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The Coming Economic Collapse - How You Can Thrive When Oil Costs $200 a Barrel

Posted on | June 25, 2008 |


How We Can Thrive When Oil Costs $200 a Barrel

This is a review of the book: The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel, by Stephen Leeb.

Mr. Leeb, sorry - Doctor Stephen Leeb, PhD - is quite fond of himself. He wastes very few opportunities to tell us just how smart he is, but I think a lot of it is nonsense.

I’ll be up front with you, I have mixed feelings about this book. He’s obviously right on the money about some things, like the high inflationary environment in which we find ourselves today. But he’s also wrong about a lot of stuff, or just plain ignores inconvenient facts or competing theories. He also comes across as an insufferable, pompous ass.

I think the 5 second review of this book would go like this:

20% serious, intelligent and worthwhile content.
80% fear, bunk, fluff and garbage.

The premise is this:

We are in the age of Peak Oil and because of decreased availability and increased demand, western civilization as we know it will be utterly destroyed.

Brief Synopsis.

Don’t bother making any plans in your life for your future, because you haven’t got one. If all out thermal nuclear war doesn’t break out when the oil wells run dry, you’ll be so pitifully poor you’ll be lucky to have a potato and bucket of rain water. Picture Mad Max, only worse.

That’s the basic gist of the first 80% of the book. The second 20% is the only part with any real value, but even that is difficult to get through with the author’s self-righteous bludgeoning of just how bad he thinks the world really is.

The Gory Details.

The reason I say there’s 80% bunk in the book is because he spends about that much of it on straw man arguments and fear mongering.

For instance, he spends a lot of time in the early parts of the book laying the groundwork of fear using the dot com tech bubble of 2000. He uses the tech bubble burst to generate fear and uncertainty in the reader, and draws false parallels to the oil markets.

He uses fear mongering by saying that the tech bubble collapse could have “destroyed the economic fabric of the United States” and compares it to the great depression.

This is an erroneous comparison because while there are similarities to the irrational exuberance of the stock market in 1929 and that of 1999, the great depression was a far reaching collapse brought on by the failing of banks and imposition of Hawley-Smoot Tariff Act among other things - not the stock market collapse alone. There was no FDIC insurance in 1929, and when the market collapsed, more people withdrew money (or wanted to withdraw money) than the banks could provide cash for. Hence, the banks failed, but the market didn’t.

Beyond the factually erroneous implications, he also states that the tech bubble collapse “could have destroyed the civilization of the U.S.” If only this… and if only that…. As my grandmother would say, “If ‘ifs’ and ‘buts’ were candy and nuts, we’d all have a very fine Christmas.” My point is that stating a list of things that might have happened to cause something that didn’t happen is little more than pointing out half a dozen asteroids in the past 200 years that would have exterminated 98% of life on planet Earth, if only their orbit around the sun was a couple degrees in any direction. Or if a mega volcano erupted it would cause mass extinction… These sorts of doomsday scenarios make for interesting and terrifying plots, but they hardly prove the next doomsday scenario is around the bend.

In fact, the first half to three quarters of the book is so heavy handed with doomsday prophecy that it reads like a worn out plot from a sci-fi channel original disaster movie. The threats and warnings are time worn cliche’s about total annihilation, and economic destruction. No joke. He uses words like “destruction”, “annihilation”, “disaster” and “collapse” to the point where such words - and warnings- lose all meaning and impact.

Another facet of this part of the book is great civilizations that have collapsed. This part is mainly to introduce and illustrate physiological phenomenon of thinking “this time its different.” To illustrate the concept, he uses examples of “leaders and experts who were blind to the problems at hand”, but ignores the possibility that he (and others) who believe that costly oil will “destroy the fabric of civilization” (his actual words) are engaged in the same thinking. In other words, the tech bubble could have destroyed civilization, but didn’t. But we are supposed to believe that the oil crisis is different!

In particular, he relies on the work of Jared Diamond’s book Collapse: How Societies Choose to Fail or Survive. Specifically he makes numerous citations regarding the collapse of the civilization on Rapa Nui (Easter Island). Diamond’s theory, as stated in his book, is that the proud Easter Islanders willingly cut down all there trees in the process of building the famous statues. Thus perpetrating eco-suicide. The message is clear: “leaders and experts were blind to the problems at hand” and failed to take proper action (ceasing to deforest their island) all because they thought “this time, it’s different.” The moral of course is “don’t be an Easter Islander - this time it’s not different!”

It’s a poetic and powerful story. The only problem is none of it is true. This theory of purposeful deforestation has been debunked in numerous archeology and scientific circles. One such paper is available for your reading pleasure at Liverpool John Moores University (PDF) and it is also reprinted in web form here.

This leads into a major discussion on the concept of “Group Think.” His premise, of course, is that anyone who thinks oil will not continue a permanent upward climb and “unravel the fabric of civilization as we know it” is simply engaged in group think and can be safely disregarded. Maybe, maybe not. Group think cuts both ways in my mind, and it’s often too easy to say that any commonly held belief is group think. Is evolution group think? Is religion group think?

He says those who don’t believe we’re in the age of peak oil are engaged in group think. Others can say that people who believe we are in the age of peak oil are engaged in group think. Since we can only be sure when the age of peak oil is hit after the wells run dry, time will tell who the group thinkers are.

One of his examples of group think is the belief in the run up to the Iraq war that Iraq possessed a WMD cache and program. The problem with using this as an example is that it was not simply the Bush administration that held this belief - it was a systemic belief of the international intelligence agencies and prior U. S. administrations - and Saddam Hussein himself. It can hardly be said to be group think when every action and word from Saddam himself belied a belief in the program! I don’t want to get into a political argument here. Obviously there were major breakdowns in numerous intelligence programs, but I don’t think it’s as simple as “group think”.

Once he has established this base of what has gone wrong in the past, he relies on drawing parallels to near the miss of calamity from the tech bubble, group think, and peak oil but ignores speculation on wall street . In the case of oil production, he accepts that the Saudis (OPEC) can’t increase production but never questions whether they might not want to increase production (and cut their profits). He also ignores the fact that reductions in U. S. oil production are legislated and self-inflicted, not due to lessening supply. He also completely ignores the effect of middle east unrest on oil prices, and other sources of oil like shale.

Well, that’s the first 80% of the book and where I think Doctor Stephen Leeb, PhD is wrong. Well, maybe he’s just trying to sell his book with the time tested method of fear. Now for the remainder - what he got right.

The Takeaway (the remaining 20%).

This book was written in 2006, at a time when oil was hovering around $65 per barrel. At that time he predicted $100 per barrel, a fact which got him much attention from “those engaged in group think“, he his fond of noting at numerous points in the book. He said when oil reached $100 per barrel, gasoline would be $10 per gallon.

His results on these predictions are clearly mixed. As I write this review, it is 2 years later and oil is about $137 a barrel, but gasoline is only $4.25 per gallon.

Anyway, so he was right about oil, wrong about gas. That’s ok, I’m certainly not going to crucify him for that especially since he also predicted a high inflationary period, something we are also clearly experiencing now. I point this error out (and those mentioned above) because the overwhelming feeling one gets from reading this book is that Stephen Leeb is a lone genius in the wilderness surrounded by ignorance. But I think he doesn’t know it all and he is not infallible, despite what he would like us to believe.

The 20% that’s worthwhile and informative is this essentially the part about how you can thrive when oil costs $200 a Barrel. This is a great example of his use of shock and fear because it’s really little more than a guide to investing in a high inflation environment. I guess that doesn’t sell as well.

He harkens back to the stagflation of the 70’s and provides security analysis on what investments did well, and which did not. Of course, he points out many times how “this time, it’s different”, but I fear the irony is unintended. He then takes the reader through some investments that might be expected to do well over the next decade. Not surprisingly, some of this have already done well over the past 2 years.

Things to avoid include cash (including CDs, money markets and savings accounts), bonds (except TIPS), stocks (except small cap emerging markets).

He recommends commodities, like precious metals (gold, silver and platinum), and oil companies - refiners and drillers. He also recommends alternative energy stocks.

Interestingly, he also believed (in 2005-2006) that predictions of a housing bubble were far-fetched group think! It seems he was under the impression that the Fed would pull the strings and government wouldn’t allow a recession. I guess this time, it was different. ;-)

Here are a few of his recommendations:

GOLD: iShares COMEX Gold Trust (IAU), SPDR Gold Shares (GLD)

MINING: Newmont Mining Corp. (NEM), Barrick Gold Corporation (ABX)

PRECIOUS METAL FUND: Tocqueville Gold (TGLDX)

BIG OIL: BP plc, formerly British Petroleum (BP), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM)

IDEPENDANT ENERGY: Devon Energy Corporation ( DVN)

OIL SERVICE COMPANIES: Schlumberger Limited (SLB)

DRILLERS: Nabors Industries Ltd. (NBR), Noble Corp. (NE), Transocean, Inc. (RIG)

REAL ESTATE (REITs): Regency Centers Corporation (REG)

CHINDIA (China and India): 3M (MMM), Coca-Cola Co. (KO), Intel Corp. (INTC), Procter & Gamble Co. (PG), Texas Instruments (TXN)

ALTERNATIVE ENERGY: FPL Group Inc. (FPL), General Electric Co.(GE), Petro-Canada (PCZ), Suncor Energy Inc (SU).

He provides a detailed sample portfolio, with target allocation percentages in each of the above. I will however leave it to the reader to determine if his model portfolio would have out performed a more typically diversified asset allocation.

Conclusion.

If you are a person who is given to experience even slight bouts of depression, I recommend that you NOT read this book. About one third of the way through, I wanted to slit my wrists. Halfway through, I had to laugh. It just got to the point of being so over the top, I had to either laugh or crawl into my bunker and cry. Seriously, at one point he even predicts the possibility of all out nuclear holocaust when oil becomes scarce.

Call me naive (I prefer to think of myself as optimistic), but I think humanity can rise above the oil crisis and I don’t think it’s all going to come crashing down around us over night like it did for the dinosaurs. But who knows, maybe “this time it’s different.” :)

EPILOGUE.

At the end of the day, the take away is this: We are in a high inflationary environment, and no one can be sure how long it may last. There are things you can do to help minimize the effects on your wealth , but I think any wholesale changes predicated on the “new paradigm” are risky. It may be different this time, but much of life is cyclical and the oil crisis of the 70’s gave way to a tremendous drop in oil prices of the 80’s. While I don’t think we’ll see quite the same drop this time (mostly because demand from China and India are far greater than they were in the 80’s), I also don’t think the fabric of the universe is going to unravel because oil is $200 a barrel or gas is $6 a gallon.

That being said, I think it’s best to take that ounce of prevention and add some real estate, oil or commodity funds or stocks as a hedge to your portfolio. But that’s just smart diversification in times of high inflation.

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