Monday, June 16, 2008

The Bigger the Surprise or 'Un-Belief' the Better

Oil bulls, having made good money, have gotten bold in their predictions. Bullish predictions range from $150 to $300 per barrel. Many of those who predict extra high prices in the near future have seen pictures of Iranian fighter planes flying low, close to full oil tankers docked in the Straight of Hormuz. They join the words of Ahmadinejad with the visual image of oil tankers and fighter planes and assume the "Battle with Iran" is going to turn out badly.

Deadlines have been coming and going quickly. The deadline for Iran to move money out of US dollar bank deposits was apparently in late April or early May. Soon after the scramble out of the dollar ended, Germany froze some of Iran's Euro Dollar funds and other Euro Nations threatened, the result has been a new scramble out of Euro banks. The dollar went well below the mid 1990's lows during Iran's scramble out of dollars but it has since recovered about 4%, the "return to normal" will provide an extra bounce to US assets when it comes. Press reports say that in just a few weeks Iran has moved $75 Billion from Euro Banks to Asian Banks and to Gold; about 10 months worth of Iranian oil revenues. With inflation rates running at 50% or more, Ahmadinejhad is once again battling his cabinet about how to handle its financial holdings. EU negotiators have not publicly shared specific new deadlines but they have said they will give Iran a short time to consider the latest offer before imposing new sanctions. In this high stakes game of poker, the "5+1" have a lot of potentially powerful hands to play but non-specific threats are best used like Swords of Damocles; always present and ready to fall. Since the French have given such bold support of late, maybe the better analogy would be that the French Guillotine has been hoisted above Ahmadinejad's head.

Saudi Arabia has leaked plans to increase its production by an additional 200,000 barrels, the announcement is expected on June 22. The key point is for Iran to come to understand that the world can do without Iranian oil if it must. Newspapers around the world, many of which write with an anti Bush slant, are reporting Iran's support for terror and the probability that Iran and North Korea purchased nuclear bomb planes from a Pakistani scientist. Many pressure points are being tightened; Afghanistan and coalition forces have given Pakistan encouragement to take away the "home base" for militants. Coalition forces appear to be willing to cross Pakistani borders in the high mountains if necessary. The financing of the gas pipeline through Afghanistan and Pakistan does not mean it will be built. Pakistan must cooperate in isolating the terrorist and their sponsors.

I have not seen a complete list of which countries have yet to sign 123 Agreements with the USA but it is clear that nations do not want to risk not reaching agreements during the Bush term. Even Ahmadinejhad has stated his desire to have an agreement in place by September. While getting the deals through congress now may be close (a 50% vote to block is required to kill the agreements), getting them passed next year is highly unlikely.


The signature of a peace agreement with Iran is going to be a huge "surprise" to most people. The great majority, including numerous international affairs reporters, do not realize how much work has gone into and how much progress has been made toward an agreement. A significant minority know a small part of the story but do not believe the odds are even one chance in ten that a deal will be reached. Only a very few know 50% of the whole story and of those most would suggest the odds are less then 40-60. I do not know major details of the story but I know more than the great majority of people and I put the odds at better than 70% for an agreement. The good news is that if there is no deal, few will be disappointed and if there is a deal there should be great surprise.


Many folk believe that before this "battle" is over, a military engagement will be necessary. Who wants to start this battle? There will be no winners and the side that gets credit for starting the battle has a lot to lose. The world economy, including Iran's would be severely damaged. The damage would be temporary.

If war is started by Iran, causing gasoline to hit $5 or more, it would certainly cause the US congress to vote for drilling in ANWAR and on the OCS (outer continental shelf), most likely in a compromise bill that would include yet another boondoggle subsidy program. There would be government, tax payer support, for for everything from switch grass to liquid coal. The vote would switch from marginal support for nuclear power construction to "get it done now votes".

We can pull 4.3 million barrels per day out of our strategic reserves. Iran claims it can stop the flow of 17 million barrels per day but the trans-Saudi pipeline is currently underused because it cost a little more to use that shipping route. As we saw during the days of "Shock and Awe" in Iraq, the battle itself would be short. Some may say a battle would play right into George Bush's plans but it is wrong to assume Bush desires war. The US strategies in Afghanistan and in Iraq have been designed to minimize war not to provoke it. Compare the strategy and death toll in Vietnam or several other wars to that of Iraq and the story is clear. The offering of packages of carrots and sticks has clearly been for the purpose of reaching agreement without reaching war. The carrot and stick approach was tried for 10 or 12 years on Iraq before the attack was made on 9/11. Can you imagine the difference in World History if one side in each conflict had always offered hundreds of major commercial deals with multiple neighbors as the incentive to avoid war?


When a country like Italy does a 180 in regard to nuclear power plants, it is clear that attitudes are changing. When a senator such as Bryan Dorgan talks in favor of more drilling in the USA, we know the light is beginning to shine (it helps that the Bakken reserves in his home state of North Dakota are at least 4.3 billion barrels). Even so, Dorgan is like the others who suggest that we replace hydrocarbons with windmills and ethanol. He and millions of others don't do math! The largest windmill farm consumes thousands of acres of land, thousands of tons of concrete, thousands of tons of steel, kills millions of birds annually and produces less than 4% of the electricity produced by a conventional power plant. Windmills are not environmentally friendly.

By failing to "do the math", the environmental crowd has worked themselves into a corner. They have failed to understand that the lowest cost methods are also the most environmental methods. Conservationist, such as me, support actions to include the full costs into the energy equation. For example, coal should not be burned without removing pollutants, but clean coal is still cheaper and better than destroying our natural resources with millions of acres of expensive windmills.

Back in the 1980's, the President of Legg Mason Wood Walker was fond of saying, "I do not like to make predictions but in the long run economics wins." In other words, it makes economic sense for the world to pay for and use the trillions of BTUs of oil and gas from Iran and it makes economic sense for Iran to sell these trillions of BTUs for 100's of trillions of dollars. That a deal will be made to allow this should be no great surprise but, right now, the majority in the world believe something else.