Monday, April 21, 2008


When putting together a difficult jigsaw puzzle one must persevere until "over the hump". Once the hump is reached, the finish comes at a faster and faster pace. Suddenly there is the obvious hole for the odd piece that one has tried to put in dozens of places. The Middle East Puzzle is starting to come together!

In one very interesting turn of events, the Iraqi government, the Iranian government and the Americans all find themselves on the same side trying to eliminate the threat of al-Sadr. (I never can get the guys name right but we all know of the cleric from Sadr City, if his name was John, he would be called John al-Sadr). Anyway, the fellow has threatened an all out war against the Iraqi government if the government does not stop rounding up his militiamen and taking their weapons away. The government ignores the threat, the US ignores the threat and the Iranians ignore the threat. Today, the Iraqi government got the endorsement of a regional council of Middle Eastern Governments. Condi Rice is encouraging these governments to support Iraq. They have committed to open embassies in Iraq and they may forgive debts owed by Iraq. With elections scheduled for October, Iraq is close to functioning as an independent, democratic state!

The UN nuclear negotiators are once again in Iran and the US has signed a nuclear agreement with the United Arab Emigrants. The concept of having a regional consortium to produce the nuclear materials for nuclear power plants is gaining momentum. And, believe it or not there are indications that Syria and Israel are close to terms in regard to Lebanon. Iran is threatening to cancel contracts with Shell Oil if certain projects do not get underway but what other oil company wants to take over a project in a country that is under economic sanctions? Since any bank transactions with Iran are now "risky business", Iran is under severe pressure to help find the middle ground. Yesterday, an Iranian, who has lived in America for the past 15 years, and I were able to agree that the Iranian situation is a battle between two hard headed men. I did not express my view that the Bush view point is going to win.

I just received a telephone call from Hillary. In the recorded message she said she wants to end the special tax breaks for the oil companies so that the money can be used to come up with alternative energy sources. Wow, what a concept, raise the price of gasoline so that politicians can decide who gets the extra money. What would be next, that the government mandates that strawberries be put in my gas tank? Millions of acres of oil fields off the coast from main to Cuba and we are still intent on raising taxes so that the government can allocate research dollars to "friends". Off the coast, near Santa Barbara, CA an oil seep releases about 40 tons of methane per day, about 19 tons of other gases and it creates a petroleum slick for miles. Tar balls wash up on the beaches but the environmentalist do not want to consume this oil. Instead, Al Gore and his friends make millions of dollars leading the charge in the wrong direction. The thing is that we can do both, we can build wind mills and consume the easy stuff without killing the environment.

By the way, the seep off the coast of California is just one of many that show that oil is still being "manufactured" deep below the surface. Oil wells that should have been empty, 20 years ago continue to produce. Scientist have reproduced many biological processes that produce one form of oil or another. One of the things that scientist have not been able to replicate is the production by the "bugs" that have been found at super deep volcano vents. The problem is that while these hardy bugs live in super hot water, we have not yet been able to get them to survive decompression. This bugs live under great pressure and in extremely hot water. Nature is more powerful than we seem to appreciate.

As the pieces fall into place in the Middle East, Iran is holding onto a few pieces. It will be interesting to see how much pomp and circumstance will accompany the insertion of these final pieces. I wish I could provide a time line. The good news is that every nation is ready because all of them win. The only problem is the psychological problem. How can the deal be structured so that the major players save face? It is like the problem many democrats have. As champions of fairness, they are willing to shrink the economic pie provided everyone gets a more similar sized piece. The ordinary folk would be happy getting a larger piece even if some rich dude got an extremely large piece. Which would the ordinary citizen of Iran prefer, economic prosperity for the nation as it exist today or suffering economically while winning the battle to increase the countries influence over its neighbors?


In recent weeks, the price of oil has gone up because it has been going up. The buy now before it goes higher strategy has become its own self fulfilling prophesy. No one knows how long a mania or bubble will last. The famous tulip bulb bubble about 500 years ago lasted a number of years past all reason. Today, there are powerful forces pushing the other way. Would you believe moped scooter sales from Australia to the US were up 400% last year? For the first time in many years, US car sales are higher than US light truck sales (which includes SUV's). Indeed, car sales have stalled as many people wait for the new high mileage vehicles. The success of the smartfortwo in the US is the harbinger of things to come. The Fiat 500 has been voted the car of the year in a few European countries. The Volkswagen UP is expected to achieve 94 miles to the gallon!


Toyota and several other Japanese companies are gearing up to produce city cars that get better than 60 miles per gallon. Leave it up to the Germans to spend the engineering money to take the 60 up to 94! Ford Motor is building the Fiesta in the US specifically for export to China. Ford is also building a huge plant in China. The Chinese have come up with an interesting innovation. They are building little cars at breakneck speed. They inspect the cars and ship the "seconds" to places like Brazil and offer them at deeply discounted prices. The first quality cars are kept in country so that the company can build its reputation as building fine cars. Countries like Brazil have historically imported a lot of three year old American made vehicles as they come off lease. US car sales are down so far this year, not as much as light trucks but still down. Selling big cars and trucks into a $3.60 gasoline market is going to be a difficult trick. Again, the public is ready to buy small. Each time a family in India gets its first car, even though it gets 55 miles or better to the gallon, the pressure to reduce the number of gas guzzlers on the road is increased. Modern cars last 17 years on average. However, as the mileage driven in small cars ramps up, the "duration" of cars becomes like the duration of a bond. If one buys a 30 year bond today, he gets his money back in an average of 16 years or so. The family that owns an SUV and a new 94 mile per gallon UP, will drive the UP as often as they can.

The UP will not be on the market for a couple more years. Some say that Americans will never end their love affair with the car. I say that it will become "cool" to drive an UP around town and to travel by bus to the resort destination of ones choice. City cars will ultimately be robotic taxis.

The completion of the puzzle in the Middle East is going to take the short term pressure off. Peak oil enthusiast believe the world is close to its end. The truth is that the world needs a little time to adjust to an age of prosperity in what are now the poorest corners of the globe. We can all ride in cars. We simply need to use our resources wisely.