Likening central banks to "your crackhead cousin" running loose with your American Express platinum card, Bob Moriarty sees serious economic threats in the future. This leads the owner of 321energy to look at resources like food, water and energy for protection and profit. He tells The Energy Report where energy opportunities exist, and why Chinese demand for everything will set prices in the future.
The Energy Report: In your Gold Report interview last fall, you said that the two biggest reasons for the erosion of the middle class are peoples' inability to save money due to low interest rates or low wages, and higher taxes, especially the hidden taxes we end up paying.
Bob Moriarty: Yes. I think there are 37 taxes on a loaf of bread. Taxes have increased dramatically over the last 20 years, including what are called the "unclaimed taxes."
In an article James Gruber wrote on peak oil last month, he made the point that debt is actually a future call on energy. Under the General Agreement on Tariffs and Trade, when you owe money, you've already spent the energy. He argues that the economy is an energy system, not a monetary system. He's absolutely correct, in my view.
The enormous increase in wealth we've seen worldwide over the last 150 years has stopped. There will be no more growth. From a mathematical point of view, you cannot increase growth. Energy consumption per capita has to go down, and that means wealth goes down. All the debt we've accumulated is a noose around the neck of society.
TER: Gruber also wrote, "Deflation is winning the battle over inflation." His argument is that excessive debt has to be deleveraged and in that deleveraging process, asset values will plummet. Central banks are doing whatever it takes to create inflation in an environment where deflation is really the underlying tide. What do you have to say about that?
BM: Deflation is actually good for society. As consumers, we know this. Think about what you paid for a computer 20 years ago. Today, computers are much, much cheaper. That's deflation, and that's a good thing.
But for central banks working under a fractional reserve system, deflation is a ticking time bomb. They can't cope with it.
With $694 trillion ($694T) in derivatives outstanding, I'm hard pressed to see how you can have inflation over the long term, because you have to get rid of debt. The only way that will happen is for it to blow sky high. What we're seeing in Argentina, Egypt, the Ukraine, Venezuela, Thailand and Turkey is all related to the global debt level.
TER: One of Gruber's scenarios, citing the example of 2008, is global deflationary shock in which all asset prices fall hard. As they begin to fall, the central banks will print even more money. Quantitative easing (QE) on a grander scale will put us at the risk of not inflation, but hyperinflation.
BM: I believe that's true. Late last month, Fed Chair Janet Yellen announced $10 billion of QE tapering, as promised. Eventually, the risk is that the Fed will decide to increase QE to respond to a deflation scare. When that happens, the system will blow sky high. The Fed painted itself into a corner and can't get out.
We need to get rid of the debt, of the $694T in derivatives. Every government has to recognize there are limits to how much money it can spend.
All of this goes back to central banks. The Bank of England, the world's oldest continuously operating central bank, was formed in 1594 as a way for kings to finance their wars. Central banks make it possible for governments to spend unlimited amounts of money. It's like you giving your Platinum American Express card to your crackhead cousin.
TER: How do investors prepare for the moment when the piper gets paid? How do they plan for hyperinflation, inflation, deflation?
BM: I can make a very convincing argument for deflation and very convincing arguments for inflation or hyperinflation. I'm not sure which will happen.
People should be extremely conservative. Looking at investments as a way to make money is foolish right now. I consider gold, silver, rhodium, platinum and palladium as insurance policies against total financial chaos. I would put money into resources, and I would expand resources to include food, fuel and water. Resources will have some value when other assets have none.
TER: Let's talk more about your expanded definition of resources: fuel, food and water. How do you define fuel?
BM: Fuel is everything from coal to nuclear energy. I am very bullish on all forms of fuel, except nuclear energy. I am biased against nuclear energy. The industry doesn't have nuclear power under control. Nuclear disasters like Fukushima have the potential to be extinction events. I would only be in favor of nuclear power if the industry gets safety under control.
Tim Morgan's book, Life After Growth?, presents a brilliant way of looking at energy and monetary systems in a new way. He makes a very convincing argument that everyone's standard of living is going to decrease over the next 10 years. He predicts socioeconomic crises for the next 10 years, one after another. There have been half a dozen brushfires in Africa alone—Somalia, Mali, Libya, Kenya. Everybody acts like they're different brushfires, but they're all the same thing; they're all connected.
TER: Your definition of fuel is broad, but the energy sector seems to be focused on oil. Is that the total sum of the sector? And how do you play oil producers versus explorers?
BM: The U.S. is almost at the point where it's self-sustaining in terms of energy because of the Bakken. But the Bakken field has become an economic disaster. We put $1.6T into exploration, and we're not going to get $1.6T out of it.
Morgan's book makes a very good point: In 1914, if it cost you the equivalent of 1 barrel (1 bbl) oil to drill a well, you got 100 bbl out of it. If you drill a well today, it costs you 1 bbl to drill it, and you get 20 bbl oil out of it. In the Bakken, you put 1 bbl oil into it, and you get 5 bbl out of it. That simply will not work from an economic point of view.
Natural gas has doubled in the last year. In the new normal, the oil price is $90–100/bbl. Any form of oil is worth looking at: producers, explorers and refiners.
Solar and wind power also play a role, although I see them as 3% of the solution, at best.
TER: I recently interviewed Porter Stansberry, who expands his energy investment viewpoint to include drilling, liquefied natural gas (LNG) plants, pipelines, infrastructure, even tankers. Is your view that broad?
BM: He's absolutely correct. There are enormous amounts of natural gas in Indonesia, both in coal bed methane (CBM) and conventional natural gas. But you have to liquefy it before shipping. You need LNG plants, shipping facilities and ports.
TER: What are some opportunities related to food as a resource?
BM: When the food crisis comes, all fertilizers will double, triple or quadruple in real dollar terms. We have to get more food out of the ground in the future, and we need fertilizer to do that.
Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:FSE) in Canada has the largest, undeveloped phosphate project in the world. Its market cap is 5% of net present value (NPV). In this space, takeovers are generally done at 35–50% of NPV. This is a stock that could go up seven to tenfold, based on today's prices.
TER: It seems to me that agriculture in North America is maximized in terms of using fertilizers. Are you saying that when the food crisis occurs, even North America will need to use more fertilizer than today?
BM: Everybody will. Besides, phosphate can be moved easily by ship. A lot of land in South America, Russia and Eastern Europe is underutilized for agriculture. I would look very closely at any potash or any phosphate.
TER: Arianne Phosphate has a number of warrants due Feb. 1. Are the warrants affecting the stock price?
BM: I just wrote an article on that. At that time, the stock was $1.26. The warrants are at $1.24. Management was hoping it could get the price up. I added about 1.5 million (1.5M) shares in the last week or 10 days. I suspect the company will get about $5M in cash from the warrants. When those warrants expire, I see the stock going back to its recent highs of $1.68–1.70.
TER: Back to oil and gas and natural gas. Which companies in those sectors interest you?
BM: Marauder Resources East Coast Inc. (MES:TSX.V) is a total crapshoot. It's on the north island of New Zealand, where it is surrounded by TAG Oil Ltd. (TAO:TSX.V). Marauder is letting TAG carry the burden. TAG has drilled a well, and while the company has been very quiet about the results, they appear to be exceptional. Marauder has a $5M market cap. It will either go to $0 or to $500M. Only time will tell.
TER: What timeframe would you put on that $0 to $500M scenario?
BM: Over the next year or two.
TER: Any others?
BM: There's a company in Indonesia called CBM Asia Development Corp. (TCF:TSX.V) that I've covered many times. The company has outlined 1 trillion cubic feet (1 Tcf) of coal bed methane. Unfortunately, every time the company raised money, its brain-dead president spent 150% of what it took in. Finally, it blew up in his face and he was fired. The last placement was done at $0.18, and then $0.10. Now, it has a $0.04 stock, and it's all due to really exceptionally poor management. This is an asset that somebody will make a lot of money on. I just don't think it will be CBM Asia.
TER: Is CBM Asia a takeover target?
BM: I think someone is going to steal CBM Asia. The total market cap is $7M, and the company recently lost a lawsuit that will cost it $1.4M.
TER: Indonesia, New Zealand and Texas also have nice shale deposits. Tell us more about opportunities in those locations.
BM: Torchlight Energy Resources Inc. (TRCH:NASDAQ) has a bunch of projects in Texas. It plans to drill 90 exploitation wells this year. It has a ton of money in the bank and will be cash flow positive in September 2014. This is a $5 stock that could easily go to $10 or $15.
TER: How long can Torchlight exploit its 90 wells?
BM: They're relatively shallow wells, and they're long-life wells. Conventional wells range anywhere from 2–100 years. The payoff is probably 20:1.
Shale has about a 40% decline in the first year, so they are 1.5–2-year wells; you have to make your money right away.
Pan Orient Energy Corp. (POE:TSX.V) is a company that has protected itself by being in three totally different environments—Canada, Thailand and Indonesia. It's all conventional, heavy oil in Thailand and Canada.
TER: If a worldwide recession occurs, I can see North America continuing as a consumer market for oil, but will Thailand and Indonesia continue to consume?
BM: When I went to Papua New Guinea in December 2013, we flew from Port Moresby to Misima Island. From the plane we saw 17 ships. Those going north were carrying coal to China and coming back south empty. Our field of view was probably 50 miles. If you extrapolate that to cover the 2,000–3,000 mile leg from Australia to China, there are probably 200, 300 or 400 coal ships doing nothing but taking coal to China from Australia.
In the U.S., we consume 33 bbl oil per person per year. In China, they use 2 bbl oil per person per year. If we decrease our use to 20–25 bbl per person, it will make a dramatic change in our standard of living. But the Chinese are going to go from 2 to 5 or 10 bbl per person. The Chinese are going to demand energy regardless of their economic situation.
TER: But China is one of the world's largest coal producers. To what extent is oil part of the energy mix there?
BM: The Chinese are voracious consumers of energy in all forms, including oil. That's good for New Zealand shale oil and gas. It's good for CBM and conventional gas from Indonesia. It's good for coal from Australia and Indonesia. The Chinese actually control pricing for all commodities. This is true of everything from coal to gold.
TER: Why do you say all commodities? China is not yet the world's largest consumer.
BM: It doesn't have to be. Do you understand the concept of a swing producer?
TER: No, please explain it.
BM: A swing producer in any commodity has control of its price structure. It can make money at $15/ton or at $5/ton. When it wants to expand the market, it charges $15/ton, allowing everybody to come in underneath its umbrella. When it wants to put people out of business, it charges $5/ton. If a competitor can't produce at less than that, it goes out of business.
Less well known is the swing consumer. The Chinese are the swing consumers of everything in the world. If the Chinese had not consumed record amounts of gold in 2013, gold would be $800/oz, not $1,250/oz. Chinese demand for everything sets the price.
TER: So Pan Orient is well positioned in two hotbeds of oil consumption in the Chinese South Seas area and in North America. What is the lifespan on its wells?
BM: Pan Orient has an extremely expansive program this year. It will announce new partners on its fields in Indonesia. It is advancing its deal in the North American oil sands. It will be financing more drilling in Thailand.
Pan Orient is going to remake itself in the next two years. In the oil business, a $100M company is tiny company; the equivalent of a $2–3M gold company. Decent-sized oil companies are worth $1–2B. I think Pan Orient is an easy tenbagger.
TER: Any other suggestions for investment in the broader resource definition you gave us—food, energy and water?
BM: There are obvious investments in food, but I hope to see more work in the next 10 years on water and agriculture. Food, energy and water are, today, where gold was in the summer of 2001. All of them will increase more than anything else that I know of, including gold and silver, which are more fully priced even today. No matter what happens to the stock market, food, energy and water are going to be a lot more valuable in the future.
TER: Bob, thank you for your time and your insights.
By Karen Roche, The Energy Report
Food, Water and Fuel Are Necessary to Life and Investors: Bob Moriarty is republished with permission from The Energy Report.
Get more special features in your inbox: Subscribe to our newsletter for alerts and daily updates.