Servias Ministries Blog

It is unfortunate that we must read articles written outside the U.S. to get a more realistic view of what is happening in our own financial markets.  National Australia Bank is writing off 90% of it American "conduit" loans.  It clearly understands the need to cleanse its liabilities.  In the corporate environment it is always best to write off bad investments when bad news is public.  You are protected by the "herd mentality" and you don’t look incompetent when compared to your peers.  The following article provides the details:

http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=sph

In another article, Joseph Stiglitz writes about the bailout of Fannie Mae and Freddie Mac.  Joseph Stiglitz is the 2001 recipient of the Nobel Prize for economics, is university professor at Columbia University. He is co-author with Linda Bilmes of The Three Trillion ­Dollar War: the True Cost of the Iraq Conflict.  He provides us with a well written view of the impact of this bailout and discusses the "unequal weights and measure" aspect of all the players:

http://www.ft.com/cms/s/0/c6999a06-5994-11dd-90f8-000077b07658.html?nclick_check=1

Treasury Secretary Hank Paulson has led the bailout effort.  With his ties to the investment banking industry, one must ask if there is a potential conflict of interest.  His net worth has the potential of severe losses as well.  Is he the best person to oversee this catastrophe?  I don’t know, Only Our Heavenly Father knows his heart.

U.S. Treasury Secretary Henry Paulson, Jr. Resume:

Career highlights from Wikipedia:

Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972.^[7] He then worked for the administration of U.S. President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973.

He joined Goldman Sachs in 1974, working in the firm’s Chicago office. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998;^[8] eventually succeeding Jon Corzine (now Governor of New Jersey) as its chief executive. His compensation package, according to reports, was US$37 million in 2005, and US$16.4 million projected for 2006.^[9] His net worth has been estimated at over $700 million.^[9]

Paulson has personally built close relations with China during his career. In July 2008 it was reported by The Daily Telegraph that: "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country over 70 times."^[10]

The "Bailout of Fannie Mae and Freddie Mac" may exceed $500 billion.  The spinsters estimate $0 to $25 billion.  The sad commentary in all of this is that the American public is not outraged at Congress for committing to this unbelievable bailout.  I have the benefit of living in the Southwest in the 1980’s when we experienced a subset of this national problem.  We saw housing decline by 30-60%.  I knew people who had to bring substantial funds to closing just to sell their houses, negative equities.  The complacency of the American public has in essence endorsed the actions of Congress in spending our children’s money.  Why should those of us who did not buy houses we couldn’t afford, pay for those who did?  We are not yet half way through this debacle.

The number of banks in the U.S. in the ’70’s was about 14,000.  Today that number is about 7,000.  Mergers and acquisitions account for most of the reduction.  When you hear that there will be less banks fail than the ’80’s, keep in mind that the issue is the amount in assets failing rather than the number of banks.  The FDIC has about $49 Billion after the Indymac Bank failure.  They are guaranteeing over $13 Trillion or about .35% of the total.  Houston we have a problem!

Energy growth must be viewed in terms of BTU growth, not barrels of oil or mcf of gas.  This measurement is about pure energy.  The globe (and the U.S.) continues to increase its usage of energy.  We must pursue ALL forms of energy production.  Some would tell us to focus on wind or solar, but we need it all.  If this were not an election year, we might get an open and frank dialogue in Congress.

What can you and I do about this?  Invest in hard assets as I have mentioned previous writings.  Reduce your energy consumption.  BTU’s are going to cost you more whether they be dominated in gallons, kilowatts, or mcf’s.  The perfect storm clouds continue to gather.

The president and the chief financial officer (CFO) have a breakfast meeting.  The president asks the question, "What will our earning be for the current quarter?"  The CFO responds, "What do you want it to be?"  That is the current reality in large financial institutions.  This is not a new phenomenon.  Top financial officers have had a bag of tricks to "smooth" earnings.  Smaller corporation simply don’t have the experience or tools to play the game.

A recent major bank just announced their earnings.  They exceeded Wall Street estimates.  Why?  They redefined past due mortgages.  If mortgages were past due at 120 days, there were procedures in place in increase loan losses which reduced the bottom line.  How do you improve earnings?  Increase the past due window to 180 days.  All of a sudden, bad loans become good loans and your earnings shoot up and you beat Wall Street’s estimates.  Also, the overall market becomes optimistic that the worst is over.  Companies who pay dividends tend to realistically report earnings since they distribute cash to their shareholders on a periodic basis.

In the Clinton era, the government would "cook the books" as well.  If unemployment became a problem, redefine who would be classified as unemployed.  If inflation became a problem, just change the method by which the index was calculated.  Use of "Hedonic adjustments" was the justification of the calculation change.  The following discussion from Wikipedia provides a better understanding:

In economics, hedonic regression, also hedonic demand theory, is a method of estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value of each characteristic. This requires that the composite good being valued can be reduced to its constituent parts and that the market values those constituent parts. Hedonic models are most commonly estimated using regression analysis, although more generalized models, such as sales adjustment grids, are special cases of hedonic models.

An attribute vector, which may be a dummy or panel variable, is assigned to each characteristic or group of characteristics. Hedonic models can accommodate non-linearity, variable interaction, or other complex valuation situations.

Hedonic models are commonly used in real estate appraisal, real estate economics and Consumer Price Index (CPI) calculations. In CPI calculations hedonic regression is used to control the effect of changes in product quality. Price changes that are due to substitution effects are subject to hedonic quality adjustments.

"Cooking the books" assumes that you will recover from the adversity forcing you to cook.  This simply forces you to over-compensate in the future for the current losses.  Losses force the cleansing cycle to take place.  Companies are forced to rethink their spending and expansion plans.  Ultimately the question is: "What is fruitful?"  This is a fundamental Biblical principle.  The Law of the fruit trees, etc. speaks of removing unfruitfulness.  Look around your house.  What is unfruitful?  Get rid of it.  If it is of value, ask yourself if there is someone you know who could use it?  This principle is applicable to companies as well as households.

"Cooking the books" is simply an illusion supported by man’s quest to control.  The president and CFO were manipulating the numbers to insure their survival and bonuses.  The current economic system rewards unequal weights and measures.  Our Heavenly Father will judge this system.  Will HE find it wanting?  The writing is on the wall:

Dan 5:24

"Then the fingers[fn3] of the hand were sent from Him, and this writing was written.

Dan 5:25

"And this is the inscription that was written:

MENE,[fn4] MENE, TEKEL,[fn5] UPHARSIN.[fn6]

Dan 5:26

"This is the interpretation of each word. MENE: God has numbered your kingdom, and finished it;

Dan 5:27

"TEKEL: You have been weighed in the balances, and found wanting;

This Presidential Election will not have a winner.  Whoever is chosen will have a challenge never before seen by this country.  There is a high probability that the standard of living of all Americans will decline substantially during this presidency.  The country has been living on borrowed time, literally.  Over consumption by all income levels has produced deficits on all fronts.  The airlines complain about the speculators of oil and they want their customers to pressure Congress to do something about speculation of oil.  However, Southwest Airlines speculated on oil for the last two years and bet correctly.  They continued to make money when other airlines were going out of business.  Airlines want cheap oil but don’t think they have any obligation or responsibility to provide any customer service.  Their frequent flier programs have deteriorated and now have limited value.  It’s all about the bottom line (and executive bonuses).  The airlines have been in denial for years.  When Southwest Airlines changed the paradigm, for the most part others did not follow.  Paradigm shifts are the overriding issue.  There has been plenty of books written about peak oil.  The Europeans have been paying substantially more for gasoline for years.  Their higher taxes helped fund the public transportation system that is spectacular.  You generally don’t need a rental car in Europe.  Here in the U.S., unless you are in one of a handful of cities, a rental car is a necessity.  Our leadership assumed cheap energy was forever.

The credit bubble which has lasted for 30 years, is bursting.  Easy credit is being replaced with historic credit analysis focusing on the 3 C’S- credit, cash, and character.  Recent lending practices required none of those.  The top two mortgage companies, Fannie Mae and Freddie Mac, are being reported as insolvent.  They have guaranteed some $4 trillion in mortgages. It does not take many foreclosures as a percentage of that total to erode their capital structure.  The mortgage crisis has not yet peaked.  The derivative crisis has not yet peaked.  The oil price has not yet peaked.  Why would anyone want to be president now?

Inflation will be with us for some time.  Wages typically lag price inflation.  Wholesale distributors will make inflation-based profits.  Price inflation increases profits for companies with inventories.  The Fed will be unable to fight inflation without taking the banking system down.  They will not sacrifice the banks.  Instead, the consumer will be sacrificed and the President will take the heat.  I expect the next president will serve only a four year term before the population ousts him and his party’s legislators.  The golden era of American dominance may be coming to a close.  Global food prices will continue to rise due to energy costs AND population growth towards affluence.  More and more Chinese are wanting protein in their diets.

Iran and Pakistan will provide leaders with serious challenges.  Nuclear arsenals in those countries threaten global stability.  Pakistan is probably the most dangerous place on the earth now.  The country is unstable and has a nuclear arsenal.  Border skirmishes continue with India.  Israel is promoting war between the U.S. and Iran.  They are doing a great marketing job to have the U.S. do their work for them.

What is the solution? Love!

The economic crisis continues. Leaders continue to spin the statistics in order to manipulate the perception of consumers to believe “all is well” once again. The Fed has monetized bad debt from investment banks. What does that mean? They bought debt from investment banks that was deemed “illiquid”. Now this debt is sitting on the Federal Reserve’s balance sheet. Recently, the Bank of International Settlements (BIS) wrote that the unsustainable is now unwinding. The financial sector is in dire straits. The high leverage of the last few years is being reduced. This forces asset sales of anything of value. Even productive assets are placed on the block. This drives down prices of all assets, mostly stocks and bonds.

Had the Fed failed to bail out the institutions with these Structured Investment Vehicles (SIV), they would have become insolvent… bankrupt. When Greenspan’s Fed lowered rates to 1% a few years ago, it set the stage for the dramatic growth of the mortgage bubble. Mr. Greenspan retired just in time. This de-leveraging cycle is a multi-year and complex event. The lack of governance allowed hedge funds and financial institutions to leverage up to 300 times their cash on hand. You and I could not have done that. Lenders kept us from entering this very arena where they are guilty of losing huge amounts of money. Once again, unequal weights & measures.

If the Fed wanted to do what is best for the average American, they would take the same money they handed over to the investment banks and direct those funds to America’s infrastructure: roads, bridges, power grid, public transportation(trains, subways, trolleys, etc.) The U.S. Infrastructure is getting old. It is estimated that $45 Trillion is required to fix it.

Cash is again King. Leverage is not. Gold and silver are cash. They have no liabilities attached to them. Oil is global money. Natural gas is regional currency. U.S. dollars are depreciating. That will not change soon. As the U.S. dollar loses value, gold increases in relative value. As central banks start up the printing presses, gold increases as well. Insolvency occurs when you cannot meet your obligations with cash. You can be worth $10 million on paper and become insolvent. If you have assets that cannot easily be converted to cash, you are illiquid. A friend who is a farmer has been leveraged throughout his career as farmers have been taught. THAT is the business model. Leverage has always helped this farmer make more money. However, if the financial climate demand all accounts to be reconciled, he could be “up a creek”. If the paradigm does shift, farmers will lose their farm just as it happened in the great depression. If you don’t keep enough cash (or equivalents) on hand, beware. We can’t assume that our limited history proves anything. Major shifts in the financial markets are normally seen through the rearview mirror. Remember when Steve Forbes incorrectly predicted oil retracting back to $40 or less? Remember when the invasion of Iraq was predicted to lower oil prices?

The fundamentals for gold and gold stocks are extremely bullish. Some stocks are getting battered by the illegal short strategy by some hedge funds. I suspect that the authorities will get around to cleaning up this market. What a deal: hold gold, silver, and related stocks while all your liabilities are being devalued in dollars. Acquiring gold and silver should increase your solvency as the dollar continues its decline to the .51 level on the U.S. Dollar Index.

Real estate is illiquid and losing value at the same time. In the 1980’s I saw the implications of this environment. In the Southwest U.S., banks went out of business, people lost homes, real estate lost 50% and more in some areas. The rest of the country paid little attention to the demise of this regional market, out of sight, out of mind. It was very instructive and has prepared some of us for the current environment. We saw our last house increase in value by 30%, then lose 45% in value. Ugly!

Oil prices are causing insolvency in lower income families. Over the last 10 years, families bought cars, new and used, based on cheap oil. Most lower income families can’t just go out and replace the older, gas guzzling vehicle. Remember those 7 year auto loans? Those were targeted to people who really could not afford the payments. Effectively those were sub-prime car loans. Though oil prices might go through a correction to $100-$115, triple digit prices are here to stay. In the meantime, the gas pump is extracting liquidity from all of us. Owners of oil inventory are gaining in liquidity. 85% of the production is owned by State owned oil companies. Russia is gaining in economic strength and political power. Vladimir Putin remembers what Ronald Reagan did to the Soviet Union. The Soviets were conquered by economic power, not military conflict. Putin may return the favor. World oil continues to decline. Expect higher prices.

Alternative fuels cost more than oil. Consumers will pay a premium for alternative fuel. Conversion to alternative fuels will reduce solvency. Who can afford a $15,000 wind turbine or solar array? The premium will extract critical liquidity from the average family. Rising healthcare, food prices, and other monthly necessities will cut into the discretionary income of middle America. Expect less crowds in the restaurants. Ethanol is a poor alternative due to the global food production crisis. We all want the farmers to be profitable but the big picture dictates that corn should be used for food not fuel. Switchgrass or sugar cane is a better ethanol alternative.

In the Great Depression, things went south so quick, even those with lower leveraged positions were forced into bankruptcy. It seems that once a generation has died off who experienced a severe event, the current generation makes the same mistakes and pushes us into a parallel situation. Greed knows no generational boundaries. As the Scripture reminds us, the borrower is servant to the lender.

PS After posting this, the following article showed up on Yahoo: http://biz.yahoo.com/rb/080710/fanniemae_freediemac_poole.html

On February 3rd of this year I posted: Personal Economic Defense Plan.

Let’s review my recommendation:

5. Weight your stock portfolio to energy (oil & gas), gold, silver, & coppper stocks, and consistent dividend paying stocks.  Chevron, Petrohawk, Goldcorp, Yamana Gold, Silvercorp, GE, Southern Copper, Penn West Energy are all stocks for your review (see disclaimer).  There are other stocks but these have had some prior review.  I expect oil to trade over $150 per barrel.  I expect natural gas to exceed $10 per mcf.

Investment	2/4/08	7/1/08	% change	Comment
Chevron	82.02	99.08	+20%	good dividend
Goldcorp	36.21	48.16	+33%	big player, small dividend
Yamana Gold	15.19	16.25	+6.9%	Upcoming, good management
Silvercorp	9.81	6.00	-39%	I believe this is a good buy, record earnings
GE	34.20	27.12	-21%	dragged down by blue chip stocks, good dividend
Southern Copper	98.44	107.09	+8.7%	good dividend, China will be buying copper for years
Penn West Energy	26.98	33.92	+25%	great dividend and in natural gas
Gold	891	939	+5.4%	near term target $1,200
Silver	16.51	18.09	+9.5%	near term target $25
Oil	90.07	141.00	+56%	one ugly hurricane and we are at $200
Natural Gas	7.55	13.08	+73%	coal is out of favor, natural gas is in

Silvercorp has dragged down the performance of this model portfolio.  They announced record earnings and went south.  I believe that an "illegal short" play has suppressed this stock.  I recently purchased this stock under $6 per share.  I believe it is a great buy!  If it is still this cheap next month, I will buy some more.  Overall the portfolio is up over 5% without including the dividend payments.  A savings account would be up by 1.5% for the same period.

Linda writes,

how would one acquire swiss francs or euros or silver rounds, do you just have 
a certificate saying you have them like stock shares?

www.golddealer.com sells silver

https://www.everbank.com/ allows you to hold money in other currencies.  They display the FDIC insurance logo.

Johnny writes,

Besides following the Spirit of God, who would you recommend as a financial advisor, brokerage firm, financial software?

thank you , truth in love, In His Service

I use Scottrade.  www.scottrade.com  They have branches as well as Internet brokerage accounts.  Each U.S. stock trade costs $7.

As far as a financial advisor, I can't recommend one.  I receive mailings from financial advisors and they all tend to follow the herd.

The purpose of this blog is to provide information and perspective.  It is your responsibility to discern what is best for you.

The Federal Reserve Bank’s lack of action to backup their bullish dollar comments appears to be sending a "flash point" signal to the worldwide credit markets.  Since last year I have been warning of a financial storm that could wreak havoc in the global markets.  The hurricane warning flags are now being posted:

Barclays warns of a financial storm as Federal Reserve’s credibility crumbles

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/27/cnbarclays127.xml

and

RBS issues global stock and credit crash alert

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

With last week’s notable recovery of the gold price and the Dow Jones Industrial Stocks pushing into Bear territory, Wall Street may be confirming what the British have alerted their clients to.  In itself, sending a subset of global investors into flight may cause the entire herd of elephant size investors to run for the hills.

Oil has responded to the U.S. Dollar’s lack of support by trading at $143.  $170 is now in view.

Gold, Silver, Oil, Natural Gas, Swiss Franc, Euro, etc. are all alternatives to holding dollars.  You have been alerted!

What is a Business Model? A business model is a framework of creating value by a company.

What is a framework? A framework is a basic conceptual structure used to solve or address complex issues.

Source: http://en.wikipedia.org/wiki/Business_model#Do_Business_Models_Matter.3F

Now that I have defined the business model, let’s look at the relevance of this topic to Biblical Economics and Love.

VALUE!

Four years ago, we bought a high-end digital television from BestBuy as a family Christmas present. The salesman urged me to buy an extended warranty. I agreed knowing that new technology tended to have “bugs” and I didn’t want a negative experience one month out of factory warranty. He indicated that the one working part (the lamp bulb) could burn out and justify the extended warranty. I took the bait. Anytime I look at extended warranties I look at the probability of the company remaining in business over the life of the warranty. After all, serviceability is the backbone of an extended warranty. I had a total of four years ending December of 2008 to test this “Value Add”.

It happened! The lamp bulb finally burned out. I pulled my paperwork and manual from the file, so much for simplifying my life. I have to keep a file with manuals for all of the electronics in insure that if the device fails, I have my receipt, a copy of the warranty, etc. Uggh! BestBuy suggests that you go to their website for Warranty customer service. No way! As an Information Technology professional I know that they want me to do all of the work. How do I know whether or not their website will freeze up just before I press the critical button? I called their 800 number, I am taking no chances on finally using this extended warranty.

When I connected to their warranty service I immediately was connected to a live person, just kidding! I went through their automated telephone directory “people barrier” system. If you have the resolve to navigate through this system, they will talk with you. After a few minutes of being on hold, I finally spoke to a customer service person. Hallelujah! After I explained that my TV needed a bulb (based on the manual’s problem analysis page), she directed me to the parts department. While on hold, They had me listen to their recording boasting of maintaining over 7,000,000 parts in inventory. Wow! I was sure that this was going to be worth the wait. After 8-10 minutes of being on “hold”, the parts person finally picked up my call. Once again, they brought up my record after I gave them my 10 digit extended warranty #. This was not enough. He wanted my serial #. Wait a minute, don’t they keep that information on file? Oh well, after retrieving my trusty flashlight and magic reading glasses, I was able to locate the serial # in the dark abyss behind my TV where a thousand cables reside. @#$%^*, there it is! Armed with my serial # I returned to the phone. In my manual, the model # of the bulb was mentioned. Obviously Sony knew that this bulb was going to fail. I wonder why they didn’t include an extra? Anyway, the parts representative agreed with me on my bulb’s model #.

Now came the surprise: “We will ship you the bulb 4-6 business days“. What? The bulb is not close by? Knowing that most large companies can ship in 3 days, I pressed the guy on the other end. Why don’t you immediately ship it? He said that they must get the bulb from the manufacturer. WHAT ABOUT THAT 7,000,000 part inventory???? I spent $$$$ for this high dollar TV and you don’t stock the bulb? Gimmee your supervisor.

After 4-5 minutes on hold again, the supervisor re-explained that they don’t stock the part and must obtain it from Sony. However, she indicated that if I was able to buy the part myself, they would reimburse me for the cost of the part. After much frustration, I asked to be returned to the parts department. They had not given me any tracking information and I needed to be sure the part was ordered. Once again while on hold they were rubbing those 7,000,000 parts in my face. After 8-10 minutes of the recording with an interruption indicating that the “next available representative would be with me in 2 minutes” four times, I spoke to another parts person. She found my order and gave me the tracking information. She assured me that I would receive an email confirmation. So, at the end of 45 minutes, I hung up.

I wondered…. I think that I will google that lamp bulb on the Internet and see if I can get it here sooner. In five minutes, I found the bulb. The company had 18 Sony bulbs in stock and they could ship it out today (Saturday) and I would have it in 3 days. What is wrong with this picture?

BestBuy’s business model contains serious disconnects. This issue is not unique to BestBuy. IBM’s administrative red tape defies understanding. One customer can have multiple customer numbers and customers have complained for 30 years about the problem. Our largest newspaper in the state is converting to a new system and we were immediately past due on our bill that we have paid on the same day of the month for 15 years. The new software did not use the same business rules as the previous software.

America’s business model is breaking. When I was inquiring of The Lord, HE indicated that this would continue and that I was to accept this as a warning of things to come. I didn’t bring up the topic, HE did. The above experience is the symptom. I found that BestBuy was using a 3rd party to fulfill the parts needed in the Extended Warranty program. I was not talking to a BestBuy employee. In the above diagram, “the partner network” was being used for this function. The theory was good, the reality stunk! As more consumers get exposed to these breaking business models, sales will decline. Simplicity will once again prevail. People will walk away from the complexities of today’s environment.

There has been a mismatch of gifts and callings with employment. There are those who are called to run businesses based on the principles of love, not greed. Those people will be raised to leadership roles as the greed is cleansed from the system. Current business models serve the corporation and its executives’ bonuses, not the customer.Who will cleanse the system? Our Heavenly Father. HE will install HIS business Model- Love! Rather than exploit consumers, businesses will serve consumers. At that time, customer SERVICE will return. Until then brace yourself.

PS. When I opened my email confirmation from BestBuy, they were shipping me a Philips bulb, not a Sony bulb.

PSS. After posting this, I went to activate my new Citibank credit card used in my business.  I went through all the automated steps, was redirected to a live Rep.  She apologized for their system being down and please call back in a few hours.

Recent record oil prices would suggest that we revisit the primary driver of high prices.  Throughout our lives there has always been an abundance of oil.  When Jed Clampett shot his rifle and discovered oil on the show "Beverly Hillbillies", the view of oil was one of abundance.  Oil discoveries enhanced economic development of the western world for the last 150 years.  The energy contained in one barrel of oil far surpasses earlier fuel sources.  The automobile propelled expansion of goods and services throughout the U.S.  That was then.

As I have shared in previous writings, major oil fields (called elephant fields) are in decline.

Conventional world oil production peaked in May of 2005.  The producing nations have been unable to sustain production of existing fields as well as replace depleting wells with new discoveries.  In 1956 Dr. M. King Hubbert, Geophysicist, predicted peak oil in the U.S. to occur between 1965 and 1970.  He was right!  Further, in 1975,he predicted world peak production in 1995 "if current trends continue".  Others have studied peak oil and have given their own prediction as shown by the graph below:

(click on Image to enlarge)

As of this writing, it appears that May of 2005 may be acknowledged as the peak a few years from now.  There are many opinions about when oil will peak.  I prefer to give credence to the technical views rather than the politically motivated (or funded) views.  Matthew Simmons, an investment banker, conducted a field by field research study based on technical papers provided by engineers around the world.  He concluded that peak oil was upon us.  In his book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Simmons provides a rather complete analysis of the major fields  (elephant fields) and statistically shows that world production is peaking.

Robert Hirsch and associates conducted a study for the U.S. Department of Energy.  The study was published in February of 2005.  The following are the conclusions of the Hirsch Report:

• World oil peaking is going to happen, and will likely be abrupt.
• Oil peaking will adversely affect global economies, particularly those most dependent on oil.
• Oil peaking presents a unique challenge (“it will be abrupt and revolutionary”).
• The problem is liquid fuels (growth in demand mainly from transportation sector).
• Mitigation efforts will require substantial time.
  • 20 years is required to transition without substantial impacts
  • A 10 year rush transition with moderate impacts is possible with extraordinary efforts from governments, industry, and consumers
  • Late initiation of mitigation may result in severe consequences.
• Both supply and demand will require attention.
• It is a matter of risk management (mitigating action must come before the peak).
• Government intervention will be required.
• Economic upheaval is not inevitable (“given enough lead-time, the problems are soluble with existing technologies.”)
• More information is needed to more precisely determine the peak timeframe.

The current supply problem was not unanticipated.  Short-term thinking by the U.S. leadership placed the American people in this serious economic challenge.  Cheap energy has been the economic assumption of the entire American population.  This population has also been the economic engine of the globe.  The shift away from cheap energy thinking will be difficult, impossible for some.  The movie "Giant" was about a west Texas rancher who fought the oil and gas paradigm, first in denial then in anger.  How long will the American people live in denial and anger?  The world is moving away from the "American-centric" thinking.  How long will it take?  It is moving much faster up the exponential curve now.

There is unlimited free energy.  Scientists have not been able to unlock the energy potential in cold fusion and other technologies.  I believe that the world is at a crossroads.  "Control" has prevailed in the recent past.  Our Heavenly Father is well aware of our energy situation.  It would appear that a day of judgment and repentance is coming.  Repentance is "turning away" from your present course.  The revelation associated with free energy will be withheld until that day of repentance is at hand.  Once we repent and once again seek The Father and His Love, I believe the Tabernacles period will be in full view for all to see.  At that time we will not be held captive by those who control the resources but will appreciate what "rest" really means!

This week the airlines were in the news with their massive personnel cuts and downsizing plans.  See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=als_9FvReWTY  Something just didn’t seem right.  The reason given for cutting jobs, schedules, and increasing fares by up to four times the previous prices just didn’t add up.  Being the financially oriented guy I am I decided to do a little research.  Here is what I found:

One of the most popular airplanes is the Boeing 737.  Southwest Airlines has built its business model around the 737.  Other low cost carriers have done the same.  I have flown hundreds (maybe thousands) of flights in a 737.  The following numbers represent estimates based on practical views of the "fuel issue".

The burn rate of fuel for a Boeing 737-4 is 792 gallons per hour. Source:

http://www.pbs.org/wgbh/nova/teachers/activities/3203_concorde.html

The cost per gallon of jet fuel on May 30th, 2008 was $3.826.  Source:http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm

So, let’s look at the economic comparison versus one year ago:

Oklahoma City to Kansas City on Southwest is approximately 1 hour of flight time.

Current year cost:

There are about 122 maximum seats on the flight.  I have been passenger 122 before.  It was ugly in the very back of the plane!

On a full flight, the cost of fuel to Kansas City was approximately 792 gallons x $3.826 = $2,996.93 or $24.56 per passenger.

On a 61 passenger flight the cost was $49.13.  However, this summer I have not been on a flight half full, most flights were 100% full.

Last year cost (1.99 per gallon):

Full flight:  792 x $1.99 = $1,576..08 or $12.92 per passenger.

61 passenger flight: $25.84 per passenger

Increase in fuel cost per passenger:   Full flight- $11.65    Half full flight- $23.29

CONCLUSION:

The airlines can easily raise fares by $25 per ticket.  They do it all the time.  We are being misled to think that their cutbacks are due to the "fuel crisis".  It would appear that they are using the "crisis" to trim staff, eliminate marginal routes, and erase expansion/aircraft mistakes.  What can the employee unions do about a crisis?  Would they dare strike when everyone knows the losses are due to the price of a gallon of jet fuel?

Let’s assume that my calculations are off by 100%.  A $50 increase would still cover the increased jet fuel cost.

The price of oil will become the excuse for business to downsize and cut staff in many industries.  Inflation actually helps wholesale distributors’ profits.  Current inventory bought at lower prices but sold at higher inflation pricing levels increases the bottom line.  Once again we are given convenient excuses for higher costs and worse customer service.  My heart goes out to the airline employees who lose the job because of this.