Tuesday, May 20, 2008


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!