The Conquest of the Rock

The Daily Reckoning PRESENTS: Peak Oil is not some sort of Internet conspiracy theory. It is as much a geological fact as is anything that occurs on a geological scale. Whiskey and Gunpowder’s intrepid correspondent, Byron King, explains why it is so important to learn about Peak Oil…


Almost 20,000 years ago, a Stone Age tribe made camp under a sandstone overhang in a place south of Pittsburgh now called Meadowcroft Rock Shelter, in Washington County. Theirs was a world still in glacial throes, with the edge of a mile-thick sheet of ice not far to the north. On the edge of a frozen ice desert that covered half the continent, these ancients sought protection from the bitter elements. Today, visitors to Meadowcroft can enter an open excavation and view evidence of tools and campfires made by these wandering souls so long ago.

Not quite a century and a half ago, in 1859, a man of the Iron Age named Edwin Drake made his own mark upon human history by driving down one of the world’s first commercial oil wells on the banks of Oil Creek, in Venango County south of Titusville. Although the Drake Oil Well produced only 25 barrels of “rock oil” on its first day of production, and that from the grand depth of 69 feet, it ushered in the Age of Petroleum. Out of Drake’s well arose most of what makes up our life as we know it now.

Of course, without oil in this world something else would be here in its place. Ours might not resemble the Pleistocene existence of Meadowcroft, but neither would it be anything remotely like what we know today. Absent abundant quantities of oil cycling through the arteries of world commerce, our motorized, mechanized, industrialized world would not be here, and neither would we, I venture to guess.

The oil wells of the world produce something over 84 million barrels of petroleum every day, or about 1,000 barrels per second, and every drop is consumed in an energy-hungry world. People move about using oil, by means of train, plane, or automobile. People wear oil, in the form of synthetic fibers. People eat oil, in the form of tractor fuel, fertilizer, transport, processing, refrigeration or preservation, and cooking.

Modern medicine is premised on the use of large amounts of petroleum-based feedstock, and other forms of disposable plastic. Much, if not most, of modern commerce is based on the extensive use of oil-based plastic and chemicals, and oil-fueled transport of goods over vast distances. And since the time of Edwin Drake, oil has been relatively cheap, which is pretty much why things evolved as they did.

This is also why it is crucial that you understand the concept of “Peak Oil,” which is a shorthand way of expressing the geological concept that mankind has reached a “peak” in its ability to produce this depleting resource from the crust of the Earth. The world’s total level of production of about 84 million barrels of conventional oil per day will not last much longer. It is on the cusp of decline.

Oil production has peaked in almost every major oil-producing nation or region on the planet, starting with the United States in 1970. U.S. oil production peaked in that year along the lines predicted in 1949 by a brilliant and eccentric geologist named M. King Hubbert.

Hubbert noted the rather obvious point that you cannot produce what you have not discovered. So Hubbert graphed U.S. oil discoveries from the 1860s onward and predicted a peak for U.S. production in 1970, a peak that occurred on schedule, although it was only apparent in hindsight.

Even the massive oil discovery at Prudhoe Bay, Alaska, in 1968 barely changed the shape of the decline in the production curve that Hubbert’s theory set forth. Since 1970, U.S. oil imports have done nothing but increase, year over year, from places with surplus oil production. This is all about to change.

Ominously, during the past four decades, oil discoveries worldwide have slowed to a snail’s pace while demand for and production from earlier discoveries have soared. Similar to what occurred in America in 1970, oil production in other regions of the world has also encountered peaks.

Oil production in places as diverse as Indonesia and Mexico, Iran and the North Sea has topped out, rolled over, and is now in a state of irreversible decline. That is, oil producers in these regions have begun to encounter dramatic decreases in the volumes of oil they can find and lift from the ground, let alone sell into the world’s markets.

The list of nations in the Peak Oil Club might surprise you. Kuwait announced a peak in daily oil production in November 2005. There are good estimates that Russian oil production is peaking and will commence a decline, if not a collapse, within 3-5 years. Even Saudi Arabia is struggling to maintain its current rates of oil production.

Add to the geological nature of the decline in oil production the fact that there is a worldwide shortage of onshore and offshore drilling rigs and necessary production equipment such as tubular goods, drill bits, pumps, and valves.

And there is a severe shortage of skilled manpower in the petroleum industry, the result of the worldwide contraction of the production industry during the “cheap oil” days of the 1980s and 1990s. The bottom line is that world oil production is maxed out and will commence an irreversible long-term decline over the next few years.

With major regions of the oil-producing world entering or already in a state of irreversible decline, there is no “swing” capacity to accommodate increased oil demand. But demand for crude oil and refined product still follows its historic and increasing trend lines, particularly with the rapid economic growth in Asia in China and India. Thus, it is left to a rising price to, as the saying goes, “clear the market” for oil.

As U.S. motorists confront the long-term reality of paying $3 and more for a gallon of gasoline (and I believe that it will be much more, barring some worldwide economic collapse), they are directly experiencing an unpleasant economic and energy future in the form of Peak Oil. Hubbert predicted it many years ago, and that future is now.

The world will produce less and less conventional oil over time, and the nicest way to put it is that people will have to figure out some other way to do things besides burning oil the old-fashioned way.

Peak Oil will force people to view the world differently, to a degree almost unimaginable to those who scarcely understand the concept just now.

Mankind will reduce oil consumption because the oil will simply not be there. Being “green” and “environmentally friendly” will have next to nothing to do with it. Being “rich” might not help much either, although it probably will not hurt.

We live with the ghost of Edwin Drake, who died in 1880. Drake’s remains are interred in Titusville beneath an imposing granite memorial, and under the shadow of a handsome bronze sculpture of a muscular man pounding and dressing a drill bit with a massive hammer. It is all very neoclassical, noble, and impressive. Drake’s monument reads in part:

“Col. Edwin L. Drake…Founder of the Petroleum Industry, the Friend of Man.

“Called by Circumstances to the Solution of a Great Mining Problem…He laid the Foundations of an Industry that has Enriched the State, Benefited Mankind, Stimulated the Mechanical Arts…and has Attained Worldwide Proportions.

“His highest Ambition was the Successful Accomplishment of his Task. His Noble Victory the Conquest of the Rock, Bequeathing to Posterity the Fruits of his Labor and of his Industry.”

“The Conquest of the Rock,” it claims on the tomb, with hubris similar to that of fabled Ozymandias. How fitting that Drake’s grave at Titusville is not far from the Stone Age ruins of Meadowcroft, only about 125 miles or so as the crow flies across southwest Pennsylvania.

In one ancient hollow, beneath a ledge of sandstone, people eked out their existence, burnt their charcoal, and lived whatever life they could make for themselves in the shadow of an ice sheet. In another, more modern locale, Drake conquered the rock — for a while, perhaps — and brought unimaginable change to the trajectory of mankind’s existence.

But in both places, Meadowcroft and Titusville, the lesson appears to be that mankind never truly conquers the rock.

Peak Oil is nature’s way of rebalancing the equation. And Peak Oil is today as much a challenge to the modern world as the Pleistocene ice sheets were to the people of Meadowcroft. Peak Oil will control your destiny. You should start learning about it, thinking about it, and planning for it.

Until we meet again…

Byron W. King
for The Daily Reckoning
May 17, 2006

P.S: There’s another massive problem with the world’s oil supply – as if the peaking of production weren’t bad enough, right? But this problem’s on the other end of the spectrum. It’s rooted in humankind – not the unassailable laws of geology. What happens when a country lies about their oil reserves?

What happens when it is suddenly revealed that there’s only HALF of the oil in a certain country than we were previously told? Bad things happen, that’s what…and you’d feel pretty astounded to see how some of our key oil-producing “allies” deceive us about how much oil their lands hold…our “allies” even lied to George W. Bush!

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.

The only thing more frustrating than a long bear market is a long bull market. Riding a great bull market is like riding a real bull. You are always in danger of getting thrown off. And once on the ground, it is hard to get back on.

(See colleague Lila Rajiva’s attempts to get into gold, below…)

Last week, we looked at the gold market. We bought when the metal was selling around $300 an ounce. Then, over a period of four years, we were able to buy in slowly and cautiously, each time the price dipped. But then, as the bull really started running a year ago, it ran right by us. We kept waiting for a pause so we could jump back on its back. Instead of pausing, the beast just ran faster. Now, it is flying so fast, we’re almost afraid to touch it.

But the real money in investing is not made by dabbling…and then sitting on the sidelines. The real money is made by people with the courage to grab the bull’s horns with both hands and hold on! In the bull market in stocks – 1982-2001, for example – the Dow ran up from under 1,000 to nearly 12,000. The last bull market in gold saw the price rise from barely more than $40 to $850 – a gain of more than 2,000%. And the most recent bull market in oil has already taken the price up 700%.

No, dear reader, it is not by trading in and out that you make a lot of money. That is only entertainment while making money for the brokers. Making the most of a bull market is like getting the most out of smoking; you have to start early and keep at it heavily…until it finishes you off.

The way to make real money is to take a big position in a big move, buy very low and sell very high. That means riding the bull market from beginning to end, which raises some vexing questions. How can you know when you’re getting close to the end of a bull market? How can you know when it is time to get on and jump off?

If we had a foolproof answer, we wouldn’t be writing The Daily Reckoning. We wouldn’t even be human. It is not given to man to know the fate of his markets. The best we can do is to look over our shoulders at examples from history and guess. And our best guess is that that the bull market in gold has a long way to run, and your best bet is to hold on. Don’t let yourself be tossed off by corrections, setbacks and bone-jarring bumps along the way.

Anther great bull market is taking place in India. The Bombay index is up 300% in the last three years. The major India funds have gained 80% in the last 12 months. And so, readers might want to know: is this the beginning or the end? Again, we have no sure answer, but we will make a guess.

The rise of the India stock market is part of a trend that probably has another 50 years to run – maybe 100 years. India is poor. Western Europe and America are rich. This disequilibrium only arose in the last 300 years. Before that, the average working man on the banks of the Ganges earned about as much per day as the man on the banks of the Thames or the Potomac. Our guess is that today’s great disparity is fleeting rather than permanent.

Last week, an Indian entrepreneur came by the office. “Yes, share prices have gone up a lot,” he explained. “But our companies are growing at 30% per year. Adjusted for growth, they are still cheap.”

Our visitor had begun building cars in India. With an investment of only three million pounds he had set up an automobile factory. The motors come from Renault. The body parts are made locally from composite materials.

“We only need to see 1,000 cars a year and we can break even,” he explained. “Of course, we don’t have to pay high wages or a lot of social costs.”

Someone should tell General Motors. Maybe someone already has. Word comes this morning that GM is hiring in India, even while it lays off thousands in America. That’s roughly why wages are rising smartly in India, while they sag in the United States.

But will it continue? Will the Indian share market continue to soar? Or, will it tumble in a breathtaking correction? And here, yes, we are so happy to be of service, we can give you a thundering, decisive answer: yes! Alas, we can’t tell you in what order.

Better yet, don’t worry about it.

Let’s check with The Rude Awakening…


Eric Fry, reporting from Wall Street:

“One of those days has just arrived…The gold price tumbled more than $50 from its high point last Thursday to its low point on Monday.”

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


And more various thoughts…

*** WaveStrength’s Adam Lass sends us this note:

“For weeks now, I have been warning any who would listen that the market’s arrival at its four-year high was not an event worth celebrating,” he writes.

“Rather, it represented a dramatic heightening of the danger level, a sort of economic ‘Code Red.’

“Specifically, I told investors that the market was about to undergo a ‘cyclic retracing’ – fancy talk for a massive shift of billions of dollars out of U.S. large-cap stocks and into a variety of other asset classes, including gold and oil.

“Two Monday’s ago, the risks I am speaking of – rising capital, energy, raw materials and labor costs, matched with American companies having complete inability to pass on these costs to consumers without facing out-and-out rebellion – came to a head.

“Rather than a launch to an all-time high we were told to expect, the Dow is down 272 points. The S&P 500 has lost 23.25 points. The Nasdaq has peeled away 98.3 points, and that is on top of the 28-point drop investors have suffered through since I first put out this warning.

“Nor does this drop show any sign of slowing, as support level after support level ruptures. As things stand now, this summer may very well go into the record books, but not for any sort of good reason.

“It is not too late to act. You do not need to sell all your American stocks (although perhaps some, to free up ready cash). In my latest report, I detail an asset that can be purchased extremely cheap, that could easily contain all your losses, and even increase your net worth handsomely. This asset has already climbed in value some 40% since I recommended it to a group of traders at the Atlanta Wealth Conference on May 6.”

*** Lila Rajiva, trying to climb onto the bull’s back:

“Bill: As a faithful believer in the doomsday scenario for the dollar and the final revenge of gold, I admit I am not having an easy ride. In fact, I think I have had a bit of a mauling. With some nervous selling across the board in the metals, and options expiration at the end of the week, the ride gets stormier.

“Of course, I’m still a dollar bear. What’s not to hate?

“Massive trade deficits, staggering debt at all levels, a tumescent real estate market hissing into an inevitable slump, saber rattling in the Middle East, a war of words with China, oil bubbling steadily around $70, and inflation simmering under the cooked-up numbers the government spews as it sees fit…it’s all a recipe for a plunging dollar.

“And way back in 2004, it seemed the dollar was taking that ride in a straight line down as it fell nine percent against the Euro. Some of us opened Everbank accounts and got ourselves a basket of mixed foreign currencies or other exotic goodies. Buffet was betting against the damn thing – how could we be wrong?

“But in 2005, Buffett and the rest of us sinners, had to dine on crow. The dollar strengthened, if it did not actually flex its pecs, erasing half its losses against the backdrop of continuing tight money policy and higher interest rates in the United States versus the euro area and Japan. The dumping of the European Union’s Constitutional Treaty in France and the Netherlands, also stiffened a few rickety vertebrae in the greenback’s spine. Of course, it was merely a touching coincidence that corporations got to repatriate earnings in stronger dollars, courtesy of a convenient window created by Congress.

“Even the trusty little GLD ETF, which was supposed to cushion my dive into the big bad speculative world of metals, stayed down the whole year.

“Naturally, as a newbie I’d bought it just when it came out in November 2004. And naturally, after being heralded like the Second Coming, it sank almost immediately. On sundry Web sites, reports surfaced hinting darkly at dire manipulations, the lack of verification of its holdings, and all manner of sinister machinations calculated to strike terror in the heart of someone’s whose last encounter with the metal was buying an ankle bracelet at a souk in Dubai. Equity bulls of our acquaintance cast a derisive eye at us. Gold? Had we forgotten that stash of 850 buck ingots from the eighties still moldering in our basement? I was ready to cave in and sell for what I’d bought it.

“But then as the year ended, the metals minuet ended and the action on the floor became hot and fast.

“Sleeping Beauty leapt out of her coffin and darted ahead almost 25% in a matter of weeks. Too much too fast? It seemed that way to me. I wasn’t going to wait around to see that thing fall back just as fast as it had shot up. A profit is only paper, until you book it, right? I booked it.

“Yeah! Wait for the correction and ride it right back up again like a Ferris wheel. But market timing is never as easy as it sounds, which is why some gold bulls, like Doug Casey, of the International Speculator, will tell you that this isn’t a market you can trade – the moves have been too fast. You drop out when it drops and you’re liable to be left standing. You miss the big profits.

“And that’s how it’s been. The first correction came in February as expected, but the next leg up was so fast and furious that by April we were hitting multi-decade highs with hardly a pause along the way

“Too bad I wasn’t on board. I was still figuring out the right moment to buy… and clearing the dust out of my eyes.”