Financial Sense Newshour
The BIG Picture Transcription
February 4, 2006
- Addicted to Oil: Peak Oil Coming Soon
- Emails and Q-Calls
- Other Voices: Joe de Courcy
- Other Voices: G. Michael Bolser
Addicted to Oil: Peak Oil Coming Soon
President Bush: Keeping America competitive requires affordable energy and here we have a serious problem: America is addicted to oil which is often imported from unstable parts of the world. The best way to break this addiction is through technology.
JOHN: You know it’s interesting, Jim, that was almost a shot across the bow that we heard during the State of the Union message, especially an acknowledgement that we are addicted to oil. It sounds like gradually we’re being prepped for something. Have you noticed that?
JIM: Yeah, I think what the President said in his State of the Union speech this week was rather significant, John. It’s the first admission by a public official that we have a serious problem. And what I suspect is this is going to be the first of many statements to come to start preparing the public for peak oil, especially as prices rise even further. Imagine what they’re going to be telling people when the price of oil goes to $100 a barrel. In other words, people are going to get a little bit tired of just bashing the oil companies: “do something about it,” but what are they going to do? If we hit peak oil we have done nothing, and there’s no way to avoid a crisis. We have an impending crisis in the next 2 years, and we’re going to see these rolling mini-crises as we saw last September ,when we had virtually one third of our oil and gas production wiped out with the hurricanes. So, I think what this was this week is the first of many announcements that you are going to see, you’ll see several this year, and it’ll get more pronounced as the price of oil goes up that we have a serious problem.
If we take a look at for example in 2004 the US was consuming 20 ½ million barrels of oil a day – roughly 25% of the world’s total oil consumption. As of the last fourth quarter of last year our consumption in this country had risen to 22 million barrels a day. And the problem that we have is we only produce the equivalent of about 7.2 million oil equivalent barrels – that takes into consideration natural gas and converting that into oil. So, we’ve got this gap now of near 13 to 15 million barrels to supply our energy needs and we don’t have a Plan B. [2:45]
JOHN: You mean as far as alternative energy sources in that area, or just for the supply of oil itself?
JIM: The supply of oil itself and alternatives.
JIM: We have neither, so this is going to become more serious. And the other thing, a lot of people say, “well, if you are importing 60% of your oil and natural gas you’ve got a problem, you don’t control the energy markets as you once did.” The US used to be the world’s largest producer of oil. We used to control the oil markets, that’s no longer the case today. We lost control over the oil markets to OPEC in the 70s. And by the way, we’re the only country in the world next to Saudi Arabia that ever came close to producing as much oil. In other words, at our peak, we were producing roughly about 9 ½ million barrels oil a day, roughly where Saudi Arabia is today. That’s how big we used to be. The US used to be a Saudi Arabia. We are no longer a Saudi Arabia. We used to have 200 billion barrels of reserves, we’re down to our last 10%, and that just doesn’t give you the muscle. To make this even worse: now, because we’re consuming 22 million barrels of oil a day, our refinery capacity in this country – and remember we haven’t built a refinery in 30 years – is only 17 million barrels a day. So we’ve got to import now 3 to 4 million barrels of refined products such as diesel fuel, gasoline and jet fuel. So when you add up what we’re importing of refined products to oil and natural gas the US now imports 70% of its energy needs. We no longer have control over the market and we’re still going around, acting like we control the market. We don’t control it anymore. A nation that imports 70% of its energy needs no longer is in control of its economy or its energy destiny. [4:50]
JOHN: You know, if we look at how this thing is being handled in the public debates, especially on the cable channels, which is where most of the chatter goes on, it seems like once again these different sides are talking past each other. It’s being framed like the oil companies are gouging us, we need to windfall profits tax blah, blah, blah. But the critical factors are all missing from this discussion, so far anyway.
JIM: And what’s also missing from this energy debate especially when it gets to peak oil and energy is when you examine our economy, 90% of our transportation – land, air, sea – is fueled by oil; 95% of the goods that you see in any store whether you’re going to Wal-Mart, or Nordstrom’s, involves some use of oil in its manufacture; 95% of all our food products require oil use. And yet every forecast of future oil consumption is unrealistic. It’s based on the assumption of endless supply. In other words if oil, let’s say oil consumption is increasing at 1.6% a year in the United States, the forecast is then by the year 2010 the US will be consuming this amount of oil, and China will be consuming this amount of oil, so you have these forecasts for example 90 million barrels a day by the year 2010, and then like 110 or 120 million barrels a day by the year 2020. Well, these forecasts of future oil consumption are based on an assumption of endless supply. Few ever question the ability oil industry’s ability to meet it, and yet you take a look at the majors, all the major oil companies – from Exxon to Chevron the two biggest ones in the United States – their average daily oil production has been declining for the fifth year. This week we had Exxon report record profits but their oil production went down in the fourth quarter. So our society is in a collective state of denial that has no precedent in history in terms of its scale and implications. We’re headed for another crisis, and John, this one’s going to be biblical in its size. [7:10]
JOHN: Well, I think what everybody is suffering from here – at least those that are old enough to remember – if you remember the Yom Kippur war, and the shock wave that it sent through the oil markets (at that point it fell about 9%), the crisis lasted a few months and the next crisis was the fall of the Shah of Iran.
JIM: And that’s true, what happened especially in 1979 with the fall of the Shah and Iranian oil output was cut was there were 3 things in place at that time that mitigated the crisis: number one, the Saudis basically opened up their spigots and really started to pump oil; number two, we had two major oil discoveries outside of OPEC at the end of the '60s, one was Prudhoe Bay in Alaska and then the North Sea. And from their discovery in the late '60s they came on stream at the end of the 70s and began pumping oil. In 1977, the first Prudhoe Bay oil started to hit the markets so we had two major non-OPEC sources of oil coming on line, as this crisis hit. And the third one was we had large amounts of oil that were released from government stock piles. I think why we should worry today over the next crisis is it is doubtful whether, for example, the Saudis could act as a swing producer pumping enough oil you know, 2 to 5 million barrels, if let’s say we had an Iranian oil embargo; or if we hit peak oil as I believe we’re going to hit in 2008, it’s not just the new oil that we’re discovering bringing on line, but you have to make up for the oil that you’re losing. Last year we know that Mexico’s oil field largest field peaked and Kuwait’s oil field peaked so you’ve got to make that up. And you see the oil geologists fear there are no more giant oil fields to be found. The last two sizeable fields of any significance – and I’m talking about elephants – were the North Sea and basically Prudhoe Bay, and before that the big oil fields in the world where there was Burgan – which is the second largest oil field in Kuwait – that was discovered in 1938 and I think it was 1948 that they discovered Ghawar – the King of Kings. So there isn’t much oil in storage relative to current demand, and that’s what is going to make this next crisis rather different. [9:33]
JOHN: Alright. Assuming that what I said earlier is true, and that we’re missing certain things from the energy debate, and there’s a lot of distortion of that as a result of that as to how people perceive this whole situation, it would seem there are core questions that we need to be asking, and I guess question number one that I would throw into the ring is: how much oil do we really have on hand in real numbers, because a lot of these numbers are just based on models and things like that?
JIM: Yeah. You know there’s three questions that this debate needs to be framed around. And you here none of this in the press, you hear none of this in the talk news stations, you hit upon the first most important one: existing reserves. What is it we actually have in the warehouses in the world? The second is what are our reserve additions? How much oil are we finding each year? If we’re going to have this increasing demand by the year 2020, then how much are we finding right now that are going to get us there? And then the third logical question that follows the previous two is how quickly can we get this new oil online and speed it to the market? As I mentioned, we discovered oil in Alaska in the late '60s, but it was a full decade before you know the first barrel of oil hit the ports of Valdez in Alaska. So, you’re talking about a 10 year period. [10:57]
JOHN: Well why don’t we beat everybody to the punch here since nobody else is talking about this, at least in the public debate out there, let’s hit some of the issues right here. First of all, let’s talk about existing reserves. That’s question number one.
JIM: Well, in understanding oil reserves you have to understand that basically from the mid 60s we went from 600 billion of oil reserves to today’s 1 trillion 147 billion and most of this comes from what everybody calls the energy bible and this is the British Petroleum Statistical Review of World Energy 2005– you can get this report by the way at the British Petroleum website, just go to their financials section – that’s where this number comes from. But here’s the key, when you analyze these reserves there was a big bump between 1985 and 1990, virtually reserves in the world went up rather significantly. And if you read the tables what you find is in 1982 as the price of oil came down obviously OPEC members were wanting to produce more oil, and OPEC got together and said wait a minute, “we’re going to give everybody quotas based on the reserves that you have. The more reserves that you have the more that you’re allowed to pump. ” And so with the price of oil being weak what happened is – I think it was 1985 – Kuwait bumped their oil reserves from 64 billion to 90 billion in 1985 – I’m looking at the BP Statistical Review. And then they got to pump more oil, and all of a sudden everybody else was kind of looking at this, “wait a minute where did they get that oil?” So in 1988, everybody in OPEC increased their reserves by 300 billion. [12:48]
JOHN: Real reserves or just on paper?
JIM: It was on paper. They said, “well, we had this amount of reserves, and all of a sudden we just increased it.” For example, in 1987 the United Arab Emirates said they had 31 billion of reserves and the following year they bumped it to 92 billion. They almost increased it three fold. Iran increased their reserves from 49 billion to 93 billion. Iraq increased theirs from 47 billion to 100 billion. Kuwait had already increased theirs they increased it to 92 billion – they added 2 billion more. And Venezuela increased theirs from 25 billion to 56 billion. And then in 1989 we get the real big one: Saudi Arabia increased their reserves from 167 billion to 257 billion. And the amazing thing is here we are increasing our reserves by 300 billion, but there were only 10 billion barrels of discovery announced by OPEC. So, they only found 10 new billion barrels of new oil but they increased their reserves by 300 billion, and this is now coming back to haunt us. And we got a glimpse of that last November when Kuwait said its largest oil field had peaked and then that was followed subsequently by a revision, they lopped their reserves in half. That to me was a warning sign, that was the first canary out of the cage.
JOHN: And you never heard of hedonic oil indexing, huh?
JIM: Maybe that’s what we’re going to have to do.
JOHN: That’s what it’s looking like. It would seem like this scenario is really a sort of a Cinderella one in that every year we pump out what? – 55 billion barrels – but nobody’s oil reserves are going down. Maybe we’re back to this abiotic oil, maybe it magically replaces itself every year.
JIM: For example, in 1988 the United Arab Emirates had 92 billion in reserve. By 2004, they’d increased that to 98 billion roughly, but each year the United Arab Emirates produce a billion barrels a year. So, we’ve had 17 years of billion barrel production, and their reserves never go down. Iran had 93 billion barrels in 88, now they say they have 133, and Iran produces roughly about 1 ½ billion barrels a year. Their oil production already peaked. Iraq has inventory of 115, they produce roughly three-quarters of a billion a year. Kuwait – their inventory reserves are the same; they’re producing about a little under a billion. Saudi Arabia – here’s the amazing one – Saudi Arabia’s reserves have never changed, they haven’t announced any major new oil discoveries and they produce nearly 4 billion barrels a year. Now, this doesn’t take a lot of math but if you take 17 years times 4 billion barrels, they’ve produced 68 billion barrels of oil since 1988 and yet their reserve figures never change. Same thing with Venezuela; they produce over a billion barrels of oil a year, and their reserve figures never change. So, something is wrong with these numbers: the reserves are overstated, I believe, by 300 billion and the implications are there are billions of barrels. Well, let me put it another way: if you assume that their numbers are accurate then the implications are they are finding billions of barrels each year to match the billions that they produce. So, if Saudi Arabia produced 4 billion barrels of oil last year, they found a new oil discovery – they found another elephant; and 4 billion barrels, or even a billion barrel oil field, today, is considered an elephant. We haven’t found a billion barrel oil field in well over a decade. So these number they just simply don’t add up. [16:58]
JOHN: Well, let’s get to the second question then. How much new oil are we finding, which we call reserve additions, since we take the reserves and add what extra is discovered out there?
JIM: Sure, because the reason this is a very appropriate question to be discussing today is because if you have a warehouse and each day barrels go out of the front door of the warehouse, you better have trucks arriving at the back end of the warehouse with new barrels to replace those you just pumped out the front door. And here’s the problem: today, close to 60 of the 65 major oil producing countries are past peak oil. Their production profiles are now in decline. The biggest oil fields in the world were discovered over 60 years ago. Chances are the gasoline in your tank came from an oil field – we get 17% of our oil from Saudi Arabia – so chances are some of that gas in your tank came from an oil field discovered in Saudi Arabia in 1948.
And peak oil discovery – in other words, the amount of new discoveries that were announced – peaked in 1965. We had very few big discoveries in the 1970s. The last year that we discovered more oil than we consumed was more than 20 years ago. We’re consuming more every year and finding less. In fact, if you really take a look at the oil profile of the world’s oil fields – and Matt Simmons has done a wonderful job of this – half the world’s oil lies in 100 oil fields that are between 25 to 60 years old. And just to give you an idea what is happening, the number of new discoveries of what we would call a major field (now 500 million barrels or more) are declining every year. In the year 2000, we made 16 new discoveries of oil fields with 500 million barrels; the following year 2001 we only had 9 discoveries; in 2002, we only had 2 discoveries; in 2003, we had zero discoveries; and 2004 we had zero discoveries; and 2005 we had one discovery. In fact, if we look at where we’re getting most of our oil: deep water discoveries in 2002 we discovered roughly about 4 since we started discovering. We’ve discovered about 47 billion barrels and peak oil discovery in deep water was 1996 where we discovered 5.8 billion barrels. So, here we’re not adding, and now we’ve got other people that are sitting at the dinner table – mainly China and India – that have more voracious appetites than we do; we’re not discovering this stuff. [20:00]
JOHN: Now, the next thing you’re going to hear out of somebody’s mouth is the quote about technology and they’re not talking about alternative sources of energy but rather enhanced technologies to extract oils that were previously inaccessible to us.
JIM: Well, in answer to that I’m going to refer back to something Matt Simmons said and Simmons’ company has financed all the oil technology companies. All oil technology has enabled us to do is extract the oil out at a much faster rate. So, in other words what technology has given us, John, is a bigger straw to suck the oil out of the ground, so we’re sucking it out a lot faster. [20:31]
JOHN: Let’s face it, there are some fields being discovered, not a lot, but some. So say that starting tomorrow suddenly the news is we’ve found another Ghawar, and it would be even better if it weren’t in the Middle East, right? That’s what you would hear. How long would it take us to get that thing online and oil flowing to market?
JIM: Good question. The first thing we have to begin with is we’re not finding it, you know, very little oil is found, and of the new oil and gas natural gas discoveries they are stranded. They are far away from where it’s consumed. You know the great thing about the United States in the first part of the 20th Century: we were getting our oil where we were needing it, where we were consuming it. We’re getting our natural gas from the United States, we’re getting our natural gas from Canada, so that’s close by, but if you look at natural gas the largest oil reserves are in Russia and the Middle East – same kind of problem. And even if we were to find a major oil field like they just found a new oil discovery offshore Brazil – I think it has 700 million barrels – the problem is like the Alaskan oil discovery at Prudhoe Bay that was discovered in 1967: the first oil didn’t arrive until 1977.
So if I was to summarize it takes a long time to find new oil, number one; it takes a long time to produce it; and number three, a long time to transport it. We had to build a pipeline to get the oil from Alaska back to the Untied States. If we’re going to be getting our natural gas liquefied natural gas we’ve got to start building LNG terminals, LNG ships – we have very few. So the thing that I think you’re seeing here is peak oil topping point is going to be defined primarily by oil fields already found. In other words, whatever we have found, let’s say in the last 10 years, how much oil is left in them, and how production can be enhanced?
The next question we need to be asking is: where will peak panic point be in society? In other words, when we wake each day and then all you’re going to hear all day long is peak oil. So that’s going to be the panic point, and then the other question that needs to be asked is which economies will be affected most directly. And we’ve got to [include] the US – as one of the largest consuming economies because the United States consumes 25% of the world’s energy – and then the growing manufacturing economies of China and India. And then a final point is what happens when that day arrives when we wake up and they say, “Oh my God, peak oil!” You know that means oil rationing, folks. [23:28]
JOHN: OK, Jim, you know the conversation we’ve just been having here – a relatively intelligent one I hope, so if we pat ourselves on the back – and we have looked at the situation, asked the hardball questions, but this is a conversation which should be going on on the cable channels; this is the conversation which should be going on in the halls of Congress. But every one right now seems – to coin an old phrase – stuck on stupid.
JIM: You know speaking of stuck on stupid, let’s take a look at how some of this debate played out because we had the President in the State of the Union talking about addicted to oil; we had Exxon reporting record oil profits; and let’s just get a sample of the way this all of this was handled. [We didn’t hear] the questions of what do we have, what are we discovering, how quickly can we get to the market, what are alternatives that we could be using now – the President did talk about one of them ethanol but we’ve got a lot more things to do than just look at ethanol. Why don’t we go to the cable talkies and give people a sample of what happened instead.
O’Reilly: Now the top story tonight the earnings are in once again Exxon-Mobil has broken records having the highest profits of any American company ever. Meantime, working Americans are getting hurt, heating their homes and keeping their vehicles on the road.
Here’s a good example of a very intelligent person, O’Reilly – you don’t get to Harvard by being stupid – but you know what he’s doing, he’s demagoguing this thing. Let’s just take a look first of all at the price of oil which went up 60%. So obviously, if you’re selling oil the product that you sell is going to cost more because you have to pay more for it. But if you’re talking about record profits in 2001 Exxon’s profit margin was 8.2%; in 2002 Exxon’s net profit margin was 6.4%; in 2003 Exxon’s profit margin was 10%; since then, in 2004 their profit margin fell to 9.6%; and in 2005 their profit margin was 9.7%. Yes, they had record profits if you look at it in dollar terms but let’s take for example Bill O’Reilly’s company, News Corp. In 2003 News Corp’s profits were 4.7%; in 2004 they went up significantly to 7.4%; in 2005 their profits went up 8.9%. So the only industry I see whose profit margins are going up significantly is O’Reilly’s – well, I’m being facetious here. You have Exxon’s profit margins which had it gone from its traditional 9% – its historical average is between 8 and 9 – to 18% profit margins, you would have a valid question as to why they’re getting these profit margins? But these profit margins have been fairly stable in that 8 to 9% range. So, once again, stuck on stupid here.
JOHN: Here’s an example of an exchange that went on on the show. A similar type argument, listen to it.
Guest: Well, I think that he’s right. This is really about volume. The margins are not spectacular they’re very much in line with a lot of other industries. They’re not significantly above the average industry margins. Now, today Exxon took out a huge quarter page ad on the op-ed page of the New York Times, saying oil industry margins are not out of line. And in fact, if you look at an industry like the pharmaceutical industry…
O’Reilly: Alright. I know, but that’s the propaganda. They don’t want to go to jail. These people they want to make their $36 million a year.
Guest: But if you look at industries like the pharmaceutical industry they’re getting 18% margins. So relatively their margins are low
O’Reilly: Pharmaceutical industry is not a good comparison because that’s another monopoly; if you have one drug and it’s under patent nobody else has it.
JOHN: “Don’t feed me that stuff I don’t want to hear that!”
JIM: Yeah, “I don’t want to hear an intelligent answer,” and what you’re seeing there is O’Reilly plays Chris Matthews where he cuts people off, “I don’t want to hear it, I don’t want to hear it, I don’t want to hear any commonsense.” And you know the oil margins as this analyst was pointing out they’ve been the same, they’ve been 8 or 9, I mean the tech industry has 12 to 14% margins, the financial industry has 17% margins. I can think of just one industry after another: the entertainment industry is notable for its higher profit margins. You know, the only one that I’ve seen here if you want to take Fox News and compare it to Exxon, Fox News’ margins have gone up; Fox has got record profits but you don’t hear anybody talking about, “well, maybe they should have a windfall profits tax and take some of that money and give it to businesses who can’t afford to pay Fox’s advertising rates.” You know, you don’t hear that. [28:28]
JOHN: O’Reilly wants something more that that:
O’Reilly: Here’s what I want. I want all the oil executives to go to jail, and I want all the consumers to cut back.
Lieutenant General Russel L. Honore: "you stuck on stupid. I’m not gonna answer that question.”
JIM: You know, I keep thinking about that when he says “I don’t want to hear that, I don’t want to hear that.” In other words I don’t want to hear anything rational that contradicts the point I’m trying to make. Don’t tell me anything that contradicts my thought process here, because I can’t handle it. And it’s amazing when it comes to oil, he really demagogues this with the stuck on stupid routine. Let’s go to that comment that he makes that they actually add on to what they get from OPEC.
O’Reilly: Somebody, Dr., from the inside told me every time OPEC rises the oil price, every time a speculator somewhere in the futures market bids up the oil contract, the oil companies find a way to actually add on more pricing into it. So every time it goes up they make a little bit more, thus you have, presto, record profits.
Let me just refute this and I’ll go back. First of all, Bill O’Reilly – and I’m speaking to you directly –when you’re in a business and you buy oil from somebody, let’s hope if you’re going to remain in business you’re going to tack on a price to the price of oil that you pay. It takes money to refine, transport, process oil, so everybody does it – I don’t care if you’re buying oil, natural gas, buying fertilizer whatever it is, cement – you’re going to add a profit margin. But if you’re saying all the companies are adding additional money, it doesn’t stack up. Exxon’s profit margins peaked in 2003, and their profit margins aren’t going up. Bill, their profits are going up because the cost and the price of the product they sell is going up. When you see the price of oil go from $45 a barrel to $65 a barrel – over a 50% increase – well, let’s hope if you’re selling this stuff, you’re going to sell that at a higher price, you have to, because it’s costing you more. The 4 million barrels that Exxon produces on a daily basis a good majority of that is imported. In other words that doesn’t come from Exxon’s fields, so a lot of the stuff they process they have to import: they buy it from the Middle East; they buy it from Nigeria; Venezuela or wherever they have contracts. And if the world price, if the spot market is $65, that’s exactly what Exxon is paying for.
Gen. Honore: Don’t get stuck on stupid!
JOHN: How’s that for an insert.
JIM: Oh, he demagogues this, and here’s the problem of the O’Reilly’s of the world and, of course, that circus that went on with the Congressional investigations of the oil companies, that by being stuck on stupid we’re not doing anything to solve the problem. How are you going to get alternative energies on line? How are you going to get or create incentives and open up a lot of the oil areas? And one of the problems that you had is that a lot of the politicians that are calling for punitive measures all fantasize about energy independence while blocking methods to achieve it. We had Washington Senator Maria Cantwell, I believe, who has sent letters to regulators demanding investigations into why there aren’t more refineries in the US, but she supports restrictions on putting refineries in the Puget Sound. You’ve got Senator Byron Dorgan of North Dakota who wants a 50 cent tax on the price of oil above $40 a barrel, and would exempt companies that invest in new energy production. Yet Mr. Dorgan opposes new energy production in places where companies want to explore: Arctic National Wildlife Refuge in the outer continental shelf. And so, what you’ve got in an election year is you’ve got these populist TV anchors like O’Reilly demagoguing this, and they’re doing it and it’s playing right in to the [inaudible]. Do you see any of these anchors or news people saying: “Look, we used to produce 9 ½ million barrels in terms of oil, today we’re only producing 4.4 and on an oil equivalent basis we’re producing a little over 7 million barrels a day, and yet we consume 22 million barrels. We’re importing 70% of our energy needs, and guess what it comes to us from people that we don’t control. These are the intelligent things that we should be doing, and we’re not doing them.” [33:23]
JOHN: Yeah, this was a conversation on Kudlow, that was on CNBC and it started off on the whole issue of oil and oil companies gouging, then it made a jump to global warming and it picked up right from that point here:
Pat Buchanan: There are a lot of folks as intelligent as Joe Conason who believe it is not a danger. Industry is not primarily responsible, and we ought not destroy the economy simply on the basis of a hypothesis.
Joe Conason: No one is advocating we destroy the economy, Pat. But it would be good if Exxon-Mobil took the money it spent in propagandizing on this issue and put it in to alternative energy research instead. Wouldn’t that be better? That would be a lot better.
Buchanan: Well, Joe, let me tell you something the prices they’re getting for oil and gasoline now are the main thing that are going to drive people into smaller cars, alternative sources of energy because if gasoline is $3 or $4 a gallon, all of a sudden these alternative sources of energy work.
See, the debate still hasn’t rotated around the critical facts. It’s still got a lot of ideology built into it.
JIM: Sure, and as he was pointing out in that, he says take the money that they’re spending in propaganda. The reason they’re doing that is because they keep getting bashed by people like this idiot, and then people like O’Reilly, so the only way that you can say, “hey, wait a minute we need to tell our side because nobody is on our side.” What we’re doing is caught up on the stuck on stupid debate.
JOHN: Well, Jim, you know we’re still stuck on stupid, right now. We have a declining oil supply. It’s taking longer and longer to get it to market due to a number of different factors, not to mention the multiplier effect that’s going to kick in as it becomes scarce, because we have to use energy to get the energy here as well, and to quote sort of an old classical analogy, the day of wrath and reckoning is eventually going to eventually come home to roost. And this day of reckoning is not far in the future.
JIM: No. and I think you’re going to see more of the kind of things the President said in the State of the Union, I really think in the next 12 to 18 months you’re going to see headlines on CNN, in Time magazine, about peak oil and then you’re going to have what I call a panic that grips society. And at that point, John, people are going to say, “Holy Cow, peak oil,” and there’s going to be a scramble and it’s going to go “what works, what do we have right now, that we need to get kicked into high gear.” You heard the President talking about ethanol. So alternative fuel stocks I believe are going to go ballistic, and that’s one of the things that we’re doing now: our energy portfolio is moving towards 50-50 between energy production, and this year we’re going to complete the process and move it to 50% alternative energy. We moved into that area last year, and as I’ve been writing and telling people about energy going back to the year 2001, and especially in the year 2002, when I wrote Hubbert’s Peak and Power Shift, the thing I’m trying to tell you now is alternative energy is going to be the next big thing. I wrote The Next Big Thing in 2002. And I talked about the commodity bull market, but perhaps another thing that I do this year, if I write anything, because I’m not going to be doing much writing this year this year is a long sabbatical being prepared for peak oil, because I am just absolutely convinced as I was in my research I did on the inflation-deflation debate back from 2002, all the way to 2004, when I reached my conclusion: The Great Inflation. Now, I’m devoting just about everything because this is going to be the most impactive event in our lifetime if depending on a person’s age, if you were old enough to have gone through the great depression or fought during World War II, these were significant events in your lifetime. I think the generation that came after for the boomers and the X'ers peak oil is going to be the most significant event in our lifetime, and I think it’s time that we started preparing for it. [37:39]
Emails and Q-Calls
JOHN: Well, first of all, Adam writes to us, he said:
You are one of the few people who seem to get it right on inflation. Part I of your series served as a nice refresher. Curious whether Part II is in draft mode and when it will be ready. I appreciate your contribution. This is the first time I’ve been to the site and now I’ll explore in a little more detail.
JIM: Adam, actually Part II came out last year. It was in one of my Storm Updates. It was The Two Bens, it was an article I published on October 28th. So if you go to our website on the right hand side under Storm Watch look under past updates, and The Two Bens was Part II.
JOHN: I’d like to remind everybody that we have a call in line which is active all during the week, you’re welcome to call in questions for the email segment of the program which is now voicemail as well. We ask you to keep it short: just give your name; where you are; and your question. And one of them of course sounds just like this. Oh the number by the way is 1-800 794-6480, that’s all during the week you can call it in.
Hi, my name is Marty, I’m from Worcester, Massachusetts, and first of all I want to thank Mr. Puplava and the rest of you, for all the help that you’ve been, and the wonderful work you’ve been doing for at least tens of thousands of people like myself who would be lost without the excellent, and good advice, that you give. And it’s been very, very helpful to me. It’s saved me what little I have, and made it grow.
My question is: Mr. Puplava was talking about mining and how energy was going to affect the profits from mining companies, and I was wondering why miners can’t use some kind of a distributed energy system like hydrogen by wind, and make electricity by hydrolysis, and save the excess in fuel cells? I know this technology exists, it’s developing. I own some shares in distributed energy from Connecticut, and they’ve got a little system that’ll fit in a small trailer truck, and I’m sure it will power enough energy to run a small mine. So that what I’m saying is some of these remote areas as long as there is wind or sun, some of these mines could generate their own electricity by a hydrogen system, and actually save money over the price of oil. Thank you very much.
JIM: Well, first of all, you’re going to start to see that, for example in the Canadian oil sands where they use natural gas to heat bitumen, they’re talking about putting in a nuclear power plant, what would be more efficient than using natural gas, right now, especially as their natural gas goes into decline in Canada.
You’ve got Brazil where they’re using ethanol. I think you’ll start seeing more of that as the price and cost of energy goes up for miners, they’re going to be seeking ways to mitigate that. I mean you have Newmont, one way they hedge their energy costs was they invested very heavily in the Canadian oil sands. So, it’s coming. [40:59]
JOHN: Yeah, ironically that ties in with what I said earlier about costing to get energy here. It’s not just the energy that we buy, we actually have to use energy to get it here as well. Moving along that line.
Emil has asked:
Given the expanding government debt in conjunction with the increasing costs of government entitlements are tax-deferred saving truly optimal? Don’t you run a significant risk of paying higher taxes later ,when the governments fiscal situation reaches critical mass? Plus your overall performance may not outpace true inflation. Rules can always change too, so why bother with tax deferred investments.
That’s a true point though, where the rules of the game are always changing and you’re jumping through hoops.
JIM: Well, you hit upon a key point. I think when foreigners no longer want to finance us I think one of the things you’re going to see is they’ll pass some kind of law called the Retirement Security Act and they’re going to require all pension plans to hold zero coupon bonds which will be worthless as a percentage of their portfolio, theoretically guaranteeing its future value. That’s coming. That’s coming. And certainly higher tax rates are coming. So, if you can invest on an after-tax basis, I think after-tax investments are going to be increasingly more important because they’re keeping a close eye on pensions, and the one thing you always know regarding pensions, they’re always changing the rules. I can guarantee you that. And when they start looking for a good source of money pensions are going to be one of them.
Hi Jim and John, my name’s Nick. I’m calling from Sydney, Australia just got a question regarding a comment you made a week or two ago about natural gas, and you stated something to the effect of the weekly figures reported not being actually gathered from the field but rather just created based from the seasonal estimates and the like. I was just wondering whether you could elaborate on that a bit further, please. Thanks a lot.
Nick, we already covered that topic in the second hour with my interview of "Zapata" George. In fact it was a lengthy discussion so I’m going to refer you to the second hour of this week’s broadcast where we discuss that, and then also to the Other Voices segment in this third hour of Mike Bolser that talks about how some of this data is manipulated. [43:21]
JOHN: From the shores of Puget Sound, Gary’s in Seattle, Washington.
As of December 2005, the M3 money supply was about $10.2 trillion, the current rate of increase is at an annual rate of 7.5%, M3 will double in a little over 9 years at this rate. What will be the effect on the economy if we are looking at an M3 of $20 trillion increase in December of 2014? Note that the European M3 has increased at a higher rate since the introduction of the Euro.
JIM: Well, first of all if we take a look at the last quarter, M3 was rising over 9%. The impact on the economy to your question is that the US is headed towards hyperinflation especially as entitlements consume more, and more of the US budget. They’re almost 60% of the budget right now. It’s hands off for everybody, and now you have the largest population of retirees headed into retirement in the next decade with the Baby Boomers and there is no money in the Social Security Trust Fund. We have 51 trillion – and let me just repeat that word again – 51 trillion of unfunded pension, social security, Medicare liabilities. It’s only going to get worse and you’re going to see the money supply expand at a faster rate, which is the reason I believe they’re getting rid of it next month.
JOHN: it’s kind of interesting to note Ben Stein was calling it in the 70 trillions a few weeks back on one of the talkies out there.
It’s John from Martha, Texas. My question is – I’ve heard different opinions on this – we of course know that gold and silver bullion and stocks are in a bull market now. What I’m wondering is if the broader stock market goes down but gold and silver bullion still remain in an upward trend will gold and silver stocks go down with the broader market, or will they reflect the higher value the bullion is reflecting?
JIM: I believe that the stocks will go up. You may see some periodic sell offs, but the best thing that I can tell you is if you go back and look at a chart of the AMEX Gold Index, which is the HUI or the XAU, go back to 2000, because in the year 2000 you had the XAU go down slightly and remember the stock market was going down. In fact, if you go back to the year 2000, you’ll see the XAU index went down from about roughly around 60 to 40 that year so stocks did go down, but during the downturn in the stock market in 2001 and 2002 from early 2001 to the present day gold stocks have been going up. So they went up during that period of time, they also went up during the downturn or mini downturn that we had in the stock market in 87. And in the stock market downturn that we had in the 70s gold stocks did very well while the Dow had one of its biggest bear markets, the 73-74 bear market was the time where gold actually went from $35 an ounce, from 1971 when we no longer backed the dollar, to $200, so it had a 4 or 5 fold increase. So, I think it will do very well. [46:49]
JOHN: Peter’s in Farmington, Connecticut.
A question. Is it possible that the Iranian regime is not serious about its immediate desire to enrich uranium but is proposing this as a diversion to cover the opening of its oil market this March? Is it possible everybody will be so relieved when the Iranians grudgingly abandon the enrichment plan that no one will even notice their new oil bourse.
JIM: I’ve heard a lot of talk about the Iranian oil bourse. The euro is not ready to replace the dollar, so I’ve seen this thing overblown in proportion to its impact. It will have some impact, and eventually we better get used to the idea that we’re going to have a petro euro, but in terms of is it curtains for the dollar longer term the answer to that question is yes, short term I don’t think so. The Europeans are inflating just like us, they have problems with their economy just like us, the only difference is they’re not running trade deficits. [47:51]
JOHN: Here’s a related question.
Yeah, my name is Peter  and the question is with the Prince of Saudi Arabia flying over to China signing up does that put the final and Iraq I mean Iran selling oil in euros does that put the final stake in the coffin of the oil importing for the United States? Thanks.
JIM: I would say it has two impacts. Number one, Saudi Arabia is hedging itself, they don’t want to be totally beholden to the United States, especially after the comments the President made in the State of the Union speech on Tuesday. And also it puts itself in a better position I think and the more important thing about Saudi Arabia doing something like that or Venezuela doing something similar with the Chinese, or the Canadians, is as demand increases for oil in the United States, and there’s are very few sources of increasing supply, it is going to be very, very competitive because now the United States is going to have to compete for that oil with China and with India. So that if we’re importing 17% of our oil from Saudi Arabia and we say, “look, we need another 5 or 6% than what you’re giving us now.” You know, Saudi Arabia can say, “hey, sorry, we’re giving it to the Chinese.” So, if anything I think what it’s going to do is create confrontation. [49:14]
JOHN: Well, Jim as we round out this part of the emails we’re going to move into other voices right here, and Mike Bolser is going to join us, but a comment by the President actually backed up what you said, and remember it was just a few years ago, that quite a number of people in Congress were booing when he said we were in a crisis when he once again reiterated it.
President Bush: The retirement of the Baby Boom generation will put unprecedented strains on the Federal government. By 2030, spending for Social Security, Medicare and Medicaid alone will be almost 60% of the entire Federal budget. And that will present future Congresses with impossible choices: staggering tax increases; immense deficits; or deep cuts in every category of spending. Congress did not act last year on my proposal to save Social Security.
Here again Jim, just like oil we have a very serious admission that we really do have a crisis in the works, and the sooner we get to work on it, and drop the nonsensical rhetoric the better off we’re going to be. [50:11]
Other Voices: Joe de Courcy
JIM: Joining me for Other Voices this week is Joseph De Courcy of Courcy’s Intelligence Review.
And Joe, I want to begin with the situation in the Middle East, we had Hamas’ overwhelming election victory last week; we’ve got Iran being belligerent. Bring us up to speed in terms of your interpretation, where are we going here?
JOSEPH DE COURCY: Well, I think the answer is that if you give a free vote in most of the Middle East that the Islamists will win, and I think that they would win in Egypt on full and free election; they would probably win in Jordan; they could well win in Syria now. So, I think that’s the main thing that we’re seeing from Hamas. This is not just because everyone agrees with everything that the Islamists stand for, but it’s because the established Arab nationalist parties and the Palestinian ones, and the ones in Syria, and previously in Iraq, are so corrupt and have not advanced the Arab cause one bit. And I think that’s why we’re seeing this response when the Arab people are given the chance to vote, this is the way they’re going. [51:25]
JIM: You know we’ve had some very belligerent statements coming from the President of Iran wanting to wipe Israel off the face of the map. We know that Hamas is very belligerent, we also know that Iran is funding the insurgency in Iraq. Where does this leave the US and where does it leave Israel? On the day you and I are talking Condoleezza Rice is pressing for isolation of the incoming Hamas led government.
JOE: Well, I think the Iranian situation is particularly interesting because really since the revolution – I mean not all the time, but largely speaking – Iran in its foreign policy has been reasonably pragmatic. They’ve always had fiery sermons on Fridays and all the rest of it, but it’s much more pragmatic than most people acknowledge, and it’s not always stuck with Islamist causes when it has been against its interests to do so. Because India is a good ally it has always opposed, or it hasn’t helped the Kashmiri cause; it hasn’t supported Islamist causes in Central Asia, which might upset Russia; I don’t think it’s ever supported the Cypriot cause etc. And it’s always been pragmatic and this is one of its strengths. And of course one of the things that is dangerous about it instead of committing the crass sort of misjudgments that Saddam Hussein did, it’s always been much cleverer in the way it’s treatied with the West. And that’s something we’ve got to manage about it in power, and when I say in power I mean one of the people in power, and really expressing these views very publicly and very aggressively. And one wonders why?
I think that the reason for this is because Iran is under a lot of pressure internationally over its nuclear program and the one thing because the Iranians are not Arabs and they’re minority Shia and they’re non-Arab and yet…the only thing which it can appeal, the only cause on which it can appeal on across the Middle East is on the Palestinian cause. And I think that because it’s finding itself under pressure on the nuclear question that it’s trying to rally Arab support because the Arabs – the other reason why the Arabs are concerned about the Iranians is because the Iranian advances within Iraq, which of course has got the Gulf Arabs very worried, and so again this is another reason why the Iranians are trying to rally the Arab Street to its cause by playing up the Palestinian. I think that’s what we’re seeing there. [53:58]
JIM: What about the position of the Russians and the Chinese who are linked to Iran, not only economically but strategically and politically?
JOE: It’s very, very interesting indeed. The Chinese of course their main interest is to stop or to neutralize or to balance American global dominance. And it’s been very alarmed by American unilateralism, by the fact that it’s prepared to attack Iraq with or without UN authority etc., and so the Chinese have tried to put together what they call a multilateralist type alliance where, you know, Third World oriented Brazil etc countries that are against US unilateralism – and that’s its main interest when it comes to the Middle East question. It has no great reason to support the Palestinians or anything but it just doesn’t want to see the Americans just doing what they like, when they like, and interfering in other peoples internal affairs which is also a big issue for the Chinese of course.
The Russians are much more complicated. They’ve got very close alignment of interests with Iran. When I say alignment of interests they realize that Iran can make life very difficult for them in Central Asia and Iran has always stuck to its bargain ever since the collapse of the Soviet Union not to push Islamic fundamentalism in Central Asia in return for Russian support. It’s stuck religiously to that agreement. So it’s been very, very interesting to see over the last week or two when as the debate has been raging about what to do about Iran’s nuclear ambitions and whether it should be referred to the UN Security Council etc., that whenever the Iranian policy makers talk about Russia, people keep on referring to, “well, Russia’s got regional interests, it’s more than just a nuclear question for them and they’ve got regional interests in which Iran is involved,” etc. And basically what Iran is doing here is reminding the Russians that it could make life very difficult for them in the Caucasus and in Central Asia. And the Russians themselves are in two minds. You can read the debates in the media on the television all these Russian experts are trotted out again and again and again and you’ll find a set of them saying we’ve got to support Iran, and you’ll find others saying, “we’ve got to side with the West.” And they’re essentially of two minds as to what to do. [56:17]
JIM: And looking at this longer term does this end in confrontation, or do you think the greater powers Russia China, the United States the Europeans would be interested in making sure this ends peacefully, because this has the potential to put the great powers at odds with each other.
JOE: Well, I don’t think anyone has got a vested interest in it ending in a major confrontation, but I don’t think that’s really the main point. I think it has the potential to end in a major confrontation through misjudgment and through just the remorseless movement of events. Iran wants access to nuclear weapons or the ability to make them. For obvious reasons, the West and Israel do not want Iran to get to that stage. The Russians are not prepared to put a lot of pressure on the Iranians to stop them for the reasons we’ve just gone through. The Chinese for slightly lesser reasons are also reluctant to put a lot of pressure on Iran. So Iran feels in a relatively strong position. It thinks it’s dispersed its nuclear facilities sufficiently for to stop anyone wanting to attack them or thinking it’s worth doing so because they would survive. And it thinks it’s in a relatively strong position and can get away with it. I mean it also knows that the Americans will be worried about what it could do, about how it could make more trouble for the United States in Afghanistan and Iraq, so it thinks it’s in a relatively powerful position.
Now, there’s an awful lot of scope for misjudgment in all of this. And then you’ve got to factor in the Israelis. Now, back in May the Israelis were saying it didn’t want the Iranians getting nuclear weapons; obviously they didn’t want them to but they might just have to live with it. There seemed to be a suggestion there that the Israelis were quite content with deterrence, that they could park nuclear armed submarine off Jordan or Iran, or they could send missiles from Israel itself, and that would be a sufficient deterrent. And now that mood has changed entirely and the latest signals we’re getting out which could be part of the election process but I think is more than that, the latest signals coming out of Israel are that under no circumstances can they allow the Iranians to have a nuclear weapon. And they’ll allow the West to use diplomacy; if that fails then they will attack and know that they can’t eliminate all the Iranian infrastructure but they can delay the moment at which it acquires nuclear weapons by some years. And of course, a delay is an advance as far as Israel is concerned, because who knows what could happen in 2 or 3 years, there could be a the counter revolution, the young liberals could take over then it would be an entirely different issue. [58:51]
JIM: And a final question, Joe, on January 11th the Russian Foreign Defense Minister Sergei Ivanov wrote an editorial in the Wall Street Journal, where he made the case for rearming Russia, and he talked about adding a strategic ballistic regiment; he talked about a new ballistic submarine that they’re getting ready to launch; and then also the training and development of a rapid deployment force of 250,000. How serious is this?
JOE: Well, Russians retain their great power ambitions. There’s no question about that. They were greatly hurt by the collapse of the Soviet Union, they went through then an extremely difficult phase at what people still talk about putting the Soviet Union together the fact which was an impossibility the Russian economy was about the size of Belgium at one stage. But now things have changed around, I mean the political situation has stabilized enormously under Putin, the price of oil has made a huge difference to the economy, and they’re getting back their confidence, and they’ve got a bit more wealth and they’re beginning to understand, beginning to work out what post-Soviet Russia should look like, and its position in the world etc. And it is no surprise that they want to build up their military power again. Now, I don’t think for a moment that they’re going to challenge the United States on a global basis as happened during the Cold War – I really don’t think that that’s going to happen again - but that’s quite different from what’s being proposed here which Russia continues to be comes again a State with a powerful military which can deploy within its main region of interest, which of course is the Middle East. [1:00:22]
JIM: Alright. Joe, I know you have to get to another meeting we appreciate you joining us from London. If our listeners would like to find out more about Courcy’s Intelligence Review why don’t you give out your website as we close.
JOE: Yes, it’s CourcyInt – which stands for Courcy Intelligence – Courcyint.com.
JIM: Joe, thanks so much for joining us and all the best, Sir.
JOE: Thank you very much indeed.
Other Voices: G. Michael Bolser
JIM: Joining on Other Voices this week is Mike Bolser. He’s proprietor of InterventionalAnalysis.com.
Mike, before we begin our discussion, why don’t you tell our listeners what you do, and explain how what you do impacts the markets. We’ve all heard about how the government intervenes into the market place whether it’s manipulating interest rates up or down, and we also know about the plunge protection committee, but we’ve also seen some things going on in the oil markets, and the gold markets, we know they’ve intervened, so let’s start from that point of view.
MIKE BOLSER: Thanks for having me, Jim. Very briefly, what I do is look at certain pieces of data available published from the Federal Reserve, specifically their repurchase agreement activity from the New York Fed. These are called repos – they’re government securities which certain parties can then turn over to banks for collateral. These securities are in effect funds that are temporarily available to entities like JP Morgan and Citibank, and other primary dealers, for the purpose of implementing what the Federal Reserve euphemistically calls monetary policy.
In addition, I specifically study intensely the currency adjusted prices of strategic commodities and financial indexes including the Dow Jones and how these repurchase agreements are correlated to rises and falls in the Dow. I look also at gold and other strategic commodities particularly natural gas and oil in relation to their currency adjusted actions and, specifically, certain of their moving averages.
Now, what the government does is not surprising, it’s no secret, they intervene in strategic commodities which are really intimately involved with monetary policy. They do so in the Dow Jones by adding increasing amounts of repurchase agreement funding, and there’re parties that work with the Fed then into the futures market and purchase S&P 500 futures to temporarily drive up or drive down the Dow. The amount involved here is massive: the current repo pool, which is the pool of unexpired assets, is near $100 billion on any given day, and those funds are easily capable of steering the Dow in a particular direction.
By the way the same is true in the bond market. The $2 trillion bond market – if you look around you, you will see a $67 trillion interest rate derivatives position at US banks – 33 trillion at JP Morgan alone. This lump of money and specifically its settlement float, is capable of guiding interest rates wherever the Fed wants them.
With regard to energy we have had a dramatic example of what the government can do in natural gas just recently – a fall from 14 to now under $9, with no technical analysis stops along the way, it was essentially a vertical fall. And this came actually right after the Federal Reserve announced that JP Morgan was entering the natural gas market. Indeed, for each day that they were in the natural gas market, following the Federal Reserve’s announcement, the markets fell by 1%.
So there’s no secret here Jim, what the government is doing, and what I try to do is track this and develop a set of tools to detect when the government is moving in. It’s not perfect by any means but it’s a different approach compared with any other form of analysis. [1:04:47]
JIM: You know, you bring up something that really is surprising because if you take a look at the month of December, it was one of the coldest Decembers on record recently. We know that for example during the month of December, Mike, that 25% of our natural gas and oil production still remained offline. In fact, the Bureau of Mines Management has now even stopped reporting on it because they don’t even expect it to be online until the next hurricane season arrives. And yet despite that we had inventories going up and what most people don’t realize is a lot of the inventory numbers we get on natural gas and oil aren’t actually there’s; nobody’s out there going out there once a week with a dipstick and measuring this, this is all done with economic modeling the way they do GDP, CPI and the unemployment rate with the birth-death models. And so we had record cold spell, and yet we were seeing inventories build. You almost have to question this doesn’t make sense, it’s not adding up.
MIKE: Well, there’s a reason for that because really the government’s goal is to support their paper currency, and it has questionable underlying values. And the paper currency is measured in its value by the ability to purchase real commodities, like gold, silver, and oil. And since that’s their job they dedicate a great deal of energy to clouding the supply information, purposely hiding the supply information.
I’ll give you an example of how central banks hide and cloud the amount of gold bullion they have. They do it by aggregating their bullion reporting with something they call gold derivatives – contracts to forward sell, or buy options – put options, call options – they aggregate their gold derivatives with their gold bullion and only make a one line item report. So it’s impossible to determine how much gold the central banks actually have. Now very few of these banks actually by constitutional decree have to report how much bullion they have; Portugal is one of them. So we get a kind of litmus test on a few of the banks but by and large all of the Bank for International Settlements’ central banks have effectively hidden their gold supply from world view in an effort to opacify their activities – to cloak or hide their activities in the gold market. This handicaps general traders terribly.
The same is true as you pointed out in natural gas where the stocks were reported as going up when one day 2 months ago the EIA web page showed that there was a notice to participants that the pressure readings inside the salt-dome storage capacities were so low that the structural integrity of the pressure chambers was called into question. There’s a limit below which the pressure would cause the chamber to collapse. This was reported on the website and immediately removed in a matter of hours later. When you look at the official information on storage there is no record of that low pressure reading in the long term EIA natural gas storage chart. So there’s clear evidence that the government is playing around with the storage information for natural gas. We could talk about the Strategic Petroleum Reserve too. It’s overfilled now by quite a margin with physical barrels, but we do not know how many of those barrels have been sold forward. So we really have no information at all – useful information – to tell us where the government stands in terms of how much oil it has to drop on the trading markets to steer the prices. And it’s this – I’m glad you brought this up, Jim – because this is one of the crucial weaknesses that commodities traders face today: they just don’t have any trustworthy information in the energy markets and specifically in precious metals. And this handicap makes an average trader who wants to go against the government – and by the way anybody who takes a long position is taking an anti-government position – those people are terribly handicapped because of this opacity and this major effort to hide the storage available to information analysts such as myself.
JIM: Now let’s bring this up because – I want to come to the gold market – because we’ve seen this big surge in gold prices, the gold stocks have gone up, we know for example that M3 is growing at over 9%, and it’s accelerated in the 4th quarter; next month they’re going to do away with reporting of M3.
And Mike, one thing that the Fed is going to have a problem with is they’re going to say, look, they need a deflationary scare so they can reinflate the economy much like they did – most people don’t realize in the year 2003 they changed the way CPI was measured: they removed housing as part of the index and substituted rent, and then they substituted used car prices versus new car prices, the net effect is that they brought the CPI from over 3% down to about 1.6. And there was a big deflation scare, that was the buzzword on Wall Street. We saw the 10 year Treasury note get down to about 3 ½ %, and everybody was worried about deflation which gave the Fed the cover to reinflate. They need another cover and to me that makes gold very vulnerable for the government to come in here to smash it.
MIKE: You know, I would advise listeners to proceed with very, very serious caution in the precious metals market now. I’ve been advising this for some time, and I’ve underestimated the degree to which the government would set a trap for longs by allowing gold to rise – to now just about $575. Most certainly the Fed has a long term plan and deflation is part of that plan, basically they want to prepare – as you said – the markets for a falling Dow, a falling gold price, a rising 10-year – which incidentally a 10-year note and a Treasury bond is their centrally targeted item to survive any sort of economic rough waters. That is what they really want to rescue, because the housing market is linked to it, and in order to have rising bonds you need to have falling gold. This is a position that assumes the government has had a long time to set up these operations, and they have. And it also assumes that the government has been able to secure bullion that the regular analysts can’t see. And I’ve even gone so far as to suggest there may be a specific favored client to have several thousand tonnes and is prepared to drop it on the market at the appropriate time. So, if I were long gold now I would be very, very worried. [1:12:12]
JIM: Yeah, I just can’t see them going on hold, the pressures that will come on the dollar, and then talking about, “well, we’ve contained [inflation]”. Remember the story for raising rates was to keep inflation in check, and if they’re going to say we’re done, and inflation indeed has been kept in check that is inconsistent with a gold price that could be approaching $600. So, it seems to me that an attack on the gold market is coming here.
MIKE: Yes, it’s not consistent to have a plunging Dow, to have interest rates spiking, you would basically have a disintegrated Federal Reserve system, at a time when their anointed new Chairman Ben Bernanke, a master of communications policy – which is a euphemism for propaganda- is about to make his first official move. And the Federal Reserve is a very worthy opponent, I mean, they’ve been at this for a while, they know what they’re doing, they are by no means you know a toothless threat at this stage, and when you see the kind of extremes they went to in 2004 in the silver market, a very tiny little market whose production comes almost all from Mexico, they let that run up from the mid 5s to over 8 and it fell back 33%. This is the kind of artificial rise that the Federal Reserve uses when they want to quell a rising commodities market: they just let it rise; they let a lot of people get long; and then they cut the legs out from under them and then it comes back. They’ve done it to natural gas in a market where there really was a deficit and they still managed to bring the price from $14 down, it wasn’t just the warm weather here because there wasn’t much of it here to begin with. So here in gold we’re looking at the same sort of a replay- a strategic commodity on the loose, running up, everybody thinking that commodities are going to run up forever, and that gold is going to go past $600, and you know, God bless them. I like the gold bugs. I’m one of them, but I don’t want to see them get massacred again. It’s happened too many times in the past.[1:14:15]
JIM: Well, I’ve seen it repeatedly in 2002, in 2004, and who knows what happens, and maybe they trot out the China slowdown story as they do periodically every year around March or April, or whatever the story is. If they trot out the China slowdown story that would have everybody scared about deflation and that would certainly let some of the air out of the commodities market. So, we’ve seen them take natural gas down because everything that was happening to natural gas prices in the month of December did not look right, especially when you have the Bureau of Mines Management saying, “we’ve got 25% of our production offline” – right in the middle of a Winter season, and also that cold snap we had in December.
Mike, if people wanted to learn more about what you do, how could they do so?
MIKE: Well, my website is InterventionalAnalysis.com. the articles I offer there are somewhat technical but I try to keep the abstract you know down to a reasonable level, they’re all free. My service is $22 a month about what a gymnasium bill would be. And everyday the recipients will get 2 communications: one a large one about 11 and another one focused solely on precious metals and gold, at about one o’clock, and they come in the form of an email. [1:15:34]
JIM: Well, Mike, I’ve seen your work, and I get it and it’s amazing how these markets are manipulated, and how you think something’s going to go left it goes right which is you know is where the government wants it to go. And very important work. I’d like to have you back on the show, and thank you so much for joining us, and give out your website one more time.
MIKE: InterventionalAnalysis.com, all one word. Thank you very much, Jim.
JOHN: Well, you can’t say it wasn’t an action-packed show again. Looking forward to our guest next week, who is?
JIM: Joining me on the program next week will be Congressman Kurt Weldon, he’s written a new book called countdown to terror, it’s all going to be about those wild cards that appear out of the blue like 9/11. This is an interview you’re not going to want to miss.
So, in the meantime, on behalf of John Loeffler and myself we’d like to thank you for joining us here on the Financial Sense Newshour until we talk again have yourself a pleasant weekend. [1:16:30]