Uncle Sam's Asleep at the Wheel

There is an energy crisis bearing down on America, and fundamental forces are lining up that could drastically alter the way we live, work…every aspect of our daily lives. The Sovereign Society’s Sean Brodrick explores…

There is a three-way race for global energy resources going on right now between China, India and the United States. Uncle Sam was the early odds-on favorite. Unfortunately, he fell asleep at the starting gate, seemingly unaware that the other two contenders are planning to run rings around him.

The good news is you can protect your portfolio from a potential energy emergency. You can even profit handsomely.

More on that in a minute. First, here are some uncomfortable facts…

The United States uses about 25% of the world’s oil … but only has 2% of the world’s oil reserves. We import 58% of the oil we consume, and more and more of it all the time.

You can see that U.S. crude oil imports are in an ominous uptrend. We’re using more imports because our own reserves are being drained away. In fact, total reserves in the Americas and Europe will be exhausted in the next 25 years. And natural gas production? That’s declining too.

Well, we can always count on OPEC, right? Sorry. The Saudis recently told the world’s leading industrial powers that OPEC will not be able to meet Western oil demand in 10 to 15 years. This was the first time – ever – that OPEC has made such an announcement.

Oil exploration won’t save us. We pump and use up about six barrels of oil for every new barrel we find. Last year, according to testimony given to the U.S. Congress, more oil was expended looking for new oil resources than was actually discovered. It was the same the year before that, and the year before that. While there may be another Prudhoe Bay hidden away in some remote corner of the world, it’s likely to be in a place where the people who live there don’t like us.

Global production could peak this year. The easy oil has been found, and a lot of it is already pumped – and as a result, production is falling drastically in places like Prudhoe Bay and the North Sea. Even OPEC isn’t immune from draining wells. Oil production has fallen so precipitously in OPEC member Indonesia that it has turned into an oil-importing nation, and may have to withdraw from the cartel.

This is all bad enough, surely bad enough for a potential oil supply/demand squeeze in its own right. And yeah, we’ve seen an energy crisis before, and we got through that one just fine, right? But here’s what makes it different this time: China and India.

Last year, oil use in both of those countries increased at double-digit rates. Chinese oil demand growth is supposed to slow along with its economy, but China’s red-hot economy refuses to slow down. It’s humming along at a 9.5% growth rate. Heck, do you wonder why China is slowly revaluing the yuan? Do you think the bureaucrats in Bejing care what the hoople-heads in Congress bluster about? I think one of their primary concerns is that, since oil is priced in dollars, the more they revalue the yuan, the more oil they can afford to buy.

India, meanwhile, is breeding an elephant-sized appetite for energy with a gross domestic product that is growing in excess of 7%. In fact, the International Energy Agency expects India’s oil demand to grow by 30% over the next five years. That’s probably an under-estimate.

Losing the Energy Race: Supply/Demand Squeeze Could Go Critical in the Fourth Quarter

The IEA anticipates oil demand to rise to 85.9 million barrels a day by the fourth quarter of this year. That’s higher than global refining capacity of about 84.5 million barrels per day. And that, my friends, is when the crude oil could hit the fan.

Normally, we can count on soaring oil prices to crimp demand. And sure, we’ll see some of that. But there is a groundswell of demand that is building on the other side of the world, as 1.5 billion Chinese and 1.1 billion Indians make the switch from bicycles to scooters to cars, and buy air conditioners to boot. That means they need oil and gas – and lots of it. And that means oil prices could go a lot higher, and stay a lot higher, than most people on Wall Street dream is possible.

Under the circumstances, you’d think America would be racing around the globe, making deals to tap the remaining oil resources. You’d be wrong.

Sure, America is topping off its Strategic Petroleum Reserves. But the SPR only hold enough oil to replace 70 days’ worth of oil imports.

America did try to secure an ocean of oil when we invaded Iraq, which has the biggest conventional oil reserves after Saudi Arabia – 11% of the world’s known reserves. And Iraq’s oil can be pumped for about $1.50 per barrel, when insurgents aren’t blowing up the pipelines.

The problem is, Iraqi pipelines keep getting blown up. And the new government of Iraq seems to be falling under the influence of next-door neighbor Iran, who hate the United States. Anyway, the religious groups that won the Iraqi elections ran on a platform of kicking the United States out. And if we get kicked out, you can bet the Iraqis will charge us market rates for the oil – if they can’t find other buyers.

There is other unexploited oil in the world. Unfortunately, a lot of it is in countries that are off-limits to U.S. oil companies. Because their governments are run by genocidal tyrants, our government prohibits U.S. companies from going there. For example, lobbying by human rights groups has forced one Western oil firm after another to pull out of the Sudan.

Losing the Energy Race: Defining Conflict of this Century Won’t Be Ideology – It Will Be Energy

But that doesn’t stop China, which runs a major drilling operation in Sudan. China’s National Petroleum Corp. is going to invest $1 billion in a new refinery and pipeline there. Elsewhere in "Ugly Parts of Africa," another Chinese oil company recently made a $350 refinery deal with Algeria. Angola is receiving zero-interest loans from China in return for guaranteed oil sales. In Gabon, China recently inked a deal to rehabilitate old oil fields.

China’s oil thirst doesn’t stop in Africa. It has other deals lined up in Cuba, Venezuela, Kazakhstan, Iran, Turkmenistan and more.

India is no slouch, either. Indian company OVL is building a $1.2 billion refinery in Port Sudan and a 460-mile pipeline to Khartoum. Another firm, the autological Indian Oil Company is going to develop wells in Libya.

India has also signed an agreement with Bangladesh for a $1-billion pipeline to transport natural gas from Myanmar to Western India (Myanamar is on the shit list of human rights groups)…agreed to a $40-billion deal with Tehran to get supplied with liquefied natural gas (LPG) annually for the next 25 years … signed another deal with Ecuador to drill for oil and gas … committed $2.1 billion in investments in Russia’s Sakhalin Island, which potentially contains as much oil as Alaska’s North Slope.

Some of these deals couldn’t be pursued by U.S. oil companies because of political constraints … others just show India and China’s intensive pursuit of energy world-wide. That’s why I couldn’t understand why so many Americans got outraged over the proposed Chinese deal to buy Unocal. Unocal is small potatoes compared to the rest of the global resources these nations are locking up in long-term deals.

And so, China and India are off and running, while Uncle Sam snoozes at the starting gate.

If there’s a happy ending to this story, it’s going to have to come through conservation and alternative fuels, and it’s going to have to come pretty fast. And the energy bill currently moving glacially through the halls of Congress – the bill that is more of a give-away to campaign contributors than anything else – is not going to do the trick.

Frankly, even if the clowns in Washington tackled the problem tomorrow, it’s probably too late to avoid serious, fundamental shifts in how Americans live, work, even eat. Yes, EAT! Food in the U.S. travels an average 1,500 miles to end up on your dinner plate. Think about that as you watch oil prices move higher in the coming months.

So, in short, Uncle Sam may wake from his nap with a start, and America may be able to pull out a miracle come-from-behind victory. Then again, maybe not. We can only hope the squeeze is slow enough for America to adjust, and we aren’t caught with our pants down by some geopolitical crisis – an energy "Pearl Harbor" that sucker-punches the American economy.


Sean Brodrick
for The Daily Reckoning

July 28, 2005

P.S. But even if there is a massive tectonic shift in store for America’s economy and society, you can protect yourself, and profit, too.

I’ve written a 30-page energy crisis report. In it, I outline the FOUR FORCES bearing down on energy-dependent America, forces that could wash over our economy like a tsunami. I lay out the six likely consequences of the next oil shock. And I also tell you about ten energy companies you may want to add to your portfolio immediately – plus, a widely held stock you should sell or avoid at all costs.

There’s so much more I have to tell you. I haven’t even told you how the government of Saudi Arabia, the "central bank of oil," is writing checks its ass can’t cash. I haven’t touched on why drilling in the ANWR is just a stop-gap and not a solution. I haven’t told you about shift in weather patterns that may wreak havoc in the oil-rich Gulf of Mexico. All this and much more – AND 10 red-hot energy picks to power up your portfolio.

Today, we give you a break. And a chance to make some money.

Our habit is to look at the big picture. We want to understand the big trends…and the eternal verities.

"Buy low, sell high," is the verity that seems to work. In the late ’90s, stocks were no longer low. Since then, few people have made any money in them.

Just being "in the stock market" hasn’t worked. And it won’t work until stocks are low again – trading below 10 times earnings. But even in a market that generally goes nowhere, there are always opportunities. Our friend, James Ferguson, thinks he sees one now…

Before we get to it we would like to pass on an astounding number – $2.9 trillion. Readers will note that there is nothing remarkable about the 2 or the 9 or even the decimal that separates them. We’ve used both those numbers many times in these daily reckonings. What is extraordinary is the word that follows – "trillion." What is also amazing is that this number describes the rate of increase in credit in the United States during the last quarter. What is alarming is that this number is to the typical figures what a NASA moonshot is to the launch of a model airplane.

We pause here for a little more big-picture reconnaissance. Yesterday’s report in the Financial Times noted that the value of Britain’s industries – in current prices – increased from 533 billion pounds in the year your editor was born, 1948, to 2,525 billion pounds in 2004. This puts the rate of increase at not 20%…not 10%…not even 5%. If you had held all of Britain’s capital stock for the entire period, your wealth would have increased at a rate of 2.8% per year.

Take note, dear reader: unless you can somehow beat out other investors, you should expect to make about 3% per year. Credit typically grows faster than additional increments of wealth – at a ratio of 1.4 to 1, historically. Which is why the latest increase in credit figures are so, well, incredible. Three percent of America’s GDP – roughly the current rate of "growth" – is less than $500 billion. Credit is increasing six times as fast.

We don’t know why…but we can take a guess: Americans are not paying off previous debt – they’re refinancing it. They’re not even paying all the interest; that is being financed too, adding to the debt load. The whole economy has come to resemble a giant Ponzi scheme…where new loans are taken out to pay off old ones…houses are refinanced to pay ordinary living costs…and the total interest burden increases far faster than borrowers’ ability to keep up.

Americans think they are getting away with something. But we are still in the greed phase…the expansive, fantasy stage of credit expansion. That the sad, contraction stage…the fear phase…will come, we do not doubt. How and when, we do not know.

In the meantime, James Ferguson thinks he has spotted an opportunity:

"Until very recently, commodity companies were suffering horribly. The prices of their products had been falling for 20 years and so had their profits, with the inevitable result that they had failed to invest in their equipment and their capital stock was tired and out-of-date. But all that has changed. We are now seeing a big, sustained upswing in commodity prices: after all these years of neglect and under-investment, the primary extraction industries (mining, and to a lesser extent, agriculture) can no go on a long-awaited capital replacement investment binge. The markers of trucks, shovels, differs, tractors and harvesters are in for a bonanza."

"Historically, each of these upswings last between one and two decades. So, if the bulls are right, after two decades in the doldrums, commodities are now at the beginning of a multi-year upswing.

More news, from our team at The Rude Awakening:


Justice Litle, reporting from Nevada…

"Even though we believe the big bull market in natural resources is going to flourish for many more years, nothing goes up in a straight line. So we don’t mind receiving some steady dividend income along the way."


Bill Bonner, with more views:

*** Surprisingly, Thomas L. Friedman, the man most likely to misunderstand any trend, has fairly captured the American esprit, circa 2005, as though it were a tee-shirt slogan:

"Live wrong. Party on. Pay later."

The later gets sooner every day.

Friedman refers to the way U.S. corporate executives focus on their own salaries…while those in China and India crave market share. Americans want something for nothing…and fast. Out in the Orient, people are willing to wait…work…and save.

Predictably, Friedman goes off the rails as soon as he gets up a head of steam; "green energy solutions are the wave of the future," he comments in the same breath – as if the two thoughts were connected. In his wobbly mind they are. He thinks that if he could just get policy-makers to listen, they would pass a few hundred much-needed "reforms"- such as reducing U.S. gasoline consumption – and somehow all the problems of debt, lack of savings and capital investment, trade deficits and so forth, would disappear.

*** And yet, the real problem…or a big part of the challenge to the American empire…was revealed by James Ferguson. "Labor’s share of the pot worldwide has been in decline since the mid-1970s," he writes. The reason for this is that there is so much labor available at such low prices – notably in China. America lives beyond its means because its means have scarcely increased…while its ability to live beyond them has soared. Thanks to low rates from the Fed and "innovative" lending policies, Americans have been about to buy things they cannot afford. When the time comes to pay the bills, neither "reforms" nor "green energy" are likely to make it much easier.

The only thing that will make it easier is stiffing the lenders – by means of inflation or default – which we fully expect.

*** This morning, on the train to Paris, a young woman said goodbye to a young man at the station in Poitiers. She got on the train, sat down, and began to sob. After a few minutes, a middle-aged woman got up and sat down beside her.

*** A reader writes in response to our "Love in the time of Viagra" reflection: [Parental warning: contains innuendo]

"’Spose you heard today of the hijack…

"Yep…a truck load of Viagra was HIJACKED as it left the factory on the east coast.