Light Speed Reversals

by Scott Causey, GWP Resource Correspondent

The world has never been faster than it is now. Technology permeates everything about our modern lives. The pace at which new technologies are brought to market is growing in an exponential fashion. From hand held smartphones that have multiplied the processing power in the palm of your hand, to the birth of green energy, technology gives people hope. Hope that the problems of today’s world can be solved through innovation and the brilliance of society’s best and brightest. In the long run, I have hope that it will occur. After the collapse…..

I think if most of us are honest enough with ourselves, certain truths will emerge. Only through great pain and suffering and/or fear will most people go away from what has made them comfortable in the past. As an example, my father had a massive heart attack last year. He was roughly 50 pounds overweight at the time. I had talked to my dad about regular exercise for 20 years. It was never a priority until his health tapped him on the shoulder and said, “What’s it gonna be?”. He has religiously exercised ever since.

We have had “leaders” in this country talk about deficits for decades. They did nothing. Talk about rapidly depleting oil resources, and they produce more, rather than less. Talk about a silver shortage in 1965, and then sell all stockpiles into the market for tiny fractions of what silver sells for today. Talk about peace and then go to war. What was left of capital markets died in 2008. The monetary defibrillator treatment works for a while, but structurally, nothing has changed. Debt is not solved with more debt, but this can-kicking will never end until one group of politicians is unlucky enough to be “IT”.

Does anyone have a memory long enough to remember when WTI oil hit $147 dollars a barrel just a couple of years ago? That same oil contract closed last Friday at under 90 dollars. So a barrel of crude, at least in US, has fallen by 57 dollars from the absolute peak. What hasn’t fallen is gasoline prices. We just set another all-time record high this weekend for gasoline prices in California. The statewide average for gasoline was $4.61 a gallon, with many cities reporting paying over 5 dollars. The national average is now $3.80, and rapidly gaining on the alltime high of $4.12 national average. The news stories in mainstream publications is that this is “transitory” and that the refinery capacity will be back online soon. From an investing perspective, who freaking cares? This is a structural problem that is going to get worse. There has not been a new refinery built in America since 1977!

Take a big step back and let’s consider that “conspiracy theory” might be “conspiracy fact”. We are literally standing collectively on a bridge that’s on fire with no transition in sight. Not only has crude oil production been completely flat since 2005 globally, what meaningful infrastructure or alternatives have been put into place? Absolutely nothing. Call me crazy, but I don’t count Solyndra as a meaningful breakthrough. Do cursory research on your own and you will find that the “Great White Hope” that is North Dakota Bakken Oil Production is not the answer to an ongoing energy crisis. Particular attention paid to current military occupations in OPEC nation states.

Print all the money you want to. Run deficits into quadrillions like a suicidal Japanese central banker. It’s all for nothing without a transition fuel, and it’s literally right under your feet. Natural gas prices have continually fallen lower and lower in the last 5 years, briefly reaching a ridiculous $1.71 per MCF. During this same time, oil majors around the globe snapped up these producing assets, only to see huge writedowns on their balance sheets as the price of the commodity continued to plummet. Fracking shale was a huge technological breakthrough for the energy industry. With chemicals and huge amounts of high pressure water in the drill bore, previously unrecoverable energy is now obtainable. Oil and gas.

This is not a panacea to recklessly use energy resources to maintain the current infrastructure. It is quite literally our last chance to get our sh*t together for a real energy policy in this country. The reason nattie is so cheap these days is because the new drilling technique in these rock formations allows for gargantuan flow rates for the first two years of the life of the well. After that, the decline rates are equally gargantuan. So while it may look like we are swimming in forever cheap natural gas, take the longer view. When oil was first discovered in North America it took 1 barrel of oil to produce 100 barrels. That one barrel was consumed to find, extract, and process the crude. By comparison, tar sands from Canada, which is the United States’ largest supplier of crude is more in the range of 2 to 1! You spend 1 to get 2. Fracking shale for natural gas is less than 10 to 1. The energy we are consuming just to create new energy is astounding when taken with a wider lens.

The only thing that even remotely compares to that wasted time and energy, is all that we collectively are spending to sustain broken economic models and failed institutions by bankrupt governments. A free market would be able to allocate desperately needed capital to lessen the pain during this inevitable energy transformation that runs the gamut. Electrical power grids, refineries, oil and gas drilling platforms and wind and solar energy all have massive shortcomings in infrastructure. We are trying to drive a car uphill without a motor in it. To say that you hate an energy company is to basically argue,”How dare you give me the highest standard of living in the history of the world?!”.

I have no crystal ball, but I do know the heart attack moment is coming. Whether engineered by governments or because the market gives us no other choice, that moment will come. With so much war already ongoing in the Middle East, and Iran louder by the day, it’s most likely sooner rather than later. War is hugely destructive to energy supplies. Both because current production is taken offline and the war machines themselves aren’t exactly a Prius. The transition to new energy realities is coming whether we like it or not. The days when the United States can continue to use 25% of the world’s energy supplies for $1 dollar a gallon are gone. Every 10 dollar increase in crude oil shaves roughly 1% off United States’ GDP. May I remind you that cude oil bottomed at 30 dollars a barrel. Do the quick math to 90 dollars a barrel and you get to a very large number on a 15 trillion dollar economy.

Preservation of capital will trump all other considerations after this Presidential Election Cycle suspended reality ends. The Fiscal Cliff awaits. The 16.4 trillion dollar debt ceiling awaits. Volatility and interest rates only have one direction they can move now. Up. Bonds and stocks are at all-time highs. Stay in precious metals “CASH” positions, and let’s hope somebody with decision-making capabilities sees just how fast we are running out of train track.

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