An Oil Boom - Without the Oil

Whiskey and Gunpowder’s intrepid correspondent has paid another visit to Titusville, Pa., the birthplace of the world’s oil patch. Inspired by the Ghost of Col. Edwin Drake, Byron King reflects on booms and busts as the world bumps up against the absolute geological limits of the "Peak Oil" phenomenon…

It is very doubtful that the domestic oil industry is going to locate any new petroleum frontiers in the lower 48 states. There really aren’t any big new discoveries out there, awaiting their time.

What about the endless droning of the politicians and their campaign promises (they are always campaigning, election or no) that "We are going to develop a national energy policy and stop relying for oil on the volatile Middle East?" Yeah, right, Mr. Politician.

Your typical U.S. political leader, of either major political party, will send the Marines to fight like hell in Fallujah. But collectively, they lack the guts to permit the drilling of new wells off the coast of Southern California, or off the west coast of Florida, or out in the frozen moose pasture east of the Alaska North Slope. What do all of those smart politicians know about producing oil that people who do this for a living do not?

And how long has it been since the United States drilled for some oil in Detroit by raising fuel efficiency standards on vehicles? Oh, about 25 years or so. Still, mileage standards or not, when you boil it all down, you will still need something to put in the tank and the crankcase.

US Oil Boom: Drill Where?

The oil companies collectively know that North America is yesterday’s news, and they budget accordingly. Have you followed what the major internationals are doing? Drill for oil in the United States? Drill where? When they are not acting like big banks, the larger oil companies are focused on the big action in deepwater, or the international arena. If you are not ready to spend serious bucks going far offshore, or to play on an international level, you are making a conscious decision to spend the rest of your life scrambling for whatever somebody else’s land man overlooked out in south Succotash County.

One famous oilman, T. Boone Pickens, says that there is nothing left to drill in North America, and he ought to know. Boone has drilled for oil in just about every part of the geologic column worth drilling, including the asphalt pavement of Wall Street. (In 1983 he was instrumental in causing the demise of my former employer, Gulf Oil Corp.) Boone has a nose for oil, and a nose for money, which in my book, is one heck of a nose. If Boone is coming up dry, then we all have a problem.

We seem to be in the midst of an oil boom, but it is an oil boom without the oil. With gasoline selling at well over $3 per gallon (higher, in other parts of the country, or so they tell me), we are paying at the gas pump for the boom, but without getting much in the way of new discovery or increased production out in the U.S. oil patch. As with much of everything else that we need in order to run the U.S. economy, we import oil from abroad and export dollars to pay for it. What is that, perpetual motion?

If it is, I must say that a long time ago I had a physics professor who proved to a mathematical and thermodynamic certainty that there is no such thing as perpetual motion. It all works for a while, but only until it does not work anymore. Then it all runs down and stops.

When the "oil-for-dollars" trade comes to an end, you will still need real oil wells pumping real oil. Or you need some useable substitute, like shale oil. (But, oh the problems with shale oil! Don’t get me started!)

Or you need a robust Department of Homeland Security and lots of National Guard troops with riot gear, the performance of which in the aftermath of Hurricane Katrina gives me pause. And then, compounding peoples’ misunderstanding of the whole situation, you have talking heads (as often as not, they are economists) saying really dumb things like, "But in dollar terms, the oil industry is only 4% of the U.S. economy." To which I say, "Try running the other 96% of the economy without it."

And what about this bumper sticker prayer pasted on the rear end of many a vehicle in America’s oil patch back in the 1980s? "Please God, Just Give Me One More Oil Boom. I Promise Not to Blow It Next Time." Isn’t the United States a shining city on the hill? Isn’t God on our side, like the red state people believe and the blue state people just take for granted, even if they don’t admit it out loud?

US Oil Boom: Not God but Greenspan

What is God going to do for us? Why is the Good Lord giving us the oil boom, but without the oil? Beats the heck out of me. I cannot speak for the Almighty, but I believe that this boom has more to do with the monetary expansion of Mr. Alan Greenspan, and the predictions of a fellow named Dr. M. King Hubbert, than with the Big Guy upstairs.

Here is the fundamental problem: We live in a material world (in this respect, Madonna was correct), that yields more or less linear increases in oil production for some period of time. M. King Hubbert called it a "material-energy system." (I was at one of his talks back in the 1970s, when he laid it all out.)

But then, after some period of time, comes the peak of oil production, which is another way of saying that about half of the Earth’s easy-to-get oil endowment has been produced and consumed. After that, as mankind produces the "other" half of the world’s petroleum endowment, it is all downhill, despite every effort to find a substitute (another discussion for another time).

Courtesy of the late deceased Woodrow Wilson and Franklin D. Roosevelt, we also live in a monetary world, in which the national currency is a fiat currency accounting gimmick. That is, the U.S. dollar is not backed by any substance of immutable value, such as gold. And in this current monetary world, the number of dollars in circulation has been increasing for 92 years, courtesy of the Fed (and more recently, increasing exponentially at the behest of the world’s most famous central banker). For many decades, the increasing monetary base did not overwhelm the linear production phenomenon. But at Peak Oil, that is all about to change. The future is now.

When you throw the U.S. fiat currency debacle up against the Earth’s rather linear material-energy system, you get a world that has raced through its reserves, consuming them and depleting the resource base at an artificially high rate. We see the direct result on a daily basis. There is an acute scarcity of oil (as well as a scarcity of a good many other natural resources), which is driving up the nominal cost of oil and of most other commodities.

There is not any time to spare for the world to make many dramatic changes to its consumption patterns. I tend to make few predictions about the future. But I assure you that the world faces the next 10, 20, or 30 years after the irreversible post-Peak Oil decline kicks into gear, when a lot of rice bowls are going to get smashed. It will not be pretty.

Will mankind figure a way out of it? Beats me, amigos. But whatever happens, I believe that it is always better to have little debt and lots of money in the bank. What form of money, and where is the bank? That is a trick in and of itself. Just keep in mind that you may as well do your best to keep your head above the troubled financial waters.


Byron King
for The Daily Reckoning

October 06, 2005

P.S. Even as I write my tale of Peak Oil gloom and doom, some guy out in some garage somewhere is coming up with a longer-lasting light bulb, if not a solar-powered cure for cancer – or something like that – on which you might be able to make a profitable investment. Either way, the boom in electricity investing is coming.

Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom.

Yesterday, the Dow took its biggest drop in 15 months.

What is most curious to us is what happened during months 2 – 14: nothing. Instead, the Dow just sat there, like a FEMA official, not doing much of anything, while the nation took some of the biggest shocks in history. The price of its most precious resource – the stuff that makes its machines go and heats its houses – rose to record highs. And the worst storm in history passed over its black-oil rigs and blue bayous, almost wiping out an entire city.

Meanwhile, Americans continued to go into debt, continued to buy things, and continued to delude themselves about their place in the world and their future.

Investors Intelligence reports that financial advisors have been bullish for 154 consecutive weeks – the longest stretch ever recorded (since they began keeping track of such things 42 years ago).

Major Dow stocks have been cut in half; even the homebuilders are in decline. But the mood is still upbeat…positive…hallucinatory.

We just read another marvelous editorial by Thomas L. Friedman, who has become a kind of traveling minstrel to the empire…singing its praises throughout the world. If only the rest of the world – particularly the Arab world – could be more like us, he seems to say. We’ll have more about that topic, perhaps, tomorrow. We never know exactly what we will write about until the words appear on the page.

That is the nice thing about barbarians. If they never appeared at the city gates, the imperial race would wallow in its delusions forever. Yes, dear reader, the Anglo-Saxon empire is on a downward slope. It has lost its edge. It no longer has an advantage in manufacturing, nor in energy, nor in money. Now it shoulders all the costs of maintaining a vast empire, but the benefits go to its new competitors.

That is the empty part of the glass. Yes, we will be hammered by history, as every empire eventually is. But, and here is the full part, we should be beaten into a better shape. This is why we are so cheerful in the face of imperial decline, dissembling at the Fed, an imminent stock and real estate market collapse, and the apparent incompetence of the Bush administration; it all helps take us where we need to go.

It is hard for a great people to be a good people. As the great imperial race becomes more and more cocksure, it becomes more and more delusional, and more and more insufferable. It comes to think its stock will never go down; that its economy is more "flexible and dynamic" (even though it runs $700 billion trade deficits); that it will save the whole world (even though it can’t save a dime); and that the sun will never set on the empire. Pretty soon, it is reading columnists such as Thomas L. Friedman without giggling.

Also, as the empire ages, typically more and more people support the reigning delusions with habitual and mutual deceit. The Romans called it "consuetude fraudium." It becomes common, pervasive, and expected.

Evidence for this comes from yesterday’s USA Today.

"Fraud booms with mortgage market," begins the article.

"As the U.S. housing market hits record highs, mortgage fraud appears to be rising from California to Florida, according to mortgage industry researchers and federal law enforcement agencies.

"According to an FBI report in May on financial crimes, ‘Mortgage fraud is pervasive and growing.’

"Lenders last year reported to the FBI 17,000 suspected incidents of mortgage fraud, and the FBI’s cases have grown from 534 in 2004 to 642 in the first half of 2005. At the IRS, criminal investigations of mortgage fraud from 2001 to 2004 have nearly doubled to 194 cases."

A recent case…

"In Kansas City, Mo., 17 people – posing as mortgage brokers, home buyers and sellers, appraisers and title-company employees – ran ‘a massive scheme of fraudulent real estate transactions,’ according to a lawsuit filed by ABN Amro Mortgage Group in federal court in June.

"In a suspected ‘flipping’ scam involving hundreds of houses, the defendants bought foreclosed homes at cheap prices, artificially inflated their values through false appraisals, then quickly resold them, the lawsuit says. They illegally profited from commissions and fees, the lawsuit says. ABN Amro, which underwrote and bought nearly 1,000 loans from the defendants, alleges that it was defrauded of millions of dollars."

What is particularly interesting about this is that involves the complicity of so many people. Was there not one honest democrat in the whole group? Apparently not.

More news from our friends at The Rude Awakening…


Justice Litle, reporting from Nevada:

"Hooray for the investment bankers, minting cash in their Savile Row suits and Hermes ties. These natty boys have the world on a string…But they also have a tiger by the tail."


Bill Bonner, back in London with more views…

*** On more than one occasion, dear reader, you have accused our daily missive of being focused too much on "gloom and doom," or being overly cynical. We recently mentioned this to our friend, Justice Litle…who is no Mary Sunshine himself…

"Oscar Wilde observed that a cynic is someone who knows the price of everything and the value of nothing," Justice said.

"That is a quote that haunts me sometimes. As I observe our world and comment on the state of things, cynicism is a common element of my writing – sometimes I fear too common.

"But on the bright side, The American Heritage Dictionary puts me in good cheer. One of the three definitions of ‘cynic’ reads, ‘A member of a sect of ancient Greek philosophers who believed virtue to be the only good and self-control to be the only means of achieving virtue.’

"While admittedly an erstwhile student of philosophy, I don’t claim allegiance to any ancient Greek sect. No membership cards in my wallet, no knowledge of sacred rites or secret handshakes. Yet based on the description, I think these particular Greeks (the original cynics) were on to something.

"The ultimate source of virtue is a debatable question. The ultimate importance of virtue, however, is a given. No society can exist for long without ongoing efforts to teach, preserve and uphold its most important ideals. And whether or not self-control is the only means of achieving virtue, it is most certainly a byproduct of it. Virtue and self-control are interdependent; you cannot have one without the other.

"The interesting conclusion is that, while some modern cynics may be unhappy cranks who see the value of nothing, the original cynics were idealists. Oscar Wilde’s sad remark did not apply to them. They knew the ultimate importance of virtue and self-control, and considered them to be the highest of all possible values. Their cynicism was born of idealism."

So there you have it. All this time you thought we were cranky old curmudgeons, when really we are idealists in the original form.

*** Ms. Harriet Miers should take a stiff drink. She is about to experience some turbulence. We have a little soupcon that the president is not as dumb as he pretends. He is offering her as a sacrificial lamb, to be torn apart by the media and politicos so that he can present his real candidate after the wolves have filled their bellies and gone to sleep. But maybe he is really on the level; perhaps he really intends for her to make it on the Supreme Court bench. Either way, the poor thing is going to be mauled.

But we read in the paper this morning something that made us think she may be just the sort of high court justice the late empire needs. Her only previous experience in an office of public trust, according to the International Herald Tribune, was a brief stint as head of the Texas State Lottery.

*** "U.S. housing boom is turning to a bust," says a headline in next week’s MoneyWeek. Lenders’ margins are being squeezed by competition, says the article. They are, "beginning to take the juice out of the market," says Edward Chancellor on "The boom’s days are numbered."

Here in England, house prices have fallen for 15 months straight, according to Hometrack. So far, the decline is so gentle that it has hardly been noticed. But on both sides of the Atlantic, investors are building up…prices are softening.

The Daily Reckoning