IMPEACH BUSH

April 7 (Bloomberg) -- Why is Stephen Leeb, who manages $160 million for Leeb Capital Management, comparing himself to Cassandra and Jimmy Carter?

Both of them predicted disaster, one for Troy if it messed with the big horse, and one for the U.S. if it didn't wean itself off foreign oil. Leeb also has a vision.

He foresees an energy crisis that could spell the end of modern civilization -- though presumably not before he sells lots of copies of his latest book, "The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel" (Warner, 211 pages, $24.95).

No stranger to skepticism, Leeb is perhaps best known for his prediction in "The Oil Factor" (2004) that oil would reach $100 a barrel by the end of the decade. Now, citing worsening fundamentals, he predicts oil will top $200 a barrel and touch off hyperinflation, double-digit interest rates and a cascading collapse of the world economy. His book, written with Glen Strathy, tries to be both a call to arms against a looming oil shock and a primer on how investors can protect themselves.

Oil and Cannibalism

"Imagine the oil supply today is the Donner Party's last crate of food," he writes, recalling the ill-fated 1846 wagon train whose surviving members ate the bodies of the dead after being trapped by a blizzard. "The leaders know the food will eventually run out, and when it does, they may be forced to do the unthinkable, or else have it done to them."

His advice to investors is simple: Avoid investments that are hurt by inflation, such as bonds, stocks and especially small-cap stocks. Buy inflation-protected Treasury bills, gold and gold stocks, oil and oil shares, and real estate, and invest in China and India.

Leeb offers plenty of historical facts and comparisons with past oil shocks to support his argument. For example, oil prices rose more than 10-fold during the 1970s, leading to hyperinflation and double-digit interest rates. Prices would later plummet and remain within a tight range through the 1980s and 1990s until about 2004. Leeb treats that precedent like an axiom: If oil prices rose 10-fold today, they would top $200 a barrel from about $20 in 2000. That's a big if.

`Chindia'

In his view, the world's supply of oil may have already peaked and started a long decline. The resulting supply shortage will be exacerbated by demand from developing countries such as China and India, which Leeb glibly calls "Chindia."

"With a growth rate that is two to three times higher than the United States, Chindia will likely surpass the United States in consumption before the end of the decade," he writes.

China, India and other countries will stop at nothing to feed their growing dependence on oil, Leeb warns. Iran's interest in nuclear energy may exemplify the type of geopolitical crisis the world could face, he says.

The fact that his view of the supply picture doesn't register with those who matter he attributes to "groupthink." The U.S. government, Wall Street, the oil industry and the media all suffer from it, he writes.

`Our point is that groupthink can affect any group trying to tackle an important job under stressful circumstances, and can lead to monumental errors of judgment."

Groupthink about oil prices borders on the "faith-based" idea that somehow more oil will be found. That's hardly a sound argument, he warns. Instead, he proposes a Manhattan Project- style investment in a viable alternative energy source, like hydrogen or wind. It would cost about $1 trillion, he estimates.

Since such a program would add to an already $7.8 trillion national debt, he suggests we start reorganizing our priorities.

Bills to Pay

That idea strains credulity in a country facing Islamic terrorism, wars in Iraq and Afghanistan, the $200 billion-plus cost of rebuilding New Orleans after hurricane Katrina, the retirement of the baby boomer generation and an unknowable future. With so many other distractions, he's not likely to be heard.

And maybe that's OK. Over time, the market will direct companies and chief executives to invest in new technologies that will discover alternative fuels.

Last Updated: April 7, 2006 00:17 EDT