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Trading Lessons

Peak Oil Has Passed

Commodities / Crude Oil Jul 27, 2011 - 04:58 AM GMT

By: The_Energy_Report


Best Financial Markets Analysis ArticleSelf-professed contrarian and 321Energy Founder Bob Moriarty expects energy and food prices to follow oil on an upward trajectory, fueling more and more turmoil, unrest and violence around the planet, including the Western world. Read on for more insights in this exclusive interview with The Energy Report.

The Energy Report: The markets don't appear to have slowed for the typical summer doldrums this year. Instead, they seem to be returning to their pre-May highs, testing the 200-day moving averages. What do you think of this rally?

Bob Moriarty: So many factors affect it that it's really difficult to figure out exactly what the market's saying. I suspect that much of this rally stems from a belief in QE3 (quantitative easing), and that's not a particularly good sign.

TER: Didn't Fed Chair Ben Bernanke indicate in testimony to Congress that QE3 isn't on the table at this point?

BM: Well, that was on an even day. On even days, he says, "No QE3." On odd days he says, "Yes, QE3." The government's gone crazy. The market is schizoid because it has no idea what will happen. He said some things that would absolutely lead you to believe that QE3 is going to happen, and he's said other things that indicate it is not going to occur.

It's not only the U.S. government; it's the Greeks, the EU (European Union), the Spanish, the Portuguese, the Japanese, the English—everybody's painted themselves into a corner, and we no longer have good alternatives. We only have bad ones.

TER: With only bad alternatives, why wouldn't the market reflect that negativity?

BM: That's what I don't understand. I think the market's going to fall out of bed shortly because QE1 and QE2 didn't add anything to employment. They cost an enormous amount of money and didn't accomplish anything. So while I believe it would be pretty stupid to do QE3, the fact of the matter is that Bernanke's totally run out of options that make any sense.

TER: Another thing that doesn't seem to make sense is that the price of oil has generally been lower than it was six months ago. The last time we spoke about energy you indicated your belief that peak oil happened a few years back. Why then aren't we seeing higher oil prices?

BM: As for peak oil, it's no longer a theory; it's an absolute. We've passed peak oil. When oil hit $146/barrel (bbl.) back in 2008, that was based purely on speculation. It wasn't based on real demand; it was the flavor of the day. At $90 and $100/bbl., oil is pretty expensive. Even though the world is in a depression—and people are starting to recognize that it is a depression—we've got pretty expensive oil, and it's going to continue to go up.

TER: Some argue that oil prices will be mitigated by the fact that as people have to pay more for gas at the pump, they drive less. Plus, we now see the U.S. trying to spark an international effort to release barrels of crude reserves. Would such a release have an effect or would it just be a Band-Aid?

BM: It’s strictly a short-term Band-Aid based on Obama trying to win votes for 2012.

TER: In the peak oil context, then, if oil starts going up, will we see a corresponding decrease in demand?

BM: It means that for the next 20 years the price of energy and food will go up on a continual basis. It's very dangerous because everything that's going on in the Middle East is a function of the price of fuel.

TER: How will the toppling of governments during the Arab Spring affect food and energy prices?

BM: In the first place, there is no quid pro quo. One is an analog for the other. The cost of corn and wheat caused the revolutions, but the revolutions aren't going to affect the price of corn and wheat. It works one way, but not the other way.

TER: Can't we reduce the rate of increase in food prices by increasing production?

BM: Of course. You can be much more efficient in producing food if you use fertilizer. You get more bang for the buck. But then the increases in energy and food prices will translate into a direct increase in the price of potash.

TER: Potash has been increasing over the last couple of years. Where's the top?

BM: Well, the earth has seven billion people to feed.

TER: Are you implying that using potash will make food available in places where people are now going hungry?

BM: Here's what people need to understand. If the price of oil doubles overnight, you can drive less. But what if the price of food doubles overnight? Eat half as much? That will be the source of much turmoil for the next 15 years. We need to match what we're capable of producing to the number of mouths we have to feed.

TER: Over the years, you've always said that eventually it will be food that has people rioting in the streets. That scenario has now started to unfold.

BM: People must have wondered whether I was in touch with reality, but everything that's happening in the Middle East, and indeed in Europe, is related. The riots in Spain, Greece, England, Italy—those riots are coming to the United States. You're seeing flash mobs start up now and I think the government's hiding a lot of the fighting.

TER: You've been investing in potash for a couple of years. What prompted you to pick potash as opposed to another form of food production innovation?

BM: There are other areas of food production to invest in and certainly water would be one of them. But I happen to know some good potash companies and I just can't see how potash could be anything but a really good investment.

One of the best—and it's a company I've been invested in for three years—is Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF). It was at $0.10 for the longest time due to some substantial management issues. Those were corrected, and the stock shot up to $1.86. It's dropped back down to the $0.55–$0.66 range now, which is healthy, and it's a pretty good investment. Passport Potash has a giant basin out in Arizona, and will be producing potash for years to come.

TER: Given that the U.S. is pretty well-endowed with food, how much higher can it go?

BM: It doesn't make any difference if the U.S. is endowed with food or not, lots of countries aren't, and it's easy enough to ship potash to the growing areas. But it's interesting that you mention the U.S., because the U.S. always had a tremendous competitive advantage over the rest of the world due to its high percentage of arable land. Ironically however, the U.S. is now actually a net importer of food due to screwed-up government policies.

TER: When did we become a net importer of food?

BM: In the last two or three years.

TER: A recent feature about new immigration laws in some of the states was focusing on the fact that Georgia's losing immigrant farm workers and can't replace them. The commentator asked why there's a farm-worker problem with 10% unemployment in Georgia. They said because "the U.S. people won't take these jobs." He summarized that food production, and the jobs that go with it, will go overseas because Americans won't work in the fields.

BM: That's true, and U.S. people who are unemployed need to rethink their attitudes. We have 44 million people on food stamps, and at some point, the government isn't going to be able to feed everybody. We need to reset our goals and start understanding where we are. One of the best things we could do is eliminate the ethanol subsidy. It's caused revolutions all over the world, and eventually it will destroy the United States. It's totally stupid, totally insane. It takes 81,000 calories of energy to produce 75,000 calories of ethanol, yet we're still subsidizing corn.

TER: With the U.S. now a net importer of food and the chances of more food production moving offshore, does it make sense to be looking at potash production overseas as well?

BM: You're trying to connect things that don't have a connection. The United States and Canada are among the main potash producers in the world, and everywhere you raise crops for food, you need to increase efficiency. The price of food being where it is now, you can afford potash. The demand will continue to go up, and whether we use it domestically or export it is relatively meaningless.

TER: But isn't it true that Brazil is trying to produce food and potash operations located there, and thus these operations would have a distinctive advantage?

BM: Yes and no. Verde Potash (TSX.V:NPK) has high-grade deposits there as well as government support. But the big issue in Brazil is the cost of transportation. It's very expensive, and probably cheaper to dig potash in Arizona and ship it to Brazil than to ship it within Brazil. Brazil lacks infrastructure. Therefore, even though we've seen amazing gains in its soybean production, trying to get potash from one place to another is very difficult.

TER: Another commodity you've been interested in is uranium. Since the Japanese tragedy, a number of countries have said—or at least implied—that they're going to reduce their reliance on nuclear energy. How much of an impact would that have on the uranium price?

BM: As far as the disaster in Japan goes, it's like an iceberg with 90% of the problem below the surface where we don't see it. I think it's a lot more serious than anybody wants to admit, and that we'll end up with tens of millions of people dying of radiation-caused problems. Consequently, I think nuclear is dead for 50 years.

We do need nuclear energy, but at the same time we need safe nuclear energy. With Fukushima, every bad thing that could happen happened, and every bad decision that a country could make was made. When people in Vancouver and Seattle start dying left and right from radiation poisoning, we'll certainly reevaluate how we feel about nuclear.

TER: So you expect more backlash?

BM: We haven't seen anything yet. People on the West Coast of the United States inhaled 30 particles of radioactivity a day for two or three months, and one particle can cause lung cancer down the road. It may be shocking how many people ultimately die as a result of that disaster, but it's going to be 10 or 15 years before we figure it out. I think it's a disaster of a magnitude that's never before occurred in history.

TER: Perhaps due in part to the renewed focus on alternative energies in the wake of that disaster, the rare earth sector has commanded quite a bit of attention this past year. Is this sector one that appeals to you?

BM: No. I think it's a very dangerous place to invest, and a lot of people stand to lose a lot of money. Jim Dines came out two years ago with the glowing recommendation for the rare earth elements and created a monster. While I have a world of respect for Jim Dines—the guy is absolutely brilliant—he's brought $50 billion worth of investment into a $5 billion industry. While it's true that China has a stranglehold on rare earths, it's also true that supply-and-demand does work, and at some point, if the price goes high enough, it will suck the metals out of the ground.

I am a contrarian, and you're never going to find me believing what everyone else believes. Too many people believe rare earths is a slam-dunk, and every slam-dunk investment I've seen in 65 years has been a loser.

Bob Moriarty's covers oil, natural gas, gasoline, coal, solar, wind and nuclear energy. It's his second site on the internet; convinced that gold and silver were at their bottoms and wanting to give others a foundation for investing in resource stocks, he and his wife, Barb, launched almost 10 years ago. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot O 1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war's most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower's pillars "just for fun."

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

1) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Verde Potash, Passport Potash.
3) Bob Moriarty: I personally and/or my family own shares of the following companies mentioned in this interview: Passport Potash. I personally and/or my family am paid by the following companies mentioned in this interview: Passport Potash.

Streetwise – The Energy Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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Tony Wakeling
28 Jul 11, 15:06
Peak Oil Has Passed.

Oil is NOT a fossil fuel. It is thermodynamically IMPOSSIBLE for any hydrocarbon higher than methane to be formed except by the pressures occuring at depths > 25km. Oil is ABIOTIC It produced at great depths in the mantle.It is virtually unlimited. This has been common knowledge in Russia since 1951. Why else do you think Russia is now world's third largest producer of oil and gas?

Thorium fuelled nuclear reactors WILL obviate the need for uranium except for weapons leading to cheap ultra safe virtually unlimited energy.

Time to do some homework.

Tony Wakeling

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