Jim Puplava: Oil Is the New Federal Funds Rate
Jim Puplava has made a decades-long career of interviewing hundreds of notable experts on the economy, energy, precious metals, geopolitics, agriculture, and other sectors that impact our future.
The outlook he has developed as a result of all this input is less than sanguine. Jim concludes that economic growth will be constrained both by world governments' chronic addiction to spending more revenue than they take in and by the systemically rising costs of fossil-fuel-driven energy.
In terms of growth, he sees political leadership becoming less and less relevant in its ability to effect outcomes. In fact, he declares the price of oil as now being more influential in stimulating or depressing sovereign economies than central bank interest rates. In his words, "Oil is the new Federal Funds rate."
Those managing capital – whether at the individual or institutional level – have a very difficult time of it today because asset prices are being buffeted by powerful but countervailing crosswinds. The deflationary forces of credit contraction put downward pressure on asset prices, but central-bank money printing and other liquidity measures push up from below. Rock-bottom interest rates are forcing investors out of the risk curve, but few are comfortable with the alternative choices they have. Many investors instead are looking to minimize risk now, but they're not sure what is safe anymore. Raise cash that's being eroding in purchasing power by inflation? Or hunker down in bonds that yield next to nothing and will have their value clobbered when interest rates eventually rise?
On Investing in a Peak Oil World
BP’s statistical review came out the day before we’re doing this interview, and what I found rather fascinating, Chris, is they said if you take a look at global energy, 87% is run on fossil fuels, 2% on renewable. We discovered a new way to get at reserves that we couldn’t get at before; that has allowed for this.
This has maybe bought us a little time. But these 80 barrels/day wells do not replace the 10,000 barrels/day to a 100,000 barrels/day [we're used to]. The great giants that are now going into decline. When those go into decline the energy industry has to go faster just to increase supply.
We’re in the inflation camp, and so one of the things that we look at is owning real assets, whether it’s owning shares in companies that produce stuff that people need – and what we have done from 2008 is, we have come up with a three-part component to the way we manage money. At the very top is what we call our "macro model," and we take a look at the business cycle, here in the United States and the major economies. When that business cycle, whether it’s the leading economic indicators, like the ECRI weekly leading index, when they begin to roll over, that tells me one thing, the economy is going to slow down, we’re going to see the stock market take a hit, we start raising cash. The other thing that we do is we’re investing more in things that people have to have. You and I have to turn on the lights, we have to bake in the oven each night, we need consumer staples, so we’re less invested in things that are luxury type items. We’re investing in places where people can save money.
If you’re an average Joe out there working for a company, you can’t go to your boss and say, You know what, oil has gone from $75.00 in October to $115, I’m paying over $4.00 at the pump, my food bill just went up, they raised my cable, my utilities; I need a 15% pay increase to keep even with inflation.
Gold and silver is a key component in all of our portfolios.
We have had to learn to manage money differently. We are seeing the business cycle being compressed. If you take a look at the '00 decade, we had two recessions within a decade, and then if you take a look at this new decade, we have had monetary stimulus and fiscal stimulus every single year. And so I think we’ve almost compressed the business cycle to a one-year cycle. Oil is the new federal funds rate. We have had to be more adaptive and flexible because that’s how the economy is working with all the intervention.
On the Euro
You know, the problem is, it’s a dysfunctional currency. It’s a currency without a country: You don’t have a Treasury, you don’t have taxing authority, and you don’t have a fiscal policy that you can implement. Basically all you have is money printing.
On Headwinds in the U.S.
As we get into the Fall, just before the elections, we’re going to have to come up with a budget for 2013. Now what’s strange is, we haven’t had a budget in this country in the last three years, and it’s unlikely we’re going to come together with a budget for 2013 fiscal year, which begins October 1.
Secondly we’re going to be butting up right against that debt ceiling. We’re going to have to come up with an extension of the debt ceiling debate.
Then we have this Fiscal Cliff that comes due January 13, 2013.
And we have the $1.2 trillion in sequestering.
We have three waves of tax increases. In fact, I’m doing a special on the show this week. We’ve got the 10% tax rates rising to 15%, the 25% to 28%, the 28% will rise to 31%, 33% to 36%, 35% to 39.6%. The marriage penalty goes away. The middle class estate tax goes from 35% to 55%, the exemption drops from $5 million to $1 million. And then the capital gains rate goes from 15% to almost 24% if you factor in the various tax hikes coming from Obamacare. Dividends will go from 15% to 43.4% and that’s only the first wave.
Then we have all the tax increases that are going to be coming in. The Medicare payroll tax rises from 2.9% to 3.8% next year. We will be taxing medical device makers. We are going to give a haircut for medical itemized deductions.
And then the third wave is the alternative minimum tax and employer tax hikes that go into effect.
As we get closer to the Fall, you’re going to see, and I think you’re seeing it right now, we know that corporations are building up cash. We know that the amount of business hiring has slowed down because businesses are saying, I don’t know what the rules are going to be. I don’t know what the taxes are going to be.
And I think eventually investors are going to say, Do I take gains if I have it in a stock and sell it now, or do I run the risk and gamble that they’ll resolve this issue next year? I think that’s another hurdle that we’re going to be approaching as we get to the end of the summer.
Click the play button below to listen to Chris' interview with Jim Puplava (51m:52s):
Chris Martenson: Welcome to another ChrisMartenson.com podcast. I am your host, of course, Chris Martenson, and today we have the very good fortune of speaking with Jim Puplava, CEO and founder of Puplava Financial Services and host of the excellent radio show Financial Sense News Hour on his popular web site FinancialSense.com. Jim is one of the most widely known – and respected by me, certainly – financial interviewers on the web, as one of the most prolific, and now we get to hear Jim speak from the other side of the microphone, as it were.
I want to ask him about some conclusions he’s drawn after all of the many hundreds of interviews he’s had with top experts on the economy, energy, precious metals, geo-politics, agriculture all interweave and intersect these days, and Jim’s right at the hub of all of that.
Jim, when we talk, usually it’s you introducing me, and so it’s a pleasure to be able to return the favor.
Jim Puplava: Thank you for having me, Chris.
Chris Martenson: Great. So for the few listeners out there who may not be familiar with your show, can you give a quick background on the mission of Financial Sense News Hour, how and when it started, and what you seek to achieve?
Jim Puplava: It basically started in 1991, Chris. I did television news. I wasn’t sane enough to have a day job, and the evening I’d go down to the television studio. And it was amazing, the database I was open to, and I would look at this database and I would see all these stories as I put together my newscast for the evening. And I would see stories that we didn’t see, either on our own newscast, or in newspapers or on network television. I’d print these stories out, and I’d bring them home at night. And I’d share them with my wife, and I’m saying, I can’t believe we’re not talking about this stuff! And so the original idea behind the Financial Sense News Hour was to start covering a lot of these topics that weren’t covered by the mainstream media.
I can remember in 1998 reading Colin J. Campbell’s book on Peak Oil; that was the first time I’d heard about it, and I began talking about it. Nobody was talking – other than Matt Simmons – at the time; very few people were talking about the subject. The original purpose of the Financial Sense News Hour was to bring people – educate them on the kind of stories that I thought were more important, that the mainstream media were ignoring, and that was the origination. We started doing it with local talk radio, we started the web site back in 1998 as sort of a newsletter to our clients, and then my studio engineer said, Why don’t you put the radio show on the Internet? And I said, How do we do that? And he said, I can record it on a digital disc and I’ll upload it to your web site. And so that was the genesis of the Financial Sense News Hour. The mission was really to bring people the real news out there that wasn’t covered by what we refer to as the “mainstream media” today.
Chris Martenson: Well, even more than that; you synthesized it for people. The storm series was something I certainly cut my teeth on a while back, and it opened my eyes to a lot of things. Excellent series. It really outlined a lot of the major trends that are in play.
But let me just go back for a second – are you saying you saw stories coming across the wire that just weren’t being covered? You had access to information is what I heard you say; why weren’t they being run? I mean we had the news, it wasn’t being put out there – was that an overt or covert act of omission or commission; where are we on this story?
Jim Puplava: I think covertly, it was just what in the news business we call “spiking,” so if I had a political view – and certainly we had a political view at the station; I’ll give you a good example. Back in 1991, George Bush, Sr. vetoed an extension of unemployment benefits. Now, prior to that, George Bush went back on his “Read my lips, no taxes” promise. He raised taxes, and they came together with a budget agreement saying, Okay, I’m going to raise taxes but any future spending increases must be paid for with spending cuts elsewhere.
Well, it came up to a vote to extend the unemployment benefits, and the President said, We need to pay for this; what we are going to cut? And the opposition said, We’re not going to cut anything, and so he vetoed the unemployment benefits. Now, I did a story on the news that night, it was 30 seconds, it was titled President Vetoes Unemployment Benefits; Congress Fails to Come Up with Spending Cuts to Pay for the Program.
Chris, that story was edited down to 15 seconds, the part about Congress failing to come up with the spending cuts to pay for the program was cut out of the news piece I wrote, and then on top of that, they showed a picture of the President getting out of his golf cart playing golf. It was creating this image that this guy didn’t care about people, but it failed to talk about the real spending issue.
Another question is related to what we’re seeing today with the Paul Ryan budget, the unfunded liabilities, Social Security, Medicare. And if you look at the Paul Ryan budget, all he does is, he cuts the rate of spending increases to a level commensurate with what GDP is growing at. I don’t know any other place in Washington D.C. where you increase spending but not at a rate you originally intended. That’s called a budget cut.
Chris Martenson: That’s how they’re going to – I’m putting air quotes up here – “That’s how they’re going to cut the military budget going forward as well.” They’re going to save half a trillion dollars from the military budget, but actually they’re going to increase spending at a slower rate and call that savings. Yeah, you and I can’t do that in our private businesses and get away with it for long.
Jim Puplava: No, we can’t do it; I’d like to take a lot of my main expenses, medical insurance – I’d like to take them off budget. Wouldn’t that be nice, Chris, if you and I could take all our major expenses and just say, we’re going to take that off budget. The unfortunate thing is, we can’t do that because we have to pay the bills.
Chris Martenson: I’m going to see if I can get the grandkids I don’t have yet to pay for my children’s college education; we’ll see how that works out.
Jim Puplava: Or your great-grandchildren, at the rate we’re going.
Chris Martenson: Potentially. So shaping the news, I guess, has always been part of the story, probably back to the first cuneiform writing on clay tablets. This is not anything new, but having the appropriate context is always important. Information, of course, is critical, but never more so I think than at a juncture like the one we’re at, and there are so many big moving pieces right now. A lot of these giant moving arcs that you characterized a decade ago very well – we’ve got the demographic arc. We’ve got this Peak Oil story, which is still trundling along, which I want to get to in a minute. And of course, there was this extraordinary worldwide credit bubble, which is now bursting in various places; it’s not one pop, but it’s a series of small pops or fairly significant pops. Let’s turn to one of those. Can we talk about Europe for a minute? I mean, it’s very hot right now –
Jim Puplava: Sure.
Chris Martenson: Spain’s yields are spiking to what’s thought to be danger territory, the psychologically important 7% level; there’s this plan, that plan. Ultimately I still think they’re trying to solve an insolvency crisis with more liquidity; what are you seeing?
Jim Puplava: You know, the problem is, it’s a dysfunctional currency. It’s a currency without a country. Ray Dalio of Bridgewater put it together nicely; he said it’s almost like our original articles of confederation when this country was first formed – you don’t have a treasury, you don’t have taxing authority, and you don’t have a fiscal policy that you can implement. Basically all you have is money printing. And the problem is, they’re talking about deposit insurance; how are you going to do that? They’re talking about bonds; how are you going to do that if you don’t have the fiscal policy to back it up?
To me, I think Europe will either implode, or it may end being a smaller euro instead of the 17 countries; I think maybe some of the peripheral countries will break out. But unless they come together in some form of fiscal union where you can have the unified policy – I mean, imagine what the United States would look like today if we didn’t have a federal government that could implement policy, and all we had was the Fed, but we had nothing to back the Fed. They could just print money, but they couldn’t control – like what my own state California is doing, which is spending beyond its means; it’s what Illinois is doing, and many other states that have found themselves in a fiscal mess.
I think if Europe implodes and the euro falls apart, right at the top will be a vacuum in what I call leadership. You just don’t see a Churchill – you’ve got these 17 different squawking heads, and the markets are reacting to that. In the morning, you’ll have the head of the ECB say one thing or you might have the President of Italy say one thing, then all of a sudden somebody in Germany says something completely opposite, and it’s like a bunch of keystone cops that are trying to run a country. I think that accounts for a lot of the volatility, but I would say, Chris, the way I’m looking at it right now, unfortunately, the Europeans seem to wait – and this is maybe part of their bureaucratic mindset, but it’s almost like the front two wheels of the car are hanging over the cliff and then they say, Okay, it’s time to do something.
Chris Martenson: At the highest level, is there fundamentally anything different in terms of the overall math between – so, the United States right now is running a fiscal deficit of 8-10% of GDP, depending on the year we’re talking about, recently. Certainly the level of profligacy in some of our member states is pretty high at this point in time, but we’re confederated, so I guess we’ve got this other piece that allows it to pull together for a while longer. But doesn’t that just allow us to get maybe further over the cliff like Japan? I don’t know how Japan gets back from its 200% official debt to GDP ratio painlessly.
In many ways, I see what Europe has done. Is this just exposed it earlier because they have sort of an uncoordinated political response, as you might expect?
Jim Puplava: I think because we’re the world’s reserve currency, an analogy I often use on the program is we have the best luck in the house in a bad neighborhood, and that is the world’s reserve currency, and we have the largest economy and the largest bond market. I would argue that if we go to some form of quantitative easing, the Fed will have to do very little. On the day that you and I are speaking, 10-year Treasury yields are 1.6%; two or three months ago, they were at 2.4%.
We’ve seen Treasury yields come down as people are looking for safety. They don’t want to keep their money in the euro; they don’t want to keep their money in the yen. Similar low interest rates, Japan’s ten-year bonds are less than 0.9%, and so the money is coming here, and we have been the beneficiary of this, but I think sooner or later – and maybe even sooner, Chris, as we get into the Fall just before the elections – we’re going to have to come up with a budget for 2013. Now, what’s strange is we haven’t had a budget in this country in the last three years, and it’s unlikely we’re going to come together with a budget for 2013 fiscal year, which begins October 1.
Secondly, we’re going to be butting up right against that debt ceiling. We’re going to have to come up with an extension of the debt ceiling debate, and then we have this Fiscal Cliff that comes due January 13, 2013, and we have the $1.2 trillion in sequestering, we have three waves of tax increases. In fact, I’m doing a special on the show this week, we’ve got the 10% tax rates rising to 15%, the 25% to 28%, the 28% will rise to 31%, 33% to 36%, 35% to 39.6%. The marriage penalty goes away; the middle-class estate tax goes from 35% to 55%, the exemption drops from $5 million to a million, and then the capital gains rate goes from 15% to almost 24%, if you factor in the various tax hikes coming from Obamacare. Dividends will go from 15% to 43.4%, and that’s only the first wave. Then we have all the tax increases that are going to be coming in; the Medicare payroll tax rises from 2.9% to 3.8% next year.
We will be taxing medical device makers, we are going to give a haircut for medical itemized deductions, and then the third wave is the alternative minimum tax and employer tax hikes that go into effect. I think as we get closer to the Fall, you’re going to see – and I think you’re seeing it right now – we know that corporations are building up cash. We know that businesses at the amount of hiring has slowed down, because businesses are saying, I don’t know what the rules are going to be; I don’t know what the taxes are going to be. And I think eventually investors are going to say, do I take gains if I have it in a stock and sell it now, or do I run the risk and gamble that they’ll resolve this issue next year? I think that’s another hurdle that we’re going to be approaching as we get to the end of the summer.
Chris Martenson: That will give you at least two good reasons to sell equities. One might be the Fiscal Cliff itself would not be very economically friendly, GDP friendly, and the second would be if you can take gains now at a lesser rate than you might in the future. You could easily see how, yes, you could come to a conclusion of saying, Now is as good a time as any, but the third main reason might be, you know, we’ve been seeing a lot of money outflows at the retail level week after week, month after month, and because for some reason retail investors have lost faith in the market somehow, I can’t figure out how, what with MF Global and Golden Sachs trading desks turning in 100% win ratios and all sorts of other funny things going on. But yes, we have this sort of general sense now that the pie is no longer expanding as reliably as it did, and when that happens, the government has got inertia behind it in terms of its spending. It’s extraordinary, the spending levels that we got, and – I’m sure you saw it; there was an analysis that said, you could tax 100% of all the income of people earning over $250,000.00 and what you would basically do is fund about 38% of the current budget of the federal government.
So what we actually have is not so much a tax problem as a spending problem. I still don’t see the political will to really address that in any meaningful way, but these tax increases you just mentioned are very real, very meaningful. To me, as a small businessperson, I am quite aware of what my effective tax rate is, and its nowhere near GE’s or Google’s or anybody’s; it’s much different. In one of those number series, did you say dividends are going from 15% to – did you say 43.4%?
Jim Puplava: Yep and where that comes from is, right now dividends are taxed at 15%. The tax bracket goes to 39.6%, that’s the highest tax bracket from 35% this year. And then on top of that, you have the Obamacare tax of 3.8% that will be leveled on capital gains, it will be leveled on dividends, it will be leveled on interest income, it will be leveled on net rental income, and it will be leveled on pension annuities. In addition to the higher income tax bracket, you have the investment tax or surtax from Obamacare of 3.8%.
Chris Martenson: In the long sweep of history, some would argue that taxes have been higher as a percent of GDP or as percent of income or however we want to measure it; in some ways, is this getting us back to historically relevant numbers, or is this just the beginning, do you think, of a long march higher?
Jim Puplava: It’s going to be the beginning of a long march higher, but the interesting thing about that – and my own state of California is a good example – if you look historically, tax revenues have been between 18% and 20% of GDP. It didn’t matter, Chris, when we were at 70% tax rates before Ronald Reagan came in, or when we had over 90% tax rates under FDR, and pretty much all the way up until Kennedy brought the tax rates down from 90% down to 70% and then eventually Reagan would bring them down from 70% down to 28%. Our tax revenues have fluctuated with about a 2% range of GDP of 18% to 20%. Now, my own state of California e in 2010 enacted what we call the Millionaire Tax. We added another 1% surtax on anybody making over a million dollars. We increased the sales tax –and the amazing thing, Chris, over the last two years, income taxes are down, corporate taxes are down, and retail taxes are down.
So you would think, wait a minute, this isn’t working, just like it isn’t working in Europe. Instead, basically, because of the special interest in the state, we are now proposing an additional 3% tax, we’re going to take our income tax rate from 10.3% to 13.3%, and then we’re also going to lower the brackets, so instead of the 10.3% starting on a million, we’re going to drop that 10.3% on $250K, people making $500K, and then they wonder why last year 235 major businesses left the state of California.
It doesn’t matter what tax rates are; you know, it’s like what Rick Santelli calls the “Happy Feet States.” We have four states in this country, Nebraska and many others, that are rushing to become the 10th tax-free state in the country, and I get letters in the mail from the governor of Nevada, Arizona is trying to attract businesses. We see Apple and Microsoft have subsidiaries in Reno, Nevada, so the higher that you raise taxes, you get what historian Charles Adams said, “Fight, Flight, or Fraud.” What we’re getting right now is flight. We’re seeing entrepreneurs, for the first time in almost a decade; you have a lot of wealthy people that are leaving the United States.
Chris Martenson: The California story is mysterious to me, it always has been. I spent a lot of time in the San Francisco area, and the average home price there still confuses me relative to average income, but California seems to in some ways – especially at the state political level, how would I put this, it feels to me like a really poorly written play. I can’t quite follow the plot line and I don’t understand what’s happening because it seems like you just mentioned, with all of these tax receipts down yet the tax rates up.
This is a fairly understood phenomenon in most circles, that there’s a rate at which you move beyond, particularly if you do not have a captive audience. That is, they can’t escape the borders of wherever they happen to be. If these people can vote with their feet, or the corporations can vote to go to one of these lower tax states, and they do that – I personally know people who’ve done that, who have made that decision, opted out of a very wonderful state of California with a really nice climate and a very nice quality of life, but economically it became too burdensome and they’ve left.
Is there any sense there that there’s a goose that’s got a golden egg and they’re about to kill it?
Jim Puplava: I think they’re intending on killing it. It's amazing. I grew up in Phoenix, Arizona; when I left Phoenix, we used to come over here for the summers when I was growing up, because the summer heat in Phoenix and California was a dream; it was the Golden State. It had freeways, it had infrastructure. When I left Phoenix it had basically two freeways. I compare California today; the infrastructure is in disrepair, Phoenix has more freeways. They have a light rail system. You would think with 12% of the nation’s population, Chris, that – and here’s another startling statistic: I think California by itself is like the 7th largest economy in the world. We have industry, we have technology, we have biotechnology, we have agriculture, we have mining, we have energy, we have entertainment, we have tourism, we have the military.
I mean, if you want to talk about a diverse economy that has just about everything that would make for a great economy, California has it. But what we’re doing – where’s Apple building a new factory? They’re building one in Austin, Texas, $300 million. Where is eBay building a new call center and work center? Austin, Texas. California is losing its high tech entrepreneurs. They’re building their new factories in places where it's cheaper to live, there’s no tax, you don’t have those big bureaucracy. I mean, we know we have oil offshore – Santa Barbara – it's leaking on the beach. But our local utility built a power plant in Ensenada because it couldn’t get by the environmental regulations here. I mean, you can’t make this stuff up. If I was coming up with a plan – how could I destroy an economy – well, the guys up in Sacramento have a pretty good handle on it.
Chris Martenson: It's a cookbook, Jim. [Laughs]
Jim Puplava: “How Not to Run an Economy,” by the California legislature.
Chris Martenson: Speaking of stories that don’t quite add up, I think I’ve read – to shift gears here – I think I’ve read probably no less than two dozen articles in the past three months about how the idea of Peak Oil is over, it’s dead. It’s been declared a null and void hypothesis, it’s a bad theory, it's in the rearview mirror. It's all kinds of things. And I’d like to have a conversation with you about that because, boy, many of these articles are just context-free, data-free. So, for example, very and rightly so, they talk about how this tight oil, a shale oil, not to be confused with oil shales.
But the shale oil is – the technology is incredible. I visited some of these drill sites. It’s amazing what these people are doing, like in Bakken, drill down 10,000 feet, turn it sideways, find a seam that might be as little as 15 to 20 feet thick, and turn it sideways and drill another 10,000 feet. That’s great. And in Bakken we have a lot of information now. There’s 560 thousand barrels per day coming out of it. It’s great. There 6,900 completed wells producing there. But when we divide those two numbers, Jim, we get 82 barrels per day.
And we can applaud it. We can say technology’s done a wonderful thing. We can say we’re prosecuting [?] it. But one thing we can’t say is that these are in any way comparable to how we fashioned the types of wells that we fashioned our industrial economy around, which we’re producing up to fifty thousand barrels per day at the high end, but more typically three thousand, four thousand, five thousand, ten thousand barrels per day per well. And that was for a straight that often stuck down maybe a couple thousand feet straight down. So I’m looking at this story and there’s a lot of context there, but I’m not finding a lot of appetite for the context, really; just for the idea that we no longer have anything to concern ourselves with. Where are you on the Peak Oil story now, given all these developments?
Jim Puplava: BP’s statistical review came out the day before we’re doing this interview, and what I found rather fascinating, Chris, is they said if you take a look at global energy, 87% is run on fossil fuels, 2% on renewable. So you hear all this stuff. I think what happened is, with horizontal drilling and fracking, we discovered a new way to get at reserves that we couldn’t get at before, as you just described, going down ten thousand feet, turn the drill and drill sideways another ten thousand feet. So that has allowed for this – what did it start out – five thousand or six thousand barrels and now we’re up a half a million. And so if you take a look at the last two years, one of the few countries on the globe that has been able to increase its oil production has been the U.S. And I think what happens with anything like this, whether it's a discovery in the Gulf of Mexico or it’s off the shores of Brazil, there tends to be this extrapolation. Oh, okay, they’re up. They went from five to 500 thousand barrels a day.
I’ve seen figures that the shale oil plays are going to be producing two and three, and you’re hearing stories that the U.S. is going to be energy independent. Well, there’s a much difference between a Spindle Top that can product 50 to 100 thousand barrels a day versus 69 hundred wells producing 80 barrels a day. And I think because we’ve been able to do that and because we’ve been able to increase our production, there’s this theory that, well, Peak Oil, that’s in the background. What I think is this has maybe bought us a little time, Chris, but these 80-barrel-a-day wells do not replace 10,000; 100,000; the great giants that are now going into decline. And when those giants go into decline, the energy industry has to go faster and faster just to increase supply.
And I’d like to bring up the example of Exxon, which is the largest publicly traded oil company in the world. They just did their 2030 study, and Exxon is going to invest a $185 billion dollars in oil. Where’s it going to? It's going to the tar sands, it's going to the shale, and it's going to deep water. Why are they doing that? Why aren’t we having these major conventional oil discoveries that produce this prolific stream of oil that we had in the past? It's just not there. So when you’re the largest oil company, publicly traded oil company, saying this is where we’re going to have to go to find oil, I mean, to me that’s a big story that the media doesn’t focus on. Why is Exxon going to spend close to $200 billion dollars and I don’t hear any talk coming from Exxon on conventional oil? So I think the fracking, horizontal drilling, I think what has happened is we get a lot of happy talk. It has bought us some time but that’s all it's done.
Chris Martenson: Absolutely. I agree with that, and Peak Oil has always been about the flow rates. And so one of the arguments I’d want to put forward is that one of the mistakes that would be easy to make is to say, listen, I’ve learned how the world works by observing it for four decades and what I’m going to do is extrapolate and say the next four decades reasonably should sort of work that same way. And when we were expanding, so let’s say from the past four decades, we doubled our total credit market debt five times. And when we’re doubling our debts over and over again, what we’re really saying is the future’s going to be really big, much bigger than the past. And we were doubling our credit market debt faster than the underlying economy.
And so I connect that oil by saying listen, anybody who looks at those four decades and says, ah, if we just vote the right person in, make the right policy tweaks, drill the right wells, we can get back to normal – if normal is the past four decades, if that’s your reference case, I’m going to submit that can’t happen, because what was fueling that rapid huge expansion of credit, of course, was cheap energy. At least we can admit, hopefully with all of this talk of Peak Oil in the rear-view mirror and look at all this tight oil, hopefully, we can just gut check, glance at it, and come to the conclusion that drilling a that’s 20 thousand feet long has a multiple stage frack process that might be 20 stages, each one of those stages costing you a lot of money, that ultimately is going to turn into something that’s averaging 80+ barrels per day. Hopefully we could say, well, that’s not cheap. That’s expensive. That’s just more expensive than it used to be. So where do we dial it up?
Well, the most the recent reports I’ve seen, they’re all over the place, it depends how you do the numbers. But the marginal barrel of oil production today is somewhere in the vicinity of $70 to $90 dollars. And that’s just different from the old days when we could count on $20 oil or $30 dollar oil at the refinery to fuel our society. So at a minimum, I hope we would say we don’t live in those times anymore. It's different.
Jim Puplava: Yeah, and my take on this is – I think this could be used to explain – I hypothesized a theory and I call it my “petro-business cycle.” And what happens is, you begin with a recession, and the authorities come in with either fiscal and monetary stimulus or sometimes both. What that does is it juices the economy. If the economy revs up and increases in production and output, there’s a greater demand for energy placed on the energy sector. The energy sector is unable to increase its output at a rate that’s keeping up with the demand for energy, so what happens is, the price of energy starts to rise. As the price of energy starts to rise, then you see it flow into the regional PMI, prices of paid components, then you start seeing the inflation rate go up.
As the inflation rate goes up, there’s a gentleman by the name of Francois Jorhann that believes that the new Fed funds rate in an era of zero interest rates is really the CPI. So as CPI goes up, that means discretionary income is cut back, because all of us as consumers have to pay more for food. We have to pay more for gasoline, and just about everything that we buy in the store has to be transported there. Truck drivers start charging a premium. You pay a premium for your airline ticket. The railroad industry is getting premiums. And then what happens is the economy starts to slow down, and as it slows down, I call it the wash, rinse, and repeat cycle because we repeat the whole process over again.
So what have we seen since 2009, 2010? We had a bottom in the summer, more stimulus coming at Jackson Hole, we take off again, the economy and the market is up in 2011. We get the Arab Spring, we got Fukushima, we had Libyan oil production take off. Oil goes or West Texas goes to $115, the economy begins to roll over, economic growth slows, the market pulls back, and boom, we get another crisis and Treasury yields fall. We saw the price of oil drop from $115 down to $75 dollars a barrel and we start the whole upwards cycle. And I would argue, Chris, a lot of the economic weakness that we are seeing today is a reflection of the rise in energy prices with the lag that we saw at the beginning of the year.
Chris Martenson: Oh, I absolutely agree, and I’ve run the numbers on an inflation-adjusted basis. We’ve never had a global recovery, GDP recovery, with oil over $100 dollars a barrel, inflation-adjusted. So those high energy prices, of course, are weighing on, and so that cycle you’re describing – I’m visualizing a ceiling and a floor getting closer together, because there’s a price below which we will not go and drill for this new oil. So as much as we might love this idea of tight oil and Bakken plays and the Eagle Ford Shale, and all that, those really are not cheap marginal barrels.
And so if oil goes below, I would submit to you, $70 dollars a barrel, you’ll see a lot of drilling slow down or cease altogether. But at $70 dollars a barrel, guess what? The economy recovers, and so it starts to take off, and next thing you know it runs into a little bit of a supply problem, and oil’s back over $100 dollars a barrel again, and the economy bumps its head. And the next thing you know, we just keep sort of bumping along. And eventually the floor and the ceiling meet in this story somewhere.
And there’s enough concern around that in my mind in terms of how our economy has to keep exponentially expanding that I would hope we would be having a credible national discussion, if not a global discussion about our energy policy. More than that, not just an energy policy. That’s ridiculous. So here we’ve got all this shale gas. It's wonderful. There might be a few decades of that left depending on how we choose to use it and whether we believe the reserve numbers.
So instead of saying here’s all this energy; it's finite, it does run out, maybe not in my political career but soon enough on human terms. What would we like to do with that? Like, where are we going as a country, how do we want to get there? You mentioned the infrastructure in California maybe could use a little sprucing up. But where do we want to be in 20 to 30 years? would be a great question to ask. And instead, the only thing I can find is that there are certain senators that are trying to grease the wheels to get LNG (liquid natural gas) terminals built so we can export this stuff as fast as possible instead of using it domestically to build things out. I’m getting very cynical that we’re not going to see a credible energy policy until we’re forced to by some circumstance.
Jim Puplava: Yeah, and the unfortunate thing is, when gasoline prices spike, what do they do? You hear the politicians, you hear the president, and if they get high enough and it's close enough to election, they’re going to drag all the heads of the oil companies before Congress, never mind the fact that they have a small percentage of the world’s reserves, and the price of oil is controlled by markets. And I don’t care even if we were importing less oil today than we did, let’s say, five years ago. We’re still importing it. We’re still importing 45% of our energy needs.
And the unfortunate thing is, when the media picks up on this, they’re bashing the oil companies from popular cable talk show hosts. You know what, the real issue that you and I are discussing here never gets explained to the American voter. So yeah, it's those greedy oil companies or it's OPEC. Instead of, we ought to say with $100 oil, why aren’t we producing more of this stuff? With Saudi oil production increased close to $10 million, I have doubts if they can go to $12. With that increase in production, how come the price of oil really didn’t fall that much? And why in a decade are you and I, Chris, talking on this day of $83 oil price and $97 dollars for Brent crude. That should be the real debate.
And what should we be doing? I mean, the country is talking or bemoaning the fact that we probably have a 14.6% unemployment rate when you take those not looking for work or those that are underemployed. Why aren’t we building, let’s say, high-speed rail, expanding railroads, doing creating incentives to become more energy efficient, building nuclear power plants, maybe thorium reactors, encouraging people to grow their own food? As many people listening to the show, if you went back 100 years ago, Chris, a lot of people grew – I remember my grandparents had a garden in their backyard where they grew tomatoes, they grew onions, they grew all kinds of things in their backyard. That was common 50 years ago, maybe right after the war. It's not so common today.
Chris Martenson: Oh, absolutely. And we will get back to that. I think more people are starting to convert lawn into garden. The lawn is, I think, the number one crop in America. So we’ve got some maneuvering room there. And as I look at this, I’m just – so this is a part of the story that’s baffled me, and I’m looking for confirmation of this. The EIA gives us all of our base energy statistics in the U.S., and it's the gold standard and the people write articles off of it. So when the Washington Post, New York Times, Chicago Tribune wrote, or the USA Today wrote, articles about The Looming Energy Independence – a bad title for a country that’s going to be importing oil pretty much forever, as far as even their own numbers showed.
But then we go to the EIA and say, look the United States, we’ve increased our oil production from 5.3 to 6 million barrels per day. So that’s a 700 thousand barrel increase per day over the past four years, and that’s awesome. And the thing that’s troubling me is that the EIA for Texas says Texas is producing 1.6 million barrels per day, and the railroad commission out of Texas is saying Texas is producing a million barrels per day. There’s 600 thousand barrels missing in this story. And in this story, an important piece of context is that the EIA samples a few companies, goes out, and asks them, hey, how much were you producing? And then extrapolates from there to guess what Texas is producing.
Whereas the railroad commission has – it's a taxing agency, and they’ve got many decades of experience, and they actually tax at the head. They’ve got flow meters, they’ve got assessors, they’ve got multiple ways of checking if the distributors are handling a different volume from what the producers are saying. So they’ve got lots of checks and balances. There’s a 600 thousand barrel per day gap between those two numbers, and I’m a little worried that we’re telling ourselves a story that may not be entirely true. But it wouldn’t the first time with government statistics that we found a little gap between reality and reporting.
Jim Puplava: Well, I mean, it's not just even the EIA. The BP Statistical Review came out, and they said, you know what, it was a great year because we were able to take alternatives. In fact, I’m reading a quote here from the BP Statistical Review. It says the good news today is that we’re seeing a whole range of areas where the process of competition, innovation, and growth is generating results. This includes shale gas, deep-water oil and gas, heavy oil, and potentially advanced biofuels. And then I look at last year, when we had, what, 1.6 million barrels of Libyan oil taken off production. And there were only three countries, and if you look at OECD countries, production was flat, if not negative. And about the only positive coming out of OECD was the U.S.
But if you look at OPEC itself, there were only three countries, Chris – Saudi Arabia, United Arab Emirates, and Qatar – that were able to make up the difference. We’re down to three countries within OPEC itself that have the capacity to generate oil that is displaced as a result of geopolitical risk as we saw last year in Libya. I mean, look what’s going on in Nigeria. Look what’s going on in Syria. Look at some of the conflicts right around the Middle East. We’re talking about taking the Iranian oil production off limits for sanctions. Where’s that oil going to come from? And I don’t hear in the BP Statistical Review or the IEA, hey, we’re finding more conventional oil. We just had a major giant find someplace, somewhere in the world. We’re not seeing that.
It's all alternatives and that should tell us that there – and this gets back to something you mentioned earlier, and that is flow rates. So you hear BP’s statistical review talks about the amount of reserves now are increased to 1.6 trillion barrels of oil outstanding from 1.2, and we’ll take stuff like either the Tupi field off the shores of Brazil, we’ll take Canadian tar sands, and now they’re even extrapolating shale oil plays. And you know that tar sands is never going to be producing 10, 12 million barrels as the United States or Saudi Arabia.
Chris Martenson: Oh no, the flow rates – and they may run into other limits, be it environmental or water or something very capital-intensive business. But again, the main point here is that even if they can’t increase the production there, it's very capital intensive. It's just more expensive. So with cheap oil in the rearview, given what you’ve told me about the tax, potential tax, changes, and hopefully all of those don’t come to pass – just very selfishly – it’s one thing to talk about those things, but it’s another entirely to put those into action.
So in addition to your interviews, you do have a financial advisory firm, the PFS Group; you’re putting this into action. Let’s get to the meat of this, what advice do you give to investors who are looking to first, maybe protect the purchasing power of their wealth such as they have right now, and, second, how would they think about investing and growing in this environment?
Jim Puplava: We’re in the inflation camp, and so one of the things that we look at is owning real assets, whether it’s owning shares in companies that produce stuff that people need – and what we have done from 2008 is we have come up with a three-part component to the way we manage money. At the very top is what we call our macro model, and we take a look at the business cycle, here in the United States and the major economies. When that business cycle, whether it’s the leading economic indicators like the ECRI (Economic Cycle Research Institute) weekly leading index, when they begin to roll over, that tells me one thing, the economy is going to slow down. We’re going to see the stock market take a hit, we start raising cash.
The other thing that we do, we’re investing more in things that people have to have. You and I have to turn on the lights, we have to bake in the oven each night, we need consumer staples, things that people have, so we’re less and less invested in things that, let’s say, are luxury-type items.
And the other thing is, we’re investing in places where people can save money. So we own a Costco, we own a Wal-Mart, because as the price of energy drives up prices for the average consumer, people are looking for ways that they can save money. Because if you’re an average Joe out there working for a company, you can’t go to your boss and say, you know what, oil has gone from $75 dollars in October to $115, I’m paying over four dollars at the pump, my food bill just went up, they raised my cable, my utilities; I need a 15% pay increase to keep even with inflation. You can almost see this, Chris, when the price of energy starts to go up; you can see it in the monthly sales at Wal-Mart; they fall.
So we take the macro model, then we take and we add technical analysis to that tells us when the charts are breaking down. So we have to be more proactive. But we own real goods, we own shares of businesses that make things that people have to have that have a global reach, not just here in the U.S. We own gold, which I think is a staple part of a portfolio. If you can’t afford to buy gold, maybe you can afford to buy silver. And gold and silver is a key component in all of our portfolios; even our most conservative capital preservation has gold in it.
So we have had to learn to manage money differently, because I think, as I alluded to earlier with the petro business cycle, we are seeing the business cycle being compressed. I mean, we went from 1981 to 1991 with the debt supercycle, ten years without a recession. Then we had a short, shallow recession in 1991. We didn’t have another one ‘til the 2000 one. But if you take a look at the ‘00 decade we had two recessions within a decade, and then if you take a look at this new decade we have had monetary stimulus and fiscal stimulus every single year. And so I think we’ve almost compressed the business cycle to a one-year cycle.
And a lot of that I would relate to what is going on with the price of oil, because oil, in my opinion, is the new federal funds rate. So we have had to be more adaptive, we’ve had to be more flexible, because that’s just way this economy is working and the way the markets are working with all the intervention. Just look at today’s headlines: Greek Minister said this, an Italian Minister said this, somebody at the ECB said this. I mean this is just – I’m reading off my Bloomberg right now. Spain slams Germany for fostering euro debt crisis in plea for assistance. I got down here, there’s a comment made by one of the officials at the ECB. So in this kind of environment, it's almost like a headline driven market today.
Chris Martenson: Well, I think we’ve got the best markets that central banks who are day trading the markets can buy; it’s just extraordinary that we do. As I say, this is a really difficult environment for an investor. It's a great environment for a speculator. We are all speculators now, and everybody’s speculating is the ECB going to open up the purse a little or a lot. Is the Fed going to have QE3 this month or next quarter? We’re just down to sort of guessing in some ways, but you’ve described a portfolio approach that obviously takes more of a macro view, looking at some TA to get the timing right, but fundamentally thinking that there are some underlying key drivers that we can still rely on this story.
Jim Puplava: Yeah, and I think it is. The two things that we watch more than anything else are the price of oil and the leading economic indicators. When I saw the price of oil start to head up, as it did in February I said, you know what, give us about 60 to 90 days and we’re going to see this economy begin to roll over, and that’s exactly what we’re seeing right now. The ECRI weekly leading index peaked in the first week of April, and it’s been heading down ever since. And I imagine it's probably going to head down in that same direction. We think the odds are some form of quantitative easing, whether they extend to Operation Twist, something coming from the ECB, the Central Bank of China, it may be coordinated like we saw in November.
But we watch the price of oil closely, and right now the price of oil is down to $83. The price of gasoline has dropped about 40 cents nationally, and that’s putting money back in the consumer wallets. Now, whether that will re-stimulate the economy if combined with Central Bank action remains to be seen. But these are the things that we have to monitor at the top of the list. So it's kind of weaving the macro model with the Peak Oil story in terms of following oil prices and relating it to the business cycle.
Chris Martenson: Excellently said.
That’s all the time we have today. I really want to thank you so much for taking the time in sharing your views, and I would really invite anybody listening to follow you and follow along with what you’re saying. I know you’ve made some changes at your website. Why don’t you tell people where they can find your web site, what’s there, and some of the changes?
Jim Puplava: A couple things: Our web site is www.FinancialSense.com, and we started a premium service, which is our Tuesday through Friday interviews where I try to a bring a wide panoply of different guests. I think my listeners know that I’m more in the inflation camp. But we have deflationists on the program. We have people positive on gold, negative on gold, and we try to give a wide point of view, and I try not to impose my own biases into the interview, and then, of course, we have the weekend show. And then we will be making videos here shortly for premium members, where we can take these concepts and explain them in a visual form rather than the weekend audio podcasts that we do every week.
Chris Martenson: Well, fantastic! Best of luck with that; I certainly know what’s involved in reorganizing and running a web site. Let’s hope that your fine state legislature doesn’t see fit to tax you out of existence on that endeavor.
Jim Puplava: If you’re listening to this interview, I highly recommend Chris’s book, it’s – I was telling you, Chris, we gave a seminar at our church, and the whole church is using that book and trying to educate the congregation in why are we paying over four dollars in gasoline and why is the economy growing slowly. And it's probably – quite honestly, I think it’s a masterpiece.
Chris Martenson: Oh, thank you so much for that. And, best of luck, and extend my warm regards to your congregation, and we’ll talk soon, I hope.
Jim Puplava: Thank you.