Monday, July 21, 2008

Rice and Bush, Serious as a Heart Attack, Operation Brimstone to Rattle Some Bones

After Iran avoided a direct answer to UN nuclear proposals Saturday, Rice responded that it is time to get serious. It just so happens that Operation Brimstone will take place over the next 10 days. Operation Brimstone is a joint naval exercise that involves 15,000 ships from the USA, France, the UK and Brazil. Many of the "ships" are small craft with crews trained to operate in shallow waters like those of the Persian Gulf. This operation has been planned for many months. It is not clear the extent to which the operation is an exercise (a practice run) or the actual enforcement of UN sanctions. Rice stated that Iran has two weeks to give a serious response or to face a fourth round of sanctions.

A month ago, an action such as Operation Brimstone would have caused the price of oil to jump at least $4 or $5 per barrel. Today, the price went up $2; this in the face of last weeks report showing a decline in demand in the US of 3.5 to 4.5%. The refinery utilization rate is down from 91% last year to 89.5% this year but actual consumption has fallen from 21.5 million barrels per day to 19.8% million barrels per day. The API (American Petroleum Institute) reports that oil demand is the lowest in 5 years and the recent drop in gasoline demand is the most significant decline in 17 years. Those who recall the recession of 1991 might remember that the price of oil dropped by half during this recession. It is true that 99.999% of Americans have never heard of Operation Brimstone but more than a few oil futures traders know about it. I will be surprised if oil goes up much more as the news dribbles out because of the plentiful and growing supply.

Iran is in a box that has been built by the UN/US. The world can get by without Iranian oil much better than Iran can get by without refined oil. The 15,000 ships could prevent refined products from reaching Iran. Some business men in Iran have described UN sanctions as a hardship but not a noose. They say their cost of goods has increased 30% but goods are still available. Will Operation Brimstone result in a serious shortage of oil in Iran? Did the French really send a submarine to participate in a naval exercise with the UK, the USA and Brazil? I will write more about Operation Brimstone over the next 10 days.


Over at the Long War Journal, Bill Roggio reports that the Mahdi Army is still under attack in Iraq. The Mahdi Army was trained in Iran and, in the past, was supported by Iran. Today, Iraqi forces with US air support are putting intelligence to good use. Day after day, arms caches are being discovered and combatants are being captured or killed. It is quite possible that Iran is providing some of the information that is making the Iraqi operations so successful. In any event, almost every day a small victory is scored against these insurgents. Obama's plan to begin the withdrawal of US troops only makes sense because of the great success achieved after Obama voted against the surge.


Countries all around the world are battling very high rates of inflation. The main tool being used to fight the inflation is tighter money (higher short interest rates). Most of this inflation is of a very temporary nature. One way to think of it is "small car inflation".

Car dealers in America are calling up people who purchased fuel efficient cars at any time in the past several years. The owners are being offered premium prices for their fuel efficient cars, because the dealers can resell them at a profit. On Ebay, 5 year old Metros are selling for more than their original retail price. Car dealers have big time pricing power! for fuel efficient cars. Car dealers are selling small cars at premium prices while big trucks sit. Inflation is reported because the price of the sold vehicles is high compared to the previous price of the same models. The price of SUV's is almost irrelevant because few are being sold. When one thinks about inflation, one should think in terms of a weighted average. Of the cars being sold, most are being sold at very high mark ups. In the past, I have talked about this in terms of airline tickets. Low fare flights have been eliminated but the price of continuing flights has soared. The recorded inflation is extreme. The inflation rate will fall significantly when canceled flights are resumed. GNP= PxQ and in an economic slowdown, businesses cut back on the production of what was originally marginally profitable. They continue to produce the goods and serviceds that are profitable, with less competition, they can frequently raise the price right in the middle of the down turn.

The fact that inflation is a lagging indicator is a great thing to know during times like these. The high inflation rates say that the cycle is ready to turn. High inflation is most devastating to non resource rich emerging growth economies at first and then to resource rich economies next. In other words, a country as large as Russia has been making out like bandits as a result of high resource prices. As the world adjusts and the profits from oil begins to fall, the emerging growth countries will be left with slower growth and lower margins.


One of the facts often ignored by liberal media is that the US exports more goods than any other country with the sometimes exception of Germany. Today, the low US dollar is pushing US exports out the door while Germany is hitting a strong Euro wall. Germany just announced that it will bring another car manufacturing line to America.

The US GDP is likely to have approached 3% this quarter. If the liberal media were to report reality instead of bias, it would be widely known that we are in an unusually strong economy even in the middle of a housing, banking and auto recession. The other day, when Bush said the economy is still strong, MSNBC anchors made his statements into a big joke. The housing recession has been no fun but, so far, there has been no general recession. The slow down in Europe has increased the chance of recession there but a sharp decline in energy prices would give the majority of economies a big boost.

Democratic leaders continue to try to blame high oil prices on speculators. Republicans are being forced to vote on trading curbs. The public is looking for relief. Common sense should win this argument. Even though the liberal left is in charge of our elementary schools, most people understand the basics of supply and demand. Even those who believe speculators are the cause of high prices tend to be in favor of adding to domestic supplies. The USA exports more goods and services than any other country but, unfortunately, we prefer to hoard our oil reserves while paying top dollar for imported oil.

Operation Brimstone should rattle some bones. Tight petroleum supplies in Iran could quickly produce gasoline lines if smuggling operations are cut off. When Condoleezza Rice responded Sunday that it was time for Iran to get serious, I wondered which card would be played by the UN/US next. Operation Brimstone has been planned for many months. The fourth round of sanctions have certainly already been planned for months. Iran needs to respond or its economy will wither on the vine.

Democratic leaders have quietly supported the ratcheting up of pressure on Iran (they must appear to be socialist to keep the campaign funds flowing). Funds have been allocated to encourage political dissent in Iran. The leaders of Iran are under great pressure. The only way out of the box is to make a deal. Oil prices will remain high until the congress makes a deal on drilling or until Iran makes a deal or both. My bet is that congress will blink before leaving for home around August 8. Which incumbent wants to go home to run for reelection with $4 gasoline still at the pump? Iran is going to face a full embargo if necessary. It is in Iran's best interest to "make a deal".