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But will current trends last another 10 years?

Keynes said he had made his money by understanding the "psychological cycle," not the business or financial cycle. Never-ending bull markets and bubbles have made the public extremely expansive and optimistic. Fear is practically invisible...subdued...in remission. Could this cycle endure two more presidential terms?

One cannot know the future. Who knows, maybe Edward will become Japanese. But it is more likely that the psychological cycle will put in a major top sometime before 2009. 

This psychological turnaround will have its objective correlatives...its "reasons" that investors can point to in order to rationalize their unwillingness to buy stocks at $3 that they couldn't wait to buy at $30 a few months before. It will have its "bad news" -- the same sort of news that might have been reported as "good" news when the public mood was different. And it will have its boosters and pitchmen. People who today claim that it is irresponsible not to be in stocks will urge you to put your money into CDs, or bonds or real estate...or maybe collectible computers. It will be another new era...

One of the most obvious of the objective events upon which public sentiment is likely to turn is the repricing of oil. America used to be an oil exporter. During WWII it was the world's leading exporter. It was Texas oil, in fact, that was largely responsible for the allied victories in both WWI and WWII. In both cases, the Germans...and then, the Japanese...ran out of gas. Machines need oil; war machines need a lot of oil. And good oil...high octane, performance oil. The Axis powers didn't have it. We did.

But the story of Texas oil is past tense. America is now the largest importer of oil. What happened to the Texas fields? They ran out. And the best thinking of the world's best geologists is that the whole world will run out of oil. They are, of course, wrong. Oil will never run out...because it will be repriced and, eventually, replaced. 

There is so much confusion on the subject of oil that it takes a while to disentangle the threads of thought. A quarter century ago, Lester Brown, Jimmy Carter and others believed the world was running out of oil. We would soon shiver in the dark. This led investors to believe that no price was too high to pay for an oil company...oil would soon go to $50 a barrel, after all.

This was nonsense. But it was the sort of nonsense that drew a lot of capital into oil drilling. The result was -- more oil. Rigs, tankers, pipelines...all expanded the rate at which oil was brought to market. This, combined with Paul Volcker's successful anti-inflation program...and the breakdown of OPEC...caused the price of oil to tumble. The oil shortage was history. Now, people entertain the opposite illusion -- that oil will never be in short supply. They think it will be cheap forever. But what, really, are the odds that the dollar will stay strong and the price of oil will stay weak over, say, a 10 year period? 

One of the leading figures in oil history is a colorful character and MIT professor named Dr. M. King Hubbert. He was a genius in the `70s, for pointing out how oil resources were limited. Then, by the end of the `80s, he was a fool...for the same reason. Yet, Hubbert was essentially right about the globe's oil supply. It is a diminishing resource. Consumption rises by 1.5% to 1.8% every year. For every new barrel that is discovered, four are used up.

Norway is the world's second largest oil exporter. But like Texas, Norway's oil will soon be depleted. Production will begin falling in 2006.

Oil is also cyclical. It is a fairly long cycle, because of the high costs in time and money of putting new production on line. Oil was discovered in Texas in 1938. Production peaked in 1971. Oil was discovered in the North Sea in 1980. Production is peaking out now. There are few places in the world left to be explored. Most likely, most of the world's drillable oil has already been discovered. And here's the key point...as outlined by oil expert C.J. Campbell in a speech to the British House of Commons this past summer: World production will probably be peaking out in the next few years.

Yes...you can squeeze oil out of shale...and you can make gasoline out of Nebraska cornhusks. The world is in no danger of running out of fuel. The problem, as Hubbert himself noticed, is with money...not energy.

"I was in New York in the `30s," he said. "I had a box row seat at the Depression. I can assure you it was a very educational experience. We shut down the country for monetary reasons. We had manpower and abundant raw materials. Yet we shut the country down."

While oil is a diminishing resource, the dollar is not. Unlike oil, the dollar can be found almost everywhere on the planet. It doesn't require much expertise to find it either. Since the early `80s...until recently...investors have generally favored dollars. Dollars went up in value, while oil went down. 

But now something new is happening. The first phase of a new psychological/monetary cycle seems to be kicking in: Investors seem to be repricing the dollar in terms of oil. Hereafter, more than likely, it will take more IOUs from Uncle Sam to buy a barrel of oil. 

This trend also has the potential to be explosively profitable. Not only is the supply of oil limited and declining, it is also subject to several influences of a very special nature. Few new tankers or offshore oilrigs have been put in service in the last 10 years. As the price rises, more capital will be put to the service of the oil industry. But it will take years before it delivers more oil. In the meantime, the markets will anticipate a shortage...and bid up oil prices in a dramatic way.

What's more, the Middle East controlled 38% of the world market in 1973. Then, with greater investment worldwide, the Middle East's share fell to only about 20%. This broke OPEC's resolve and caused the oil price to crash. (As predicted by Strategic Investment after a discussion with Saudi oil minister Sheik Yamani. -- http://www.strategic investment.com )

Well guess what? OPEC is gaining strength because oil supplies are getting tight...and because more oil is once again controlled by the Middle East nations. By 2001 they'll control 35%. By 2008, they'll control 50%. And by then, oil supplies are estimated to be declining at 3% per year.

Taking a 10-year view, therefore, would you rather own oil...or dollars? There are good reasons why oil may be repriced dramatically higher in dollar terms...and no reasons I can see why the opposite might occur.

But how do you invest in oil? Ah...there's the trick. U.S. oil companies are already very expensive. Texaco, Conoco and Schlumberger are already trading so high that a general bear market will take them down sharply. Then, of course, they may be great stocks to buy. But what do you do in the meantime? Lynn Carpenter of the Fleet Street Letter* and Dan Ferris of Real Asset Investor ( http://www.realasset.com ) have very different ideas about how to profit. 

Tune in tomorrow,

Bill Bonner 

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