2011: A Brave New Dystopia

The two greatest visions of a future dystopia were George Orwell’s "1984" and Aldous Huxley’s "Brave New World." The debate, between those who watched our descent towards corporate totalitarianism, was who was right. Would we be, as Orwell wrote, dominated by a repressive surveillance and security state that used crude and violent forms of control? Or would we be, as Huxley envisioned, entranced by entertainment and spectacle, captivated by technology and seduced by profligate consumption to embrace our own oppression? It turns out Orwell and Huxley were both right. Huxley saw the first stage of our enslavement. Orwell saw the second.

We have been gradually disempowered by a corporate state that, as Huxley foresaw, seduced and manipulated us through sensual gratification, cheap mass-produced goods, boundless credit, political theater and amusement. While we were entertained, the regulations that once kept predatory corporate power in check were dismantled, the laws that once protected us were rewritten and we were impoverished.

Now that credit is drying up, good jobs for the working class are gone forever and mass-produced goods are unaffordable, we find ourselves transported from "Brave New World" to "1984." The state, crippled by massive deficits, endless war and corporate malfeasance, is sliding toward bankruptcy. It is time for Big Brother to take over from Huxley’s feelies, the orgy-porgy and the centrifugal bumble-puppy. We are moving from a society where we are skillfully manipulated by lies and illusions to one where we are overtly controlled.

Orwell warned of a world where books were banned. Huxley warned of a world where no one wanted to read books. Orwell warned of a state of permanent war and fear. Huxley warned of a culture diverted by mindless pleasure. Orwell warned of a state where every conversation and thought was monitored and dissent was brutally punished. Huxley warned of a state where a population, preoccupied by trivia and gossip, no longer cared about truth or information.

Orwell saw us frightened into submission. Huxley saw us seduced into submission. But Huxley, we are discovering, was merely the prelude to Orwell. Huxley understood the process by which we would be complicit in our own enslavement. Orwell understood the enslavement. Now that the corporate coup is over, we stand naked and defenseless. We are beginning to understand, as Karl Marx knew, that unfettered and unregulated capitalism is a brutal and revolutionary force that exploits human beings and the natural world until exhaustion or collapse.

"The Party seeks power entirely for its own sake," Orwell wrote in "1984." "We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness: only power, pure power. What pure power means you will understand presently. We are different from all the oligarchies of the past, in that we know what we are doing. All the others, even those who resembled ourselves, were cowards and hypocrites. The German Nazis and the Russian Communists came very close to us in their methods, but they never had the courage to recognize their own motives.

They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power."

The political philosopher Sheldon Wolin uses the term "inverted totalitarianism" in his book "Democracy Incorporated" to describe our political system. It is a term that would make sense to Huxley. In inverted totalitarianism, the sophisticated technologies of corporate control, intimidation and mass manipulation, which far surpass those employed by previous totalitarian states, are effectively masked by the glitter, noise and abundance of a consumer society. Political participation and civil liberties are gradually surrendered. The corporation state, hiding behind the smokescreen of the public relations industry, the entertainment industry and the tawdry materialism of a consumer society, devours us from the inside out. It owes no allegiance to us or the nation. It feasts upon our carcass.

The corporate state does not find its expression in a demagogue or charismatic leader. It is defined by the anonymity and facelessness of the corporation. Corporations, who hire attractive spokespeople like Barack Obama, control the uses of science, technology, education and mass communication. They control the messages in movies and television. And, as in "Brave New World," they use these tools of communication to bolster tyranny. Our systems of mass communication, as Wolin writes, "block out, eliminate whatever might introduce qualification, ambiguity, or dialogue, anything that might weaken or complicate the holistic force of their creation, to its total impression."

The result is a monochromatic system of information. Celebrity courtiers, masquerading as journalists, experts and specialists, identify our problems and patiently explain the parameters. All those who argue outside the imposed parameters are dismissed as irrelevant cranks, extremists or members of a radical left. Prescient social critics, from Ralph Nader to Noam Chomsky, are banished. Acceptable opinions have a range of A to B. The culture, under the tutelage of these corporate courtiers, becomes, as Huxley noted, a world of cheerful conformity, as well as an endless and finally fatal optimism.

We busy ourselves buying products that promise to change our lives, make us more beautiful, confident or successful as we are steadily stripped of rights, money and influence. All messages we receive through these systems of communication, whether on the nightly news or talk shows like "Oprah," promise a brighter, happier tomorrow. And this, as Wolin points out, is "the same ideology that invites corporate executives to exaggerate profits and conceal losses, but always with a sunny face."

We have been entranced, as Wolin writes, by "continuous technological advances" that "encourage elaborate fantasies of individual prowess, eternal youthfulness, beauty through surgery, actions measured in nanoseconds: a dream-laden culture of ever-expanding control and possibility, whose denizens are prone to fantasies because the vast majority have imagination but little scientific knowledge."

Our manufacturing base has been dismantled. Speculators and swindlers have looted the U.S. Treasury and stolen billions from small shareholders who had set aside money for retirement or college. Civil liberties, including habeas corpus and protection from warrantless wiretapping, have been taken away. Basic services, including public education and health care, have been handed over to the corporations to exploit for profit. The few who raise voices of dissent, who refuse to engage in the corporate happy talk, are derided by the corporate establishment as freaks.

Attitudes and temperament have been cleverly engineered by the corporate state, as with Huxley’s pliant characters in "Brave New World." The book’s protagonist, Bernard Marx, turns in frustration to his girlfriend Lenina:

"Don’t you wish you were free, Lenina?" he asks.
"I don’t know that you mean. I am free, free to have the most wonderful time. Everybody’s happy nowadays."
He laughed, "Yes, 'Everybody’s happy nowadays.’ We have been giving the children that at five. But wouldn’t you like to be free to be happy in some other way, Lenina? In your own way, for example; not in everybody else’s way."
"I don’t know what you mean," she repeated.

The façade is crumbling. And as more and more people realize that they have been used and robbed, we will move swiftly from Huxley’s "Brave New World" to Orwell’s "1984." The public, at some point, will have to face some very unpleasant truths. The good-paying jobs are not coming back. The largest deficits in human history mean that we are trapped in a debt peonage system that will be used by the corporate state to eradicate the last vestiges of social protection for citizens, including Social Security.

The state has devolved from a capitalist democracy to neo-feudalism. And when these truths become apparent, anger will replace the corporate-imposed cheerful conformity. The bleakness of our post-industrial pockets, where some 40 million Americans live in a state of poverty and tens of millions in a category called "near poverty," coupled with the lack of credit to save families from foreclosures, bank repossessions and bankruptcy from medical bills, means that inverted totalitarianism will no longer work.

We increasingly live in Orwell’s Oceania, not Huxley’s The World State. Osama bin Laden plays the role assumed by Emmanuel Goldstein in "1984." Goldstein, in the novel, is the public face of terror. His evil machinations and clandestine acts of violence dominate the nightly news. Goldstein’s image appears each day on Oceania’s television screens as part of the nation’s "Two Minutes of Hate" daily ritual. And without the intervention of the state, Goldstein, like bin Laden, will kill you. All excesses are justified in the titanic fight against evil personified.

The psychological torture of Pvt. Bradley Manning—who has now been imprisoned for seven months without being convicted of any crime—mirrors the breaking of the dissident Winston Smith at the end of "1984." Manning is being held as a "maximum custody detainee" in the brig at Marine Corps Base Quantico, in Virginia. He spends 23 of every 24 hours alone. He is denied exercise. He cannot have a pillow or sheets for his bed. Army doctors have been plying him with antidepressants. The cruder forms of torture of the Gestapo have been replaced with refined Orwellian techniques, largely developed by government psychologists, to turn dissidents like Manning into vegetables.

We break souls as well as bodies. It is more effective. Now we can all be taken to Orwell’s dreaded Room 101 to become compliant and harmless. These "special administrative measures" are regularly imposed on our dissidents, including Syed Fahad Hashmi, who was imprisoned under similar conditions for three years before going to trial. The techniques have psychologically maimed thousands of detainees in our black sites around the globe. They are the staple form of control in our maximum security prisons where the corporate state makes war on our most politically astute underclass—African-Americans. It all presages the shift from Huxley to Orwell.

"Never again will you be capable of ordinary human feeling," Winston Smith’s torturer tells him in "1984." "Everything will be dead inside you. Never again will you be capable of love, or friendship, or joy of living, or laughter, or curiosity, or courage, or integrity. You will be hollow. We shall squeeze you empty and then we shall fill you with ourselves." The noose is tightening. The era of amusement is being replaced by the era of repression.

Tens of millions of citizens have had their e-mails and phone records turned over to the government. We are the most monitored and spied-on citizenry in human history. Many of us have our daily routine caught on dozens of security cameras. Our proclivities and habits are recorded on the Internet. Our profiles are electronically generated. Our bodies are patted down at airports and filmed by scanners. And public service announcements, car inspection stickers, and public transportation posters constantly urge us to report suspicious activity. The enemy is everywhere.

Those who do not comply with the dictates of the war on terror, a war which, as Orwell noted, is endless, are brutally silenced. The draconian security measures used to cripple protests at the G-20 gatherings in Pittsburgh and Toronto were wildly disproportionate for the level of street activity. But they sent a clear message—DO NOT TRY THIS. The FBI’s targeting of antiwar and Palestinian activists, which in late September saw agents raid homes in Minneapolis and Chicago, is a harbinger of what is to come for all who dare defy the state’s official Newspeak.

The agents—our Thought Police—seized phones, computers, documents and other personal belongings. Subpoenas to appear before a grand jury have since been served on 26 people. The subpoenas cite federal law prohibiting "providing material support or resources to designated foreign terrorist organizations." Terror, even for those who have nothing to do with terror, becomes the blunt instrument used by Big Brother to protect us from ourselves.

"Do you begin to see, then, what kind of world we are creating?" Orwell wrote. "It is the exact opposite of the stupid hedonistic Utopias that the old reformers imagined. A world of fear and treachery and torment, a world of trampling and being trampled upon, a world which will grow not less but more merciless as it refines itself."

Huge Amount of Oil Available, But…

There is a huge amount of oil which theoretically can be extracted, but the question is whether the cost will be cheap enough for us to be able to afford to extract it. If the oil is too expensive to extract, the shortage of oil seems to cause a recession, similar to what we are having now. I discuss this in purely monetary terms, but it is also an issue with respect to low energy return on investment (EROI), because oil which is of low EROI needs a high price to justify its extraction.

In many ways, the folks who say we a have lots of oil are correct. All one has to do is include the oil which is extremely expensive and slow to extract. Much of the cheap, easy-to-extract oil has already been removed.

Economic theory seems to say that if oil prices rise, substitutes are likely to be found, and these will tend to bring prices back down. When oil prices rose, we found substitutes, but they were poor substitutes. They are more generally more expensive, when all of the costs are included. Biofuels interfered with food supply; wind is a substitute for natural gas and coal in electricity production, but it is not as a transportation fuel, which is one of the things that we specifically expect to be short of.

In the above slide, I purposely exaggerated the impact of an oil price rise on food and gasoline. The effect would be greatest on a low income individual. It would also be very great, if the price rise were to something like $400 barrel.

This is pretty obvious, if you think about it. Does it sound like anything we have run into in the last few years.

Many people think of the effects of peak oil as a future event. But we are really experiencing them here and now. Oil production stopped rising in 2005, so by 2006, we were feeling the effects of the squeeze. The effects were being felt as early as 2004, when oil prices began to rise.

I have omitted several slides, showing the rise and fall of oil production in the US 48 states, Alaska, and the North Sea. At this point, most of the fields that are in easy to access locations are in decline, and we are “stuck” with what is left–the slow to extract, expensive oil from difficult locations.

So many people have equated high prices with oil shortages, that people have come to believe that if prices are low (or at least relatively low, compared to last years’ prices), everything is OK. But we really need lots of quite inexpensive oil to fuel the economy, or it goes into a recession. Reduced credit reduces demand, and has the effect of bringing oil prices down.

In the above slide, the cutback in credit is especially important. Without credit, many people cannot buy new cars, new houses, or expensive Christmas presents. All of these use oil in their manufacture and distribution, and keep oil prices up.

US consumer credit (including things like credit card loans and auto loans) peaked the same month as oil prices. Mortgage loans peaked about the same time, and many types of commercial credit have been affected. The government has tried to pick up the slack with additional borrowing, but this is not the same.

The EIA indicates that on a constant dollar basis, energy expenditures more than doubled between 1990 and 2008. Going forward, the EIA sees more increases in energy expenditures, on an inflation adjusted basis.

I might mention that one of the major uses of new technology is to bring down prices. There are limits to what can be done–if oil is very deep in the ocean, it is likely never going to be cheap to extract. The need for new technology to bring down prices is probably as great or greater with fossil fuels as it is with things like wind, solar, and biofuels. Fossil fuels are at least well adapted to running our current infrastructure. Anything that is very different will require huge expenditures for conversion.

In my view, the big question mark is how debt (and financial institutions) will do. The front page story on today’s Atlanta Journal Constitution is “Troubled banks find it hard to stay afloat”. How long will bailing out failing banks with printed money work?

The growing gap is the concern. Regardless of whether oil production remains flat, or declines fairly steeply, we have a major problem. With many people from around the world interested in using oil products, and many new cars in places like China and India, the gap between production and what we would normally consume (if prices were low and credit were available) is likely to continue to grow, even if somehow oil production could be kept flat.

In the recent past, the advanced economies have been able to “offshore” their energy intensive industries to places like China, giving the illusion that countries can get along with only non-energy intensive services like finance. But for the world as a whole, there seems to be a close relationship between growth in oil consumption and GDP growth. Since finance and some other services don’t need much oil to grow, the relationship is not exactly 1:1. Efficiency growth would also tend to raise make GDP growth higher (but declining EROI would tend to lower it).

My big concern is international trade. If debt defaults are a problem, this could interfere with the workings of the whole system, especially if it leads to major countries (perhaps Greece) defaulting on their debts.

In the years since fossil fuel use has developed, world population has greatly expanded.

We are already seeing problems with people in some of the poorer nations having adequate food. Even in the US, there are people at the margins who are “food insecure”. Currently, there are government programs to help, but states are finding it increasingly necessary to cut back, because of falling tax revenue.

It would be a lot easier to get politicians to talk about the situation if there were a good solution in sight. There are some partial mitigations, but they likely don’t get us back to “business as usual”. Voters are likely to be very unreceptive to such news.

The Peak Oil Crisis: The Time of the Demagogues

The transition from 200 years of cheap and plentiful fossil fuels to an era without will go through many phases as it gradually dawns on the body politic what is happening.

A few weeks ago Virginia's U.S. Senator Mark Warner noted that the global warming debate was not so much a scientific one as it was religious. On one side were the apostles of science and on the other was the "American way of life."

When Election Day came, it was no contest - the American way of life won hands down and numerous veteran politicians were sent packing. In state after state, "cap and trade" was widely perceived as the implacable enemy of all Americans hold dear - prosperity and economic growth.

Now it shouldn't take long for one to figure out that the good times we have enjoyed for the last 200 years or so were based on cheap energy.

If one takes some and eventfully much of the energy out of the equation, then the coming decades are simply not going to be prosperous in the conventional sense. The bottom line is that most of us will be making do with much less stuff and certainly a lot less fossil fuel powered mobility in coming years.

The trouble, of course, is that most of us don't want to hear this and many will embrace any prophet that will say drastic changes are not in store and that we can return to the life as we have always known it. Reality of course is that, unless you are among the handful that are still hunting and gathering up a remote Amazon tributary, you are going to be hurting soon. For many this has already happened.

In America, and many other places for that matter, in the last 100 or so years we managed to move much of our rapidly increasing population into cities and suburbs and find some means for them to earn a living there. This transition was underwritten by prodigious amounts of cheap fossil energy that supported people in increasing abstract occupations such as law, finance, analysis or government.

History is replete with large numbers of people willing to follow prophets to disaster.

Without the cheap fossil fuels, there will simply not be enough energy to maintain the jobs and lifestyles for many, many millions of us.

Nearly half of all Americans report that they are already hurting in some fashion from what they believe is a recession, but in reality is the beginning of the transition from one age to another less prosperous one. Give the large numbers already hurting financially, there is little wonder that so many are willing to follow voices saying they can make life better.

A simple example is the American attitude toward global warming.

A few years ago most of us were willing to accept the abstruse science that concluded that not only was global warming caused by man-made emissions, but mankind had also started along the path to wiping itself out.

The general acceptance of the idea that we had better do something to control emissions was widespread until there arose the demagogues preaching that the science was false, global warming was a natural phenomenon, the consequences of temperature rises were far in the future, and that efforts to control emissions could cost you your job or the hopes of ever getting one.

Given arguments like that, concerns for the as yet unborn great -grandchildren quickly melted and a majority of Americans now believe that controlling emissions is not a priority when compared to creating jobs.

History, unfortunately, is replete with large numbers of people willing to follow prophets to disaster. The last millennium or two has abounded in holy wars that resulted in the death of millions and the demise of many civilizations.

In our lifetime the German people followed a prophet of prosperity that resulted in the destruction of much of the civilized world. Closer to home we only have to go back 150 years to a time when hundreds of thousands died fighting for a belief that their economic well-being depended on the indefinite continuation of slavery.
At present America is abounding with demagogues professing an answer to the current economic difficulties and a restoration of the jobs and prosperity that is the American birth right.

Restoring "prosperity" in the conventional sense of acquiring more and fancier things and ever increasing real incomes will, of course, be impossible as liquid fuels become more and more expensive. As this fact of life in the 21st century is not yet widely recognized, the demagogy will continue for a while and many will be elected to public office on platforms that are simply impossible to fulfill.

The heart of the problem is that there are no simple and painless solutions to transferring mankind from an abundance of cheap energy to scarcity. So long as the false prophets of prosperity are in the political ascendency, rational efforts to prepare life in the decades ahead will be impossible.

Although the path ahead is far from clear, serious and possibly expensive efforts to make substantial reductions in energy consumption before we are forced to do so by a combination of cost and scarcity would seem an unlikely course.

As long as enough people are willing to believe that free enterprise and market forces will bring us through the coming transition through substitution of other forms of energy nothing is likely to happen until unprecedented economic pain sets in. Then perhaps we as a nation will stop trying to return to the good old days and will focus on real solutions to the pain we are all about to suffer.

Oil, Money, & War

Introduction

The next war has just begun. The era of peace and stability that we have come to know is over. We are entering an era in history, not of peaceful economic competition between nations, but a time of warfare between tribes, ethnic groups, religions, and economic systems. This war will be unlike other wars. There will be no major battlefields. Armies won’t line up to face each other and do battle. The 21st century war will be taken to the cities and suburbs as well as the skies. It will be fought with car bombs, small explosives, light armaments, and surveillance. It will be a war of men killing each other at close quarters. Battles will be replaced by skirmishes, bombings, massacres and genocide. It will be fought by regular armies against small groups known as terrorists, guerrillas, bandits and robbers. For the first time in the West, war will become personal. It won’t be watched from afar, but will be experienced first hand as immediate participants, victims or targets. In this new war, age and sex will be meaningless for many of its warriors will have little regard for life.

The Visible, Yet Invisible Face of Evil

This war will be bloody, brutal and cruel. Lives will be lost, villages and property destroyed, commerce disrupted, and governments toppled. In many ways, it will seem like medieval times. Military and economic functions will start to merge in an effort to wage war. Glory, profit and the spoils of war will be just as important as winning the war. In fact, they may become the objective of war itself. At other times it may seem that the war doesn’t exist. Most of this war will be fought covertly. Battles, victories and skirmishes may not be reported or for that matter, even known. It will be a lot like a chess game, but with real players. It will be fought through intelligence as each side tries to determine what the other side is up to in order to predict what is unpredictable. It will be fought through action as well as words. It will be visible and at the same time, invisible.

The deeds of 19 terrorists on September 11th were visible for all to see. Yet al Qaeda is visible only when it acts. It is not a nation. It has no boundaries. Its few thousand warriors are scattered throughout the world. It is both agile and highly mobile as it is invisible. It doesn’t present an easy target for the generals. This will not be an easy war to win. It will be as long as it is uncertain. There will be no measurable yardsticks for the public to view its progress. An occasional firefight, a sudden explosion, or a downed jetliner will be the only recognition that this war even exists.

Defining The New War - Shifting Plates

To some this war will be about freedom, to others it will be about revenge. To the Islamic world, it is about social unrest as well as an assertion of cultural and national identity against a background and inability to modernize in a very modern world. This war will have many facets, some of which will be political while much of it will be economic with religion thrown in between the two. Like all wars, it will disrupt the flow of power and wealth. A great power shift is taking place. Like the natural world where volcanic eruptions and earthquakes signal powerful forces are at work, the tectonic plates are on the move again. Just as those volcanic eruptions and earthquakes throw the earth's crust up into mountains and down into basins, the same events are taking place in the world's political and economic systems. The world’s present power structure and economic system are coming under severe strain. The economic eruptions that are now present in the financial and currency markets are the first signs that a Vesuvian eruption is about to be unleashed. As these political and economic plates shift under the pressure of war, a new political and economic order will emerge.

We live in a bifurcated world -- part rich, but mostly poor. It is this growing world of the poor where populations are exploding that now confront the modern world. These two worlds can no longer be walled off, separated, and viewed from a distance. The barrier that separates the two worlds is crumbling. In his book “The Coming Anarchy” Robert D. Kaplan states that "To understand the events of the next fifty years, then, one must understand environmental scarcity, cultural and racial clash, geographic destiny, and the transformation of war.” 1 The realism of which Kaplan writes and to which this Perspective Series will be directed may at times appear as unreal as it is heresy. But in Kaplan’s words, “They track well with the analyses of the military and intelligence communities, where accountability is based less on false displays of idealism than on the ability to pinpoint trouble spots a few years down the road.” 2

The Clash of Human Nature

To a western world that has known mostly peace for half a century, a prolonged and faceless war may clash with the idealisms and emotions of a pop culture centered on entertainment. We have in many ways become creatures of the moment. How and what we think, the way we vote, and yes, even how we invest, are the result of the latest news event or public opinion poll. This news is spoon fed to the masses in emotional images designed to entertain and appeal to emotion rather than reason and intellect. The media conglomerates bombard and saturate us with news events that are impassioned by classical liberal values strewn with a tunnel vision that is as narrow as it is lacking in analysis. Because of industry consolidation, what you hear, read, or see is now controlled by a handful of corporations. It is, as many have called it, The Fourth Estate. In reality, it is a power unto itself and accountable to no one. At a time of war, this is dangerous for it clouds issues and prevents real analysis from occurring. It alters public opinion at a time it needs to be marshaled for war by its leaders. The media's views are transnational whereas a president or prime minister's concerns are for their country. The media mainly speak of peace and diplomacy as the solution to the world’s ills. Appeasement is its mantra. Peace is its promise.

However, throughout history, war, not peace is the natural state of man. In the words of Professor Donald Kagan, “…over the past two centuries the only thing more common than predictions about the end of war has been war itself.” 3 The Greek historian Thucydides wrote that nations go to war out of honor, fear, and self interest. In the future, nations will go to war over resources, especially those nations prone to resource scarcity. Of all of the world’s resources, none is more likely to provoke conflict between nations in this new century than oil and water. Oil is the lifeblood of the modern industrialized state while water is the key to sustaining life. Without water, human life would cease to exist. Without oil, industrial nations will die.

Oil Is At The Root of Turmoil

The modern industrial states are dependent on oil as never before for their prosperity. Cheap and easily obtainable oil is the fluid which powers industrialized economies. These states are dependent on cheap and plentiful oil for their prosperity. This has led to a growing dependency on Middle Eastern and now Caspian oil. Meanwhile, as this bondage grows, there are no policies that would free us from this dependency. Some argue that if left to the marketplace without government interference, the laws of supply and demand will replace this dependency on oil either through conservation or substitutes. This is a naïve view which permeates much of today’s discussion on solving our energy and dependency crisis. These arguments ignore an important geological fact called depletion. If the technology existed to replace Middle Eastern oil by an alternative energy substitute, it would have been done so years ago during the last energy shock. Even if a new technology was to be discovered to replace oil, it would take years to implement. Where would the hundreds of billions, if not trillions, come from to finance such a project?

I’m afraid, as this Perspective Series will show, the only supply of cheap and affordable energy for the foreseeable future lies buried beneath the sands of the Middle East. That is where the battlegrounds of this present war are leading us. The Middle East is the land bridge that connects the masses of Europe, Africa, and Asia. On its eastern border, it is flanked by the Caspian states and the oil of the Caspian Sea. The distant drum of war is beating more loudly by the growing buildup of military forces in the region. It is not just the states that border the region that are arming but the Great Powers are building up their military presence in the region. That war is coming to this region is a foregone conclusion. It has not become a question of if, but when.

Resource Scarcity . . . A Harbinger of War

At a time of tremendous population growth and escalating demand for commodities of all types, resource scarcity will become a harbinger of war. The wars of the 21st century will arise over the scarcity of resources like water, oil and food as much as they will religion and economics. National security will become aligned and directed towards the securing and protection of global resource flows. It is become a prominent feature of American national security. As America imports more of what it needs to fuel its industries and economy, its military presence will grow even larger. Carrier battle groups now protect the flow of oil, raw materials and trade routes around the globe. American legions are stationed in over 100 countries and on all the major continents. As a major superpower, America has been both an arbiter and maker of peace. It is that position which is now being challenged.

THREE MAJOR POWERSHIFTS IN THE 21ST CENTURY

There are three major powershifts occurring around the globe that will unsettle and reshape the world of the 21st century. The aftershocks and tremors from these trends will be felt long after the earthquakes that birthed them. The first is oil which is about to deliver a powerful geological truth -- its scarcity. Sooner or later, it is going to become common knowledge that we are running out of this precious resource with nothing at present to replace it. The world is going to face this fact head-on in the next decade as developed and developing nations vie with one another for access and control over a depleting resource.

The second trend that will reshape this century is the current monetary system which has been built and based on a fiat money system. The world is about to relearn a valuable lesson from history. Money is a commodity. This commodity differs from other commodities in that its demand comes mainly from being a medium of exchange. Like all commodities, what determines its price is the same. The price of money is determined by the laws of supply and demand. Increase in the supply of money tends to lower its price, while increase in the demand for money will make its price rise. Governments have sought to meddle with this process by altering its supply while trying to keep its price stable. The result of this meddling has been chaos in the world’s monetary system. From Mexico in 1994, to Asia in 1997, Russia in 1998, Turkey in 2000, Argentina in 2001, Venezuela, Uruguay and now Japan in 2002, the system is breaking down. A coercive money system that is forced on people eventually brings the conflict and chaos which we are now witnessing.

The third shift will be war itself. This shift will be about who fights the war, what the war is about, and how the war is fought. The nation states' monopoly on violence is slowly eroding. Powerful nations must now deal with terrorism which poses a new challenge to its monopoly on power. This new war has just begun. In the words of President George W. Bush, responding to the terrorist attacks against the Trade Center on September 11, “You just witnessed the opening battle of the first war of the 21st century.” 4 In this new century, war will be waged by states, but increasingly by groups we call terrorists, guerrillas, or bandits. It will be fought over resources, over religion and tribe and for the larger players, over economic systems. It is from the shifting of these tectonic plates that a new world order will emerge. Its shape, form and victor at this time are still unknown.

Tremor #1: Oil

“The Great Game” is a term used by politicians and historians to denote the foreign policy of Great Britain from the Napoleonic Wars onward to its fight to shield its Indian Empire from onslaughts by France and Russia. The term was coined by a British officer named Arthur Conolly. Conolly played at this game while serving the British Empire in the Himalayans, deserts and the oases of Central Asia. Conolly met his end through an Uzbek emir who tortured and then beheaded him. The term “The Great Game” was found among his papers. The phrase began to be quoted by historians in reference to the first Afghan War and was later made famous by Rudyard Kipling in his novel, “Kim”. 5 The Game began with the Duke of Wellington when he became Prime Minister as a strategy to keep India from being attacked by Russia through Afghanistan. The Game was played throughout the 19th century and culminated in the creation of what we now know as the Middle East. The Middle East was fabricated in Europe as a result of decisions made by the Allies during and after the First World War.

The Great Game pitted England against European rivals in the halcyon days of empire building during the late 19th and early 20th century. In the early days of the 20th century, the Ottoman Empire ruled much of the Middle East. Britain saw the Middle East as a buffer zone between its Indian Empire and a growing political threat from France, Germany, and Russia.

The Middle East became a cauldron for national economic interests. It became the chess board on which the major powers played their game. Great Britain embarked upon a vast new imperial expansion that would take decades to play out. As a result of the politics of the First World War, Britain and France decided to occupy and partition the Middle East. The great powers thought they could reshape and mold the Middle East in their own image. The result was that they created an artificial state system that ignored a fundamental tenet within the region -- religion.

Today "The Great Game” is still being played. The artificial boundaries which were created as a result of the First and Second World War still exist, but are now unraveling. Another factor has been introduced to The Game -- oil. At the time the Middle East was partitioned by the great powers, oil was not a consideration. The vast oil reserves of the region were not yet known. The United States was the world’s largest exporter of oil. Great Britain imported the majority of its oil from the United States well into the first half of the 20th century. Now it is known that the region contains close to 70% of the world’s known oil reserves. If the Caspian Sea’s reserves are added in, the Middle East contains over 80% of the world’s oil.

In the present time, the region has become a vast political cauldron that mixes oil and religion. Instability has become a part of life in the Middle East as a result of the Islamic Revolution. The only peace and security the West can now have will come only if there is stability in this part of the world. The prosperity of the industrialized West is based on affordable oil from the Middle East. The most serious threat to that stability is the rising tide of fundamental Islam in Middle Eastern politics. Foreign powers are still playing at The Great Game in an effort to shape events in the region to suit their own self interests. But now those self interests are threatened and both major players and lesser players have much to lose. For the West, it is the economy and a way of life. For the residents of the region, it has become a matter of life and death. That death toll is rising each day.

The Game is about to enter its third and final phase with the stakes never higher. If the West does not act wisely and decisively, then The Great Game may be lost with tragic consequences for both sides. The wars and tragedies of the past will pale by comparison to what may lie ahead if radical Islam triumphs in the region. For the West, it will mean the end of cheap oil and a way of life. For the Middle East, it will mean more bloodshed and poverty. And for the Great Powers, it could lead to greater confrontation and the next World War.

Tremor # 2: Money

Loss of Confidence

On August 15th, 1971 President Nixon brought the Bretton Woods system to an end. For the first time in American history, the dollar would become a fiat currency without any gold backing. The threat of European Central Banks demanding gold for dollars ended gold backing of the dollar. From that point forward, the US would begin an era of deficit spending freed from the shackles of gold that had forced fiscal discipline. The world would revert to the fiat system of the 1930’s. From that point in time, the financial system would go through one upheaval after another. The result was a new era characterized by competing currency devaluations and international monetary instability. As the international monetary system moved into an age of freely floating exchange rates new risks were imposed upon the world’s economies. Interest rate and currency risk were added on to business risk. Under a fixed rate exchange system anchored by gold, these risks weren’t as prevalent.

Derivative Models Give Risk a New Game

A system of freely floating currencies emerged and the world of business adapted with innovative financial instruments called derivatives. With the advent of the Black Scholes model, risk could now be measured in terms of volatility. Introduced to the world by three economists -- Fisher Black, Myron Scholes, and Robert Merton -- their elegant theory would cause the derivatives markets to explode. Businesses could now hedge against currency risk and interest rate risk brought about by the abandonment of fixed exchange rates under the Bretton Woods system. Models could now be developed to allow businesses to hedge against any risk with multiple options to insure against any kind of financial calamity. You could use forward contracts, option contracts, options on futures, swap contracts, or any derivation or combination of the above. The markets grew as the hazards of operating internationally grew. Governments soon found out, with currencies no longer anchored by gold, they could inflate at will. They could expand or contract the money supply through the expansion or contraction of credit. Instead of gold, currencies would be anchored by interest rates. The supply and demand for money would now be controlled by the rate of return offered by paper investments.

A "Simple" Money Game

A new system developed in place of the gold-backed systems of the past, and another new experiment with money began. These architects thought they had invented a new way around the failure of past fiat systems. Complex economic models came into vogue in which governments thought they could fine tune the economy. The complex interactions of the marketplace and the interweaving of human action were ignored in favor of mathematical models that predicted certainty. Input “a” mixed with input "b” equaled output “c”. It was that simple and yet, not so simple. To be sure, the models were elaborate in their structure and detailed as to their output. The only trouble was that they weren’t as accurate or controllable on their outcome. They still ignored Adam Smith’s “invisible hand."

A New Breed of Speculators

As this new system was being developed, a new element injected its way into the system in response to a government-imposed fiat system. It was the “speculator” who now emerged to challenge the power of the fiat system and central banks. These financial warriors battle against each other and vulnerable governments in their quest to amass wealth. They move and operate in the world's capital markets. Their weapons are money and on a daily basis, they move trillions of dollars throughout the world’s monetary system. Their battlefield has become the world’s currency market which is the common link to all other financial markets around the globe. They have become the vigilantes of the financial system enforcing economic law against recalcitrant governments. Their motivation is not love of law -- it is the pursuit of profit that propels them into action.

In the financial markets, the battle for confidence is fought between these two opposing armies. Like the real wars of today where armies of the state are pitted against small armed groups in the financial markets, it is central banks against these master-less financial samurai. Governments disparagingly refer to them as the “Electronic Herd”, a term popularized by journalist Thomas Friedman. The herd is made up of hedge funds, mutual funds, pension funds, commercial banks, insurance companies, professional money managers and wealthy investors. Just as governments have enormous financial reserves that they can marshal into battle, the Electronic Herd is capable of matching the resources of governments, and at times, overwhelming these forces. The weapon of the herd is leverage. It is the great equalizer. Through complex financial instruments known as derivatives, they become a force multiplier that enables financial players like hedge funds to humble governments. In 1992, George Soros was able to use the leverage of derivatives to force England out of the European Monetary System’s Exchange Rate Mechanism. In the process, he forced England to devalue its currency when its Prime Minister John Major said he wouldn’t. The spoils of the battle went to Soros who made a billion dollars in a few days.

These financial ronin have taken on governments wherever they think they are vulnerable. They battled inflationary policies in Mexico in 1994, Asia in 1997 and in the process, they’ve broken down the walls that separate national economies and financial markets. They have become both judge and jury over governmental policies with the ability to punish them financially. At times, they seem invincible. At other times, they seem vulnerable. Many times they win. Other times they lose. And when they lose, they can wreck havoc on both sides of the battlefield as in 1998 when LTCM nearly drove the world’s financial system to its knees. Right now they are engaged in battle in Latin America against the fiat systems of Argentina, Venezuela, and Uruguay and in Asia against Japan.

The Gauntlet Has Been Thrown

A bigger battle has just begun in the U.S. which will become the ultimate battle in the confidence game. The first skirmishes have taken place in the financial markets where over a trillion dollars of investor wealth has disappeared. Opinions still run in favor of the power of the Fed to revitalize the U.S. economy and ultimately the U.S. stock market. The reputation of the U.S. central bank has been elevated to a pedestal where it is thought to be invincible. It is this invincibility that is about to be challenged -- first in the stock and bond markets, and then in the currency markets. It is the dollar that is now most vulnerable. The dollar has become the fulcrum on which the financial markets rest in an uneasy balance. The dollar is about to be devalued and it is the next target for the herd. The U.S. has been running up monstrous trade deficits to the tune of over $1 billion dollars a day. For all of 2001, the U.S. trade imbalance for goods and services was $346.3 billion. 6 The growing trade deficit poses a real threat to the US financial system. No country in history has ever been able to sustain a large trade deficit without paying a financial price.

The dollar and U.S. financial assets like stocks and bonds are headed for a steep fall, contrary to Wall Street hype of another boom. The gross imbalances in corporate debt, consumer debt, and grossly-inflated profits through financial engineering (only now being exposed) are going to lead the world into the steepest recession of the post-World War II era. The root cause of this recession is the financial bubble created by an unmitigated credit boom fed by an expansionist monetary policy of the U.S. Federal Reserve. You can feel the tremors in the financial markets in the U.S. which have begun their third year of decline. It is also visible in the Treasury markets which have failed to rally as short-term rates have plunged. The U.S. markets are held together in a precarious balance made up of numerous financial bubbles waiting for a shock wave that will cause them to burst. This could be the year of “big surprises” and “unexpected events” -- a time when global financial problems are magnified by the introduction of war.

Tremor # 3: War

The flint of war routinely sparks,
No steel need ever strike it.
To arms! is nature’s hearty cry;
We fight because we like it.
-- Art Buck

In 1968 historians Will and Ariel Durant had calculated that in over 3,421 years of recorded history, the world had enjoyed only 268 years of peace. 7 It has become a familiar refrain of Western ideology to believe that man is capable of changing and controlling the physical and social environment in which he inhabits. Wiser philosophers have concluded that this propensity to impose one’s ideology on another often leads to war. It is a constant struggle brought about by the competition for power. In this competition between states the resolution of a conflict is often resolved through the venue of war. In the words of the Prussian statesman Carl von Clauswitz, “War is the continuation of politics by other means… War is an act of force to compel our enemy to do our will.” 8

The study of war has been the primary task of historians, but one can’t help but realize how oftentimes those wars have been unnecessary. In the words of Professor Donald Kagan, “A persistent and repeated error through the ages has been the failure to understand that the preservation of peace requires active effort, planning, the expenditure of resources, and sacrifice, just as war does. In the modern world especially the sense that peace is natural and war an aberration has led to a failure in peacetime to consider the possibility of another war, which, in turn, has prevented the efforts needed to preserve the peace”. 9

Leviathan, The Missing Element

According to Thomas Hobbes, man is in wanton need of a Leviathan. One of mankind’s greatest fears is of violent death or death at the hands of another human being. It is this fear that causes humans to submit themselves to government. They do so willingly in an effort to bring about order. The luxury of freedom is only possible once order has been established. That is why throughout history the greatest periods of peace have been when there was a giant Leviathan that kept order. One of the greatest illusions of the post-Cold War era is that of permanent peace. Since the break up of the former Soviet state, the world has been characterized by greater conflicts. Could it be because the power of the Soviet state to police its sphere has receded? One of the greatest challenges in this new century will be to reestablish of order created by the vacuum of the end of the Cold War. For good or bad, the great European empires of the 19th century kept the world in relative peace. It has been the disintegration of those empires that has now given way to so many of the conflicts of the 20th and now the 21st century.

The Clash of Two Worlds

It is this new challenge of the reestablishment of order out of chaos that confronts one of the world’s last remaining leviathans -- the United States. Many will disagree with this concept out of national, economic, tribal or ethnic loyalty. However, one only has to look at the annals of history to see a world without a Leviathan. The Dark Ages and the battle between city states during the Middle Ages stand in sharp contrast to the peace of great empires. The bifurcated world we live in is a world of opposites that stand in sharp contrast to each other. One world is aging and prosperous, while the other is poor, young, and growing more violent. These two unequal worlds are now confronting each other no longer separated by the vast distances of ocean. They are brought together more closely through the revolution in information. At a time that the power of the nation-state seems to be withering, it remains a challenge of supreme statesmanship to bring about a new sense of order.

Robert D. Kaplan, in his new book “Warrior Politics," quotes the English political philosopher E. H. Carr in saying ”…Power cannot be created out of thin air… every approach in the past to a world society has been the product of the ascendancy of a single Power. There is no sign that this has changed.” 10 Many of American values are in ascendancy around the globe -- from business models to culture and democracy. At the same time, there is another model that is rising to confront it -- Islamic fundamentalism.

The opening battle of this new war began with the bombing of the World Trade Center on American soil. This new war has just begun and is entering its second and deadliest phase. The next phase of the war is likely to be against nation states like Iraq or possibly Iran. The growing power of a fanatical theocracy in Iran is another time bomb on a short fuse, capable of joining other conflicts in the region and turning them into a wider conflagration. The Iraqi dictatorship of Saddam Hussein is of immediate concern. Without the resolution to the Iraqi threat and Saddam’s potential to use weapons of mass destruction, instability in the region will only increase. The growing clash between Israelis and Palestinians is yet another unresolved conflict in this new war. Added to the mix are the issues of the unstable monarchies of Saudi Arabia, Kuwait and other Gulf States. At the same time, there is an arms race within the region that has the potential to destabilize and turn the current Israeli-Palestinian conflict into a much wider scale war. These are just a few of the ticking time bombs in the Middle East that could change the existing order and power within the world.

For Americans, this will be a different kind of war. This war will be personal, viewed up-close and experienced first-hand. The opening battle began on American soil. The vast oceans that surround the U.S. no longer afford the country protection. In the age of travel and mobile missiles, the world has become a much smaller place. Geography is no longer a defensive advantage. In fact, our open borders and freedom only make us more vulnerable. In this new war, the antagonists refuse to play by our rules. America will have to fight this war on two fronts --one on the battlefield and the other in the diplomatic arena. Both are necessary to prosecute this war. At times the burden of power and fighting this war will be experienced alone. At other times, it will mean working with friends as well as adversaries. It is a responsibility from which this nation cannot retreat, if American power is to endure. Unlike the last century, there is no other power to replace it.

The Challenges America Will Face in the 21st Century

Our resolve is about to be challenged. Our commitment to the successful prosecution of this war will be tested by the absence of constant conflict and economic uncertainty. Excluding Osama bin Laden, this war will be fought against an faceless enemy. There isn’t a country, a national leader, an immediate threat or a grand prize on which to focus our attention. For this reason, the memory of September 11th is quickly fading from American consciousness. This makes it more difficult for the Bush Administration to keep the public’s attention focused and in support of the war's efforts. That is why the next phase of the war will be against nation states -- an enemy with a more visible face.

The other test will come from economic uncertainty. Our country is currently in recession. During periods of recession, government expenditures rise as unemployment and transfer payments increase. At the same time, tax receipts shrink as profits decline and unemployment rises. This creates deficits. There is already talk in Congress of reducing our military commitments in favor of domestic consumption, an argument that is now being made as an alternative solution to combating the current recession. The threat of danger recedes with each new week that passes by. For many there is nothing but confusion over foreign policy and defense issues. This is heightened by the fact that the media has trouble understanding it since it is invisible and can’t be televised.

Make no mistake: America is in danger. The major cutbacks in America’s armed forces over the last decade and in particular by the past administration have only encouraged our enemies. The last decade has seen the rise of hostile states and powerful coalitions that threaten America’s peace and security. There are many in power who advocate appeasement and negotiation as the only instruments of conducting foreign policy. However, foreign policy, if not backed by sufficient military force, is doomed to failure. The price of peace is eternal vigilance. There can be no alternative course for keeping the peace than an engaged foreign policy that is backed by an overwhelming military force. It is the equivalent of preventive medicine in that it is far cheaper than the cost of war.

The world we now live in has become a more dangerous place. There are many states and would-be dictators with grand illusions and the need to do great things. The air of despotism is in the air. Each new week brings more evidence of a world that is becoming destabilized. Columbia seems to be plunging into civil war. Neighboring Venezuela, the fourth largest exporter of oil within OPEC, is undergoing a major political crisis. In Iran there is internal dissent between the governed and those who govern them. India and Pakistan are still at odds with each other, while the Israelis and the Palestinians are locked in mortal combat.

These are the matters of immediate political concern. But destabilization is not confined to the political realm. On the economic front, Argentina’ crisis threatens to turn into another Latin American brushfire spilling over into other states. In Asia, you can feel the tremors of a major earthquake coming from Japan, where an already bad situation could spread and become a worldwide contagion.

It appears at the moment that crisis and instability are everywhere. The destabilization process is intensifying and expanding from countries to continents. Economic turmoil has spread like brushfires from the currency markets to the stock and bond markets, while military conflict seems to be cropping up everywhere. There doesn’t seem to be an end in sight to the regional wars that keep on proliferating. Unlike past crises, they are not localized. They can now be found erupting on every continent including North America with the United States. They represent signs of a Powershift that is taking place -- rooted in oil and money and resolved by war.

The events and conflicts that are described in this essay may not unfold in the manner that has been written. The future is unpredictable and is full of twists and turns. History teaches us that terrible storms can appear with little or no warning and when they do they can cause great harm. This Perspectives series is based on my own observations and experience following the financial markets and as both a reader and student of history.

The installments that follow will build on the premises outlined in this introduction. As in previous Perspectives, I hope to stimulate new thoughts on events that are emerging. It is my belief that to prosper in this age of destabilization and economic turmoil, it will be necessary to think in historical terms. In the upcoming segments on oil, I will discuss its importance in the twilight of the petroleum age, the economics behind it, its key role in war, and why I believe it will be a profitable area for investing over this next decade. In the section on money, I will lay out a case why the present monetary system is doomed to collapse, the role that gold and silver will play in restoring stability to the financial system, and the upcoming bull market for precious metals that has already begun. I will also expand on my rogue wave thesis and the danger that derivatives pose to the financial system. Finally, in the section on War, I will talk about future conflicts and the revolution in military affairs (RMA), why this war will be different than any others we have fought before, and the investment opportunities it presents. I leave it to the reader to decide whether it is prudent to stay with the trends of the past or to start thinking outside the box.

-- James J. Puplava, CFP

Lies Across America

“Every single empire, in its official discourse, has said that it is not like all the others, that its circumstances are special, that it has a mission to enlighten, civilize, bring order and democracy, and that it uses force only as a last resort.” – Edward Said

The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers. Aldous Huxley had it figured out decades ago:

“Thanks to compulsory education and the rotary press, the propagandist has been able, for many years past, to convey his messages to virtually every adult in every civilized country.”

Americans were given the mental capacity to critically think. Sadly, a vast swath of Americans has chosen ignorance over knowledge. Make no mistake about it, ignorance is a choice. It doesn’t matter whether you are poor or rich. Books are available to everyone in this country. Sob stories about the disadvantaged poor having no access to education are nothing but liberal spin to keep the masses controlled. There are 122,500 libraries in this country. If you want to read a book, you can read a book. The internet puts knowledge at the fingertips of every citizen. Becoming educated requires hard work, sacrifice, curiosity, and a desire to learn. Aldous Huxley describes the American choice to be ignorant:

“Most ignorance is vincible ignorance. We don’t know because we don’t want to know.”

It is a choice to play Call of Duty on your PS3 rather than reading Shakespeare. It is a choice to stand on a street corner looking for trouble rather than reading Hemingway. It is a choice to spend Black Friday in malls fighting other robotic consumers for iSomethings, the latest innovative, advanced TVs, flashy Rolexes, and ostentatious Coach bags rather than spending the day reading Guns of August by Barbara Tuchman, a brilliant Pulitzer Prize winning history of the outset of World War I, which would provide insight into what could happen on the Korean Peninsula. It is a choice to watch 6 hours per day of Dancing With the Stars, American Idol, Brainless Housewives of Everywhere, or CSI of Anywhere rather than reading Orwell or Huxley and discovering that their dystopian warnings have come true.

Conspicuous Consumption Conquistadors

Americans have chosen to lie to themselves. They have persuaded themselves that buying stuff with plastic cards while paying 19% interest for eternity, driving BMWs while locked into never ending indecipherable lease schemes, and living in permanently underwater McMansions bought with 0% down on an interest only liar loan, is the new American Dream. They think watching the boob tube will make them smart. They soak in the mass media hype, misinformation and lies like lemmings walking off a cliff. Depending on their political predisposition, they watch Fox or MSNBC and unthinkingly believe the propaganda that pours from the mouths of the multi-millionaire talking heads who read Teleprompters with words written by corporate media hacks. They tell themselves that buying stuff on credit, giving them the appearance of success as measured by the media elite, is actually success. This is a bastardized, manipulated, delusional version of accomplishment. Americans have chosen to believe the lies because the truth is too hard to accept.

Becoming educated, thinking critically, working hard, saving money to buy what you need (as opposed to what you want), developing human relationships, and questioning the motivations of government, corporate and religious leaders is hard. It is easy to coast through school and never read a book for the rest of your life. It is easy to not think about the future, your retirement, or the future of unborn generations. It is easy to coast through life at a job (until you lose it) that is unchallenging, with no desire or motivation for advancement. It is easy to make your everyday troubles disappear by whipping out your piece of plastic and acquiring everything you desire today. If your brother-in-law buys a 7,000 sq ft, 7 bedroom, 4 bath, 3 car garage, monolith to decadence for his family of 3, thirty miles from civilization, with no money down and a no doc Option ARM providing the funds, why shouldn’t you get in on the fun. It’s easy. Why sit around the kitchen table and talk with your kids, when you can easily cruise the internet downloading free porn or recording every trivial detail of your shallow life on Facebook so others can waste their time reading about your life. It is easiest to believe your elected leaders, glorified mega-corporation CEOs, and millionaire pastors preaching the word of God for a “small” contribution to their mega-churches.

Americans love authority figures who act as if they have all the answers. It matters not that these egotistical monuments to folly and hubris (Bush, Obama, Paulson, Geithner, Greenspan, Bernanke) have committed the worst atrocities in the history of our Republic, leaving economic carnage and the slaughter of thousands in their wake. The most dangerous man on this earth is an Ivy League educated, arrogant ideologue who believes they are smarter than everyone else. When these men achieve power, they are capable of producing catastrophic consequences. Once they seize the reigns of authority these amoral psychopaths have no problem lying to the American public in order to achieve their objectives. They know that Americans love to be lied to, so the bigger the lie, the more likely it is to be believed.

The current lie proliferating across the land of the free financing and home of the debtor is that austerity has broken out across the land. The mainstream media and the government, aided by various “think tanks” and Federal Reserve propagandists insist that Americans have buckled down, reduced spending, increased savings, and have embraced austerity.

Austerity – Circa 1932

Austerity – Circa 2010

They now proclaim that it is time to spend again. It is the patriotic thing to do, just like defeating terrorists by buying an SUV with 0% down from GM was the patriotic thing to do after 9/11. Defeating terrorists by going further into debt was the brilliant idea of those Ivy League geniuses Bush & Greenspan. Let’s critically examine the facts to determine how austere Americans have become:

• Consumer credit outstanding is $2.41 trillion, the same level reached in early 2007, and up from $1.5 trillion in 2000. This is a 60% increase in ten years. Personal income has risen from $8.4 trillion to $12.6 trillion over this same time frame, a 50% increase. Americans have substituted debt for income in order to keep up with the Joneses. The mass delusion lives.
• The MSM declares that the reduction in overall consumer debt from its peak of $2.56 trillion in 2008 to $2.41 trillion today proves that consumers have been cutting back and paying off debt. This is another media lie. Non-revolving debt, which includes car loans, education loans, mobile home loans and boat loans sits at $1.6 trillion, an all-time high matched in 2008. Credit card debt has “plunged” from $957 billion to $814 billion, not because consumers paid down their balances. The mega Wall Street banks have written off $20 billion per quarter since early 2009, accounting for ALL of the reduction in credit card debt. Clueless consumers continue to charge at the same rate as the peak in 2008.
• Average credit card debt per household with credit card debt: $15,788
• There are 609.8 million bank credit cards held by U.S. consumers.
• The U.S. credit card default rate is 13.01%
• In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space – and be almost as tall as 13 Mount Everests.
• Penalty fees from credit cards added up to about $20.5 billion in 2009.
• The national average default rate as January 2010 stood at 27.88% and the mean default rate is 28.99%.
• Total bankruptcy filings in 2009 reached 1.4 million, up from 1.09 million in 2008. Bankruptcies in 2010 are on pace to exceed 1.6 million.
• 26% of Americans, or more than 58 million adults, admit to not paying all of their bills on time. Among African-Americans, this number is at 51%.

Does This Look Like Austerity? Really?

This data clearly proves that austerity has not broken out across the land of delusion. The billions in consumer loan write-offs by the Wall Street banks that run this country have masked the fact that Americans have not cut back on their spending habits at all. GMAC (taxpayer owned) and Ford Credit continue to dish out car loans to anyone with a pulse and a 600 credit score. The Federal Reserve and the FASB have encouraged, if not insisted, that banks fraudulently value the commercial real estate loans on their books. The Federal Reserve has bought $1.5 trillion of toxic mortgage loans from the criminal Wall Street banks at 100 cents on the dollar. The government’s corporate fascist public relations firms then spread the big lie that the economy is recovering and consumers should join the party and spend, spend, spend.

If Americans were capable or willing to do some critical thinking, they would realize that those in power have created the illusion of a recovery by handing $700 billion of your money to the banks that created the financial meltdown, spending $800 billion on worthless pork barrel projects borrowed from future generations, dropping interest rates to 0% so that the mega-Wall Street banks can earn billions risk free while your grandmother who depended on interest income from her CDs edges closer to eating cat food to get by, and lastly Ben Bernanke’s blatant attempt to enrich Wall Street by buying US Treasury bonds in an effort to make the stock market go up, while the middle and lower classes are crushed under the weight of soaring fuel and food price increases that exceed 30% on an annual basis. The illusion of recovery is not a recovery. With a true unemployment rate of 22%, a true inflation rate of 8% and a real GDP of -1.5% (Shadowstats), we are in the midst of the Greater Depression. You are being lied to, but most of you prefer it.

The Little Lies We Tell Ourselves

“Our ignorance is not so vast as our failure to use what we know.” – M King Hubbert

When Jimmy Carter gave his malaise speech in 1979, Americans were in no mood to listen. Carter’s solutions were too painful, required sacrifice, and sought to benefit future generations. The leading edge of the Baby Boom generation had reached their 30s by 1979, and the most spoiled, pampered, egocentric generation in history could care less about future generations, long term thinking, or sacrifice for the greater good. They were the ME GENERATION. The 1970s had proven to be tumultuous episode in US history. M King Hubbert’s calculation in 1956 that U.S. oil production would peak in the early 1970s proved to be 100% correct.

The Arab oil embargo resulted in gas shortages and economic chaos in the U.S. Hubbert used the same method to determine that worldwide oil production would peak in the early 2000s. If long term planning had been initiated in the early 1980s, combining exploration of untapped reserves, greater utilization of natural gas, development of nuclear plants, more stringent fuel efficiency standards, increased taxes on gasoline, and more thoughtful development of housing communities, we would not now face a looming oil crisis within the next few years. Instead of dealing with reality, adapting our behavior and preparing for a more localized society, we put our blinders on, chose ignorance over reason and pushed the pedal to the medal by moving farther away from our jobs, building bigger energy intensive mansions, and insisting on driving tank-like SUVs, Hummers, and good ole boy pickups. Kevin Phillips in American Theocracy explained that hyper-consumerism, fear, and inability to use logic have left our suburban oasis lives in danger of implosion when the reality of peak cheap oil strikes:

Besides the innate thirst of SUVs, some of the last quarter century’s surge in U.S. oil consumption has come from Americans driving more – some twelve thousand miles per motorist per year, up almost one – third from 1980 – because they as a whole live farther from work. In consumption terms, exurbia is the physical result of the latest population redistribution enabled by car culture and the electorate that upholds it.

Family values are central – if by this we mean having families and accepting lengthy commutes to install them in reasonably safe and well churched places. In the 1970’s such households might have been fleeing school busing or central city crime; in the post – September 11 era, many sought distance from “godless” school systems or the random violence and terrorist attacks expected to occur in metropolitan areas.

We willingly believe the lies espoused by the badly informed pundits on CNBC and Fox that if we just drill in Alaska and off our coasts, we’ll be fine. The ignorant peak cheap oil deniers insist there are billions of barrels of oil to be harvested from the Bakken Shale, even though there is absolutely no method of accessing this supply without expending more energy than we can access. Environmentalists lie about the dangers of nuclear power, while shamelessly promoting the ridiculous notion that solar, wind and ethanol can make a visible impact on our future energy needs. Ideologues on the right and left conveniently ignore the facts and the truth is lost in a blizzard of their lies. Here is an explanation so clear, even a CNBC “drill baby drill” dimwit could understand:

When oil production first began in the mid-nineteenth century, the largest oil fields recovered fifty barrels of oil for every barrel used in the extraction, transportation and refining. This ratio is often referred to as the Energy Return on Energy Investment (EROEI). Currently, between one and five barrels of oil are recovered for each barrel-equivalent of energy used in the recovery process. As the EROEI drops to one, or equivalently the Net Energy Gain falls to zero, the oil production is no longer a net energy source. This happens long before the resource is physically exhausted.

After the briefest of lulls when oil reached $145 per barrel, Americans have resumed buying SUVs, pickup trucks, and gas guzzling muscle cars. They have chosen to ignore the imminence of peak cheap oil because driving a leased BMW makes your neighbors think you are a success, while driving a hybrid would make your neighbors think you are a liberal tree hugger. It boggles my mind that so many Americans are so shallow and shortsighted. According to Automotive News, at the start of 2008 leasing comprised 31.2% of luxury vehicle sales and 18.7% of non-luxury sales. This proves that hundreds of thousands of wannabes are driving leased BMWs and Mercedes to fill some void in their superficial lives.

I bought a Honda Insight Hybrid six months ago. It gets 44 mpg and will save me $1,500 per year in gasoline costs. I put 20% down and financed the remainder at 0.9% for three years. My payment is $450 per month. I will own it outright in 2 ½ years. I could have leased a 2010 BMW 328i with moonroof, bluetooth, power seats with driver seat memory, lumbar support, leather interior, iPod adapter, 17″ alloy wheels, heated seats, wood trim, 3.0 Liter 6 Cylinder engine with 230 horsepower for 3 years at $389 per month. At the end of 3 years I’d own nothing. In 2 ½ years I’ll be able to put $450 per month away for my kids’ college education and I’ll be saving more on fuel as gasoline approaches $5 per gallon. The self important egotistical BMW leaser pretending to be successful will need to hand over their sweet ride and move on to the next lease, never saving a dime for the future. I’m sure they’ll make a killing in the market or their McMansion will surely double in price, providing a fantastic retirement.

Delusional Practical

The delusion that cheap oil is a God given right of all Americans can be seen in the YTD data on vehicle sales. Pickups and SUVs account for 48.5% of all sales, while small fuel efficient cars account for only 16.5% of all sales. Americans will continue to lie to themselves until it is too late, again.

	Oct 2010	% Chg from Oct’09	YTD 2010	% Chg from YTD 2009
Cars	448,127	3.9	4,840,525		5.3
Midsize	220,998	-0.2	2,407,457		9.9
Small	142,983	9.7	1,616,840	-1.5
Luxury	78,487	9.7	742,278		7.2
Large	5,659	-31.9	73,950	-0.8
Light-duty trucks	502,038	23.5	4,730,196		16.7
Pickup	147,207	16.9	1,334,133		13.9
Cross-over	195,274	20.0	1,928,191		16.8
Minivan	55,596	21.0	561,736		15.1
Midsize SUV	51,494	86.6	443,922		37.9
Large SUV	23,946	1.5	202,806		12.1
Small SUV	14,861	53.6	146,000	-3.8
Luxury SUV	13,660	22.1	113,408		26.2
Total SUV/Cross-over	299,235	27.4	2,834,327		18.3
Total SUV	103,961	44.3	906,136		21.7
Total Cross-over	195,274	20.0	1,928,191		16.8

Americans are so committed to their automobiles, hyper-consumerism, oversized McMansions, and suburban sprawl existence that they will never willingly prepare in advance for a future by scaling back, downsizing, or thinking. Our culture is built upon consumption, debt, cheap oil and illusion. Kevin Phillips in American Theocracy concludes that there are so many Americans tied to our unsustainable economic model that they will choose to lie to themselves and be lied to by their leaders rather than think and adapt:

A large number of voters work in or depend on the energy and automobile industries, and still more are invested in them, not just financially but emotionally and culturally. These secondary cadres included racing fans, hobbyists, collectors, and dedicated readers of automotive magazines, as well as the tens of millions of automobile commuters from suburbs and distant exurbs, plus the high number of drivers whose strong self-identification with vehicle types and models serve as thinly disguised political statements. In the United States more than elsewhere, a preference for conspicuous consumption over energy efficiency and conservation is a signal of a much deeper, central divide.

M King Hubbert was a geophysicist and a practical man. He observed data, made realistic assumptions, and came to logical conclusions. He didn’t deal in unrealistic hope and unwarranted optimism. He knew that our culture had become so dependent upon lies and an unsustainable growth model based on depleting oil and debt based “prosperity”. He knew decades ago that we were incapable of dealing with the truth:

“Our principal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have evolved what amounts to an exponential-growth culture, a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of non-growth.” – M King Hubbert

Our country is at a crucial juncture. It is time for thinkers. It is time for realists. It is time to deal with facts. It is time to drive the ideologues off the stage. Are you tired of lying to yourselves? Are you tired of being lied to by the corporate fascists that run this country? It is time to wake up. Right wing and left wing ideologues will continue to spew lies and misinformation as they are power hungry and care not for the long-term survival of our nation or the unborn generations that depend upon the decisions we make today. It is time to see how we really are.

“Most of one’s life is one prolonged effort to prevent oneself from thinking. People intoxicate themselves with work so they won’t see how they really are.” – Aldous Huxley

Middle East OPEC reserves revisited

According to the BP statistical review of world energy 2010, the big six Middle East OPEC oil producers (Saudi Arabia, Iran, Iraq, Kuwait, Unite Arab Emirates (UAE) and Qatar) had 743 billion barrels (Gbs) of proved oil reserves (1P) between them, representing 56% of reported proved global oil reserves. Knowledge of this bounty provides OECD governments with much comfort. The trouble is there is no chance these figures are correct. A simple analysis of the published BP data that corrects reserves for historic production and questions reserves revisions that took place during the 1980s points to a proved plus probable (2P) reserves figure in the range 160 to 545 Gbs for this group of countries. It is high time that BP noted in its statistical review that the reserves reporting standard of ME OPEC countries is different to that used by the OECD.

Figure 1 ME OPEC reserves history from BP statistical review of world energy 2010. Chart is copied from an earlier version produced by Rune Likvern.

What is wrong with ME OPEC reserves reporting?

Many regular readers of The Ol Drum will be all too familiar with the following arguments raised against the validity of ME OPEC reserves as reported by BP, this post is written for those who have not heard the story before. Issues with reporting standard fall into two categories, 1) large upwards revisions to reserves that took place during the 1980s and 2) flat line reporting of reserves over time (Figure 1). I will deal with flat line reporting first, but first a few words on reserves reporting standards and mechanisms.

It is important to know that there are two very different reporting standards in operation. The Security Exchange Commission (SEC) guidelines (pdf warning) are very conservative and will normally lead to gross under reporting of reserves in immature oil fields and provinces. The Society of Petroleum Engineers (SPE) guidelines (pdf warning) are much more flexible, with multiple categories, offering companies and countries the opportunity to estimate what may reasonably be expected to be recovered ultimately.

BP specifically reports proved oil reserves (1P) attaching this definition to the spread sheet:

“Proved reserves of oil - Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions.”

This is paraphrasing the SEC guidelines and yet it is quite clear that ME OPEC countries are reporting figures more allied to SPE 2P category that includes proved + probable and are non compliant with the standard adopted by BP.

Flat line reporting

A simple scheme for annual adjustments to reserves is as follows:

reserves at start of year
+ new discoveries
± revisions
- production
reserves at end of year

Since 1980, the 6 ME OPEC countries in question have produced 198 Gbs of oil between them, and yet the flat line annual returns (Figure 1) demonstrates beyond any reasonable doubt that reserves have never been adjusted down for this production. Adjusting reserves for production produces the picture shown in Figure 2 suggesting that ME OPEC oil "reserves" are at most 545 Gbs, well below the declared amount.

Figure 2 ME OPEC reserves history from BP statistical review of world energy 2010 adjusted over time for cumulative production.

1980s revisions

All companies and countries are entitled to revise reserves estimates in light of new technical data. The most recent revisions in Middle East OPEC took place in 2002 where both Iran and Qatar presumably booked natural gas liquid reserves in the North Field / South Pars Field that spans the Qatar - Iran border. There is nothing wrong with that. What is more often contested is the validity of large upwards revisions to reserves made in the 1980s, starting in 1982 and ending in 1988 (Figure 1). Prior to this time several of the large multi national oil companies operated in the Middle East and with the nationalisation of the oil industry reserves estimates were revised by the National Oil Companies (NOCs). On the one hand, it is sometimes argued that the upwards revisions were justifiable to take into account higher recovery factors expected through application of new technologies such as horizontal wells. On the other hand it is often argued that the reserves adjustments were entirely politically motivated as countries vied for OPEC production quotas. It seems likely that both arguments may be valid and it is impossible to know exactly where the truth lies.

It is worth observing some of the history between Iran and Iraq. The Iran - Iraq war began in 1980 and ended in 1988. In 1980 Iran had 58 Gbs and Iraq 30 Gbs of reserves. In 1982 Iraq raised its reserves to 59 Gbs giving it a narrow lead. In 1986 Iran retaliated with a rise to 93Gbs giving it a clear lead. But in 1987, Iraq retaliated with a knockout blow raising its reserves to 100 Gbs. The war ended in 1988 and the reserves of these two countries have barley changed since. By 1988 the reserves of Iran, Iraq, Kuwait and UAE were all roughly the same, approximately 100 Gbs each, only Saudi Arabia was permitted to bid higher with 260 Gbs.

How much of this is real and how much of this is fantasy it is impossible to say apart from in Kuwait where more details emerged from an unlikely source in the form of IHS Energy. At a conference I attended in 2006, IHS energy presented their view of Kuwaiti reserves based upon their proprietary database of fields. They showed this chart (Figure 3), suggesting that the large upwards revision in Kuwait in 1984 was bogus and that the pre-nationalisation figures from the 1970s were a more faithful reflection of reality. I wrote a post on this rather important information that can be read here.

Figure 3 IHS Energy estmate for 2P Kuwaiti reserves.

It would be wrong to assume that all of the 1980s revisions are equally bogus. The more than 3 fold uplift in Iraq is certainly questionable, however, Saudi Arabia uplifted their reserves by only 50% after reportedly conducting much technical work. It is however reasonable to assume that the pre nationalisation numbers provide a lower bound since these were compiled with the participation of international oil companies (IOCs) who tended then to be conservative in reserve reporting conventions employed. In Figure 4 the pre-nationalistion reserves figures from 1980 are adjusted for production.

Figure 4 Comparison of official ME OPEC reserves with official reserves adjusted for production and pre-nationalistaion reserves figures adjusted for production. The arrow gives the likely range of 2P reserves.

This exercise provides likely upper and lower bounds for ME OPEC reserves that lie between 160 and 545 Gbs. My best guess would be that reality lies somewhere in the middle at around 350 Gbs, less than half the official figures.

Conclusion

It has long been held that ME OPEC countries are reporting as reserves what would normally be regarded as ultimate recoverable reserves (URR) give or take a few 100 billion barrels of politically motivated revisions. It must surely not be beyond the wit of very smart folks who work at BP to see that it is wrong to classify ME OPEC reserves as "proven" and to give these same weight as the OECD reporting standard. It is high time BP (and other government agencies) got its house in order and noted on the Annual Review spread sheet the anomalies in the ME OPEC reports that are so glaringly obvious.