“Cometh the hour, cometh the man,” I’ve said many times during this narrative of the life and wars of General Curtis Lemay (1906-1990). And when the hour has passed? Well, so passes the man, one might think.

But the muse of history seldom lets go of a good story. Recall, as I’ve counseled before, the first words of Virgil’s Aneid. “Arma virumque cano.” I sing of arms and the man. Though time and history overtake the man of the hour, can he ever really exit the stage?

In the last article, about Lemay and what he told President Lyndon Johnson, we left the general as he retired from the Air Force in 1965 and moved to the tony Bel Aire section of Los Angeles. Lemay took a good job with a fine technology firm. He and Mrs. Lemay settled in, and — it being Los Angeles in the mid-1960s — life was good.

1968 – Vietnam

But time passes, and by 1968 Lemay was frustrated with the direction that the U.S. was taking. The country’s social fabric was fraying. There were riots on college campuses, as well as in the streets of major cities. What was happening to the nation that Lemay had served for his entire career?

Much of the national discord crystallized around opposition to the war in Vietnam. It’s certainly fair to say that Lemay’s frustration came from watching the Johnson administration bungle the fight. And this was no abstract or academic matter to the old bomber pilot from Ohio.

That is, in 1964 Johnson rejected the military advice of his Air Force Chief of Staff, a certain General named Curtis Lemay. Lemay counseled Johnson that if the U.S. was going to fight the North Vietnamese — a big “if,” in Lemay’s view — then the U.S. needed to hit North Vietnam hard and up front with air power. “Throw a punch that really hurts,” said Lemay, and wreck the means by which North Vietnam was waging war against South Vietnam.

This advice was not what Johnson wanted to hear. Instead, Johnson and his counselors escalated the war gradually, on land, sea and in the air, and by 1968 waged it to a bloody stalemate. (“I g****m told you so,” Lemay surely thought.)

Strategy, Operations and Logistics

There were many reasons, at many levels, for what happened in Vietnam. First of all, at the strategic level, the North Vietnamese Communists actually knew what they wanted and what they were doing. The North Vietnamese were serious students of the theory of war, from Sun Tzu to Mao Zedong. They had a plan and an end-game, and it was all quite simple. It was to unite North and South Vietnam into one large, Communist state.

At the operational level, the North Vietnamese also had a thoughtful plan to implement their strategy. They took massive aid from the Soviet Union, Peoples’ Republic of China, and other like-thinking Communist and Socialist nations. Well-armed by the outsiders, the North Vietnamese intended to pour troops and equipment into the South, build up forces and capabilities, and fight for as long as it took to prevail.

What would it take to prevail? In one word, logistics. “In large part the history of the (Vietnam) war,” wrote U.S. intelligence analyst Cynthia Grabo in her insightful book Anticipating Surprise: Analysis for Strategic Warning (Defense Intelligence Agency, 2004), “was a chronicle of ingenious and unrelenting North Vietnamese efforts to sustain their logistic movements and of our (U.S.) attempts to disrupt them.”

It gets back to the old military saying that amateurs study battles, while professionals study logistics. Lemay’s advice to Johnson had been to “disrupt them” by bombing North Vietnamese supplies at the source. Kill the logistics, and you kill the enemy’s ability to wage war.

Thus in 1964 Lemay presented Johnson with a plan to bomb the ports of North Vietnam, and mine the harbors through which Soviet and other Communist-bloc aid poured into North Vietnam. Lemay advised mining the coastline to prevent infiltration. Lemay also advised destroying North Vietnamese oil supplies at the storage facilities.

Johnson did none of this. Instead, Johnson’s operational plan was to bomb the jungle trails, through which North Vietnamese supplies and troops poured south. At the end of the so-called Ho Chi Minh Trail, Johnson’s operational plan was to “disrupt” North Vietnamese efforts via direct action against an armed invasion force. It was as if someone was squirting you with a fire hose. But rather than turn off the hose at the source, you stood there trying to soak up the water with a towel.

To top it off, Johnson pursued his operational plan gradually. Johnson escalated the Vietnam war slowly. In particular, there was on-and-off bombing, punctuated by well-publicized “pauses.” While the aircraft were chained down, the North Vietnamese rearmed their gun pits and recalibrated their antiaircraft tracking radars.

A Proxy War, a Long War, and Many Mistakes

In the larger scheme of things, the Vietnam war was a proxy war. Other powers — Soviet Union, Warsaw Pact, Cuba, China, et al. — waged war against the U.S.

North Vietnam was the proxy in this proxy war, of course. But the prize was conquering the South and defeating the U.S. So the North Vietnamese were OK with their role.

Indeed, the North Vietnamese “gradually” adapted to the gradual war escalation of the Johnson administration. The Northerners dug in and took their hits. They wanted to win. They were patient and ruthless. In a war, that helps.

On the U.S. side there were fundamental misperceptions and misunderstandings. At many levels of command – starting in the Oval Office and moving down the chain — there were geostrategic blunders, strategic errors, operational miscalculations and tactical mistakes.

After he retired, whenever Lemay was asked for his opinion on how the war was playing out, he answered honestly and with characteristic bluntness. Primarily, Lemay criticized Defense Secretary Robert McNamara and his crew of “whiz kids” at the Pentagon. The McNamara team was “mirror-imaging” its values onto the North. For as smart as they were — and many dripped with academic wax and ribbons — these geniuses couldn’t make hard choices. They let things drag out.

For most Americans, by 1968 the central point of the Vietnam war was that it was a televised meat grinder, killing hundreds of U.S. soldiers per week. The war cost untold billions and wrecked both the U.S. military, and the larger American economy, from the inside out. So much for Johnson’s “coonskin” that he was going to “nail to the wall.”

The U.S., Painted into a Corner

The year 1968 was a historical tipping point for the U.S. and the Vietnam War. It started with the Tet Offensive in Vietnam, in January and February. Overall, the Tet campaign was a battlefield defeat for the Communists. But the Tet Offensive crystallized one overarching idea inside the head of many an American. The Vietnam War had lasted too long and cost too much.

As the Tet fighting wound down, U.S. leadership and decision-making was paralyzed, starting with the top echelons of the Johnson administration. It dawned on the U.S. political classes that they were painted into a corner. The historical record is that Americans will fight a war. But not a long war.

By stringing out the Vietnam fighting over many years, Johnson had squandered the political will of the nation. Where could the U.S. go from here? Who could untie this Gordian knot? The battleground of the Vietnam War spread to U.S. campuses and streets. It was a mess.

A Year of Living Dangerously

Add to this, that the nation was living dangerously. On the worst day of the Vietnam war, there was never a military threat from Hanoi against the U.S. homeland, or towards U.S. allies in Europe and Asia outside Indochina.

But from what Lemay knew – and he knew a lot because he received regular classified briefings as a courtesy extended to a former Air Force Chief of Staff — the Soviets were building a powerful nuclear force with which to challenge the West. At the strategic level there was a “breakout” in the making.

In Lemay’s opinion, with the focus on Vietnam and the accompanying policy paralysis, the bulk of the policy-making class in Washington was oblivious to the Soviet nuclear threat. (Looking ahead to the 1970s, a Soviet nuclear breakout occurred. The top echelons of the U.S. political-media classes eventually figured it out, for the most part — except for some of the supremely stupid ones.)

On March 31, 1968 Johnson announced that he wouldn’t run for reelection. At the national level the Democratic Party descended into chaos. By August the Democrats pulled their party together and nominated Vice President Hubert Humphrey as their candidate for president.

Lemay knew Humphrey, but didn’t trust him because of events that dated back to Lemay’s Air Force tenure during the Johnson presidency. “I thought that Humphrey was as big a liar as Johnson,” remarked Lemay at one point.

The Republicans in turn nominated Richard Nixon, with whom Lemay had worked during the Eisenhower administration when Nixon was Vice President. Nixon had his flaws, Lemay thought, but at least he understood foreign and military affairs.

George C. Wallace

In response to the Vietnam War, and a long list of other national issues, a relatively obscure, but smooth-talking lawyer named George C. Wallace (1919 – 1998) appeared on the national horizon.

Wallace had served in the Army Air Corps in World War II. He was part of the 20th Air Force under Lemay in the Pacific, although then-Gen. Lemay and then-Staff Sergeant Wallace never met. After the war Wallace returned to his native Alabama and made a career in politics. By 1968 Wallace was a former governor of Alabama, and his wife Lurleen held the job after Wallace could not run due to term limits.

Wallace offered a Southern-fried version of segregationist populism. Wallace preyed on the social and economic fears of lower-class and working-class white people. Wallace particularly touched nerves with peoples’ fear of the unfolding civil rights movement.

“When I talk about roads and schools,” Wallace once remarked, “nobody cares. But when I talk about black people moving in down the street, people listen real hard.” On this point, Wallace made political hay out of federal efforts to integrate the races. In one famous comment about federal efforts to promote racial integration, Wallace stated “there’s not a dime’s worth of difference between the Democrat and Republican Parties.”

Wallace believed that there was a market for his brand of political moonshine outside of Alabama. Hence in 1968 Wallace campaigned as a third-party candidate for president. In order to qualify for the ballot in most states, Wallace needed a running mate.

Wallace went through a long list of possibilities for VP. All of the candidates turned him down, including a private citizen living in Los Angeles named Curtis Lemay, Gen., USAF, Retired.

Vice Presidential Candidate

But Wallace pressed on. He needed somebody to balance the ticket and get on the ballot in most states. And oh, Wallace was smooth. He was slick. He could turn on the charm.

In one call after another, Wallace urged Lemay to become the VP candidate. Wallace enticed Lemay with the idea of speaking to a national audience. Lemay could help, said Wallace, with getting out the message to resolve the Vietnam War. Lemay could focus on national security and defense preparedness.

Finally in October, towards the end of the 1968 campaign, Lemay rose to Wallace’s bait. The reason? In September Lemay learned that, if elected, Nixon planned to negotiate over “arms control” with the Soviets. Lemay didn’t trust the Soviets to negotiate in good faith. Lemay believed that the Soviets would wage a propaganda battle. The Reds would talk nice and smile in public, and then build nuclear missiles in secret. (This is exactly what happened.)

Lemay disagreed profoundly with the direction in which he believed Nixon was heading. So in early October, about 30 days before the election, Lemay agreed to be Wallace’s running mate. Many members of Lemay’s family were shocked. Old friends and colleagues could scarcely believe the news. What the hell was Lemay doing?

Irony of ironies, it’s fair to say that George Wallace was soon shocked as well. From Lemay’s very first day on the ticket, the old warhorse started discussing the possibility of “thermonuclear exchange with the Soviet Union.” Huh? People couldn’t believe what they were hearing. Say again? Sure enough, there was Lemay on national television, talking about “radioactive crabs” at the nuclear testing site at Bikini Atoll. Say what?

Lemay Was No Politician

It dawned on Wallace – too late – that Lemay was no tub-thumping, stump-talking, man-of-the-people politician. Not only was Lemay no politician, but he was reverting to his inner-SAC general. Lemay went out on the campaign trail to meet the voters, but he acted more like he was giving a seminar about nuclear war at the RAND Corp.

For all his image as the gruff, profane war-general, Lemay was an exceedingly intelligent man. When it came to airplanes and weapons, he knew his stuff. Actually, he knew his stuff inside out, down to the last technical detail.

It came naturally for Lemay to talk like he was running a SAC staff meeting, where his targeting cells planned the nuclear strike packages. Even worse for the Wallace campaign, Lemay wouldn’t shut up. Nuclear war? Lemay was an expert. Lemay wrote the book on nuclear war — several of ‘em, in fact, and all classified. Sweet Jesus! Now Lemay was talking up a nuclear storm. And the press loved it.

But could nuclear war really be a campaign issue? This was hardly the kind of thing the American people wanted to hear during a presidential election. In every election, as the saying goes, “It’s the economy, stupid.” But in 1968 there was more on the national plate. Vietnam and civil rights worried people — and angered a lot of them. A candidate could talk about those topics out on the campaign trail. Nuclear war, however, was over the top. That scared the voters.

Furthermore, many public opinion surveys indicated that the core of Wallace’s supporters – his political base — were former enlisted soldiers from World War II and Korea. And here was Wallace, the former staff sergeant, choosing a retired general officer as his running mate. It didn’t balance.

Wallace’s ploy backfired. While many Americans admired Lemay the war hero, many old troopers didn’t like him on first principles. Wallace’s political problem boiled down to the fact that Lemay was a general. In the minds of many old soldiers, he was one of those “brass hats” who made their lives miserable for several years during the war. (Many old soldiers did like Lemay, to be sure. Particularly the troops who served with him. Many of “Lemay’s boys” revered their former boss.)

And the train rolled on. Throughout October 1968, the Wallace-Lemay ticket fell in the polls. By Election Day in November, the Wallace-Lemay ticket was adrift. Wallace-Lemay picked up a lot of votes, and even won entire states in the South — which broke the back of a century of Democrat political dominance in Old Dixie. But at the end of the day, Nixon was the one.

Tarred By Association

Lemay was a national political candidate for all of about a month. In his entire life, he never planned to enter politics – and it showed. Yet there was something worse for Lemay than losing his one and only election. He was instantly tarred with the label of racism that accompanied much of Wallace’s political baggage. The media-historical complex promptly turned its darkest lights onto Lemay. Now it was Lemay’s turn to get firebombed.

After a mere 30 days on the campaign trail, Lemay’s career and accomplishments of almost 40 years went down the memory-hole. Lemay’s long list of accomplishments was replaced by the simple notation that he was “George Wallace’s running mate.” Period.

Lemay Confined WHO to Quarters?

By all accounts Lemay was a tough-as-nails general, but entirely fair-minded and non-biased over issues of race. During World War II in England, for example, Lemay went out of his way to ensure that black troops in the then-segregated Army had access to the same opportunities for housing, food, recreation, training and advancement as did the white troops. One time when Lemay learned that there was a racial fight off base, he confined all the WHITE troops to quarters.

Lemay did much the same thing with black troops in the 20th Air Force in the South Pacific. Everyone got a fair shake from Lemay. He judged people by work ethic and performance.

Pres. Harry Truman officially desegregated the U.S. military in 1948. And during Lemay’s tenure at SAC, in the years after 1948, he made great strides in recruiting and training black personnel to work on and fly the world’s most advanced bomber fleet. Indeed, Lemay was a leader in implementing the Truman desegregation order.

There’s no body of evidence that Lemay shared Wallace’s racial views. But still, Lemay ran on Wallace’s presidential ticket. He spent a month talking about Vietnam and the Soviet military threat. Then the election was over and Lemay returned to private life.

Footnotes to 1968

There’s a short footnote to the story. In 1969, newly-elected Pres. Nixon ordered an IRS audit of Lemay’s taxes, just to send a message. Typical Nixon.

Oh, and there’s one more footnote. In 1972, Nixon implemented Lemay’s old plan to bomb the tar out of North Vietnam and wreck the logistics effort at the source. For about two weeks in December, near 200 heavy bombers of the Strategic Air Command (SAC) — B-52s commissioned by Lemay, with pilots trained and doctrine designed by Lemay — pounded targets in North Vietnam. The effort was called Linebacker II. By the end of the Linebacker II, the North Vietnamese came to the peace table and made a serious effort to end their battle with the U.S.

According to accounts by American prisoners held captive in North Vietnam, the North Vietnamese could not believe that the U.S. had such awesome firepower as SAC delivered, yet had not used it earlier in the war. One North Vietnamese officer told an American prisoner, “If we knew you could have done this to us, we would never have fought against you. Why did your government wait so long?” Why indeed?

Thanks for reading. Until we meet again…

Byron W. King

November 2, 2009

The Life and Wars of General Curtis Lemay, Part V: Vietnam, Wallace and Nuclear War was originally featured on Whiskey and Gunpowder

The idea is that supply chains are only as strong as their weakest link. The fact is that many thousands of technologies — electronics, aerospace, military, automotive, clean-tech and renewable energy, to name just a handful — rely on a small number of specialty metals, or what some call “technology metals.” These metals have obscure names, but in many cases, there are simply no substitutes.

United States of Windmills

Some so-called “technologies of the future” are destined to fail due to lack of critical metals with which to effect buildout. Take the rare earth, neodymium, for example. It’s a component of strong permanent magnets — which are made out of a mixture of neodymium, iron and boron.

Strong permanent magnets are critical to gaining efficiency in rotating power-generation units like, say, windmills. Y’know… we’re going to replace burning fossil fuels with windmills, right? Isn’t that the idea? We’re going to live in the United States of Windmills, right?

Except one fact of physics is that without strong permanent magnets, you can’t generate nearly as much power with each turn of the large blades. So neodymium — in the magnets — is critical to our windmill future. There’s NO substitute for neodymium, and believe me, people have tried to figure a way around it.

But with neodymium, as with a host of other relatively obscure substances from the periodic table, the global supply is precarious. In some cases, the supply chain is at great risk because there are but a few sources. For some of those sources, we see things like a major mine playing out due to depletion (Baotou, China, for rare earths) or shut down due to environmental issues (Mountain Pass, Calif., again for rare earths). With other metals, many mines are effectively off-limits due to political problems (in the Congo, for instance).

Looking Ahead with Critical Metals

Most of the strategic and critical metals are just plain “different” than other major industrial metals, like copper, aluminum, lead and even gold and silver.

From the standpoint of nuclear physics, for example, rare earths are not like the other elements. They are brilliant, stubborn and complex, and at the same chemically similar and uniquely individual. You take each rare earth atom the way it was formed in a nuclear reaction within some long-gone, exploded sun, billions of years past.

Another more mundane aspect of the critical metals is that few are exchange traded. For the most part, there’s no futures market, other public market or well-defined transparent price discovery mechanism. There has never been sufficient volume to build up a worldwide market for futures in these obscure elements. So most of the critical metals that get used in world commerce are sold under one-on-one, long-term contracts.

Lacking a forward market, industrial users can’t lock in future prices or deliveries through traditional hedging. They have to sign a contract and agree to pay for future product. It sounds straightforward, but the reality is different. The firms that use many specialty metals live in the worst of both worlds. There’s no futures market, but they are still vulnerable to supply interruptions, spot shortages and price squeezes in the market.

Dealing with Risk, and Virtual Hedging

One technique for users — as well as strategic-minded governments — is simply to pay upfront and stockpile material. This leads to issues with the costs of storage, ensuring physical security, the cost of money and the usual problems with inventory accounting and taxes. Also, with some metals, there are insurmountable storage problems with the rapid deterioration of product due to oxidation or other chemical deterioration.

In other words, in a world where supplies of critical metals are spotty, the traditional tools of costing and forecasting are unreliable. There’s just more risk in the critical metals biz, in some cases rising to “bet the company” levels.

The newest trend in the industry is what’s called “virtual hedging.” This is a term to describe a menu of techniques for developing forward prices and assured deliveries of critical raw materials. Firms use virtual hedging where a futures market does not traditionally exist.

One tool of virtual hedging is to make a direct investment in a mine and get payback via guaranteed metal deliveries (also called off-take agreements). Other kinds of virtual hedging are wide ranging, from stockpiling (for oneself or others), synthetic and/or over-the-counter hedges, material leasing, strategic reserves (i.e., get the government to do it for you) and closed-loop recycling.

Meanwhile, users are hard at work trying to work around issues of physical supply. There are aggressive efforts going on with traditional programs like critical material “thrifting” (use less and see what happens), material substitution, pricing index selection (gear the amount of input to the cost), flexible transfer pricing (charge the customer a surcharge for the extra costs of critical inputs) and in-house waste stream recoveries. The idea is to develop an overall strategy and methodology to mitigate price and supply risk of critical raw materials.

Similarly, producers and industrial processors may also employ these tools as a way to assure adequate income streams for debt retirement, more assured profitability and funding for future expansion and production. Virtual hedging truly has the ability to be the elusive win-win formula that most Western businessmen publicly promote, but are rarely able to employ.

Living Off Past Stockpiles

With one particular element — which I’ll decline to name just now — there’s already a severe supply crunch. This is an element that’s used in a wide variety of electronic products. The supply chain could run dry soon.

Thus, the industry that uses this item is “living off past stockpiles,” according to one inside player. Last year, the general estimate was that there’s enough product in the supply chain to last for two years. So the pipeline will be dry by 2012.

What happened? The problems originated with an unprecedented spike in the spot market price in 2000. In this thinly traded resource, supply fears caused many nervous dealers to sign long-term contracts and lock themselves into high market prices. Then when prices crashed for product off contract, across the user community, there were significant inventory write-downs, both current and future.

By 2006 and 2007, the industry returned to some semblance of normality. But with the crash of 2008, everything fell off a cliff as the economic meltdown jammed the brakes on consumer demand.

Meanwhile, the few companies that mine the substance suspended production. So now there’s a situation in which primary production of ore is all but shut down. There are stockpiles, and just a very limited amount of material coming out of a very small number of mines in faraway jurisdictions.

Thus, with this product, as with most other of the critical technology metals, the question to ask is what does is the downstream industry fear more? High prices for an essential, irreplaceable input? Or lack of physical supply from the mine and mill and widespread unavailability of any product at any price?

It’s a problem within the industry. And it’s just this kind of situation that gives us an entree into an opportunity for profit.

Until we meet again,
Byron King

October 30, 2009

Rare Earths and Other Critical Technology Metals was originally featured on Whiskey and Gunpowder

We’re Not Alone…

Thank GOD! I thought to myself. They’re here!

My mind raced. We’re not alone in the galaxy. The aliens have arrived. They’re going to save us. Kind of like at the end of Star Trek: First Contact.

My mental gears kept turning. Unless they’re here to destroy us with death rays, like in The War of the Worlds. And then eat us, like in The Thing. All while they take our oil, gold, rare earths, tungsten, cobalt, vanadium and other good stuff. Like in Independence Day.

I wondered if an alien would leap out from the floating disk and say, “Take me to your leader?” Hmmm… But would some trigger-happy National Guardsman pull a Kent State and shoot him, like in The Day the Earth Stood Still?

Oh, man. We don’t want to get pushed around by the aliens, of course. But if somebody shoots the alien, it’ll make for trouble. We’ll have an interplanetary crisis on which hinges the fate of humanity.

Hmmm… If somebody shoots the alien, my advice is to sell your stocks. Go to cash, pronto. Meanwhile, you’d definitely be glad you bought gold — and TOOK DELIVERY! See? I told you so. When you buy gold, take delivery.

It’s All About Ratings

I pondered the cosmic implications for, oh… all of about half a second. Then I listened to the television announcer in the background. He described how an errant balloon was drifting over Colorado with a little boy onboard. Damn, I thought. No aliens. Just a bad imitation of The Wizard of Oz.

Then the milk of human kindness began its slow IV drip into my veins. For as much as I’d have preferred real aliens landing to take over (c’mon, could they be worse than the current crop of commissars?), I worried about the little boy.

I figured that yes, maybe it was happening like the TV drones were saying — although TV drones often lie like rugs. A wayward balloon? A little boy? OK, it might be real. If so, then it’s high drama, literally. Stranger things have happened. Remember the OJ slow-speed chase in the white Ford Bronco, through Los Angeles, down Interstate 405, back in 1994? Historic, no?

Yep, maybe some little tyke climbed into a gondola. I’d hate to have the kid fall to his death from a balloon. In living color. On the 42-inch flat-screen TV with awesome resolution. Of course, the TV news vultures would be all over the story. Live at Five. I can only imagine the headline in Variety: “Kid Falls, Ratings Soar.” That’s showbiz, right?

Except, as you surely know by now — unless you’ve been living on Mars or something — there was no little boy on the flying saucer. It was just some guy trying to do a publicity stunt. It was all a hoax.

Not a Hoax — We’re in Trouble

I’ll tell you about something that was drifting over Colorado last week, and it’s NOT a hoax. It’s Peak Oil. I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here’s the long and short of it. We’re in trouble. With a capital “T,” and that rhymes with “P,” and that stands for Peak Oil.

Last week, I told you about how Marcio Mello, one of the explorationists that discovered the offshore Tupi oil field of Brazil, gave ASPO a spellbinding stemwinder of a keynote talk about the newly discovered oil resources of the Brazilian pre-salt play. It was a great talk. I believe Marcio. Not only do I believe him, but I’m choosing investment ideas based on his research. Marcio has changed the thinking within the world oil exploration community. Marcio is a player. He’s a game changer.

But let’s get real about this. Sure, there’s a LOT more oil out there. As in, “out there,” 150 miles and more offshore, in 8,000 feet of water and deeper, beneath 20,000 feet of rock and salt. You see the problem, right?

Yes, that offshore resource is out there, and it’s super hard to extract. This is not the “easy oil” of the good old days. (Just kidding. It’s never been easy.)

But we’re looking ahead. And that’s why we’re invested in the future of deep-water oil, plus subsea equipment builders and service companies. These are long-term plays, for a long-term process of deep-water development.

Meanwhile, Brazil is still building the shipyards in which it will build the drill ships and platforms, which will develop the offshore arenas, over many, many years. Again, you see where I’m going with this, right?

Sure, there’s a lot of offshore development going on now. But there’s much, much more that’s going to happen in the coming decades. It HAS to happen. And that’s the problem. It’ll take time. And capital. And many people with critical skills. And some of those critical skills have not yet been developed. And it’s just super complex. By comparison, maybe building a flying saucer is easy.

Peak Oil: We’re There

By every measure, the world’s output of crude oil peaked between 2005 and 2007. Peak Oil? Hey, we’re there.

What do I mean? That’s output of crude oil, as in conventional petroleum that flows or gets pumped out of wells. Yes, the worldwide total output of what we generically call “oil” has risen — slightly — in recent years. But that’s because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada’s oil sands.

Let me focus on NGLs for a moment. In other words, the global energy industry is blowing down the gas caps on older fields. That’s how you get NGLs. That, and spinning the NGLs out of tight gas, like what we see with another recent addition to the OI portfolio.

In a macro sense, it means that the global energy industry is pulling what’s left of the conventional oil out of the early-discovered fields and taking the gas too. When it comes to Peak Oil, we’re there, and in fact, we’re past it.

The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries. That deep-water oil will sure help, but it won’t power the world of the future the way it powered the world of the past. We live in a different world now.

Thus, the energy future is all about transition to something else. It gives a whole new meaning to that phrase, “Take me to your leader.” Huh? What leader? Most of the world’s policymakers are clueless about this.

More on NGLs, and “Oil Pharmacies”

Let me clarify things some more. NGLs are hydrocarbon fractions that are not methane and ethane. NGLs are present in the high-pressure, high-temperature gas that flows from the ground. But NGLs are not gaseous at surface conditions. After a short time at the surface, NGLs condense out of the gas flow and become liquid. It goes back to Boyle’s Law and the “ideal gas law” in chemistry.

NGLs condense out of natural gas flows, from oil field gas caps and from some tight-gas output like we see in the Marcellus Shale of Pennsylvania. NGLs include things like propane, butane, pentane and other items up the hydrocarbon chain, up to and including high-grade gasoline.

NGLs are nice. But they’re not crude oil. According to Matt Simmons last week in Denver, “There’s no such thing as West Texas Intermediate [WTI] oil anymore.” Mr. Simmons states that places like the pipeline crossroads at Cushing, Okla., are little more than “crude oil pharmacies” anymore.

That is, there are lower and lower flows of conventional oil from the wells of the traditional U.S. oil patch. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along those lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the U.S. “You are worried about your foreign oil imports now,” he said. “You in the U.S. import about 65% of your oil today. You don’t like it. But if you follow the clear trends, by 2025, you’ll be importing about 92% of your oil. You’ll like that even less.” No doubt.

On that cheery note, let me quote James Kunstler, who recently summed up the problem, describing “the tragic evolution of an industrial economy into a financial-finagling economy.”

Jim Kunstler’s view is that sooner or later, the citizens will awaken and wonder how the energy situation could get so out of hand, or “stealing of their future,” as he phrases it. “Whatever else one might say about American culture,” adds Kunstler, “it is keenly attuned to a sense of heroes and villains. We take great pride in our ability to blow away the bad guys.”

Maybe those aliens realize this. And that’s why they haven’t shown up yet.

Until we meet again,
Byron King

October 27, 2009

Deep-Water Oil Won’t Cure Peak Oil was originally featured on Whiskey and Gunpowder

That’s the most that can be produced. So when recession causes a temporary decrease in world consumption, it can seem like those 85 million barrels are enough. But consumption is bound to resume its upward climb, while those 85 million barrels a day are all we get. The day of reckoning has just been delayed for a little bit.

“Can’t we get more than 85 million barrels?” some folks are bound to wonder. Let’s look into that.

Those Stubborn “Peak” Curves

This week I was in Denver, attending the 2009 conference of the Association for the Study of Peak Oil & Gas (ASPO). Despite all the happy talk in the Big Media about how the oil situation is under control, I assure you that the oil situation is NOT under control.

The market meltdown and world recession of the past year has bought some time, or stolen some time may be a better way of saying it. All the “peak” curves are still out there, but are merely adjusted a bit to the right on the timelines.

As Marine Corps Gunnery Sergeant R. Lee Ermey likes to say on the television show Mail Call, “Wipe that smile off your face.” We’re staring at an energy problem that’s coming down the tracks like a runaway freight train. It’s just astonishing that more people don’t appreciate the looming impact of Peak Oil.

Meanwhile, the politicians are fooling around with the health care issue. Hmmm… I have some news for them. If you screw up energy, health care isn’t going to matter very much.

Oil Output Not Increasing

It might be a comforting thought to believe that world oil output can increase. Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day — “if only the world oil industry were more efficient.”

Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil’s Petrobras and Norway’s StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world’s pipelines and tankers filled.

But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela’s oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

Mexico’s national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

Iran’s oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development. Apparently, there’s a “Twitter Revolution” going on in Iran that includes people at the grass roots impeding the oil industry. Well, it worked to depose the Shah back in 1979. Perhaps the Iranians can rid themselves of their mullahs in a similar way.

Next door in Iraq, chaos reigns. According to Matt Simmons, the Iraqis “are in the dark about how to run their oil industry.” The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won’t invest in your oil fields, there MUST be something wrong.

And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. It should go without saying that despite any calamities that may come from such a thing, you would be very happy if you’d taken advantage of lower oil prices to stock up.

Until we meet again,
Byron King

October 23, 2009

Peak at 85 Million Barrels of Oil a Day was originally featured on Whiskey and Gunpowder

In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin.  If Marcio’s estimates are correct, Brazil may be the location of near 200 billion barrels of additional petroleum resources.  That’s well within the range of current resource estimates for Saudi Arabia.

For good measure, Marcio described the petroleum potential of offshore West Africa — another 130 billion barrels — as well as the Congo region, with 50 billion barrels or more.

Finally, Marcio described the “unknown potential of the US back yard, the Gulf of Mexico (GOM).”  Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana.  He showed early work he performed on a number of GOM areas, including the site of BP’s (BP: NYSE) recent billion-plus barrel find at the Tiber site.

It was clear from the reaction of many in the ASPO audience that Marcio hit nerves.  If his analyses of the South American, African and GOM petroleum systems are right, then in the future the world has access to much more conventional oil than people previously believed.  But it’s not the same as saying the nothing has to change in modern habits of energy use.  Getting this oil will require a trillion-dollar level of offshore, deepwater investment.  It’s a 50 to 100 year project.

The new thinking about deep petroleum systems may allow the world’s energy thinkers to back off from raw geologic concerns about the wheres and how-muches of resources.  But like a game of “whack-a-mole,” the reduced worry about geology now translates into a new emphasis on exploration and development technology, as well as capital, skilled personnel, political issues, environmental safety and climate alteration.

In the past 20 years, Marcio has pioneered the idea of detailed geochemical analysis of “petroleum systems” in the Southern Hemisphere.  The goal of the work is to identify and locate deply buried oil-bearing zones.  Marcio’s work led directly to dozens of oil finds by Petrobras, both onshore and offshore.  His work has also led to significant oil finds in the Caribbean region, Colombia and Peru.

Some Bad News

After Marcio Mello offered his ebullient view of future oil supplies in the world’s deep waters, the next day was a return to earth for the assembled throng at the Denver meeting of the Association for the Study of Peak Oil & Gas. The day was filled with well-informed viewpoints on the looming issues of energy scarcity in a capital-constrained world. Among other things…

Geologist Art Berman offered a decidedly negative view of the latest “big thing,” which is obtaining large volumes of natural gas from tight shales. In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman has a gloomy forecast.

Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.

This hardly dovetails with the happy talk about how “shale gas” will supply U.S. energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure. Across the industry, according to Mr. Berman, the whole process stays afloat due to liberal application of borrowed money, as well as dilution of existing shareholders by production companies issuing new stock.

According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.

And Peak Oil Still Looming

Matt Simmons gave another of his famous talks about the specter of Peak Oil. The only things that are changing, according to Mr. Simmons, are that things are getting worse for future energy supplies. It’s difficult to say with specificity how bad things are, because the data are so poor on a worldwide basis.

“Look at what happened with the bad information we had, or didn’t have, with the financial institutions over the past couple of years,” said Mr. Simmons. “With our energy data, it’s worse. We’re in for some shocks that will change our lives in ways that’ll rival Pearl Harbor.”

Expect to see oil at $200 per barrel by the end of 2010, according to Mr. Simmons. Also expect to see net oil exports from Mexico simply vanish within 24 months or less. This will play havoc with U.S. refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster. These die are cast.

Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. For example, there’s a stealth “Twitter revolution” in Iran that’s slowly shutting down that country’s oil production. Shutting down the oil industry was the straw that broke the camel’s back and brought down the Shah in 1979. There’s some thinking that it may work to rid Iran of its mullahs.

In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment.

In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war.

In Iraq, according to Mr. Simmons, “They’re in the dark about how to rebuild their oil industry.”

And of course, a lucky terrorist shot could take down any of hundreds of major oil installations worldwide, wreaking havoc through the following ripple effect.

Mr. Simmons admires Brazil’s Petrobras, calling it “the finest large oil company in the world today.” But the offshore success of Petrobras will simply not be able to make up for the multitude of other problems with the global energy industry. There won’t be enough oil, and it won’t arrive in time. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. “People need to understand how expensive it is to obtain oil,” said Mr. Simmons.

Much of the world’s energy infrastructure is old and rusting and will require several trillions of dollars to replace — if it can be replaced. (Is there enough steel, for example? Where will the money come from?) Add the aging work force, within which many new hires were laid off in the past year. There’s a serious lack of skilled talent across the board, and no amount of clever management and automated “expert systems” will make up the difference.

Finally, new technology is coming on line slower than most people anticipated. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas. Thus are high costs, delays and reduced cash flows hurting the ability of the energy industry to maintain adequate levels of capitalization.

The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves set for the ride.

Until we meet again,
Byron King

October 20, 2009

An Update on Peak Oil from ASPO was originally featured on Whiskey and Gunpowder

Lately, the politicians and monetary bubbas have all been focused on big-picture stuff, like saving the world financial system. Dressed in their superhero suits, they’ve lost sight of issues like the fundamental soundness of the dollar. They’re just too busy admiring themselves in the mirror and patting their own backs about how smart they are.

Meanwhile, a single headline set the metals markets on fire. It was about how a group of Arab nations plus Russia, China, Japan and France are plotting to replace the dollar for trading oil. Sound plausible. Will that happen? Eventually, I’ll bet, but not overnight.

$1,000 Is the New $900

The point is the dollar replacement story is a monetary rumor, and we’ve heard it a zillion times before. This week, for some reason, the rumor gained traction. Why? Well, sometimes the rubber meets the right spot on the road. It’s just “time” for something to happen. And this week, it was time for $1,000 gold to become the new $900.

It’s not hard to understand why. For many years, American politicians have overspent the resources of the nation. It was one of the few bipartisan things that national leadership could agree on. Spend, spend, spend. No issue was too small for federal intervention and funding.

The U.S. dodged the monetary bullet because a) the U.S. economy was big and resilient and it appeared like the economy could deal with the hit, b) the rest of the world didn’t have an alternative to the dollar and c) most of the world wasn’t really on to the monetary con job of the U.S. writing checks that never got cashed.

The politicians spent money like it didn’t matter. Except… it did. We’ve been approaching some sort of monetary tipping point. Now it seems like we’re there. Information flows around the world in microseconds. So there’s no big con job anymore. People across the world are tired of getting jerked around by the U.S. dollar.

Thus, now we’re watching the dollar melt down before our eyes, like the Wicked Witch at the end of The Wizard of Oz.

Off to See the Wizard

Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the U.S. in the 1890s. More broadly, Wizard was an allegory about life and political populism in the U.S. in the 1890s.

Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.

Just look at just the title, The Wonderful Wizard of… Oz, where “Oz” stands for “ounces.” I’ve heard that in the real story, the “Emerald City” of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.

The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking. The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.

The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.

Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the Wizard book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.

The only thing that’ll begin to save us is if the elites realize that they’re not as smart as they think. Of course, then they have to admit it and pursue other policies that work — like not spending so much money at the federal level. That, and create conditions to rebuild the basic economy and maintain a stable dollar.

But these are politicians we speak of so I wouldn’t count on that anytime soon. Instead of hitching your cart to political salvation, you should be counting on gold, silver and oil to pull you and your portfolio through.

Until we meet again,
Byron King

October 16, 2009

Gold, Silver and the Wonderful Wizard of Oz was originally featured on Whiskey and Gunpowder

There are so many questions. There are so many ways to explain things. And lately I’ve been looking at our modern world by focusing on the remarkable life of a relatively unknown man — unknown to most people of recent vintage, at least. Indeed, he’s been dead for 19 years, and he died at a ripe old age. Yet his legacy is still with us. I refer, of course, to General Curtis Lemay of the U.S. Air Force.

“Cometh the hour, cometh the man,” I noted in the previous articles. And the U.S. endured many hard hours during the Second World War and the Cold War. In the worst hours of the most troubled times, Mars, the god of war, gave the U.S. Lemay, a knight of the sky. But knights need swords and steeds. In Roman mythology, Jupiter had Vulcan to forge mighty weapons. In mid-20th Century America, Lemay had a U.S. industrial base that could crank out big bombers.

In Lemay’s case, he had some very big bombers. With the big bombers of World War II, Lemay blasted Germany and burned Japan. With the bigger bombers of the Cold War, Lemay encircled the Soviet Union and kept the Red Army behind its own lines. Lemay’s Strategic Air Command (SAC) was critical to the Western doctrine of “containing” the Soviets. In the annals of American arms, Lemay was a mighty eagle with talons of hardened steel.

Pres. Johnson Chooses His Advice

But times change, and times changed in a big way after the death of Pres. Kennedy on November 22, 1963. Vice Pres. Lyndon Johnson moved into the Oval Office.

One can ably argue that Johnson put his broad, Texas shoulders to history’s wheel, and set events in motion that created the modern world. Yet one can also capably argue that Johnson was rolled by history, like a drunk in the hands of a seasoned mugger.

One thing you cannot argue is that Johnson lacked choices and options. Because one of the privileges of the office of U.S. President was (and remains, of course) that the National Executive may choose his advisers. And when you choose your advisers, often as not you choose your advice.

Tough Advice from Lemay

From the Kennedy administration, Johnson inherited Lemay as Air Force Chief of Staff. As far as Johnson was concerned, the military man, Lemay, did not offer the kind of advice that the politician from Texas wanted to hear. In particular, Gen. Lemay gave Pres. Johnson politically tough advice about waging war in far distant Vietnam. Johnson, to be sure, needed a lot of advice on that subject.

That is, Vietnam was a complex place. Leaving aside most of the last thousand years of history, there was plenty of modern mischief in play. In the late 19th Century the French colonized Indochina and ran it until 1942. Then in World War II the Japanese Empire conquered the region and spoiled the party for the colonists. “Asia for the Asians,” said Japanese propaganda, expressing an idea — if not an ideal — that took deep roots despite the irony of Japanese lording it over Vietnamese.

Post-war, the French returned to rule. “Not so fast,” said many locals. Within a decade the French were defeated and driven out by Vietnamese nationalists and Communists. It was tough going. The main road through Vietnam was, in the words of professor Bernard Fall, a Street Without Joy.

The French defeat in 1953-1954 (or Hell in a Very Small Place, also by Bernard Fall) was followed by a north-south division and a festering civil war. The Communist North was slowly, but effectively, invading the South. There was much meddling by outside powers, to include the U.S. Indeed, the CIA — under orders from Pres. Kennedy — sponsored the murder of the president of South Vietnam. And that was just the start.

Lemay understood military power, but he also understood limits to power. Lemay told Johnson that it would be difficult and expensive to wage a defensive war in South Vietnam against Communist-armed insurgents, and regular troops from the North. Vietnam was at the tail end of U.S. logistical lines. It would take years for counter-insurgency operations to work – if they worked, and there was no assurance of that. Would the American people accept years of warfare in a distant land? Especially a land to which the U.S. had no longstanding historical attachments or vital national interests?

Bomb ‘Em? Well…

Sure, Lemay told Johnson – after Johnson asked – the U.S. could bomb Vietnam. But to be effective, the U.S. would have to “carry the war to the north, and really carry it there” (Lemay’s emphasis).

The way Lemay phrased it, if the U.S. decided to bomb Vietnam, “We must throw a punch that really hurts.” To Lemay’s way of thinking, this meant “Knock out all their (North Vietnamese) oil. … This immediately brings a lot of things to a halt.” This from the man whose bombers wrecked Germany’s liquid fuel production in World War II, thus grounding the Luftwaffe and stopping German tanks in their tracks.

Lemay also counseled Johnson to “(knock) out the harbor at Haiphong,” and mine the seacoast to halt weapons imports from the Soviet Union. This too was sound military advice from an experienced military man. Lemay’s historical parallel was what his B-29s had accomplished — and what had worked so well — in World War II against Japan.

Time Is No Ally in War

For all his gruff exterior, Lemay was an intelligent and serious man. He was a keen student of technology, and an even better judge of human ability. Lemay could (in fact, he did) hold his own in a discussion of the principles of radar with engineers from MIT. And the fact is that Lemay ensured the success of his own career, over 25 years in senior command positions, by selecting thousands of the right people and placing them into the toughest jobs in wars hot and cold.

Sure, Lemay had the outward, aggressive spirit of a bomber pilot. Heck, he WAS a bomber pilot. “I’ll tell you what war is about,” Lemay once said to Sam Cohen, the inventor of the neutron bomb. “You’ve got to kill people. And when you kill enough of them, they stop fighting.”

But as a military planner Lemay was deliberate. When it came to the business of fighting, Lemay the warrior believed in scrupulous training and exacting preparation, followed by speed and lethality in the execution.

It’s not just that Lemay was a zoom-zoom, go-fast airplane pilot. Silk scarf or no, in Lemay’s comments, writings and actions, he echoed military scholars from Sun Tzu to Carl von Clausewitz. Lemay understood that the essence of war was to prepare carefully and then act quickly and decisively to defeat an adversary. In warfare, time is no ally.

Clausewitz on War

Consider what Clausewitz wrote on the subject of war, for example. “In war more than anywhere else,” wrote the Prussian, “things do not turn out as we expect. Nearby they do not appear as they did from a distance.” Thus, per Clausewitz, it’s imperative to adapt to the enemy, hit hard, do your business and finish things rapidly. If not, then time degrades one’s ability to reach objectives. Don’t drag things out. “Everything in war is very simple,” said Clausewitz, “but the simplest thing is difficult.”

Damn right. Lemay could have told stories of how “simple” things become immensely complex in wartime. Like getting 500 bombers off the ground from multiple bases in England. Then rallying them over the North Sea. Then driving them in formation across hundreds of miles of defended airspace to bomb a target that’s obscured by clouds and smoke. Then bringing the aircraft home, through more flak and fighters, to land in a night-time fog. And accomplish it all within a drop-dead time-frame (literally) constrained by onboard fuel supplies. Simple, right?

Or if a skeptic fails to appreciate Clausewitz, perhaps the words of Clausewitz’s better-known opponent will work. “Ask me for anything,” Napoleon said to his subordinates during the Russian campaign. “Anything but time.” As he crossed the plains of Russia, Napoleon knew that there were time-imposed limits to weather, supplies, manpower and political will at home to support the expedition.

Thus it’s not difficult to understand the advice that Lemay offered to Johnson when the man in the Oval Office asked the Air Force chief for options. Lemay was blunt, as befits a scholar of warfare. “Apply whatever force it is necessary to employ,” he stated, “to stop things quickly. The main thing is to stop it (i.e., the North Vietnamese-backed insurgency). The quicker you stop it (Lemay’s emphasis), the more lives you save. … The quicker you complete the military action, the better for all concerned.”

Stating the Military Truth

Distilled to its essence, Lemay presented Johnson with a military campaign plan that also served as a strategy for confronting and defeating the North Vietnamese Communists. Lemay counseled that if the U.S. committed its armed forces to war — a presidential and Congressional decision, to be sure — then the troops should be authorized to move quickly and hit North Vietnam with everything, up front.

Lemay knew that the threat to South Vietnam was not a bunch of philosopher-farmers toiling out in the rice paddies, spouting Marxist drivel. The threat was not “agrarian reformers” who wore black pajamas.

No, the threat to South Vietnam was Soviet weaponry funneled into North Vietnam, and then shipped south to supply a well-trained invasion force. Thus Lemay’s war plan was to use U.S. air power to smash and strangle the logistical underpinnings of the slow Communist takeover of South Vietnam. Would it make the Soviets mad? Sure, but that was another issue — and it was what SAC was for.

In Lemay’s opinion, an air campaign against North Vietnamese harbors, and related mining campaign against the seacoast, would strike the North Vietnamese center of gravity.

Center of Gravity? Lemay offered Johnson a practical tutorial on pure Clausewitz, via overwhelming air power dropping steel rain on an adversary. It was the military truth, according to Lemay, and in this world very few people have the ability to state the military truth.

Looking for Different Advice

Unfortunately in this world, a lot of people don’t want to hear the truth, military or otherwise. Johnson was one of them. Johnson saw things differently. The U.S., of course, had immense military power at its disposal. But Johnson lacked the will to use it.

Johnson didn’t want to go all out against North Vietnam, and then have to explain to the voters why he was committing the nation to a large conventional war in a far off place. “I’m not going to send American boys nine or ten thousand miles away from home,” said Johnson, “to do what Asian boys ought to be doing for themselves.” No. Of course not.

Johnson saw his presidential legacy in a domestic political agenda. He was going to enact Medicare for senior citizens. He was going to build a “Great Society” at home. He was going to push for civil rights, and rebuild America’s cities from the inside out.

Johnson didn’t want to spend political capital waging a costly war in Asia. Sure, he was obliged to suck it up and confront Communism on the foreign front. There are some things that American presidents HAVE to do. But deep down, Johnson just wanted to cut a political deal with the North Vietnamese, not bomb them.

So Johnson needed different advice than what he was getting from Lemay. Johnson looked around and — it being Washington, D.C. — he found other advisers more to his liking.

Telling Johnson What He Wanted to Hear

The new counselors were no fools. Working for a U.S. President would be good for their careers. So they told Johnson that the U.S. didn’t have to make a rapid, costly, all-out bombing effort against North Vietnam. No need to bomb Haiphong, or mine the harbors, or seed the coastline with mines. Nope, not at all. Forget that center of gravity crap from Clausewitz. What the hell did Clausewitz know, anyhow?

No, said the new advisers to Johnson. There was another way. If Johnson would only pursue a strategy of turning the heat up gradually on North Vietnam, the Communists would change their ways. After all, weren’t the North Vietnamese rational people?

Moving step by step, said the new consiglieri, Johnson could escalate on the cheap until he found just the right level of force at which the Vietnamese opponent would bend to his Texas-sized will. Now THAT was the kind of advice Johnson wanted to hear.

In short, Johnson looked at the complexity of Vietnam. He had a difficult set of choices, and wanted to make it all easy. Johnson wanted to “do Vietnam,” but on the cheap. In one memorable use of his astonishing powers of rhetoric, Johnson referred to Vietnam as a “coonskin.” And he wanted to “nail it to the wall.”

Lemay, the old World War II bomber-general, just didn’t fit into Johnson’s inspired vision for confronting and defeating the North Vietnamese. Hit them hard, up front? Not when you could hit them less hard, and escalate gradually. To Johnson, at least, it made sense. Johnson heard what he wanted to hear. Johnson saw what he wanted to see. Thus in the ancient ways of Washington, Lemay’s clock ran out.

Ushered into Retirement

Johnson kept Lemay on the Air Force payroll through 1964, always with an eye on the upcoming election in November. Even before the nominating conventions, Johnson had a hunch that he would be running against Barry Goldwater. Johnson used the FBI and CIA to dig up dirt to use against Goldwater. Basically, Johnson was paranoid about the election, and he didn’t want Lemay to retire and campaign alongside the old Army pilot from Arizona.

But after the election, in early 1965, Johnson was long past listening to Lemay talk about massive bombing of North Vietnam. So Johnson told his war-bird to retire as Chief of Staff of the U.S. Air Force.

Oh sure, it was Lemay’s time to go, everyone agreed. He’d had a long career. It was time for Lemay to hang up the uniform and, as the saying goes, “spend more time with his family.” Yes. Sure.

In true Washington fashion, there was a splendid farewell ceremony. Everyone smiled. The troops paraded. The brass shone. There were fine speeches. The Air Force Band played ruffles and flourishes. Thundering jets roared overhead. Pres. Johnson pinned a medal on Lemay’s chest – as if Lemay needed any more medals. Lemay’s “faithful, zealous and obedient service to America” was “gratefully acknowledged and deeply appreciated.”

And then Lemay passed to others the baton of war and peace. Lemay didn’t mind, or so he said. He had groomed many a capable successor within the ranks of the Air Force. It was time for Lemay to pack up and get out of Washington.

Lemay left town. He went west and took a job in Los Angeles. He settled into private life. Indeed, Gen. and Mrs. Lemay even bought a lovely home in upscale Bel Aire. (Bel Aire? An eyebrow rises at that one.) Things were going well, except for that issue about “gradual escalation” over in Vietnam.

We’ll never know about the advice “not taken.” But we can ponder the “what ifs.” In another article, I’ll discuss Lemay’s post-retirement life, including his 30-day candidacy for U.S. Vice President in 1968. Thanks for reading.

Until we meet again,
Byron King

October 12, 2009

The Life and Wars of General Curtis Lemay, Part IV: Vietnam and President Johnson was originally featured on Whiskey and Gunpowder

“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

October 8, 2009

Energy, Brazil, Gold: What More Could You Want? was originally featured on Whiskey and Gunpowder

On Wednesday, the day before the G-20 opened, I drove through the Oakland section of town, home to the University of Pittsburgh and Carnegie Mellon University. There were squads of state troopers on every block. It was just a long, gray line of troopers, with their distinctive “Smokey Bear” hats. Along some blocks, there were more troopers than college kids. Nothing to see here, folks. Just move along. Oakland was safe.

The other good news was that if you were out driving on the Pennsylvania Turnpike, there were few troopers on road duty. You could go pedal to the metal. As in, you could finally figure out how fast that Buick Fireball 3800, Series II, L-67, supercharged, V-6, 220-horsepower engine could take you. Not that I know anything about anybody doing something like that. Nope.

Down with Plate Glass… Ummm… I Mean Capitalism!

On Thursday afternoon, a few protesters tried to march through a Pittsburgh warehouse district toward the downtown convention center. But they were met by platoons of police in “tactical” dress — ninja armor, riot helmets and long batons.

From what I saw, on Thursday, there were more police than protesters. I think there were more news reporters than protesters, as well. Still, in the name of anti-globalism, a few windows got smashed here and there. Down with capitalism and plate glass, and all that.

The cops revved up and used a new device (new to me, anyhow) called a sound cannon. It shoots a directional sound wave that’s noisy as hell and very disorienting. Worked as advertised. First time it’s ever been used in the U.S., I’ve been told. Probably won’t be the last, if you know what I mean.

Not to be overly judgmental, but the protesters were pathetic. Really, I’ve seen protests, and these guys were amateurs. Thursday’s protest activities, for example, included the young waifs tossing rocks at such noted Pittsburgh corporate criminals as Lu Lu’s Noodles and Pamela’s Diner. Also, a few sticks and stones went through the glass of that notorious oppressor of the poor, Boston Market. “Down with chicken! Down with chicken salad!”

Dudes, is that your best shot? Really. Whatever happened to, “The people, united, will never be defeated”? Put your ball cap on straight, pull your trousers up, and PROTEST like you MEAN it!

To be fair to the protesters, someone managed to score a hit on an A-list target by tossing a brick through the window of a BMW dealership. And we all know how BMW has wrecked the hopes of mankind, right? Right-on, right? Power to the people, right?

Black Masks and F-15s

That Friday, the G-20 world leaders gathered around a VERY large circular table. They all read from written scripts, except for President Obama, who used a teleprompter. Then they all issued a communiqué. More on that below.

There was rumbling jet noise all day, as Air Force F-15 Eagles flew combat air patrol overhead. They were guarding the earthly bigwigs from wayward airliners piloted by any hardened ideologue who may have smuggled a pair of nail clippers or an oversized tube of toothpaste past the TSA screeners at Boston Logan, or Newark Intl.

One Eagle driver surely earned his flight pay and a commendation, if not an air medal, by dropping flares near a Cessna 152 that was following Interstate 79 west of Pittsburgh. Turns out that the little prop-job broke airspace restrictions and wound up getting escorted to Wheeling, W.V., for a visit with the nice people from the Secret Service. I can hear him now. “Hey, it’s IFR flying. As in the expression, ‘I follow roads.’”

As the air war raged overhead, back on the asphalt, the Friday protesters staged another march. Many wore black jeans, black sweatshirts, black face masks, black gloves, dark glasses, and even dark hard hats. I know it’s not right to label people, but it seemed to be more than a mere group of youths out on a frolic while collectively making a fashion statement.

As these men in black (and women, to be sure) marched through the Bloomfield section of town — Pittsburgh’s Little Italy — something happened that was right out of a movie script. Local home and business owners appeared at their front doors, holding baseball bats and garden shovels. The message was clear. Toss a brick, and you’ll get your arm broken, or maybe lose a few teeth. Forget the sound cannon. That’s one way for a city to keep its disobedience at the “civil” level.

Friday Night Lights

By Friday night, after the G-20 was officially over, the protesters were ready to party. So they went to Oakland and tried to trash the place. Too bad for these revelers, but there were still a couple thousand cops walking the beat. There were cop cars all over, with lights winking and blinking. The festival culminated in a protester roundup on the lawn in front of Pitt’s iconic — and, in this case, ironically named — Cathedral of Learning.

According to the Pittsburgh Police, there were 190 arrests related to G-20 over three days. The number pales to insignificance compared with other world venues for similar meetings. Then again, in how many other cities will homeowners break out the baseball bats and garden shovels to keep the protesters in line?

Pittsburgh locals accounted for 91 of the arrestees, with 99 from out of town. It appears, in the aftermath, that a number of those busted were innocent nonprotesters who came out to take a look and got caught up in various police sweeps. This included a few members of the news media, and even a Pitt videographer who was recording the protests for the university’s insurance carrier.

The G-20 Results — a Communiqué!

So what did the G-20 accomplish, besides spending $35 million in the Pittsburgh area on hotel rooms, food and other support? (Plus another $20 million budgeted for security — see above.)

Well, there was a communiqué. Whew. Close call. Had me worried for a time. OK, it was a darn good communiqué! All’s well that ends well. It was worth the hassle. Or so they say.

In the G-20 communiqué, the U.S. said that it would take the lead in phasing out subsidies for fossil fuels. The rest of the world said, essentially, “Yeah. Right. Go ahead. Do it. Whatever that means.” What does it mean, by the way? It’s not entirely clear. I think that “phasing out subsidies” is a smoke screen (whoops, bad metaphor) for raising taxes on oil companies.

As sure as the sun rises in the east, you can count on the current U.S. political class to raise taxes on oil companies. There’s a political class in the U.S. that just HATES oil companies. Must be something in the water, so to speak. The rest of the world doesn’t care. “Go ahead, U.S.,” they say. “Tax your oil companies into the dirt.” That just makes it easier for other up-and-comers to compete and profit (which is why those up-and-comers are in the OI portfolio and why my subscribers to Outstanding Investments will benefit).

Everybody at the G-20 also agreed that the International Monetary Fund (IMF) would set up a fund to help with development in poor countries of the world. How noble, right? But wait a minute. Did anybody tell the protesters? There they were, marching through Lawrenceville to help the poor countries of the world, and in the process getting their eardrums busted by a sound cannon. All the while, the G-20 was coming up with a program to help the poor. Hey guys, listen up! (Whoops. You’re deaf. Sorry. My bad.)

Next question, though, is where will the IMF get the funds to set up this development fund? There were some vague references to something about selling IMF gold. That’s right. Get rid of that barbarous relic. Who needs gold anymore, anyhow? Sell the gold. Raise cash to lend to the poor nations for development.

Now the next part is a little tricky. Who’s going to buy the gold? That decision wasn’t exactly spelled out in the precise wording of the communiqué. But rumors are that the Chinese agreed to bite the bullet and take that barbarous gold off the hands of the IMF. Whew! Had me worried.

Calling for Mogambo Guru

The G-20 communiqué also delved into the current world recession, and the global policy response. Here’s some of the exact wording:

“We cannot rest until the global economy is restored to full health, and hardworking families the world over can find decent jobs.

“We pledge today to sustain our strong policy response until a durable recovery is secured. We will act to ensure that when growth returns, jobs do too. We will avoid any premature withdrawal of stimulus. At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility.”

Let’s dissect this. The G-20 gang are not going to “rest.” Not until “the global economy is restored to full health.” I think we’re going to have some very tired G-20 people on our hands. If they’re really not going to rest, I want to know if there’s enough NoDoz in the whole world to support this commitment.

Then, they’re going to “sustain” their “strong policy response” until a “durable recovery” occurs. Meanwhile, they’ll keep the “stimulus” flowing. (Stimulus? Have you seen it? I must’ve missed it.) And do it all while “maintaining our commitment to fiscal responsibility.”

Wow. They’re going to spend stimulus money, but do it with fiscal responsibility. OK, if you say so, boss.

Then again, where’s Mogambo Guru when you need him? This communiqué overflows with total cognitive dissonance. It’s incoherent. It babbles. It flies in the face of reality. It was obviously written by a committee, pulling 3-by-5 cards out of a hat, and on the cards were written every feel-good political bromide known to modern man.

This communiqué is an embarrassment. It makes it look like the police used the sound cannon on the people who wrote it. It’s as if the drafters were blinded by the flares from the F-15. For this kind of pabulum, the owners of Lu Lu’s Noodles had to get their windows broken?

Since I can’t find the Mogambo Guru, I’ll just quote him. “We’re all freaking doomed. Buy gold. And if you can’t buy gold, buy silver. Or oil.”

Until we meet again,
Byron King

October 7, 2009

G-20, Protesters, Sound, Fury was originally featured on Whiskey and Gunpowder

Fair enough. Let’s think about why a few historical articles about Curtis Lemay fit within a publication entitled Whiskey & Gunpowder.

A Great Story — the Route that History Took

First of all, Lemay played a big role in shaping the modern world, in the 1940s, 1950s and 1960s. Lemay’s world is, in many respects, the route that history took to arrive at our world today. So Lemay’s life and times make for a great story, and most people like great stories.

Indeed, the muse of history seldom lets go of a great story. Recall the first words of Virgil’s Aeneid. “Arma virumque cano.” I sing of arms and the man. For near 3,000 years, people have liked great stories. And what better place to tell a great story than in the comfort of the Whiskey Bar? Of course, I know that the Lemay story has taken a number of readers out of their comfort zone. Too bad. Have another drink.

It’s All About NOW!

Then there’s the OTHER reason why I’m writing about Lemay — because I’m not just writing about Lemay.

I’m writing about NOW! I keep saying, “Cometh the hour, cometh the man.” And Lemay was the “man” for the “hour” at a certain time. That’s the history. But what about NOW?

Can we in the U.S., today, recognize our own “hour?” Because that hour is upon us — NOW! We live on the cusp of Peak Oil. We live in a world where the U.S. dollar is poised for a crash. The U.S. is a nation that appears more and more unable to govern itself for the long haul. That’s for starters.

Ours is a complex civilization that could quickly collapse — in every sense of the word. Really, we’ve built a society, economy and political process that’s utterly poised for a takedown. It could be the grid powering off (recall August 2003), natural disaster (Katrina writ large) or the dollar cratering (they’re working on it). We’re set up for an asymmetrical hit.

The Hour Is Upon Us

So the “hour” is here. It’s upon us, if only we would collectively look at the clock and tell time. Can we?

And thus I wonder if we, as a nation, can still recognize the right “man” (or “woman”) when that person is needed. So far, I’m not impressed with who I see entering into, and operating within, the ethereal reaches of U.S. governance.

Is anyone out there putting together a comprehensive energy policy with the vision, drive and speed with which Lemay built the Strategic Air Command (SAC)?

At the Federal Reserve, is Ben Bernanke — recently reappointed as Chairman — really the Curtis Lemay of monetary policy, to defend the dollar over the long haul?

Is the Securities and Exchange Commission guarding the capital markets against the looters of Wall Street? Really, SEC is no SAC.

When I discuss how Lemay gave military advice to presidential administrations full of amateurs and charlatans, does it hit any nerves? Has the U.S. endured any, umm… “long wars,” lately?

Condemned to Repeat It

What’s that old saying? If you don’t study history, you’re “condemned to repeat it?”

And do you know something else? You might even die.

So lighten up, shooters. Sit back. Take another nip. Enjoy the cigar smoke. I’ve got more stories. Lots of ‘em.

Until we meet again,
Byron King

September 17, 2009

Why Military History and Lemay: The Story of Now was originally featured on Whiskey and Gunpowder