Wednesday, July 02, 2008

Almost There: Dominoes to Fall

Russia has been on the edge of most favored trade status since 1995. Russia very much wants to be a member of the WTO. Europe will support its inclusion later this month. The US Congress has to get over the hump of a 1974 amendment that prohibited Russian inclusion until after it allowed the emmigration of Jews. Russia has allowed immigration since 1995 but, of course, some in congress want to change to new rules.

Russia also wants to go forward with a new nuclear power framework, as agreed by Putin and Bush, which would result in the mass production of low cost nuclear power plants. These plants use a form of nuclear fuel that is not easily converted into nuclear bombs and the plan calls for low cost fuel to be available from UN supervised facilities. China currently has a plant design that it believes is can build in 2 years. It is naive to think that no one will ever make a nuclear bomb again but why not give countries access to very low cost nuclear power without forcing them to learn how to refine nuclear fuel? Why not set up a system that will result in the conversion of 58,000 tons of nuclear waste into fuel and why not convert some of the 19,000 nuclear war heads, owned by the US and Russia, into electricity?

The economics of nuclear are compelling and the use of nuclear power dramatically reduces the geo-political risks!

Yesterday, I wrote that the world map has been relatively stable in recent years. Russians would strongly disagree. The Berlin Wall fell in 1989. The old Soviet Union collapsed. Dozens of states became independent countries. In recent times, several of these states have become more aligned with the "West" and a number of them have joined NATO. The most important fact about the map changes after the fall of the Soviet Union is that they generally occured without any military conflict.

During the past 20 and 30 years, Russia and China have each evolved into "western style economies" even while remaining under command and control political structures. Trade and international investing is flourishing. The large Russian oil company is now operating in dozens of countries and is even considering drilling in the Gulf of Mexico.

In a world economy where Russia does not need to own the Gulf of Mexico but can instead enter into lease agreements there, the risks of war are reduced. As always, opening up markets helps both the buyers and the sellers. In this case, the US taxpayer will benefited from higher lease rates produced by the competition between Russian, Brazilian, Spanish and American drilling companies. American consumers will benefit from the lower oil prices produced as a result of this competition. China is one of at least a dozen nations which are bidding on Cuban leases. The Cuban leases will also result in more oil production in the Gulf. It is important for the US to allow offshore drilling because Cuba is ready to play "the long straw drinks the milk shake game".

Iraqi officials are about to open bidding to develop 6 major oil fields. No less than 35 oil companies have signed up to bid. Production in Iraq is expected to increase 60% within 5 years. Total, Shell and others are eager to follow through on commitments to help Iran develop its fields, as soon as sanctions are lifted.

Iranian Foreign Minister, Mottaki, says that Iran is ready to negotiate. Once again, he has failed to agree to suspend nuclear fuel production but he did not rule it out this time. The latest 5+1 offer is said to offer preliminary negotiations while enrichment is maintained at current levels. I think it was an a Marty Feldstein article that said oil future prices will fall as soon as negotiations begin. After all, futures prices are a projection of the future and once Iran makes its move a lot of other dominoes will fall.

Cisco just made a deal to sell equipment to Russia. Increasingly wealthy Russians are going on holiday to resorts on Turkey's Mediterranean Coast. Here again, the rational to fight a war to win territory is diminished once people learn they can purchase a nice resort condo and visit as often as they like. The concept of renting a fellow Russians resort condo for a week first required the right to own real estate. Real estate markets in Russia and China have boomed as these states have sold more properties into public hands.

This October, Iraqi citizens will once again exercise their right to vote. It is anticipated that hundreds of thousands of Sunnis who have abstained in the past will vote this time around. The smallest taste of freedom is addicting. Human capital constantly moves to nations where the people are free. Americans should be thankful that people from around the globe would move here in a minute if they could. One way to lower the level of illegal immigration is to help other nations become better places to live. It is inconsistent to be against NAFTA and against immigration at the same time. The correct policy for America is to support free trade, including trade with Russia, and to practice selective immigration. Citizenship in America, just like any good, should be available at the market price. A company that wants to support a PhD's immigration cost should have to out bid the man who came here without his wife.

Yesterday, the EIA gave a more pessimistic view of oil supply and demand in 5 years. Among OPEC countries, it only sees significant supplies coming from Angola. It is hard for anyone to be optimistic about production from Iran but I am. I am also very optimistic about oil from Brazil. I do not believe oil companies would be making such massive investments there if the prospects were not at the high end of estimates. I even believe the US Congress will support the will of the people and allow drilling in ANWR.

Last Wednesday, the 10:30 oil report was bearish. Even so, prices held up due to threats and counter threats in regard to Iran. Today's report should be bearish again. The world wide economic slow down is bearing down hard. Even though the USA is already bouncing back from its GDP bottom, the rest of the world is showing signs of weakness. Iran's power is all about it's strangle hold on oil, but that strangle hold has been weakened considerably. Iran is under extreme pressure to make a deal. Which domino will start the run? Falling oil prices or a deal with Iran? Hank Paulson is pressuring Russia to do more to help sway Iran. Russia wants to join the WTO and it wants the 123 Agreement to go through. It is in the best interest of Iran, Russia and the USA for these deals to go forward and the clock is ticking. The Russian 123 Agreement was presented to congress on May 13. The congress has 90 days.