[Peakoil] [Fwd: FW: Letters to the Editor: Peak Oil]

[Mike Hettinger]

I like this snippet from near the end of the article:

One final comment and parting shot. If I still have not convinced you of
the merits of the cause, you ought to know that Peak Oil people have
better parties, and hang out with prettier girls and cuter guys.

But you really should read the rest of it...

Mike

-----Original Message-----
From: Whiskey & Gunpowder [mailto:strategicinvestment at agorafinancial.com] 
Sent: Wednesday, 15 February 2006 9:40 AM
Subject: Letters to the Editor: Peak Oil



  <http://www.ezimages.net/WHISKEY/WnGemailLogo.gif>

Greg's Note: We've asked for your comments, and you've sent them to us. In
this edition of Whiskey & Gunpowder, our intrepid correspondent Byron King
reprints and replies to some of your e-mails about his articles on (what
else?) Peak Oil. If you have more to say, just lay it on your re-patrioted
editor: greg at whiskeyandgunpowder.com <mailto:greg at whiskeyandgunpowder.com>

Whiskey & Gunpowder
February 14, 2006
by Byron W. King
Pittsburgh, U.S.A.

Letters to the Editor: Peak Oil

My articles on Kuwaiti oil reserves, oil reserve estimation, and the
president's State of the Union speech generated a lot of thoughtful
commentary from the readers. We appreciate that you take the time to think
about what we are writing, and even more that you care enough to comment.
Here is a sampling, starting with an e-mail to Greg Grillot from Bob in
Upland, Calif.:

"Byron does understand oil. Would it be an imposition for him to tell us
when he feels we will see $100 oil so I can look for some profits in my
oil investments?"

Byron's reply: Thank you, Bob. I have been following the oil industry for
over 30 years. I read the geology and engineering textbooks in college,
and got oil on my boots while working for the former Gulf Oil Company (now
part of Chevron) in the Exploration & Production Division. I left Gulf to
spend some time in the U.S. Navy, another story entirely. But through it
all, then and now, I have spent time in the oil patch and kept up on the
technical literature.

In my present occupation as an attorney in Super Bowl Steelers country, I
do a lot of things, to include working in the arenas of land and leasing
and oil and gas development. So yes, I like to think that I understand
oil. But I assure you that almost every day I learn new things about oil,
its history and chemistry, and the nuts and bolts of the oil business.
There is no end of knowledge.

As to the question of when we will see $100 oil...First, the disclaimer. I
do not have a copy of tomorrow's newspaper, let alone the newspaper for
next week or next month. If, for example, there were a terrorist bombing
that severely damaged or shut down a loading terminal in Kuwait or Saudi
Arabia, you would see the price of oil shoot up on a trajectory like that
of the space shuttle. Or if things keep on heating up with the situation
in Iran, and the government of Iran decides to interfere with the tanker
routes in the Straits of Hormuz, you will see the price of oil simply
explode.

Will something like this take place next week or next month? I sure hope
not. But could it occur some time? Yes, it is possible. So there is your
$100 oil, and a lot more. My colleague Dan Denning has written extensively
on this topic in his monthly newsletter, Strategic Investment. Many
Whiskey & Gunpowder subscribers are already subscribers to Strategic
Investment, but if you are not plugged in to Dan's way of thinking, here
is how to order  <http://www.isecureonline.com/Reports/DRI/EDRIG124/> your
subscription:

http://www.isecureonline.com/Reports/DRI/EDRIG124/
<http://www.isecureonline.com/Reports/DRI/EDRIG124/>


Getting back to Bob's question, absent some extreme terrorist or military
event like the examples I used above, will market forces keep on pushing
up the price of oil? The short answer is yes, so just wait and watch. The
longer answer is that there are day-to-day fluctuations in the price of
oil due to those same market forces. So the listed price for oil goes up,
and then the price comes down.

My opinion is that you should use the pullbacks as an opportunity to
accumulate positions in well-managed companies with ownership interests in
oil and gas in the ground. Or, equally as good over the long term, you
should be investing in firms that provide critical services and equipment
to the oil industry.

If you attended the Agora Wealth Symposium last August in Vancouver, you
may have heard me give a plug for one of the best-managed oil field
service companies in the business, Core Laboratories (NYSE: CLB). Since
last August, the price of the stock in Core Labs has increased by about
75%. Why? Core Labs provides services to oil producers, as well as to
pipeline and refinery operators, that increase the efficiency of recovery
of oil from the ground, and in throughput and output from refineries. In
other words, Core Labs provides services to people who already have the
oil in hand, so there is no geological risk, or no "dry holes."

Core Labs assists operators in determining the best way to produce oil
from the rocks in the ground, such as to maximize ultimate oil recovery.
In addition, Core Labs assists pipeline companies in improving efficiency
in transmission, and assists refiners in maximizing the product yield from
a barrel of oil. As the price of oil rises, the value of the services
provided by Core Labs increases in tandem. The company is a moneymaker in
this business. Obviously, you should do your own research on any
investment, but Core Labs has been a great company during the past run-up
in the price of oil.

If you will indulge me just a bit more on the subject of investing, my
colleague Justice Litle publishes a monthly newsletter called Outstanding
Investments, which focuses on exactly these types of opportunities in
natural resource and energy companies. Justice's newsletter has been rated
No. 1 in its class by the authoritative Hulbert's Financial Digest. Here
is a link to obtain more information, including how to order a 
<http://www.isecureonline.com/Reports/OST/EOSTG222/> subscription:

http://www.isecureonline.com/Reports/OST/EOSTG222/
<http://www.isecureonline.com/Reports/OST/EOSTG222/>

A reader named Roger from West-by-God Virginia e-mailed me to say the
following:

"In your article on the State of the Union speech, you referred to the
'so-called free market' for fuels and energy sources. Why did you
characterize it that way? Do you think that the government should plan and
run the energy markets of the country?"

Byron's reply: Good question, Roger. Why did I use the expression
"so-called free market?" To paraphrase former President Clinton, It
depends on how you define "free market." First of all, we denominate all
of our economic activity in U.S. dollars, which are also Federal Reserve
notes. (Just look at what it says on the face of your greenbacks.) So
right away, we run our economy via a government "plan" for the currency.

The Federal Reserve has done a poor job of managing the U.S. dollar over
the years, which is why a nominal dollar from 1913, the year when the Fed
was established, is now worth about 4 cents. And this figure is straight
from the records of the U.S. Treasury Department. So right away, you might
figure out that the United States is having a long-term problem with its
currency.

I do not want to get into a discussion of monetary theory, but the
inflation in the currency supply over many decades and the decline of the
U.S. dollar over the years has done much to corrupt what would otherwise
be the natural flow of funds into energy investment. My Agora Financial 
<http://www.isecureonline.com/Reports/RCH/ERCHG202/> colleague Dr. Kurt
Richebacher, macroeconomist extraordinaire, is fond of stating that
"inflation destroys capital."

http://www.isecureonline.com/Reports/RCH/ERCHG202/
<http://www.isecureonline.com/Reports/RCH/ERCHG202/>

If inflation destroys capital, then we have a big problem. There are few
industries more capital-intensive than the energy industry. How does one
plan for long-term energy investment in an era of monetary inflation and
corruption of the currency?

The U.S. government is running massive deficits. The national debt is out
of sight. Interest payments on the national debt are not quite, but
approaching, the size of the budget for the Department of Defense. The
U.S. economy, and the U.S. government in particular, relies upon over $2
billion of foreign loans every day just to keep the lights on. And we
flatter ourselves to think that we live in a "free market" economy? I
don't think so.

Getting more specific to oil and gas and related hydrocarbon fuels, let's
take a look. Over a period of many years, the federal and state
governments have been taxing gasoline at the pump and using the funds to
build highways. The highways have not just provided access to relatively
undeveloped countryside, but subsidized the expansion of human activities
distant from the nation's traditional urban cores.

For a long time, we called it "growth." But now we have a nation that is a
landscape of urban sprawl, and an associated lifestyle of commuting. Would
the present state of cities like Los Angeles, Las Vegas, or Phoenix be
possible, particularly in such arid climates, without cheap gasoline and
subsidized roads? No way.

Compounding the problem, most freight in the nation travels in
over-the-road trucks, with an average fuel burn of 4 miles per gallon of
diesel. Author James Kunstler refers to the "3,000 mile Caesar salad,"
meaning that the lettuce you ate with your lunch came to you via
refrigerated truck, over a 3,000 mile road network. All of this rests on
the depleting resource known as oil. Is this mixture of tax policy and
government roads really the hallmark of a "free market" economy? Or ask
the related question, is this sustainable over time, considering the
rather rapid depletion of the world's known oil reserves? No way.

Roger also asked if I think that the government should run the energy
markets. No, no, a thousand times no! Let private industry drill the
wells, run the pumps, refine and ship the product. Let private industry
build the plants of the future, and market and deliver the energy supplies
that the population will require. The government should seldom be in the
business of turning wrenches on the main stack of plumbing.

But that does not mean the federal and state governments should not play a
role in developing a national energy strategy. There are innumerable
issues that need to be addressed in such a strategy, far more than I can
detail in this article. But I should say that a national energy strategy
needs to address current and future demand patterns, sources of supply,
future levels of technology, as well as how we intend to pay for it as a
nation. And let me add that it will not be cheap.

Sweden, for example, is presently taking the most significant strategic
step of any advanced Western economy by trying to wean itself off oil
completely within 15 years. According to the "energy committee" of the
Royal Swedish Academy of Sciences (the same people who hand out the Nobel
Prizes), there is a growing awareness that global oil supplies are peaking
and will shortly enter into the phase of irreversible decline.

In connection with this impending Peak Oil event, the Swedish government
believes that a global economic recession will result due to oil shortages
and high oil prices. Thus the official policy of the Swedish government is
to replace all fossil fuels with renewable energy sources before climate
change destroys economies, and growing oil scarcity leads to huge new
price rises.

According to Swedish Minister for Sustainable Development Mona Sahlin,
"our dependency on oil should be broken by 2020... There shall always be
better alternatives to oil, which means no house should need oil for
heating, and no driver should need to turn solely to gasoline." Another
Swedish government official has been quoted as saying, "We want to be both
mentally and technically prepared for a world without oil. The plan is a
response to global climate change, rising petroleum prices, and warnings
by some experts that the world may soon be running out of oil."

Sweden has an energy committee composed of the people who award the Nobel
Prize? Sweden has a minister of sustainable development? Sweden wants to
become mentally and technically prepared for a world without oil? Very
clever, those Swedes. (And have you driven a Volvo lately?) You did not
hear anything like this in the State of the Union speech, now did you?

I received another e-mail from David, a professor of chemistry at an Ivy
League university. David said:

"What I would like to know is how many of those guys out there promoting
ethanol know that an ethanol-based fuel is energy-negative by a mile? And
even if you could make it energy-positive, the very act of growing ethanol
to burn as motor fuel would turn the world into one big dust bowl. I guess
the question is, how many of those guys are clueless and how many are
simply liars? ...

"It would be great if the Peak Oil crowd was as nuts as people say (ed: Oh
yeah? Smile when you say that, pal). But I've looked at it as much as a
non-oil specialist can look at it and still hold down a job. I concluded
that it is a scary scenario. What is particularly problematic for me is
that my training as a physical scientist helps me see the proposed
alternative energy technologies for what they are -- a load of baloney in
many cases.

"I spent a particularly harrowing hour with a high-ranking official from
the U.S. Environmental Protection Agency who answers directly to President
Bush. He was not a tree hugger but he sure took Peak Oil seriously. I
asked him for his best guess on the date and he said, '2010.' Of course,
that answer is becoming a little too common for comfort. It is scary. We
talked about the alternatives and he could not have painted a more
gruesome picture. He also expressed utter amazement at the complete lack
of attention to the issue."

Byron's reply: This is why I love reading the e-mails from our readers. I
happen to know who David is and where he works. He is a top-notch
researcher in the field of chemistry and chemical biology, and firmly
established in the upper echelons of American science. David's e-mail
speaks for itself. Do me a favor. Read it again. It is that good.

There is no lack of attention to the Peak Oil issue from me here at
Whiskey & Gunpowder. I have been banging this drum, in one way or another,
since Bill Bonner invited me onboard and I published my very first
article, entitled "The Ghost of Colonel Drake." (Thanks Bill!) And neither
is there any lack of attention to the Peak Oil issue from my colleagues at
Agora Financial. We are there. We are onboard. We are serious. And, to be
purely mercenary about it, we have made some money off the issue. But if
you wait for the band to start playing "Nearer My God to Thee," it will be
too late.

One final comment and parting shot. If I still have not convinced you of
the merits of the cause, you ought to know that Peak Oil people have
better parties, and hang out with prettier girls and cuter guys.

Until we meet again...
Byron W. King

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