–In much simpler terms, we still don’t know how many people are going to default on their mortgage in America. We know more and more of them are missing payments (delinquencies are up.) We know unemployment is rising (and that certainly doesn’t help). But we don’t know who’s going to make it through to the far side of the crisis and who won’t.

–That makes it really hard to value the bonds backed my mortgages and that’s why the credit markets continue to exist in a state of suspended animation. Their soul-the buying and trading of debt-backed assets-is frozen.

–How about something we do know, like the fact that oil futures closed over US$110 and that Pemex better start exploring for more oil in the Gulf of Mexico or its going to pump out all its reserves in less than ten years. Mexican President Felipe Calderon went on national television last night in Mexico and told his countrymen (in Spanish, we presume), “We have to act now because we’re running out of time and out of oil.”

–What’s he talking about? Mexico has just over 12 billion barrels of oil reserves, or ten percent of the world’s total. It exports 1.5 million barrels per day to the U.S., putting it third behind Canada and Saudi Arabia, and just ahead of Nigeria and Venezuela.

Source: U.S. Energy Information Administration

–The trouble is that Mexico’s government has been using the state oil company, Pemex, like a cash machine that never runs out. Pemex contributes 40% of the total tax revenues of Mexico’s Federal Government. It’s a resource of the people, for the people, and by geology. But you cannot print oil on a printing press. There is no such thing as “just in time” energy resources.

–Mexico’s government has not been investing enough in exploration or new production to top off Pemex’s reserves. Those reserves are being depleted. What’s more, its largest oil field Cantarell, is in an alarming state of decline. Cantarell was discovered in the Gulf of Mexico in 1976 by a fisherman. Estimates are that it was a 20 billion barrel discovery.

–Mexico has been producing from it ever since in huge numbers. But those production numbers appear to have peaked in 2004 at around 2 million barrels per day. Today, Cantarell produces just 1.4 billion barrels per day-a loss of 600,000 barrels a day in four years. Overall Mexican production peaked at 3.4mbpd 2004 but is now under 3mpbd. In the first two months of this year alone, Mexican oil production fell 6.4% compared to the same time last year.

–Enjoy the oil while it lasts folks. Of course, it’s going to last for a very long time. Peak oil doesn’t mean that all the world’s oil will be gone. It means that all the world’s cheap oil will be gone.

–That loss will have a radical effect on economic and social arrangements that were built on cheap energy. And for nation states like Mexico (and Venezuela, and Saudi Arabia) that finance welfare states with oil revenues, it will be a disaster unless oil profits are turned into income producing capital assets-instead of merely redistributed as transfer payments…or tuned into new Towers of Babel.

–”We should leave oil before it leaves us,” said International Energy Agency chief economist Faith Birol in an interview with German monthly journal International Politics. There’s an idea.

–Birol says the world has time to make other energy plans, but not much. The rise in the oil price will be gradual he says, as a function of declining production and growing demand. “But looking at this long-term, it becomes clear that nothing changes whether oil runs out in 2030 or 2040 or 2050.”

–We are assuming he’s referring to cheap oil and not the world’s total supply of oil. Either way, the warning is unambiguous. “One day it will definitely be finished. And I think we should leave oil before it leaves us. That should be our motto. We should prepare for that day with research and development, how we can replace oil, what kinds of living standards we will be able to maintain, what alternatives we can develop.”

–Here here. Finding the commercial alternatives to oil is mainly what we’re up to in the Australian Small Cap Investigator.

–Finally, we’d never heard of former Labor politician John Button until we learned he’d died earlier this week. But as we read a few obituaries, we learned the man played a key role in reducing tariffs on the Australian auto manufacturing sector (which were around 60% in the 1970s, we also read.)

–The Button Car Plan doesn’t seem like it was terribly popular at the time. But dropping tariffs exposed Australian industry to global competition. That competition eliminated firms (and jobs) that existed because the barriers to entry for foreign producers were so high. It also gave consumers better products at cheaper prices. Individual industries unable to compete globally lost out. But consumers won.

–Still, Australia is a tough spot when it comes to the division of labor. In a country of just 20 million people, you are not going to be able to produce a huge variety of manufactured goods. There are just not enough people for the division of labor to work-where you can build up specialists in all sorts of manufacturing disciplines.

–Australia’s situation is not nearly so dire as say, Mexico or even some of the Gulf countries. Those countries are reliant on one commodity for a large part of their economy. Australia has a diversity of natural resources. But when it comes to innovation and economic diversification, there’s plenty to accomplish in Australia.

–On a different note, we found a great article written by Button the February 2007 edition of “The Monthly” magazine. The article was called “America’s Australia,” and referred to a 1942 book called “Instructions for American Servicemen in Australia.”

–The book tried to help American soldier in Australia (there were 1 million of them in 1942, compared to seven million Aussies) understand more about their local hosts. It had some dubious definitions of Australian words. But since we were on the subject of the differing attitudes between Americans and Australians this week (with respect to guns) we found the article really refreshing.

–We know what America is. It’s an abstract idea of equality. It’s based-correctly or not-on the proposition that all men are created equal. Americans are big believer in reinvention and self-invention. If life is getting you down, you could simply pack up and start over somewhere else. Mobility-social, economic, and physical-is key to understanding why America’s are so future focused and un-traditional.

–We wouldn’t think that Aussies are traditionalists either. Both countries are young. But they clearly don’t have the same set of values (if millions of people can be said to hold the same values, or believe in the same national mythologies.)

–As for us, we like both cricket and baseball, VB and Budweiser, Sydney’s Northern Beaches and Colorado’s Rockies. As for Australian values, we are still trying to figure those out. Button gives us his take, while comparing Australians to Americans.

–”We spend time trying to describe our differences from Americans because they are the people we are most like, and our identity as Australians depends on difference. In the process, we end up defining some things which are these days described as ‘Australian values’.

–”The prime minister [John Howard at the time] has been good at this. In speeches on various important occasions, he has referred to our virtues as being ‘a fair go and practical mateship’ (part of our ‘creed’), ‘a sense of fair play and a strong egalitarian streak’, ‘decency and pragmatism in a classless society’, ‘tolerance and hospitality’ and ‘those laconic characteristics which we hold so dear’.

–”Perhaps ‘Australian values’ are not as immutable as might be believed. The things we ‘hold so dear’ – the mateship, the sense of fair play, the egalitarianism, the laconic characteristics – came out of a convict heritage, and later from the shearing sheds, the mines, the construction sites, the trenches of World War I: from all those places where hardship was endured and collective action was the most meaningful response….

–”It is possible that Australian society may come to resemble, by default, some of the worst aspects of American society. For me, this would be a tragedy, because I like John Howard’s stated Australian values, and neither an individual nor a country can live on nostalgia. And if this happens, there’s no way we can blame the Americans, which we sometimes like to do. As our forebears used to say, we might just end up looking like a mob of drongos.”

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