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The BIG Picture Transcript
April 26, 2008
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  Part 1
  The New Energy World Order
  Part 2
  The End of the World as You Know It
  Other Voices: Eric King Trading Analyst
  Part 3
  Q-Calls

 Part 1

 The New Energy World Order

JOHN:  Well, this is the part of the program where we connect the dots and project the trends and try to remind everybody that generally the other media – the mainline media – are looking in the rearview mirror to figure out where they are going.  Just a year ago, Jim, it was sobering to remember that everyone was screaming about how wonderfully the Dow was reaching to new heights and the sky was the limit again and the economy was doing great, and in just a couple of months later we just pitched right over into the subprime mortgage debacle.  So that’s definitely not the place to go for your future information.

Last week we talked about the decline of our major oil fields and I should make a sidebar note here about the food issue, the ethanol issue and people are beginning to realize that oil, ethanol, food and the dollar are all interconnected which is what you’ve been saying here on this show for ages. 

And we briefly mentioned last week on the program an article in the Asia Times by Michael Klare –who has been a guest here on the program before – it is entitled The New Energy World Order ().  This article was a brief summation of Klare’s new book Rising Powers, Shrinking Planet: The New Geopolitics of Energy.  And as I said we’ve interviewed Klare here on the show regarding his previous books, Resource Wars and Blood and Oil.  And what we’re going to do is contact him to arrange another interview on the new book.  But we thought – and both of us read the article – that it was probably one of the soberest assessments of where we stand in this whole issue. 

And what we’re going to do today is to take the five key points of his Asia Times and then supplement those points with your added research to show life as we now know it is really going to change.  Not only just for Americans but for people around the world as well.  I would say that this is a paradigm shift change.  We are not over-emphasizing this. 

So let’s begin.  What we’re going to do here is give you a glimpse of what lies ahead as we head closer towards this crisis window which we have been saying goes between 2009 and 2012 in terms of a number of different trends colliding together with all of the squall lines developing in 2008, which is where we are right now. 

So, Jim, take it.  [2:20]

JIM:   The reason I wanted to cover this because I think this is really a seminal article.  I think both you and I walked away after reading that...because many of the points that Klare highlights in the Asia Times article and elaborated upon in his new book deals with directly I think what is going to be this perfect financial storm that we’re heading into next year.  (And Klare by the way I just want to point out is director of the five college program in peace and world security studies at Hampshire College at Amherst.)

But when we talk about energy, energy has three dimensions.  We’ve always tried to point this out here whether you’re looking even at the investment markets.  There’s a political dimension to energy, there’s an economical dimension and there is also a geological dimension.  And unless you focus on all three you have a very difficult time of understanding for example on the day you and I are talking oil prices are up $3 a barrel at $120 a barrel.  There was a story that came out earlier in the day that the US fired on an Iranian gunboat that was menacing part of the US fleet in the Persian Gulf.  [3:38]

JOHN:  You bring up an important point about understanding the markets. It’s our view on the program that the market is really driven by three dimensions.  And again, they all interact.  They are the fundamentals, the technical aspects and then there are the unavoidable political aspects which probably tend to be more of the wild card in the whole deck.  As an example, Congress passes a bill mandating ethanol use in our gasoline, so because of that, because there are incentives now for farmers to make more money by growing corn crops for the purposes of using ethanol; they plant more corn, they use 25% of our corn crop for ethanol driving up corn prices, dairy prices, chicken, beef and other grain prices in the process.  Moreover, they begin consuming a lot more water because of the nature of producing ethanol – not just in the farm stage but also in manufacturing stage.  And this is just one aspect.  There are many other examples. 

But you can’t look at a market or understand in a uni-dimensional field.  You just can’t do that.  There are three dimensions, they are interactive.  You can’t divorce politics from the markets or the economy; they all run together.  And if you do, you’re really going to miss the big picture of what’s happening.

So, let’s begin with the new energy order and how it is going to transform life as we now know it. 

JIM:  Well, to set the stage I think it’s necessary to understand that worldwide economic expansion over the last half century was made possible by an abundant supply of cheap energy.  This economic expansion was also mainly a western phenomenon – and that’s a very important point to understand here.  But in the late 90s, and this decade, third world countries such as China, India, Brazil began to industrialize their economies, so this in turn led to an unprecedented spurt in global energy consumption.  I mean a 47% rise in energy consumption just in the last two decades.  Instead of energy demand plateauing because that’s what the experts…you remember this in the 90s, they were talking about “well, the US economy is more energy efficient today, it burns less units of energy per dollar of GDP” and so there was talk in the 90s that energy consumption had plateaued as the experts were predicting.  Instead of plateauing demand actually grew and as this demand grew the world’s surplus production capacity shrunk while supplies of new energy were really struggling to keep up.  One of the dimensions that we now face today to the energy sector is this 10 million barrel of surplus spare capacity has diminished and I think experts say it’s somewhere around 2 million barrels today.  And the majority of those 2 million barrels is really Saudi Arabia. 

And then as we have talked on previous programs, discoveries of major oil fields peaked in the 1960s and what we have been discovering since that time as we talked about last week in the decline of the giants has been smaller fields.  And we stopped replacing – and this is another important aspect – what we consume.  The last time we replaced what we consumed was the year 1985.  So today, we’re looking at oil prices at $120 a barrel.  And as I mentioned in the first show of the year, I think we’re headed to – heck, we’re only $5 away from my prediction of $125 oil.  But here’s the surprising thing, it’s going to go to 150, 200 dollars and then 300 dollars.  In fact, one of the stories of CBS MarketWatch was quoting Jeff Rubin –an analyst that we’ve had on the show – and he’s talking that in the next couple of years $200 oil and $7 for gasoline by 2012.  And the article mentioned that demand is growing much faster in non-OECD countries like China, India, Russia and within OPEC itself.  It isn’t just us talking about high energy prices anymore and where they’re heading in the future.  [7:54]

JOHN:  Let’s discuss the five forces that are really going to shape this new world order.  Remember, we have three market factors and now five forces driving in this whole thing. 

JIM:  The first force that Klare talked about in his article in the Asia Times that’s going to shape this new world order is going to be competition between older and newer economic powers for available energy supplies.  Now, here’s a statistic that I just read this in a report last night, for every one barrel decline in the United States – because the US is slowing – there is a 14 barrel increase in demand coming from China, India, Brazil alone.  Now think about that.  because, John, you see this on the air constantly:  “How are prices this high when the US economy is slowing down which means less demand for oil?”  Well, for every one barrel reduction in the US there is a 14 barrel increase coming from the rest of the world.  And it’s going to be a battle between western industrialized countries and the new economic powers that we’re seeing emerge in this century such as China, India or the BRIC countries.  In 1990, to put this in perspective, OECD countries consumed about 57% of the world’s energy; the developing countries at that time consumed roughly around 29%.  By 2010, just a couple of years away, developing countries’ share of energy consumption will have grown from 29% to 40%.  And within  just a few decades it will overpower OECD demand and rise to 47%.  These countries – many of whom control vast quantities of oil have formed what we call national oil companies and these national oil companies are now moving beyond their borders and are competing with western international oil companies for the world’s remaining oil.  They’re forming strategic alliances that will end up controlling probably the vast majority of the world’s oil and gas reserves.  So when you think about oil at $120 a barrel, forget about what the US consumer is doing or if the US economy is in recession, we’re becoming marginalized.  Think more about what the other 3 ½ billion people on the other side of the planet are doing.  [10:22]

JOHN:  I don’t know if you noticed it or not this week, but Congress is going to hold hearings again to find out why oil prices are so high.  And this sort of reminds me of when California was trying to figure out why businesses were leaving the state, but they’re going to try to figure out – it was pretty obvious, taxes and regulation.  And what they don’t seem to understand is that we import about 70% of what we need in terms of oil here in this country.  85% of the available oil is either inside of OPEC or the countries of the former Soviet Union.  And then we have another rising middle class ironically in Mexico, by the way – that’s going to affect Mexico’s exports starting as early as next year.  But we have 1.5 billion people in China who are moving upwards because they’re now in the process of developing their infrastructure and becoming a strong middle class there.  The Wall Street Journal ran an interesting clip on its video site:

Luxury car brands are here to sell and China’s new rich are here to look for the coolest looking vehicle.  But neither of the exhibitors nor the customers care too much about the city’s traffic and pollution problems.  Ian Robertson, BMW board member, is simply happy business is going well.

“We’re doing exceptionally well and if you look at the sales in 2007 they were about 43% up on the previous year.  If you look at the first quarter of 2008, they’re already 40% up on 2007.  So I think, you know, we can be confident that as the year progresses we will see at least a good double-digit growth during the rest of this year.”

According to Chinese media, Beijing alone has about 3.1 million cars and there are about 1,200 new ones hitting the road every day.  But with the upcoming Olympics the city’s growing traffic and pollution problems have risen to the top of the government’s agenda.  Beijing is spending billions of dollars expanding its subway network.  The government encourages more people to take trains to help deal with worsening road congestion.  But not everyone likes to take the subway.  Mr. Yuan bought three cars in the past five years.  He thinks traffic and pollution problems should be left to the government.

“From the perspective of living and working here, having a car is a must.  Buying a car has its own problems but the government will take care of it step by step.  For me, buying a car solves my own problem and relevant government departments should deal with the traffic problems.”

Car manufacturing executives at the auto show might offer different models and cars of different price ranges.  But one thing they share in common is that with car sales slowing down elsewhere, China is the hottest market. 

In Beijing I’m Kitty Boo [phon.] reporting for Reuters.

JOHN:  It’s interesting that these things are driven much more by what the public wants and then typically some groups will come in and try to turn that and mandate opposition – you see that a lot in the West, you know, especially in environmental areas.  And it almost never works, which is why we always talk about the fact that if you’re going to come up with a solution for environmental issues it has to be both economically and scientifically sound.  And China is not the only hottest auto market in the world; it’s only one of many reasons why China is now the world’s second largest consumer of oil.  They’re expected to increase their consumption to 17% of global consumption by 2015.

So with other countries competing for oil and the US now heavily dependant on imports – a position we put ourselves in – doesn’t that leave us now vulnerable to, and make more likely, the forecast that you’ve been making here for 200, 300 dollar oil?  And if there is one thing I’d say we’ve always been wrong about when we’ve made forecasts here on this show is we give a nice, wide window and it happens a lot earlier than we thought it would. 

JIM:  Yeah, I mean I was looking at 125 oil by the end of the year, and all we need is just a slight crisis and we’re only five bucks away on this Friday where oil prices are up 3 dollars to 120 dollars a barrel.  So we’re five dollars away so we may be conservative on that. 

But right now, one of the things that is very important to understand and maybe we should send this report to Congress is the US consumes 20.7 – let’s just round it off – 21 million barrels a day, or roughly 25% of the world’s total oil consumption.  We produce about 5.1 million barrels a day which declines by the way each year.   We import 12.4 million barrels a day – these are figure taken from last year – of which  5 ½ million barrels a day comes from OPEC and then on top of that we import – and this figure is also growing – 3.6 million barrels a day of finished oil products such as diesel, gasoline and jet fuel.  We don’t have enough refineries in this country to process all the oil that we import.   So basically we are now importing roughly two-thirds of our energy needs so we are becoming more vulnerable as our production falls and our needs grow.  [15:36]

JOHN:  You mention that we get about 5 ½ barrels a day from OPEC and it’s really sobering when you begin to look at where the energy comes from.  I mean if you look at also the fact that we are importing so much, then from a strategic point we become vulnerable to a lot more forces out there – or I guess I should quote Glenn Beck from time to time who is saying, “we get a lot of our oil from people who hate us” which isn’t necessarily a good position to be in. 

JIM:  No.  I mean if you take a look at the 12  - almost 12.4 – million barrels a day that we import from the rest of the world – forget about the energy products – and I’m going to talk about a new alarming development that’s going to impact us even more – but the top imports come from Canada.  Canada supplies roughly about 17% of our total imports at roughly about 2.4 million barrels a day; second to Canada is Mexico where we import as of last year, 1.7 million barrels a day, or 12% - and that figure is falling rapidly as Cantarell (Mexico’s largest oil field) goes into rapid decline.  Just last month alone production at Cantarell dropped around 50,000 barrels a day.  Third on the list is about 1 ½ million barrels that we import from Saudi Arabia – that’s about 11%.  And here’s a real stable source:  fourth on the list is Venezuela, 1.4 million barrels a day, or 10% of our supply and Venezuela has been cutting back.  Venezuela used to export to us roughly about 1.7; they’ve reduced their exports to the US by 300,000 barrels and those 300,000 barrels are now going to China.  Fifth on the list is Nigeria at 1.1 million barrels; that’s 8%.  That’s very important because a lot of the oil we get from Nigeria is light, sweet crude.  But look at last week’s story, the reason that oil prices rose is they blew up a pipeline in Nigeria. 

Number six on the list, Algeria at around 657, 5%. 

Seventh on the list at over half a million barrels a day or 4% of our imports, Iraq.  Then we have Angola at 534,000 at 4% and Russia roughly 400,000 barrels at 3%. 

So you can see politically how vulnerable we are to either Saudi Arabia, Venezuela, Nigeria, Algeria, Iraq, Angola, Russia.  The two areas that are neighbors, the two largest exporters to this country, Canada –outside of the oil sands – is seeing falling production especially in natural gas; Mexico’s production is dropping rapidly with the peaking of Cantarell’s oil field and also politically the president of Mexico wants to bring in western countries because they’re siphoning off so much money. That’s what pays for a lot of the social programs and running government comes from oil revenues.  The problem that they have is they’re siphoning off a lot of these revenues when the oil industry itself is lacking the capital investment to develop new oil fields.  So you can see there how unstable of a position this puts us in.  [18:52]

JOHN:  So the first factor Klare mentions is that competition for the world’s scarce remaining oil is increasing, so that’s factor number one.  What’s the second factor?

JIM:  The second factor deals with the insufficiency of energy supplies and that’s something that we’ve been addressing here for a number of years which is one of the reasons why you and I are talking about $125 oil this Friday:  The capacity of the global energy industry to satisfy this demand is shrinking because the global supply of all forms of conventional and non-conventional oil will expand – the experts are saying we probably have maybe two or three years of increasing production – from all sources whether it’s coal-to-liquids, gas-to-liquids, which are supplementing conventional oil production which peaked in May of 2005.  And that’s why as we talked about last year that IEA report that was issued last summer which talks about this crisis window developing between 2009 and 2012 because after 2012 OPEC production fails to expand, western oil production fails to expand.  At the same time, you’re going to have this increased demand.  So the IEA report highlighted how producers are struggling to keep up with this demand.  In other words, they’re having to run faster and faster and as we talked about last week we’re not discovering the major oil giants and it’s the oil giants that supply most of our oil which are now going into decline.  So global oil supply increased slightly last month which is why we saw a little softness, while OPEC supply actually fell.  Saudi Arabian production has been flat now for a  number of years and the IEA highlights the mistakes made by politicians to treat the sharp rise in oil prices in the last eight years as sort of like an anomaly, “well, you know, we’ve always had low oil prices, what we’re experiencing now is really an anomaly and it’s mainly due to speculative inflows of capital.”  I saw a Congressman make a speech this week regarding one of the candidates for president, saying “well, you know, we think this is just speculators coming into the market.” 

But the IEA points out how supply is struggling to keep up, it’s getting harder to find; the cost of finding it is rising and companies are having a lack of access to where the oil is as producing states begin to husband their resources at the same time that supply struggles to keep up, demand has been relentless in the developing world.  As I mentioned earlier, for every barrel of decline this year in the US there is a 14 barrel increase coming from the developing world.  Chinese demand was up 7.8% in 2006, it rose 4.6% in 2007 and already this year the demand is increasing.  It’s expected to grow by roughly by 5.6%.  Now this demand growth is due to two reasons:  1) population growth and there’s a high correlation between population growth and energy consumption; 2) increased industrialization.  So oil and population growth are correlated; more people means more transportation, more manufacturing, more food, more of everything and almost everything in the modern world requires energy from oil.  So just think of the issue of rice, which has more than doubled in the last year.  In fact, on Friday Brazil announced that they were cutting back on their exports of rice in order to conserve what they produce to keep prices under control.  So the production of food requires fertilizers made from natural-gas-based fertilizers, oil-based pesticides and herbicides and then fuel to run the big farm machinery, energy to run the pumps for irrigation and fuel to transport food to our stores.  [23:01]

JOHN:  You realize that this is sort of a rising collision here because as population grows –and it’s not even so much the population it’s really the countries developing that is driving this on – they industrialize more and more, the middle class in these countries develops which theoretically is a positive thing, right, because people are lifting out of poverty.  But as they’re doing that they’re going to require more energy – that’s number one; and then more commodities which requires energy to produce it as well.  So that’s what really has changed.  That’s what changes.  A new demand dimension that requires energy which at the same time the supply of it is diminishing and sooner or later we’re going to have to talk about the issue of what’s really out there remaining in terms of what infrastructure can produce etc, etc..  But at least that’s framing the picture is this increased demand for energy and commodities.

JIM:  Exactly, and just to put this in perspective of how important China and the impact of the developing world – China’s imports have grown from 246 billion yuan in 2001 to 958 billion yuan in 2007.  This year, import growth – and most of this import growth is raw commodities – imports in China are expected to grow to almost 1.2 trillion.  [24:14]

JOHN:  So basically what you’re saying then is  that the developing world is growing in population and industrializing.  The world is going to need vast quantities of energy but –what you’re telling me now –or what Michael Klare has been saying in his article as well – the energy we assume will be there, in other words,  everybody assumes “oh, it will be there, we’ll find it” – that’s what you hear all the time – to meet the demands for the next two decades is highly unlikely given where we are now.  This just highlights the crisis window is developing because we have a bottleneck that we have to go through here.  It’s not that ultimately the energy couldn’t be there but it’s not going to be here in the short run and just economic demand isn’t going provide it. 

JIM:  No, in fact I go back to the IEA which just issued a report last month and also the US Department of Energy, they take a look at demand and they extrapolate that and they say “okay, by the year 2030 based on present assumptions of demand we’re going to need 118 million barrels a day to meet that demand.” And that oil production at those levels simply isn’t going to be there.  In fact, in order to meet this growing demand and make up for depletion we’re going to need to find the equivalent of six new Saudi Arabias between today and the year 2030.  I can tell you with absolute, complete confidence that just isn’t going to happen.  The days of finding a Ghawar, a Burgan, a Cantarell a North Sea, a North Slope – I mean those days ended four decades ago.  The giant oil fields are peaking which is why we’re headed for trouble.  [25:33]

JOHN:  This brings us to the next point I guess the slow development of alternatives for energy and somewhere in here I hope you can also address the issue of – you’ll hear people saying from time to time, “well you know, we just made this big discovery out here and the oil companies just  have all this bottled up’ or “this is a trick of the oil companies to force the price up” – some of those things.  But let’s look at the alternatives first, and you can see the backlash now beginning because of poorly thought out alternatives.  There was an article in a British paper this week saying Al Gore is ducking the backwash coming from around the world about what the US is doing in ethanol and what it’s doing to the global food crisis.

JIM:  The first thing that you need to understand or at least politicians need to understand when they take a look at oil prices and what people are paying at the pump is they’ve got the problem wrong.  We’re essentially facing – if you take a look at our transportation system – a liquid fuel problem.  Our transportation system – planes, trains, automobiles, and boats – run on gasoline and diesel.  Renewable fuels including wind, solar, hydropower supply roughly about 7.4% of global energy with biofuels 0.3%.  Meanwhile, oil, coal, natural gas supply 86% of our energy with nuclear power another 6%.  So you’re talking about 92%.  In order to replace these carbon fuels we’re going to need a massive – and I mean the word ‘massive’ – influx of alternative fuels requiring investments that borders on trillions and trillions of dollars.  And we would need to speed up these alternatives from the laboratory to full scale commercial production.  And as Klare points out in think article, sadly that is not happening right now.  Politicians talk the talk, they give great speeches with nice soundbites but they don’t walk the talk. 

I’m afraid that –as many of the experts on the program that we’ve had over the years have stated – the only way we’re going to get serious about energy is when we’re knee deep in a worldwide crisis.  And other countries have taken steps to prepare for this.  The last crisis that we saw in the 70s, France went nuclear; they’re using vast amounts of solar energy on home construction in Germany; Norway and many of the northern countries in Europe are going to windpower.  The only thing we get from our politicians is soundbites – “Yes, we want clean technologies, green technologies” – but once again we want wind turbines but we got NIMBYism – not in my back yard.  There are lawsuits going on in Texas to stop the building of wind turbines because people don’t like looking at them.  Or building them offshore – they don’t want that done.  So we give lip service as long we don’t build them near any place we have to look at them.  [28:55]

JOHN:  In order to respond to this it seems like radical steps are going to have to be taken.  The more that you look at the situation and the more you look at what has to be done, the nonsense say of 10 years to get all the permitting done for a refinery or power plant or whatever, that’s going to have to go overboard if we are to make this.  Which means something has got to give somewhere in this whole political circle because you can’t just do it; we can’t react fast enough to deal with the issue.  You can’t fight your way through the courts all these years when the crisis is coming about you – it’s not a time to be…I don’t know…I’m just saying from a realistic standpoint I don’t know what that means politically or from a legal point of view but something is going to have to change. 

But these higher prices also means there is a great wealth transfer that’s taking place from energy-deficit countries to energy-surplus countries.  But that also means power.  Power always follows the money flow and I don’t think we have seen anything like this in world history before.  This is a radical paradigm shift that’s occurring right before our eyes.  And again, on the geopolitical scene, you don’t see that reflected in politicians’ eyes – not just in the US but in reading what’s going on in Europe they haven’t grappled with what this means yet. 

JIM:  No, and in fact, what you’re addressing here is Klare’s fourth factor in which he’s talking about wealth transfer.  And to just put this in perspective and show you how big this is, in 2006 exporting countries took in 970 billion from the United States, Europe and Japan and China – just from the sale of oil.  Think about that – nearly 1 trillion dollars – that was in 2006.  Imagine what they took last year when the price of oil went from 50 to 100, or today where these politicians are holding hearings on why gas prices are up.  How about the price of oil being up 25% at $120 a barrel, just from January alone?  Last year the figure passed well beyond one trillion.  And if you think about just the United States alone, the US alone will transfer over 400 billion to oil exporters this year.  Oil and energy now account for nearly half of our monthly trade deficit. 

Those countries that are now using this vast wealth, we’ve seen it to buy stakes in large companies; we saw last year Middle Eastern sovereign wealth funds invested 7.5 billion dollars in Citigroup.  In January Citigroup sold an even larger share – 12.5 billion dollars to Kuwait Investment Authority.  This is just a glimpse of what lies directly ahead.  I mean just think of the wealth transfer that’s going to take place when oil prices hit 150, 200 and 300 dollars a barrel.  I mean it’s staggering.  And you’re right, nothing like this has happened in history before.  [31:58]

JOHN:  And I don’t think it’s really hit the geopolitics, we see things almost in status quo.  But the rumblings are there.  You can feel the rumblings beginning to hit.

Let’s look today at a snapshot, let’s take Russia for example.  In 1989, the Berlin wall comes down, that sort of marked the beginning of the end, or at least psychological transformation of the implosion of the socialist failure that was the former Soviet Union.  Then they went through a period of chaos.  In the 1990s. you had all of these czars and plundering Russia’s wealth and you can think of all the names that might come to mind for that.  And Vladimir Putin came in as president and began making a lot of changes.  One of the significant things they did was the opposite of what we’re talking about in this country, they slashed their tax rates because at the time virtually nobody was paying the taxes.  All right.  And then that jump-started the economy, they got rid of the tax burden that was laying on top of their economy and then they rose from these ashes to become an energy superpower; and they’re using that wealth now to buy controlling shares in assets that will give them control over much of Europe’s energy.  And Europe is really vulnerable to this.  Look at where all their natural gas heating comes from. 

And then the former Soviet states as well, they’re also using that wealth to rebuild and modernize their military.  But you don’t hear the press speaking about this, but in reality a new type of cold war has begun which takes us down to the fifth factor which is a growing risk of conflict around the world, especially if the conflict gets hard or the shortages get bad and countries begin to play with their oil supplies on the world market, then where goods and services don’t cross borders, armies or missiles do.

JIM:  Before we move in to the fifth factor that Klare talks about which is military conflict, we’ve been talking here about this giant wealth transfer, it’s going to get even worse in the years ahead because a lot of these countries are saying:  “Why should we spend a lot of money to increase production just to drive the price down so western consumers can pay lower prices at the gasoline pump.”  So they’re starting to husband their resources. 

And one of the developing trends that I talked about last year; you know, everybody has heard about the China story about their consumption of energy but another story that we’ve talked about here is one of the fastest areas of growth in energy consumption is within OPEC itself where oil is subsidized. 

Well, there is another concept that is taking place here that people have not understood the significance of what this is going to mean for countries like the United States.  And Saudi Arabia, they are building four new cities; they are going to build the world’s largest aluminum smelter plant; they are building three or four petrochemical complexes and refineries because Saudi Arabia is saying:  “You know what, why should we export our oil and export this to western countries or western oil companies where they then take our oil and they refine and they make plastics and petrochemicals and refined products like gasoline and diesel fuel or jet fuel, why don’t we build new refineries, cut back on our exports and then we will make even more money on the oil.”  In other words,  they are taking it to the next level:  “Why should we just be satisfied with making money on the oil that we produce, why don’t we make even larger margins by taking the oil we produce, turn it into petrochemicals and refined products where we can even make more money.” 

So by building these new cities that they’re building – they’re building four cities – by building petrochemical complexes, by building refineries that means more of what they’re going to produce, they’re going to keep within the country and turn it into refined products.  So instead of importing 3.6 million barrels a day of refined products we may be importing 5, 6 and 7 million barrels a day in the next decade and paying higher prices.  So in other words,  our import bills are only going to go higher as the price of energy goes up.  And I wanted to bring that up on this wealth transfer before we move on to the fifth factor. 

But let’s move in to the next category in Klare’s report which is the growing risk of military conflict.  In fact, one of the things I like to do in the evening at the end of the day after I’m done with all my reading I watch documentaries.  And I watch a lot of history documentaries.  And throughout history, you’ve seen these major shifts in power that have normally been accompanied by violence and war.  And what Klare points out as his last major point, is that the major powers – both the US, Russia and China – are now employing military means in their efforts to gain advantage in the global struggle for energy.  And we shouldn’t naively delude ourselves – as Klare points out – that these endeavors could easily lead to unintended escalation and conflict.  I mean take a look at how World War I began.  Nobody thought the assassination of the Archduke would lead to a worldwide war – but it did.  Now what you have today is almost very similar in my mind in terms of what occurred prior to World War I with all three major powers rearming.  What is occurring is very similar to the arms build up and the power shift that occurred prior to just the outbreak of war at the beginning of the 20^th Century.  There are a lot of similarities here.  And just as oil played a key role in that war – as it did in subsequent wars of the 20^th Century – natural resources, especially energy are likely to be at the root of future conflicts which will begin to escalate during this crisis window that we see entering and beginning in 2009.  [38:11]

JOHN:  Let me read a piece right here.  It says:  

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 of 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 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 listening devices.  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.  War will, for the first time, in the West become personal. 

And that was from an article, which you authored, which I thought was significant here, The Next War Has Just Begun, February 22nd, 2002, as part of a whole series called Powershift, Oil Money and War.  These are archived, by the way, if you people want to go to our site.  It's entitled The Next War Has Just Begun or go to the Powershift series in the perspective section. 

Another article, Hubbert's Peak was written in March of 2002, and then Eyes Wide Shut written in March of last year, and all three articles describe much of what we are now seeing transpire today.  And as I said, these articles are still posted in our perspective section on the website.   

We're going to be covering a lot more of the subject matter in the weeks and months to come because by the time the new president and Congress are sworn and seated – not sworn out, sworn in – and they are seated in Congress, this is probably going to be the big issue of the next Congress and the next presidency.  That's important to understand.  A lot of the nonsense has been pushed aside.  Look at what the candidates were talking about just a year ago – they weren't even touching this whole economic situation.  This is how rapidly these things are evolving.  We'll be doing interviews as well as Big Pictures especially on this as we head to 125 oil and the other dark side of the Oreo. 

Remember, here we are in April of the year.  We're almost halfway –not quite, but halfway – through the creamy center and coasting into the other dark side of the Oreo and the crisis window whose doors open in January of 2009.  And really it's not just a crisis of oil, Jim, it's a crisis of currency, a crisis of baby boomers retiring in Europe and the United States.  Food issues around the world, all of these things are colliding with each other; not to mention some of the religious undertones that are running in the various conflicts around the world.  So that's what we're facing here. 

“News at 11:00.”  I tell my friends, I say, occasionally, I feel like I'm a mortician because the mortician tells the family that he's sorry about his loss but then he goes to business.  And whenever times are really rough everybody turns to news programs, so it's a very strange phenomenon of our business.  When times are good, listenership and readership goes down.  I don't know why.  But anyway, why don't you do a summary of where we are on the whole Klare issue.

JIM:  Before I do that, it's interesting, you made a comment and some of our experts have said this, particularly Matt Simmons, this will be the single most important issue that will dominate the next president.  And it's amazing because that's the way Klare ended his article. 

But anyway, John, as Klare points out in his new book and as I've written in the past, what I think is happening here is we are witnessing in real time the end of the world as we know it.  Just think of people hoarding rice, countries stopping their exports of food.  I mean in this new era that we have now entered into, I think you're going to see the price of energy is going to dominate our lives and power is going to shift to those who control its global distribution.  I mean just look at the wealth that is being transferred to the Middle East and to Russia. 

And not only is energy going to dominate most aspects of our life.  It's also going to determine our mobility.  And we'll get into this in future shows, our ability to heat and cool our homes and where we're going to go back to controlling our thermostats.  It's also going to determine what foods we're going to be able to eat and when, because when oil gets to 150, $200 or $300 a barrel, say good-bye to the 3000 mile Caesar salad or having fruits and vegetables all year round.  I mean it's also going to determine how much protein we're going to have in our diets.  It will determine in many ways where we live, when or if we visit family and friends, what businesses that are going to survive and prosper and under what circumstances we will go to war. 

The energy issue is going to be the single most important issue facing the next American president, whoever that will be, and right now, none of our candidates are aware of what faces them the minute they walk into the Oval Office.  Absolutely amazing.  [43:12]

JOHN:  Just out of curiosity, you used to write a lot about these issues.  It would really be neat if you could do that again.  I don't know if you have sort of backed off from that, retired or whatever, but they were really good.  Especially your serial stories.  Those are great things to get in bed with, curl up on – well, you don't have cold winter nights but we do here, turn the fireplace on...and burn some more natural gas!  So I think you should do that again, to be honest with you.

JIM:  A lot of the technical pieces that I used to write, my son Chris has taken kind of over that mantle and is doing a lot of that. 

But you know what always was amazing, John, when I was writing on the web when we first started the website, you know, I'd write a technical piece and you'd sit there and I'd throw all of this research into it and back then of course the website was much smaller, but I remember the last significant piece that I thought I wrote outside of the Eyes Wide Shut was the piece I did The Great Inflation that I wrote in the fall of 2004 talking about inflation was going to be the wave of what was going to hit the economy and the markets.  And I got maybe 15, 20,000 hits on people reading the article.  But then when I started a series in 2005 about the coming crisis in housing and credit.  It was a fictional piece that I wrote called The Day After Tomorrow.  I mean, John, the last piece that I wrote in that series, I forget what the hits were, 50 to 100,000.  I was getting emails, “please don't take away the Wheelers TV,” you know.  But even though it was done in a fictional sense, we wrote a lot of technical things in that article, but there were more people reading that than anything else. 

And so I'm working on my mind, I'm thinking I may return to writing next year and I'm working on a fictional piece in my mind.  I've got several characters and explaining what the world is going to -- that we're going to live in in the next decade is going to look like, and I'm thinking of doing it more from a serial piece done in fictional form of describing it, because number one, it's a little more entertaining than reading a pure technical piece and then when you do it in terms of characters that people can relate to, there were a lot of people that related to my characters, the Wheelers, in the story The Day After Tomorrow.  I got hundreds of emails, “gosh, my neighbors are just like the Wheelers” or something like that.  So if I do something in the future in terms of writing, I've got this idea it will be sort of like a serial novel that will release in installments next year about life in the next decade, what it's going to look like, the very issues that we're sort of talking about here. 

And the other thing that I've thought of working on is producing a documentary in the area of energy.  I've got the script, I've got the key players, the only thing now is just finding a camera crew and a producer to put this.  But I want to do something different because I think you reach more people.  It's amazing that more people read a novel than they will a technical piece.  A number of years ago, I was contacted by a major finance publishing company and they wanted me to write a book, and they were saying if it does very well, you sell 50,000 copies.  And I'm thinking a technical book sells 50,000 copies, that's considered a best seller.  But then take a look at novels, John, a Clancy novel and some of the popular novels and authors that people read that sells millions of copies – so I think that fiction is a better way to tell a story than non-fiction.  [46:49]

JOHN:  Yeah.  Dr. Malachi Martin, I don't know if you -- he used to be a Vatican commentator – a former Catholic priest – who died in 1998, but he would write what he would call ‘factions’ and they were actually facts all being cramped into a fictitious story.  But if you understood the code language there – you know, “who was who at the zoo” –  and what was going on in religious politics –and they were always intriguing – they were the same thing.  You could sit in and read through these the same way.  But he was the one that came up with the concept of the faction as opposed to religious factions or breaking things up. 

By the way, you realize, of course, this also has significance.  I don't know if you saw the article this week that piracy is going up as economic things become scarce, commodities become scarce.  And so if you're planning on sailing off into the sunset in any time in the near future, you need to haul your sail boat over to Joe's armor-plating service.  I mean, you don't want anybody shooting bullets just below the water line on your boat there, you're going to have a real problem, right.  So we'll do some Kevlar lining and maybe put some weapons on, it what do you think?  I don't know.

JIM:  I don't know.  M50 caliber machine guns or something.

JOHN:  There you go.  I think you'd be really good.  Here comes good old drunk Jim with five bottles of wine and a 50 caliber machine gun.  This is a winning recipe, I'm sure.  You're listening to the Financial Sense Newshour at www.financialsense.com. We'll be back.  [48:07]

 Part 2

 The End of the World as You Know It

JOHN:  Well, what all of the last hour ends up to is simple and sobering:  The end of the world as you and I have known it.  In the new energy-centric world we have all now entered the price of oil will dominate our lives and power will reside in the hands of those who control its global distribution.  In this new world order energy will govern our lives in new ways and on a daily basis.  It will determine when and for what purposes we use our cars, how high or low we turn our thermostats; when, where or even if we travel; increasingly, what foods we eat given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil or the allure of growing corn for ethanol.  For some of us, even where to live; for others, what businesses we engage in.  For all of us, when and in what circumstances we go to war or avoid foreign entanglements that could end in war – that is probably the final observation that Michael Klare has made in his article, other than the most pressing decision facing the next president and Congress may be how best to accelerate the transition from a fossil-fuel based energy system to a system based on climate-friendly energy alternatives.  There’s going to be the crunch and maybe the biggest thing they could do is get out of the way. 

By the way, Jim, something else too.  Glenn Beck was quoting last night:  oil in euros has appreciated in price 92% showing upward commodity issues, but against the dollar it’s 319%, which shows the state of our own currency which we’ve discussed before. 

Let’s look at what this new world is going to look at.  I feel like we’re rewriting Atlas Shrugged or something Orwell would come up with.  Why don’t we start out with Suzie Soccer Mom and she goes to Walmart.  Where do we go from there?

JIM:  You know, there was an interesting article on this week’s cover of BusinessWeek and it was called Buying Dinner by the Case and as the BusinessWeek article goes on:  As food prices spike, shoppers are flocking to discount stores.  So why aren’t those chains profits benefiting.  And they talk about this one shopper, Natalie Stone.  She used to go to the supermarket just about every week.  Now, with the price of gasoline and with the price of food she makes and plans out her meals for almost two to three weeks in advance and then hits Costco, Walmart in one weekend, buying huge bulk quantities of foods to do a number of things.  Number one is bring down her cost of food because she’s not going to regular grocery stores anymore and then also, driving around town all the time.  By only doing her shopping once every two or three weeks she minimizes the amount of money she has to spend on gasoline. 

And as BusinessWeek is talking about here, this confluence of high food and gas prices, slumping real estate, the credit crunch “has left families like the Stones and millions of other middle class families feeling pinched.”  That has major implications for the nation’s retailers as consumers get more anxious and more organized about where and when they shop.  They’re drawn to Walmart stores, Costco and the like and this is going to have a profound effect on retailing.  People are driving shorter distances, “shopping trips are down and baskets are getting bigger.”  [3:36]

JOHN:  All right, so the first issue is going to be somewhat in the area of commodities and what it is going to cost people to live.  But in parallel to that we have a tax and inflation issue; let’s face it, the baby boomers start to retire and there is not enough money there to pay for this whole thing.  And we’re not talking about 40 years out, are we, Jim?  You know, all these estimates like “it’ll be bankrupt in 2030.”  Basically it’s sort of bankrupt right now. 

And the question is then, how much they can delay the ultimate disaster of this whole thing, which we could probably see, what,  Means testing, raising the caps?  First of all, they’ll try to get people to pay more into it which is going to become less and less popular as people discover they’re going to get less out of it when they get to retirement age.  So that’s only going to work on an interim basis.  But then we’ll see means testing –if your income is above so much you don’t get any, even if you did pay into it all your life.  So that’s what we’re looking at there.  I’m not sure which way the taxes are going to go.  Do you think politicians are dumb enough to you know, raise the taxes…because they are.

JIM:  If they do that and they allow the Bush tax cuts to be repealed they will lose control of Congress.  Whatever party does that.  If the Republicans take the White House, they allow the tax cuts to expire, they will lose Congress in the following election year.  If the Democrats do the same, the same thing will happen to them.  And so you know, one of the things that is happening to most people – the very same issue that we were dealing with when I got in this industry over 30 years ago: taxes and inflation.   [5:08]

JOHN:  You know, when we talk about taxes, everybody thinks about income taxes and they’re not really the big burden of what workers pay.  What is really the big tax is the Social Security tax and the cap has been systematically readjusted every year, supposedly to allow for inflation and other changes in what employees could theoretically get back when they retire.  But if you look at how the cap – meaning, beyond that cap you don’t have to pay any Social Security no matter how much you make – but if we go back to 10 years ago in 1998 the cap was $68,400; go back 5 years ago, it was $87,000; today, the cap in 2008 is $102,000.  And we should also point out this isn’t evenly distributed because if you get a paycheck from someone else, you pay whatever the going Social Security rate is; if you work for yourself you pay double that.  So self-employed people, small businesses effectively pay twice what those people who are in workforce that work for somebody else.  So I always have to laugh whenever someone talks about “paying their fair share of taxes.”  There’s nothing fair at all about anything in this tax system.

JIM:  No, and this is one of the issues that are squeezing the middle class are taxes and inflation.  And remember, inflation is just another form of taxation.  It’s a way of taxing people without people understanding that when you inflate the currency and the government creates inflation, the cost of living goes up and so people are having to pay higher prices for goods and services.  But you know, it’s astounding to think – I remember when I first got in to the workforce in 1977, the Social Security base amount was $16,500.  If you look at the beginning of each decade:  1981, the Social Security base was 29,700; you go to 1991, it was 53,400; you go to 2001, it was 80,000.  So like you say…and a lot of people who are working in their own businesses pay twice that.  The first $102,000 of a self-employed person, he pays 15.3% in combined Social Security and Medicare taxes.  And even on top of the regular income taxes you pay a 1.45% Medicare tax on all of your income, and if you’re self-employed you double that figure to 2.9%.  So you can add 2.9% to the top tax rate of 35; or if the Bush cuts are repealed and they go up to 39.6, you can add another 2.9.  So taxes and inflation are really are what are squeezing the middle class and the poor today.  [7:54]

JOHN:  So the question is now: where it will go because the government itself – and not just our government but in Europe as well – are going to be hard-pressed to deliver on their promises.  And this is a no-win situation.  They can’t win coming out of this one.  So it’s going to be interesting to see which one tips to. 

So given the fact that taxes and energy – two big things here, along with inflation – are just ravaging people’s incomes, what are the effects of this as far as the consumer?

JIM:  Well, you’re already seeing it.  You’re seeing food prices go up, whether you’re looking at grains, whether you’re looking at milk, dairy products, the cost of beef and chicken.  And then on top of that, as you’re also going to see resource scarcity.  I mean one of the stories that we’re seeing today is this whole issue of rice.  Rice is just one of many food issues that we’re going to see going forward as the price of energy goes up and it costs farmers more to farm, you know, costs them more for fertilizer, costs them more for diesel fuel. 

And as consumers are squeezed on both ends, I mean in the 70s when they removed gold-backing of the dollar and the government began to inflate, you know, the wife went to work, we had a period of prosperity in the 80s.  But in the 90s as they inflated –which was showing up in the stock market – what happened is the savings rate dropped in this country from about 8 to 9%.  So people were able to increase their discretionary spending by lowering their savings rate.  In this decade, because of taxes and inflation people went into debt.  So what you’re going to see now is two themes that are going to be key going forward:  Deleveraging and downsizing.  You’re going to see consumers deleverage, rebuild their balance sheets, they’re going to be forced to do that.  And as the boomers head into retirement you’re going to see downsizing.  And what I contend, that means you’re going to see the slow death of consumption. 

It’s not going to die off and fall off a cliff, but you’re going to gradually see a reduction in consumption and obviously, you’re seeing the effects of that right now in this crisis that we’re going through. You’re seeing more and more retail chains are closing hundreds and hundreds of stores, some stores are going out of business and filing bankruptcy.  The banks which extend lines of credit –you know, these retail credit cards – are really an offshoot of bank lending, a lot of the banks are pulling back on that credit card lending to a lot of these retailers and so you’re going to see retail chain closures.  That has been evident probably in the last six months; we’ve seen numerous chains and also with some of these companies being cut off from bank lending in stocking their shelves such as Linens 'n Things.  They’re filing for bankruptcy.  So you’re going to see this slow death of consumption and then I think that the big box stores – whether it’s Costco, Walmart or Sam’s Club or wherever it is that you can go to reduce your cost of food and minimize….I mean you ought to see what it’s like pulling into a Costco on the weekends and trying to buy gas.  I mean there are car lines because you can get gas at six, seven, sometimes eight cents cheaper a gallon at Costco.  So these are the kinds of things that you’re going to see becoming more commonplace.  [11:30]

JOHN:  Other people have done interesting things.  In church groups or community groups they form co-ops, and the co-op itself buys directly from the producer and even bypasses, say, Walmart.  They buy in huge bulk.  Everybody gets together for a meeting and they meet and decide what they’re going to order and they all pitch in their money and on one day it all arrives and they divvy it all up and they go home.   And they do this and buy in bulk.  And that even bypasses, say, organizations like Walmart.  So I would predict you’re going to see a lot more of that again.

JIM:  And another trend that I think that there is a word for it, they call it ‘cocooning’ where instead of going out socially on the weekends, you know, going out for dinners and the movies, movie prices are at 11 and 12 dollars – in LA a friend of mine told me there’s a movie theater there that has prices at $14 for a ticket.  And you’re going to see more people who are saying “instead of going to a movie where it’s going to cost me 50, 60 bucks for two hours to see a movie, we’ll go to Blockbuster and rent a movie.”  Heck, it’s cheaper to go to Walmart to buy the DVD than it is to go out to the movies.  And you’re seeing people stay at home.

A couple of weeks ago we took the family out to our favorite restaurant on the Bay in San Diego for my son’s 30^th birthday, and it was amazing, John, this was a restaurant if you don’t have a reservation on a Friday night plan on an hour – sometimes I’ve seen it during the summer when we get a lot of tourists coming to the city, you can wait for an hour and 15 minutes.  Well, first of all we made a reservation, thinking that 7 o’clock I don’t want to wait, so we made a reservation.  They took us right outside where we were able to look at the bay and the city, and it was breathtaking.  The room was half full and when we were done with our meal at 9 o’clock, as we walked through the main dining room it was half empty.  I have never, since I’ve lived in San Diego, seen anything like this.  Maybe the closest would have been back in 1991 recession during the S&L crisis but it would never have looked as empty as this restaurant was.  And this restaurant does a bang up business. 

My wife and I –occasionally we go out to the moves – and we went out to the movies – we try to go on like a Sunday night where there’s less traffic – and one of our favorite Italian restaurants there’s always an hour wait if you go on a Friday or Saturday night; and even on Sunday’s it can be a half-hour wait – we were able to get right in and even as the restaurant filled as the evening progressed, even at 6:30 there were empty tables.  And so you’re seeing a lot of that.  I think it’s just getting too expensive.  So a lot of discretionary spending –whether it’s entertainment, movies, going to concerts or going to ballgames or going to restaurants or on discretionary goods – and I think you’re seeing that, it’s being affected.  And I think you can see this as restaurant chains of public companies report their earnings.  [14:35]

JOHN:  So basically what we’re saying in the long run is that those businesses that do not operate staples that people see as being essential are going to be in trouble because that comes out of discretionary spending, say, going out to a restaurant of something.  Those businesses will probably see a tremendous downturn. 

JIM:  Not only a tremendous downturn, John, but I also think that you’re also going to see our ability to travel.  You’ve seen for airlines go out of business.  And I think with higher fuel costs now, the airlines are going to charge you for I think a $20 charge for the second bag because the more weight on the plane the more fuel it consumes to fly.  And I think what you’re going to see is a consolidation of the airline industry.  The airlines will mainly fly to what I call main hub centers – the main cities, you know, the main areas even overseas.  And I think what you’re going to see is a new business that’ll emerge that is going to be small private jet travel.  In fact, Barron’s ran two articles on this.  But there are a new series of jets coming out.  Honda has a jet that is going to be a six passenger jet that is more fuel efficient; in terms of equivalent planes it is 30% greater fuel efficiency. 

I’ve read about one company that’s starting up in Florida, they will fly the shorter areas so that if you want to get to a city that isn’t covered by a major hub they will be able to do that.  So you’re going to see the consolidation of the major airlines, you’re going to see the rise of new smaller airlines that will fly these small – what I call – commuter jets that are going to rise because how do you get to some of these areas.

You’re going to see transportation change instead of a lot of our goods being transported by let’s say trucks, the large trucking companies are now working with the railroads.  And for the first time in over a century, the railroads are making major capital investments to expand their routes.  So what you might see is goods, for example, dropped off in the port of Long Beach put on a train and the trains will then…they’re building regional hub centers of which the goods will get to the hub centers and from the hub centers we’re going to put them on trucks. 

But I also think the ability to travel. You know, I’ve gone sailing the last two weekends and it was amazing being out on the bay, John, usually if you go out on a Saturday and Sunday, and especially when the weather is as nice as it is now in San Diego, it’s amazing most of the motor yachts are in their slips and you’re just not seeing the motor yacht traffic out there because diesel fuel in the bay is over $5 a gallon.  I talked about my next door neighbor who has a boat – a 35-footer – with a 600 gallon capacity, and he reads my stuff and thinks about peak oil and he was just shocked at paying over $3,000 to fill his tank at $5 fuel.  It’s also going to impact entertainment and travel.

And the other thing, I don’t know if you’re seeing this in your neck of the woods, but boy!, am I seeing a lot of Honda Civics and Prius’s and maybe, I don’t know, maybe it’s because I’m more aware of it now, but we see Prius’s all over the place where you know, two or three years ago I mean every time you pulled into a parking lot you were looking at a new Hummer, a new Chevy Tahoe, a Cadillac Escalade – all those big SUVs.  And one of my clients whose in the car business who’s telling me one of the trends is people are getting out of their – especially since a lot of the cars sold in this decade were on leases, you know, 25 month, 30 month lease – people are getting out of those cars and are getting into more fuel efficient cars – and that I think is a trend you’re going to see here, our ability to travel.  As Matt Simmons has said on this program and something I’ve believe very strongly in I think over the next two years you could very well see gas rationing.  [18:35]

JOHN:  One of the things that James Kunstler talked about when he was here on the program was the end of the “3,000 mile Caesar salad” which I always thought was a funny way of putting it, but when you walk into your local grocery store at different times of the year, you are seeing something that has been grown in South America, in New Zealand – you know, when it’s wintertime up here, they’re growing it somewhere else in the world wherever it happens to be.  And if we don’t want it to consolidate on energy that will probably end too because those things have to be brought in rapid order.  And simultaneous from that, you’ll probably see a rise in – remember the Victory Gardens from World War II.  And a lot of people do that already.  In our part of the country where I live, that’s common.  This is ranching, farming territory – I don’t know if it is in San Diego or not – I don’t think so, I don’t think everything’s there – but even in your yard you could put in stuff if you had to. 

JIM: We’re working on our landscape plan where I intend to put in a greenhouse.  In fact, there was an interesting article in the Wall Street Journal and also let’s go to that film clip about this one gentleman in Colorado that has turned the whole neighborhood into a farm.  Why don’t we go to that clip:

It may have the elements of rural America but this isn’t the country, it’s suburbia.  There’s growing numbers of Americans looking to grow some food and make some money off their lawns.  Instead of relocating to rural areas, they uproot their grass and start mini-farms in their own backyards and sometimes even their front yards.  And when they need more space they ask their neighbors for help.  Kipp Nash in Boulder, CO, started a small farm in his own yard a few years ago where he grows many different varieties of vegetables including tomatoes, bok choy and beets.  Since then, he’s expanded his operation and now farms eight of his neighbors’ yards.  He’s selling shares of the farms to locals who will pick up weekly bundles of fresh vegetables and herbs in the summer and early fall.

I’ve had this really strong desire to grow vegetables for a living.  I didn’t have a way to do it, I didn’t have a piece of land.  I didn’t have a whole lot of financial resources so the only way I could think about going about it since I was living in town was to either volunteer at other farms and get a job in another farm; or, I don’t know, I just got the crazy idea I could start growing vegetables here.

Farming in suburbia has its own foibles however.  Dogs and squirrels can trample the crops, mud and manure can get in the house and neighbors might not be so keen on seeing dirt and vegetable plants instead of green grass. 

Debbie Dalrymple of Denver farms her backyard and four other yards around the Denver area.  For her, one of the hardest parts is time management.  Farming requires long hours and hard work. 

“In most cases like this you’re getting rid of any grass you might have had and you’re deciding that you really want to grow food instead of grass.  So it’s mindset and it’s a scale, so you know, if you had a farm you could really just grow as much of anything you wanted, so here you have to kind of prioritize how much space you want to give to each thing.”

For now, her biggest challenges are figuring out what to plant, where to plant it, and how much water it needs. 

This is Kelly Spors for the Wall Street Journal.

JOHN:  You know what was really funny about that, Jim, was when we lived in Denver we always had a garden in our backyard every year because there are certain parts of the country where you can do such a raising.  We always had a good corn crop and you couldn’t keep control of the asparagus.  It went crazy.  So did the rhubarb.  And then people work with each other and swap things – that’s very common.  And what we still do in terms of that is we have a neighbor down the road who raises cattle and then we buy a cow from him every year and our beef is about a $1.50 pound, or a $1.60, $1.70, which is way under what the supermarkets are doing right now.  We rarely buy beef at the supermarket.

JIM:  I think you’re going to see more of that trend.  I mean right now we’re just seeing people are shopping in bulk, they’re going to the big box stores, the major discounters, to help control the cost of rising food inflation that we’re seeing right now.  But once again, our transportation system is going to be transformed.  We’ve talked about what trucking companies are doing with railroads. Also I think you’re going to see more goods transported by barge down the Mississippi. 

But also, I think it’s going to change business too.  Putting executives on a plane, flying to a conference I think you’re going to see wider use of teleconferencing because Cisco is working on a system that is very effective in this regard where you could have – in fact, we’ve set up something similar to this in our conference room where we’re set up now to do teleconferencing.  But I think you’re going to see more of it because it’s just going to be too expensive to put people on a plane when you can sit there and have a teleconference face to face so you can see the reaction of the other person you’re talking to, to the things that you say, or present.  And so this is also going to affect the retail business, the travel business, the hotel business where basically getting on an airplane and traveling is going to be a luxury. 

I grew up in Phoenix, Arizona and I can remember to go back and see my family, I mean it was like $49 on Southwest.  Those days are gone.  [23:53]

JOHN:  Yeah, when I was at San Francisco State it was $15 each way from San Francisco to Southern California and even as a college student back then I could afford a $30 round trip on Thanksgiving and Christmas and spring break and everything like that. 

JIM:  It’s interesting because as we are sitting here talking, there’s an article that made the headlines, Jeff Rubin at CIBC who we had on our energy roundtable – one of the sharpest analysts out there – one economist that really gets it – is talking about $200 oil here in the next couple of years and $7 gasoline.  I mean if consumers are blown away by over $4 gasoline, just think what they’re going to do when it’s 7, 8, or 9, or even more importantly what happens when it’s rationed.  When they say, “well, based on your license plate you can only buy gas on Monday and Wednesday,” or you’re only allotted 20 gallons per week per family or 30 gallons or whatever that is.  What is going to happen is a radical transformation in terms of the way people think, because up till now, yeah, you haven’t been happy about the fact that gas went from a buck fifty a gallon to today in California we’re already over $4.  But every time you pulled into the gas station you could fill your tank.  I think that as these issues become more pronounced there’s going to be a cry to do something.  And don’t just tell me you’re going to hold hearings.  I think most politicians quite honestly think that gas comes from a gas station.  [25:21]

JOHN:  I thought it did.  I mean that was my impression.  I don’t know.  I go over there every day it seems to be there.

I think the issue we’re coming into is what I mentioned earlier is if we look at the history – and here’s the collision that’s coming and the collision is going to be how will the environmental movement which started as a grassroots movement and now has gone very commercial, much to the disgust of some of the earlier founders of it in a lot of areas in terms of its regulation it has gone from being sound science to absurd; and the basic joke –the way we describe it – is if it gets in the way when the crisis goes to bed, Bambi will be roadkill.  

Now, don’t misunderstand me, I don’t want to see that.  Driving home last night there were close to 40 elk down in the meadow.  You know, we stopped and looked at them.  Everybody was stopping on the road to look at all these elk and there were a bunch of deer down there too.  I like wildlife.  I like Bambi.  But the problem is a lot of what people think has been sound environmentalism has been built on increasingly more and more what governments can make out of it in terms of money and permits and organizations.  So there’s a big factor there that the movement is going to have to fess up to if it is to stay in existence because if they don’t –as you say – the cry will be:  Do something!  And the politicians, when reality sets, in will panic, and Bambi goes over the side – that’s what’s going to happen.  And I’m not sure that’s going to be good either, but that’s just the colliding trend we see here. 

JIM:  Yeah, one of the trends that we’re talking about I’ve talked about global infrastructure plays and then also the decline of infrastructure here in for example the United States.  And what you’re also going to see as this happens, I think we’ll start moving towards some form of mass transportation.  Where I grew up in Phoenix, they’re already working on a light rail system.  I think you’re going to see more of that.  But there’s definitely going to be a call to build power plants. 

One of the things that I’m going to be doing this year is applying for permits to put solar roof tiles.  There’s a company here that makes roof tiles that look like slate tiles that are solar to power the house because every time we get warm temperatures here in the summer due to a Santa Ana we get rolling blackouts in California; and we got them in the fires here.  And they’re happening more frequently and that’s because we haven’t built the added capacity that we need.  I mean we have 11% of the country’s population here in California and most of it is along the coastline.  And we’re just not building the power plants, we’re not building the pipelines, we’re not expanding the grid system because of environmental deadlocks and that’s why we’re going through these blackouts.  And we saw even in other areas of the country;  in the Midwest, remember the heat wave, what was it, the summer of 2005 or 06 where the grid broke down because of heat waves and people died.  I mean you’re going to see that more and more.  And remember, this problem was beginning to surface in South Africa and ESCOM in 1998 went to the government, “we need to build more power plants here or we’re going to have a problem with the way the economy is going.”  And it wasn’t until 2004 that the government took it seriously and now you’re seeing those power shortages, you’re going to see ESCOM cut out power to neighboring states and it’s definitely impacting mineral production in South Africa and the economy.  And it’s going to take 5 years to fix.  You don’t just flip on a switch and you can put a new power plant in place.  Power plants take five to seven years – depending on what kind of power. 

So the kind of things that I predict we’re eventually going to move towards: what do we know that works, we know that we can come up with clean-coal technology – coal provides about 40% of our electricity needs in this country.  And I think we’re going to go to coal and nuclear.  And then what we’ll be doing is we’ll be using natural gas to liquids as a transitional fuel until we can come up with an alternative source of power.   

But the kind of things we should’ve been doing, 10, 15 years ago, are going to be brought to the forefront because in a crisis politicians can’t go in front of the camera and go, “well, we’re going to have another hearing, blue-ribbon.”  In the meantime, you’ve got gas rationing and power outs and people are going to get tired of that.   And that’s what happened in the 70s and people got fed up with it and finally we began to do things; we began to conserve, the government gave us credits for insulating homes, the big three automobile manufacturers began to come out with more fuel efficient cars.  But it takes that kind of a crisis and a major increase – because you’ve got to remember, gasoline went from a little over a dollar something a barrel before the Arab oil embargo, and the peaking of oil production in the United States in 1971 to $40 a barrel by the end of the decade – and that got people’s attention.  [30:23]

JOHN:  But you’re telling me two things right here.  Okay, number one, the fact that fossil fuels are the staple of global energy and will be for the next 10 or 15 years at least; global warming is going to join Bambi on the road as roadkill because we’re not going to make that conversion fast enough.  And that was the observation that Michael Klare made in his article, number one.

Number two, if we convert to hybrids, say, we had battery-packed hybrids that you can come home and plug in to a 20, 30 amp circuit and charge your batteries up; or, look at the railroads, remember how European railroads have been running for a long time, they run on electricity with overhead pantographs providing the power.  But to have that power to charge millions of cars, you have to have some way of generating the electricity to do and to run the trains.  And I think the day of the long haul trucker is over.  I don’t know if the truckers realize it yet, it’s over because the mood will be to move all of the long haul to long trains, super trains, or to barges that can do it much more energy efficient, double-stacking on the trains etc.  Even the railroads now, from what I’ve been checking, are starting to look into reopening lines they’ve been closing.  You’ve been watching all over the west here, they’ve been closing out lines.  Now it’s going to become more economical to reopen those lines again.

JIM:  There was an article in Barron’s done just a little over a month ago for the first time in a hundred years, the railroads are going to spend $2 billion to expand their hub structure, expand the height of tunnels so they can carry double containers on railroad cars.  I mean there are a number of things that they’re doing here that are going to help –but this stuff takes time.  That’s why I think…you know, we’re talking about this crisis window because whether it’s building a power plant, expanding your rail line, these are things that you cannot do over night.  They’re going to take a while for this to take place.  [32:14]

JOHN:  They don’t have to expand the tunnels.  Just send the first overheight train through.  It’ll clear it out as it goes.

But I think so,  I think this is really true and that’s what’s going to have to happen.  It’ll almost be a resurgence of the good ol’ days of trains when you used to see huge numbers of them traveling.  I think even passenger traffic will again switch back to that over the short haul – I mean in addition to some of the Amtrak we have running now and some of the corridors on the East and West coast where people commute using trains.   But I mean in addition to that – long distance travel. 

JIM:  It’s amazing how a lot of these things are going to come back – stuff that we weren’t even considering five or six years ago.  It will become more pronounced.  There was an article done last year about the state’s recognizing that they have to start building power plants because of the increase in commerce, the increase in population in their states, and yet they didn’t want to approve clean-coal technology.  I think that’s going to get thrown out the window.  And watch clean-coal technology and nuclear come back because that’s the only thing we know that we have right now.  Wind and solar will help, and we’ll use that to supplement peak power consumption.  But what are you going to do when we start going to plug-in hybrids, so at night when consumption of energy goes down all of a sudden everybody’s got a car in their garage plugged in for a recharge?  So, we’re obviously going to have address these issues.  [33:36]

JOHN:  One of the factors that I don’t think people are looking at is the ability of people to vote with their feet.  You know, you were talking about politicians going to have another hearing, “Save us, Obe-Wan Kenobi” that type of thing.  And what will happen is there are some states that are actually encouraging businesses with low regulation,  low taxes and energy abundance, versus those states which are having power outages and a high taxation system.  And there will be a migration.  I don’t think the politicians in the high states – which are largely on the left and the right coasts – but they’re not going to catch on to this until their revenues – like look in your state, California, is already approaching another tier of its crisis right now as more and more people are voting with their feet and leaving the state, from small businesses to retirees.  You name it, they’re out of there. 

JIM:  And especially with some of the larger manufacturers.  Anytime we have the – once again, these warm spells, we have these rolling blackouts.  Well, if you have a unionized assembly plant and you have a power out, well, what happens is the city will go to the manufacturers and say, “in order for people to cook in their ovens and turn on the lights, you can’t manufacture.  You’ve got to shut down your plant.”  You can’t run a plant like that.   And just a while back, some of the manufacturers actually converged on the state and said “look, if you don’t address this power issue we’re out of here because we can’t run a manufacturing plant where anytime we get a warm spell here we’ve got to shut down production in order to keep the lights on everywhere else in the city.” 

And I think also, John, as the things of taxes and inflation begin to impact more consumers and businesses, they’re going to go simply where they can cut their costs.  I mean you can go elsewhere in the country and live a lot cheaper than you can in the most populous areas of the country (the big cities along the west and the east coast.)  I think you’re going to see more of that.  Taxes, regulation and the cost of living are going to determine that because that’s one way people are going to be able to cope.  [35:43]

JOHN:  I think you’re right about that.  What about the social society we have created here, the welfare state.  What’s going to happen to the welfare state as we plow into this do you think? 

JIM:  I think it’s going to collapse or just simply get checks that due to inflation will not buy the things that they used to buy when the dollar was more stable.  But I think you’re going to see more devaluation of the dollar because governments won’t be able to cope, the federal government won’t be able to cope and when you can’t pay your bills and you’re not collecting enough tax revenues to pay for these bills and the promises that you make, you’re going to have to cut back and you’re going to have to inflate.  [36:24]

JOHN:  I think even the concept of wealth transfer etc., that we’ve sort of been sold on since Lyndon Johnson started the Great Society, that’s not going to fly as more and more of the middle class out there are just struggling to stay afloat.  They’re going to say, “well, why should we do this.  Everybody roll up your sleeves and get to work.” 

JIM:  Well, you’ve already seen this, to this 400 billion dollar mortgage bailout program where public opinion polls across the country are dead set against this.  It’s like, “gosh, I’m struggling, I’m working, I’m making my bills, why are you going to raise my taxes so you can bail out my neighbor?”  And so I think there is going to be a growing resentment on some of that, and that’s why I think some of the politicians right now are just absolutely petrified.  I mean, John, it doesn’t matter whether you’re a Democrat or Republican, if you’re up for reelection and things are not going well in your local economy, it doesn’t matter who’s in office the voters take out their anger at whoever is in office at that time.  So both Republicans and Democrats are up for election and a lot of these guys are like a deer in the headlights in terms of what they need to do.  And actually the best thing they can do is get out of the way and l