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The Daily Reckoning | Monday, July 26, 2010 If gold really is going down to $850, is it time to sell? Why one expert says we'll never see oil in the $70-$80 range again, Plus, Bill Bonner's "soft-core deflationist" position and much more... The Troubling Truth About Future Oil Prices And why the end of "cheap oil" has nothing to do with supply Bill Bonner Somewhere over Canada's western planes... Ooowee...ain't the mornin' light pretty When the dew is still heavy So bright and early My home on the range It's a one-horse town And it's alright with me - Greg Brown, "Early" We are flying over western Canada, on our way back to Paris. We already crossed the Rockies. Below us now is a patchwork of rectangles and squares. They are either light green...some more blue-green...or pale greenish yellow. Dotted with lakes and crossed by roads, the place looks flat and forlorn. What do people do down there? They are farmers, of course. But do they live in those tiny boxes on the edges of the squares? And do they get in their pick-up trucks and drive somewhere? Where do they get supplies? Where do they go to restaurants and bars? We see no sign of any towns...just long lonesome roads leading as far in the distance as we can see. There are no trees. No hills. No parks. No towns. We've been flying for about half an hour over this section, at more than 500 miles per hour. Down below is an area still laid out in squares...but with no sign of any crops. It looks like a wasteland. Still no town. Where do they shop? Where do they get their trucks fixed? How do they keep from going mad? How much money do they make? Do their wives leave them for fertilizer salesmen? Do their daughters run off to Winnipeg? Maybe they make so much that they don't mind the isolation. They plant; they harvest; and then they go back to Miami for the winter months. Or maybe they get together with neighbors and carry on a lively social life...with local bands, dancing 'til midnight, champagne breakfasts and wife-swapping? Who knows. Wait...maybe that's a town. Or a junkyard. Or a graveyard. We can't tell. A collection of shiny things...maybe 5 or 10... Nothing is moving. In fact, we haven't seen a single automobile or tractor in motion. It looks to us as if there is nothing to do down there but get in your car and drive around, but no one is doing even that. Alert the Mounties. Something funny is going on down there.... Maybe the whole area has been taken over by zombies. But we're going to have to interrupt our travelogue and get back on the job. Our beat is money. Economics. Finance. On Friday, stocks went up another 102 points on the Dow. Gold dropped $7. Oil finished the day at $78, about where it began. Many analysts think they see the end of the stock market's funk. Others think this is just prelude to another drop. We spent the last week listening to Marc Faber, Chris Mayer, Doug Casey, Porter Stansberry, Eric Krause and others in Vancouver. (What a nice city. Snow capped mountains. Beautiful harbor. Clean. Lively. Attractive. You'd hardly know it was North America.) What did we learn? Probably the thing that made the most impression on us was the discussion of the oil market. The facts are fairly obvious. The world is producing less and less oil. Meanwhile, it is consuming more and more oil. If the law of supply and demand is still the law of the land, the price of oil will rise. This was the point made by Byron King, Rick Rule and Marcio Mello. We analysts may not know much - or be able to forecast very accurately - but unless some 'unknown unknown' appears, we're going to know higher oil prices in the future. "We will never again see oil in the $70-$80 range," said Mello several times. "It's not that we're running out of oil geologically or physically," Rick Rule added. "It's just that we're out of $40 oil. The cheap oil has been pumped. Now we're forced to go deeper and extract oil under more difficult, more expensive conditions. "It's the $40 oil that is disappearing. There's still plenty of $200 oil." The Daily Reckoning Presents Too Much Debt, Not Enough Oil Byron King I just returned from the 2010 Agora Financial Investment Symposium in Vancouver, B.C. This year's theme, "Assault on Enterprise," provided a fascinating context for a wide range of investment insights and recommendations. According to many of this year's presenters, the assault on American enterprise is intensifying. Because the government has been overpromising, overcommitting and overspending for decades, it is hurtling toward a fiscal train wreck. The numbers have stopped adding up. Looking out, there's NO WAY that most Western governments can ever pay their ongoing obligations or pay off past debt. But that doesn't mean that governments won't try to maintain their expensive and intrusive invasion of the private sector. In fact, the odds point to rising taxation and tightening strictures on all aspects of capital formation. The effects will be to make you poorer, either by taking your money or by blocking you from pursuing your dreams. On the first day of the Vancouver conference, for example, former US comptroller of the currency David Walker summed things up, saying, "Government has grown far too big, promised far too much and delivered far too little for far too long." Mr. Walker backed up his claim with slides showing how, over just the past nine years, unfunded liabilities on the government's balance sheet - Social Security, Medicare, Medicaid, etc. - have tripled. For example, Medicare alone has a $38 trillion ("trillion," no typo) hole in its future. Meanwhile, according to Mr. Walker, Social Security is now cash-flow negative. That is, Uncle Sam is paying out more out than he receives in revenues. Uh-oh. So where does the "extra" money come from? Out of general revenues. Which means that the federal deficit makes up the difference. Which means that the government just borrows the money and papers over the hole in the budget. On this track, the nation's key social safety net - a "retirement fund" (ahem) for elderly people - is moving further and further into the red, forever. What's the answer? Well, you could ask the always understated Doug Casey. In Doug's view, it's all good - for the moment. That is, he believes we're in the midst of a "Greater Depression" and right now we're basking in the calm eye of the hurricane. The problem, according to Doug, will come when we go through the eye and get hit by the other side of that storm. But Doug is not one simply to identify a problem and fail to offer solutions. Indeed, he shared five ways reduce the inevitable damage: Abolish the Federal Reserve and return the US to a gold standard. Reduce government spending by about 95% - give or take. Withdraw US troops immediately from across the world, and end the ongoing wars in which the US is involved. Abolish the income tax. Do the "honest, ethical thing" and default on national debt. "After all," says Doug, "We're never going to pay it back. Or if we do, it'll be with dollars that are utterly worthless." Sad to say, according to Doug, none of this will happen. These proposals are mere "pipe dreams," he admits. "The government is doing the exact opposite," says Doug, despite the clear evidence that "the very idea of the nation-state - which has been around only since the 17th century - has failed." Thus, instead of a somewhat orderly, controlled financial collapse as governance across the world restructures, we'll experience the chaos of decline and collapse. Doug's recommendation? For the individual, buy gold and silver. Doug is also big on productive agricultural land - in remote parts of the world, far from the looming unpleasantness. Otherwise? Well, you just have to do the best you can. Gloomy, right? In my mind, "provocative" is more like it. That is, if there's one thing that Doug Casey can do, it's push the edge of the intellectual envelope. There's no failure of imagination with Doug and his views of where the economy is headed. In my talk to the 1,000 or so Vancouver attendees, I discussed the failure of imagination that brought about the explosion and sinking of the Deepwater Horizon (DWH) and the subsequent well blowout in the Gulf of Mexico (GOM). I noted that when I was in Houston in May for the Offshore Technology Conference, I had a discussion with some people from the maritime insurance industry. One guy told me that before the DWH exploded and sank, the insurance industry rated the risk of such an event as zero. Zero? As in no large deep-water drilling vessel would ever sink. "We thought it could never occur," he said. "Never." In my talk here in Vancouver, I analogized how that sort of failure of imagination was right up there with the idea that the Titanic was unsinkable. Thus did the British Board of Trade not mandate enough lifeboats on the vessel. I looked back at two other disasters, both in January 1969. I reviewed the terrible fire aboard the nuclear-powered Navy aircraft carrier USS Enterprise on Jan. 14 of that year. The flight deck was an inferno, with 500-pound bombs cooking off. Dozens of sailors were killed, with hundreds more injured. The ship suffered severe damage, and for a time, there was a distinct possibility of the vessel - and its eight nuclear reactors - sinking in the middle of the Pacific Ocean. Yes, heroic actions by the crew saved the ship. But it was a close call. Then I discussed the Santa Barbara, Calif., oil blowout about two weeks later, on Jan. 29, 1969. No lives were lost, but the environmental impact was severe. Political pressures all but closed off the West Coast of the US to future energy exploration. Out of these two disasters, the Navy, of course, kept on going with nuclear power, but with much-changed procedures to improve safety and harden against damage. The oil blowout was a key factor in the rise of the modern environmental movement. The offshore industry redoubled its efforts to drill safely, in deeper and deeper waters. For the past 41 years, since Santa Barbara, there was all that oil coming from offshore, and from deeper and deeper waters, and with equipment that seemed to work safely. It was, to go back to Doug Casey's notion, like being in the eye of a hurricane. Things seemed OK, for the moment. In a sense, looking back over the decades, it was almost easy to imagine big, expensive, well-built drilling rigs would never blow up and sink. It sure fooled the normally flinty insurance industry. Also, considering the track record of operations, it was easy to believe that deep-water wells would never blow out. It apparently fooled the engineering and regulatory community. Surely, no one was ready to deal with the current Gulf of Mexico blowout. As I've noted many times, in the past couple of months, we've witnessed decades of R&D all compressed into an emergency-level time frame. The hastily imposed GOM drilling "moratorium" is just one more energy problem for the US. It compounds an already dysfunctional national energy policy. It's as if we would shut down the entire airline industry just because one airliner crashed - due almost certainly to pilot error, by the way. The GOM drilling moratorium is terrible policy for medium- and long- term US energy production. We're already seeing rigs leave the GOM destined for other continents. We won't see those rigs back here for many years, most likely. And GOM oil output is now destined to fall, meaning that US oil imports will rise - if we can find the oil in a competitive world. Meanwhile, I discussed how some other energy sources might help the US, but with a hard cautionary note: These other energy supplies might not offer as much as many people believe. The short version is that there's not as much shale gas as people believe, although there are some great shale gas investments. And then I highlighted the promise of Canadian oil sands. Much of that was similar to what I said in the most recent Outstanding Investments issue, in which I introduced readers to Cenovus (NYSE:CVE), an up-and- coming oil sands producer. I'll amplify the Vancouver message of resource scarcity in future emails and Outstanding Investments issues. The times may be rough for debt-strapped governments, but there has never been a better time for identifying investment opportunities in the natural resources sector. Regards, Byron King, for The Daily Reckoning Joel's Note: As two members of a very small handful of optimists presenting at last week's investment symposium in Vancouver, Byron King and his special guest speaker, Marcio Mello, were crowd favorites among opportunity-seeking attendees. To listen to their electrifying presentations, see here. To fast track directly to Byron's exclusive Outstanding Investments email list, see here. Bill Bonner Soft-Core Deflationism Bill Bonner And the rest of today's thoughts... Eric Krause made the point that the news media has been brain dead about oil for years. He showed a cover of The Economist from about 10 years ago. It predicted a "flood of oil"...back when oil was priced at $10 a barrel. "The next week, oil dropped down to $9.95...then, it headed up. It hit $150 a barrel just two years ago." There are two major schools of thought on what is coming next...and two renegade, home-schools too. There are those who believe we have a recovery...though weak...that will continue and eventually bring the economy back to health. This is the line of the Obama Administration and most mainstream economists. Then, there are those who think the recovery will not come as planned...and that the feds' efforts to spur a recovery - along with strong demand from Asia and the emerging markets - will lead to higher levels of inflation, destroying the dollar and bonds. This is what Marc Faber expects. He urges listeners to avoid going too heavily into cash, since it might be the number one victim of inflation. Instead, you'll do better in stocks and real estate, he says. A third line of thinking is what Faber calls "hard core deflationism" - typified by Robert Prechter and Gary Shilling. They think the de- leveraging trend will be catastrophic - leading to outright deflation, taking the Dow down below 1,000, for example. Then, there's The Daily Reckoning line. You can call it "soft-core deflationism": 1) There is no recovery; there won't ever be a recovery 2) The de-leveraging period will be longer and harder than people expect...leading to spells of deflation and double...triple...dipping 3) The feds will fight it with every weapon available 4) However, they will not push the 'nuclear button' - wanton, reckless money printing - until the bond market cracks 5) It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation; at least, not soon. 6) The dollar will remain strong. Bonds will go up...for now... 7) The Dow will fall...but not below 1,000...probably not below 5,000 What does that mean for gold? Well, it means gold won't do spectacularly well. It might decline...say, down to $850 or so. Eventually, the bull market in gold will resume, however. You can't keep a good metal down. Just don't expect it to go up dramatically while the private sector is reducing its debts in an orderly fashion. Does that mean you should sell your gold? We wouldn't if we were you. Because something could go very wrong. Another big bank failure. A blow-up in China. It wouldn't take much to cause a panic. Investors could turn to gold for security. Or, maybe the feds will panic...and dump dollars from helicopters as Ben Bernanke threatened. Besides, we could be wrong. Predictions are always difficult to get right. Especially when they're about the future. Regards, Bill Bonner for The Daily Reckoning