Wednesday, April 23, 2008


The most recent signal to Iran came from Hillary Clinton. She said that a nuclear attack of Israel by Iran would result in the obliteration of Iran. In the meantime, Russia is having trouble getting parts for the Iranian nuclear electricity plant delivered (yeah right) (one of the rare combinations where two positive words work together to make a double positive or negative). At the same time, the Shia in Basra and in Sadr city who looked to Iran for support are on the run. An Iraqi commander says Iraqi forces are almost in total control of Basra.

Of course, we must verify the reports coming from either side of the battlefield before believing them but the weight of the evidence suggests that the Iraqi government is having success knocking the the militias out. Over in Kuwait, the "news" is that Condi Rice was not able to get a firm commitment of Iraqi financial support from other Arab states. Condi basically ignored the Iranian minister who was present at the meeting. At the end of the day, Kuwait said it would review the amounts owed and take the request under consideration.

The ultimate question remains, how long will Iran and the US go at it before a deal is made? No one knows.

As far as the oil market is concerned, speculators have the market cornered at about $116 per barrel and users are not willing to buy one drop more than necessary at that price (according to James Williams, "The Energy Economist"). Mr. Williams equates the situation as similar to going to the market to buy bananas and finding them at $50 per pound. The bananas are not bought but that does not mean there were no bananas at the market.

The USA is currently using only 80% or so of its refining capacity. The demand for finished product is not strong at the current price. It makes sense for the refiners to spend a little extra time doing maintenance. They can restart prior to when the summer time driving needs kick in. Of course, the refiners and the consumers can only hope that they will save a few bucks by waiting to buy. It is clear that demand is being destructed at the current price.

A series of polls, done by, show that a threshold has been crossed. A majority of people plan to buy a smaller more fuel efficient car if the price of gasoline stays above $3.50. Indeed, the Bush administration was just able to raise the fuel efficiency requirements demanded of the auto industry. Is this not the biggest joke? The law currently requires the average auto sold to get 27.5 miles to the gallon and the average truck to get 22 miles to the gallon. Based on the current mix of cars being sold, the average car gets 31.3 mpg and the average truck gets 23.1 mpg. The government is raising it mandates because the consumer is willing to exceed the current mandate. By the way, the average truck and the large SUV's based on the truck frames are sitting on the car lots. For the first time in many years, small car sales are the only area of growth in the car business. Indeed, for the first time in years, more cars are being sold than are trucks (includes SUV's). Hybrid sales are very strong on the mistaken belief that they save. In the early days, hybrids were purchased by the few willing to pay a few thousand extra to help reduce global warming. Today the average buyer does so because he thinks the fuel savings will make up the extra few thousand in costs. Unfortunately for these buyers, they are not likely to ever recover their investment. One can buy a Chevy Malibu that gets 32 miles to the gallon. The price is about $6,000 less than the similar hybrid model and the difference in fuel savings is small. The comparison between a hybrid Honda and a non hybrid Honda yields a similar truth.

Will Iran make a deal with Bush or with his successor? I believe the Bush deal will be the preferred deal over the McCain deal and I believe the odds have increased that McCain will be the next president. Bill Clinton was a member of the Southern Democratic Council of Governors (name may not be exactly right) before he ran for office. Jimmy Carter was governor of Georgia. These two are the only democrat presidential contenders to win in a very long time. In all the other years, the democratic candidate ran to the far left of center. Al Gore came the closest to a win. He is from the southern state of Tennessee but his platform was the typical democratic platform. Obama has run almost to the left of McGovern.

Hillary is suddenly running to the right of Obama. Recently, when asked about increasing capital gains taxes, in the face of a recession, she said she would raise the taxes from 15% to 20% if at all. Obama ignored the point about the recession and pledged to raise taxes no matter what. He said he would raise the capital gains tax from 15% to 28%. In the same session, he said he would raise the payroll tax and that he would not raise taxes on the middle class. This is all similar to the pandering statements about free trade. Democrats want capital account surpluses and trade account surpluses at the same time because they believe the "low class democratic voters are too dumb to know we can't have both". The win in PA by Hillary was from the vote of the more conservative democrats. It is common knowledge, even among the common folk that raising taxes during an economic slow down or recession is the exactly wrong economic strategy. Hillary left herself wiggle room by saying she would raise to 20% if at all. Obama, once again, went for the far left vote. Raise taxes to be fair, even if we are all fairly poor!

My thanks to Hillary for the signal to Iran. Of the two democrats, it is clear that Hillary has the better understanding of economic and foreign relation matters. Of the democrats, she would be the better president. Her solid win in PA, gives her a ray of hope but it is still unlikely that she can over take Obama in the popular vote or in the delegate count. On the other hand, a win in Indiana and a close vote in NC could be momentum builders. She has an excellent chance of winning in places like Kentucky and West Virgina.

With the pressure mounting, Iran continues to make tiny baby steps toward a solution while maintaining a straight face. The Iranians will met with the IAEA to explain the evidence that the country has had a program to make nuclear bombs. The USA has asked India to ask Iran to explain a few things before going forward with energy deals. India says that Iran should work through the IAEA. In other words, countries that want to buy energy from Iran must walk a tight rope. India does not want to wake-up on the wrong side of the USA but it does not want to miss out on energy deals.

Iraq is likely to increase oil production in the months ahead, to hold successful elections in October and to see a decrease in the number of terrorist bombings. The increase in oil revenues should give the economy a boost. It is certainly too early for Bush to crow loudly but there is an excellent chance that the Bush term will turn out to be like the Truman term. Truman was not popular while in office (though more popular than Bush) but after his term he has been lauded for being one of the "great" presidents.

Since our current economic problems are tangled up in the price of oil, it is still possible that a deal will be made with Iran before the election, that the price of oil will fall and that the economy will be recognized for its current hidden strength. An improvement in the international situation could boost the US dollar substantially and further depress the price of oil.

Again, a key to a strong economy is the average weekly wage and the USA is enjoying more than a 3% over the past year. By the next quarter, it is possible that the news media will tell us that a recession never happened. I must admit that a down turn in the auto market on top of a down turn in the housing market would have been a sure guarantee of a deep recession "in the old days". Again, the average person simply does not realize how rich we are all becoming. The billions of people who have come out of severe poverty in the past 30 years understand. Those of us who have seen only a steady drip of prosperity do not always recognize just how nice it is to be able to afford things like the cell telephone. In our busy lives (made busy by our own desire to take kids to dance or music lessons that perhaps we would have like to have had as children), we forget how much time we save by making and receiving calls. Our ability to communicate by email in an instant allows us to stay in touch with "too many family and friends". Staying in touch with family and fiends, to the current level, is a luxury that we could not afford in the past.

The people of Iran are currently suffering through inflation rates reported to be 40% or more. How important is it to the Iranians to have control of nuclear fuel production? The rest of the world says the risk exceeds the benefits. The rest of the world is willing for Iran to have nuclear power plants, provided the fuel is made by a consortium of nations that will guarantee that only energy fuel will be made. Iran is receiving lots of signals and given back a few of its own. Let us all hope and pray that a deal can be reached. It is probable that other problems in the area will be solved once the nuclear question is out of the way.