Financial Sense Newshour
The BIG Picture Transcription
March 4, 2006
- The Last Oil Crisis
- Inflection Point: The Next Oil Crisis
- Emails and Q-Calls
- Other Voices: Richard Loomis, World Energy Source
- Other Voices: John Williams, Shadow Government Statistics
The Last Oil Crisis
JOHN: Well, Jim, you know I’ve been listening to all sorts of things going on out there on the talkies, and talking to people in think tanks especially – some of the Conservative think tanks back in Washington and elsewhere that monitor various trends or are advocates of free enterprise – and there is a plethora so to speak, a plethora of voices, saying a plethora of things, say for example: “Technology will fix this problem. We have infinite faith in the free market capitalist system, technology is going to fix this.” And I finally said to the gentleman: “No, you don’t understand, technology can’t replace what isn’t there to begin with.” And on the Liberal side of the ledger I was listening to Jeremy Leggett talk about the two greatest crises being global warming and oil, but of course if we don’t burn fossil fuels because of peak oil then global warming would take care of itself – these things are interacting. And I don’t think they’ve caught on to the implications of that either. So, there’s a whole plethora of voices going on, a lot of it contradictory, and very few people are looking at the last oil crisis that we had, and comparing it to this oil crisis and looking at the whole chronology of events. So, that’s what we need to do here on the program today.
JIM: Yeah, what we’re going to try to do today, because we believe that we’re heading into an oil crisis, at this point it is unavoidable, there’s nothing that we can do right now that’s going to stop that crisis from occurring, and as you mentioned John, whether it’s belief in technology, or it’s market forces what we need to understand is because when people look at the 70s, and go: “Yeah we had an oil crisis in the 70s, oil went from a couple of bucks a barrel to almost $40 a barrel at the end of the decade, and look we dealt with it, we came up with more efficient means, CAFé standards went up for cars ,we came up with alternative fuels, we really started to build nuclear power plants, there were a number of things that we did, we found more oil, the crisis was over and we had 20 years of prosperity.” So when people look at this situation that we are now facing today, they look at it from the lens of the previous crisis, and I think what we need to do is put the previous crisis in the 70s in perspective, then point out what is so much different this time, than what occurred in the 1970s.
And the first thing that we have to begin with the last oil crisis is, because it was really geopolitical in its nature, there was no warning sign leading up to the first oil shock in 1973 and 74, and the second oil shock that occurred in 1979 with the fall of the Shah of Iran. Basically oil prices were level between 1950 and 1973. And I hope Bill O’Reilly is listening because this was the era of the big oil companies, the big oil companies – the Seven Sisters – basically controlled about 50% of the production of oil worldwide. And because they did this, these worldwide oil contracts were traded on a prearranged basis – in other words the contracts were fixed price contracts rather than free market prices. At that time the major oil companies – the Seven Sisters – basically set the price of oil. They told OPEC countries, where the majority of their reserves were still located, basically what the price was: “hey, we’re going to pay you this.” It was set for a fixed period of time, and because of that, and because of OPEC, oil was so cheap. And remember, the oil companies owned the assets at the time, and there was a sharing arrangement that they had with the host country, and because it was so cheap to get Middle East oil out of the ground, we had these contracts in which the price of oil was basically set at $2 to $3 a barrel. So from 1950 to 1973, you saw these flat oil prices despite some of the fastest economic growth that we were seeing globally, whether it was the United States or Europe, or even Japan. [4:35]
JOHN: Right, basically what you’re actually saying is the whole market was pretty stable for that matter.
JIM: Sure, because of all these contracts and because there was plenty of oil at that time, since the United States was still the world’s largest producer of oil. Many people may find that hard to believe today, but we’re the only country outside of Saudi Arabia that was ever able to produce roughly almost 9 ½ million barrels of oil a day. We don’t do that today – but at that time we were. And because these contracts were basically fixed contracts, what people saw was the price of 25 cents a gallon for gasoline, throughout that tremendous growth period. So, there wasn’t any price variation as for example you see today. [5:18]
JOHN: You know I actually have here a charge slip from when I was in college in San Francisco where that’s what I paid for gas, I’ve kept it for all these years.
JIM: 25 cents?
JOHN: 25 cents!
JIM: Yeah, I remember that, I used to mow the lawn and I can remember taking the old gas can down to the gas station fill it up with a gallon of gas, 25 cents, for the lawn mower.
JOHN: OK what blew that apart then. Right we were stable from what really from right around World War II, all the way into the 70s, what took that apart?
JIM: Well, you have this growing political cauldron that was sort of brewing in the Middle East. A lot of the Middle Eastern countries, because of the price sharing arrangements that were set by the major oil companies were saying: “Wait a minute, we’re getting the raw end of the stick, demand for oil keeps growing, we have this product in the ground in our country, we know it’s a finite resource. We see world economic growth growing and we keep selling oil for this same cheap price for the last two decades.” And so there were political forces that were brewing, and one was the founding of OPEC itself, and that really changed the political landscape, and the result was you had these political factors which when they got out of control, they basically put a clamp on our oil supply chain. One of the first things we saw is that nationalization occurred globally: most of the Middle Eastern nations by the end of the 70s, Saudi Aramco had been completely taken over by Saudi Arabia; Venezuela nationalized its oil reserves; you had Kuwait nationalizing its oil reserves; Libya. All these countries basically kicked the oil majors out of their country and they said, “no, this is our stuff now, we’re going to set the terms, and price of oil, we’re going to dictate what we produce, and what the world market is going to pay for that.” And I can remember British Petroleum was kicked out of Kuwait and they said, “OK, if you kick us out we want $2 billion for our part of the bargain.” Kuwait said, “look, here’s $50 million, take it or leave it.”
Now, the nationalization of all the majors’ oil reserves in these countries and the confiscation of their assets, when the majors lost the major source of their oil reserves it kicked off one of the largest exploration budgets in the history of the oil industry, and we saw this large exploration trend that took place in the 70s. But the key thing here is the with the majors’ loss their major source of oil reserves, they lost a major source of setting oil prices, and OPEC started to exercise its political clout. And now OPEC was controlling the price, and they began to use it, geopolitically.
The first oil spike after the Yom Kippur war where they basically warned the United States, “look if you support Israel, there’s going to be a price to pay for that”, in fact the United States was flying in not only oil but also military supplies, they didn’t want the world to know this so they were supposed to fly these big cargo planes in at night, but by the time they crossed the ocean, made it over to Israel, they were showing up in broad daylight. OPEC found out about that, got very upset, and so an oil embargo was imposed against the United States.
The second oil spike occurred in 1979, with the Iranian oil revolution where you had basically 5.5 million barrels of oils, roughly 9.1% of world supply taken offline. In 1979, Saddam Hussein took the reins of power in Iraq, and within a year initiated a war against Iran, so that impacted Iraqi oil production, that impacted Iranian oil production. And also in the year 1979, the Russians invaded Afghanistan. So, you had the change or trading places, so to speak, of power where the major oil companies lost their major source of oil reserves, and the major political clout that they used to have in dictating oil prices. From that point forward, OPEC was in the driver’s seat in terms of dictating oil price, and at the same time what occurred during this period of time is in 1971 US oil production peaked. So in 1972, and 1973 and going forward the US has had to import oil into this country to meet its growing energy demand to keep economic growth going.
Another significant event which will come towards the end of the oil crisis is in 1968, and 1969: the two largest oil finds in recent history were found in the Alaskan North slopes and the North Sea. Those two large oil deposits were found at the end of the 60s, and it would take almost a full decade to develop them, but as we came to the close of the last oil crisis at the end of the 70s, early 80s, North Sea oil production, and Alaskan oil production came online. [10:50]
JOHN: Alright, so we’re looking so far 1950 to 1973, smooth sailing, everything’s pretty stable, everybody knows the rules of the game. Starting in the early 1970s, lots of political upheaval, we look at embargos – by the way, one of the first times that oil is used as a political or geopolitical weapon. And that’s important because one of our guests here on Other Voices in this hour is going to talk about that, and the potential for what this could do here in the world. Now, what happened in response to these shocks that were occurring in the 1970s?
JIM: Well, the first thing that happened with the oil embargo, and the doubling and tripling in the price of oil: 1974, and 1975, global GDP slowed down from an annual rate of almost 6.8%, to 2.3%. We got a recession; in 1974 we got the worst bear market that we had seen since probably the great depression where the Dow lost 55% of its value. We also saw that happen once again in 1979 with the fall of the Shah of Iran: GDP growth fell, we went into a recession by 1981, the Dow had another major bear market. And so world economic growth slowed down, and we saw a rise, an increase in the rate of inflation that was up until 1971; we were printing money but our money was backed by gold so there were lower levels of inflation.
After 71, the US government was free to inflate as much as it could ,and we saw a rise in inflation, a rise in interest rates, interest rates went from the 2% or 3% on long bonds, all the way up to 15% by 1981. The stock market had its worst bear market, and economic growth slowed down as a result of that. So, the rise in oil impacted many things. We saw the full effects of inflation that was manifested in rising interest rates: poor returns in the stock market – a major bear market; a decade, almost 18 year cycle of rising commodity prices – a bull market. I mean the place to make money in the 70s, if you were in the stock market it was small cap growth stocks or the energy stocks. That was the era where you made a fortune buying Exxon, Schlumberger, Chevron – if you were in energy, energy stocks, you made good money. [13:18]
JOHN: OK, now typically when you run into a time like that, the political pressure for the government to begin pulling and tugging on levers is almost irresistible. So, positive or negative responses, what happened?
JIM: Well, if we take a look at the responses to the crisis, government policies were put into place that forced utilities to get rid of oil to generate electricity. Businesses and individuals were all forced to conserve oil, and become more energy efficient. Car manufacturers for example were forced to improve fuel economy; fuel economy literally doubled in this country. And if you bought luxury cars, if you bought a Mercedes it was a diesel Mercedes that got 28 and 30 miles per gallon, not like today’s Mercedes that get lower gas mileage with the gasoline engine. You also had a massive build up in coal and nuclear fired plants which squeezed oil out of the electricity market. If you take a look at what happened in the ensuing 10-15 years going all the way into the mid-80s, nuclear power and coal power became a greater percentage of how electricity was generated in the United States. So, we were using less oil to generate electricity. There was also a large buildup in liquefied natural gas structure.
People remember for example some of the government mandates where the speed limits were dropped to 55 miles an hour, because we know that as you go above 55 it takes more fuel to generate that extra speed. So we had speed limits put in, we also had the invasion of foreign import cars, where since they didn’t have a bounty of oil like the US did, and they levied higher taxes. Foreign car manufacturers were making more fuel efficient car, and that was the inroad of the Hondas, the Toyotas, the Nissans, and the Volkswagens into this country that greatly ate into the market share of the big 3 auto companies in the US. [15:25]
JOHN: OK, Jim, back to the original question, positive / negative overall?
JIM: Very, very positive if you look at collectively year over year demand growth for crude oil, which was growing at a 9% growth rate prior to 1974 dropped to only a 1 ½ % growth rate by 1985. People were driving more fuel efficient cars, we were using insulation, a lot of alternative energy technology came online; cars had improved mileage; we got rid of a lot of oil burning power utility plants; substituted coil, we used nuclear power. So overall the demand growth started to drop, and so at its peak in 1980, OPEC really thought they were in the cat bird seat at that time, but all of these things were now starting to take effect: demand for oil was slackening; you had slower economic growth; and at the same time we were fortunate those two major oil fields –one in the North Sea, and the Alaskan North slope – which were discovered at the end of the 60s were now coming online producing a lot of oil.
So, collectively we were producing a lot of oil and also the US made a deal with Saudi Arabia, Saudi Arabian oil production increased from only 2 or 3 million barrels a day which was insignificant in the 70s to you know 6,7,8,9 million barrels a day. So, we also had in the latter part of the 70s, as a result of higher oil prices, oil companies were using their oil profits, scouring the globe and looking at every inch of land outside of OPEC countries to find new oil discoveries. It was also during this period of time that technology was developed that allowed oil companies to discover what we call deep water oil. So, we went from drilling for oil on land to drilling for oil in the world’s oceans. And so all of these discoveries start coming online, plus the two major discoveries of the North Sea and Alaska, and Saudi Arabia, and the result John is by the mid-80s, the average price of oil in 1980 was around 36 bucks a barrel ,which it hit in 1980, and then we went to roughly $14.40 average by the middle of the 80s. So, it was very, very successful: the combination of technology, the combination of new oil discoveries, and the combination of conservation. All of this reduced demand, increased supply, and the price of oil came down. [18:11]
JOHN: OK, so basically we should summarize this for people, but this is how we dodged the bullet in other words at that time: we were able to pump supply, reduce demand, and that coasted us for what, the next 25 years, something like that.
JIM: Sure. If we were to summarize there was a major push to conservation both with the utilities, with cars, appliances, insulation, the building of homes. We had major oil discoveries by the majors as they were nationalized, as they went to look for new oil to replace what was lost – a major increase in production coming from the majors, North Sea, Alaska, and Saudi Arabia. And so if we were to summarize what happened, the last crisis in the 70s was really a geopolitical crisis: it was the OPEC countries turning the tables, taking the oil away from major western oil companies, taking it for themselves, and they began to dictate the price of oil, and they also used it as they showed in 1973 and 74, as an oil weapon. That was the last crisis. The key in understanding the next crisis is the next crisis is geological versus the last crisis which was geopolitical. [19:42]
JOHN: And turning to our emails today before we move on to Other Voices. And we’ll answer the question what makes this coming oil crisis different from the last one in much more detail, coming up later here on the Big Picture.
First of all, Ari writes to us, Jim, and he says:
Jim, and John, I’m trying to understand what is or what is not excluded from CPI – the consumer price index – I’m getting conflicting reports. I believe you said that food, energy and healthcare and housing are excluded, and then I was reading Bob Chapman’s International Forecaster, which said, “the January CPI rose 0.7% led by housing, food and energy costs.” So, I went to the Bureau of Labor Statistics CPI page, and looked up their report, it’s about in the middle of their web page, under the tables section created by BLS, and entitled Consumer Price Index: Detailed Report Tables 1-29, January 2006. That report includes all of the costs you said were excluded. What is the source of your belief that the CPI excludes these items? I’m just trying to understand the issue better.
JIM: OK, let’s put that into perspective. There are a lot of things that are not accounted, for example, for the cost of housing we use imputed rents, instead of the real cost of housing and real estate. When I say excluded, no, what we’re talking about is when you saw that report where CPI went up 0.7%,, what they do is they talk about the core rate of inflation, and the core rate of inflation doesn’t include the rise in food and energy prices. So, if you look at the CPI report for the month of January it was up 0.7%, that was the headline inflation number, but backing out food and energy gets you to what they call the core rate of inflation and that was up only 0.2%. So, it’s whenever you hear the words ‘core rate of inflation’ it excludes the food and energy component of the consumer price index. [21:49]
JOHN: Interesting. We had an interesting email here from Scott, and he said,
“The guy from South Carolina couldn’t be more wrong..
Now he’s talking about a gentleman last week who said that we were wrong to say the exodus from the Red States to the Blue States were due to tax policy.
“I have sold out of California, and moved to Washington State, and paid taxes on some profits because I think that taxes are pointing up, up, up. When I bought in Washington home prices were $100 a sq. ft., which included the site with a view, what it cost $150 sq ft. to build here in Vista, not counting the site cost and the messing that the cities give you when you try and process a development. If you go to the area West of Reno, and the area South of Reno, and Double Diamond Ranch area you’ll see that many of the buyers are moving in from Sacramento. They can make a house payment in Nevada with the State tax savings they would have paid in California. The exodus has not even begun in earnest yet. You are absolutely correct in your analysis when they are again paying people to drive U-hauls back into California and then the people will wake up. By the way I have a friend who moved to Coeur D’Alene Idaho from Fall Brooks, who tells John to move over.”
As I said last week here in Coeur d’Alene, Jim, in just the last 10 years our population has gone from almost totally locals to a third Californians fleeing the system there. The other disadvantage by the way is when people move out from the blue States to the Red States, unfortunately they bring their somewhat crummy economic attitudes with them, and they start to do the very same thing in those states that messed up the states they’re moving from. For example, here we’re seeing our housing inspectors are all Californians now, and all of a sudden permit prices are soaring, everything you’ve got to do starts to soar, it just starts all over again. I watched this happen in Colorado for the 20 years that I was there. But let us not think this is not happening because of things related to both political and economic pressures, which are not separable.
Hey, Jim, this is Rohan from New York, and I had a question about the gold market, you’ve mentioned in the past that gold is due for a pullback, but I also know that you guys are pretty sensible so what would it take for the pull back I mean there’s already been a pull back to 530, 535 but you guys think the pull back would be more to like 490 or so, so what would it take to change your view. You know, assuming it goes to 600, would that change your view, would you jump back in, or otherwise? Great show, and look forward to hearing your answer. Thank you.
JIM: Sure, if we were to actually break out above those highs on all the indexes we would have to reevaluate, but the one thing that we have seen, and Friday is a good example where you had gold stocks rising early in the morning, you had gold prices up, and the rally couldn’t hold – you had an intra-day reversal. And we’re seeing more and more of that. If you take a look at for example the major gold indexes like the XAU we had a big pop in January, and then it fell in early February, came back up, then went down. So, it’s showing a lot of signs of weakness, so we still think that corrective cycle is still in play by witnessing since the January top. Frank thinks what we’re seeing here is the right shoulder form of a head and shoulder formation. But aside from that, one of the things that strikes me about this fundamentally –Frank’s a technician, I look at fundamentals –as I mentioned a lot of the major [gold] companies were so overpriced in terms of ounces in the ground, ounces in production. I mean you had for example, Newmont mining report this week their earnings were down 67% due to increased costs – low grading that is – and even the largest mining company has terrible economics in terms of what they’re earning for investors. Base metal companies are far more profitable. Newmont's return on equity has been under 4%, and you compare that to a BHP Billiton, or a Rio Tinto, or a Rio in Brazil, companies that are making billions and billions of dollars. As I wrote about in Captain’s Log this week, you’re going to need to have much, much higher gold prices, somewhere in the neighborhood of $750-780 before the gold mining industry really becomes profitable. Right now, most gold mines lose money. So, but yeah, we could change our view, but in the meantime we still think this corrective cycle is playing itself out much as we saw on Friday again.
Other Voices: Richard Loomis, World Energy Source
JIM: You know one thing we’re starting to see globally today it’s almost happening on a weekly basis where many of the countries that control oil are starting to use oil as a political weapon. To discuss that issue, joining me on the program is Richard Loomis, he’s publisher and CEO of World Energy. And Richard, we saw in January where Russia used natural gas for political purposes, we’re starting to see throughout Latin America Hugo Chavez is now starting to use oil to gain influence in terms of influencing politics in the region. Why don’t we begin with that?
RICHARD LOOMIS: Well, I think it’s very interesting. If we look at what Russia’s doing, most of their satellites are headed to the West, so for Russia to become a superpower again it has to slow that process down. Ukraine was the most recent example of this: where they’re trying to become energy independent but were taking advantage of low priced natural gas from Russia to do it. Well, that just changed, it changed in a moment. That slows down the march to the West and shows the power of Russia which has lost its position as a superpower, and could easily regain it under these circumstances.
In Latin America we see – if we compare Russia to using the stick to keep people in line – we see Latin America, a Hugo Chavez who’s more prone to giving away things – gifts, similar to what he did up here in North America, giving low cost heating oil to the economically disadvantaged, as he would call them, in the Northeast. So you have a growing use of either oil or natural gas in politics. Almost in a veiled threat if you don’t do it my way I won’t give you the resources.
JIM: That puts a lot of countries that import energy in a very precarious position because Richard, if we look at where most of the world’s oil reserves, and natural gas reserves are located they’re located in countries that are not traditionally friendly towards the West, or either that, they’re politically unstable, whether you’re looking at the Caspian states, you’re looking at Nigeria, you’re looking at the Middle East, or in this case Venezuela.
RICHARD: Well, about – I think the last numbers I saw – 70% of the world’s reserves are in these countries, and as those countries begin to flex their muscles with this power, we see how it can affect our economy very, very quickly. I like to look at what happened when we had the hurricanes come through our own Gulf and our own supplies were reduced, and we saw suddenly prices shoot through the roof. I think it sent a clear signal our economy is very dependent on cheap fuel, and natural gas, gasoline, and of course oil. And when you see that kind of ripple effect happen so quickly it doesn’t take a rocket scientist to see what kind of power you have when you have control of the resources.
And I think what I find interesting is for such a long period of time the NOCs which would be the national oil companies really needed the IOCs – or the international oil companies – to come in and help them develop their resources. So, they needed us, they needed our expertise, our management our money. But with a high price commodity the money’s there, with our own industry divesting itself of its experts, Exxon-Mobil and Chevron and these companies having to go through huge swings because the price of oil went all the way to $12, so these large numbers of employees were shed from the industry, and landed in the service companies. People laugh about Halliburton and say, “you know this is a terrible thing, look what they’ve done in Iraq,” but Halliburton has some of the very best experts in the industry. So does Schlumberger, so does Veritas, so do these service entities. Those service entities can be hired directly by the NOC and the NOC has the money, and we’re seeing companies like Petrobras take leadership roles, doing fantastic things, right here in our own gulf, on major deep water finds, and yet this is the national oil company of Brazil. So, it’s not Chevron that’s out on the cutting edge, not to say that we aren’t out on the cutting edge, but we’re in the same position, but they hold the reserves. [30:49]
JIM: This is the most remarkable thing because in the hearings on Capitol Hill, following Katrina and Rita when oil prices shot up to 70%, the Congressmen and Senators all seemed like they almost wanted to vent on the oil companies, and what they don’t realize where if you were to go back 50 years ago these IOCs - or international oil companies – dictated and controlled the price of oil, but if you look at the NOCs I think the top 10 producing entities in the world are countries. And I think Exxon-Mobil, which is the largest oil company in production they’re like number 12 on the list. So the international oil companies no longer control – and I forget what percentage, but I know the percentage that they control today is less than what? 10%, compared to when they controlled 45% 50 years ago.
RICHARD: I believe at those same hearings where you had Jim Mulver from Conoco-Phillips, and Lee Raymond from Exxon-Mobil, the head of Shell, and BP US operations discussing this. They said they had six or seven percent of the reserves globally sitting at the table, and when asked point blank how is the price set, I think that Mr. Raymond had a very good answer: “for simplicity’s sake, Saudi Arabia calls and says we’ve got oil at this price, and Exxon has a choice: take it or not take it.” And with that kind of pricing structure it’s not much we can do from our IOCs perspective.
I think they all make very good points in those hearings which is if we’re going to affect the price we must have access to more reserves, and that means more access to our own reserves, and reserves in friendly nations. If I look around the world, there aren’t very many that will let us, really come in and take advantage of this: and it would be Canada, it would be Australia, it would be the UK, and it would be the United States, and the rest of the world has far more restrictions.
Earlier in this conversation, you mentioned Nigeria, very tough place to work. The contracts are difficult and the political risk is very, very high, and you don’t own the reserves. So, it’s tough to work in this kind of environment if you’re going to try and affect the price.
JIM: Let me bring something up here because in your article where you talk about Russia and Venezuela using natural gas as a leverage and a political weapon, the problem that I can see this leading to Richard is that countries have gone to war before when oil is cut off – I mean Japan bombed us at Pearl Harbor because the United States tried to cut off its oil, and if you get countries that start wielding this weapon, and you deny countries access to energy doesn’t this create the possibility for armed conflict?
RICHARD: Well, people are starting to talk about it, and if I look at the Sunday edition of the Times online – January 15th – one of their stories was An Insatiable Beijing Stirs Fear of a Global Conflict Over Oil and I think people are starting to realize this, that if right now the least expensive way to secure these resources is to buy them and develop them, but what happens when there aren’t enough of these to buy: it’s not economical anymore; or because the competition is too high. Now, don’t get me wrong I can’t see the Untied States walking into Venezuela and saying it’s mine now, but there are other nations who may not have that same kind of scruple, who may say it’s better for me to secure this resource, and I think if that starts to occur which we may be headed down that path, I don’t think it will happen in the short term, but in the long term it’s distinctly possible. I mean, what other need do we have in short supply that could create a conflict. You know, conversely as the largest consumer on the planet were we able to reduce our demand we could dictate the price from the consumer side, particularly if there is more available on the supply side. [34:49]
JIM: But you know you have a situation where you have companies like Talisman energy that had contracts in the Sudan, and politically were forced to divest themselves, and I think it was Chinese or Indian companies that said: “Great! Great opportunities for us – we don’t have a problem with human rights,” and went right in and secured their own contracts.
RICHARD: That’s happened to Talisman before, it happened to them in Libya as well. And our own companies have had to stay away from the Sudan, and I think you really have a conflict of interest. If I go back to 1998, Archie Dunham did an excellent piece in World Energy as head of Conoco where he talked about how sanctions simply don’t work because of this economic cost to the person who enforces the sanctions, and the opportunity for those that do not have to adhere to them. And it’s a choice we’re going to have to make. The other issue is how can you support regimes that are for all intents and purposes not doing the best interests for their own people, and it is a huge conflict: do we allow our money to be used to fund those kinds of activities?
And I think you have a difference here also between what can an NOC like CNOOC – the Chinese National Oil Company – what can an NOC do that an IOC cannot. So, if we say that Exxon can’t go to the Sudan, but CNOC certainly can, and it’s in the best interests of their government, and it’s a government owned entity, and they don’t have any of the qualms on human rights, and this type of thing, they feel that’s up to the country to take care of their own people, they’re going to take the resources. I’m not sure where that takes us except there will be fewer opportunities and a higher priced environment. [36:36]
JIM: The problem I guess that this leads to as we saw following Katrina and Rita, if the United States is moving towards importing 65% of its energy needs, we’re putting restrictions on US oil companies in terms of where they can go, number 3 a lot of places US oil companies are no longer welcome, and number 4 if you have more countries, whether it’s Russia, or Venezuela that are going to use oil as a political weapon, I’m not sure where that leaves us in the United States since we’re doing nothing to develop our own resources.
RICHARD: Well, you raise an interesting point. I mean if I look what we have here in the US we’re speaking out of both sides of our mouths. I mean we are saying we want energy independence, and that we can’t support these regimes. We also look to our oil companies and we say you cannot explore. And in a more recent edition of the Monthly Review this was an issue I picked up in an article entitled Gas Wars over there and over here, and one of the things that I talked about was how I think it was Dave O’Reilly who during those same hearings that we were discussing on windfall profits, pointed out that there’s a gas field 25 miles off the shore of Florida that’ll supply a million homes for 30 years. He can develop it quickly, he held the lease on it, he was not allowed to because we don’t allow drilling on the West coast of Florida, which would be the East coast of the Gulf; and that makes no sense.
Recently, New England was having very high natural gas prices after being promised that by going to gas fired generation they would be benefiting the environment, it would be low cost instead, no more messing around with heating oil, of course they’re at the end of the pipeline. Well, Maine is an interesting place, they’ve got these craters in the bay which they believe are methane bubbles. Rather than build an LNG facility where they say these methane bubbles might actually sink the ship we haven’t looked at what is that methane is associated with. I mean wouldn’t it be ironic if we developed an import business for natural gas right on top of a major natural gas field in a market that really needs the natural gas, simply because we won’t allow development off the East coast.
I think it was Hilary Clinton who was pushing for a pipeline down from Canada for natural gas to help out New York. Well, right off her shore, in Buffalo Canyon, are several fields that Texaco discovered – it’s tight gas but would be easy to develop with today’s technology. I think you come down to – I mean when does the American public look at this and say, “wait a minute if we have the resources, if we have the technology we can preserve the environment, and we can develop a more stable supply situation, why are we not doing it?” And this isn’t going to ANWR, I mean ANWR is a whole different issue all together. This is stuff that we could bring online in a relatively quick period of time. California is in the same issue, they know they have the reserves, they’ve got the resources, and they won’t develop them. They’re going to rely on the rest of the country to support them, and then be very upset when the price goes up. [39:38]
JIM: Yes, I was reading a book last night, it’s called A Thousand Barrels a Second by Peter Azakhian I believe is the name, and he wrote something, Richard, that expresses something you and I are talking about. And he said:
In the United States and Canada, a sense of energy birthright is deeply entrenched in our mind sense. We want energy cheap, clean, secure, and discreet. We want to fill our gas tanks and our furnaces without undue concern, drive long distances without worrying about gas prices, and live comfortably in our temperature controlled homes, sheltered from the heat and cold outside. We don’t want to feel vulnerable to the tensions and conflicts of the Middle East, and we would prefer to reduce or eliminate our reliance on foreign oil. We don’t trust big oil companies and don’t want them to make profits. We fear nuclear power and don’t want to see it returned to prominence, and we treasure clean air and clean environment and we don’t want to see a return to the heavy use of coal. We certainly don’t want unsightly pipelines, refineries or other energy supply infrastructures anywhere where we live. We simply want energy available to us at a cheap price out of sight, wherever we need it.
Doesn’t that really express it?
RICHARD: It does. And what’s even more interesting is as an industry we probably could provide that, and with the technology that we have today, in our ability to develop resources, our ability to preserve the environment, our ability to go into very deep water and very hostile environments, but we’re not allowed to do it. So you’ve got to add to all of that, that you simply don’t want to let the industry provide a low cost product, environmentally safe [product]. I mean you mentioned coal in that litany, and coal is probably one of the most misunderstood of our fuel resources. I mean here is an opportunity we actually have the reserves, better yet, we have the technology to develop it cleanly, and yet try to get a coal plant sited in today’s political environment, it’s simply very difficult to do.
JIM: What do you think is going to turn this around, because we are starting to see as you pointed out in your recent issue of World Energy where a lot of hostile states now are sensing the resources that they have they can use it for political means ,whether it means cutting natural gas or oil off to the United States, or cutting it off to Europe. So this is becoming more prominent. We’re seeing it occur more frequently, what do you think it’s going to take to turn around things in the US? I mean, do we have to go to $100 oil, shortages, gas lines, before we wake up, or what gives?
RICHARD: I think there are 2 things which would need to happen: one, yes, we would have to see a high priced environment and high prices at a level you see in Western Europe, I mean, I think we would be looking at $6, 7, 8 at the pump before we would have the will to make some of these changes. Secondarily, the industry itself must build up a level of trust among the general public, so that we aren’t seen as the price gouger, we’re seen as the only hope to lower that price, and that’s going to be very difficult to do. This industry has never been good at making people understand what it is that we do. I think Matt Simmons probably said it best when he pointed out that oil today at $60 a barrel is about 10 cents for a cup, and you can go about 8 to 10 miles with it, I don’t know any other kind of transportation you can buy for 10 cents where you can go 10 miles. He equated it with trying to negotiate with the horse cart in New York – you know they’re not going to take you 10 miles for 10 cents, simply isn’t going to happen.
I think the other issue here is there’s a general perception among the public that Exxon-Mobil’s going to fix this, I mean they’re the ones causing the price to go up, and yet their domestic production isn’t anywhere near the size of what the independents produce, and there’s not a general knowledge of what a company like Devon is, or who is the owner of Chesapeake. I mean, who are these individuals? And I think the more people dig into who is actually making these finds, and which companies are actually making progress in this area, they’ll find it’s not who they expected, and these individuals are very similar to themselves, operating local small business, sometimes getting bigger and bigger. I think the last time I looked Southwestern Energy was on the rise to a $6 billion company. [43:57]
JIM: Well, Richard, unfortunately, I wish we had more time, but I’d like to have you back again. Why don’t you tell people about World Energy Monthly, it’s a rather unique publication in the energy industry.
RICHARD: Well, the World Energy Monthly Review is our newest project, I mean we have World Energy Magazine which is quarterly, and written entirely by the CEOs, Presidents and Chairmans of the industry on big issues. World Energy Monthly Review really takes advantage of that network. This publication, we write about it from a perspective given to us by our network, so we look at those types of things that they really can’t go near, and we can write on some of these topics. We can take a very hard look at the windfall profits hearing, and analyze it. We do focus on what Mr. Chavez is doing in Latin America, but also what’s happening in Mexico. What are the reasons that we’re not trying to enforce our own borders what would be the reasons for this, and then we may also look at things happening domestically.
It’s a publication that’s as comfortable talking about Angola and all the things that are happening there, as it is describing the idea of using distributed generation in Kansas City, or GTL technology – Gas to liquids – or how we might diversify our own fuel base, and reduce the price of gasoline at the pumps through the use of diesel fuel. So, the Monthly Review is more about the analysis of what’s happening, it’s not the news of the day, but it’s connecting the dots. We also have World Energy Television where we do CEO roundtables, and we tie this altogether with the world energy source, which is our website, and that’s at worldenergysource.com where you can read these editorials, you can watch the television shows, you can view interviews with some 300 CEOs from this industry. I like to look at World Energy and say it really is the voice of the industry.
JIM: Well, I’ll tell you I found it to be a wealth of information. Richard, give out that website as we close.
RICHARD: It’s www.worldenergysource.com.
JIM: Well, I want to thank you for joining us on other voices this week, Richard, I’ll hope you’ll come back and visit us.
RICHARD: I’d be happy to.
Webnote: World Energy has agreed to become one of our Editorial Contributors. Note their first editorial, "Mexico: An Ally in the Balance"
Inflection Point: The Next Oil Crisis
David Bloom, GlobalPublicMedia: Would you be correct to say that you believe peak oil is a major problem on the scale of global warming.
Jeremy Leggett: In the book I describe the problem of peak oil and the other problem of global warming as the two great overtimes of our times, and there’s a big difference between them of course. Now these days, actually I’m not sure that this applies so much to America, but most of the world you are really dealing with a situation where global warming is accepted as pretty obvious, and it’s kind of flat-earth denial to say there’s nothing to worry about there, that all these weird things we’re seeing and all these projections by the government climate labs, of a warming world, just have to do with natural variability. So global warming is pretty much accepted outside the White House, and maybe large parts of America; certainly in the rest of the world it is.
Peak oil is not. It’s still very much a minority view, and that is something that I think we’re going to see changing around over the next couple of years.
JOHN: And that was Jeremy Leggett in an interview on Global Public Media about his book The Empty Tank talking about what he believes to be the two major crises that we’re facing: global warming and peak oil. But there’s no connection quite yet as to what the down the road implications are going to be. Also, talking earlier about the fact that we hear changes in the States when people move from the Blue States to the Red States, you’re hearing talk in Idaho now of the words Proposition 13. I’s sort of interesting, because what’s happening here is as people move in, the demand for houses goes up, the house prices are soaring along with the housing bubble that we’re seeing out there, and what is happening Jim is that people are being forced to pay inordinate amounts of property tax, especially when you compare it to what they paid for their houses originally. So there’s talk now about trying to tie property taxes to the original payment of the house, not to what the valuation is today. So, in other words the tax wouldn’t be reflected until the houses change hands etc.
OK, let’s get on to the next topic for the Big Picture today: Inflection Point – the next oil crisis. We were comparing at the beginning of the Big Picture here, first of all we looked at the crisis of the 1970s, and how we were able to dodge the bullet, you pointed out that the last crisis was geopolitical, and that this one is geological. Why are we not going to dodge the bullet this time, like we did last time, and why is technology not going to bail us out, at least immediately?
JIM: If you take a look at for the longest period of time in the '80s and '90s, as we had supplies come online, demand was still growing globally because the US economy was growing, in fact one of the longest expansions in US history up until the 91 recession. So we had almost a 10 year period there where the economy grew, and the economic cycles began lengthening. But if you understood where inventory levels were, there was a very strong correlation to where the eventual price would be. In other words, when inventory levels built up there was economic price weakness in the price of oil. As inventories were drawn down, the price of oil would increase. And that relationship held pretty constant for almost a two decade period during the '80s and the '90s.
Since we started in this new century the last year of the last century in 2000, we had a natural gas crisis in California where we saw the price of natural gas spike up to $10 for the first time. We also saw oil prices which had hit a bottom of nearly $10 a barrel in 1998 now begin to work themselves up. Beginning in 2002, we saw this price spike in oil and natural gas in 2000, in 2001 the US economy was in a recession, many of the economies in the world were in a recession; we had the events of 9/11 which really slowed down the economy. However, beginning in 2002, you began to see global economic growth pick up and it was global. In other words, for the first time in a long time we had synchronized economic growth. The economies across the globe began firing on all cylinders, and as a result beginning in 2002 we began to see world oil consumption began to accelerate, consuming industries began to maintain higher levels of inventory, because prices were going up – I mean if you were a manufacturer and your fuel bill costs are $20 a barrel, and now you were looking at $25 and $28 a barrel you were saying, “holy cow, the price of energy’s gone up 40%, let’s keep a higher level of inventory, let’s go in and hedge our energy costs,” so that began to change. [51:11]
JOHN: Yeah, but it’s something we didn’t have in the '70s, Jim, was this economic, manufacturing power house called China, which is growing at what? What did you say? 9 to 10% a year, something like that, and is acting like a giant sucking source of oil; it needs that to keep that sustained growth going, and that demand is going up with its economy each year.
JIM: And that is the real key here. Not only was the world economy starting to grow simultaneously, so we had this synchronized economic growth, but you had two major economic powerhouses: the US economy and its increasing consumption, and the Chinese economy and its increasing consumption because of its manufacturing base. And also car sales began to grow expeditiously in China; and they were building roads, and they were putting in freeways. It starts out small and it seems insignificant, somebody trades in their bicycle for a Vespa or a motor scooter, then the next thing you know you’ve got people buying cars, and so it’s really key to understand the role of the automobile in the evolution of the oil and energy cycle. One half of the world’s oil consumption ends up in somebody’s gas tank, and so now you’ve got millions of cars being sold in China each year, everyone of those cars now is consuming oil, so that’s expanding.
Another factor I think that you began to see too over the last two decades which is catching up with us now, as a mass migration of population from large urban centers to the suburbs. So, instead of living very close to work, and not taking long to commute, people were commuting longer distances because they moved out to the suburbs but they worked in the cities. And so every single day the amount of mileage by the average car driver increased gradually over the last two decades to an average of around 12,000 miles a year. So, population growth, increase in another major growth economy, China, also India, also increases in population, and then also beginning in the 90s, as the price of oil remained relatively cheap you had a change in the mix of cars from what you’d call automobiles, [to] light trucks and heavy trucks: the SUVs are really what you’d call a light truck category. All of a sudden the family station wagon, or the family sedan was replaced by an SUV. So, the mileage standards dropped dramatically in the 90s and especially in this new century. [54:00]
JOHN: OK, well, dividing it in 2 here, that’s the demand side, what about supply side as far as the availability of oil?
JIM: Well, as I mentioned, in the last oil crisis, as a result of nationalization, you had the major oil companies scouring the globe in the 70s and 80s trying to find new oil deposits to replace the oil that they lost as a result of nationalization. The other thing that was also happening is the number of discoveries really peaked in the 1960s, and each decade from 1960 going forward there were fewer oil discoveries, and also the size of those discoveries began to fall. We used to consider major elephants like the North Sea, or the Alaskan North Slope multi-billion barrel oil deposits; then an elephant was considered a billion barrel oil deposit. Today, an elephant would be considered anything above 250 million barrels of oil.
So, as demand was increasing the amount of discoveries peaked and the size of the discoveries began to fall dramatically. And the other thing is the cushion that we used to see in OPEC, I mean at one time OPEC had between 8 and 9 million barrels of spare capacity. So if you had a geopolitical event like the first Gulf war in 1991, where basically Iraqi oil was taken offline, 3 million barrels that wasn’t a problem for Saudi Arabia that had so much oil and spare capacity, Saudi Arabia ramped up their oil production. Today, spare capacity, and it’s exclusively in OPEC is anywhere from 1 ½ to 2 million barrels.
JOHN: So basically this substantiates what I said started out by saying a long time ago on the program, and that is that technology cannot replace what is not there, it can still ramp up to try to find things that are there, but that requires more investment in new technology, but still we’re facing a supply side issue.
JIM: Yeah, we’re running out of reserves that provide enough economic incentive to produce with today’s technology. Technology can help you find oil, it’s easier to extract more oil out of the ground, and it’s easier to extract it a lot faster. And because today it’s getting more expensive to find oil the return on investment calculations for the oil company, they use that technology once they make a discovery to bring that oil out of the ground at a faster pace, so therefore the decline rates or the depletion rates are much faster today as a result of technology.
So, it’s getting harder to find, it’s getting more expensive to produce. And for those of us in the United States, 1970, the United States was producing 9.6 million barrels a day, almost what Saudi Arabia produces today. In 2004 that production had dropped by 40% to 5.4 million barrels a day, and now John, the good – what we call light sweet crude – which is the best kind of oil to have, many experts feel that’s already peaked, so what we’re getting now is a lot of non-conventional oil: oil from the oil sands, oil shale, other resources. And what we’re going to need is basically more refineries to process this non-conventional oil, a lot of US refineries for example are not set up to process heavy crude oil, or the kind we’re starting to find, and even a lot of the sour crude that is now coming out of the Middle East.
So, we often need to exploit secondary and synthetic sources as much as we can to use that technology to prolong the onset of peak oil, and that’s where we are right now. If you take a look at the new oil coming on-stream, if you were to back out from that non-conventional oil, oil would have already peaked. It’s non-conventional sources of oil that are really helping us maintain this level of production that we see today. [58:15]
JOHN: Yeah, by the way, explain to people, I’m sure a lot of listeners don’t know the difference between sweet, sour when we’re talking about crude oil.
JIM: Heavier sulfur content and the heavier grades of oil. It takes a lot more refinery process to get a lot of the stuff out to a level that you can turn it into a refined product, like jet fuel, gasoline or diesel.
JOHN: OK, so that’s basically what it means, it’s just an industry term is what it is.
JOHN: It doesn’t reflect the taste of the oil.
JIM: I hope you’re not drinking the stuff, anyway.
JOHN: Alright, Jim, so what you’re saying is we can ramp up the technology to continue producing but it’s taking a lot more investment in technology, a lot more sophisticated techniques, but the other thing that we’re not taking into account here is depletion rates, and sooner or later, I don’t care what technology you have, this can’t go on forever.
JIM: No, and to put that in perspective, the world’s oil industry needs to find the equivalent of around 4.3 million barrels a day, or the equivalent of 2 ½ Iraqs every year just to keep oil production levels even. You can’t have economic growth without increased oil production. I’m probably going to show an economic graph in next week’s Captain’s Log with oil production and economic growth – it’s a linear regression line – and it just correlates almost perfectly.
And the other thing that we have to understand today, the only spare capacity left in the world is in OPEC and that’s down from about 9 million barrels down to 2. If we take a look and I hope you’re listening Bill O’Reilly, the top 10 oil producers in the world aren’t even international oil companies, or IOCs, they’re NOCs national oil companies – so they’re countries such as OPEC producers that are the top 10. Exxon-Mobil is only the 12th largest producer in the world. So it is the NOC or national oil company they are the people that dictate price, and they are getting more aggressive, in other words they can use this for political means. We saw it with Putin which our Other Voices guest, Richard Loomis, explained; and then you’re seeing it with Chavez. So oil is increasingly being seen by these national oil countries as a political weapon. [1:00:41]
JOHN: And that’s where things really get a little iffy because now politics is in the mix. We’re watching political conditions especially in the Middle East, whether it’s Israel versus Hamas or the Shiites versus the Sunnis, or the war on Terror, everything is polarizing; and that is mixed in with this. So here we go into the storm, what’s it going to look like?
JIM: Well, I think what you’re going to see is these inflection points that I call [them] are usually triggered by a seminal event, the Yom Kippur war, and the oil embargo in 73, the fall of the Shah of Iran and the Iranian revolution in 1979, you know the Gulf war in 91, I think this is going to be a culmination of events that are going to take us into the storm. And as we head to this inflection point I’m going to read from a book I’m reading right now and it says:
At a break point, those lifestyle changes can seem like painful sacrifices until we readjust. It is the pain of those sacrifices that makes any political administration reluctant to tell the whole truth about our energy situation,
that’s where I think we are today –
until the evidence of the need for change is obvious to all citizens, it will be difficult politically to make the necessary tough choices. In the United States and Canada a sense of energy birthright is deeply entrenched in our mindset, we want energy cheap, clean, secure, and discreet. We want to fill our gas tanks and our furnaces without undue concern, drive long distances without worrying about gas prices, and live comfortably in our temperature controlled homes, sheltered from the heat and cold outside. We don’t want to feel vulnerable to the tensions and conflicts of the Middle East, and we would prefer to eliminate or reduce our reliance on foreign oil. We don’t trust big oil companies and don’t want them to make exorbitant profits. We fear nuclear power and don’t want to see it returned to prominence after those unforgettable incidents like 3 Mile Island, and Chernobyl. We treasure clean air and clean environment and we don’t want to see a return to the heavy use of coal. We certainly don’t want unsightly pipelines, refineries or other energy supply infrastructures anywhere near where we live. We simply want energy available to us at a cheap price out of sight, whenever we need it.
There you have it. Everybody knows we like energy, and even the environmentalists drive cars, they live in homes that they have to heat and cool. But we’ve got movements here, you want to put up a windfarm, you’re not going to be able to do it, you’re going to have environmental lawsuits. You want to build a refinery – good luck, they’ve been trying to build one in Arizona for over 10 years. You want to build a clean coal fired power plant – good luck, won’t get it approved. You want to build pipelines or an LNG terminal – good luck, we’re trying to build 3 or 4 here in California and everyone of them is tied up in an environmental lawsuit.
One of the real frightening things about the US, is compared to the rest of the world, I mean Japan, when faced with that energy crisis in the 70s embarked on nuclear power programs, so did France. France gets almost 70% of its energy from its nuclear power, you’re seeing that in Japan, you’re seeing it advocated for example in England now, now that England is having to import energy, especially natural gas as a result of depletion and decline rates in the North Sea. So you have windfarms in Europe, you have solar arrays, the world is moving beyond the United States in energy security. Unfortunately, the only thing that we have for energy security is our carrier battle groups. We are more dependent than ever, almost 70% if you take into consideration the importation of refined oil products such as diesel fuel, gasoline, and jet fuel. I mean this is becoming a very, very untenable situation that we’re heading into. [1:04:56]
JOHN: And having said that, Jim, this is an appropriate place to insert the stuck on stupid award of the week. And with the theme of the 3 stooges echoing in the background the stuck on stupid award for this week goes to Senator Edward Kennedy of Massachusetts who even over the opposition of Senator John Kerry of Massachusetts is opposing installing electric generating windmills along Cape Cod, Martha’s Vineyard, and Nantucket, and most people are hailing it, even some of his friends, as another example of NIMBY – not in my back yard.
JIM: You know, this is the problem that we’re running into John, the rest of the world is moving ahead of us, for example nuclear power plants. We still haven’t built one in the United States, they’re building them in Japan, they’re building them in China, they’re building them in India, they’re building them in Europe, they’re considering building them in Latin America, they’re building windmills and windfarms in Holland in areas where there’s a lot of wind that they can harness. They’re using solar panels on homes in Germany. So the rest of the world recognizes this problem.
And why is it for example that France which generates almost 70% to 80% of its electricity from nuclear power plants they don’t have a problem? Why is it a problem for the US? Certainly companies like Westinghouse, General Electric are building these nuclear power plants for these nuclear plants they’re building globally; GE makes a wind turbine. But you know as you just mentioned, stuck on stupid, they want to put them to replace an oil burning power plant around the Cape Cod Nantucket area and the Nimbyism comes into play here, or in California it’s Bananistas that come into play. And unfortunately, John, it’s this kind of thing that we’re going to wake up one day and we’re going to be in the middle of a crisis and people are going to say, “you know what? I am tired of being inconvenienced.” And at that point politicians will force the issue. [1:07:08]
JOHN: Well, let’s talk about the evolution of where we’re heading and maybe things that are working. How would that be?
JIM: Yeah, probably four stages that we’re going to be heading into, the first stage is what we’re in now. I call that the pain, complain and act insane stage: it’s painful, people have seen their utility bills go up, they’ve seen their gas bills go up – you’re no longer buying gas at a buck fifty a gallon as we approach close to $3 a gallon; a lot of complaints, demagoguing those evil oil companies, even though they only produce about 6% of the world’s oil. And then the acting insane, you just talked about Sen. Kennedy trying to stop wind turbines. We are building natural gas plants in California, but we’re trying to stop LNG terminals to supply that natural gas or natural gas pipelines, so Sempra, our local utility has to go down to Mexico to build an LNG plant. This is where we are right now: the pain, the complain, and act insane.
Stage 2 is what’s coming up next, and that’s when the price goes to $100 or more. That’s when conservation is going to start to set in; that’s when people are going to start driving less; they’re going to be looking for more economical cars; they’re going to start maybe turning the temperature down in a home. It will be forced on people because when your gasoline bill goes up $20 to $25 a week for many people, I mean, you start taking steps to [reduce] that. Maybe you trade in the SUV, and you get something more economical like a Honda Civic, or a Civic Hybrid where you can get 50 miles a gallon, versus the SUV that’s maybe only getting 9 to 15 miles a gallon. So stage 2 is when conservation and the move to efficiency sets in. We’re not there yet. We’re still the pain, complain, and act insane stage.
Stage 3 is you’re going to see the adoption of alternative energy sources that’s when we’re going to start looking for whether it’s ethanol, biodiesel, more efficient energy sources like windpower; that’s when I think you’re going to see the government use more government mandates, “I don’t care California you don’t like an LNG terminal, you’re going to get one because don’t look to us if you have these power outs.” Much in the same way as the government reacted with the utilities, the automobile companies in the 70s.
The other thing is by the time this ends in Stage 4, which is somewhere in the middle of the next decade, you’re going to see societal, lifestyle and business changes. You’re not going see the 3,000 mile Caesar salad, you’re going to see more local agriculture appear in the local stores. You’re not going to be flying apples from exotic places in the rest of the world. You’re going to be doing something about telecommuting, you’re going to see lifestyle changes in immeasurable ways: the move to smaller communities or communities that are more self-sufficient and self-contained, because energy at that point is just going to be so cost prohibitive and unfortunately unlike the 70s we don’t have a North Sea, a Saudi Arabia, or let’s say the Alaskan slopes coming online, or for that matter the major oil companies making all this tremendous oil discoveries in deep water to bring that on line.
So what we’re going to do at that point is go to what works. So, in cars you’ll probably see lighter weight materials and composites used to reduce the weight because that gets better mileage; you’re going to see some fuel switching. I predict you’re going to see a very strong comeback of diesel; you’re going to see driving speeds lowered; you’re going to see hybrids, hybrid diesels; and then also you’re going to see the method of transportation for bulk goods change from trucking more to using the railroad system. So the hope is the US which right now is still stuck on stupid – SOS – hopefully we’re going to move forward as a result of a crisis but it will – and I want to emphasize this – this will take a crisis before any movement takes place, before anything the government does and instead of being stuck on stupid saying, “look, we’re going to start putting in wind turbines, we’re going to start building nuclear power plants because the one thing that we do not have right now is a silver bullet. There’s nothing out there – there’s a lot of things out there on the horizon technologically, but nothing that we can put into play immediately here in the next 3 to 5 years, you can say, “Aha, that’s it!” For example, oil replacing coal, or coal replacing whale oil, or kerosene replacing whale oil let’s say in the 19th Century. [1:12:09]
JOHN: Well, obviously as we move into this environment, there are going to be things you want to invest in, and things you want to avoid, and that’s what we all about here on the program. So, here we go, the Perfect Financial Storm: what are our storm assets?
JIM: Well, when you take a look at what’s happening, as the price of oil starts to rise and head towards $100 and eventually $200 a barrel, as the price of natural gas heads to $20-25 per cubic foot, what you’re going to see is the value of energy resource assets will rise along with it, but at some point those resources are going to peak, and demand will start going down, people will start conserving. So what you’re going to want to look at, at that point, is buying things that are going to bring alternative energies, or efficiencies, online. So what you want to start doing is looking for example oil service companies I think, because everybody’s going to be scrambling to find more oil. And then also I think you’re going to see a change in the investment climate move to substitute resources and supply chains: liquefied natural gas, coal, uranium, renewable energy sources will all start to increase in value as crude oil prices become progressively encumbered by pressure and ultimately at a breakpoint where people say I can’t run my business on $200 oil.
Non-conventional sources of petroleum products: the oil sands, oil shale will come to the fore, and what you also want to look for is the next best substitute to expensive oil and natural gas. So, since there are no magic bullets you’re going to be looking at things that are going to balance out the energy infrastructure investing in activities like liquefied natural gas, Canadian oil sands, are going to be real key; look for companies that are building equipment, hardware, specialty devices that facilitate increasing energy efficiency, and you’re going to see the development of alternative energy supply chains. One of the things that we’re undergoing now, and we have been since the beginning of the year is we’ve got a big research project where we’re looking at almost 50 different companies involved in alternative energy, or supply technology to increase efficiency, because at some point you get to a level where the world wakes up and they say, “you know what, find something, start spending money, but we’re in a crisis here, we need to work our way out of it.” And as I said there is no silver bullet, but at some point you’re going to want to have almost 75% of your energy portfolio in alternatives because once somebody comes up with either a better solar panel, a company that has a major uranium deposit, a company that has a new wind terminal; I just found a company we’re looking at I’m talking to the President of the company where it’s a wind turbine that can be used to power a domestic home, homes up to almost 4,000 sq.ft., and it’s $23,000. Obviously, you’re only going to be able to use something like this if you live in an area where there aren’t those kind of restrictions, you’re not going to be able to do that in your regular neighborhood, stick up a wind turbine in your back yard, but you may start seeing solar panels. California is moving forward to try to create the incentives to start using solar panels because you get so much sun here.
JOHN: Are you trying to say this isn’t going to fly in a covenant community?
JIM: No, I don’t think it’s going to fly.
JOHN: I don’t know what Sen. Kennedy’s problem is, when you drive on Interstate 10 from Los Angeles to Palm Springs as you come through Banning Pass there, those things look rather majestic sitting up there doing their thing. I don’t know.
JIM: We’re more worried about hitting a bird.
JOHN: It’s the birds that hit it. We need to raise genetically smarter eagles. I think you can thrive in any circumstance, Jim, so are you optimistic or pessimistic about this?
JIM: I’m actually optimistic because right now as Jeremy Leggett is talking about 99% of the population doesn’t get this peak oil thing. So, energy has been a fabulous investment for the last 5 years for us, alternative investments have been a fabulous investment for the last 2 years. And I think there’s a real opportunity to invest in this area, move into this area while everybody is chasing something else, because people really don’t believe this, I mean if you were to turn to your neighbor, and talk to them about peak oil they would probably look at you, “what is that?”
I look at just everywhere I go here in Southern California, you pull into shopping malls, the local strip mall to do grocery shopping, and you’ve got all these giant cars. I’m working on acquiring a diesel automobile. What I really hope to see is a diesel hybrid because something like a diesel hybrid would get somewhere in the neighborhood of 70 to 75 miles a gallon. So, this movement still hasn’t caught on with the public, they’re still selling SUVs, you see Hummers, Chevy Tahoes, Cadillac Escalades, you see these big cars driving around, nobody gets what’s in front of us, and I think what’s in front of us, this crisis is going to happen within the next 24 months. [1:17:40]
JOHN: And everybody will be talking about it by then.
JIM: When it makes the cover of Time magazine, and all the political talkies, but I do believe when the the next energy spike first starts to surface, which we could get this Summer with hurricanes, we could get next Winter if we get an unusually cold Winter; we dodged a bullet with unusually warm January this year, but the next price spikes I think we’re still stuck on stupid, we’re in the pain, complain and act insane stage – we haven’t quite moved to stage 2.
Emails and Q-Calls
JOHN: Dan’s in Sheboygan, Wisconsin. You know he says:
Jim, I recently talked with the son of a friend who’s a PhD geologist employed by an oil major working in the area of exploration, he agrees we’ve reached peak oil in terms of easily recoverable oil, however he says the Canadian oil sands have a trillion barrels of oil that is economically recoverable with oil over $60 a barrel. It seems to me this indicates we may have a persistent price for oil over 60, and may perhaps get temporary spikes but that the long term picture is that we will have a steady supply of expensive oil for decades to come. I think this is a different view than is being expressed on FSN, I’m wondering about your thoughts on it.
JIM: You know the myth about the Canadian oil sands, when you talk about I think the estimates that Canada uses are 179 billion barrels of reserve. People think they can produce 20 million barrels a day. By the year 2015 it’s going to take 10s of billions of dollars just to get Canadian oil sand production up to 3 million barrels a day. In the meantime, just to give you an example of how precarious a situation we’re in: terrorist attacks in Iraq have drawn Iraqi oil production down by half a million barrels a day; the attacks on Nigerian oil platforms and Shell oil workers have drawn Nigerian oil production down almost half a million barrels a day; the peaking of the Burgan field in Kuwait, and Cantarell in Mexico has drawn production down half a million barrels a day; and then on top of that oil production in the Untied States will decline by a couple hundred thousand barrels this year; North Sea oil production will decline by a couple hundred thousand barrels. You’re going to need to see Canadian oil sands run at a much faster rate. There’s just no way in the next 10 years you’re going to see Canadian oil sand production go from 1 ½ million barrels, to 5,10, or 20 million barrels – so that’s the myth about these oil reserves. The key is not necessarily reserves, it’s how quickly and how much can you turn those reserves into production. I just don’t see in the next 10 years: Canadian oil sands production at 20 million barrels a day to make up for the rapidly increasing depletion rates of the world’s oil fields. You have to understand 50% of the world’s oil comes from a handful of oil fields that you can count on both your hands, and those oil fields are 40,50 years old, just like the one in Kuwait that was discovered in the 40s, or 30s. You know it’s going into decline now, its production has peaked. You’ve got more than three-quarters of the world’s oil producers have gone beyond peak production, so I just disagree with that assumption. [1:21:09]
JOHN: Harry lives in Brisbane, Queensland, Australia, and he says:
Thanks for providing a great broadcast every week. I had a question regarding your views on the Japanese economy, my broker here in Australia has advertised a mutual fund that invests directly in the Nikkei 225. You and Frank Barbera have stated in the past you were bullish on Japan, but I have to wonder what peak oil will hold for Japan as the country imports a lot of its food, and almost all of its resources. The minimum investment for this mutual fund is $10,000, quite a bit of money for the average person. What would you advise where you think the Nikkei is going in the next 5 years? Do you think the Japanese central bank will inflate its currency and hence the Nikkei will rise, or will peak oil collapse the Japanese economy?
JIM: I think the world’s central banks are inflating, and I think we’ve got a window period here maybe 12, 18 months at the outside of a better time for the markets, and the economy, but I think as we get closer to this inflection point it’s going to affect everybody, it’s going to affect Japan, it’s going to affect Europe, it’s going to affect the United States. I think the United States will be one of the hardest hit is because we not only import 70% of our energy but we of all countries have done the least to increase our alternative fuel structures, so we’ve basically done nothing, we’re still stuck on stupid. We’re not building nuclear power plants, I’d be accelerating that. I’d override the Ted Kennedy’s of the world. I’d put in wind farms, I’d put in solar arrays; I’d start doing everything I could; I would start increasing CAFé standards. It’s going to be a multiple front attack because like I say, it’s not like we’re sitting with whale oil, and we just discovered coal or rock oil – we don’t have any of those kind of alternative energies of such abundance that can step into the shoes of fossil fuels.
Hi, this phone call’s for Jim and John, this is Bruce from Houston, my question is: relative to Dr. Faber’s interview last week he states that having brokerage or banking accounts in several different countries would be advisable. How would I do this? How much money can I transfer, and can you give me some general mechanics behind what he’s suggesting?
JIM: Well, there is no limit to what you can transfer, although the cash transfers are all reported. You can open up for example a Canadian brokerage firm, or you can set up a European brokerage firm, and then what you would do is simply wire transfer either funds, which would be reportable to the Treasury to that brokerage firm or you transfer securities. So, you would have to get in foreign contact, they’re going to require a lot of information from you but it’s just simply figuring out where you want to open up a foreign account, whether it’s in Europe, whether it’s in Canada. I’d recommend Western friendly type countries, and then just making the arrangements to transfer either cash, or securities. But once you do that you will be reporting a separate form on your income tax return because the government keeps track of all cash or security transfers overseas. [1:24:31]
Hi Jim, this is Daniel from Phoenix, Arizona. Very much enjoy your show, and you’re one of the three people I follow for advice and direction. One of the people I follow suggested zero coupon bonds, holding some in case there is some kind of deflationary pressure at some time in the future. What’s your opinion on that?
I don’t like zero-coupon bonds, if I was to hold anything and hopefully it would be in a pension account, I would go with TIPS, because they’re going to be indexed to inflation. The problem with buying zero-coupon bonds now with incredibly low and historically low interest rates, if interest rates start to rise as I think they inevitably will as the dollar starts to fall, as we no longer can finance all of our deficits, and as the Fed inflates, interest rates start to rise, the value of your bonds go down. And so if you are doing anything I would have Treasury Indexed Securities. Now, those are geared to inflation, your advice is that in case of deflation. If we have deflation it will be an artificial deflation, like we did in 2003 when the Bureau of Labor Statistics jerry-rigged the consumer price index, substituting used car prices for new car prices, and imputed rents for the value of real estate, so even though the CPI went down and you had people talking about deflation there really was no deflation. [1:26:04]
JOHN: Jim lives in New York, and here’s a data point, he said:
I thought I’d give you a data point on this Winter’s fuel usage. I live in the Northeast, I heat my house with oil, last year I used 500 gallons of oil for a cost of about $1,000, it looks like this year I will use about 300 gallons for a cost of about $650. My electric bill as far as taxes and insurance are up about 40% but the Northeast dodged the bullet this year as Evelyn Garris would say.
And then CD lives in Dunkirk, New York, he says:
I was reading MSNBC and they had written about water stocks. I remember reading your thoughts back in November of ’04, about blue gold. My question is are there any mutual sector funds that have these water stocks, my company only allows us to invest in mutual funds.
JIM: You know there is something out there – there’s a unit trust that invests in water stocks. It’s the first trust, water utility, and infrastructure portfolio, it’s a unit trust and they have water infrastructure companies such as 3M, GE – most people don’t realize. They have water utilities; so it’s a combination of roughly about, a little more than 20 companies and that’s the only one that I’m aware of. The only thing that you have to be aware of there are sales charges. I think the first 50-100 thousand, there’s a 4.7% sales charge, over 100 it’s 4 ½ . So, the sales charges are quite high on that, but that’s the only one I’m aware of. [1:27:44]
Other Voices: John Williams, Shadow Government Statistics
JIM: Well, this is considered the second strongest profit cycle of all time, however it’s translated into the weakest business spending on record. There are a lot of misconceptions in the market place today: one, the US economy is booming; two, the consumer is going to remain strong, underpinned by record wealth; three, high end retailing stocks will be safe because of the wealth effect; four, interest rates are too low to generate economic weakness; and finally, a tight labor market will trigger wage inflation.
To talk about these topics, joining me is John Williams, he comes to us from ShadowGovernment.com and John, you know one of the things that has really surprised me about this economic cycle is we’ve seen probably one of the strongest profit cycles in recent memory, however despite the record profits, despite the record build up of cash in corporations, it’s translated into the weakest business spending on record. And I know you used to do a lot of forecasting for Fortune 500 companies, and a lot of those companies have their businesses tied to economic growth and GDP growth, but if the numbers we get on GDP aren’t accurate, do you think maybe that’s why they’re not spending?
JOHN WILLIAMS: Most companies know they’re in a pretty weak environment. There is an element of reality out there. Profits can be gimmicked by all sorts of games playing with the books, or in the case of this real strong economic recovery, companies downsizing because they can’t make their sales projections, and getting Wall Street to rally around the charge offs they take up front for laying off 10,000 people or shutting plants. That’s hardly the sign of a booming economy. If you leave in the one time charges you’ll find the profit picture is actually not quite as bright as many people would like you to think. But going forward, there’s an underlying reality here with the economy, and those who’ve listened to us talk before, very briefly there’s been biases built into economic reporting over time in the way the methodologies – the reporting methodologies – have been structured; it tends to overstate economic growth by 3% per year; understate inflation by about 4%; and in the case of unemployment understates it by about 7%. The real numbers are generally much worse in terms of economic strength, and much worse in terms of inflation than are popularly seen in the press. [1:30:25]
JIM: Let’s suppose though, for example, that I do have a manufacturing business in the United States and let’s say that there’s a close correlation to economic growth that GDP grows 3% a year, and my business expands. However, if you overstate GDP, the official numbers we get by understating CPI, don’t you get gross distortions and that’s bound to show up somewhere in somebody’s bottom line.
JOHN WILLIAMS: Oh sure. And in fact I’ve had clients where that happened, and it’s one reason why I began specializing in the quality of government statistics because it’s impossible to make a reasonably good forecast using bad underlying data. You need to know where the biases are, where the problems are, with the reporting where. Indeed, if you’re getting overstated economic growth you can’t plan on that for your sales, for your profits. And many companies have discovered that. The GDP’s not as widely used as it once was as a forecast tool, or as part of a forecast tool, because it’s just become more of a political, a propaganda number than an economic number. [1:31:35]
JIM: The other thing that is striking about this, and maybe this is behind Alan Greenspan’s real conundrum, is this CAPEX to cash flow ratio that is at a 30 year low. You know, you’ve got the cost of capital at very low rates today, which in turn means probably expected returns are low, but do you think maybe this is one reason, you know there’s something there corporations are not funneling much of their profits back into the real economy? You’re seeing merger activity, you’re seeing dividend payouts, and share buybacks, but you know those don’t do a lot of things for economic growth.
JOHN WILLIAMS: Those strategies seem more for enhancing the stock price of a given company as opposed to looking for long term growth. The problem is that there is no long term growth in the works right now for the US economy. We’re undergoing a structural change which has left us in a stagnant to a down economy that’s going to hold on for some time. You mentioned earlier how the economy was going to be driven by record high levels of wealth – the wealth effect – that’s not what drives economic activity. What drives economic activity if you’re going to have sustained economic growth is you’re going to have to have sustained personal consumption, which is driven by sustained growth in income, and you don’t have growth in income. The Fed just recently published its tri-annual survey of household wealth of course that was to a large extent inflated by home prices which Mr. Greenspan worked on inflating while he was Fed Chairman successfully, but if you look at household income, average household income declined between 2002 and 2004 adjusted for the government’s understated inflation number. The poverty survey showed a similar measure. The Internal Revenue Service numbers showed that household incomes are dropping as well. If you don’t have income growth you can’t sustain economic growth. You can borrow it for awhile, you can increase that which we’ve seen with people borrowing on their houses – I guess that’s how we’re driving the economy off the wealth. Or you can liquidate your wealth, liquidate your savings, and spend from that. Most people finding that they’re unable to make ends meet with their income are borrowing to make up the difference, and now they’re running into trouble with their debt exposure. [1:34:10]
JIM: You know, I’m still amazed, John, when you either pick up the Wall Street Journal, or BusinessWeek, or you turn on CNBC, most of the analysts and economists out there carry on as if we’re having a normal business cycle: this is just routine, the economy heats up, the Fed raises interest rates to slow it down, and then when it slows down the Fed will loosen up again and we’ll get another recovery. But there are so many things that are out of balance here, and that are not normal in an economic recovery, but it seems like Wall Street and Washington is carrying on like times are normal.
JOHN WILLIAMS: Well, there’s a reason for that, and that is that you have two groups there – politicians and Wall Street – those who are employed by Wall Street, either directly or through advertising who have to put forth a happy picture. I know for a fact that most wall Street economists cannot say what they actually believe. I was on CNBC oh back in 1989 before the recession for 1990 was beginning – but it officially didn’t start until 1990- and I was on with an economist from a large bank – a New York City bank – and we were sitting talking before the show, and he said, “what are you looking at,” and I said, “ I think we’re heading into a pretty deep and protracted recession,” and he said, “ yes, I think that’s the consensus forecast.” And I almost fell off my chair, because I hadn’t heard anyone talking about it, certainly not him, or any of his colleagues in the banking community, or on Wall Street. We get on the air, I give my outlook – we’re going into a deep recession – he says, “we have a booming economy ahead.” He had to publicly sell the concept that things were fine because that was what was good for his employer. And I’ve had economists tell me that they wish they could say certain things but they can’t. They get fired, it’s that simple. [1:36:07]
JIM: You know it’s amazing because one of the references made into the FOMC minutes is about tight labor markets and the fact that this might translate into inflation. And yet, John, if you look at the real unemployment rate, you’ve got 3 potential job seekers out there for almost every available position, and you have scores and scores of people who no longer are looking for jobs because they can’t find work, yet we don’t count them as unemployed.
JOHN WILLIAMS: That’s right. That’s not an environment that gives you wage inflation. And in fact, wage inflation hasn’t been a problem for some time. If you look at the series called real average weekly earnings, it’s published by Bureau of Labor Statistics, and they use the CPIW – it’s one of the inflation measures that are commonly published to deflate it into constant dollars – the average real weekly earnings today are significantly below where they were back in the 1970s, and they’ve generally been on a downhill slope over time, they started down a little more steeply before this last recession, and they’ve never recovered. One effect of that is that back in the 1970s, it was much more common to have one person staying at home with the children, and the other going to work to earn a living. Today it’s much more common to have two people going to work to turn a living. That’s not an environment that’s showing a wage inflation. In fact, if anything it’s showing a wage deflation, and then there’s a reason for that in terms of the ‘free trade’ agreements we’ve entered into – and I use the term free trade with quotation marks around it because the agreements are far from free trade, but for example, you look at NAFTA, the concept behind the free trade and why this is good for everyone – this is using an academic theory. If you have one country that’s very efficient at, let’s say, producing food, and one that’s very efficient at producing clothing, but not so efficient in the other areas, if these two countries – and they’re the only two countries in the world – open up their borders and trade with each other, the country that’s so good at making food will end up making all the food and the country that’s so good at making all the clothing will make all the clothing and the result will be you’ll have more food and more clothing made than would have been possible had the two countries not traded. That’s the basis for all the goodness of free trade. But there’s an underlying assumption to that, and that is that the two countries involved are at full employment. And we’ve not been at full employment, nor have any of our trading partners that we’ve entered into free trade agreements with such as Mexico. And the end result is that the country with the lower wages ends up getting the bulk of the benefit with manufacturing, in this case shifting to the low cost producer, wages rise in the low cost producing country, and they sink under downside pressure which is generally what you’ve seen here in the United States for the high cost producer. [1:39:25]
JIM: You know, the other aspect of discussion in the financial markets is this so called worry with coming deflation. I mean last year we had a trade deficit of $760 billion, and if you take a look at the government’s budget deficit – on budget and off-budget – we saw for example in 2004, the unfunded liabilities to account for the new drug prescription bill and Medicare was 11 trillion, and the deficit was 3.7 trillion in 2004, and 3.4 trillion last year. Yeah, and 2005 was 3.5. How can anybody look at those numbers – the trade deficit numbers, the budget deficit numbers, the total outstanding debt numbers – and think or come to any other conclusion other than inflation. Where do you think this deflation bias comes in?
JOHN WILLIAMS: [1:40:21] That’s a gimmick Alan Greenspan created a couple of years back perhaps to justify spiking the money supply a little bit. There never was any deflation threat. If you look at the real inflation numbers we’ve not gotten below 3% inflation in the last 10 years, and it’s very similar to the budget deficit numbers. We didn’t have any budget surplus under Bill Clinton it was all in the accounting.
JIM: It’s absolutely amazing. I guess one of the arguments made about deflation is in an economic downturn you’re going to see bank failures, but if there is anything we can draw from history, recently, whether it’s Long Term Capital Management, Asia, you know Orange County, Russian debt default and recently Refco, I think the Fed would forest burn down before they would let a widespread banking crisis envelop the United States.
JOHN WILLIAMS: I fully agree with you. They’ll spend every last dollar they can print to support this system wherever it might show weakness that would have terrible ripple effects throughout the financial structure. And you mention the real budget deficit numbers, those are so far beyond control now it’s worth a quick comment, if you wanted to let’s say raise taxes to bring the budget deficit under control, to have a balanced budget, you could raise everyone’s taxes so that you took all of their salaries, all of their wages, and you’d still have a deficit. You can’t do it by raising taxes, it’s beyond control, and from a political standpoint who’s going to stand up and say, "yep, we’re going to eliminate, or severely cut Medicare or Social Security.” Politically, that’s not going to happen.
So right now we’re seeing a financial situation for the government if it were a company it would be looked at as headed for bankruptcy, if not already in bankruptcy. It’s a situation where the country if its bonds were rated as they would be for any other country that didn’t have their currency as the world’s reserve currency you’d see junk bond status on US Treasuries. The problem is that what is promised here that is going to be paid to people and the benefits down the road just cannot possibly happen. There’s no way physically it could happen. At some point, and it’s not too far down the road the Treasury’s going to have to come up with cash to pay off the IOUs it’s put in the Social Security system. Who’s going to lend the money? if the foreign holders of the dollar begin to dump it as I think they’re going to do – I sure would – you’re going to start seeing the Treasuries that are held there, you’re going to face a big spike in interest rates, and you’re going to find an instability in the financial system, and guess what the Fed does. It’s simple solution is it goes in and buys the debt – it monetizes the federal debt. And you end up with a situation that in its scope has never been faced by anyone before but in principle has been handled before, and that is, instead of declaring bankruptcy as a corporation might do, very rarely do you have a country that reneges on its debt. What it does is it revs up the printing presses, and pays off all the debt in very cheap dollars, and that gives you a very high rate of inflation, not deflation – a very high rate of inflation, a hyperinflation, like was seen in Germany after World War I. A situation where a 100,000 Mark notes were worth more as toilet paper than as currency. A situation where you could go into a restaurant one night and buy the most expensive bottle in the house and the next morning that empty bottle was worth more as scrap glass than it had been worth the night before filled with very fine wine. That’s the type of inflation that’s going to come out of this circumstance – that’s called hyperinflation, not deflation. Given the structural change we’re in and the problems that we’re facing in terms of getting sustainable growth in the economy and all the fallout that will come from system as the deficit crisis comes to a head both on the budget side and the trade side. What you’re going to see here is going to be a hyperinflationary depression. [1:44:52]
JIM: You know, John, you brought up a key point earlier and that is we have now gone beyond a situation that is controllable. No amount of income tax levied, sales tax, property tax, any kind of form of tax, estate tax will ever put this budget in balance once again. The only thing it will do is create economic hardship and misery and I think the only situation as you point out is inflate or die. John, as we close here, why don’t you give out your website and tell people about your newsletter. I get it, I find it fascinating, and it’s great to have somebody that spends a lot of time unraveling all the myths that we get daily called economic statistics.
JOHN WILLIAMS: Well, I really appreciate your kind comments and I enjoy everything that you do as well. The website is called Shadow Government Statistics; the address is shadowstats.com. We have on the website a number of articles that explain what has happened to the government statistics over time, and we have also available all the newsletters and some key documents I think most people will find very interesting, and I’m always happy to take new subscribers if anyone is so inclined.
JIM: Alright, John. As always I appreciate you coming on the program, it’s kind of nice to have somebody to fall back on, as we get these economic numbers each month. We’ll have you back to unwind the spin. Thanks for joining us.
JOHN WILLIAMS: Thank you Jim. It’s always a pleasure.
JOHN: Jim, as always we preview what’s coming up in the next few weeks, it’s never a dull moment here on the Financial Sense Newshour.
JIM: I’m looking forward to next week, joining me as my special guest will be Stephen Leeb, he’s written a new book called The Coming Economic Collapse: How you Can Prepare For $200 Oil, it’s a sharp contrast from his book written a couple of years ago called The Oil Factor, that’s coming up. Ike Iossif Ahead of the Trends will follow that, and John Howe The end of Fossil Energy, will close out the month; and then Gwynne Dyer Future Tense coming up in April, as well as Russell Napier Anatomy of a Bear Market, April 15th.
JOHN: Remember, folks, build those windmills in your backyard whether or not your covenant allows it.
JIM: Endear your neighbors to yourself. Anyway on behalf of John Loeffler and myself, we’d like to thank you as always for joining us here on the Financial Sense Newshour, until you and I talk again have yourself a pleasant weekend.