In The Coming Economic Collapse by Stephen Leeb (writing with Glen Strathy) sets out the case for a potential economic collapse triggered by a shortage in oil that may be a lot closer than is generally accepted.
The basic case for an oil shortage is in two parts. The first is rising demand, not only in emerging large economies (especially China and India) and emerging markets generally but also in developed markets and the oil producing nations themselves. The second is production levels which are already, or will soon begin, declining in many oil producing nations (including the USA, Norway and the UK) and the failure of the oil industry to discover new oil fields.
The author makes the point that, unlike the oil shocks of the 1970s, the oil price is being driven by supply and demand factors and not by political factors - meaning that the problem will be a lot harder to solve. In addition, surplus production capacity is very limited meaning that any supply disruption in a major oil producing nation could have an immediate impact on oil prices.
The section of the book dealing with alternative sources of energy makes interesting reading (he believes that wind power is the best long term alternative source of energy) as does the discussion on the choices which must be made at a political level to deal with the shortage. After noting that political leaders have been making all the wrong decisions to date (nothing new or unique there), the key conclusion is that political leaders have no choice but to accept a high inflation environment as the alternative to economic collapse. The greatest risk to correct political decisions to deal with the shortage is effectively the ballot box - political leaders may bow to pressure from lobby groups and consumers.
The final substantive section of the book looks at invetsments that will either thrive or will suffer in this high inflation environment. While it is difficult to quibble too much with most the conclusions I am slightly uncomfortable with the fact that the recommended course of action is generally based on the experience in the 1970s inflationary period. Instinctively, I am nervous about assuming that history will repeat itself. If we have another bout of high inflation, I would expect there to be some differences to the 1970s. Examples would include the fact that many developed nations have much higher levels of debt (at national, corporate and individual levels) than they did when the first oil shock took place and the effect of the retirement of the baby boomers.
The key recommendations are (i) gold and gold mining stocks (ii) stocks in Chindia or which have exposure to Chindia (iii) oil and oil service companies (iv) alternative energy companies (v) TIPS and (vi) real estate. He shies away cash, bonds (other than TIPS) and stocks generally (including small cap stocks). Leeb also recommneds investing in zero coupon bonds in case the inflationary scenario does not eventuate and we end up with a 1930s style deflationary experience.
There is a lot of thought provoking material packed into this short (196 page) book - the author cannot be accused of waffling. I do not agree with all of the conclusions or the arguments that he uses to support those conclusions. One major issue which the author does not mention is what I term "inflation by stealth" where the inflation numbers (CPI) are manipulated to produce official levels of inflation which are below the true levels. If this eventuates, then TIPS may not be such great investments and using more debt to enhance returns may be a sound strategy (so long as you can service the debt).
One weakness in the case for an oil shortage is the treatment of contrary opinions. In many cases the author does not properly refute opnions which diverge from his own - he simply dismisses the opinion holders of being guilty of "groupthink" and moves on.