The Daily Reckoning December 10th


More Too Much of a Good Thing

Parley-vous francais? You can learn that much French in about 5 minutes. If you knew no French before, this represents an infinite increase. In about 5 more minutes you can learn “Je m’appelle Todd,” an increase of about 100% on what you knew before. Thereafter, the rate of return declines. By the time you are laboring over the past conditional form of the subjunctive mood or the archaic simple past form, which is used only in literature or formal writing, you will find progress hard to come by…with hours of additional time and energy needed just to make the smallest contribution to your useful lexicon.

Initial investments of energy in anything tend to produce more results than later inputs. In your first week, you learn quite a lot. Each successive week brings fewer new words. When you have become ‘fluent’ whole months can go by without learning a single new word or verb form. Of course, you can persist. You can spend all your time studying the language in all its bizarre and arcane forms, memorizing expressions of the ancient Luberon local dialect and verb forms that haven’t been used since the time of Moliere. Keep it up and your friends and family will probably think you’ve gone too far, that you’ve gone a little funny in the head.


Often, progress comes in fits and starts. You may have to put in a certain amount of energy before you get the payoff. If you are breaking into a liquor store, for example, it takes a while to jimmy open the door and cut the alarm cables. Then, you get the reward. In that sense, the input/output curve can be more of a stair-step pattern than a simple humpback curve. Still, you can easily imagine that your first B&E job will be more rewarding than your 10th….or your 100th. Or imagine that you were building a bridge. You would have enormous inputs of energy over a long time while you were in the construction phase. Then, the payoff would come in a dramatic ribbon-cutting ceremony…with a flat rate of return everafter. Your return on investment curve would be a single giant step.

We tend to think that fossil fuel is an exception to the general pattern. The more the merrier. But it is not so. Energy from coal, oil and gas follows the same lifecycle…from fast growth and strong returns in early life to slower and slower growth in mid-life. This is just a way of saying that the utility of fossil fuels declines over time, just as it does with everything else.

Energy — available, useful, effective energy — is always in limited supply. There are only so many hours in the day…only so many neurons to do their work…and only so many tons of coal in the earth’s crust. You either use them well…or you don’t. All human progress comes as a result of using energy effectively. In the hundreds of thousands of years before man was fully human, he had no more energy available to him than other animals. He ate what he could gather or grab. His brain developed, allowing him to use tools and weapons and to undertake collective projects, such as hunting, war, irrigation, public hangings, entertainment, and so forth. But this larger brain came at a cost. Brains take energy. He needed to increase his calorie intake to pay for it.

Usable energy is a function of the technology existing at the time. For at least 10,000 years men wandered the plains and scrub forests of what is today Texas. But only in the last 100 years were humans able to extract oil and do something with it. Only in the last 10 years were they able to frack out even more oil and gas. It’s not enough just to have a lot of energy available.

Over many, many years people learned to use energy from a variety of sources. Some figured out how to work metal using the heat from coal or charcoal…others learned to navigate the oceans using the force of the wind to drive their boats…still others figured out how to mill flour using the power of a waterwheel…and some even developed construction cranes powered by slaves walking on a treadmill. They invented these machines to move, grind, lift and hammer things. But they lacked a convenient, flexible and reliable source of condensed energy to power them. Using the energy and technology they had, output increased very, very slowly. This gave innovations time to spread widely and distribute themselves fairly evenly. As late as the 18th century there was not much difference in the level of wealth and standard of living between a farmer in Bengal or one in China or Virginia.

Machines burn energy; they turn it into something we can use. In that sense, even the cow is a type of machine. It converts grass — which is indigestible by humans — into milk, cheese and meat. The horse is a useful machine too — converting grass into horsepower, which can be used for transportation, war or farm labor. But the machines of the Industrial Revolution gave us the biggest boost of all. Now man could use the condensed energy from millions of years of sunlight. He could use it to make things and move them around. You can see here what this did to the human population. It permitted a staggering increase in the number of people the world could support.

World Population Growth

This innovation is barely 2 centuries old. It is so new that it has yet to be fully exploited by much of the human population. It took a while for these engines — and the machines they powered — to be perfected, but over the 19th and 20th centuries the results were spectacular. Nothing in human history comes even close. Now, humans could burn far more energy than they had in the past. You see the consumption here:

World Energy Consumption

These innovations happened so fast that not everyone was able to take advantage of them at the same rate. Not all people had the savings, the financial system, and the property rights that would allow them to exploit energy efficiently. In 1910, for example, Russia was fast applying the new technology. It had one of the highest growth rates in the world. Then, the Bolshevik Revolution stopped the process in its tracks. For the next 70 years, much of the energy put to use in the Soviet Union was wasted. Same thing in China after the triumph of Mao in 1948.

Today, the use of energy is extremely uneven. The average American uses 327 gigajoules of energy per year. In Vietnam the figure is only 22. In India it is only 21. Even in Brazil, it is just 44. All of these countries have plenty of room to grow simply by putting into place the innovations that have already been developed. By contrast, the rich countries will find it hard to put more machines into service profitably. That’s why energy use is now declining in the US, Europe and Japan; it just doesn’t pay.

That is also why the world we see in Europe and America today is so similar to the world of 50 years ago. We had much cheaper gasoline back then. But the machines we used to turn the fuel into useful output were about the same. There were automobiles, tractors, factories with assembly lines, air-conditioners, refrigerators, television, elevators, jet aircraft. In fact, it’s hard to think of anything we didn’t have — other than electronic gadgets. Even the cultural world is little changed. The Rolling Stones, for example, just celebrated their 50-year anniversary, and they’re still going strong. So too are many other musical groups from the ’60s. We still watch late-night talk shows on TV. We wear suits and ties. We turn on the A/C. And we drive down the freeway in our automobiles, listening to the “classics.” What has changed?

More tomorrow…



Bill Bonner
for The Daily Reckoning

More Too Much of a Good Thing appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Christmas Story’s Hidden Capitalism

People talk like capitalism is some strange foreign invader, a mechanical system that was imposed on the world a couple hundred years ago, fueled by burning coal and emitting smoke, and certainly not anything organic to the social order.

This is preposterous. The Christmas story that surrounds us in this season, told millions of times in songs and sermons and popular lore, presumes capitalistic institutions. I mean by that: the story presumes private property employed in an extended order of production, organized by human volition, with owners, entrepreneurship, speculation, workers, and consumers all trading to their mutual advantage.
The central place of the merchant innkeeper is obvious enough. But consider scene two, introduced immediately after the trip to Bethlehem and the manger scene. It’s all about the shepherds.

And there were in the same country shepherds abiding in the field, keeping watch over their flock by night…. And it came to pass, as the angels were gone away from them into heaven, the shepherds said one to another, Let us now go even unto Bethlehem, and see this thing which is come to pass, which the Lord hath made known unto us. And they came with haste… – St. Luke 2: 8-11-20

Who were the shepherds? The profession has a documented existence going back some 6,000 years but anthropologists suggest that sheep were domesticated hundreds of thousands of years earlier. That makes shepherdry one of the oldest known professions, one that continues to this day.

The shepherds served as security workers and providers. Their main job was to keep the flock safe from invading thieves and from predatory animals, shuffle the sheep from pasture to pasture, and get them to the right spot so that they wool could be shorn and their milk taken for food. The end result is sold to weavers or cheesemakers or at the public markets.

The sheep were privately owned capital. They needed to be protected and cultivated, so that the produced goods could make it to the final consumers. It’s all an effort to — prepare yourself — make money. The protectors were most like paid in cash for their work.

Why was domestication of animals even necessary? It wasn’t always. But early man (we are talking about 500,000 years ago) discovered that without private animal ownership and breeding, people would starve. That’s because collective ownership led to the “tragedy of the commons.” That is to say, everyone rushes to right for what exists to the point that nothing exists for anyone (kind of like modern democracy).

In absence of ownership, people would kill any animals for food. They would kill them when they found them, eating what they could when they could. Sheep were particularly vulnerable to overutilization because human beings could catch them, unlike deer and tigers and the like.

The animals began to disappear, introducing the possibility of mass famine and death. In order to preserve them, much less use them to make clothing, animals had to be owned and reproduced and hence came domestication and the beginnings of capitalism.

Thus did ownership come about as a social convention as a way of addressing the great economic problem: nature herself does not provide enough of everything to go around. Using what we find, with no attempt to cultivate and allocate, is a prescription for death. Things have to be produced. Production is made possible through private ownership.

The same is true of the land itself. Through either title or informal convention, the pastures were owned privately as well. Shepherds had to know where to allow grazing or face accusations of invasion, trespassing, and theft. Even the Code of Hammurabi (the Babylonian legal document that traces to 1770 years before the events mentioned in the Bible) listed stiff penalties for uninvited grazing.

Also private were the products of the production cycle: the wool, the milk, the meat. In other words, there would be no shepherds without the existence of a capitalist sheep owner and pasture owner.

The shepherds were not typically slaves. There is a reason for this. The owner has to fully trust the shepherds, who worked under contract but could not be monitored. They would be in a position to steal. Forcing people into this role would not be a good idea. It’s best to pay them as willing workers, and count on their desire for continued employment to assure for a long-lasting and trusting relationship. In other words, they were just like us.

So, yes, they were paid. And with what money? They were paid with the saved proceeds of the previous year’s profit, mostly likely, given that banking institutions were not likely advancing loads. Regardless, the payment to present workers is granted unto the workers before this season’s profit is earned. The shepherd might also enjoy a bonus at the end of the season based on the return brought back to the owner.

No owner of sheep or pastures could know for sure that the wool, milk, and meat would turn out to be a good investment. The future is always unknown. There could be a blight, terrible weather, mass theft. The very employment of shepherds represented a speculation on the part of the capitalist — an entrepreneurial judgement made in a world of uncertainty.

The particular case reported in the Bible adds an interesting twist. An angel of the Lord shows up to tell the shepherds that a savior is born and that they should head to Bethlehem right away.


That’s an offer that is difficult to refuse. But there was a problem: work commitments and schedules. Money was tight and jobs that allow you to lie around in green pastures — living out the dream of the Psalmist — were not entirely easy to come by. So it is not likely they would just abandon their jobs. They surely had to ask permission and seek replacements. After all, the Bible tells us that they later returned to tell of the good news.

That means, essentially, that unless the shepherds took the whole herd with them, the owner gave them a bit of vacation time. The circumstances certainly seemed momentous enough to justify it. After all, an angel had appeared to them!

Note there was no legislation mandating worker leave. It was an agreement between the workers and the capitalist. And in the story as it appears in the Bible, they seemed to get along just fine. So much for the inherent conflict between labor and capital. Everyone figured out a way to trade and work without conflict.

This story resonates with us, as do many stories from the Bible, because so many deal with commercial realities that remain with us today. We are all workers with responsibilities. But there are also unforeseen circumstances that intervene. We hope that others understand and we work it out between ourselves in a mutually agreed upon way.

There are also capitalists who employ people and have to pay for security services. They have to speculate about the future, paying workers now before the profits appear later.

But such productive arrangements between people are only made possible by the existence of private property, not only in land but also in tools and machinery (and the sheep qualify as such). This is not anything unusual. It is normal life, wholly visible in the story of the birth of Christ. Capitalist institutions are so much part of our storied past — appearing everywhere in our songs, history, fiction, and our respective religious traditions — that we tend to overlook them. We don’t see what is everywhere around us.

And yet, for hundreds of years fanatics have tried to get rid of these institutions. Remember that it is private property, trade, and capitalist production processes that enable beautiful things to be born in this world. They are truly the foundation of peace on earth and good will toward all men and women.

Jeffrey Tucker

The Christmas Story’s Hidden Capitalism appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Significant Impact of U.S. Oil Production

The Eagle Ford shale formation lies south of our headquarters in San Antonio, Texas, giving the U.S. Global investment team a firsthand, tacit perspective on the oil and gas industry’s growing natural resources phenomenon. We’ve witnessed how the oil activity is boosting the local economy with solid-paying jobs, a healthy housing market and strong consumer sentiment, as oil giants such as Schlumberger and Halliburton take a bigger stake in the area.

After seven long decades of importing oil, the U.S. seems only a few years away from reversing the flow, largely from shale technology not only in Texas but several areas around the country. In 2005, the U.S. reported net imports of 13.5 million barrels per day, or almost two-thirds of its oil needs, according to Raymond James. By the end of 2012, net imports are projected to fall to 8.6 million barrels per day, which is about half of the country’s current consumption.

By 2020, the estimated gap between supply and demand narrows considerably.

Production has been growing at such a steady pace in recent years that Credit Suisse says the U.S. should see the largest growth of crude oil than any other oil producing country by 2015. An anticipated growth capacity of nearly 4 million barrels per day in the U.S. is three times more than Iraq, and almost four times more than Brazil, Canada and Russia.

2012 might be the year that the world fully realizes the significant contribution North America has made to the overall global oil supply, especially after the International Energy Agency (IEA) claimed that the U.S. would surpass Saudi Arabia as the largest oil producer around 2020.

The U.S. output expected by 2020 amounts to more than 10 percent of what the IEA says will be the world’s daily oil requirement of 96 million barrels per day by 2020. This compares to a consumption of 87.4 million barrels per day today. And, when you factor in the expected decline of about 10.5 million barrels per day from the mature fields around the world, North America’s success in this area is significant to global supply.

In addition, new discoveries of oil have led to disappointing results. There was high hope that a small group of countries—Brazil, Russia, Iraq and Kazakhstan, or the BRIKs—would “redraw the world’s oil map by boosting their production over the next two decades,” says the Financial Times. However, the newspaper reported that Kashagan field in Kazakhstan, “the biggest oil discovery in nearly four decades,” will finally begin pumping next year after several delays. Its anticipated flow is about 150,000 barrels per day, then rising to 350,000 barrels a day, but those figures are way below the maximum pumping target of 1.5 million barrels a day.

Yet century-old legislation may be the biggest obstacle to the U.S. becoming a card carrying member of OPEC. Around the time when Henry Ford was selling his Model T to millions of Americans, the government passed the Minerals Leasing Act of 1920, dictating that all U.S. crude exports must get approval from the government before proceeding. At the time, the country had net imports of about 300,000 barrels of oil a day.

Since the 1940s, the U.S. hasn’t had to worry about what to do with excess barrels of oil. With the rising use of oil, the country increasingly consumed more of the commodity than it produced.

However, over the years, certain types of exports have been allowed, including exports to Canada (not including the crude from the Trans-Alaska Pipeline System, which has other restrictions), exports from Alaska’s Cook Inlet, re-exports of foreign origin crude, and exports made under international agreements, says Raymond James.

But other exports are only permitted on a case-by-case basis as they are more dependent on what the government believes is in the nation’s best interest. Beyond what’s written in the rule books, “there are political overtones to anything that entails presidential discretion,” says Raymond James. The firm compares potential oil exports in the future to the experience of natural gas exports today, noting that “utility and manufacturing trade groups are actively lobbying against U.S. liquefied natural gas export permits because, of course, any such exports would incrementally raise domestic gas prices.”

In the spirit of economic nationalism, Raymond James believes that “as applications for crude export permits become more common, we would anticipate opposition to emerge, which means that the newly reelected Obama administration will probably suffer political backlash if it signs off on increasing exports of U.S. crude.”

The backlash that would result is likely because there is a common misperception between exporting crude and the price of a gallon of gasoline at the pumps, which is based on the Brent price of oil. “The irony here is that U.S. consumers pay a global price for gasoline, and exporting U.S. ‘land-locked’ light sweet crude would actually help push down the global price of gasoline,” according to Raymond James.

“Keeping the ‘land-locked’ crude in the U.S. does nothing to help domestic consumers, but as we all know, politics and reality can be very different things,” says the research firm.

If Washington prevents oil from leaving the country, the likely outcome is that barrels will begin stacking up in the Gulf Coast area. With the significant growth from areas such as the Bakken, Eagle Ford and the Niobrara Formation in Nebraska, Bank of America Merrill Lynch estimates that by 2017, refiners will likely be “saturated with light oil.”

How do investors benefit in the near term?


Refiners have two distinct advantages that help them bring in more profits.

One is the fact that the price of WTI oil has been trading at a discount to Brent. In 2012, the spread between WTI and Brent averaged about $17 per barrel. Domestic refiners have access to less expensive crude and benefit from the price differentiation as its refined product is priced closer to Brent. The other big advantage for U.S. refiners is record low prices for natural gas, a commodity used in large quantities by refineries.

Look to U.S. oil refiners, especially those with mid-continent exposure such as HollyFrontier (HFC) and Phillips 66 (PSX), which stand to benefit from these rising trends in production.

Frank Holmes

Original article posted on Daily Resource Hunter 

The Significant Impact of U.S. Oil Production appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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