Servias Ministries Blog

The International Energy Agency is projecting global oil demand at 116 million barrels per day by 2030.  Currently the global demand is approximately 88 million barrels per day.  China and India will continue to increase their demand for oil.  India is now manufacturing at $2,500 car.  As its exports grow, oil consumption will grow.  China is expected to overtake the U.S. in light duty vehicle sales by 2016-2017.  This alone will add about 10 million barrels of new oil demand by 2030.

Population:

With over 2.3 billion people and growing, China and India’s income growth will fuel auto sales, infrastructure spending, and commodity prices.  Sand, cement, copper, and other commodities are at record prices due to the infrastructure needs of these countries.  China is building new roads, gasoline stations, pipelines, and other infrastructure to support this increase in transportation requirements.

Peak Oil:

The U.S. 48 states experienced "peak oil" in 1970.  Overall production has been in decline ever since.  The North Slope of Alaska experienced peak oil in 1989.  Mexico’s Cantarell field (the 2nd largest field in the world) experienced peak oil in 2005 and has declined by 41% since.  OPEC countries have reported the same reserves for decades which is clearly not true.  Therefore we must assume that their fields are in decline as well.  The largest oil discovery in the world has been in production for over 60 years (Ghawar field in Saudi Arabia was discovered in 1948).  Considering the current decline curve of existing production, we will need to find over 60 million barrels of new oil by 2030. I do not expect this to happen. 17% of global crude supply comes from 10 super-giant oil fields.  The following table provides this breakdown:

In reviewing this chart, you can see that we would have to discover an equivalent of 14 new giant oil fields the size of Ghawar to meet the expected future demand.  There is no silver bullet of technology that will make up this difference in expected demand vs. supply.

Ownership of Reserves:

Who owns the oil in the ground?  The following chart shows that National Oil Companies (NOC) own most of the production:

U.S. Oil companies account for less than 20% of world production.  These companies do not have the ability to set prices.  OPEC is the major supplier of world oil and has pricing power.  Taxing U.S. oil companies for high prices produces no impact on pricing.  Oil companies are currently buying reserves by buying back their own stock in a repurchase program.  If there was a major probability in discovering huge reserves, they would be directing cash to those projects instead.

The Impact of Two Decades of Low Prices:

The last 20 years’ prices drastically reduced infrastructure investment and replacement.  The pipeline infrastructure is made of steel and is rusting.  This will force notable investment in infrastructure thus supporting high commodity prices.  In the U.S. alone, oil and gas employment was reduced by 50%.  The drilling rig count plummeted and rigs sat rusting away in fields.  A small drilling rig costs in excess of $500 thousand to build.  Oil field experience is at a multi-decade low.  50% of Exxon’s employees will be at retirement age in 5 years.  Low prices caused a "brain drain".  The IEA projects energy infrastructure cost to exceed $5 trillion for growth alone.

Alternative Energy- Ethanol

Ethanol is a poor substitute for oil.  It is corrosive to the existing pipeline infrastructure.  Its energy output versus energy required to refine it is low compared to oil.  Ethanol requires a feedstock and fresh water.  Both ingredients are in limited supply and are expected to be in shortage as well.  The current primary feedstock is corn.  Its price is at an all time high.  Although we all support the farmers in their effort to generate a profit, ethanol will lose its support as the impact of production is understood by the politicians.  Ethanol contains 84,100 BTUs per gallon and the replacement energy value for the other co-products is 27,579 BTUs. Thus, the total energy output is 111,679 BTUs and the net energy gain is 30,589 BTUs for an energy output-input ratio of 1.38:1. Oil ratio is much higher (8:1 to 23:1 depending on the logistics).

Alternative Energy- Wind

Wind is totally dependent upon geography and weather.  Although it will supplement the power grid in some states, the economics do not support a major infrastructure investment to solve the energy demands of the upcoming crisis.  Individuals living in windy areas might consider the use of wind to generate electricity.  Major population areas will not benefit from this technology anytime soon.

Alternative Energy- Solar

Existing technologies will not support the growth of the electrical requirements of the U.S.  Although a reasonable personal alternative for supplemental power, the solar solution will not be effective as a national solution.

Alternative Energy- Nuclear

Although 3 Mile Island reactor incident never caused a death, Americans have been afraid of nuclear power since.  France generates over 70% of its power from nuclear power plants.  Red tape and civil litigation contribute to 10 year construction cycles of new power plants.  If the U.S. power companies were to start plans immediately for new nuclear plants, it would take 10 years to become operational.

Alternative Energy- Electric

There are approximately 170,000 service stations in the U.S.  Building electric cars will necessitate a substantial infrastructure cost to ramp up service stations to handle increased recharging needs.  This will take time.  Early buyers of electric cars will be restricted in their driving range.  Another issue is that our electrical grid is growing and outpacing power plant construction.  Any additional burden on the grid will move it to a crisis sooner than later.  The U.S. commercial infrastructure is heavily dependent on oil for energy and thus the impact of electric cars would be minor for 15-20 years.  The U.S. has a 17 year inventory turnover rate of vehicles.  It would take at least 8 1/2 years to replace half of the country’s fleet if electric cars were available and could meet the transportation requirements of the population.

Alternative Energy- Coal

Coal is an abundant resource in the U.S.  However, the "green" direction of the U.S. will prevent new coal plants from being built.  New coal plant construction has been denied in several states.  Instead, natural gas plants are being considered as an alternative.  These plants will generate electricity at a higher cost versus coal.  Green is in, coal is out!

A comparison to oil:

To obtain in one year the amount of energy contained in one cubic mile of oil, each year for 50 years we would need to have produced the numbers of dams, nuclear power plants, coal plants, windmills, or solar panels shown below:

Summary

The energy crisis is here.  There is no alternative that could be developed in time to avert this crisis.  Wars have been fought over resources throughout history.  Unless we have a Divinely appointed intervention, energy prices will skyrocket and will support a global depression.  The response to the Great Depression of the 1930’s was a World War.  The NOC’S have no incentive to sell their inventory at lower prices.  In fact, their incentive is to slow production and receive a higher price for their product.  U.S. oil companies will enjoy the profits but have no ability to determine price.  Investing in well run energy companies will be the best defense against rising prices at the gas pump.  "You might as well buy the product from yourself."

The basic economic cycle is divided into four parts: boom, recession, depression, and recovery.  There is no absolute, firm definition in today’s environment of exactly what quantifies each aspect of the business cycle.  Economists continually increase the complexity of their trade by adding new formulas and statistics in an attempt to describe which part of the cycle we are in.  Complexity steers us in the direction of chaos.  Simplicity moves us to "order".

Tampering with the business cycle has disastrous consequences.  The natural business cycle allows for orderly expansion and contraction.  Contraction is designed to be a "cleansing cycle."  Entrepreneurs will eliminate waste created from bad business decisions during this period.  This is a time of reflection.  Do we really need this expense?  Did this sales program produce additional profit?  The list goes on.  However if the cycle is tampered with by delaying this cleansing cycle, the result will be a longer, deeper cleansing cycle.  A sustained boom will result in a sustained bust.

Those in control of the creation of money seem to be on a continual quest for the "Holy Grail"- a formula that will eliminate the business cycle and only produce sustained growth.  They study Economics and write theses to introduce their perspective of economic prosperity.  In the last 100 years, the Great Depression became a popular case study.  How can we eliminate another great depression.  Economists agree that a depression contains negative growth of the "Gross Domestic Product", high unemployment (10-20%+), and a lower standard of living for most of the population.  Those in control of the money supply have experimented with our livelihoods.  Interest rates were consistently higher in the 1970’s to fight inflation.  For years passbook savings accounts were paid 5% interest.  That rate rarely changed.  Mortgage rates varied from 7 to 10%.  The standard down payment on a conventional loan was 20%.  FHA loans required less but not the 0% allowed in recent years.  Fixed interest rates were the standard.  The gold standard was dismantled in the 70’s.  When inflation started rising in the early 80’s, Paul Volcker as Fed Chairman raised interest rates to arrest the boom cycle and force a recession and thus cleanse the waste out of the system.  During that time I was a Chief Financial Officer.  Our plans for expansion would take into account the cost of money and the expected return on investment (ROI).  If the ROI was not substantial we would axe the plan.  Only the plans with the greatest potential were implemented.  The high rates slowed our growth.  Those same rates minimized our mistakes by requiring greater scrutiny of each project before implementation.

Our current central banks around the globe are postponing the cleansing cycle.  By providing "easy and cheap" money, they have promoted poor economic decisions throughout the entire global population.  The average family has created substantial liabilities including excessive mortgages, credit card debt, and consumer loans.  At the same time creditors have successfully eliminated the bankruptcy alternative that eliminates the consumers’ mistakes (a jubilee).  Once again, we’ve been bamboozled!  At the same time, this easy money policy has fueled inflation.  Those that did not fall into the borrowing trap are having their savings eaten away by excessive inflation.

In college, we did not have an economics lab class.  A school laboratory was a place where you could experiment with the principles you learned during the lecture class.  Physics principles were validated in the lab class.  How do you validate economic principles?  In the biggest lab of all-the globe.  What happens when all of the economists are taught by a prevailing theory?  The result is a "cluster of errors".  Those in charge continue to operate under assumptions that may be invalid.  The gold standard was eliminated since it seemed to restrict growth.  Who decided that growth was being restricted?  Those in power motivated by greed.  Biblically, the gold standard has been used for thousands of years.  There was a reason for this.  It created a reasonable business cycle without the volatile changes.  The Lord God Almighty created the business cycle.  Man has decided to tamper with it.  The current "cluster of errors" will produce a well-defined view of economic depression in our economics lab.  After it is all said and done, we will have a close and personal view of the negative economic impact created by financial derivatives, selective regulation, investment bankers’ greed, and poor lending/borrowing practices.

I was recently asked what to do with funds contributed to a retirement plan.  This is difficult to say since I do not have the balance sheet/income statement of the individual.  However I can provide a plan that I believe will help a family weather the uncertain future economic reality.  Nobody but the Lord God Almighty can be certain of what we will face over the next five years.  We can only use the knowledge, wisdom, skill, and understanding (Daniel 1:17) to direct our loved ones and friends to what we believe is best in preparation.  Some of us are called to the financial arena, others are not.  They must rely on and trust the brethren who are called to look out for the best interest of the Body of Christ.  Every joint is to supply the others: Ephesians 4:15 but, speaking the truth in love, may grow up in all things into Him who is the head–Christ– 16 from whom the whole body, joined and knit together by what every joint supplies, according to the effective working by which every part does its share, causes growth of the body for the edifying of itself in love.

For the body of Christ to grow, people must give.  I am giving the following advice in order to help you defend yourself against expected economic downturns based on the global direction of the current system.  I understand the many people do not have enough assets to take advantage of the following steps.  Do what you can.  Most of us can afford to buy an ounce of silver weekly.  It’s a start.  Go to the local coin shop and start an accumulation plan.  Don’t worry about the daily price.

1. Buy gold and silver (the metals) as insurance.  I would buy one ounce coins.  I have no interest in rare coins because their value is perception based.  Consider having 5-10% of your cash in these two metals.  I expect gold to exceed $1,600 per ounce and silver to exceed $100 per ounce over the next 5 years (in U.S. Dollars).

2. Maintain 6-12 months’ supply of expenses in cash on hand or in the bank.  If you personally lose a job, you want to be able to meet monthly obligations while looking for employment.

3. Check your bank’s exposure to derivatives and profitability at: http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp  Look on Page 5 of the report for the derivatives’ exposure. Page 2 provides a 5 year comparison of net income.  If they are losing money you might want to find a new bank.

4. Spread CD’S over multiple banks if you have more than the insured limit.  CD rates are expected to decline over the next 12-24 months.  The Federal Reserve has historically supported the banking system’s profitability at the expense of savers.  This is done by lowering savings rates while the loan rates are lowered at a slower pace.  You ultimately pay for their investment mistakes.

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.

6. Bonds may be good but I am concerned about the insurers going bankrupt thus having a negative impact on the bond market.

7. Eliminate any leverage you have been using in investing.  If necessary, sell stock to pay off the leveraged position.

8. Reduce/eliminate debt.  Its time to contract your liabilities.  If you use credit cards, pay off the balance each month.  If you are making credit card payments, quit using the cards.  If you can’t pay cash you probably don’t need it.  Debt consolidation only works if you have the discipline to refrain from creating more credit card debt.  Even though credit card usage is easy, start writing checks for purchases.  This reinforces your awareness of the impact purchases has on your cash position.  Credit card purchases seem to be "out of sight, out of mind" until that bill comes in.

9. Simplify.  Look at what is controlling you and your time.  Less is better.  A friend of mine had a large pickup because he used to pull horse trailers.  He doesn’t do that anymore.  Get rid of your "pickup".  It’s costing you money.  It is easier to obtain than to "maintain".  Calculate the 5 year cost of any asset that has an ongoing maintenance expense.

10. Eliminate on-going expenses if possible.  Review your budget.  If you don’t have a budget, create one.  Look at your last six months’ expenses to see if there is something unnecessary.  Don’t overlook the small expenses either.

These steps are intended to help direct your thinking, not eliminate your accountability in your financial affairs.  Each of us are called to be stewards.  If this website is helpful to you, share it with your friends.

Disclaimer:

The material on this website has no regard to the specific investment objectives, financial situation, or particular needs of any visitor. This site is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

References made to third parties are based on information obtained from sources believed to be reliable, but are not guaranteed as being accurate. Visitors should not regard it as a substitute for the exercise of their own judgment. Any opinions expressed in this site are subject to change without notice.  Servias Ministries, Inc. is not under any obligation to update or keep current the information contained herein.

Servias Ministries, Inc.’s officers, directors and associates may have an interest in the securities or derivatives of any entities referred to in this material and accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a licensed, qualified professional before making any investment decisions.

The material on this website has no regard to the specific investment objectives, financial situation, or particular needs of any visitor. This site is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

References made to third parties are based on information obtained from sources believed to be reliable, but are not guaranteed as being accurate. Visitors should not regard it as a substitute for the exercise of their own judgment. Any opinions expressed in this site are subject to change without notice.  Servias Ministries, Inc. is not under any obligation to update or keep current the information contained herein.

Servias Ministries, Inc.’s officers, directors and associates may have an interest in the securities or derivatives of any entities referred to in this material and accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a licensed, qualified professional before making any investment decisions.