Friday, August 08, 2008


Yesterday, when a bomb blew a gaping hole in the oil pipeline from Iraq trough Turkey, oil jumped but only $1.40. Other news caused the dollar to strengthen and gold to fall. A few weeks ago, a hit to an oil pipeline would have caused a $4 or $5 jump.

One yesterday's "other news" was the visit by General Petraeus to Lebanon. Petraeus is now the US commander for the entire region. With Syria and Israel, Lebanon and Israel, deeply engaged in peace talks, the general's visit bolstered the prospects of peace in the region. Hezbollah grunts want no part of the US military.

It is not every day that a US Commander visits a small country like Lebanon. The step about to be taken in Lebanon is a big step in the political progress that will lead to big $$$ for all parties. Syria, Lebanon, Turkey, Jordan and Egypt all have much to gain, including revenues from gas pipelines from the Middle East to Europe. Several blogs have recently mentioned how many trillion cubic feet of gas there are on this planet. The years of discovered reserves that remain are many times the years of oil that remain. The network of pipelines being built are more important than the old oil pipeline that was hit by Kurdish rebels. Rebels who are being pounded by US, Iraq, Iran and Turkish forces. It will take a couple of weeks to repair but only a small amount of oil will be lost and another small amount will be delayed.

If Obama had no shot at being President, his energy policies would be funny. It is amazing that so many voters let him get away with bashing Exxon at the expense of Saudi Arabia. Obama would impose a windfall profit tax on Exxon and all other US oil companies that would be passed onto the public in higher oil prices. It would also provide massive subsidies to Saudi Arabia, Iran, Brazil and other foreign oil producing countries. Exxon and other US companies would be put at an even greater competitive advantage to state owned oil companies from Venezuela to Russia. Obama will allow the US government to auction oil leases and take in billions of dollars in royalties for the American people only if the public agrees to penalize US oil producers! How misguided can one be?

My friend says there is a huge difference in good economics and good politics but I say this huge gap can be closed through common sense and economic education. The average American already understands the basics of supply and demand. As a result, 65% to 75% of Americans support increasing our energy supplies through drilling.

Obama is also anti-nuclear power. He says he is for nuclear if... while he pushes for more of the silly subsidies for alternatives that have been proven not to work. This week, Alston Corp signed a deal to provide nuclear equipment to China and AREVA signed a deal to provide nuclear assemblies to Taiwan just as a democratic congressman announced a delay in the confirmation of the US-India 123 Agreement (the one Obama will consider if.... The situation in nuclear under Obama might head down the same road we have taken with oil, where the production of oil and electricity in foreign countries helps them take jobs from America.

Most political progress develops behind the scenes. Hillary and Bill negotiated for weeks before they made serious "public" threats yesterday and then a deal was announced just a few hours later. Hillary made her "public threat" by telling a crowd of women supporters that their voice should be heard at the convention, just as her negotiator suggested to the Obama campaign that Hillary's name should be put into nomination at the convention. The last thing Obama needs is a divisive convention.

Bill helped apply pressure when he was unwilling to say in a news interview that Obama is qualified to be president. By the end of the day, peace was negotiated and Bill will speak at the convention on Wednesday. Hillary will speak on Tuesday. The Clintons will appear to fully support Obama's candidacy, but we all know that Hillary's best chance at the presidency would be after 4 or 8 years of a McCain presidency.

Another "behind the scenes" successful negotiation is in regard to US troops in Iraq. The reports are that US combat troops will be out by the end of 2010, depending on battle conditions, and all troops will be out by 2013, unless extended by the agreement of both sides. The highly sophisticated air support needed to prevent further wars in Iraq is not going to be sold to Iraq on a whim.

One of the ways we know that political progress is being made is by military acts. For example, the Iraqi government has contracted with the army corp of engineers to build army bases for Iraqi soldiers. Iraq will pay the USA 1.3 Billion Dollars to build these bases. Another example is more than 12 billion dollars of sophisticated military hardware and munitions being sold to Iraq. Not every country qualifies for our best "ground attack" equipment.

The skeptics will roar but, the USA is also selling $130 million dollars worth of sophisticated anti-tank shoulder fired missiles to the UAE. Think about the psychological pressure these combined actions exert on Iran! Had Saddam had the 140 tanks, 24 helicopters, 400 personnel vehicles, and armaments the US has pledged to Iraq, he would have marched deep into Iranian territory during the Iraq-Iran war. UAE has been sold protection but Iran's vulnerability has increased. The bigger point is that the weapons deals with Iraq imply confidence in the stability of the government in Iraq. They imply that a deal is ready to go in regard to troop commitments.

While on the subject of weapons, Robert Gates is doing a wonderful job as Secretary of Defense. It is my hope that he stays in the position for many more years. He has knocked some sense into the heads of the "military-industrial complex". We are restructuring our military to fight and prevent modern war, not just to send lots of contracts to certain districts back home. The formula for GNP is: GNP = C + I + G + I -X The G is government spending. If G spends on nonproductive assets, it hurts the USA while helping the political hacks who won the latest "project".

Gates just won the cancellation of the Minute Men III missile program. An old, redundant, ineffective program designed to protect the USA from attack from Soviet Union nuclear bombs. By closing down this group of missile silos, Gates has saved the Air Force 100 million dollars per year. For the past 20 years, B-52s have carried GPS guided bombs. The bombs are much more expensive per bomb than the old bombs but one bomb is as effective as 100 of the old bombs. After about 50 years of good service and political support, it took a strong secretary to retire 18 B52s. They will be put in dry storage. The cost to keep them active will be saved.

In the area of small arms, the army has used technology to turn our soldiers into highly accurate snipers. The other side still comes blazing with automatic fire but our solders use one bullet to take the machine gunner out. Our soldiers get lots of practice by "playing military video games". Money is saved, but the big savings is collateral damage. The insurgents have become despised by the Iraqi people because they kill so many civilians. The US kills bad guys, with only a rare mistake.

What is Gates doing with all the savings?

Buying new technology that saves lives and money. Most Air Force Generals made their first several promotions by flying fighter planes under duress. We all tend to support the "way we did it". It has been tough for the Air Force to concede that unmanned air craft should be used extensively and should be flown by non-pilots. An air force recruit can be quickly and cheaply trained to fly drones from safe locations. A smart move in the works now is to remake the computer terminals used into "air craft cockpits". Young kids learn to "fly" video games using joy sticks. It takes them no time at all to learn to fly the real thing. Small UAVs and Predators continue to do good work in Iraq, Afghanistan and Pakistan but the big bad Reaper went into action on July 17. Lives and cash are being saved. When will fighter planes go remote? (A big hat tip to the

In another sign of political progress, Sunni and Shiite extremist are converting to political parties. A couple of years ago, when British soldiers had become targets in Basra, British intelligence discovered that Shiite militia were being paid $300 per month specifically to kill British soldiers. Since that time, the flow of funds from Iran has been dramatically reduced and more than 150,000 Iraqis are drawing $300 or more per month to help secure Iraq. There are some indications that groups that convert from military activist to political parties have received "payoffs". The 5.8 Billion Dollars worth of oil, "loaned" to Pakistan by Saudi Arabia being one of the largest examples of "pay for performance". But there is more than a payoff involved here.


Muhammad tried to explain the concept of Jihad in the Hadith. He tried to show that the concept is more spiritual than militant. He also spoke out against suicide. He said that those who commit suicide are forbidden to even smell the sweetness of heaven.

Suddenly the clerics who support only peaceful Jihad have been "promoted" and many who have not are being "converted". There are more than a billion Muslims. Only a tiny percent have been involved in militant jihad. However, at the peak, about 40% said that military jihad is sometimes justified. It is of great importance to your family and mine for an attitude adjustment to take place. The evidence is growing that the war on terror is being won. It is being won in the minds of the people.

The success of the "attitude switch" in Iraq has lead to an interesting problem. The government has absorbed about 20,000 of the Sunni "awakening council militias" into their regular army. Finding jobs for the other 130,000 is the next big task. The 130,000 live in a culture where those bearing arms are respected. However, these people are no longer needed to secure the peace.


Right now, it is easy to compare any and all sorts of alternatives to oil and come up with the conclusion that each is competitive with oil. For many years, at least from 1986 to 1998, people who heated their homes with electric heat pumps had to scratch their heads and wonder why they had not installed an oil furnace. Today, people with oil furnaces are in a scramble to move to natural gas which is selling for half the energy cost of fuel oil.

The problem is that the cost of electricity and even natural gas has price waves the size of waves on a lake while oil has waves the size of ocean waves. We use oil because it is a concentrated source of relatively clean and very cheap electricity. It is cheap until it periodically goes through the "perfect storm".

I finally got around to looking up the electric energy value of a barrel of oil. One barrel of oil will produce 1,700 kilowatt hours of electricity. Oil must be refined before it can be used. A barrel of oil is equal to 42 US gallons. At $3.20 (down 5 cents to $3.18 yesterday) for fuel oil, a barrel of fuel oil "costs" $134. Seventeen hundred kilowatt hours for $134 is equal to 7.9 cents per kilowatt. Nuclear power is being sold in Tennessee for 4 cents per kilowatt. Wind, with the 1.9 cent gift from American taxpayers included is currently almost competitive with oil but almost double the price of nuclear.

To be fair, present nuclear construction costs have pushed new nuclear up to the 5.5 to 7 cent range but "assembly line" production and huge gains in fuel efficiency already invented should bring the cost of nuclear down to 2 cents or less, some say as low as 1.3 cents. The electrical energy value of oil must fall from 7.9 cents to 2 cents (a 75% decline) to stop the substitution from oil to electric. Wow! For oil to be competitive with nuclear at its projected cost will have to fall to $30 per barrel, gas to $.88 per gallon. Wow indeed!

Many will argue that 2 cents per kilowatt hour is pie in the sky. But, the first of several assembly lines is under construction in China, the technology to burn 65% of nuclear fuel instead of 4% now exist, and the cost of refining nuclear has been reduced by 70% as a result of inventions by GE and others. Toshiba has increased the burn rate from 4% to 6% even in existing light water reactors, a 50% gain for about 300 existing nuclear reactors.

Using 4 cents per kilowatt as a benchmark, the rate offered by the TVA, a barrel of oil would have to fall to $61 to compete with electricity. The substitution can only happen as fast as nuclear can be built. Even 4 cents per kilowatt gets us down to $1.75 gasoline.

The daily savings to Americans from today's price to $1.75 will be about 1.47 Billion Dollars! The annual savings will be about 536 Billion Dollars! The average annual savings for each man, women and child in America will be $1,700! Year after year. This $1,700 is a big number relative to the false $1,000 tax reduction promised by Obama. The tax reduction is false because the money is raised by taxing the oil the public buys. The tax reduction takes money from one of your pockets and puts it in the other. The savings achieved by cutting the cost of energy production is "found money". The $1,700 per person comes out of thin air and produces great wealth. Americans need to learn the formula P = W, Productivity = Wealth.


Steam cell research is leading to many big and little productivity gains. GSK acknowledged the importance of stem cell research this week when it funded a 25 million dollar research project.

Nanotechnology is leading to many big and little productivity gains. Nano-tech is affecting all fields of study. Some drugs are viable only because of nano-tech. Super strong, light weight materials are available due to nano-tech. Computers are taking a giant step forward as a result of nano-tech.

Intel, INTC, is leading the computer efficiency charge. Describing the smallness of new computer circuits is like trying to describe the largeness of the universe. Man's brain is too small to understand super small or super large. The key understanding needed is that super small means it is very cheap to move huge quantities of data around the world and back.

Intel has joined Yahoo and HP in a major cloud computer initiative. Google, IBM, MSFT, AT&T, DELL, Yahoo, HP and Amazon are among the companies that are offering cloud computer services. The costs of computation and storage are falling so rapidly that billions of things are possible this year that were not possible last year. When computer geeks start talking about petra-flop speed, I am lost. All I know is that an "economic surge" is underway.

McCain's Economic and Political Surge

McCain's economic plan is now favored by the majority of Americans. His idea of having a US economic surge is wonderful. As a result of his plan to dramatically reduce the cost of living, he is having a political surge. It is likely to be temporarily slowed by the upcoming democratic convention but the trend is real.

States like Colorado and New Mexico are now back in play. States like Alaska, Montana and North Dakota are now in McCain's camp and not worth the money for Obama to try to turn. Nevada, Virginia and North Carolina have been moving in the right direction, Virginia is now a dead heat and North Carolina is now leaning to McCain.

Tough battles will be fought in the Midwest; Ohio is once again a key state. Obama may well choose Bayh to be VP in hopes of winning Ohio and Michigan in addition to Bayh's home state of Indiana. McCain may counter with Romney in hopes of winning Ohio and Indiana in addition to his home state of Michigan.

White middle class, union and catholic voters are the prize. McCain's economic surge, which would include lower fuel prices and thus more jobs for America's heartland, gives McCain a shot at winning the region; even Wisconsin is within reach.

McCain was careful to vote against last years energy bill that included subsidies for oil companies. Obama voted for these subsides. Again, Obama is willing to give away the public store, provided his wind and ethanol friends get a big chuck of the largess. McCain's vote to limit subsidies to oil companies makes Obama's attempt to pin the "big oil tail" on McCain look silly.


If you don't believe the turn is here, look at a chart of a commodity index or a chart of any commodity from corn, copper or oil. Look at a chart of the dollar. Look at an interest rate chart.

It is easy to buy something. Open your e-trade or other discount brokerage account and put in a market order. You will know the results in seconds. With only 5 stocks, you can achieve a significant amount of diversification and you can follow five stocks closely. It takes 12 to 15 stocks to eliminate 90 plus % of the selectivity risk but in this kind of market selectivity risk is not the prime consideration. Buying stocks that will benefit from lower oil prices is pretty easy because most will! Buy consumer goods, financials, technology and of course airlines.