Global mar­kets have been tough in 2011 but I look for­ward to a strong 2012. To kick the year off, we’ve sched­uled a spe­cial web­cast with John Mauldin and our invest­ment team to dis­cuss our out­look for the com­ing year.

Make sure to reg­is­ter and add it to your calendar.

Mauldin is a wiz­ard when it comes to mar­kets and his annual out­look pieces are a peren­nial “must read” for global investors. His Thoughts from the Front­line e-newsletter is also dis­trib­uted weekly to more than 1 mil­lion readers.

In this week’s edi­tion, Mauldin shared his thoughts regard­ing the Key­stone Pipeline that I thought you might find inter­est­ing. He begins with a short dis­cus­sion from his book, Endgame, on the bud­get bal­ance strug­gle that coun­tries face when the pri­vate sec­tor is delever­ag­ing, and con­tin­ues with a can­did com­men­tary on America’s depen­dence on energy and the impact of the pro­posed pipeline:

The desire of every coun­try is to some­how grow its way out of the cur­rent mess. And indeed that is the time-honored way for a coun­try to heal itself. But let’s look at yet another equa­tion to show why that might not be pos­si­ble this time. It is yet another case of peo­ple want­ing to believe six impos­si­ble things before breakfast.

Let’s divide a country’s econ­omy into three sec­tions: pri­vate, gov­ern­ment, and exports. If you play with the vari­ables a lit­tle bit you find that you get the fol­low­ing equa­tion. Keep in mind that this is an account­ing iden­tity, not a the­ory. If it is wrong, then five cen­turies of double-entry book­keep­ing must also be wrong.

Domes­tic Pri­vate Sec­tor Finan­cial Bal­ance + Gov­ern­men­tal Fis­cal Bal­ance — the Cur­rent Account Bal­ance (or Trade Deficit/Surplus) = 0

(By Domes­tic Pri­vate Sec­tor Finan­cial Bal­ance we mean the net bal­ance of busi­nesses and con­sumers. Are they bor­row­ing money or pay­ing down debt? Gov­ern­ment Fis­cal Bal­ance is the same: is the gov­ern­ment bor­row­ing or pay­ing down debt? And the Cur­rent Account Bal­ance is the trade deficit or surplus.)

The impli­ca­tions are sim­ple. The three items have to add up to zero. That means you can­not have sur­pluses in both the pri­vate and gov­ern­ment sec­tors and run a trade deficit. You have to have a trade surplus.

Thus the prob­lem of Greece, with its mas­sive trade deficit and huge fis­cal deficit. They have no choices but default or depression.

The U.S. has two main sources of its trade deficit: energy and China, in roughly equal pro­por­tions. If we reduce our energy depen­dence, we can get the trade deficit below 2% of GDP.

The China prob­lem is not sim­ply one of reduc­ing our trade deficit with China, as much of what China makes and sells to the U.S. is sourced in coun­tries out­side of China. While the final man­u­fac­ture is per­haps in China, the bits and pieces come from other parts of Asia. The true cost of a prod­uct from China is less than 20% actual Chi­nese value added. An exam­ple is the Apple iPhone, which is assem­bled in China but whose most costly com­po­nents come from else­where in Asia. Direct Chi­nese costs are less than 4%, but the entire amount is “attrib­uted” to China in cal­cu­lat­ing the trade deficit.

The real prob­lem is the demand in the U.S. for cheaper goods. If the U.S. were to pass a tar­iff on Chinese-manufactured goods, then pro­duc­tion and buy­ing would shift to other coun­tries with­out the tar­iffs. Mar­kets look for the lowest-price source. For a tar­iff to be truly effec­tive, it would have to be on the prod­uct and not the source coun­try. And the only way to do that is to start a trade war. That is typ­i­cally not a good way to pro­mote free mar­kets and gen­eral pros­per­ity. Think Smoot-Hawley in the 1930s.

On the other hand, the U.S. can do some­thing about its energy depen­dence. We are blessed with abun­dant energy, if we sim­ply exploit it in a respon­si­ble man­ner. And doing so would directly cre­ate hun­dreds of thou­sands of jobs, many of them quite high-paying, and many more hun­dreds of thou­sands of jobs ser­vic­ing those employed and their companies.

Which brings us to the rather strange case of the Key­stone XL Pipeline project. For non-U.S. read­ers, this is to be a 1,700-mile pipeline designed to con­nect Canada’s oil pro­duc­tion in the province of Alberta with the U.S. Gulf Coast. The var­i­ous gov­ern­ment agen­cies of the cur­rent U.S. admin­is­tra­tion approved the project, after exhaus­tive envi­ron­men­tal impact analy­ses. Pres­i­dent Obama over­ruled his sub­or­di­nates, post­pon­ing a deci­sion until 2013, after the next elec­tion. Even though labor unions (nor­mally thought of as Demo­c­ra­tic and Obama allies) actively sup­ported the project (as it means lots of jobs), var­i­ous envi­ron­men­tal lob­bies were against it, and Obama appar­ently gave into them. (That is not just my opin­ion, but widely assumed, even by Demo­c­ra­tic supporters.)

This issue has raised a few ques­tions from inter­na­tional read­ers, want­ing to know why so many peo­ple (the large major­ity of US vot­ers, if polls are right) are seem­ingly will­ing to hurt the envi­ron­ment sim­ply for the pur­pose of trans­port­ing oil. Wouldn’t a new pipeline cre­ate a whole new host of envi­ron­men­tal dan­gers? What were we thinking?

As it turns out, a new pipeline is not all that rad­i­cal. If you drive in the U.S., you can­not go ANYWHERE for any length to time with­out cross­ing dozens of pipelines that already exist, espe­cially in the cor­ri­dor where they want to build the Key­stone XL pipeline.

Let’s look at two maps. The first is a map of nat­ural gas pipelines in the U.S. To say it looks worse than your grandmother’s vari­cose veins is no exag­ger­a­tion. It is hard to find a state that does not have a nat­ural gas pipeline. With­out them the U.S. would sim­ply come to a grind­ing halt. (The source for this map is a gov­ern­men­tal agency, the U.S. Energy Infor­ma­tion Administration.)

The next map is just the major oil pipelines. If you were to add in all the small (8-inch or less) lines con­nect­ing minor oil fields, you could not dis­tin­guish between the lines in cer­tain areas, as we will see in the third chart.

This next chart I throw in because it also shows the rather exten­sive pipeline sys­tem in Canada. This chart com­bines com­mod­ity pipelines of all kinds. The point is that we have the tech­nol­ogy to build pipelines safely and in an envi­ron­men­tally rea­son­able way. When was the last time you heard of a seri­ous pipeline dis­as­ter, or even a small one? Yes, the BP oil rig cer­tainly comes to mind, but that was human error and not the fault of tech­nol­ogy. Just as the large major­ity of air­plane acci­dents are pilot error, you do every­thing you can to min­i­mize the impact, and require safety pro­ce­dures. But peo­ple screw up every now and then.

This is not to dis­miss the prob­lems and envi­ron­men­tal con­cerns of drilling for petro­leum prod­ucts, or min­ing for var­i­ous min­er­als. There needs to be strict con­trols on all such activ­i­ties, with real penal­ties. You can see from the maps that my home state of Texas has a lot of pipelines and wells. The prob­lems with pol­lu­tion in the early devel­op­ment phase here in Texas were well-known. Now there is a very aggres­sive and pop­u­lar reg­i­men of con­trol of drilling and trans­porta­tion of oil and gas. We have to live next to the wells and pipelines. No one wants their water or land destroyed.

Now, let’s cir­cle back to the Key­stone Pipeline. We started this sec­tion with a ref­er­ence to trade deficits. And this is Cana­dian oil, not U.S. oil. So it does not help our trade deficit directly, although a large por­tion of U.S. dol­lars that go to Canada come back to the U.S. Canada is far and away our largest trad­ing part­ner and major energy supplier.

The prob­lem is that the oppo­si­tion is mainly of the “I don’t like any carbon-based energy” vari­ety. Whether it is coal or oil or nat­ural gas, it is not as “clean” as solar or wind.

The prob­lem is that solar and wind sim­ply can­not pro­duce enough energy with­out huge gov­ern­ment sub­si­dies, at least with cur­rent tech­nol­ogy (although that will change over time). In the mean­time, if we want to bal­ance our bud­get in the U.S. (and we must!), we are going to have to become energy inde­pen­dent as one part of the solu­tion. In the short term (10–15-20 years), that means carbon-based energy. If we can pro­duce our energy in the U.S., and we can, then why not cre­ate the jobs here rather than else­where, if jobs are our #1 polit­i­cal con­cern, as they seem to be, accord­ing to the polls? Fur­ther, in the short term, as Mex­i­can pro­duc­tion is falling rather fast, we are going to need that Cana­dian oil if prices are not going to rise.

(Note: in my book, I actu­ally call for a slowly ris­ing energy tax on gaso­line usage, to be solely used for rebuild­ing our decay­ing infra­struc­ture, so I am not against higher prices per se. I just want the rea­son for higher energy costs not to be short­ages. But that’s another story for another day.)

In the “pay­roll tax cut” bill that will be passed in a few days here in the U.S., Con­gress will require the Pres­i­dent to make a deci­sion by the end of Feb­ru­ary on whether to allow the Key­stone project. I hope they do pass it, and I hope he does decide to allow it.

But let’s not think that this one more pipeline is going to destroy the envi­ron­ment of the U.S. It might cre­ate com­pe­ti­tion for some U.S. pro­duc­ers, but if you can’t live with com­pe­ti­tion then you’re in the wrong country.

The U.S. is in a very deep hole. We need to stop dig­ging and start fig­ur­ing out a way to climb out. The world is sadly going to see what hap­pens when Europe has to resolve its cur­rent cri­sis, one way or another, and what that will mean for world GDP growth. Then, I am afraid, Japan will be the next cri­sis in waiting.

The world can ill afford for the U.S. to be the third major econ­omy to implode. The world is far too con­nected to shrug off such problems.

Reg­is­ter for Out­look 2012 Webcast

Fol­low the event on Twit­ter #Outlook2012

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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