Three deformations of the apocalypse

In response to my 2012 outlook last week, a reader requested a five-year outlook that’s long on opinion and short on data. As SmartPlanet’s resident energy futurist, how could I decline? As that reader suggested, I will offer three scenarios: the bad, the good, and the likely.

The bad: Evil drift

Tough times call for tough men. But at this crucial turning point in history, they are nowhere to be found. The entitled class of pantywaist leeches who command our political and economic institutions spend their time slap-fighting over picayune issues and debating points of style like 18th Century French courtesans, accomplishing nothing, utterly tone-deaf to the cries of the people. (Overheard in the Bastille in the spring of 1789: “These protestors are so disorganized and filthy. What do they want? Can’t somebody just clear them from the square?”) As it always has in the past, this toxic brew spawns revolution.

The Fed remains committed to pushing printed dollars onto a world already awash liquidity, in hopes that growth will return. But it doesn’t. The captains of the financial industry refuse to mark their hallucinated assets to hard assets, because the former exceed the latter, and the people are unable to force a reckoning that would put the economy back on terra firma. The great tide of the global currency wars sucks the sand out from under our feet as it recedes, and we gradually sink deeper into the mire of debt and deflation. Slowly, bit by bit, the Great Contraction tightens around the world.

Rick Santorum is elected president in 2012 on the back of a massive evangelical campaign. The Tea Party retains its hold on the House, and the Democrats retain control of the Senate, ensuring four more years of legislative gridlock. Grover Norquist is appointed to Santorum’s cabinet, and embarks on a relentless campaign to shrink the federal government, browbeating the House leadership into radical cuts to social services. These new austerity measures squeeze the economy dry.

Spot shortages of gasoline and food begin to appear, along with ever more frequent failures of infrastructure. Transformers blow up and water mains break once a week in major metropolitan areas. Road transportation becomes increasingly difficult as roads and bridges fall into disrepair, but mass transportation systems are unable to compensate due to power outages and fuel shortages. The veneer of civilization wears thinner, and finally crumbles as complex delivery systems begin to fail.

In the aftermath of the 2012 election, Americans lose their last vestiges of faith in the corrupt, immobile knot of their so-called democratic institutions. Realizing that there are only passengers on this ship, and that no strong hand will take the till to keep us from drifting into the teeth of disaster, they live up to their self-image as anti-government, rugged individualists and take matters into their own hands.

There simply aren’t enough National Guard and police to keep the peace, and our military troops remain committed to securing our globalized corporate interests on the far-flung reaches of the American empire. Tax revolts deprive state and local governments of enough revenue to maintain, let alone increase, their police and fire services. Civil order begins to break down.

By 2013, protestors are occupying public spaces permanently. Retail shopping becomes next to impossible, sucking the remaining wind out of economy. Inner-city neighborhoods in poor areas fall under the control of local gangs. Wealthy areas hire private security and throw up fences. Street gun battles become commonplace as local thugs vie for turf. Vigorous black markets in food and fuel bloom like toxic red mushrooms in an early winter rain.

Armed mobs take over Wall Street, and go hunting in the Hamptons. The national banks collapse as it becomes impossible for them to function, leaving only small regional banks. Lloyd Blankfein meets a gory end, hanging by his thumbs from the Brooklyn Bridge. The dollar becomes worthless and gold and silver become the only accepted currencies.

Global oil supply begins to decline in 2014 as the depletion of non-OPEC producers entwines with the collapse of governments across OPEC, keeping prices high even as the global economy contracts and demand falls. Consumers in the West are continually outbid for rapidly falling available net exports by the five billion people of the East. New geopolitical alliances are formed along the shortest energy supply routes, binding Asia to Russia, and India and Pakistan to the Middle East.

By the general election of 2016, the remaining vestiges of American civil society, now desperate for order and stability, elect a hardcore right-wing fascist who promises to “kick ass on those ragheads and make ‘em give us their oil.” He launches military strikes against Iran and Syria, and re-occupies Iraq. He imposes a harsh domestic police state in an attempt to restore domestic order, imprisoning all dissidents without due process under the legal framework that Barack Obama signed into law on the last day of 2011. Millions of destitute citizens are conscripted to serve in a massively expanded military- prison complex. The governments of Canada, Mexico, and all of Central and Latin America fall under the new authoritarian government of the U.S. in all but name, as it installs friendly puppet regimes.

Global resource wars break out in 2017. The people revolt against the increasing taxes needed to fund the wars and the domestic police state, and Texas secedes from the union, followed by the states of the Pacific Northwest. (Think it can’t happen? It already did, in 1941.)

Five years from now revolution, and the dissolution of the American republic, are under way.

The good: Seizing the future

President Obama, having been reelected in 2012, abandons his previous ineffectual tactics of appeasement and finally finds his sac. At the head of a new Democratic majority in both houses of Congress, in which labor threw out the stultified party leadership and brought in a new crop of reformers, he leads the country on a breathtakingly ambitious infrastructure rebuilding program, riding roughshod over all opposition. Over $1 trillion dollars per year are committed via public-private partnerships to transition transportation to rail, rebuild our water and sewage systems, and transition grid power to renewables. Only essential local roads are maintained, and lanes of interstate highway are converted to rail corridors. The power grid is nationalized and upgraded with smart-grid technology. A high-voltage long distance DC transmission grid is built to redistribute wind power from the Plains, solar power from the South and Southwest, geothermal power from the Rockies, and marine power from the coasts. Solar PV becomes the cheapest form of power generation by 2016.

The program reunites the country politically, restoring full employment and national pride. The principled opposition to federal spending is swept away by a new fervor to retake the high ground of the global economy. The American Restoration Act of 2012 imposes harsh penalties on profits made from foreign operations, while rewarding the repatriation of profits and manufacturing with generous tax breaks. “Made in America” becomes a national slogan again, and is proudly stamped into every nut and bolt.

The surge of domestic rebuilding tilts the global balance of power back toward America, as companies scramble to rebuild manufacturing capacity at home and withdraw from their outposts in Asia. The dollar becomes stronger, and the return of growth allows the Fed to begin withdrawing the trillions of dollars it injected after the crisis of 2008.

Sweeping financial reform legislation is forced through Congress, including a massive transfer of private sector assets to the federal balance sheet. Bondholders are forced to take a 50 percent haircut. New incentives allow all Americans to refinance their homes and personal debt under federal programs at 2 percent interest for 30 years, with the stipulation that they can no longer use credit cards. Banks are once again relegated to the boring historical norm of making loans earning no more than 2 to 3 percent interest, and are forbidden to use leverage or take positions in equities or commodities. The finance sector is forced to shrink from over 8 percent of GDP today to just 2 percent, as it was in the 19th Century, and millions of its workers are forced to find something useful to do.

The “Victory Garden” initiatives of WWII are revived, and everyone plants vegetables in their yards. Those without yards are given plots to farm in public parks. Overbuilt and disused suburbs are demolished, and the land converted to agriculture. Tariffs are imposed on imported food in proportion to how far it traveled to get to the U.S., and agriculture is slowly relocalized across the country, resulting in a two-million-barrel-per-day cut in domestic oil consumption by 2017.

Five years from now, America is on course to be a new economic powerhouse with domestic demand replacing the falling consumption of Asia. The decline of global oil supply pinches the economy, but does not break the skin, as demand is shifted from liquid fuels to domestic renewables. Realizing that she can get by on North American oil supply once the transportation and power transitions are complete, America begins to withdraw its military forces across the globe, ending the drains of military adventures and foreign oil expenditures simultaneously. By the time the global resource wars ensue in 2017, she will stand once again as a prosperous, peaceful, more insular, “shining city on a hill.”

The likely: Decline by default

Barack Obama is reelected by default in 2012, since none of the GOP’s insane clown posse are deemed both electable, and acceptable to the Tea Party. A broad anti-incumbent electoral revolt completely transforms the leadership of both parties and creates a balance of power in both houses of Congress, creating a brief window of opportunity for real change.

Unfortunately, that opportunity is squandered for a lack of effective vision and leadership. As in all other scenarios, oil still declines starting in 2014, squeezing the economy and stifling growth. The Fed keep printing, but in vain. America is sucked into the deflationary vortex by default.

Oil prices remain just above the pain threshold of ordinary Americans. In response they move to small apartments in converted downtown office buildings. Empty suburbs are abandoned and James Howard Kunstler does a victory dance in the dust of the geography of nowhere, to the applause of no one. Roads and bridges fall into disrepair, forcing the working class to crowd into slow, meandering buses and decrepit light rail systems when they aren’t traveling on foot or bicycle. Things work until they don’t, and then they are abandoned.

America is drawn by default into the global resource wars starting in 2017, but fails to secure any significant new supply of foreign oil. Available imports from the Middle East begin to fall, prompting a massive drilling and mining campaign across every last inch of America where hydrocarbons may be found, with attendant soaring environmental damage. But solar PV still becomes cheaper than regular grid power, and millions of small rooftop solar systems with battery backup are installed by individuals in self-defense, creating little islands of light in a country plagued by sporadic blackouts.

Unemployment continues to rise until Americans are willing to work for less than the Chinese. Farming is the hot sector for young people entering the workforce, as the finance, insurance and real estate sectors shrink. Millions of Americans move to Canada in search of a better life and a stronger currency. The dollar survives, but it doesn’t buy much.

Five years from now, America is crumbling, mumbling and bumbling its way to a smaller, leaner, and more agrarian economy. Its superpower days are fading into history. The republic holds together in name only. The inability of the economy to generate excess revenue starves the federal government of receipts and a gradual, decades-long shift to more regional governance and culture begins.

Postcript

I have offered these fanciful, extreme, and hopefully mildly humorous scenarios to provoke thought, not to draw a map. And if I seem hard on the GOP, it’s because of their staunch opposition to energy and transportation transition, which I believe are absolutely necessary to avoid collapse. In reality, the next five years will be replete with surprises—including natural disasters, unprecedented political upheaval, and unimaginable financial hijinks—that may incorporate elements of all these scenarios.

So. . . What’s your scenario?

Illustration: “Enchantment’s End” (gideon_wright/Flickr)

Read it here: 2012: Terra incognita

Predicting the future is never easy, but as I contemplate what 2012 might bring, I confess that it’s never been harder.

In 2005, it was fairly easy to see that commodity prices would rise in the coming years, and that the purveyors of petro-Prozac who dominated the press were wrong. It was evident in the data, particularly on oil. My outlook was generously validated up through the first half of 2008. While I expected a significant correction in housing prices and equities, I underestimated the magnitude of the late-2008 crash in the financial markets. Only a few observers who paid close attention to arcane derivatives markets got that one right.

In the fall of 2009, I made some outlier calls for 2010 on oil, equities, the US dollar, and China, all of which proved correct. I attribute that in part to luck, but mostly it was the result of having done my homework and developing a fine-tuned contrarian view.

Then it got more difficult.

In the fall of 2010, I was having a long email discussion with some fellow peak oil analysts about our outlooks for oil supply, trying to identify when the next big oil price spike might occur. After working over several detailed models of OPEC and non-OPEC supply, I snipped irritably that oil prices would likely be affected far more by above-ground factors in the next few years than below-ground factors. Geopolitics would soon trump geology, I ventured, and we would do well to pay attention to the news overseas. One well-placed bomb, another big hurricane in the Gulf of Mexico, a civil war in the Middle East, or any number of other events could blow our carefully constructed mathematical models out of the water.

But even I did not anticipate how radical the upsets of 2011 would be. No one could have predicted the earthquake and devastating tsunami that struck Japan on March 11, or foreseen how wide-ranging its effects would be: from shutting down automobile manufacturing plants, to record grid power prices in Hawaii, to several of the world’s most advanced economies turning their backs on nuclear power. We had plenty of advanced warning that weather would become more erratic due to climate change, but a record 12 natural disasters in the U.S. costing $1 billion or more, each, was an eye-opener. And I don’t think anyone expected the Arab Spring. It was a tough year for dictators.

Geopolitical challenges for fossil fuels

Above all, what jumps out of my crystal ball about 2012 is geopolitical instability. The popular unrest we saw worldwide this year feels like a mere prelude to a very chaotic period.

As an example, consider the slew of threats that currently imperil the global oil market:

• On December 16, a months-long peaceful protest by striking oil workers in Kazakhstan exploded into violence. Somewhere between 14 and 64 people were killed by police over the following weekend (depending on whether you believe the official count or a report from the morgue) in a harsh government clampdown which included shutting off all Internet and telephone access, and cordoning off the city. (Steve LeVine has been doing some terrific coverage of the events there for Foreign Policy.) The echoes of the Arab Spring are unmistakable. With about 1.6 million barrels per day (mbpd) of oil production, Kazakhstan is the world’s 18th-largest oil producer, on par with Libya’s output before the uprising there added about $10 to the global price of oil.
• Fresh waves of unrest in Syria could lead to civil war and seriously destabilize the already-tenuous oil trade in the Middle East. Oil production there has fallen from over 400,000 barrels per day in 2010 to 260,000 bpd now, in part due to EU sanctions. And Egypt is still very much in play in the region.
• Sanctions are likewise behind heightened tensions with Iran, as the US and EU forbid domestic and foreign partners from doing any business with the country in continuing efforts to stymie its nuclear ambitions. Iran conducted naval war game exercises near the Straits of Hormuz last week in retaliation, an implicit warning that it would attempt to shut down the critical Persian Gulf oil trade chokepoint if hostilities increase. And yesterday, they made that warning explicit, as Vice-President Rahimi said, “If Iran oil is banned not a single drop of oil will pass through Hormuz Strait.” Iran’s primary oil buyers, including China, Japan, Korea, and India appear to be seeking alternate supplies, but that will support oil prices globally as competition increases for oil from OPEC producers, notably Saudi Arabia.
• The situation in Iraq deteriorated almost immediately upon the exit of US military forces, with fighting between Sunni and Shiite leaders within the fledgling central government threatening its dissolution. A barrage of attacks in Baghdad over the last week portend continuing violence and instability, and do not bode well for the future of oil supply in the region.
• Tens of thousands of protestors jammed the streets of Moscow on Christmas Eve, jeering the Kremlin over widely alleged fraud in the recent election which retained Prime Minister Vladimir Putin’s grip on power. Russia was the largest oil producer in the world at the beginning of 2010, and now stands just below Saudi Arabia with 10.3 mbpd of production. Were it not for Russia, non-OPEC oil production would have been in steep decline for the last several years, and as such it remains a critical pillar of stability for world oil markets. . . a pillar which may now be eroding.

Though little reported in the American press, popular protests are on the rise in China as well. With a major turnover in leadership scheduled for 2012, there is at least the potential for significant reforms favorable to the country’s burgeoning middle class, who are growing increasingly restive under the suppression of its central government. But there is also the potential for renewed attempts to reinforce authoritarian rule. In the province of Guangdong in the south of China last week, tens of thousands of residents participated in two separate protests against the local governments over land policy and a planned expansion of a coal-fired power plant in the smog-choked town of Haimen. With the largest GDP of any province in China due to its heavy manufacturing base, Guangdong may be considered a leading indicator of China’s direction, more oriented to its trading partners to the west than to Beijing. Local authorities capitulated to the demands of the Haimen protestors, but only after police used tear gas to quell the demonstration. In short, China looks like an interesting wild card in 2012 where popular unrest could explode, particularly if its economic growth slows significantly, as some observers expect, and/or if the protests in Russia become more strident.

Another interesting wrinkle with potentially far-reaching implications emerged on Christmas Day, as China and Japan announced that they would begin direct bilateral trading of their currencies. About 60 percent of the trade between the two nations is currently settled in US dollars, according to Japan’s Finance Ministry. Coming from the two largest holders of foreign-currency reserves in the world, the accord constitutes a potentially serious threat to the hegemony of the US dollar, which has conferred an enormous economic advantage to America for many decades. The pact is considered largely symbolic for now, but could signal the ascendancy of the renminbi, and will likely lead to continued weakening of the dollar against it. More broadly, the move could presage an entirely new era of geopolitical alliances.

Economic outlook

The economic front looks perilous indeed. It is certainly possible that 2012 will be another year of aimless bouncing around in a narrow channel while the world’s central banks keep trying to extend and pretend. With just three trading sessions left in a brutally difficult year that ruined many a seasoned hedge fund manager, the S&P 500 stands up a lousy 0.6 percent on the year. That could happen again. But I would put greater odds on a real reckoning. The long series of attempts to save the Eurozone in the final months of 2011 staved off collapse, but they fixed nothing. The enormous overhang of leveraged debt and the impossibility of restoring economic growth in the West are still with us, and every month that passes without an honest strategy to bring obligations in line with hard asset values only increases the threat. Faith in the markets, the dollar, and the euro has all but evaporated, and our economies now hang by a string dangling from the hand of Ben Bernanke. If that string doesn’t break in 2012, it will in 2013, or 2014 at the latest. The key question is how long the world’s central bankers can skate on the thin rim of the deflationary vortex.

Should the global financial regime fail, there will be blood in the markets. Bank runs are not out of the question. Commodity and equity prices could fall to the tune of 40 percent or more, but without destroying enough demand in Asia to restore a comfortable cushion of supply in oil and agricultural commodities. Here, it is useful to reflect on 2008. From 2005 on, the data suggested that 2012 would be the turning point when oil supply began its long, inevitable, terminal decline. But the crash of 2008 bought us a few more years of adequate oil supply at a moderately uncomfortable price, and pushed that point off, at least theoretically, to around 2014. If there is a similar crash in 2012, the turning point could be delayed another year or two, but only if supply from all of the highly unstable sources mentioned above remains firm. I would put 50-50 odds that it does not, in which case prices will remain uncomfortably high even as deflation takes a firmer grip on Western economies. The world will be hard-pressed to increase liquid fuel supply from current levels.

Certain uncertainty

The one thing I can say with certainty about 2012 is that it will be fraught with uncertainty. 2011 could look tame by comparison.

More natural disasters are almost certainly on the menu, which will disrupt supply chains and exact a painful toll of blood and treasure the world over.

Regional skirmishes over resources, particularly in developing oil-rich areas like the Caspian and Africa, are likely.

Authoritarian governments, along with their corporate sponsors, will continue to be challenged by the people, and will resort to heavy-handed crackdowns in response. The Arab Spring and the Occupy movement are merely the beginning of popular revolts that will ultimately transform the political and economic order of the world. Unrest in previously pacific areas should be expected.

Intelligence agencies will find it difficult to keep up with multiplying threats. Attacks by the hacker group Anonymous on powerful vested interests, like the Christmas weekend attack on the US-based security think-tank Stratfor, will become more commonplace and focused on high-value targets like government and military organizations. The potential disruptions to business as usual are hard to overestimate. Banks, public services, utility grid operators, and communications systems could suffer extended outages. Electronic systems of exchange could be compromised. Faith in our large, complex systems will wane.

In the face of all this uncertainty, then, what is one to do?

The answer is simple: Do what you can.

Minimize your expenses, and pay down debt as rapidly as possible.

Grow some of your own food, whether you have a big backyard or just a little balcony with room for a couple of small pots. Millions of people have begun doing so since the crash of 2008, and they have found it a universally rewarding and fun experience. It helps to ground one in reality, and brings a little peace of mind. Before you know it, you’ll be expanding your garden and maybe keeping a few chickens.

Reduce your consumption of fossil fuels any way you can, by focusing on efficiency. Then (and only then), if you can, think about installing some solar hot water, solar PV, and battery backup on your house or business. I expect the distributed solar market to be a rare and surprising bright spot in 2012.

Keep a little “rainy day” cash on hand. To really hedge your exposure to financial collapse, physical gold and silver bars and coins are your best insurance.

Renew your relationships with friends, family and neighbors. Nothing is worse than feeling alone when the world is going crazy around you, and they will help you keep your head on straight.

Most importantly: Try to keep your mind in the present. Don’t let the uncertain future frighten you into immobility, and don’t let the past keep you from doing the best you can today. It’s surprisingly hard to do, but it gets easier with practice. The Buddhist approach is to simply be mindful of what you’re doing, seeing, hearing, and feeling right now, be it walking down the street or cleaning the cat box. Or, in the Biblical verse of Matthew 6:34, “So do not worry about tomorrow; for tomorrow will care for itself. Each day has enough trouble of its own.”

I wish all of us luck, wisdom, fortitude, and peace of mind in what will undoubtedly be a very challenging year. We will soldier on, somehow.

Photo: marcobellucci/Flickr

Until someone actually names names and provides some authenticated details, it’s impossible to know how true Fisk’s allegations may be. I have heard noises along these lines for at least five years running, and so far have not found any convincing evidence that such moves are an impending reality, so at this point I am not rendering an opinion. I will say that it does seem likely and rational that eventually the dollar will be at least partially displaced as a global reserve currency and/or the currency of choice for the  global oil trade.

In the meantime, it’s worthwhile to remain alert for developments in this story with real credibility. Here is a sampling of responses to the Fisk article I rounded up today, most of which rebut it.

The always on-point Izabella Kaminska at the Financial Times Alphaville blog did a roundup of her own: “The world and the dollar react to Robert Fisk”

Aaron Task and Henry Blodget, Tech Ticker: “Dollar Living on Its Reputation and Borrowed Time”

Mish: “Why Would Anyone Want to Hold Dollars?”

Zero Hedge: “Will a Basket of Currencies Replace the Dollar?”

Bloomberg: “Saudi Bank Governor Denies Talks to Replace Dollar”

Seeking Alpha: “Is There Really a Global ‘Cabal’ Aiming to Dump the Dollar?”

Reuters: “Iran says profited from non-dlr oil sales increase”

Reuters: “Gulf region to stay with dollar for oil: UAE central bank source”

There is also a good deal of background reading on the subject available, such as this academic paper from 2007: “Oil market structure, network effects and the choice of currency for oil invoicing,” which uses a “network effect model to identify the conditions under which a parallel invoicing in different currencies would be possible” and “includes a simulation designed to illustrate the dynamics of the currency choice of oil invoicing.”

Just a few quick words about the bailout bill today and the markets. But before I get into that, if you wanted to catch my live online TV interview yesterday but were unable to tune in, it is now available in their archives. See http://www.getreallist.com/live-interview-on-cleanskies-tv-today.html for instructions on how to find it.

I think almost everybody expected that if the bailout bill passed the House today, the markets would rally and the good times would start rolling again. It was a tense morning as we watched the debate. The major indexes rose about 3%. And then the vote came.

The bill passed. And then, a couple of very unexpected things happened.

First, the credit markets didn’t move, and the LIBOR spread shot to a new high. That means that the Street considered the bailout to be inadequate to solve the problem at hand–which is liquidity, not just the solvency of a few institutions. In reaction, stocks sold off sharply, and the major indexes all ended the day about 1.5% down, marking the end to a wicked week.

Second, although the bill contained an 8-year extension to the 30% Investment Tax Credit (ITC) for solar installations, which was widely ancitipated and should have meant a banner day for the whole sector, solar shares sold sharply with the rest of the market, ending the day down as much as 8% after rising as much as 10% earlier in the day. Woof, how’s that for volatility, and counterintutive moves?

Meanwhile there were reports of widespread bloodletting in the hedge fund world, leading to more forced redemptions, indiscriminate selling to meet margin requirements, etc. See http://tinyurl.com/4uxdph. In short, the selling is continuing to feed on itself.

The take-home? Passing a bailout bill is one thing; unfreezing the credit markets is another. It ain’t over till it’s over, and we’re nowhere near done with this mess. Monday could be brutal, unless we have a new round of Sunday night shenanigans.

For a good summary of what happened today, check out my buddy Aaron Task’s end of day post:

Roubini: ‘Much More Radical’ Action Needed as Bailout Fails to Lift Confidence

I also recommend poking around at the archives there on Tech Ticker for some excellent insights from Howard Lindzon and Nouriel Roubini in particular.

Finally, for those who somehow missed everything I’ve been saying for the last month or more: get out, stay in cash, keep yer head down and good luck!

Now let’s try to have a nice weekend and forget this week ever happened, if only for a little while.

It will take you about 2.5 hours to get through the 16 short segments, so you can watch a new segment whenever you’ve got about five minutes to spare if you like. But I highly recommend it–I’d call it must-see material. Watch it, grok it, blog it, digg it, send it to your friends!

–C

Experts Say Oil Likely To Go And Stay Up

 
By: Marc Kramer

The Bulletin

Like every American, I want to know why the price of oil is up, will it ever go down and what can take its place? My personal feeling is that the price of oil is up because traders, not usage, are driving up the price. I recently interviewed Brian Hicks, co-author of Profit from the Peak, about what we can expect of oil pricing going forward and what business opportunities will arise because of high costs. Mr. Hicks is the managing editor of Energy and Capital and The $20 Trillion Report. Mr. Hicks writes a weekly column for Wealth Daily concerning high-profit opportunities in the ever-tumultuous geopolitical environment.

Kramer: Why did you and Chris Nelder write Profit from the Peak?

Hicks: Chris and I have been students of Peak Oil for over 5 now years. We consider it to be the most significant crisis facing the world this century. There have been many books written about Peak Oil mainly presenting the negative consequences of the end of cheap oil.

But being inherently optimists, we wanted to present the other side of the issue … the opportunity. We believe that every crisis contains the blueprint for its own solution, and PO is no different.

The world is undergoing an epic energy shift. What happens today will impact our world for decades to come. And right now, the investment community is funneling billions of dollars into renewable and alternative energy. Some estimate that between $50 and $100 trillion has to be spent to solve this problem. Early investors are going to make a fortune. And we want to be there profiting the entire way. That’s why we wrote the book.

Kramer: Who is the targeted reader because it comes across as more academic than commercial?

Hicks: It does come off a little more academic than commercial and that’s because we wanted to present a cogent and comprehensive thesis regarding the opportunity PO represents.

But the targeted reader is any serious investor who’s looking for a beacon into the future of the world economy and the world energy complex. Energy is the largest market in the world and right now the entire sector is undergoing a metamorphosis.

Kramer: Are you surprised by the high oil prices?

Hicks: Not at all! When I was first introduced to the topic of PO in 2003, I was skeptical, much like today’s media. But I looked at the data and started to crunch the numbers and what I discovered shocked me.

The mere magnitude of the problem was overwhelming. For instance, today the world consumes 87 million barrels of oil per day. The IEA estimates the world will consume 103 million barrels per day by 2015. That’s a net gain in consumption of 16 million barrels.

So in other words, by 2015, we need to produce 16 million more barrels per day to meet demand. Saudi Arabia produces 8 million barrels per day. So to the put all of this in perspective, the world needs to find the equivalent of 2 Saudi Arabias by 2015. And that doesn’t even take into account the decline rates we’re seeing in today’s giant oilfields.

Cantarell – the giant field in Mexico (and the world’s third largest) – is now in terminal decline. It’s estimated that global decline rates are in the area of 4 to 5 percent, and many suggest that that’s an extremely lowball figure. But even at 4 percent, just to stay even we have to find a new Iran every year!

With demand skyrocketing in the face of a super tight supply, the price of oil has to go up. Price reflects supply-and-demand and right now the price is telling us that the market is tighter than a snare drum.

Kramer: When experts claim the reason the price is up is because of supply verses demand, are they talking about actual oil usage or traders bidding up the price because they believe there will be a scarcity of oil?

Hicks: They are talking about actual oil usage.

Kramer: Should we get used to $4 to $5 a gallon gas or will it eventually come down?

Hicks: Anything is possible. But I don’t see demand for oil dropping for years. For far too long, oil was essentially free. Let me explain …

There are 336 pints in every barrel of oil. So when oil was selling for $20 a barrel, which was seen as the healthy and normal price back in the 1990s, it was essentially $0.06 per pint. I don’t know of any other precious resource that sells that cheaply.

So because oil and gas were so cheap, we burned it up without a second thought. In December 2005, the world consumed its one-trillionth barrel of oil. The first trillion barrels were the cheapest oil for the planet. Now we’re beginning to consume the more costly oil, the stuff coming from the Canadian tar sands and deep water drilling. This oil costs more to get.

So not only we should we get used to $4 to $5 a gallon gas we should hope that it stays at this level because it could easily rocket to $8 to $12 a gallon, a price many European nations have been paying for years.

Kramer: What would have to happen for prices to go lower?

Hicks: You have to hit demand somewhere. The Chinese automobile market is doubling every 6 years. The Indian market is expected to grow just as fast. If you take China and India out of the equation, the price of oil would go down.

China and India, which represent over 2 billion people, are just now entering the modern age. They want the western lifestyle. In this backdrop, I don’t see how oil could possibly go down.

Kramer: You talk about other types of renewable energy, which one or ones have the most promise?

Hicks: I like solar and geothermal the most because the infrastructure for them already exists. You can put solar roof shingles and siding on your house or on top of an office building.

You can install a geothermal heat pump in your home. You can put a vertical axis wind turbine on your roof. These 3 things make the energy generation very local and concentrated. In other words, the footprint is very small.

Large wind farms like the one being built in Texas takes up too much land. I’ve visited 2 large wind farms in California and the land needed to build and operate these farms is enormous.

Kramer: Will we see a total conversion to hybrid cars and if so in what period of time?

Hicks: Well we’re seeing that transition right now, I believe. With the price of gasoline at $4 a gallon, consumers are buying hybrids. The market, in my opinion, is responding to the situation. I think within 5 to 10 years, all cars will be hybrids.

Kramer: What industries do you see as high growth because of the price oil?

Hicks: Without a doubt, railroads! It’s cheaper to transport goods via rail right now than by trucking or by car. And you’re seeing this reflected in rail stocks which have been some of the best performers in the market.

We’re also extremely bullish on industries that support telecommuting. More and more employees are working from home. So companies that sell video-conferencing or “telepresence” technology like some of the stuff coming out of Cisco are going to be in high demand.

Kramer: Which industries are going to get hurt because of the high price of oil?

Hicks: Anything dependent on oil or gas – airlines, trucking, shipping. Even restaurants and amusements parks. As the price of oil rises, this will cut into discretionary spending by the American consumer. The American consumer is resilient, but they’ll have to cut back.

Kramer: Will we see suburban communities building monorail systems as a way to reduce traffic?

Hicks: Potentially! But I have to admit, public transportation like that isn’t a part of the American genome. Americans are by nature independent. They love their cars because it represents freedom and excitement and adventure. I’m more bullish on hybrids that get incredible mpg than I am in monorails. Or even Segways.

Kramer: What is your biggest concern from economic standpoint regarding this current energy crisis?

Hicks: A sudden and severe supply disruption. A good example is a hurricane that blows throw the Gulf of Mexico and knocks out 20 percent of U.S. production. But my biggest fear is that in the very near future, the Saudis call the President and tell him. “Mr. President, Ghawar is in a catastrophic decline. We can’t produce anymore oil.”

Ghawar is the largest oilfield in the world. It’s been producing for decades. But some suspect that if Ghawar hasn’t already peaked, it’s very close to peaking. As our good friend Matt Simmons has so often cited, if Saudi Arabia peaks, the world peaks.

If and when that event happens, the price of oil will experience a super spike. And that’s something the world economy cannot absorb. I hope and pray that the price of oil goes up in a very tempered and measured manner. We need to buy ourselves some time. A sudden super spike in oil would cause social unrest a modern day Hobbesian world reminiscent of Haiti.

Marc Kramer, who is the author of five books and project faculty at the Wharton School of Business at the University of Pennsylvania, is a serial entrepreneur.