Britannia Radio

The Daily Reckoning Weekend Edition Saturday, January 29, 2011 Baltimore, Maryland ------------------------------------------------------- Puru Saxena on how 'Peak Oil' will affect the future of the energy market... Plus, all the reckonings from the past week, bundled for your convenience... ------------------------------------------------------- Now You Can Beat the Bastards at their Own Game... Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch the new presentation now. ------------------------------------------------------- [Joel's Note: Your editors are making their way back to their respective homes after a productive week back at Agora Financial's H.Q. in Baltimore. We've got plenty to share next week...so stay tuned. In the meantime, please enjoy the musings of the always thought-provoking Puru Saxena, reporting from Hong Kong...] Welcome, 'Peak Oil' By Puru Saxena Hong Kong, China The day of reckoning is approaching and the world does not have a contingency plan. The truth is that the world's output of conventional crude oil peaked in 2005 and global oil exports are also past their prime. Furthermore, the unconventional sources (tar sands, heavy sour crude, ethanol, natural gas liquids, bio-fuels and shale) are struggling to keep up with the ongoing depletion in the world's largest oil fields. Therefore, it is probable that the world's current production of total liquids is at or near maximum capacity. Veteran clients and subscribers will recall that we have been extremely concerned about 'Peak Oil'. However, for many years, ours was one of the lone voices in the dark. It is interesting to observe that up until 2007, various government sponsored energy agencies were extremely optimistic about their oil production forecasts. In fact, before it commissioned its first field by field analysis in 2008, the IEA used to claim that the world could easily produce over 110 million barrels of total liquids per day! Ironically, other agencies such as CERA and the EIA were even more liberal with their oil production projections and 'Peak Oil' was dismissed as a lunacy. Thereafter, in November 2008, the IEA released its World Energy Outlook 2010report, which contained a thorough analysis of the world's 800 largest oil fields. In this study, the IEA admitted (for the first time) that most of the world's largest oil fields are depleting at a rapid clip and serious capital spending is essential to avoid an energy crunch in 2020. Although this report was a step in the right direction, in our view, the IEA was still painting an unrealistic picture. Fortunately, it has taken the IEA only two years to realise its mistake and its latestWorld Energy Outlook 2010 report presents a far more realistic scenario.According to its latest study, the IEA now expects global total liquids production to increase to just 96 million barrels per day by 2035! Bearing in mind the fact that the world currently produces 88 million barrels of total liquids per day, the IEA is now essentially implying that output will only increase by 9% over the next 25 years! It is notable that in 2009, the IEA stressed the importance of oil for economic growth and concluded that 106 million barrels per day will be required by 2030; representing an increase of approximately 18 million barrels per day above current output. Interestingly, in last year's report, the IEA predicted that global production will peak at only 96 million barrels per day in 2035! So, within the course of a single year, the energy watchdog for the developed world lowered its production estimate by 10 million barrels per day! To complicate matters further, the IEA's latest forecast of 96 million barrels per day of peak production depends on the assumption of finding an extra 900 billion barrels of oil over the next 25 years! However, given the fact that over the recent past, we have managed to discover only 10 billion barrels of oil each year, we cannot help but take the IEA's rosy forecast with a pinch of salt. Call us skeptics, but at the current rate of discovery, it will take us 90 years to discover 900 billion barrels of oil. Yet, the IEA somehow believes that this task can be accomplished by 2035! The chart below is taken from the IEA's World Energy Outlook 2010 report and it does a good job of capturing the sorry state of affairs. As you can see, the IEA now expects the output from the currently producing fields (dark blue area on the chart) to drop from approximately 70 million barrels per day to only 16 million barrels per day by 2035. Furthermore, the IEA also believes that 60% of oil production in 2035 will come from oil fields not yet found (light blue area on the chart) or developed (grey area on the chart)! Once again, call us skeptics, but we do not believe that oil fields yet to be found or developed will somehow succeed in offsetting the ongoing depletion. It is our contention that the world will struggle to produce more than 91-92 million barrels of total liquids per day and global demand will collide with available supply. Of course, we do not know the exact timing of this event but if global consumption continues to grow by 1.5% per annum, we will get there within the next 2-3 years. Needless to say, when aggregate demand hits available supply, the price of oil will rise sharply. More importantly, if demand continues to increase in the developed world, there will be a permanent shortage of crude and governments will probably end up rationing petroleum. Furthermore, it is our firm belief that ultimately, oil will only be used for its highest uses (agriculture and aviation). If history is any guide, the price of oil will not rise in a straight line and the secular uptrend will be punctuated by severe economic recessions. After all, the cure for a high oil price is a high oil price! At some point during the course of this business cycle, as the price of oil continues to rise, it will (once again) cause economic pain for the overstretched citizens of the developed world. When that happens, consumption will slow down and we will experience demand destruction in some parts of the world. In our view, the next economic recession will be caused by yet another spike in the price of oil and during the next business slowdown, crude will get whacked again. This is the reason why we will liquidate all our energy related investments prior to the onset of the next economic recession. Turning to the current situation, the price of oil is trading around US$90 per barrel and during the course of this business cycle, we expect it to surpass its previous record of US$147 per barrel. In addition to crude oil, we are also optimistic about the prospects of uranium. As you may know, various nations are scrambling to build new nuclear reactors and this is good news for uranium (raw material used for a nuclear reaction). As the world approaches 'Peak Oil' and crude is conserved, demand for electricity will surge. Either that or the world will go back to horse drawn carriages, which we seriously doubt! Furthermore, given the environmental damage associated with burning poor quality coal, the world will turn to nuclear energy to meets its energy needs. Therefore, worldwide consumption of uranium will appreciate over the following years and this will exert enormous pressure on mined supply. At the time of writing, the price of uranium has climbed to US$61.5 per pound and it is probable that it will at least double from this level. In the previous cycle, the price of uranium peaked around US$140 per pound and we will not be surprised to see that level exceeded within the next 2-3 years. Such a bullish scenario for uranium is great news for the unhedged uranium mining companies and a modest exposure to these stocks seems like a reasonable bet. In summary, given the reality of 'Peak Oil' and our bullish bias, we have allocated approximately 30% of our clients' capital to those assets which will benefit from the looming energy crunch. At present, we have exposure to upstream oil companies, integrated energy giants, oil services firms, renewable energy stocks, uranium and electric car/rechargeable battery manufacturers. It is our contention that these businesses will prosper over the following years, thereby rewarding our investors. Regards, Puru Saxena for The Daily Reckoning Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here. Puru is also the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. ------------------------------------------------------- Why China Is About To Bring America To Its Knees... The world is 97% dependent on supply of these little-known resources from the red dragon. At stake is America's ability to create cell phones, hybrid car batteries, even our high-tech military equipment... They are about to shut supplies of this vital resource off from the rest of the world... FOREVER! Click here to see how to make 8,577% gains or more from the greatest global supply squeeze in modern history. ------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... Food Crisis II By Chris Mayer Gaithersburg, Maryland A story I've been warning about for years is making sensational headlines right now. It's a story most people don't realize could make a huge impact on all of our portfolios in a number of ways. "US Crop Stock Forecasts Deepen Fears of Food Crisis" read a recent Financial Times headline. The US government cut its estimate for key crops. This came only a week after the UN warned the world faces "food price shock." Corn and soybean prices jumped and now sit at 30-month highs. Inventories are very tight. Corn is up 94% since June! Gold, More Relevant Than Ever By Charles Kadlec When Chinese President Hu Jintao visited the White House Wednesday, President Obama made sure to raise the contentious issue of currency values and press the Chinese leader to allow the renminbi to rise against the dollar. Not least among the reasons given was China's $226 billion trade surplus with the US. Time to Buy Gold Stocks...Again By Dan Amoss Jacobus, Pennsylvania It's time to buy gold stocks. Top-down "macro" analysis indicates that the bull market in gold stocks still has a long way to go. And bottom- up analysis tells me that gold stocks are cheap. Inflation: Inevitable...But Not Predictable By Bill Bonner Baltimore, Maryland Government is not like science or technology - where we build, intentionally, on past experience to create something that becomes better and better over time. Instead, it is rather like an evolutionary development...that often ends with extinction. 'Fear and Love Make Gold Strong' An interview with Frank Holmes, by Jeff Clark "Fears over the European debt crises were a big driver of gold in the first half of the year, as investors bought both gold and the dollar for safety. However, by mid-year, the dollar started to break down as smoldering budget woes in the U.S. began to reignite concerns over the fiscal situation here." ------------------------------------------------------- Welcome to the "Next Net" - It's About To Change Lives and Could Build Fortunes... You simply cannot afford to miss this groundbreaking report... Today's Internet is obsolete! New breakthroughs are building speed! Huge wealth potential! Get all the details right here... ------------------------------------------------------- The Weekly Endnote: And the inflation emails continue to flow. We've now received frontline reports of price creeping from six continents... Keep 'em coming...and keep an eye out next week for more reader mail on the most destructive tax of all... And on that note, enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Have You Heard of the OTHER Government Backed "Pension Program?"