E-Day! - Part I

Eric Fry reporting from Wall Street

If the earth is running out of cheap oil, should we care?
Or should we trust that the faceless “they” will find a
solution before rising energy costs begin to cramp our
cushy American lifestyle?

Should we trust that “they” will locate or create ample
supplies of cheap alternative energies well before we might
be forced to set our thermostats to 55 degrees in winter
and 85 degrees in summer? Or, should we begin learning how
to cure beef and to salt pork and to dig potato cellars?

Three of my colleagues recently debated this very topic via
email. Their spontaneous exchange of ideas unfolded over
several days, and contained a number of fascinating
observations and outlandish predictions. So your editor
decided to raise the curtain on this debate and to expose
his colleagues’ private thoughts to the public.
But first, a bit of background…

Global warming is President Bush’s fault, says Hugo Chavez,
the outspoken president of Venezuela, a country that just
happens to send more than 60% of its oil exports to the
United States. After claiming to count hundreds of cars
containing only one passenger during a recent ride from JFK
airport to the United Nations building in Manhattan, Chavez
declared to the UN assembly, “The world cannot tolerate the
American way of life.”

We here at the Rude Awakening have no idea whether global
warming is the fault of Republicans or Democrats, or if it
results from a rare bi-partisan effort, or if it is simply
a periodic quirk of nature…like ice ages. But we have
observed that Democrats and Republicans both continue to
drive SUVs (even though the Democrats tend to conceal such
inconvenient facts during Presidential campaigns).

In short, the fiery Chavez may have a valid point. The
American lifestyle is not easily replicated, energy-wise.
We consume much more than “our share” of the world’s
resources. In round numbers, we represent about 5% of the
world’s population, but consume more than 25% of its
resources.

Our energy-intensive lifestyle prompts the question: What
will become of us fat and happy Americans when the world’s
easy-to-extract oil supplies begin to finally run dry? Most
of us are too fat and happy to give the question much
thought, or to worry about what might happen to our
lifestyles as energy costs mount.

But three of my colleagues have been debating this very
issue for several days. All three of them agree that the
soaring price of crude oil opens a new chapter in U.S.
economic history. But each of the three offers a different
storyline. And each of these esteemed colleagues offers his
ideas with passion and conviction. In other words, they
love this stuff.

While many of us white-collar Americans are consuming our
workday by surfing the Internet for Ukrainian brides, or
bidding for collectible ashtrays on eBay, these guys are
earnestly debating and exchanging ideas – the very same
ideas that often emerge in their investment letters and
trading services…The really odd thing is that these guys
engage in email debates constantly.

Byron King, co-editor of Whiskey and Gunpowder, kicked off
their latest debate:

“Peak oil” is real…The world as a whole will not do
enough to prepare for the depletion of cheap oil supplies,
and whatever it does do, it will not do early enough to
make a difference.  So things will get very ugly, in many
places, for a long time…

Justice Litle, editor of Outstanding Investments,
responded:

 “…the peak oil scenario represents more of a political
threat than a physical one…We have the capability of
solving our energy problems for the long run. It is just a
matter of how much pain we face in the short run.”
 
Dan Denning, editor of Strategic Investments, countered:
 
“The American economy is not prepared for expensive
energy…the American economy was built on an aberration
and abetted by a mistake. The aberration is cheap oil,
which will prove to be the exception and not the rule of
industrial development…”
 
More below…

E-Day! – Part I
By Eric J. Fry

On September 19, Byron King, editor of Whiskey and Gunpowder, dispatched an email to several of his colleagues
that contained an article by Jim Kunstler. The gist of the
article may be gleaned from its first two paragraphs:

“Take a good look at America around you now, because when
we emerge from the winter of 2005-6, we’re going to be
another country. The reality-oblivious nation of mall
hounds, bargain shoppers, happy motorists, NASCAR fans, Red
State war hawks, and born-again Krispy Kremers is headed
into a werewolf-like transformation that will reveal to all
the tragic monster we have become.

“What we will leave behind is the certainty that we have
made the right choices. Was it a good thing to buy a 3,600
square foot house 32 miles outside Minneapolis with an
interest-only, adjustable rate mortgage – with natural gas
for home heating running at $12 a unit and gasoline over $3
a gallon? Was it the right choice to run three credit cards
up to their $5000 limit? Was I a chump to think my pension
from Acme Airlines would really be there for me? Do I
really owe the Middletown Hospital $17,678 for a gall
bladder operation that took forty-five minutes? And why did
they charge me $238 for a plastic catheter? All kinds of
assumptions about the okay-ness of our recent collective
behavior are headed out the window.”

Two days later, Byron added a few choice comments of his
own…just to get the debate rolling:

“‘Peak Oil’ is real,” he asserted. “Peak Oil is the
intersection of resource depletion of the world’s most
commonly used fossil fuel, with the expansive activities of
the world’s central banks, and particularly that bank of
the USA. Too much money-creation over the past 90 years has
accelerated the world’s ability to exploit and use a finite
resource. We have plundered the future. So Peak Oil will
happen.

“Now, the world can either let Peak Oil happen and do
little or nothing along the way. In that case, Malthus will
be vindicated in the manner forecast by the folks at
www.dieoff.org. I kind of think that many nations are on
that track, including the US.

“Or the world can adapt itself to Peak Oil, and change the
way that mankind does business. I know that this latter
notion is rather fanciful. But it is the “other” option at
the ‘other’ end of the argument.

“I am of the belief that the world as a whole will see
something of a middle pathway.  The world as a whole will
not do enough for depleting oil supplies, and whatever it
does it will not do it early enough to make a difference.
So things will get very ugly, in many places, for a long
time.  Life will suck in most parts of the world. Human
hardship will be common, and death will be proximate, as it
was and has been amongst the human tribe for many
millennia, excepting for the past 200 years or so. 

“Mankind will survive in some ‘gated communities’ of this
planet, where people will have made adequate preparation.
Those fortunates who do so will just have to make do for a
couple of generations, as the over-populations of the rest
of the world decline at some level short of catastrophic,
but still in a manner that is rather abrupt.

“Certain societies will survive because they have a good
survival strategy, not because they have more resources.”

 A few days later, Justice Litle, editor of Outstanding
Investments, offered a reply:

“I submit that the peak oil scenario still represents more
of a political threat than a physical one.

“I remember reading not long ago that the American public
spends more on yogurt than they do on the entire political
election process. To invoke Senator Dirksen, force
Americans to give up yogurt, ice cream, frozen pizza, and a
few dozen other non-essential items, and suddenly you’re
talking real money.  

“The US is a $12 trillion economy grown fat on entitlements
and a me-first political process. The point of that
observation is that there is a lot of fat we can trim
before it’s time to start talking about people dying in the
streets. 

“Alternative energy and US based energy sources like shale
oil have been ignored because there was no economic
viability and no need, thus no political will, for the past
few decades. If the peak oil scenario sinks in, I guarantee
you there will be political will…on an unprecedented
scale.   

“Threat of dying or starving is pretty much the ultimate
incentive to change. People will give up ALL their
frivolous life conveniences before they resign themselves
to dying for lack of energy, and the government would
nationalize a massive energy development project, probably
mixed with some form of martial law, long before the die-
off scenarios ever came close to occurring.

“Given a hypothetical extreme peak oil environment, it is
not to hard to imagine something like the following:

–strict rules as to how much energy any family can use 
and what products they can consume

–any and all frivolous product consumption cut back for
the vast majority of the populace

–some form of martial law brought about in the face of 
severe recession to guarantee food and energy distribution

–US oil majors nationalized

–confiscatory tax burdens on the wealthy to pay for new
energy projects and mass upgrades to energy infrastructure

–hundreds of billions, if not trillions, mobilized for
immediate access and development to shale and other
alternative energy type projects

“I don’t foresee the worst peak oil predictions coming
true. But if they did, it might look like a Mussolini style
nightmare from a political standpoint… but I doubt that
mass numbers of Americans would be starving or dying off.

“In however ugly a fashion, the problem would get solved.
The energy levels would come back, and the comforts with
them. And if the political will was there, and the fear
levels were high enough, developing new sources like oil
shale, etc., etc., would be a matter of years or even
months, not decades. Political will combined with
unrestrained force would absolutely demand it. A program
that slashed consumer energy use by a third and poured
trillions into energy development projects would likely see
stabilizing results in less than a year.

“And if this were happening in the US, it would be
happening over the rest of the world too, as energy is
basically a fungible market. The pace of energy saving
developments and new energy developments would rapidly
accelerate, aided by a top-down political process that
would create ten times the urgency of uncoordinated free
markets.

“Standards of living would be dialed back fifty years and
democratic forms of government would likely be replaced
with fascist ones, but modern civilization would not die. 
It would just go into a severe holding pattern for a while.

“So, in my opinion, the peak oil predictions suggest
political Armageddon more than anything else. From a
technological standpoint, it remains true that we have the
capability of solving our energy problems for the long run. 
It is just a matter of how much pain we face in the short
run due to deadline compression.”

Please join us tomorrow, as Dan Denning gets in the last
word!

And the Markets…