Speaking of housing, the ABS reports that building approvals fell 7% in January from December. "Experts" were expecting a one percent increase. It was the first time approvals have fallen in five months. But with the expiration of the first home buyer's grant and rising interest rates, it shouldn't be that much of a surprise.

Yesterday's news came from the world's most akwardly named bureaucracy, the Australian Bureau of Agricultrual and Resource Economics, henceforth to be called ABARE. The group published its quarterly commodity outlook. It tells you how much Australia can expect to make from selling the family: silver, iron ore, and coal. Its conclusions were kind of surprising.

The main conclusion was that Australia would see rising export earnings on higher volumes but moderating commodity prices. In other words, the China boom will drive export volumes for the next five years. But you won't see any more mammoth increases in commodity prices.

Before we dive into the data, a warning: these kind of forecasts are usually worthless. Not that they aren't carefully prepared. But you just don't know what's going to happen in the world. You can be motoring along during a big boom and whammo! A credit depression hits and reveals a 25-year misallocation of resources in the consumer economy.

But for the sake of determining if Australian resource stocks are cheap or expensive to projected earnings, let's see what ABARE thinks earnings will be like. As you'll see, the big growth will come fromm mineral and energy commodities, with base metals giving a big kicker in the next year especially.

ABARE reports that "The value of Australia's commodity exports is forecast to be around $186.8 billion in 2010-11, which is an increase of 15 per cent from a forecast $162.5 billion in 2009-10. The value of Australian commodity exports in real terms is projected to rise over the outlook period. By 2014-15, Australian commodity exports are projected to be around $211.4 billion (in 2009-10 dollars), which is 30.1 per cent higher than forecast for 2009-10."

You're looking, then, at about 7.5% annual growth in the value of Australia's agricultural and mineral exports. That's slightly less than China's annual GDP growth rate (also a suspect number). But it's certainly a lot healthier than growth rates in the rest of the Western world.

ABARE says that in the next 12 months, export earnings will be driven by 19.8% increase in energy commodities (oil and coal, but not including uranium). Metals and bull commodity export earnings will rise by 17.6% to $87.9 billion. Iron ore and coal are the big winners here. For this year, higher prices will account for the increase.

But ABARE's rather muted conclusion is that increased volumes are going to drive earnings growth, and not just underlying gains in commodity prices (which will begin to be weighed down by increasing global production). For stock pickers that means you can't just find stock that you think are leveraged to higher prices. You're also going to have to find low-cost producers. And you are going to have to find projects with the best economics.

Good thing we've got Alex on the case at Diggers and Drillers. He's been on baby duty at home with his newborn. But he continues to check in with reports and is back on the case full time next week. We'll keep you posted.

We're taking the projections somewhat seriously. That could be a mistake. For example, take ABARE's estimates of crude steel consumption and production. Both are predicated at average annual growth rates in the Chinese economy of just under 10%. And both assume China's resource-intensive industrialisation has years to run, rather than having already run its race.

It's quite possible we're much closer to the end of the China-driven steel boom than a next higher phase. But ABARE's numbers are astonishing. It predicts that global steel production will have grown by 30% between 2008 to 2015, from 1.347 billion tonnes consumed in 2008 to 1.774 billion tonnes in 2015.

ABARE is projecting a 79% growth in Chinese crude steel production during that same period. In fact, by 2015, according to these figures, China will consume 812 million tonnes of crude steel per year. That's more than the U.S., Brazil, Russia, the 27 nations of the European Union, India, Japan, and Korea combined.

This either shows how cataclysmic things are going to get in the industrial West (and Far East). Or it shows how wildly unsustainable projections of Chinese steel consumption are. How many more empty cities can you build? How long can you sustain fixed asset investment at 30%+ of GDP, especially when much of it is in commercial and residential real estate?

On the production side - and this is the part that has the most to do with Australia's iron ore and coking coal industries - ABARE estimates Chinese steel production will be 880mt in 2015. The rest of the world combined will be 712mt. This means China will be a net steel exporter, if ABARE's production and consumption figures for crude steel turn out to be right.

Our guess is that they will be sensationally wrong. China has its own credit boom malinvestments that are bound to blow up in the next few years. Precisely when doesn't really matter. And don't forget the fact that the Global Financial Crisis has smoothly shifted into a sovereign debt crisis. This too has the potential to knock out the legs from under the world economy and hugely reduce resource demand.

"'Prepare for a very difficult economic time, which you will not be able to escape,'" said Hans Hoogervorst, the Netherlands Authority for Financial Markets chairman. He was speaking at an ASIC sponsored gig in Melbourne that sounded pretty interesting.

He said that "'Even for a country that has been so soundly managed as Australia, this will have consequences...The problem is that there is now too much on the shoulders of government. They have basically taken on all the problems caused by the financial crisis, with the effect that most of them are in really, truly horrible budgetary shape."

Large government deficits usually mean slower growth. For one, government borrowing robs the private sector of the capital it needs to resume growing. Australia doesn't have a lot of surplus domestic capital to begin with. But really the problem is what it always is: a world built on too much debt. It's gotta give.

Yesterday we promised to tell you about how some Australian savers/investors are being locked out of their money for as much as four years. Look for that tomorrow. We're runing out of time and space today.

The next few days should be busy but insightful. We're meeting with all the gathered editors from Agora Financial, a sister company here in Baltimore. And later in the week, the investment board of the Bonner Family Office meets. We're on the board there and are eager to here what other investors from all over the world are looking to buy or sell right now.

In the meantime, it's amazing how cheap things are in America. Coffee...haircuts...food. The dollar really is cheap right now. If we didn't know intimately how screwed up America's finances were, we'd think it was a buy.

Dan Denning
for The Daily Reckoning Australia

• Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike
• Posco’s Production Cuts May Be Bad for Australian Iron Ore
• The Future of the Australian Resource Market, Two Ways the Boom Could End
• BHP Billiton (ASX: BHP) to Report Second Half Results Today
• The Australian Resource Boom Isn’t Dead Yet

Oil did move up overnight in the futures market to US$71.94. And locally, there was more positive news for energy and energy stocks. Bloomberg reports that, "LNG sales from Australia's biggest resources project may reach A$300 billion over its first 20 years." It added that, "Chevron yesterday completed supply agreements with Tokyo Gas Co., Osaka Gas Co. and South Korea's GS Caltex Corp. that [Aussie Prime Minister Kevin] Rudd valued at A$70 billion. The Japanese companies have agreed to buy a combined 2.25 percent stake in Gorgon."

The Prime Minister would be keen to associate himself with the success of Gorgon. Who wouldn't? It's a big deal. It's also a dirsuptive deal.

Earlier in the week - prior to being struck down again with an intestinal virus - we reviewed the negative comments on unconventional LNG from Woodside Petroleum's Don Voelte. He pointed out that the capital spending and operating costs for the coal-seam-gas business were probably higher than people realised, and that there were real problems with higher carbon dioxide levels and other by-products from unconventional gas (compared to conventional off-shore LNG).

Voelte may be a bit frustrated that investors are taking a punt on the small companies in the LNG business that have yet to produce anything, instead of say, chucking some cash into his firm. After all, Woodside remains one of the best established LNG producing stocks in the world. That's why we featured it in Diggers and Drillers a few years ago.

But he was wrong to imply that unconventional LNG can't be economic or competitive. It can. An example is the production of unconventional reserves from the Barnett Shale formation in Texas over the last two years. Yes, it was capital intensive. But it - and other 'tight gas' projects - increased gas production in the U.S. over the last three years. That reversed a long period of stagnation, with natural gas production having peaked in the States in the early 1970s.

So the financial and business model for succeeding in the unconventional energy space is already there. For Australia, that makes the prospect for investors even more exciting. Not that it will be easy. But at least you know what you're looking for. You're looking for geographic regions that are highly prospective for either "tight gas" (natural gas stranded in semi-porous structures) or coal-seam-gas, most of which is being found in Queensland's Bowen and Surat Basins.

Once you find the companies that have the best prospects, you look for the companies that can produce those prospects at the lowest cost. You'd also look at the capital structure to make sure the firms can execute their projects without a lot of debt, and preferably with a cash cushion. You'd look for good managers too.

None of this still guarantees the company will succeed or the share price will rise. But if you want safer integrated energy plays, there are already plenty of those to choose from. And all those firms are valued on production and reserves, meaning that the upside (in terms of share price) is strictly correlated with rising oil prices.

The case with the unconventional energy plays is different. First, the big institutions aren't looking for these firms. They don't want to take a punt on unproven company in an unproven industry with high capital costs and high probability of failure. The advantage for finding the eventual winning firms goes to small investors simply because bigger investors can't be bothered to look until later, after the winners emerge (by which time the largest share price gains will have already occurred).

But the main advantage of looking at the smaller firms is that they are emerging as the disruptive technology firms of the energy sector. It is true that technology can increase production from oil and gas fields and help us find more oil and gas. We don't think this means that better technology means there is no oil crisis.

However the smaller, entrepreneurial companies are probably the most exciting energy stocks because their success is so unexpected. As Ingrid Campbell writes in "A overview of tight gas resources in Australia, "The defining feature of the history of tight gas exploration in North America has been the high level of scepticism by the major global oil and gas companies towards the commercialisation of this unconventional resource. It was, and is, the smaller independent explorers, who were motivated to develop the techniques and technology for extracting gas commercially from tight reservoirs."

Small companies with everything on the line had better be extremely motivated. If they aren't, they'll fail. And frankly, most of them do. But the ones that don't, well they often do very well indeed. And that alone is the best reason to keep looking at these stocks, as Kris Sayce has with his "thin air" plays at the Australian Small Cap Investigator.

Dan Denning
for The Daily Reckoning Australia

• Uranium: A Carbon-friendly Substitute for Coal
• Giant Costco Opens in Melbourne!
• Tesco is a Buy
• Small Caps to Lead the Way in 2009
• Supply of Conventional Crude Oil is Very Close to its Peak

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold.

He said that gold hadn't done much adjusted for inflation since 1980. What's more, he said, its worth less, adjusted for inflation that it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We've asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year's Vancouver show next month. The theme of this year's show is "Ten Years of Reckoning," celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it's still not as high as we expect it to go before it starts to look foolish. Meanwhile, today's government bond market looks an awful lot like the stock market circa 2000. You're seeing a generational high in bonds. It's another version of the "high-low" strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 yesterday. Bloomberg says the weakness in the U.S. dollar is, "bolstering the appeal of energy as an alternative investment." Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil's latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it's the smaller-than-expected oil supply growth that will drive the market.

By the way, some Diggers and Drillers subscribers have wondered exactly which of our energy recommendations come from our "Long Aftershock" scenario. We'll make sure to specify which oil and energy stocks we had in mind in tomorrow's weekly e-mail update (for subscribers only).

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia's position is in the developed world. "Even as Australia's challenges increase, it will still be the envy of the developed world," writes William Pesek at Bloomberg. "Even in its worst moments... Australia is among the least unsightly economies anywhere," he adds rather optimistically. We'll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realise it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Dan Denning
for The Daily Reckoning Australia

• A Simpleton’s Trade: Sell US Stocks and Buy Gold
• The Bailout is Approve So Now It’s Time to Buy Gold
• Sell China and Buy Goldman Sachs
• LNG – The Energy Play for 2009
• Note to Australia: Buy Resources, Not Banks

That said, coal stocks stand to lose the most from cap-and-trade or emissions trading schemes that put a price on carbon dioxide. Even so, there ARE plenty of unconventional hydrocarbons out there that can provide transportation fuel or gas streams for turbines to generate electricity.

Turning stranded coal seams into liquid fuel is a kind of "energy mining," a hybrid industry that's capital intensive but also sensitive to global oil prices. Australia is full of these "energy mining" projects that could benefit investors. Today's Age has a story about underground coal gasification. It's a story we first covered in the Australian Small Cap Investigator in June of 2007, which, by our reckoning, was about two years ago.

Since then, editor Kris Sayce has looked at the coal-seam-gas industry brewing in Queensland. He's found a few recommendations that have zoomed up with the interest of major international oil and energy players. And as we mentioned last week, the newest aspect of the "Long Aftershock" is the development of gas-rich shale formations. We're on that story in this month's Diggers and Drillers.

Our main point in all of this is that you don't have to take the coming implosion of the U.S. bond market and soaring interest rates lying down. Oil, gold, gas, silver...precious metals and energy projects...these are all investments that ought to do well in an inflationary boom.

The big risk to all of these investment ideas is that deleveraging of global balance sheets sends all stocks down to new lows (lower than 2003) and sucks the global economy into a deflationary depression.

The only reason we doubt the deflationary depression scenario is that central banks have an unlimited capacity to print money to buy assets or finance fiscal deficits. Granted, this will ruin their economies if they do so. But it's what they always seem to do. It's part of that body of lies currently circulating that says it is always and everywhere appropriate for governments to run 'temporary' deficits in order to 'support demand' during a recession.

That's a load of rubbish.

Dan Denning
for The Daily Reckoning Australia

• Energy Debate in Australia Needs to Get Serious
• Rising Coal Prices to Increase Electric Bills in Australia
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• A Hot Future for Geothermal
• Thorium as a Nuclear Fuel

BHP is seeking permission from the West Australian government to mine the Yeelirie deposit in WA. BHP reckons it's a $17 billion ore body at current uranium prices, capable of producing 5,000 tonnes of uranium a year for 30 years. It says the project would increase Australia's uranium exports by 50%.

You don't have to worry about a uranium supply glut quite yet, though. It's a subject we've been covering over at Diggers and Drillers. There are other, smaller ore bodies that could enter into production if the uranium industry ever gets off the ground in Queensland. And many Australian explorers are active in Africa.

But the big story of the week-the one that's got us really excited-has been under-reported. Norway's largest oil company, StatoilHydro, and Chesapeake Energy Corp. from the States are kicking around Asia and Europe for unconventional natural gas projects to develop. Asia includes Australia, according to the story in Bloomberg.

Statol's Olivind Reinertsen, who runs the company's U.S. and Mexican operations told an interviewer that, "At this point in time, we are looking at 14 different plays all over the world together with them to try to narrow it down." The plays will be similar to the Marcellus and Barnett shale formations in the States that helped increase un-conventional U.S. gas production in the last two years.

Australia has some shale formations that are suitable for this kind of production. It's capital intensive. And the formations have to be injected with something to drive the gas out, mostly because the sandstone formations are not porous enough to allow for conventional production. They don't call it unconventional for nothing.

But one thing you'll notice about natural gas produced from shale formations is that it's not coal. It's not uranium either. As the Federal government tightens the noose around the coal industry via the delayed but not-dead-yet emissions trading scheme, we wouldn't be surprised to see unconventional gas production enjoy its own mini boom in Australia.

Uranium, of course, would be a carbon-friendly substitute for coal in terms of generating abundant and cheap electric power for Australia's economy. But there is an irrational fear of developing a domestic nuclear industry. So even though uranium is going to be a valuable export commodity, the fact that only WA, the NT, and SA permit new mines to open means you're not exactly spoiled for choice when it comes to uranium explorers who have ore bodies that can realistically be developed in the next five years.

What does that leave us with? Well , you have conventional off-shore LNG and unconventional on-shore coal-seam-gas. Seeing as how we've got both those stories covered in Diggers and Drillers and the Australian Small Cap Investigator, we're going to bid you adieu for the day and get on the shale story for the May issue of D&D. See you next week!

Dan Denning
for The Daily Reckoning Australia

• Buying Oil on Sale as U.S. Dollar Gets Weaker
• Latest Energy Bull Market Won’t Be Confined to Crude Oil
• Australia Presents Investors With Great Portfolio of Energy Choices
• Thorium as a Nuclear Fuel
• Australia’s Next Big Export Industry

So profitable in fact, that it could soon be Australia's single largest export industry.

That's why, since last November I have been recommending two companies to subscribers of Australian Small Cap Investigator that I am certain will profit from a new wave of investment in this industry.

The industry is liquefied natural gas (LNG).

It's hard to imagine that in a country as rich with resources as Australia, liquefied natural gas production is still a relatively new industry. Overseas, the production of LNG has been going on for years. Here in Australia you can count on one hand the number of LNG terminals that we have.

There are just the two. One is based in Karratha to service the North West Shelf off Western Australia. The other is a ConocoPhillips facility in Darwin.

But the investment I've tipped to ASI readers isn't in either of those areas. That's because all the new investment in LNG is happening in Queensland. And it is thanks to the investment that explorers have been making in coal seam gas (CSG). There are at least four new LNG terminals proposed for construction at the Queensland port town of Gladstone.

The first new entrant to produce is likely to be one of the eventual winners in this new industry. The company I like the most is scheduled to be the first to get its LNG terminal ready for business. In addition, its LNG plant will be operational at least three years in advance of the competition. That's a significant head start, or first-mover advantage if you will.

So, why is now the time to be getting into LNG? And why am I recommending it in ASI and not our resources newsletter Diggers & Drillers.

On-shore and unconventional LNG product (coal-seam-gas) is virtually an untapped market in Australia. The opportunity for large-volume, high-dollar exports is enormous. It falls clearly into the category of a high growth play, even though it's what you might call a traditional "extractive" industry.

Australian companies haven't entirely sorted out the economics of the LNG market, on both the cost and revenue side. But it's the revenue side that makes it so appealing for small cap punters. According to industry sources, if the LNG industry develops successfully in Australia it could generate $20 billion in total exports by 2017.

Let me put that in perspective. By the time the production of this product peaks in Australia it could quite easily be our most lucrative money-winning industry in the coming years. Right now, coal and iron ore between them churn out nearly $30 billion a year in exports. Those exports are the profit lifeblood of household Australian names like BHP, Rio Tinto, Fortescue, and Macarthur Coal.

You're talking an industry that could be bigger than the ones that built BHP and Rio. That's why I believe the single most exciting industry for smaller companies is energy.

But don't just take my word for it. Robin West, chairman of consultancy firm PFC Energy, told the Financial Times last year that "Australia's gas reserves are potentially the biggest OECD gas reserves left in the world and are not subject to the same political constraints as non-OECD reserves."

And because of the expected growth in demand for gas, along with the maturing of many overseas gas fields, international companies are eager to get a slice of the action here in Australia. Not wanting to miss out, domestic companies are also keen to exploit it.

You only have to look at some of the recent corporate transactions in this area. You'll remember the USD$5 billion investment by US energy giant ConocoPhillips in a CSG joint venture with Origin Energy. And UK based BG Group's $5.6 billion takeover offer for Queensland Gas.

That is why Australia has the potential to become a major and important global supplier of LNG, and that's why I have recommended ASI subscribers invest in two of the best small cap LNG companies Australia has to offer.

Kris Sayce

for The Daily Reckoning Australia

Editor's Note: Kris Sayce is the editor of the Australia Small Cap Investigator. For more on his research into LNG stocks, go here.

• LNG – The Energy Play for 2009
• Uranium: A Carbon-friendly Substitute for Coal
• Gorgon LNG Deal with China a Really Big Deal
• Queensland Govt Chooses Coal Seam Methane Over Resource Boom
• Australia Presents Investors With Great Portfolio of Energy Choices

True, a big barrel of West Texas Intermediate crude oil might be hard to fit under a Christmas tree. And it's probably a fire hazard. But it also makes an excellent end table or lectern. However, we would wait for the post-Christmas sale, or maybe even until 2009, for a lower price.

Speaking of Christmas, just a reminder that our third annual Doomer's Ball is tomorrow night. The location is BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30 p.m. until later. There will signs directing to the right room and even be a red carpet, we hear. If you've RSVPd, there will be a check in desk where you can pick up a name badge at your ticket for a free drink . See you then!

Today's AFR reports that Australia has a funding gap. The credit crisis is causing foreign banks to pull up stakes, pack up their cash, and head back to wherever they've come from. The AFR reckons about $50 billion in lending will have to be replaced by Aussie banks.

Those banks, by the way, may not be so keen to make new loans. ANZ boss Mike Smith was in Melbourne Friday swinging the axe. Eight hundred heads toppled from their shoulders by the time he was done. If the banks do as good a job deleveraging their balance sheets, things might start to look better in 2009.

You'd expect job losses and a bad year for stocks to impact consumer confidence and spending habits. You'd be right. Australia had a $20 billion current account deficit in March, according to David Uren in today's Australian. That was seven percent of Aussie GDP and pretty remarkable for a country in the middle of an export boom.

Now, though, consumers are rolling back their spending ways. The weaker Aussie dollar makes imports more expensive. The current account deficit has halved to 3.2% of GDP. This probably isn't great news for retailers. But if household's rebuild their balance sheets on savings, it's not a bad development.

Over the long run, in fact, an increase in the savings rate increases the amount of credit banks can lend to businesses. Household savings are the source of bank deposits. And in a fractional reserve banking system, every new dollar deposited is multiplied into ten dollars that can be lent. If the banks are lending, that is.

Christmas has come early for Leighton Holdings (ASX:LEI). Dubai's Department of Civil Aviation awarded Leighton's Middle East operation a $1.3 billion airport contract. At $21.31, Leighton is not selling for much above its 52-week low of $18.68. It trades at just 10 times earnings. Is it a buy?

That depends on whether you think countries like Dubai are going to keep building and spending. Dubai has the money, generated from the oil trade. And it's in the middle of an ambitious project to turn oil money into the capital stock of a new economy, via tourism, finance, and trade. But it could also be just another example of the credit bubble.

Take away Western demand fuelled by credit, and the world needs less oil. Ironically, this actually accelerates the rate of depletion in global oil fields. How? When a good falls in price, people tend to use more of it. The cheaper it is, the more you use it. But wait. There's more.

While cheaper oil prices in 2009 accelerate the depletion rate by encouraging more use (and lulling us all into a false sense of oil security) they also discourage smaller firms from going out and finding more. The majors are always looking for oil. They have to constantly replenish reserves to match production, or the stock price falls. But what about all the other searchers and explorers. Will they keep looking for oil with the price at $40?

In America, Barrack Obama is already busy spending money America doesn't have. And he hasn't even officially taken office yet. Impressive. Obama is dusting off construction plans for bridges, highways, and schools that he says are "shovel ready." That means all the blue prints and plans are drawn up. They just need men, machines, and money.

America doesn't have the money. But that has never stopped anyone with a can-do attitude. Obama says we can't worry about the deficit in the short term. Right. It doesn't look like anyone has been worried about the deficit in America for a long time.

Dig a hole. Fill it up. We're not sure where we heard that. Maybe it's a Buddhist way of dealing with stress, and realising...something. But we get the feeling a lot of holes are about to be dug across the world. And most of it will be paid for with borrowed money.

But who will be doing the lending? So many new government bonds are going to hit the market in the next year from the U.K. and the U.S. that you wonder if the world's creditor nations aren't starting to get a bit nervous. What happens if they balk? Interest rates should rise.

That's not happening yet. Just the opposite. "Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt," reports Bloomberg. And get this. The yield on three month T-bills is a sparkling 0.01%.

Hear that sound? It's the sound of the bond bubble stretching to historic levels. Cover your ears.

Dan Denning
for The Daily Reckoning Australia

• Unemployment Set to Rise by Christmas
• The Most Foreboding Christmas Season in History
• Obama Admits: America is Out of Money
• Crude Oil Could Hit $200/Barrel
• OPEC May Cut Oil Production

It's an ambitious project too. The project includes a 10 million barrel per year (30kbpd) open cut mine and a 560 megawatt power plant. Altona Chairman Chris Lambert told investors the project could provide both base-load power to SA and diesel fuel. He says SA has, "a significant looming power deficiency and currently imports all of its distillate requirements."

Nuclear, geothermal, coal, solar-thermal...what's it going to be Australia? The energy to run Australian industry has to come from somewhere. And that somewhere is going to be influenced by whatever the price of carbon ends up being once the government gets its scheme in place.

Meanwhile, perhaps following Worley Parson's (ASX:WOR) lead from last week, West Australian Premier Alan Carpenter said, "Us too!!" yesterday in announcing plans for an electric power grid in the Pilbara. The plan calls for 6,000 megawatts of capacity to be installed by 2015. It would replace the current on-site and private system whereby mining firms provide their own energy from diesel generators or dis-integrated power plants.

Just a reminder that we'll be out in Geraldton next week-unless we are disinvited-to take a look at things and give a keynote address at the Midwest Resources Forum. We'll let you know what we find out.

Dan Denning
The Daily Reckoning Australia

• China as a Nuclear Power Play
• What Makes the Wheels on a Bus Go “Round and Round”? Electricity!
• Latest Energy Bull Market Won’t Be Confined to Crude Oil
• Riding the Bear & Deep Drilling in Australia
• Worley Parsons (ASX: WOR) Announces Pilbara Solar Energy Project

We hope you don't mind that we've modified the old saying, "How do you know when a politician is lying?" "When his lips are moving," is the answer. But no one is surprised with lying politicians anymore. Yet despite their worst efforts, politicians can still surprise us with astonishing levels of stupidity.

For example, Maurice Hinchey, a U.S. Congressman from the great state of New York has offered a solution to the oil crisis: nationalise the refineries! Hinchey told a press conference in Washington, DC, "We (the government) should own the refineries. Then we can control how much gets out into the market."

Yes, yes Congressman. Simply press the "on" button and the oil flows. It's magic. That's the great secret the oil industry doesn't want you to know...oil comes from belly of a giant metal machine.

How incompetent are Western policy makers on energy? The first step on the road to incompetence begins with economic illiteracy. Controlling the "means of production" (to borrow a phrase from Mr. Hinchey's intellectual inspiration Karl Marx) does not guarantee that things actually get produced. It just guarantees lower investment over time and ultimately, a poorer country.

Real economic production requires labour, capital, capitalists, and resources. Capitalists invest in new projects because they expect a return. If there is no return, or the government threatens to nationalise the assets, you'll see a lot less investment. America is fast become a land that Vladimir Lenin would be glad to call home.

How big of a moron do you have to be to realise that oil is not "made" at a refinery? Technically, crude oil is refined into different types of fuels at a refinery. But oil is "made" by nature. To find it, you drill for it. Maybe Congressman Hinchey should support lifting the restrictions on off-shore drilling in the U.S. But then, that would actually help solve the problem.

Unfortunately, stupid politicians are not a uniquely American phenomenon. You have them right here in Australia. Green's Senator Christine Milne told the press, "Coal should be left in the 20th century while the rest of us move into a clean future." Apparently, the Senator wants us all to return to the Stone Age, where no one uses coal or oil and we all live in huts, eat grass, and worship cloud formations.

If the Greens were being honest, they'd call themselves the Reds. Good marketing though. Everyone likes green. It's not a colour you normally associate with Totalitarianism and the relentless meddling of the state in your private life.

What serious analyst of the modern world would suggest that we can run our economy without coal? Does the Senator know that Australia gets 80% of its electricity from coal? Her comments wouldn't be broadcast on the airwaves without coal. Hey wait...maybe she's on to something...Hmm.

Dan Denning
The Daily Reckoning Australia

• Rising Coal Prices to Increase Electric Bills in Australia
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• Queensland Govt Chooses Coal Seam Methane Over Resource Boom
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Australia gets 80% of its electricity from coal. That's because the country has a lot of it. But there are two reasons why your electric bill could be going up.

First, global coal prices are headed higher. Electricity producers - unless they own coal - will pay a higher market price for brown and black coal. Already in the States electric utilities are looking to hike rates as much as 29% thanks to the doubling in coal prices and the 50% gain in natural gas prices.

The second shoe to drop on your wallet could be an eventual carbon trading scheme in Australia. Utilities will pass the cost of producing carbon friendly electricity right on to the consumer. Electricity, like coal and gas, is due for a structural revaluation higher. Electricity may seem like magic, but everything comes from something, and for everything, there is a price to be paid.

For better or worse (and we'd argue it's been for the better) the world has sunk 100 years of capital investment into an economy built on oil and energy. You can't just switch to renewable or electric cars over night. And even if Toyota and Honda build millions of new fuel cell or hybrid cars that you can plug in and recharge, the juice has to come from somewhere.

Right now, that somewhere is coal. You can't easily switch to a new fuel source any more than you can pour a new foundation for your house... while still living in the house. On the flip side, with rising coal prices... what a great time to be an investor in coal shares.

Dan Denning
The Daily Reckoning Australia

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