August 17, 2011; Too Little Energy or Too Much Worthless Money? An Interview With Alexander Landia

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, this is the week of our 40th anniversary. I told my wife I was sad, I forgot to buy a cake for the office.

David: August 15th, 1971, good Richard Nixon was giving a speech and telling us all the problems that he was solving in taking the actions which he was announcing in that speech. We included a part of that speech in this year’s DVD. The clip is public domain. You can google it, or you can watch the DVD, and listen to Nixon explain the temporary measures that he was putting in place to gain control of the U.S. dollar, which was, in his opinion, being punished by the monetary speculators.

Kevin: David, some people call this the grand experiment. Here we are, with a reserve currency, purely fiat after August 15, 1971. There was no more redeemability for gold, even though the Europeans and the rest of the world saw this as a grand betrayal.

David: And it ended up being less than temporary. In fact, we are coming up, as you said, on the fourth decade of remembrance, so 40 years later, that is the distance that we have covered as a company. We are celebrating our 40th anniversary this year, as well, and for good reason. We saw a significant change happen then, and we have accommodated tens of thousands of clients all over the world, in light of a regime change, if you will, a dollar regime change, a downgrade which is very different than the downgrade from S&P a few weeks ago, but clearly, our foreign creditors did not approve, and we have seen the value of the dollar and what it purchases in the marketplace, decline significantly from 1971 to the present.

The reason we mention it, Kevin, is because there is this tendency by politicians to scapegoat, and clearly, they could never have put in place policies which jeopardize a particular asset class. They are not responsible. It is the “speculators.” It was the speculators responsible in 1971 for the demise of the dollar, it is the speculators which are destroying the energy markets today. Kevin, these are convenient scapegoats and we have invited Alexander Landia to be a part of our conversation today, to look at the myths of the oil and energy markets, but also to put oil in a broader context – oil, LNG, coal. All of these things play into a larger energy picture, and whether we are concerned about peak oil, peak energy, or some combination of those two, we like to go back and forth, point and counterpoint, in an exploration of what the issues are that we should be prioritizing as investors today.

Kevin: It is interesting to me, and I have seen these patterns in the past, just looking at charts, that there are very few things that can hedge you against the inflation that the decision in 1971 has created – the devaluation of the dollar. But one of the things that you see a correlation with is the price of gold, and oftentimes, the price of oil. It is not always exactly the same, but most times, people will buy gold as a hedge from a devaluing currency that the government can print. And oil oftentimes plays that same role, as an inflation hedge. If you look at the price of oil back in 1971 versus the price of oil today, it has been an increasing-in-price item. We have seen it higher, we have seen it lower. But in reality, it is much, much higher than it was in the past.

David, I want to bring something up. When we interviewed Dr. Chris Martenson, we wanted to highlight some of the things that he had brought out in his book. One was the exponential function, and just how critically that plays into the creation of debt, the printing of money, energy consumption, various items like that. He also believed that we had hit some sort of peak oil situation in the 70s. As you have promised the listener, we look at point and we look at counterpoint, and talking to Mr. Landia is like talking to the heart of the energy industry.

David: Yes, because it is not really looking at oil, per se, and from the vantage point of someone who has very studiously considered the facts, but is, in fact, an operator in that area.

Kevin: Not only an operator. We’re talking about a man who has controlled a company that controls about 4% of the world’s energy. This is a big-time insight into probably one of the largest industries in the world.

David: Why do I want to talk to Alexander Landia, the former chairman of the largest coal company in Russia? To me, this is quite simple. Energy is both the present, and future, global concern. The changes in supply sources over the last 20 years, within the European context, have been critical to shaping that landscape. We look at Russia as a country, as the second largest coal producer, and with the second largest reserves in the world. It is #1 in terms of natural gas, #8 in terms of oil reserves, exporting what was over 7 million barrels per day, to now, over 10 million barrels per day, the #1 exporter, even ahead of Saudi Arabia.

Alexander Landia has been with the Siberian Coal and Energy Company, as well as Lambert energy advisors. SUEK, Siberian Coal Energy Company, is the largest coal company in Russia, in total production. It produces 89 million tons per year, 29 million tons for international sales, and the company represents, believe it or not, 3-4% of global power generation via coal.

We would like to begin the conversation today with you, Alexander, with just an overview of the energy markets, and perhaps, the energy economics big picture – trends that you see, supply and demand issues, pricing. Perhaps you could start with the most important of these energy markets, the oil market.

Alexander Landia: Thank you very much. It is my pleasure to be on this podcast. Indeed, oil is the most important global commodity, both in terms of provision of energy for mobility, but also, the level of spending on it. The world spends currently, at the current oil prices, around 5% of global GDP on oil. On the other hand, in the times of crisis, the oil price has collapsed quite deeply, and went to around 0.5% of GDP, but it did so from $146 per barrel, which represented around 7% of global GDP. There is no equivalent of any stimulus program, or any other measure, which would be commensurate with the effect on global GDP which the global oil price swings give. Therefore, it is a very important commodity.

Another aspect is that the global oil system has not evolved to cope with the increase of global consumers, while in the ’60s, when the industry established itself, there were something like 2 billion global consumers. Today there are something like 5.5 billion global consumers, and the system has not evolved, really, to deal with that, in my view.

The most important issue with the oil price is that, in fact, supply and demand of oil does not determine, in my view, the pricing of oil any more, to a significant extent. This fact has been stated many times by both producers and consumers, and it also has been used in calls for more regulation, or to prohibit speculation, and so on. But there are several myths which mar the view of politicians, in my view, who call for more intervention, more regulation, while not understanding, and not being involved deeply enough in, the oil business.

If you take the demand side, and I will, in this moment, put speculation into the demand side, and I will explain why. There is, in my view, a new pocket of demand, for paper oil, which is mainly focused on hedging against inflation, rather than physical oil fundamentals. We saw the same trend, also, in coal, and in gas, and other energy-related commodities. There is a myth that paper trading of oil has overtaken the physical market, and therefore has deformed the market completely.

But one has to look at this myth in a more accurate way. Yes, it is true that the volume of the paper market is now probably 10-15 times the physical market with hedge funds, global trading houses, and other financial institutions now accounting for the majority of all trades, as opposed to commercial traders, like oil companies and oil traders. But this volume, to which often politicians make reference, reflects only high churn, and does not necessarily move the price in one or another direction.

A better indicator for the impact on the price would be open interest, which means an amount of live futures or option contracts which have not been yet closed and delivered. Statistics show that, in economic terms, only about 20% of global oil demand or supply is hedged at any time, not 10-15 times, it is 20%, and this is fact #1 about this myth.

There is also another myth that speculators are driving the oil prices high and are responsible for extreme volatility. Therefore, speculation is to be curbed. I would refer again to my statement that here we have a muddled picture, because the economic definition of speculation is betting on future price with aim to make profit, thus contributing to finding the right price on the market. But the definition of speculators is applied, at the same time, often in statistics, to the oil paper market, which includes those who seek active hedge against inflation. This is not speculation, but rather a new type of demand driven by loose money policies of central banks, especially the Fed, and people are trying to defend themselves against that. This is not a bet on higher prices of oil.

Can inflation hedges distort the market pricing? Yes, absolutely, for a period of time when inflation expectations increase or decrease, very much so. Why? As I said before, only 20% of oil is hedged at any time, and this is a pretty small market, in terms of amount of money. That is probably 55 billion dollars a month, and if the asset managers who oversee trillions of dollars want to make a bet and move together, then this could trigger quite a lot of distortion, and that is something which is very much impacting the rapid movement of oil price, and that is a problem, again, caused by inflation expectations, and hidden inflation, and that is another fact which I would like to put on the table.

On the other hand, if we were to look on the supply of these paper trades, it is a strange thing that if the world economy is perceived to be slowly growing, or not growing, but there is an inflation fear, then oil behaves like gold, so it is considered an inflation hedge. But then, if there is a perception that the world economy will not grow, and will contract, then suddenly, the oil turns into a junk bond, because it is perceived as a risk asset rather than the equivalent of gold, in terms of inflation hedge, and therefore, it changes the character, and that is exactly what we have seen, for example, in 2008. Before 2008, oil and gold followed each other pretty closely in terms of prices, and then oil skyrocketed because of fears of supply disruption, and then plunged dramatically during the crisis, and then restarted again to reflect the inflation hedge, meaning, moving parallel to gold.

So we have quite some distractions in terms of inflation hedge, in my view, and we have quite a lot of distractions, also, on the supply side, and on the demand side, through interventions of the state, and excessive taxation. I am happy to elaborate that if that is an interesting topic for you.

David: Certainly. There has been some conversation about the concept of peak oil, which focuses more on the supply side, and supply constraints. Your suggestion, initially, is that the entire energy complex is not coping with the rise of global consumers, so the increase in global population would be the demand side of the equation. Which would you consider to be the more salient of the two – the demand side, or the supply side – and do you give any credence to the concept of peak energy, or peak oil?

Alexander: The concept of peak energy, I think, is not existent because supplies of coal are there for hundreds of years, and that is one source of energy which we have in very large abundance, I would say. Therefore, I think, on the whole, with energy, there is no issue. On oil, I am not a believer in the peak oil theory. There are some people who believe in the peak oil production, but I think that currently the focus has shifted to peak oil consumption, rather than production.

The oil industry has proven ability to find, and bring to the market, the oil. The question is, where, and at which price? Here, the question of price is not with the oil industry but with the government policies. This is the key question: At which price? And in this question, the cost of production is an important factor, but a small one. The fact is that the government take is as high, or higher, than 40%, in most significant oil-producing countries, including the U.S.

Outside, the Middle East, which should be considered 100%, and out of the top 20 producing countries, only the USA, Canada, and Brazil have government take lower than 60% from the oil price. Therefore, the ability to react to price signals is related more to willingness of government to take less, rather than the ability of producers to lower cost. In today’s high-deficit, high-business environment, this often is the case.

Recently, the U.K., where I live, increased taxes on oil production from 50% to 62%, and for old oil fields, that is higher than 80%. Russia, as you said, the largest oil producer in the world, currently, larger than Saudi Arabia, in 2008 needed $64 per barrel to balance the budget, in 2010 around $100 to balance the budget, and now it will need $115-120 price in order to balance their 2012 budget. Of course, these are all Brent prices, not WTI. The Russian government take is more than 75% of current oil prices, but so is that of Norway, which is around 78%.

What I am saying is that the physical ability to find and extract oil, in my view, is not a constraint. The problem is that the system has developed in such a way that many governments, and it is not the usual suspects, but also good countries, if you want, have gotten accustomed to having the oil revenues in their budgets, and therefore, that drives the higher cost of delivered oil, and that drives the overall price high, and then you come into an area where this leads to, in fact, demand destruction.

Unfortunately, the current market, because of the distortions which I mentioned, is reacting more to demand destruction rather than to a smooth supply/demand balance. Therefore, I think that peak oil production is not a theory in which I believe. I rather believe in an issue of peak oil consumption destroyed by blown-up prices for oil.

David: You started the conversation today by saying that just prior to 2008, with oil hitting 146-147 dollars a barrel, that represented 10% of global GDP, and as oil declined into the 30s, it represented 0.5% of GDP, so it is clear that it is a huge factor in the global economy. If it is that we see a slowing global economy, and that certainly is more and more, at least in recent months, to be anticipated, shouldn’t we see lower oil prices? There were positive expectations for the economy and the global economy just a few months ago, and oil marched to 117. As those expectations have been reverting to the negative side, now we are closing in on 90. Is that something that we might continue to anticipate?

Alexander: Yes, I think that is what one could anticipate, very high volatility, because when you have the expectations of world economy growth, then oil prices will go high and probably follow gold in inflation expectation terms. But, if the economy slows down, then oil prices will tank, but what this will cause will be another rebound, because the oil business is a business where you need investments just to keep up. You have to run very hard to stay still.

Worldwide, currently, probably the natural decline rate of oil fields is around 5%, which means that simply because you are pumping the oil from the same field, at the same rate, you are losing reserves at the pace of around 5%, which means that you have to find, every year, more than 5% of reserves, and develop them, and bring them to production, and this is billions of dollars. So when the oil price tanks because of this high volatility, then the investment declines.

People are starting to cut their investment budgets and costs, and then the oil supply will decline, and this will lead to another rapid increase in oil prices. In my view, again, the government take is a large portion of that, and I do not expect governments to rapidly reduce their take in order to allow the oil producers to make investments. By the way, Russia had quite a good track record in this in recent years, in that they tried well to accommodate the investment programs and investment needs of the oil producers, so they have scaled back their take a little bit, but then again, the recovery came, and the take is up again.

David: So, on average, you are saying that in most countries it is 40-60%, in some 75%, and as high as 80-82%, of the oil price paid is going to government coffers, which would imply that government is actually quite happy with the status quo, and probably lacks the political will to truly pursue anything like alternative energy sources. Would you say that that is something that might change with greater utilization of natural gas, greater utilization of coal, greater utilization of uranium? Or are some of those options now off the table, in the aftermath of the Japanese nuclear accident?

Alexander: That is a very good question. I think that the Japanese nuclear accident has changed quite a lot the perception of the world about the nuclear stations. The most dramatic change was, obviously, in Germany, where, within nine months after the German government had extended the life of nuclear power plants substantially, and was expected to receive something like 5-6 billion euros from the power companies to compensate for that, then in nine months’ time after Fukushima, they have just cancelled all of that, and now these stations will be closed down. So there is a swing, but I think one has to take the view, from country to country, and there are different policies from country to country. In France, nothing dramatically will change, in my view. In the United States, probably not a very big impact, but of course, one will have to take care of security and other issues.

On oil, specifically, and the substitution issue, I think that, indeed, the shale gas revolution in the United States could have been a very important contributor to more diversification of dependence on oil of the United States, but it is happening very slowly. For example, I was in New Delhi two years ago, and then probably five years ago, again, and the difference is very substantial in terms of quality of air, because New Delhi public transportation has been converted to run on natural gas, on LPG. That would be a natural thing to do in the United States, for example, but it is happening very slowly.

Instead, there are very, in my view, strange policies to try to substitute oil by ethanol. This is the recipe for how to reduce the dependency of the United Status, and also the EU, on imported oil. But the fact is that 40% of the U.S. corn crop in 2010-2011 is for ethanol production, and this 40% of the U.S. corn crop provides only 3.5% of U.S. oil demand. That is a very strange medicine to cure the disease of oil dependence, and as a result of application of this medicine, corn prices increased by 90% within a year.

I think that, again, there is a distortion caused by government policies and involvement. I think that the best thing would be to allow the market to evolve around shale gas, around offshore drilling, which has been a problematic issue during the last years, and I think that would be the best way to address this issue. And of course, the United States has very large reserves of coal, and another very reliable source of energy, and in fact, while coal is already more than half of the power generation in the U.S., it is already providing quite a big chunk.

David: Coal is something that is often neglected here in the United States, viewed as a dirty fuel. Perhaps it can become cleaner in its application, but close to 50% of current coal usage the world over, I believe, is in China. Do you see things changing? Perhaps you can share some insights from your vantage point as a former chairman of the board with the Siberian Coal Energy Company. What should we be viewing, in the West, as a resource? The coal fields in Montana are immense. They provide close to 30-40 million tons of coal per year and are not fully utilized, but certainly, could add to that energy independence.

Before you comment on that, I would go back to your comment on ethanol. We have a strange relationship, as you say, they are strange policies, and it is because of the incestuous nature of the relationship between politicians and their constituency groups. We have no real cohesive energy policy. Nothing has been set forward as a grand strategy for either energy independence, or conservation, or covering any of the issues relating to energy. If it seems strange, it is because our political system is endemic with corruption and we are willing to put forward policies like that, that make no sense when it comes to numbers, dollars, and cents, but it certainly secures votes every 2-4 years.

Going back to coal, that is something that you know a lot about. Share with us how we might see coal in the future, either domestically, here in the United States, or internationally, utilizing that resource better.

Alexander: Yes, I think that is a very important aspect, to look at the energy market and sources of energy in a triple way, and some people call that a trilemma of energy supplies. One important factor is price. Another important factor is availability and accessibility. The third important factor is climate impact. Coal, in terms of accessibility, is the best resource, because if you mentally map the world demand for energy, geographically, and then map the availability of coal reserves in those markets, there is almost a perfect match.

The global coal seaborne trade, international trade, is around only 10% of the global coal production. This shows that coal exists in the markets where it is needed, and therefore, from the accessibility point of view, and also from the price point of view, it is a very benevolent resource. However, of course, its climate impact is much higher than that of gas, and higher than oil. That is the issue with which we have to work. It is quite a lot of effort to achieve coal gasification, or coal liquefaction, also to work on carbon capture and storage. I think that coal liquefaction and coal gasification at current prices could be interesting.

Interestingly, China is the leader in that area, and Shenhua, the leading Chinese coal company, is building major plants for coal liquefaction, and separately, for coal gasification in China, and I remember that something like 2 or 3 years ago, there was quite an interest, also, from the U.S. Department of Defense, toward coal liquefaction as fuel for the navy. It is something which is related to more R&D and innovation, otherwise I think the market is regulating that pretty well.

David: So the climate impact is a consideration, price is a consideration, and availability is a consideration. Perhaps that explains, at least in terms of the accessibility, why your particular company, the Siberian Coal Energy Company, sees most of its supplies consumed there domestically, with a smaller percentage directed toward international sales.

Maybe you could also look at Russia as a primary natural gas supplier, primarily to Europe. There is massive exportation, of crude, as well, but natural gas seems to be where the biggest growth has been in relation to Europe. What has changed, in your opinion, with NATO countries? Have they gained a new sort of polestar, as strong energy ties with Russia have been made in recent years, a growing dependence, if you will, within Europe, on Russian supplies?

Alexander: I think that this issue was on the table for quite some years. In fact, Germany started importing Russian gas to Germany through these pipes for a gas deal. It was not liked by many NATO partners, and particularly by the United States, but it has proven to be a very reliable source of supply for 30 years, and more.

Therefore, I think that when you look at the dependence, it is not a dependence, it is interdependence, because of course, European countries would be more dependent on Russian supplies if they import more, but also Russia will be more dependent from the export revenues to support the Russian budget. As I said, the Russian budget has had an increased appetite during the last years, because they started social programs and other things which they would like to fund, and therefore gas and oil exports play a very important role in such revenues.

Therefore, there is an interdependence, and that is also a physical question of the fact that in Europe you have declining production of gas, and therefore, this gas has to be supplied from somewhere, and Russia, with its largest reserves of gas in the world, and with the established infrastructure and established ties, is a natural supplier.

If course, there is also another game, which is, in my view, a primarily LNG game, very well seen in the UK, but also in the south of Europe, and probably in the future, in Northern Europe, and that would be something where the European countries could diversify their gas supplies, and they should be doing so.

David: Through LNG, liquid natural gas.

Alexander: Yes. And of course, we should not forget that Russia is one of the suppliers to the European Union. If you would look at the statistics for the last few years, in fact, Russia’s share declined a little bit in the European supplies, and the share of Statoil from Norway has increased. There is also Algeria, which is supplying quite a substantial part to southern Europe. And you have quite substantial production in the North Sea, and in the Netherlands, but if you have tax policies, for example, from the U.K. government which could increase the burden on the producers of oil and gas, then it doesn’t help.

David: No. And you said the North Sea could be as high as 82% government take on proceeds from that oil production?

Alexander: That is 80% from the old fields, yes, that’s true. And 62% is for the new fields.

David: I see. Let’s go full circle to energy economics. We come back to Russia, the Russian economy, and what it takes to balance the budget. What does the Russian economy look like at $90 a barrel, when, as you have said, at present, or at least for 2012, they will need $115-120 a barrel to balance the budget? What would you anticipate?

Alexander: I think that is what the government is trying to do now, to prepare for that scenario and to further privatize the companies which have been either not privatized yet, or have been partially privatized. For example, Rosneft, one of the largest producers of oil in Russia, where the government still has a 75% stake, would sell down, probably, up to 50, or even further. There are some rumors that they are planning that. That would be privatization and increasing efficiency of the economy as a declared goal, which the government is trying to pursue. Well, how effective that will be, we will see in 2012, I think.

David: I think this has been most interesting, our conversation about government policy impacts on the price of oil and energy. I think, for most people around the world, the assumption is that it has nothing to do with government. We are told, in the news media, and we are told, by politicians, that the increase in the price has had to do with speculators pressing that price higher and higher and higher. That singular point of the government take being anywhere from 40-80%, is very compelling in terms of the more populist opinion of what the energy market actually is as a cash cow to government.

Alexander: Don’t forget, also, the demand side, because also, at the pump, there is quite a significant take. I have to say, in all fairness, the United States is probably the best behaved country in that sense, that the United States does not take much tax at the pump. But European countries take quite a lot. You have distortions through that, and you have distortions through subsidies, in countries like China, India, the Middle East, and so on, and when I said the United States is behaving very well, the United States is currently the largest oil market, in terms of demand, but it is only 21%. If you take those countries where you have subsidies, it is up to 30% of the total demand.

The U.K., Norway, and Germany take taxes between 50% and 60% of end-consumer price at the pump. Here, you have a huge distortion. Therefore, you have distortion on the supply side. You have distortion on the demand side. And then you have the wrong definition of speculators, who are, in my view, inflation hedgers, who are driven, again, by government policies. It is a very strange picture.

David: In your opinion, do you think there is good reason to be hedging against loose monetary policies, or do you anticipate a return to reason amongst the monetary geniuses around the world, or do you think we will continue to see low interest rates and loose money?

Alexander: I am afraid, also as a private investor, that the inflation fear will persist, and I have that inflation fear, but I have to say I have more fear of hidden inflation, because if you take the methodology of calculation of inflation, it is very strange. I read an article in CNBC in, I think, May of this year, which said that if one would apply the same methodology of calculating the inflation which was in place at the time when Paul Volcker, at that time Chairman of the Fed, started increasing interest rates, then that inflation rate calculated by that methodology today, would be 9.6%. At that time, the official estimate of inflation was 2.6%.

Therefore, I think it is already there. It is hidden. What will be the monetary policies in the future? What is the solution for the U.S. debt problem? Raising more taxes, or cutting spending so dramatically that you can solve the problem – I think it is a very tough decision. The easiest way, which is, I think, economically extremely dangerous, but may happen as well, is simply to inflate your way out of the debt.

David: And it appears if they can keep it hidden, that is the route they will take. It will be private investors who, I think, like the bond vigilantes of old, begin to call that particular problem out and drag it into the light of day.

Alexander, thank you so much for spending some time with us today. I look forward to seeing you in London in the next month or so, and wish you well. Perhaps when there is a topic in the news, of particular interest relating to energy, we will invite you back onto the program.

Alexander: Thank you very much. My pleasure.

Kevin: David, what a fascinating interview. This is why we have to have these guests on, so that we can get the varying viewpoints. What we are finding is, even though supply can be an issue, if there is huge demand, there is going to be a supply issue, but that doesn’t seem to be the issue right now, does it?

David: He stated well the trilemma of price, availability, and climate impact, and I think, at the end of the day, his personal concern ends up being the same concern as a lot of folks all around the world. How do we deal with a monetary policy that is on steroids? The inflationary impact has to be addressed. This is not, as he said, speculators looking to profit from a rising price in oil, as much as it is investors trying to create an inflation hedge. When there is an increased paper trade on oil, a lot of it has to do with hedging out the inflation component in the larger asset allocation mix.

Kevin: So what could be mistaken as peak oil, or a supply problem, is actually just a government problem. It’s still the same thing. It’s the printing of too much money.

David: And I think it’s fair to say, and we discussed it, I think, in the right terms, that we may have a peak in oil production. We do not have a peak in energy production, and that is a distinction worth considering when you look at the different ways in which we drive the engine of growth in the global economy. It is oil today which is absolutely vital, and will be until an alternative is found. We have alternatives, and as he mentioned, the availability with Russia being a tremendous source.

He is keenly aware, as we should be here in the United States, of ample supply of energy sourcing: LNG, shale, natural gas, the finds that we have had on the East Coast here in the United States, which have rewritten the whole landscape of energy, even in our own area. We are at the north end of the San Juan basin, one of the largest places for natural gas in the United States. There is the San Juan and the Permian basin, which are the two large natural gas fields here in the U.S., and we now have a ghost town just south of us because of the new and very lucrative finds on the east coast, all throughout the Marcellus shale area, so instantly, we come up with a new energy calculus. But again, we are talking energy calculus, as opposed to strictly oil calculus, and when we are concerned about oil, I think there is good reason to be, but in the larger context of energy and mass, all of a sudden I think some of those fears are allayed.

Kevin: I think sometimes you have to look at where things are on the horizon. David, you have flown planes, and I fly planes. You can look sometimes 70 or 80 miles ahead of you. You were talking about this ghost town to the south of us. You can look to that airport, which is about 50 miles away, just as soon as you take off from Durango, but that is really not an issue. The issue is what is maybe a mile or two a head of us when we are flying.

In the situation of peak oil, yes, maybe on the horizon, we will have an oil problem. But right in front of us, right now ready to hit us, is actually this peak, or too much, debt. We are hitting peak debt in a way and it is turning into defaults. It is turning into devaluations. It is turning into lower ratings. In fact, David, what I would ask you is this: Could we go through the lexicon, or the glossary, of what those things mean, as currencies are devalued, and as this debt comes apart, so that we don’t blame the wrong things, supply of oil, supply of gold, hedgers, hoarders of gold, all the wrong people?

David: Kevin, this next week we should do that. Let’s look at both the monetary inflation side, which we have looked at before, but the monetary policies which deal with a burgeoning debt issue is one alternative. The other is just outright default. We’ll look at those, and look at some test cases from South America. We will be in South America next week and we will be discussing them with people there on the ground.