end of cheap oil

"Americans are delusional," began James Howard Ku nstler, speaking to the investment conference we are attending here in Vancouver.

"They think they can continue living the way they've been living for the last 50 years. They think the key to it is to find a way to keep getting fuel. And Vice President Cheney summed up this line of thinking when he said, 'the American way of life is non-negotiable.' The trouble is, Americans may not be willing to negotiate. But if they don't, they are going to find that someone else is negotiating for them. And that someone else is called reality."

Ku nstler is a good speaker. His vision of the world…and the future…has a certain power and authority to it. He imagines that higher fuel prices will change everything - the suburbs will become unlivable and undesirable…Wal-Mart will be unable to continue stocking its shelves with cheap imports…food will have to be produced locally, not shipped half-way around the world…and people will have to find ways to manufacture locally too.

"Globalization is not a permanent trend," he cautions. "It is a consequence of two transient and unstable trends. Currently, the world's governments are favorable to it…they provide the political stability necessary. And the price of the fuel that transports all this stuff is unsustainably low. Both those trends are going to change."

Ku ntsler is the author of The Long Emergency. What is the long emergency? We're not sure. We think it is the fact that energy is going up in price…making a lot of arrangements - the aforementioned suburbs, for example - untenable. But, listening to him, we got the impression that he hated big cars and parking lots long before he discovered peak oil. The man has a vision of the way things "ought to be" in America. The rising cost of gasoline is probably just a prop - an argumentum that turns "ought" into "will". Since the era of cheap oil is coming to a close, he says, Americans will have to stop living in ugly, soul-destroying suburbs; they will have to stop their vulgar consumerism; the mo ron masses won't be able to keep driving their commuter tanks either. They'll have to change, whether they like it or not.

This will come as a rude shock to most people. They've come to depend on cheap fuel the way Jonestown depended on Kool-Aid.

But the days of cheap gas are over. Our friend, Byron King, made the same point. North Sea oil went into a decline in 1999. Mexico's Cantarell field peaked out in 2006. Alaska's Prudhoe Bay is producing less and less oil every year. But that is happening all over the world. Oil fields are peaking out…and going into double digit declines.

"We're using it up fast," says Byron. "In fact, we've used up most of America's oil already. I hope you enjoyed it…I know I did."

Mexico's national government gets an incredible 40% of its budget from the Cantarell field. "You think we have a problem with illegal immigration now," Byron continued. "Just wait until the budget gets cut in half as revenues from oil go down."

*** For the oil consumer, the news from around the world is not good. Oil fields are depleted. Few are promising new discoveries. The Chinese are muscling into Canada's Tar Sands. And most importantly, the price is up seven times in the last ten years.

But wait.

"The resource business is not a cyclical industry. It is an extremely cyclical business. More cyclical than you can imagine," says our old friend, Rick Rule.

"In natural resources you only have two choices," he continues. "You can be a contrarian or you can be a victim. And yet, many people still buy resource companies after they have been run-up. They still sell them when they get disgusted after they have fallen down. That is no way to make money."

So…does that mean it is time to sell oil? Maybe.

Rick says there are three rules to buying resource stocks.

First, you have to be contrarian. You have to buy them when others don't want them.

Second, you have to buy the good ones. Most resource companies are run by incompetents, he says, or worse - "people who would normally wear a mask when they go to the 7-11." The 80-20 rule applies here as elsewhere. Only 20% of the companies will make 80% of the profits. And the 80-20 rule applies to the 20% too. So only 20% of the 20% of companies will make 80% of 80% of the profits. You have to do some serious research and analysis to figure out which those companies are.

"I look for serial and sequential winners," says Rick. "I look for the people who have proven that they can produce profits.

Finally, Rick says you need to look for projects in places where most people don't want to go. Political risk is always a problem for resource companies. But the political risk is not what most people think. Most investors judge the risk high in the Congo, or in Mayanmar, and low in California. "Actually, the opposite is true," Rick explains. "California is so rich that it can afford to treat mining projects badly. But these poor, basket-case countries need them. They are much more respectful to miners.

"What you want is a place where people have misjudged the political risk, as they did in Thailand after the general's coup d'etat last year. So when you see those scary stories on TV - those places that look dangerous and too backward to want to visit - that's where I'll be."