I just finished listening to an excellent interview with John Miles of the UK Energy Task Force on the Financial Sense Newshour: The Oil Crunch: A wake-up call for the UK economy. The interview can be accessed from Financial Sense. Look for HOUR 3 on Saturday, March 13, 2010. I can highly recommend that U.S. investors and policymakers listen to this interview.
A study of worldwide oil production and demand was done by a collection of UK business people. The study was done as a result of Jeremy Liggett (a former geologist at BP now working in solar energy) convincing UK CEOs there was high probability that worldwide oil supply would have trouble keeping pace with worldwide oil demand in the very near future and that this would have a major impact on the business community in the UK. The CEOs signed on to support the project and take a look at the issue.
The result was an executive summary which paints three likely scenarios with respect to oil supply and demand:
- We’re already at near maximum production, no new large fields will be found, and we’re very near to hitting the depletion curve. (not likely)
- We’re currently at max capacity, new fields will be found, and the oil extraction rate more or less be balanced with demand today. So, if demand increases, it will out-strip supply and the depletion curve is a few years away (2015) until large new fields come on stream. (more likely)
- We’re close to the peak extraction rate, production declines due to well depletion rates are near, but large new fields will be found. However, it will be very difficult and very expensive to extract the new oil supplies (tar sands, deep water offshore, Arctic). (most likely)
Not surprisingly, each scenario points to much higher oil prices. This answers the question as to why oil is trading at $80 today despite a 7% drop in demand from the U.S. (largest consumer of worldwide oil supply at roughly 25%) and the largest worldwide economic contraction since the Great Depression. Also interesting is that Goldman Sachs and just about every credible oil study done along these lines agree with the findings with the exception of Daniel Yergin’s group CERA. But CERA has been wrong for so long, I’m surprised anyone still listens to anything CERA says about future worldwide oil supply and demand.
So, how can U.S. policymakers and U.S. investors prepare for such a future?
U.S. Policy Measures to Prepare for the Oil Crisis
- Reduce Foreign Oil Imports
I’m boring people to death on this subject, so I’ll summarize the effort here with a very simple statement: the U.S. needs to significantly reduce foreign oil imports by adopting the only abundant, clean, and cheap domestic resource that can be scaled up to do so: natural gas. Since U.S. Energy Secretary Chu does not understand this simple fact, a logical first step is for Chu to resign or for Obama to fire him. I don’t care which happens as long as it happens. Instead of filling up an NGV in my garage with domestically produced natural gas at $10/tank I have no option but to spend $35 to fill my tank with 65% foreign oil. This is absurd. Congress needs to pass HR1835 (the so-called Natural Gas Act) today.
- Fix our Foreign Policy
The United States spends 18% of its total budget on defense spending. If one adds up the total amount of defense spending done by every country on the planet, the U.S. accounts for 48% of the total. We maintain 50,000 troops in Germany and more in Japan. Weren’t these wars won decades ago? For the price tag of the war in Iraq, the U.S. could have built out a nationwide natural gas refueling infrastructure, put millions of NGVs on the road, and leverage our #1 economic advantage over all other countries: our millions of miles of natural gas pipeline distribution network combined with abundant natural gas resources. Instead we are building hospital, roads, and schools in Iraq and Afghanistan. This is absurd. The oil crisis is a much bigger threat to the future of the U.S. economy than are the terrorist. We need to bring the troops home and secure our borders and our ports and get to work on protecting the country from the oil crisis by funneling money not into unproductive wars, but into energy infrastructure.
- Get our Financial House in Order
Higher oil prices will mean higher inflation and therefore higher interest rates. Since the U.S. imports 65% of its oil and maintains a debt and deficit ridden government, the first order of business is to get our financial house in order. This means balancing the budget and strengthening the currency. Perhaps the government could set up a website with a PayPal “donate” button so that some of the executives on the receiving end of the U.S. taxpayer bonus money (Lloyd Blankfein, Jamie Dimond, Robert BenMosche, etc.) could give some money back. The government could publish the names of all those people and provide some peer-pressure competition. Perhaps we’d see Warren Buffett, Bill Gates, and the Google (GOOG) guys participate. Maybe even Benjamin Bernanke and Alan Greenspan and other Federal bureaucrats and economist that have gotten us into this jam (and benefitted greatly in the process...) could also contribute. If the U.S. government does not get a handle on its debt and deficit challenges, the next oil spike will see the world will move quickly away from the U.S. dollar as the world’s reserves currency toward a basket of currencies from more economically prudent and resource rich countries like Canada, Brazil, and Austrailia.
Of course the best way to get our financial house in order is to adopt Ron Paul’s idea to audit the Federal Reserve, then shut the Fed down after we see the fraud, and then transition the country back to Constitutional hard money based on gold and silver. Once we do this, it would not be possible to fight all the foreign oil wars because we’d actually have to pay real money to do so (i.e. raise taxes) instead of printing money out of thin air and mortgaging our children’s future. Actually, it’s OUR future since the problem is so severe today judgment day will be coming during OUR lifetime.
- Adopt a Strategic Long-term Comprehensive Energy Policy
The need here is self-explanatory and obvious. Here’s such a policy.
It is no surprise that this energy policy is heavy on leveraging the #1 economic advantage the U.S. has on all other countries: our millions of miles of natural gas pipeline distribution network combined with our abundant, clean and cheap natural gas resources.
U.S. Investor Advice to Prepare for the Oil Crisis
- Buy Energy Stocks that Pay Dividends
My favorites here are BP, COP, CVX, XOM, PBR, and STO. All of these pay dividends of over 4% except for XOM and PBR. However, PBR has the potential for extremely positive production growth and XOM has the best efficiencies in the business. XOM will also be the largest natural gas producer in the U.S. after it completes the XTO buyout.
- Buy Gold and Silver Bullion
- Buy an NGV if you live in Utah, California, or Oklahoma
Few other states support natural gas transportation. Perhaps one should relocate to one of these states. Otherwise, trade in your gas guzzler now and buy very fuel efficient vehicle. Unfortunately, the best solution (a natural gas/electric hybrid) is not even available.
- Make a garden and build compost box.
Here are instructions on building a compost box very cheaply.
Disclosure: Long BP, COP, PBR, STO