Yet there are many other uses for oil-plastics for example. If we try to solve the energy problem with increased oil production, we'll just buy ourselves some more time. But eventually, demand will exceed supply, or prices will rise so high that an economy based on cheap energy will perish from the earth.

There is no single easy alternative to getting fuel from crude oil. We reckon the world needs to spread its bets in a portfolio of energy experiments that not only produce fuel from different sources, but also take advantage of an entirely different energy architecture.

By that we mean a system which produces energy that's different from the centralised generation and distribution model we use know. For example, if you're going to run cars on electricity, there are many ways of generating electricity at the household level and not relying on more coal-fired plants. Or maybe you don't have a system that uses cars. Maybe people live closer to work and drive less.

We won't go into the gory details. Suffice it to say that sussing out the world's next energy architecture-and the technologies and companies that will make it work-is what we do more or less full time at the Australian Small Cap Investigator. We think trillions of dollars in new capital investment will be thrown at the energy problem. Much of it won't produce any new energy, or any returns for investors. But some of it will.

And don't forget, all hydrocarbons are a form of stored solar power, or solar income as the saying goes. Oil and coal are decayed plant life. Plants get their energy from the sun. The sun shines down on us (or somewhere) all the time. The great energy challenge is to increase our ability to turn sunlight into energy without having to wait millions of years for plant life to turn into black goo.

The efforts to turn Canada's tar sands and Colorado's oil shale into energy are really just efforts to speed up what would happen naturally over time. But we don't have time. So we throw excess energy at the problem, trying to cook shale in situ or use huge quantities of natural gas to increase oil production via the tar sands. We don't have much excess energy, either.

Both processes use tremendous amounts of energy for a small net energy yield (energy returned on energy invested, or EROEI). Yet free solar income rains down on the planet each day. The sun is eight minute energy! We simply don't have an industrial system built to run off the modest amounts of energy we can convert from sunlight. We need a new system or a way to convert a higher percentage of sunlight into usable energy.

It's not the sort of thing you design on your kitchen table. It's the sort of thing that evolves out of necessity and experimentation. Its evolution obeys the same basic laws that govern the evolution of species…variation, mutation, adaptation. Australia has a wide variety of clever and well managed companies working on different aspects of the problem.

But in the big picture, we think human beings are pretty good at adapting when they have to. The alternative is non-survival, which also goes by the name of death. True, civilisations seem to through a life cycle of their own. And perhaps this oil-based one is past its prime. People are quarrelsome and stupid. We may not adapt our way out of this problem before it overwhelms us. But it would be unnatural not to try.

Dan Denning
The Daily Reckoning Australia

• We Are Facing a Global Oil Crunch
• Worley Parsons (ASX: WOR) Announces Pilbara Solar Energy Project
• Crude Oil Becoming Much Harder to Find
• Electricity Crisis is Coming
• The Energy Resources Are Out There

"The World Bank met on Sunday faced with a mounting food price crisis that has sparked deadly unrest in developing countries, underscoring the urgency of fighting hunger and poverty," reports Channel News Asia.

How urgent, you ask? The Prime Minister of Haiti was sent packing this weekend by crowds protesting soaring food and fuel prices. We don't even know who the man is but reckon he won't be the last public official to be ridden out of town on a rail before this current crisis is over (and it may not be any time soon).

As usual, it's the people at the margin (whether lending or with food) that are affected first when surplus turns to scarcity. Despite all the daily signs of abundance here in Australia, let us not forget that there are about four and half billion people on the planet who have little margin for error in their daily lives. If food prices go up, many of these people go hungry.

World Bank President Robert Zoellick, doing his best impersonation of Franklin Delano Roosevelt, wants a "new deal" for global food programs. He's asked richer nations to contribute US$500 million immediately to help get food to poorer nations.

IMF President Dominique Strauss-Kahn was less pragmatic but more rhetorical. Wrapping up his organisation's annual spring meeting, he said that, "Food prices, if they go on like they are doing today ... the consequences will be terrible…Hundreds of thousands of people will be starving…As we know, learning from the past, those kinds of questions sometimes end in war."

People often talk about resource wars being a common feature of the coming century (or decade). But it's usually oil and energy they're talking about, not rice and wheat. Food is fuel for the body (we've been watching the Biggest Loser). If you don't have access to cheap calories, what good is cheap fuel?

It's our contention here at the Daily Reckoning that both food and fuel are getting more expensive. The scary thought is that artificially low interest rates and cheap energy have, for many years now, sent bogus signals to the world about how much and how fast the population can grow. Agricultural abundance is only a very recent (and perhaps temporary) historical phenomenon. It's no coincidence that it occurred alongside the energy boom from cheap oil.

Not that it's any consolation to starving people stranded in long petrol lines, but businesses in the agricultural sector are going to boom (provided they aren't nationalised). Farm equipment, fertilizer, and large producers should all see earnings rise this year. And next year. And the year after that.

The second "f" crisis is in finance. It's been with us so long now it doesn't seem like it's new. But some people are slow on the uptake. The nerve endings of large institutions like the IMF and World Bank are few and far removed from the tiny central brains that direct the movements of these mammoths. Brontosaurus Banks.

Like a bunch of dinosaurs standing under a meteor shower, the G-7 meeting this weekend produced lots of talk and no action. The ministers agreed that concrete steps need to be taken in the global financial system to improve transparency and the way the banks value certain assets. The G-7 statement also paid lip service to issue of credit ratings and how to make sure in the future that garbage debt doesn't get a Triple A investment grade rating.

Here's the trouble though…American policymakers are worried about recession and plunging house values. Everyone else-especially the increasingly sweaty Wayne Swan-is worried about inflation. Because of the different concerns, no one can agree on any policy solutions.

The conclusion? There is no one solution to the credit crisis. That is bad news for people who think of the economy like a machine. It's not just a matter of changing the oil or checking the fuel pump. The engine is sputtering, the drive train is wrecked, the tires are flat, and someone seems to have cut the brake lines. There are no air bags.

As they say in the used car business, it's not the years, it's the miles. You wonder if this globalisation jalopy is going to make it.

As for the dollar, Europe would like it to be stronger in order to revive its exports. Dollar-pegging countries in the Persian Gulf would like the dollar to be stronger too, so they don't import inflation and the political instability that goes with it. Even Japan and China would like the dollar to be stronger. Dollar strength maintains the basic economic model of the last 50 years: manufacture cheap and sell to America.

But the dollar is not strong. And the things that would make it stronger-a lower trade deficit, higher interest rates, lower government spending-are not going to happen. In fact, the opposite will happen. While officials talk up a "strong dollar," everything they actually do weakens the dollar.

This is why the day-to-day movements in the dollar index and in gold don't tell you much. The most important fact about the gold price is that that the official policy of the U.S. government is to cheapen its currency. Rates are being lowered. The government is spending money. It's also giving away money, hoping Americans can spend the country out of recession.

Do you know of any person or any nation that ever spent its way to prosperity? Neither do we.

The fuel crisis hasn't reached the same acute stage as global food markets. But in time, it will. There were two developments in the clean coal front this that caught our eye this week. First, "Australia is now investing $63 million in developing clean-coal technology in China, our biggest coal buyer," according to Dennis Shanahan in today's Australian.

Making the last stop in his first world tour, Aussie PM Kevin Rudd told reporters made the case for an Australian Chinese partnership on coal, "The fact that Australia is the world's largest coal-exporting country, and that China is the world's largest coal-consuming country, presents both of us with a fundamental responsibility to act in this area of critical technology," he said.

You say "responsibility" we say "opportunity." Now that we are moving into a world of energy "haves" and "have nots," coal is a realistic source of transportation fuels for oil-poor, coal-rich nations. What coal-rich nations lack is the technology and capital to turn coal into liquid transportation fuel. Australia has several public companies that can help them do it. That's the opportunity.

The trouble with above ground coal-to-liquids (CTL) technology is that it produces nearly double the carbon dioxide emissions that you get from burning coal to make electricity. In the U.S., green politicians have actually prohibited U.S. government agencies from buying coal-based fuel with tax payer money.

The U.S. has plenty of coal. The Air Force would like private enterprise to turn that coal into fuel for U.S. planes. But California Congressman Henry Waxman introduced a provision into last year's U.S. Energy bill (section 526) that prohibits government agencies from buying fuels from "unconventional" sources.

Those "unconventional" sources are oil shale (the Pieceance Basin in Colorado), coal (the Powder River Basin Wyoming), and heavy oil sands (found in Alberta in Canada). Two U.S. Congressman are looking to repeal Section 526 from last year's U.S. Energy Bill and unlock the future fuel from those unconventional hydrocarbons.

Will the section be repealed? It depends on what you think about global warming. We won't weigh in here. Our main interest is in how governments respond to the dueling crisis of Peak Oil and Global warming.

The old "real politik" answer is to use your domestic resources to achieve energy security. This way you don't exchange your currency reserves for oil and outsource your supply of a vital industrial commodity to foreign interests. If you have lots of coal but no oil, you turn your coal into fuel.

But hey, if the planet is warming and coal is the culprit, burning more coal doesn't exactly make things better, does it? What do you do? Go nuclear? Conserve? Go renewable?

All of these options are on the economic table and an intelligent and prompt response is becoming increasingly urgent. You can bet that the government will do something, and probably the wrong thing. Meanwhile, our money is on the firms doing something with coal, wind, waves, and solar.

These three crises-food, fuel, and finance-are a formidable triply whammy for the global economy. It's bad news for the indexes, which already have plenty of bad economic news to consider. But for a certain class of agricultural and alternative energy firms, this could be the bull market of a lifetime.

Dan Denning
The Daily Reckoning Australia

• Technology Is Pushing Down Farm Prices
• Rising Coal Prices to Increase Electric Bills in Australia
• Thorium as a Nuclear Fuel
• Increased Oil Production Won’t Solve the Energy Crisis
• Are Farm Prices Destined to Rise as More People Compete for Food?

Energy prices work their way into everything - notably food, where the land must be tilled, planted and harvested with fuel-consuming tractors...and then, the tomatoes grown in the south of Spain have to be trucked all the way up to Northern Europe...and refrigerated...and sold in energy using stores, whose customers arrive in their energy-consuming cars to buy them.

But from the oil-producing nations comes news that there, too, inflation is hitting hard. In Saudi Arabia, for example, consumer price inflation was about zero for 10 years...but now is over 6% and rising.

"Oil boom shows a dark side," says the headline in the International Herald Tribune . The dark side is that the oil exporters not only sell oil...they use it too. And while the sheiks and sultans may have the money to keep their harems hot, the average Abdul on the street is feeling left out in the cold.

"Now we have to choose: We either eat or stay warm," says Abdul Rahman Abdul Raheem.

Back in the U.S.A, inflation is just what the doctor ordered. The old quacks that run U.S. monetary policy prescribe inflation as an antidote to deflation. Better to let the fever rise, than let the patient die, they say.

The death that scares them is the kind suffered by the Japanese economy after 1989. It was as if they had subjected the Japanese economy to waterboarding and forgotten to pull it up out of the water. The economy drowned. Even now, 18 years after the Nikkei Dow went under, the poor thing is still coughing up suds.

Which puts us in a helpful mood again. Last week, we promised some buy-side suggestions. Here's another one: buy Japan . Did we already give you that advice? We can't remember.

Here's the story in a nutshell: While credit and speculation ran wild in Britain and America - from the mid '90s to 2007 - the Japanese struggled to raise themselves up off the floor. Each time they tried, they just fell down again. The Nikkei Dow, once at 39,000, bounced around at the 12,000 - 15,000 level. Each time it looked like things might be looking up, wham...back down on the floor.

The latest bruises came in 2007. After getting roughed up for 17 years, finally, it looked like Japan, Inc. was back in business. And then, along came subprime and the worldwide credit crunch. Japan didn't have any subprime debt. Its bankers, investors consumers and businessmen had grown cautious and conservative over the years. In America, a downturn is believed to be temporary. Almost everyone believes it will be over by July. Some think it is over already - after only a modest pullback in GDP growth. But in Japan, people think a downturn is permanent. "It will never get better," they say to one another. "It will get worse. "

"In Japan, the opposite psychology [from the USA] has been in effect," writes Martin Hutchinson. "Japan was in deep recession for 13 years after its bubble burst in 1990, so traders and analysts had grown used to discounting the government's positive announcements as mere spin. When the subprime mortgage crisis occurred in August 2007, while U.S. analysts ignored the problem, Japanese analysts decided it must be very bad news for Japan, even though no Japanese banks had more than minor exposure to the market."

In America, investors ignore gloomy circumstance. In Japan, they pay attention to gloomy circumstances that don't even exist. So when the credit crunch hit world equity markets, it fell upon the Japanese like kamikazes on the U.S. fleet. Japan's great companies were sunk...with the Nikkei Dow suffering more than twice the losses of its American cousin. The Japanese stock market was the worst performing major market in the world - following the subprime crisis, even though Japan has no subprime mortgage debt.

"The market has discounted bad news that has not happened," Hutchinson continues, "and has ignored the continuing evidence of Japan's fairly strong growth and negligible inflation. Even a housing problem, that has led analysts to forecast a huge drag on Japan's economy similar to that in the United States, turned out to have resulted from new tighter housing permit regulations, which caused a dip in new construction that is already ending. There is no subprime mortgage problem - how could there be? The Japanese housing market had a catastrophic downturn in the early 1990s, when Tokyo house prices dropped in some cases by as much as 70%, so there was no possibility of a price spike or lending bubble against that background.

"With the market sharply down, the economy continuing solid (fourth quarter GDP growth was 3.7% double the forecast) and analysts negative, Japan appears a safe haven in an uncomfortable world. Certainly it is likely to lead the world upwards at the end of the current unpleasantness."

"My right flank is in retreat. My left flank is giving way. And the center cannot hold. Conditions perfect," reported French general Foch in WWI. "I will attack!"

Likewise, conditions are perfect for us in Japan. The foreign investors have given up. Domestic investors aren't interested. And stocks are trading at very low prices, with half the companies listed selling for less than book value.

Bill Bonner
The Daily Reckoning Australia

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