by Christopher Kyambadde
When Stephen Leeb wrote The Coming Economic Collapse in 2006, few could even attempt to disprove his prophecy of the oil price escalating to $200. Oil escalated to the never-seen before price of $147 last year and Leeb looked more correct than ever.
Oil has now plunged to less than 1/3 of last year’s peak and one wonders whether the prophecy of it hitting $200 will ever come true.
Leeb has some compelling arguments as to why oil should go to as high as $260 in the near future. It is a non renewable asset where what is extracted progressively leaves behind less and less to exploit. As more is extracted, the remainder only becomes more difficult and expensive to pump.
He very ably supports his argument by referring to Hubbert’s law which states that, after half of a non renewable resource is extracted, production starts to decline. This has been proved correct in the case of USA whose oil production has progressively declined since the mid 1970s and there is ample evidence that it will apply to the whole world. He in fact suspects that world oil production may have already peaked whereas consumption is still rising.
Saudi Arabia, with proven reserves of 110 billion barrels, has already extracted about 60 billion barrels of oil therefore, since they have not discovered any new big reserves, their production could be declining. He laments the fact that the Saudis are very secretive about their reserves so they provide no reliable figures.
He notes that for decades now, the safety margin between oil production and world energy needs has progressively narrowed from 8.7 million barrels per day to less than 1 million barrels per day by 2006. This is worsened by the fact the world has had no major oil discovery since about 35 years ago.
The costs of finding new oil is also escalating due to rising costs of the more advanced technology required and the fact that most of the easy-to-find oil has already been discovered.
He argues that even if the oil price were to just increase by its long time historical rate of 50% of world GDP growth, it will soon approach the dizzy levels he is predicting.
Leeb refers to studies that show that the ability of a civilisation to maintain or advance its complexity depends on the availability of energy. Basing on the pending shortage of oil on which we now so heavily rely to maintain our civilisation, he predicts chaos and a possible destruction of the world economy as we know it.
If the world does not reduce its dependence on oil, he predicts, high inflation, decimation of the world economy and the inevitable reversal of the level of development we have so far achieved will soon be upon us. He gives the example of England who, due their reliance on wood for fuel, ended up exhausting their wood supplies until they had to import it at exorbitant prices and their economy was threatened by imminent collapse. What saved them, and possibly ignited the start of the industrial revolution was the discovery of another source of energy – coal.
The Coming Economic Collapses laments the popular belief by politicians, environmentalists, Wall Street professionals and even academicians that oil will perpetually be cheap. Leeb mentions Goldman Sachs analysts who state that the long-term price of oil will average $30 to $40 per barrel whereas the US Department of energy said on their website in 2005 that oil will decline to $25 by 2005 as new supplies enter the market.
As he predicts the pending economic collapse, Leeb uses his book to advise against mentalities that are sure to destroy the world economy by delaying actions to mitigate the situation.
Recognising the expense of coal due to environmental and health hazards, he suggests that it can be used more in the interim as the world buys time to reduce dependence on oil.
He notes that wind power is environmentally safe, is as cheap as coal and its technology has been extensively tested. The UK House of Lords have also found that wind is as cheap as natural gas in some locations.
Hydrogen, solar power, natural gas, ethanol, biodiesel and nuclear fission also get good coverage in the book where they are presented as good alternatives to oil if we are to avoid economic disaster.
Convinced that the politicians and Wall Street are unlikely to act any time soon to avert the coming energy crisis, Leeb then addresses the individual investor with advice on how to survive, and possibly thrive when oil costs over $200.
He strongly advises investment in major oil extractors and processors together with oil services companies because they will all make extraordinary profits in case of oil price inflation. The same, he says, will apply to companies dealing in alternative energy for example wind power, natural gas and also companies that make hybrid cars.
Since inflation will be rampant when oil reaches over $200, he also recommends some inflation hedges in the form of gold, platinum and zero coupon bonds.
South Africa features in this book as he recommends investing in Sasol and Impala Platinum as some of the stocks that he trusts will make you rich as the world economy crumbles due to high oil prices.
Leeb is very convincing in many of his assertions but the recent plunge in the price of oil may give his detractors all the ammunition to shoot him down. Could he be correct and the present price is just a temporary blip in a price trend that is only set to carry on upwards? Or is cheap oil here to stay?