Friday, May 23, 2008


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!