The book sold more than 100,000 copies in hardback. Some three decades later, a dear reader sent me a copy of the 1971 paperback when I ran The Daily Reckoning’s desk here in London.

“You guys…you’re just saying the same as Harry Browne did 30 years ago! What’s new?” he wrote in an e-mail. And on first reading, Harry Browne’s book confirmed the jibe.

On rereading it on the train between Waterloo and Hammersmith this week, the cold fact stands out colder still.

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“In the short run,” wrote Browne — variously an investment adviser, newsletter tipster, and U.S. presidential candidate for the Libertarian Party — “inflation seems to be producing a ‘boom.’ Prosperity appears to hit the economy when the government pumps new inflationary money into circulation…

“The so-called gains from inflation are always spectacular, while the losses are generally hidden from view… But the truth was that nothing had actually changed. We still had the same amount of resources to work with; we still had the same general level of technical competence. Inflation deceived us into redistributing our resources temporarily toward more glamorous industries.”

What’s wrong with that? Demand for granite countertops grew some 15% per year — worldwide — between 2000-2006, according to Dimension Stone Advocate News. More glamorous still, demand for marble rose by 12% annually.

Come September 2007, research from the Freedonia Group (costing $4,500 for the full report) said sales of kitchen and bathroom countertops in the United States alone would rise to 540 million square feet by 2011. That would fetch some $14 billion for “natural and engineered stone” manufacturers in Italy, Spain, China, and Brazil.

OK, so nobody’s food got any tastier simply because they chopped onions on new marble plinths. And we all ate fewer meals at home anyway. By August ‘06, consumers in Britain were spending more on dining out than they spent on eating at home; across the Atlantic, the restaurant and fast-food business employs 13 million staff — one in 12 of the work force!

But what’s not to love about a little glamour each day?

“Let’s take a hypothetical engineer,” wrote Harry Browne back in 1970, “working in an aerospace company… One day, his boss calls him into his office to tell him some good news. ‘Bumstead,’ he says, ‘the company has just received a new government contract. That means we can now give you a raise. Your take-home pay is going up by $100 per month.’

“[Bumstead] rushes home, tells his wife, and they spend all of four minutes deciding what to do with the raise. They rush out and buy a swimming pool, probably by obligating themselves for the $100 per month the new raise is bringing him.”

Here in the 21st century — where $100 hardly buys a tankful of gas in the U.S., let alone here in the U.K. — the total number of swimming pools for U.S. homeowners now stands around 8.6 million, by one industry estimate. The pool maintenance and equipment market, having grown by 8% per year since 2002, approached annual sales of $3 billion in 2006.

“There’s only one problem,” as Browne noted. “Prices are rushing upward to meet the increased paper money supply caused by inflation — the same inflation that deceived Bumstead into thinking he’d received a raise.”

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That’s why, just as in 1970, Reuters reported, “April Personal Spending up as Expected.” The Commerce Department said U.S. consumers spent 0.2% more last month than they did in March. But after adjusting for higher prices, real consumer spending was unchanged — despite the impending arrival of economic stimulus checks, set to total $106.7 billion for 2008.

Does the fact that oil touched US$127 in futures trading contribute to BHP Billiton’s earnings and its war chest for its pursuit of Rio Tinto (ASX: RIO)? BHP thinks the answer is yes.

BHP Billitons’s oil projects showed up in a research report we reviewed yesterday. The report tried to answer the question of where future global oil production would come from. There is a 32 million barrel per day gap between what the world produces today (about 87mbdp) and where the International Energy Agency reckons the world will be in 2030 (117mbpd).

In other words, the world needs another OPEC if oil supply is going to keep up with demand. OPEC currently produces 32mbpd. The IEA says OPEC can double that figure if it invests about US$2.4 trillion in exploration and production. OPEC is not as sure. As you can see, the gab between global production capacity and global consumption is, ahem, pretty tiny right now.

Source: BHP Billiton, IEA

According to BHP’s oil man Mike Yeager, BHP’s cost of production for a barrel of oil is between $6 and $12 a barrel. For the last three years, production at BHP’s various oil fields has hovered around 300k bpd. That makes it the world’s 25th largest oil producer, according to the company, which is not bad if your main business is mining.

It’s an axiom that the mining business and the oil business don’t mix. Energy exploration and production sucks up the capital, while project life is uncertain and cash flows variable. There are lot of known unknowns, and on the exploration side, some unknown unknowns.

But BHP Billiton does know that oil production increased to 378k per day last month, and 415k per day last week. It knows that the fifth LNG train from the North West Shelf is scheduled to begin production this year. It knows that its Neptune field in the Gulf of Mexico, though delayed this week, should begin cranking out 50kbpd in June of this year.

It also knows that by this time next year the Shenzi field in the Gulf of Mexico should begin producing about 100kbpd and that by 2010 the Pyrenees field in Western Australia should produce about 96kbpd. And there are more projects in LNG on the way, too.

That is a lot of good news for an oil company that’s not an oil company. By market value alone, BHP Billiton is bigger than BP (NYSE: BP) and not far behind Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A). If the company is valued as an energy company and not just a miner, then yet another reconsideration of its value may take place. Rio Tinto should be worried about that. All that energy translate into cash for a bid sweetener.

BHP Billitons’s cost of production is going to rise. There is huge cost inflation across the entire oil industry as projects move further off-shore and deeper underwater. But this is an example of Australia’s exposure to straight-forward bull markets in energy and resources. The businesses aren’t easy, but they are not conceptually complicated.

What’s so astonishing about Australia’s resource economy right now is how it’s filtering down from gold and oil to base metals, bulk commodities, and even lead. “The great minerals land grab by China Inc continues with Hunan Nonferrous Metals Corp looking to buy one of Australia’s best untapped lead deposits,” reports Kevin Andrusiak in today’s Australian.

Lead?

“Yesterday Hunan launched a takeover bid for Perth-based Abra Mining, saying it is prepared to spend just $67.3 million to control one of the nation’s best untapped lead deposits. Hunan, which has received the backing of the Abra board for the takeover play, has offered 83c for 70 per cent of the remaining Abra scrip it does not already own.”

Hunan’s offer puts a 44% premium on Abra shares. A 44% premium on lead. If lead gets that kind of premium, what would BHP’s oil and energy reserves (1.3boe) and its resource base (3.5boe) command? The resource grab is well and truly on, and it’s moving at the speed of lead.

Dan Denning
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: The Oil Company That is Not an Oil Company

Pickens became the 117th richest person in America by a series of oil corporate raids and acquisitions in the 1980s. He is a genuine legend. He’s also man enough to admit when he is wrong, which means I respect him even more.

Pickens admitted he got it wrong on the oil price. He has been running the BP Capital hedge fund and revealed overnight that he has now reversed his short position in crude futures.

“I covered the short position; it was a mistake on my part. We missed.”

Indeed, he has now gone long and has predicted that WTI futures will hit $125 in short shrift. My current view is that we will see $120 sooner rather than later, so we now appear to be singing off the same hymn sheet.

The oil price is now at $111.15, with the futures strip price (the average of the next 12 months WTI contracts) at $111.81, up from $111.61 at the start of trade on Thursday.

Continues below…

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There was more bullish news for the oil price this morning from Nigeria. Not only is their infrastructure in crisis, but pipeline explosions have become almost de rigueur.

The Movement for the Emancipation of the Niger Delta (MEND) issued a press release this morning, saying it would funnel explosives to communities there to use against oil companies.

Oil companies working along the coastal region of Nigeria “are in for a raw deal as the military is not in the position to protect them… [it will] offer materials such as explosives to communities that have now realized that it is better to destroy oil facilities in their territory since they do not benefit [from] them in the first place.”

Now, of course, the people of the Delta have a point. It appears that they are not benefiting at all from Nigeria’s oil wealth (although bombs are not the way to reverse that situation in my mind).

However, it is not my job to moralise on this situation; I’m here to look at facts.

With global supply so tight, any supply disruptions will send oil traders into a tizzy – and give T Boone Pickens his $125 level sooner than he thinks. This is yet another bullish factor for the oil price.

Regards,

Garry White

PS: should you know anyone else that you believe will find my musing of interest please forward this link so that they can sign up for the service.

PPS: I also write a newsletter each month called Smart Commodities UK which expands on the views expressed in Garry Writes and makes specific recommendations in the resource, infrastructure and biotech sectors. To discover more click here.