Peak Oil and the Sorry State of the Union

The Daily Reckoning PRESENTS: During the State of the Union last week, Bush said that America has an oil addiction and that ethanol and other alternative energy sources was the cure. In all this talk about oil and energy, Bush failed to utter two important words: Peak Oil. Whiskey and Gumpowder’s Byron King explores…

PEAK OIL AND THE SORRY STATE OF THE UNION

In his State of the Union speech, President Bush said, “America is addicted to oil,” and set a goal of replacing 75 percent of the nation’s Mideast oil imports by 2025 with ethanol and other energy sources.

Who is he kidding?

Saudi’s Ghawar field is close to being in irreversible decline. The Saudis are only managing to maintain current oil production volumes by virtue of a massive seawater injection program that pumps more than seven million barrels of salt water per day into its oil fields. This pumping helps to maintain production pressures in the oil reservoirs, but is also the source of formation damage due to the presence of oxygen and bacteria in the seawater. By 2025, Saudi will still export oil, but far less oil than now and each tanker will be of such value as to require its own armed escort.

United States Peak Oil: Iran and Iraq

Iran is not quite at its production peak, but within 20 years, even the most optimistic estimates forecast that Iran will cease to be a net oil exporter. (This may also have something to do with Iran’s desire to develop a nuclear program.)

And Iraq? By 2025, Iraq may be an oil exporter, not to mention an eastern province of Iran. But considering the looming and inevitable decline in daily world oil production, who will be able to afford whatever gets exported? (Hint, do you speak Chinese?)

The point is, on the other side of Peak Oil, the United States will be fortunate to receive any oil at all from the Mideast, let alone the Bush goal of only 25% of current (or forecasted) imports. The planners, who are connecting the dots of the past, and mechanistically extrapolating out into the future with no allowance for Peak Oil, are living in a fantasyland. They are planning, if anything, for the failure of the American economy and the attendant decline of American civilization.

Still, our Mr. President raised the subject. To recall an old phrase: “What does the President know, and when did he know it?” If G.W. Bush is onboard with Peak Oil, he failed to bring up the subject with specificity in his State of the Union speech and give the concept the publicity and credibility that such a speech would merit. Then again, maybe the president saw the movie A Few Good Men. Maybe he is imitating Jack Nicholson’s character, a colonel in the Marines, who said, “You want the truth? You can’t handle the truth.” Maybe, to Mr. Bush’s way of thinking, he is just doing the best that he can.

There are people who plan for the long term. There are Japanese companies with 100-year business plans. Can anyone predict what the world will be like in 100 years? No. But these companies, reputedly, intend to be around when the next century rolls over. One way or the other. It might be the founder’s great grandchildren, but they will be around. As the saying goes, “It’s not the plan, it is the planning.” (This is a famous quote from General Eisenhower that is painted on the wall of every staff college of the U.S. military.)

United States Peak Oil: Strategy

Strategic planning, operational planning, tactical planning…they all have their place in this world. It is not that things will follow exactly the plan. It is that you have at least planned something and thought things through. You have identified your challenge. You have considered your “desired end state,” and determined which pathways might get you there. There are many roads from which to choose, so ya gotta choose. What are you going to do? You need to marry-up your resources to your action plan. What do you need in order to accomplish your mission? You need to identify what you need, and how you are going to get it. And you have to consider the alternatives along the way.

You need to think in terms of “what if this?” and “what if that?” And then you act, starting tomorrow morning, knowing full well that the next day, some freaking damn thing will occur to screw you all up. But at least you have a plan for this as well. And whoever has the better plan, the United States, China, Russia, the European Union, or the Bolivians…they are going to be left standing at the end of the day.

Few things in this world are more scripted than a U.S. President’s State of the Union address. By comparison, the Oscars are a little-old-lady Bingo game down at the fire hall. The entire resources of the U.S. federal government are at the disposal of Herr POTUS. If el Presidente says “X,” then the next day there are small armies of federal employees power-pointing “X.” If el Pres. says “Y” in the SOTU address, then…you get the picture.

The U.S. Navy, for example, has a 50-year plan. Why? It is because we are building ships with a useful life of 50 years. What will the world look like in 50 years? Beats me; beats anybody. But I bet that you will see U.S. Navy nuclear-powered aircraft carriers floating on the waters of the world. The Navy is inventing its own future, Congress permitting and appropriating. They are designing berthing compartments and kitchen sinks, not to mention nuclear reactors and gear reduction systems and catapult systems, for sailors who will not be born for another 25 years. And when the time comes, these young lads & lassies will be sleeping and washing up, and sailing and shooting airplanes, off of something that some guy designed at a drafting table in Newport News, like, maybe, yesterday.

United States Peak Oil: Reduction of Dependence

Yes, we have been hearing this “We will have to reduce our dependence on foreign oil” B.S. for 30 years. And for 30 years, it was easier to let the daily oil markets dictate that the nation did not have to get serious. What were we going to do, put a $4.00-per-gallon tax on gasoline and kill the driving-based economy? Sorry, guys. Democracy gave you Hamas in Palestine, and Ahmadinejad in Iran, right? Well it also has given cheap gas in the United States for the past century. It was fun while it lasted. Now, Mother Nature is at the door, telling you that it’s payback time. Uh-oh.

So, we had our $8.00-per-barrel oil in the 1980s, and our $10.00-per-barrel oil as recently as 1999. We sprawled all over the land, from sea to shining sea, paving over the amber waves of grain, running condos up the sides of purple mountains, and laying out housing tracts where the deer and the antelope used to play. We choke the land with Interstates from the Redwood Forests to the Gulf Stream Waters. This land was made for you and me, huh?

And we plugged a hell of a lot of stripper wells along the way, too. So long to those marginal barrels, at three or five units per day, times 100,000 wells.

Now we see and hear G.W. Bush, who is pals with Matt Simmons and Richard Rainwater (ahem…), saying we are going to reduce out oil imports from the Mideast by 75% in the next 20 years. We never heard Herr Clinton say that…did you? Or if he did, he was just trying to pick up some cute girl, sitting in the front row wearing a wet T-shirt that said “No Blood For Oil” (Whatever works, right Slick?). Considering the reality of Peak Oil, G.W. Bush’s statement is a freaking no-brainer. Finally (“Hallelujah!!”), the Bush Administration gets it right, even if it may well be for all of the wrong reasons.

Wisdom may come late, but it seldom never arrives.

Then again, maybe Bush is talking alternative energy for the right reasons, but sometimes a president just can’t tell people what is going on. Why did the United States decide, almost overnight, to implement the Safeguard Antiballistic Missile System in late 1968 and early 1969? Did it have anything to do with Soviet submarine K-129, and its abortive nuclear strike at Pearl Harbor? Do you think that President Johnson or President Nixon could have come out and said, “Hey, we almost got nuked on March 8, 1968, by some Red Star Rogue (hey, catchy title…), so we need an ABM system.” Sorry, there are some factual secrets that you just have to keep.

This applies to motive as well. Why alternative energy? Why now? Hmmm. The gears are turning, slowly maybe. But they are turning. I can hear the medulla oblongata, grinding away in the Oval Office. “I cannot really say ‘Peak Oil.’ The only people who know what it is are a bunch of too-smart people at the margins. Besides, whatever I say, it won’t be enough for them. And I have to talk to the center. And we all know how stupid they are out there in the center.

“The lumpenproles in Florida cannot even push a stick through a piece of paper on election day. Do I want to lay the Peak Oil gig on them? It will be panic-city. What will happen to the stock markets if the masses wake up and realize that their 401(k) funds are invested in utter trash, in an economy whose long-term business model is just plain busted.

“Besides, we have 60 Minutes peddling all that crap about how the Alberta tar sands are our salvation. People are confused, and I cannot hold school for the entire freaking country during a one-hour SOTU speech. So, I will say as much as I can get away with, and not get myself assassinated by the…well, I’m not supposed to even think about those people.”

Something is going on. Something big.

Byron King
for The Daily Reckoning
February 7, 2006

P.S. Not all nations suffer equally in the event of a crude crisis. Since the United States accounts for roughly 25% of the oil being consumed, even a minor shortfall in the production and distribution of oil around the globe portends disproportionate economic downsides here in America.

Editor’s Note: 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. To get your free subscription, click below:

Whiskey and Gunpowder

Ben Bernanke was sworn in yesterday, but he wasn’t born yesterday. He knows how the central bank works. Or, at least he thinks he does. The secret, he believes, is in the plumbing. You have to keep the money flowing. And when things get a little sluggish, you have to open a few more valves and sluice gates.

Since he can only create “money” and not real wealth, the deeper secret – one that requires hip waders and a nose clip – is that a central banker must hoodwink the public into thinking it has more wealth than it really does. Consumers, investors, politicians, and businessmen all feel the flush of cash and readily spend some of the wealth they think they’ve come upon. After a while, they’re all giddy from the sewer gas and have forgotten that they have to pay the money back.

Under these circumstances, inflation is a dead certainty. The only unknown is how and when it appears. Until now, it has happily gone into asset prices. Stocks – then real estate – rode high on the tidal wave of money, while consumer prices, mostly, stayed put. But the dollar is vulnerable, warned the experts. Bill Gross, who manages the largest bond fund in the worlds, claims it is “doomed.” When doom will show up and in what guise we do not know. But we bet that when it does show, it will yank up the cost of living for consumers. Prices of imports – at say, Wal-Mart – will shoot up. Anticipating this unwelcome variety of inflation, the central bank may turn the screws longer than expected.

Maestro Bernanke is now, officially, the world’s most powerful central banker, but, from Chicago, evidence is emerging that the great economic tide over which he presides may already have begun ebbing. The Midwestern city reports that almost 25,000 people applied for jobs at a new Wal-Mart opening up nearby. We have heard of thousands of people in India applying for jobs at Google, but that is not surprising; there are millions of jobless people in India…and Google pays well.

But Wal-Mart? The merchandiser is Scrooge-like with its employees, and U.S. employment, supposedly, is at record highs. We are continuously reassured that we have a “full employment” economy. Whence then, cometh these eager jobseekers?

That is the problem with America’s prosperity: it has a cheap and gaudy character to it, like too much make-up on an aging tart. The wrinkles show through the cracks in the rouge.

People are lining up to work in Wal-Mart for the obvious reason: they need the money.

Last year, foreclosures rose 25%. Energy and health care costs are soaring. What’s a poor boy to do but don a blue jacket and push more consumer junk at “Everyday Low Prices” to people who can’t really afford it?

We read in today’s press that Britain is ahead of us. Reports vary, but the bubble in real estate prices in the U.K. apparently peaked out a year ago. Since then, bankruptcies have hit new heights. Yesterday, the Financial Times warned that British consumers might be beginning to put their prehensile thumbs to family budget work; they might soon be “pinching pennies,” says the FT.

We don’t know. But, we wouldn’t be at all surprised to see American consumers begin to squeeze their nickels a little tighter, too. True, the present generation has little experience at it, but they might get the hang of it mighty fast, if they had to…especially when they realize how overvalued their ATM – er, house, has become.

More news from our team at The Rude Awakening…

————–

Eric Fry, reporting from Manhattan:

“Today, many investors are diving headlong into high-risk stocks and bonds…and we would not be surprised if these ‘no limits’ investment plunges also end badly.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

Bill Bonner, back in London with more views…

*** We just received word that Empire of Debt is the number one business bestseller in Canadian bookstores – now we just need U.S. readers to follow suit. Click on the link below to purchase your copy of Empire of Debt:

“The Most Feared Book inCanada?”

*** The Daily Reckoning crew has been to India three times in the last two years, and as Addison promised in our latest India report, we’re going again this year. Since he couldn’t go, Addison sent our own Penny Sleuth, James Boric and Whiskey and Gunpowder’s Greg Grillot, along with our friend Karim Rahemtulla. Here’s what James had to report so far:

“India’s main stock index – the Sensex – eclipsed the 10,000 mark for the first time in the country’s history. The lead article in today’s Economic Times declared, ‘MOVE over Dow Jones, the Bombay Sensex is all set to overtake you…’

“The euphoria here is reminiscent of the late 1990s and early into 2000 in the States. Nothing can go wrong. Just about every stock I see flash on the Bloomberg ticker is green. And they are up big too – 2%, 5% and 10% gains are the norm, not the exception.

“Of course, I don’t need to remind you if it looks too good, it is too good. Fundamentals don’t matter here in India right now. The average company trades for close to 20 times earnings and over 4 times book value. That’s hardly a value – especially for the risk you have to take to invest in India.

“I would be afraid to be a buyer right now.

“The market is up four-fold since 2002. And the Indian rupee has gained 10% on the US dollar in that same time. But it can’t keep rising like this. Eventually the bubble will burst – at least temporarily. And to make sure everyone is prepared, I have found what I believe is a tremendous hedge against a fall in the Indian market. Stay tuned…I’ll explain what it is in a later update.”

*** We have been thinking about the way ideas or moods take hold of a populace. Without being aware of it, one generation will take things for granted that future generations will take for absurd.

The Aztecs emperors required their conquered vassals to deliver up children to be butchered and eaten by the imperial gourmands. They considered it not only normal, but also necessary. Otherwise, the gods might get annoyed.

Christian crusaders could think of nothing more important than retaking the Holy Lands. Japanese central planners, in the 1930s, thought the nation’s future depended on armed control of neighboring Asian resources. And the Russians, in the same period, saw an urgent necessity in getting the rest of the world to go along with their proletarian revolution.

In a person’s private life, delusions are usually corrected, or isolated – quickly. A man goes broke, or sits on a sidewalk muttering about how aliens have taken over his body, but often, the public and the private intersect. Extravagant imbecilities are honored, both at home and by major public institutions, for many, many years.

The descriptions we are reading of Soviet troops in World War II has left us unsettled. We always knew people were impressionable and, in the mass, hopelessly simpleminded. Why else would they buy Google at 75 times earnings? Why else would people mortgage their houses in order to buy SUVs and televisions? Why else would they vote for either George W. Bush or John Kerry?

Butthe Soviets seem to have been roosting on another planet altogether. And yet, there they were on terra firma Eurasiana. They were human, too – just like us. And just like us, they were barking mad.

What unsettles us is the way people are ready to make their lives miserable – even kill and die – for the sake of a misbegotten idea. The worldwide victory of the proletariat hardly strikes us today as a cause worth dying for. But for millions of Soviets, it was as good as any other.

Today, of course, we have causes, too. The International Herald Tribune proposed a “war on diabetes” in yesterday’s issue. What…are they proposing to line up diabetics and shoot them, we wondered? No, the warmongers note: “neighborhoods where diabetes runs rampant are almost always short on parts for exercise.” We can see the troops gathering for an assault now; they’re going to fight diabetes by building parks!

Of course, the whole nation is involved in an even more earnest cause. If you believe the president, ending “tyranny” is worth bullets….many, many bullets.

“Abroad, our nation is committed to an historic, long-term goal – we seek the end of tyranny in our world,” said the commander in chief a few days ago.

“Some dismiss that goal as misguided idealism,” Mr. Bush continued.

They do? Well, then…there, we part company with the critics. We don’t dismiss it as misguided idealism. Idealism has nothing to do with it. It is merely a conceited delusion. The Soviets – who died by the millions in World War II – thought they were trying to end tyranny in the world, too. They just saw a different tyrant: the capitalist class. And their most vicious enemy, Nazi Germany, said it was trying to exterminate tyrants, to the Bolsheviks. But that’s the problem with the world improvers: they always think they can spot the tyrants and never bother to look in the mirror.

*** “The biggest threat to the U.S. Empire is incompetent U.S. leadership,” says retired General William Odom, who served as a national security adviser to President Ronald Reagan.

We can’t agree with that criticism either. History and nature…requires that one empire make way for the next. What looks like incompetence is really no more than just that. The U.S. Empire is doomed anyway. The present leadership is merely doing its best to oblige nature.

The Daily Reckoning