Marin Katusa: 199 Days of Hell

By Marin Katusa, Chief Energy Investment Strategist

Just after I signed the publishing agreement for my first book, The Colder War, I realized how much research I was going to end up doing, specifically in areas that I never thought would be so integral to my subject area: energy and mining. Along the way, I came across some fascinating events that were completely out of my area of expertise but gave me a better sense for the unintended consequences in an historical perspective of the events that led to where we are today.

One epic event that really stood out for me, which I will discuss today, is the bloodiest battle of all time, to my knowledge. Over 2 million soldiers and civilians died in this one battle that lasted 199 days from start to finish. (If you know of one particular battle—not a war—that had more deaths, I would love to hear about it)

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What was the catalyst for the bloodiest and most horrible battle of all time? Oil. Before I get into why it was, I want to present the events that led up to this epic battle.

In 1939, Hitler and Stalin signed the German-Soviet Nonaggression Pact. Hitler focused on Western Europe and on defeating France by the mid 1940s, he became rattled by Soviet expansion in the East, which by this time included the occupation of the Baltic states (now Estonia, Latvia, and Lithuania) by the Soviets.

The Day That Changed the World

A critical, often forgotten event (especially by the French) occurred on June 22, 1940. That was the day the French surrendered to the Nazis and signed the armistice. Four days later, the Soviet Union made a decision that ended up becoming one of the critical turning points of WW II.

Initially, the Soviets planned on annexing parts of Romania via full-scale invasion. Sound familiar? I’ll touch on Crimea later in my missive, but for now, stick with me—this gets very interesting.

However, the military masters of the Soviet Union recognized that with the fall of France, out went the French guarantee of security at Romania’s borders.

So rather than actually invading Romania, the Soviets sent an ultimatum to Romania: withdraw from our territories of interest—which were Northern Bukovina and Northern and Southern Bessarabia—and avoid military conflict with the Soviet Union. If not, the Red Army will invade.

Germany via the 1939 German-Soviet Nonaggression Pact recognized the Soviet Union’s interest in Bessarabia; thus Hitler became paranoid about the Soviet Union’s expansion from the east to Central Europe. But more specifically, Hitler feared the proximity of the Russians to the Romanian oil fields, which the Nazis depended on.

By early August 1940, these territories that Romania withdrew from made up the Moldavian Soviet Socialist Republic, and they were quickly folded into the Soviet Union.

By late 1940, Hitler made the decision that I believe was a critical turning point of WW II. Initially, Hitler planned on invading the Soviet Union in May 1941, but Yugoslavia and Greece got in his way, and his plans were delayed by five weeks until the Nazis defeated those armies in the Balkans.

The Russian winter came early in 1941, but Hitler believed that the Nazi Germany army was much superior to the Red Army (and they were more superior at the time) and that the Soviets would be defeated before November 1941.

The Nazis sent 3 million soldiers. Stalin met the Nazi offensive with over 5 million Soviet soldiers. I don’t know of a larger invasion in the history of mankind.

To put this battle in perspective, it’s the equivalent of battle lines spanning from Florida to New York (over 1,100 miles). Also, over 90% of all Nazi casualties in WW II were due to their invasion of the Soviet Union.
By late July 1941, the Nazis fought their way within 200 miles of Moscow; by this time, they had progressed over 400 miles into the Soviet Union in less than a month.

Initially, the Germans made incredible progress. However, heavy rains in early July hampered their speed as the terrain became a mud bath, and by this point, Stalin ordered a scorched earth policy, where the Soviet troops destroyed all infrastructure, burned all crops, and dismantled and evacuated all factories and equipment via rail to the east upon the Nazi advance.

As winter set in, the progress of the Nazis came to a standstill. On December 7, 1941, Japan bombed Pearl Harbor and subsequently, the United States joined the Allies and entered WW II.

Hitler was well aware that the biggest priority of the Americans upon entering WW II was to defeat the Nazis. He knew he had to bring a quick defeat to the Soviet Union and drastic measures had to be taken.
Hitler believed that rather than attacking Moscow (the heavily fortified capital of the Soviet Union), Germany should go after the Soviet oil fields in the Caucasus. For Hitler, the victory would result in a triple positive for Germany:

1. Cut off the flow of oil to the Soviet resistance;

2. Divert the oil produced from the oil fields in Caucasus for the Nazi cause and for future battles against the Americans; and

3. Cut off Soviet access to the breadbasket areas of Ukraine.

To execute Hitler’s plan, the Nazis would have to control a key industrial city, which happened to be named after Soviet leader Joseph Stalin: Stalingrad (today known as Volgograd). The Nazis invaded, and Stalin threw everything the Red Army had at this battle, even refusing to allow the civilian population to be evacuated. He believed the soldiers would fight to their death if civilians were in the city.

He was right. Stalin’s ruthless orders worked. The Red Army, including civilians who worked in factories made up of men and women of all ages, put up a ferocious resistance doing whatever possible. The Germans had superior weapons, training, and land and air support. To put things in perspective, the average Soviet soldier, upon arriving to Stalingrad, had less than one day’s life expectancy.

The battle eventually evolved into concrete guerilla warfare within the city ruins. The Nazis captured 90% of the city by September 1942 and by this time, they took over 3 million Soviet prisoners of war, most of which never returned alive.

The Soviets’ luck changed on November 19, 1942, when they decided to launch Operation Uranus, which many at the time within the Red Army believed would be their last chance to defeat the Nazis. With 90% of Stalingrad under Nazi command, the Soviet plan was to swing multiple army troops around the Nazis and surround them. It worked.

Up to this point, Hitler publicly made announcements that the Germans would never leave Stalingrad. For most of the German soldiers, this proved to be true. Rather than having the German troops attempt a breakout (and going against Hitler’s promise of Germany never leaving Stalingrad), they were ordered to fight, even though they were running low on ammunition and starvation had set in within the German camp.

On January 31, 1943, German Field Marshal Friedrich Paulus surrendered to the Soviets. After the Nazi defeat in Stalingrad by the Soviets, it was only a matter of time before Germany lost the war. Hitler never got access to the oil fields, and over 2 million soldiers died.

Déjà Vu and the Butterfly Effect

Let’s reflect back to the events that followed. Hitler became paranoid about the Soviet expansion after the signed 1939 German-Soviet Nonaggression Pact.

Remind you of anything?

We see NATO today supplying military troops and land and air force in the Baltics for similar fears about Russian expansion. NATO sees Crimea today as a reminder of the Baltics’ situation in 1940. Ukraine is not in a civil war—let’s make that very clear. A civil war is defined as two or more groups fighting for control of the government. What’s going on in eastern Ukraine is not a civil war, but rather a war of secession; the two breakaway provinces don’t want to go to Kiev. Furthermore, NATO will not stand for a secession.

Putin is facing sanctions from the West and military force by NATO… not to mention that oil has dropped in half from over $100/bbl to under $50 a barrel in the last 12 months. Hitler’s decision, based on actions that essentially involved a small territory (now known as Moldova) sandwiched between Romania and Ukraine, resulted in the bloodiest battle of all time.

But behind the scenes there is always tension and momentum building and waiting for a catalyst to release the pressure that has built up. We have seen this many times in the past where an insignificant event on the global stage puts in motion events with shocking results. But there is always more behind the story than a “simple” catalyst or unconnected events.

The Arab Spring eventually brought to the global front a built-up dissatisfaction of many youths and lower-income people of human rights violations, dictatorships, absolute monarchy, extreme poverty, and many other factors. The catalyst for the protests in Tunisia was the self-immolation of Mohamed Bouazizi in 2010.
I recall a specific event I experienced in Kuwait in December 2010, where a Pakistani taxi driver shared with me his story of anger and contempt with the government of Kuwait. I asked him to be my driver for the week, mainly because he spoke English and had been in Kuwait for 10 years and knew his way around, but I also enjoyed his company.

But I got much more than I expected. He took me around Kuwait, where I saw the good, the bad, and the ugly. Every city in the world has those areas you will never see advertised in the travel guidebooks.

Kuwait—a “dry country,” meaning you cannot buy alcohol—wasn’t that difficult to find alcohol in if you really wanted it. Yet at what seemed to me to be every hour on the hour, I heard prayers blasting through the air. My taxi driver wasn’t an extremist; he was Muslim—and no different than any Catholic, Jew, or atheist—working his cab 12-15 hours a day, wanting a better life for his family. He was a good guy, caught up in the momentum that was building, which led to the Arab Spring.

The spread of the Arab Spring was muted by high oil prices. That is fact, though not a popular one. How did Saudi Arabia prevent protests in its kingdom? The House of Saud promised tens of billions of dollars in social programs.

How will the oil producing nations, such as members of OPEC, Russia, Canada, and Mexico, fare at $45 oil in 2015? How will the African petro-states function? How will the investors, who are exposed to billions of dollars of debt in the US energy sector (below is the payment schedule of all public companies’ debt payments due over the next 11 years), going to fare if oil stays below $50 in 2015?

History doesn’t repeat, but human nature has a repeatable pattern. The growth for energy will only increase in the future, even with energy efficiency improvements.

The fact is, the world will consume more oil in five years than it does today… even though I get many emails a day from uninformed individuals telling me why fossil fuels are awful (and yes, to the 100+ people who have emailed stating that Tesla cars will kill the need for oil—keep on dreaming. And by the way, your Tesla is on average powered over 50% by coal and natural gas—so you all are absolute hypocrites).

The world still needs uranium to power its nuclear base-load power, such as the US, which is currently the world’s largest consumer of uranium, using about 25% of the world’s uranium. China won’t be far behind, and it’s catching up quickly.

You Need to Be Brave When Everyone Is Fearful

Investing isn’t easy. If you want to do well in cyclical sectors, such as energy or mining, you must be able to buy when the sector is unloved and beaten down. Unfortunately, from a psychology standpoint, it’s easier to buy when it feels good.

Here is a list of rules of speculation I like to follow:

1. Never put more than 10% of your speculative portfolio into any one stock. True success in speculation is only achieved with risk mitigation and letting your winners ride. While putting all your eggs in one basket theoretically can pay off in a big way, it rarely does so in reality. If your speculative portfolio is worth $50,000, don’t put more than $5,000 into any one junior.

2. If, for whatever reason, an investment causes you stress to the point that you cannot sleep or are overly distracted from your daily life, sell enough stock to alleviate the situation. Life is too short. Have fun. If your stress level becomes intolerable, you’re either overinvested or speculating just isn’t for you. That’s okay; you’ve found out more about yourself. Speculation is a journey where the reward is money and the experience, but it’s not for everyone. If your wife, husband, family, or partner is hating you because you lost the family’s vacation money, look back to Rule 1.

3. Know what you own and why you own it. The Casey Energy Report posts all relevant news about the companies in our portfolio every Monday and Thursday after market close.

4. Use trailing stops and stop losses. For liquid stocks, they’re important, in my opinion. We work to create for you a balanced portfolio of high-risk speculations along with mid risk and lower risk yield plays, and we lock in gains along the way.
   
   The current market is exciting but carries a significant level of volatility. We want to be able to capture the upside and hold on to it, which is best accomplished by locking in gains with trailing stops (we did this very well earlier in 2014). Then we can sit patiently on the sidelines and await a general correction that allows us to get back into our favorite stocks, which we are currently doing.
   
   There’s a big difference between a trailing stop and stop loss. A stop loss limits losses. It’s the price you set to sell your stock in case the trade goes south on you. A standard stop loss is a sell order that’s automatically triggered if the security falls 20% (or whatever you put in for your stop-loss percentage) below your purchase price. For example, if you bought a stock for $10 and you put in a 20% stop loss, it would be $8, at which point you would lose $2. Unfortunately, stop losses (and trailing stops) don’t work for illiquid juniors, so be careful. That’s why Rule 3 above is so important.
   
   A trailing stop locks in your gains. Let’s say you paid $10 for a stock, and it goes to $14. If you’d be happy to sell at $13 and pocket $3 per share in profit, then that’s where you set your trailing stop, in case the price retreats to that level. Of course, if the stock continues to push higher, you can always move your stop along with it, to capture even more profit.
   
   Many of our trailing stops were hit in early to mid-2014, a good indicator that we’ve been right to be careful amid this market’s volatility.

5. Give your speculation some time to play out, as with trends like the European Energy Renaissance. Such speculations demand that the investor wait for the market to catch on to the potential. This one specific rule—be patient—is probably the most difficult of all to stick to. A speculator is his or her own worst enemy.

6. Risk mitigation. Reduce your risk while preserving profit by using the Casey Free Ride formula when the opportunity arises. It’s prudent speculation.

Getting Your Casey Free Ride

Number of shares to sell =	Purchase price of stock	x Number of shares bought
	Stock price when you want to sell

7. Know that you’ll make mistakes, and that will result in losing money on that trade. Not every trade will be a winner. But if one or two of the junior high-risk speculations work out, they will make the whole journey more than worthwhile. I’m speaking from personal experience.

This is just a short list of many of the rules to speculation.

With oil at $45 per barrel, could there be massive changes that many aren’t expecting?

Definitely.

If you’ve been a subscriber of mine, you know how cautious I’ve been since early to mid-2014 on the price of oil.

What’s Next in the Energy Sector?

In the past four months, I’ve personally invested more cash than I have in the last four years. Could I be wrong? You bet I could, but this is not my first downturn.

I also believe in not owning too many positions, as I don’t have many positions either personally nor in the Casey Energy Report. I follow a very disciplined approach, and my style isn’t for everyone. I’ll be the first to acknowledge that fact.

If you’re looking for a newsletter that recommends a stock every month on the month and has 50 stocks in its portfolio, I’m not your guy.

But if you’re looking for in-depth research, experience, and exposure to my vast network in the resource sector, then you may want to pay attention to what I’m doing.

There’s blood in the streets in the energy sector—and I love that!

Now if you believe that to be successful in the resource sector one must be a contrarian to be rich, as I do, now is the time to become engaged.

Come see what I am doing with my own money. You’ll get access to every Casey Energy Report newsletter I’ve written in the last decade, and my current recommendations with specific price and timing guidance. It’s all available right here.

I can’t make the trade for you, but I can help you help yourself. I’m making big bets—are you ready to step up and join me?

The article 199 Days of Hell was originally published at caseyresearch.com.

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How Global Interest Rates Deceive Markets

By John Mauldin

 “You keep on using that word. I do not think it means what you think it means.”

– Inigo Montoya, The Princess Bride

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

– From an 1850 essay by Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen”

All right class, it’s time for an open book test. I’m going to give you a list of yields on various 10 year bonds, and I want to you to tell me what it means.

United States: 1.80%

Germany: 0.36%

France: 0.54%

Italy: 1.56%

UK: 1.48%

Canada: 1.365%

Australia: 2.63%

Japan: 0.22%

I see that hand up in the back. Yes, the list does appear to tell us what interest rates the market is willing to take in order to hold money in a particular country’s currency for 10 years. It may or may not tell us about the creditworthiness of the country, but it does tell us something about the expectations that investors have about potential returns on other possible investments. The more astute among you will notice that French bonds have dropped from 2.38% exactly one year ago to today’s rather astonishing low of 0.54%.

Likewise, Germany has seen its 10-year Bund rates drop from 1.66% to a shockingly low 0.36%. What does it mean that European interest rates simply fell out of bed this week? Has the opportunity set in Europe diminished? Are the French really that much better a credit risk than the United States is? If not, what is that number, 0.54%, telling us? What in the wide, wide world of fixed-income investing is going on?

Quick segue – but hopefully a little fun. One of the pleasures of having children is that you get to watch the classic movie The Princess Bride over and over. (If you haven’t appreciated it, go borrow a few kids for the weekend and watch it.) There is a classic line in the movie that is indelibly imprinted on my mind.
In the middle of the film, a villainous but supposedly genius Sicilian named Vizzini keeps using the word “inconceivable” to describe certain events. A mysterious ship is following the group at sea? “Inconceivable!”

The ship’s captain starts climbing the bad guys’ rope up the Cliffs of Insanity and even starts to gain on them? “Inconceivable!” The villain doesn’t fall from said cliff after Vizzini cuts the rope that all of them were climbing? “Inconceivable!” Finally, master swordsman – and my favorite character in the movie – Inigo, famous for this and other awesome catchphrases, comments on Vizzini’s use of this word inconceivable:

“You keep on using that word. I do not think it means what you think it means.”

(You can see all the uses of Vizzini’s use of the word inconceivable and hear Inigo’s classic retort here.)
When it comes to interpreting what current interest rates are telling us about the markets in various countries, I have to say that I do not think they mean what the market seems to think they mean. In fact, buried in that list of bond yields is “false information” – information so distorted and yet so readily misunderstood that it leads to wrong conclusions and decisions – and to bad investments. In today’s letter we are going to look at what interest rates actually mean in the modern-day context of currency wars and interest-rate manipulation by central banks. I think you will come to agree with me that an interest rate may not mean what the market thinks it means.

Let me begin by briefly summarizing what I want to demonstrate in this letter. First, I think Japanese interest rates not only contain no information but also that markets are misreading this non-information as meaningful because they are interpreting the data as if it were normal market information in a familiar market environment, when the truth is that we sailed beyond the boundaries of the known economic world some time ago. The old maps are no longer reliable. Secondly, Europe is making the decision to go down the same path as the Japanese have done; and contrary to the expectations of European central bankers, the potential to end up with the same results as Japan is rather high.

The false information paradox is highlighted by the recent Swiss National Bank decision. Couple that with the surprise decisions by Canada and Denmark to cut rates, the complete retracement of the euro against the yen over the past few weeks, and Bank of Japan Governor Kuroda’s telling the World Economic Forum in Davos that he is prepared to do more (shades of “whatever it takes”) to create inflation, and you have the opening salvos of the next skirmish in the ongoing currency wars I predicted a few years ago in Code Red. All of this means that capital is going to be misallocated and that the current efforts to create jobs and growth and inflation are insufficient. Indeed, I think those efforts might very well produce a net negative effect.

But before we go any farther, a quick note. We will start taking registrations for the 12^th annual Strategic Investment Conference next week. There will be an early bird rate for those of you who go ahead to register quickly. The conference will run from April 29 through May 2 at the Manchester Grand Hyatt in San Diego.

For those of you familiar with the conference, there will be the “usual” lineup of brilliant speakers and thought leaders trying to help us understand investing in a world of divergence. For those not familiar, this conference is unlike the vast majority of other investment conferences, in that speakers representing various sponsors do not pay to address the audience. Instead, we bring in only “A list” speakers from around the world, people you really want to meet and talk with. This year we’re going to have a particularly large and diverse group of presenters, and we structure the conference so that attendees can mingle with the speakers and with each other.

I am often told by attendees that this is the best economic and investment conference they attend in any given year. I think it is a measure of the quality of the conference that many of the speakers seek us out. Not only do they want to speak, they want to attend the conference to hear and interact with the other speakers and conference guests. This conference is full of speakers that other speakers (especially including myself) want to hear. And you will, too. Save the date and look for registration and other information shortly in your mail.
Now let’s consider what today’s interest rates do and do not mean as we navigate uncharted waters.

Are We All Turning Japanese?

Japan is an interesting case study. It’s a highly developed nation with a very sophisticated culture, increasingly productive in dollar terms (although in yen terms nominal GDP has not moved all that much), and carrying an unbelievable 250% debt to GDP burden, but with a 10 year bond rate of 0.22%, which in theory could eventually mean that the total interest expenses of Japan would be less than those of the US on 5 - 6 times the amount of debt. Japan has an aging population and a savings rate that has plunged in recent years.

The country has been saddled with either low inflation or deflation for most of the past 25 years. At the same time, it is an export power, with some of the world’s most competitive companies in automobiles, electronics, robotics, automation, machine tools, etc. The Japanese have a large national balance sheet from decades of running trade surpluses. If nothing else, they have given the world sushi, for which I will always hold them in high regard.

We talk about Japan’s “lost decades” during which growth has been muted at best. They are just coming out of a triple dip recession after a disastrous downturn during the Great Recession. And through it all, for decades, there is been a widening government deficit. The chart below shows the yawning gap between Japanese government expenditures and revenues.



This next chart, from a Societe Generale report, seems to show that the Japanese are financing 40% of their budget. I say “seems” because there is a quirk in the way the Japanese do their fiscal accounting. Pay attention, class. This is important to understand. If you do not grasp this, you will not understand Japanese budgets and how they deal with their debt.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: How Global Interest Rates Deceive Markets was originally published at mauldineconomics.com

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German Chancellor Merkel Won’t Let Ukraine Get in the Way of Business

By Marin Katusa, Chief Energy Investment Strategist

The Ukraine crisis has moderated for now, but it should have awakened the world to the new “great game” being played in Eastern Europe. Vladimir Putin is positioning Russia to control the global energy trade, knowing that he holds the trump card: Europe’s dependence on Russian oil and gas.

This epic struggle between the US and Russia could change the very nature of the Euro-American trans Atlantic alliance, because Europe is going to have to choose sides.

The numbers in Putin’s OIL = POWER equation are only going to keep getting bigger as Russia’s control and output of energy continues to grow and as Europe’s supply from other sources dwindles—as I outline in my new book, The Colder War. Finland and Hungary get almost all their oil from Russia; Poland more than 75%; Sweden, the Czech Republic, and Belgium about 50%; Germany and the Netherlands, upward of 40%.

Cutting back on energy imports from Russia as a means of pressuring Moscow is hardly in the EU’s best interest.

Germany, the union’s de facto leader, has simply invested too much in its relationship with Putin to sever ties—which is why Chancellor Angela Merkel has blocked any serious sanctions against Russia, or NATO bases in Eastern Europe.

In fact, Germany is moving to normalize its relations with Russia, which means marginalizing the Ukrainian showdown. Ukraine is but a very small part of Moscow’s and Berlin’s plans for the 21^st century. Though the U.S. desperately wants Germany to lean Westward, it has instead been pivoting East. It’s constructing an alliance that will ultimately elbow the US out of Eastern and Central Europe and consign it to the status of peripheral player. (The concept of the “pivot “ in geopolitics was advanced by the celebrated early 20^th century English geographer Halford Mackinder with regard to Russia’s potential to dominate Europe and Asia because it forms a geographical bridge between the two.

Mackinder’s “Heartland Theory” argued that whoever controlled Eurasia would control the world. Such a far flung empire might come into being if Germany were to ally itself with Russia. It’s a doctrine that influenced geopolitical strategists through both World Wars and the Cold War. It was even embraced by the Nazis before Russia became an enemy. And it may still be relevant today—despite the historical animosities between the two countries. After all, the mutually beneficial alliance of a resource-hungry Germany with a resource-rich Russia is a logical one.)

Considering the deepening ties between Russia and Germany in recent years, the real motive for the US’s stoking of unrest in Ukraine may not have been to pull Ukraine out of Russia’s sphere of influence and into the West’s orbit—it may have been primarily intended to drive a wedge between Germany and Russia.

The US almost certainly views the growing trade between them—3,000 German companies have invested heavily in Russia—as a major geopolitical threat to NATO’s health. The much-publicized spying on German politicians by the US and the British—and Germany’s reciprocal surveillance—shows the level of mutual distrust that exists.

If sowing discord between Russia and Germany was America’s goal, the implementation of sanctions might look like mission accomplished. Appearances can be deceptive, though.

Behind the scenes, Germany and Russia maintain a cordial dialogue, made all the easier because Vladimir Putin and Angela Merkel get along well on a personal level. They’re so fluent in each other’s languages that they correct their interpreters. They often confer about the possibility of creating a stable, prosperous and secure Eurasian supercontinent.

Despite the sanctions, German and Russian businessmen are still busy forging closer ties. At a shindig in September for German businesses in the North-East and Russian companies from St. Petersburg, Gerhard Schröder—former German prime minister and president, and friend of Putin—urged his audience to continue to build their energy and raw-material partnership.

Schröder’s close personal relationship with Putin is no secret. He considers the Russian president to be a man of utmost trustworthiness, and his Social Democratic Party has always been wedded to Ostpolitik (German for “new Eastern policy”), which asserts that his country’s strategic interest is to bind Russia into an energy alliance with the EU.

Schröder would have us believe that they never talk politics. Yet in his capacity as chair of the shareholders’ committee of Gazprom’s Nord Stream—the pipeline laid on the Baltic seabed which links Germany directly to Russian gas—he continues to advocate for a German-Russian “agreement.”

That’s a viewpoint Merkel shares. In spite of her public criticism of Putin’s policy toward Ukraine, Merkel has gone out of her way to play down any thought of a new Cold War. She’s on the record as wanting Germany’s “close partnership” with Russia to continue—and she’s convinced it will in the not-so-distant future.

Though Merkel has rejected lifting sanctions against Russia and continues to publicly call on Putin to exert a moderating influence on pro-Russian Ukrainian separatists, it looks like Germany is seeking a reasonable way out. That makes sense, given the disproportionate economic price Germany is paying to keep up appearances of being a loyal US ally.

Politicians in Germany are alert to the potential damage an alienated Russia could inflict on German interests. Corporate Germany is getting the jitters as well, and there are a growing number of dissenting voices in that sector. And anti-American sentiment in Germany—which is reflected in the polls—is putting added pressure on Berlin to pursue a softer line rather than slavishly following Washington’s lead in this geopolitical conflict.
With the eurozone threatened by a triple dip recession, expect Germany and the EU to act in their own interests. Germany has too much invested in Russia to let Ukraine spoil its plans.

As you can see, there’s no greater force controlling the global energy trade today than Russia and Vladimir Putin. But if you understand his role in geopolitics as Marin Katusa does, you’ll know how he’s influencing the flow of the capital in the energy sector—and which companies and projects will benefit and which will lose out.

Of course, the situation is fluid, which is why Marin launched a brand new advisory dedicated to helping investors get out in front of the latest chess moves in this struggle and make a bundle in the process.
It’s called The Colder War Letter. And it’s the perfect complement to Marin’s New York Times best-seller, The Colder War, and the best way to navigate and profit in the fast changing new reality of the energy sector. When you sign up now, you’ll also receive a FREE copy of Marin’s book. Click here for all the details.

The article German Chancellor Merkel Won’t Let Ukraine Get in the Way of Business was originally published at casey research

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The Madness of the EU’s Energy Policy

By Marin Katusa, Chief Energy Investment Strategist

The stakes couldn’t be higher. Vladimir Putin has launched a devastating plan to turn Russia into an energy powerhouse. And Europe, dependent on Russian natural gas and oil for a third of its fuel needs, has fallen right into his hands: Putin can bend the EU to his will simply by twisting the valve shut.

Considering how precarious Europe’s economic security is, one would have thought that now would be a good time for the EU to reassess its energy policy and address the effect crippling energy costs are having on its struggling economy. But the EU is never going to agree to a rational reappraisal of its policies, because eco-loons like its new energy commissioner, Violetta Bulc, have taken over the asylum.

A practicing fire walker and a shaman, she’s the sort of airy fairy Goddard College type who only believes in the power of “positive energy.” What will guide us in this frightening new era is, according to her blog, the spirit of the White Lions:

The Legend says that White Lions are star beings, uniting star energy within earth form of Lions. The native ancestors were convinced that they are children of the Sun God, thus embodying Solar Logos and legends say that they came down to Earth to help save humanity at a time of crisis. There is no doubt that this time is right now.

With the European Commission stuffed with green anti capitalist zealots, it’s not surprising that the EU’s response to the challenges of a resurgent Russia is a complete break with reality.

The EU has come up with an aggressive climate plan—just like Obama’s. In defiance of all logic—if not Putin—it’s agreed to cut greenhouse gas emissions by 40% and make clean energy, like wind and solar, 27% of overall energy use by 2030. Instead of guaranteeing the “survival of mankind,” this would cause the extinction of Europe’s industry—unless there’s a secret plan to massively expand nuclear power.

Fortunately for Europe, its leaders haven’t yet lost all their marbles.

These climate goals are just a bargaining chip in the runup to next year’s UN climate summit in Paris. They’re not legally binding. Unless the whole world commits to an equally radical policy of deindustrialization—which seems rather unlikely to say the least—the EU will “review” its climate targets.

This is just as well. In trying to meet the so-called 20:20 target—a 20% reduction in emissions by 2020—Germany and the UK have already discovered that renewable energy is too costly to maintain a competitive industry. As electricity prices skyrocket, Germany’s industrial giants are either having their power costs subsidized or are relocating to the US.

Both countries are struggling with the inability of wind and solar energy to provide reliable baseload power, which is threatening to cause blackouts.

The UK is putting its faith in fracking—and has managed to head off any EU legislation to ban shale-gas. But Germany and its fellow travelers, who have no qualms about reverting to coal, are simply overriding the EU Commission and its zero emissions utopia.

Knowing that EU climate policy would destroy international competitiveness and crush their economies, Poland, which depends on coal for 90% of its energy needs, and other low-income countries have taken a different approach. They've forced the Commission to give them special exemptions from any emissions reduction plan.

Unlike in the U.S.—where Obama is taking executive action to wipe out the coal industry—lignite, or brown coal, is set to become an increasingly important part of Europe’s energy supply, as it is in much of the rest of the world. There are 19 new lignite power stations in various stages of approval and construction in Bulgaria, Czech Republic, Greece, Germany, Poland, Romania, and Slovenia. When completed, these will emit nearly as much CO₂ as the UK.

Which is ironic. The UK is the only member of the EU to have been insane enough to impose a legally binding carbon dioxide reduction target intended to take it to 80 percent of 1990 levels by 2050. It’s also the only modern industrial nation where there’s serious talk of World War II style energy rationing.

As you’ll discover in my new book, The Colder War, Europe and America need to wake up. They’ve never been so economically vulnerable. The time for indulging environmental fantasies and putting one’s faith in White Lions is over—unless, that is, you want to see Putin controlling the world.

Click here to get your copy of my new book. Inside, you’ll discover exactly how Putin is orchestrating a takeover of the global energy trade, what it means for the future of America, and how it will directly affect you and your personal savings.

The article The Madness of the EU’s Energy Policy was originally published at casey research

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Gold: Time to Prepare for Big Gains?

By Casey Research

Years of a severe downturn in the gold market have left very few bulls to speak out in favor of the yellow metal. Here are some positive opinions on the future of the precious metal, from the recently concluded Casey Research Fall Summit.

David Tice, founder of the Prudent Bear Fund, believes we are heading for a “global currency reset” that will reduce the role of the dollar in global trade. Central banks, he says, don’t possess all the gold they claim to, and the unwinding of the paper gold market probably isn’t far down the road—it could even ignite the next major crisis.

The paper gold market (for example, exchange-traded funds like GLD) has massive leverage, with a ratio of 90:1 or 100:1 of paper claims on gold bullion. If only a small fraction of owners convert their paper to physical gold, says Tice, it will create a “no bid” price environment and cause the price of gold to explode.
He believes that once the paper gold market collapses, gold will be priced on the basis of supply/demand for the physical metal—which means it could be headed for $3,000 to $8,000 per ounce.

Ed Steer, editor of Casey Research’s popular e-letter Gold and Silver Daily, is equally bullish on gold… in the long term, because right now, he believes the gold market to be rigged: “Central banks intervene; that’s what they do.”

They control not only gold, but also silver, platinum, palladium, copper, and oil. He says there are two possible reasons that Germany hasn’t gotten its gold back that it had stored in the U.S. — either the gold doesn’t exist or there’s so much paper written against it that it can’t be moved for collateral reasons.

While there’s not much an investor can do about gold manipulation, Steer believes that the manipulators’ schemes will blow up in their faces sooner than later.

Summit regular Rick Rule, chairman of Sprott US Holdings, isn’t worried about the bear market in gold.
“What matters is your response to the bear market,” he says. “If you have the wits, courage, knowledge, and cash to take advantage of them, bear markets are great.”

He’s keeping his eyes peeled on junior gold mining stocks, which, he says, are hugely attractive right now.
“Our market has fallen by 75% in three years. That means it’s 75% more attractive than in 2010, when we were all in love with it. Within a few years, we’ll look back on today’s low prices as the good old days.”
Louis James, chief investment strategist of Casey’s Metals & Mining division, also welcomes the opportunities to buy low that the current slump in gold prices provides.

He personally owns stock of three of the junior miners present in the Map Room at the Casey Fall Summit. All three of them have exceptionally high-grade projects that are delivering what they promised.

To get all of Louis James’ stock picks (and those of the other speakers), as well as every single presentation of the Summit, order your 26+-hour Summit Audio Collection now. It’s available in CD and/or MP3 format. Learn more here.

The article Gold: Time to Prepare for Big Gains? was originally published at casey research

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What’s on Your Radar Screen?

By John Mauldin

Toward the end of every week I begin to ponder what I should write about in the next Thoughts from the Frontline. Much of my week is spent in front of my iPad or computer, consuming as much generally random information as time and the ebb and flow of life will allow. I cannot remember a time in my life after I realized you could read and learn new things that that particular addiction has not been my constant companion.

As I sit down to write each week, I generally turn to the events and themes that most impressed me that week. Reading from a wide variety of sources, I sometimes see patterns that I feel are worthy to call to your attention. I’ve come to see my role in your life as a filter, a connoisseur of ideas and information. I don’t sit down to write with the thought that I need to be particularly brilliant or insightful (which is almighty difficult even for brilliant and insightful people) but that I need to find brilliant and insightful, and hopefully useful, ideas among the hundreds of sources that surface each week. And if I can bring to your attention a pattern, an idea, or thought stream that that helps your investment process, then I’ve done my job.

What’s on Your Radar Screen?

Sometimes I feel like an air traffic controller at “rush hour” at a major international airport. My radar screen is just so full of blinking lights that it is hard to choose what to focus on. We each have our own personal radar screen, focused on things that could make a difference in our lives. The concerns of a real estate investor in California are different from those of a hedge fund trader in London. If you’re an entrepreneur, you’re focused on things that can grow your business; if you are a doctor, you need to keep up with the latest research that will heal your patients; and if you’re a money manager, you need to keep a step ahead of current trends. And while I have a personal radar screen off to the side, my primary, business screen is much larger than most people’s, which is both an advantage and a challenge with its own particular set of problems. (In a physical sense this is also true: I have two 26-inch screens in my office. Which typically stay packed with things I’m paying attention to.)

So let’s look at what’s on my radar screen today.

First up (but probably not the most important in the long term), I would have to say, is Scotland. What has not been widely discussed is that the voting age was changed in Scotland just a few years ago. For this election, anyone in Scotland over 16 years old is eligible. Think about that for a second. Have you ever asked 16-year-olds whether they would like to be more free and independent and gotten a “no” answer? They don’t think with their economic brains, or at least most of them don’t. If we can believe the polls, this is going to be a very close election. The winning margin may be determined by whether the “yes” vote can bring out the young generation (especially young males, who are running 90% yes) in greater numbers than the “no” vote can bring out the older folks. Right now it looks as though it will be all about voter turnout.

(I took some time to look through Scottish TV shows on the issue. Talk about your polarizing dilemma. This is clearly on the front burner for almost everyone in Scotland. That’s actually good, as it gets people involved in the political process.)

The “no” coalition is trying to talk logic about what is essentially an emotional issue for many in Scotland. If we’re talking pure economics, from my outside perch I think the choice to keep the union (as in the United Kingdom) intact is a clear, logical choice. But the “no” coalition is making it sound like Scotland could not make it on its own, that it desperately needs England. Not exactly the best way to appeal to national instincts and pride. There are numerous smaller countries that do quite well on their own. Small is not necessarily bad if you are efficient and well run.

However, Scotland would have to raise taxes in order to keep government services at the same level – or else cut government services, not something many people would want.
There is of course the strategy of reducing the corporate tax to match Ireland’s and then competing with Ireland for businesses that want English-speaking, educated workers at lower cost. If that were the only dynamic, Scotland could do quite well.

But that would mean the European Union would have to allow Scotland to join. How does that work when every member country has to approve? The approval process would probably be contingent upon Scotland’s not lowering its corporate tax rates all that much, especially to Irish levels, so that it couldn’t outcompete the rest of Europe. Maybe a compromise on that issue could be reached, or maybe not. But if Scotland were to join the European Union, it would be subject to European Union laws and Brussels regulators. Not an awfully pleasant prospect.

While I think that Scotland would initially have a difficult time making the transition, the Scots could figure it out. The problem is that Scottish independence also changes the dynamic in England, making it much more likely that England would vote to leave the European Union. Then, how would the banks in Scotland be regulated, and who would back them? Markets don’t like uncertainty.

And even if the “no” vote wins, the precedent for allowing a group of citizens in a country within the European Union to vote on whether they want to remain part of their particular country or leave has been set. The Czech Republic and Slovakia have turned out quite well, all things considered. But the independence pressures building in Italy and Spain are something altogether different.

I read where Nomura Securities has told its clients to get out of British pound-based investments until this is over. “Figures from the investment bank Société Générale showing an apparent flight of investors from the UK came as Japan’s biggest bank, Nomura, urged its clients to cut their financial exposure to the UK and warned of a possible collapse in the pound. It described such an outcome as a ‘cataclysmic shock’.” (Source: The London Independent) The good news is that it will be over next Thursday night. One uncertainty will be eliminated, though a “yes” vote would bring a whole new set of uncertainties, as the negotiations are likely to be quite contentious.

One significant snag is, how can Scottish members of the United Kingdom Parliament continue to vote in Parliament if they are leaving the union?

I admit to feeling conflicted about the whole thing, as in general I feel that people ought have a right of self-determination. In this particular case, I’m not quite certain of the logic for independence, though I can understand the emotion. But giving 16-year-olds the right to vote on this issue? Was that really the best way to go about things? Not my call, of course.

Emerging Markets Are Set Up for a Crisis

We could do a whole letter just on emerging markets. The strengthening dollar is creating a problem for many emerging markets, which have enough problems on their own. My radar screen is full of flashing red lights from various emerging markets. Brazil is getting ready to go through an election; their economy is in recession; and inflation is over 6%. There was a time when we would call that stagflation. Plus they lost the World Cup on their home turf to an efficient, well-oiled machine from Germany. The real (the Brazilian currency) is at risk.

Will their central bank raise rates in spite of economic weakness if the US dollar rally continues? Obviously, the bank won’t take that action before the election, but if it does so later in the year, it could put a damper on not just Brazil but all of South America. Take a look at this chart of Brazilian consumer price inflation vs. GDP:

Mbeki

Turkey is beginning to soften, with the lira down 6% over the last few months. The South African rand is down 6% since May and down 25% since this time last year. I noted some of the problems with South Africa when I was there early this year. The situation has not improved. They have finally reached an agreement with the unions in the platinum mining industry, which cost workers something like $1 billion in unpaid wages, while the industry lost $2 billion. To add insult to injury, it now appears that a Chinese slowdown may put further pressure on commodity-exporting South Africa. And their trade deficit is just getting worse.

Who’s Competing with Whom?

We could also do a whole letter or two on global trade. The Boston Consulting Group has done a comprehensive study on the top 25 export economies. I admit to being a little surprised at a few of the data points. Let’s look at the chart and then a few comments.



First, notice that Mexico is now cheaper than China. That might explain why Mexico is booming, despite the negative impact of the drug wars going on down there. Further, there is now not that much difference in manufacturing costs between China and the US .
Why not bring that manufacturing home – which is what we are seeing? And especially anything plastic-related, because the shale-gas revolution is giving us an abundance of natural gas liquids such as ethane, propane, and butane, which are changing the cost factors for plastic manufacturers. There is a tidal wave of capital investment in new facilities close to natural gas fields or pipelines. This is also changing the dynamic in Asia, as Asian companies switch to cheaper natural gas for their feedstocks.

(What, you don’t get newsfeeds from the plastic industry? Realizing that I actually do makes me consider whether I need a 12-step program. “Hello, my name is John, and I’m an information addict.”)

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: What’s on Your Radar Screen? was originally published at mauldineconomics.com.

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The Age of Transformation

By John Mauldin

One of the many luxuries that my readers have afforded me over the years is their willingness to allow me to explore a wide variety of topics. Not all writers are so blessed, and their output and responses to it tend to stay focused on specific, often quite narrow topics. While this approach allows them to dig very deep into particular subject matter, it can reduce the total scope of their research, vision, and advice. But don’t get me wrong; these types of letters are very important. I benefit greatly from being a subscriber to a number of letters that give me detailed analysis for which I simply don’t have the time to do the research. There’s just too much going on in the world today for any of us to be an expert in more than a few areas.

I seem to find the most enjoyment and elicit the best response when I try to give my readers the benefit of my broad scope of reading and research as I try to figure out how all the various and sundry pieces of the puzzle fit together. For me, the world is just that: a vast and very complex puzzle. Trying to discern the grand themes and detailed patterns as the very pieces of the puzzle go on changing shape before my eyes is quite a challenge.

To try to figure out which puzzle pieces are going to have the most influence and impact in our immediate future, as opposed to languishing in the background, can be a frustrating experience. I often find myself writing about topics (such as a coming subprime crisis or recession) long before they manifest themselves. But I think it is important to see opportunities and problems brewing as far in advance as we can so that we can thoughtfully position ourselves and our portfolios to take advantage.

Today I offer some musings on what I’ve come to think of as the Age of Transformation (which I have been thinking about a lot while in Tuscany). I believe there are multiple and rapidly accelerating changes happening simultaneously (if you can think of 10 years as simultaneously) that are going to transform our social structures, our investment portfolios, and our personal futures. We have had such transformations in the past. The rise of the nation state, the steam engine, electricity, the advent of the social safety net, the personal computer, the internet, and the collapse of communism are just a few of the dozens of profound changes that have transformed the world in which we live.

Therefore, in one sense, these periods of transformation are nothing new. I think the difference today, however, is going to be the simultaneous nature of multiple transformational trends playing out within a very short period of time (relatively speaking) and at an accelerating rate.

It is self evident that failure to adapt to transformational trends will consign a business or a society to the ash can of history. Our history and business books are littered with thousands of such failures. I think we are entering one of those periods when failing to pay close attention to the changes going on around you could prove decidedly problematical for your portfolio and fatal to your business.

This week we’re going to develop a very high-level perspective on the Age of Transformation. In the coming years we will do a deep dive into various aspects of it, as this letter always has. But I think it will be very helpful for you to understand the larger picture of what is happening so that you can put specific developments into context – and, hopefully, let them work for you rather than against you.

We’re going to explore two broad themes, neither of which will be strange to readers of this letter. The first transformational theme that I see is the emerging failure of multiple major governments around the world to fulfill the promises they have made to their citizens. We have seen these failures at various times in recent years in “developed countries”; and while they may not have impacted the whole world, they were quite traumatic for the citizens involved. I’m thinking, for instance, of Canada and Sweden in the early ’90s. Both ran up enormous debts and had to restructure their social commitments. Talk to people who were involved in making those changes happen, and you can still see some 20 years later how painful that process was. When there are no good choices, someone has to make the hard ones.

I think similar challenges are already developing throughout Europe and in Japan and China, and will probably hit the United States by the end of this decade. While each country will deal with its own crisis differently, these crises are going to severely impact social structures and economies not just nationally but globally. Taken together, I think these emerging developments will be bigger in scope and impact than the credit crisis of 2008.

While each country’s crisis may seemingly have a different cause, the problems stem largely from the inability of governments to pay for promised retirement and health benefits while meeting all the other obligations of government. Whether that inability is due to demographic problems, fiscal irresponsibility, unduly high tax burdens, sclerotic labor laws, or a lack of growth due to bureaucratic restraints, the results will be the same. Debts are going to have to be “rationalized” (an economic euphemism for default), and promises are going to have to be painfully adjusted. The adjustments will not seem fair and will give rise to a great deal of societal Sturm und Drang, but at the end of the process I believe the world will be much better off. Going through the coming period is, however, going to be challenging.

“How did you go bankrupt?” asked Hemingway’s protagonist. “Gradually,” was the answer, “and then all at once.” European governments are going bankrupt gradually, and then we will have that infamous Bang! moment when it seems to happen all at once. Bond markets will rebel, interest rates will skyrocket, and governments will be unable to meet their obligations. Japan is trying to forestall their moment with the most breathtaking quantitative easing scheme in the history of the world, electing to devalue their currency as the primary way to cope. The U.S. has a window of time in which it will still be possible to deal with its problems (and I am hopeful that we can), but without structural reform of our entitlement programs we will go the way of Europe and numerous other countries before us.

The actual path that any of the countries will take (with the exception of Japan, whose path is now clear) is open for boisterous debate, but the longer there is inaction, the more disastrous the remaining available choices will be. If you think the Greek problem is solved (or the Spanish or the Italian or the Portuguese one), you are not paying attention. Greece will clearly default again. The “solutions” have so far produced outright depressions in these countries. What happens when France and Germany are forced to reconcile their own internal and joint imbalances? The adjustment will change consumption patterns and seriously impact the flow of capital and the global flow of goods.

This breaking wave of economic changes will not be the end of the world, of course – one way or another we’ll survive. But how you, your family, and your businesses are positioned to deal with the crisis will have a great deal to do with the manner in which you survive. We are not just cogs in a vast machine turning to powers we cannot control. If we properly prepare, we can do more than merely “survive.” But achieving that means you’re going to have to rely more on your own resources and ingenuity and less on governments. If you find yourself in a position where you are dependent upon the government for your personal situation, you might not be happy. This is not something that is going to happen all of a sudden next week, but it is going to unfold through various stages in various countries; and given the global nature of commerce and finance, as the song says, “There is no place to run and no place to hide.” You will be forced to adjust, either in a thoughtful and premeditated way or in a panicked and frustrated one. You choose.

I should add a note to those of my readers who think, “I don’t have to worry about all this because I am not dependent on Social Security.” Wrong. A significant majority of the retiring generation does depend on Social Security and also on government controlled healthcare, and their reactions and votes and consumption patterns will have an impact on society. Ditto for France, Germany, Italy, and the rest of Europe. The Japanese have evidently made their choice as to how to deal with their crisis. If you are a Japanese citizen and are not making preparations for a significant change in your national balance sheet and the value of your currency, you have your head in the sand.

There’s no question that the reactions of the various governments as they try to forestall the inevitable and manage the crisis will create turmoil and a great deal of volatility in the markets. We have not seen the last of QE in the U.S., but Japan is going gangbusters with it, and it is getting fired up in Europe and China.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: The Age of Transformation was originally published at Mauldin Economics

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How a Big Cat Started Europe’s Addiction to Crude Oil

By Marin Katusa, Chief Energy Investment Strategist

On July 1, 1911, a German gunboat named Panther sailed into the port of Agadir, Morocco, and changed history. For the previous two decades, a faction within the British Admiralty had called for the navy to switch from coal fired ships to ones powered by a new fuel. Admiral John Fisher, First Sea Lord, led the charge, trumpeting oil’s numerous advantages: It had nearly twice the thermal content of coal, required less manpower to use, allowed refueling at sea, and burned with less telltale smoke.

Doesn’t matter, replied naval tradition: Britain lacks oil, and she has lots of coal. The switch would put the greatest navy in the world at the mercy of burgeoning oil rich countries and the oil trusts that operate in them. (It didn’t help that the navy’s first test of oil firing in 1903 engulfed the ship in a cloud of black smoke.)

It wasn’t common knowledge at the time, but Germany had surpassed the mighty British Empire in manufacturing in the late 1800s, most notably in the production of steel. Britain’s manufacturing base had largely moved abroad, taking investment along with it. Germany, meanwhile, was determined to build up the quality as well as quantity of its goods. That included its military technology and capacity, especially its navy. Has a familiar ring, doesn’t it?

Then came the Panther. Germany said she was there to protect German businessmen in restive Morocco, a reason more credible had there actually been German businessmen in Morocco. Britain read it as a challenge to its supremacy, a maneuver toward expansionism, and a threat to trade routes west out of the Mediterranean.

Britain’s young, up and coming home secretary wondered what specifications would be required to outmaneuver the ships of Germany’s growing navy. The war college gave a deceptively simple answer: a speed of at least 25 knots.

Coal couldn’t do it—too many boilers, too much weight, too long to build up a head of steam, too short a range. But oil could.

With the Panther’s arrival in Morocco, Admiral Fisher’s faction gained a new and eloquent advocate for converting the British Navy to oil, and it wasn’t long before Home Secretary Winston Churchill became First Lord of the Admiralty and the fellow whom history often credits with guiding the British Empire’s destiny with oil.

Germany’s Great Game

 

If Britain were to switch its navy to oil, it would need a secure supply of the stuff. Churchill saw that the struggling Anglo-Persian Oil Co. had the resources, but lacked the cash.

With Germany setting its cap for control of Middle Eastern oil—building a railroad between Berlin and Baghdad was the last straw—it wasn’t hard for Churchill to convince the Parliament that cutting a deal with Anglo-Persian Oil Co. was a good idea.

In exchange for an infusion of cash, the British government got 51% of the company’s stock. A hush hush rider on that deal was a contract for Anglo-Persian to supply oil to the Royal Navy, with very favorable terms, for the next 20 years.

All this happened just in time for the spark that finally ignited the Great War, or as we call it today, World War I. Because of Churchill’s preparations, among them a new class of oil-fired ships, Allied naval forces were able to restrict the flow of essential supplies to Germany.

By war’s end, every country realized the strategic importance of a secure supply of oil. The players have been maneuvering ever since.

Fast-Forward 100 Years—the Rise of Mother Russia

 

The fortunes of the various players may change, but the scrimmage remains the same. Oil does everything from power vehicles on land and sea to supply manufacturers with the building blocks of medicines, plastics, and a host of other products.

The Soviet Union was a global powerhouse and a major oil producer until its disintegration in 1991, and Russia then had to shop hat in hand for loans to keep its economy afloat. It was largely its oil and gas resources that have enabled Vladimir Putin, Russia’s canny and forceful president, to wrest his country back onto the world stage of heavyweights in recent years. The European Union is currently Russia’s largest customer.

Indeed, Europe is feeling the squeeze from Russia, which has gunned hard to make it easy to get its oil and gas, but not so easy to keep getting them. Putin will happily play hardball with any country that won’t meet his terms—just ask Ukraine—and doesn’t mind if others down the line feel the sting of his stick.

The EU-28 imports over 50% of all the energy consumed. Russia provides about one-third of all the oil and natural gas imported by EU-28. Germany is the largest importer of Russian oil and natural gas.

The member countries of the European Union may be cheering Belarus on, but they’re also taking the hint from Russia. And they’d better: Between growing demand in Asia and instability in the Middle East, the European Union faces some serious energy challenges.

Slowly but surely, Europe is waking up to its situation. Alternative energies are a noble goal, but the hard truth is that the technology isn’t there yet to replace hydrocarbon fuels. For energy security, there’s little choice for EU countries but to back the oil and gas companies that call Europe home.

“We must get on and explore our resources in order to understand the potential,” declared Britain’s energy minister in July. Other countries, such as Germany, are taking on this pursuit as well. We believe that governments and oil giants in other European countries will follow their lead.

This article is from the Casey Daily Dispatch, a free daily e-letter written by renowned investment experts in the fields of precious metals, energy, technology, and crisis investing. Click here to get it your inbox every day.

The article How a Big Cat Started Europe’s Addiction to Oil was originally published at Casey Research

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