Oct 8, 2022 • 55M

Byron King on Europe's Energy Nightmare

Plus the Nord Stream attacks, German's "Energy Stalingrad" and strategic weaponization... of gas lines, supply chains and the almighty US dollar itself...

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A podcast about mobs, markets and manias. Each week, Joel Bowman sits down with a member of Bill Bonner's private research team to discuss the pressing issues of the day. From high finance to lowly politics, irrational markets and international real estate, great wine and classical books, nothing is off the table in these freewheeling discussions. New episodes every Sunday.
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And now for some more Fatal Conceits…


When the Nord Stream pipelines were sabotaged last week (Sept. 26), we immediately fired off an email to energy and resource investor, geopolitical expert and all round man of letters, Byron King.

Regular listeners (and readers) will recognize Byron as the man who called out “Germany’s Energy Stalingrad” during our Winter Catastrophe summit. That was back in December of 2021, when European technocrats were still guffawing over suggestions that their green pipe dreams and over-reliance on Russian gas might present some problems in the near future…

Fast forward to… well, the near future… and lo! Energy prices have gone parabolic on the continent as nations scramble to “weaponize” every strategic advantage they have, be they cubic feet of gas, global supply chains or greenbacks…

Byron responded almost immediately… despite the fact that he was at the time kicking rocks deep in the heart of Mexico’s Sierra Madre mountain range on a mining expedition.

We caught up with Byron as soon as he landed back in the US to get his take on what’s happening over in Europe, and what it could mean for folks on both sides of the Atlantic as ol’ General Winter enters the fray.

We hope you enjoy the conversation…

Cheers,

Joel Bowman
Host of the Fatal Conceits Podcast

Thank you for reading Bonner Private Research. This post is public, so feel free to share it with comrades and compatriots alike...

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Joel Bowman:

Well, welcome back to another episode of the Fatal Conceits Podcast, dear listener, a show about money, markets, mobs and manias, not necessarily and certainly not always in that order. If you haven't already done so, please head over to the Substack page, at BonnerPrivateResearch.substack.com. There, you can sign up for plenty of daily articles from Bill Bonner. We also have lots of research reports courtesy of Dan Denning and Tom Dyson, and of course, many more episodes and conversations just like this under the Fatal Conceits podcast tab at the top of the page.

It's my pleasure to welcome back to the show today a long-time friend. Mr. Byron King is an energy and resource expert, the editor of the Lifetime Income Report, and all-round man of letters. Mr. King, welcome back to the show, sir. How do you do?

Byron King:

I'm doing very well. Greetings, thank you. And thank you, everyone out there who's watching, listening, reading the transcript, whatever. Appreciate it.

Joel Bowman:

Always a pleasure to have you on, Byron. I always feel like you've probably forgotten more about whatever our given subject is than I may ever know. So, thanks again for taking the time. You and I were catching up on the state of the world recently while you were on tour down in a rock-and-mineral-kicking expedition of some sort, down in the heart of Mexico. How was your trip and what did you find?

Byron King:

Oh, well, thank you for even bringing it up. Yeah, I went to the legendary Sierra Madre of Central Mexico. Most people, when they think of Sierra Madre, they think, “Oh yeah, the Humphrey Bogart movie, The Treasure of the Sierra Madre, where these desperados are out there and they're fighting over gold and whatever, and in the end, everybody kills everybody else and the gold dust blows away in the wind.” It's a real morality tale there. But there really is a Sierra Madre, and it is a really, really rugged range of mountains in Central Mexico, pretty much just south of Texas. And it extends, oh, I don't know, 800, 900 miles south. There's the Gulf Coast of Mexico, then there's the Pacific Coast of Mexico, and then there's this big mountain range in the middle, and that's the Sierra Madre.

And it is an extension of the Rocky Mountains, and it is filled with minerals, and people have been mining great stuff there for literally 500 years. And I visited a company, I'll just name the name because it's a publicly-traded company. It's a nice company, Avino, A-V-I-N-O, silver and gold. And they are, I think, the oldest mine, you might say, in possibly the Western Hemisphere. The mine was found by the Spanish, Portuguese. I mean, the Native Americans, they were digging ore even before that. I mean, that's how the Incas got their gold and all that.

But in 1558, Cortés, who burned his ships, and his conquistadors were making their way across the Sierra Madre. No maps, no nothing, just native guides, looking for whatever is over the next hill. And one night, they were camped out and somebody literally spilled the wine. I mean, they'd knocked over a bucket of wine or whatever. And everybody was mad because, "Hey, dude, you spilled the wine, man."

Joel Bowman:

Party foul.

Byron King:

Yeah, terrible. The next morning, they wake up, the sun is coming up, and they look where the wine had spilled, and there's elemental native silver just sort of cropping out from the ground there. And it was like, "Whoa. We spilled the wine, and God graced us with silver." So, they named the place Avino, as in vino being wine. But then Avino in Spanish means “it comes.” So, it's kind of a play on words, it comes from the wine. We've spilled the wine, and God gave us the silver. They started mining silver there in the 1560s. 1560s, think about that. Do the math. And they mined there for several hundred years, as much as they could. They didn't have the high explosives, they didn't have modern techniques or anything else. They were just chasing veins. Pulled a lot of silver, gold, lead, other minerals out of there.

And then after the Mexican Revolution, nothing happened for decades and decades. And then in the late 1900s, well, yeah, from about 1968 on, some people started the mine back up. There's a group called Avino which is running the operation now. They deal with everything. You got your labor issues, you got your Mexican jurisdiction issues, you got logistical issues, everything else, but it's an up and running mine. And even in a low metals price market, they're making money. What I like about them is first, we got there, we suited up, we went 2,000 feet down to the rock face of the mine, down this spiral decline. It was a total gas. And they've got beautiful ore. It's copper, zinc, lead, silver, gold. And it's the gift that keeps on giving. I look at Avino as sort of a call on future higher metal prices in that regard.

There's a little plug, but it was fascinating geology. It's great geology. It was incredible history. And that was just one part of the trip. Another part of the trip, we went way into the outback of the Sierra Madre and saw this silver exploration site, tiny, little Canadian company that's working there, but gorgeous, gorgeous geology. I mean, it's just this granodiorite that intruded into this limestone. And the contact edge is what's called a skarn, and just unbelievable mineralization. It's destined to be one of those multi-hundred million ounce plays, if not multi-billion ounce plays. I mean, the Sierra Madre, like I said, is the gift that has been giving for 500 years. That's what I do in my spare time, is travel around and look at rocks.

Joel Bowman:

Yeah, yeah, kicking rocks, collecting stories. That's fantastic. Just as you were speaking, and with the enthusiasm that you're speaking with and the depth of knowledge that you have, I'm just recalling one of our recent conversations in which you were lamenting the dearth of expertise graduating from the US in the hard sciences right now. It's not sufficient to just have these gifts that keep giving. You've got to have the human capital and the knowledge to be able to go in, do the drilling, do all that work that you know so well.

Byron King:

Oh my goodness, since you brought it up. I mean, I'm giving a talk in the not-too-distant future in Las Vegas with our good friend and colleague, Jim Rickards. There's an event in Las Vegas, and they asked me what's the topic of my talk, and I said, "Well, I think the title is going to be, What Would Admiral Rickover say?" Hyman Rickover, the father of the Nuclear Navy. He wrote a book in 1959, do the math, 63 years ago, Education and Freedom. It's out of print, you got to buy it on eBay or whatever, Education and Freedom.

Joel Bowman:

Ironic, it's out of print.

Byron King:

Yep. This is 1959. It's all about how bad the US education system is or was back then. And then he actually had a set of congressional hearings on the subject, American Education, A National Failure. This is about almost 400 pages of congressional hearings on how bad the US education system was back then. This is in the post-Sputnik days of late '50s. Rickover, if people don't know the story, you should. He graduated from the Naval Academy in the 1920s. He served in the Navy through World War II. At the end of World War II, he went down to Oak Ridge, Tennessee, and said, "Teach me about this nuclear stuff that you guys are doing." And so he became an expert on nuclear power. He said, "Hey, we could take this nuclear energy and run submarines on it and run ships on it."

But what he found early on in his efforts was that there just weren't enough people who understood the math and the physics and the chemistry and the engineering to do what he needed to do. And so, in addition to being an admiral who promoted the Nuclear Navy and what have you for many, many years. I think he finally left in about 1982. I think they finally kind of showed him the door. He was quite elderly, but he was very, very sharp all along the way. But he was a champion of improving the American education system. We need more math, we need more physics, we need more just general rigor in our curriculum. We need to teach foreign languages. We need to study real history. We need to teach people to write. And he was lamenting these things.

And in this book, in Education and Freedom, 1959, again, this is about a 300-page book, 275-page book, just talking about how bad the education system was in the US. School districts everywhere, I mean, nobody escaped the sting of his lash. I mean, the elementary schools, the high schools, the colleges, the grad schools. We were not doing a good enough job. And arguably, 63 years later, we still aren't. And which brings us around to why we're talking here...

There's not enough things we need to run the world, is there? Because again, there's not enough people out there who understand what's going on, understand what we need, why we need it, where it comes from, how to get it, where you have to go, what do you have to do to make it all work? Perhaps with that introduction, we can-

Joel Bowman:

Yeah. Well, let's connect some dots there, because you've put a lot on the table, Byron. And one of the things that occurred while you were around on the trails in the deep heart of Mexico, of course, and something that you and I exchanged some emails about at the time, speaking of energy and getting it from one place to another, was of course the September 26th explosion, sabotage, what-have-you, on the Nord Stream pipelines up there in the Baltic Sea. You were jumping on trains and planes and in airport lounges, but we still managed to fire off some communiqués. First of all, what was your read on that when you got the news across the wires? And I want to just set the scene here by saying, we, up here in the cheap seats, me a lot further up in the peanut gallery than yourself, Byron, we may never know what really went down there. But it's worth at least some investigation and some kind of clearheaded analysis, because I think that there are certainly going to be knock-on effects.

Byron King:

Oh, it is a matter of a historical pivot, you might say. I would put it up there with assassinating the Archduke in Sarajevo in June of 1914. I would put it up there with the sinking of the Lusitania. I would put it up there with the Gulf of Tonkin. Really, if you want to get historical, back to where we began, I would put it there with Cortés burning his ships.

Joel Bowman:

Cortés' ships, yeah.

Byron King:

When Cortés burned his ships as if to say, guys, we're going into the mountains and there's no turning back. We're not going back to Spain.

Joel Bowman:

It's one way from here.

Byron King:

Does not work that way, fellas. Cortés was lucky. He managed to keep his head on his shoulders for a good while longer. But yeah, there I was in the Sierra Madre with very intermittent cell service, and we'd be up over a hill and down in a valley and up over a hill. And you're at the top of the hill and it's like, "Oh, quick, maybe I'll just see if I can get a signal. Oh, good, Yeah, yeah." I'm downloading emails or whatever. And then down you go. I was like, "Oh, what the heck? Somebody blew up the Nord Stream? Are you kidding? What's going on here? What happened?"

Well, like you said, it's one of those things that we may never know the true, real, absolute story. Who killed JFK? Where is Jimmy Hoffa? One of those mysteries of everything. The instant was, "Oh, Putin did it. Putin, Putin, Putin, Putin, Russia. Russia." And it's like, I mean, well, why would the Russians blow up their own pipeline? I mean, I suppose you can have that supposition. You can think that. But, they already had the valves closed. So, now what? "Well, we're going to blow up the pipeline just to make sure." Well, okay, that's one idea.

But getting back to that burn the ships thing, what have we really done here? Well, we've definitely made sure that Germany is not going to get any Russian gas, not this winter. If Germany and Russia were having real quiet, sub rosa, under the radar discussions about, "Hey guys, come on, maybe we can work something out here," well, that's foreclosed.

I mean, the pipes are blown up and full of sea water. You're not going to pump much natural gas this winter. And who knows how long it'll take to fix? If maybe they have to replace five miles or 10 miles or 100 miles of pipe, I don't know. I don't think the entire pipeline is destroyed, because they have these shutoff valves along the way. But it's not good. If you're Russia, if you're Putin, if you're the general staff, you've got two things that you're balancing. You've got your military power on the one side, I've got my tanks, got my jets, got my troops, got my rockets. And over here, it's like this is my peaceful side here. If we can trade, we can have energy. I can sell you natural gas and nice, clean-burning fuel and all this.

It's a trade-off. For a couple of months, we're going to be very aggressive. We're going to roll the tanks, shoot the artillery, blast away at the battlefront. But then, every now and then, we'll say, "But if you want, we can work something out and here's your gas." Well, somehow or another, this whole option for the Russians just went away. Who would want to do something like that? Would the Russians want to do that to themselves? Well, I mean some people are crazy, but I don't think the Russians are that crazy. Would the Americans do it? Well, the US military came out and officially denied that they did it. They go, "We didn't do that." Well, okay, I'll kind of take your word for that. I mean, it's not that generals and admirals never lie, but I mean, okay, I hear you.

Well, I mean if the US military didn't, whose military did? I mean, this was not some fishing trawler that caught the anchor or whatever. You had at least three, maybe four explosions. It's a crime scene, when you think it through, beginning with just the radar tracks of what airplanes were around, what helicopters, what ships were on the surface. And not just right then, I mean within the past weeks or even months, because you can make things happen even months after you set the charge.

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Joel Bowman:

And this is international waters too, it should be pointed out. This isn't in an area that's a declared war zone or even an undeclared war zone.

Byron King:

Well technically, it was Swedish environment, Swedish economic zone, and Danish economic zone. So, Sweden and Denmark are involved, just because it was in their exclusive economic zone under the law of the sea.

Joel Bowman:

And they were the two that first registered the seismic activity, I think. And then it was subsequently Germany, the line operators, that noticed the 94% plummet in gas pressure in the lines.

Byron King:

Sure, so things explode. Well, there are some other clues there. Just the acoustics of what's going on, because the Baltic Sea is wired for sound. They've got sound listening systems all over the place because people are always listening for submarines and what have you. There's a whole acoustic library. You can tell a lot just from the waveform of the explosion through the water. I mean, you can tell whether it’s a fast burning, high power explosive or a slower burning explosive. I mean, you can tell a lot about that. The seismographs in Sweden measured it. You can tell a lot from what are called the P waves and the S waves on that. There's a lot of geophysics involved in that. Then eventually, I mean once the water clears and it's safe for divers to go down, it's a couple hundred feet of water, 200 and something feet of water.

You get down, you look around and you take pieces of the steel. The steel will record what blew up. There's ways of taking that steel and making it talk to you. If it was a cutting type of a charge, a shape charge that cut in, that leaves evidence. There's explosive residue, then there's whatever was the package of the explosion. Was it just a charge? Was it a timer? Was it a torpedo? Was it something? It's going to leave debris all over the place. It's going to be all over the ocean floor. So, the guys will be out there, picking it up and finding it. There's a definite crime scene and a lot of forensics to do there. The people who did it know who they are, they did it. They're not talking. The people who didn't do it, they know who they are too. But how do you trust everybody else? They're all, "I deny it. Well, I know I didn't do it, but I don't know that you didn't do it, even though you're denying that you did do it." You're in one of those war game scenarios.

Joel Bowman:

I was just going to say, just to speak to that exact point, there are a lot of people who put their hand up very shortly afterwards, and also some months before, as you mentioned, one might have deployed ships or subs or delivered the package sometime previous, if we're going sequentially. 

I just want to read you a couple of quotes that people are focusing on, and we can just discuss them after. But I'll take you back to January 27. I'm sure you've read this, but just for the interests of our listeners, this is the Under Secretary of State for Political Affairs, Victoria Nuland, January 27th of this year. She said, and I quote, "With regards to Nord Stream 2, we continue to have very strong and clear conversations with our German allies. And I want to be clear with you today, if Russia invades Ukraine, one way or another, Nord Stream 2 will not move forward."

And then, if she was rattling sabers or maybe talking above her pay grade, it was 10 days later when the big guy, Joe Biden, was on hand to clear up any ambiguity. This is reported in ABC and elsewhere. But I'll quote here, President Biden, "If Russia invades, there will be no longer a Nord Stream 2. We will bring an end to it." And then the reporter follows up with, "But how will you do that, exactly, since the project is in Germany's control?" Biden responds, "I promise you, we will be able to do that."

Now, that's not to say that maybe Mr. Biden did not follow through on his promise, but it was a day after, that is to say, September the 27th, that the day after these explosions, when the former Polish foreign minister, Radek Sikorski, tweeted, "Thank you, USA." This was one day after the attack. And if listeners want to bone up on Mr Sikorski's political platform, you can go and check him out on Twitter. There's a banner picture of him sharing a happy moment with President Biden. He's the Chairman of the EU-USA delegation for the European Parliament. All of which is to say, there's a lot of sort of scuttlebutt around this, and a lot of finger pointing. What do you make of all that?

Byron King:

If the US had no role in it, between Nuland and President Biden, they sure as hell painted the country into an evidentiary corner with their collective big mouth. And I think any police officer will tell you when the husband dies, the first suspect is the wife. When the wife dies, your first suspect is the husband. And when somebody says they're going to do something and then it happens, one of the first suspects is the person who said that they're going to do something.

I mean, this is big mouth diplomacy. Diplomacy by tough talk, talking all this macho stuff, all this President Corn Pop and all this kind of thing that Biden's so famous for. He always has a story for everything. He has always been involved in everything. He got arrested with Nelson Mandela in Robben Island, and he was in the Civil Rights Movement way back when. And the other day, he was talking about how he grew up around Puerto Ricans, as he's down in Puerto Rico visiting. Yeah, come on. You're a white boy from Scranton who grew up in Delaware. "I grew up down from those oil refineries there, and everybody I knew had cancer." Really? Oh yeah.

Him and his big mouth. I mean, if he didn't do it or if he didn't sign off on it, or if his people didn't sign off on it, not that President Biden knows everything that goes on in the US government, if you get my drift. He sure did paint himself, paint the country into a nice corner on that. The group that is really affected immediately is Germany, because there is no way that Germany is going to get Russian gas any time soon, period, the end, full stop. And Germany is shutting down its industry. It's shutting down its steel industry, aluminum industry, glass industry, and chemicals industry. BASF is the largest chemicals company in Europe, and pretty much if you shut down BASF, you have shut down all of the downstream things, all the paints, all the resins, all the chemicals, all the everything.

I mean, you can barely bake bread in Europe without using something that came from some chemical factory of BASF. And if they don't have natural gas to run their hundreds of different operations, an awful lot of chemistry doesn't happen, and a lot of other cascading effects don't happen. Germany is already talking about ... I mean, it's one thing to talk about the cold winter and how we're going to keep people warm. And I should mention that this trip that I was on last week in Mexico, ee had a couple of German guys with us who had come from Germany. They were investors in the company that we were visiting. And they were saying that from Frankfurt, from Munich and from another small town, I think near Leipzig, they were already being told by their municipalities, "Okay guys, you have to take fewer showers. You have to turn down your thermostat, you're going to take sponge baths. You really only need to take a shower about every week or 10 days because you can just wash your face and you'll be okay."

This is what they're being told in Germany. And these are fairly upper level investors. I mean, these aren't the huddled masses yearning to breathe free or anything like that. These guys can afford to come to Mexico on a nice trip and visit their investment in the copper mine, the gold mine. This is what they're being told over there. Germany is immediately affected. No gas for you, and you're not going to get any gas, and don't think that you can negotiate a backdoor deal with the Russians to get that gas. Like I said, this is the Lusitania moment or the Gulf of Tonkin moment, except it is Germany that's being screwed. When they say, "Well, Russia is not going to make any money selling gas," they're making plenty of money. Russia is making more money selling oil and gas right now than they were making before the war.

I mean, they're selling their product at a higher price than before the war. "Well, the Russians have to sell it at a discount." Yeah, so what? That discount is a higher price than they were getting 10 months ago. And then the people who they sell it to, they turn around, the Chinese, the Indians, they turn around to either refine it, or maybe they don't refine it and they just send it off to somebody else. And then they get that nice little plus up, that nice delta. They buy the $85 oil from Russia and then they sell it for $105 to some refinery in California, which is why Californians are paying almost seven bucks a gallon for gas. For motor fuel gas, not natural gas.

Yeah, everything is connected to everything else. And when you blow up a pipeline like that, you've destroyed German industry, plus much else in Europe, you're putting multi, multi billion, $100 billion companies literally out of business. We're not just winding down gently. We're just going to take a little bit off the top here, just little off the top, Ernie, that kind of thing. No, no, no, no. We're throwing a switch. We're pulling the switch.

Joel Bowman:

It's the buzz cut, yeah.

Byron King:

We're closing the gates and putting a big padlock on the factory gates. "Sorry guys, you got to go home." We have no energy to melt the steel. We have no energy to run the machines. Can't bend anything.

Joel Bowman:

What does that look like then, Byron? Because I think readers with a sense of European history will know that going back to, I think it was probably the late '60s, early '70s, we had German Chancellor Willy Brandt's “Ostpolitik,” this idea that you would have Russia providing an increasing supply of energy sources to the continent. And that this was going to be the common interest bridge that would help promote peace, et cetera, et cetera. This seems like, as you said, this is a ship-burning pivot, or pivot away from that. And not only if we look toward the continent, where we see all of the cascading effects that you've just outlined, but also if we look further east, we see now that, as that bridge has been detonated, or the connection has been severed, they'll pivot to other customers. This will foster a growing alliance between China and Russia. There are projects underway. There's talk underway of increased commercial dealings there. What do you see looking on both sides of that geopolitical coin?

Byron King:

Well, you're absolutely right that Russia has, for several years now, been moving closer and closer in many, many ways with China. There's already a major pipeline called Power of Siberia 1, which moves massive amounts of energy from Russia into China. They have a crash program right now to build Power of Siberia 2, which is going to be more gas out of the Russian pipeline system and into the Chinese pipeline system. And the Chinese are a bottomless pit for all intents and purposes in terms of their ability to absorb the energy. And that's just in natural gas. In the northern part of Russia, there's the Yamal project, which is an LNG project. They pull the natural gas out, they liquefy it into liquified natural gas, and they send it all over the place, including the United States. I mean, a couple of times a year, a Russian ship or a ship carrying Russian Yamal gas pulls into Boston Harbor.

And I mean, here's New England, which they won't allow about oh, maybe 100 miles' worth of pipeline. The New England liberals, they won't allow about 100 miles' worth of pipeline to be built from Pennsylvania across New York into Connecticut, Massachusetts. They won't allow those pipelines, which would bring a lot of that Marcellus, Pennsylvania gas, Ohio gas, West Virginia, bring that straight up into New England. No, no, no, no, no. We have to bring a whole sailing ship, a whole LNG carrier into Boston Harbor and unload it in the LNG storage so that we can keep Boston warm in the winter time.

And I assure you that when that LNG carrier pulls into Boston Harbor, it's a major military operation. I mean, the Coast Guard is out there, the National Guard is out there, the helicopters are flying around, they got jets in the sky and everything else. That is a big thing, not because it's Russian gas, just because it's gas. It's a big, huge thermos ship, you might say, full of LNG. You don't want to bump into anything. You don't want anything bad to happen to that ship.

I mean you can look it up, it's in the news accounts: Russian Gas Boston. Google it, you'll find article after article after article, year after year after year, of that. Russia is exporting gas, LNG. They're exporting it at terrific prices. I saw something this morning that made just an eye-popping statistic. When we had that energy crash, I guess it was in about March of 2020. Remember when everything crashed because of the early days of the COVID? Stock market sold off everything. And I mean, March, April that year, I think oil sold for negative $39 a barrel.

Joel Bowman:

That's right.

Byron King:

Which was a trading thing. It just had to do with clearing the papers and stuff like that. At any rate, at that particular point, 1,000 cubic feet of LNG was selling for $1.90, a buck 90. Today in Europe, that same MCF, that same 1,000 foot of gas, going for almost 60 dollars. So, times 30 in a matter of a little over two years. And it's the crazy economics of what has been going on in order to clear the market. And for all the listeners, readers, viewers, et cetera here in the United States, who don't think it's all happening, "Oh, it's over there. It's all in Europe. I don't have to worry about that stuff because it's all European." No, no, no, because here in the United States, when we're exporting all of this marginal natural gas off the top, we are raising our natural gas prices to a global level.

Not that we're going to be a European level, but I mean if you were paying, pick a number, three or $4 an MCF a year or two ago to heat your house, for example, to turn the burners on on your stove or something like that, you're going to be paying seven or eight or nine bucks. It's going to cost you twice as much, and maybe three to heat your house this winter as last year, I assure you. Look in your filing cabinet for all your paid bills from the last year or two from the gas company, and look and see how much they were charging you per MCF, and you just wait until December, January, February. I mean, people are talking about the upcoming election. What are the big issues there? One that nobody's talking about, not very many people are talking about, is how Americans are going to have a hell of a hard time heating their house this winter.

I mean, maybe not these Americans at the top of the income pyramid, but pretty much everybody else, the other 75 or 80% of the population, some people are just not going to be able to afford it at all. Fortunately, we have laws about you can't turn off the gas in the middle of winter and freeze people to death, in most places. But a lot of people are going to come out of this situation very broke, very indebted. They're not going to be spending their income on other things because between heating your house and buying those expensive groceries at the grocery store, you're not going to have any money left over for anything. People are saying, "Well, the economy is going to recover." I'm thinking, which economy is going to recover? Which economy would you be talking about? I don't see that happening, because it's all connected to energy.

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Joel Bowman:

I was just about to say, as you mentioned earlier, that everything is connected to everything else. A couple of statistics that we've published in the last week or so, we saw last Monday, the Case-Shiller home price index dipped negative. It was the steepest one-month decline on their books. Maybe that's just the kind of teetering at the top. But another cousin statistic to that was, with rates rising for the first time in a long time, the average monthly mortgage repayment for the medium-income American family has just tipped 50% of their net income, which is not a trivial portion of one's budget. Then you add into that 40-year high inflation of course, and falling stock valuations, it's of course not a very good outlook going forward. 

Now, you mentioned US gas may be going off to fill some of that market gap over on the European continent. What does that do immediately for American gas prices? I noticed just in the last couple of weeks, a chart that I saw on Twitter, I'll put it up in our transcript. 

[Joel’s Note: h/t to @ericnuttall with Ninepoint Energy Fund]

It showed the big three distillate inventory in the United States. It has been in very sharp decline for the past, well, basically since back in early 2020. We're at multi-year lows there. What do you see as a kind of price outlook for Americans who are going to be watching that? 

Byron King:

Oh, I think it will, yes. When you talk about housing prices, I mean it’s all location, location, location. I suppose if you've got the right location, you're still going to be able to sell your house at the price you think you ought to get for it. But I mean, if somebody wants to buy a house for, pick a number, half a million dollars, and their mortgage rate is 3%. Okay, well, they can swing it. But if the mortgage rate is now 6%, well, 7% actually, from what I've heard, that puts a whole different pricing mechanism on your ability to finance the house. What can you pay for that half million dollar house? Maybe that half million dollar house is now a $350,000 house. I mean, everybody's different. Every house is different, location, location, of course. The froth is off the beer on the housing market.

You also see it in the automobile market, just as more and more of those missing chips, those computer chips that they needed to build the cars, more and more of those things are starting to flood into the market, and the car makers are starting to make all the cars they want. They're finding that people can't afford them. And that has also trickled down into the used car market. A lot of people have these used cars on the lot, which they paid too much for two months, three months, five, six months ago. And they don't want to sell them at a loss. To which some people might say, "If you don't sell it at a loss today, you're going to sell it at a bigger loss in a month or two or three months." I'm not telling anybody how to run their used car business. I've never been a used car salesman, although a good used car salesman, probably worth her weight in gold about now.

Going forward, I mean when energy costs more, when we're shipping it overseas, big whacks of it, entire tankers of LNG going overseas, it's going to raise prices here in the US. It's going to cost more to heat your house. It's going to cost more for your utility company that uses natural gas to spin a turbine and generate electricity, so your electric bill is going up too. If your electric bill is going up, well, that means that it costs more to run the supermarket, costs more to just keep the coolers on, to keep the frozen foods frozen and the fresh produce fresh, so that it doesn't all deteriorate into mulch on the stacks there.

And meanwhile, it cost more to run an oil refinery. It costs more to refine your oil because it takes energy to refine oil. So, your refined product prices go up, your diesel fuel prices go up. We already have shortages around the country in all sorts of things, lubricants, things like hydraulic fluid, things like kerosene. People think, oh, diesel trucks, they run on diesel. Yeah, they run on diesel but in the wintertime, but you add kerosene to the diesel to keep it from gelling up in the cold. I mean, there's not enough kerosene out there.

Kerosene, what's another word for kerosene? Jet fuel. Oh, yeah. When you have these kinds of shortages that are just permeating all through the economy, it screws things up big time. I mean, one of the problems with, for example, airline travel, and especially in the smaller airports, if you're flying in or out of JFK or Chicago O'Hare or Atlanta or something like that, Atlanta has an entire pipeline that comes from refineries in Texas and Louisiana to Atlanta. They have plenty of jet fuel in Atlanta. But if you're flying to some of these smaller places where they have to haul the jet fuel in on a truck, they might not have enough fuel. I mean, the jets have to fly in with enough gas to fly out, or you fly in and you think, "Well, we'll fuel up overnight." They might not have the fuel. So, that 6:00 AM flight out in the morning doesn't happen.

This was one of the problems that we saw all summer with all the airlines canceling flights and all that. They weren't canceling flights just because they felt like canceling flights. They were canceling flights because they didn't have fuel for the jet, they didn't have lubricants for the jet because the air crew couldn't get to the airport on the inbound flight where they were deadheading so that they can fly the airplane out the next morning. These things just ripple through the economy in a very, very turbulent sort of way. And it's all reflected in really the disruptions that you see everywhere across the economy.

Joel Bowman:

Yeah, I remember Mr. Henry Hazlitt. I think he was writing for The New York Times, if I'm not mistaken, back in the '50s or '60s. I imagine having a Henry Hazlitt on the editorial board at one of the mainstream papers today, it's almost unthinkable. But one of his main lessons was not just to look at the immediate consequences of one or any given policy, but to look at the secondary and tertiary knock-on effects of those policies, and not just for one particular focus group, but across the broader economy. And that seems to be a lesson that has been often lost. So, just as we're wrapping up here, Byron, I wanted to get back to these pipelines. Whether Mr. Putin did it, whether some coalition of the West, NATO, et cetera, did it, again, we may never know. But in any case, the taps have been decisively blown up, up there in the Baltic. Whatever the ripple on effects are now going to be, what happens for a continent of people who were getting cheap, relatively local, that is Russian gas, what happens to all the people who are concerned about CO2 emissions and so forth, who are now going to be shipping liquified natural gas thousands and thousands of miles further? And I've even seen some reports of potentially LNG shipments coming from Australia. I mean, that is a long supply line, and it's not a supply line that doesn't require energy inputs in and of itself.

Byron King:

Yeah. Well, ocean shipping is a relatively efficient way of moving product from anywhere to anywhere. Although, yeah, you're burning up fuel in the ship to move it. Right now, the price is super high in Europe and they are desperately looking for gas. I mean, you probably saw just last week or so, in the last few days, the new Prime Minister of Italy, Giorgia Meloni, she takes office and the next thing you know, the word is that, oh, Russia's not sending gas to Italy. That's not what Russia is saying. Russia is saying, "We're sending gas through Austria to Italy, but the Austrians are not letting it go into Italy because the Austrians don't have enough gas. They're using it."

There's one school of thought in the mainstream media that somehow or another, the Russians are shutting off Italy. There's another school of thought in terms of a different story. The Russians say that they're shipping their gas to Italy, but the Austrians are pirating it in Austria. What does that story tell you? Well, what that story tells you is that the European Union is disunionizing, so to speak, to make up a word here. Put on my Alexander Haig hat and make up words as we go along. But no, when it's every nation having to figure out what they're going to do ... I mean, France has a big nuclear industry, but it's sort of throttled back right now for maintenance, and because of drought, they can't cool the power plants as much. Well, France isn't exporting nuclear electricity anymore. The Czech Republic has nuclear power, but they've got their problems too. They're not exporting.

The Netherlands has the Groningen gas field, which could help quite a bit to alleviate the natural gas shortage in Europe. But for local political reasons, because earthquakes are shaking the china in some people's houses, we're shutting the Groningen gas field in the Netherlands. Britain has plenty of frackable real estate. I mean, if you do your plate tectonics and put everything back together again, a big whack of England, in fact, looks an awful lot like Pennsylvania and Ohio if you do the geology, except that Britain didn't want to frack. But one of the first things that Liz Truss has done now is said, "Well, maybe we are going to do some fracking." 

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Joel Bowman:

It's amazing what people will revert to when the lights don't come on at the flick of a switch, and the bread isn't ready in the morning at the bakery, and you can't get the candlestick maker to get his chemicals and his waxes in order. 

Let's go with your word of disunionization here for a second. The disunionization of the European Union. It was just a couple of weeks ago that it was Ursula von der Leyen, I think I'm pronouncing that correctly, who sent out a not so veiled threat ahead of the Italian elections and said essentially they were monitoring the election results in Italy. They will see the results of the vote and, “If things go in a different direction, we have tools, as was the case in Poland and Hungary, at our disposal.”

Yeah, this was essentially, “We have a European Union way of doing things, and any nation therein that deviates from that may expect consequences.” I'm not sure if that is filed under conspiracy theory, but it just kind of jogged my memory there. And it does seem like the European Union is under duress ahead of this coming winter. And as we see those supply chains breaking down, it does not look like the harmonious, peaceful continent that those who set out to build the European Union ostensibly or allegedly had in mind at the outset.

Byron King:

Well, it's hard to have a European Union, and it's hard to have a unified currency as in the euro when the entire foundation of your economy has begun to crumble. And the foundation of any advanced economy is energy. We have had this discussion before. In fact, one of the first times that you and I ever met was, I think, back around 2005, you came up to Western Pennsylvania and we took a field trip into the oil fields, the original oil fields around Oil City, Pennsylvania, Titusville, the Colonel Drake Well. And if I remember, we actually had it fracked, except that it was a different kind of explosive charge. But we watched somebody frack an old oil well and increase the production.

Joel Bowman:

I remember it well.

Byron King:

That was a long time ago. And energy is the economy. When people say, "Oh, the economy, the economy, the economy," yes, but energy is the economy because try running the rest of your economy without the energy. You and I wouldn't be talking. We'd have no electricity for our computers and for the wires and for the sound system and the people out there, everybody who is watching this, without the energy, you would not be watching this. Energy is the economy. Drill that into your head.

And so what Europe has said, or what the green side of Europe has been saying, we're going to take a low density, low energy density concept. We're going to do solar and wind and whatever. And we're going to take these low density, intermittent, unreliable, because the wind doesn't always blow and the sun goes down every night. We're going to take these low-density energy systems and we're going to try to run a high-energy density economy on it. An economy that's built around lots of mass transportation, that's built around using vast amounts of metals and materials and vast amounts of food. People eat this food that has to be transported from all over the place and kept frozen or kept cool in the coolers, and we take it home, put it in the refrigerators, all those sorts of things. You're trying to run an advanced, high energy density economy on a low energy density gathering system. And there is a disconnect.

And what we're watching now is the disconnect just explode in everybody's face. I mean, in between the war in Ukraine, military operation in Ukraine, whatever you want to call it, and now with literally the analogy of Cortés' ships getting burned. Maybe it wasn't Cortés who burned the ship, but somebody burned Cortés' ship by blowing up those pipelines. In any case, Germany's not getting the gas.

Joel Bowman:

Yeah, there's only one way from here.

Byron King:

And they're in trouble.

Joel Bowman:

I think that's a great analogy. And of course we're watching, I think, the end or the decline of three simultaneous buoying agents that have lifted us into this modern cornucopia of prosperity, being cheap and abundant energy, which we've through various means kind of slammed the brakes on or blown up the pipelines, cheap and abundant manufacturing through the weaponization of supply chains from China, and cheap and abundant credit, which had us all living high on the hog in the future. These things all, for various reasons and through various complex dynamics, in and of themselves are coming to a very abrupt end. And yeah, it feels like there's not many places to hide.

Byron, I know I've taken up a bunch of your time here, mate, and I really do, as always, appreciate your insights on a broad array of topics. But before I let you go, tell our good listeners where they can find your work, where they can find your latest thinking, and what it is you are telling your readers in general to look at over the back half or back quarter, I should say, of the year and beyond.

Byron King:

Well, I am still with what we used to call Agora Financial, but it is broken into different stovepipes with different names. But I'm with a group called Paradigm Publishing, P-A-R-A-D-I-G-M (readers can learn more right here). I am writing for a newsletter called Lifetime Income with Zachary Scheidt. And I'm also writing in Jim Rickards' newsletter. And you'll find me in different versions of his newsletter, but Strategic Intelligence, the Gold Speculator, things like that. And if you aren't subscribed, I suggest you go to Paradigm, take a look, see what you see, what you think. And Lifetime Income or the Jim Rickards franchise has me writing things. I've been writing about energy, I've been writing about mines and minerals, been writing about military matters. I mean, Jim said, "Write something about the war in Ukraine." So, I wrote an essay about a month or so ago on the origins of the American approach to air power.

I went back to a Russian guy, in fact, named de Seversky. He was a Russian émigré to the United States who founded the Republic Aircraft Corporation, Republic being a great old name in aviation. But he wrote a book called Victory through Air Power, which came out in 1942, and truly changed the thinking of the United States towards the use of air power. And it was absolutely critical to the whole philosophy behind building a massive Air Corps in the Second World War, and to the foundation of the US Air Force and aerospace power. I wrote about that about a month or so ago. That's in the archives. And yeah, I get all over the place. And then every now and then, I take these fun field trips, like down to Mexico and to the legendary Sierra Madre, and go kick rocks.

Joel Bowman:

Outstanding.

Byron King:

Go visit the silver mine that Hernando Cortés discovered when he spilled the wine.

Joel Bowman:

And there we go. There we go. In vino veritas, as we've since discovered. Byron, we'll have to get you back on again soon, mate, when you're not out on expedition, kicking rocks and minerals somewhere. It's always such a pleasure to talk to you, and I really do appreciate all your insights as always. Just for our listeners out there, I'll put some links down below to all of the many ways that you can get and follow Byron's latest thoughts and musings. And of course, you can find more conversations with Byron and plenty of other analysts, experts and friends of Bonner Private Research on our Substack page. Head over to BonnerPrivateResearch.substack.com for all that and plenty more. 

Byron, thanks again, mate. Let's catch up again soon. And readers, listeners, viewers, I'll see you all next week.

Byron King:

Thank you so much. Thank you.

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