John Mauldin's Outside the Box : Mexico

Arizona, Borderlands and U.S.-Mexican Relations

John Mauldin — Thu, 05 Aug 2010 14:37:00 GMT

The immigration issue and Arizona’s controversial new law provokes passions on all sides. But too often the debate doesn’t reflect the complex history and geopolitics that inform the issue.

Today I'm sending you an article from George Friedman, expert on geopolitics & founder of STRATFOR. Dr. Friedman presents his unique perspective on the immigration issue by touching on everything from the geography of the borderlands to Andrew Jackson and the importance of New Orleans. It is a prime example of how putting an issue like immigration in a geopolitical perspective gives you context for understanding how events are related and what the future may hold. Be sure to sign up for STRATFOR's free mailing list for weekly analyses like this one.

John Mauldin, Editor
Outside the Box

Arizona, Borderlands and U.S.-Mexican Relations

By George Friedman

Arizona’s new law on illegal immigration went into effect last week, albeit severely limited by a federal court ruling. The U.S. Supreme Court undoubtedly will settle the matter, which may also trigger federal regulations. However that turns out, the entire issue cannot simply be seen as an internal American legal matter. More broadly, it forms part of the relations between the United States and Mexico, two sovereign nation-states whose internal dynamics and interests are leading them into an era of increasing tension. Arizona and the entire immigration issue have to be viewed in this broader context.

Until the Mexican-American War, it was not clear whether the dominant power in North America would have its capital in Washington or Mexico City. Mexico was the older society with a substantially larger military. The United States, having been founded east of the Appalachian Mountains, had been a weak and vulnerable country. At its founding, it lacked strategic depth and adequate north-south transportation routes. The ability of one colony to support another in the event of war was limited. More important, the United States had the most vulnerable of economies: It was heavily dependent on maritime exports and lacked a navy able to protect its sea-lanes against more powerful European powers like England and Spain. The War of 1812 showed the deep weakness of the United States. By contrast, Mexico had greater strategic depth and less dependence on exports.

The Centrality of New Orleans

The American solution to this strategic weakness was to expand the United States west of the Appalachians, first into the Northwest Territory ceded to the United States by the United Kingdom and then into the Louisiana Purchase, which Thomas Jefferson ordered bought from France. These two territories gave the United States both strategic depth and a new economic foundation. The regions could support agriculture that produced more than the farmers could consume. Using the Ohio-Missouri-Mississippi river system, products could be shipped south to New Orleans. New Orleans was the farthest point south to which flat-bottomed barges from the north could go, and the farthest inland that oceangoing ships could travel. New Orleans became the single most strategic point in North America. Whoever controlled it controlled the agricultural system developing between the Appalachians and the Rockies. During the War of 1812, the British tried to seize New Orleans, but forces led by Andrew Jackson defeated them in a battle fought after the war itself was completed.

Jackson understood the importance of New Orleans to the United States. He also understood that the main threat to New Orleans came from Mexico. The U.S.-Mexican border then stood on the Sabine River, which divides today’s Texas from Louisiana. It was about 200 miles from that border to New Orleans and, at its narrowest point, a little more than 100 miles from the Sabine to the Mississippi.

Mexico therefore represented a fundamental threat to the United States. In response, Jackson authorized a covert operation under Sam Houston to foment an uprising among American settlers in the Mexican department of Texas with the aim of pushing Mexico farther west. With its larger army, a Mexican thrust to the Mississippi was not impossible — nor something the Mexicans would necessarily avoid, as the rising United States threatened Mexican national security.

Mexico’s strategic problem was the geography south of the Rio Grande (known in Mexico as the Rio Bravo). This territory consisted of desert and mountains. Settling this area with large populations was impossible. Moving through it was difficult. As a result, Texas was very lightly settled with Mexicans, prompting Mexico initially to encourage Americans to settle there. Once a rising was fomented among the Americans, it took time and enormous effort to send a Mexican army into Texas. When it arrived, it was weary from the journey and short of supplies. The insurgents were defeated at the Alamo and Goliad, but as the Mexicans pushed their line east toward the Mississippi, they were defeated at San Jacinto, near present-day Houston.

The creation of an independent Texas served American interests, relieving the threat to New Orleans and weakening Mexico. The final blow was delivered under President James K. Polk during the Mexican-American War, which (after the Gadsden Purchase) resulted in the modern U.S.-Mexican border. That war severely weakened both the Mexican army and Mexico City, which spent roughly the rest of the century stabilizing Mexico’s original political order.

A Temporary Resolution

The U.S. defeat of Mexico settled the issue of the relative power of Mexico and the United States but did not permanently resolve the region’s status; that remained a matter of national power and will. The United States had the same problem with much of the Southwest (aside from California) that Mexico had: It was a relatively unattractive place economically, given that so much of it was inhospitable. The region experienced chronic labor shortages, relatively minor at first but accelerating over time. The acquisition of relatively low-cost labor became one of the drivers of the region’s economy, and the nearest available labor pool was Mexico. An accelerating population movement out of Mexico and into the territory the United States seized from Mexico paralleled the region’s accelerating economic growth.

The United States and Mexico both saw this as mutually beneficial. From the American point of view, there was a perpetual shortage of low-cost, low-end labor in the region. From the Mexican point of view, Mexico had a population surplus that the Mexican economy could not readily metabolize. The inclination of the United States to pull labor north was thus matched by the inclination of Mexico to push that labor north.

The Mexican government built its social policy around the idea of exporting surplus labor — and as important, using remittances from immigrants to stabilize the Mexican economy. The U.S. government, however, wanted an outcome that was illegal under U.S. law. At times, the federal government made exceptions to the law. When it lacked the political ability to change the law, the United States put limits on the resources needed to enforce the law. The rest of the country didn’t notice this process while the former Mexican borderlands benefited from it economically. There were costs to the United States in this immigrant movement, in health care, education and other areas, but business interests saw these as minor costs while Washington saw them as costs to be borne by the states.

Three fault lines emerged in United States on the topic. One was between the business classes, which benefited directly from the flow of immigrants and could shift the cost of immigration to other social sectors, and those who did not enjoy those benefits. The second lay between the federal government, which saw the costs as trivial, and the states, which saw them as intensifying over time. And third, there were tensions between Mexican-American citizens and other American citizens over the question of illegal migrants. This inherently divisive, potentially explosive mix intensified as the process continued.

Borderlands and the Geopolitics of Immigration

Underlying this political process was a geopolitical one. Immigration in any country is destabilizing. Immigrants have destabilized the United States ever since the Scots-Irish changed American culture, taking political power and frightening prior settlers. The same immigrants were indispensible to economic growth. Social and cultural instability proved a low price to pay for the acquisition of new labor.

That equation ultimately also works in the case of Mexican migrants, but there is a fundamental difference. When the Irish or the Poles or the South Asians came to the United States, they were physically isolated from their homelands. The Irish might have wanted Roman Catholic schools, but in the end, they had no choice but to assimilate into the dominant culture. The retention of cultural hangovers did not retard basic cultural assimilation, given that they were far from home and surrounded by other, very different, groups.

This is the case for Mexican-Americans in Chicago or Alaska, whether citizens, permanent residents or illegal immigrants. In such locales, they form a substantial but ultimately isolated group, surrounded by other, larger groups and generally integrated into the society and economy. Success requires that subsequent generations follow the path of prior immigrants and integrate. This is not the case, however, for Mexicans moving into the borderlands conquered by the United States just as it is not the case in other borderlands around the world. Immigrant populations in this region are not physically separated from their homeland, but rather can be seen as culturally extending their homeland northward — in this case not into alien territory, but into historically Mexican lands.

This is no different from what takes place in borderlands the world over. The political border moves because of war. Members of an alien population suddenly become citizens of a new country. Sometimes, massive waves of immigrants from the group that originally controlled the territory politically move there, undertaking new citizenship or refusing to do so. The cultural status of the borderland shifts between waves of ethnic cleansing and population movement. Politics and economics mix, sometimes peacefully and sometimes explosively.

The Mexican-American War established the political boundary between the two countries. Economic forces on both sides of the border have encouraged both legal and illegal immigration north into the borderland — the area occupied by the United States. The cultural character of the borderland is shifting as the economic and demographic process accelerates. The political border stays where it is while the cultural border moves northward.

The underlying fear of those opposing this process is not economic (although it is frequently expressed that way), but much deeper: It is the fear that the massive population movement will ultimately reverse the military outcome of the 1830s and 1840s, returning the region to Mexico culturally or even politically. Such borderland conflicts rage throughout the world. The fear is that it will rage here.

The problem is that Mexicans are not seen in the traditional context of immigration to the United States. As I have said, some see them as extending their homeland into the United States, rather than as leaving their homeland and coming to the United States. Moreover, by treating illegal immigration as an acceptable mode of immigration, a sense of helplessness is created, a feeling that the prior order of society was being profoundly and illegally changed. And finally, when those who express these concerns are demonized, they become radicalized. The tension between Washington and Arizona — between those who benefit from the migration and those who don’t — and the tension between Mexican-Americans who are legal residents and citizens of the United States and support illegal immigration and non-Mexicans who oppose illegal immigration creates a potentially explosive situation.

Centuries ago, Scots moved to Northern Ireland after the English conquered it. The question of Northern Ireland, a borderland, was never quite settled. Similarly, Albanians moved to now-independent Kosovo, where tensions remain high. The world is filled with borderlands where political and cultural borders don’t coincide and where one group wants to change the political border that another group sees as sacred.

Migration to the United States is a normal process. Migration into the borderlands from Mexico is not. The land was seized from Mexico by force, territory now experiencing a massive national movement — legal and illegal — changing the cultural character of the region. It should come as no surprise that this is destabilizing the region, as instability naturally flows from such forces.

Jewish migration to modern-day Israel represents a worst-case scenario for borderlands. An absence of stable political agreements undergirding this movement characterized this process. One of the characteristics of the Israeli-Palestinian conflict is mutual demonization. In the case of Arizona, demonization between the two sides also runs deep. The portrayal of supporters of Arizona’s new law as racist and the characterization of critics of that law as un-American is neither new nor promising. It is the way things would sound in a situation likely to get out of hand.

Ultimately, this is not about the Arizona question. It is about the relationship between Mexico and the United States on a range of issues, immigration merely being one of them. The problem as I see it is that the immigration issue is being treated as an internal debate among Americans when it is really about reaching an understanding with Mexico. Immigration has been treated as a subnational issue involving individuals. It is in fact a geopolitical issue between two nation-states. Over the past decades, Washington has tried to avoid turning immigration into an international matter, portraying it rather as an American law enforcement issue. In my view, it cannot be contained in that box any longer.

Mexico and the Failed State Revisited

John Mauldin — Thu, 08 Apr 2010 17:28:00 GMT

The United States' southern neighbors have always held a special interest for explorers. In particular Sir Walter Raleigh and his ill-fated quest for El Dorado comes to mind (I'm sure we can all relate). Modern day explorers, also known as investors, are still looking for the best place to stake their resources in search of riches. Thankfully, we have considerably more information at our disposal than a treasure map. But how do we know when X marks the spot, or if it's just another faulty lead?

Intelligence, not just mass-produced information, is the key. For my global intelligence, I turn to the experts at STRATFOR. In this edition of "Outside the Box", I've included a STRATFOR analysis on the situation in Mexico. It evaluates the drug wars in terms of the U.S. and Mexican economies. Give it a read and sign up for their free reports. You'll soon understand the value in intelligence, not just news.

John Mauldin
Editor, Outside the Box

Mexico and the Failed State Revisited

April 6, 2010 | 0902 GMT

By George Friedman

STRATFOR argued March 13, 2008, that Mexico was nearing the status of a failed state. A failed state is one in which the central government has lost control over significant areas of the country and the state is unable to function. In revisiting this issue, it seems to us that the Mexican government has lost control of the northern tier of Mexico to drug-smuggling organizations, which have significantly greater power in that region than government forces. Moreover, the ability of the central government to assert its will against these organizations has weakened to the point that decisions made by the state against the cartels are not being implemented or are being implemented in a way that would guarantee failure.

Despite these facts, it is not clear to STRATFOR that Mexico is becoming a failed state. Instead, it appears the Mexican state has accommodated itself to the situation. Rather than failing, it has developed strategies designed both to ride out the storm and to maximize the benefits of that storm for Mexico.

First, while the Mexican government has lost control over matters having to do with drugs and with the borderlands of the United States, Mexico City's control over other regions — and over areas other than drug enforcement — has not collapsed (though its lack of control over drugs could well extend to other areas eventually). Second, while drugs reshape Mexican institutions dramatically, they also, paradoxically, stabilize Mexico. We need to examine these crosscurrents to understand the status of Mexico.

Mexico's Core Problem

Let's begin by understanding the core problem. The United States consumes vast amounts of narcotics, which, while illegal there, make their way in abundance. Narcotics derive from low-cost agricultural products that become consumable with minimal processing. With its long, shared border with the United States, Mexico has become a major grower, processor and exporter of narcotics. Because the drugs are illegal and thus outside normal market processes, their price is determined by their illegality rather than by the cost of production. This means extraordinary profits can be made by moving narcotics from the Mexican side of the border to markets on the other side.

Whoever controls the supply chain from the fields to the processing facilities and, above all, across the border, will make enormous amounts of money. Various Mexican organizations — labeled cartels, although they do not truly function as such, since real cartels involve at least a degree of cooperation among producers, not open warfare — vie for this business. These are competing businesses, each with its own competing supply chain.

Typically, competition among businesses involves lowering prices and increasing quality. This would produce small, incremental shifts in profits on the whole while dramatically reducing prices. An increased market share would compensate for lower prices. Similarly, lawsuits are the normal solution to unfair competition. But neither is the case with regard to illegal goods.

The surest way to increase smuggling profits is not through market mechanisms but by taking over competitors' supply chains. Given the profit margins involved, persons wanting to control drug supply chains would be irrational to buy, since the lower-cost solution would be to take control of these supply chains by force. Thus, each smuggling organization has an attached paramilitary organization designed to protect its own supply chain and to seize its competitors' supply chains.

The result is ongoing warfare between competing organizations. Given the amount of money being made in delivering their product to American cities, these paramilitary organizations are well-armed, well-led and well-motivated. Membership in such paramilitary groups offers impoverished young men extraordinary opportunities for making money, far greater than would be available to them in legitimate activities.

The raging war in Mexico derives logically from the existence of markets for narcotics in the United States; the low cost of the materials and processes required to produce these products; and the extraordinarily favorable economics of moving narcotics across the border. This warfare is concentrated on the Mexican side of the border. But from the Mexican point of view, this warfare does not fundamentally threaten Mexico's interests.

A Struggle Far From the Mexican Heartland

The heartland of Mexico is to the south, far from the country's northern tier. The north is largely a sparsely populated highland desert region seen from Mexico City as an alien borderland intertwined with the United States as much as it is part of Mexico. Accordingly, the war raging there doesn't represent a direct threat to the survival of the Mexican regime.

(click here to enlarge image)

Indeed, what the wars are being fought over in some ways benefits Mexico. The amount of money pouring into Mexico annually is stunning. It is estimated to be about $35 billion to $40 billion each year. The massive profit margins involved make these sums even more significant. Assume that the manufacturing sector produces revenues of $40 billion a year through exports. Assuming a generous 10 percent profit margin, actual profits would be $4 billion a year. In the case of narcotics, however, profit margins are conservatively estimated to stand at around 80 percent. The net from $40 billion would be $32 billion; to produce equivalent income in manufacturing, exports would have to total $320 billion.

In estimating the impact of drug money on Mexico, it must therefore be borne in mind that drugs cannot be compared to any conventional export. The drug trade's tremendously high profit margins mean its total impact on Mexico vastly outstrips even the estimated total sales, even if the margins shifted substantially.

On the whole, Mexico is a tremendous beneficiary of the drug trade. Even if some of the profits are invested overseas, the pool of remaining money flowing into Mexico creates tremendous liquidity in the Mexican economy at a time of global recession. It is difficult to trace where the drug money is going, which follows from its illegality. Certainly, drug dealers would want their money in a jurisdiction where it could not be easily seized even if tracked. U.S. asset seizure laws for drug trafficking make the United States an unlikely haven. Though money clearly flows out of Mexico, the ability of the smugglers to influence the behavior of the Mexican government by investing some of it makes Mexico a likely destination for a substantial portion of such funds.

The money does not, however, flow back into the hands of the gunmen shooting it out on the border; even their bosses couldn't manage funds of that magnitude. And while money can be — and often is — baled up and hidden, the value of money is in its use. As with illegal money everywhere, the goal is to wash it and invest it in legitimate enterprises where it can produce more money. That means it has to enter the economy through legitimate institutions — banks and other financial entities — and then be redeployed into the economy. This is no different from the American Mafia's practice during and after Prohibition.

The Drug War and Mexican National Interests

From Mexico's point of view, interrupting the flow of drugs to the United States is not clearly in the national interest or in that of the economic elite. Observers often dwell on the warfare between smuggling organizations in the northern borderland but rarely on the flow of American money into Mexico. Certainly, that money could corrupt the Mexican state, but it also behaves as money does. It is accumulated and invested, where it generates wealth and jobs.

For the Mexican government to become willing to shut off this flow of money, the violence would have to become far more geographically widespread. And given the difficulty of ending the traffic anyway — and that many in the state security and military apparatus benefit from it — an obvious conclusion can be drawn: Namely, it is difficult to foresee scenarios in which the Mexican government could or would stop the drug trade. Instead, Mexico will accept both the pain and the benefits of the drug trade.

Mexico's policy is consistent: It makes every effort to appear to be stopping the drug trade so that it will not be accused of supporting it. The government does not object to disrupting one or more of the smuggling groups, so long as the aggregate inflow of cash does not materially decline. It demonstrates to the United States efforts (albeit inadequate) to tackle the trade, while pointing out very real problems with its military and security apparatus and with its officials in Mexico City. It simultaneously points to the United States as the cause of the problem, given Washington's failure to control demand or to reduce prices by legalization. And if massive amounts of money pour into Mexico as a result of this U.S. failure, Mexico is not going to refuse it.

The problem with the Mexican military or police is not lack of training or equipment. It is not a lack of leadership. These may be problems, but they are only problems if they interfere with implementing Mexican national policy. The problem is that these forces are personally unmotivated to take the risks needed to be effective because they benefit more from being ineffective. This isn't incompetence but a rational national policy.

Moreover, Mexico has deep historic grievances toward the United States dating back to the Mexican-American War. These have been exacerbated by U.S. immigration policy that the Mexicans see both as insulting and as a threat to their policy of exporting surplus labor north. There is thus no desire to solve the Americans' problem. Certainly, there are individuals in the Mexican government who wish to stop the smuggling and the inflow of billions of dollars. They will try. But they will not succeed, as too much is at stake. One must ignore public statements and earnest private assurances and instead observe the facts on the ground to understand what's really going on.

The U.S. Strategic Problem

And this leaves the United States with a strategic problem. There is some talk in Mexico City and Washington of the Americans becoming involved in suppression of the smuggling within Mexico (even though the cartels, to use that strange name, make certain not to engage in significant violence north of the border and mask it when they do to reduce U.S. pressure on Mexico). This is certainly something the Mexicans would be attracted to. But it is unclear that the Americans would be any more successful than the Mexicans. What is clear is that any U.S. intervention would turn Mexican drug traffickers into patriots fighting yet another Yankee incursion. Recall that Pershing never caught Pancho Villa, but he did help turn Villa into a national hero in Mexico.

The United States has a number of choices. It could accept the status quo. It could figure out how to reduce drug demand in the United States while keeping drugs illegal. It could legalize drugs, thereby driving their price down and ending the motivation for smuggling. And it could move into Mexico in a bid to impose its will against a government, banking system and police and military force that benefit from the drug trade.

The United States does not know how to reduce demand for drugs. The United States is not prepared to legalize drugs. This means the choice lies between the status quo and a complex and uncertain (to say the least) intervention. We suspect the United States will attempt some limited variety of the latter, while in effect following the current strategy and living with the problem.

Ultimately, Mexico is a failed state only if you accept the idea that its goal is to crush the smugglers. If, on the other hand, one accepts the idea that all of Mexican society benefits from the inflow of billions of American dollars (even though it also pays a price), then the Mexican state has not failed — it is following a rational strategy to turn a national problem into a national benefit.

The Russian Resurgence and the New-Old Front

John Mauldin — Thu, 18 Sep 2008 16:30:34 GMT

It's been a hell of a few weeks, so let's start with a little much-needed levity. Two friends, a Trader and an Investor, walk up to the roulette wheel in a casino. They watch a guy hogging the table hit on his first spin. Then his second. Third, boom. Four in a row! The guy has an enormous stack of chips which he lets ride again on a fifth spin. 00. He's wiped out and skulks off to the bar.

The two friends are excited because now it's their turn. The Trader says he's going to follow exactly the same pattern as the guy they just watched, BUT he's going to pocket his money after four spins. The Investor tells him to hold off for a minute. He wants to first buy stock in the casino....

Like most good jokes, there's a kernel of truth. When everything is in turmoil, you can't focus on the instances; you have to focus on the underlying foundations. Roulette isn't about guessing red or black; it's about understanding statistics. Today in a Special Outside the Box, we look at some potential problems from Russia that could impact the US and Latin America. It comes from George Friedman's company, Stratfor, the source I rely on for my geopolitical analysis. Peter Zeihan is one of the very sharpest thinkers in George's shop, as you'll see. The basic definition of public capital markets in the US and Europe is fundamentally different than in a country like Russia. If you don't understand the geopolitical lens through which a state views its capital markets, then you're making roulette bets instead of investments.

George is kind enough to have a special offer on a Stratfor Membership for my readers. I encourage you to click here to take advantage of this opportunity. Whether it's energy, public equities, or debt, the world's markets are inextricably intertwined. And that means you've got to understand the lay of the land. No one does a better job of providing the geopolitical drivers behind "the statistics" than Stratfor.

John Mauldin, Editor
Outside the Box

The Russian Resurgence and the New-Old Front

By Peter Zeihan

Russia is attempting to reforge its Cold War-era influence in its near abroad. This is not simply an issue of nostalgia, but a perfectly logical and predictable reaction to the Russian environment. Russia lacks easily definable, easily defendable borders. There is no redoubt to which the Russians can withdraw, and the only security they know comes from establishing buffers — buffers which tend to be lost in times of crisis. The alternative is for Russia to simply trust other states to leave it alone. Considering Russia's history of occupations, from the Mongol horde to Napoleonic France to Hitler's Germany, it is not difficult to surmise why the Russians tend to choose a more activist set of policies.

As such, the country tends to expand and contract like a beating heart — gobbling up nearby territories in times of strength, and then contracting and losing those territories in times of weakness. Rather than what Westerners think of as a traditional nation-state, Russia has always been a multiethnic empire, heavily stocked with non-Russian (and even non-Orthodox) minorities. Keeping those minorities from damaging central control requires a strong internal security and intelligence arm, and hence we get the Cheka, the KGB, and now the FSB.

Nature of the Budding Conflict

Combine a security policy thoroughly wedded to expansion with an internal stabilization policy that institutionalizes terror, and it is understandable why most of Russia's neighbors do not like Moscow very much. A fair portion of Western history revolves around the formation and shifting of coalitions to manage Russian insecurities.

In the American case specifically, the issue is one of continental control. The United States is the only country in the world that effectively controls an entire continent. Mexico and Canada have been sufficiently intimidated so that they can operate independently only in a very limited sense. (Technically, Australia controls a continent, but with the some 85 percent of its territory unusable, it is more accurate in geopolitical terms to think of it as a small archipelago with some very long bridges.) This grants the United States not only a potentially massive internal market, but also the ability to project power without the fear of facing rearguard security threats. U.S. forces can be focused almost entirely on offensive operations, whereas potential competitors in Eurasia must constantly be on their guard about the neighbors.

The only thing that could threaten U.S. security would be the rise of a Eurasian continental hegemon. For the past 60 years, Russia (or the Soviet Union) has been the only entity that has had a chance of achieving that, largely due to its geographic reach. U.S. strategy for coping with this is simple: containment, or the creation of a network of allies to hedge in Russian political, economic and military expansion. NATO is the most obvious manifestation of this policy imperative, while the Sino-Soviet split is the most dramatic one.

Containment requires that United States counter Russian expansionism at every turn, crafting a new coalition wherever Russia attempts to break out of the strategic ring, and if necessary committing direct U.S. forces to the effort. The Korean and Vietnam wars — both traumatic periods in American history — were manifestations of this effort, as were the Berlin airlift and the backing of Islamist militants in Afghanistan (who incidentally went on to form al Qaeda).

The Georgian war in August was simply the first effort by a resurging Russia to pulse out, expand its security buffer and, ideally, in the Kremlin's plans, break out of the post-Cold War noose that other powers have tied. The Americans (and others) will react as they did during the Cold War: by building coalitions to constrain Russian expansion. In Europe, the challenges will be to keep the Germans on board and to keep NATO cohesive. In the Caucasus, the United States will need to deftly manage its Turkish alliance and find a means of engaging Iran. In China and Japan, economic conflicts will undoubtedly take a backseat to security cooperation.

Russia and the United States will struggle in all of these areas, consisting as they do the Russian borderlands. Most of the locations will feel familiar, as Russia's near abroad has been Russia's near abroad for nearly 300 years. Those locations — the Baltics, Austria, Ukraine, Serbia, Turkey, Central Asia and Mongolia — that defined Russia's conflicts in times gone by will surface again. Such is the tapestry of history: the major powers seeking advantage in the same places over and over again.

The New Old-Front

But not all of those fronts are in Eurasia. So long as U.S. power projection puts the Russians on the defensive, it is only a matter of time before something along the cordon cracks and the Russians are either fighting a land war or facing a local insurrection. Russia must keep U.S. efforts dispersed and captured by events as far away from the Russian periphery as possible — preferably where Russian strengths can exploit American weakness.

So where is that?

Geography dictates that U.S. strength involves coalition building based on mutual interest and long-range force projection, and internal U.S. harmony is such that America's intelligence and security agencies have no need to shine. Unlike Russia, the United States does not have large, unruly, resentful, conquered populations to keep in line. In contrast, recall that the multiethnic nature of the Russian state requires a powerful security and intelligence apparatus. No place better reflects Russia's intelligence strengths and America's intelligence weakness than Latin America.

The United States faces no traditional security threats in its backyard. South America is in essence a hollow continent, populated only on the edges and thus lacking a deep enough hinterland to ever coalesce into a single hegemonic power. Central America and southern Mexico are similarly fractured, primarily due to rugged terrain. Northern Mexico (like Canada) is too economically dependent upon the United States to seriously consider anything more vibrant than ideological hostility toward Washington. Faced with this kind of local competition, the United States simply does not worry too much about the rest of the Western Hemisphere — except when someone comes to visit.

Stretching back to the time of the Monroe Doctrine, Washington's Latin American policy has been very simple. The United States does not feel threatened by any local power, but it feels inordinately threatened by any Eastern Hemispheric power that could ally with a local entity. Latin American entities cannot greatly harm American interests themselves, but they can be used as fulcrums by hostile states further abroad to strike at the core of the United States' power: its undisputed command of North America.

It is a fairly straightforward exercise to predict where Russian activity will reach its deepest. One only needs to revisit Cold War history. Future Russian efforts can be broken down into three broad categories: naval interdiction, drug facilitation and direct territorial challenge.

Naval Interdiction

Naval interdiction represents the longest sustained fear of American policymakers. Among the earliest U.S. foreign efforts after securing the mainland was asserting control over the various waterways used for approaching North America. Key in this American geopolitical imperative is the neutralization of Cuba. All the naval power-projection capabilities in the world mean very little if Cuba is both hostile and serving as a basing ground for an extra-hemispheric power.

The U.S. Gulf Coast is not only the heart of the country's energy industry, but the body of water that allows the United States to function as a unified polity and economy. The Ohio, Missouri, and Mississippi river basins all drain to New Orleans and the Gulf of Mexico. The economic strength of these basins depends upon access to oceanic shipping. A hostile power in Cuba could fairly easily seal both the Straits of Florida and the Yucatan Channel, reducing the Gulf of Mexico to little more than a lake.

Building on the idea of naval interdiction, there is another key asset the Soviets targeted at which the Russians are sure to attempt a reprise: the Panama Canal. For both economic and military reasons, it is enormously convenient to not have to sail around the Americas, especially because U.S. economic and military power is based on maritime power and access. In the Cold War, the Soviets established friendly relations with Nicaragua and arranged for a favorable political evolution on the Caribbean island of Grenada. Like Cuba, these two locations are of dubious importance by themselves. But take them together — and add in a Soviet air base at each location as well as in Cuba — and there is a triangle of Soviet airpower that can threaten access to the Panama Canal.

Drug Facilitation

The next stage — drug facilitation — is somewhat trickier. South America is a wide and varying land with very little to offer Russian interests. Most of the states are commodity providers, much like the Soviet Union was and Russia is today, so they are seen as economic competitors. Politically, they are useful as anti-American bastions, so the Kremlin encourages such behavior whenever possible. But even if every country in South America were run by anti-American governments, it would not overly concern Washington; these states, alone or en masse, lack the ability to threaten American interests … in all ways but one.

The drug trade undermines American society from within, generating massive costs for social stability, law enforcement, the health system and trade. During the Cold War, the Soviets dabbled with narcotics producers and smugglers, from the Revolutionary Armed Forces of Colombia (FARC) to the highland coca farmers of Bolivia. It is not so much that the Soviets encouraged the drug trade directly, but that they encouraged any group they saw as ideologically useful.

Stratfor expects future Russian involvement in such activities to eclipse those of the past. After the Soviet fall, many FSB agents were forced to find new means to financially support themselves. (Remember it was not until 1999 that Vladimir Putin took over the Russian government and began treating Russian intelligence like a bona fide state asset again.) The Soviet fall led many FSB agents, who already possessed more than a passing familiarity with things such as smuggling and organized crime, directly into the heart of such activities. Most of those agents are — formally or not — back in the service of the Russian government, now with a decade of gritty experience on the less savory side of intelligence under their belts. And they now have a deeply personal financial interest in the outcome of future operations.

Drug groups do not need cash from the Russians, but they do need weaponry and a touch of training — needs which dovetail perfectly with the Russians' strengths. Obviously, Russian state involvement in such areas will be far from overt; it just does not do to ship weapons to the FARC or to one side of the brewing Bolivian civil war with CNN watching. But this is a challenge the Russians are good at meeting. One of Russia's current deputy prime ministers, Igor Sechin, was the USSR's point man for weapons smuggling to much of Latin America and the Middle East. This really is old hat for them.

U.S. Stability

Finally, there is the issue of direct threats to U.S. stability, and this point rests solely on Mexico. With more than 100 million people, a growing economy and Atlantic and Pacific ports, Mexico is the only country in the Western Hemisphere that could theoretically (which is hardly to say inevitably) threaten U.S. dominance in North America. During the Cold War, Russian intelligence gave Mexico more than its share of jolts in efforts to cause chronic problems for the United States. In fact, the Mexico City KGB station was, and remains today, the biggest in the world. The Mexico City riots of 1968 were in part Soviet-inspired, and while ultimately unsuccessful at overthrowing the Mexican government, they remain a testament to the reach of Soviet intelligence. The security problems that would be created by the presence of a hostile state the size of Mexico on the southern U.S. border are as obvious as they would be dangerous.

As with involvement in drug activities, which incidentally are likely to overlap in Mexico, Stratfor expects Russia to be particularly active in destabilizing Mexico in the years ahead. But while an anti-American state is still a Russian goal, it is not their only option. The Mexican drug cartels have reached such strength that the Mexican government's control over large portions of the country is an open question. Failure of the Mexican state is something that must be considered even before the Russians get involved. And simply doing with the Mexican cartels what the Soviets once did with anti-American militant groups the world over could suffice to tip the balance.

In many regards, Mexico as a failed state would be a worse result for Washington than a hostile united Mexico. A hostile Mexico could be intimidated, sanctioned or even invaded, effectively browbeaten into submission. But a failed Mexico would not restrict the drug trade at all. The border would be chaos, and the implications of that go well beyond drugs. One of the United States' largest trading partners could well devolve into a seething anarchy that could not help but leak into the U.S. proper.

Whether Mexico becomes staunchly anti-American or devolves into the violent chaos of a failed state does not matter much to the Russians. Either one would threaten the United States with a staggering problem that no amount of resources could quickly or easily fix. And the Russians right now are shopping around for staggering problems with which to threaten the United States.

In terms of cost-benefit analysis, all of these options are no-brainers. Threatening naval interdiction simply requires a few jets. Encouraging the drug trade can be done with a few weapons shipments. Destabilizing a country just requires some creativity. However, countering such activities requires a massive outlay of intelligence and military assets — often into areas that are politically and militarily hostile, if not outright inaccessible. In many ways, this is containment in reverse.

Old Opportunities, New Twists

In Nicaragua, President Daniel Ortega has proven so enthusiastic in his nostalgia for Cold War alignments that Nicaragua has already recognized Abkhazia and South Ossetia, the two territories in the former Soviet state (and U.S. ally) of Georgia that Russia went to war to protect. That makes Nicaragua the only country in the world other than Russia to recognize the breakaway regions. Moscow is quite obviously pleased — and was undoubtedly working the system behind the scenes.

In Bolivia, President Evo Morales is attempting to rewrite the laws that govern his country's wealth distribution in favor of his poor supporters in the indigenous highlands. Now, a belt of conflict separates those highlands, which are roughly centered at the pro-Morales city of Cochabamba, from the wealthier, more Europeanized lowlands. A civil war is brewing — a conflict that is just screaming for outside interference, as similar fights did during the Cold War. It is likely only a matter of time before the headlines become splattered with pictures of Kalashnikov-wielding Cochabambinos decrying American imperialism.

Yet while the winds of history are blowing in the same old channels, there certainly are variations on the theme. The Mexican cartels, for one, were radically weaker beasts the last time around, and their current strength and disruptive capabilities present the Russians with new options.

So does Venezuelan President Hugo Chavez, a man so anti-American he seems to be even a few steps ahead of Kremlin propagandists. In recent days, Chavez has already hosted long-range Russian strategic bombers and evicted the U.S. ambassador. A glance at a map indicates that Venezuela is a far superior basing point than Grenada for threatening the Panama Canal. Additionally, Chavez's Venezuela has already indicated both its willingness to get militarily involved in the Bolivian conflict and its willingness to act as a weapons smuggler via links to the FARC — and that without any heretofore detected Russian involvement. The opportunities for smuggling networks — both old and new — using Venezuela as a base are robust.

Not all changes since the Cold War are good for Russia, however. Cuba is not as blindly pro-Russian as it once was. While Russian hurricane aid to Cuba is a bid to reopen old doors, the Cubans are noticeably hesitant. Between the ailing of Fidel Castro and the presence of the world's largest market within spitting distance, the emerging Cuban regime is not going to reflexively side with the Russians for peanuts. In Soviet times, Cuba traded massive Soviet subsidies in exchange for its allegiance. A few planeloads of hurricane aid simply won't pay the bills in Havana, and it is still unclear how much money the Russians are willing to come up with.

There is also the question of Brazil. Long gone is the dysfunctional state; Brazil is now an emerging industrial powerhouse with an energy company, Petroleo Brasileiro, of skill levels that outshine anything the Russians have yet conquered in that sphere. While Brazilian rhetoric has always claimed that Brazil was just about to come of age, it now happens to be true. A rising Brazil is feeling its strength and tentatively pushing its influence into the border states of Uruguay, Paraguay and Bolivia, as well as into regional rivals Venezuela and Argentina. Russian intervention tends to appeal to those who do not feel they have meaningful control over their own neighborhoods. Brazil no longer fits into that category, and it will not appreciate Russia's mucking around in its neighborhood.

A few weeks ago, Stratfor published a piece called “The New Era” detailing how U.S. involvement in the Iraq war was winding to a close. We received many comments from readers applauding our optimism. We are afraid that we were misinterpreted. “New” does not mean “bright” or “better,” but simply different. And the dawning struggle in Latin America is an example of the sort of “different” that the United States can look forward to in the years ahead. Buckle up.

Your Grinning-and-Bearing-It Analyst,

John Mauldin

What the Export Land Model Means for Energy Prices

John Mauldin — Mon, 19 May 2008 22:10:00 GMT

Goldman Sachs recently forecasted that oil would be at $141 a barrel by the end of the year, and rising to $200 a barrel in the not too distant future. I have seen other forecasts calling for oil to slip significantly under $100 a barrel before starting yet another bull market.

I have written for years that we are not going to run out of oil or energy, just cheap oil. I was just in South Africa, where much of their gas and diesel comes from coal gasification. At one time this was an expensive way to make gas, and South Africans had to pay more for their gas than the rest of the world. Now, it is getting close to "par" to the cost of gas in the US, and is cheaper than gas in Europe.

In this week's Outside the Box, my friend David Galland at Casey Research presents some very troubling thoughts on why oil may rise higher than we think in the next few years. Many of the countries from which the US gets its oil are seeing production fall, not rise. Some of it is political ineptitude, but much of it is from oil production peaking.

Yes, we can move to coal gasification, and the US has centuries of coal for such purposes, but building such plants takes time and capital and political will, the latter of which is in short supply. In the meantime, and until we get a full-blown crisis, oil is going to continue on its path to $200 and higher. But such a rise will not only make gasoline prices higher, it will make a host of new technologies competitive for the first time. The shift in how we make energy is inevitable.

As a quick aside, if we would start a project to build a massive nuclear infrastructure, such as in France, which produces 80% of its energy from nuclear, while at the same time pushing ahead in a Manhattan-type project the development of electric cars (or some hybrid), we could reduce our dependence on foreign oil and lower travel costs by the middle to the end of the next decade. And the environment would be cleaner and safer.

We are headed to such a future. It would be nice if we did it sooner rather than wait for a real crisis. But in the meantime, the price of oil is going to rise and opportunities for investors will rise along with it. My friends at Casey Research publish an excellent newsletter highlighting the opportunities not just in exploration companies but in all manner of energy-related firms. As David writes:

"The good news is that there are no shortage of high-quality energy-related investments available ... in coal, heavy oil, LNG, photovoltaics, natural gas consolidators, "run of river" hydroelectric, uranium and small to mid-cap oil companies with the potential for significant near-term gains in reserves or production."

They have agreed to give my readers a risk-free three-month trial to the Casey Energy Speculator. If you like the research you read below and want more of it, you can click on this link and subscribe.

And now let's see one of the main reasons why the price of oil is going up.

John Mauldin, Editor
Outside the Box

What the Export Land Model Means for Energy Prices

By David Galland,
Managing Director
Casey Research - Casey Energy Speculator

Jeffrey Brown is someone you should know. That's because he can help you understand today's high energy prices and that, as an investor, can make you a lot of money.

I'll introduce to you to Jeff Brown in a moment. But first, as it's relevant to the discussion, I want to touch on an important concept related to investing in challenging times.

You might call it "the Davy Crockett principle" in honor of something that American icon said during the War of 1812: "Be sure you are right and then go ahead."

Simply, it's critical to step away from all the noise and clutter that passes for knowledge on the financial talk shows, and take the time to be very sure you are investing in close concert with a powerful unfolding trend. That accomplished, come what may, you'll come out okay once the dust has settled.

And the earlier you can get on board with a trend, the more money you can make.

In fact, Casey Research chief economist Bud Conrad has shown how, by making just four trades over the last four decades -- into exactly the right sector at the beginning of a strong new trend -- you could have turned $35 into $150,000. Or $350 into $1,500,000 ... or $3,500 into $15 million. And that assumes you don't use leverage. Toss in some options or futures and the returns run exponentially higher. Here's the chart.

While it is unlikely anyone actually made those exact trades, it is a certainty that many investors got in early on one or more of those big moves.

(Interestingly, replacing the last trade -- the move into crude -- with gold produces a final number of $131,496. Proving there is more than one path to the top.)

The key point I'm trying to make is simple: focusing your investments on big trends is a big leg up in your quest for investment success. By then digging in to find the right opportunities, whether they be in commodities or undervalued companies that benefit from those trends, assures you earn returns that are well above average.

More importantly, in the context of the current market environment, the combination of the right investment in the right trend makes your portfolio bullet-proof.

Which brings me to the work being done by Jeffrey Brown, a professional geoscientist with an avid academic and professional interest in something called the Export Land Model.

Turning off the Taps

You don't have to have an awful lot of gray hair to remember the excitement around England's massive North Sea oil fields. While discovered in 1969, it wasn't until well into the 1980s, on the back of surging oil prices, that the fields came into full production. Turning up the taps, the United Kingdom (as well as Norway and Germany, who also have North Sea production) became a significant exporter of oil.

But then, in 1999, something happened: the UK's North Sea production hit peak ... that tipping point after which reservoirs go into decline, setting in motion both reduced production and progressively higher costs related to extracting the remaining oil.

While the experience of North Sea oil production provides yet another useful example of the validity of the Peak Oil theory, what concerns us today is a critical but usually overlooked aspect of the discussion, exports.

At the time the North Sea peaked in 1999, the U.K. was exporting 1 million barrels of oil per day. By August 2004, it had become a net importer. What happened to cause the situation to turn around so quickly?

The Export Land Model

To understand the importance of exports when discussing peak oil, ask yourself the question, "What's more important: the fact that global oil production is falling ... or that the oil-exporting nations are cutting off their exports?"

While the two questions are clearly linked, it is the nuance of the export question that clearly matters the most. Especially if you live in a country such as the US, which currently imports about 70% of its oil.

Which brings us to the Export Land Model (or ELM, as I will refer to it from here). The basic thesis expressed by Jeff Brown and other students of the ELM is that, to fully appreciate the impact of peak oil, you cannot look only at the production declines so presciently anticipated by MK Hubbard in 1956. You also have to look at the rate of local consumption and the effect of that consumption on the ability of a country to export its oil.

The following ELM graph looks at both sides of the equation, and the result as it applies to exports:

As you can see, for illustrative purposes the ELM assumes that, after a country's oil production hits peak it will decline at a rate 5% annually, at the same time that local consumption increases by 2.5%. The dotted red line then shows the impact those two metrics will have on the ability of the country to export its excess production. Using these assumptions, the ELM shows that exports reach zero in 9 years.

Real-world data shows that the metrics used in the ELM are quite conservative. The chart below plots the hypothetical ELM against the actual data from the United Kingdom and Indonesia. While the ELM forecast hypothesizes 9 years between peak to the end of exports, Indonesia's exports ceased 7 years after peak, and the UK's exports stopped just 6 years after peak.

The important take-away here is not that the UK and Indonesia are no longer receiving the oil export income of the good old days -- that is entirely a localized concern.

Rather it is that the global market is now deprived of those exports; between UK and Indonesia alone, the change over just the last decade amounts to a swing in the wrong direction of a total of 2 million barrels per day. And those are just two of a number of important countries which have swung from exporters to importers in recent years.

China, for example, became a net importer in 1993, the result of flattening production against skyrocketing consumption. Over the last decade alone, China's oil consumption has almost doubled, to about 8 million barrels a day, about half of which is now imported.

So, again, while people tend to focus on production, they are overlooking the impact on exports forecasted by the ELM. In the case of China, they went from a net exporter in 1993 to importing 4 million barrels a day today ... with those imports projected to rise another 50% over the next 10 years.

This is what is creating so much international competition for the remaining supplies of oil. And why the trend to higher energy prices is so well entrenched. And if the ELM is right, things are about to get far worse ... far sooner than most people expect.

The #3 Source of Oil to the US Is About to Go Offline

Mexico provides about 14% of the oil the US imports. On any given day that makes it either the #2 or #3 leading source for US oil imports after Canada and Saudi Arabia. Given that the US currently imports close to 70% of its oil needs, the Mexican oil is critical.

But here's the thing. Using straightforward ELM calculations, Jeffrey Brown is confident that Mexico will ship its last barrel of oil to the United States -- or anywhere else, for that matter -- about 6 years from now, in 2014. In a recent interview with Brown, I asked about this forecast.

"Mexico was consuming half of their production at peak in 2004. And if you look at the '05, '06, '07 data, they're basically on track, on average, to approach zero net oil exports no later than 2014," he confirmed.

Of course, the US is completely unprepared to replace this source of oil, especially considering the growing stresses on global oil supplies causing by ballooning demand from emerging markets. That means the international competition for available supplies is only going to get more desperate in the months and years ahead.

What will this mean to oil prices, according to Brown?

"From this point out I think we'll see a geometric progression in prices ... you know, $50, $100, $200, $400, whatever. The only question now is how short the periods will be between prices doubling again."

Coincidentally, while this report was in preparation, on April 30, 2008, PEMEX, Mexico's national oil company, announced it would be unable to fulfill this year's scheduled oil export obligations to the United States ... falling short by about 11%, or 184,000 barrels a day.

(As an aside, I also have to believe that Mexico's coming transition to a net importer and the loss of almost 6% of the country's GDP, now earned from exporting oil, will trigger serious social issues in that country. But that is another story for another day.)

The Even Bigger Picture

In my interview, I also asked Jeffrey to share his thoughts on the situation globally. Here's his response.

"Global production peaked in 2005, and we're now into the third year of decline. And the critical point to keep in mind is, our model and case histories show that the decline rate accelerates, year by year. Using the Lower 48 in the United States as an example, you can see the annual declines going 2%, 3%, 5%, 7%, 10%, 15%, 20, on and on. So it's an accelerating decline rate."

Underscoring Brown's concerns:

On April 15, 2008 the Russians, the world's second largest oil exporter, announced that their oil production appeared to have peaked, with production in the first quarter of this year declining for the first time in a decade. If they have indeed peaked then, based on the ELM, the world could lose Russia's current ~7 million barrels a day in exports within 6 to 9 years.
Echoing the baseline premise of the ELM, Herman Franssen, president of International Energy Associates, projects that Iran, the world's fifth largest exporter, may consume an amount equal to their exports by 2015. A prominent oil analyst, the late Dr. Ali Samsam Bakhtiari, estimated that Iran is either at or near peak.
Most concerning, this April Saudi Arabia's King Abdullah announced they were not going to raise oil production above 12.5 million barrels a day. Commenting on the news, Tom Petrie, vice president of Merrill Lynch, said

"King Abdullah's quote speaks to the fast-emerging reality of what I call 'practical peak oil.' The Saudis and other exporters are placing a new emphasis on elongating the petroleum exploitation and depletion cycle. This stems from a growing awareness of the challenges of conventional resource maturity, as well as rising resource nationalism. This is likely to result in an earlier occurrence of global peak oil output than many consumers yet recognize."

Summing it up, Brown told me that "The reality is that this thing is coming so much faster and so much harder than even most pessimists were expecting."

Rice & Oil: a Useful Comparable

For a useful way to think about energy exports and prices, Jeff Brown points to the current situation with global rice supplies.

As long as there are abundant local supplies, countries are happy, eager in fact, to export excess production in order to generate foreign exchange. But as soon as local consumption exceeds locally available production, then all hell breaks loose, and the next thing you know countries are banning exports, a move that has already been undertaken by Vietnam and a number of other countries.

In that scenario, price is eventually no longer a factor in the availability of the commodity. Vietnam, for example, is not going to let its people starve just because higher global prices would allow it to earn an extra $10 per bag of rice.

And so in the face of the prospect of any serious shortage of an important resource -- energy being maybe the most important - export markets freeze up and the price begins to be set at the margin, literally based on a global competition for the dwindling supplies that manage to leak out around the edges.

"People are crazy not to be focusing on the oil export situation," Dr. Brown told me.

Any White Knights on the Horizon?

Of course, the question of energy alternatives is a big topic and one which needs a far more extensive discussion than space allows for here.

Will viable alternatives be developed to help mitigate a domino collapse of oil exports? Absolutely. Of those alternatives, nuclear, solar, and heavy oil seem to hold the greatest promise.

But the sheer scope of the problem - with the world now consuming the energy equivalent of 1 billion barrels of oil every 5 days - assures that we are probably decades away from a real solution.

In the words of Jeff Brown:

"If you look at the situation in US presidential terms, looking at fossil fuels plus nuclear, the world burned through the equivalent of 10% of all oil ever consumed in Bush's first 4-year term. And, in our model, we're going to burn 10% of all remaining conventional crude in the second 4 years of Bush's term.

"That is the equivalent of around 25 billion barrels a year. So that's 100 billion barrels every four years, and we've burned 1,000 billion barrels. It gets interesting when you consider that current estimates are that we've only got 1,000 billion barrels of conventional crude remaining. I think with natural gas liquids, we've got a little bit more. But of the conventional crude oil, we've got 1,000 billion remaining. Which then begs the question, how fast can we bring on the tar sands and everything else?"

Grasping for straws, I asked Jeff about an article I had read recently about the Bakken oil shale reserves around North Dakota.

"They're talking about somewhere between 200 billion and 500 billion barrels in situ, but the USGS recently came out with a mean estimate of between 2.5 and 4.4 billion barrels recoverable, as an outer limit," he replied, before continuing:

"In 1966 they said, if Lower 48 ultimately recoverable is 150 billion barrels, then the US would peak in 1966. If the recoverable oil from the Lower 48 ultimately came in at 200 billion barrels, then the US peak would come in 1971. The higher-end estimate probably turned out to more accurate, and the U.S. peaked in 1970. But the point is this: a one-third increase of estimated ultimate recoverable - a total increase of 50 billion barrels - postponed the peak by all of 5 years."

Rigging for Persistent High Energy Prices

The trend for sustained higher energy prices appears solidly in motion. If Brown and the ELM are correct, energy prices will double, then double again.

Even if he is wrong and prices don't rise geometrically, the global dogfight to replace declining supplies - decidedly exacerbated by the loss of Mexican and maybe Russian (and ??) exports in the near future - is going to get ugly and expensive.

So, what's the investment angle? Paradoxically, the larger energy companies are probably a bad bet, because they are forced to replace their depleting reserves, which is getting harder and more expensive to do with each passing day.

It is our contention that, because the solutions to the world's energy problems are going to involve a variety of energy sources and technologies, you have to build a portfolio that is equally varied.

That assures you are well positioned to profit from the broader trend, while avoiding the risks of being overly exposed to a single sector. (As an example, solar has had a great run, but most solar plays are now overvalued.)

The good news is that there are no shortage of high-quality energy-related investments available ... in coal, heavy oil, LNG, photovoltaics, natural gas consolidators, "run of river" hydroelectric, uranium, and small to mid-cap oil companies with the potential for significant near-term gains in reserves or production.

In the final analysis, it comes down to two choices: you can either suffer the consequences of persistent higher energy prices, or use the work Jeffrey Brown has done with the Export Land Model as an early warning and get positioned to profit.

The decision is yours, but don't wait long to make it.

David Galland is the Managing Director of Casey Research, publishers of the Casey Energy Speculator, a comprehensive newsletter dedicated to helping individuals and institutions uncover today's most undervalued and compelling energy investments. A no-risk three-month trial subscription is available that allows you to access all current recommendations and to decide for yourself if the service is right for you. Learn more by clicking here now.

Your believing the cure for high prices is high prices analyst,

John Mauldin

The Geopolitics of Dope

John Mauldin — Thu, 31 Jan 2008 22:17:23 GMT

Protecting the border is a big part of the presidential political debates. This week in a special edition of Outside the Box, my friends at Stratfor give us yet one more reason why we should be concerned when we look south. The topic not only concerns...(read more)