Peak Oil or Peak Silver?
(Neither; just rising prices!)
Silver Stock Report
by Jason Hommel, Octoer 21, 2011
This means that if peak oil is true, then peak silver is more true, that we will run out of silver, first. If that happens, you can forget about peak oil, because without silver, we won't have any computers or electronics to be able to go out and explore for, or pump, or deliver, any oil.
But wait, see, 10 years ago, when I first got into silver, the world had a 15-16 year supply of silver in the ground. Why isn't it down to 6? Because we explore for, and find, more silver all the time. We always have. Also, with rising prices, previously explored and uneconomic silver deposits suddenly can become economic and add to supply, especially as silver prices have risen from $5 to $30/oz.
See, mankind has been exploring for, finding and mining silver, for maybe up to 6000 years. In contrast, oil has a shorter history, only going back 160 years to the mid 1800's. And the oil market today is so large, that we feel we are dependent on it, and in many ways, we are, and this kind of dependency tends to bring out irrational fears.
The general trend has been that the number of years of oil in the ground always goes up. In 1975, we had only a 25 year supply of oil, and the world was supposed to run out by the time I was 30. I'm 41, and now the world has a 50 year supply. (See HSBC article: http://green.blogs.nytimes.com/2011/03/30/less-than-50-years-of-oil-left-hsbc-warns/)
See, the trend is that in the next 50 years, the world will have a 100 year supply of oil.
But going back even further, about 100 years ago, there was only a 2-3 year supply of oil in the ground.
People predicting shortages have been around forever. Lot said to Abraham, there is not enough water for both of our flocks, so you go one way, and I'll go another. Malthus predicted we would soon run out of food, way back in 1798. O-kay!
So let's agree that we will run out of "cheap oil". Agreed. But we will run out of "cheap silver" far sooner, and thus, silver is the better investment! The world should try to squeeze $2.7 trillion in oil revenues into the tiny $30 billion silver market and watch silver prices explode upwards due to the economic realities of scale, size, and price!
Some people are saying that we are not exploring for oil fast enough, despite the rising reserves. OK. There might be another rational explanation, other than "the world is running out".
See commodities run in cycles, with low prices, and high prices. High prices lead to exploration booms, which tend to stop during cycles of low prices. These cycles can last 30-60 years.
Oil was $10/barrel in the year 2000--the low price time. Oil was $43/barrel back in 1980--the last price peak. That's a 20 year cycle, for just a one way price movement, a drop. The monetary base has increased ten times since 1980, so the prior peak price was really $430/barrel. That's a big swing in prices for a 20 year commodity cycle, the equivalent of going from $430 to $10.
Basic economics explains a lot. The economic incentives to go out and explore for more oil are a lot less when oil is $10, as it was in recent history, and oil at $85 is still "low", down 80% from the peak!
Another factor vastly reducing oil exploration incentives in our modern world is that 80-90 percent of world oil production has been confiscated by the dictators running the world's nations. A perfect example is the oil found by the Hunt brothers in Lybia. Lybia stole fields worth $5 billion from the Hunts. Now, after that happens, where is the economic incentive for anyone to explore for oil in Lybia? And a few months ago, Venezuela nationalized oil, again.
See, 80 to 90 percent of the best places to explore for oil in the world are off limits to free market exploration. And yet, the world is still managing to find an ever increasing annual number of years of oil left. Amazing!
Imagine how much oil the world would explore for, and find, if there were no dictators stealing oil, and if oil prices were at $430/barrel! Hint, most "peak oiler" guys cannot imagine such circumstances. (OK, yes, but we still have dictators!) I know. I understand. I agree with the reality of today. But how many revolts would there be against such dictators when people can no longer afford oil or food? Conditions of scarcity caused by dictators tend to help remove such dictators from power. Witness Egypt.
And let's also consider the remaining 10-20 percent of the oil in the "free" world? Well, about 9 cents per gallon of gas goes to "oil profits" and about 50 cents goes to state and federal taxes. So, about 80% of the world's "free" oil is being confiscated at the pump in taxes.
Yet with all that theft of oil, the world's oil reserves are still growing! Do you see any reason to be optimistic yet?
See, in my view, the world does not have an "oil shortage" problem. Instead, the world has a "freedom shortage" problem. The best way to increase freedom is to buy silver, as this takes away the power of governments to steal by using the printing press to print paper money.
Yes, my view is supported by my ideals. There is also the issue of prophecy, which matches exactly with the history of the last 100 years. The Bible says that in the last days, travel and knowledge will increase. "Daniel 12:4 But you, Daniel, roll up and seal the words of the scroll until the time of the end. Many will go here and there to increase knowledge.”
Is anyone worried about the impending world wide banana shortage? No? Why not? After all, there is only a 20 day supply in the whole world. After that, all the green bananas turn brown and are rotten. Nobody worried? Why? Because more bananas are always growing.
As far as we know, oil comes up from the earth and re-fills old oil fields, over time. This is the abiotic theory of oil, that oil bubbles up from the earth's magma. If that's the case, we essentially have an unlimited supply of oil.
I would tend to be more likely to believe peak oil proponants if they understood basic economic laws.
As oil prices go up, people will naturally use less gas, if the economic pain is high enough. As far as I can see, the rise in oil from $10 to $100 has hardly caused a reduction in gas use, and gas prices only rose from about $1.50 to $4.50, only 3 times.
But this just goes to show that oil, at $10, was ridiculously cheap, and thus, recently extremely abundant! (Hint, not scarce, not running out.)
Again, with oil now at $85, oil is still down more than 80% from it's inflation adjusted high of $430/barrel from 1980.
As oil prices rise, not only are there are higher economic incentives to explore for more oil, but also, vastly larger oil fields with lower grade oils suddenly become more economic to produce from. There's that word again, "economic", which trips up the peak oil crowd.
The peak oilers warn about this lower grade oil, warning about the lower "energy returned on energy invested" (EREI), warning that if the energy return heads to zero, we run out. I get that.
But lower grade deposits have two interesting points about them. First, today, many are economic even with oil 80% lower than prices that the world can tolerate! Second, the good point about lower grade oil deposits, is that like almost all lower grade mining projects, the size of the deposit tends to grow exponentially larger, thus aiding exponential growth rates of oil usage.
The other factor not often considered about "energy returned on energy invested" (EREI) arguments is that the proponants count all costs in terms of energy, and this is not true. Energy is only about 4% of the world economy, only about $2 trillion out of about $50 trillion or so. Costs are usually in dollars, and could also be counted in terms of gold.
The EREI proponants say that when energy is spent, it is destroyed. And they also correctly warn that dollars could be destroyed. True, and true. And thus, they worry, and warn that we could "run out of money" to spend on oil. NOT TRUE. Why?
They forgot about gold. Gold is not destroyed when it is spent, but rather, it just changes hands. In fact, when gold goes into the hands of people who have successfully explored for, and managed, and produced oil for the world to solve our oil needs, it goes into the best possible hands in the world, because those people will likely continue to try to produce oil for the world! Furthermore, as gold goes up in price, there is MORE MONEY for all the holders of all the gold in the world.
Here's a comparison to show why there will be a lot more money if paper money goes away completely. If we could not spent paper money on oil, we would have to spend gold and/or silver. What would that look like?
Let's start by looking at how much paper money is out there, and the annual value of the oil and gold production.
Currently, there is always seemly a dire shortage of money, and yet, there is only about $50-60 trillion worth of paper currency. Despite the fact that they are always printing it, the problem is that the value keeps going down, resulting in a weirdly stable $50-60 billion for the world economy over the last ten years.
The world produces about $3 trillion of oil per year. The math is 88 million barrels per day, x 365 days, x $85/barrel = $2.7 trillion.
The world mines about $130 billion, or $0.13 trillion, of gold per year.
2.7/.13 = 21 Thus, the world's oil production is worth about 21 times as much as the world's gold production.
But what if the entire world used gold for money? And what if the world still spent only 5% of the world's gold production on oil production, because the world has other things to buy with the gold, too.
Well, what if the world's gold production was worth 20 times as much as the world's oil production? It could happen. After all, the detractors of gold say that "you can't eat gold". But that's a benefit. See, if gold prices go up, nobody starves, and mining simply increases!
So, to measure value in terms of "stable dollars", because that's how our minds value things today, what would gold values be if gold production were worth 20 times oil production, and if there were no paper money on earth, and if only 5% of gold production were spent on all world oil production?
Math: $2.7 trillion worth of annual oil production x 20 = $54 trillion, divided by 75 million oz. of gold annual production, = $720,000 dollars per ounce. wow. It could happen! And there would be no shortage of money to spend to go out and explore for oil! Again, that implies a value for gold, if there is no paper money, and if 5% of gold production were able to buy 100% of world oil production, because the rest of gold production would be spent on other things, just like in today's world.
If gold were worth so much, then the world's 5 billion oz. of gold would be worth $3,600,000 billion. See, that's a lot more money than $50,000 billion in world cash. So, the world does not ever have to worry about running out of money (poking a major hole in the Energy Returned on Energy Invested argument), as long as it simply values gold higher. This also means that gold does not cause a restriction on economic activity, like the bashers of the gold standard falsely claim. Gold causes a restriction on govenrment intervention, and helps to create an explosion of freedom that the world so desperatly needs, to solve world problems like shortages of oil!
Also, as the dollar continues to fail, very very few people will try to buy 100 barrels of oil to put on their front lawns to store the equivalent of $8500 worth of wealth. But millions of people will try to buy $10,000 worth of silver and gold, or far more, and put that in their vaults at home!
And that information might just be better than silver!
We have much lower prices, or premiums over spot, right now. Everyone wants to buy on a dip. Now's your chance!