Price of Oil More Important Than the Price of Gold?

There are many of you who are skeptical of my claim that not only will gold and silver go up like they have in all the rest of the last 4,000 years of economic history when a government started creating excess money and credit like the stupid buttheads that they are, and I get tired of arguing with them because it is so hard to be convincing when it is obvious that I have no idea what in the hell I am talking about.

But while it is obvious that since gold and silver are going up because the United States Federal Reserve has debased the dollar so much, it is less intuitive that oil is on its way up, too.

That is why I am pleased to present part of an interview between Matt Simmons and Bud Conrad of Casey Research, which was published in the August 2007 edition of the Casey Energy Speculator, which has never interviewed The Mogambo, so that proves that they are a class act.

Anyway, they say that Matt Simmons has been an investment banker for 40 years, is founder and chairman of the world's largest energy investment banking company Simmons & Co. International, and that in 2005, he published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, a book that, as they say, "has galvanized the peak oil debate." So he probably knows what he is talking about.

Well, I don't know for sure whether it galvanized the Peak Oil debate or not, but Mr. Conrad asked, "If I can just interject, when you look at the big picture, and try to get to the big numbers of 342 million barrels of oil equivalent per year from all energy types that the world will demand for its energy needs by the year 2030, you need huge increases not only in the production of oil, but you need the other kinds of energy. And you need a huge investment. I've seen numbers like $10 or $15 trillion in the infrastructure to get there. My question when looking at the big picture is - how are we going to fund that sort of investment?"

At the prospect of spending $15 trillion on oil infrastructure alone, I was instantly on my feet, shouting, "Yeah! Where? You got $15 trillion freaking dollars, pal? You do? Well, how about handing a few thousand down here? You won't miss it!"

Well, I am not sure to which question he was responding, probably both, but Mr. Simmons replied, "the odds of that happening are less than one percent." Naturally, even a bonehead like me knows that a one percent chance is not very good, and I saw that my chances of him coming across with that cool thousand bucks was now slipping away. But I cleverly figured that I could up the percentage if I sort of, you know, made vague threats of physical violence against him and his family (which is so popular around the globe these days), but I have to be careful since the judge came up with his, "This is the last time, you Vicious Mogambo Moron (VMM)! The next time you assault somebody, you're going down, whether or not, in your Stupid Mogambo Opinion (SMO), you think they deserve it,!" and I remember thinking, "I'll bet you wouldn't say that if I came up there and beat the hell out of you, you halfwit, loser, piece of judicial dog crap!", which I did not say out loud, which turned out to be a good thing, just like my lawyer said it would be!

But it turns out he was not even talking to me! He was responding to the suggestion that a mega-infusion of capital could save us from Peak Oil Armageddon, which everybody thinks is more important only because it wasn't THEY that was getting the thou!

Anyway, he says, "If we were lucky enough to open up the entire outer continental shelf and then we were lucky enough to invent quickly enough seismic equipment to start doing some sort of a high-grading of where we should drill, and then we were lucky enough to have a growing fleet of newer offshore rigs that could drill wells and we just discovered two new North Seas, then there's grounds that we could basically spend four or five hundred billion dollars and maybe end up ten years from now with six million barrels a day of fresh supply. But the problem is that each one of those things that I said, 'If we were lucky enough', we don't have. And to create each one of those is going to take ten to fifteen years to do. And ten to fifteen years from now, our 73 million barrels a day of current crude production could easily be down to 50 or 45. So you say even if you had another 6 million barrels per day, you can't climb back out of the hole."

But climbing out of holes is no problem for those who have gold, as is explained by Ross B. Hansen of Northwest Territorial Mint in his essay, "The Price of Gold Doesn't Matter". He writes, "After the past two months, it's difficult to remember that the year began with gold trading at $636.30, silver at $12.96, palladium at $335, and platinum at $1,139.50."

Now things are different, of course, but it is not just about gold. It's also about energy, and he notes that it is also hard to remember that "gasoline cost $2.38 on January 1 of 2007, according to the US Dept of Energy's Energy Information Agency. On December 31, that same fuel cost $3.10. That's an increase of 30%."

As an example, he says, "If in January of 2007 you had $637.50 to buy an ounce of gold, you could have bought 1 ounce of gold, or 267 gallons of gas. With that same $637.50 today, you could only buy about three-quarters of an ounce of gold, or 205 gallons of gas."

So why doesn't the price of gold matter? He explains, "If you were using gold as your standard, you'll discover that you can buy about the same amount of gas (actually, a little more) with the same ounce of gold you had on January 1", thus effortlessly demonstrating gold's "store of value" as it preserves buying power!

And for a guy who just wants a little gas in his car so that he can go out, have a few drinks with his hoodlum friends and make a creepy nuisance of himself by flirting with the waitresses until they get the bartender to come over and make me stop, then I agree; the price of gold doesn't matter, as all I want is a little gasoline! And a pizza. And some beer to wash it down with, too.

Mogambo Guru
for The Daily Reckoning Australia

Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

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