Monday, August 11, 2008


The war between Georgia and Russia is all about control of oil flow from East to the West. The USA and Europe have turned their backs on Georgia, allowing Russia to begin the process of taking control of the pipeline from the Caspian Sea to the Mediterranean Sea. It is my conjecture that the West allowed Russia free reign in exchange for Russia's agreement to go along with a negotiated pipeline through Iran. With trillions of dollars at stake, Iran, Russia, and the West will benefit when Iran helps the rest of the world end state supported terror.

While the war in Georgia and the John Edwards announcement of infidelity were both timed during the Olympics in order to get the least attention possible, the war is just another step toward a settlement with Iran. Step by step, the UN5 +1 and Iran are moving toward an official agreement. The good faith demonstrated by Iran has included the reduction of support for Shiite militias. A couple of months ago, the USA cleared the way for Syrian influence in Lebanon. Now, the takeover of the Georgia pipeline shows that the UN5 + 1 can guaranty a certain volume of oil and gas to be purchased from Iran.

The timing of the war was perfect (crass but true). The next step is to force democrats to permit drilling in the USA. Senator Jim Demint says that republicans have the votes. The key factor; they only need 41 votes in the Senate. Democrats have not passed even one of the 12 appropriation bills past due October 1. Democrats have planned to "continue" spending in October based on this years budget. The problem for democrats is that many republicans will vote no on any continuing resolution that has a drilling moratorium attached.

Of course, when Congress reconvenes on September 8, democrats will begin to craft a package of goodies, a drilling bill that also includes payoffs to "friends of congress". We all know the routine, a bill with wasteful subsidies for windmill and battery makers, among others. For the first time since 1995, republicans seem ready to resume their roll as "keepers of the purse". Blue Dog Democrats, especially those who won their seats just two years ago, are in no mood to vote against drilling. It is suddenly reasonable to hope for a fairly clean drilling bill or no bill at all.

As Demint has noted, republicans do not have to pass a drilling bill. Republicans cannot be accused of shutting down the government if they are willing to pass a CR that does not have a drilling moratorium attached.

Demint has a web site, Check it out.


Pundits have implied that the takeover of the Georgia pipeline will cause energy prices to spike. In truth, everyone involved has incentives to keep the pipeline open. The bigger issue is the old, old story of supply always meets demand at a price.

Markets are well supplied. Industrial production is falling, demand is falling. New wells are coming on line, supplies are growing. The rational for hoarding has ended. With supplies rising and demand falling, the prospects for lower prices is bright. Prospects for American drilling has improved, dramatically. The number of Americans who support increasing domestic supplies has passed 80%. The support of the public will give backbone to our congressional representatives.

Despite the fact that a US Aircraft Carrier Battle Group is on the way to the Persian Gulf, the risk of a shut down of the Straight of Hormuz has been reduced. The USA and Russia have demonstrated to Iran that a new pipeline through Syria and Turkey will be a valuable asset. Iran and Qatar would like to sell and Europe, India and China would like to buy 53 Trillion Metric Cubic Feet of Natural Gas.

It will take a few years to develop these resources, but, even in the short term, the scramble to get out from under inflation plays will continue as the price of all everything from steel back around to soybeans falls. Low inflation makes all the sub prime paper being held by banks far more valuable. The homeowner struggling to make his mortgage payment will get a boast from lower energy costs. The average family will cut about $5,000 off their costs of goods and lower mortgages will save them another $5,000. Consumers will pay mortgages and buy new goods, including hand held computers. I have mentioned a number of companies that are offering cloud computing services. Apple is one that I sometimes forget to mention. Apple is storing tunes, movies, personal calendars, email and all sorts of data on cloud computers.


Looking out a few years, the rapid growth of China and India will have resumed, adding more demand for energy. By then, oil production from Iraq, Brazil, Kazakhstan, Angola, etc. will have increased. Also, the pace of completion of nuclear power plants will have increased. The substitution of electricity for oil will become common.

The current movement toward nuclear power is just gaining momentum. Three days ago, the UAE joined the Global Nuclear Power Bank. It made a contribution of $10 million. The US has contributed $50 million and Norway $5 million. Warren Buffet has pledged to match the first $100 million deposited with a $50 million contribution, knowledgeable democrats and republicans understand that safe nuclear power is needed.

The UAE has staked out a place at the front of the nuclear fuel line; signors will not need to spend the money or time to refine uranium. By 2025, the UAE expects to produce half of its power by nuclear. Having already signed 123 agreements with France, the UK and the USA, it expects to plan, construct and start its first plant by 2016.

Kazakhstan has contracted for South Korea to build a $4.8 billion dollar plant. The point of mentioning UAE and Kazakhstan is that the richest oil and gas countries understand the price shift that has occurred. It now makes sense for oil rich countries to spend billions to develop nuclear power because current technology produces the equivalent of $1.75 gasoline. They understand that by automating the production of nuclear power plants that China expects to get the cost down to the equivalent of $.90 per gallon.

Buy banks, consumer cyclicals, technology and big pharma!