Friday, May 30, 2008


The CIA reports that Al Qaeda has been strategically defeated in Iraq and in Saudi Arabia and it is in retreat or in hiding in other areas. Iraqi polls show little support for Al Qaeda.

Perhaps the most remarkable story of the Middle East is the degree to which the Saudis interest are aligned with those of Israel. With Iran as a common enemy, the two nations are working for common purposes. Each has encouraged Syria to help decrease the influence of Iran. Israel is prepared to give the Golan Heights back to Syria and Saudi Arabia is willing to provide financial incentives, including the building of an oil pipeline to or even through Syria.

The election of Amadenijhad's rival to the powerful Speaker of the Parliament position highlights the tenuous position of Amadenijhad. Another amazing fact is that the Iranian people, who sit on some of the riches oil and gas reserves anywhere, have been suffering from power outages and fuel shortages. Once again, we see the failure of "command and control" economies. The irony is that democrats in America continue to proposed movement in that direction. One commentator has compared the "dictatorship" of environmentalist to communist and fascist dictatorships; he notes that all three demand that individuals give up their rights so the leaders rules can be followed.

New times are here. The numbers in places like Mosul are revealing. It has been estimated that 4,000 of 6,000 Al Qaeda "foot soldiers" lost their lives in the recent battles. In the past year, the number of Iraqi deaths has fallen sharply. Over by Israel, the surge in support given to Hamas by Iran appears to be a last ditch effort to gain bargaining power. Hamas is a weak threat to Israel. Iran needs to make a deal.

Thursday, May 29, 2008


It was early May when the thickest of Iranian oil lost its market. 30 million barrels of oil was put in super tankers over the next three weeks. On Sunday May 25 the Gulf Times reports that the cost of shipping had fallen the previous three days. The report went on to say that there are 40 of the VLCC class ships available for hire within the next 30 days.

The above does not tell us what has happened in regard to the oil stored by Iran or if the "thick oil" fields have been shut down. The after market reports today explained today's big oil crash on a delay in off loading tankers in the Gulf of Mexico. Again, this is reminiscent of the events of 1980 when ships mistakenly waited for the price to jump before unloading. If that was the game being played today, the owners just lost about $4.50 on 2 to 3 million barrels per ship.


In response to Iran's claim that the USA has made up the story about Iran's nuclear bomb activities, the IAEA reported that it has received intelligence from no less than 10 countries that at least partially confirm the US version. The IAEA also noted that it has a copy of an Iranian plan for building a bomb. Iran must come clean before the negotiations can go further. Negotiators have said they would like to meet by June 2 or 3 but are waiting for Iran to follow the rules of the NPT.


The fall of tanker rates and the fall of oil prices suggests that a deal is probable. In the meantime, Brazil continues to order huge quantities of equipment to discover, produce and move oil. The probability is growing that the discoveries in Brazil are a series of fields that could rival the fields of Saudi Arabia.

Now is the time to add money to your accounts if you can. It seems like this turn has taken forever but those who take advantage will enjoy the money they make on this move for years to come!


A regular reader has suggested that DUG might be the thing to buy today. DUG is the Ultra Short Oil play. It goes up when the price of oil goes down and it trades like buying a stock on margin. The price hit 54 back last August and is around 28 today. Room for a 100% gain with little resistance.

Another buy, among many, is the financial stocks. A significant drop in the price of oil could bring inflation and interest rates down while giving mortgage payers an economic boost. As a caveat, predicting interest rates is as tough a game as any. One might even suggest that a decline in oil will work like a tax cut, stimulating the economy and thus increasing interest rates. Still, the "book" says, financial stocks tend to turn up at about the time the price of basic materials and energy prices turn down.

Please note that there is once again the potential for disappointment in today's numbers. The price of gasoline never caught up to the price increase in oil. Today, the wholesale price of gasoline has been down only a penny or two while the oil price was down 2 or 3 dollars. Oil companies will attempt to rebuild their crack spreads in the days ahead, no matter which way the price of oil goes.

By the way, the collapse in certain metal and agricultural commodity prices is into the second and third months. Today's revision to GDP shows that there has been no recession. The odds of 4% or higher real growth by next quarter has increased. A part of the reason the real growth is likely to rise is because the inflation rate should moderate.

Oil down $4!


The complete question asked, "Why is the price of oil down $3 after the announcement of the biggest weekly decline in oil inventories in 4 years?"

The answer could be one of the following.

1) To maintain maximum pressure on Iran, the US is sacrificing inventories to make sure other nations are well supplied without buying oil from Iran. The US has the option to tap our SPR if needed.

2) Seeing the "tipping point turn" in world wide demand, buyers are refusing to buy at today's price. A corollary being that the "battle with Iran" seems to have been won.

3) The back up in oil going to tankers in Iran, which started around May 5, has finally reached the US. It is Iran that is holding back production.

While there is a partial truth in number 3, my vote is for number 2. In 1980, a similar scenario played out. Oil was sitting in tankers being stored on the speculation that prices would continue to rise. Suddenly there was a "buyers strike", prices fell and there was a rush to unload tankers. The energy czar under Jimmy Carter stated that deregulating oil prices in the US would cause gasoline to soar to $10 per gallon. Reagan deregulated and the price fell. Some politicians become so caught up in "winning" that they suspend belief in basic laws of economics The pressure on the US congress to permit drilling for US oil is growing. The average representative and even the average person understands that an increase in supply should lower the price.

Today it was reported that officials in India have said they no longer desire to buy Iranian oil. Oh the pain! For months, Iran wooed India. India, Pakistan and Iran have been working on a $7.5 billion dollar gas pipeline. The status of the IPI pipeline is not clear but we know that on April 24th a deal was make for a gas pipeline to run from gas rich Turkmenistan through Afghanistan and Pakistan to Iran. This TAPI gas line will also cost about $7.5 billion dollars. The big difference between the two is that the promoters of the TAPI line have already arranged financing. It is likely that the Iranian line cannot get financing. Only last week, European banks threatened to freeze deposits held by an Iranian bank.

The TAPI line will not be finished until 2014 and the planned extension to China will take longer. The slow down in exports to the US is zapping the current demand in India and China. Supplies will be ample because there will be about 14 million barrels of new production started in 2008 and 2009. There is much more new production expected to start up from several countries from 2011-14. It could be coincidence but Iran stopped buying oil from Iran soon after the TAPI deal was signed and soon after Russia agreed to supply Iran with nuclear fuel.

I recall reading that the average American under 40 years of age does not know that Russia was a US ally during WWII. Many folk today cannot believe that Russia and China are working with the USA, Europe and Saudi Arabia to eliminate the threat of a nuclear armed Iran. The UN security resolutions, including three sets of sanctions against Iran were approved 15-0, 15-0 and 14-0-1. Russia, China, UK, France and USA all had the ability to veto the resolutions. Saudi Arabia is building a network of oil pipelines that will bypass the Straight of Hormuz. An agreement with Iran is a matter of time.

Aggressive investors in stocks should do well!


Yes, there does appear to be a reluctance to buy oil at today's prices. The trend should be down for the rest of the year.


US oil inventories declined for the second week in a row. The public is being left in the dark. There has been little if any mention of the decline in shipments from Iran that began around May 5th. Immediately after this mornings announcement, the price of oil went from down $2 to up $1.50. The current price of $132 is close to the all time high. It will not last. The USA can make up the shortfall from our SPR if needed. Using this reserve would cause some excitement but would be a feather in the Bush cap if a deal with Iran followed. The bottom line is that the world can do without Iranian oil for a lot longer than Iran can go without oil sales.


When a tipping point is reached, there is simultaneous suffering and opportunity. A tipping point has been reached.

In the USA, the price of gasoline has finally bitten the butt of the American consumer. This bite is evidenced by the shut down of light truck factories, by the increased ridership of buses and by the huge decline in miles driven. The miles driven has fallen year over year since last November but the biggest ever recorded decline was reported in March. Aprils numbers are likely to be equally weak. Economist know that price cures price, but they never know the price it will take, until after the fact.


In the USA, the GDP per person is about $46,000 and the makeup of the GDP is .9% agriculture, 20.6% industrial and 78.5% service. The world average GDP per person is about $10,000 with GDP equal to 4% agriculture, 32% industrial and 45% service. These numbers show a lot and hide a lot. The USA is the most productive farming country in the world and yet farming is a very tiny portion of our total output. We are the capital goods industrial champion but industrial production is a small percentage relative to the rest of the world. The reason our Ag and industrial percentages are so small is because we can afford to stop at the Jiffy Lube and drink our Starbucks coffee on our way to the dentist. We earn 4.6 times the average income efficiently; thus we have the time to spend these earnings on services.

No less than 40% of the people of the world make their living in agriculture; they produce only 4% of the worlds GDP! In China, 43% of the people are employed in agriculture while 21.5 million of these farmers earn less than $100 per year. Only 20.5% of the people of the world are engaged in industrial production but due to automation industrial production represents 32% of the worlds economy. Contrary to popular belief, China has lost many more jobs to automation than has the USA.

The average person in the USA, who has been brainwashed by politicians, self serving businesses and the media, would be surprised to learn that the 40% of the people in the world, who work in the service industries, produce 64% of the worlds GDP. For years, the left tried to convince the American people that service jobs equate to flipping hamburgers at McDonald's. The numbers show that the high earners are more likely to be service workers, such as doctors, lawyers, surgeons, professors, teachers, dentist, nurses, sales representatives etc. While those 21.5 million Chinese who earn less than $100 per year in agriculture bring down the average, the average person in China earns double the amount of the average person in India. Even so, the average person in India is super rich relative to the average person in a few dozen other countries, including a major portion of Africa.


The poorest of the poor suffer in good times and bad but billions who climbed up on the bottom rung of the middle class ladder are now suffering. The lower middle class person might spend 70% of his income no food and fuel. The recent price spikes have caused many to do without heat or food.

The USA produces a dollars worth of GDP efficiently. We use less fuel per dollar of GDP than does labor intensive economies. Many developing countries have tried to insulate their people from oil price shocks by subsidizing fuel and imposing price controls. The result is wasted fuel. Any time the price of something is subsidized, too much of it is used. The more the use the greater the cost of the subsidy. The greater the cost, the greater the pressure to eliminate the subsidy. The distorted price causes ripples all the way around the world. The price of gasoline at your local pump is influenced by the wasteful use in Iran, India, China, etc.

As the fuel subsidies are reduced or eliminated, the people and economies of the developing nations will suffer. The demand for oil will decline. The world will approach recession but there will be modest relief at the gas pump.


Politicians on the left and right keep raising our taxes, again and again. Of course, they find ways to raise taxes without even saying the word tax. They find ways to raise taxes while doing there friends (lobbyist) favors. The sneaky ways used to raise taxes has caused our economic system to be distorted into a complicated scheme. Businesses in America face costly regulations each way they turn. They face an income tax code that is 10's of thousands of pages long. No two of a dozen professional tax preparers cannot produce the same results on the same small business return.

The ways of collecting taxes is virtually endless. The subsidy paid to farmers to not grow food is a tax on the rest of us. The proposed cap and trade system is a very expensive tax but it is presented as a way to solve an environmental problem. The same is true of CAFE auto mileage standards. The cost of the average car is increased by this legislation that is designed such that it protects big US auto companies. Restricting children to certain schools is a tax increase. Government run transportation or subsidized mass transit are tax increases. Regulations are put on foreign auto imports to make them expensive.

A friend tells me that the smartfortwo had to be re-engineered to make it one inch longer than the European model. Of course, this was a "safety feature". A 50 cent tariff was imposed on ethanol from Brazil to protect American farmers who have been paid 51 cents to produce an inferior ethanol.

The distortions to the economy are great. Americans drive 6,000 pound trucks to and from work because politicians are unwilling to bite the bullet and pass a simple tax. If politicians were truly willing to engage in "straight talk", they would replace a very long list of regulations and at least some portion of the income tax with a tax on gasoline consumption. The problem is that a simple fair tax system takes away power from the congress. They want and need to be lobbied.


We live in a country that sits on trillions of barrels of oil while we borrow money and fight wars to secure millions of barrels each day from half way around the world. We drive 6,000 pound vehicles to move our 200 pound plus out of shape bodies while we complain about fuel prices. We put the growing population of polar bears on a threaten species list while we put corn in our car engines and while millions of people cannot afford to buy corn to feed their families. We declare the breath of life for our plants and our oceans a pollutant while we pump out billions of tons of hazardous chemicals. We send 29 billion dollars worth of food to hungry people as a gift but refuse to pay them for the goods and services they are willing to provide. We blame Hispanics who were born in America, who have lived in America all their lives and who have served in our military for our problems. We burn trillions of tons of coal that is responsible for killing millions of people while we refuse to build nuclear power plants that would save us money and dramatically reduce the number of deaths.


The high price of gasoline has caused the people of the world to focus on what is right and wrong. Ethanol has lost much of its support. The wisdom of burning dirty coal is being questioned. The waste of subsidizing solar and windmills is becoming obvious. Nuclear power is not the whole answer. The free market is the answer. On average, the world is moving in the direction of economic freedom. Unfortunately, the push of the democrats is to move the USA in the other direction. The democrats will be foiled because the desire for freedom burns deep. Many Americans have died to preserve freedom. Americans are ill informed but they see what has happened to the price of food and fuel and they will not vote to expand this madness.

Ironically, the step toward the free market that is needed is to replace at least a portion of the income tax with a consumption tax. It remains to be seen if the American people are ready to make the kind of change that would allow the free market to solve our problems. If fuel consumption were taxed, we would find many ways to use less fuel. We would substitute every thing from mass transit to bicycles to pocket video for oil consumption. If income taxes were reduced we would find many ways to produce more income.

In the old days, we called the tipping point the clearing price. The tipping point or clearing price has been distorted by the actions of government. In the airline business, the small "suv jet" that uses a lot of fuel per passenger mile is subsidized by the government. Commercial passengers subsidize the billionaire travelers in private jets. Still, a tipping point has been reached. The revenue per passenger mile in commercial aircraft was 90 cents in 1938, 70 cents in 1972, 60 cents in 1978, 12 cents in 2005 and 13 cents in 2007. Only the largest and most fuel efficient aircraft makes economic sense today. Thousands of private jets are dinosaurs. The revenue per mile for the major airlines is headed up as a result of recent fare increases. In 2001 the average commercial flight produced 41 passenger miles per gallon of fuel. By 2006, this number had reached 49. Based on the recent high load factors and fare increases, this number is probably above 55 or 60. The typical car would need to carry at least 3 people to get that level of miles per gallon per passenger.


The BBC reports that inflation in Iran has soared to over 30%. The response of Amadenijhad has been to lower interest rates, to nationalize the banks into one big government bank and to continue to belligerently blame the US and Israel for its problems. The GDP per person in Iran had reached $12,000 in 2006. This was slightly above average, but the number was calculated using what is called purchasing power parity or PPP. The 30% inflation rate and a double digit unemployment rate means the standard of living is falling rapidly.

It takes a lot of mismanagement for such a resource rich and strategically located nation to suffer so much. The pertinent question is, "how much pain will the Iranian people suffer just so Amadenijhad can get his wish of acquiring nuclear weapons"? This week a long term rival of Amadenijhad, Larijani, was elected Speaker of Parliament. He has spoken out boldly about Amadenijhad's mishandling of the economy. Amadenijhad's days are numbered. A tipping point has been reached. He will come to terms with the UN Security Council, he will be replaced or his nuclear enrichment center will be torched. The third option is unlikely because the sanctions are working. The lowering of interest rates will increase inflation all the more. The protest marches are going to grow. The pressure will continue to build.


The world is well supplied with oil even though much Iranian oil is staying home. Little up to date information is available about Iranian oil. The latest information is that 30 million barrels have been stored in supertankers but those were filled a week ago. So far today, the oil price is down $2. US inventories will be announced at 10:30 this morning. The decline in world wide consumption is going to exceed the total amount supplied by Iran. The rest of the world is doing fine; it is Iran that needs to sue for peace!

Wednesday, May 28, 2008


I got two good letters this afternoon. Both were from readers who are ticked off at the congress, the media and the politics being played. I also note that people from all sides of the political spectrum are getting angry over the ethanol scam. The congress is entertaining bills to cap the mess at today's levels, John McCain is a cosponsor. If something is not done to bring food and gasoline prices down, the public is not going to vote for congressmen who have supported this ethanol scam.

A deal with Iran, the passage of the nuclear treaties, relative peace in Iraq and new oil flowing from Iraq will all take some of the wind out of the antiwar tree hugger sails.

Thanks for the letters.


Companies that consume more energy than they produce, most companies, will enjoy the massive new oil discovery. The cost of fuel is going to trend down as production from a new 235 billion discovery is rapidly developed. The construction of pipelines to carry the fuel has already started. Some of the contracts to develop the fields have already been let.

Last month, Iraq's listed oil reserves were 115 Billion Barrels. This month, based on updated technology being applied in Iraq, the reserves were raised to 350 Billion Barrels. In the coming months, an all out production assault on Iraqi oil fields, large and small, is going to occur. Up north, a deal is brewing between the Kurds and the Iraqi government. The Kurds will give up on their plan to annex the disputed area of Kirkuk in exchange for being permitted to manage the development of their fields. Get this deal done and a lot of development will move forward. By the first week in November, progress will have been made.


Politicians have long treated Americans as uninformed stooges who can be brainwashed and manipulated. To a large degree the politicians have been correct. Politicians have learned the old psychological trick that if a number of "leaders" repeat the same falsehood time and time again, it becomes truth. The current lie being told is in regard to high oil prices. The congressional leaders are all point one finger toward someone else. They should remember that when you point one finger you point three back at yourself.

Some politicians are pointing a finger at oil companies, others at oil rich countries and others at George Bush. Hillary blames the oil companies and her solution is to tax them more. Econ 101 tells us that if you tax something you get less of it. Mark Perry wrote in the IBD yesterday about how a windfall profits tax in the 1980's resulted in lower US oil production. A "breakout" is occurring in nuclear power. The proposed taxes on CO2 (the cap and trade system), will cause an even faster dash toward nuclear.

The story that grabs my attention is that Chuck Schummer, the other senator from NY, repeats the story that a 1 million barrel per day increase in oil from Saudi Arabia would lower the price of gasoline by 25 cents per gallon. His fellow democratic senators like to say that production from ANWAR would produce a 1 cent per gallon reduction in the price of gasoline. I wish Schummer would explain to us why the Saudi production would save 25 cents while the same amount of Alaskan production would save only 1 cent.


The truth is likely to be somewhere between a penny and 25 cents per million barrels per day and net new production should be over 3 million per day by the end of 2008 and over 6 million by the end of 2009. If the midpoint of 13 cents per gallon is used, the price of gasoline should fall by 39 cents this year and by 78 cents over two years. If Schummer's is correct, the reductions should be 78 cents and $1.56. By 2010, new production would be more than 10 million gallons per day.

No one can forecast market supply, demand or price to much certainty, but the discovery of billions of barrels of oil off the cost of Brazil, billions of barrels in the Gulf of Mexico, billions of barrels in the Bakken, billions of barrels in Iraq, etc. makes it appear that supplies are plentiful.

The drop off in miles auto miles driven in March in the USA was the largest in recorded history. The pressure on centrally planned governments to cut back on fuel subsidies is intense. Many economies have show signs of slowness. The destruction of demand is real. With supplies up and demand down, prices should fall. A fall in prices will be like a powerful tax cut. Where will this money be spent?

When the price declines, the public will not run out to buy SUV's. Consumers almost always spend the bulk of new found dollars. A lot of companies will benefit from the decline in the price of oil. The stock market is set to rise!


Pipelines to the left and pipelines to the right of Iran mean that the Straight of Hormuz is losing its choke hold on the world.

If you have played the game of Risk, you know that Iran is one of those key land bridges between continents. Place a large number of pieces on Iran and it is difficult for an opponent to invade significant territories to the East or West of Iran. In terms of oil supply, there is no more strategic location than the Straight of Hormuz. The Middle East holds about 60% of the world's proven oil reserves; most of the oil from the Middle East flows past the 2 mile wide Straight. Should war break out, Iran could potentially stop the flow of oil from Saudi Arabia, Iraq, Kuwait and other countries.

In 1949, a Trans-Arabian pipeline was built to connect Saudi Arabia to Europe via the Mediterranean Sea and a terminal at Tripoli, Lebanon. After years of civil war in Lebanon, this pipeline is no longer used. One of the reasons Syria wants to control Lebanon and to get the Golan Heights back from Israel is to regain control of the pipeline route. The pipeline route is the reason the Saudis and the Iranians have financed opposing sides in Lebanon.

The animosity between Iran and Saudi Arabia has inflamed by the conflict in Lebanon but it is a natural conflict as Iran is the military threat in the region. Iran holds the strategic location and its leaders have expressed the desire to rule a much larger territory. The fear of Iran's neighbors has been heightened by Iran's pursuit of nuclear weapons.

Under the circumstances, Iran's neighbors are in pursuit of other delivery routes. The constant conflict in Lebanon cut off the Trans-Arabian pipeline to the Mediterranean and politics prevent its extension to the Mediterranean through Israel, but there are several other potential routes.


There are many oil and gas pipelines under construction and several more in the planning stages. Some have been in the planning stages for years. An agreement signed on April 24, between Turkmenistan, Afghanistan, Pakistan and India (TAPI) will deliver abundant gas supplies from Turkmenistan to India and perhaps to China. While this route has been under consideration for 20 years and while it will not be completed until 2014, it represents a major set-back for Iran. The financing has already been arranged and this success could easily be followed by an oil pipeline from Kazakhstan, again, bypassing the Straight of Hormuz.

Iran is second only to Russia in proven gas reserves. Iran has promoted a competing, Iran-Pakistan-India-China pipeline, but UN sanctions have delayed progress. India and China hope both pipelines will be built. Iran is becoming a bit like King Midas. Iran sits on huge amounts of oil and gas but has no way to sell it. Last month, Iran's oil production declined by 200,000 barrels per day. My guess is that number is misleading because much more production was deposited into ships that are now full to the brim.

The cost of pipelines is enormous but the long term profits can be even more enormous. In North America, the current competition is for a pipeline to bring natural gas from Prudhoe Bay Alaska to Alberta Canada and on to US markets in the Midwest. The projected cost is 26.5 Billion Dollars! The battle with tree huggers is not totally over but it certainly makes economic and environmental sense to pipe gas rather than sending a steady stream of super tankers up and down the Pacific coast. The total cost of the TAPI pipeline will be about $7.5 Billion but there are also costs to protect it from terrorist attack. Afghanistan will earn an 8% transit fee $31 billion dollars worth of gas per year; $2.48 billion is not a bad commission if you can get it.

The Risk player, who desires to control Asia but who does not control Iran, must place equal sized armies in Turkmenistan, Afghanistan and Pakistan. The proposed TAPI pipeline bypasses Iran to the East but there are Western efforts in the works as well.

Saudi Arabia is on a pipeline building binge. An East West pipeline has cut across the country to the Red Sea. It is not being used to full capacity because the shipping route is longer. For now it is primarily a safety valve. However, plans include an extension through Egypt to the Mediterranean. Another pipeline will connect Basra, Iraq to the Saudi network. Another will connect Yemen. Another Dubai. And, there are others. The point is that once the network is completed, oil will not have to move past the Straight of Hormuz on its way out of the Middle East.


Peace and prosperity is a promoted by win-win trade deals. Syria is finally ready to join a winning team. In the same city where Israel bombed Syria's nuclear facility, China has agreed to build a large oil refinery. One report says the oil refinery is 100,000 barrels per day but another says it is the largest refinery ever. In any event, it is well located; the Saudis have agreed to build a pipeline to it. It has also been noted (by John Loftus, International Analyst Network) that the location is very close to the old Hess pipeline from Iraq. Iraq produces a lot of oil just across the border from Syria. According to the preliminary deal reached between Syria and Israel, Syria will control the total route to Tripoli. There is yet another network of pipelines connecting several countries, including Iraq to the Mediterranean through Turkey.


Russia made deals to build a gas pipeline to Europe, underneath the Baltic Sea. European nations, which have expressed concern about being too dependent on Russia, support competing routes from several former Soviet Union states.


A game of Risk can go on forever. One way a game can end is for one player to be such a threat that the others gang up on him. Long ago, the leaders of Iran decided to win through intimidation. Their strategic location and oil wealth allowed them to get away with this strategy, until the other players, almost unanimously, decided to gang up on them. Now, Iran needs to sue for peace. There is room for all players to enjoy peace and prosperity.


Despite the constant criticism, the Bush Administration has played an excellent game of Diplomacy. The game of Diplomacy is much like the game of Risk. The US has looked for and negotiated win-win deals. Deals have been made to help countries like India and China secure energy supplies and deals have been made to give countries like Russia, Saudi Arabia and Turkmenistan an outlet for their supplies. The deaths of over 4,000 US soldiers in Iraq has been a steep price. As George Will noted, this war is an extension of WWI and WWII, in which there were 117,000 and 440,000 American deaths respectively.

In the game of Risk, there comes a point when you know it is over. The weak player still has a few armies but the odds of beating the other players has approached zero. Iran is whipped unless they cooperate. The PR from Iran showed they are ready to make their suspension of enrichment of uranium a victory by securing the location of an international enrichment center. In any event, it is going to be necessary for Iran to agree to stop arming and financing terrorist.


Iraq is in the process of signing technical agreements with the major oil companies. Exxon and BP were the first two to sign. A recent review of Iraqi oil fields, in light of new production techniques, resulted in recoverable reserves being increased to 350 billion barrels. Iran could easily double its reserves by allowing the best of the best to develop it's oil and gas. It can also build a pipeline all the way to China. While these abundant reserves will not last forever, nuclear power is ready for prime time. Iran can sign on to the 123 nuclear accord and participate in low cost electricity.

It will take years to build the nuclear power but we have the time. The price of oil is falling again so far today because the price is holding down demand and increasing supplies. Good news is here for all!

Tuesday, May 27, 2008


Iran and the US are engaged in a public relations battle. The US is fighting with one arm tied behind its back. The AP, CNN, ABC, CBS and others come close to being on the Iranian side of this battle. Iran has sent the message that it is the country trying to make peace. Iranian officials say that they have answered all the UN's questions about bomb making activities and the country is ready to sit down to negotiate.

This morning the IAEA issued a 9 page report saying that Iran has not come clean. The IAEA report backs up the claim of the USA that Iran has demonstrated that their enrichment program is about nuclear bombs, not nuclear electricity. The 5 permanent members of the UN security council plus Germany have offered several alternatives for Iran to get fuel for nuclear electricity. The 123 treaties being signed around the world show that nuclear power is going to be developed in many nations. Iran, as a signor of the Nuclear Proliferation Treaty, needs to follow the rules.

Yesterday, Iran refocused its efforts to influence Syria. Syria and Israel have reached a preliminary peace agreement but the relationship of Iran to Syria is a sticking point.

With the EU ready to take the next sanctions step, the pressure on Iran continues to build. Iran is running a three ring circus but they can't sell tickets. The west and the east are united in demanding that Iran make a deal to suspend its development of nuclear bombs. Iran fires back with verbal support for Hamas. Not something that wins friends among all who are tired of bomb throwers. The Hamas roll would be that of the clowns at the circus, comic relief, if it were not for their willingness to kill non-combatants, including women and children.


Monday, May 26, 2008


The Arab Times reports that 27 EU nations are preparing to freeze the assets of the Bank Melli. The USA has been pushing the EU to take this action. Historically, sanctions have often failed to achieve results because there are economic incentives to cheat. Over the past several years and particularly over the past few weeks, the sanctions against Iran have been honored by more and more nations. In many cases, the financial incentives have been turned around. If better grade, cheaper oil is available from Iraq, Saudi Arabia or Brazil, it becomes easy to go along with sanctions against Iran.

Iran continues to stall the inspections of the IAEA. Even so, progress is being made. There has been common ground found in some of the offers floating back and forth. There is even talk of direct negotiations between the US and Iran. The US has insisted that Iran needs to at least temporarily suspend enrichment of uranium. The US and Israel believe Iran is getting too close to a nuclear bomb for comfort. Neither country deems it wise to spend a lot of time at the negotiating table, while Iran stalls on the one hand and hurries up the production of a bomb on the other hand. It is time for Iran to come clean. It either wants nuclear fuel for peaceful uses or it wants to develop a bomb. In case of the former, the US and Iran have lots to talk about, in the case of the later, it will soon be necessary to use military force to stop the enrichment.

The noose is getting very tight. My guess is that Iran will cease enrichment within a 10 days.

Friday, May 23, 2008

A Tiny Dot

anwr2.bmp (image)

The proposed development area in Alaska is a tiny dot on the map. The people of the USA are suffering unnecessarily high gasoline prices and some people in the world are going hungry because 85% of the US reserves of oil and gas have been declared off limits. It is estimated that 10.4 billion barrels of oil are available in ANWAR. A hat tip to Professor Perry at Carpe Diem.


The only business that posts its prices on tall signs on millions of street corners is the oil business. During times like these, when gasoline prices have moved up sharply, everyone knows and is reminded daily. As a result, people who decide to cut back on consumption are likely to follow through. Less gasoline is being purchased and thus the total amount of "extra" money being spent on gasoline is not as much as the price would indicated. Painful, but few Americans are going hungry.

Since food and fuel are prices are in our faces and very volatile, the average person today thinks that the US inflation rate is being misrepresented by the government. Support for this point of view comes from very savvy investors such as Bill Gross, but one must always remember to be cautions about accepting as truth the words of anyone who might be talking up their multi billion dollar "book". The fact that the big investment brokers have turned negative on airline stocks (after they have been pounded to ultra low prices) should not be taken as a sell indicator but as a buy indicator. Investment bankers make their money by buying assets cheap, not by selling or giving away advice.

The inflation reality is like going swimming with a bunch of teenage kids. The water level of the pool has gone up some because these kids are in the water but the big difference is in the amount of splashing that is going on. When these kids do cannon balls, they make their presence known, but they actually add less total net volume to the water level than does the same sized kid who does not splash water out of the pool. Indeed, if there is too much splashing, some swimmers may leave. The higher the price of gasoline the higher the number of people who decide to stay home or who find transportation alternatives. Conservation is happening.

The overall inflation level has not increased very much, primarily because the unit labor cost of producing products has not increased very much. Talking heads like to go on and on about how transportation costs are getting passed through to the cost of every product but they never mention how insignificant transportation costs are relative to total costs. A cost breakdown of a $100 product is in the neighborhood of $70 labor, $29 in materials and less than $1 in transportation costs. The amount of fuel expended to move a super tanker half way around the world is a very minor relative to the value of the goods transported.

If the transportation cost of the above $100 product increases by 50%, the price of the product goes up one half of 1%. If the unit labor cost were to fall 1% simultaneous with a 50% increase in transportation costs, the total cost of the product would go down 20 cents!

Unit labor cost go down for several reasons. The production process might be slightly more automated at any point along the manufacturing process or a production engineer, line worker, or distribution manager may see a way to speed the production process or the production might be moved to a lower labor cost location. The availability of low cost labor has made it profitable for knitted socks to be shipped halfway around the world and back just to have the heels sewed. Again, the transportation cost per unit is a very tiny fraction of the labor costs.

What has happened lately has been a lot of splashing around in the pool but the water level has not been rising much. Not long ago, a huge cannon ball hit one end of the pool. It caused a huge wave and several after shock waves. Oil and food rode the crest of two of these waves. The swells of these two waves were home prices and mortgage securities. It is pretty amazing for a guy on TV to rant about terrible inflation at the gasoline pump and the grocery store without mentioning that his California house has declined $200,000 in value! Has this guy experienced inflation or deflation?


The negotiating cycle in Iran has moved into over drive. The US, Russia and others have agreed to set up international consortium to enrich uranium under UN supervision. Iran has requested that one of the locations to be on Iranian soil. A major compromise appears to be brewing. EU negotiators have said to Iran that the idea is worth considering. EU negotiators have, once again, asked Iran to suspend the production of nuclear fuel so the two sides can sit down to talk. As added incentive, the EU negotiators have indicated that they are preparing to freeze Iranian bank deposits.

Over the past weeks and months, Iran traded its US dollars for Eurodollars. There was a "transaction fee" to make these trades. Now, the EU has confronted Iran with the same problem all over again. When the entire UN Security Council acts in unison, it is a powerful force. I say so without being able to remember another incidence in which the actions of the Council were so well coordinated.

It will take cooperation from Iran's neighbors to allow the regional consortium to be headquartered in Iran, but I believe this is a deal that can be made. In other words, it is time for the negotiations to move to the next level. Iran needs to suspend uranium production and the oil stored in supertankers needs to start flowing again.

UK Telegraph

An article in the UK Telegraph notes that oil supply seems to be over running demand. The article notes the addition of 300,000 barrels by Saudi Arabia and 200,000 barrels by Iraq. The article includes a chart of new production coming on line in the USA and in many other nations over the next couple of years. New production from Brazil should be quite substantial over the next several years. The article implies a tipping point has been reached. The article makes no mention of the slow down or halt in delivery of Iranian oil. There is indeed very little information being distributed about this situation. One must look at data to reveal the truth. For example, it is interesting that daily super tanker lease rates have soared from $44,000 to over $140,000 in a few weeks while the number of super tankers available has declined sharply. One owner of a super tanker licensed in the USA reports that he has declined a lease offer from Iran.

I can find mention of Iranian oil being stored in tankers as far back as May 5. Since daily production from Iran is over 4 million barrels, the development of this squeeze must have developed like the turning off of a faucet. The inventory numbers reported in the USA this past Wednesday showed a decline of 4.1 million barrels. Since it takes something like three weeks for a super tanker to make its way around the world, the squeeze apparently started several weeks back. I am not saying that Iranian oil is shipped directly to the USA but that the diminished flows began at least three weeks ago. With more than 700 million barrels held in strategic reserves, the US must allow those countries that do not have reserves to have first crack at international oil supplies. Only if this "embargo" last a few more weeks will the wisdom of building the SPR be showcased. Iran is still probably selling a little oil to some poor country in Africa or to some dictatorship like Cuba but that last 300,000 barrels added by the Saudis, at a low price, must have turned the faucet almost off.

The pressure on Iran is great, but Iran has put great pressure on the rest of the world. The risk of allowing Iran to build nuclear bombs is too great. The good news is that this crisis should be resolved through negotiations. The congress of the USA has been debating the Iranian problem as a part of the development of the defense appropriations bill. A lot of noise has been made. Nancy Pelosi and the Premier of Israel have made noise by publicly debating a potential naval blockade. President Bush has made the news more than once denying plans to invade Iraq. All of this is saber rattling.

During fits of saber rattling from both sides, step by step, progress has been accelerating. It was nice for the Iraqi troops to take charge of the "invasion" of Basra, Sadr, and Mosul. It was extra nice for the troops to stroll into Sadr unopposed. The US soldier death rate just returned to a low made some 4 years ago. The fight in Iraq is not over but, in a speech yesterday, Bush used the word victory for the first time in a very long time.


The tenor of the UK Telegraph article is likely to be repeated again and again if oil supplies continue to grow faster than oil demand. The speculative bubble will be broken. Inflation rates will fall. Real estate and stocks will rebound!

Thursday, May 22, 2008


Most people are not aware of the tremendous progress being made in Iraq and throughout the rest of the Middle East. During the tough times, the media focus is on Iraq. During the good times, the media focus is elsewhere. In his testimony before congress, General Petraeus reported that the recent death rate is the lowest in 4 years and that the Iraqi military has taken the lead in the drive to secure Basra, Sadr and Mosul. The militias are standing down. The Iraqi government is as strong as it has been. It enjoys the support of Kurds, Sunnis and moderate Shiites. Steady increases in oil production is causing revenues to soar. Iraqi troops now peacefully patrol Basra and Sadr city which were under militia control a few weeks ago.

In the area around Mosul, the occasional car bomb and fire fire fight breaks the peace but even here the progress is noticeable. Yesterday, terrorist where caught in a fire fight with a US helicopter and 6 terrorist were killed. After the fight, it was learned that the terrorist carried children as human shields, two of whom were also killed. It was the terrorist who killed those children, even though they were hit by American bullets. Petraeus told congress that he expects to bring additional troops home by the fall.

Over in Lebanon, Syria and Israel are preparing for a marginalization of Hezbollah. If the Syrian's will secure the peace for Israel, Syria will be granted power in Lebanon. Syria will also receive title to the Golan Heights while Israel will retain the water rights.

The underlying story, hidden in the above, is that Iran has apparently withdrawn its support for militias and for Hezbollah. The amazing thing is that the market has not yet caught up with the reduction in risks. I have done a private poll and have not found a single person who believes peace in the Middle East is a probability. Of course, there will be wars and more wars but I believe there is a real shot at relative peace.

The commodities futures market does not believe it possible, it has gone wild. Michael Masters, a hedge fund manager, told a Senate committee that the funds invested in commodities index trading has zoomed from 13 billion in 2003 to 260 billion in 2008, a twenty fold increase in 5 years! I read a report somewhere today, perhaps the Hays Advisory report, that says the demand for gold has fallen in every market except the ETF demand. In other words, portfolio managers are going all out to secure inflation hedges. The great irony here is that many who believe inflation is a growing threat also believe that housing prices will fall another 20% or more. Which is truth? Inflation or deflation? Please do not reply both. The total overall cost of living is basically unchanged. A peace agreement, followed by a break in the price of oil and food, will cause the headline inflation rate to fall below the moderate core inflation rate. Money will flow out of commodities and back to real estate and stocks.

It is the hype of the market that is becoming a self defeating action. If everyone believes the price of oil is going to rise a great deal, then everyone will find ways to cut back. At first, the price momentum will break and then the actual price will break. Stories are all around about the cut back in usage. Scooter sales are at all time record levels, truck and SUV sales have collapsed and buss ridership is soaring. In some cities, privatized bus systems have seen huge increases in ridership and lower costs.


I cannot tell you enough times that peace is at hand. While it is difficult to find information about the oil piling up in Iran (a search on supertanker leases will show you that Iran's most recent lease is for a 270,000 ton ship at the rate of $44,000 per day), it is easy to find information about Iran's willingness to negotiate. Iran has agreed to let the UN negotiator deliver a proposal that includes the request for Iran to temporarily suspend the enrichment of uranium. The offer of incentives is said to include the gift of enriched uranium in exchange for Iran's commitment to not enrich.


If peace is at hand, the world is a new place. Ironically the power the peacenics, who have taken control of the democratic party, will suffer as a result of the break out of peace. The probability of a democratic three house sweep will fall. The probability of foolish cap and trade legislation will fall. The probability of drilling for known reserves of oil will rise. International trade will soar.

History is clear, the way to secure peace is to maintain a strong deterrent force. The way to maintain peace is to build commercial relationships with your neighbors.

Iran, Pakistan, India and China are prepared to work together on a pipeline to take natural gas from Iran to the other three. This pipeline is of great importance to all four countries. Just the thought of it gives all four reason to be at peace with their neighbors. After years of war between Pakistan and India, would it not be great to see them working together? It sounds too good to be true but the chances are good!


Iran is drowning in oil. Since the US, along with the other permanent members of the UN Security Council plus Germany, picked the timing of the oil "embargo", it is clear that the world is ready to face down Iran. It took the cooperation of Saudi Arabia, which is selling an extra 300,000 barrels per day at a cheap price, to bring some nations on board. If given the opportunity to save money and not go against the US, why not buy Saudi oil rather than Iranian oil?


Iran has 30 million barrels of oil parked in ships to nowhere, in addition to full tank farms, tanker cars and pipelines. Meanwhile, halfway around the world, Brazil is 3 for 3. In the 15 or so deep water "formations" near its coast, the first three have all been gushers. Brazil is ordering no less than 40 of the monster drilling ships to explore and develop these fields. If one extrapolates these early results into the future, Brazil is the new Iraq, Iran or Saudi Arabia of Latin America. The first production from these fields is two years away but these fields illustrate again that there is ample oil still on this planet. If the congress would permit the USA to drill, our oil problems would be over in less than 3 years.

Iraq has 115 billion barrels of reserves, so far. Iraq has been isolated for about 20 years. As a result, it's oil fields have not been developed. So far, there have been about 2,000 oil wells drilled in Iraq. Compare this to over 1,000,000 in Texas and one begins to wonder just how much oil there is in Iraq. Iraq is in the process of signing "technical agreements" with major oil companies. In the years ahead, the development of fields in Iraq and Iran will provide billions of new reserves.

With billions of people moving out of poverty, demand will continue to grow. Thus, we need to allow development of nuclear power and we will ultimately need to build coal to liquid processing plants. We have 1 and a half times as much coal as Saudi Arabia has oil. Guarantee the current or higher prices and plants will be built to convert coal to liquid. The world demand can be met in an orderly fashion, if our world leaders will think rationally and get of the crazy global warming band wagon. The temperature on the planet is lower today than it was 10 years ago. Carbon dioxide is the breathe of life to our oceans and plants. We need to feed them.


Nine days ago!

It has been 9 days since Iran submitted its latest proposals to the Security Council Members (the 5+1, which includes Germany). Since then, Condi Rice has once again called on Iran to suspend its production of nuclear fuel and to comply with the terms of the Nuclear Proliferation Treaty. The IAEA has once again asked Iran to "open its books" in regard to its bomb making activities. Iran has agreed to meet with the 5+1 negotiators in regard to three broad issues. This agreement to open discussions is a significant development. In the final agreement, it does not matter if Iran is allowed to refine its own fuel or not. It would be less costly for them to rely on the international consortium for their fuel but, if they comply with the rules regarding inspections, the processing for peaceful purposes is not a problem. In other words, there is room for face saving proposals.

Drowning in oil is no fun. Iran produces 4.5 million barrels of oil per day. As such, it only took 7 days for Iran to fill up all those super tankers parked off its coastline. Eleven super tankers, sitting around at a cost of $59,000 each per day, with no place to go. How long can the world do without Iranian oil? A very long time.

Of the 4.5 million barrels produced, Iran normally re-imports 2.5 million as refined products. Thus the net production is only 2 million barrels per day. We know that the Saudis are making up 300,000 of that 2 million. We know that Iraq is making up about 200,000 barrels. We can guess than Russia is also helping to make up the difference. We also know that high prices are causing demand destruction. Furthermore, the US SPR holds 700 million barrels for the expressed purpose of dealing with supply disruptions. Using our reserves to replace 100% of the embargoed oil would give us 350 days to watch Iran drown, they have no chance.

In this crazy market, oil futures have gone into contango for the next 10 years! This is a highly unusual development. Speculators are putting down deposits on contracts to buy oil at $140 per barrel 10 years from now! When this bubble pops, those contracts are going to cause a lot of pain and a lot of gain. The value of these contracts could easily be cut in half in a matter of days. With leverage involved, the loses and gains will be huge.


The big investment banks, such as JP Morgan and Goldman Sachs, are likely to make out like bandits. Each time one of these futures contracts is bought, someone else has to sell it. The number of contracts exceed the total supply of oil many times over. These contracts do not call for the physical delivery of oil. They are nothing but a way to bet on the future price. You are one of a very few people in the world who even know that the "embargo" is in progress. Investors who are responsible for trillions of dollars of pension funds are buying oil futures contracts without full knowledge of what is going on. The bid draw down in inventories in the USA announced yesterday, was a natural result of the "embargo". US supplies are still very ample. Again, we know that Russia signed on to the sanctions only a couple of days after signing the civilian nuclear deal with the USA. It is simply too early to know if Russia has stepped up production to help. Those who are buying high dollar contracts have no way of knowing if the combined new supplies are more than greater than the amount of embargoed oil. The current craze quacks like a bubble. Bubble prices are not rational.


Iran will totally drown in days, not weeks. Sure, if Iran has no income, it can draw down on investments for a while and it can print more money. Iran has experience severe inflation for the past couple of years. Iranian clerics have become vocal about Amadenijhad's handling of the economy. The pressure on Amadenijhad has reached a boiling over point. Consider the effect on Iowa if the World suddenly refused to buy its corn. The World would suffer from extra high corn prices but the people of Iowa would soon be facing an economic depression. Iran is facing an economic depression if it does not "make a deal".


This morning the talking heads are going on and on about high oil prices and what this means for airlines and other businesses. There has been no mention of the Iranian oil "embargo". A search on the Internet provides little information. An article that was on the UK Guardian web on May 14 is no longer available! One of the few additions to the information available last night was an excellent and detailed comment on a blog. The comment was posted by anonymous!


Consumption in emerging growth economies is 40 to 45% more volatile than in developed countries (according to a study done by Mark Aguiar and Gita Gopinath). This is only common sense. If you were one of the billions of people who live off of less than $3 per day and the price of food and fuel soared, you would naturally cut back your discretionary spending by a large percentage. Economist call what happens to emerging economies during a world wide crunch a "sudden stop". These economies can go from hyper speed to zero in no time flat. Dennis Gartman of Gartman Letter Fame mentioned today that the Chinese have seen a 3.7% rise in their currency in just one month. A country that depends on the export of low priced, low margin consumer goods has a steep hill to climb when its competitive advantage falls by 3.7% in a month.

Of course, some of the emerging growth countries are resource rich. These countries are enjoying the surge in oil, but the price of nickel fell the limit yesterday. The oil rich countries are drowning in currency. Suddenly Brazil is one of the heavy US investors. It is extremely important that these investors be permitted to reinvest in any manner they please. With the exception of strategic military investments, it is good for both parties if those with money are able to shop for the best investment.


The whole concept of loving your neighbor comes down to a willingness to build relationships with one another. Those who have built relationships have economic reasons to solve their differences. Israel and the USA have offered Syria powerful economic incentives to sign a peace treaty. This treaty was negotiated over 15 months with Turkey serving as the mediator. Yesterday, a line was drawn in the sand, the US and Israel will not go forward unless Syria cuts its ties to Iran and Hamas. Syria and Iran are in the midst of a game of prisoners dilemma, who will give up the other first?

Iran, being the richest country in the world in regard to natural gas reserves, has an incredible incentive "to go along to get along". Iran will sell trillions of cubic feet of gas to Pakistan, India and China after Iran agrees to live peacefully with its neighbors.


The package of incentives offered has not been taken away. The "oil embargo" is only a lever to encourage Iran to take the life preserver. Sometimes you have to almost force a person or a country to do what is right for that person or country. Condi Rice says that Iran has a choice to make and I say they have little choice. The country has negotiated hard to "win" many concessions. A deal will be a victory for Iran and for the rest of the world.

Tuesday, May 20, 2008


The stock market is an emotional auction sale. The lower the airline stocks go, the better the buy they become. Even the weakest majors, LCC and UAUA have substantial cash on hand. After years of seeing the big carries, such as Pan Am, Eastern, TWA, CAL, DAL and NWA file bankruptcy, it is now the little carriers that are going under.

For the month of May, CAL is flying the second or third highest May load factor ever. This incredible feat is after adding an average of more than $160 per ticket for higher fuel costs. The company is producing positive cash flow and is even likely to show a taxable profit this year. The current price is a very rare opportunity.

I have written extensively about the huge fuel investments that will pay off in the coming months. The refinery that opens in India in July is designed specifically to refine the sour gunk that comes out of Iran and Saudi Arabia. The 9 billion dollar investment the Saudis made over the past, I think 6 years, is producing 300,000 new barrels this month and will be producing another 200,000 by year end and another 600,000 in 2009. Consumption has fallen to the point that refiners are refusing all thick gunk unless huge discounts are offered. Saudi Arabia has reduced its price on thick gunk several times in the past two months. Iran sits with 30 million barrels in ships off the coast and probably much more in land based storage. With Iran refusing to sell thick gunk at the market price, the market price of the sweet crude you see posted every day has gone up. The refiners do not start up a thick gunk refinery just to handle a barrel or two. US refinery utilization is running in the low 80's as a result of the refusal to crank up for a few barrels of gunk. It may be true that the US refineries are not willing to buy Iran gunk for any price.

The price is ready to break. Brent oil futures went into contango last week and US futures are flat for months to come. Any oil producer who is not selling forward several years worth of production at today's prices is playing a fools game. The current price gives the producers extreme profits. Profits that are temporary but still extreme. The congress is ready to investigate speculators but it is the speculators who will be left holding the obligation to buy oil at these prices for years to come.

No matter what happens to the price of fuel, several large airlines will survive and prosper. CAL and DAL are two that will do well. AMR will make a dramatic recovery as soon as its unions come to terms. The willingness of regulators to go along with consolidation is going to dramatically increase the "network value" of these carriers. As I have reported, the value of a network grows exponentially by the number of nodes. An airport connected to hundreds of other airports is the same as any other kind of network; the addition of one more airport increases the value of all the other locations.

The talking heads cannot figure out why the railroads are exploding upward in price. The railroads are further along in the restructuring that began in 1978. The price has been bid up to irrational levels relative to airline stocks. I would not dream of shorting railroads but Dow Theory tells us that the economy booms soon after both theindustrial average and the transportation average breaks out. The transports are on new all time record highs. Big rails that are enjoying peak earnings are selling at 17 times those earnings. They are selling at maybe 35 times normalized earnings.

Commodity futures contracts are at never before levels. Trillions of dollars have been bet on higher oil prices even though current prices are unsustainable. My only concern is when not if. When the commodities bubble pops, there will be a flood of money looking for a new home.

The list of international negotiations that are in progress is also at an unprecedented level. Just a few days ago, when Bush came back from Saudi Arabia with his tail tucked between his legs, the media was all over the fact that the Saudis had only agreed to increase production by 300,000 barrels per day. The media did not bother to report that this was another 300,000 barrels per day undercutting the price of oil sitting in Iran. Iran normally sells about 4.5 million barrels per day but they import about 2.5 million barrels per day of petroleum products. The 300,000 barrels extra production from the Saudis represents 3/20 or 15% of Iran's export volume. OUCH!

What else did the media fail to report? That Bush walked away from Saudi Arabia with yet another civil nuclear trade agreement. It is now true that most of the Middle Eastern nations have signed off on civil nuclear power development treaties.

Why did Bush not hold the treaty high and brag on the extra 300,000 barrel hit to Iran? Bush needs the American people to cooperate in putting maximum pressure on Iran. The way to do that is to create the impression that the price of oil is going to go up to $150 or even $200 per barrel this year. Many an American must be shocked before taking action. Who can guess how many bicycles, scooters and small cars will be bought because there seems to be no end in sight.

Iran is the odd man out in more ways than one and yet all kinds of concessions are being made to "bring them to the table". The Sunnis of Lebanon have been "thrown under the bus" in order to give a bone to Iran. The Gaza strip has been given over to Hamas. The US is well served by a legitimate government in Lebanon of any stripe, as long as it agrees to not support terrorist. Iran is holding tightly to its "right to the peaceful use of nuclear power" while progress is being made. Iran has submitted a package of proposals to the 5+1 nations and the 5+1 nations will be sitting down to discuss a resolution soon.

With Spain and Italy teetering on the edge of recession and central bankers from all over standing on the brakes, the demand for oil is going to subside. Even so, the US is enjoying a boom in trade. A boom in trade means that international air traffic will hold up well. While international traffic is off 1% from its record pace, this is in the face of price increases of 40% or more. International demand is very inelastic. Prices could double from here and most of the business travel would continue.

When Yogi Bear sat down on the freshly painted white park bench, he tried to fix his painted rear by sitting down on a freshly painted brown park bench. The point is that two wrongs do not make a right. I should have told you to wait until now to invest in airlines. The profits from here will be enormous. My recommendations have been wrong but even a stopped clock eventually gets the time right.

The peak in oil prices is likely to be over by memorial day. We are almost there. I mentioned a day or two ago that short term indicators are over bought. Without seeing the numbers, I can assure you significant repairs to these indicator were made by the action today.

Let me give you another time frame. A long remembered major historical event of 2008 will be the civil nuclear power treaty between Russia and the USA. This treaty is already in the hands of congress. The congress has 90 days to vote no or the treaty becomes law. There are something like 83 days left. Russia very much wants this treaty to go through. Russia is the second largest producer of oil on the planet. After dragging their feet for years, Russia signed off on the economic sanctions against Iran a couple of days after the treaty was negotiated. The Russians may have quietly increased production more than the Saudis in order to insure that there will be no market for thick Iranian goo!

When I was 15, a friend and I attended a high school football game. As we walked over to the opponents side of the field, we were met by a motorcycle gang. The two biggest guys were suddenly in our face. They each whipped out switch blade knives and asked us if we were the ones who had thrown tomatoes at them. I can honestly say that I did not wet my pants, but I would have eaten dirt if these guys had only asked. I can still remember the feeling of pending death. Iran has the USA and Russia in their face. The rest of the gang is ready to bankrupt the country if an agreement cannot be reached. Iran has actually moved to the negotiating table. The US will not be an attendee but the parties will finally be talking head to head.

Bush has about 90 days to help his party hold the presidency. The Bush loss to Clinton has not been redeemed. Bush has given Russia 90 days to get a deal done. Russia stands ready to sell trillions of dollars worth of uranium. Even Egypt and Turkey have no less than 7 nuclear reactors on the drawing boards. This is not your neighborhood poker game. The stakes are extremely high. The map was laid out years ago.

A few days ago, Osama bin Laden delivered an audio address. He rebuked the Arabian states for agreeing to allow the existence of the Zionist State. In other words, Osama bin Laden is familiar with the fact that the Syrians and the Israelis have negotiated a treaty. The addition of Lebanon and Syria secures most of Israels border as Egypt and Jordan are already on board. Iraqi government troops just strolled into Sadr City. The Iranian supported militias are standing down. There will still be sporadic suicide bombing for years to come but the war on terror has been "won". Crime will always be with us but those who kill innocents do not deserve to be called warriors.


Why is Iran spending substantial sums to hold 30 million barrels of oil in ships? The good folk at Right Side Advisors offered a few speculations yesterday. Perhaps, the heavy crude refineries are down for maintenance. Perhaps, Iran is waiting for a higher price. Perhaps, the sanctions are working.

The 300,000 barrel per day production increase from Saudi Arabia has received scant praise. The addition of 125,000 barrels per day from Iraq is another small drop in a big bucket. The cessation of additions to the SPR, in effect adds only another 75,000 barrels per day to the available supply. The above 500,000 barrel additions may not be all, the monthly liquids report will give more details. Another thing we already know is that the LNG docking station is now operating near Boston. The first delivery, 1 billion cubic feet of gas, has been off loaded.

An article at the Oil Drum site reports that new technology has started cracking the ample supplies of "tight gas" in the USA. The American Gas Association says the USA has 1,000 to 2,500 years worth of natural gas supplies. The Oil Drum article includes a table showing world wide gas supplies of 32,560 trillion cubic feet. The massive ship that just delivered 1 billion cubic feet would require 32,560,000 trips to haul that much gas, one trip each day for 89,205 years. Since the Oil Drum site is all about the belief that hydrocarbons are quickly being used up, the site notes that the great majority of this "gas in place" is not recoverable at today's price and with today's technology.

By the way, it is not difficult to find this gas. Drill anywhere in the state of Nevada or Michigan to strike gas, not to mention about a third of Texas and the majority of Ohio, West Virginia and Pennsylvania. The problem is finding the "sweet spots" or creating them. The gas flows easily from sweet spots and from other locations after the surrounding rocks are hydraulically cracked.


Most people, including myself, assume interest rates are going to go up over the next several years. The next 6 months or so could be a very different story.

The perspective of the 1950's and 60's has been lost. In those days it was not unusual for the Fed Funds Rate to trade for less than 1%. With the gathering momentum for an economic slowdown in Europe, it is likely that oil prices will fall, that inflation rates will fall and that long term bond prices will rise. The potential rewards are greater than the common perception. At today's rates, a 1% decline in long rates might push the value of a bond up 12%, with no leverage involved.

I prefer to patiently hold stocks. If the economic slowdown in Europe gathers steam quickly, the rest of the world could follow, however, the rest of the world is showing remarkable resilience. The stock market in Russia just hit another new high! About the time it seems that China is due for a slowdown, the numbers show huge strength. Brazil just keeps on keeping on. Stocks declined shapely in China but recently have gathered new strength.


The pace of congress is like that of a sloth, it seems to take forever for major legislation to pass. This is a good but frustrating thing. In October of 2001, only a month after the September 11 attack, Bush signed The Patriot Act into law. The goals of the Bush Presidency had changed. In his speech, on the day of the signing, he said that those who support terrorist and those who harbor terrorist are against us. The invasion of Afghanistan was Osama bin Laden's desired outcome from the 911 attack. Osama was present in Afghanistan when Russia was defeated there. Osama expected the USA to ultimately lose the battle to take over Afghanistan. He was wrong.

Bush surprised Osama with the power of the US military but also by his decision to leave the most difficult of the mountain regions to another fight on another day, those hills are a great hideout but of little strategic importance. The key point of Afghanistan was that the jihad training camps were quickly destroyed. By the next year, Bush was ready to take on the next challenge. After the UN issued 15 or so sanctions against Iraq, Bush won approval to invade Iraq. Some in congress like to suggest that they really did not authorize the invasion but they did. When US forces quickly took over Iraq, changes took place in many other countries. The best example is that Iran immediately stopped its program to enrich bomb grade nuclear fuel. The open support of terrorist in other countries began to wain.

Diplomatic relations with Iran were purposefully suspended 27 years ago. For more than 6 years, it has been Bush who has attempted to bring Iran into the fold of nations that do not support terror. Will Bush accomplish his goal? Time is short, but the pressure is on.

It is hard to find much information about Iran's 30 million barrels of oil parked in ships. We know that another tanker was leased last week for a price of $52,000 plus. (I believe that is a monthly rate!) If this oil is parked because Bush has talked China, Japan and other buyers into avoiding purchases from Iran, then there is serious pressure on Amadenijhad. Just last week, a cleric in Iran openly criticized the failure of Amadenijhad to keep his economic promises to his people. If Iran is not able to export oil, matters will worsen quickly. Times are going to be very tough. The country already is suffering from an economic slow down and from inflation rates in excess of 20% (some say 40%).

In the mean time, the US congress is discussing the civilian nuclear power treaty the Bush Administration has negotiated with Russia. If the congress does not vote against this treaty within 90 days, it will become law. One liberal democrat has said he will vote against the treaty because Russia has been cooperating with Iran against the USA. This is a misreading of the situation. Russia and the USA have played the game of "good cop, bad cop" with Iran. Russia has built a nuclear power plant for Iran but, the latest information is that the plant is still not ready to start. Russia has joined the USA and others in enforcing the sanctions on Iran.

A while ago, North Korea was headed toward becoming a nuclear power. Last week, the USA gave 500,000 metric tons of grain to the starving people of North Korea. While the final deal has not been made in regard to nuclear power in Korea, the development work on the bomb, to the best of our knowledge has been suspended. The government of Venezuela is the last remaining vocal supporter of Iran but pending law suits against Venezuela has its financial affairs in knots. Venezuela needs to sell oil in US markets, even worse than we need Venezuelan oil.

Yesterday, I wrote about how peace is promoted through trade. As we can see in the current situation, the world has leverage with Iran because of the trade in oil. Neither country wins by going to war with the other. Both countries will win if a deal is made.

The stockpile of 30 million barrels of oil is growing daily. The pressure is on Bush to achieve his goal quickly. The pressure is on Iran to accept both the benefits and the costs of making a deal. Iran will be permitted to build nuclear power plants. The statements of the government officials and the practices of the government of making war for the purpose of eliminating Israel, means that Iran will not be permitted to build a nuclear bomb. If this matter is unsettled at the end of the Bush term, it will be a political football in the upcoming elections. Since McCain's perceived strength is in matters like these, a delay in the resolution of these matters may result in his election!

Monday, May 19, 2008


I love the Internet. After reading the Cafe Hayek blog, it only took a minute to find another great quote in regard to trade and peace.

Here is a clip from the Cato Blog,

The fourth-century writer Libanius declared in his Orations (III), "God did not bestow all products upon all parts of the earth, but distributed His gifts over different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so, He called commerce into being, that all men might be able to have common enjoyment of the fruits of the earth, no matter where produced."

One of the many stories about the collapse of the World Trade Towers is of the Muslim who was running from the building when he tripped. It was an Orthodox Jew, dressed in dreadlocks and yarmulke, who helped him up and said, "lets go brother". They ran out of danger, were separated in the crowd and never saw each other again.

The Saudis are in the process of increasing their recoverable reserves from 750 billion barrels of oil to 900 billion barrels. They will accomplish this for a tiny fraction of what it would cost for the same amount of reserves to be proved in the USA. Until production increases force the price back to the level of margin cost, both countries should develop their least expensive alternatives. In the USA, the least expensive alternatives are not wind mills, corn oil or solar panels. It makes all the sense in the world to continue to do research on these more expensive alternatives. In the mean time, the US Government should lease the most promising locations to those who are willing to spend the millions required.

Should the new Brazilian discoveries be offered at a good price, we should buy oil from Brazil. Given that oil has a strategic value, we should continue to build our strategic reserves. It makes no sense for us to develop energy independence at all costs. We promote peace and prosperity for all when we buy energy from the low cost producer.


The following was clipped from an article posted by Professor Boudreaux at his Cafe Hayek blog.

the more vital course is for Uncle Sam to immediately eliminate all trade and investment restrictions with China, and for politicians to stop threatening further restrictions. Such moves would speed the integration of China's economy with our own. Being economically integrated means being economically reliant on each other - a happy recipe for prosperity and peace.Want evidence? See the important work of economists Solomon Polachek and Carlos Seiglie.

Humans have the tendency to try to make our neighbors into enemies, instead of into friends. The neighbors who find ways to help one another find ways to help themselves!


If the stories of a tightening race in Oregon come true and if Hillary wins by another land slide in Kentucky, Obama is going to limp across the finish line. This is good news for those who have hope that the congress will be forced to avoid raising capital gains taxes in exchange for compromise on the AMT tax. The public will not understand if the congress sits on its hands after all three branches of government are controlled by democrats. Several democrats who won house seats in the past two years are fiscally conservative. A democratic sweep of three houses does not necessarily mean the US economy will be hammered by massive new, unfunded, government programs. Perhaps, if the democrats win a 60 plus majority in the Senate, all bets are off.


Back at the market ranch, the bears are stretching their arguments pretty thin. A common reprieve is that truckers are passing along higher fuel cost into everything we buy, thus inflation is about to soar. I cannot recall the exact numbers but the cost of the average product is primarily the cost of labor. The cost of transporting an individual item is a very minor portion of the total cost of that item, besides, the costs of shipping has already climbed along with the price of fuel. Future inflation implies higher costs in the future. It could happen but prices are high enough to cause people to stay home. More important than fuel, unit labor cost are going down! The cost of labor is going down because businesses continue to become more efficient. Part of this is automation and part of it is the science of management. American business managers are among the best in the world.

In a related phenomenon, the transportation index is on its all time high. The main reason is that big cap railroads such as CSX are on all time highs. Since the index is a cap weighted index, the decline in AMR shares is a non event relative to the climb in CSX shares. Mark Haynes, on CNBC has expressed confusion about why the index is hitting new highs. There are two reasons. The first, is the short term reason that railroads are about 10 times more fuel efficient than are truckers. The higher the price of fuel goes, the higher the price the big cap rails will trade. The second reason is the longer term rebound in the US economy. With the US dollar sitting near record low levels, US exports are soaring. These exports include bulk commodities such as coal and grain which are hauled by railroads. It is "normal" for transports to lead the market after a slow down or recession.


A big article in the Winston-Salem Journal this morning was about setting up huge, expensive CO2 filtering farms. The most respected of scientist keep proposing this sort of lame brain "solution" to our problems. Of course, these guys typically want to spend the governments money, not their own. These guys would be happy to serve as the paid consultants on these massive boondoggles.

In 1939, the US Department of the Interior said that the US oil supply would be exhausted within 13 years. This foolishness was prevalent before 1939 and it has continued to prevail in recent times. In 1885, 6 years after the Pico Canyon, CA oil strike, the US Geological Survey reported that there was "little or no chance" of oil being discovered in California. A few years later, the same agency said that the prospects for discovering oil were not good in Kansas or Texas!

In 1974, the USGS said that the US supply of natural gas had been reduced to 10 years. Last month, this same agency estimated that the amount oil and gas equivalents in the US portion of the Bakken formation (basically in North Dakota and Montana), is in excess of 300 billion barrels and that at current prices and with current technology 1% or about 3 billion barrels is recoverable. The American Gas Association offers their, perhaps biased, assessment that there is a 1,000 to 2,500 year supply in the USA. So far, it has been the doomsters not the boomsters who have made the most exaggerated estimates.

Walt Williams, an economics professor at GMU, reported interesting numbers in an article last week. He notes that 95% of the green house effect is from water vapor, that the earths temperature without the greenhouse effect would be very cold and that most of the variation in the earths temperature is the result of small variations in the sun's output. He goes on to note that natural wetlands produce more greenhouse gases than all human activity.

The opening of the Jamnagar, India refinery in July could be the mind changer. Suddenly, a lot of folks who have swallowed the peak oil gloom and doom scare, hook line and sinker, will begin to see that supplies are not running out. The Jamnagar refinery was built with profits in mind. India plans to export 100% of the petroleum products production. When a new refinery spits out 580,000 barrels of good stuff each day, the world may take notice.


I hope you are prepared to take advantage of the coming shift in sentiment. The stock market is gradually rising now in anticipation of the coming boom.

Recently, while facing the massive global warming consensus, I came close to believing that old men always lie. The problem is that I am a 58 year old man. I certainly do not want to call myself a liar, after all, the first law of scouts is, "A scout is trustworthy". I hope you believe in the boy scout law and in the scout motto, which is "Be Prepared". Those who take full advantage of the coming shift will make more money than they might have dreamed.


What if the oil that is backing up in Iran the result of the sanctions on Iran, perhaps in combination with sharply lower demand in the USA? Then did Bush go to Saudi Arabia to coax them into producing even more oil to push Iran all the more? In recent days, the Saudis accused Iran of stirring the pot in Lebanon. There is no love lost between the Sunni's of Saudi Arabia and the Shiites of Iran. The people of Iran are suffering very high inflation rates just so Amadenijhad can make his nuclear bomb. The deal offered by the 5+1 includes access to low cost power grade nuclear fuel.

Last week, it was reported that Japan has become a petroleum product exporter! Japan has to import oil but its refineries now produce more products than the country needs. The flip flop that occurs at the mid cycle between Asia ex Japan and Japan is in the works. Stocks in developing nations are struggling just as Japan's economy is growing at the fastest pace in many years.

Japanese stocks should do well over the next couple of years.


In late 1800's, naive immigrants flooded into New York City from around the world. America was settling "new lands" rapidly and it was known as the land of opportunity. While no one can produce an accurate count, it is known that quite a large number of immigrants paid good money to purchased some or all of the Brooklyn Bridge. Several individuals paid $1,000 or more, a tidy sum in those days. In at least an instance or two, when the mark was not able to pay the full $1,000, an inbound or outbound lane was sold for $500. Others merely bought shares. Every now and then, New York Police were forced to take action against "owners" who were trying to set up toll booths. George Parker, who sold the bridge any number of times, provided a new owner with a well forged deed, bill of sale and other documents. George spent the last 8 years of his life in prison where the other inmates enjoyed laughing at what seemed like tall tales while they learned as much as they could about his trade.

Several notches down the totem pole from the likes of George Parker, were the pig-in-a-poke sellers. Many an immigrant bought a pig-in-a-poke sack in anticipation of starting a profitable American business. Too often they learned too late that the pig was a worthless raccoon, possum or alley cat. Even "sleeping" clumps of dirt were sold. Pastors, politicians and authors, who earn their living telling good stories, have tended to "clean-up" the worst of the abuses. In the revised versions, the pompous, arrogant, rich, city slicker has often been bested time and again by an "ordinary Joe". In "Adventures of Huckleberry Finn", Samuel Clemens ruffled quite a few feathers when it was the old, ignorant, black slave, Jim, who turned out to be the one honorable man among the many characters.


Is George Bush the country bumpkin that he sometimes seems to be? To hear him speak, you would never guess that he has an Ivy league education. Would you like to play a game of high stakes poker against him?

In poker, the really big pots are often the ones where the winner's hand is just slightly better than the loser's. Bush has won many a close hand, including his 2004 election. The loser in poker is willing to bet big because he knows his hand is very good. The common misconception about poker is that the winner is the one who bluffs the best or most. Bluffing is an important part of the game but, the better players don't bluff often; just when you think they are bluffing, they have a great hand. Indeed, the successful bluff is often for a small pot and even then it is often only a semi-bluff. When a great player is successful bluffing for a small pot, he picks up a few chips for free and when he gets caught, he has successfully "advertised". The player who holds the top card set (three of a kind) is not going to go fold meekly, even when there is the possibility of a straight or a flush, provided he has seen his opponent bluff before. Did Bush fall on his face in Saudi Arabia just to advertise?

What kind of game is Bush playing?

Last week, Bush made a big deal about going begging for Saudi Arabian oil. Many an American felt embarrassment by this action. It became easy to empathize with Marcellus who in Act 1 of Hamlet said, "there is something rotten in the state of Denmark". A fish rots from the head down so Shakespeare's reference was to the head of state. Bush seemed impotent. To make matters worse, John McCain jumped-in with his promise to end the war in Iraq by 2013. 2013 seems like a very long time for all who hope for a quick end to the war, which is the hope of the great majority of voters. Recent polls show 69% of Americans disapprove of Bush's job performance. After his graveling, I will not be surprised if his disapproval rating reaches a new all time record. Are Bush and McCain members of the Keystone Cops? Or, are they managing expectations?

I happen to be among the 28% who believe Bush has done a good job. I believe Bush has turned the tide against terrorism. According to National Geographic, when Bush came into office, al-Qaeda had bases in 35 countries; al-Qaeda had thousands of "jihadist" in training. In the years prior to the Bush terms, America had been hit again and again by terrorist. A truck bomb had blown a hole in 7 stories of one of the World Trade Towers, several aircraft had been hijacked or blown-up, massive bombs had exploded at three American embassies and the USS Cole, an American Battleship, had been bombed. Hundreds of Americans, military and civilian, had died with virtually no response from the US Government. Within about 60 days of the September 11, 2001 attack, the biggest of the training camps were destroyed and the al-Qaeda leadership was in hiding. Quite a few terrorist bombs have exploded since 9/11, some in Europe, but none in the USA.

Another attack is possible any hour of any day, but the most recent attacks have been concentrated in places like Afghanistan, Pakistan, Iraq, Lebanon, and India. The USA continues to be the leader in demanding an end to terror.


Why did Bush make such a big splash, only to fall on his face, in Saudi Arabia? Why did the Saudis insist that they could do no more and then mention later that they increased production a week ago by 300,000 barrels? Why did the news media treat this 300,000 per day addition as so inconsequential to be a joke?

Some interesting facts are that Saudi Arabia spent about 9 billion dollars over the last several years to develop a "new" field. This field just started at the 300,000 barrels per month level, it will gradually increase to the 500,000 level later this year and it should reach 1.2 million barrels per day sometime next year. The timing has been coordinated with the timing of a new refinery in India. This refinery is a state of the art facility. Much Saudi Arabian oil is a thick goo that contains sulphur, metals and other impurities that must be removed. The new Indian plant, which was built expressly for export, is designed to take the worst goo and convert it to the best petroleum products. Chevron owns 5% and has dibs on the first 100,000 barrels of gasoline per day.

Perhaps a part of the answer is that 300,000 barrels per day is only about 3 and one half tenths of one percent of world wide daily consumption. The addition was a joke but it was a joke that bush knew the punchline to before he went to ask!


The good folk at offer other interesting facts. Iran just leased an ocean tanker to store another 270,000 barrels of oil. This increases the Iranian off shore storage capacity to about 30 million barrels. Why do you suppose this oil is being held off the market? Is it due to sanctions by the 5+1? Is it due to a game of hard ball by Iran?

Last week, Chavez was rattling his sword and his mouth again. He talked about cutting off oil to the USA while he talked about supporting rebels in Columbia. It is possible that the problems with Nigerian production are related to sympathy for Iran. In other words, the heat is on. At a time when Obama complains about the lack of negotiations with Iran, the negotiations are hot and heavy. When Crocodile Dundee pulled out his long knife, he negotiated with a common criminal without saying a word. Yesterday afternoon, Bush called on Iran's Arabian neighbors to support his request for Iran to stop enriching uranium. Bush continues to draw the noose around Iran tight.

Iraqi government troops continue to take on militias that were supported by Iran in the past. Iraq has been having quick success against these foes. Does this imply that Iran is in the process of proving it is willing to go along to get along? In addition to progress in Sadr City and Mosul, the Iraqi government is reportedly in control of Basra, which is Iraq's southern oil portal. Iraq has kept its oil exports up to a high level for several months in a row, the control of Basra suggest the pipes are available should other wells be developed. International companies have lined up in preparation to develop other Iraqi fields. Within 5 years or so, Iraq could be the second largest oil exporter.


Brazil is aggressively developing its monster Tupi field. Brazil is paying as much as $600,000 per day per deep water rig. Exxon and others are paying $400,000 to $550,000 per day for deep water rigs. Brazil has moved up its projected start date to 2009. In the mean time, Thunder Horse, in the Gulf of Mexico, is supposed to start in 2008. It is not clear if this oil will flow prior to the election.

Let me know what you think. Is Bush selling a pig-in-a-poke? Is he more ambitious than that? Is he selling the Brooklyn Bridge? Or, is he just a dumb old country boy from Texas trying to fit in a 10 gallon hat?

Please note: if a deal is made with Iran, those 30 million barrels plus more in storage on land will hit the market fast. Venezuela has let it be known that it wants to continue to export oil to the USA. James Williams, The Energy Economist, says that Venezuela needs the USA more than the USA needs Venezuela. The problems with 800,000 barrels per day from Nigeria could be over quickly. It is possible that we are about to hit a very big gusher! The EIA monthly report is due. It could show a decline of as much as 6% in US consumption!

How high would the stock market climb if a big Middle East settlement is made?