Our story begins with "Peak Oil" - the belief that conventional production of crude has already peaked, and has already slipped into an irreversible decline. As "Peak Oil" moves from mere theory to indisputable fact, the global economy will face wrenching changes. But the vigilant investor will gain an opportunity to profit along the way.

As I discussed in yesterday's edition of The Daily Reckoning, oil production seems all-but-certain to decline, despite the huge new discoveries off the coasts of Brazil, Africa and elsewhere. In fact, production is already declining rapidly from some of the world's largest fields. Mexico's "Catarell" Field, like a kind of Peak Oil poster child, was producing more than 2 million barrels a day as recently as 2005. But production from this field is plummeting irreversibly toward 500,000 barrels a day, as the chart below illustrates.

The recent discoveries of deep offshore oil will certainly help slow the decline of conventional crude oil production, but theses discoveries will not come on line for many, many years.

But what about alternative energy sources? Won't they make up for the shortfall of crude oil? No chance. Alternative energies might offset a tiny sliver of falling crude oil production. But solar panels can't lift a fully loaded Boeing 777 off a runway...nor even lift an empty Piper Cub.

So what about the many sources of "unconventional" oil and gas? Won't these compensate for declining production from conventional sources? The short answer is no.

Geologist Art Berman, for example, offers a decidedly negative view of the latest "big thing" - obtaining large volumes of natural gas from "tight shales." In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman presents a gloomy forecast.

Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.

This hardly dovetails with the happy talk about how "shale gas" will supply US energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure.

According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.

But this bad news does need to be ALL bad. As the world's mature and aging oil fields slip into an irreversible decline, production from the world's new offshore discoveries will become increasingly important.

Therefore, forward-looking investors can begin TODAY to make selective investments in those sectors of the oil industry that will flourish during the coming oil shock. I am particularly fond of the "deepwater" sector...and have been urging my subscribers for several months to focus on the companies that facilitate deepwater oil production.

Marcio Mello, the former "explorationist" from Petrobras (PBR: NYSE) and now independent petroleum consultant, electrified the Denver meeting of the Association for the Study of Peak Oil & Gas (ASPO) with his analysis of several high-profile deepwater discoveries.

In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin. If Marcio's estimates are correct, Brazil may be the location of nearly 200 billion barrels of additional petroleum resources. That's well within the range of current resource estimates for Saudi Arabia.

For good measure, Marcio described the petroleum potential of offshore West Africa - another 130 billion barrels - as well as the Congo region, with 50 billion barrels or more.

Finally, Marcio described the "unknown potential of the US back yard, the Gulf of Mexico (GOM)." Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana. He showed early work he performed on a number of GOM areas, including the site of BP's (BP: NYSE) recent billion-plus barrel find at the Tiber site.

If his analyses of the South American, African and GOM petroleum systems are correct, the world has access to much more conventional oil than people previously believed. But accessing and producing this oil will require a trillion-dollar level of offshore, deepwater investment. It's a 30- to 50-year project.

"Deepwater" will be a BIG business.

Some of the companies that are well-positioned for the deepwater era of crude oil production include Petrobras, Repsol (REP: NYSE), BP (BP: NYSE) and StatoilHydro (STO: NYSE). I am also a fan of subsea equipment builders like Cameron Intl. (CAM: NYSE) and FMC Technologies (FTI: NYSE), plus service companies like Halliburton (HAL: NYSE) and Baker Hughes (BHI: NYSE).

These are a few of my favorite long-term plays for the long-term era of deep-water development.

Regards,

Byron King,
for The Daily Reckoning Australia

• Peak Oil – The Risks
• Supply of Conventional Crude Oil is Very Close to its Peak
• Peak Oil: Supply Data Doesn’t Lie
• Where Will Future Oil Production Come From and How Can Investors Profit Today? Part 2
• Pemex and Mexican Peak Oil Equal Expensive Oil

That's the world's current production of crude oil...and that may very well be close to the world's PEAK production of crude oil. Although the recession caused a temporary decrease in consumption, demand is already bouncing back toward pre-crisis levels. Too bad production isn't.

"Can't we get more than 85 million barrels?" some folks are bound to wonder. Let's look into that...

A couple weeks ago, I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here's the long and short of it. We're in trouble. With a capital "T," and that rhymes with "P," and that stands for Peak Oil. By every measure, the world's output of crude oil peaked between 2005 and 2007.

Yes, the worldwide total output of what we generically call "oil" has risen - slightly - in recent years. But that's because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada's oil sands. But the production of oil - actual oil - has peaked already. The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries.

"There's no such thing as West Texas Intermediate [WTI] oil anymore," Peak Oil apologist, Matt Simmons, moaned to the ASPO conference attendees. Instead, the pipeline crossroads like Cushing, Okla., have become little more than "crude oil pharmacies."

In other words, as the quality of the crude from the traditional U.S. oil patch continues to degrade, oilmen must mix and match their product with "sweeter" forms of crude if they hope to sell it as the premium- priced WTI. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along these same lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the U.S. "You are worried about your foreign oil imports now," he said. "You in the U.S. import about 65% of your oil today. You don't like it. But if you follow the clear trends, by 2025, you'll be importing about 92% of your oil. You'll like that even less." No doubt.

The market meltdown and world recession of the past year has bought some time. But the planet is still staring at an energy problem that's coming down the tracks like a runaway freight train.

Sure, there's a lot more oil "out there"...as in WAY out there - 150 miles offshore, beneath 8,000 feet of water and 20,000 feet of rock and salt. Yes, that offshore resource is out there, but it's super hard to extract.

And so what? Aren't the world's oil companies busy developing these massive offshore deposits? Yes, but this development will take decades. It'll take time and capital and expensive cutting-edge technologies, some of which are barely commercially viable.

Future energy supplies have never been more uncertain, according to Simmons. It's difficult to say with specificity how bad things are, he says, because the data are so poor on a worldwide basis.

"Look at what happened with the bad information we had, or didn't have, with the financial institutions over the past couple of years," Simmons said at the recent ASPO Conference. "With our energy data, it's worse. We're in for some shocks that will change our lives in ways that'll rival Pearl Harbor."

Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment. In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war. In Iraq, according to Mr. Simmons, "They're in the dark about how to rebuild their oil industry."

Closer to home, Simmons expects net oil exports from Mexico to vanish within 24 months or less. This event will play havoc with U.S. refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster.

But even without a supply shock, Simmons believes that the mere inevitability of declining production will cause oil to hit $200 a barrel by the end of next year. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. "People need to understand how expensive it is to obtain oil," said Simmons.

Much of the world's energy infrastructure is old and rusting and will require several trillions of dollars to replace - if it can be replaced. Furthermore, new technology is coming on line slower than most people anticipate. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas.

The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves buckled-in for the ride.

Regards,

Byron King,
for The Daily Reckoning Australia

• Peak Oil – The Rewards
• Crude Oil Becoming Much Harder to Find
• Peak Oil: Supply Data Doesn’t Lie
• Pemex and Mexican Peak Oil Equal Expensive Oil
• Supply of Conventional Crude Oil is Very Close to its Peak

"If they [the Fed] keep printing money to buy bonds," said Mr. Cheng, "it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies." Mr. Cheng was referring to over $2 trillion of Chinese foreign reserves, the world's largest holding.

"Gold is definitely an alternative," said Mr. Cheng, "but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market."

From Mr. Cheng's lips to God's ears - and now to ours. We have direct testimony from a high-level cadre that China, while cautious, is a key driving force in the gold market. China is buying.

We already knew that the Chinese are buying gold - and hoarding it. For example, China is the world's largest gold-mining nation. China mines more gold each year than the US or South Africa. Yet what are the net gold exports from China? Umm...zero. That is, China doesn't export gold (unless you buy a Panda coin or something.) Overall, in fact, China is a net importer of gold.

Sure, the Chinese use gold in industry, such as for electronics, jewelry and the like. But much of the rest of Chinese gold purchases go into state coffers, or into "off-books" storage. I'll bet that there's a lot of gold in "industrial stockpiles" in China, which are really just strategic monetary reserves for China's Central Bank.

The implication from Mr. Cheng is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it's more than likely that China will buy gold whenever there's a price dip.

The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners such as we hold in the Energy & Scarcity Investor portfolio.

Is there an upper limit to gold prices? Well, I expect to see the gold price rise, but slowly and in a long series of plateaus. I also expect to see pullbacks, usually based on world monetary and political events.

So we'll surely have some roller-coaster rides with the prices for the mining shares. How it all unfolds for us as investors will depend on when, and to what degree, monetary-driven inflation begins to bite into the economy. When it becomes totally obvious, it'll probably be too late to protect and preserve your wealth and purchasing power.

The problem for us in the West is that most of the politicians and major media just DO NOT GET IT. Or at least, the ones that do "get it" generally don't report things honestly to the citizens. They're probably afraid of what might happen when the citizens really figure out how much the political classes have screwed up the world.

So you see these rosy-sounding headlines about how the economy is "improving" and things are "getting better." Huh? What planet are these guys on?

The tide of inflation is rolling in. It'll lift the boats of the gold miners.

Byron W. King
for The Daily Reckoning Australia

• Gold Outlives Paper Money, Empires and Governments
• India Beats China to Walk Away With 200 Tonnes of IMF Gold
• The Chinese and the Fed Both Buying U.S. Treasury Bonds
• Stock Prices Down Signals Bears to Hold onto Cash, Treasuries and Gold
• Admonishment from China and the Decline of U.S. Credibility

Then for a national perspective, I looked at The Wall Street Journal, which published a slightly different alliteration, "Decade of Debt: $9 Trillion." And finally, for an international view, The Financial Times summed it all up in characteristic British understatement, with, "US Says Debt Outlook Worsening." Oh, you don't say.

The big problem - obviously, the headline issue - with the US economy is too much debt. (That's the BIG problem. There's a long list of other problems after that.) And the debt problem is getting worse, not better.

Debt is ubiquitous across US society. Debt permeates the culture. Practically the whole nation has bitten off more than it can chew. Within the past two generations, the US economy has transformed from what Harvard historian Charles Maier calls an "empire of production" (which is what won the Second World War, for example) to an "empire of consumption."

The lunch bucket-toting factory worker, or the beam-walking riveter constructing a skyscraper, symbolized the former empire of production. Those iconic workers are no more. They've been replaced by the image of vast tracts of McHouses blanketing the landscape. Or of parking lots filled with new cars outside coast-to-coast malls, with their owners inside maxing out their credit cards.

It's the difference between an economy that creates surplus capital and an economy that consumes capital to gross deficit. Professor Andrew Bacevich of Boston University summed it up this way in his recent book, The Limits of Power. "The evil genius of the empire of production was Henry Ford. In the empire of consumption, Ford's counterpart was Walt Disney."

Come to think of it, we should be so fortunate as to be indebted just because we collectively took too many trips to Disneyland. As a nation, the US has borrowed and spent far beyond its means. You know what I mean. I don't have to get into the details on that point. In particular, the political class just can't seem to say no.

The other side of that debt coin is a widespread inability to repay. Households are so deep in debt that they've stopped buying, and I don't care what the so-called consumer confidence surveys say. Less buying means that business profits are down. Where businesses are showing profits, a lot of it is because they are goosing the bottom lines through layoffs and spending cuts.

Layoffs? That's putting it mildly. Many of the recent job losses are permanent. They're structural. It's not just the good old days, when the company said, "Go home and we'll call you back in a few months." No, in many cases, the jobs are gone forever.

It's not just factory jobs, either. Those jobs were the first to go. The US economy lost millions of its old-line factory jobs over the past 25 years or so. It brought us into the age of the Rust Belt. Some economists and deep thinkers bragged about how this was somehow "good" for America. (Call me old-fashioned, but I could never quite figure that out.)

Now people with white collars are getting hit with permanent job losses in sectors like banking and law. Many parts of the nation's financial districts are the new Rust Belts of America.

There are former lawyers waiting on tables, stealing jobs from the traditional class of table servers, starving artists. At many silk- stocking firms, even the formerly sacrosanct legal "billable hour" is under attack. And I know doctors and architects who've been laid off.

So joblessness is up, and it's not about to come down anytime soon. With joblessness up, tax collections are down across the board. Unemployment compensation accounts are running out of money. Public assistance accounts are running down. Some states want to give early release to prisoners to save the costs of incarceration.

In Michigan, for example, some counties are no longer repaving the roads. They just grind the asphalt to gravel and save the cost of paving. It's a foretaste of things to come, I believe.

I don't see where the problems of indebtedness have been cured. We're not even close. Maybe it's my inner bankruptcy attorney at work. Where's the wipeout? Where's the discharge? How has all that bad paper out there been voided? It hasn't.

Regards,

Byron W. King
for The Daily Reckoning Australia

• Feds’ Plan is to Reflate the Economy
• China Will Rule the Business World While America Finds Itself Heavily in Debt
• Debt Backed Securities Face Deepening Trouble
• Reader Mail: Manufacturing is Not a Dirty Word
• A Degree from an Elite College is No Guarantee of Higher Wages

My gut reaction to Mr. Bernanke's statement was to recall the famous words of former President Nixon, who said of the Vietnam conflict, "I'm not going to be the first American president to lose a war." And we know how that turned out.

Poor Mr. Bernanke. Does he really not understand his fate? I'll grant that he was dealt a bad hand - a draw of pure, malevolent evil - by his incompetent predecessor at the Fed, Alan Greenspan. But when you volunteer to run the nation's central bank, you're asking for a seat at the table of history. When history deals, you play the cards that you're dealt. And sometimes history holds all the trumps, if not a few aces up its sleeve.

This past weekend Mr. Bernanke "appeared stoic at times," according to The Wall Street Journal, as he met with 190 people in a town hall-style forum at the Federal Reserve Bank of Kansas City. Over the course of an hour, at an event moderated by PBS correspondent Jim Lehrer, the Fed chairman answered 20 questions from attendees.

The unusual setting allowed the former Princeton professor to speak outside of his usual comfort zone. The give-and-take in Missouri - aka "flyover country" to many Washingtonians - was far removed from Fed chief's normal, well-scripted congressional testimony, or his occasional academic presentations to roomfuls of big shot bankers and professional economists.

Continuing the Nixonian theme, the Kansas City forum was an opportunity to find out what Mr. Bernanke knew, and when did he know it.

Mr. Bernanke defended himself and the Fed against suggestions that he was too eager to aid large financial institutions last fall and winter, while sacrificing the interests of small businesses and everyday American citizens. "It wasn't to help the big firms that we intervened," argued Mr. Bernanke as he discussed intervening to help the big firms - y'know, the financial firms that are supposedly too big to fail.

Using a Discovery Channel analogy, Mr. Bernanke said, "When the elephant falls down, all the grass gets crushed as well." Thus did he justify unprecedented levels of federal aid to the very Wall Street banking houses that contributed so mightily to the bubble economy of recent years. In essence, the Fed had to feed the beast and save the big guys to protect the little guys. But have the little guys really benefited?

Mr. Bernanke claimed that he was "disgusted" by circumstances under which the Fed rode to the rescue of several large financial firms. "Nothing made me more frustrated," he said, "more angry, than having to intervene" when big banks were "taking wild bets that had forced these companies close to bankruptcy."

Then Mr. Bernanke argued - strangely - in favor of new laws to let financial firms other than banks fail WITHOUT going into bankruptcy. Huh? What's wrong with bankruptcy? It's been around since the days of the Roman Empire.

I practiced bankruptcy law in my pre-Agora career as an attorney. (I'm a recovering attorney now.) I don't understand Mr. Bernanke's viewpoint at all. Why shouldn't big financial firms go bankrupt when they deserve it? OK, there's the usual canard: because it would be difficult or impossible for a bankruptcy court to "unwind" all the open trades in the sweatshops and boiler rooms of big outfits like AIG. I disagree.

Mr. Bernanke's comment makes me wonder how well he understands the intent (let alone the history and legal process) of bankruptcy. Or does the Fed boss just always default to handing out special deals to the big-money guys?

Still, I have to give Mr. Bernanke credit for showing up to speak with a couple hundred informed citizens. The Fed certainly deserves the exposure.

According to a recent Gallup poll, a mere 30% of Americans believe that the Fed is doing a "good" or "excellent" job (down from 53% as recently as 2003). About 57% of Americans believe the Fed is doing a "fair" or "poor" job.

Indeed, according to Gallup, the Fed is the least-trusted of nine government agencies. The Fed lags far behind on a list that includes agencies such as NASA and the FBI, as well as traditional bête noires such as the Central Intelligence Agency, the Internal Revenue Agency and the Food and Drug Administration.

Mr. Bernanke's tenure at the US central bank faces intense scrutiny, and not just from the serial bashing that he receives from the writers at Agora Financial. He has only six months left in his term as Fed chairman. Mr. Bernanke will soon learn whether President Obama will reappoint him to another four-year term or replace him with another Fed chairman wannabe.

Does Mr. Bernanke really want to continue at the Fed? Why? If Mr. Bernanke doesn't want to preside "over the second Great Depression," as he claims, then he should get the hell out now and try to salvage some measure of his professional reputation - if not his old job and paycheck at Princeton. Or does Mr. Bernanke want to continue on the pathway of becoming the central bank equivalent of Gen. William Westmoreland?

The questioners in Kansas City were on the right track. They certainly raised better issues than we see in the softball questions Mr. Bernanke routinely receives from members of Congress and senators.

Here's the key point. Mr. Bernanke and the Fed had a clear policy choice last fall. They could do a big bailout or not. The Fed chose to open Door No. 1 and bail out Wall Street. This was at the expense of Main Street, let alone the national balance sheet.

But the "Second Great Depression" was not going to be stopped so easily. You don't just throw money at a Great Depression, especially money that you don't have. Mr. Bernanke ought to know this, based on his studies of the first Great Depression.

Instead of the bailout last fall, Mr. Bernanke and the Fed should've let the big guys fail. The Fed should've upset the whole stinking mess on the card table and reset the US monetary system. The Fed had the chance to make a statement and choose a new path, and to cast the money-changers out of the temple, so to speak.

Mr. Bernanke and the Fed should've allowed the failed banks to go down. The Fed should've sent the bubble perps down the street to the US Bankruptcy Court in lower Manhattan, along with all their fraudulent paper such as MBSs, CDOs, SIVs, etc.

Would large-scale bankruptcies have been a shock to the US and world financial system? Of course. That's the idea. It would have been very ugly. But it would've helped to clean up the US economy for a couple of generations.

Would Mr. Bernanke be despised by many people? Yep. Burned in effigy, a la Paul Volker? Yes, and it comes with the job. The Fed chairman should not try to be Mr. Popularity.

By now, almost a year later, we'd have some semblance of financial finality. That's because bankruptcy courts have the legal power to void bad contracts and discharge unpayable debt. Instead, we still have the problem of bailed-out zombie banks with massive levels of unmarketable paper and unpayable debt on their books. Right now, the "dead banks walking" are doing little but sucking capital out of the system while the Fed tries to reinflate more bubbles.

Would finance and commerce have proceeded during a banking bankruptcy? Yes, because there's an entire economy out there, with hundreds of millions of people expressing needs and wants in the marketplace. If you believe in the basic idea of Capitalism, then you have to believe that we would have adapted, and learned new ways to meet the needs and wants absent the big, failed banks.

And it's worth pointing out that plenty of people and companies do business while they're in bankruptcy court. There's nothing quite like the stroke of the pen of a federal judge to cut through the crap.

When Ben Bernanke says that he doesn't want to preside over the second Great Depression, he's missed a critical point. He's already there.

Whether it was Pres. Nixon and his policies, mired in the rice paddies in Southeast Asia many decades past, or the current fever-swamps of the Potomac River, there are some bullets that have your name on them. You can't duck and dodge.

Right now, many years of monetary malpractice are roiling the American economy. To quote a famous Chicago preacher, "The chickens have come home to roost." The second Great Depression is happening, and it's happening on Mr. Bernanke's watch. Did he really expect to skate through a couple of terms as post-Greenspan Fed chairman and not get blown up?

Sad to say, Mr. Bernanke bailed out the big banks. Now the damage is done. We're still in for that "Second Great Depression." And Mr. Bernanke will forever be associated with it.

Ben Bernanke could have been a heroic figure. He could have refused the bailout and repudiated several generations of bad monetary ideas. He could have launched a new movement - something like monetary perestroika in the US - and moved the country ahead into a future of increased productivity and financial solvency. Instead, Mr. Bernanke is just a bit actor in a historical tragedy.

There's no armor against the arrows of fate. Mr. Bernanke has lost his chance. Perhaps he can take solace in the words of Robert Louis Stevenson from his classic "Requiem": "Home is the sailor, home from the sea."

That's all for now. Thanks for reading...

Byron W. King
for The Daily Reckoning Australia

• Ben Bernanke “Respectfully Disagreed” With Angela Merkel
• Ben Bernanke Averts a Second Great Depression
• Ben Bernanke Pays Homage to Milton Friedman’s Theory
• Gold and the Euro Just Hooked Up Together Again
• Ben Bernanke is a Victim of the Trade

Busy airports may or may not be a sign of life in the larger economy. Even unemployed people can buy a ticket and fly somewhere. All you need is a credit card, if you can still get credit. Meanwhile, airline profit margins are tight. Fuel prices are creeping upwards. The airlines are still nicking you for things like $15 baggage fees. And as I flew over the heartland of the nation, I looked down and pondered our collective fate.

Last week, for example, the Federal Reserve predicted that the U.S. unemployment rate would surpass 10% in the coming months.

That's no big surprise. The true U.S. unemployment rate as at least 15% already when you factor in the long-term unemployed who are not carried on the "official" books.

Then the Fed made a shocking prediction. It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years! Whoa!

No net new jobs? That ought to scare you. The Census Bureau predicts that the U.S population will grow over five years. But the numbers of new jobs will remain static. That is, for every job gain there will be a loss.

This job-stagnation is a recipe for all sorts of bad things at the local, state and national levels. Government budgets won't balance, so I guess we can plan on more "cost saving" measures such as releasing prisoners early and closing schools. Yep, that's how to build a great nation... More criminals and fewer well-educated citizens.

The Fed announcement is basically an admission of monetary and policy malpractice at the highest levels of the U.S. political class. I witnessed it first-hand a couple weeks ago when I was in Washington, DC. I met with some Congressional staffers who were just clueless. But they sure were full of themselves. They had all the answers, too.

As my Delta flight flew over eastern Washington the other day, I looked down and saw a familiar sight. It was a long, narrow body of water, with a stark, linear feature at the end of it. It was Lake Roosevelt, impounded by the Grand Coulee Dam, of which I wrote last year.

From 36,000 feet, Grand Coulee Dam sure looked small. But it's the largest manmade structure in North America. It's three times the height of Niagara Falls. It's larger than the Great Pyramid of Cheops, times a factor of three. It has enough steel in it (9 million tons) to build about 225 World War II-era battleships, at 40,000 tons each. Today it's rated at about 6.8 gigawatts of electrical power, or the equivalent of about seven large nuclear power plants.

Grand Coulee was built in the 1930s as a government "stimulus" project. This was back in the good old days when the government knew how to "do stimulus." Y'know, build big dams. Kick-start the steel and cement industry. Employ tens of thousands of skilled workers. Do some heroic engineering and create an energy project that will benefit the nation for decades into the future.

No, Grand Coulee by itself didn't solve the issues of the Great Depression. But it sure did come in handy when it started spinning power in 1942, just as the U.S. entered into fighting World War II. One lesson is that if you dream big dreams, you never know what will come out on the other side.

And today? Congress's idea of "stimulus" is to pass a $787 billion pork-bill. But most of the money won't get spent until 2010 and 2011. Oh well, we're going to have to borrow it all anyhow.

I drove across part of southeast Washington and northwest Oregon during my journey to Vancouver. I haven't been up in these parts in many years, so this was my chance.

As I motored around the two and three lane back roads, I sure saw a lot of stuff for sale. It seemed that many households wanted to sell one item or another, often parked prominently along the highway.

I saw cars for sale - old, not-so-old, and nearly new. There were vans, SUVs, trucks, campers and trailers. There was farm and construction equipment. There were boats and ATVs. Then there were dozens of homes and lots with "for sale" signs. Plus many yard sales, with all sorts of household, workplace and institutional goods waiting for buyers.

It was entirely clear that many people are trying to raise cash. So everything's for sale.

Remember that old expression, "Shop 'Till You Drop?" Well, people are dropping. Where's that Grand Coulee Dam project when you need it, right?

I drove along the Columbia River for quite a ways, following the trail of Lewis & Clark, from their expedition in 1805-1806. Today the Columbia is a well-regulated, controlled body of water crossed with dams and dredged as necessary. Large ocean-going ships float serenely in the water next to downtown Portland.

In their journals, Lewis & Clark described a wild Columbia River of raging rapids, filled with gigantic log snags. Some of the logs floating down the Columbia of old were up to 7-feet in diameter and 200-feet long. Big trees, huh? It was a different world back then. Speaking of a different world, I was impressed by the old U.S. Customs House in Portland. Now THAT building also represents a different world, one where the federal government raised its revenues from duties and imposts.

In the olden days a ship captain would dock at Portland, or another locale on the Columbia. Then he'd walk over to the U.S. Customs office to declare the cargo and pay the taxes due. This was how the federal government funded its operations. And when the funds were spent, the government had to observe its own fiscal limits.

In other words, the original U.S. government had to take an interest in growing and maintaining the economy. Today, with the fiat dollar, the feds think that they can do anything. Until, of course, the nation spends itself into national penury.

Until next we meet,

Byron W. King
for The Daily Reckoning Australia

• 2008 Energy & Geology Tour
• U.S. Government Hiding True Unemployment Rate in Statistics
• Water Usage by Big Companies
• Housing and Unemployment Are Weaknesses in the U.S. Economy
• Australian GDP is Doing Better Than the U.S.

Last time Iran had a revolution, in 1979, it ushered in turmoil in the oil (and gold) markets for several years. Of course, the invasion by Iraq in 1980, and subsequent war, had something to do with it as well.

After 30 years, the Iranian theocracy - and well-connected family and friends - has pretty much taken over that nation's economy. Most everything that's worth owning - oil facilities, banks, industrial facilities, etc. - has some 'revolutionary' connection. And these folks are not going to walk away from it without a fight.

There are clearly a series of major disconnects within Iranian society. Young versus old, middle-class versus theocrat, reformer versus revolutionary. And then there's the oil problem. Mr. Depletion and Ms. Rust.

Iran is suffering from its own version of Peak Oil. Iranian net exports of oil are falling. Iran's oil infrastructure is aging. According to the U.S. National Academy of Sciences, the trend is that Iran will be exporting ZERO oil by 2014, which is a mere five years from now. That means almost no serious money will be coming in for the Iranian leadership and government.

So if you think that they're rioting in the streets of Iran now, just wait awhile. Iran is headed for national insolvency and penury. It'll get even more exciting. Then again, the Iranians may have nuclear weapons. Pretty depressing, huh? Better buy that gold while you can.

Byron King
for The Daily Reckoning Australia

• Consumers are Suffering Because European Governments Boosted Spending
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• Silver and Gold Will Make You More Attractive

Everybody who's anybody in this country, it seems, gets a permanent, pet government program, if not a large bailout. (Huh? You didn't get your program or bailout?) How long can it last? I think we're about to find out.

As Bernie Madoff might say, "Bailout, schmailout." Still, the axis of overspending leads to inflation. It's the 1970s redux. And inflation will soon rear its head and roar so loud that even the wizards of Washington will have to admit the obvious.

Actually, our betters in Washington are waking up to the issue of inflation and the decline of the dollar. Just yesterday, I received an inquiry asking if I want to appear on a nationally syndicated show that originates from Washington, D.C. (well, Alexandria, Va., to be exact). The audience is Washington people - you know the type - and their intellectual and spiritual kin in "blue spots" across the country.

Here's the exact inquiry:

"We're doing a story on hoarding behavior and I am looking for people who have taken some (or all) of their savings out of traditional investments and are now storing money as cash or in the form of physical gold or some other precious metal in a safe or secret place. I am having trouble finding anyone like this. Do any of you know of someone who fits this description, who might be willing to talk to me about it? I am looking for someone in Boston; Washington, D.C.; New York; or maybe Chicago. If anyone has any leads, please let me know!"

Oh, man! That's rich! Verbatim! Honest to God, I have not edited this inquiry by EVEN ONE WORD! These people are clueless!

The producer wants to interview gold bugs for the show. In an anthropological fashion that would do Margaret Mead proud, the subject of the story is "hoarding behavior." But the poor producer says, "I am having trouble finding anyone like this." (Like looking for a registered Republican at the Harvard Faculty Club?) And how about that request to find somebody in Boston, Washington, New York or Chicago? If you're from, say, the silver mining town of Wallace, Idaho, you need not apply.

Here was my reply: "People who've taken their savings out to buy gold and store it or hide it probably don't want to brag about it on NPR."

Remember that line from the movie Apollo 13? "Houston, we have a problem."

Wow. Do we have a problem in this country, or WHAT? It's WORSE than Apollo 13. We should be so lucky as to be in a small capsule in the cold of space heading away from Earth toward the moon with almost no oxygen or electrical power. Instead, we're watching the national currency declining and dying right before our eyes. And the opinion makers of the nation don't know anybody who owns gold. Amazing!

Well, the producer could always go find somebody in Dubai. Because from that distant desert kingdom comes word that the Dubai Multi Commodities Centre (DMCC) has finished building a state-of-the-art precious metals vault, with world-class tracking and security systems. Think Fort Knox, but in the desert and without the trees and pretty landscaping we see in the hills of Kentucky.

You want "hoarding behavior"? The new vault will become the home for the exchange-traded fund (ETF) of Dubai Gold Securities. Also, "It's a natural home for the central banks in the region to store their gold in Dubai, rather than in London, where they have typically held their gold," said a Dubai-based gold dealer INTL Commodities DMCC's CEO Jeffrey Rhodes. Yep. "Natural home." (Margaret Mead, call your office!)

A DMCC official stated that the new vault will be used to store precious metals associated with precious metal-based ETFs that are on the drawing boards and scheduled for launch later in 2009. This can only add to worldwide demand for gold and silver, especially from the traditionally gold-friendly Middle East.

OK, so here's the bottom line. When the American people realize that the dollar is in for another round of inflation, they're going to look for a way out. When people envision the future decline in their purchasing power, we'll see a rush for the monetary exits. It'll be the "Gold Panic" of 2009, or 2010 or 2011... Whichever year gets the naming rights.

When the reality sinks in, people will flock in droves to physical precious metals (yeah, try to get some!), as well as mining shares. I'm old enough to remember the last time it happened, in the 1970s and early 1980s. And I've studied enough history to know it won't be pretty.

So beat the gold rush! Hoard now!

Until next we meet,

Byron W. King
for The Daily Reckoning Australia

• From the Gold Pan… Inflation, Deflation and Precious Metals
• The Precious Metals Gang Gathers
• Arab Wealth Pours Back into Dubai
• Feds’ Attempt to Bail Out Consumers with Tax Rebates
• Gold and Silver!

If you're into lunches where you'd rather listen than eat, then this was the lunch for you.

According to the satellite builder, the dominant elements of the political and media culture are "completely in the tank" when it comes to believing in the dangers of "climate change." It's not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the aerospace executive - some of whose satellites were built to track climate change - "For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money."

Thus the research literature is coming out strongly in favor of "doing something" about climate change. And policy-makers are using this research literature to justify doing what they've wanted all along, which is change the world as we know it. As a class, the activists want to change the world into something else.

According to the steel executive, the climate change issue has spurred what amounts to "a pathological hatred" of carbon-based energy systems. "It doesn't have to make practical sense," says this source. "It doesn't even have to work with economics. It just has to support a policy to utterly transform the nation's energy system. The people making policy now have a crusader's mentality. 'The past is trash,' is how many of the new policy makers view our world. So the new policy makers want to promote radical change in energy policy. They're going to jam it down the throat of the economy."

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. "Whether the government taxes carbon-based energy at the source, or whether they pass 'cap-and-trade' legislation, it's going to cost us. So we'll pay. Of course, we'll pass along the new costs to the steel buyers. If demand goes down, we'll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we'll get called bad names by the people who never much liked us in the first place."

The former Treasury official added that a new "policy paradigm" has yet to form in Washington DC. "It's like during the Cold War, there was a bi-partisan consensus to confront and contain the Soviet Union. It was expensive, but we agreed to do it. We made the national sacrifice. Well, that foreign policy consensus ended when the Berlin Wall fell and the USSR came down." The groupthink in the early 1990s was that another kind of broad consensus had to take the place of the confrontation with the Soviets. And by its very nature, that consensus was fragile.

"Let me back up," said the former Treasury official. "Confronting the Soviet Union gave the U.S. an excuse to continue with Franklin Roosevelt's Depression Era, New Deal, big government for 45 years after World War II. But after the USSR fell? Why did we still need big government? To run a modern welfare state? That was the justification. Remember the talk about that 'Peace Dividend?' People were drooling over the idea of cutting the military budget and paying for more and better social welfare through more big government."

"So what happened?" asked the Treasury guy. "Some people thought they were going to run a big government welfare state using modern monetary theory. They convinced themselves that we could do that. They didn't understand the long term problem."

What was the long-term problem? "The welfare state was never going to last. Especially because the nation collectively wanted it to support a rank, consumerist culture that could not earn its keep within the world economy. We imported, imported, imported. And we paid for it with cheap dollars. After the U.S. left the gold standard in 1971, the fundamentals of the American productive economy could never support what the nation was trying to do. We'll look back eventually and realize it was delusional policy-making. All we did was run down the economy for a couple of generations. It finally collapsed in 2008."

Whatever "post-USSR consensus" existed in the U.S. in the 1990s shattered during the 2000s. "People went nuts because of the Bush Administration," said the Treasury official. "The white-bread explanation - call it 'Decline and Fall for Dummies' - was that it was all about the evil George Bush and his wars in Afghanistan and Iraq. Well, Bush and the wars were visible, so that's what people blamed. The real problem for the U.S. was that the whole foundation for post-war American society, economy and governance was caving in under our feet. The timbers were rotten."

According to the Treasury man, the U.S. economy is now confronted by "block obsolescence" of many of the economic and political assumptions with which we've lived for decades, since World War II. "Chrysler isn't the only big institution that's bankrupt. We ought to burn down a few universities, while we're at it," he added.

And he noted that Republicans and Democrats both fed at the trough while the going was good. "But while the politicians had their heads buried in the trough for all those years," he said, "they didn't notice that the barn was burning down around them."

The Treasury-man continued: "Look at the destruction of former industrial titans like General Motors, and with GM the annihilation of much of the rest of the automobile industry. Who's going to invent whatever will take its place? We used to say that 40% of the U.S. economy was based on the auto industry, directly or indirectly. Are we ever going to see 40% of the U.S. economy based on putting solar panels on roofs, or tuning the gearboxes of windmills?"

The former Treasury official looked at the ongoing economic crash. He placed it within the context of the long-term decline in U.S. manufacturing. "As a society," he said, "we've made a lot of very bad choices of both moral philosophy and economic policy. Those bad choices have brought us to the edge of the end. We've spent, borrowed and 'free-traded' ourselves to the poorhouse. Now the Chinese own us."

The venture capitalist chimed in with some thoughts. "If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels."

"We'd be killing about four birds with one stone," explained the venture capitalist. "We'd be taking down CO2 emissions. Not much, maybe, but some. We'd be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we'd be creating a new supply source for the liquid fuels industry. And we'd be able to point to at least one success story where people can agree that we all did something right."

Then the venture capitalist added that one of his startups is "working on coal-eating bugs." He explained, "There's a lot of coal buried so deep, or under other conditions that we can't mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things."

At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, "Well Byron, what do YOU think?"

I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, "clean and green" energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We're at the point where a utility like California's Pacific Gas and Electric is so desperate for "clean" energy that they're contracting with a privately-owned company to build a satellite to harvest solar energy from space, and "beam" it back to earth.

The companies that are out there now are in relatively advanced stages of developments. The big problem is that the follow-on pipeline is almost empty. The problem has been lack of access to capital for the past year or so. In other words, lack of capital is the strongest headwind to progress. If the funding delays can break down, then we'll see decreased complexity for funding, and project schedules moving ahead.

Until next we meet,

Byron W. King
for The Daily Reckoning Australia

• The Energy Resources Are Out There
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• An Old Friend With a New Idea on Global Warming
• Geothermal: Clean, Green, Reliable Power
• Increased Oil Production Won’t Solve the Energy Crisis

You surely know that windmills don't turn when the wind doesn't blow. And solar does not generate electrons in bad weather or at night. But geothermal runs 24 hours per day, in essence "mining" heat from the bowels of the earth. (That is, the fuel is "free.") Thus, geothermal offers reliable baseload power. And geothermal emits near-ZERO carbon dioxide (trace amounts at worst), so it completely trumps any and all fossil fuels for a clean power source. There are no long-term waste or storage issues, like with nuclear. There are many locations within the U.S. - and around the world - that are completely suitable for geothermal. Geothermal is a technology whose time ought to be here.

Yes, the time for geothermal ought to be here. So why isn't the geothermal business exploding? First, geothermal power is competing against a worldwide installed base of existing power systems and economics. When most people think of electricity, they don't naturally conjure up images of steam wells turning turbines. Few schools anywhere teach future geologists how to "do geothermal."

Second, the pure-play geothermal companies are small firms subject to the same credit crunch as everything else that has gotten hosed in the past year. (Note, however, that the largest geothermal power player in the world is Chevron.) At the same time, all five of the ESI geothermal companies are following their business plans. There is no bad news from any of them. Each of the geothermal companies is on target and budget. They are generally doing well, with sufficient cash to fund their current business plans. Yet the stock prices of the ESI players are trading flat or down. All I can say is that we should consider it our opportunity to buy a few more shares at low prices and to wait to profit in the future.

Rick Rule has a great way of putting it all in perspective. And I had a long talk with Rick about the geothermal players. Here is some of what he told me.

"Geothermal is easy to understand," said Rick. "You drill a hole. You lower pipe. You get steam up the pipe from the heat of the earth. You use the steam to spin a turbine. You make electricity. You sell the electricity down the wires. But for as easy as it is to understand, it takes special expertise to put it all together. And the world does not have a vast army of people with that geothermal expertise, as you have with the oil industry. So geothermal is still in a developmental stage. That's what we have to realize. It takes patience."

Rick continued: "The good news is that the political and economic climate for geothermal is improving almost every month. Every time the U.S. government, the European Union or the United Nations passes some new regulation about saving the environment, we are one step closer to the geothermal power revolution. Everything that the regulators are doing seems to be making the world tougher for burning carbon and easier for industries that don't emit CO2. That means that they're paving the way to a geothermal power build out."

Rick and I discussed how already, Nicaragua-based Polaris Geothermal is selling CO2 credits to German buyers. "Hey," said Rick, "if the Germans want to give me euros for my CO2 credits at Polaris, I'll take their money. Meanwhile, Polaris is operating and selling power to people who want electrical power down in Nicaragua. Eventually, the stock market will figure this out. I'm patient."

Until next we meet,

Byron King
for The Daily Reckoning Australia

P.S. So the future for geothermal is bright. The worst I can say is that the geothermal future is coming slower than I anticipated a year or two back. But it's coming, of that I'm certain.

In fact, there are three government mandates that could just about guarantee geothermal's future...and one of these mandates could happen soon...very soon.

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