not party to the conspiracy as a whole. If the CIA really wanted to blow up the WTC, I don't think they would find it so hard to train (and silence) a demolition team. The information that the WTC's bomb sniffing dogs were removed weeks before 911, and a number of unidentified construction crews were seen in the building is unsettling to say the least. Everything can be rationalized, and people can be made to believe that the evil deed they do is necessary and right. If Bin Laden is capable of conspiracy, then certainly Dick Cheney is also. Ambitious and ruthless men conspire.

Not to say a neoconservative led cabal did have anything to do with 9/11. I don't know. The truth is hard to find. And perhaps even harder to stomach. I am just saying don't stifle debate. I don't see the value in all the character assassinations of conspiracy theorists. Same for peak theorists. What's the point? Harper's published a particularly silly article on peak oil (not online), interviewing mainly survivalists, ridiculing their views, with minimal explanation. If the theory is stupid, don't write about it. If the theory is intriguing but flawed, expose it. Whether the theorist is eccentric is irrelevant.

gold stocks or gold coins?

I can't understand all the excitement and belief in gold and silver mining stocks. Of course the theory is that mining stocks will rise faster than the price of gold. In economic hard times, gold mining stocks are supposed to be one of the few market sectors that prosper. Gold writers say the XAU and HUI (gold mining stock indexes) have to lead the spot price of gold.

I just don't agree. There are good reasons why the price of gold might rise, but gold mines might not be able to profit from that rise. It is all about cost. The costs of mining gold are all going up, and they could easily outrun the price of gold itself. Mining costs consist mainly of:

energy

raw materials, such as steel

highly skilled and specialized labor

specialized and expensive equipment

capital

Costs for all these items are rising fast. The price of base metals has been outpacing gold in recent years. Costs of capital (interest rates) are rising. Remote mining locations, usually in undeveloped nations, also increases costs for the mine. The skilled labor has to be brought onto the location, and housed and fed. The steel and equipment have to be imported and transported. Energy supply has to be secure (note that before the age of fossil fuels the energy source was usually slave labor).

A final risk to mining operations is the risk of nationalization, or psudo-nationalization. A nation hosting foreign mines on its territory might not want that operation to shut down, especially if it employs lots of local labor, or trains workers in skilled positions. But they might decide to tax the operation so that little (if any) profit leave the country.

And what would happen if, in a time of rising precious metal prices, gold mines have to shut down because they can't make a profit? The result would be a decrease in the supply of gold - thus driving prices higher. Of course not all gold mines will find it hard to profit. Some mines are more profitable than others. But the costs and risks are variable and uncertain. I'm not going to try to pick a winning gold stock. If you can pick em, or trust some gold stock guru to find them for you, maybe you'll be happy. Or not. I'd stick with shiny round coins, its so much simpler.

War and Nationalization: Children Of Depletion

Depletion is the declining availability of natural resources. Wars for resources are both indicators and consequences of depletion. We are currently seeing such conflicts every month, and on every continent. Depletion demands that nations nationalize natural resource wealth. Depletion also demands that countries with precious mineral and energy resources acquire advanced weapons to defend those resources, or make strategic deals with nations that do have weapons. With treacherous circular logic, war requires nations to try to acquire strategic commodites at virtually any cost, to enable its military.

All the world's gigantic "elephant" oil fields are now in decline. This is depletion! Did anyone notice that Saudi Arabia admitted that their major legacy fields are now declining by 8% annually? This was reported by Platts news, and didn't stay live for long, but ASPO picked it up. Replacing enormous oil fields with smaller ones, at huge capital investment, will neither bring down the price of oil, nor increase supply. The largest copper mines are slowly becoming less and less productive. Depletion! Replacing big mines with smaller ones, at huge capital investment, will not bring down copper prices. The world will shortly face peak oil, peak copper, peak you-name-it. Note that we don't have to "run out" of any given commodity for it to become far more expensive, just for some mines or wells to become too expensive to operate because of declining yields, higher energy costs, and higher capital costs. If the problem is a production "bottleneck", then that is a result of depletion.

Wars and nationalization of resources will remove large sources of energy and mineral production off the open markets. This will mean that far more oil will change hands than is sold on the futures markets. Oil will be sold directly from one state oil company to another, at secret prices. Nationalization is an unstoppable trend. Venezula moved only last week to nationalize "inactive" mines. Economists and investment analysts like to suggest that if nations with oil wealth would simply let private firms come in and invest massive capital then production would rise and we would not have a peak oil problem. Whether this is true or not, it does not benefit the oil producing nation. Protecting a strategically important resource, like oil, is far more important than getting the best price and highest production for that resource.

Even the United States will be forced to nationalize its remaining mineral and energy resources someday, if only to keep them out of the hands of its creditors.

Just as every nation must now attempt to create a secure energy supply, it is just as important to deny, or limit, energy supplies to strategic rivals. A nation that must use all its available energy just to maintain its own economy is a nation that is unlikely to go to war. Economists need to start admitting that these things are not anomalies, and that depletion exists. It is the trend. It is formenting nationalization and war.

US Markets To Be Sacrificed

I think we should just consider the possibility that the Fed is willing to sacrifice US stock and real estate markets to keep the dollar afloat. The Fed could easily do this with a half point rate hike next with no indication that hikes are finished. Such a policy would have the support of our creditors. The resulting fire-sale asset prices would look very attractive to cash rich foreign buyers who are wondering what the heck they can do with all the dollars they have accumulated. In the resulting recession commodity prices might soften, and international trade would be able to continue, although at depressed levels.

I know I've been ragging on the dollar for a while, predicting its ultimate collapse to near worthlessness, but lately an alternate scenario has been brooding in my mind. Suppose the dollar doesn't collapse? Maybe the Fed can save the dollar. I think this is possible, but at enormous cost.

Joe Duarte describes the increasingly worried tone of the Fed, as expressed by Fed governor Janet Yellen:

"Ms. Yellen, and the Fed are slowly coming to grips with the gravity of the situation. Her remarks show that Ms. Yellen may just be starting to come to grips with the fact that despite the potential for an economic slow down, perhaps of some significance, the Fed may have to continue to raise interest rates indefinitely, just to keep the dollar from collapsing."

Unfortunately, Wall Street is now counting on an end to rate hikes. Money managers have been saying for the last six months that the Fed has to be near the end of its rate raising cycle. They were saying "one and done" in December, or, in the worst case, then they would endure "two and through". Quarter point rate hikes that is. Since then we've had two rate hikes and they are not through. The horrible possibility of more rate hikes, or even the truly terrible, unspeakable thought of accelerated hikes (half a point instead of a quarter), has not been considered. If you are working on Wall Street, managing over a billion dollars and have a staff of traders, then you probably see the American financial markets as the center of the world, the key to prosperity and stability, the one thing that must be preserved at all cost. But the world is changing.

It has been said, by Jim Puplava and company, that the Fed "walks a fine line". They risk a dollar crisis and runaway inflation if they lower rates, and a real estate and stock market crash if they raise interest rates. Now it looks like they will have to choose one or the other. There is no such line that will avoid both these catastrophes, rather it is choose which one is the lesser of two evils. And hope that energy shortages or political crises don't bring us both. If the Fed keeps doing what it is doing, that is raise rates by one quarter point at every meeting, we will almost certainly get both a dollar crisis and market crashes. They can't simply stay the course because:

a) Central bankers around the world are getting very anxious about the dollar. Soon the Fed will not be able to withstand the combined attacks from currency speculators, Vladimir Putin, and Hugo Chavez.

b) The stock and real estate markets are clearly showing the strain from rising interest rates and energy prices. A crash is only a matter of time anyway. Markets around the world have all fallen heavily lately, but the American markets have only fallen in the single digits so far.

In the end the Fed will have to try defend the dollar to support the all important treasury bond market. This is what keeps the government solvent. And if things play out this way, I wonder how how much independance our Federal Reserve will really have anyway. I wonder if China's central bank Governor Zhou Xiaochuan, and Russian central bank chairman Sergei Ignatiev are now discrete and unofficial members of the Federal Reserve, and if they will be the ones who really set monetary policy.

Commodity Deflation? Not Likely.

If the dollar collapses (say it corrects on the USX index down to the 70s) who knows what that will do to commodities? Commodities are priced internationally in dollars. It will throw the markets into utter confusion if no one really knows what a dollar is worth (if anything). Could commodity markets be created in other currencies? Yes, but these markets will be regional markets, not global ones.

Several writers, including MorganStanley's august Stephen Roach, have been making the case that commodity prices are in an unsustainable bubble. A correspondant emailed me an (unlinkable) Wall Street Journal article about money manager and commodity trader Dwight Anderson now tentatively bearish on commodities.

Anderson simply says demand will drop (i.e. a global recessionary slowdown?) and supply will kick in. Roach says commodities will drop because (a) China can't continue to grow so fast and (b) it "looks like a bubble in commodities", and that speculators are pushing the market.

I totally agree with Roach's first point about China having to slow down, but I'm not convinced the result will be falling commodity prices. Commodities priced how? In dollars or in gold? The dollar looks very weak and is being attacked on all fronts now. China and Russia both want to increase state gold reserves. Multiple energy trading markets are proposed, several to tade in alternative currencies to the dollar. Norway intends to sell oil only for euros. Russia will sell their huge energy and mineral commodity surpluses only in rubles soon.

The euro doesn't look strong enough to float global trade, and the European Central Bank doesn't want the doomed role of managing the enormous monetary inflation required. In several years time we may have several regional currencies, all similar to the euro. China and Japan are now negotiating the creation of a pan-asian currency. This is very significant. The pan-asian, the euro, the ruble, the loonie could all survive, with none needing to be the One Big Global Reserve Currency. I predict a South American currency (the Che Guevara!?) will launch also. The US dollar will be simply irrelevant. Gold will be very important, functioning as the ultimate meta-commodity, that all currencies and commodities are judged against. Because it is expensive to move and store, especially over long distances, it will create a worldwide recession. With regional currecies dominating trade, most commodity markets will be regional in scope.

It is very hard to predict the cost of producing any particular commodity. One reason is that a large portion of the cost of mining or wellhead production is the energy needed for that production. Energy is extremely volatile in price, and generally surging upward. Look at the dirt cheap natural gas we have now. Look at the high oil. These conditions could so easily reverse, or both could easily rise. Some commodities need lots of natural gas for production, some need lots of diesel fuel. Some can use either, and can switch as needed. Everything that goes into pricing is a moving target, including the dollar itself. But mostly, the dollar is moving down and energy moving up. So these things will drive commodities strongly upward, even as demand for commodities softens.

The other problem with Roach and Anderson's analyses is that neither of them factor, or even acknowledge, the existence of depletion. The largest copper mines are slowly becoming less and less productive. Depletion! Replacing big mines with smaller ones, at huge capital investment, will not bring down copper prices. The world will shortly face peak oil, peak gold, you name it. We don't have to "run out" of any commodity for it to become far more expensive, just for some mines or wells to become too expensive to operate because of declining yields, higher energy costs, and higher capital costs.

And wars. And nationalization. These are the children of depletion. They will remove large sources of production off of open markets. Nationalization is an unstoppable trend. Protecting a strategically important resource will become even more important than getting the best price and highest production for that resource. I predict even the United States will nationalize mineral and energy resources someday, if only to keep them out of the hands of our creditors. Wars for resources and nationalization are both indicators and consequences of depletion. We are seeing these things every day, on every continent. War requires nations to try to acquire strategic commodites at virtually any cost, or risk defeat.

Economists need to start admitting that these things are not anomalies, and that depletion exists. It is the trend. It is formenting nationalization and war. So, even if China goes into recession, I think it is possible for some commodities to rise in price, even relative to gold. Commodities will trade regionally, not globally. Some commodites may rise astronomically, in places, if there is a shortage.

Friedman is optimistic. So what?

Here is a long quote from Thomas L. Friedman's recent column, published behind the New York Times' firewall:

“I was recently interviewing Ramalinga Raju, chairman of India's Satyam Computer Services. Satyam is one of India's top firms doing outsourced work from America, and Mr. Raju told me how Satyam had just started outsourcing some of its American work to Indian villages. The outsourcee has become the outsourcer.

Mr. Raju said: "We told ourselves: if business process outsourcing can be done from cities in India to support cities in the developed world, why can't it be done by villages in India to support cities in India. ... Things like processing employee records can be done from anywhere, so there is no reason it can't be done from a village." Satyam began with two villages a year ago and plans to scale up to 150.

There is enough bandwidth now, even reaching big Indian villages, to parcel out this work, and the villagers are very eager. "The attrition level is low, and the commitment levels high," Mr. Raju said. "It is a way of breathing economic life into villages." It gives educated villagers a chance to stay on the land, he said, and not have to migrate to the cities.

A short time later I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google's India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team — rather than the project's being driven by Google headquarters in Silicon Valley.

If more countries can get just a few basic things right — enough telecom and bandwidth so their people can get connected; steadily improving education; decent, corruption-free economic governance; and the rule of law — and we can find more sources of clean energy, there is every reason for optimism that we could see even faster global growth in this century, with many more people lifted out of poverty.”

Friedman sees the global economy optimistically all right. But what is America's role in it (other than consumption, over consumption, and conspicuous consumption)? That Indian employee records processing firm that is planning huge expansion — whose employee records will they be processing anyway? Probably employees from the surging industrial economies of the world: China, Eastern Europe, Brazil, and India itself. US payrolls are not expanding.

Then Friedman talks about Google, how Google is employing not only engineering teams in India, but also project management and business developement. No doubt their payroll is done in India, and the rest of the admin. If the legal team is not largely Indian, it will be soon, with enormous cost saving. There does not need to be very much of the company left in America at all. If I were in Google senior management I might be getting a little nervous. The higher up the corparate ladder you go, the bigger the cost savings of outsourcing. And at some point the center of gravity of the company shifts from California to Bangalore.

When an American firm hires Indian labor, that is an Indian payroll, not a US one. The paycheck is made out in rupees, cashed in India, drawn from an Indian bank. The Indian economy benefits, not the US economy. The global economy won't look nearly so rosy if we are shut out of it. We have un-competitive labor, over-priced real estate, ludicrous executive compensation, a failing currency, and an infrastructure designed to waste the maximum amount of energy. It will be hard for America to participate. I don't think it is pessimistic to point out that these facts.

Its not that I think Friedman is wrong about globalization that bugs me, but that he doesn't see an urgent need for America to get its shit together and fix its dire problems. He casually notes the need to find new sources of energy, without any sense of the risk or high stakes involved. The whole optimism vs pessimism thing is annoying anyway. Niether one is logical.

US Dollar Faces The Firing Squad

Ben Bernanke's Federal Reserve has lost control of the dollar. Even long time friends of the dollar, like the IMF, have turned against it. Imagine how it would work if the entire world used Weimar reichmarks to trade goods and commodities? How about Zimbabwean dollars? Laughable, except that it is very real.

In the past 6 weeks the dollar has been falling like a bomb. We are awaiting the crash when it hits the ground. This is the real nuclear bunker buster, and it is aimed at us, not Iran. Gold has been accelerating it's climb. If we had the power to stop it we would.

Vladimir Putin has said Russia will soon require payment for their energy exports in rubles, not dollars. This is the trend. Norway says it will sell only in euros soon. China, Japan and most other asian nations are now negotiating the terms of a pan-asian currency, similar to the euro. I personally predict a South American regional currency to launch. The Chinese have also stated they will quadruple their gold reserves, from 600 to 2500 tons. This is a shot across the bow of the US Federal Reserve. Resource nationalization, of base and precious metals, and energy, is spreading worldwide. Colombia announced nationalization of its oil fields only yesterday, joining with Venezuela and Bolivia. Some day even the United States will have to nationalize mines and energy fields on US soil and waters. This will be an attempt to stay solvent, and defend our remaining resource wealth from foreign ownership.

These ominous signs point to huge shifts in the global economy that have barely begun to affect our daily lives, but will soon. There are only two options. One is an organized dis-assembly of the global economy, as governments come to grips with the fact that the US dollar can no longer function as the world reserve currency. Nations can find fixes, substitutes for the US dollar, work-arounds, etc, but it will take years. In that time the entire global order will shift. This will not be a slight change, more like a 180 degree re-alignment.

The other option is panic selling, driven by some crisis such as war or catastrophe, where foreign nations are forced to liquidate US treasury bills, or endure default. We should hope for the first option. Few things are certain, except one, and that is that none of the coming changes will benefit the United States.

Ideology and armaments fight wars, but fuel and money win them

I have hope that war with Iran will not happen. For the simple reason that Iran is already to strong to attack. I suppose it is possible for Israel to attack Iran, even though the Israeli generals must know that it would be a doomed enterprise. Much like the Japanese generals who launched the first strike on Pearl Harbor even though they knew it would bring ruin to Japan. Optimism may make no more sense than pessimism, but I still have hope there won't be another war.

Iran now has all the power that they have been seeking for so long. They have tough friends, in Russia and China. Israel may have advanced military hardware, but it is not enough. They are vulnerable to oil supply disruption. I don't know what the state of their finances are, but with America and Britain both as close to bankruptcy as they are, how can Israel go to war? Israel has always relied on US and British financial backing (credit) and energy supplies.

In the 1980s Russia had a lot of highly advanced military hardware. When they went broke, they were not able to use it, and it didn't do them any good. Britain went into WWI when it was technically bankrupt, although few knew it. They were only able to fight because they had the US to bankroll them, and supply fuel.

Now it is Russia, China, and Iran that have lots of cash and fuel supplies. No matter who wins the initial skirmish, they will eventually prevail. The Central Asian nations, Kyrgystan and Kazakhstan, etc, also have critical energy resources and are strategically important. Russia, China, and Iran are building a huge integrated pipeline network, for both oil and gas, and it crosses all over Central Asia. It feeds China, and Europe, and soon India. These nations' futures are linked and they will support each other. Europe, including Britain, is now utterly dependent on Russian natural gas, and Russia can cut this supply line, as Putin recently demonstrated. All energy importing nations are counting on receiving a slice of the Kazakh oil pie (although there is clearly not enough to go around). So, I believe no European nation can support a US/Israeli attack on Iran. India is waiting in line, hoping to receive Iranian and Kazakh oil and gas. They won't support the US. Australia is having fiscal pressures of its own, similar to the balance of trade problems, and real estate bubble problems that the US has. They have made important energy deals to supply liquified natural gas to China. Australia will not support us. South America will not support us either, gloat is more likely.

As for Israel, I do think they are in trouble, and they won't be able to fight their way out of it. For that matter, Taiwan is also in trouble. We will not be able to defend them either when China finally comes to retrieve her “stray province”. The world is changing. People should deal, not fight.

Oil Trading In Weimar Reichmarks?

News item: Iran Oil Bourse Next Week. This issue does not go away. I quote:

Oil Minister Kazem Vaziri Hamaneh said on Wednesday that the establishment of Oil Stock Exchange is in its final stage and the bourse will be launched in Iran in the next week...

It does not go away because it is part of the worldwide trend. Not just Iran, but also Dubai, Qatar, and Norway are among the countries that are planning to open energy trading bourses. Both Qatar and Dubai have stated they will trade in US dollars. Norway prefers Euros, and seems to have the support of Russia. It looks like the days when Britain and the USA were the only market makers in oil (and other commodities) are nearly over.

These new bourses are not in themselves an immediate threat to the dollar. The dollar is heading for a train wreck all on its own. The new bourses may be part of a solution. Not a solution from the United States' perspective, but a solution for the rest of the world. If there is a dollar crisis, it will throw the whole global commodities trading system into crisis. They will have to switch to either euros or gold, no matter what governments prefer. Imagine that the Reichmarks of Weimar Germany were the worldwide trading currency. And that Weimar was trying to bully the globe into supporting it.

Could a dollar crisis be averted? Yes. If the USA immediately withdrew its foreign military forces, and launched a crash energy conservation program. Obviously this sort of thing will not happen. I don't have much confidence in the euro either. The ECB inflated the Euro supply at 8% last year, about the same as the US dollar. The pound inflated at 12%! Thus gold will regain status as the de facto world currency.

Peak oil and peak money?

Capital flight has begun. See it in the commodities boom. Real stuff is looking a lot more solid than virtual stuff these days. The US dollar index is falling. It is going down compared to other currencies, such as the Yen, the Pound, the Euro. But they are all losing purchasing power too, because of their own inflation.

The innovation of fiat currency only became possible because of the huge supplies of energy that became available in the 20th century. Paper money was tried many times before throughout history, but only in times of national emergency (like war) and it always resulted in depression afterwards. The rapid economic expansion of the 20th C was powered by cheap energy, and it made fiat currency possible. Both are historical anomalies.

The oil-driven economic expansion needed fiat currency. With gold backed currency, the huge sums of capital required in the industrial and information age economies would not have been available. This is because gold production could not be expanded as fast as the economy. Cheap energy and fiat money go together, and they will peak and decline together. We are clearly seeing this. Right now capital is so cheap they are practically giving it away. Interest rates for banks are negative. The interest banks pay on a loan, from the Fed, or from the Japanese central bank, is less than the real rate of inflation. And the central banks make this cheap cash available in vitually unlimited quantities.

The interest we suckers pay on a loan is far higher of course. No wonder banks have so much cash to lend. No wonder they pass out credit cards like sticks of bubble gum, and call us at dinner time asking if we would like a few grand to remodel our kitchens. This high pressure cash machine (that we call the global economy) works beautifully as it expands. Thus the Keynesian dictum that a central bank can, and must, inflate the money supply only as fast as the economy grows. But now the machine is running out of gas. The economy can no longer grow without a cheap energy supply. How the economists can think that the growth can go on forever baffles me.

Interest rates, in all currencies, are on a rising trend, as they try in vain to keep up with accelerating price inflation. High rates and high debt will make banking very unprofitable. In the coming depression it will be nearly impossible for anyone to get a loan for anything. Energy costs and food costs will rise at a hyperbolic rate. The oil will be gone. The money will be gone.

Yay! $100 checks all around!

The congressional proposal to mitigate American citizens' high cost of gas by passing out $100 checks to all taxpayers is the clearest, most explicit example of Bernanke's "helicopter money" policy yet. How much cash is this anyway? On the web I see that in 2003, there were almost 140 million US federal tax returns filed. Lets round that up to 150 million for 2005. If every taxpayer gets $100, that is $15 billion. So, this is not a huge factor compared to the entire US economy. It could have a significant effect on the K-mart set. But it would have no effect at all on the high income end of the economy. Maybe the best thing you can say about this policy is that it reduces income disparity instead of exacerbating it.

So why not issue $100 checks monthly? How about $1000 checks? What difference would it make anyway? The Fed can issue as many bucks as it pleases, at virtually no cost. Unfortunately, the more checks they issue, beyond the token $100, the faster prices will inflate. Capital flight, from dollars to gold, will accelerate. The Fed generally prefers to distribute dollars in the form of debt, rather than passing out party favors. Debt is a the rationalization for money creation.

No one seems to notice that there is more to energy-cost inflation than oil company profits and geopolitical issues. There is also the issue of US government's, and governments' worldwide, monetary inflation. If the US inflates the US dollar supply by 8% in one year (they did this in 2005), that alone will drive up the price of oil by 8%. Oil is priced in US dollars! As the dolllar goes down, oil goes up. On top of that we have a geopolitical oil shortage.

Since a month ago, when the Fed stopped publishing the M3 money supply numbers we don't know how much the Fed is inflating. The $15 billion they propose to pass out to mitigate gas prices won't, by itself, inflate oil much. Rather, oil price inflation (property inflation, insurance premium inflation, gold price inflation, you-name-it inflation) is caused by governments around the globe frantically pumping cash into the banking system in a desperate effort to keep the international trade system flowing. This money spreads everywhere, via the easy-credit pipeline. All those credit card offers we get in the mail? The money they are offering to lend us comes from the Fed. They badly want us to go out and spend.

Its easy to inflate the money supply. Much harder to inflate the oil supply.

Shiny new oil refinery in Yuma? Nope.

Thanks to Cyberedoubt for this link on an american oil refinery that won't be built for the lack of a guaranteed supply of crude oil. After Katrina I was blogging that the Gulf of Mexico refining complex would not be rebuilt. And this is why. Of course the residents of Yuma, AZ, might be glad that the refinery that supplies American gasoline will probably be in Mexico instead of their own back yard.
But if this business issue becomes a trend, it represents another huge loss for America. Refining is an essential industrial manufacturing process. If we cede that industry to other countries we are dependent on them to supply our gasoline. They get the refining margins, not us. They get the fat manufacturing paychecks. And why shouldn't they? They have the oil. They should get the value added profit of selling consumer products, instead of crude oil.
And for America? Since we can no longer make cars profiably, nor gasoline, maybe we should consider the idea that our way of life, which consists of driving the SUV to the mall, isn't working out so well.

I have been told that I express an illogical glee in my notes on peak oil. No doubt this sounds very disturbing.

I can't help it! The globe has reached the stage of tragi-comedy. Religious buffoons are threatening each other with nuclear bombs. They brazenly censor science. They print money and believe themselves rich. We are returning to the dark ages, the inquisition, and the crusades. I conclude that the human race learns nothing in the end. Mighty civilizations are fated to repeat the same sad follies that have brought them to ruin, again and again, since the age of Sumer.

A Short Rant This Evening

There will be no shortage of blame at least. We will hear lots of “there'd be plenty of oil if it weren't for those damn enviro-freaks preventing us from drilling” or “we'd have all the oil we need if the hateful Iranians would just let us come in and run things”.

Meanwhile, the real problem, inexorably falling EROEI, is so subtle and gradual that people don't notice it. A constant series of political crises captures our attention. These crises will make it very hard to make sensible long term choices.

Iran is a case in point. Iran and the USA are intent on facing off in confrontation. They seem to have lost site of the fact that war would destroy lots of critical energy infrastructure. It might be very hard to bring Iranian oil production back after the massive bombing campaign they are talking about. They can't even get Iraq to produce oil. The Iraqi oil facilities were the only thing they cared about protecting all along, but it didn't even work! And now they want to do Iran also???? WTF??!!

Daniel Gross Fearlessly Faces Down The Gold Bugs

I have to admire Daniel Gross, Slate's retrograde, believes-the-CPI-is-accurate, all-is-prosperous, economist. He has come out with a column describing how demand for gold will fall this year, and the price for gold will tumble from its current high of $600 per ounce. It takes chutzpah to be so contrarian. The big fund money is now moving strongly into commodities, gold included. Investment advisors Keith Rabin and Scott McDonald describe the current mood in an editorial for 321 Energy:

The major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky “gold bugs”, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s. Today, these institutions appear to be slowly realizing the rise of commodities, metals and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as global growth and demographic trends continue at anywhere close to present levels. We have seen this change reflected in numerous conversations with fund managers, bankers and other financial professionals in recent months.

So why does Gross think gold will fall? He says that the largest demand for gold comes from Asian jewelry buying. Chinese and Indians are heavy buyers of 22 carat gold jewelry, not just as adornment, but also as a store of wealth. Gross asserts that Asians, being "poorer", can't afford to buy gold at today's inflated prices. They will slack off on buying the stuff. Gross also maintains that they will sell the gold they own, which will enter the "recycled" gold market on the supply side. This increased supply, and reduced demand, will start gold on a downward path.

A gold bug myself, I find this logic baffling. Asians like to save large portions of their income. They see gold as a store of wealth and an investment. Won't a rising gold price encourage them to keep buying it? A rising housing market encourages more people to buy houses. A rising stock market gets more people buying stocks. I think the Asian retail gold market will increase volume, not shrink. And if there is a worldwide recession? After some initial liquidation, I think gold buying will resume. The Japanese have only increased their astonishing saving rate (approx. 25%) right through their deflationary recession.

Another thing that bothers me about Gross' column is the quick association of "Asian" and "poor". I'm not being politically correct here, I just think it is wildly off base. There are a lot of Asians who are getting fabulously rich these days. The Asian standard of living is going up, as Americans' is trending down. Per capita, we may still have more money than they do, but we have huge debts. They have savings — in gold. If anyone will be forced to liquidate assets this year, it will likely be Americans who can't pay their mortgages, not Asians who can't afford $600 gold.

Saudis suddenly see the benefits of peak oil

My friend Mary sent me this link: Demand May Outpace Saudi Oil Capacity. Mary writes:

"this is one of the more chilling things I've read in a while. Why? Because the Saudis have always been publically in bold denial about peak oil, and now all of a sudden they're crying uncle. It really brought it home to me in a stark way. I have been reading about peak oil for a long time but it has always seemed kind of abstract to me, almost theoretical. Now it seems real. The quotes that some of these Saudis make are astonishing. A real eye opener."

Then I saw this, a true conspiracy theory by Huffington contributor Raymond Learsey: Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading. Learsey's thesis is that Saudi Arabian speculation is behind the recent rise in oil, not any fundemental supply and demand issue. It does fit rather nicely with the shift in official Saudi statements. However conspiratorial it sounds, I think it is neither unlikely nor incompatible with peak oil (although Learsey presents no evidence for his theory). Peak oil, or just the perception of peak oil, creates the market conditions in which manipulation is possible.

All commodity producers hope and dream of controlling the price of their commodity, preferably in a smooth uptrend. But they can only do that in sellers' markets. Powerful commodity consumers hope to control the price downward. Sometimes the opposing forces balance out, but if they don't, then one side can be said to control (manipulate) the market. Industrial nations, led by the USA, successfully drove the prices for practically all commodities down for decades in the 1980s and 1990s. It was in their interest to do so and they did. Central banks wanted gold to go down. They were able to do that. I see this as normal.

But now it is a sellers' market for oil and most other commodities. I would assume that the Saudis are manipulating oil! And so are the Norwegians, the Venezuelans, the Texans, and anyone else who wants to pile on for a quick buck.

It is important to recognize that pushing oil up is also a backhanded way to push the dollar down. Is oil worth more? Or is the dollar worth less? Same difference!

Disastrous Fall In Energy Prices?

In the current race to break up the globalized economy, between peak oil and peak capital, the money sure looks like it will run out first. There is more to this interaction that we hear about.

The housing bubble is leading this process and seems to be popping right now. I think the consequences, for this year, will be far more severe than anything peak oil is likely to deal out. I don't see how we can have a soft landing. America is already in a recession, but for the faked GDP numbers, and we are running only on freshly printed cash from the Fed. So, after the inevitable market crash, sparked by a bankruptcies in GM, Ford, Fannie Mae, and many others, our economy will come to a near complete halt. This will surely create market crashes and recessions in China and many other countries. It is a huge world of dominoes out there, all set to knock each other down. The massive and impenetrable business of derivatives, originally created to share and minimize risk, has been perverted for the sole purpose of maximizing profits. If any of the huge derivative based hedge funds fall down that will make the financial depression far worse.

The real estate and inflated currency boom is not only in the USA. Australia, Britain, and much of Europe and Asia are enjoying similar monetary free-for-alls.

The short term effect will be falling energy prices! Oil back down to $40 or $50. The reason is that we are at peak and therefore by definition pumping more oil than ever. There is a huge vested infrastructure in oil, gas etc. They have to try to keep pumping to pay their rising capital costs.

Demand may not fall so much in the USA because it is built in structurally. But in Asia they have not been heavy consumers of energy very long. They can conserve by getting the bicycles out, far easier than we can. Given the Asian propensity to save money in a crisis, Asian energy demand will plummet.

The real problem with this scenario is that it will make the capital-intensive process of developing an alternative energy infrastructure impossible to finance due to unprofitability. As almost everything will be impossible to finance anyway.

Then, as the dollar and other currencies continue to bounce down the road to utter worthlessness, commodities (such as oil) will rise in price. But only because the fiat currency is worth so much less, and because it will be so hard to raise the capital to produce the commodities, not because there is any more demand for them. I am just saying I think we'll run out of money before we run out of oil.

Waiting To Jump Into Real Estate? Sorry To Tell You This..

Suppose that you want to buy a house, but you are waiting for the bubble to pop. You are hoping that prices will go down 20% and then you'll jump in and buy. But suppose when home values do go down 20% you find that no one, not one single bank, will lend you anything. Suppose several banks have already gone under and there are not that many to choose from anyway. Suppose that all the surviving banks can do the math: that they will most likely lose tens of thousands on any loan they write, on top of the huge portfolio of bad loans they already have. This scenario is not so unlikely. It happened in Japan not too long ago after a very similar real estate bubble to ours. I am not talking about some vauge possible future event. I am predicting banks to be in serious trouble, and a near complete halt in lending in 2006. The real estate bonanza is over and gone!

And why would this dreadful scenario come to pass? Because interest rates are inverted. They are unlikely to come back. A continued inverted yield curve will completely wreck the home mortgage business, making virtually all lending unprofitable. This inversion has been building for a long time, and seems to be a long cycle trend. It is very likely to invert more deeply. The reason that the mortgage business will end is that banks borrow short term to get the cash to lend to buy houses. The mortgage itself is a long term loan. To be profitable, there has to be a good spread between the long and short lending rates.

Now think what will happen to Americans when they not only can't get mortgages, but they can't get LOCs on the houses they do own, and they can't even get a lousy 20% interest rate credit card. Americans may be addicted to oil, but they are heavily addicted to credit. Commerce comes to a halt. Businesses close up. Plywood on the storefronts.

This is depression, folks. Very few houses get bought or sold (very little of anything gets bought or sold). When houses do sell, they go for all cash to the real estate barons who are just waiting for the chance. Or maybe a seller will accept a monthly payment plan from you. A few ounces of gold will make a useful down payment.

What Happens When Oil Trades In Mongolian Tugriks

“Suppose oil is traded only in Mongolian tugriks. So, you take your currency to the forex, exchange it for some tugriks and buy all the oil you need – and then the seller immediately converts tugriks to euros or yuans or whatever. Net benefit for Mongolia? Exactly zero. What difference does it make? It seems to me that as oil exchange currency the US dollar is no more more significant than a subway token.” —abb1, writing a comment on blog Crooked Timber

This post brings up the very good question: what difference does it make what currency oil trades in, anyway? So, lets follow the admittedly absurd proposition that oil may only be traded in tugriks. A single crude oil contract (one thousand barrels) is worth almost 62 thousand bucks today. That converts to 73.5 million tugriks. Given a week or two, a banker might be able to come up with that sum. Don't forget that currencies are commodities, subject to supply and demand equations like any other. Some have a vary large, liquid market with small spreads between buy and sell quotes, others, like tugriks, don't. Maybe a Canadian mining and exploration company would want a lot of tugriks now and then. But overall, it is not a huge market.

How many oil contracts can the tugrik support? Total supply is not that large: M2 in 2004 is 847 billion tugriks (stats here). That will buy only 11 thousand oil contracts. Clearly, if the world traded oil only in tugriks, the Mongolian central bank would have to get busy issuing bonds. Bankers all over the world could buy these bonds and lend out the cash to those who want to buy oil. Mongolia would have to issue a lot of bonds. This amount of cash would completely change Mongolia as a nation, because many of those petro-tugriks would come back to Mongolia. What would the Saudi princes do with their tugriks? They would probably buy beautiful ranches in Mongolia and breed racehorses (they probably already do that). Canadian oil-sand barons, Venezuelan oil rich bureaucrats, Russian KGB tycoons, all would have mountains of tugriks. Eventually that Mongolian cash would come home to roost like loyal hunting falcons on the high steppes of Asia. Because if the oil sellers don't buy Mongolian property with the tugriks, then they will have to sell them - the principal buyer would be the Mongolian central bank.

Mongolia would be flooded with their own cash. Real estate values would soar, stock market values in Ulan Bator would skyrocket. Domestic industries such as mining, farming and manufacturing, would produce so little money in comparison to the huge currency trade that they would be declared unprofitable and irrelevant. Because the money would come in through international banks instead of broad based domestic industry, it would be an extremely unequal distribution of wealth. This is not unlike what has happened to the United States in recent decades. But the US economy, being the world's largest, can absorb such huge quantities of money much better than the tiny economy of Mongolia.

The real question in my mind is why does oil have to be traded in a single currency? It was Henry Kissenger who formalized an agreement with OPEC, that in return for military protection, OPEC would agree to trade oil only in dollars. Kissenger foresaw the long term structural benefits to this arrangement. It need not be so. A sensible system would be to peg oil to gold. Oil exporters could ask for bullion, or, for countries that have stable currencies, could accept any national money at the rate gold trades for in that currency. Since every nation needs oil, it makes sense to trade it in a way that is internationally equitable.

Where Will Oil Trade: New York? London? Tehran?

Jerome a Paris has written an unusually forceful article denouncing the many doom and gloom scenarios that predict that an Iranian Oil Bourse (IOB) will bring the US dollar to its knees and starve western nations of oil. An article with a similar conclusion was written by Iranian academic Bahman Aghai Diba for the Persian Journal. These pieces insist that Iran lacks the legal and financial infrastructure to host international trading in oil.

These writers are missing a key point. They are assuming that oil will continue to trade freely, albeit perhaps at a much higher price. They assume that liquidity and transparancy will endure in the oil markets. But there may come a time when geologically driven oil shortages dry up liquidity in the oil markets. There may come a time when politically driven resource competition creates shortages in the oil markets. Liquidity will disappear when sellers in New York and London cannot guarantee delivery. It stands to reason that commodity markets function best, with great liquidity, when there is a plentiful supply of goods to trade. If there is a shortage, much less of that commodity will end up on the auction block. This is especially true for strategically critical commodities such as oil.

It hardly needs to be repeated that China is the most powerful buyer of commodities, and it has the biggest checkbook. Russia and Iran are key suppliers. These three countries are now the big shots at the poker table. The big shots do not have any commitment to open markets. They prefer backroom deals, made for strategic advantage, rather than securing the best price. One reason oil producing nations like Iran and Russia would have for keeping oil markets closed would be to exclude buyers they don't like. For example Americans.

America can still acquire oil, but only to the extent that other nations agree to finance its debt. Or America can use its military to try to secure its oil supply by threat, invasion or occupation. The American military itself consumes vast amounts of oil. Reducing American oil supplies would increase other nations' security (the nations that feel threatened by us) more than any military upgrade they could achieve. Note that it is in neither Russia's nor China's interest to cut off American oil supplies, nor bankrupt the USA. What is in their interest is that we are no longer a military super power.

It seems logical that China, Iran, and Russia will choose to set up an oil trading bourse, in Iran or elsewhere, that trades in Euros, or perhaps gold. Access to their market will be by invitation only. Private speculators, rude Americans, and those who don't honor Islam will be among the many who will be shut out of the party. Security, dispute resolution, and payment and delivery issues will not be settled in courts of law, but by the blessing and decree of the KGB, or the Iranian Revolutionary Council, or some such body.

Whether or not the Iranian Oil Bourse gets off the ground, don't expect the USA and Britain to be able to control oil trading much longer. They simply don't have the oil to trade.

Alien Vs Predator

"Chevron's water rights for its DeBeque, Colo., shale oil project are leased, not sold, to the city of Las Vegas for drinking water. How will Las Vegas replace that in the future when Chevron won't extend the lease?" -- anonymous, via Byron King

This is funny! I was blogging about the stupidity and unsustainability of Las Vegas last year. Then I was blogging about a ludicrous shale oil boondoggle . Well it turns out that a significant part of Las Vegas' water supply come from water rights to the Colorado River that are owned by Chevron Oil. Chevron aquired the water rights when it bought a shale oil project! I read about this in a Whiskey & Gunpowder mail by Byron King. So I'm imagining two of the most wasteful, environmentally damaging enterprises, Vegas and oil shale production, fighting over water rights. Lets just hope they both lose and we start to think about sustainability. Fat chance.

Employment in Depletion

This is astounding. I quote from Paul Craig Roberts:

In the last five years, US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world.” Communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computers and electronic products declined 30%. Electrical equipment and appliances lost 25% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 17% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15%. Even manufacturers of beverages and tobacco products experienced a 7% shrinkage in jobs.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

Original here at Counterpunch
I wonder if this is accurate? When the real estate bubble finally pops, will we wake up to the fact that we are not just beginning an economic depression, but that we are in the middle of one?

living in candyland

I find myself in a constant state of analysis and scepticism of society.

I look around me, I see the strip malls, the multiplicity of Starbucks, the credit cards, and I think: all is an illusion. Americans are living in Candyland now, and the candy will soon wash away in the rain. This city, and every city, will be full of empty stores in some number of years time, rotting evidence of our stupidity, waste and hubris. It is hard to watch history's largest train wreck occur, in slow motion, right before your eyes. It could be avoided, but instead we choose to charge full speed into the catastrophe of the Greatest Ever Depression.

What to do? My advice: buy gold and silver coins, get a sewing machine, get a garden. Make friends with your neighbors.

Latino vs Black

When times get tough, how quickly we descend into tribalism.
Another racial brawl breaks out Friday at LA jail
This is much like the type of social unrest Kunstler predicts for the USA on the downslope of peak oil. Don't think ethnic violence is unusual, or limited to jails. Read in Jared Diamond's Collapse about how resource scarcity caused the ethnic violence and genocide in Rwanda. All people can become viscious when threatened. How long did it take in New Orleans? Three days. White "deputies" with shotguns on a bridge were defending their town against a percieved invasion of mostly black refugees from New Orleans.

It is not gloomy to say it, these are facts

I look to the great depression as a model for the next ten, twenty years. Gardening and sewing will be helpful, both of which I like to do, although I'm sloppy at both.

But there are big differences between the 30s and now. Back then we were self sufficient in energy, capital, and manufacturing. That was then. Now we have nothing. Except massive liabilities. It is not gloomy to say it, these are facts. Now I'll move on to some doom and gloom.

A friend said she'd lost the sense of impending doom that she had last summer. Sure. Energy and food are both cheap right now. Adjusted for the CPI, gasoline is close to its historical mean, and far cheaper than it was in the 1980s. As soon as prices go up, which is about as inevitable as anything, then a general sense of crisis will come back. I did appreciate Bush mentioning energy in his speech, economics of ethanol notwithstanding. Just because energy prices are at a temporary lull doesn't mean we should be complacent. And food! People have no idea. Corn is $2.30 for a 45 pound bushel! Just think about it, that is crazy. When corn goes to $6, and then $10, then see how many people are talking about ethanol and bio diesel. Hyperbolic rises in cotton, sugar, and wheat are also on their way. Food prices will hurt even more than energy prices, especially for low income people.

When gloomy, my friend considers moving to Idaho. I'm not convinced Idaho is a better place to be than Seattle. No way. Living around all those red-state wing nuts? Yelling "FAG" at me from their pickups?

Of course, if the gulf stream breaks up, at the same time that oil peaks and the dollar collapses (note that these things will exacerbate each other) it may just be game over. But lets not get ourselves down about this. Hey what's fate is fate. Oh, I forgot: pandemic bird flu might be another factor that could wipe us out..

George Bush on biomass

I don't often agree with our faux-Texan prez, but when he said that sawgrass, (and other low grade, high cellulose biomass products) could reduce our dependence on liquid fuel imports by 75% by 2025, well I thought that was pretty absurd. So did this analysis from the Christian Science Monitor. But then I thought maybe Bush is right after all, but probably not in the way he was thinking.

First off, I think peak oil is immanently upon us. The moment when this becomes accepted as unassailable fact will come when Saudi Arabia announces that the Gwahar oil field, the world's largest, is in irreversible decline. This will be similar to Kuwait's December '05 admission that their giant field, Burgan, is in decline. Saudi Arabia's announcement, which is close at hand, I believe, will be the world-changing event. But no matter when peak oil crosses the line from conspiracy theorist, malthusian doom to simple, obvious global reality, by 2025, we should assume and plan for a critical energy shortage. This is George Bush's date, not mine. I believe that our crisis will come much sooner: probably by 2010 the USA will be in a state of semi permanent energy crisis.

But looking 19 years ahead to 2025, we will be importing no oil from the middle east, simply because the middle east will be running thin on oil. Nations can go from energy exporters to energy importers very quickly. Indonesia made the switch in 2005. If the Middle East exports oil, it will go to China. Byron King makes this point in his essay The 75% Solution. The point being that today biomass looks pretty scrawny in comparison to gasoline. By 2025, gasoline, and owning one's own car, will exist mainly in our memories. Gasoline will be available only to military and government elites. But some vehicles will need to keep running, especially trucks and tractors and trains. Diesel will be available for commercial use, but it will be very expensive, with limited production coming from Canadian tar sands. But contrary to the Christian Science Monitor's writer's article, you can run your car on biomass, and at times when fuel has been scarce, many people have done exactly that. The equipment is simple and cheap.

Look at historical examples of severe fuel crisis. In parts of the world, there was virtually no civilian fuel available during world war II. In Scandinavia, Russia, and Australia fuel was unavailable at any price. The way that people in these countries found most expedient to keep cars running, and, significantly, agricultural production moving, was to install simple wood gasifiers on their vehicles. These cars can run directly on wood chips, compressed sawdust pellets, charcoal, etc. Here's another example. And a Seattle Times article about a backyard welder who built a gasifier to make a wood burning truck.

So, I'm thinking even the paltry amounts of money Bush proposed would go a long way in refining and publicizing this simple, proven method for operating vehicles on biomass. I imagine high cellulose products like sawgrass, compressed into pellets, or wood chips made from brush wood, would be more efficient to burn in a gasifier than try to distill into alcohol. Or, high-cellulose materials can be made into charcoal to make a more powerful fuel. These high cellulose biomass sources do not require nearly as much cultivation or fertilizer as corn. Most importantly, a local energy economy can be made from such biomass sources without huge sums of capital. Small producers can manufacture wood chips and pellets. Small shops can make gasifiers and install them. If we find that it is hard to raise the capital to build fleets of gigantic LNG tankers and the terminals to recieve them, then we may find that small biomass producers are not only a good way to keep people and goods moving, but also a good way to employ people.

Unfortunately, Bush cares in no way for energy efficiency. The research cash he spoke of will go either as hand outs to politically connected agribusiness corporations, or publicists posing as scientists to spin crises in favor of the republican agenda.

Kuwait's oil reserves

Kuwait has let it be known, through the mouthpiece of an oil industry newsletter, the Petroleum Intelligence Weekly, that its oil reserves are less than half of what had been previously stated. Last week Kuwait possessed 99 billion barrels of oil. This week it has only 48 billion barrels. As Byron King points out in his newsletter Whiskey and Gunpowder, this amounts to a 5% reduction in global oil reserves.

Of course it has been suspected for many years that OPEC countries' oil reserves have been over stated by 50%. This is the first official confirmation. If Saudi Arabia follows suit, it will confirm (Saudi oil magnates' nemesis) Matthew Simmons' thesis that the Saudi kingdom is near peak also.

Why is it in OPEC nations' interest to restate their reserves now? Maybe because times have changed. When these countries overstated their reserves, it was a buyers market in oil. Oil producers were suffering from falling energy prices. A larger reserve base meant a larger production quota, and greater revenue.

Now things are different. All OPEC countries are finding it hard to meet their production quotas for light oil. This stuff has become extremely valuable all of a sudden. Countries that possess large reserves of it have to think about defending their territory against the possibility of invasion. It would be safer to emphasize how little oil a small nation has, rather than how much.

It has also become clear that faster production means that a smaller percentage of the entire oilfeild will be recoverable in the end. Slower production preserves the geological integrity of the oilfeild. Few countries now are trying to maximize their production. Nations are now trying to steward their natural resources carefully, not sell them off as quickly as possible.

Import dependant countries, like the USA, Japan, China, Europe are making increasingly desperate pleas for more oil production, which are mostly going unheard. China is backing up its pleading with very large cash and military protection offers. The USA is mainly backing up its pleading with threat of invasion. When asked, the Saudis typically announce that they will increase production, but they never do. Instead they offer heavy sour oil, of which there is a glut on the maket, and few refineries can process.

I bet more coutries will follow Kuwait's lead in restating official reserves this year.

strife at the plateau of oil production

Peak oil is not just about how much oil is produced, but also:
1. who gets it
2. who finances it, and in what currency

Strategic power is forcefully shifting east, to Russia, Iran and China. Jim Willie just wrote a killer essay on the geopolitics of oil. I quote Willie on why the USA cannot attack Iran to control its oil fields, like it did to Iraq:

The Iranian Oil Exchange challenges the Petro-Dollar. This time it is different. Iran aint Iraq. Iran has two big friends who have a good memory of recent heavy-handed dealings. When the United States invaded Iraq, established the reconstruction, and began to install a new government, it did so with little resistance. In the process two big events took place, not mentioned much by the lapdog US press & media. Russia got screwed out of multiple billion$ in Iraqi debt. China got screwed out of multiple billion$ in large energy contracts for Iranian oil & gas....

By enlisting Russian and Chinese assistance militarily, Iran has won some effective defense. Clearly, Russia is the key participant, but not without China supplying key Silkworm missiles themselves. Recall Putin is a master chess player. Russia recently announced the sale of world class missile systems to Iran. Be sure that overtaking Iraq was akin to taking the lunch pail from a 7-yr old boy sitting for a school bus. Overtaking Iran bears no resemblance to Iraq. Iran has over 70 million people, as opposed to Iraq's 23 million. Iran has no easy borders and no friendly neighbor for the US to base an attack. The "shock & awe" was mere target practice and an exercise of advanced weaponry on largely undefended sites...

If oil does not actually peak in the next five years, but production follows a bumpy plateau, the key question will be "who gets it"? If the USA gets less and China gets more, then there will be a major change in the relative prosperity of those nations. Also, Putin's Russia is becoming very strong, controlling most of Europe's access to energy.

If the worldwide banking and trading markets shift to Euros, which is something Putin wants, this could bring severe changes also. Our bankers would probably lend us enough cash to stay solvent, but require reductions in our defense budget..

innovation is overrated..

In the business pages I read companies bragging about innovation, ad nauseum. Their own innovation of course. Most ludicrous of all is Microsoft. Microsoft says innovation is their one true "core competancy". Bill Gates even says his position in the company is "chief innovator". Naturally companies can be expected to brag and bluster, but Microsoft innovative?

The problem is larger than an annoying business buzword. It is a philosophical assumption that innovation is always good, that there is no downside, that there is no cost nor drawback to innovation. A free lunch. Society, and particularly progress, depends on innovation. It is a freight train that can not slow down. If it did, then the unthinkable would have to be thought. The freight train of progress must, by definition, make the world a better place. Technology is widely admired. The myth is that it will make our lives easier and give us more free time. Like an ad for a handheld computer, showing a person in office attire using a gadget at the beach - technology has set the person free! The reality is exactly the opposite. Nobody goes to the beach more often because innovative technology has given them more free time. Innovation means working more hours, not less. We also assume that innovation is that proverbial rising tide that floats all boats. That everyone will benefit. But inconveniently, disparity of wealth is growing, not shrinking. The technocrats' answer is of course: more innovation.

We should be aware of what is lost with innovation. That is tradition. In America we are accustomed to despise tradition, we are so eager to replace it with something better, a more profitable, faster, bigger thing or way of doing. Accounting standards are a good example. Enron was among the companies that was applauded for innovative accounting in the 1990s. When Enron fell apart the innovation was relabled: fraud. The same thing might be said for fiat currency itself some day. It was a wonderful thing. Until it crashed. Then we might think there was a good reason that money was, traditionally, made from silver and gold.

I love it!!

"The market rout came as energy prices surged and as key technology stocks disappointed"
- MarketWatch

Not Shale Oil Again!!

I bet we'll be hearing more about shale oil, or Kerogen, this year. Canadian Tar Sand had a very profitable year in '05, thanks to a massive marketing campaign to promote Canada as the Saudi Arabia of the future. This year Colorado's shale will want some of that action. Really, all kerogen has going for it is that it is American. So, we can at least dream of energy independence. And some people will want to invest in that. I've thought for a while that it won't work, for a shortage of water, for one, and a very low return on energy.

Now Shell Oil has a particularly preposterous, and seductively innovative, plan to produce oil from shale. They intend to heat Colorado earth to 650 degrees F, from the surface to 1000 feet down, and let it cook for three or four years. This will turn the kerogen into light free-flowing oil! Lots of natural gas is also produced, which can be recovered, and many bi-products, which are mostly toxic. So that the oil doesn't escape (and pollute groundwater) they plan to construct a "freeze wall". This is a huge box of frozen earth that contains the boiling earth. They plan to do this for up to 1000 square miles!

Its hard to even imagine the environmental consequences of such madness. I read about this scheme in Dan Denning's Strategic Investment newsletter (I would link, but it is subscription only). My first reaction was that this would never work out, so why worry? But then I thought of all the people who are desperate to find the "next energy source", and the people who are desperate to achieve "energy independence", and the people who are simply desperate to get rich on any scheme no matter how stupid. And then I thought of how easily Shell and other oil companies will be able to raise billions of dollars just by making classy presentations (they will make presentations to everyone except the hapless residents of the shale country, who will have their land and health taken from them). And then the oil companies will have to do something with the dollars that they raise. They will have to go make a gigantic mess in Colorado. They will destroy what little, and very precious, groundwater there is in those high arid plains. Then naturally the whole thing will go bankrupt amid financial scandals.

So I just hope, as it becomes more obvious that we are facing peak energy, and we look to the future, and as our dollar starts its long final slide to irrelevance, that we do sensible things with the last of our capital and energy, not blow it on a dangerously idiotic shale oil boondoggle. Lets think about re-building America's rail system. There is a lot that we could fix in this country. No need to boil up Colorado.

Inflation in 2006

In the current Newsweek issue (January 9), Robert J. Samuelson says that 2006 will be a boring but moderately prosperous year IF nothing very bad happens to the US economy. Then he goes on to list 5 things that could derail the economy and send presumably it into recession. The five things are:

Housing goes bust

The dollar crashes

General Motors files for bankruptcy

Oil jumps to $85 a barrel

The yield curve inverts
He did not see the need to ponder what would happen if all five things happen in the coming year. The all seem likely to me anyway. Except maybe the last item - I have no idea if yield curve will invert (I have tried to figure this one out. All it says to me is that the Fed is not in control. They want to raise interest rates, but they can only raise the short term rate, and the long term rate, set by the market, remains stubbornly low). But a housing market bust? virtually certain. The re-finance industry will come to a complete halt. Oil going to $85? Also near certain. And if a dollar buys that much less oil, and the liquidity in housing dissapears, then yes, the dollar will fall.

There are some other dark clouds on the horizon that Samuelson didn't mention. War with Iran. This is looking more and more likely. Can there be anything more threatening? This would be the very worst thing at the worst time.

A dark horse that no one seems to be thinking about is that commodity price inflation will spread from oil to such basic goods as corn, cotton, and soybeans. For now people seem to take it for granted that grains and other soft commodities will always be available at very cheap prices. I mean $2.20 for 50 pounds of corn??? I think corn will double this year and then double again next year. And corn is used to make many thousands of products. Same for soybeans. For years now the prices of these commodities have been held down by globalization: cheap production could always be found somewhere, like Brazil, Eastern Europe, if not America or Canada. But now the key factor in agricultural production is fuel and fertilizer (which is linked to natural gas) prices. These costs are going up worldwide, giving a very stong inflationary push to the dollar.