Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that "Current global trends in energy supply and consumption are patently unsustainable."

There's not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. "It is," as our Arab friends like to say, "written."

The IEA performed a comprehensive study of 800 of the world's largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That's an average. We see depletion rates in excess of 15% in Mexico's Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there's no reason why it won't), the base of world oil output could conceivably dry up within seven-10 years.

Don't get me wrong. The world won't run out of oil in seven-10 years. That's not how it works. It's just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman's noose around the collective neck of the oil-consuming world. We might not quite realize it, but when it comes to oil, we are all walking that long green mile.

The investment angle for OI is that the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas, should profit in the future. Yes, the portfolio is down. It has been a hard hit to everyone (me too) who bought into the market up until midsummer. We've all lived through a midsummer's nightmare on this one.

So how long will we have to wait for this "future" to show up? Well, how long will the current worldwide recession last? I don't know. But I do know that many energy companies in the OI portfolio are at long-term lows in share price. If you can afford to be patient with your funds, these firms should eventually stage a comeback as oil prices rise again. As I said above, "It is written."

Says who, you ask? Written by whom? Well, how about the IEA? According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

What do I mean by "other kinds" of hydrocarbon substances? Fortunately, there are many different kinds of hydrocarbon molecules out there. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I'm just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the nonoil forms of carbon is affordability. That is, are people willing to pay? It takes a lot of steel and technology to transform some kinds of carbon into something we want to use. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input - all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel. And the whole thing emits lots of carbon dioxide (CO2) in the process, as well.

The other big problem is whether or not there is the political will to "do carbon." Will the governments of the world allow - let alone promote - industry to invest in the industrial base that will be required to transform the varying kinds of carbon into something that the world can use? Because the other side of this coin is ever-increasing CO2 emissions, global warming and climate change. The more carbon that gets burned, the more CO2 that goes up the flue and into the atmosphere. In essence, within about two centuries, mankind is undoing the geological work of tens of millions of years.

This is not a "global warming" article. But most nations of the developed world have governments that are more and buying into the global warming thesis more. The political gun sights are on carbon. But if we collectively decarbonize the economy, the energy supply will dry up and we'll wish for the "good old days" when we had to worry only about Wall Street crashing. And besides, try telling the developing world not to develop. People have fought wars over lesser issues.

Do you want some numbers on hydrocarbon resources? Here are estimates of the total hydrocarbon resources in the world and the relative costs to convert them. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time, but only if the world collectively decides to utilize the resources. If not? Well, you had better own some gold too.

The stark assessment from the IEA described above comes just as much of the world's banking and finance system lies in ruins. Many forms of lending have dried up, and much of the former system of world commerce is just not functioning.

So the politicians, bankers and investors of the world - including us - have their work cut out.

• The Energy Resources Are Out There
• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• Queensland Govt Chooses Coal Seam Methane Over Resource Boom
• Top Resource Prices in 2008: Food, Water, Energy & Metal

"But the election is over. Now it's time to get real. Sure, we can build a lot of windmills and solar installations. More geothermal would be great, too. But the U.S. and world industrial base is limited in what it can turn out, and at what rates. There are constraints in manufacturing, in materials, in systems integration, in the grid, in the labor force and in the regulatory system. And we are going to overcome this in 10 years? By comparison, putting Neil Armstrong on the moon in the 1960s was a piece of cake.

"So will the U.S. - let alone the world - abandon carbon sources of energy in the next 10 years? You just gotta be kidding me. That ain't going to happen. If it does happen, your world will turn upside-down. Count on it.

"So the long-term thesis of Outstanding Investments - in energy and resources - should still be valid. We just have to navigate our way through the economic and political land mines that are getting dropped like cluster bombs onto the landscape. Remember what Friederich Nietzsche said: 'That which does not kill you makes you stronger.' It's getting past the 'not killed' part that's the hard part."

*** But let's get back to Obama. Seems like a decent fellow, as near as we can tell. But he has a great temptation to become a jackass. And early indications are worrying; we think we see his ears are growing (more below).

Obama is beginning to realize what he's up against. This is no ordinary cyclical downturn. Typically, a slump brings interest rates down. (Usually accompanied by central bank rate cuts.) Cheaper borrowing arouses business and speculative activity... which, in turn, tends to get the economy moving again.

This time, that's not happening. The authorities are handing out money below the inflation rate and practically begging banks to lend... But who wants to lend when there's a danger you might not get your money back? And who wants to borrow when everyone is desperate to get out of debt?

Today's Financial Times announces that another 70,000 jobs could be lost on Wall Street. Who needs so many employees when no one's doing any deals? No one's borrowing... no one's lending... investors are running scared... and private equity is curled up in a cave somewhere...

Why? Because it's a 'balance sheet recession,' not a regular, cyclical downturn. People have lost a lot of money... and they're afraid of losing more. So businesses are cutting back as fast as they can. The job losses aren't limited to Wall Street. Today's news from Associated Press tells us that there are 10 million people out of work - the most in 25 years. The New York Times says unemployment is at a 14-year high. (We didn't study the figures to see how they differ; but we predict that the figures in the last quarter of this year will be even more alarming... )

Everywhere, investment portfolios are being trimmed... cash is more than king; it has become a demi-god. This despite the fact that there are some great investment bargains around.

After "Black October," says the FT, it's the "buying opportunity of a lifetime."

Stocks were overpriced for the last 20 years. Now, they're not so overpriced. In fact, by almost any measure you use, they're fairly reasonable. Compared to the yield, you get from Treasury bonds, for example - a popular method of gauging the stock market - stocks look like a good deal. P/E ratios, too, are in the 'normal' range. Or, you can look at James Tobin's q ratio - comparing stock prices to business net worth. Here again, stock prices don't look out-of-the-ordinary.

But a 'balance sheet recession' is an unforgiving, mean, and tenacious rascal. After such big losses, businesses, consumers, investors, and banks need to rebuild their balance sheets - by paying off, defaulting on, or working out their debt. And then they need to rebuild their confidence... with rising asset prices and a growing economy. All that takes years... many years.

Worse, a balance sheet recession is like a straightjacket; the harder you fight against it, the tighter it gets. When government tries to prevent assets from being marked to market, for example, it delays and obstructs the process of adjustment. Rather than let the debts and mistakes be flushed out, they remain on balance sheets... blocking progress, frustrating change.

"Change is Nature's delight," said Marcus Aurelius. Trying to stop change - at least in a balance sheet recession - is Nature's horror. Balance sheets need to be corrected. Until they are corrected future growth can't happen. So, the whole system is stymied, clogged, stopped up, constipated... like the U.S. economy in the '30s... or like Japan's economy in the '90s...

• There Are Two Ways of Studying Economic Theory
• The Latest Las Vegas Odds Say that Obama Will be the Next President
• Barack Obama is a Strong Favourite to Win the Presidency
• “Give us Obama.” America’s voters spoke yesterday.
• Obama faces huge challenges

And the same thing will also hit the Western U.S. And the Southeastern U.S. And parts of the Midwest.

They sure did not talk about power failures in the presidential debates, did they? I don't know why not. All the insiders know about it. Indeed, power failures and price spikes are baked into the national economic cake. People who follow these things are quite sure of it. It's just a question of when, exactly, the lights will start to flicker.

We already had one experience with a regional blackout. Do you remember the power failure of Aug. 14, 2003? Almost the entire Northeast U.S. went dark, except it occurred in the middle of the day. The effects were immediate on over 50 million people in the U.S. and Canada.

Skyscrapers just stopped working - no elevators, no lights, no water, no nothing. Hospital operating rooms went dark. Traffic signals stopped functioning and people were in the midst of instant gridlock. If you ran out of gas, there was no power for the pumps at the gas station. Refrigerators stopped humming and large amounts of food spoiled. Rail systems stopped running - from streetcars in Toronto to subways in New York and Amtrak and freight trains in the middle of nowhere. FAA flight controllers had to communicate with airborne pilots via battery-powered walkie-talkies. Sewage systems shut down, and a lot of you-know-what backed up in many low-lying areas.

The 2003 power failure was bad news, although short in duration. And then it was back to business for the U.S. Things became (if you will excuse the expression) "normal" again. Just like in Amity.

Looking back, the utility companies got the power back up and running, right? And the experts investigated the origins of the problem, right? The people who know all about power grids fixed the problem, right? It could not happen again, right? The U.S. power grid has ample electricity-generating capacity, right? And there's plenty of transmission to move power from one region to another, right?

Well, no.

Earlier this week, I attended a privately sponsored presentation on U.S. energy policy. The main speaker was a senior faculty member from Carnegie Mellon University. This guy has been "doing electricity" for about 40 years or so. He has written reports for the National Academy of Sciences. When the people at the U.S. Department of Energy have a question about electricity, they call this CMU professor.

The news is not good. In 2007, there were about 144 new coal-fired power plants on the drawing boards of the U.S. energy utilities. But, said the professor, "We will probably build none of them." Indeed, "The electric industry in the U.S. is in terrible shape," said the CMU man. So we should expect local and regional brownouts and blackouts to become common occurrences "within five years." But the first isolated instances of brownout and blackout will hit us much sooner than that.

Why is there such a gloomy forecast? Because essentially, the deregulation of the 1990s was botched. According to the CMU electricity expert, botched deregulation "slowed investment, raised prices and led to more and more uncertainty." So now few utilities or their executives want to take political, regulatory, technical or financial risks. Hence, the entire long-range planning cycle has broken down.

It's almost impossible to decide what to build, and at what scale. Costs are exploding, particularly for new construction. It's safe to say that most power plant construction cost projections have doubled within the past 18 months. The prospect of fast-changing environmental regulations also adds to the uncertainty. No one wants to build a power plant and learn in five or 10 years or so that environmental regulations are going to shut it down.

Even the alternative energy industry - with wind, solar and geothermal as the poster children - has formidable challenges. The biggest issue is cost competitiveness. That's because alternative systems provide power at costs that range from slightly higher to much higher than traditional power from, say, coal plants. Then there are issues of reliability, due to the intermittent nature of wind and solar, and the still-novel nature of geothermal power. And other issues include the lack of transmission from the usually remote sites of wind and solar facilities.

Overall, U.S. power producers face the prospect of many different forms of investment uncertainty. What will be the availability of different fuel mixes? Will coal still be useable? Or will natural gas be available at a cost they can afford? Can power producers invest in nuclear systems when there is still no definite program for disposing of the waste stream over the next 50 years? Or should the utility companies go all out for alternative systems?

But the next question is how much can consumers afford to pay? And what rates will the regulators allow? If utilities invest in alternative power systems (like wind or solar) that produce electricity at, say, 20-30 cents per kilowatt hour (kwh), will the regulators set those relatively high costs as the level of reimbursement? And for how long? What if the regulators permit the higher costs for only a few years and then penalize the utilities because some "better" technology comes along? At the end of the day, the base line cost of electricity is set against the cost to produce comparable coal or natural gas-based electricity. And this cost setting occurs even though there is a growing bias against burning carbon in the U.S. political and regulatory culture. One attendee at the discussion commented, "When you're in a 'no-win' situation, guess what? You can't win."

The CMU professor has looked at historical trends for power in the U.S. His best estimate is that over the next decade or so, the price for electricity will about double on average throughout the nation. "This would put the cost of electricity about on par, as a percentage, with where it was back in the 1950s." But that is only if people keep making investments in new power systems and the nation adopts conservation and efficiency measures on a large scale. Absent that? It's lights out.

So you might not see it in your daily life - not yet, anyhow - but the power industry is currently paralyzed by the uncertainty of lopsided risks. And as old power plants age and go off stream, there will be less and less reserve power. Costs are going to rise. And reliability will fall. It's inevitable.

So one investment sector that ought to do well over the next five years is power and backup power systems. And particularly, the companies that should do well are involved in power systems that are off the drawing boards and in some phase of construction, or near completion.

Best wishes, until we meet again...

Byron W. King

for The Daily Reckoning Australia

• The Energy Resources Are Out There
• Worley Parsons (ASX: WOR) Announces Pilbara Solar Energy Project
• Rising Coal Prices to Increase Electric Bills in Australia
• Increased Oil Production Won’t Solve the Energy Crisis
• What Makes the Wheels on a Bus Go “Round and Round”? Electricity!

"Have you tried to buy real gold lately? Many dealers are just out of bullion and coins like the U.S. Gold Eagle and Krugerrand. The U.S. Mint has customers on allocation. The only way to get real gold is to pay a premium over the 'paper' price, and I don't mean the former $20 markup per ounce.

"As far as I can find out from a spokesperson, the SPDR Gold Shares does have physical gold to back up every ounce on the books. The only other way to find out is to go tour the vault and count each gold bar.

"The other gold and precious metals miners in the Outstanding Investments portfolio are all way down. It's a combination of low metal prices and the market meltdown. I know that it's frustrating to watch these gold miners decline. It's painful. What ever happened to the 'dollar down, gold up' thesis? I'm just going to wait it out. Unless I absolutely needed the money right now - and if I did not come up with the money, there would be a severed horse head in my bed - I would not sell the gold shares.

"I'd like to think that the current share prices are absolute bargains. I'd like to think that we would all kick ourselves in five years for not buying up all the shares we can get hold of right now. But then again, this market is confounding. There always seems to be another down day. So my advice is to hang in with what you've got. And buy shares only with your speculation money, not any funds that you cannot afford to tie up for a long time.

"And speaking of long times, I believe that the current banking 'bailouts' (pardon me, 'rescues') are going to be inflationary. The general macroeconomic trend right now is deflation. And the U.S. and most other central banks of the world are fighting that with inflation of the money supplies. This can only be bad news for the dollar. And it should be good for gold."

So, you could wait it out empty-handed...or you could take advantage of gold's uncharacteristically low price and stock up. And at just a penny per ounce, this will hardly make a dent in your bank account.

• How to Trade Gold Shares
• The Price of Gold Has Not Retreated Permamently
• Australian Resource Shares, What’s Next?
• From the Gold Pan… Inflation, Deflation and Precious Metals
• Today’s Current Gold Price

How bad can it get? It's already bad, but can it get worse? Markets go up and they go down. That's what markets are all about. Still, it's one thing to live through a market pullback or correction. It's another thing entirely to experience a total rout. It's like what happened during Napoleon's retreat from Moscow. There's no relief from the suffering.

Evidently, the world wants its money back. It's selling. In fact, a lot of people want out of the market right now. Are you one of them? I don't blame you if you are looking for a way to bail out. But before you pull the "Eject" handle, let's think this through.

Sure, it's easy to wish that you sold your stocks six months ago. But you didn't. Neither did I - at least not all of them. Why didn't we sell? Were we focusing too much on the long term? Did we miss some sell signal? Where's that bell that they're supposed to ring at the top of the market? What the hell were we thinking, that we're bulletproof or something? Well, before we get too far ahead, let's look back and see how we got here.

From the end of 2006 to July 2008, oil steadily increased in price:

Also, between late 2006 and July 2008, the U.S. dollar declined in value, particularly against the euro.

Both run-ups - in the price of oil and the value of the euro against the dollar - were too much, too fast. The apparent strength in both oil and the euro (and the weakness of the dollar) masked the fact that the trading numbers were outrunning the pure economic fundamentals.

Here's the key set of points. The eurozone economy was not that good last year. The dollar and the U.S. economy were just not that bad. Oil was just not worth that much. Despite the Peak Oil thesis - in which I believe strongly - the world really wasn't coming to an end last summer. (And it didn't.)

So by this past July, oil was too expensive and the dollar was too cheap. I said so both in writing and on Fox Business News and other media. As you can see from the charts, by the second week of last July, oil was selling at $147 per barrel and the euro was over 1.6 relative to the dollar. Too much.

What happened, then? In mid-July, the U.S. dollar began to strengthen, due to central bank intervention. And the price of oil fell. Both changes were rapid, even abrupt. A surprise? No, not really.

I expected the dollar to strengthen, and I said so. And I expected the price of oil to decline from the $140s to about $100-110 per barrel, with a possible excursion down into the $90s per barrel. I actually thought that a stronger dollar and declining oil prices would be "good" for the overall world economy, because this would leave more money in the pockets of consumers - especially energy users.

But now in hindsight, it appears that the run-up in oil prices from 2007-mid-2008 sapped household and consumer income across the world. The oil run-up and simultaneous dollar devaluation were enough to trigger the mortgage crash. Of course, the mortgage crash was coming, and it was always just going to be a question of causation. Now it's up to history to assign naming rights to the meltdown.

Let me use a different analogy. The dollar decline and energy run-up did not give just a chest cold to the world's credit-driven economy. The yearlong decline of the dollar and rising oil price gave the world economy a case of tuberculosis. And it's a strain of TB that is resistant to all the usual antibiotics.

So here we are. The world economy is sick. And I mean really sick. The markets are coughing up blood. None of the usual remedies will work. There's no magic pill. From here on out, it's trial and error. It's hit or miss. And the prognosis is grim.

Let's get back to whether or not to sell your stocks.

First, I'm certain that it's painful for you to watch your investments decline. You worked hard for the money with which you bought stocks over the years. And now the value of those stocks is falling. It just stinks.

This market meltdown is not like Goldilocks sneaking into your kitchen and eating your porridge. No, this is like Goldilocks breaking into your house and burning the place down using magnesium flares as accelerants. Years of hard work are just turning into smoke and ashes right before your eyes.

I have to say that declining markets are plenty painful for me. It hurts twice as much because I edit Outstanding Investments. That is, I have both money AND a reputation at stake in this process. Agora Financial does not give out personal investment advice. But the last thing I want to do is offer up a bum steer when it comes to helping you make your financial decisions.

My newsletter has a straightforward investment thesis. We invest in energy and resource plays because over time - we believe - energy and resource investments will become more valuable. There are a number of reasons for this, including geological scarcity, past underinvestment and increasing future demand. But it's a basic idea, and we think it works. At least, it has worked for the past six years or so.

For the past few years, we have been selecting investment ideas in companies that appear to have bright futures in a looming era of rising energy and resource demand. And many - most, really - of the investment ideas did well. Some did very well. A lot of readers made a lot of money. Whether it was oil, gold, refineries, cement or energy infrastructure, it seemed like we were investing in places where the world was going. Right?

But now it seems like the investment locomotive - energy, resources and related infrastructure - has derailed. Energy prices are declining. Energy-related stock plays are down. Commodities are down. Mining and infrastructure stocks are in the dumps. The falling tide is leaving us high and dry.

But does that mean that our whole investment thesis is unraveling? Not so fast, pilgrim. Let's keep on thinking this through.

Before you do anything precipitous - like sell your last stocks and stuff the cash into your mattress - let's ask a few more questions.

If you sell out now, what price will you get? A low price, right? So if you sell now, you will leave a lot of value on the table. That is, most things in the world of energy and resources are underpriced compared with their intrinsic value. I don't care how bad the market looks just now (and it looks awful). Go out and try to find an oil field somewhere, or build an oil refinery, or find an ore deposit and build a mine. Can't do it, can you?

So if you sell out now, just be aware that you will be getting a relatively low value. You will be leaving long-term value behind. If that's what you want, then that's what you ought to do. Just understand the point.

Which brings up the next set of issues. How badly do you need the money? How soon do you need it? How scared are you of further declines? How much risk can you handle, especially going forward? What kinds of reassurance do you need?

The markets are down. A lot of Elvises have left the building. And who is left to do the selling? Just you? Nope. Whatever you think, you are not alone. There are still a lot of people holding their shares. What do they know? And what is their reasoning to hang on?

From what I have seen, the biggest sellers - the market drivers who are taking the express elevator down to the subbasement - are people who have lost control of their money, if not their investment destiny.

People are selling to meet margin calls. The wildest sellers are traders who are just plain behind the eight ball. It's more than being scared by what is happening. Heck, we're all scared in some way or another. I wasn't around in the 1930s, so I have no firsthand experience with the Great Depression. I know only what my parents and other relatives and friends told me. It was pretty bad for a lot of people.

But right now the serious sellers are people who cannot afford to be patient. A lot of the sellers in the energy and resource field are hedge funds. These firms are meeting redemption calls from investors who want out. The hedge funds just plain need cash. They have to sell. And a lot of those funds are throwing everything over the side, even the life rafts and the emergency rations.

When you look in the mirror, is that you? Are you like a hedge fund in panic mode, selling everything just to raise cash? Do you fit into this "sell-sell-sell" model? Don't feel bad if this is what you have to do. Just be honest with yourself.

Meanwhile, the U.S. - and the world, really - has been dealing with a credit crisis for over a year. Which makes me wonder if there is a turnaround coming sooner, rather than later. I don't know that. I don't have a copy of the Financial Times from next March. So I just cannot say if we are closer to the bottom than to the top.

How soon do you need your funds? If you need cash within the next 12-24 months to pay bills like those for college tuition or a nursing home for a relative, then maybe you ought to just take the hit and get out of the market now. There's no shame in being safe. Look after your needs.

But do you have a longer horizon? Are your "down" stocks in your IRA or 401(k)? You can't take it out without penalty until you are 59 1/2 years old. Then consider riding it out. And maybe with these low valuations on most stocks, it's even time to go shopping - but certainly not blindfolded. Nibble away.

In a lot of respects, the world is on sale right now. Heck, a lot of stocks in the OI portfolio have turned into dividend plays. Can they maintain their dividends? That's a good question. Can they sustain earnings? At the same time, if you were management at these companies, would you risk further tanking the stock by cutting the dividend?

And let's look ahead a year or two. Commodities in general have been plunging in price since early July. The dollar has been strengthening. Will that continue? Can it continue? Why should the dollar stay strong? Does the number $700 billion mean anything to you? So sure, the strong dollar can continue and commodity prices will stay weak. But at some point, the dollar will start to decline in value. And commodity producers will have to cut back on operations by closing mines and mills and smelters. Then they regain pricing power.

And if the world has the vast recession that many people are forecasting? Then global demand should decline in the near and further future.

But there are 6.5 billion mouths to feed on this planet. The world will still have to produce a lot of materials to satisfy basic demand. That is just built into the equation of human survival. And what will happen to pricing power as some layers of high-cost output go away?

For example, the world petroleum industry will lift over 31 billion barrels of oil this year. Even if world demand dropped by, say, 5% - as if the world airline industry simply vanished - the world would still lift nearly 30 billion barrels. And as the current economic woes cause new projects to slow, annual depletion will overwhelm annual new output from new fields. There will be less oil.

That is, looking ahead, the world may never again exceed the oil output levels that we will have in 2008. Indeed, it will require heroic efforts just to keep global oil output flat in the future.

So this brings us back to that OI investment thesis. Energy and resources are getting scarcer and ought to become more valuable going forward. Hey, too bad the world financial system is busted. But that just means that there's an opportunity to buy good stuff really cheap.

No, I'm not saying that you ought to go out and buy stock with both arms or back up the pickup truck and start shoveling. You need to be very cautious right now. But don't panic, either.

Sell if you need to sell. Buy if you want to take on the risk. We're in for some rough economic times. But unless world population starts to die off fast or people develop a taste for living low and being cold a lot, the energy and resource plays are still going to work over the long haul.

Until we meet again...

Byron W. King
for The Daily Reckoning Australia

• The Aussie Dollar as a Measure of Global Risk Appetite
• Themes from Day 1 at the Agora Financial Investment Symposium
• CRB Index Correction Likely to Go Further
• Crude Oil Extends its Price Decline
• Deutsche Bank Tells Clients to Get Out of Commodities

Also, as August rolled on, gold fell from a price over $900 to under $800 per ounce. And oil tumbled from a price point near $145 to $111-115 per barrel. This is quite a drop. And a lot of observers credit the drop to the strengthening dollar. So what’s going on?

Usually, a currency strengthens when there is some sort of good news about the underlying economy. But is this the case for the U.S. and the dollar?

The banking crisis is still with us, as is the ongoing housing meltdown. And many insiders say that there are still more tough innings in this game. So where is the good news?

Indeed, Kenneth Rogoff, an economics professor at Harvard and the former chief economist of the International Monetary Fund, recently predicted that there is still more bad news to come from the worldwide credit crunch and financial turmoil. According to Rogoff, “The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.”

Rogoff added an ominous prediction, stating, “We’re not just going to see mid-sized banks go under in the next few months. We’re going to see a whopper. We’re going to see a big one - one of the big investment banks or big banks.”

So if the U.S. financial system is in such a precarious state, is the rise in value of the dollar really justified? Will it be good for the U.S. economy to have a major bank failure? Or on the other hand, will it be good for the economy if the U.S. government has to step in to bail out a large bank? It all seems like a “lose-lose” proposition.

Another well-respected commentator, Richard Russell, who has published Dow Theory Letters since 1958, believes that we are on the eve of world deflation.

According to Russell, the big problem facing the world economy is not inflation, but deflation:

“From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling - big money, sophisticated money, is cashing out, raising cash, preparing for world deflation.”

According to Russell, “Smart money is selling into the stock market, day after day.” People and institutions are raising cash. When deflation rules, this will usher in a strong dollar.

Russell offers an illustration for why people are raising cash:

“Look, if you have $5 million and you are receiving only 2% in interest on your money, that’s only an income of $100,000 on your $5 million. Big money realizes that in a deflation, you need a mountain of cash to keep up your lifestyle.”

So Russell anticipates an era of deflation, accompanied by low interest rates. Hence the need to raise cash to support an income stream over time.

Then again, what if the markets are anticipating an increase in interest rates over the medium to long term? Could this be prompting a rise in the value of the dollar? Think of how much new “money” is floating around out in the world due to just the recent creation of credit as the Fed has bailed out insolvent banks and investment houses.

Where has all that newly created money gone? It’s lurking out there, somewhere in this world. And that new money could show up at any moment, bidding up the prices of whatever happens to be the “big thing” on any given day. Thus, while Richard Russell thinks we are on the eve of deflation, we are also confronting the specter of inflation.

The last historical experience the world market has had with high inflation rates and stagnant growth was back in the late 1970s and early 1980s. To combat inflation, then-Fed Chairman Paul Volcker increased interest rates to double-digit levels. High interest rates hit the economy like a ton of bricks, but that was the idea. High interest rates broke the back of inflation for a generation.

You have to look back even further, to the 1930s and the time of the Great Depression, to find the last long-term era of deflation. What do you see? The price of gold and gold mining shares actually increased during the 1930s.

The key to the rising price for gold in the 1930s was the effort by President Franklin D. Roosevelt to raise the nominal price of gold from $20 to $35 per ounce. It was still - in many respects - a gold standard world back then. But in raising the gold price, FDR also indirectly spurred the market capitalization of much of the mining industry.

One thing to keep in mind is this. We know a few things about inflation, both practically and from economic theory. We don’t know nearly as much about deflation. If deflation shows up at the door, will anyone really know what to do about it?

So this prompts the question. Where are prices for precious metals headed? If we encounter deflation, will we just retrace the run-up of the past six years or so? Will we see gold back at $300 per ounce, and silver at $3 per ounce? I doubt it.

I think that we will look back at the summer of 2008 as a time when precious metals had a correction after a relatively quick move upward. To put it in terms of technical analysis, the prices “outran their support.” It’s like the tanks of Gen. George Patton outrunning the fuel trucks in the closing days of World War II. Patton had to stop advancing, while the trucks caught up.

When the dollar strengthened in mid-2008 - for a variety of reasons - it prompted a pullback in prices for precious metals and the related mining shares. If you are cautious, you will hold cash and sit it out. If you are bold, you’ll look for bargains and buy shares.

Long term, I don’t think you will get hurt by buying into share price weakness. Over the long term, precious metals and the mining shares should still continue to rise in a market in which dollars are getting cheaper and things of real value are becoming scarcer.

Regards,

Byron W. King
for The Daily Reckoning Australia

• Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses
• Exhausted Gold Shares
• Inflation and Deflation Battle is a Long Way from Won
• Gold Calls Bernanke’s Bluff
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?

Head-Smashed-In Buffalo Jump bears witness to a custom practiced by the native people of the plains for nearly 6,000 years. The native people were hunter-gatherers, so they understood both topography and animal behavior. And the native people killed large numbers of bison by chasing them over a cliff.

The bison used to graze on the plateaus adjacent to a deep river valley. The early human inhabitants would sneak up on the bison. Then they'd scare them with loud screams and burning torches. The bison would spook, run over the edge of a sandstone cliff and fall to their deaths on the rocks below. Then the natives would carve up the carcasses and leave the remains to the vultures and other scavengers.

People don't herd buffalo over cliffs anymore. Smashing in the heads of large herbivores - by luring them into a deathtrap - has gone out of fashion. But still, there is something similar in our modern time. It's called investing on Wall Street. Or so it seems.

Can you believe what is going on in the markets? Pardon me, but the markets are making almost no sense.

The future of the U.S. dollar looks terrible, yet the dollar is rising at a record-setting pace. And depletion is causing oil output in some areas to...well, fall off a cliff, if I may use that phrase. Energy and commodity stocks are tumbling like buffalo in the olden days of Alberta.

Let's start with the U.S. dollar. It's strengthening on world markets, but why? Is there some sort of good news about the U.S. economy we've missed? Is the U.S. tax code suddenly more capital friendly? Are national levels of wages and household incomes rising? Is the labor force suddenly more focused on producing goods that the world wants to buy by the boatload? Are government expenditures suddenly under control? How about none of the above? Really, where's the good news?

Despite the lack of good news, for the past two months, the dollar has been strengthening. The euro, in turn, has been weakening as Germany and France have slid into recession. Pretty much in tandem with the rising dollar, the prices for oil and natural gas have been falling. And prices for precious metals have also been declining. It's devastating the stocks in the Outstanding Investments portfolio.

Meanwhile, the U.S. banking system is badly hobbled. Back in January, in an Outstanding Investments weekly update, I predicted, "Three major banks will fail in 2008." Now here we are in the ninth month of the year, we've bagged a good deal more than three banks and the list is getting longer. (Last week, an acquaintance who works at a government agency described Citigroup to me as a "dead bank walking.")

Heck, the U.S. government just seized Fannie Mae and Freddie Mac. Don't these firms count as major banks, what with their $5 trillion and more of liabilities? They're both too big to fail, yet too big to bail. Really, does anyone have a spare $5 trillion lying around?

It used to be that the job of the Federal Reserve was, as former Chairman William McChesney Martin Jr. told it, "to take away the punch bowl just as the party gets going." Now it seems like the Fed is laying a direct pipeline to the distillery to keep everyone loaded. And in the process of taking over Fannie and Freddie, the U.S. government is socializing the financial side of the national housing market. The cynical view is that the federal government will loan you the money to buy an overpriced house and your local government will tax you for the privilege of living there. But where is the money coming from?

And what's going on with the price of oil? The other day, someone sent me an e-mail asking about the "plunge in oil prices." Plunge? Not quite. If you want to see a plunge, go to Head-Smashed-In Buffalo Jump. But oil has not plunged. Or at least it depends on your time frame.

This time last year - September 2007 - a barrel of oil cost about $80, and rising. I remember being in Houston in October 2007 - sitting about 10 feet from T. Boone Pickens and his wife - when oil crossed the $90 mark for the first time. Pickens commented, "We'll see $100 oil before we ever see $80 again."

T. Boone Pickens was right. Today, a barrel of oil is trading for about $107, or about a 33% increase year over year. That's no plunge.

OK, I know what people are talking about. Back in the spring and summer, oil ran up in price. Oil crossed $100 early this year and kept rising. By July of this year, oil traded for over $147 per barrel. At the time, I said that oil was "rising too far, too fast." I said that a lot of things in this world stop working when oil gets to about $130 per barrel. And I also said - on Fox Business News one early morning in June - "Oil OUGHT to pull back to around $100-110 per barrel." In the past two months, the price of oil has fallen by $40 or so.

That is, oil is down close to 30% from its recent high. But that's after more than doubling in the past year. So the recent price retreat is not a plunge. It's just a correction within a long trend of rising prices for energy.

Meanwhile, almost all of the world's largest oil fields were discovered over 30 years ago and have been lifting crude oil for 30, 40 or more years. So crude oil output from many of the world's oil fields is either flat (such as in Saudi Arabia) or falling (such as in Mexico).

Even Russian oil output is dropping this year. No less an authority than the head of Gazprom recently stated that oil should sell for $250 or more per barrel.

Closer to home, let's take a quick look at Mexico. Crude output from Mexico's Cantarell oil field - the third largest in the world - is falling at its fastest pace in 12 years. For the past two decades, Petroleos Mexicanos (Pemex) has badly underinvested in field upgrades and new exploration. So Cantarell oil output has fallen 34% within the past year.

Indeed, Mexico may cease to be an oil exporter as early as 2010 and, in all likelihood, no later than 2012. In all candor, even the "lack of investment" argument holds a large element of spin. It may well be that no amount of new investment can reverse Mexico's oil output decline.

Along these lines, I surely do not envy the next U.S. president. One of these days, the morning National Intelligence Brief will begin, "Mr. President, we have some really bad news about Mexico's oil exports to the U.S. Pemex told us that within the next two months, it just can't deliver the oil that we're expecting. And none of the other oil suppliers in the world can begin to make up the difference."

Yet in the face of all this, the market is currently selling off oil and other energy players. The market is selling off oil field service companies, infrastructure companies, precious metals companies and even basic metals.

So how do we deal with this? I hate to see what's happening to the Outstanding Investments portfolio. It's painful to watch such great companies decline in value. But I also have to keep my eyes on the future.

And what does the future hold? The dollar will weaken, what with all the new credit being created to bail out banks, and probably the automakers, and everybody else with a hat in their hand, it seems. And the energy and resource plays are going to stage a comeback. Of that I am convinced.

For now, just be careful when you walk next to any cliffs. Remember what happened with those buffalo out in Alberta.

Until we meet again...

Byron W. King
for The Daily Reckoning Australia

• Making Sense of Today’s Financial News
• We Are Facing a Global Oil Crunch
• Welcome to Murphy’s Market
• Credit Crunch Is Overpowering Current Investment Banking Model
• Two Reasons the Price of Crude Oil has Increased

When the conference was over, I took a bus from Vancouver down to Seattle. Starting at the banks of the Puget Sound – where I visited a large trawler that pulls fish from the Pacific Ocean, as well as a Coast Guard cutter – I headed back home to Pittsburgh.

Over the next two weeks, I covered 3,993 miles in a rented Ford SUV. My plan was to take a firsthand look at some of the most interesting geology – and exciting energy opportunities – that North America has to offer. And I sure saw some things that made my eyes pop.

In Everett, Wash. I toured the Boeing production facility – the largest building in the world. Really, the Everett plant is the box in which they must have delivered the Pentagon. Its floor area is as large as 75 NFL football fields. All of Disneyland could fit inside the Everett Plant, with 12 acres of parking lot left over. And there at Everett, I saw an array of the leading technologies for producing more fuel-efficient airplanes.

I saw three new Dreamliners – Boeing 787s – in the assembly phase. These aircraft will be 25% more fuel-efficient than any comparable aircraft currently flying across the world’s skies.

The technology of the 787 will probably decide your flying future, as well as the flying futures of your children and grandchildren. One Boeing representative told me, “Most of the people who will fly on the 787 have not even been born.” If the 787 works, you will still be able to enjoy relatively affordable air travel in the future. If not, I guess we’ll all be walking to Vancouver.

And even the “older” models of Boeing aircraft, like the Boeing 777 and the venerable workhorse Boeing 747 (whose first flight was in 1969), are still rolling off the assembly lines at Everett. But Boeing has added many new features to improve the fuel-efficiency and operational economics of these aircraft.

There’s no living in the past in the world of aerospace. With fuel costs soaring (sorry for the pun), the focus has to be on efficiency and new technology. So we’ll see who wins this race – new technology or expensive jet fuel.

In central Washington, I visited the Grand Coulee Dam. Grand Coulee is the largest concrete structure in North America, and the fourth largest dam on Earth. (Two dams in South America and one in China are larger.) At 6,809 megawatts of rated electric power, Grand Coulee is also the largest point source of energy in North America. The spillway alone is twice the height of Niagara Falls.

Grand Coulee contains 24 million tons of concrete and 12 million tons of steel. Back when they constructed Grand Coulee in the 1930s, 12 million tons of steel would have built 240 battleships. So that’s a lot of steel.

But devoting massive amounts of resources is exactly what you have to do when you want to build energy systems and produce a lot of energy. People made that choice back in the 1930s. They spent the money, dedicated the labor and resources and built the dam. Now, about 66 years after the first turbine started spinning, we are still benefiting. So there’s certainly a lesson for our time in the history of the Grand Coulee Dam.

In Saskatchewan and North Dakota, I saw the development efforts that are going on in the Bakken Formation. The Bakken is a rock formation within the Williston Basin, a sedimentary basin covering parts of three states and two provinces. The Williston Basin contains a vast wedge of sediments as much as 15,000 feet thick in some places.

The Bakken itself is one of several hydrocarbon-bearing formations within the Williston Basin. But the Bakken reaches a maximum thickness of only about 150 feet. In fact, it’s even thinner in most areas.

The best understanding of the Bakken Formation is that it is both a “source rock” for hydrocarbons, as well as an oil and gas reservoir. That is, over millions of years, organic matter accumulated in the sediments and became chemically altered by heat and pressure. All of this produced oil and gas. Now the oil and gas have collected within the sedimentary beds of the Bakken. But it’s tricky to get them out. It requires directional drilling and subsurface “fracturing” to break up the shale and release the hydrocarbons.

Wells in the Bakken Formation are not easy to drill, and they are not cheap. Yet on my travels, I saw at least a dozen working drilling rigs. I saw many dozens of brand-new oil wells with the pump jacks still breaking in. The roads of Saskatchewan and North Dakota were clogged with literally hundreds of trucks hauling rig components and drilling supplies.

Investment is moving into the Bakken play, what with the high prices for oil in the last few years. I spoke with farmers who described years of toughing it out on the hard prairies, followed by recent lease payments in the millions of dollars.

And there’s a human migration going on as workers from all over North America travel to this exciting new energy patch to take jobs that can pay over $100,000 per year. But if you are thinking of going, take your fur-lined underwear – they drill year-round, and in winter, the temperatures have been known to get down to 60 below.

There’s much more to discuss about where I went and what I saw. But I want to say that I’m home now and there’s another hydrocarbon boom going on right around me. It’s the Marcellus Shale play, and in a sense, it’s like reliving the history of the old boom days of the Pennsylvania oil patch in the mid- and late 1800s.

The Marcellus Shale is a vast rock formation that extends over New York, Pennsylvania, Ohio, West Virginia and parts of Maryland, Kentucky and Virginia. And like the Bakken, it’s loaded with (mostly) natural gas, but in some areas, there are a lot of natural gas fractions like ethane, propane, butane, etc.

And just the initial leasing and land plays of the past year or two have brought immense new money into the region. Indeed, in parts of Pennsylvania, it seems like entire counties have hit the lottery. Prices for oil and gas leases have just plain soared.

From one end of Pennsylvania to the other, courthouses are packed with land agents. The agents are searching titles as far back as the 1850s. Really, there are lines out the doors of some courthouses due to the Marcellus land rush. In Bradford – home of the original Pennsylvania oil boom of the 1860s – the local register of deeds has placed a 15-minute time limit on any one person’s use of the title search computer terminals.

One woman told me that she and her husband have been “land rich and dirt-poor” for their entire lives. “My husband had to work at a factory job just to make enough money for us to pay the taxes on the farm,” she said. “And we almost never made any money off farming.” And now they are millionaires. They have engaged a “big name” law firm in Pittsburgh to write up a business plan for the newfound family wealth.

Stories like this are occurring all over the lands west of the Alleghenies, and even in hardscrabble places like northeast Pennsylvania. As a matter of fact, some of the thickest sections of the Marcellus Shale are in northeast Pennsylvania. (Marcellus Shale is shown as the gray region below)

So the Marcellus play is going to have some serious legs. And I have already identified a few great investment opportunities, which I will share with you in the coming weeks.

Byron W. King
for The Daily Reckoning Australia

• Increased Oil Production Won’t Solve the Energy Crisis
• A Degree from an Elite College is No Guarantee of Higher Wages
• The Energy Resources Are Out There
• Worley Parsons (ASX: WOR) Announces Pilbara Solar Energy Project
• Unsustainable Energy Trends

But then again, a lot of energy and scarcity facts defy party labels. The energy resources are out there.

They are what they are and where they are. We can exploit the resources or not. But it's not like in Star Trek. There's no "dilithium" power source out there to keep the economy running.

So for the next president and his administration, it's a question of doing something. The U.S. can always just go on importing large amounts of its energy supply. That sure has worked well in the past, hasn't it?

There's offshore oil and gas. There's onshore oil and gas. There's coal. There's uranium.

There's biomass, wind, solar, geothermal, falling water and tidal power. There are conservation and efficiency methods. And there are big choices to make.

At the end of the day, the next administration will have to decide to do something to keep the pipelines full and power lines energised. Or the pipelines and power lines will start to run down. And then the next president will have bigger problems on his hands than just deciding which of his friends to appoint as federal judges, or who gets what plum job.

What can the U.S. afford to do?

I've written before that the capital costs for energy projects have swelled in recent years. The costs for key inputs - steel, cement, copper, aluminum, machinery, labor - have outpaced inflation. And it won't all come to an end just because the Beijing Olympics are over. There's still a lot of concrete to pour in the Middle Kingdom.

So the world commodity boom will continue its long-term trend upward. And according to the latest data, the costs to build different kinds of power sources have increased dramatically. The relative changes are astonishing, if not sobering.

According to the U.S. Federal Energy Regulatory Commission (FERC), the capital costs of building power generation capacity in the U.S. in 2008 compared with 2003-2004.

The inflationary environment in power generation capital costs has impacted all types of systems. Nuclear has increased the most, because it uses the most steel and concrete. Costs for coal systems have increased quite a bit, as well.

At the same time, the fact is that coal and nuclear generate in excess of 60% of the U.S. electricity supply.

And much of the installed base is between 30-40 years old, with a significant amount even older. So this installed base of power generation systems is coming to the end of its design life. What will replace it? The U.S. had better figure that out now, because it will take the next 20 years (and more) to build the next generation of power systems and plants.

On the other hand, wind power has been affected to a lesser extent by capital cost inflation. Combined cycle and gas turbine combustion still remain cheaper than wind, but wind made up a lot of ground in 2003- 2004. These effects will play out over the next few years. These are things that neither the next president nor his policymakers can do anything about. They will just have to ride the wave.

And look at geothermal. It has become more expensive to build out geothermal capacity, but not that much more so. So geothermal is among the most competitive systems out there.

And on the surface, wind appears "cheaper" to build than geothermal. But that does not take into account that geothermal is far better for baseload power. That is, geothermal can supply power pretty much 24 hours per day, seven days per week. Wind, on the other hand, is limited to times when the wind blows. So it might take, say, three or four separate windmill sites to ensure 24-hour coverage, instead of one geothermal site.

We can only expect that fossil fuel costs will rise over the next few years. Really, who thinks that coal or oil will get cheaper? Rising fuel costs will further damage the economics for fossil-fired power generation, along with rising capital costs.

And despite the relative cost advantage for coal-fired power, the climate change debate is affecting the energy markets. Uncertainty about the future "carbon regime" is a key factor.

There are many questions. That is, will there be a "cap and trade" system on a national or worldwide basis? Both of the major party U.S. presidential candidates are discussing this. And cap and trade could manifest itself in many different forms. We might see national limits on carbon emissions. Or there could be taxes on carbon. (British Columbia already has a small tax on carbon. And what happens to small taxes? Yes, of course.)

In addition, the U.S. could enter into any number of treaties that set limits on overall carbon emissions.

What will this do to U.S. industry, both domestic and international? This is no idle musing, either. Large companies like General Electric are making extensive preparations for a future of limitations on burning carbon.

Even now, Americans are living with the effects of the debate over climate change. The prospect of dramatic carbon regulation has already altered the economics for the coal industry. In the past two years, we have seen numerous cancellations for proposed U.S. coal plants, from Texas to Montana to Pennsylvania to North Carolina.

At the same time, renewable power systems are a fast-growing industrial sector. But renewable power systems cannot in any way meet the scale of future demand in the near to medium term. The industrial infrastructure is just not there to build large numbers of basic systems for wind, solar and even geothermal.

Anyone who says America is going to do vast amounts of renewable this or that within the next four years just does not know what he's talking about.

So you can be sure that energy efficiency and demand control (higher prices and smart metering) are key near-term responses. That is, in locales where customers are exposed to fluctuating daily power prices, demand control is more likely via higher prices. In places where customers see relatively static pricing for energy usage, we can expect to see mandatory efficiency measures gain ground.

And if the next U.S. president does not get energy right, nothing else that he does will really matter very much.

Until we meet again,

Byron W. King
for The Daily Reckoning Australia

• Electricity Crisis is Coming
• Rising Coal Prices to Increase Electric Bills in Australia
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• Unsustainable Energy Trends
• Why an Energy Crunch Could Lead to Booming Profits in “Solid Electricity”

Or imagine offshore oil production platforms in the Gulf of Alaska or the North Sea. What do these offshore platforms have in common with a luxury ski resort near St. Petersburg, Russia?

When you first think of it, there's not much commonality between a city bus in China and a large presidential library in the U.S. And how do you begin to compare an austere and remote offshore oil platform with a fancy resort in Russia? Heck, the Russian resort probably has chandeliers and Faberge eggs on the shelves.

What do these things have in common? Well, they all need power. More specifically, they all need electricity. And for one reason or another, they need or want the power source to be on-site and self-contained.

The Beijing bus happens to be an electric hybrid vehicle. A hybrid vehicle uses an engine to power an electric generator. The electricity from the generator powers a motor that turns the wheels. And the wheels on the bus go 'round and 'round.

But even better, this bus puts out ultra-low emissions. That's because reducing engine emissions is critical in China, where pollution is so bad. The electricity that powers the bus comes from an on-board device called a "microturbine." In the case of the Beijing bus, this is a small engine that burns compressed natural gas. The gas spins a turbine and generates electricity. And it moves that bus.

OK, but how is the Chinese bus similar to the Reagan Library? Well, the Reagan Library also gets its electricity from microturbines. There are 16 microturbines at the Reagan Library, delivering over 95% of the power that the large building uses. (Large? Hey, the Reagan Library houses an entire Boeing 707, the former Air Force One, in a gigantic hangar section.)

The microturbines at the Reagan Library burn natural gas. The gas comes from the regional pipeline system. So yes, the library buys natural gas. But it hardly ever has an electricity bill. Even better, the heat from the turbines actually gets recycled to run the library cooling system.

Yes, you read that right. At the Reagan Library, the heat runs the cooling system. I know it seems strange, kind of like Reaganomics did at first. But hey, it works. And the library has much lower electric costs than if it bought power from the Southern California grid. The microturbines eliminate all but a small electrical connection to the larger grid. The process is highly efficient.

And how about that ski resort near St. Petersburg? It too is off the electric grid. But without a reliable source of power, the Russian resort is out of business. So the resort uses a series of microturbines that burn natural gas (and it being Russia, sometimes kerosene). These microturbines are the sole source of power and heat for a luxury hotel and other facilities like chairlifts and water pumps.

Out in the Gulf of Alaska and the North Sea, many offshore platforms now obtain power from rugged microturbines. These platforms are no ski resorts or stately libraries. These platforms are serious industrial facilities, exposed to salt water and the heaviest storms that Mother Nature can blow at them. And there are earthquakes in Alaska.

Traditionally, almost all offshore platforms have used diesel generators to crank out power to run the on-board systems. Things like oil pumps, lighting and signaling devices, and crew quarters. This requires that the platform operators send out diesel fuel by barge to the platforms. Then they have to pump the fuel into holding tanks.

As you can imagine, hauling, pumping and storing diesel fuel at sea is a logistical pain in the neck. Not to mention it's an oil spill waiting to happen. But now microturbine systems on the offshore platforms burn wellhead gas. That is, the microturbines burn natural gas that comes straight from the wells drilled into deep hydrocarbon formations. There's no more diesel fuel handling. And the energy cost for an offshore platform is now a negligible element to the operators.

Oh, and by the way. In all four applications I just listed - bus, library, resort and offshore platform - the microturbines run almost continuously. They require maintenance about once per year. Maybe twice, just to be on the safe side.

So what's going on with these microturbines? They are clean. They don't need much maintenance. And you can use microturbines to run large buildings and industrial facilities, not to mention city buses in Beijing.

Well, this is nothing short of a new energy revolution. Microturbines are clean, green, energy-efficient and adaptable to a wide array of applications.

Whatever you want to do, you need power. When you are close to a power line, you can tie right in. But if you are off the grid, or if you just want to be more in control of your own destiny (like at the Reagan Library), you look for new ideas.

And one of the newest ideas is to use microturbines, or compact turbine systems.

Microturbines run at high speeds. They are compact (about the size of a large refrigerator) and put out a lot of power. Microturbines are "agnostic" when it comes to the fuel they burn. That is, you can power them with natural gas from the ground or even biogas from a landfill. Or you can use propane, butane, kerosene or just plain old diesel.

So when you boil it all down, microturbines deliver power and electricity with impressive efficiency, and very low levels of emissions. You can use a microturbine at a remote site like an offshore platform or a Russian ski resort. You can put one in the basement of a building like the Reagan Library to generate power on-site. Or you can run a city bus with a microturbine.

Sure, you need some sort of fuel to spin the turbine. But if you do it right you can free yourself from the grid and dramatically lower your total energy consumption and cost.

Byron W. King
for The Daily Reckoning Australia

• Rising Coal Prices to Increase Electric Bills in Australia
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• The Energy Resources Are Out There
• Electricity Crisis is Coming
• Thorium as a Nuclear Fuel