America And Mexico Face Depletion

I've been listening to the debate over immigration and thinking something important is missing here. Basically I think that the USA cannot build a wall separating itself from Mexico anymore than England can separate itself from Scotland. Our two nations' destinies are closely tied together, and no wall can change that.

Anyone who has read my posts knows that I see things from an energy perspective first, and Mexico is no exception. Do Americans realize that Mexico is a major supplier of oil to the USA? In 2006 America imported more oil from Mexico than from Saudi Arabia. We bought 1.445 million barrels every day from Saudi Arabia, and 1.556 million barrels per day from Mexico. Source is the Energy Information Administration. Mexican oil powers our SUVs. Perhaps Americans could be just a little bit appreciative?

Most Mexican production comes from a single huge offshore oilfield: Cantarell, which supplies us with vast quantities of high quality light sweet crude oil. All this oil goes directly to American refineries on the Gulf of Mexico, mostly in the New Orleans area. This has been a very good deal for America. Because the oil was high quality, we were able to process it in our vintage refineries with out the major upgrades it would take to process heavy or sour oil. This means we get the refining profits. The oil is nearby, and not subject to threats or vulnerabilities from hostile nations, like passing through the Straights of Hormuz, etc.

Now the good deal is coming to an end. Cantarell is in decline, and at a rate much faster than even the pessimists anticipated. In 2006 production fell by 20% from 2005's level. This is a catastophic rate of decline, may soon plunge the Mexican state into chaos. Mexico depends on the cash from its oil production to keep functioning.

So, what would be the appropriate action for America? Bolt the door and watch TV, while Mexico has its crisis by itself? I don't think this would work. Remember globalization? Like it or not, the USA and Mexico are practically married. There is no possibility of divorce. We are stuck to each other. Another reason that we can't ignore Mexico is that we need Mexico just as much as Mexico needs us. We depend on that Mexican oil. We depend on Mexican labor. Our southern cities have huge Mexican (and other hispanic) populations, and those millions of Mexican Americans are simply not going to disappear. I simply think America and Mexico will have to face their crises together and solve their problems together. Mexico does have huge natural resources that could benefit both nations. I believe and open border, and work permit program would benefit both nations. One writer who senses the coming crisis is Dan Amoss, editor of an investment newsletter. He sent me a rather hyperbolic pitch by email, trolling for subscribers. I can't find it on his site, but I have taken the liberty of posting it here: The Dominoes of Doom Are Falling South of the Border. I certainly don't agree with all Amoss writes, but at least he does try to tie together the many scary implications of peak oil.

update: here is a news item that confirms my point that America's problems and Mexico's are inextricably linked: Border violence pushes north.
And another one: the current and ongoing housing and mortgage collapse will exacerbate all USA-Mexico tensions. Remittances from Mexican home building workers are way down:

Remittances are the financial lifeblood for millions of Mexican families and a crucial source of foreign exchange for their government. The $23 billion that maids, cooks, gardeners and others sent home last year — almost all from the U.S. — topped the amount that multinationals invested in Mexico. But fallout from the U.S. construction industry, which employs 1 in 5 Latino immigrants, is now rippling south of the border. Growth in remittances to Mexico has slowed to a trickle.

America's and Mexico's economies are fast decending into recession.

Sallie Mae Eaten by Private Equity

I can't see any rationale for Sallie Mae being acquired by a private equity firm. This is a sad example of a business deal that is perfectly legal, raises no eyebrows, and seems completely straightforward to many people. But to me it smells like a corrupt society. Not like Sallie ever did smell like a bouquet of roses.. Sallie Mae is the largest provider of student loans in this country, and it was a publically traded, for profit company with some vauge assumption of government backing. In recent years, Sallie has become more and more expansionist, agressively acquiring non-profit state run student load programs. Now, like most finance corporations that have expanded too fast in boom times and now are facing economic slowdown and recession, Sallie is finding itself over-leveraged. Being vulnerable, it finds itself the takeover target of a private equity group.

I can't think of much justification for for-profit educational loans. We should have non-profit, government sponsored student loan programs. A better educated society brings benefits to the whole nation. By far the most benefit comes from improving the education of the least advantaged populations. I would think this is obvious.

To me this brings up the whole debate between efficiency of government versus private enterprise. The prevailing center-right ideology states that private enterprise is always more efficient, and therefore creates a better stucture for society. I strongly disagree with this one sided view. For an example of non-regulated private enterprise gone berserk, look at our ludicrously bad health care system. IMO, niether business nor goverment is inherently more efficient. But some enterprises are suited for private and some for public ownership. Health care and education top the list of areas that should almost always be government run, sponsored, and regulated. Transportaion would come in third place in fields that benefit from goverment control and support.

A large public sector does of course require an efficient bureaucracy to function. Just as an efficient corporate sector requires good corporate governance to function. We must always expect and demand efficiancy from government and corporations. When we have such debacles as Enron, or the Bush aministration, we must hold the criminally incompetant perpetrators accountable.

Some things just don't lend themselves to fat profits, but are required for a society to function. Could a private enterprise have built the New York subway system? No way. The interstate highways? No way. Public transportation can be a long term asset to society. We should treasure these things.

The case for public education and health care is even more clear. If we require education to be profitable, it will not be long before only the rich will get educated. It is that simple. If health care must be profiable, only the rich will be healthy. We are already seeing this in the United States: we have an enormous gulf between rich and poor. We are a class-divided nation, unhappy, unprosperous and unstable.

Divide Up Iraq: The Get Rich Quick Scheme

The rising tide of bad news regarding Iraq seemed more like a tsunami yesterday. NPR covered the following stories:

• Scooter Libby lying badly under oath. (Does anyone believe him?)
• Independant contractor corporations (Blackwater) gone amok in Iraq, able to kill with no accountability.
• A fifth helicopter shot down in three weeks. Insurgents now may be able to seal off the Green Zone, preventing any meaningful mobility of US troops in the country. This maybe a prelude to a siege at some point. Will America be so stubborn that they they ride the war right out to their own Dien Bien Phu? It is telling that we don't even seem to know who is is shooting down our helicopters. If you don't know your enemy, what chance to you have of prevailing?
• Tragicomic tales of US dollars by the ton being flown into Iraq under Paul Bremer's CPA, and now it is revealed that some Americans stole some of the money. What a surprise.

Current thinking regarding Iraq is now saying that we'll need to chop up the country into at least three parts. I admit I've said as much in this blog. I mentioned it as the inevitable conclusion to our debacle. Now conservative investment newsletter writer Ned Humphrey says this in a recent post. To his credit, he does not see this is an easy or safe solution, in fact he sees more and more conflict ahead:

The trouble with this option is there would be no way to control the outcome after the division, any more than we could stop the looting after Saddam was toppled. There are substantial minorities of Sunnis in the Shi'a areas and vice versa. Baghdad is thoroughly mixed and would need to become some kind of internationally protected city-state, as the prospects of disentangling its mixture of residents is about as likely as the Pope converting to Islam.

And the Turks would definitely not be happy with the idea of an independent Kurdish state at their back, as that country's own ethnic Kurds would immediately want to join their brethren and cast off the yoke of Ankara.

The basic problem is that Iraq is not ours to divide, either from a moral or tactical perspective. America will not ultimately decide the fate of the Iraqi conflagration that it started. It is far more likely that Iraqis divide their country themselves, Yugoslavia-style, or with the so called help of Iran or Saudi Arabia. No one knows how the civil war will play out. But America will not be making the decisions.

Humphrey unfortunately goes on to suggest that Americans can make the best of a bad situation by investing in military stocks! I have to say this is a terrible idea, not just from a moral perspective, but also from financial one. The whole "who cares if we are losing Iraq as long as the S&P 500 is going up and gas is cheap" attitude, prevalent these days, astonishes me. Don't Americans know what it means to lose this war? It means we are going to have a market crash and massive inflation. Nations do not get rich by losing wars. Nations rarely get rich by winning wars for that matter. Nations can get rich by looting vanquished nations though, and Iraqis might well conclude that such is our intention, consistently supported by our actions from the beginning. When it come to nations, believe actions, not words.

We are paying some two hundred milllion dollars a day to lose this war. Of course a lot of that will go into the fat-margin profits of corporations like Halliburton, and other "security contractors" and armament manufacturers (one of Humphries' favorites is Force Protection Inc, a vehicle armoring firm) . And maybe the nominal price of stock in those corporations will appreciate. But it will not keep pace with inflation. Not by a long shot. I don't really have data or links to back this up, just a rationale and a hunch. War=inflation. That's the short version. During, and especially after, the Vietnam war we had huge inflation in America. It is coming back now. Britain had disasterous inflation after the second world war, even though they were on the winning side. Iraq was invaded largely to "secure" their oilfields. Now that oil is anything but secure, and that is sure to create inflation. Oil and the fate of our dollar are closely tied together.

I have another reason for not believing military stocks are a good investment (besides the immorality of war profiteering). I don't think there is a culture of honesty in the American corporations these days, and expecially not in corporations whose only customer is the US goverment. The system is rotten to the core. If there is money to be made it is not likely to trickle down the shareholders. I don't believe these are times to buy stocks. Stocks will peak this year and trend down for a long time. Just buy gold or silver instead, OK?

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.