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Quick jump to below stories:
Japan warns of 'bold action' in E. China Sea
Japan, China Should Resolve Energy Row, Minister Says
Running on empty
Renewable Energy: Too Little, Too Late
Things to come: part I
Mugabe, Chavez slam U.S. at U.N. event
Bush puts brave face on failure to secure trade deal
Oil supplies may be lower than OPEC countries want to admit
Zero? Less than zero?
Tough Flying Conditions in the Global Economy

[FTW has long been tracking the growing tension between Japan and China. China’s claim to all mineral rights out to the Continental Shelf is something Japan can never accept because it denies the Japanese access to all waters to the west of their country where there may be significant deposits of oil and gas for a nation that has no other resources. Now the tensions are heating up as the first few nations (Zimbabwe, Indonesia and Guatemala) are succumbing to Peak Oil. This bears watching, but it remains to be seen whether this potentially nuclear drama will be enough to divert American’s attention from what will be happening here this winter. – MCR]

Japan warns of 'bold action' in E. China Sea

Eric Watkins, Senior Correspondent
Oil and Gas Journal
October 10, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

LOS ANGELES, Oct 10 -- Japan's Trade Minister Shoichi Nakagawa has warned that his country will take "bold action" if China is found to be building a pipeline to carry crude oil or natural gas from a disputed region of the East China Sea.

Nakagawa said Japan received information on Oct. 6 that ships carrying lengths of pipe were heading to Tianwaitian and Chunxiao fields.

Nakagawa said the information came from "reliable sources" as well as a video purporting to show a ship heading for the fields carrying a "huge heap" of pipes.

"The number of pipes was obviously too many to just [drill] down. Then what are they for? I can assume the reason, but I'd rather not speak out," Nakagawa said, implying the possibility of a pipeline.

He said the Japanese government had made an inquiry to China about the matter but had received no response.

Last month, the Chinese government confirmed it sent warships to the disputed area on Sept. 29, a day ahead of talks with Japan over territorial claims to waters in which both sides want to drill (OGJ Online, Oct. 10, 2005).

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Japan , China Should Resolve Energy Row, Minister Says

Megumi Yamanaka
Bloomberg News
November 1, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Nov. 1 (Bloomberg) -- Japan and China, Asia's two biggest oil consumers, should cooperate to resolve a dispute over energy resources in the East China Sea and make joint development of gas fields a reality, Japan's new trade minister said.

“The two countries need to cooperate more to be able to agree on joint development in the course of time,'' Toshihiro Nikai, appointed to the post yesterday, told reporters in Tokyo. “This shouldn't develop into a problem for the Japan-China relationship.''

The countries are sparring over energy rights in the East China Sea because they've yet to agree on the location of their sea border. China claims its territory extends to the end of the continental shelf, while Japan says the sea border is the median line, or halfway between the countries' shores.

Asia's two biggest oil consumers agreed Oct. 1 to hold talks in Beijing on issues including possible joint development of energy resources in disputed areas of the East China Sea. Japan wants China to cease production that it says will siphon gas from Japanese territory.

“We are still waiting for China's response on when the next meeting will be,” Nikai said today.

Nikai called for cooperation with China in the nations' dealings with Russia about the construction of a Siberian oil pipeline.

Russia , which now sells most of its oil in Europe, is negotiating with Japan and China on the direction of the pipeline to export Siberian oil. Japan is lobbying for a 4,100-kilometer (2,563 mile) link to Perevoznaya on Russia's Pacific coast while China wants a 2,400-kilometer pipeline to Daqing in northern China.

To contact the reporter on this story:

Megumi Yamanaka in Tokyo at

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[The more you learn about the brain, the harder it is to imagine that there can ever be a mind without it. The relatively new discipline of “cognitive neuroscience” makes a very powerful explanation for what consciousness is and how it happens, and it doesn’t come from some mysterious energy field in some other dimension.

But then here is this terrifying story about the Amazon River and its rainforest. It is almost impossible to read without the feeling that this planet is alive, and that it (She!) is rapidly reacting to human spoliation, either with retributive anger or with a serene sort of immune response. And somehow this mythic view is much more bearable, even though it’s just as deadly in its projected outcome. Why is that? Because if the Earth is actually defending itself, then the biosphere will probably be all right after a long time. If it’s just a rock with an astonishing thin film of living matter, then the current chaos is likely to kill it forever. Now to return the brain book to the shelf, and pull out the Tao Teh Ching … -- JAH]

Running on empty

Wednesday November 2, 2005
The Guardian,,1606083,00.html

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

The rainy season can't come soon enough in the Amazon, but even the end of a drought that has had terrible consequences for the area's plant and animal life may bring only temporary respite.

Not far from the mouth of the Amazon, dead animals, including manatees - mammals up to 10ft long with flat, paddle-shaped fins - and distinctive pink dolphins, line the banks of some tributaries. Normally, you would have to take a boat to cross these rivers but today, because of the Amazon basin's worst drought in memory, they are little more than mudflats with a trickle of water in the middle.

So far, the drought has had its most serious impact in the upper reaches of the river and its hundreds of tributaries in Brazil , Colombia and Peru. There, along many stretches, the water has fallen to the lowest levels ever recorded and has become impassable even for canoes. Some 600 Brazilian schools in Amazonas state have had to be closed and many hamlets, whose only contact with the outside world is by river, are running short of food and medicines. Several districts have been declared disaster areas and the army is having to bring emergency supplies to 900 towns and villages.

The problems are expected to get worse before the drought eventually breaks, perhaps in the next month when the Amazon's rainy season usually comes. "Most little towns don't have sewage treatment," says Dan Nepstad, a US scientist based in Brazil. "Their sewerage is to put a pipe into the river. When you reduce the flow of these rivers, you have less water to dilute the sewage and cesspools build up. That has got all the makings for intestinal diseases and cholera. Water that's not moving is also a breeding ground for insects that carry malaria, dengue and other diseases."

But what is worrying some scientists even more than the growing scale of the humanitarian crisis is a suspicion that this year's drought may be the harbinger of a much greater disaster that could push the whole Amazon forest to a critical flip-over point and into an unstoppable process of self-destruction.

Recycled rain

This is how the theory goes: the Amazon river contains a fifth of the planet's fresh water. Two hundred miles wide at its estuary, it carries more water than the world's next nine largest rivers combined. In a remarkable process, much of this water is recycled within the forest.

"The watering of the Amazon basin is a cycle that starts with the trade winds that fly over the surface of the Atlantic Ocean from Africa," explains Peter Bunyard, science editor of The Ecologist and an expert on the Amazon. "The winds flow over warm tropical water so they become utterly laden with moisture. When the winds reach the Amazon forest, some of the vapour comes down in rainfall, but three-quarters of this rainfall is then recycled back into the atmosphere through evaporation and transpiration - which occurs when water is sucked up from the soil into the trunks and then out through the leaves. This process of convection, as it is called, occurs seven times as the winds cross the continent. It leads to the absorption of huge amounts of solar energy," says Bunyard.

When the winds eventually hit the Andes in the west, a huge air mass is pushed high up into the atmosphere. It moves out of the influence of the spinning of the Earth and drifts back to Africa. "By the time this air mass reaches Africa, it is high, cold, dry and dense," says Bunyard. "It forms a high-pressure zone and, in sinking, causes the dry winds that blow across the Kalahari and Sahara deserts towards the Atlantic ocean. Africa's deserts are the other side of the coin to the tropical forest in the Amazon."

This process occurring around the very middle of the Earth is the driving force in the world's climate. It is directly responsible for much of the rainfall in South America and even, scientists have discovered, in faraway places such as the corn belt in the US mid-west. If there is poor rainfall in the Amazon's rainy season (November to February), then the US is likely to have a drought four months later during its all-important growing season.

What happens to the Amazon affects the rest of the planet, and scientists have long been aware that if too much forest is felled by loggers, cattle rearers and soya farmers, the convection process will be disrupted, with disastrous global consequences. "If the Amazon loses more than 40% of its forest cover, we will reach a turning point where the world's largest forest will begin an irreversible process of savannisation," says Carlos Nobre, a senior scientist at INPE, the Brazilian institute of space research, and a leading climatologist.

The consensus is that a smaller forest would be unable to sustain the convection process and will start drying out. A vicious spiral will begin in which the drier forest becomes more vulnerable to forest fires and the fires, by destroying vegetation, will make the Amazon more vulnerable to drought.

Until last week it was widely assumed that only 17 % of the forest - an area larger than the size of France - had been felled. This is well short of the critical 40% postulated by Nobre, but an article printed in Science journal last month shows that the satellite images on which this figure was based were not telling the full story.


The images, the scientists said, were detecting only clear-cut swaths of land, where all the trees had been removed. They were failing to detect so-called "selective logging", where timber companies go into a forest under the canopy and take out valuable hard timber. The scientists reckoned that this kind of activity was destroying on average an additional 15,500 square kilometres of forest each year. This means that the destruction, previously put at about 20,000sq km a year, is almost twice as serious as had been thought.

Dorothy Stang, an American nun who was killed in February by gunmen sent in by local landowners, was a passionate environmentalist. Living in the Amazon basin for over 20 years, she complained in one of her last filmed interviews of the devastation caused by loggers and cattle farmers, which, she believed, was changing the climate. "It used to rain steadily for nine months," she said. "Now it rains for six or seven months at best. The destruction is killing the forest. We've got to stop it."

Sue Branford was the BBC's Brazil correspondent.

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Renewable Energy: Too Little, Too Late

Big Renewables cannot replace Big Oil.

In fact, Big Renewables IS Big Oil.

Wed, 12 Oct 2005 00:00:00 -0700
By Michael Kane
Presented by Michael Kane at the NYC PetroCollapse Conference,
October 5th, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

When you combine the seven deadly sins with high technology, you get some really serious problems. You get turbo-sins. It’s dreadful to imagine what goeth after turbo-pride. -- James Howard Kunstler

Renewable energy may offer a way into a sustainable future, but not without massive conservation efforts and a drastic shift in human consciousness. – MK

This paper focuses on the limitations of big renewable energy technologies and, more importantly, how society lacks the proper mind state and will to address the Peak Oil crisis appropriately. I conclude by taking a look at what people can do to prepare themselves for what is to come, as well as looking at small renewable technologies which may be helpful going forward.


The American Council On Renewable Energy (ACORE) is the leading national advocacy group for renewable energy. ACORE members include former CIA and military officials, as well as many individuals in all sectors of the energy industry. [1] Recently ACORE unintentionally revealed exactly why renewables offer no escape from the certain Peak Oil crisis.

A recent ACORE press release stated, “What are the national policies that will result in renewable energy contributing 20%, 30%, 40% of national energy supply by 2020- 2030-2040?” [2]

20% renewable energy by 2020 is no solution for the Peak Oil crisis that is here now, and there are other participants at this conference who will show that the crisis is upon us now: at best we have till 2007 especially considering that The Powers That Be are behaving as if Peak is happening now.

We are in a race against time.

So what does an energy intensive society do as it begins to run out of its main energy source? You use whatever you’ve got. And that is what ACORE is calling “Phase 2.”

Phase 2 is the mass deployment of renewable energy projects in America, which is way behind that of the Europeans. I will be speaking about a number of renewable energy sources and what they have to offer a society of over-consumption.

But what is critical to understand at the outset is that renewables are not being viewed as a way to transition away from, or even to limit, the consumption of hydrocarbons, but rather to supplement over-consumption.

Sylvain Santamarta of Shell Renewables confirmed this fact at the Renewable Energy Finance Forum in NYC (REFF – Wall St) in June of this year, when he stated Shell will continue to invest in renewables – especially wind – since they are a valid and valuable supplement to hydrocarbons.

So why do I say the problem is lack of proper mind state and will?

Shell, BP, GE and other oil majors have big interests in renewable energy. Big Oil IS Big Renewables. Now renewable projects are being massively deployed by the military to fine tune its killing machine as it battles for dominance over the last remaining hydrocarbon reserves on the planet. This is what I call SUSTAINABLE DESTRUCTION.

With renewables being used to supplement over-consumption and promote SUSTAINABLE DESTRUCTION, there is no possible way renewable energy can offer a path to true sustainability. A massive shift in human consciousness is a prerequisite to any hope of technological mitigation of the Peak Oil crisis.


Without question, wind is the biggest economic winner in the field of renewables to date. Wind farms can produce hundreds of megawatts of energy, putting them on par with many traditional power plants. But the challenges facing the wind industry are vast, and the limitations are enormous, especially in comparison to hydrocarbons.

The most optimistic estimates by the Global Wind Energy Council show that, at best, wind could represent 12% of global energy supply by 2020. The American Wind Energy Association estimates that America could possibly have 6% of its energy provided by wind in 2020. [3]

But that is just the value on paper.

Wind farms operate at around 40% efficiency. So the actual energy would be approximately 6% of global capacity and 3% of America’s by 2020. This number may be slightly higher when we consider that offshore wind farms have a higher efficiency rating than those onshore. While the financial institutions are ready to put up the needed capital for offshore projects, there are mostly cold feet throughout the industry as everyone wonders whether these projects will ultimately be profitable. I will discuss offshore wind farms later in this paper.

Europe is light-years ahead of America in wind energy, and Germany leads the world.

The German numbers are painting a dismal picture for wind’s capacity. E.ON Netz – one of the world’s largest private energy providers – owns over 40% of Germany’s wind generating capacity. They released a report titled “WIND REPORT 2004” stating that wind energy requires “shadow stations” of traditional energy on back-up reserve in case the wind forecast is wrong. They state that reserve capacity needs to be 60% to 80% of the total wind capacity! So as more wind comes on line, it is all but certain that more hydrocarbon reserve capacity will be required, further demonstrating how renewable energy is used to supplement over-consumption. [4]

The main problem with wind energy is intermittency: the wind doesn’t always blow.

Martin Fuchs, CEO of E.ON Netz stated the following at a June press conference in Munich this year:

On 12 September, wind power supplies covered up to 38% of our grid power requirements at times. This was the highest value achieved during the past year. On 30 September, on the other hand, this figure was down to 0.2 % – the lowest value of the year


The random nature of the wind energy supply means that control and compensation energy requirements, for the provision of which transmission system operators are responsible, are constantly increasing

Fuchs went on to state that when Germany’s wind capacity increases to its expected 48,000 Megawatt capacity by 2020, it will only be responsible for replacing 2000 Megawatts of traditional, thermally generated power. In short, wind energy – the best renewable energy technology available to date – offers no hope of mitigating the Peak Oil crisis without massive conservation efforts that are nowhere in sight.

Even less known is a study conducted by Scientist David Keith, using computer generated simulations, where it was concluded if the world is eventually over saturated with wind turbines they could change wind patterns contributing to climate change. While this thesis has not been fully explored, it clearly indicates that unless mankind actively seeks to minimize our footprints upon the earth, we are doomed to repeat the same failures of our current energy paradigm: the failure of over-consumption through the exploitation of nature. [5]


The big buzz in the wind industry lies offshore.

Offshore wind farms are the next frontier in the industry because these winds are sustained at high rates over long periods of time posing less intermittency. The problem is that no one is jumping into these projects for multiple reasons.

Who will pay for the new transmission lines out to sea? Can you get that energy inland cheaply and efficiently enough to be profitable? What happens if turbines break and you can’t get to them due to harsh weather? Most estimates have shown many offshore wind farms would be inaccessible for repair throughout most of the year.

Many in the industry argue that massive offshore projects are the only way to empower wind on a large scale. Large orders of turbines and services funded by multinational corporations would cause prices to drop dramatically. But regardless, by all estimates, none of these offshore farms have a chance to mitigate Peak Oil even if the best case scenario posed by industry leaders came to pass.

The first offshore project in America – Cape Wind in Cape Cod, Massachusetts – is facing huge NIMBY opposition. The rich folk of Martha’s Vineyard may change their tune when natural gas shortages and price spikes become grim realities.

Perhaps ironically, many “conservatives” already realize this.

For example, Theodore Roosevelt IV, the great grandson of our 26th President and a registered Republican, lives on Martha’s Vineyard and is the managing director of Lehman Brothers, who is providing Cape Wind with financial advisory services. When Cape Wind’s 420 MW of power come online, Roosevelt is certain to be receiving that power into his home.

Meanwhile American “liberals” in Massachusetts are opposing the country’s first offshore wind farm. This includes Democratic Senator Ted Kennedy, whose family owns interests in natural gas pipelines in Massachusetts.

The wind industry argues that wind was never intended to solve all of our energy problems, and cannot be viewed in isolation from all other energy sources. This is a concession that everything I have said today is correct. Renewable projects should be developed, but we must be realistic about what they can and cannot provide to society.


There is a technology called “Solar Thermal” or Concentrated Solar Power (CSP) that is just now hitting the market, but it is not new technology. It is over 20 years old and was capable of generating just as much energy when first developed as it does today.

Why was it held back for two decades?

It appears those financially involved with the technology were waiting for the right time to deploy it for the highest profit yield. This technology is being brought to the desert taking up 7 square miles to produce 500 MW of energy 70 miles north of Los Angeles. Thus far this only seems capable of large production in the desert. Other projects using this technology that are not in the desert are designed to produce less than 10 MW.

The environmental impact of these massive installations on the fragile ecosystem of the desert is uncertain, which will likely depend largely on how many of these installations are constructed. This is decent technology, but quite limited. It will ultimately hold a similar capacity to that of wind power generation at best.

If we are extremely lucky, solar thermal and wind will account for a true 15% of society’s energy capacity by 2020. That is simply no replacement for hydrocarbons.

The first major installation of solar thermal technology is headed by Stirling energy in conjunction with Lockheed Martin, Boeing and SAIC – three of the largest military contractors on the planet. This is completely different from photovoltaic (PV) solar panels commonly installed on rooftops.


The cruelest of all myths concerning renewable energy is known as “the hydrogen economy.” We have yet to see any significant indication that hydrogen fuel cells will be capable of successfully moving the transportation sector away from fossil fuels. There are some vehicles being tested today, but they are literally time bombs waiting to explode, as a hydrogen fuel cell can be very dangerous if compromised in an accident. More importantly, the net energy gained compared with the net energy used in the process of storing energy in a hydrogen fuel cell is low. It is not an energy efficient system. Fuel cells function at lower than 40% efficiency, often much lower.[6]

There is a lot of rhetoric claiming one day hydrogen cars will be powered by renewable energy on the grid. This will never happen – not on the scale of 700 million automobiles. The intermittent nature of renewables cannot sustain such a massive system of inefficient over-consumption. The only way the hydrogen economy becomes remotely feasible is with a massive deployment of nuclear power plants.

When you hear “hydrogen economy,” think “nuclear power.”

Biofuels are good-and-fine as long as there is plenty of oil to burn. Getting a massive feedstock of corn husks to create biodiesel can only be done within the hydrocarbon intensive world of petro-farming. Once hydrocarbons are removed from the picture, try harvesting all of that corn by hand. Try not using petroleum-based pesticides and see what your yield will be. Try finding a replacement for the commercial fertilizers that are derived from natural gas.

And if you wanted to power every single truck in America (excluding cars) with biodiesel you would have to cover the entire nation’s surface with crops dedictated to the creation of fuel. Biofuels are great for recycling, not for fueling a massive society of over-consumers.


Synthetic fuels are soon to be coming to market much more aggressively as the oil crunch tightens. One technique for creating such fuel is by extracting hydrogen from water, recycling CO2 from coal-fired emissions, and processing the two together to form a synthetic hydrocarbon.

The first problem is that there aren’t many facilities that can make synthetic fuels, so massive investment into infrastructure is needed. The second problem is that this is not a highly efficient way to produce fuel. Electricity is needed to extract hydrogen from water and to capture CO2 from coal emissions. And no one is considering the fact that the world is starting to run out of fresh water to exploit due to over-consumption. Desalination is not the answer to that problem, as it is energy intensive and environmentally disastrous. Lastly, but most importantly, the CO2 that is captured from coal emissions will eventually be released into the atmosphere when consumed as fuel, further contributing to global warming.

This is not a renewable technology. At best, this is a band aid that will be placed on a severed artery. If synthetic fuels become a major part of our energy paradigm we will soon be facing both a coal shortage and yet another environmental crisis. Hitler made synthetic fuel during World War II when Germany no longer had access to abundant oil reserves. It was inefficient, but the war machine must have oil.

So must America.

SUSTAINABLE DESTRUCTION: The Military Marriage with Renewables

The military has documented all renewable energy projects within 100 miles of their installations. It is army policy to purchase renewable energy whenever possible, and many military installations are installing renewables on base.

The Naval base at Guantanamo Bay has wind turbines on base to supplement power needs.

Ethanol/Diesel blends are being tested at military bases

National Guard Training Center Goes Solar

Camouflage Solar Panels

Solar Powered Tents in the Military


POWERDOWN is the only solution. That is, the intentional decrease of energy consumption by the entire industrial world to avoid a die-off. But at the second Peak Oil Conference in Paris, Dutch economist Maarten Van Mourik stated that it may not be profitable to slow the decline of Peak Oil.

So then what would be profitable?

Perhaps it was best stated by Ray Liotta in the acclaimed mafia film Good Fellas when he said, “you light a match”.

Torch the place. Burn the American economy to the ground and make money on the way down. The super-rich know how to profit off of a depression. America represents 5% of global population consuming 25% of the resources. Unless consumption is intentionally slowed down, Americans may be the sacrificial pigs.

Is this the plan of the elite? Who knows, but especially in the wake of hurricanes Katrina and Rita, it can’t be ruled out.


Small wind turbines should be investigated, and perhaps, invested into by those who can afford to do so. However it may not be possible to install such systems in urban or suburban areas. Law likely prohibits this, and it may be a good time to take strides towards finding out what the legislation is in your area and how, or if, this can be changed. There is a good online handbook addressing small wind turbine installations. Wind and solar hybrid systems are discussed and look somewhat promising. [7]

Fire places and wood burning stoves are good investments. It is best to burn cedar and maple woods, seasoned for at least 6 months. After 4 years the wood may start to lose carbon content and burn less efficiently. A good tarp covering the wood to avoid getting water logged is important.

It would be wise to have supplies for a minimum of 2 weeks on hand in your home. Lighters, matches, candles, flashlights, batteries, crank radio, heavy blankets, bottled water, and canned goods are necessities in times of blackouts, crisis or shortages. Make sure to store things that you need as opposed to accumulated junk from years past. In case of problems with municipal water systems, it is worth having multiple buckets/barrels that could be used to collect rainwater or rainwater run-off.

Run-off comes from your roof and is quite an efficient form of water collection. However, roofing shingles are made with petroleum which may present a problem for human consumption. Perhaps a tarp can be set up to gather water and funnel it into a barrel or bucket. Let your roof or tarp be pounded for a long period of time before starting your collection – this should help rinse off chemicals. Jan Lundberg can go into further detail on this, as I first read about this from his own experience living in the redwood forest.

Relocation should be considered. Water and food are primary concerns. Electricity is a luxury that is not required for survival; you can go to sleep when it is dark, and wake to the sun. Ready yourself for a humble lifestyle, as the Indigenous Natives of what is rightly called Turtle Island [8] have told us for so long.

Ultimately – based upon the current will and mind state of society – I am convinced there won’t be any tech-“no-logic” solutions, as my dear friend Tiokasin Ghost Horse has profoundly stated on many occasions. Internalizing critical knowledge and cultivating spiritual practice are the only way forward to true sustainability.

peace eternal

For more information on Renewables, see:

Renewables Part 1 by Michael Kane
Renewables Part 2 by Michael Kane
Renewables Part 3 by Michael Kane

The Demise of Business as Usual by Thomas L. Wayburn, PhD

more on renewable energy here:

Matt Savinar Esq. on renewable energy

***Explore Matt’s entire web site for high quality information on how to survive Peak Oil.

Surviving Peak Oil – Dale Allen Pfeiffer’s website

***EXCELLENT resource for low-tech solutions that will ultimately be of greater value than solar panels or wind turbines.

Alice Friedemann on Hydrogen

end notes and sources:

[1] Former CIA Director James Woolsey, who is currently a VP with Booz, Allen & Hamilton, is on ACORE’s advisory board. And Michael Eckhart, a former Principal of Booz, Allen & Hamilton, is the ACORE President.



[4] While hydropower can also be used as back-up capacity for wind, nuclear power cannot due to technical limitations. Hydropower is a good counterbalance for wind energy where it is available. The problem with hydro capacity is drought, and as climate change continues there are signs that drought will worsen as the world water crisis deepens.




[8] “ Turtle Island” is the true indigenous name for what is commonly referred to as “ North America.”

c. Michael Kane, 2005

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Things to come: part I


In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Britt Ekland was a gorgeous "Bond girl," Miss Mary Goodnight in The Man With the Golden Gun, a celebrity more than an actress, but no fool. In a recent interview, Ekland, now 62, offered an idea to be remembered if we are to endure the enormous changes that are overtaking us: "The key to life is being able to downsize without losing your dignity."

That thought will run through this series of columns, in which I'll sketch, as best I can, what we're in for (for good as well as for ill). One disclaimer, though: I'm assuming a best-case scenario for global warming; that is, climate changes proceeding at about their present rate. If those changes turn drastic, as other scenarios suggest, all bets are off.

In a column titled "$4 a Gallon" (The Austin Chronicle, April 29) I wrote, "Gas prices can only go up. Oil production is at or near peak capacity ... that means $4 a gallon by next spring [2006], and rising ... probably $10 by 2010." Three days before Hurricane Katrina hit, The New York Times (Aug. 26, p.1) reported $3 a gallon in some parts of the country. That article noted: "In two years, the national oil bill has jumped by $210 billion, or 54%." Since Katrina, $3 has become the national norm in many parts of the country. If Rita had behaved as advertised, it would be closer to $4. Katrina increased the rate of America's decline by at least a year, and Rita has confirmed out vulnerability. Heating oil was expected to rise 17% this winter before Katrina (NY Times, Sept. 8, p.C5). Expect $4 this spring, probably $5 next summer, $6 next hurricane season. Long before then, it will be obvious to all that nothing can remain the same.

People grasping at straws often argue, "Gas has been $6 a gallon in Europe for years, what's the problem?" With Europe's national health insurance, Europeans (and their businesses) aren't burdened with our incredible health costs, which are due to rise 10% next year (The Week, Sept. 23, p.8), while Medicare premiums will rise 13% (NY Times, Sept. 17, p.8). The average American family health policy is now $11,000 yearly (USA Today, Sept. 15, p.1B); next year's 10% hikes raise that figure to $12,100. If we weren't shelling out so much money to insurance companies, we could absorb $6 a gallon too. (Even some conservatives are realizing that national health insurance would lift an enormous burden from large and small businesses as well as consumers.) More importantly, most Europeans don't need a car and most Americans do, because Europe is structured around cities while America is structured around suburbs. Minus the sparsely populated stretches of Norway, Sweden, and Finland, Europe is roughly half the size of the U.S., so its transport costs are half. Finally and crucially, Europe has the finest rail system in the world. We've let ours go to the dogs, though railroads are the cheapest way to carry people and cargo (more on this in future columns). Also, Europeans recognize the importance of global warming and peak oil. As Jeff Immelt, the CEO of General Electric, recently said, " Europe today is the major force for environmental innovation. European governments have encouraged their companies to invest [in] and produce clean power technologies." (NY Times, Sept. 21, p.25) Europe has big problems too, but has positioned itself intelligently for the 21st century. America still clings to the 20th, and we're about to pay for that.

With its excellent rail system, Europe is far less dependent (internally) upon air travel. That is tonight's subject. More than pump prices, and perhaps more than heating-oil prices, the first drastic change for middle-class and more-or-less affluent Americans will be their inability to fly.

In the last year, the price of jet fuel has risen 50% (NY Times, Sept. 15, p.C1). The airlines have desperately tried to absorb this price hike, keeping fares low and hoping for the best. But those days will be over by Easter, if not Thanksgiving. USA Today, Sept. 15, p.1B: "The airline's jet-fuel bill this year will be about $3.3 billion [a pre-Rita figure], up from $2.2 billion last year and $1.6 billion in 2003." That article notes that four of our seven largest airlines are now in Chapter 11: "51% of the USA's top 12 airlines is now operating under bankruptcy protection." The article quotes James May, CEO of the Air Transport Association: "No business model of any airline can survive with sustained jet-fuel prices of $90 to $100 a barrel." Yet those are exactly the prices predicted by many experts in the relatively near future; a major natural or manmade disruption could bring them about in a day. There is no relief in sight. This situation cannot be sustained. The average driver may be able to absorb fuel costs for a few years more, but not the average flier. Within a year – or two, or three? – affordable passenger flight will be history.

What will that mean in real life?

Airfares will skyrocket. Schedules will be pared to the bone. If you're not rich, and if your lifestyle includes hopping planes when you choose – you're grounded. As airlines fail and the surviving carriers cut back, flights will be fewer, especially to smaller cities. Some areas will lose service altogether unless the government mandates that every city of under half a million people must get, say, two flights a week. Conventions and conferences of every description will be beyond the means of any but the wealthy. The average person won't be able to jet to the wedding, sick bed, or funeral of a loved one. Even if you can scrounge the money for a ticket, there may not be a flight. Music and film festivals that can't be sustained locally will be a thing of the past (unless and until rail service is restored). Families will think twice about letting their kids apply to colleges hundreds or thousands of miles from home. Family members who live scattered all over the country will see one another rarely, if at all (again, unless and until rail service is restored). None but the rich will vacation in far-off places – and "far off" will come to mean any place beyond two tanks of gas. The gaudy entertainments that depend on flight in places like Orlando and Las Vegas will dry up and blow away. The real estate value of summer homes or winter playgrounds will fluctuate wildly; those accessible mainly by air will plunge. Flight's ancillary industries – hotels, restaurants – will hit bottom, displacing and impoverishing many hard-working people. Tourism as we know it, an industry merely decades old, will not survive. Nor will such minor luxuries as next-day delivery. Mega-airports and mega-hotels will become ghostly caverns, monuments to a failure of foresight.

What good could possibly come of this? Well, for starters, if it happens soon enough it may save many millions of lives. The Economist, Aug. 6, p.10: "[E]xperts now believe a global outbreak of pandemic flu is long overdue, and the next one could be as bad as the one in 1918 [before passenger flight], which killed somewhere between 25 and 50 million people." The Times, Sept. 22, p.12: "Just as governments around the world are stockpiling millions of doses of flu vaccine and antiviral drugs in anticipation of a potential influenza epidemic, two new surprising research papers ... have found that such treatments are far less effective than previously thought." The experts' greatest fear has been that air travel will spread the disease uncontainably before its symptoms are obvious, raising the casualty rate into the hundreds of millions. Without convenient air travel, that's unlikely.

Another benefit: 9/11 turned the U.S. into a no-fly zone for three days. There were many reports that air quality throughout the country (after just three days!) was measurably much better. Drastic curtailment of flight would not only make our environment healthier, but would probably do more to slow global warming than the full enforcement of the Kyoto Treaty, and do it quicker.

I'll explore other benefits in future columns, but briefly now: Amid this massive disruption, we will be forced to pay attention to where we are. You can't go elsewhere for culture; you must cultivate it where you are. You can't go elsewhere for beauty; you must create beauty where you live. Family life will be literally closer: a Georgia gal won't take a job in Seattle if it means she may not see her mother again for many years. With long-distance travel a rarity, communities will become more conscious of being communities. I'm no optimist, but perhaps, perhaps, many will realize that we're all in this together, and that our well-being and our neighbors' are entwined. Above all, the frantic pace of American life will slow down. Way down. That'll drive some people crazy, but others – perhaps, perhaps – will discover a truth put best, once again, by Caroline Casey: "Beauty is abundantly available to the unhurried mind."

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[What’s important here is not that it’s Chavez and Mugabe slamming the US. We expect that and they are correct. What is significant is that this message is resonating throughout a world that smells US economic/military blood in the water and sees clearly America’s just-beginning collapse. Our nation absolutely depends upon $2.5 billion a day in foreign investment to sustain a consumer economy that is imploding. Chavez has already wisely pulled some $25 billion out of US banks and notes. Bush has promised to spend another $300 billion on hurricane relief without raising taxes. Inflation has just had its largest increase in 25 years and consumer confidence has plummeted to a 30-year low. The writing’s on the wall in capital letters (pun intended). Late October marked the start of the historic time for stock market crashes. All we need now is for the thermostats to start clicking on and for the real hurricane damage to make itself felt.. – MCR]

Mugabe, Chavez slam U.S. at U.N. event

Zimbabwe leader compares Bush, Blair to Hitler, Mussolini
Monday, October 17, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

ROME, Italy (AP) -- The leaders of Zimbabwe and Venezuela on Monday denounced President Bush and British Prime Minister Tony Blair as "unholy men," and blamed the United States and other developed countries for world hunger, pollution and war.

President Robert Mugabe of Zimbabwe and Venezuela's Hugo Chavez turned their speeches at the U.N. Food and Agriculture Organization into tirades, with the African leader describing Blair and Bush as "two unholy men of our millennium."

Chavez accused what he called "the North American empire" of threatening "all life on the planet," while Mugabe compared Bush and Blair, for their alliance in the war in Iraq, to Germany's Adolf Hitler and Italy's Benito Mussolini, who were World War II allies.

U.S. representatives at the U.N. organization's gathering in Rome said Mugabe and Chavez made "a mockery" of the occasion with their scathing remarks.

The gathering, a day after the United Nations marked World Food Day, commemorated the organization's 60th anniversary.

The verbal attacks by Chavez and Mugabe drew cheers and applause from many of the delegates. The organization has 188 members.

"These leaders chose to politicize an event that was meant to be about feeding the hungry people of the world," Tony Hall, the U.S. ambassador to U.N. food agencies, told The Associated Press in a telephone interview.

"Mugabe, especially, should not have been invited," Hall said. "He would be the last person, I think, an organization should invite to talk about hunger."

A defiant Mugabe defended the land reforms blamed for ruining the country's agriculture-based economy and contributing to widespread famine there.

Agreement avoids restrictions

The European Union has imposed sanctions on Zimbabwe's political elite that include travel restrictions. But an agreement between Italy and the U.N. agency allows all delegations to go to the organization's headquarters, FAO spokesman Nick Parsons said.

Despite the restrictions, Mugabe has been allowed to do some travel in the countries that imposed the sanctions, including U.N. General Assembly sessions in New York.

The seizure of white-owned commercial farms in the past five years and prolonged drought have crippled Zimbabwe's agriculture-based economy. About 4 million Zimbabweans are in urgent need of food aid in what was once a regional breadbasket, according to U.N. estimates.

Recent constitutional changes in Zimbabwe will prevent white owners of confiscated farms from recovering their land and could be used to strip critics of their passports and the right to travel.

Mugabe defended the land reforms as "redressing the past gross imbalances in land ownership which were institutionalized by British colonialism."

"Countries such as the U.S. and Britain have taken it upon themselves to decide for us in the developing world, even to interfere in our domestic affairs and to bring about what they call regime change," he said.

Chavez praised Mugabe's land reform, saying the African leader had been "demonized" and that similar reforms were being enacted in his own country.

The Venezuelan leader used his speech to rail against woes that he blamed on rich countries -- including climate change, agricultural trade barriers and debt interest payments by developing nations. He called for wealthy nations to cancel debt, or give poor countries a grace period of at least a year on the interest payments.

Brazilian president focuses on hunger

Brazilian President Luiz Inacio Lula da Silva appealed to rich countries to put hunger on their political agendas. He also suggested poor countries should stamp out the corruption that often diverts aid.

"The poor countries must give an example of honesty, of ethics, so that we truly deserve the solidarity from millions and millions of people who would like to contribute but sometimes are not sure their money will go where it should go," the Brazilian leader said.

The U.N. agency said it had signed a deal with Brazil to run food programs for schoolchildren in developing countries around the world.

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Bush puts brave face on failure to secure trade deal

The Latin Americans have stalled plans for an economic zone to rival the EU, write our correspondents

By David Charter and Fiona McCann
The Times
November 07, 2005,,11069-1861075,00.html

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

PRESIDENT BUSH put a brave face yesterday on “frank” talks with his counterpart in Brazil as a bruising visit to South America did little to advance his plans for a giant free trade area to rival the European Union.

If the White House ever nursed a hope that the fourth Summit of the Americas would boost Mr Bush’s flagging image, that hope died as the talks in Argentina petered out late on Saturday without clear agreement on how or when they might resume.

Mr Bush’s follow-up bilateral with President Lula da Silva in Brasilia yesterday ended in warm words, but no sign of a meeting of minds on the stalled Free Trade Area of the Americas (FTAA).

Standing alongside his host, Mr Bush said: “He has got to be convinced, just like the people of America must be convinced, that a trade arrangement in our hemisphere is good for jobs, it’s good for the quality of life.”

There were some small signs of progress on the free trade concept launched in 1994 by President Clinton with an eye to completion by January 2005. Mr Bush won support from President Fox of Mexico, who urged that, of the 34 states at the summit, the 29 that broadly favour the FTAA should continue to discuss it.

Brazil, one of five recalcitrant countries, co-chaired the talks with the US and there was a suggestion that Mexico and Chile might assume leadership to inject some momentum.

While Mr Bush left with little to boast about, the summit was not the public relations disaster many had predicted. President Chávez of Venezuela, the self-styled anti-capitalist, had been joined at the head of an anti-Bush rally by Diego Maradona, the Argentinian football star. Their rally was peaceful, but the anti-capitalist riots that followed did nothing to advance Señor Chávez’s brand of socialism or his proposals for a redistributive South American economic zone excluding the US.

His call for the FTAA concept to be “buried” was largely ignored. Even though he was joined by the four important nations of Argentina, Brazil, Paraguay and Uruguay in shunning the US plan, they will continue their own free-trade talks without Venezuela.

“We do not want to bury the agreement and we do not want to resuscitate it either,” Celso Amorin, the Brazilian Foreign Minister, said.

President Kirchner of Argentina urged the creation of globalisation that works for everyone, not just a few. Brazil showed that it was the real muscle behind the scenes by leading opposition to Mr Bush’s desire to set a date for the resumption of full FTAA talks. Senhor Lula said that he preferred to wait until next month, for the next ministerial meeting in the World Trade Organisation’s Doha Round of trade talks, when world agricultural subsidies are on the agenda. He won the day against the US and 28 other countries supporting a firm date to relaunch the pan-American free trade zone.

Senhor Lula, facing elections next year in which cosying up to Mr Bush could cost him votes, said: “We agree that the reduction, with a view towards the elimination, of agricultural subsidies, will be a key to balance.”

Showing the restrained tone that he has used throughout his visit, Mr Bush suggested they should keep working on the FTAA, but not introduce it if Senhor Lula judged it was against his people’s interest.

Dan Restrepo, of the liberal Centre for American Progress, said that the summit showed how much Mr Bush had lost control of the free trade agenda in South America. He said that Señor Chávez was “a sideshow”, and had distracted many people from the important relationship, which was between President Bush and President Lula. He said that the US and Brazil had been at odds about the FTAA almost as soon as it was proposed in Miami in 1994.

“Chávez is a good showman but it is quite remarkable that Chávez can pose as an anticapitalist leader with a straight face because his whole socialist revolution is greased by the sale of oil to the capitalist world,” he said.

The South American press criticised not only Mr Bush, the most unpopular US President in the region since polling began, but also his host. Argentina’s leading broadsheet, La Nación, called the summit an “all-out failure”. It said that Señor Kirchner had been “navel-gazing” when, at its inauguration, he blamed US policies for Argentina’s economic crash in 2001. La Nación criticised Señor Kirchner for not concentrating on the “common conflicts” of Latin America, such as social inequality.

It also saved some venom for Señor Chávez, saying that, without his oil, he would be insignificant, and that no country in the region would follow him.

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Oil supplies may be lower than OPEC countries want to admit

By Tom Dunbar
Special to The Clarion-Ledger
November 6, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

There are motives within the Organization of Petroleum Exporting Countries and among its members to overstate capacity. Members include Algeria, Indonesia, Iraq, Iraq, Kuwait, Libya, Nigeria, Qatar, United Arab Emirates and Venezuela.

In the 1960s and the early 1970s, OPEC established quotas — how much a country could produce — based on each member nation's "stated" oil reserves.

Thus, each member nation of OPEC had an incentive to inflate the statement of its reserves to obtain a larger oil quota.

Additionally, assurances to the world that there was an abundance of cheap oil discourages investment in alternative energy sources and enhances the political influence of OPEC.

So, there are very clear reasons to question not only the reserve claims of OPEC members — as has investor Jim Rogers, who says: "Tell me which OPEC nation you would trust not to inflate its reserves" — but also very valid reasons to question the claims of OPEC itself to a never-ending source of fossil fuel.

Check out Twilight in the Desert, a book published this year by Matthew Simmons of Houston, Texas, who has a long background in the oil industry and is an investment banker specializing in oil. He has testified before the U.S. Congress, and believes that the world's oil supply is depleting fast, that consumption is rapidly exceeding production and reserves, and that alternative energy resources are needed quickly.

Simmons particularly disputes the claims of Saudi Arabia of unlimited reserves in his book. Others in the industry — and in OPEC — dispute Simmons' conclusions, but they are worth our consideration. That's because, if he is right, then we are quickly moving to the end of "cheap oil."

Simmons has three decades of insider experience as an investment banker for the oil industry. He says he has exhaustively researched the Saudi Arabia oil and production industry, and analyzed more than 200 historical technical reports prepared by the Society of Petroleum Engineers analyzing Saudi petroleum resources and production operations.

His conclusions are drawn in part from reports of American engineers employed by American companies which managed the Saudi oil industry prior to the Saudi's nationalization of the oil industry in 1980, as well as interviews with those engineers.

Simmons' book, Twilight in the Desert, provides a history of the discovery of oil in Saudi Arabia, the size and extent of the huge oil fields discovered several decades ago, the production from those fields, and the classic signals of oil field depletion which he says are now being experienced in Saudi Arabia.

The book also discusses strategies used by Saudi Arabia attempting to maintain high production levels and why they will soon be less effective. Simmons also explains Saudi oil field production management and why some methods used actually damaged the long-term productivity of the oil fields. His conclusions are alarming.

He argues:

  • The bulk of Saudi Arabia's oil production has come from four super-giant fields which have yielded 80 percent to 90 percent of Saudi Arabia's oil production for almost four decades. There exists three or four smaller fields that produced virtually the remaining balance. All of these fields reached their probable peak of sustainable production around 1979.
  • Classic signals present themselves as any oil field ages and begins to deplete. Declining pressure occurs. Over time, as oil is produced, water or gas must be injected to replace the oil to maintain pressure. Increased water injections into an oil field though massive separation gas and oil separation plants are indicators of depleting reserves. As early as l978, oil field managers had already constructed 58 such plants.
  • Secondary oil recovery techniques and strategies have been employed for decades on all of the major oil fields in Saudi Arabia. These techniques would not be utilized unless necessary, because of the additional expense. In addition to pumping water and gas into the ground to maintain pressure so that the oil will flow for easier extraction, horizontal well-drilling techniques have been extensively employed within the last decade.
  • It is an error to accept the conventional assumptions that the remainder of Saudi Arabia's portion of the Arabian Peninsula has been lightly explored because the super-giant oil fields are adequate for the foreseeable future. To the contrary, Simmons says his investigation reveals that Saudi Arabia has been actively looking for new fields for decades, but has been unable to find significant new oil reserves. There are still a few areas which have not been explored, acknowledges Simmons, but the most promising areas have been, and the Saudis have become increasingly anxious since the l980s that there are no new fields sufficient to replace the declining production.
  • Saudi Arabia 's oil output reached its all-time peak in approximately 1979 when the four large fields — Ghawar, Safaniya, Abqaiq and Berri — accounted for 8.5 million barrels a day of the total 9.8 million barrel peak output. The assumptions of never-ending oil are based in part on the size of the Saudi fields which are massive.

The "king" is the Ghawar field, the greatest oil-bearing structure the world has ever known. It is 174 miles long, and 31 miles wide. Since its first production in l951, it has now produced over 55 billion barrels of oil, accounting for 55-65 percent of Saudi Arabia's total production.

In 1979, Ghawar produced approximately 5.3 million barrels of oil per day, and it continues similar production even today, but with increasing "water cut" to maintain production levels — i.e., some 26 percent of Ghawar's production was water in l993, and today the percentage is 36 percent, a clear sign of declining oil pressure and field capacity.

Saudi Arabia stated in early 2004 that it would spend $18 billion through 2007 to improve and enhance its current production capacity. Simmons disputes these claims and says it will soon be difficult for Saudi to maintain existing production even with current technological advances.

He says Saudi Arabia will soon join the United States and other Western countries that have reached the point of declining production with increasing world demand.

Simmons’ purpose in Twilight in the Desert is to inform the public, politicians and business leaders of his concerns, and he presents strong arguments that our government's policy should move to a strong and immediate commitment for the development of alternative energy sources, as well as conservation of fossil fuels, if we are to continue to prosper and maintain our national security. His thesis is well worth our consideration and that of our leaders.

Tom Dunbar is a money manager and attorney in Jackson. Questions or comments may be sent to his asset management firm, Dunbar Financial Strategies, LLC, via e-mail at or his office telephone at (601) 366-3170.

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[David Dropsey, an analyst at Thomson Financial, is quoted below: in order for corporate profit growth to hit zero in 2006, "you'd need some kind of doomsday scenario… You'd need an environment where you have rampant inflation, increased unemployment and surging interest rates." The implication is that inflation is low enough to avoid the unpleasant mixture described. But according to John Williams, the government’s figures for the consumer price index and inflation – and unemployment – are highly doctored anyhow:

As a result of the systemic manipulations, if the GDP methodology of 1980 were applied to today's data, the second quarter's annualized inflation-adjusted GDP growth of 3.0% would be roughly three percent lower (effectively netting to zero percent or below). In like manner, current annual CPI inflation is understated by about 2.7% against the pre-Clinton CPI methodology (would be about 5.7%), and the unemployment rate is understated by about seven percent against its original design and what many people would consider to be actual unemployment (would be about 12.5%).

As for interest rates and the bull’s-eye on the ceiling, our new Fed Chairman will be hard put when he takes over this January, just as the cold weather starts ratcheting up demand for scarce oil and gas. It will be possible to keep the Dow above 10,000 so long as the folks at Wal-Mart and Home Depot can get their orders filled and onto the shelves. After that, things get trickier. –JAH]

Zero? Less than zero?

An analyst at a prominent bank is forecasting no corporate profit growth next year. Could it happen?

November 4, 2005
Alexandra Twin
CNN/Money staff writer

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

NEW YORK (CNN/Money) - 'Twas the week before Halloween when a big Wall Street firm did send, a note most scary to investors that said ...

Next year, no earnings growth.

What? Zero earnings growth?

Granted, a boatload of bulls and bears alike are concerned about the outlook for stocks, and the economy, in 2006, particularly in the first half. And "slowing earnings growth" has become something of a mantra for many on Wall Street.

But none? Zero? Zip? It would be the first time in four years Wall Street's had to weather that.

In his Oct. 25 note titled "10 reasons to be bearish," J.P. Morgan Chase's global stock analyst Abhijit Chakrabortti highlighted why he thinks that a mix of higher inflation and interest rates, better returns on cash and no earnings growth meanthe stock market could be in for a rough ride next year.

Not everyone agrees.

"I don't expect zero earnings growth next year, but I do expect slower growth," said Barry Hyman, equity strategist at Ehrenkrantz King Nussbaum.

Hyman cited a possible slowdown in the economy coupled with higher inflation and interest rates, not to mention tougher comparisons from the previous year. Earnings were bound to slow down after more than three years of surprisingly strong growth.

Profit growth was essentially flat as recently as 2002, when earnings for the S&P 500 grew a scant 0.1 percent from 2001, according to earnings tracker Thomson Financial. (see chart)

But for that to happen in 2006 "you'd need some kind of doomsday scenario," said David Dropsey, a Thomson Financial research analyst. "You'd need an environment where you have rampant inflation, increased unemployment and surging interest rates. I just can't see zero earnings growth next year."

Zero? Less than Zero?

Other market analysts contacted for this story agree that no earnings growth next year doesn't seem likely. Calls to Chakrabortti's office were not returned.

Right now, S&P 500 earnings are expected to grow 12.6 percent in 2006 from 2005, when earnings growth is expected to come in at around14.5 percent, according to economists surveyed by Thomson Financial.

Of course what comes out in fourth-quarter earnings reports and forecasts could change the outlook for next year considerably.

And to be sure, not everyone out there is as rosy as the consensus. While Thomson Financial's average forecast is nearly 13 percent, many analysts say profit increases could easily come in below 10 percent for 2006.

"We won't see 15 percent growth like we're seeing in the third quarter (of 2005), but I think certainly low- to mid-single digits," said Jon Burnham, portfolio manager at Burnham Securities.

Burnham thinks that's partly because the economy is going to keep posting respectable growth, citing government spending that will kick in from the rebuilding efforts after the 2005 hurricanes.

That's a sentiment that Federal Reserve Chairman Alan Greenspan and other central bankers seem to share. (Full story).

But some market watchers question whether the economy, and the stock market, will hold up as well next year.

"I see the whole business cycle slowing down," said Ken Tower, chief market strategist at CyberTrader, adding he expects a bear market in 2006, something he says tends to happen every four years or so.The current bull market has stretched for nearly three years.

Better quality earnings?

Energy, consumer and tech are among the early sectors primed for strong earnings growth next year, according to Thomson Financial

Energy earnings are expected to grow another 13 percent in 2006 on top of the 50 percent growth forecast for 2005. Consumer Discretionary is expected to grow 20 percent versus 1 percent in 2005. Technology is expected to grow 17 percent next year after growing 16 percent in 2005.

Corporations could be better set to handle a possible economic slowdown next year than would first seem to be the case, said Donn Veckery, co-founder of independent research firm Gradient Analytics.

"Typically, market analysts are too optimistic about earnings, but I think in terms of 2006, there's an excess of pessimism," Veckery said.

He noted that while there are definite exceptions, the quality of earnings overall has been improving in the third quarter of 2005 and that looks to stretch into the fourth quarter, and 2006 as well.

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Tough Flying Conditions in the Global Economy

By Stephen Roach
Japan Focus
October 24, 2005

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Not surprisingly, an unbalanced global economy is struggling under the weight of the energy shock of 2005. This has not been lost on world financial markets. Stock markets have sagged on the fear of demand risk and bond markets have backed up as central banks sound the alarm over incipient inflation. This underscores the inherent risks of the fabled four-engine global airplane. This gigantic 747 is now flying on just two engines, fueled by the American consumer on the demand side and the Chinese producer on the supply side. If the demand engine sputters, added thrust from the supply engine may be destabilizing. That’s a legitimate concern in late 2005. If US consumption falters in the face of ongoing vigor from Chinese production, it may be difficult for an already wobbly plane to maintain its altitude.

Nothing comes close to equaling the impact of the American consumer in supporting the demand side of the global growth equation over the past decade. By our reckoning, over the 1996 to 2005 interval, real consumption growth in the United States averaged 3.75% per annum -- fully 70% faster than average gains of just 2.2% elsewhere in the developed world. The world drew support from an extraordinary transformation in the US consumption model -- a morphing of income-based consumers into asset-driven spenders and savers. While growth in real disposable personal income remained on trend at 3.3% over the past 10 years, real consumption growth exceeded real income growth by about 0.5 percentage point per annum over this period. Drawing support first from equity wealth effects in the latter half of the 1990s and then from housing wealth effects over the past five years, the American consumer became the world’s consumer.

But at a steep cost. America’s wealth-based consumption binge pushed the income-based personal saving rate down by five percentage points over the past decade -- taking it deeper into negative territory than at any point since 1933. Alan Greenspan has estimated that equity extraction from residential property has been sufficient to have accounted for all of the decline in personal saving since 1995 (see his September 2005 working paper, co-authored with James Kennedy, “Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences”). Of course, the monetization of wealth from homes hardly came out of thin air. It required an enormous build-up of debt -- sufficient to take up the outstanding volume of household indebtedness by 20 percentage points of GDP over the past five years, equaling the gain over the preceding 20 years. Moreover, despite historically low market interest rates, the debt overhang pushed up the household-sector debt service burden -- interest expenses as a share of disposable personal income -- to a record high in mid-2005. The world’s consumer has taken the concept of macro risk into an entirely different realm.

The current energy shock is a very different threat to a wealth-based consumer than it is to an income-supported consumer. That’s especially the case since it hits US households when they are running a negative saving rate. In the three previous energy shocks -- 1973, 1979, and 1990 -- the personal saving rate averaged about 8%. US consumers had a cash cushion they could draw upon in order to support lifestyles. A negative saving rate offers no such cushion. Dick Berner has estimated that higher energy product prices are the functional equivalent of an annualized tax of around $130 billion on US consumers, or about 1.4% of total disposable personal income. With a negative saving rate, a significant portion of that tax will undoubtedly be funded by a retrenchment of discretionary consumption. The world’s consumer is now facing major cash-flow pressures heading into the all-important holiday buying season.

Meanwhile, halfway around the world, nothing seems to be stopping the Chinese producer (see my 21 October dispatch, “Wrong on the China Slowdown”). With GDP growth holding above 9% through 3Q05 and industrial output growth continuing to run north of 16%, a seemingly impervious Chinese economy seems all but oblivious to potentially ominous developments in its external sector. This could be an accident waiting to happen. In an energy-shocked environment, China’s export-led growth dynamic is at growing risk of decoupling from its major source of end-market demand -- the American consumer. If US consumption slows as I suspect, an inventory overhang could quickly emerge in China that would undermine production support in the months ahead.

That may not be idle conjecture. Nicholas Lardy of the Institute for International Economics drew my attention to an ominous build-up of Chinese inventories that predates any impacts of the energy shock. According to China’s National Development and Reform Commissions (NDRC) -- the modern-day version of the old central planning agency -- the accumulation of finished goods inventories accounted for fully 20% of the increase in China’s nominal GDP in the first half of 2005. This represents a major step-up in the inventory boost to Chinese economic growth. By way of comparison, finished goods inventories accounted for just 1% of China’s nominal GDP growth in 2004. To the extent that Chinese economic growth was already drawing unusual support from inventory accumulation before the energy shock hit, any energy-related shortfall of external demand could lead to an increasingly destabilizing overhang of domestic production.

Yet the China macro call is not just an inventory call. The Chinese economy suffers from a deeper strain of imbalances. With private consumption having fallen to a record low of just 42% of GDP in 2004 and likely to have declined further in 2005, China is lacking a key building block of self-sustaining internal demand. This is not surprising. Reflecting the ongoing pressures of the massive headcount reductions traceable to state-owned enterprise reform, Chinese consumers are predisposed toward precautionary saving. The lack of a well-developed safety net only reinforces this tendency. As such, China’s growth dynamic has become increasingly reliant on exports and on the investment in infrastructure and factories required to build a state-of-the-art export platform on a scale the world has never seen. Collectively, exports and fixed investment, which now account for over 80% of Chinese GDP, are still surging at close to a 30% annual rate. The rest of the economy is simply not pulling its weight.

The risk of the China call is that we extrapolate this year’s forecast errors into the future. Just because China did not slow in 2005, doesn’t mean that it’s full steam ahead for years to come. It is, of course, quite possible that Chinese officials turn up the dials on investment and fiscal policy if its export markets weaken. That was exactly what happened in the Asian crisis in 1997-98 and again in the mild global recession of 2000-01. But in those two earlier periods, the combined share of exports and fixed investment amounted, on average, to “only” about 55% of Chinese GDP -- far short of the current 80% share.

China can only go to this well for so long before it hits bottom. Unless internal private consumption quickly springs to life, China’s export- and investment-led growth juggernaut may simply outstrip its global support base. If the American consumer pulls back in an energy-shocked environment, as I suspect will be the case, those risks need to be taken seriously.

Sure, the world has other options. Maybe Japanese or even European consumers could ride to the rescue. Here, I think there is a serious phasing problem. While I am quite taken with the upside potential for non-US consumption, I believe such rebounds are likely to come later rather than sooner (see Consumer Rebalancing, October 4, 2005). Moreover, in the early stages of their consumption recoveries, the Japanese and European dynamics are likely to be glacial rather than vigorous.

While we are increasingly optimistic on prospects for sustainable recovery in Japan, we are only projecting a modest acceleration in Japanese consumption growth from 0.5% in 2003 to 1.8% in 2006. Similarly, our forecast of Euro zone consumption calls for an even more limited acceleration from 1.0% growth in 2003 to just 1.4% by 2006. By contrast, over the near term, the cyclical downside from America’s consumption trend-line of 3.75% growth is likely to be larger than the upside from the roughly 1% consumption growth path of Europe and Japan. Meanwhile, all consumers -- except, of course, those in oil-producing nations -- will be hit by the energy shock of 2005.

Alternatively, maybe Chinese exporters could penetrate new markets. In this instance, I think it’s wishful thinking to believe that China can simply push a button and redirect the focus of its export machine. This year, the US will probably account for 35-40% of total Chinese exports. Implicit in this extraordinary degree of dependence is a well-established distribution and logistical support infrastructure to US-Chinese trade flows. If the American consumer falters, China doesn’t just switch markets overnight. This may also explain why Chinese officials have been so reluctant to utilize their new flexible foreign exchange mechanism to engineer a stronger renminbi. Fearful of slippage in US demand and mindful of the stickiness of export distribution channels, currency appreciation would create export headwinds for China at precisely the moment its unbalanced economy can least afford to face them. At the same time, China’s export explosion is now encountering political resistance in major parts of the developed world -- underscoring a potential protectionist backlash to export diversification.

In the end, it may all hinge on the stability of a two-engine 747. The supply engine is going at full throttle while the demand engine is at risk of sputtering. An unbalanced global economy has long been lacking the internal stabilizers to cope with such a mismatch between supply and demand. As long as the American consumer keeps spending, this enormous airplane will keep flying. However, the energy shock of 2005 and the likely end of America’s housing bubble draw that key presumption into serious question. The supply engine will have a tough time keeping the 747 aloft if the demand engine runs out of fuel.

Investors need to pay greater attention to the downside risks to global growth in 2006. Such an outcome will put pressure on the earnings underpinnings of equity markets, provide support to bonds by drawing inflation worries into question, and pose a serious challenge for dollar bulls. The 747 is about to enter turbulent skies.

Stephen Roach, Chief Economist, Morgan Stanley, wrote this in the October 24, 2005 Global Economic Reformer. Posted at Japan Focus October 24, 2005.

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