Marius Kloppers had his numbers wrong. He said there were 74 resource projects in Australia at an advanced stage worth $80 billion. Yesterday, the Australian Bureau of Agricultural and Resource Economics (ABARE) said it was 74 projects for $112 billion. That's a 67% increase from this time last year. Is it inflation? Or just Gorgon?

These were projects already in the pipeline before the commodity price correction of 2008. The Gorgon gas project off the Northwest Shelf alone is a $43 billion project (nearly 40% of the total). Energy projects make up 38 of the 74 projects and 72% of total capital spending - which is why in both Australian Small Cap Investigator and Diggers and Drillers, Kris and Alex are recommending both conventional and unconventional energy shares.

But usually the companies doling out billions in new cap ex are larger companies with deeper pockets. That doesn't mean they aren't shares you want to own, or that their share prices aren't correlated with rising commodity prices. But we reckon you're going to find bigger cap ex related gains from the companies getting some of the contracts related to projects like Gorgon. These are the "pick and shovel" companies of the cap ex spending boom.

Or you can look at the other end of Resource City, to the explorers and developers. ABARE reports that last year set another record in resource exploration spending in Australia. Some of it was brownfield exploration (old sites or mines being redeveloped) and some was greenfield (brand new sites or mines). All up, there was $6 billion in exploration spending in Australia last year.

More than half of that was a frenzy of small companies drilling for new oil. $3.8 billion was spent on petroleum exploration. That tells you what the industry thinks about oil prices: they are going higher. Coal exploration spending was up 27%, with iron ore exploration up 30%.

The big shocker was that uranium exploration and gold exploration spending were both down by double digits in the last year. The uranium exploration spend was down 20% and gold down 26%. Yet the price forecasts for both commodities look, at least according to Alex's research, pretty damn bullish. So why aren't the explorers out kicking rocks and taking names?

It turns out they are, just not in Australia. The ABARE numbers measure exploration spending within Australia. But many Australian-listed firms are looking for gold and uranium in other places, especially in Africa. They're doing so because production costs are lower there, even if political risk is higher (although in some places, it's more than acceptable for the projects on offer).

They're also doing so because if you find a country with an acceptable level of political risk, you can also find greenfields mines to develop and build. Granted, that takes a lot of capital. But some of the developers never plan on running the mine anyway. What they're looking for is an economic deposit (high ore grades that can be produced easily) leveraged to higher commodity prices. They can then sell that off to a producer without ever turning a shovel in anger.

Just this morning, Aussie-listed Impact Resources said it believes it's found a large new uranium province Botswana. In a possible case of "nearology," Impact said the new province has similar characteristics to A-Cap Resources 98 million pound inferred resource in the same neighbourhood.

We have no idea what the facts are for either company. What we do know is that Alex told us two things (in his November letter) that you should look for with Aussie uranium companies: they need to have a resource big enough to produce a given amount of uranium each year and they need to be in production by 2012-2013. Impact's resource, according to Alex's research, was not big enough to qualify on the first measure.

As to the second measure, that's when Alex believes a shortage could hit the uranium market, thanks to interrupted mine supply at BHP's Olympic Dam and Cigar Lake in Canada. That, plus the removal of Russian-supplied recycled nuclear warheads. And that's just on the supply side. On the demand side, well, you've probably heard that story so we won't go into it.

Of course all this fuss about oil, gas, gold, and uranium presumes there will be a functioning world economy needing and/or wanting these things next year. Maybe not so, says a report from Societe Generale!

The French bank published a note to clients warning them to be ready for a possible "global economic collapse." In its report, "Worst case debt scenario," the bank said what we've been saying for the last month: the transfer of private sector debts to government balance sheets threatens a sovereign debt crisis (which is really a kind of debt-induced fatal heart attack for the fiscal welfare state).

The bank shows that overall debt-to-GDP ratio in the U.S. (when you include government, business, and households) is 350%. Bank analyst Daniel Fermon says in his report that even without more fiscal stimulus, government debt-to-GDP ratios will, within two years, be at 105% of GDP in the UK, 125% in the U.S. and Eurozone, and 270% in Japan.

This massive global debt burden is more than the underlying assets can bear. That is, the assets (collateral and the tax base) will not generate sufficient income to service the debt. It's global Ponzi Finance. What's in store, then, is another great forced deleveraging where debts are liquidated and asset values are forcibly written down.

That's not anyone's idea of a good time. "Under the French bank's 'Bear Case' scenario," writes Ambrose Evans-Pritchard in the Telegraph, "the dollar would slide further and global equities would retest March lows. Property prices would tumble again. Oil would fall back to $50 in 2010."

Hmm. Doomer porn? Or prudent preparation? You decide!

Rock-star bank analyst Meredith Whitney has already made up her mind. She told CNBC in an interview, "I haven't been this bearish in a year...There's nowhere to hide at this point...The Fed and the Treasury have to get the banks to pay back TARP. That means the banks are going to raise capital again."

She was asked if the banks are adequately capitalised? "No way," she answered evasively. "All this said...I don't know what's going on in the market right now 'cause it makes no sense to me. There's no root in fundamentals."

That's the trouble with a market trading on liquidity alone. Valuations don't make sense. But that's doesn't keep people from making them, or having an opinion anyway. Take gold (or pay $1,143.20/oz. for it).

Another report from Societe Generale - this one from analyst Dylan Grice - says that if the U.S. dollar were fully backed by gold, as it was in during the peak of the 1970s gold bull - it would trade for $6,300 per ounce. That makes gold, er, cheap at these prices.

Is this a case of gold entering its mania phase? Are analysts now starting to outdo each other with gold predictions? Maybe.

But Grice makes a sensible case. He writes that, "The U.S. owns nearly 263 million troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap - at current prices, the USD is only 15 percent gold-backed."

If gold goes to $6,300, a lot of things will have gone wrong. Uber-bear Nouriel Roubini fears things are about to go from worse to much worse. He writes in an op-ed that the American unemployment picture is harbinger of bad times ahead.

"This is very bad news but we must face facts," Roubini writes. "Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries."

"As a result of these terribly weak labour markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures."

It's pretty gloomy. But at least now, at the end of the week, the status quo seems to have clarified itself. We think we know what the opposing forces are in the market and just what's at stake.

In the red corner is the spectre of another massive forced deleveraging (debt deflation). Banks are undercapitalised. Assets are overvalued (shares, property, commodities, and most definitely most government bonds). This fighter will pummel stock markets and asset prices much lower as the world comes to grips with too much debt that produced too few productive assets and real income.

And in the blue corner is Helicopter Ben Bernanke. His mission, should he choose to accept it, is to devalue the U.S. dollar (and all those currencies currently pegged to it) and create more new money faster than deleveraging can wipe out debt. In theory, Bernanke is just the man for the job. Why?

He's an avowed deflation fighter. And, again in theory, there is no limit to how much money the Fed can create. Through monetary policy and other methods, the Fed can continue to shovel liquidity into the banking sector to keep it fictitiously capitalised and nominally solvent. In this fight, the Fed expands its balance sheet two to three times its current size (at least).

Of course if the Fed does begin growing its balance sheet at that rate one thing will happen and another thing might happen. First, gold will get closer to $6,300 as global dollar holders realise the Fed's intentions toward the dollar (not honourable). But there is another possibility.

The other possibility is that the U.S. Congress, not understanding anything, but seeing the fiscal deficit explode and the dollar plunge, begins to call for Bernanke's head on a pike. Or, to be more precise, bill's stripping the Fed of its independence and calling for a formal audit might began garnering support in the Congress.

There might even be some elected representatives of the American people who try and prevent a further currency calamity for Americans (who are rapidly realising that a weaker dollar means a lower standard of living and rising prices for imports). Don't hold your breath, though.

Congress get tough with the Fed? Granted, it's a stretch. My colleague Dan Amoss back in the States suggests Bernanke's political strategy could be to let a little deflation creep back into asset markets. A drop of 10-15% on the Dow would get Congress good and worried again, and mid-term elections are not far off are they? With another spell of deleveraging, Congress might just back off and let Chairman Bernanke continue his long-slow, back-door re-capitalisation of the zombie American banking sector.

You have to wonder, though, if the markets will be so compliant with the Fed's plans (assuming the Fed's plans are anything like we've described). You have to wonder if normal people are beginning to lose confidence that the so-called authorities have our best interests at heart, of even know what they're doing.

Above all, you have to keep really tight trailing stops to lock in your equity gains, increase your allocation to cash, and keep an eye on element number 79 in the periodic table. It's telling you exactly what to expect.

A final possibility is that the United States is ripe for a populist demagogue who either rails against the unfairness of China's currency policy and/or tells Americans it's time to close the borders, repudiate the debt, and get the fiscal house in order...with a big broom...and some pitchforks.

Dan Denning
for The Daily Reckoning Australia

• Uranium: A Carbon-friendly Substitute for Coal
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• BHP Billiton: The Oil Company That is Not an Oil Company

Of course there is. George Soros is picking up more shares of gold and potash producers. Mineweb reports that, "Billionaire investor George Soros' Soros Fund Management substantially raised its shares in PotashCorp as well as invested in gold ETFs during the third quarter. In Form 13F documents filed with the SEC, Soros Fund raised its PotashCorp from 1.98 million shares to 2.95 million shares with a fair market value of $266.4 million."

And while China and America bicker over currencies, Chinese firms are scrambling to buy real assets. And while Aussie banks source foreign borrowing to lend in local real estate, Aussie mining firms go begging for bits of capital that would bring world-class ore bodies (and key strategic resources) into production...by local producers and owners.

Take Moly Mines. It's aiming to operate a 10 million tonnes per annum copper and molybdenum mine at Spinifex Ridge in Western Australia. Prior to the credit crisis last year, things were going swimmingly. Molybdenum is a hardening agent used in steel-making. There aren't a lot of economic ore bodies in the world. Moly, according to the research we published in April of 2008 in Diggers and Drillers, had one of the most economic deposits.

But it all went off the rails with the credit crisis. The company couldn't secure the funding it needed to bring the project into production. And the share price fell. That made management amenable to any offer that would secure financing and rescue what was still, by all accounts, an immensely valuable and lucrative resource.

Yesterday, the Foreign Investment Review Board (FIRB) approved a $200 million investment in Moly by China's Sichuan Hanlong Group. It gives the Chinese group majority control in Moly and could see the development of the project at Spinifex Ridge begin in the middle of next year.

Good on the Chinese for finding a great project to invest in at a bargain price. The truth is, Australia has more good mineral and energy projects than the local capital markets can realistically fund (given the preference by the banks for investing in/spruikin property). BHP CEO Marius Kloppers made this point yesterday in a lecture to the Lowy Institute in Sydney.

Kloppers said there are 74 separate resource projects worth $80 billion the advanced stages of planning. Those projects need capital. "'Although clearly not simple," Kloppers said, "a part of the solution lies in continued foreign investment, meaning that both Australia and Australian companies need to be open to this kind of investment, despite its immediate and strategic implications."

What are those "immediate and strategic implications?" Well, up to now, existing Australian shareholders are being clobbered. Those who owned equity in these projects before the credit crunch have been diluted as the firms in question raised money with rights issues or institutional placements.

That's fair enough. Owning shares implies an assumption of risk. The stock market is not a savings account. But the other immediate implication is the transfer of majority ownership of these key projects to overseas owners (including the transfer of a big chunk of income from the assets).

This is what it is. And in most cases, it is not an issue of national security. The truth is, many of these projects won't get off the ground without foreign capital. They will create Australian jobs, export earnings, and share price gains for Australian investors. They will also secure key resources for foreign manufacturers.

There's no sense getting all lathered up about it. The status quo is a result of Australia's status as a net capital importer and the investment decisions made with the money Aussie banks have borrowed. The banks could have chosen to invest in Australian mines. But mining is a risky business.

Is it as risky as property? We don't think so. But the way the Australian property market is currently structured - with the government supporting prices directly through grants and indirectly through miserly land releases, and the banks channeling new lending into the market - it's a rigged game for the banks. Why wouldn't they invest in property? It's certainly in their interest.

Whether there is a national interest at stake in the mining industry is another question. You'd certainly think so, given how much government revenue is derived from royalties and exports. But most state governments and the Federal government seem happy with the current arrangement.

The large producers have an unassailable competitive position. And the smaller explorers and developers are left to their own devices to find capital for their projects. Hey...that's why they call it capitalism!

For investors with the patience to investigate the smaller fry, it's a great market. Our new editor of Diggers and Drillers, Alex Cowie, looks like an insomniac in a coffee shop when he comes to the office each morning. There are literally more good stories than he can possibly research.

The important point is that what might be a national problem - selling of mining projects to foreign investors - is an individual investor's opportunity. You always want to invest where you have an advantage. And as an Aussie resource investor looking at the mid and small caps, you DO have an advantage.

Sure, you may be investing alongside the Chinese, who may be getting a better deal. But there are dozens of smaller projects across the resource spectrum that - as long as the world does not plunge into a second great manufacturing depression - make compelling investment stories.

Murray got back to us with his U.S. dollar index chart. You may recall that the other day we published a chart of the dollar index showing that the short-term and long-term moving averages were in danger of crossing. Murray, a full time technical analyst, basically said our chart looked nice but didn't communicate any useful information to traders about when to enter or exit positions affected by the dollar's decline (or rise).

Murray sent over his chart with a note that begins, "The US dollar index is still in strong downtrend. My last update (to Slipstream readers) said that we needed to keep an eye on the 10 week/35 week Moving Average as the confirmation for any change of trend. Also we needed to see a close above around 81 to confirm a re-entry into the distribution between 78 and 89 formed over the last year."

"None of these indicators are close to being confirmed. So, from a long term perspective, you have to remain bearish the dollar although entry into any short positions is highly risky at this point. Have a look at the chart and you can see that the lowest dotted blue line comes in around a price level of 73 which is close to where we are now."

Click to enlarge

"The meaning of the lower dotted blue line is just that it is an area where a false break can occur. So even though the current price action doesn't look like it is related to the distribution between 78 and 89, it still could be so beware. You can see from the other ranges that I have shown in the chart that a break through the low of the range saw a move to around that lower blue dotted line and then saw a squeeze from there. The first one saw a move all the way back to the top of the range and the second one tried to re-enter its range but ultimately failed.

"The point being, if you had sold down at the lower dotted blue line on either occasion you would have ended up in a difficult position. The market usually looks terrible at those points, but all too often you will see a reversal there which will at least move back to the bottom of the range.

"In this case that would see a move back to 79ish. And from there a re-entry into the range could see a quick move to the point of control at 84 and on to the highs at 90. I think we will see the Dollar create a low somewhere between 67 and 74 and then we will see a big short squeeze to take out traders in what has become a very overcrowded trade.

"Don't get me wrong," he concludes. "I still think the US Dollar is toilet paper, but it doesn't mean it won't buck around like a wild bronco on its way to fiat currency heaven."

Yee haw!

Dan Denning
for The Daily Reckoning Australia

• Australian Recession in the Works? Ask the Sharemarket
• The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand
• Australian Iron Ore Shares on China’s Menu
• The Aussie Dollar as a Measure of Global Risk Appetite
• Foreign Investment in Australia, How Much is Too Much?

It takes water to produce energy and energy to produce clean water. That nexus creates a number of profit possibilities. Sometimes, they are not so obvious. But often, a company that possesses expertise in water treatment will possess a related expertise in the energy field. The connection between water and energy is at least as old as the process of pumping water into old oil fields to boost production.

But the connection between these two precious fluids is changing quite a bit.

Let's take a look at one of the less-obvious connections...

You may not realize this, but two-thirds of oil discovered stays in the ground. The average recovery rate is only about 35%. What if we could recover more of the oil we've already discovered?

If the recovery rate improved to 50%, the world's recoverable oil would increase by 1.2 trillion barrels. It would double today's proven reserves, says the IEA. That much oil makes even a cynical old oilman catch a gleam in his eye and starts his heart aflutter. Indeed, lots of big brains churn away at this problem day and night.

"It's the prize for the next half century," says Howard Mayson, vice president for technology at British oil giant BP, quoted in this morning's Wall Street Journal. BP relies heavily on enhanced-recovery methods. These methods aim to improve that oil recovery rate.

As The Wall Street Journal reports:

"Enhanced recovery is a lifeline for the biggest oil companies, such as Exxon Mobil Corp. and BP, which are under intense pressure from shareholders to keep ramping up production and gaining access to fresh reserves. But that's hard to do when the companies are shut out of the oil-rich Middle East and places like Russia. So they rely more and more on existing fields, some of which have been producing oil already for decades."

It is like squeezing a sponge ever tighter to extract the most of what you can get. The old method is to simply flood the reservoir with water. The idea is to create enough pressure to make it easier to pump the oil out. It is not very efficient, but it works for a time. It is also becoming a bigger problem to secure the water supply. That's why we see oil companies buying water rights out West. Currently, the shale oil plays consume a lot of water.

Instead of using water, some companies will pump the reservoir with carbon dioxide. Companies used to store carbon dioxide in old unused reservoirs. Using this method of enhanced oil recovery, they put that carbon dioxide to work. BP uses this method out in its Prudhoe Bay reservoir, to great effect. Recovery rates there are 60%. Now Prudhoe Bay, which people in the 1980s once thought would cease pumping oil in 30 years, looks to be good for another 50 years.

The WSJ describes another method BP uses: "flooding reservoirs with polymers that expand like popcorn when they come into contact with hot rocks, thus flushing more oil out of difficult-to-reach nooks."

The name of that polymer is BrightWater. One company has a patent on this material and makes it for a profit. That company is Nalco Holding (NLC:NYSE), a company I recommended several months ago to the subscribers of Capital & Crisis. BP uses BrightWater in Argentina and Pakistan. "BP says the additional oil the new technology will produce over the next 20 years is roughly equivalent to finding a major new field," reports the WSJ.

"Nalco," you say, "but isn't Nalco is one of the world's largest water purification companies for industrial companies?" This is what we mean by energy-water nexus. The two are related. And Nalco sits right in the middle of that nexus.

Last year, Nalco's energy services segment was a bright spot. Sales grew 17% organically for the year. In the fourth quarter, sales were up 23% despite the steep oil price decline. In that segment is Nalco's enhanced oil recovery (EOR) business.

CEO Erik Fyrwald commented on this business in a quarterly conference call. "We are in with a lot of oil companies explaining and talking to them about it," he says. "We believe as oil prices come back up, [EOR will be a] really big growth opportunity, just delayed for a period of time."

The delay stems from the fact that many oil companies slashed their exploration and production budgets last year, when oil and gas prices were falling. But it seems inevitable that as the big oil reservoirs dwindle, the EOR business will be big down the road. Of course, EOR is only one of the many valuable things Nalco does in the energy-water nexus. It is no wonder why Warren Buffett's Berkshire Hathaway is the biggest shareholder.

Nalco is a long-term buy.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• Water Usage by Big Companies
• Unsustainable Energy Trends
• Price of Water Rises in China
• Buying Oil on Sale as U.S. Dollar Gets Weaker
• Top Resource Prices in 2008: Food, Water, Energy & Metal

Much of your medical info is already stored electronically, of course, but much more is stuffed into old paper file folders. Nor is there any centralized database that routes your records wherever they are wanted. That is going to change, and change dramatically.

The present system has too many embedded inefficiencies, and the industry wants them gone with yesterday's used latex gloves. Whether you like it or not, someday soon there will be a collection of bits and bytes that stores all the most intimate details of your health history.

Making that happen is a daunting job, and a touchy one.

On the one hand, think of how much medical data each American accumulates each year. Multiply that by 300 million. The amount of paper currently required to track it all would stretch to the moon. Doctors want to set fire to that stack.

But on the other hand, they don't want their patients' records falling into the hands of every Eastern European hacker for whom such data would be a major arm shot to his fake Viagra business. Data security has to be tight.

Thus software solutions must be developed both to serve and to protect. Billions will be spent in the process of digitizing, maintaining, and guarding medical records, and guess whose pocket the money will be extracted from. Did you select mine?

Don't care for this idea of white jackets anywhere in the world having access to your private info at the click of a mouse? Or don't like the idea of footing the bill for the conversion? Well, tough. On both counts. You won't be able to prevent the medical business from setting up the grand database, nor from using your own money to manufacture the electronic you.

In fact, the government has already installed the plumbing that will feed the big money shower. As in, very big.

That happened on February 17, when President Obama signed the Health Information Technology for Economic and Clinical Health Act (HITECH), which its sponsors had tacked onto the comprehensive American Recovery and Reinvestment Act (ARRA).

Everyone loves ARRA, right? Well, maybe. But citizens who cheered it might not have been quite so happy if they were aware of everything they were agreeing to fund with their hard-earned dollars. Buried inside HITECH is an allotment of $19 billion (yep, that's billion with a B) just for the conversion of paper medical records into electronic.

Tell you who was cheering lustily, for certain: health care software developers. For example, maybe you read about the recent deal whereby Dell acquired Perot Systems, a premium software company, for about $4 billion. What that was largely about was HITECH. Dell didn't have real access to it. Perot Systems - whose annual revenues derive 25% from government and 48% from health care - did. Sound the wedding bells.

Dell, of course, is by no means the only company eager to step into the generous governmental shower stall. You can bet that IBM, Hewlett- Packard, and the rest of the heavies in the field are all busily preparing proposals, if they haven't already filed them.

And the big guys won't have that field all to themselves. There's a lot of cash to be spread around. Smaller competitors will nab their share.

Those are the kinds of companies Casey's Extraordinary Technology searches for and recommends as longer-term investments. The ones whose bottom lines will profit the most from political largesse.

Subscribers learned about one such firm in the September issue. There will be others, as anyone who has both a solid product and the savvy to play Washington's money game, is going to prosper mightily in the years ahead.

Regards,

Doug Hornig
for The Daily Reckoning Australia

• When Computers Meet Cell Biology
• Technology Is Pushing Down Farm Prices
• Meredith Whitney and the Buy Recommendation on Goldman Sachs
• Money Can’t Buy Happiness
• The Impact of the Genome

According to Goldman Sachs, robust 2010 oil demand growth will deplete these inventories over the next 12-to-18 months and diminishing production rates in key areas around the world will create a supply/demand imbalance.

The top portion of the nearby chart shows the decline in production from the world's top 230 projects. After peaking in 2009, production from these projects is set to fall for the next several years. Excluding OPEC countries (bottom portion of the chart), the decline rates will likely quadruple from 2007 to 2012.

Over that time period, non-OPEC production is expected to fall by 2.5 million barrels per day. Only Brazil, Canada and the former countries of the Soviet Union are expected to see production growth.

One of the largest contributing factors for this is chronic decline rates from some of the world's top mature fields. Mexico's Cantarell field, one of the largest oil fields in the world, produced 30 percent less oil in 2008 than it did in 2007 - a trend that's expected to continue.

Norway, the world's 11th largest oil producer in 2008, saw its oil production peak in 2001 and is down 27 percent since. Another big producer, Venezuela's state-owned oil company PdVSA has seen annual decline rates of more than 25 percent in certain fields according to the Energy Information Administration (EIA).

Adding to the dilemma, many countries without decline-rate issues have been holding out production increases until projects become more cost effective; this is why we recently saw Russia overtake Saudi Arabia as the world's largest oil producer.

The Saudis have been content to sit on the sidelines while awaiting the return of higher prices. The same goes for other OPEC countries; PIRA, an oil-industry consultant, says the cost of oil will have to rise above $80 per barrel in order for the cartel to increase production.

With oil prices currently hovering around that $80 level, OPEC officials have recently hinted that production increases aren't off the table for the cartel's upcoming December meeting.

But even if we see a production increase out of OPEC, decline rates from maturing fields and high barriers of entry to bring new fields online should keep the supply/demand balance tight for years to come.

Regards,

Evan Smith and Brian Hicks
for The Daily Reckoning Australia

• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• BHP Billiton: The Oil Company That is Not an Oil Company
• Where Will Future Oil Production Come From and How Can Investors Profit Today?
• Oil Price Chart Shows Slight “Correction” in Near Future
• OPEC Agrees Not to Cut Oil Production Until it Meets in May

Contrary to popular mythology, we Californians do not live merely on love, sunshine and granola.

I mean, sure, we've all got our yoga mats, our quartz crystals and our "life coaches" (who doesn't?), but life is just so much more than "namastes" and positive energy. Life is also about building enough windmills (somewhere else) and installing enough solar panels (somewhere else) to keep our yoga studios air-conditioned.

And, yeah, I guess we need SOME crude oil, cause our Priuses cannot ALWAYS run on electricity. So I guess its fine to use crude oil if we have to, as long as we can obtain the oil in an ecologically friendly way...like getting it from somewhere else. (OMG, remember the Santa Barbara oil spill in 1969? That was a SERIOUS bummer!)

So, yes, we Californians certainly understand that we cannot break our dependence on crude oil overnight. At least not until some "next generation" process comes along that can convert text messages into jet fuel. And even if we Californians use less crude oil, someone else is bound to use more of it...like all those reckless industrialists in the Developing World. Don't they know how bad crude oil is for the environment?

But I guess there's just no reasoning with these people. So I guess we'll just have to keep finding and pumping crude oil for a long time to come.

Hmmm... I'm not sure how easy that's going to be. When I was out recycling newspapers the other day, I saw an old headline that said crude oil is becoming much harder to find...and that oil production is falling off rapidly at many of the world's largest fields.

So I did a little research and - would you believe - it's true. Crude oil is becoming much harder to find and much more expensive to produce.

Eric Fry
for The Daily Reckoning Australia

• The Price of Oil Explained by ‘Astrology’
• Supply of Conventional Crude Oil is Very Close to its Peak
• Increased Oil Production Won’t Solve the Energy Crisis
• We Are Facing a Global Oil Crunch
• Consumer Confidence is at its Lowest Point Since 1980

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

Look. Skeptics can say what they want; it does not change the fact that our world is struggling to maintain daily flow-rates. Whether you agree with us or not, the energy reality is that the supply of conventional crude oil is very close to its peak and no other fuel source can easily fill the supply gap.

Yes, various governments are now promoting alternative sources of energy and over the following years, we expect this drive to intensify. But those sources will provide too little, too late. So there remains, today, an unbelievable degree of denial when it comes to 'Peak Oil.' Most people simply dismiss it as a conspiracy. Others gleefully point to alternative sources of energy, whereas some believe that the vast improvements in oil drilling technology will save the day. Do not be seduced by these delusional hopes.

Remember, crude oil is the lifeblood of the global economy and roughly 70% of it is used to power transportation. Moreover, a vast amount of crude oil is also used up by agriculture (production of fertilizers, pesticides and irrigation systems). In fact, modern-day agriculture can be best described as a process of converting hydrocarbons into calories. Without cheap energy, the world would certainly have trouble producing half of the current food supply and the result could be far worse.

Thus, crude oil is a key ingredient in two of the most critical processes which make modern life possible - transportation and agriculture. And shortages of this vital natural resource will result in extreme pain. In the initial stages, the price of crude oil will rise remorselessly and eventually, we will face rationing.

Now that we have established the importance of crude oil, we will explain why new drilling technology and alternative sources of energy will not make this problem go away.

First, as far as drilling technology is concerned, it is worth noting that America is home to the best oilfield technology on this planet. However, its oil production peaked in the early 1970s and has been in a relentless decline. Furthermore, apart from America, other technologically advanced nations in the world have also failed in maintaining their daily flow-rates. For instance, after exporting crude oil for over two decades, Britain is now a net importer and its production is in a state of permanent decline. Hard data confirms that two of the most advanced countries in the world now live in a post 'Peak Oil' era, so what are the odds that other less fortunate nations will succeed in averting 'Peak Oil'?

Secondly, as far as alternative sources of energy are concerned, they represent a drop in the energy ocean and will not be able to offset the depletion in crude oil. Despite all the euphoria surrounding renewable energy, the 'sources' like ethanol and solar panels are net energy losers. In other words, it takes more energy to produce ethanol and solar panels than the energy you obtain from them. For sure, hybrid and electric cars will help us to some degree but you must keep in mind the fact that electricity is not a source of energy; it is a carrier of energy. Even if electric cars become popular, how will we generate sufficient electricity?

Elsewhere in the alternative energy patch, a lot of hopes currently rest on unconventional sources of oil (especially tar sands and shale oil). Once again, this optimism is misplaced, as the increased supply from the unconventional sources will not even make a dent in the overall energy picture. The nearby chart confirms that our world currently produces roughly 85 million barrels per day of total liquids and out of this gigantic sum, only 13 million barrels per day of oil is derived from unconventional sources. So, when the production of conventional crude oil finally declines due to 'Peak Oil', it is extremely improbable that unconventional supply will be able to rise to the challenge.

As far as Canada's tar sands are concerned, Alberta currently produces roughly 1.4 million barrels of oil per day and under the best case scenario, this figure is expected to rise to just 3.5 million barrels per day by 2020. To complicate matters even further, the tar sands require huge amounts of water and natural gas. In addition to this, the mining procedure is extremely polluting. For example, the process of extracting 'oil' from bitumen releases at least three times the amount of carbon dioxide emissions as regular oil production. Accordingly, we have no doubt in our minds that Canada's tar is not the Holy Grail.

Finally, the new oil shale discoveries in America are not going to help us either because the 'oil' trapped in the shale is in fact kerogen - a precursor to oil. So far, all major oil companies have struggled to convert the kerogen into usable oil and it will be interesting to see whether any of them succeeds in the future. In any case, this conversion process is extremely expensive and we can assure you that shale will not be producing any oil at today's prices. Recent studies reveal that the price of oil will have to rise to several hundred dollars per barrel to make this process economically feasible.

Well, now that we have covered the supply side, let us briefly discuss the demand side of the equation. According to the IEA, global oil usage in 2009 will amount to 84.4 million barrels per day and it will rise to 85.7 million barrels per day in 2010. This means that oil demand will rise by 1.5% over the next twelve months which is in line with the growth rate over the past two decades. If this growth rate continues over the next 4-5 years, there is no way our world will be able to ramp up production.

Unfortunately, positive thoughts and wishful thinking will not change the equation. Precious time has been wasted and we have no margin of safety. We must prepare ourselves for sky-high commodity prices and periods of acute shortages, which will make wartime conditions seem rosy. In fact, we believe we are already a decade into this painful transition but let us warn you that we have seen nothing yet.

If our assessment is correct, it seems prudent to make a sizeable allocation to the energy sector. However, given the realities of 'Peak Oil', we do not recommend exposure to the oil majors, as their reserves and production are in decline. On the contrary, we urge you to invest your capital in quality upstream oil/gas companies and businesses involved in the energy services sector.

Regards,

Puru Saxena,
for The Daily Reckoning Australia

• Peak Oil – The Rewards
• Peak Oil: Supply Data Doesn’t Lie
• Increased Oil Production Won’t Solve the Energy Crisis
• Peak Oil – The Risks
• We Are Facing a Global Oil Crunch

"The real boom in Dubai really only kicked off recently. After spending some time here and chatting with those who live here, I would boil down the more important ingredients to these:

• Low regulations, low tax. This has probably been a Dubai advantage for a hundred years, but people here told us repeatedly how easy it is to set up shop in Dubai and how your privacy is protected. There are also no income, property or corporate taxes. Zero.

  (The city funds itself with taxes on hotel occupancy, liquor sales and restaurant meals, as well as permits for roads and such. Part of the budget also comes from the Sheikh's business interests - such as Emirates Airlines and the aluminum smelters.)

• The introduction of freeholds. In 2002, Dubai allowed foreigners to own property in so-called freeholds. That was a big milestone that kicked off a wave of immigration. So now there are these freeholds where the Penthouse Gypsies live in high style and in very nice communities.
• The backlash of 9/11. Before 9/11, Middle-Eastern exporting countries re-invested $25 billion a year in the US. After 9/11, that slowed to about $1.2 billion a year. Arabs no longer felt welcome and feared what might happen to their wealth. So guess where the money went?

  Arab wealth started flowing back to their own countries. The economies of the eight states of the Gulf Coast grew 60% between 2001-08, compared to 18% for the US. 'Cash poured into Dubai,' Krane writes. And Dubai's growth rate topped China's, averaging 13% per year.

  Essentially, the repatriation of Arab wealth in the US was a big driver and still continues to today. As the Middle East region gets wealthier, a good chunk of that wealth will flow through Dubai.

• Finally, the UAE fixes the value of its currency to the dollar - at least for now. What this means is that as the US printed dollars the effects were exported to Dubai, too. That is where Dubai got into trouble. Lots of speculative capital flowed to building islands in the shape of date palms or creating residential communities with robotic dinosaurs from Japan. Now Dubai is suffering through a massive real estate bust as a result.

"Still, Dubai's important position in world trade is many layered, like a wedding cake."

Bill Bonner
for The Daily Reckoning Australia

• Is Dubai the Bubble It’s Made Out to be?
• Qatar Relies on Natural Gas Reserves While Dubai Leans on Trade and Finance
• Dubai and Abu Dhabi: Newcomers to the Global Finance and Trade
• Bureaucracy and Corruption Holds India Back
• China is the World’s Largest Exporter to the Middle East