Peak Oil - Energy and Capital

A Story Nobody Wants To Hear

As we prepared to tape the final segment of my interview with Aaron Task on the Yahoo Finance "Tech Ticker" podcast at their Times Square studio on Monday morning, the producer asked: If there is no hope of increasing the supply of oil from here, and prices are going to just keep going up, what changes did I expect in the future?

Watch Chris Nelder
on Tech Ticker

Part 1: 'Sky's the Limit' for Crude, says Peak Oil Advocate: Buy Drillers, Avoid Majors

Part 2: No Relief from $120 Oil Anytime Soon — or Ever, says Energy Expert

Part 3: The End Is Nigh: Peak Oil Proponent Forecasts Grim Future

We both laughed. Aaron flashed me a knowing grin. "Does she really want to know?" I asked him. Yes, yes she did. The tape rolled, and I tried to tell it straight.

Not only does it mean the end of personal transportation using internal combustion engines, I told him, but much, much more. It means the end of cheap air travel. It means we won't be able to keep living in the suburbs and commuting to cities. It means the end of globalization, such that we will have to relocalize our production of manufactured goods and food. Eventually, it might even mean that if you didn't grow it yourself, you won't have anything to eat!

Being an old friend of mine (we used to work together at Microsoft, 11 years ago), Aaron has heard it all before from me, and has read my book, so he accepted my perspective with a certain panache. But when we encountered the producer again after the taping, he asked if she found it shocking.

Yes she did, she said, "but by the time it happens, I'll be dead."

Oh, if I had a dollar for every time I've heard that reaction...

Afterward, I retired to my hotel room and flipped through CNN, CNBC, and the other business news shows. I shook my head as I watched the pundits worry over the future of energy, and bemoan the impasse in Congress right now over the energy bill. If you've been following the news, you know the score: The Republicans want to open the remaining federal lands to drilling, and the Democrats want the oil companies to drill on the leases they already have.

If you have read my previous articles, you know that both sides of that debate are wrong if they think their proposals can alleviate high oil prices. If we started drilling ANWR and the OCS now, it would take on the order of 10 years-about 7 years after the global peak of oil production—to begin producing a very modest flow of new oil, at which point it will be too little to make much of a difference in prices at the pump. And the oil companies don't drill on their existing leases because they know there isn't enough oil there to make it worth their while!

It seems we are still firmly stuck in denial about the future of oil. (See "Peak Oil: Living on the Banks of Denial.") The buzz over the new USGS report on Arctic oil is just the latest example. I read that report, such as it was, along with whatever additional analysis I could find, and found absolutely nothing there to get excited about. If and when that oil does arrive on the world market, it will probably be another modest flow of the most expensive and difficult-to-get oil the world has ever produced...and that will be decades from now.

The truth, as best as I can make it out, is an ugly story. If you're still alive in 10 years, you will see the end of life as we know it, and the beginning of a long transformation in which we learn to live within an energy budget that shrinks ever year. No amount of new drilling can change that fact. And the long-term trend will be toward higher and higher prices for oil, at least until a global depression sets in and reduces demand.

I know it's a story nobody wants to hear, but I tell it because I have always tried to tell the truth as I see it. I could be wrong, and I hope I am, but I have seen nothing yet to convince me otherwise.

We can blame each other until the cows come home for failing to plan for this day, but that will get us nowhere. All of the solutions are on the demand side now. Instead of crossing our fingers for some new supply of oil, we should be driving less, driving more efficient vehicles, and investing in renewable energy and electric transportation. That is truly the only way forward, as far as I can see.

A side note: Since I am a big believer in rail as part of the solution to the peak oil crisis, it was a great pleasure for me to take my very first inter-city train ride in America after the interview, from New York City to Baltimore. (I have spent most of my life on the West Coast, where there is so little inter-city train service that it almost never makes sense.) It was clean, quiet, comfortable, and cheaper than driving. Here's hoping that the rest of the country can have such an option as soon as possible!

I may have a story to tell that nobody wants to hear, but those who long for sweet assurances can always flip on the TV and find some commentator to put their minds at ease, like the one I heard on TV the morning of my interview, claiming that oil would soon be back at $80 a barrel. There will always be analysts out there willing to tell you whatever you want to hear-that Arctic oil will prove the peakers wrong, or that drilling the OCS will bring gasoline back down to a buck a gallon, or that Saudi Arabia will always ride to our rescue.

No doubt they will be much more popular than me, too. But I'm not here to be popular. I value credibility above all else.

Maybe that's why I had an old Shel Silverstein poem titled "The Perfect High" stuck in my head all day, in which a thrillseeker named Roy seeks out a guru named Baba Fats who was said to know the secret to the perfect high. But the guru tells him that he must find it within himself. This makes Roy furious, and he insists that the guru tell him the secret. So Baba Fats makes up a wild story about a mythical magical flower, and Roy goes off in search of it. The poem ends:

"It seems, Lord", says Fats, "it's always the same, old men or bright-eyed youth,
It's always easier to sell them some sh*t than it is to tell them the truth."

Until next time,

Chris

P.S. Although I do not believe that there are any supply-side silver bullets that might solve the peak energy problem, I do believe that oil, gas and coal producers will continue to see high demand for their hydrocarbons. That's why we created the $20 Trillion Report—to find the best plays and alert you to them. Check it out today and take your share of the profits while you still can.

Shadowboxing the Apocalypse

(An homage to John Perry Barlow)

If it weren't such a desperately serious situation, watching our fearless leaders trying to grapple with the energy and financial crises would be hilarious.

Anyone with more than $100,000 in their bank accounts must be having some sleepless nights right about now, as the failure of overextended financial institutions continues its brutal cascade. The federal seizure of IndyMac, and the potential federal intervention into Fannie and Freddie, have somewhat dampened the fallout, but Congress' response on Monday to Sec. Paulson's plan was tepid. As I have discussed in previous articles, by the numbers there is still a long way to fall before we hit bottom.

Merrill Lynch warned yesterday that the flagging faith in US financial institutions may hasten that long-dreaded day when Asia, Russia and the Middle East start dumping dollars and refuse to continue buying $700 billion of our debt every year to keep our listing ship afloat.

According to Brian Bethune, the chief financial economist at Global Insight, the situation is even worse: If the US Treasury does not push through a rescue of Fannie and Freddie within a mere two or three days, he said, it risks a financial crisis that spirals out of control. "We can't dither," he warned. "The markets can be brutal. We have to break the chain of contagion before confidence is destroyed."

Free-market champions like Larry Kudlow have argued that a $1.4 trillion Fannie and Freddie bailout would only increase the "moral hazard" risk, by allowing an unsound mortgage business to go even deeper into a hole of lending to try to rescue itself. Far too few of their holdings could be called a piece of moral land, they say, and I am inclined to agree on that. On the other hand, I don't think the economy can tolerate the risk of letting them fail.

In response to the crisis, Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson have been vigorously waving their magic wands before a weary band of bankers, but the Street seems unconvinced. The Dow Jones U.S. Financials Index has fallen 15% over the last week alone. (Of course, if you have been buying SKF, as I have recommended several times this year, you're up 30% over the same week, and using that to hedge your losses elsewhere in your portfolio.)

Meanwhile, President Bush continues to complain that he doesn't have a magic wand to make gas prices go down. I don't know who advised him to keep hammering on that talking point, but every time he says it, it just sounds dumber. We don't need magic wands, or for that matter bloody and costly attempts to secure by military means our access to foreign oil. What we urgently need is a sensible energy policy for the long run, and by that I mean a 100 year plan.

Unfortunately, I see very little of the kind offered from our energy cretins on the Hill. For your amusement and horror, I offer this little selection of their vast, bipartisan failure to come to grips with reality.

A Parade of Bad Ideas

I begin with Newt Gingrich's soft-money PAC, American Solutions for Winning the Future, which is largely funded by Las Vegas billionaire Sheldon Adelson, a major Republican donor and fundraiser. Their flashy new web site panders to the patriotic breast shamelessly, while promoting a "Drill Here, Drill Now, Pay Less" message. Apparently, they have gathered over a million signatures in short order on their petition to Congress, asking them to "act immediately to lower gasoline prices" by "authorizing the exploration of proven energy reserves" off our coasts.

Nice try, Newt. I assume that none of my readers were among your signatories. They know that any new drilling off our coasts could not produce any significant new stream of oil for at least 10 years, and would only slightly affect prices at the pump. Even the EIA has acknowledged that "any impact on average wellhead prices" would be "insignificant" after 2030.

For his part, President Bush lifted the moratorium his father placed on offshore drilling, saying that "as the Democratically controlled Congress sat idle, gas prices have continued to increase. The failure to act is unacceptable." Apparently he has forgotten that the Republican controlled Congresses that preceded this one, on his watch, also watched gas prices increase without actually doing anything about it.

Since Congress has its own moratorium in place, Bush knows that the gesture is purely symbolic, just as he knows that new offshore drilling would have no effect on prices until well after his successors are out of office. But it might reassure the gullible that he's trying to do something about oil supply, and score a few political points.

Seeking to score some points of her own on the issue, Senator Barbara Boxer (D-CA) expressed her "outrage" over the presidential reprieve, saying that the oil companies should drill on the leases they've already got. (We'll discuss the energy illiteracy of that claim in a minute.)

Next we have a strange and oft-repeated claim by a handful of Republican senators (and Dick Cheney) that we must start drilling in offshore Florida because the Chinese are already drilling off the coast of Cuba, and taking "American oil." In fact, there are no Chinese firms drilling off Cuba's coast, but according to the Washington Post, the claim is "just too juicy not to repeat."

The hype about oil shale must also grace our list. Bush and other boosters are trying to whip up public support for a new run at turning low-grade shale into liquid fuel (the fifth such attempt in our nation's history), touting the deposits as being three times the size of Saudi Arabia's reserves. As my readers know, such assertions are extreme exaggerations. The oil shale resource, while large, has never proved to be commercially viable and is unlikely to ever deliver more than a trickle of very expensive, synthetic fuel, which will have very little impact on American supply or prices while incurring as-yet-unknown environmental damage. Unfortunately, the appalling ignorance about energy that burdens most of America makes such wild claims useful political fodder.

On the other side of the aisle, House Speaker Nancy Pelosi struck her own pandering pose, claiming that the current economic "emergency" justified releasing oil from the SPR. Clearly, Pelosi is no more up to speed about the realities of the oil business than anyone else on the Hill. As I have explained before, the SPR is already far too small an emergency reserve, and should only be tapped in the event of severely disruptive actual shortages. It's bad enough that the Democrats were able to stop the filling of the SPR some months ago. Anyone who isn't in total denial about peak oil knows that trying to use the SPR to moderate prices is a terrible idea.

The Democrats, of course, have a growing list of terrible ideas on how to address the energy crisis. I'm sure it scores political points with angry voters to say they'll crack down on oil price "gouging" and excess speculation, but as I have written repeatedly, I don't believe either of those things are a significant factor in today's prices, if they're happening at all.

But the crowning idiocy of Democratic suggestions must remain the legislation that makes it possible for Congress to sue OPEC for price gouging, an idea so stupid that whoever conceived it should win a Darwin Award. In a way, I hope they actually try that some day. Maybe the blowback will slap some sense into them.

And so the shadowboxing continues, with both sides of the aisle feinting and jabbing against straw men, and getting us exactly nowhere in terms of real solutions. Each side blames the other for being in this predicament, while none dare whisper the one word that ought to be the first on the list: conservation. Our addiction to oil is too great to even talk about.

A silent war rages within the very breast of America. Will we continue to insist, with the mentality of a two-year old, that all the oil we want should be ours, that we have some birthright to endless growth and cheap energy? Or will we grow up, and realize that we're neither immortal nor wise, and that the world has real limits we have to live within?

Enough, Already!

While politicians do their level best to ensure that America is as confused as possible about energy, spreading their spins and racking up pander points, there are at least a few experts in the energy industry who are telling the story straight.

John Hoffmeister, former CEO and president of Shell Oil's US operations, told CNBC yesterday why he supported lifting the ban on drilling the outer continental shelf (OCS). Recognizing that OCS production is "not gonna make any material difference" in the short term, he noted that America has resisted developing those areas for 30 years, and that we're now "paying the price" for that.

He went on to explain that all of our options—including drilling for more oil and gas domestically, swapping out 200 million liquid-fuel burning cars for ones that run on electricity, and growing the 2% share of renewably generated energy up to a much more significant level—will take decades to achieve. But politicians, with their short term motivations, simply can't grapple with the long time horizons of the energy business.

Our 30-year failure to develop a sensible long-term energy policy, a period that has seen both Republican and Democratic presidents and majorities in Congress and a long history of shortsighted solutions, is ample demonstration of his point.

Regarding the Democratic assertion that the oil industry isn't using its existing leases, Hoffmeister remarked, "The industry is pursuing the leases it has, but to be blunt, the prospective nature of many of those leases is very low. And you don't go drill oil where you know it doesn't exist." That, I believe, is a true statement.

Hoffmeister explained why he chose to leave the oil business and found a nonprofit group called Citizens for Affordable Energy: to start "doing what's right in America." "Doing what's right in America is listening to the citizens that are in great pain," he said, "making the tough political choices to go after more oil and gas, and—and, as T. Boone Pickens would say, all those other forms of energy that are out there, and do it all."

That has been my position all along, because the way I tally the numbers, even if we do it all, and do it well, we're still likely to come up quite a bit short.

Decrying the "politics of partisan paralysis," Hoffmeister said "It's not helping the American consumer or the American economy one iota. We really have to look at this as an American problem. It's not a Republican problem, a Democratic problem...It's an American problem, and I wish the two branches of government would work together." He went on to say, "The great American public has said ‘enough, let's quit the political rhetoric, and get on with solutions.'"

I only hope that's what we're saying.

(To those of you who caught the references: hey now!)

Until next time,

Chris

Oil Speculation

Editor's Note:

While some of you may know Ian Cooper from past options trading services, his 4,500% cumulative gains of 2007, and gains such as these...

Fremont General September 2007 12.50 puts - 291% in 16 days
Lennar January 2008 25 puts - 279% in 40 days
Pulte January 2008 15 puts - 224% in 40 days
New Century January 2008 25 puts - 214% in 16 days
Centex January 2008 25 puts - 207% in 40 days
Countrywide January 2008 27.50 puts - 203% in 69 days
Thornburg October 20 2007 puts - 188% in 6 days
MGIC Investments December 35 puts - 175% in 80 days
Capital One January 2008 65 puts - 160% in 59 days
Accredited Home September 2007 7.50 puts - 141% in 4 days
Hovnanian November 2007 17.50 puts - 136% in 13 days
Radian Group August 2007 60 puts - 122% in 19 days
Standard Pacific September 2007 15 puts - 111% in 2 days
Autonation January 2008 20 puts - 105% in 49 days
New Century January 2008 25 puts - 89% in 1 day

...he's decided to launch a new options service, Options Trading Pit, which will look to profit from the market's demise and well as its upside.

In fact, he's been beta testing new strategies in the Options Pit blog, sitting with gains like these:

Expedia Inc. October 22.50 put: 189% in 31 trading days
Coca Cola Enterprises November 20 put: 271% in 31 trading days
Masco Corporation October 20 put: 92% in 27 trading days
Lehman Brothers Holdings October 20 put: 313% in 27 trading days
UBS AG September 22.50 put: 165% in 21 trading days
Walt Disney Company October 27.50 put: 10% in 2 trading days

Are gains like these easily attainable? You bet... especially in today's bearish environment.

Options Trading Pit launches shortly. Stay tuned.

Today's Energy and Capital: Why Oil Speculators are Not to Blame

Oil speculators have been blamed for skyrocketing oil prices... but it's not their fault.

It's a supply and demand issue.

Even Warren Buffett agrees. "In my lifetime, up until the last year or two, there's been a huge amount of excess supply available," he said. "We don't have excess capacity in the world anymore, and that's why you're seeing these oil prices."

Couple that with news that world energy consumption will rise 50% between 2005 and 2030, as demand in developing countries rises 85% and oil "worst case" scenarios become plausible.

But in a witch hunt against any one, or anything, responsible for the problems, speculators are taking blame.

Ask the airlines and they'll blame the speculators, too.

Northwest and Delta are among a group of 12 carriers asking Congress to address oil speculator issues, whom they still blame for rising oil cost.

The carriers even issued a statement, saying "We are urging our customers and employees to ask Congress to act quickly to curb speculation in the commodities markets. This speculation, while not solely responsible for the extraordinary rise of oil prices in recent months, continues to make the situation much worse — harming the economy and having devastating effects on our industry."

"For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities," the CEOs said. "To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers."

Sen. Joseph Lieberman and Rep. Bart Stupak, too, believe oil speculation has added some $70 to the cost of oil.

Lieberman wants to ban funds or institutions with more than $500 million in assets from betting in futures markets. Stupak introduced "The Prevent Unfair Manipulation of Prices Act," accusing Goldman Sachs and Morgan Stanley of market manipulation, even though he has no evidence of such illegal behavior.

Unfortunately, the assertion of speculation and manipulation theories doesn't hold up.

Even if you restrict the blamed speculators, it won't curb higher oil cost.

According to the Wall Street Journal, "the wild assertions about speculation and manipulation are defective, and completely unsupported by reliable evidence."

"For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market — the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices."

It's a fact. The run in oil prices is very painful for us all. But to focus on speculation as a culprit is misguided at best. The real culprit here is continued heavy global oil demand in the face of slowed production, supply disruptions, and a weaker dollar.

And if you need more of a reason for a rise to $150, $170, even $200, look no further than the Middle East.

Israeli-Iranian tensions over nuclear projects aren't doing much to help. There's a growing fear that in the event of war with Iran, the Strait of Hormuz (passageway for 90% of oil exported from Gulf producers) would be jeopardized. If that happens, we'd see an immediate oil super-spike.

Iran's Revolutionary Guards has already said it would impose controls on shipping in the Persian Gulf and Strait of Hormuz, which accounts for about 40% of the world's oil, if it were attacked.

Buffett and Big Oil Agree...

Big oil companies are agreeing with Buffett.

The heads of some of the world's biggest oil companies recently countered "claims that speculators were driving high oil prices, instead blaming a dearth of new supplies."

Executives from Royal Dutch Shell, BP Plc, and Respol YFP said "restrictions on where they can invest and higher taxes meant they could not help boost supplies as much as they might."

BP's CEO Hayward felt that oil speculation theories were a "myth," adding that supply-demand failures are the reasons for recent price hikes.

The Respol CEO agreed, saying, "The fundamentals in the industry are the significant reasons for having these prices."

Even Goldman Sachs and Chicago Mercantile Exchange Chairman Emeritus Melamed dismissed the theory of speculation.

The reason we're seeing higher crude oil prices is because demand for oil has risen significantly in the last few years, says Melamed. "the oil demand-supply equation in the world has changed. While there has been a massive 25 per cent rise in oil demand, the supply of the commodity has come down resulting in this current price rise."

So How do You Profit from Higher Oil Prices?

You buy domestic oil and alternative energy companies.

Making these companies even more attractive are the oil and gas discoveries and the fact that domestic explorations are more appealing given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

Listen, we're not economically pessimistic at Energy and Capital. But we won't put on the rose-colored glasses and tell you everything's fine. Our goal is to profit from the situation, which we've been doing in Energy and Capital, Pure Energy Trader and The $20 Trillion Report.

Good Investing,

Ian L. Cooper
http://www.goldworld.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of July 7, 2008.

IndyMac, a $0 Stock?: The Nail in the Coffin...
In my last position at a competing company, I recommended a buy on IndyMac January 2009 20 puts. And I wasn't the only one that saw the coming IndyMac disaster.

Lehman Breaks $20... Hands Us 143%: We nailed it... Plus, What to Watch for...
On June 3, 2008, Lehman had just broken $30 support before catching a wave of buying. But you'd have to be blind not to see that Lehman was in real trouble. It's why we recommended buying the October 25 put (LYHVE) right here in your free options blog.

Gold Moves Higher on Iranian Rocket Tests: 'Can Hit Isreal'
Gold regained ground on Wednesday as speculators resurfaced on news that Iran had test-fired nine long- and medium-range missiles, lifting the metal's safe-haven appeal in times of uncertainty.

Progress Or Complacency?: How The G8 Screwed Us Again On Climate Change
So the G8's global warming discussions are officially over. What did they decide? Well, they made a statement that calls for cutting global greenhouse emissions in half by 2050.

Investing in Solar Installers: The Other Side of Solar
It's fair to say that, so far, solar installers have been the red-headed stepchild of the renewable energy investment world. Their counterparts, module manufacturers and silicon suppliers, have been in a noticeably different boat. And rightly so.

Peak Oil Confusion - A Game Whose Time Is Up: Taking IBD to Task
Confusion breeds apathy, and that's not something we can afford anymore. I believe that the impending energy crisis is too urgent to allow misinformation about peak oil to go unanswered. So I am attempting to set the record straight.

Haynesville Shale: Two Stocks Rushing for Haynesville Shale Gas
Another week, another record. Hopefully by now you've gotten used to seeing record crude prices. As usual, we started to see a sell off after nearly reaching $145.85 a barrel last Thursday. This morning, crude dipped over six dollars a barrel before bouncing back over $141 per barrel this afternoon.

Investing in BBVA: Profits Across the Pond
MADRID, SPAIN: You can't blame Spaniards for playing to win. They're on a roll, with a European soccer championship and Wimbledon title in just the past few weeks. Now Spanish players are surging into games of chance, and their top opponent is the slowing economy.

ETF Options Trading: Make Another 58% as the World Goes Mad
Behind the unemployment stats, layoffs are surging, as corporate profits sink. According to the Wall Street Journal, UK homebuilders like Barratt Developments and Taylor Wimpey announced that, together, they'd cut 2,000 jobs.

Insiders Buy at 2-Year Lows
What's interesting is that the last time insiders bought, the stock ran from about $21 to more than $24 between March and April 2008. Hoping the stock will do the same off recent lows, we're recommending a buy. Double bottom support doesn't hurt either.

Peak Oil Confusion - A Game Whose Time Is Up

Pain at the pump is finally putting energy on the front burner in this election season, but media coverage of the issue has been fraught with misinformation.

I hate to say it, but I am beginning to think some of the confusion is intentional. From the news that Cheney's office has interfered with reporting on climate change science (what a shocker!), to the assertions of some pundits that there are 12 trillion barrels of oil yet to recover out there, to assertions by politicians that we can drill our way to energy independence, it's tough for the average person to get a real grip on the issues.

Confusion breeds apathy, and that's not something we can afford anymore. I believe that the impending energy crisis is too urgent to allow misinformation about peak oil to go unanswered.

So I am attempting to set the record straight.

For this week's Energy and Capital column, I am publishing a formal rebuttal to a May editorial on peak oil in Investor's Business Daily, which got the facts about peak oil-as I understand them-badly wrong.

It refers to a companion piece which has just been published, a "Peak Oil Media Guide" that I developed for the Association for the Study of Peak Oil - USA.

I hope my readers will find these two pieces helpful in separating fact from fiction about peak oil.

Until next time,

Chris

To the editors of Investor's Business Daily:

I feel compelled to respond to your editorial of May 28, 2008, entitled "Peak Oil: An Idea Whose Time Is Up." For a respected financial publication such as yours, I found your coverage reprehensible and rife with errors. I have to wonder if it was deliberately designed to confuse the public, or if the authors were merely deeply misinformed.

Our nation urgently needs to get up to speed on the realities of energy before we can have any sort of intelligent conversation about reforming energy policy. Articles such as yours do the public a grave disservice.

First, peak oil is a study, not a "theory." That is why the name of the world's top authority on peak oil is the Association for the Study of Peak Oil (ASPO), not the Association for the Theory of Peak Oil. The peak oil study is simply a scientific analysis and modeling of available data. More data might correct existing models, but there is no theory to prove or disprove. Likewise, politics plays no role in the scientific assessment of the ASPO's respected petroleum geologists.

Second, peak oil is not about "running out of crude," it's about the rate of oil production. You are correct "that one day the crude supply will effectively dry up," but that day, perhaps 100 years in the future, is not what the study of peak oil is about.

I will refer to the "Peak Oil Media Guide" as I address your remaining statements.

To begin with item 1, "It's not the size of the tank which matters, but the size of the tap."

Talking only about the number of barrels of oil that might exist somewhere, without also talking about the rate at which that oil can be produced, and when, is utterly meaningless.

You stated:

U.S. production is trending down again, but it's not because there's no oil. It's due to shortsighted policies that prevent the industry from drilling for the almost 100 billion barrels of crude known to be under Alaska's Arctic National Wildlife Refuge and beneath the oceans just off of America's coasts. It's because politics and political correctness block the development of Big Sky state oil shale fields, where as much as 2 trillion barrels of crude, by some estimates, sit idle.

Here's the reality.

Right now, the world is producing between 86 and 87 million barrels per day (mbpd) of oil, just 2 mbpd more than it did in 2005. The world has reached a bumpy production plateau, and will likely continue on it for another three to six years before beginning the terminal decline of global oil production.

Your numbers on oil are also questionable:

But the impact of those nations on crude prices in recent months is suspect. Global oil consumption grew 2% in the first quarter of this year over the first quarter of 2007, while production increased 2.5% over the same period. On a daily basis, roughly 85 million barrels of oil are consumed across the world, almost exactly matching the amount produced each day.

You don't state your sources, but according to the IEA Oil Market Report of May 13, the most recent publicly available global data I am aware of, the numbers are quite different:

Global oil consumption grew 0.81%, not 2%, from 85.9 mbpd in Q1 2007 to 86.6 mbpd in Q1 2008.
Global oil supply in the grew 1.81%, from 85.6 in Q1 2007 to 87.2 mbpd in Q2 2008. However, April supply fell 0.4 mbpd to 86.8 mbpd, due to declining output from OPEC and the FSU, plus North Sea outages.
Average demand in 2008 is projected to be 1.2% higher than 2007.
According to this data, supply is a scant 0.6 mbpd higher than demand.

If you will refer to "Figure 3 - US Oil Production 1900-2005," which shows the historical peaking of U.S. oil production, perhaps you can explain why you would dismiss the U.S. peak with a comment like "Yes, domestic output has peaked. But it peaked at a level 13% above what Hubbert predicted. And the peak wasn't followed by a falling-off-the-table decline. Output rose after a temporary slide."

Yes it did...and then resumed its downward course on a relentless, 38-year history of decline, as the chart clearly shows. Who are you trying to fool?

As for the fact that U.S. production peaked 13% above Hubbert's prediction, I say, "close enough." Hubbert also found that if the recoverable amount of oil in the U.S. were increased by one-third, it would only delay the Lower 48 production peak by five years. A similar calculation for world production would produce similar results. Again, when it comes to the question of peaking, flow rates are far more important than reserves.

The decline of U.S. oil production was not the result of politics, nor can any political decisions now significantly alter its future course. It is simply the nature of petroleum extraction that it ramps up to a peak and then declines, in a rough bell-curve shape. This observation has been made in thousands of oil fields (and oil producing nations) worldwide, which is why Hubbert's model continues to be respected.

If you will refer to item 2, "We are now at, or ‘close enough' to the peak," you will note that global oil production has plateaued. It may continue to rise at a negligible rate for the next couple of years, but no major increases are possible.

You seem to be among those who are laboring under the mistaken belief that the U.S. can somehow drill its way out of dependency on foreign oil, and that increased domestic production could the relieve today's "high" prices.

Nothing could be further from the truth.

In fact, the U.S. uses about 20 mbpd of petroleum, and produces about 7 of that. The other two-thirds is imported because there is no possible way that we could produce another 13 mbpd domestically, even if we drilled every single place that might have oil.

Regarding the potential of oil shale, please refer to item 4, "Oil shale: the fuel of the future...and it always will be." After four decades of fully authorized, commercial, even subsidized attempts to develop oil shale into a usable fuel, no one has ever been able to make it economically feasible. Part of the reason for that is that it's not even really oil-it's kerogen, an immature precursor to oil, and it takes an enormous amount of energy to turn it into something usable.

It remains to be seen if the energy returned on the energy invested (EROEI) for oil shale is high enough to even make its production worthwhile. Even if it does prove to be viable, it is unlikely to ever produce more than a modest flow (though perhaps a very long-lived one) of extremely expensive, synthetic oil. It is not some quickly available "two trillion barrels" of "crude," as you asserted, and it will require an enormous amount of energy, probably from coal, to produce.

As for the oil reserves of ANWR and the continental shelf, please refer to item 5, "ANWR and the continental shelf are no panacea." The flow rates from these resources cannot be known until they are produced, but we can make ballpark estimates.

Preliminary estimates by the USGS indicate that ANWR would likely only produce around 750,000 barrels per day at peak. More importantly, it would take 10-20 years to achieve that peak production level.

If all limits on domestic drilling were removed, including ANWR, it could only increase US oil production by a maximum of 2-3 mbpd. It would come online slowly, and given the loss in global oil production by the time it arrives, the additional production from these remaining domestic reserves will be underwhelming. Together, they could amount to perhaps 12-15% of our daily usage today, or about 3% of world production.

However, if we are currently on the peak/plateau of global oil production, and production starts to fall within the next five years, then 10 years from now, at a reasonable average 2.0% rate of net depletion, world oil production will be down 11 mbpd-about 12%-from where it stands today. Therefore any additional domestic production could only offset perhaps one-quarter of the global production that will be lost!

It should be obvious, after a close look at the data, that at the rate that the U.S. currently uses oil, the chance of producing all of our own needs domestically is zero.

The potential impact of increased domestic drilling on oil prices is also minimal. Since oil is traded globally, and the U.S. imports about two-thirds of the oil it consumes, the price of the oil we produce will always maintain parity with global prices. With the global supply and demand balance as tight as it is for oil, natural gas, and coal, increased production in the U.S. would make a negligible difference in U.S. gasoline prices.

The U.S. Department of Energy estimates that drilling in ANWR would only reduce the price of gasoline by less than four pennies per gallon-20 years from now!

The slight declines in petroleum consumption over the past year in the U.S. and Europe have been more than offset by the increasing consumption of countries in Asia, South America, Russia, and the Middle East. Net global consumption is expected to increase another 1 mbpd this year.

Indeed, we should recognize, as the Saudis have, that the oil we still have will only become more valuable as time goes on, and it makes sense to save some for future generations. Oil is incredibly useful and energy dense, and we use it altogether too profligately today. Burning every last bit of what remains as quickly as we can makes no sense at all. I further submit that it is irresponsible and immoral to attempt it.

One of the most glaring errors in your analysis was in misunderstanding depletion. I refer your attention to item 7, "Depletion is relentless."

The concept is simple: Oil production first must make up for the depletion of mature fields before any net additional oil can be counted. It's like pouring water into a bucket with a hole in it. The background global decline rate is generally accepted to be 4.5 - 5%.

Anyone familiar with a balance sheet should understand this concept, but you missed it when you said:

Production over the next two quarters is projected to continue rising (3.3% and 4.1%, according to estimates from Citigroup), while demand is expected to grow at a slower 1.6% pace over the next six months.

A net global production increase of 3-4% has not occurred in several decades, nor is it conceivably possible in the future, let alone the next six months, given what we know about the projects that are under way.

Clearly, you confused "production" with net production. The world's net production over the next six months would be lucky to manage a 0.6% increase, after accounting for the background decline rate.

You point out: "World output is expected to rise from 85 million barrels a day today to 110 million barrels by 2015, according to the International Energy Agency," but your information is out of date.

Surely you are aware of the Wall Street Journal's article, "Energy Watchdog Warns of Oil-Production Crunch," published on May 23, 2008, about a week before yours? It previewed the IEA's upcoming report in November, which will announce the results of their first detailed study of the depletion rates of the world's top 400 oil fields. That study has prompted them to reduce their estimate to 100 mbpd by 2015.

I should also point out that the IEA has lagged well behind other knowledgeable analysts who have consistently demonstrated why the IEA's past projections could not be obtained, and who are now of the opinion that global oil production is unlikely to ever exceed 90 mbpd.

I must emphasize that no political considerations, or faith-based economics, are needed to understand the available data and the models. The mathematics are quite clear.

Finally, I must address your quote from Peter Jackson of CERA, who said, "The 'peak oil' argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future."

I respond that CERA's projections of future oil production have been far off the mark for about the last five years straight. If anyone's analysis is faulty, it is theirs. The ASPO's has come much closer to reality. ASPO-USA has directly challenged CERA to back their projections with real money; so far, they have declined to respond.

CERA is correct, however, that faulty analysis could "distort critical policy and investment decisions and cloud the debate over the energy future." I beg you to consult more reliable authorities than CERA for that very reason. They have a lovely story to tell; unfortunately, it's wrong.

I hope you will explore the information I have provided here, and avoid making such fundamental errors in your future coverage of the oil markets, and of the study of peak oil.

Sincerely,

Chris Nelder
Energy Journalist

A New Paradigm

It was a wicked, wretched June for the Dow, which posted its worst performance for the month since the Great Depression.

Oil prices setting record high after record high, while the dollar sinks ever lower, have put the hurts on the whole economy—except for commodities and energy, which are the only two asset classes I have promoted in these pages.

It's not that I'm a genius investor or anything—I assure you, I'm not. All I do is read the writing on the wall, and tell you what I think. It's a surprisingly rare thing to do among Wall Street pundits, who seem to prefer the safety of historical patterns and chart analysis to actually looking around them.

So you have to look past the talk about how all those beaten down stocks in tech, retail, and luxury items are good buys.

They sure are: Good bye house, good bye car...

What we have here is a new paradigm. It's time to throw out the old investing playbook and make a new one.

Rather than being safe ways to play the market, index funds, diversified portfolios, momentum trading strategies, and technical chart analysis are now more likely to lose you money than increase it.

Want some proof? Here are the top-performing diversified U.S. stock-fund categories, according to MarketWatch:

Category	Q2 Avg. Return	YTD Avg. Return
Midcap Growth	5.2%	- 8.3%
Small-Cap Growth	4.2	- 11.3
Midcap Core	4.1	- 6.0
Multicap Growth	2.0	- 10.5
Large-Cap Growth	1.8	- 10.0
U.S. Diversified	0.6	- 9.7

Yes, that's right, the top performing stock funds are down 6-11% on the year. As for the major averages, they're down 12-14% this year.

A typical Wall Street pundit, trying to paint a happy face on an abysmal market, might write up the headline as "Funds beat the indexes in 2008!"

But that's not the kind of gruel we serve around here.

A Perfect Storm

Regular readers of my column know the real score: We've got a perfect storm on our hands.

As more and more of one's income is eaten up by the basic needs of food and energy, it leads to further dependency on credit, which increases the likelihood of credit and mortgage default, which further hurts the financial sector, taking down the broader markets and putting the economy in an increasingly worse position.

Oil prices are causing inflation across the board, from food to everyday goods, and by "inflation" I mean prices for everything going up, not some geeky Austrian-school definition of it.

Part of the reason oil keeps going up (apart from simple supply and demand) is that the Fed has devalued the dollar in order to stave off a financial crisis resulting from the subprime meltdown. But if the Fed tries to prop up the dollar now, and raise rates, it could bring an already-down economy to a standstill. So by averting a crisis of confidence in the banks, they brought on a crisis of stagflation for the entire economy. As the old saying goes, if the only tool you have is a hammer, the whole world looks like a nail.

The fact is, the Fed is whistling past the graveyard. Or sticking their finger in a leaky dike. Or whatever metaphor you like.

While most investors are shaking their heads in confusion and dismay over a recession that just won't go away, it all makes perfect sense to those who really understand the implications of peak oil.

I hold a very simple thesis: Without an ever-growing supply of cheap and plentiful energy, the old investing strategies simply don't work anymore, because the markets don't behave as they should.

In fact, record high oil prices have clearly failed to bring adequate new supply to market. Consequently, oil and commodity prices stubbornly refuse to revert back to the mean, as a technical analysis says they should.

A Very Nasty Period

The trends should be clear enough to anybody who reads the news.

Transportation is on the ropes. The Big Three automakers are posting huge losses after being asleep at the wheel for years, continuing to pin their futures on big trucks and SUVs even as global oil production flattened out and the peak oil story started to unfold. Now new and used car dealerships are saddled with row upon row of gas guzzlers nobody wants, and American-made vehicles with European fuel economy are nowhere to be found. It's no surprise to me that Chrysler just shut down an assembly plant, and I expect more bad news yet from the American automakers.

The airline sector is going down in flames, with fuel prices destroying the bottom line. (See my article of last month, "Peak Oil and the Rail Revolution - Say Goodbye to Cheap Air Travel.")

Truckers are trying to strike their way out of losses due to skyrocketing fuel costs, but if they can't pass on the higher cost of their fuel to the buyers of the goods they haul, which is hard to do in a declining economy, then they're going to simply run out of road.

The financial sector is down 20% on the year, and it ain't over yet, not even hardly. Hedge fund manager John Paulson believes that we're only $360 billion of the way through a $1.3 trillion writedown from the credit crisis.

Oh, yes. The subprime mess was just the beginning. Now we're getting into the option ARM resets, where borrowers have a choice about how much to pay off each month. Merrill Lynch estimates that the losses from option ARMs could add another $100 billion to the $400 billion in mortgage and subprime related losses. And after that, we'll likely see another wave of personal credit defaults, leading to yet another fat writedown for the banks.

On June 18, the credit strategist for the Royal Bank of Scotland said, "A very nasty period is soon to be upon us - be prepared," and warned that the S&P 500 could tank to 1050 by September—a 28% drop since the beginning of the year. That means that all of the gains made by the index's component companies since the end of 2003 would be wiped out.

Retail, luxury goods, tech, travel, entertainment...all in the dumper. Want a good way to hedge against recession? Pick the weak companies in any of those sectors, and short them.

Yesterday, the Dollar Thrifty car rental company blamed its poor 2008 performance on "tough operating conditions" as if this were some unexpected, nasty bump in the road, but I call it an entirely predictable result of peak oil.

Likewise, it should have been no surprise to anyone who's paying attention when Starbucks announced that it will close 600 stores, cut 12,000 jobs, and halve its expansion plans. When people can't afford to fill their tanks just to get to work, a $4 cup of frothed coffee-flavored milk just doesn't rank on the priority list.

But energy and commodities? Ahh...now there's a different story.

Energy Stocks: The Only Way to Make Any Money

In a CNBC interview on May 29, Matthew Simmons, one of the world's top energy investment bankers and a proponent of the peak oil study, explained his investing strategy. "I have a very significant portfolio that I've built up over the last 25-30 years in energy stocks," he said, "because I think it's the only way that anyone's going to make any money."

I couldn't agree more.

The investing game has changed, and those who realize it now have an opportunity to jump on the greatest investment event of the century. The growth potential for renewable energy in particular, and the associated technologies of the future, seems nearly limitless. After decades of investment and research into renewable energy, it currently accounts for only about 1% of the global energy mix, but by the end of the century, it will have to be closer to 100%.

We should expect prices for our most basic of needs, food and energy, to continue to rise until the supply and demand equations are back into balance. And it looks to me like that will be achieved mainly by demand destruction, which could take years to play out. This bear is going nowhere.

Meanwhile, energy and commodities, including agricultural commodity ETFs, are doing very well this year even as the rest of the market goes south. (For my previous recommendations in these sectors, see the Related Articles section at the bottom.) Along with traditional safe havens like gold and silver, bonds, T-bills and the like, they're really the only place to be right now.

But if you want to do really well, then you need to have a stake in some of the choice energy picks we have selected for the $20 Trillion Report.

Until next time,

Chris

Energy and Capital

Peak Oil

"What is peak oil?"

I distinctly remember the last time a reader asked me that question, I tried to offer him a solid answer. Before I wrote back, I couldn't help wondering how many people really understood what peak oil was. Back then, oil barely broke past $90 a barrel and we were being laughed at for assuming $100 a barrel would soon be considered 'cheap'.

Anyone still think $90 a barrel is expensive?

Over the weekend, the peak oil question appeared again in my email. This time, however, it was from more than a dozen of my Energy and Capital readers. I can only assume that as peak oil finally falls under the global spotlight, I'll continue getting the same question.

So in honor of those of you new to peak oil, here's a chance for you to catch up.

Peak Oil

Believe when I say that we could talk for months about the various aspects of the peak oil issue. For the sake of our newer readers, we'll stick to the basics.

Simply put, peak oil is the point when global oil production reaches its maximum rate. We're not talking about the total amount of oil left in the world (and I can't begin to tell you how many people have said to me with a straight face, "The peak oil theory is a bunch of garbage, there's trillions of barrels of oil left underground.").

The problem isn't how much oil is left, but rather the rate at which we can produce it.

If we were somehow able to put every drop of oil left in the world into one gigantic barrel of oil, yet were only given a tiny cup to draw out the oil, we'd be in a bit of trouble. Sure, the oil is sitting right in front of us, but we would be unable to get it.

Now, if I had to pinpoint when peak oil was announced to the world, in a heartbeat I would say, "March 8, 1956."

That was the day M. King Hubbert stood in front of a crowd at the Plaza Hotel in San Antonio, Texas and delivered his ominous speech. During the speech, Hubbert predicted that U.S. oil production would in the early 1970s.

You can imagine the response. After all, U.S. production that year was higher than ever before. But as you can see below, U.S. oil production peaked in 1970:

Although new unconventional plays like the Bakken formation in North Dakota are experiencing "a good old-fashioned oil boom," I doubt it will be enough to pick up all the slack. Don't get me wrong, dear reader, there's a lot of oil over there, and you can bet that producers are going to go after it. Actually, according to the Energy Information Administration (EIA), it's one of the few areas where domestic production is growing at a strong pace.

But peak oil in the U.S. is obviously in the past. Today, experts are predicting that global peak oil is right around the corner (a few even believe we've already passed it). Unfortunately, predicting the exact timing of global peak oil is a little tougher than you'd think.

What's the problem?

For starters, approximately 90% of the world's oil reserves are held by state run companies. It's kind of hard for me to watch Congress go after the major oil companies when those publicly traded companies only hold about 6% of the world's proven reserves (and don't even get me started on the ridiculous idea of suing OPEC, either).

If you made a list of the largest oil and gas companies in the world according to proven reserves, how far down do you think you would have to look until you recognized a company that isn't nationalized?

Unfortunately, most of the top oil producing countries consider their oil data a closely guarded secret, and without proper field data, all we can do is guess.

Then again, how can you not be skeptical of OPEC after they boosted their reserve numbers. Here's a look at one of my favorite examples of how shady OPEC reserves are:

Some countries managed to double their reserves practically overnight! Iraq even managed to significantly boost reserves twice in a five year time span.

Now let's take field decline into account...

Depending on who you're listening to, the average decline rate is between 4.5-8%. Not only do we need to find more barrels to make up for growing demand, but also the millions of barrels from field decline. Even taking the conservative rate of 4.5% (from CERA), that's still a considerable amount of oil.

Approximately 94% of our known oil comes from just 1500 giant and major oil fields. The problem, however, is that we aren't finding those giant oil fields anymore. In fact, discoveries of giant fields peaked back in the 1960s.

Whenever you hear about a massive discovery, there's always more to the story. Take the Tupis discovery off the coast of Brazil, for example. That field is going to take a long time and cost billions of dollars to develop.

Peak Oil Investing

You don't need to be an economist or geologist to realize that oil prices are inevitably heading higher. When the world is consuming 87 million barrels per day, yet it's stuck producing 85 million barrels, the price jump shouldn't come as a shock.

Now, I only scratched the surface of peak oil (like I mentioned earlier, this topic could go on forever). Next week, I'll give you a reason why the doom and gloom side of peak oil shouldn't get to you. The reason? Let's just say, peak oil is going to open up a number of investment opportunities for investors like us.

Until next time,

Keith Kohl

P.S. Even though U.S. oil production has been declining for over three decades, it doesn't mean you need to throw in the towel just yet. I know that most of my Energy and Capital readers have had tremendous success investing in the latest Bakken oil boom. If you're interested in joining them, you can learn more about the $20 Trillion Report here.

Energy Shortage

You can feasibly make an argument for recession, but then again you can get your head chewed off by those sticking by the two quarters of negative GDP definition.

Recession... Depression... Inflation... the arguments have raged for months. But the only thing many can agree upon is that our economy is slipping into further decay.

Unemployment just spiked to 5.5% for May - the biggest monthly increase since 1986, further proof of a dwindling economy, troubled by job scarcity, and continuing housing, credit and financial issues, coupled with higher energy and food cost on over-stretched paychecks.

The news only served to bolster oil strength, as the dollar weakened.

And, unfortunately, it'll get worse.

We will see $200 oil

Up 28% in five months, and more than 94% in a year, some investors think it may be too late to buy energy.

They may have thought the same at $80, $90, or $100... even $125. But it's the only real way to make money these days. Oil's going higher.

As much as Americans would like to ignore $150 to $200 oil forecasts, growing numbers of forecasters are still sounding the alarm.

Jim Rogers just joined that list, saying the price of crude oil has "years to go" as sources are dwindling. "I know that unless someone discovers a lot of oil, it can go to $150, $200'' a barrel, Rogers said. "The facts are the world is running out of known oil reserves.''

Morgan Stanley says prices could reach $150 in a month, as millions of Americans go on vacation.

Asia demand for oil is soaring.

Workers at Chevron in Nigeria may strike.

The dollar continues to fall.

Israel's transportation minister Shaul Mofaz has announced that Israel will have to attack Iran if it "doesn't abandon its nuclear-development program." That move alone could risk eventual damage to the Strait of Hormuz, resulting in catastrophic oil spikes.

And, according to Chris Nelder's It Takes Two to Contango,"Global demand for oil is still greater than supply, and we believe that it will continue to remain so (with perhaps a few short periods of easing), so we think we'll be dancing the contango for a good long time to come-at least until global demand destruction sets in.

As for the conventional wisdom on the Street, Lehman Brothers and others are convinced that prices are now "anomalous" and that oil is an asset bubble. They believe that global supply will increase faster than expected in the next few years to resolve the tension, and for a while that will probably "talk down" the price of oil.

But I think they're wrong. Non-OPEC supply in particular looks terminally broken to me, and any growth in OPEC supply is dubious, at best. That means you've got a buying opportunity developing here, while the market is underpricing the future of oil."

So how do you profit from it?

You buy domestic oil and alternative energy companies.

Making these companies even more attractive are the oil and gas discoveries and the fact that domestic explorations are more appealing given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

Good Investing,

Ian L. Cooper
http://www.energyandcapital.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of June 2, 2008.

Gold Mining in Brazil: Magellan Minerals Reports Final Brazilian Gold Results
Believe it or not, the Brazilian equivalent to the Dow Jones has skyrocketed 306,622% in the past 15 years alone.

India Benchmark Gold ETF: India Gold ETFs Held 4.57 Tonnes in May
Physical gold held by the exchange-traded funds (ETFs) listed on the National Stock Exchange of India peaked to the highest level ever at 4.57 tonnes during May.

Consumer Confidence Hits 28 Year Low: Inflation Takes its Bite
Here's more news from the consumer front. Consumer confidence has fallen to its lowest point since 1980. Here's the skinny.

Masco Chairman Gets Bullish: You may want to ignore him, though
Lumber and wood producer Masco Corporation (MAS) is seeing its third day of call option buying activity. But don't be so quick to buy.

Energy Efficient Transportation: How Peak Oil is Transforming Air Travel
With new energy efficient technologies being employed almost daily, we see a niche where smart investors can make serious money.

It Takes Two to Contango: Pullback in Oil Is a Buying Opportunity
A few readers have asked about the meaning of a term I used in my last column: "contango." So this week, we'll delve into the murky world of oil futures trading.

Canadian Investments: Canadian Economic Contraction Means Buy Now
It's part of a political tug-o-war that international investors must understand if they want to make money from Canadian investments.

Coal Production: Why There's Further Upside for Coal Stocks
While coal supply is bad for China, it's great news for U.S. coal companies, which are predicting that global coal demand, will outstrip supply by 25 to 35 million metric tons. Coal consumption could rise 74% by 2030. India alone is expecting for its current annual demand of 460 million metric tons to quadruple by 2031. That's great news for coal company earnings potential.

Investing in Nuclear Energy: Cashing in on Cap and Trade: A Nuclear Power Surge
Whether you call it a "cripple and rob" or by its real name, the "cap and trade" legislation currently being debated in Congress does have a certain inertia of inevitability about it.

Insider Buys More... Follow Him.
What's not to like? The Chairman and CEO just bought another 600,000 shares between $52.95 and $54.10, and he's been a steady long-term buyer.

The Tipping Point in the Peak Oil Debate

Those of us who have watched for the inevitable arrival of the peak oil crisis have been waiting for years for the day when we no longer had to fight for the acceptance of the idea, and could start getting on with the hard business of what to do about it.

And then, just like that, it happened.

Like a chorus line turning in unison from left to right, the media and the financial markets turned and embraced the notion of peak oil last week.

For convenience, let's call it Memorial Day, 2008.

CNBC devoted a whole day to peak oil coverage, allowing some in-depth discussion of the issue possibly for the first time. In the evening, it broadcast a special called "Oil Crisis."

Billionaire hedge fund manager and oil man T. Boone Pickens said he saw oil going to $150 this year, and this time, was widely quoted in the financial press. (Check out this excellent interview with him from the Milken Institute Global Conference 2008 in April.) He put the reasons behind rising oil prices plainly:

"They've got to go up, because the people that have the oil want it to go up. They're running out of oil. They're going to have to have—85 million barrels a day is all the world can produce. The demand is 87 million. It's that simple. It doesn't have anything to do with the value of the dollar. It's a fact of supply and demand. That's it."

While we might politely disagree with the legendary oil investor about the dollar part, in terms of the overall trend being about the fundamentals, he was spot-on. He took a 14 percent loss in the first two months of this year by shorting oil and natural gas, and quickly learned from the error to get long again and back into the black.

Goldman Sachs analyst Arjun Murti, the only major investment bank analyst who correctly predicted oil over $100 last year, said that oil could breach $200 this year, and $150 was very likely. Again, this time, Wall Street sat up and took notice instead of laughing.

In the last couple of weeks, when I talked about peak oil in my radio and TV appearances, I didn't get shouted down immediately, or dismissed for holding a "controversial theory." Instead, they actually listened to hear what I had to say next.

In an interview with CNN radio last week, I think the host was rather shocked when she asked me if recent predictions of $12 gasoline in the next few years could happen.

"Easily," I said, "easily." And then explained why peak oil means that prices will have to keep going higher as long as global demand continues higher, because supply appears to be maxed out. Even as demand in the developed world declines due to price-induced demand destruction, the red-hot developing economies of the world are more than making up for it.

And you could have heard a pin drop when I explained that "there are no supply side solutions to peak oil" to another radio interviewer last week.

The dialogue didn't shift because pundits suddenly understood the importance of flow rates, or because the data on reserve estimates suddenly became clear.

It was the price that did it.

With oil and gasoline making an almost a unbroken string of record-breaking prices since the start of the year, the problem finally got the attention of the media, and now they are grasping for answers. Reaching the $130 mark was apparently the last straw.

There is still much confusion over why oil prices are so high. Some blame speculators, even though the ultimate holder of a futures contract must take delivery of the oil for use in a refinery. Some still point to a "terror premium," even though oil prices have continued straight up as geopolitical events come and go. Others vastly overrate the importance of the declining dollar, or the latest inventory numbers, or pronouncements from OPEC.

At least nobody is claiming that oil will go back to $45 a barrel anymore, or that new supply in the next few years will somehow resolve the tension with unflagging global demand. Oil futures have gone back into a contango mode, indicating that fears about supply have gripped the market, prompting the Financial Times to report last week that "peak oil views" are now influencing oil prices.

IEA's Bombshell

As the Street grappled with the new reality of oil price, the Wall Street Journal dropped a bombshell that reinforced the supply question decisively. They previewed the International Energy Agency's upcoming report, which won't be out until November, on the world's top 400 oil fields, including their individual depletion rates.

The bottom line was a zinger.

For the first time, the IEA admitted that the depletion of aging oil wells, combined with the dampening effect of skyrocketing costs on new field development, means that the world will have a hard time reaching 100 million barrels a day of production within the next two decades.

Their previous estimate from only last year was 116 mbpd by 2030, which was backed up by similar reports last year from the EIA and the National Petroleum Council.

Their projected supply curves are now sharply reduced, while their global demand projections continue to show about a 1.5% annual rate of growth.

Fatih Birol, the IEA's chief economist, said: "One of our findings will be that the oil investments required may be much, much higher than what people assume. This is a dangerous situation."

For those who understand this data, this was a major, major announcement. It means that the IEA—the official energy data agency of the OECD—has given up on its long track record of ridiculously optimistic projections that supply would always meet the expected demand. They are no longer assuming that any supply gap would be filled by big OPEC producers such as Saudi Arabia, Iran or Kuwait.

Perhaps they felt emboldened to leak this preview of their findings because they realize that their credibility is at stake. They have consistently underestimated the challenges of today's oil business in their previous annual outlook reports, and their projections for both supply and price have been way off the mark.

The world's remaining undeveloped oil resources will require enormous efforts and capital to produce, including extreme technology, extreme physical challenges, and unprecedented geopolitical risks. Any increases in oil production that the world does manage over the next couple of years aren't going to come easily.

Whatever the IEA's reasons, however, the game is up. Most of the world now recognizes that we are up against a bona fide supply limit, and all the market is doing now is trying to find the proper value of a barrel of finite, nonrenewable, and diminishing petroleum.

In fact, I'm having my doubts about anything over 90 mbpd. I suspect that in another two or three years, as we reach the end of plateau at the global peak of oil production and start down the other side, the IEA will once again revise its estimates downward to match up with reality.

Those of us who have been laboring for years to explain that we really do have a supply problem and that no, drilling ANWR or deepwater Gulf of Mexico won't fix it, should take a brief moment to shout "Hallelujah!"

With all the media attention, the game of investing to profit from the peak is most certainly afoot, and we've got some excellent picks in the $20 Trillion portfolio that can produce domestic oil for under $50 a barrel.

Hold on, folks. The ride is just about to start getting interesting...

Until next time,

Chris

Peak Oil Consequences of Bush's Failed Energy Policies

Rising oil prices just seem unstoppable.

Even I was amazed to see crude pushing $130 on Tuesday. Not because it had gotten to that price, but because it got there so fast. That's 30% over where it was at the beginning of the year.

The peakers (or, if you like, the "peak freaks") have won the debate about oil supplies, and it was the price shock that ended it. I'd still prefer that the discussion revolved around flow rates—that is, whether we can really get from 85 million barrels per day (mbpd) today to 116 by 2030, as the IEA has predicted—but I'll settle for not having to see some "expert" on TV predicting that oil is going back to $45, or $25, or whatever, anymore.

At least the message that oil prices are never going back to those levels seems to have gotten through.

Last July, the National Petroleum Council joined the chorus predicting that oil supply would reach 115-120 mbpd by 2030. I lambasted them for it, along with many other knowledgeable observers.

One of those observers was Matthew Simmons, the world's top oil investment banker, who remarked, "We don't have any idea where those reserves are going to come from or how we are going to get them out of the ground. The odds of this ever happening are zero."

Simmons had argued for years that oil was far too cheap, and would soon go into triple digits. He saw $150 oil not too far into the future, and eventually perhaps $300 oil, but in mid-2007, he was widely ridiculed for it.

Well, Simmons was right. He wasn't the only one, either.

Legendary oil investor T. Boone Pickens agreed with Simmons, and placed his bets accordingly, which made him a fortune. Pickens' latest bet is that we'll see $150 oil by the end of this year.

Goldman Sachs is another. They were the only investment bank to correctly predict today's oil prices last year. Their latest prediction? $148 a barrel this year.

I think that's about right. It might even be a bit on the conservative side.

But not everyone in the oil and investing business has had the vision to see the future of oil clearly, or the guts to make such bold predictions.

Unfortunately for America—indeed, for the world—our president, with all of his experience and knowledge of the oil business, has been one of the last to come around.

The Jawbone of an Ass

When Dubya was first running for president in 1999, and oil had risen to the shocking price of $30 a barrel, he chastised President Clinton for it, arguing that he "must jawbone OPEC members to lower prices."

Perhaps he intended "jawbone" as a reference to Judges Chapter 15 in the Bible, where Samson picks up the jawbone of an ass and uses it to slay 1000 Philistines. That sort of megalomanic Christianity has been a common theme in his presidency. But some of us might read his metaphor a slightly different way...

As his campaign went on, the "jawbone" solution became a regular part of his stump speech. In June 2000, the New York Times reported:

"I would work with our friends in OPEC to convince them to open up the spigot, to increase the supply," Mr. Bush, the presumptive Republican candidate for president, told reporters here today. "Use the capital that my administration will earn, with the Kuwaitis or the Saudis, and convince them to open up the spigot."

His pitch was essentially unchanged in the spring of 2005, with oil now trading in the $50s: "I'll be talking to our friends about making sure they understand that if they pinch the world economy too much, it'll affect their ability to sell crude oil in the long run," Bush said.

When Gov. Bill Richardson was energy secretary under President Clinton, he did plenty of jawboning—or at least, he tried. In an interview with the Associated Press a few days ago, he remarked that "on several occasions they increased production and the price actually went down."

But Bush, he said, was (as they say in Texas), all hat and no cattle. "He never jawbones."

Until recently, that is.

To be fair, Bush has sent his energy secretary, Samuel Bodman, several times to try to talk OPEC into producing more oil, but he too has been frustrated. "I certainly have made my views known. Whether they respond or choose to respond is up to them and not up to me. I'm doing the best I can within the limited sets of options that we have," Bodman recently remarked.

Neither Bodman's efforts nor Bush's have produced results. Not only has Bush earned no capital with Kuwait or Saudi Arabia, he's been earning their disdain.

Last Sunday, on his second jawboning trip to Saudi Arabia this year, the president had the temerity to lecture the Saudis over their morality, social policies, and energy policy. He warned that "the supply of oil is limited, and nations like mine are aggressively developing alternatives to oil."

"Over time," he cautioned, "as the world becomes less dependent on oil, nations in the Middle East will have to build more diverse and more dynamic economies."

The Saudi leadership was swift to respond, chastising those "who are questioning our oil practices and policies." They were also quick to point out that their decision to increase oil production by 300,000 barrels a day by June was not influenced by Bush's trip. That decision was made a week prior, and was simply calculated to meet anticipated demand.

The markets weren't impressed, and responded to his trip by sending oil a few dollars higher, to over $126 a barrel.

"Bush's credibility is zero anyway," remarked Walid Khadduri, a Beirut-based consultant, on the trip. "I really don't know anyone who follows what he says, especially after what has happened in Iraq and then his Knesset speech the other day," he said, referring to Bush's apparent swipe at Barack Obama at a recent speech to the Israeli legislature, wherein he said that "some seem to believe we should negotiate with terrorists and radicals."

Once again, Bush seems to be living in an alternate universe.

Not only is jawboning the Saudis to increase their oil production a kind of negotiation with our "friends" who don't subscribe to most of our democratic ideals, biting the hand that feeds you at the very same moment is a tactic that even a three-year-old wouldn't try.

OPEC knows the score on oil as well as anyone. They are basically correct in asserting that the markets are well-supplied, and that global refining capacity for the ample supplies of heavy sour crude from sources such as Iran, Saudi Arabia and Venezuela is limited.

They also know that, as I have written about previously, the skyrocketing price of oil in recent times has as much to do with the sinking dollar as anything else. But the Bush administration has done nothing about that, so why should OPEC make extraordinary efforts to increase oil production? They would rather simply limit their exposure to the Fed's failed fiscal policy by trading more oil in euros and other non-dollar denominations.

Finally, OPEC knows that peak oil has arrived, and its members are becoming more focused on stewarding their black gold riches for their own countries' benefit than they are on trying to prop up the U.S. economy. "I think it's a mistake to have your biggest customer's economy to slow down," Bush whined, but OPEC is looking at their biggest customers going forward: not the U.S., where petroleum consumption is slowly declining, but the emerging economies of the world, where demand is red-hot.

But President Bush has continued to pretend that we can drill our way to oil freedom, if only those damn Democrats and environmentalists would get out of the way...even though he knows that's not true.

"W" Is For Wrong Way

It's not like President Bush has been oblivious to peak oil. This wasn't his first statement to the effect that oil won't last forever, although he's been careful to avoid the phrase "peak oil." Dick Cheney himself explained the reality of peak oil to the Institute of Petroleum in November, 1999:

By some estimates there will be an average of two per cent annual growth in global oil demand over the years ahead along with conservatively a three per cent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day. So where is the oil going to come from? Governments and the national oil companies are obviously controlling about ninety per cent of the assets. Oil remains fundamentally a government business. While many regions of the world offer great oil opportunities, the Middle East with two thirds of the world's oil and the lowest cost, is still where the prize ultimately lies, even though companies are anxious for greater access there, progress continues to be slow.

Adding another 50 million barrels par day is like adding another five Saudi Arabias. Even Bush knows that's not possible. The whole time he's been talking about jawboning our friends, he has known what was to come.

And he has done his level best to ensure that America is completely and utterly unprepared to deal with it.

A president who truly cared about his country, knowing what he has known about peak oil, would have taken the galvanizing effect of 9-11 to ask his fellow citizens to drive less, to conserve, to pull together in a campaign of relocalization, and do to all that we could to wean ourselves from our addiction to oil.

Instead, he encouraged us to jump in our SUVs and go shopping.

Instead, he tried to manufacture consent to invade Iraq, and go after its oil militarily on a false pretext, which actually reduced the global supply of oil.

Instead of actually doing something to reduce our dependence on oil, or aggressively pursuing renewable energy technologies that are technically and economically viable today, he has put a big fat thumb on the scale in favor of the oil and gas business, and trumpeted the fairy tale of a "hydrogen economy" and not-ready-for-prime-time switchgrass ethanol.

He has blocked and stalled every meaningful attempt to address the climate change challenge, to the point where America now stands alone in the developed world in opposing the Kyoto Protocol. Worse, the White House has directly intervened to prevent the EPA from granting states the authority to set more stringent air quality standards. This administration has consistently demonstrated a "disregard for the law and science" in its opposition to environmental protection, according to federal judges.

Instead of asking America to reduce its dependence on petroleum, he has argued that we should crawl out even further on that limb by expanding destructive drilling off our coasts, and in our remaining wildlife refuges and natural preserves. This White House has attempted at every turn to gut conservation laws and render their enforcement toothless.

"Until we change our habits, there's going to be more dependency on oil," he admitted, but then has recommended absolutely nothing to change those habits. Instead of doing something effective, like supporting expanded rail service and requiring higher CAFE standards, the administration has sided firmly with the automakers in resisting higher efficiency and emission standards, while leaving Amtrak to struggle along on a life-support budget.

Indeed, he has actually made our problems worse, by killing the Partnership for a New Generation Vehicle program, which promised to deliver 80 mpg cars, and replacing it with a the pie-in-the-sky "Freedom Car" program, which only served to delay any real progress. Oh, and giving tax breaks to SUV drivers.

Not to mention this administration's full-throated support for corn ethanol, which has caused the painful—and entirely predictable—inflation of food prices, but which has not brought oil prices down at all. In fact it has only delayed the inevitable day when we must find ways to reduce our consumption of liquid fuels, a delay that will cost us dearly in the coming years.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said after meeting with Afghan President Hamid Karzai a few days ago. "Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation," he said.

If only that were true. The nation's refinery utilization is currently at the bottom end of the normal range. Nuclear energy production cannot grow much beyond the current level (I explain the reasons for this in my book, Profit from the Peak), and it isn't going to do squat about our liquid fuel crisis. For electricity production, wind and solar are safer, and in many cases, cheaper than nuclear energy anyway.

And continuing his "strategy" for advancing alternative energy and conservation would amount to doing far too little, too late.

There is talk, and then there is action. With the Bush administration, they are two totally different things.

When you look at the actions of this administration, they are clearly focused on one purpose only: to increase the wealth, and limit the liability, of the traditional energy business. Period.

The rest of the nation has been hung out to dry.

A recent survey by law firm DLA Piper showed that 54% of its top corporate clients cited energy as the top issue that the next president and Congress should focus on, because energy costs are hurting their businesses from top to bottom. Energy costs have trumped the credit crisis, the recession, and foreign competition as their primary threat.

But you wouldn't know it from listening to Bush.

While oil and gasoline prices have hit record high after record high, and the dollar has posted record low after record low, Bush has said next to nothing, other than that he "understands" that America is hurting.

I have no doubt of that, just as I have no doubt that things are going exactly the way he wants them to. He has successfully pushed the difficult choices that this nation has to face onto the next administration, and delayed the growth of renewable energy, while thickly lining the pockets of his friends in the energy business.

Thanks for nothing, Dubya. Don't let the door hit you on the way out.

Until next time,

Chris

P.S.: Despite the Bush administration's efforts to forestall it, the alternative energy revolution has started without them...and the profits to be made in the sector are nothing short of amazing. A piece of the action can be yours when you sign up for our premium newsletters, such as Green Chip Stocks and the Pure Energy Trader.