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
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).
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