This from Taipan Daily:

Mark my words. It will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking.

— Vice–President-Elect Joe Biden

Just a few weeks ago, Vice–President-elect Joe Biden (back when he was plain old Senator Joe Biden) promised the world that Barack Obama will be “tested” by America’s enemies.

“Remember I said it standing here,” Biden told his Seattle audience, “if you don’t remember anything else I said. Watch, we’re going to have an international crisis, a generated crisis, to test the mettle of [Barack Obama]. And he’s going to have to make some really tough — I don’t know what the decision’s gonna be, but I promise you it will occur. As a student of history and having served with seven presidents, I guarantee you it’s going to happen.”

Say it ain’t so, Joe…

Russia: “I’m Your Huckleberry”

With no time to waste, it seems Mr. Biden’s words have already come true. Within 24 hours of Obama’s historic victory, Russia elected to stir the pot. As the Financial Times reports,

Russia’s president Dmitry Medvedev on Wednesday became the first world leader to throw down a gauntlet to U.S. president-elect Barack Obama, declaring that the Kremlin would station missiles in the tiny Russian enclave of Kaliningrad, which borders Poland, in response to U.S. plans for an anti-missile system in Eastern Europe.

Your humble editor is a big fan of old spaghetti westerns – Clint Eastwood westerns in particular. The Good, the Bad & the Ugly… The Outlaw Josey Wales… Unforgiven… and so on.

But one of the best westerns ever, in part for its cheek and cheesiness, has to be Tombstone, with Kurt Russell, Val Kilmer, Bill Paxton, and a few other notables.

One of Tombstone’s best lines is when Doc Holliday (Val Kilmer) tells Johnny Ringo, “I’m your huckleberry.” Meaning, “I’m the man you want to fight.”

October 13th, 2008: Dawn of a NEW COLD WAR

Overnight, the superpowers find themselves locked in a stare-down over a newly-confirmed strategic energy reserve that could last 391 years. Here’s how you could rake in “spoils” of 19,000% no matter who prevails…

In acting so swiftly to station missiles on the Poland border, Russia is in effect saying to the U.S. President-elect: “I’m your huckleberry. Let’s see what you’re going to do.”

What’s more, this plan does not feel like something Medvedev could have cooked up all by himself. To the contrary, it has Vladimir Putin’s fingerprints all over it.

So is it really a further surprise, then, to hear the Russian newspaper Vedomosti predict that Putin could retake his post as Russia’s president (with the current occupant stepping aside) sometime in 2009?

I have no idea how President Obama will respond to a newly-hostile Russia. My guess is that he will prove much less the “dove” than some expect… that the pragmatic Chicago operator in him could find the means to take a very hard line.

Dove or hawk, we’ll get a chance to find out either way…

A few weeks ago we noted in these pages that “falling oil is a geopolitical time bomb.” That notion holds true as ever, I believe. We just can’t be sure when or in what fashion the bomb will go off.

OPEC Still a Factor

Meanwhile, the Saudis aren’t exactly sitting on their duffs. Crude oil prices saw a ten percent jump earlier this week on news of the Kingdom’s production cuts.

There is open question as to just how effective OPEC really is. Some believe there is so much “cheating” going on that changes in the official quotas amount to little more than hot air. And with budgets getting tighter, the Saudis are one of the rare OPEC producers with enough “swing” capacity to really make a difference in day-to-day crude supply.

With that said, though, the long-term trend for oil prices remains up, not down… and that means greater concentration of power for OPEC. The IEA (International Energy Agency) is expected to release its “World Energy Outlook,” an annual report of sorts detailing the state of energy production around the globe, very shortly.

In that report (according to those who have seen advance copies), the IEA will release a forecast of $200 per barrel oil by 2030. The IEA expects a tripling of OPEC’s revenue in the coming years, from $700 billion in 2007 to more than $2 trillion down the road.

The IEA further notes “a real risk that underinvestment… will cause an oil supply crunch,” and that we will see “persistently higher levels of consumer spending on oil.” No surprises there.

Direction, Not Destination

How much stock should we put in a forecast for oil’s price more than 20 years out? Not much, obviously. I have no idea where the price of oil will be in 2030. (If they were honest, the IEA would admit they don’t either.)

But there is still value in this type of forecasting, because rigorous analysis of the data helps uncover the likely direction of the long-term trend.

We may not know how high or how fast oil’s price will rise in future… but we do know that the long-run direction for energy prices is still UP — not down —  in spite of the recent price implosion.

The credit crunch and ensuing panic have put global growth projections on hold for a time —  but it is only a pause, not a halt. Nor has the reality changed that all the “easy” oil is gone… that remaining oil supplies are getting ever harder to find… and that the NOCs (national oil companies) are increasingly hoarding the spoils for themselves, forcing the western oil majors to pursue ever tougher and riskier projects.

(Eventually) Back in Black

As far as the global economy goes, the worst case scenario for 2009 is one in which the powers that be screw things up so badly that we wind up with Great Depression 2.0.

Barring that tragic outcome — and it’s a pretty low-probability scenario I might add — a real problem we will face is lack of preparedness when demand trends come back on line.

As outlined in our explanation of why the commodity supercycle isn’t dead, a lack of capital spending now will likely lead to even bigger production bottlenecks in future.

And so, in short, I believe that while the price of oil got “crunched” along with everything else — the dollar’s sharp rise playing a role too — energy prices will bounce back with even more velocity and vigor when global growth returns.

And when that happens, we’ll have the same problems to deal with that were temporarily back-burnered by the credit crisis… and as a result, natural gas will play an expanding role.

Jumpin’ Jack Flash It’s A…

When we talk about oil and gas, we typically forget about the “gas” part. This is largely due to the varying roles that the major fossil fuels play. Oil is the big dog because we use it for transport. Coal is king because we use it for heat and electricity.

Natural gas has many uses too, but it’s a less critical piece of the energy puzzle in comparison to its bigger, dirtier fossil fuel brethren.

Oil and gas have big troubles though. The trouble with oil is that we are running out of it (or the easy stuff at any rate). The trouble with coal is that we hate it. America and China have more coal than they know what to do with, but coal is viewed as public enemy number one from an environmental standpoint.

The reality of rising demand is that oil and coal won’t go away — but alternatives will become all the more important. We’ll keep burning all the oil we can, and on a global basis, we’ll see new coal plants firing up every week for the next twenty to thirty years.

But natural gas still has room to be a much bigger part of the mix because coal is so undesirable as a primary electricity source, and the available oil just won’t be enough.

Natural gas is hard to transport across oceans now. But it will become much easier to transport as more LNG (liquid natural gas) facilities get built. In the same vein, it’s not very common these days to think of natural gas as a “transport” fuel… that is to say, something you put in your gas tank. But that mindset will change too, as Western countries move towards the mutually supportive goals of cleaner energy sources and less oil dependence at the same time.

We are nearing the stage, for example, when electric cars become truly viable on a mass scale. Technology, political will, public sentiment, and investor capital are all finally converging on this idea simultaneously.

When we see it really take off, chances are many of these next-gen cars could draw their electricity from natural gas-fired power plants. That’s just one quick example of how natural gas, the cleanest and least offensive of the major fossil fuels, can grab a march on oil and coal. There are plenty more.

Rumblings of GOPEC

As one might expect, the world’s major oil exporters tend to be the world’s natural gas powerhouses too. Last time I checked, Russia held an estimated 25% of the world’s known gas reserves.

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As an aside, there has been a lot of excitement around natural gas shale finds in the US, but the “decline rates” on shale are extraordinary — as high as 70% in the first year. Thus if natural gas truly catches on in terms of consumer heating and transport trends, North America will be back in its same old position… running to stand still as new gas production barely keeps up with the old production’s decline.

This creates an opening for the big gas players — Russia leading them — to band together and form a sort of “GOPEC,” or “natural gas OPEC.”

In fact, the GOPEC idea has already moved beyond the “maybe we should ponder this” stage and progressed to serious implementation. As the UK Guardian reported just recently,

Western concerns about global energy markets hit new heights [in late October] when Russia, Iran and Qatar said they were forming an OPEC-style gas cartel.

The move by the three countries, which control 60% of the world’s gas reserves, was met with immediate opposition from the European commission, which fears the group could drive up prices.

Alexey Miller, chairman of Russia’s Gazprom, said they were forming a “big gas troika” and warned that the era of cheap hydrocarbons had come to an end.

“We are united by the world’s largest gas reserves, common strategic interests and, which is of great importance, high cooperation potential in tripartite projects,” he explained. “We have agreed to hold regular — three to four times a year — meetings of the gas G3 to discuss the crucial issues of mutual interest.”

Don’t Get Fooled Again

In conclusion, investors who think cheap oil and gas will stay cheap should take a lesson from Pete Townshend and the Who. They should get on their knees and pray they don’t get fooled again.

“Meet the new boss, same as the old boss” might not apply to President-elect Obama, who is most decidedly not the same as President Bush. But it does apply to the same old realities of supply and demand.

The world’s oil and gas reserves are still a scarce resource, relative to the global demand that will eventually be coming back on line. The fact that Wall Street has temporarily lost sight of this creates short-term opportunity to scoop up well-run, well-capitalized energy players at insanely cheap valuations.

I’ll confess, too, that I like the little guys here a lot more than the big guys.

The big, well-muscled oil majors like Exxon and BP are bursting with cash and profits right about now — a sign of stability and comfort for nervous investors. The trouble is, all that stability may well be priced in to the shares… and at the same time, the hidden troubles that the oil majors will face in finding replacement reserves do not feel adequately priced in.

Exxon is heralded for its cash and ledger-busting profits, for instance, but few talk about the troubles the big behemoth will have replacing depleted reserves down the road… a task that is getting harder by the day.

Many of the little guys, on the other hand — smaller, more nimble energy companies that are often good takeover candidates — are in an opposite position to the oil majors. Their values are being discounted by Wall Street due to an irrational fear that the financing of current operations won’t hold up.

In other words, we’re in an environment where investors are perhaps paying up too much for the perception of safety, while shying away from the opportunity to pick up great assets at a discount because of an overcompensated aversion to risk.

That’s the kind of discrepancy great investors love to exploit all day long.

And, last but not least, there’s a bonus factor in regard to the “big boys” being stuffed with cash right now — their big cash positions and tough replacement challenges make it easier for them to buy new production versus going out and finding it. (This is sometimes known as “drilling for oil on Wall Street.”) In other words, it’s all the more likely for an Exxon or a BP to spend some of its hoard snapping up smaller names at a fat premium to the going share price.

The Best of Times, the Worst of Times

Charles Dickens opened up A Tale of Two Cities with the famous line, “It was the best of times, it was the worst of times.”

That’s a good summation of how I feel about markets right now. We just went through some of the worst carnage in a hundred years… but at the same time, the fact it’s been the “worst of times” is also what makes it the “best of times” in terms of here-and-now opportunities.

Your spoils of the NEW COLD WAR: 19,000% Gains

On October 13th, an unexpected, world-changing resource discovery put the superpowers at odds — and YOU in the catbird seat. Here’s how to play the coming stare-down for gains of up to 190 TIMES YOUR MONEY…

Exploiting the wide disconnect between public perception and the inevitable reality of the looming “oil and gas showdown” headed our way is exactly how sharp-eyed contrarians get rich. It’s a textbook example, right in front of our eyes, of how new fortunes are built in the aftermath of crisis.

Oh, and one last thing. Speaking of “crisis,” I recently received some interesting intel from Christian DeHaemer, the editor of Breakaway Investor and Crisis Trader.

Not only is DeHaemer relaxed about the looming prospect of a natural gas OPEC, he’s actually excited about it. Why? Because Crisis Trader has pierced the veil of secrecy shrouding a new “natural gas superpower…” an unexpected gas find so big and so astonishing that Russia and the other hoarders will be knocked back on their heels by this new player’s entrance into the game.

DeHaemer also believes he’s found the one company poised to make astonishing gains from this find… and he reveals it to Crisis Trader subscribers. You can find out more here.

Source: As Russia Tests the Waters, an Oil & Gas Showdown Looms

There are about 12,000 gas stations with the Exxon sign at the entrance, though the company owns about 2,220 of them. And Exxon plans to sell those over the next few years, Reuters reported.

Texas leads the states with the most company-owned gas stations with 190. Florida has 170, the Associated Press reported.

“We are in a very, very challenging market. Margins are reduced,” Exxon spokeswoman Prem Nair said in a statement. “We feel the best way for us to grow and compete is through our distributor network.”

Exxon stations may be everywhere but retail gasoline sales are only a small portion of the company’s revenues. And with gasoline costing 31% more than a year ago and crude oil prices at record levels, it’s also one of the most unprofitable.

This doesn’t mean we’ll stop seeing the ubiquitous blue signage across the country. Exxon will continue selling fuel to station owners who pay to use the company’s brand name.

Oppenheimer & Co. (OPY) analyst Fadel Gheit estimated the stations’ profit margin was between 10% and 15% (the company doesn’t release margins for its retail division), which is about one-third of its margin for crude oil production.

“I think the decision came that it’s more of a headache than it’s worth,” Gheit said.

Gas stations can’t pass higher prices onto consumers as easily as oil companies pass prices onto them. On top of that, car owners nationwide are taking serious steps to curb gasoline and energy usage, doing everything from using other forms of transportation to buying more fuel-efficient vehicles such as hybrids.

Exxon’s decision follows that of competitors Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) and BP PLC (ADR: BP), who are also moving away from station ownership.

“They can actually point their attention to some other area where you can make money,” Jeff Lenard, a spokesman for the National Association of Convenience Stores, told The AP. “Retail is incredibly volatile. This way, they can (sell gasoline) wholesale and count on a fairly predictable income.”

Source: Exxon Plans to Sell 2,220 Profit-Squeezed Gas Stations

New world record, for both longest well bore and extended reach.

As the Senators insulted the oil executives, I was wondering if the politicians would prefer to trade managements with the National Oil Companies of other countries. Would you trade the guys who run Exxon for the guys who run Pemex? How about trading the Chevron leadership for the fine people at Petroleos de Venezuela (PdVSA)?

BWK

Source: Oil Service Companies Doing Well…

I believe the charts I have in this column contain some powerful insights. You will want to keep them handy when things get rocky. They come courtesy of Barry Bannister, an analyst at Stifel Nicolaus, who delivered an interesting talk in Baltimore recently.

I’ll focus on oil, though a similar story holds true throughout the commodity sector. I don’t put a lot of faith in macro predictions — as no one can predict the future. But you can study track records. You can look at history. History reveals some interesting clues about what the future may hold.

The quick take? It doesn’t look like the party is over just yet. But even if it is, past peaks in oil give us clues. When you dig a little deeper into those relationships, you find a great road map for making money.

If you look at the price of oil, you find something interesting. Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply, as this next chart shows:

Basically, $100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply. Given that we are still in the midst of a credit crisis of sorts, it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

The other thing to remember — and people forget this by worrying excessively about a U.S. recession — is that the story of oil is no longer a U.S.-centric story. You’ve surely heard about how the rapid growth in China and other emerging markets drives oil demand. Well, it’s good to keep that in mind. See the chart below:

China and India are only beginning to consume oil at any meaningful level. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century. But look, we don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. The way I look at it is this: What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.

Even if oil has already peaked, that doesn’t mean oil is headed back to $40 per barrel or lower. In fact, if this oil boom follows history at all, we’re looking at years of oil prices right around $100 per barrel.

After studying the history of other recent oil booms, what you learn is that in no prior oil boom did the price of oil retreat rapidly toward where it was before the boom began. In each case, the price of oil stayed up for years after the peak. If you’ve got investments tied to the booming oil prices, that means you’ve got plenty of years to make more money.

So where do you go to make that money?

In Russia, they elect the former president of Gazprom as president of the country.

Hmmm… Russia or the USA… Which country does not have an “energy crisis?”

“People we represent are hurting,” says Sen. Leahy of Vermont to the oil company executives. “The companies you represent are profiting.”

Yeah? So what? Oil companies make about 4-cents per gallon gas. The federal govt makes at least 18-cents, and state govts make much more than that. Besides, most oil companies are actually “losing” money on downstream operations. The refining margins just plain suck right now.

And whose fault is it that people “are hurting?” People in the US have made several generations of bad choices in energy policy, to include electing guys like Patrick Leahy to the US Senate. The Patrick Leahys of the world have never done a darn thing to increase the energy supply of this country. They just sit back, pass legislation to lock up areas the size of Maine — as well as 85% of the US Outer Continental Shelf — and then take potshots at the people who put gas into the fuel tanks of America.

Really, Senator… Would you trade the management team of Chevron or Exxon for the mangers of Pemex? You want gas lines? Try that, genius.

Here is the scoop, if you missed the story.

Until we meet again

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Congress Beats Up On Oil Execs…

I don’t put a lot of faith in macro predictions – as no one can predict the future. But you can study track records. You can look at history. History reveals some interesting clues about what the future may hold.

The quick take? It doesn’t look like the party is over just yet. But even if it is, past peaks in oil give us clues. When you dig a little deeper into those relationships, you find a great road map for making money.

If you look at the price of oil, you find something interesting. Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply, as this next chart shows:

Basically, $100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply. Given that we are still in the midst of a credit crisis of sorts, it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

The other thing to remember – and people forget this by worrying excessively about a U.S. recession – is that the story of oil is no longer a U.S.-centric story. You’ve surely heard about how the rapid growth in China and other emerging markets drives oil demand. Well, it’s good to keep that in mind.

China and India are only beginning to consume oil at any meaningful level. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century. But look, we don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. The way I look at it is this: What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.

Mark Mobius, in a column he wrote for the Financial Times , points out that the fundamentals in emerging markets are better than they’ve been in a long time. The future looks bright. “The Chinese and Indian consumers are the world’s new consumers and they, along with consumers in Brazil, Russia, Turkey, the United Arab Emirates, Egypt, Mexico, Poland and many other emerging markets, are becoming an important force in global markets.”

All that bodes well for oil demand. But I haven’t really gotten to the best parts yet…

Even if oil has already peaked, that doesn’t mean oil is headed back to $40 per barrel or lower. In fact, if this oil boom follows history at all, we’re looking at years of oil prices right around $100 per barrel.

It is important to realize that in no prior oil boom did the price of oil retreat rapidly toward where it was before the boom began. In each case, the price of oil stayed up for years after the peak. That ought to give you some comfort about our current situation. The price of oil should stay up here for years. If his estimate of 2013 is at all close, we’ve got plenty of time left to make a lot of money.

So where do you go to make that money?

The one obvious place people will automatically look to is to own oil and gas producers. That’s not a bad idea at all. But I’ve got another angle here. The next two charts are amazing. They show you the capital and exploration spending of both Exxon and Chevron from 1928-2007. They show spending bottoms in 1948 and 1974. After each bottom, there was a long run of spending. Spending peaked nine years after 1948. Spending peaked seven years after 1974. If 2005 proves to be the bottom on capital spending – and it seems so, since Exxon only recently announced it would increase its capital spending to $25-30 billion over the next few years, a 25% increase -we won’t see capital spending peak until 2012 at the earliest.

Now, why is this important? Think about what the oil companies spend money on. Where do they go shopping? They go shopping at the oil field services and equipment companies.

So that is where we want to be. Because even if oil has peaked, we’re still looking at years of strong spending by the oil companies. You want to have some exposure to the receiving end of all that spending. Such companies will mint cash. And they give you a little different payoff than owning a straight producer. It can sometimes be better to own the picks and shovels. You don’t actually own or produce the oil or gas, but your equipment is vital to those that do.

Newmont Mining, the big gold producer, is an example of a producer that has profoundly disappointed investors amid what may be the greatest gold bull market in history. Newmont’s costs rose so fast and so much that it never really enjoyed (at least not so far) the higher price in gold. But if you were in some mining equipment manufacturer, you got paid.

So the key takeaways here are these: The price of oil has room to run yet, in part because of the growth in money supply and in part because of pressing international demand. Secondly, even if we already saw oil peak, history says that prices won’t retreat by much over the next several years. And finally, the capital spending boom by the big oil companies is just getting started, which is great news for investors in oil field services companies.

The big idea here is well servicing…

It’s really a great and kind of sneaky way to play an undeniable trend in oil and gas: the depletion of older wells past their peak production. Well servicing helps you get a little extra out of every well. A well service rig is the workhorse that does the well servicing.

Here’s the life cycle of a typical oil well…

Every time somebody drills a well, it creates an annuity for the well service industry. That’s because the maintenance work follows the life span of a typical well. If you don’t service your well, your production rate declines much more rapidly. So if you want to stay in business, you keep servicing your existing wells. You may not drill new ones, but you keep what you have.

The second key to remember is this: The more mature the oil or gas field, the more well servicing work needed. Well servicing doesn’t typically have the same ups and downs as exploration. Well service fleets provide much more durable and predictable cash flows. I expect all that money the big majors spend on exploration will lead to a lot of new drills and a long tail of new business for well servicing companies.

Chris Mayer
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Has Oil Hit Its Peak Price?

Gazprom is a $239 billion company in terms of market cap. And in one of its latest reports, it bragged that it would surpass Exxon Mobil in revenue by 2014.

About four years ago, I recommended that you buy Gazprom based on the fact that it had more natural gas than any company in the world. If you are still holding, you are up about 800%. Over the same period, Exxon Mobil is up 125%. You can see it as that little black squiggle on the chart…

With the energy boom in full swing and natural gas prices doubling, Gazprom will soon be the largest energy company in the world. I’ve found a $3 Canadian company that, due to a unique situation in North Africa, stands to make a bundle as Gazprom attempts to monopolize the natural gas industry in Europe. Read all about it here. Don’t wait. Things are happening fast.

Sincerely,
Christian DeHaemer

Editor, Crisis Trader

Source: Gazprom to Overtake Exxon Mobil

They sang the national anthem and raised their fists in victory. Senator Carlos Navarrete, leftist leader of the Mexican senate, was especially joyful. “We triumphed! We triumphed!”he said.

What the victors did not realize — or refused to recognize — is that their “triumph”merely took Mexico one step closer to the brink, to a deep, dark chasm into which the entire economy could fall…

Monday was Cinco de Mayo, the “Fifth of May,” so it’s fitting to touch on Mexico this week. Many believe Cinco de Mayo is to Mexico as July 4th is to the United States, but that isn’t quite true. It’s actually a regional holiday for the state of Puebla. (Mexican independence day falls in September.)

In other news, crude oil hit new record highs above $120 a barrel this week. Arjun Murti, the Goldman Sachs analyst who first called for a $105 oil “super-spike” three years ago, now sees the possibility of $200 crude in the next 12-24 months.

You might not see the connection between Mexico and the price of crude at first glance. But believe me, the connection is there — and it’s frightening.

Let me explain…

Bigger Than Exxon

Though not a member of OPEC, Mexico is the seventh-largest oil producer in the world. Petroleos Mexicanos, or “Pemex,” is the country’s state-owned oil company. Pemex pumps out more oil each year than Exxon.

Needless to say, oil is a key driver for the Mexican economy. The cash flow from Pemex alone pays for 40% of Mexico’s federal spending.

Imagine if the U.S. government drew nearly half its funding from the revenues of just one company. That would be one heck of an important company. You would think the powers that be would do everything in their power to keep the cash flowing in.

You would think… and yet, Mexico’s oil giant is headed for collapse.

According to Bloomberg, Pemex is plagued by “too little investment, high taxes, laws that forbid competition, corruption, and corroding and exploding pipelines.” That’s just for starters.

A Budding Crisis

It’s not as if the Pemex crisis is new. Observers have been sounding the alarm with ever-heightening concern for at least the past decade. In the past few years, though, things have taken a serious turn for the worse. The company’s 110,000 union workers are poorly trained and hard to control. Fatal accidents are increasing.

Worse still, Mexico’s oil fields are running dry.

Take the Cantarell field, for example. Cantarell is Mexico’s biggest field. In fact, it’s the second-largest oil field on the planet, behind only Ghawar in Saudi Arabia. In 2005, it came to light that Cantarell production had declined rapidly. “Fallen off a cliff” is how some might put it, in terms of the speed and suddenness of the drop.

If Cantarell production spirals downward into collapse, then Pemex — and, by extension, the entire Mexican economy — will be in deep, deep trouble. Mexico’s finances have been boosted in recent years by the sky-high price of crude, and those extra dollars have hidden Pemex’s behind-the-scenes problems. But fewer barrels from the ground means fewer dollars in the bank. Eventually the dropoff becomes too big — and too painful — to ignore.

Mexico’s Energy Minister predicts that, without new production, the country could be forced to import light crude for gasoline by 2011. (Most of Mexico’s oil is of the heavy, sour variety.) By the year 2016, Mexican oil exports could plummet from 1.67 million barrels per day, last year’s levels, to a shockingly low 289,000 barrels per day. That’s quite a dropoff.

Think how much the world’s oil thirst has grown these past eight years. Now think how much it will grow in the next eight years. Now consider how tight the supply-demand situation has already become — and imagine pulling another 1.4 million barrels or so off the market.

Too Deep to Contemplate

The funny thing is, Mexico has more oil that hasn’t been tapped yet — maybe a lot more.

Bloomberg again has the details: “The Mexican Energy Ministry estimates 30 billion barrels of oil and gas are sitting below deep water on the Mexican side of the Gulf of Mexico. Yet it’s unclear whether Pemex, which hasn’t been permitted to form partnerships with foreign oil companies, has the technology, money or competence to drill successfully.”

The problem comes down to technology and experience. To conquer the deep water and drill for oil 10,000 feet down, you need a heaping helping of both. Pemex has neither. The company’s engineers are not savvy enough, its technology not nearly cutting-edge enough, to handle the challenge of deep-water drilling in the Gulf.

This is where politics comes in.

Almost all Pemex profit — and as much as 60% of sales revenues — goes straight to the government. At the end of the day, the company is little more than a cash cow for the state. And because the Mexican presidency can only be held for a single six-year term, the holder of that office typically cares little about long-term planning. The focus is on spending for the here and now instead.

The nature of the beast explains why Pemex is poorly outfitted and poorly run. Political promises are expensive and Pemex cash is there for the spending; only scraps are left over for upgrades and maintenance. Can you imagine running a company whose masters have no regard for the future? I can’t. Perhaps that’s why Pemex has had four different CEOs and five chairmen in the past eight years. Most of them threw up their hands and quit in disgust.

The “next big thing” our friends at The Daily Reckoning recently predicted, “will be downsizing, cutting back, making do. Barely on the radar screen now, thrift is coming into focus more clearly day by day. So far, people are a bit embarrassed about it…a bit ashamed that they have had to cut back. But soon, it will be popular…fashionable…and, finally, almost obligatory.”

This new austerity craze — if/as/when it arrives — will impose hardships on many American companies. But a select few might actually benefit.

The cause(s) of downsizing are pretty clear. Home values are falling so sharply that very few homeowners can still pull equity out of their houses. Stock prices are also drifting lower, more or less. Meanwhile, inflation is ramping up.

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Prices are rising in Europe as in America. Bread is up 12 percent in Germany over the last 12 months. Butter has gone up 45 percent. Milk, 25 percent.

Higher prices often stem from printing more dollars. “Force-feeding the rest of the world $2 billion per day (more consumption),” Warren Buffett reminded us last week, “is inconsistent with a stable dollar (more inflation).”

We share Mr. Buffett’s concern. Bernanke keeps printing. Politicians keep promising. Bridges keep crumbling. Wars keep spending.

With regret, we read last week that the projected total cost of medical care for U.S. veterans of the Iraq and Afghanistan wars will top $500 billion, a figure on par with the total military spending to wage these wars to date. And speaking of military might, Defense Secretary Robert Gates estimated in testimony before the Senate Armed Services Committee that the Pentagon will spend upward of $685 billion next year alone. That’s $170 billion more than the $515 billion the president proposed in his first-ever $3 trillion budget.

If that weren’t enough, Gates doesn’t even expect that number to stick. “I have no confidence in that figure,” he admitted. You can expect the estimate to rise in the near future.

A hundred billion here…a hundred billion there. Who’s counting?

Apparently, no one.

But that’s not to say the S&P can’t weather the storm. The companies representing the Standard & Poor’s 500 index now derive 49 percent of revenue from foreign markets, up from 30 percent in 2001. Meaning, those with money to burn (Southeast Asian consumers) should keep earnings reports strong. Stronger repatriated currencies should only bolster this trend.

Unfortunately, many Americans believe a strong S&P equals a strong American economy. We tend to see another American economy. We see an economy riddled with debt, more debt and even more debt. We see the American consumer eerily close to tapping out. Thirty-four percent of Americans now believe they are among the “have-nots.”

It serves to reason. More than 405,000 homeowners lost their homes to foreclosure last year.

Most middle-income Americans, the ones driving our buy-now, pay-later economy, have spent well beyond their means. Americans currently perpetuate a negative savings rate. That can’t last forever.

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Cheap oil and cheap credit have fueled this era of consumption…this gilded age of instant gratification.

“It’s the economy, stupid.”

And it was economic worries that were on the minds of most voters who entered the polling booths yesterday. Those on low-incomes had recently been hit by the scrapping of the 10p tax rate. Those better off have the memories of Brown’s stealth taxes. And, of course, the ever-present credit crunch is making all of us nervous.

Where now for Gordon Brown? If he leads Labour into the next general election, Labour will lose. That certainly seems to be the opinion of many in Brown’s own party.

Call me a conspiracy theorist, but I reckon Labour backbenchers deliberately bided their time on the 10p tax issue. Brown announced it last year in his final Budget as Chancellor. But it was only once it came into force — conveniently one month before elections — that the rebels kicked up a stink.

Few MPs in marginal seats are looking forward to fighting an election under the Flag of Gordon. They know that the struggling economy will give opposition parties some priceless ammunition over the next couple of years. Brown can’t really duck those bullets — he was Chancellor for ten years.

Expect further dissention in the Labour ranks. In fact, the only people who stand to benefit from Brown’s continued premiership are the Conservatives. If they’re clever they’ll keep the pressure on Brown moderate enough that he stays on.

But if he wants his party to stand a chance of retaining power, he won’t. The only reason he might stick around is if he’s extremely stubborn.

Oh.

Who will build those 3 million houses?

The Government has grand plans to build 3 million new homes by 2020. Trouble is, who’s going to build them? And if anyone does want to, will they be allowed to?

Today we read that private housing orders during the first quarter of the year were 29% down on those in the same period last year. The construction industry, as everybody knows, is in a slump. Homebuilders are building fewer houses.

I’ve said this before about mortgage lenders, but the same applies to homebuilders: private businesses make decisions based on what’s best for them. Not to hit some government target.

This is how it should be, of course. This is capitalism.

Recommended

—FLEET STREET LETTER ALERT—

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

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lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

So at some point this policy will probably be quietly ditched. But as I’ve noted above, Gordon Brown may not be at the steering wheel for that particular U-turn.

What went wrong with Exxon?

On Tuesday Garry White wrote about the “earnings surprise” gravy train. Oil analysts are consistently underestimating the oil price, which means they also underestimate oil company profits.

This has created a great investment opportunity.

But yesterday ExxonMobil announced that its profits had missed consensus. That is to say, they were less than analysts expected.

So does that mean Garry was wrong?

“No,” says the man himself. “This says more about Exxon as a company than it does about the sector. This gravy train is still on the rails, my friend. Choo choo!”

Find out why a defiant Garry says: “There’s nothing wrong with my assessment!”

China’s next big investment…

As we all know, China’s growing rapidly. But to achieve this, it needs raw materials.

And where better to get them than mineral-rich Africa?

“This deal will net the Chinese up to 10 million tonnes of copper, and 400,000 tonnes of cobalt,” says an excited Manraaj Singh. “Not to mention how much it could make investors who get in now!”

Find out where Manraaj believes the next multi-billion dollar Chinese investment bomb is about to land…