--------------

Bill Bonner, with more views from London...

*** As we all know, Bush admonished the United States in his State of the Union Address, telling us that we were "addicted" to oil and we need to stop relying so heavily on the Middle East.

It turns out, next in line for the world's-biggest-producing oil field, after Saudi Arabia's Ghawar, is Mexico's Canatrell. Our neighbor to the south's biggest oil field produces 2 million barrels of oil per day, or six out of every ten barrels produced by Mexico.

But, an internal study done by Petroleos Mexicanos, or PEMEX, details scenarios in which a decline of oil production would be likely.

The WSJ reports: "The worst two scenarios suggest a drastic decline in output to 875,000 barrels a day by the end of 2007 and to just 520,000 a day by the end of 2008. If such projections turn out to be correct, Mexico's overall oil exports would decline by about one million barrels a day - equal to about 63% of its daily crude exports to the U.S. - from its current 1.8 million."

"'In my mind, this report suggests a collapse scenario is the most likely,' says David Shields, an energy consultant in Mexico who first published the study's findings. Mr. Shields doubts Pemex can make up for lost output at Cantarell because it only discovers one new barrel of oil for every 14 it extracts at the moment, leading to falling reserves."

So, what does this mean for Mexico - and, in turn, the United States, since they are our No. 2 source of oil. We turn to our intrepid correspondent, Whiskey and Gunpowder's Byron King, for some answers...

"The jungle drums out of PEMEX have been beating this tune for a while, but at low volume. There have been the proverbial 'unconfirmed reports'

and 'unnamed sources' within PEMEX who have been quoted as saying things like 'The Hubbert Curve is beginning to fit the oil production volumes of Mexico." Much of it was at the technical level, from the petroleum engineers and the mathematics-guys who do the Hubbert linearization work.

But the bottom line is that the people with their hands on the actual equipment, and who measure the actual volumes, were saying that oil production and output from Mexico is about to enter into irreversible decline.

"The senior managers, and certainly the politicians, do not want to discuss the matter. They say things like 'We need to increase the exploration efforts,' and all the usual feel-good bromides. Go ahead boys.

Knock yourselves out. Drill in Mexico until the place looks like a pin cushion. You've found the biggest and best stuff first, as is always the case. Now you will find the smaller oil fields, at deeper depth, further in the outback or offshore, with lower quality oil.

"I guess we had better start getting to work, producing some of that 'ethanol' stuff that President Bush was talking about in the State of the Union speech. Yeah, that's it. Ethanol. Whew. Had me worried for a couple of minutes."

[Ed. Note: The IEA predicts global oil demand to rise 2.1% next year, which is probably a conservative estimate, while current production is running at within 1% of total capacity. That's right, this coming year will by all accounts be the first in which demand exceeds supply. In 2006, someone's not getting all the oil it needs - and odds are, it'll be the United States. Find out how you can stay informed and ahead of the upcoming "Petrocalypse":

The Four Horsemen of the Petrocalypse

*** And wait - what's this? Stop worrying, dear reader...Bloomberg writer Matthew Lynn recently publishing an article heralding, "The Oil Crisis is Over."

Pfew. Thank goodness...we really dodged that bullet.

"Forget that order for a funny-looking electric car. Take the solar panels off the roof. Don't worry about hoarding tinned food for the long economic slump that is about to engulf the world," starts the Bloomberg piece.

"Why? Because the oil crisis we were all concerned about less than a year ago is quietly going away...The laws of supply and demand are starting restore market clam. They suggest that although oil isn't about to get really cheap, talk of $100 a barrel can now be put to rest."

"When I saw that headline," Byron said to us of the article, "I thought he was kidding. But no, this Bloomberg-man is serious.

"This is EXACTLY why amateurs should not fool around with issues of Peak Oil. They confuse their readers with rah-rah bromides, and will cause people to hurt themselves. These types of party-hardy cheerleaders idealize the workings of the so-called 'free market' (dollar-denominated, so how 'free' can it be?), while ignoring the inexorable march of resource depletion and the irreversible decline in future amounts of available liquid fuels. They confuse a temporary market retreat with the equivalent of the Russians defeating the Germans at Stalingrad, and mark an otherwise minor trading event as the start of the end of the Great War.

"But of Peak Oil, allow me to paraphrase Churchill after El Alamein, 'This is not the end, nor the beginning of the end. This is not even the end of the beginning.'"

[Ed. Note: You can read the rest of what Byron King thought of this Bloomberg article on our site:

Gentlemen, Start Your Engines

*** Meanwhile, the Financial Times gives us another hearty little chuckle, when it explains that the Bush administration, while trying to "undo"

democracy, is also trying to undo China's new currency peg. The Chinese are edging up toward $1 trillion in foreign reserves this year - money that comes largely from America. U.S. officials blame the Chinese. Why, in China, one person told the FT, "Saving is encouraged!"

Oh, be still our beating hearts! What savage thing will they be doing next? Encouraging chastity? Charity? Probity?

What amazes us is that there are so many jackasses...so many public officials...so many politicians...so many economists - all making our lives more entertaining and our work easier.

FYI...

Country Name Deficit in Millions Year to Date

China -16,299.29 -201,625.79

Canada -8,039.45 -76,449.76

Japan -6,800.21 -82,681.59

Federal Rep. Of

Germany -4,516.52 -50,663.33

Mexico -4,262.76 -50,148.97

Venezuela -2,425.65 -27,556.41

Nigeria -2,207.04 -22,573.30

Malaysia -2,197.09 -23,252.23

Saudi Arabia -1,607.61 -20,398.02

Ireland -1,507.39 -19,285.67

--- Advertisement ---

3 Simple Keys for Making Money Every Time You Trade Stocks and Options

San Francisco money manager-and-veteran trader Jeff Clark came up with 3 easy steps for always winning at trading. Using these keys, you could have turned:

- $5,000 into $64,250 in 2 days (with just one trade)

- $5,000 into $22,500 in 13 days (with just one trade)

- $5,000 into $50,350 in 41 days (with just one trade)

Learn how you can do the same. Click here.

---------------------

The Daily Reckoning PRESENTS: There is plenty of greed and bad faith out there in the big leagues of geopolitics and corporate life. But the global energy predicament is foremost a geological problem. James Kunstler explores...

THE SYRIANA SYNDROME

by Jim Kunstler

Anyone who sees Syriana, the new George Clooney movie about political hugger-mugger in a Middle East oil kingdom, will not come away with an enhanced understanding of the global oil predicament. They'll see a dark, brooding, and impressively restrained story with one brief car chase, few explosions, and barely a bullet flying. They'll sense several layers of intense paranoia that seem to suggest almost no one in authority here in America can be trusted about anything. They'll see a foreign culture depicted as (to crib a phrase from Winston Churchill) a riddle, wrapped in an enigma, wrapped in a hairball.

In the movie's most terrifying scene, they'll see George Clooney's character, Bob, a washed-up CIA agent, receive an extremely severe manicure, so to speak, from an al Qaeda type sadist.

But they won't get any clear ideas about the implications of our sick dependency on Middle Eastern oil for life in United States. In fact, one of the unfortunate results of this otherwise not-stupid movie, is that it will cater to exactly the kind of paranoid fantasies that will be least helpful for Americans facing a bewildering future and needing desperately to take measured collective action to preserve living standards. Sure, there is plenty of greed and bad faith out there in the big leagues of geopolitics and corporate life. But the global energy predicament is foremost a geological problem.

Despite the claims of those who believe that the Earth has a creamy nougat center of oil, the supply of this critical resource is actually finite, and we are at very dicey moment in our brief history with it. There is good reason to believe that the world is now passing over the tippy-top of its all-time maximum peak oil production and starting down the gruesome slope of irreversible depletion. Meanwhile, discovery of new oil has been practically nil in the 21st century, and you can't produce oil that hasn't been discovered. The shorthand for this conundrum is Peak Oil, a subject lately growing in the public's awareness.

The great problem, therefore, is not that we are immediately running out of oil, because at peak there will still be a lot left. The problem is that the first half was the lightest, sweetest crude in the easiest-to-reach places, including Texas. It was cheap to get and refine.

The remaining half is mostly harder-to-refine heavy, sour crude, or tar sands, or oil shales (which aren't even composed of oil, by the way, but of an uncooked organic precursor called kerogen), and these things can now only be gotten in forbidding arctic terrains, Amazonian jungles, deep under the sea, or in unfriendly countries. The remaining oil is distributed inequitably around the world. More than two-thirds belongs to the nations of the Middle East. It does not come cheap, either in monetary terms or in geopolitical costs.

Syriana is about some of those geopolitical costs. The movie was loosely based on Robert Baer's gripping 2004 account, Sleeping With the Devil, of his career as a CIA agent operating in Saudi Arabia, and much of the book is devoted to the stupendous corruption, greed, and incompetence of the al Saud royal family - as well as the behind-the-scenes string-pulling by the Anglo-American interests scheming relentlessly to do what's necessary to keep the oil flowing.

Flowing into American gas tanks, that is. And that is the more precise context of the problem we face over Peak Oil: we have poured our postwar national wealth into an easy motoring suburban sprawl living arrangement that cannot possibly operate without continued reliable supplies of cheap oil. Perhaps even worse, our economy has insidiously shifted from manufacturing to sprawl-building (otherwise known as the housing bubble).

Having made such massive misinvestments in the infrastructure for a way of life with no future, we are trapped in a deadly psychology of previous investment which prevents us from even thinking we can do things differently.

This was all neatly encapsulated by the remark widely attributed to Vice-president Dick Cheney that "the American way of life is non-negotiable." Whatever you think of the remark, it is probably an accurate representation of how most Americans feel - that we are entitled to 3500 square foot houses, all the cheap gasoline we can burn, and supernaturally easy credit because we hold the torch of freedom as an example to the world.

Thus, we are dismayed when other people in the world scoff at our torch-bearing while they blow up our soldiers, because they know - as the characters in Syriana know deep down somewhere - that it's all basically about our desperate addiction to their oil. It would be unfortunate if our dismay turned into unbridled wrath, because that kind of political rage is just as likely to turn inward.

There is a whole set of intelligent responses to America's oil predicament that we ought to be talking about now. These range from restoring the nation's passenger rail system, to supporting local agriculture in earnest, to rebuilding local networks of retail trade and economic interdependency for the time ahead when the Big Boxes die of oil starvation, to setting legal limits on new suburban sprawl. These are the kind of things that will help us through the Long Emergency of the post-cheap-oil world we are entering. The temptations of paranoia will only make things worse.

Regards,

James Kunstler

for The Daily Reckoning

Editor's Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, "The Long Emergency," describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can purchase your own copy here:

The Long Emergency

You can get more from James Kunstler - including his artwork, information about his other novels and his blog - at his website: