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U.S. Tax Court Changes IRA Rollover Rules

Flourishing Tax Principle #1:  It doesn’t pay to be too clever in your dealings with the Internal Revenue Service.

Just ask Alvan and Elisa Bobrow.  Despite Alvan’s being a tax lawyer by profession, the U.S. Tax Court ruled that Alvan and Elisa violated the spirit of the 60-day rollover rules outlined in IRS Publication 590—Individual Retirement Arrangements.  That publication says that if you take money from your IRA, you have sixty days to put it back, without incurring either a tax or a penalty.  Further, Publication 590 says that you can do that once per year (365 day period) per IRA account.  That idea was backed up by two Private Letter Rulings (PLRs) from the IRS—one in 1987, and another in 1996.  

So, Alvan thought it would be okay to take $65,064 from one of his IRA accounts, as long as he replaced it within sixty days.  Before his sixty period expired, Alvan withdrew $65,064 from another IRA and deposited it into his personal checking account, and then wrote a check for the same amount for deposit into his first IRA.  Elisa then withdrew $65,064 from her IRA and deposited the money into their joint checking account.  Then Alvin wrote a check on that account for $65,064 and deposited it into his second IRA, again within the sixty rollover window.  This all seems a little silly to me, but it seems to comply with the IRS’ previous guidance, as provided in Publication 590 and the two PLRs mentioned above.

Nevertheless, Alvan and Elisa received a letter from the IRS, disallowing Alvan’s second sixty–day rollover.  Along with the letter was a bill for unpaid taxes of$51,298.  They were also penalized $10,260 for inaccurate reporting.  Alvan and Elisa disagreed and took the IRS into Tax Court.

According to IRA guru Ed Slott, Alvan bungled his own argument in court, failing to cite Publication 590 and the PLRs.  Whether that was the reason for the court’s decision may never be known, but the court ruled against the Bobrows.  It also rewrote the sixty-day rollover rule to allow only one sixty-day rollover per taxpayer in any 365 day period, regardless of the number of IRA accounts the taxpayer has.  To reiterate:  Publication 590 currently limits sixty-day rollovers to one per 365 day period per IRA account.  Big difference.  The new rule takes effect on January 1, 2015.

The bottom line is:  It’s generally not a good idea to withdraw money from your IRA, intending to do a sixty-day rollover.   If you have any other choice in the matter, consider that first.  When transferring money from one IRA account to another, always do it as a trustee-to-trustee transfer, and never take possession of the money yourself.  Like everything else I’ve ever seen from the IRS, this new rule comes with exceptions, lots of them.  But, don’t try to be your own tax advisor, looking for loopholes the way that Alvan did.  Always seek advice from a qualified tax professional before—not after—you withdraw money from your IRA or other qualified retirement plan.  After is almost always too late.  mh

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Source: Ed Slott, Financial Planning Magazine Online, IRS Issues IRA Rollover Warning, April 11, 2014.

A Notable May Birthday

Friedrich August von Hayek was born in Austria on May 8, 1899.  After World War I, he earned doctorates in Law and Science at the University of Vienna.  Upon receiving his degrees he joined a private seminar led by the greatest of the Austrian economists, Ludwig von Mises.

The free market, Hayek said, was not designed by anyone, but evolved through the spontaneous ordering of self-interested human actions.  He showed, as have others, that so-called market failures are actually the failures of government central planners.  For example when the central bank holds interest rates at artificially low levels, people are led into mal-investment and reduced savings.  (A certain housing crash comes to mind, and before that a tech bubble.)

The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. They’re smarter than their fellow citizens, after all.  But Hayek pointed out that the data are not “given.” The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each of the individuals who make up a market—millions of people, actually—has knowledge about particular resources, and opportunities for using these resources, that a central planner can never have. The virtue of the market is that it gives those individuals the freedom to use and share their own unique sets of information.  Without markets, information can’t flow.

In 1944, Hayek published The Road to Serfdom1 to warn the British people of Socialism as a growing political force within their country.  The warning was ignored, and it was finally left to the “Iron Lady” Margaret Thatcher to undo the damage thirty-five years later. 

In 1974, Hayek shared the Nobel Prize in economics with the Swedish economist Gunnar Myrdal (1899 – 1987) for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social, and institutional phenomena. 

Hayek was still publishing at age eighty-nine. In his final book The Fatal Conceit2, he offered some profound insights explaining the intellectuals’ attraction to socialism, and he masterfully refuted the basis for their beliefs.  Of all Hayek’s work, the two named here are the required reading. 

Friedrich August von Hayek died in Freiburg, Germany on March 23, 1992.

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1   The Road to Serfdom, University of Chicago Press, 1944.

2   The Fatal Conceit, University of Chicago Press, 1988.

From the Dark Side

Over the past few months, I’ve forced myself to read from among the plague of doom and gloom books that have been published since the Great Recession of 2008-2009.  Think of it as a vaccination to strengthen my psychological immune system.  (That’s why I’m passing my thoughts on to you, dear reader.)

The quality of the analyses I’ve read has varied, from rambling to erudite.  There are some very smart people in the black sunrise industry, and there are a few people who are just a wee bit the other side of misguided.  The author who impressed me most is James Rickards.  His latest book, The Death of Money1 is a sequel to his first, Currency Wars2.  Each book can stand alone, but they’re better read back to back.  In this essay, I’ll focus on the overall message of both books, without trying to negotiate either the overlap or the differences.

The Death of Money could be to our time what Harry Browne’s, How to Profit From the Coming Devaluation3 was to the 1970’s; except that, unlike Browne, Rickards doesn’t tell his readers how to invest.  Harry Browne’s book was published in 1970, just before President Nixon removed the last formal link between the U.S. dollar and gold in 1971.  In the days immediately after Nixon’s de facto credit default, the dollar was devalued by more than 20%.  In the decade that followed, the greenback lost well over half of its 1971 purchasing power.  Unfortunately, in many ways, we seem to be repeating the worst economic policy mistakes of the Nixon/Carter era. 

From the late 1960’s through the late 1970’s, every sentient being on earth knew that our main economic challenge was inflation.  But the Federal Reserve (the Fed) and most academic economists had insisted that top-down banking could manage the economy more efficiently than a free market.  They generally blamed exogenous events like the war in Vietnam and Arab oil embargoes for the escalating rate of inflation.  Those things certainly didn’t help, but Harry Browne showed that it was the Fed’s monetization of federal budget deficits (money printing) that ultimately led to dollar devaluation and hyperinflation. 

Now as then, the vast majority of academic economists and the Fed share a shaman’s idea of how the world works.  James Rickards calls it “Keynesianism and the arrogance of the PhD.”  He’s being generous.  As I’ve watched the Fed’s operations over the past four decades, it’s become clear to me—as Rickards explains in considerable detail—that they don’t really know what they’re doing.  But to be fair, they’ve also been given a virtually impossible task.

James Rickards asks a lot from his readers with the depth of his analysis, but he’s not overly prone to jargon. He is an attorney, a portfolio manager, an investment banker, and he consults with the Pentagon and major corporations. He was the chief negotiator of the Fed’s settlement with Long Term Capital Management, when that firm’s leveraged bond market bets threatened to bring down the world financial system back in 1998.  In other words, his résumé reads like a who’s who of international finance.  One wonders if he ever sleeps. 

It’s Rickard’s contention that the Fed and other central banks are trying to solve deflationary problems, which in the present situation are structural—including, but not limited to cronyism, regulatory overreach, aging populations, out-of-control entitlement spending, and government debts and deficits—with a cyclical solution; e.g. money printing.  The Fed is actually doing its best to create inflation, with a target of 2% or more.  Therefore, he says they’re quite willing to err on the side of too much money printing, as opposed to too little.  He says that the Fed’s econometricians think they’re dialing up a household thermostat, but in reality, they’re tinkering with the control panel on a nuclear reactor.  The danger of overheating is much greater than the Fed thinks.  Once inflation reaches critical mass (above 2.5%), they won’t be able to dial it down; crowd psychology will take over, and inflation will spiral out of control.  That’s a familiar argument, one that both former Fed chairman Alan Greenspan and Harry Browne often made.  And, it’s a real possibility.    

Rickards’ more frightening complaint is that the world’s too-big-to-fail institutions are now exposed to more than $650 trillion in derivative securities risk; nine times world GDP.  Rickards says that Wall Street, the Fed, and the International Monetary Fund (IMF), are using the wrong risk models.  Their models assume that the derivatives mostly cancel each other out, thereby reducing overall risk to the financial system.  But, as we should have learned from AIG and others in 2008, he says, they should be using risk models based on the relatively new science of “complexity”, which, I confess, I found fascinating.  But, Rickards says, despite complexity theory, and the compounding nature of the risks it explains, the solution to the derivatives hazard is simple and straightforward:  Break up the too-big-to-fail banks and ban most derivative products.  I won’t hold my breath waiting for either of those things to happen.  My guess is that if Rickards’ analysis of derivatives risk is correct, nuclear may again be the appropriate metaphor, but in the sense of a meltdown, not an explosion.  The other aspect of the “too-big-to-fail” problem may not be size at all, but regulatory favoritism.

You may have noticed the chart on the back of this newsletter.  My sweetie says it’s monetarily obscene, but it reflects the aforementioned attempt by the Fed to offset the continuing deflationary effects of the housing finance bust of the late 2000’s.  Similar stories are playing out in Japan and in Europe, especially Japan.  That’s the main difference between the 1970’s and now:  For today’s central bankers and politicians, the threat of a 1930’s style deflationary collapse is more terrifying than the threat of a 1970s hyperinflation.  Inflation increases government tax receipts; deflation erodes them. 

The U.S. dollar has functioned as the world’s reserve currency since (and despite) the 1971 Nixon convertibility default.  It has served reasonably well, but according to Rickards, the Fed’s recent actions have threatened the dollar’s stability once again.  The saving grace, so far, is that no other currency is even in the same league with the dollar.  Still, as the chart shows, the Fed has printed more than $3 trillion since 2008, quadrupling the size of its balance sheet.  Rickards says that if the Fed were a regulated bank, and it was forced to disclose the true market value of its bond portfolio, it would be bankrupt.  So he asks, what will they do if there’s another crisis?  They can’t print another $3 trillion without destroying the dollar altogether; or can they?  Rickards says that the next global financial crisis will be bigger than the Fed, so it will be up to the IMF to bring order out of chaos.  I warned you that this was the scary part, didn’t I?

Yes, James Rickards draws a fairly bleak picture of the dollar’s future, but he assures us that we’ve been through this kind of thing before and survived.  He’s right about that, and if necessary, we’ll survive to thrive, yet again.  In the next issue of this newsletter, I’ll share a more positive analysis with you.  So please, don’t let this message from the dark side upset you; and especially, don’t jump out the window.  Indulge me just a bit longer, and go to page seven.  mh

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1 The Death of Money, James Rickards, Portfolio/Penguin, April 2014.

2 Currency Wars, James Rickards, Portfolio hardcover, November 2011.

3 How You Can Profit From the Coming Devaluation, Harry Browne, Arlington House, August 1970.

How to Win a War (Make it Personal)

With Commander N.D. Nguyen (USN Retired) aboard the U.S.S. Midway.
With Commander N.D. Nguyen (USN Retired) aboard the U.S.S. Midway.

The Battle of Điện Biên Phủ started on March 13, 1954.  Both sides in the fight wanted to emerge as the victor to establish a favorable position in the planned negotiations about “the Indochinese problem”.  After fighting for fifty-five days, the besieged French garrison in French Indochina (Vietnam) was overrun, and all French positions were captured by the communist Việt Minh.

Although the resulting negotiations technically set up national elections across all of Vietnam, the country was effectively divided into two separate states, a communist controlled North Vietnam, supported by China and the U.S.S.R.; and a democratic South Vietnam, supported by the United   States.  Seven-year-old Nguyen Dinh Nguyen fled from his home in Hanoi, along with his parents and siblings, to the relative freedom of Saigon.

A dozen years later, America became fully engaged in the War in Vietnam, and coincidentally, N. D. Nguyen joined the South Vietnamese military.  He was sent to the United States to be trained as a pilot.

How he did it, I can’t say, but in April of 1975, with a murderous band of communist soldiers from the north closing in—and with the last contingent of American Marines valiantly defending and evacuating the U.S. Embassy and other installations—N. D. Nguyen evacuated his parents and siblings from Saigon to Guam.

Upon arriving in Guam, Nguyen’s mother asked, “Son, we ran from Hanoi to Saigon; now we run from Saigon to Guam; Tell me, where do we run to next?

One can only imagine how she must have felt.  But, it’s worked out OK.  Nguyen’s parents are still alive—they are now ninety-four and eighty-nine years old—and they reside quite happily and peacefully in southern California.  N. D. Nguyen himself is a retired U.S. Navy Commander.  And, he recently retired a second time, ending a long career at Spawar Systems, Inc. in San Diego.  His business card reads,  “N.D. Nguyen,  Scientist”.

Commander Nguyen graciously told Linda and me his story while we were visiting the flight deck of the U.S.S. Midway, an aircraft carrier much like those that Commander Nguyen had flown from during his military career.  (My thanks to Derek Kenney and Columbia Management for inviting us aboard.)  mh

A Notable September Birthday

September 29, 2013 will be the one hundred and thirty-second birthday of history’s most important economist, Ludwig Heinrich Edler von Mises.  He was born in the city of Lemberg in Galicia, Austria-Hungary in 1881.  He attended the University of Vienna, where he studied under the founder of the Austrian School of economics, Carl Menger.  In 1906 he was awarded a doctorate from the University’s School of Law.  His subsequent accomplishments are beyond counting, so I’ll leave it to one of Mises’ most accomplished students– my teacher, Dr. George Reisman—to introduce him to you:

It was my great privilege to have known Mises personally over a period of twenty years.  I met him for the first time when I was sixteen years old.  Because he recognized the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance.

His seminar, like his writings, was characterized by the highest level of scholarship and erudition, and al­ways by the most profound respect for ideas.  Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man’s ideas were true or false.  In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement.  He constantly strove to bring out the best in his students.  This, combined with his stress on the importance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemological Problems of Economics—something that has always been one of my proudest accomplishments.

Today, Mises’s ideas at long last appear to be gaining in influence.  His teachings about the nature of socialism have been confirmed in the most spectacular way possible, namely, by the collapse of the former Soviet Union, and by the substantial conversion of mainland China, Russia, and the rest of the Soviet empire to capitalism.

Some of Mises’s ideas have been propounded by the Nobel prizewinners F.A. Hayek (himself a former student of Mises) [PhD. Univ. of Vienna] and Milton Friedman.  His ideas inspired the “miracle” of Germany’s economic recovery after World War II.  They have exerted a major influence on the writings of Henry Hazlitt [1894-1993], Murray Rothbard [1926-1995], and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz [1922-2007; PhD. NYU] and Israel Kirzner [b. 1930; PhD. NYU].  They live on with increasing power and influence in the daily work of The Ludwig von Mises Institute, which publishes books and journals and holds conferences, seminars, and classes on his ideas.

Mises’s works deserve to be required reading in every college and university curriculum—not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, business, journalism, education, and the humanities.  He himself should be awarded an immediate posthumous Nobel Prize—indeed, more than one.  He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he labored to preserve it.  If he is widely enough read, his labors may actually succeed in saving it.

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Dr. George Reisman is the author of Capitalism: A Treatise On Economics, which itself should be required reading.  He now holds the title Professor Emeritus of Economics at Pepperdine University.  The material quoted above is an excerpt from a speech Dr. Reisman presented to an audience of his peers and their students at the Ludwig von Mises Institute in Auburn, Alabama on the occasion of Mises’ 125th birthday.  The entire text of that speech can be found on Dr. Reisman’s website http://georgereismansblog.blogspot.com/.  

Ludwig von Mises wrote more than twenty books.  The most important are The Theory of Money and Credit, 1912, and Human Action, 1949.  The most accessible to lay readers is Planned Chaos.  That book of only forty-three pages is available (at no cost) at http://mises.org/.  The book shows that rather than creating an orderly society, the attempt by governments to centrally plan and administer has precisely the opposite effect. By short-circuiting the price mechanism and forcing people into economic choices contrary to their own wishes, central planning destroys the capital base and creates economic randomness that eventually ends by killing prosperity.  To say that the book’s message is still timely would be a gross understatement.   mh

Keep Calm and Carry On

First, my thanks to Dr. Mark Dotzour and to Simon Sinek for bringing the “Keep Calm and Carry On” poster (displayed on the back of this newsletter) to my attention.  Both Mark and Simon have written excellent blog posts featuring this poster, and I encourage you to become familiar with their websites.

Dr. Dotzour1 is Chief Economist and Director of Research for The Real Estate Center at Texas A&M University in College Station.  A native Wichitan, he earned a PhD. at the University of Texas at Austin, and for the better part of four decades, he’s been married to my cousin Lu Ann.  Obviously, Mark’s a very smart guy.

Simon Sinek2 was born in Wimbledon, England.  He is the author of Start With Why:  How Great Leaders Inspire Everyone to Take Action, published by Portfolio Hardcover in 2009. Simon now lives in New York City, and teaches a graduate level class on strategic communication at Columbia University.

This is the time of year that traditionally has given us weakness—indeed, in some cases, panic—in the equity markets.  Countless reasons have been given for this seasonal tendency, and some of those reasons even seem credible, though none can provide us with certainty.

I myself could offer a dozen what-if scenarios for why a market setback might still happen this year.  But, as I’ve said many times prior, if we sell out now and wait for the smoke to clear, only you would know when to get back in.  Heaven knows I wouldn’t. 

But please don’t mistake my attitude for complacency.  It is anything but that.   Unlike Britain in 1939, we’re not facing annihilation.  But, it might not hurt to remember that a grossly outmanned people—the land of the stiff upper lip—were the first to successfully push back the Nazi juggernaut.  In so doing Britain helped send a monster to, uh … his just end.  Without doubt it was the British attitude of defiance and self-assuredness—embodied in Winston Churchill and our poster of the month—that gave that tiny island nation its inestimable advantage.

Let us then be Churchilian investors, assuming the same attitude of persistence and fortitude—and yes, Patience, and Discipline, and Confidence in the Future; and come what may—keep calm and carry onmh

 

http://blog.recenter.tamu.edu/

http://blog.startwithwhy.com/

The Real Arab Spring

Originally published in Flourishing July/August 2013.

 

I wrote about this two years ago, when the Arab Spring was first making the nightly news reports.  At that time most commentators in the media presented the protestors as student idealists or as pawns of the Muslim Brotherhood, or both.  I’m back to say I told you so; the media were wrong back then (with one notable exception), and they’re still wrong today.  The real Arab Spring was/is about economic freedom and opportunity.

I remember back in 2011, seeing Geraldo Rivera interview a group of Libyan millennials, during the battle to overthrow the certifiable Muammar al-Gaddafi.  To his great credit, Geraldo clearly understood those young people as seekers after freedom, economic opportunity, and the rule of law.  Clutching their smart phones as their most potent weapon against tyranny, they were obviously frightened, but hopeful.  They were trusting Geraldo to tell their story honestly and without the filter of partisan talking points.  It may have been his finest hour as a journalist.  But, if anyone in Washington heard him, we’ve seen no evidence of it.  To the contrary, in fact.

Hernando de Soto is a Peruvian economist and author of The Mystery of Capital1.  He recently published an article on the real Arab Spring—the one Geraldo reported on—in the July 13 issue of The Spectator.2   In it he wrote that the Arab Spring was an economic uprising, not just a fight for a “democracy” wherein the people get to elect their next dictator.  They were seeking the very things they had shared with Geraldo Rivera, economic opportunity, property rights, and the rule of law:

“The Arab Spring was a massive economic protest: a demand that the poor should have the basic rights to buy, sell and make their way in the world. I have the nerve to say this because just after the death of Mohammed Bouazizi, the Tunisian fruit seller who started the Arab Spring by setting himself ablaze, my researchers spent 20 months in the region to find out more …

 

…They were all, like Bouazizi, extralegal entrepreneurs—protesting for the right to get on. The right to own and better their lives; to accumulate capital; not to have their property expropriated on a whim. They were in businesses as diverse as restaurants, computing, real estate, opticians and taxis and their decision to commit suicide in public was usually taken after the authorities confiscated their wares or their documentation.

…Outside Cairo, the poorest of the poor live in a district of old tombs called the ‘city of the dead’. But almost all of Cairo is the city of the dead — that is to say, dead capital. Assets that cannot be used to their fullest, cannot be used as collateral for loans or changed for other assets. Seeds that can never grow. These people are working, but not in ways that western governments are prepared to recognise. Given the chance, they would pull themselves, and their countries, out of poverty. But they are denied the chance, because the rule of law is a cosy club to which only the elite belong.

If the West places Egypt and the Arab Spring into the category of ‘Islamist uprising’, it will not only misunderstand the hopes of millions but miss a remarkable opportunity. By our estimates, entrepreneurs who want a legal system with property rights like those in the West outnumber al-Qa’eda members in the region by a ratio of about 100,000 to one. [emphasis added]

…Britain is ideally placed to see the link between the 1688 Glorious Revolution, and what it did to ensure so many shared the benefits of the industrial revolution, and what is happening today in Egypt. If it did so,

much of the confusion of what underpins the Arab Spring would clear up. This is not only an Arab phenomenon. It needs an eloquent western advocate, who can point to the  economic potential in extending the rule of law, property and businesses to the many, not the few. [emphasis added]

 

Unfortunately, they don’t have one in either London or Washington. But, they do have Hernando de Soto and his research team, perhaps Geraldo Rivera, too; and therein lies the seed of a promise of a better future for young Arabs and many others still struggling for freedom and opportunity throughout the Middle East.  mh

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The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Hernando de Soto,

       Basic Books, 2000.

2     Arabs Are Rebelling Because They Want Capitalism, http://www.spectator.co.uk/  

A Noteable August Birthday

Originally published in Flourishing July/August 2013.

Howard Homan Buffett was born in Omaha, Nebraska on August 13, 1903.  Like his famous son, Warren, Howard maintained a conservative lifestyle throughout his life, a lifelong resident of Omaha.

But, while Warren Buffett, America’s greatest and most famous investor, is aligned with the American left on most political issues, and a strong supporter of President Obama; Howard might well have supported someone like the libertarian, former Texas Congressman, Ron Paul.  Both Ron Paul and Howard Buffett had friendly, ongoing relationships with Murray Rothbard (1926—1995), a seminal figure in the early development of the libertarian movement.  Howard served four full terms as a Republican Congressman in the 1940’s and early 1950’s.

It’s interesting to me that Rothbard and Warren Buffett were about the same age, and both attended Columbia University.  While at Columbia, Buffett studied under the dean of value investing, Benjamin Graham; Rothbard was influenced by the greatest of the Austrian economists, Ludwig von Mises, attending Mises’ private seminars, while pursuing his PhD. in Economics.  Both Warren and his father earned their baccalaureate degrees at the University of Nebraska.

Howard Buffett was never well known outside the confines of his own Congressional district, but he did gain notoriety for his opposition to the Korean War.  He tried, but failed, to have classified documents released, which he said would prove that the United States was the instigator of that conflict.  He was also opposed to the Marshall Plan and  the Truman Doctrine.  Very Ron Paul-like, don’t you think?

(Please see the comment on Howard’s character in the left hand column.  They may have had differing political views, but in almost every way that really matters, Warren Buffett is his father’s son.)

Howard Buffett died on April 30, 1964. mh

Renewable Energy Source-Natural Gas

Originally published in Flourishing July/August 2013.

 

You may remember that back in the days of “peak oil” hysteria, I told you that the “peak oil” theory was hogwash.  That was a safe proclamation on my part, because the oil industry had hardly scratched the surface of our planet, which as you know, has a diameter of about 8,000 miles.  That’s still true today.

But now—with the exception of a few demagogic politicians—we all know that “peak oil” theory is indeed hogwash, because the evidence has been found under the very land we live on.  The new technologies of horizontal drilling and hydraulic fracturing are releasing natural gas, natural gas liquids, and oil from shale formations all across America, most notably for this discussion, in North Dakota, Oklahoma, Texas, Louisiana, Pennsylvania, and yes, Kansas.

Some years ago, I read a book, The Deep Hot Biosphere1, written by the world-famous geophysicist Thomas Gold.   I won’t pretend that I understood every word, but I was fascinated by Gold’s idea that hydrocarbons are produced abiotically (chemically, as opposed to biologically) in the earth’s mantle, and that they have a natural tendency to migrate toward the surface, the Earth’s pressures being what they are.  Gold has been mocked and denounced as a crank by many, and most of the oil we know about probably does have biological origins. But, I’ve held my own judgment in abeyance, pending further scientific investigation.  The thing that hooked me on Gold’s theory was the knowledge that planets within our own solar system are swamped– if that’s the right word—with abiotic hydrocarbons.  Methane being the most prominent. 

Then, in June of this year, the U.S. Energy Information Administration (EIA) released a new study, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States.  This study doesn’t prove—nor does it disprove—Gold’s theory of abiotic oil. 

But, it does admit that the EIA’s Annual Energy Outlook 2011 was off in its estimate of shale oil deposits by a factor of ten (32 billion barrels in the 2011 report vs. 345 billion barrels in 2013).  I’ll go out on a limb here, and suggest that two years from now, the number will have jumped again. 

Do you remember Matt Ridley?  He is the author of The Rational Optimist2, a book I’ve recommended on several occasions.  He’s also a geneticist and a member of the House of Lords.  More to the point, he maintains a terrific blog, which you may want to bookmark, http://www.rationaloptimist.com/blog, and from which I now quote:

But there’s increasing doubt about whether all natural gas (which is 90% methane) comes from fermented fossil microbes. Some of it may be made by chemical processes deep within the earth.

The ocean floor accumulates not just the soft bodies of plankton, but also their shells and skeletons, made in effect from dissolved carbon dioxide, which build up to thick layers of rocks (such as the white cliffs of Dover in England).

When the ocean floor is driven down deep into the molten mantle, in the so-called subduction zones where continents are barging their way over the oceanic crust, this carbonate gets heated and pressurized.  In 2004, Henry Scott and his colleagues at the University of Indiana discovered that ideal conditions exist for this carbonate to lose its oxygen and gain hydrogen instead, making methane on a massive scale.

In effect, this would recycle the Earth’s carbon dioxide by turning it back into the fuel from which it was made when burned or breathed.  Maybe this explains why so much methane bubbles up through hydrothermal vents on the ocean floor.

….Dr. Kutcherov3 thinks the evidence “confirms the presence of enormous, inexhaustible resources of hydrocarbons in our planet.” If he is right—and America’s new Deep Carbon Observatory aims to resolve the question in the next few years—natural gas may effectively never run out. (emphasis added)

Within this blog post Matt Ridley cites a March 2013 article4 published in the Journal of Petroleum Technology to the effect that Dr. Thomas Gold, who passed away in 2004,  may have been right after all; at least about abiotic methane.   mh

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The Deep Hot Biosphere,  Thomas Gold, Springer, 1998.

The Rational Optimist, Matt Ridley, Harper, 2010.

Hydrocarbon, ed. Vladimir Kutcherov and Anton Kolesnikov, University of Stockholm, ebook3000, 2013.

http://www.spe.org/jpt