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The Coming Economic Collapse

An economist shares ways to profit from the coming economic collapse he believes will be triggered by declining global oil production.

By Trey Shaughnessy
Published April 30, 2007

Stephen Leeb, PhD, The Coming Economic Collapse: How you can thrive when oil costs $200 a barrel. Warner Business Books, 2006, ISBN-10: 0-446-57978-5

The Coming Economic Collapse

Author Stephen Leeb makes an argument for why crude will reach $200 and how an investor can profit from that. He spends about 80 percent of The Coming Economic Collapse establishing the argument for peak oil and the rest on how to profit – as absurd as that may sound.

In contrast to other books written by geologists, energy investors/bankers, and petroleum experts, Leeb's alarm started with the 2006 skyrocket in the price of crude. (Other experts started warning the world years before, some of whom argue that the peak is happening now.)

As with all peaks, it is impossible to know until after it has happened. Leeb is famous in Wall Street cliques as being the person who first predicted oil will reach $60 and most of his colleagues scoffed at the idea, when oil was in a cheap $30 range and he became known as the "$60/barrel oil-guy".

At the time of writing the book, crude was trading around $60 per barrel, after reaching a high around $80. (Not long after CIBC Wood Gundy predicted $100 a barrel.) Today, barrels of oil oil trade in the mid- to upper $60s.

Leeb's background is in economics and it is somewhat contrary to other economists and investors. First, Leeb doesn't confuse technology with energy. Most economists see the solution to peak oil as 'supply and demand' law. Demand for energy increases as it does with growing economies and therefore the price increases, fueling greater technology and drilling to meet the demand.

Capitalism has taught us that if someone has money, anything can be possible and anything can be acquired. However, that doesn't apply to a resource that is limited. As James Howard Kunstler puts it, "The earth does not have a creamy nougat center of petroleum.". More drilling and more efficient extraction technology won't create more oil in the earth.

When the peak of oil extraction happens is debatable. Whether it happens is not debatable. Some say now. Some say in five years. The most panglossian of people say the peak will come in 30 years - and that includes the US Department of Energy.

Leeb's get-rich strategy is based on the events of the 1970s OPEC crisis. He does distinguish that the OPEC crisis was very different, but the results are similar. The economic results from higher energy costs are: inflation, high interest rates, less disposable income, layoffs, recession, and smaller returns on equities – possibly smaller returns than the inflation rate.

The big difference today is the record-high consumer debt levels and mortgages. The level of mortgage versus home equity throws a wrench into how central banks typically fight inflation, which is increased interest rates.

The US Federal Reserve will have to deal with massive inflation or massive foreclosures, and Leeb predicts that the Fed will have to choose inflation as it is a safer choice than having a country of homeless families and banks with real estate that nobody can afford to buy.

In short: real estate will still be a wise choice to invest money and that it won't collapse, simply because the government can't let it. He writes, "If the tech bubble was a light rain, then a housing bubble would be a Category 5 hurricane."

I'm not sure I trust that prediction. There are plenty of things that federal governments have tried to avoid but couldn't.

One obvious investment is in oil futures. The author basically says buy them now at $68 and sell at $200. He also says oil producers are a wise choice (I prefer to call them extractors). At $200 a barrel, the profits of oil companies and the oil service companies will never have been better.

Another obvious choice for investment is in alternative energy companies. He names a few in the book, like Scotland Energy, GE, and other companies that are leading the way in the gasified coal, liquefied natural gas, uranium and coal mining, wind turbines, nuclear and solar energy.

Gold is another investment for an energy crisis. During inflation and times of crisis gold has always been a safe option for capital. Leeb points out that the real return on gold during the 70s was significantly higher than equities.

One more option for investment is in what the author calls "Chindia" - China and India. He doesn't say anything too specific, other than just invest almost any company operating in India or China.

Could it be because the US with its huge consumption and requirement of energy (almost one quarter of the entire world's energy) is positioned to crash the hardest in an energy crisis? Or is it possibly because when the dust settles after an energy crisis, the US will loose its global hegemony and Chindia will be the world's next superpower?

The author fails to mention a few things. Leeb fails to point out what will end the energy crisis and what will be left of the US economy. The 'event' he does point out will be one of the most significant events in world history. He fails to mention that the US Dollar's value will be wiped out.

After US President Richard Nixon took the greenback off the Gold Standard, the US Dollar's value has been unnaturally propped up by the Petrodollar cycle.

Finally, capitalists being capitalists, they will likely abandon the very country that made it possible for them to make their fortunes, and create unprecendented flight of capital from the US to 'Chindia', further crippling the US (and Canada, too).

Trey lives in Williamsville NY via Hamilton. He is a Marketing Manager for Tourism and Destination Marketing in the Buffalo-Niagara Metro.

His essays have appeared in The Energy Bulletin, Post Carbon Institute, Peak Oil Survival, and Tree Hugger.

And can't wait for the day he stops hearing "on facebook".

14 Comments

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By DealWithThis (anonymous) | Posted May 01, 2007 at 11:56:40

I believe in the "undulating plateau" - waves of layoffs, recession/depression, recoveries and
oil prices dropping and leaping with the waves. People owning land will be able
to grow food. In a scenario of stark collapse those who have not will take and I don't see that as being likely.
In the undulating plateau there will be much denial of the actual cause. We
see it now. It's boiling a frog by slowly raising the temperature. We see the denial, the blaming of "above ground factors" or big oil not being willing to pump or gouging the consumer.
Those who really understand - the move will have to be to localize,
become productive and prepare for the innevitable - a low energy future.

I don't see how "Chindia" can be a superpower. They produce for US/first-world
consumption. Without that who are they producing for whom? Themselves? They are
only making money because of the west - both their upper and lower classes. They
are gone when they USA sinks. Rampant, evil, destructive consumption will not be possible. The old order will give way to ???

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By DealWithThis (anonymous) | Posted May 01, 2007 at 14:15:31

I believe in the "undulating plateau" - waves of layoffs, recession/depression, recoveries and
oil prices dropping and leaping with the waves. People owning land will be able
to grow food. In a scenario of stark collapse those who have not will take and I don't see that as being likely.
In the undulating plateau there will be much denial of the actual cause. We
see it now. It's boiling a frog by slowly raising the temperature. We see the denial, the blaming of "above ground factors" or big oil not being willing to pump or gouging the consumer.
Those who really understand - the move will have to be to localize,
become productive and prepare for the innevitable - a low energy future.

I don't see how "Chindia" can be a superpower. They produce for US/first-world
consumption. Without that who are they producing for whom? Themselves? They are
only making money because of the west - both their upper and lower classes. They
are gone when they USA sinks. Rampant, evil, destructive consumption will not be possible. The old order will give way to ???

Permalink | Context

[ - ]

By Zac (anonymous) | Posted May 02, 2007 at 14:02:09

"Chindia" can and will be a superpower in effect after the U.S. loses it's hegemony because of the financial effects of peak oil.

Once the U.S. dollar loses dominance, there will be less trade with the U.S. but the producing capacity will still be there. They will still sell goods to the rest of the world. As the new economomy of less energy intensive lifestyle emerges there will still be a demand for electronics and other goods even though they will probably become more expensive.

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By jason (registered) | Posted May 02, 2007 at 14:12:22

"Finally, capitalists being capitalists, they will likely abandon the very country that made it possible for them to make their fortunes, and create unprecendented flight of capital from the US to 'Chindia', further crippling the US (and Canada, too)."

this is already happening.

As for the China-India superpower...I too think that they want to avoid a Western collapse even more than the West. They know that if the US crashes and burns, so does their economy. It's nice to say "there will still be goods to sell the rest of the world", but the fact is, the US consumes like it's going out of style (wouldn't that be nice) and China/India will feel the heat in a big way if that slows down. Global recession is more likely, not just a Western recession.

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By trey (registered) | Posted May 03, 2007 at 10:02:29

If we look to the past, the Great Depression was brought on (one reason) by over-production. Too much was produced and not enough was consumed. Even food, milk poured into ditches while people starved to inflate prices.

It's fair to say a similar scenario will happen to Chindia. Their massive producation capabilities will have to be shut down, like the 1930s. Prices will bottom out to ridiculously low levels and still have very little demand for cheap plastic dodads that have no purpose in our lives.

Unless Chindia turns its own population into consumers. To do that, Chindia will have to start paying living-wages. Like Henry Ford who wanted his own workers to be paid well enough to be able to afford the very products (Model T) they were producing.

Then Chindia looses its economic advantage of being the world's manufacturer from low wages.

O what will the world do?

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By jason (registered) | Posted May 03, 2007 at 10:51:31

if the US keeps buying stuff, the world will keep making it. I don't see a scenario that lets one region off the hook while the other collapses. They will both survive or fail together. they're too interconnected.

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By Ryan (registered) - website | Posted May 03, 2007 at 10:53:36

What happens is that China's export economy produces so much wealth that the Chinese can start to afford to buy their own goods. That's the point at which the US economy stops mattering to China - the point at which China stops propping the US up by holding dollar assets in its central bank.

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By Rusty (registered) - website | Posted May 03, 2007 at 11:32:45

Yes, but don't you have to be a net exporter in order to prosper? China and India can't just sell goods to themselves to thrive. Don't they need the mighty dollar/demand for their goods and services from outside their borders in order to get rich?

I'm confused...Nothing like a global economic discussion for a Thursday morning...:)

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By Ryan (registered) - website | Posted May 03, 2007 at 12:02:00

Wealth is generated when people produce things, not when countries trade them. In fact, most wealth is generated when a producer substitutes locally manufactured goods for imported goods - it's called import substitution and it's a big part of how countries like the US and Canada got rich in the first place. Read Jane Jacobs' _Cities and the Wealth of Nations_ for a much better explanation than I can provide here.

In any case, most global trade is intrafirm - it is essentially internal logistics that happens to span political borders to take advantage of low taxes here, cheap labour here, cheap materials here, and an affluent market here.

The logic of this globalized commerce is ultimately self-defeating, because 1. people who are employed by dint of their cheap wages cannot ever become rich enough to have their own vibrant economy; and 2. people who import every good they use cannot stay rich on an economy built around services that cannot be outsourced (i.e. homebuilding and pizza delivery).

The economics of a country like China generating cheap products for other markets depends on the following:

  • Very low taxes - Countries cannot invest in the critical infrastructure to generate domestic wealth as long as taxes remain too low.

  • Very low wages - Citizens cannot become wealthy enough to buy their own manufactured goods as long as their wages remain low enough to continue attracting foreign companies looking for cheap labour.

  • Very cheap transportation - As global oil production slides into decline, this will gradually disappear, and the false economy of paying cheap workers on the other side of the world to manufacture your goods for you will disappear with it.

If China doesn't have a domestic economy of goods produced locally for local consumption, it will be as dead in the water as the US.

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By Sneakerone (anonymous) | Posted July 14, 2007 at 01:39:24

Ok let's talk Metaphysics..
Accordint to 5000 yo accurate Mayan Calendar, in our current existing Fifth World Age, the Global Economic Collapse will start beginning November 18, 2007.
The Mayans havent even do explorations and oil drillings at that time.
Go figure.

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By Western Fools (anonymous) | Posted September 08, 2007 at 06:06:44

China and India want North America to be destroyed and will colonize our homeland if and when the get the chance. Working with many new immigrants from these places have taught me this. Wake up!

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By BR Pepperell (registered) - website | Posted June 11, 2008 at 05:02:46

Peak Oil

The age of human energy has begun and we face the biggest challenge the planet has known in the last 100 years. What we must now do is take a great leap backwards. Globalisation along with cheap energy is an aberration. We must now concentrate on equality as a new paradigm. We do this or we perish. We cannot embrace such a change without acceptance of a universally acceptable moral code. We need absolutes in every sphere of human activity . Humanity has proven its need for moral guidance. Global law based on a fair and just society must now be our ruler. This is our biggest challenge, a challenge that Plato wrestled with and we must too.

Bryan Pepperell

Wellington (NZ)

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By alice (anonymous) | Posted August 21, 2009 at 06:53:23

I suggest that the path to a cure requires clarity about making and honoring distinctions between markets and governments.Printing money to solve a nation's economic problem can never be sustained. Eventually, it will lead to the debasing of a nations currency and run-away inflation.Thanks........

Funeral Homes

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By singledad1234 (anonymous) | Posted June 18, 2011 at 16:41:11

911weknow com infowars com henrymakow com ohcanadamovie com gigisup net wearechange org

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