The GIFT of Life -- Wake Forest University and Nuclear Power

Wake Forest University has developed what appears to be the GIFT of life for those with cancer. Some 5 years ago a lab rat survived the worst of cancers and today WFU is ready to start human trials on a new treatment for cancer. The new technique has cured 100% of rats infected by certain advanced cancers! The technique is called Granulocyte Infusion Therapy or GIFT. The procedure involved is to do a selective blood transfusion from donor to patient. Certain white blood cells are transferred. Of course, human trials will begin slowly and the waiting list is long. The current treatment cost of $100,000 will come down rapidly once the trial stage is over. Pray for success as human trials do not always work out as well as animal trials.

Rebirth of Nuclear Power

The gift of life is also being granted by the rebirth of nuclear power. If power is rated by death rate caused, coal power is very expensive and nuclear power is very cheap. Natural gas and other sources are between the extremes but still quite deadly when compared to nuclear. Wind power is expensive and very expensive for birds that fly too close.


The upside down and backward story here is the fact that nuclear power holds great promise for helping to bring about world peace. Deals are in the works that will increase trade between nations and thus lower the risk of war. The total value of nuclear power deals in the foreseeable future is huge.

Oil producing countries such as Nigeria and the UAE are working on nuclear power deals (many others as well). It makes infinite sense for them to use oil weath to build nuclear power plants which will in turn allow them to save expensive oil for the export market and for the future.

Indian Breakthrough

The Prime Minister of India just eliminated a difficult choice. It appears that he has worked out a deal to save his job and to move forward with his nuclear 123 Agreement. Russia has already delivered the fuel for the start-up of an Indian power plant that has been suffering from lack of fuel and Russia has already contracted to build 4 more plants once USG sanctions are lifted. It has been reported that India will announce its final decision on July 3rd. A quick decisions is needed because the process for India requires approvals by more than one international group.

On June 20, Russia and Europe began work on a new 123 Agreement. These 123 Agreements are sometimes called "civilian use of atomic energy agreements". The key provisions of these new agreements include the responsibility of all signers to help prevent terrorism and to help promote the safe use of nuclear power.

Professor William H. Miller recently reported on STLToday.com that the US has used 327 of 500 metric tons of ore provided by excess Russian Nuclear Warheads. Over the past few years, more than 50% of US nuclear fuel has been coming from these excess warheads. Even so, since US nuclear fuel recycling was banned during the Carter Administration, the US has accumulated over 55,000 metric tons of spent fuel. This huge natural resource is currently seen as a liability. Russia has the technology and equipment to safely recycle this fuel and the 123 Agreement currently before Congress calls for Russia and the US to reduce the number of warheads and the amount of stored waste. Part of the reason France has been able to supply 80% of its power needs with nuclear energy is because it has been recycling its fuel for 30 years or so.

The Wind Has Changed Directions

The US Congress is a rooster sitting on top of an arrow. Something we call a weather vane. The winds are shifting.

During the 1970's, the left leaning news outlets combined with a group of gloom and doom scientist and environmentalist to convince the majority that the next ice age was on its way. By the end of the 70's, efficient and profitable companies such as Exxon were painted as the demons of the world and forced to pay wind fall profit taxes. High taxes on US companies forced the US to get more and more of its oil from foreign sources. Here we go again. Today, the left has convinced the world that gloom and doom are just around the corner due to the opposite of an ice age. The solution is once again to bash efficient and profitable companies such as Exxon. The plan is to raise the price of gasoline and to use the extra price to support lobbyist, representatives and their friends.

Jim McTague has written an article for Barrons that illustrates the crazy wind shifts we have seen. It is a fact that after the oil price increases of the 1970's, Chevron discovered 2.6 Trillion Cubic Feet of natural gas 25 miles off the coast of Florida. By the time it was discovered, the price of gasoline had fallen sharply. The congress joined with the local governor (Jeb Bush) to put this gas off limits. The fields had been leased, the gas had been discovered but Chevron could not get the permits to drill. A couple of weeks ago, a number of members of congress and the governor of Florida suddenly changed their minds. They now support drilling for this gas.

For a group of politicians to willingly prohibit access to Trillions of Dollars worth of fuel, it shows the power of the media and the lobbyist. It also shows the apathy of the public. When the price of gasoline was around $1 per gallon, the public paid little attention to the games played by special interest groups.

Over the past 18 months or so, the poll numbers have made two dramatic shifts. The majority has switched from don't drill to drill and the importance of the issue has surged to the top. Last week, I wrote that Liddy Dole was against drilling. She has seen the "surge" and has wisely changed her position. How much pressure will it take to get Hillary to switch? How about Obama?

Bankruptcy Will Cause an Emotional Response!

When the news of ethanol refinery bankruptcies becomes a major story, the insanity of spending billions to subsidize inefficient methods of energy production will be hard to defend. If the majority realize that the media and politicians have been offering false hope, the support for drilling for oil and building nuclear power plants will surge. A story in the Telegraph.co.uk demonstrates the point. England has also fallen into the trap of granting heavy subsidies for noisy, non-productive wind mills. Now that nuclear power is being given a fresh look, it did not take a reporter long to discover that the grand total of the energy produced by all 2,000 wind mills built in England is not half as much as any one the 50 coal or nuclear powered plants.

Since 1980, after Three Mile Island virtually shut down the construction of nuclear plants, the energy produced by nuclear plants has increased by over 400%. Recently GE announce a reduction in fuel cost of 70% and Toshiba announced an increase in fuel efficiency of 50%. The cost of the lowest cost source of electricity is going down!

Great strides have been made in increasing the efficiency of wind mills and solar panels. Neither has even come close to the efficiency of nuclear.

SUMMARY

1) Attitudes are changing; realistic solutions to high energy prices are being sought.
2) New technologies are increasing the length of life and lowering the cost of living.
3) The age of ultra low cost electricity is near.
4) Death rates make a strong case for nuclear power.
5) Former enemies are 'beating swords into plowshares' in order to participate.
6) Sponsors of terror are not allowed to join.
7) There will be wars and more wars but nuclear power deals are helping to spread peace.

Starting Rumors With Old News

In recent days, rumors have been started right at the peak of oil price moves. The technique being used to start the rumors is to "report old news". If someone ask, "Did you hear that Israel did a practice bombing run?" The next person down the line is given the details about how the Greeks and the Israelis flew practice bombing runs of just the right distance to bomb Iran. Pretty soon, it does not matter that this "practice run" happened three weeks ago or that these joint defense maneuvers had been scheduled two years in advance. It does not matter that Bush is trying to get establish a quasi-embassy in Iran like the one in Cuba. We certainly do not plan to put citizens in the middle of a war zone.

A similar question that went around Friday was in regard to the 172 terrorist who were caught trying to fly airplanes into Saudi Arabian oil facilities. Once the question moved past its original source, the questioner was not able to correct the impression that this attack and arrest happened Thursday. The truth of the matter is that the Saudis made the arrest in April. AP reports say that the Saudis have arrested 701 terrorist in the past 5 months. The problem with knowing this information is that it leads one to think along the lines of "eventually a terrorist will blow up an oil super tanker or an oil pipeline".


If there is success, the response will be similar to what happened after 9-11. For the first several months after the attack, there was a consensus that the "good guys" must do what ever it takes to find the "bad guys". In recent weeks, Obama and other democrats have tried to weaken our ability to listen-in on terrorist telephone conversations. The terrorist who truck bombed the World Trade Center were caught because the US was able to listen-in on cell phone calls they made. The NY Times found out an blabbed. Our ability to monitor Osama bin Ladden was severely curtailed. Democrats have tried to make telephone companies subject to law suits if they allow US intelligence to listen-in on phone calls from terrorist. It is well past time to choose sides.

Our success in keeping a major terrorist event from happening has caused many to take down their guard. I do not advocate allowing a terrorist event to happen and I pray that none will but, if one did, our resolve to win the war on terror would be fortified.

The rumors being started are often made as a way to discredit Bush or the Israelis but in most instances they are really about creating swings in the futures markets. Big money is being made off of amateurs who have become convinced that they know the direction of oil prices in the near term. The shorter the guess the more difficult to be right. The average individual trader gets much of his "news" from sources he is trading against.

One of the interesting little "news twist" of last week was two separate reports on the threat by Libya to cut oil production. One article stated the threat was made in response to the actions of certain congressional members to allow OPEC to be sued. Another article stated that the threat was made in support of Iran. Who can verify either side of the story? Knowing both sides of the story, I have come down on the side I believe to be true, which is that Libya is showing support for Iran. The head of OPEC talked about the threat from Libya and he talked about the possibility of oil going to $200, $300 or $400 per barrel if production is stopped in Iran. It is possible the threat of Libya was for a different purpose but the head of OPEC certainly used the threat to support Iran.

Once again, I find it interesting that new supplies are hitting the market just as the maximum pressure is being applied to Iran. Stories about production in the North Sea being played out were in the news for the past few months. Suddenly, new discoveries are being made and new production is coming on line. North Sea production is expected to be up 8.6% year over year as of the next report. The North Sea is small relative to what is happening in Saudi Arabia but the timing is perfect.

The Saudi timing for some of the new production is also perfect but another .5 million barrels per day will not come on line until December and yet another 1.2 million barrels per day will not come on line until next June. By June, the Saudis will have spent more than 10 billion dollars developing this latest field. According to Business Week, there are currently 28,000 workers in this field. The Saudis are using the latest horizontal drilling techniques to dramatically increase the amount of exposure to oil bearing rocks. These same techniques are being used to dramatically increase production in oil fields in Russia and in the Bakken reserve in North Dakota, Montana and Canada.

If you hear a rumor about oil right now, chances are it is not true. Rumors play on emotion and cause people to totally sell out of the stock market, even though history shows that those who stay in through thick and thin do much better than those who jump in and out. Ninety-nine point nine percent of all great fortunes made in the stock market were made by people who tended to buy and hold for an average of several years or more.

Right now, times seem to be so much tougher than they are. Being fed a constant stream of bad news, investors are seeing little hope. They see democrats talking talk about nationalizing refineries, adding wind fall profit taxes, adding to the payroll tax, adding to the capital gains tax, adding to wasteful subsides and leading in the polls. More than half of the cars leased by the US congress are big gas guzzling SUVs. It is obvious that the congress has not yet caught on to the current state of affairs.

The solutions to our problems are obvious. We can easily and dramatically cut our consumption and increase our supplies. It will take only a couple of weeks for the congress to pass measures which will encourage new energy supplies. Right now, partisan games are still being played. The democrats pushed through mass transit subsidies this past week. These subsidies increase the cost to those who live outside the big cities and they reduce the cost of those who live in the big cities. We know that average people in the big cities spend only 2 to 4% of their income on transportation energy and the poor rural person spends from 10 to 16%. It is unfair to take public money and use it to benefit the few but that has been the mode of congress since the science of gerrymandering has been perfected. About 90% of the congress will be re-elected in most years. As a result, the good of small groups is trumping the good of the many. There is a limit before there will be backlash. The polls show that the majority of Americans are ready for a change but they clearly do not know how to accomplish this change. Gradually, the light will shine brightly on the best of solutions.

Don't let false rumors fool you! There are reasons to be highly optimistic. Markets find the way to climb the most horrible walls of worry. A steep assent will begin very soon.

Amadinejhad -- A Squealing Pig

Wednesday through Friday, Iran squealed like a stuck pig. Last weekend, a European leader said Europe would discuss additional sanctions on Tuesday. On Monday the big news was all about banking sanctions imposed by Europe. This was month old news but it was presented as if it had just happened. I did not see or hear much more about the Tuesday meetings, except a few mentions that European leaders might block oil imports from Iran.

Wednesday, Iran said harsh sanctions would cause them to stiffen their resistance to nuclear negotiations. By Thursday, the head of OPEC was telling that the price of oil would go to $170 during the month of July (the market discounted that risk on Thursday). When Libya joined the fray, threatening to cut off its shipments, the OPEC leader said that the price of oil could go to $200, $300 or $400 per barrel if the oil flow from Iran was cut off. The oil price moved up another .57 on Friday, making it clear that even the wildest bulls do not believed the $200 figure.


The traders who sold oil short early in the week were on the run by the end of the week. The short sellers had noted the drop off in use in such places such as South Korea and the USA. Sellers were also aware of a sharp drop in purchases by China. While the traders for Goldman and other "big boys" are well aware of the facts, the news that China has filled up a new, large, storage facility is still not widely known. It has been estimated that sales from North Africa to China were 500,000 barrels per day higher than normal during the past 3 or 4 months while these storage tanks were being filled.

If one adds up all the new oil coming on line to the decline in consumption that has already occurred (Ed Wallace made a partial listing in Business Week) the total is more than enough to replace all of Iran's production. If Libya and Venezuela were to also shut down, forcing Bush to use up to 4.3 million barrels per day from the SPR, Bush would win accolades for having built up the reserves and, as is usually the case, the market would surprise the world and quickly turn down as it would suddenly be clear that the world can outlast the renegades. .

The way to view the price of oil is to think of it as a weighted average of what investors believe is going to happen. If a large speculator believes oil will be at $100 in three months, he will sell short. If he suddenly comes to the realization that Iranian oil might be cut off, he might change his expectation to $150. Under the circumstances, he would "buy-in" his short contract and buy a long contract. If he is on the very high margin allowed on the futures market, he might buy 10 times more oil than he has money, twice!

This is the type of change that happened late this week. There was a huge move that baffled the pundits who decided the price must have risen because Ben Bernanke spoke like a "wimp" in regard to higher interest rates. Others decided that demand from China and India is still driving up the price, even though each of these countries have just taken extraordinary steps to curtail their consumption. The price can go to relatively short term extremes due to speculation but the price must come back into the range supported by total physical demand plus spare storage capacity. I doubt if there is much spare storage capacity left and physical demand is falling around the world. Japan has decreased demand to such an extent that they are now an oil products exporter!

The problem the traders will discover with this weeks big change is that the risk of bombing Iran is not nearly has high as is perceived. Bush does not want war with Iran. Also, the risk of a cut off of oil by Libya or Venezuela is not nearly as high as believed. Neither Libya nor Venezuela want to cut off the sale of oil. The leaders speak words to show their support for Iran but they also need as much revenues as they can get.

Iran is squealing because the leadership is facing the likelihood of more domestic riots. Last summer, there were riots when gasoline was rationed, riots when rice was not available and since that time there have been al-Qaeda style explosions. An Iranian Mosque was hit a few weeks ago. The political opposition to Amadinejhad is speaking out. The bottom line is that time is running out. Amadinejhad needs to make his deal soon or he will be kicked out of office. Polls in Iran show that the majority blames the Iranian government, not the sanctions, for the economic problems. This is partly the case because Amadinejhad made the mistake of shutting down opposition media. The story, in the Iranian press, about the oil stored in ships, is that oil is being stored while waiting for refineries to complete their maintenance. He cannot keep telling that lie much longer.

The other day, you asked me why Bush is not more open about what he is trying to accomplish. I should have answered in terms of football coaching strategy. Neither the offensive coach or the defensive coach is going to share his play book with the other team or even with home side spectators. Each coach has a plan laid out for the whole game but he may have to alter that plan depending on how the game goes. In a good game, both the offense and the defense will pull off a couple of stunts or trick plays. At just the right time, there will be a hitch to a wide receivers familiar route that causes the defender to make a step in the wrong direction. At just the right moment, a line backer will blitz.

Bush has timed his big moves for a fourth quarter win. His team has played a very complex and even a brilliant game. He will win in Iraq just a few months before the elections. He will announce the returning home of a substantial number of troops before the elections. Iraq will hold elections just before the US elections. The odds are in his favor that deals will be signed with India, Iran and Syria before the elections.

You may have seen the article in which the NY Times begrudgingly gave Bush credit for pulling off the "impossible" in North Korea. If he pulls off the proposed agreements with Syria, Lebanon, India and Iran, ninety-eight percent of Americans will be totally surprised.

I keep thinking of Amadinejhad as a trapped animal. Many people say that a trapped animal is a dangerous animal but that is not true, if his cage is locked tight. An animal in a tight cage may growl and howl a lot, it may foam even foam at the mouth but Amadinejhad is surrounded. There is only one way out.

My real concern is how much more time until the drop dead date? If an agreement is not going to be reached, Bush will need to change strategies. Bush has sternly said that he will have his deal signed in Iraq within the month of July. He will attend the Olympics that start on August 8 and end on August 24. The democratic convention is in late August and the republican convention runs from September 1 to the 4th. Bush surely has this whole process timed to give a month for the success to sink in before the convention. Perhaps he will have to leave the Olympics to sign the completed deal.

With or without a deal in Iran, the 123 deals will need to be pushed through congress. It is my opinion that there will be fussing and cussing but in the end, many more than 50% will vote yes. This is not one of those deals that the leadership can lock up in a committee or that 40 senators can block. It is my expectation that these votes will be cast about the time that troops are headed home.

History in the Making -- The Biggest Commercial Deal Ever

Yesterday a regular reader asked the question, "Can Bush control the price of oil"? The answer is that the Bush "team" can. The Bush team has more power players than any other international team in history. Some of the significant players include Goldman Sachs, Russia, Saudi Arabia, Iraq, Israel, Japan, China, India and Europe. Some of the key players are members of the UN Security Council, some are members of the G8, some are predominately Sunni, some are predominantly Shiite, some are democracies, some are oil producers, some are oil consumers, some are enthusiastic and some are being pulled along for their own good. The Bush team has timed the introduction of new supplies of oil such that the team can afford to embargo all of the Iranian oil if necessary. So far, the timing has been carefully orchestrated such that new supplies are coming on line equal to the amount of Iranian sequestered supplies.

In the old days, European Leaders and the US got together for what were know as the G6 meetings. Later, this group became known as the G7 and then as the G8. The G8 includes the UK, France, Germany, Italy, the United States, Canada, Japan and Russia. It is important to note the inclusion of Germany, Japan and Italy with the allies and to note the inclusion of Russia with its cold war opponents. At what other time in history has there been the cooperation of so many major nations? Yesterday, this group petitioned Iran to carefully consider the latest proposals, made by the UN Security Council and Germany. The second request was for Iran to act more responsibly in regard to the terrorist activities in the Middle East. If Bush is able to pull this deal off, it will be written about history books throughout the ages.


Yesterday on Kudlow and Company, once again the market decline was blamed on the US dollar without a mention of the most recent "back-up" in the negotiations with Iran. According to Kudlow, the price of gold and oil went up and the price of the dollar went down because Ben Bernanke did not raise the Fed Funds Rate by a quarter point or at least talk strongly about stopping inflation. The news pundits must alway find reasons to speak. The reality is that the price of the dollar fell because of the "back-up" in the negotiations with Iran. Until there is a deal with Iran, two of the largest oil fields in the world will remain sequestered. The 30 million barrels of Iranian oil that is stored in super tankers is not going any where until there is additional progress in the negotiations.

CHINA BELIEVES

China recently completed a large expansion in their oil storage facilities. As a result, oil imports to China have spiked in recent weeks. I noticed the spike on a chart and failed to write down the numbers but millions of barrels of oil are now stored in China, the same way that the USA now has 700 million barrels stored in our Strategic Petroleum Reserve. The US added about 14 million barrels to its SPR in recent weeks, even though Bush has agreed to stop adding barrels as of July. Iran has no more ships to fill at the same time that the US and China are full to the brim and at the same time that the new Saudi and other production is set to come on line. The table is set, it is time for dinner.

One of the big ironies is that "the big boys" are twisting the arms of India, Syria, Iran, Venezuela and others by keeping the price of oil high. Take the arm twisting going on in India as an example. The Prime Minister of India must soon run a campaign for reelection at at time when food and energy prices are soaring and at a time when his central bank has been forced to raise interest rates to 8.5% in an attempt to slow a soaring inflation rate. This Prime Minister signed off on a 123 Peaceful Use of Nuclear Power Agreement over a year ago. However, India's democracy is a Parliamentary System like England's and one party that supports the Prime Minister has threatened to withdraw if the 123 Agreement is accepted. The Prime Minister can drop the agreement and hold elections off until next year or he can implement the agreement and face elections before this year is out. He obviously wants to wait until Iran is ready to make a deal before he commits. He knows that a deal with Iran will bring oil and food prices down and help his chances for re-election. Bush and his team can give assurance that food and fuel prices will decline once a deal is made.

Over in Venezuela, where inflation is off the chart and milk is being rationed, Chavez is facing these and other severe problems. Low and behold, Russia has offered to come to the rescue. Russia has offered Venezuela a slot on the "team". I call it a slot because there is great prestige to be had by being among the first to acquire nuclear power. This situation is quite remarkable. A few months ago, a tentative deal was made with Syria to join the team. This really made Iran mad but it did not stop the march toward the final agreement with Syria. Would it not be incredible if Venezuela signed with Russia! It would be like a football player joining a team where he hated the offensive coach but joined to play defense. Venezuela hates the USA but it does not want to be the last man selected to play or to be left off the team.

The Biggest Commercial Deal Ever

The pending deal for the US and Russia to form a huge commercial partnership to provide nuclear fuel and technology to the rest of the world will be the largest commercial deal to date. Around 1867, the USA purchased Alaska for $7.2 million dollars. That was a lot of money in those days. We paid a little more than 1.9 cents per acre. The purchase was very controversial. It was called Seward's Folly, Seward's Ice Box and Andrew Johnson's Polar Bear Garden.

An even larger and more controversial deal was made about 65 years earlier, the Louisiana purchase. Opponents declared that the purchase was unconstitutional. They noted that there is no provision in the US constitution that grants the authority to purchase territory. The purchase price was $15 million dollars and, again, in 1802, 15 million dollars was a whole lot of money. On the other hand, $15 million in exchange for 828,000 square miles of land is a pretty good bargain, don't you think? Even if it was inhabited by Indians? The French got the money, the US got the land and the Indians got the shaft. Bonaparte's comment about the deal, "This accession of territory affirms forever the power of the United States...".

The 123 Agreement between Russia and the US involves no territory and there is not a price tag attached, but the history of the world will be changed in ways that we cannot fully appreciate yet. The age of abundant electricity is in gestation. The deal is controversial but every bit as attractive as the Louisiana purchase.

Today, the electricity cost of operating a computer is far greater than the capital cost to buy the computer. Great strides are being made to bring both cost down. For the first time, Petra-Flop computers are in operation. Things that were impossible yesterday are possible today and more things will be possible tomorrow. The coming of the powerful mobile computer is going to change the world. The pace of advance is swift but ready to hit another gear.

When Google first started hiring software engineers right and left, the new hires were told to design products without factoring in the cost of computing, data storage, electricity, calculation .... What Google understands is that the cost of computing is declining so rapidly that one can treat this cost as zero per transaction. Indeed, the cost per transaction is already out to many zeros to the right of the decimal point.

The reason Google has invested millions of dollars in energy projects is because a huge portion of that very small number approaching zero is the energy cost. The advent of abundant electricity will mean that the cost of trillions of transactions will approach zero. If there is no cost for a few million contestants to attend a teleconferenced chess championship, would players from North Carolina, Iran, Russia and England do battle? Would millions of novice players take the opportunity to kibitz?

THE FUTURE IS NOW

The US Congress is investigating speculators who trade the futures markets. They give these traders far more credit and scorn than is due. What a speculator does is tries to guess the direction of future prices. The problem is that the shorter the time frame the more difficult to predict. To the extent that futures traders can guess the future correctly, they do us all the great service of moderating extremes or bubbles. Unfortunately, numerous academic studies have shown that predicting short term price fluctuations with any degree of consistency is impossible. The most successful investor of our time, Warren Buffet, has made this point many times. Those who think they can "catch that last 15%" of the market are fooling themselves, but, it is impossible to see longer term trends.

What trend can we all predict will continue?

In only a few years, we have seen communication capacity explode. Men, women and children are "in-touch" today like never before. From the communication point of view, it did not matter that my brother was at the beach when I called him yesterday. As I recall, it was around 1938 when the picture phone was introduced at the Chicago World Fair. The dream of instant and "complete" communication has been alive for centuries. The dream is quickly becoming reality. Today, the kid who challenges other kids half way around the world to a video game match, including a continuous conversation connection between the players, will be the kid who does business in a "virtual world" in the future.

Nuclear power will be one of the keys to making the future happen. The cost of nuclear electricity is about 4.5 cents per kilowatt and going down while the lowest cost hydro-carbon based power, including the cost of pollution, is at least double the price and going up.

Iran, Venezuela, Russia, Saudi Arabia and other oil producers recognize that nuclear power is the power of the future. These countries can choose to bleed oil for all they can before becoming second class world citizens or they can join the biggest commercial trade deal ever. Saudi Arabia and Russia have already joined. Indeed, seventy-one nations have joined. India, North Korea and Syria are all but ready to sign. Venezuela has a long way to go but it is no where near the strategic importance of Iran. Venezuela does not want to abandon its friendship with Iran but it also does not want to fall behind Brazil and Columbia.

The pressure on Iran is great. This relatively wealthy country (70,000,000 people with a $12,000 per capita income in 2005) has been reduced to economic pain. The country is experiencing everything from shortage of goods to hyper inflation. It is even suffering from terrorist attacks! Sunnis from neighboring states are giving Iran a taste of its own medicine. Of course, Iran blames the USA and Britain for the attacks but the nuclear treaties being signed require opposition to all terrorist activities.

Drawing the connection to Bush's support for corn based ethanol and the shortage of rice in Iran may seem like a stretch but it is a real connection. The high price of corn and the high price of oil are being used as the tools for George's Team to recruit players. If you appreciate the words spoken by Bush in the aftermath of 9-11, you appreciate that his administration has been focused on bringing about a new "world order", a world in which supporters of terror pay a stiff price.

There is a clear connection between the idealism of Woodrow Wilson and George W. Bush. Woodrow Wilson had a dream of world peace and he worked hard to try to accomplish it. His proposal, The League of Nations, was a gallant attempt to achieve world peace through the cooperation of all nations. The League was formed but the US Congress was not willing to join!

Woodrow had his share of detractors. He was the son of a preacher and we all know how easy it is for people to turn on a preacher or a preachers son. One of the reasons many people hate George Bush with passion is because he has not been afraid to openly allow his religion to influence his policies. George has been painted as a war monger but his religion promotes peace. His religion is against war but it includes 5 tests of what makes a "justified war". In the eyes of Bush, the war in Iraq has been a part of a justified war against terror. It does not matter if you agree with Bush or not, there is a strong probability that the war in Iraq is winding down and there is a strong probability that Iran is going to be forced to join the rest of the world in discouraging state supported terror.

FOLLOW THE MONEY

There is no escaping the fact that wars are ultimately fought for economic reasons. Those who say the war in Iraq is a war over oil are correct. Those who say that it is only about oil are absolutely incorrect. The fact of the matter is that trillions and trillions and trillions of commerce, year after year after year will be determined by the outcome of the current negotiations. It is in the economic interest of Iran and everyone else for these deals to go through. Iran wants to negotiate as large a slice of pie as they can but they do not want to bargain so hard that they miss out. Time is getting very short. The pressure is on. Trillions of dollars and millions of lives are at stake. Americans should always remember that we would not be an independent nation without the aid of the French against the British. We should always remember that we would be speaking German today without the aid of the Russians against the Germans. Is it not wonderful that the Americans, the French, the British, the Germans and the Russians have all joined in cooperation to prevent another potential WWII and that we all agree that we should solve the current hostilities by placing economic sanctions on Iran. If we stand together, who will rise against us?

Market Concerns and Calming Words

A regular reader asked me to send him some calming words. The following is my response.

As far as calming words, I am running low. In games of brinkmanship, one after another, the President and the Congress seem willing to crash rather than to chicken out. The same is true for the game between Iran and the US.


Bush was just on TV asking Congress to pass a drilling bill and a "good" housing bill. I think a housing bill will be passed latter today or tomorrow. It is impossible to know if the drilling bill will be saved as a campaign tool or if it will get passed before the elections. Bush also asked for his political appointees to be approved. The FOMC is just one important agency that has several vacancies.

The bright side of the story is that international agreements are popping. Even Venezuela is considering signing a 123 Nuclear Agreement!

Russia and Venezuela are in talks. The huge nuclear agreement signed between Russia and the US (not yet approved by the US Congress or the Russian Parliament) requires Russia and the USA to not share nuclear materials with any nation that supports terror. Venezuela is the location for several terrorist camps. The skeptical might say that Russia is playing fast and loose. My opinion is that there is a chance that Venezuela, being aware of the turn in North Korea, the turn in Syria and the potential turn in Iran, will climb on board. No, Venezuela will not make a deal directly with the USA but, the beauty of the 123 Agreement is that various countries can strike their own deals with those who have signed on to the central promise. For example, Russia, France and Britain are all eager to do business with India as soon as they sign-on.

The most positive thing I can say is that these deals need to be signed very soon. The train is leaving the station and some countries will not be passengers. The train will not stop here again for quite some time.

While it will take years for new signers to get a nuclear plant constructed, the psychology will change immediately when it becomes clear to the world that electricity is going to be abundant relative to oil.

The "nuclear collar bottle neck" is being rapidly addressed. At least seven countries, including South Korea, Japan, China and Russia, are preparing to expand capacity. Westinghouse has ordered collars from more than one source to insure supplies are coming. The number of plants to be built in any one country is being limited so that more countries can put their name on a slot. Who would have thought that Turkey, Jordon and several oil rich Middle Eastern countries would be in a scramble to be among the first to have nuclear power plants?

While all of the above seems to be far removed from the daily grind of the stock market, I submit that the markets are in for a big change. The change in sentiment will result in higher PE ratios for many companies.

'Axis of Evil" -- 3, 2, 1, 0

North Korea has finally provided documentation of its nuclear program. Bush has promptly removed North Korea from our trade restriction list. Bush also expressed his intent to remove North Korea from our List of State Sponsors of Terrorism. The removal will be made after the US has verified that Korea has performed certain duties, including blowing up its nuclear production facility.

Back on January 29, 2002, Bush named North Korea, Iraq and Iran as the "Axis of Evil". The list of three is now down to one. Syria escaped being named to the list but it is suspected that the Syrian nuclear facility bombed by Israel last September was a North Korean import built for the purpose of supplying Iran with nuclear bomb making materials. The declarations made by North Korea are known to be incomplete but further analysis should shed light on the facilities built in Syria. There have been reports that two other facilities were started in Syria.


Syria just allowed UN inspectors to take soil samples from the first location. The US has called on Syria to fully cooperate with UN inspectors. These steps are leading up to the signing of a treaty between Israel, Syria and Lebanon.

In his January 29, 2002 State of the Union Address, Bush said, "Iran aggressively pursues these weapons and exports terror, while an unelected few repress the Iranian people's hope for freedom". This is still true but the heat is on.

Today, many people in many countries are suffering from economic decline. The world is currently split between the new wealth of those who have oil to sell and new pain for those who must buy oil. Iran is in a special place. It has oil and gas to sell but cannot sell it. Its neighbor, Iraq is preparing to double its production in just a few years. It's neighbor is preparing for elections to be held this fall. All is not settled in Iraq or North Korea but neither sponsor terror and both are about to reap financial rewards.

GUNS, GUNS AND MORE GUNS.

Today the Supreme Court of the USA ruled that our constitution was written to allow individuals to own guns. The court ruled that this right is not tied to belonging to a government sponsored force. The key understanding Americans need is that each of us has the right to defend ourselves. A double barreled shot gun is a good defensive weapon. I believe that such weapons have prevented a lot of break-ins, rapes and deaths. Petty crooks do not know who has guns and who does not but they don't want to find out the hard way. Soon, there will be good news in places like Washington, DC where laws against individual gun ownership have given criminals confidence. Once law abiding citizens, in these hornets nest of crime, can have guns again, the crime rate will fall.

The Palestinian leaders in Gaza signed a peace treaty last week and rockets have been fired into Israel this week. Over in Iraq, more than 40 people were killed by two suicide bombs yesterday. It is very difficult to understand how so many people can be talked into purposely killing innocents. Weapons are not evil. Using them for protection is a good thing. Those who use them to kill the innocent must be confronted.

The Pressure is Intense

The latest barrage of words out of Iran shows that the pressure on Iran is intense. The implication has been made that if the 5+1 does not back off on the stick portion of their carrot and stick approach, the Iranians will kick out the IAEA inspectors. Risky business! The UN head of the IAEA has said he will resign if Iran is attacked. If the inspectors are kicked out, the job of the IAEA head will not be the key consideration in regard to what happens next. The world will face the choice of allowing an attack on Iran or allowing rouge nations the right to build nuclear missiles.

The words of the US are being echoed. The US has told North Korea, Syria, India and Iran that time is running out on the chance to join the world in a pact for the peaceful use of nuclear power. Iran spokesmen say that time is running out to negotiate a nuclear deal. North Korea, Syria and India are all right on the edge of success. The linkages between these nations and Iran are not clear. Will the movement of anyone of the four result in a domino effect or will they all move at the same time? Will the next president have to deal with this situation?


Bush certainly wants to get these and other issues settled. The longer the international stalemate drags on, the more pressure there is on the congress to vote on drilling. The perfect timing would be to have a vote to drill and then an international settlement in time to pass the 123 Agreements. Does either US political party want to hold a convention while the price of gasoline is over $4? The congress continues to try to place the blame on OPEC, Big Oil and speculators. Only 6% of the American people believe congress is going a good job. Surely the congress will vote to open up drilling in the USA soon?

Yesterday, the house voted to patch the AMT, again. The bill also included oil company tax increases that would be partially passed through to the price of gas. The bill will be bounced around before the tax increases are removed. It sure does not seem that congress is ready to do what needs to be done, but the pressure is intense.

False Hopes -- Bad Policy -- Economics Wins

When we hope for the best, we often hope for the impossible. We want to believe that we can put a glass panel on our roof and have all the free electricity we want. We want to believe that we can stick a windmill in the air and pay nothing more for electricity. We want to believe that enzymes will chew up biomass and excrete clean fuel for free. We want to believe there is no need to burn anything to produce all the power we want. We want to have our cake and we want to eat it too. We want the proverbial free lunch.

The per kilowatt cost of electricity produced by photovoltaic cells has fallen dramatically over the past 30 years. The efficiency gains are not over as high fuel prices have given numerous companies the urge to invent the "super cell". Scientist are researching everything about solar energy they can think of. Billions of dollars are being spent. Recently, the cost has fallen very rapidly and is less than half the cost of a decade ago. It still costs about 100 times as much as it costs to burn coal!


It is true that coal is a dirty fuel. If one accounts for all the external costs (according to a study done by the Paul Scherrer Institute in Switzerland), including the pollution, the cost of solar is still more than 3 times the cost of burning coal. We want cheap solar but what we have is coal and cheap oil, even when we pay the Saudis $135 per barrel.

The two cheapest ways to produce abundant electricity is by nuclear power and by oil. The problems with oil are that most of it is used as transportation fuel and that our environmentalist have made bad choices about what to protest. We should be encouraging drilling and nuclear power and discouraging the burning of dirty coal. Of course, politicians tend to avoid speaking out against coal or the environment, we all want a clean environment but at what costs.

HOPE THROUGH TECHNOLOGY

While most every one has heard about the progress being made in solar energy, most have not heard about the progress being made in nuclear energy. New technology and the standardization of plants are dramatically lowering the cost of nuclear power. Nuclear currently cost from 4.5 to 9 cents per kilowatt hour. Coal cost from 6 to 23 cents per kilowatt hour. Include the costs of pollution and coal cost from 15 to 23 cents per hour. In America we produce half of our electricity with coal even though it cost two or three times as much as nuclear power.

Our old nuclear plants used only a small percentage of the uranium and produced a very high percentage of waste. The life of old plants has been extended 20 years beyond their original estimated life and they are producing much more power as a result of improved fuel. The volume of wast is going down while the efficiency is going up. Westinghouse recently announced another major improvement. The company estimates a 50% increase in power plant efficiency as a result of a classified technique that uses nano-technology. GE recently announced a patent on a laser technique for refining fuel that will cut the cost of fuel by as much as 70%!

GROUP THINK

So many people pine for low cost wind or solar energy that the media is full of pictures and stories. People really do not want to hear that clean wind and solar power are very expensive. A recent issue of Fortune Magazine had at least a dozen pictures of windmill farms. Dreamlike windmill "inventions" have been common in magazines like Popular Science for at least 50 years.

According to the Paul Scherrer Institute, the cost of electricity produced by windmill ranges from 20 to 50 cents per kilowatt. In the range of 4 to 12 times the cost of nuclear power, before the latest nuclear advances were developed. Once group think sets in, it is a powerful force. It was group think that has caused congress to waste money on ethanol, wind farms and solar subsides while prohibiting drilling for oil. Many ethanol plants are on the edge of bankruptcy because the cost to produce the product, even after the 46 cent government subsidy is greater than the value produced. Alcohol in car engines was tried 110 years or so ago and it was found to be problematic back then.

Once a group think mind set is established the facts are dismissed until they cannot be dismissed anymore. It took $7 per bushel corn before people were ready to hear that food based ethanol is not the answer. It was only after the price of gasoline reached $3.20 that attitudes toward drilling for oil began to change. Today, polls show that from 57 to 71% of Americans believe we should drill for oil. Congress is finally under pressure to stop spending billions on fairy tales. In the long run economics wins.

CHEAP NUCLEAR POWER

Change takes time. I was seven years old in 1957 when, theoretically, US schools were integrated. Nine years later, Roland Douthit was the one black student at my high school. Today, a black man is the democratic nominee for President. Like it or not, some votes will be cast for Obama only because he is black and some votes will be cast against him only because he is black. Change takes time.

The problems at Three Miles Island in 1979 caused a 30 year set-back in nuclear power generation. Since that time, billions of people have breathed noxious air. The Chinese will close down factories a few weeks before the Olympics in order to reduce noxious coal fumes. The good news is that China plans to build 30 nuclear power plants within the next 12 years and 6 of them are under construction now. Better still, there are 35 nuclear power plants under construction somewhere in the world right now. This does not include the reactor finally being completed in Tennessee. Will America continue to pay Venezuela $135 per barrel or will it join the rest of the world in building "clean burning nuclear power". Currently, 9 US companies have permits pending to build 31 nuclear plants. Without looking up numbers, my guess is that more than 40,000 oil wells will be drilled in America this year. Drill, Drill, Drill is a part of the solution but drilling is like the false hope of wind, solar and biomass if we think drilling will provide all the resources we need.

SEVENTY-ONE AND GROWING

At last report, 71 nations have promised to help eliminate terrorism, to help eliminate nuclear bomb production and to jointly share in the safe production of nuclear fuel. India is close to joining the group. The Indian Prime Minister faces a difficult choice, he can agree to join and be forced to face elections by December or he can refuse and do significant damage to the Indian economy. Economically speaking, all nations, including Iran, should join the group. The USA and all of the major economic powers in the world are pressing hard to make it politically correct for Iran to join.

The countries that spend 4 cents per kilowatt on energy will eventually dominate those countries that spend substantially more. Deciding not to pay an extra 400% for wind power or an extra 1,700% for solar should be an easy choice. Drilling for 5 cent oil should also be an obvious choice. It is sensible to spend on clean energy research but it is not sensible to spend billions subsidizing the production by any method. Unfortunately, the process of winning congressional districts has resulted in government subsides for every energy source. It is also unfortunate that huge taxes are collected on some sources in order to subsidize the others. "Big Oil" has won a few battles but it is a heavily taxed industry. "Big Oil" has been the convenient scapegoat.

EXXON'S SURPLUSES

Every good is priced such that there is both a consumer and a producer surplus. This means that when Exxon sells a gallon of gas for $4 it could have easily charged more or less and the consumer could have easily paid more. As a profit making company, Exxon does not charge the maximum price it could. The maximum profit is reached though a combination of high volume and "moderated price". In other words, if Exxon unilaterally raised its price to $5 per gallon, it would not sell nearly as many gallons and its total revenues would fall, its profits would probably also fall.

From the consumer point of view, Exxon could raise the price a few pennies and still sell a lot of gas. This means there are always people who could pay more. I submit that Exxon has probably saved more people more money in the past 50 years than any other company in the world while making more profit than any other company in the world. Although Exxon is despised by many, it is a very well run company. It is a very efficiently run company. It does not wast its resources. As a result of its efficiency it can charge a small mark up and still make a nice profit.

Exxon's profit margins are quite low when compared to many businesses. Computer companies, advertising companies, drug companies and many more have much higher profit margins. In a free economy, the word profit should be a positive word. Exxon sells a lot of oil because it is good at what it does. As a result, millions of people benefit, consumers and shareholders. In the long run, economics wins.

CONDI SAYS -- MY WORD IS GOOD!

Condoleezza Rice has told the Iranians that Americans want permanent friends not permanent enemies. This week, proposals have surfaced in regard to an quasi-embassy in Iran. About the same time, Condi's signature appeared on the latest UN 5+1 offer. This offer includes the concession to allow Iran to continue to refine fuel at the current rate while negotiating the final agreement. A Qatar Minister says that Iran will respond to the latest offer "soon".

Yesterday, the British Foreign Secretary, David Miliband, said, "There is a massive prize for Iran on offer... if Iran is willing to behave...". He says the offer includes "tough measures balanced by generous incentives". It is wonderful to know that so many countries are working toward a peaceful settlement.


Iran could probably work many years and not reach the current proficiency of nuclear refinement by GE. The problem is that Iran only needs a few small nuclear bombs to wreck havoc. It is know that Iran has the plans to build small bombs and it has the rockets to deliver them. From an economic point of view, it makes no sense for Iran to waste years of effort on a process that is no where close to the efficiency of the GE process. The UN offer includes free uranium fuel for Iran!

Should there be a quasi-embassy in Iran, it will help to lower the bomb, bomb, bomb Iran mentality. While we do not want war with Iran, we cannot risk allowing them to build nuclear bombs. The threat of war must be left on the table, however, the threat of war could be reduced by paring a fuel production limit with the establishment of a quasi-embassy. The Iranians would gain comfort from seeing the presence of Americans in country. Full diplomatic relations must come only after a comprehensive treaty is signed. It is nice to know the potential agreements have reached the stage where Condi is willing to sign off!

The price of oil is down $4+ this morning. Inventories increased even while two of the largest Iranian fields are "sequestered". We can get along without Iranian oil if we must. We cannot get along with Iranian nuclear bombs or terrorist bombs.

NC POLITICIANS SAY DRILL, NO DRILL, DRILL, NO DRILL

Sue Myrick, congresswoman from Charlotte, has introduced a bill to allow OCS drilling, it is supported by the congresswoman from Forsyth. Sue cites a US Department of Interior study that estimates at least 29 Trillion Cubic Feet of natural gas off our coasts. The study goes on to say that the total could be 420 Trillion Cubic Feet or more! We do not know how much is there but, for the sake of political triangulation, it is better for politicians not to find out. It is hard to confuse an issue if the facts are clear!

Our Senators are split. Burr supports drilling, Dole does not. Burr voted against the wasteful farm bill, Dole is the power politician who wins goodies for her district at the expense of us all. She is proud of getting $25 billion in subsidies for vegetable growers in Southern States while forcing those vegetable growers to support hundreds of billions of other subsidies. Why should a tax payer who grows his own vegetables pay any farmer for growing vegetables? Why should anyone else?


Our governor does not support drilling. He and his buddies in the legislature like to play power games too. In this case, they have forced power plants to be inefficient in exchange for goodies. They allow Duke Power to charge more in a three way split between Duke, the politicians and the lobbyist. The price per citizen is only a few cents here and a few cents there. The people of the state are like sheep being sheared. We like having our backs massaged by the shears.

Drill, Drill, Drill -- And....

A long-term reader responded to my diatribe about the huge international move to nuclear power with the words, "drill, drill, drill". I think he has been listening to Larry Kudlow.

The fact of the matter is that the drill, drill, drill phenomenon has reached new heights and will not go a great deal higher. In 2000, there were about 1,100 rotary oil well drills operating. The count early this year, 3,400, an increase of 309% in 8 years! And, these are not the low powered rigs of the 1970's. Some of them complete a well in 8 days! remain on site! to drill again and again! from the same location! A small patch of ground can now be used to cover many square miles as the wells are angled. Should we drill at ANWR, an area smaller than Washington DC will be used to explore and area greater than the size of South Carolina. The caribou will roam in peace. When production starts, the servicing costs are reduced by the fact that 40 or more wells end at one location. In 2000, the USA accounted for 45% of all rotary rigs, approximately 500. This year, the USA has 1,900 rigs operating or 56% of all rotary rigs! The USA has seen an increase of 380% in 8 years. The effort is on in America to find more oil; the score is 380 to 309.


The correct question is not drill, drill, drill but where, where, where? The congress has restricted drilling to the played out or least productive locations. The result: the US proportion of total oil production is going down even while we drill more wells than anybody else. It is only in America where the congress has put massive areas, about 85% of the areas of known reserves, off limits. Thus, we drill fast and hard but to less and less effect. Our oil companies are being forced to spend heavily to drill in largely played out areas. Never-the-less, progress is being made. In 2005, the USA had 130 horizontal rigs working. This year there we have 550 so far. A 423% increase in only 3 years. Sizable new production is the result of horizontal drilling combined with the process of fracturing porous rocks. The process is expensive but the oil companies are doing what they do best, producing oil. The misguided have tried to force the oil companies into other businesses, such as ethanol production. This is like requiring a professional basketball player to teach the game of chess during the off season, some could do it but others know they can't.

OFFSHORE DRILLING

The Rigzone web site provides information about offshore drilling. There are currently 176 floating rigs working. These massive drilling ships are leased at an average cost of better than $300,000 per day, 109 million dollars per year, each. The annual cost to lease these 176 ships is about 19 billion dollars. They operate virtually non-stop. Very expensive crews are at work 24/7, 365 days per year. Crew members are given rotations on shore leave. While on site, crews work long hours for week after week. One does not spend $300,000 to lease a rig and then shut it down for holidays. The costs of operating these ships is many times the cost of the leases. A single well in deep waters can cost 100 or even 200 million dollars. Drill, drill, drill, non-stop!

In addition, there are 364 jack-up rigs in operation. These rigs lease for an average of $150,000 per day. They too are operated 24/7. Drill, drill, drill at an additional annual lease cost of 20 billion dollars. Annually, hundreds of billions of dollars are being spent on drilling.

Since there are not enough rigs available, more are being built. The demand for steel (for ship hulls and for casings, etc) has been very high in recent years as the worlds infrastructure has tried to catch up with the new demand. The good news is that we almost have. Even so, Brazil recently leased offshore rigs for as much as $600,000 per day. Brazil has ordered $30 Billion worth of new rigs. Drill, drill, drill. Brazil has discovered what appears to be more than 100 billion barrels of oil. It will be several years before this oil comes on line. The most massive discovery in US Gulf waters, the Thunder Horse Field, was discovered in 1999 and was expected to come on line in 2005. It just recently delivered its first oil. The pipelines from Thunder Horse have been connected to Atlantis and Mad Dog. It is no small trick to build a pipeline on the ocean floor two or three miles deep. On the other hand, a billion barrels of oil is nothing to sneeze at.

SAMOTLOR

One of the biggest oil fields ever discovered produced about 16 billion barrels of oil between 1965 and 2003. During 38 years of production, about 17,000 oil wells were drilled in this field, an average of 440 wells per year, drill, drill, drill. By 2003, it was considered to be a depleted or a dying field. At its peak, about 2.5 million barrels of oil flowed from this field 365 days per year. The flow rate gradually fell to 300,000 barrels per day. This field is in Russia where the scientist believe in the abiotic theory of oil creation. They do not believe that all oil was made from dinosaur bones or from rotted plant material from the age of dinosaurs. They believe, as I do, that oil is being constantly "produced" by microbes, 5 x 10^ 30 of them, the number is right, the estimated number of oil chewing microbes on this earth is 5,000,000,000,000,000,000,000,000,000,000.

The good news is that BP stepped up with 10 billion dollars to purchase a half interest in this field. BP formed a new venture with a Russian company and has since drilled 4,500 new wells (900 per year), drill, drill, drill. These have been horizontal wells. They extend for up to 4 miles. The porous rocks beneath these horizontal wells are fractured, using water under high pressure and sand particles to maintain the cracks. The cracks allow additional oil to seep up, that's what I said, seep up, from the depths below. In the past 5 years, the flow rate has doubled. The extra 300,000 barrels per day works out to a retail price of about $15 Billion per year. BP shareholders deserve the profit because their company put 10 billion dollars plus development cost at risk.

LESSONS LEARNED? NONE?

The average person can not seem to wrap his brain around the size and relative values of the energy market. People with considerable "brain power" are easily side tracked. For thousands of years, there has been the dream of abundant power from wind mills and, as kids, we learned how to focus the sun to fry ants. I have no data to support my belief that there have been hundreds of windmills abandoned for every single one that is producing energy today. However, I know that my father once hauled two windmills from North Dakota to North Carolina only to discover that the permits would cost him more than the value produced. We simply do not seem to appreciate the "effort" that went into making coal, oil and gas for us. We have been given great gifts. Perhaps the real problem is that we are too proud to accept the gifts given? Drill, drill, drill.

Jimmy Carter proposed that we wear sweaters in the winter and that we tax the oil companies wind fall profits. Who among you is willing to spend 100 million dollars drilling a hole that may produce zero return? Most of you own a tiny piece of Exxon in a mutual fund such as an S&P Index fund. Exxon is a very profitable company and it produces a massive consumer and a massive producer surplus. Both consumers and shareholders benefit greatly from the efficiency of Exxon.

Theoretically we understand fundamental laws such as gravity, the conservation of energy and supply and demand. In practice, democrats are once again proposing wind fall profits taxes. Jimmy Carter used billions of dollars from his wind fall profits taxes to develop synfuels, have you put any synfuel in your car lately? The fact is that the wind fall profits tax made things worse not better. After all, the laws of economics tell us that if you want to reduce the quantity of a good and to increase its price, tax it. Today, you and I are required to pay high prices for oil so that politicians can waste our money on very expensive wind mills and very expensive corn oil refineries. It costs at least 35% more to make power with windmills but, that is OK, your taxes can be used to cover the operators losses.

YES, DRILL, DRILL, DRILL IN AMERICA!

The big ships are drilling mostly in foreign waters. America has vast untapped resources. What has basically happened in America has been the political marriage of socialist and environmentalist. The socialist believe in command and control economies and the good intentions of the environmentalist have been subverted. Americans are being forced to breath noxious coal fumes while trillions of cubic feet of clean burning natural gas sits. In Alaska, we actually pump billions of cubic feet of gas, produced in conjunction with oil production, back into the ground because construction of a gas pipeline continues to be blocked.

We breath noxious coal fumes while construction of emission free nuclear power plants are blocked. In the USA last year, 50 or so coal miners died and millions of Americans suffered from respiratory problems while Harry Reid blocked the storage of nuclear waste. US citizens pay billions of dollars to Venezuela each year. Some of our money goes to train terrorist and to buy bombs that are used to blow up innocent men, women and children. Some of our money is used to support FARC while democrats refuse to allow American companies to sell goods to Columbia.

Seventy one nations have signed a new treaty designed to eliminate support for terror while supporting UN supervised consortium to refine nuclear fuel. Signors to the treaty cannot have it both ways. They cannot support terrorist bombs or hide nuclear bombs and participate in this extra cheap fuel. GE has patented a new nuclear fuel production process. Laser beams are used to produce fuel at a fraction of the cost of the old process. It will take years to build the refinement centers but they can be ready by the time new power plants are constructed. The time to start is now.

Drill, drill, drill is not enough. Less than half of our energy consumption is oil. About half of our electricity is fueled by coal. Most of the rest is fueled by natural gas and nuclear power. A small amount is fueled by hydro. A very small amount is fueled by oil. The amount produced by wind power is relatively close to nothing; solar power is also close to a big nothing. Wind power receives average subsidies of more than $23 per megawatt and it still is a relative zero. The HEE HAW routine applies: "Doctor it hurts when I do that." "Then don't do that!" The French get 80% of their electricity from nuclear and they export power. The USA needs to stop shooting itself in the foot with wind fall taxes and $5,000 subsides for cars. We can go from 20% nuclear to 80% nuclear if we choose. If the "super battery", whether a hydrogen cell or not, is developed, then we can convert nuclear power to transportation fuel.

The simple answer to our energy problem is to replace income/payroll taxes with consumption taxes. The laws of economics tell us that the change would result in an increase in our income and a decrease in our consumption. What is not to like about that! A tax on carbon would make dirty coal less attractive. It would make wind mills, solar and nuclear more attractive. A reduction to the income/payroll tax would offset our costs in the short run and pay us a bonus in the long term. The response would be rapid. If we all knew the tax on gas was going up 10 cents per year for the next five years and that our payroll tax would fall by an equal amount, we would all find ways to reduce consumption and thus we would lower our individual tax burdens.

One of the beautiful things about a consumption tax is that foreign oil sheiks would pay a portion of the tax. For example, the laws of economics tell us that a 10% increase in the tax on gasoline would not result in a 10% increase in the total price. The increase would cause a shift in the point where the demand curve crosses the supply curve. The result might be an 8% increase in the total price and about a 12% decrease in the revenues to the oil sheiks. The consumer might save $100 in income/payroll taxes for each $80 increase in consumption taxes.

DRILL, DRILL, DRILL BUT REFORM THE TAX CODE! FREEDOM!

We Agree! On Nuclear Power!

There is a coalescing around nuclear power. In Japan, a Fast Breeder Reactor, closed down in 1995, is set to re-start soon. In India, a new Fast Breeder Reactor is under construction. France just signed a nuclear deal with Algeria. Russia just signed a deal to supply China with a billion dollars worth of nuclear fuel and equipment. Seventy-one nations have signed a treaty endorsed by Russia and the USA that will assist in the safe development of safe nuclear power. Most importantly, the attitude of Americans has changed. A number of ethanol plants are being shut down and 13 companies have applied to build 31 nuclear plants in America.

John McCain has proposed the construction of 45 nuclear plants. Once this process is underway, many more than 45 will be built. McCain has also proposed a 300 million dollar prize to the developer of a "super battery". No prize is needed because the race to develop a "super battery" is well underway. Billions are being spent and the prize for success will certainly be many times the 300 million dollar "tax payer" prize. McCain also has proposed a $5,000 tax credit for those who buy a zero emissions car. McCain is trying to be the best democrat on the ballot. Maybe republicans should just stay home. Instead of Robin Hood, candidates for President are becoming Hood Robins. Just like what happened with ethanol, it will be the poor who will subsidize expensive electric vehicles.


Obama has endorsed nuclear power, provided the waste can be properly stored. The massive 123 Agreement submitted to congress on May 13, it becomes law 90 days from that date if not voted down by congress, includes reprocessing and storage of spent fuel.

Oops, there is still need for more coalescing. Democrats in congress have cobbled together a bill that would prohibit the 123 Agreement with Russia. Whose side are these guys on?

The congress is also on a witch or devil hunt. The congress is trying to blame futures traders for high oil prices. The congress uses the word speculator as if a speculator is the devil incarnate. For every devil who trades a futures contract, an angel must take the other side! Both the buyer and the seller are making a guess as to which way the price will go. To the extent that speculators are right, they reduce the volatility of the market and help us all. If the price of fuel must go up, it is better for it to go up some this year and a little more next year than to jump in price next year. Right now, the speculators are betting on lower prices next year. As a result, they are actually keeping prices down. The problem has been that even the smartest of speculators did not foresee how huge the growth in China and other developed nations would be or the extent to which the "global warming crowd" would be able to distort markets. It is absolutely silly not to drill for oil because of the air temperature. Coal produces much more C02 than does oil and much more than natural gas. The USA could easily have more than 500 Trillion Cubic Feet of Gas off our coasts. We need to find out.

The worldwide move to avoid global warming took on a life of its own. Europe is using less coal in its energy mix. Less coal and no growth in nuclear required an increase in drilling for natural gas (not nearly enough in the USA) and thus fewer rigs available for oil drilling.

Coal is a dirty fuel. It can be cleaned but the cost is high. One of the beauties of abundant nuclear power is that it will make clean coal affordable. It is one of those political-news-media ignored facts that the richer a nation becomes, the cleaner it becomes. The US has relatively clean water and air. China is forcing half its cars off the road over the next 7 weeks in order to try to have clean air for the Olympics. China has over produced goods in recent months so that coal fired electricity plants can be closed down prior to the games. Whenever possible, more expensive natural gas has recently been used in China to avoid burning dirty coal. The push to be ready for the Olympics will be over soon.

The energy markets have been in a "perfect storm". Storms are temporary. If we assume that the 123 Agreements are going to go though (the one between Turkey and the USA went into effect on June 2), then the odds become high that many nuclear power plants will be built. Nuclear plants will effect the price of motor fuels. Speculators who believe the price of oil is going to $200 will make different bets if they believe the price is going to $70. The good thing about financial speculation is that premiums change in an instance. Still, it will take time for markets to adjust. Nuclear power plants take 5 years from breaking ground to finish. The good news is that a number of plants are already under construction, with China leading the way. The other good news is that several big oil projects are being finished (including the one in Saudi Arabia that is allowing the increase of 1.2 million barrels per day by next year) and that several more will be in the coming months and years.

It is a shame that both major candidates for President of the USA believe in raising taxes in order to pay for pet projects. To paraphrase Milton Friedman, the good intentions of the powerful does not grant them the right to do wrong. Nuclear power can be built in abundance. The abundance of resources does not excuse us to waste resources. We need to change from an income tax system to a consumption tax system. Those who save their income should not be taxed for doing so. We will not reach a consensus on a consumption tax for a long while but for now, it is great to know that the world is coalescing around the construction of clean, safe, nuclear power.

The War Between Saudi Arabia and Iran

Yesterday, the Saudis held a conference to assure an oil thirsty world that supplies will be adequate. This conference was held just a few days after the Saudis accused the Iranians of using Bahrain's citizens to spy on Saudi Arabia. There is no love lost between Iran and Saudi Arabia. At the conference, the Saudis spoke of increasing production while Libya spoke of potential decreases by Libya, Algiers, Qatar and Venezuela. The situation in the Middle East is always more complicated than it seems. The Libyans are Sunnis. Did they show support for the Shiites of Iran or are they simply after keeping the oil price high? Does the support of Venezuela help or hurt Iran's cause?

British Special Forces have evidence that Iran is supporting the Taliban against the government of Afghanistan and the US has evidence that Venezuela has 5 bases where Hezbollah terrorist are trained. Those who want peace know that Iran is the ring leader of war. It is clear that Chavez is nothing but a petty dictator. The response of Chavez was to nationalize a milk plant to "cure" the problem of milk shortages in Venezuela. As is typical of command and control economies, now that Venezuela has nationalized a number of industries, shortages are the only thing in abundance.


There are exceptions to every rule. The Saudis produced 9.6 million barrels of oil per day for some months following Katrina. Production continued at an average of about 9.4 million barrels per day until prices fell significantly in the fourth quarter of 2006. Saudi production was cut by a million barrels per day by June of 2007. The high prices of 2008 induced a climb to 9.2 in April, to 9.5 in May and the announcement of 9.7 in July. The Saudis are rationally responding to the market price. In the meantime, Iran has 30 million barrels loaded onto ships and has offered this oil to any taker for $6 per barrel below market rates. The Iranian oil minister, Ghanimifard, said just a week ago that the oil would not be discounted. Bloomberg reports that 13 oil tankers are still parked. Bloomberg cannot confirm the 30 million barrel figure but there is no indication that the oil has been sold. Ghanimifard says the seasonal maintenance of heavy oil refineries will be finished by the end of June and the oil will start flowing again, and the Easter Bunny will deliver. His words were directed to the Iranian people. Ahmadinejhad just closed down another critical news paper.

India has worked its way into a bargaining position. India completed a huge refinery just a few months ago and is looking for a long term supply contract. The oil being offered by the Saudis is a good fit. The new refinery is designed specifically for the heavy - sour crudes that the Saudis can add to the market quickly. A major Saudi field has been mothballed for several years while the Saudis have waited for higher demand for sour crude. The Saudis say they can add 2.8 million barrels of production by the end of 2009. The Indian refinery is huge but it can only handle 1.2 million barrels per day. India is trying to play Iran and Saudi Arabia against one another. Iran, Pakistan and India continue to assert that the IPI pipeline, a 7.5 Billion Dollar gas pipeline, should be built. Those who desire Iran to give up its nuclear warhead ambitions are ready and willing for Iran to sell gas and oil, as soon as a deal is made on the nuclear/terror issue. The UN Security Council and Germany have offered free nuclear fuel to Iran as one of several incentives to "make a deal".

Whack a Mole -- In Canada?

The good folk at Stratfor report that Hezbollah seeks to pull off a major terrorist attack, perhaps in Canada, as the way to convince Iran to continue its support. My take is that any attack right now would be bad news for Iran. The EU will meet to discuss additional sanctions tomorrow. Syria, which has negotiated a deal with Israel in regard to the Golan Heights, Lebanon and protection of Israel from rocket shots from Hezbollah, supports the end of Hezbollah terrorist activities. The negotiations with Iran must be handled carefully because a trapped animal is prone to lash out. Still, little by little, the wall around this trapped animal is approaching completion. For example, a "Shiite Awakening Council" in Iraq has accumulated 3 million signatures on petitions asking Iran to stay out of Iraq!

Goldman's Joke

A couple of weeks ago, when jet fighters from Israel were engaged in joint maneuvers with Greece, the price of oil made its biggest one day jump ever. This past Friday, negotiators re-told the story of the maneuvers to "turn up the heat". The maneuvers were suddenly being described as a "practice run". Goldman predicted oil prices of $200 per barrel back when the maneuvers were taking place. This past Friday, Goldman used the report of maneuvers as a good time to offer twisted logic in concern to oil demand in China. After a meeting with Hank Paulson, US Secretary of Treasury and former Chair of Goldman, China made a significant move to curb oil demand. The consumer price in China was raised by 18% to $3 per gallon. China will need to raise prices another 30% to reach market rates. The 18% jump was huge.

The average American now spends 9% of his disposable income on fuel. Averages, like all statistics, sometimes hide the truth. The truth is that many "big city Americans" ride subsidized trains, buses and subways. Many of these Americans spend 2% or less on fuel. Many rural Americans spend 16% on fuel while many others spend 10% while paying extra taxes to support the 2% price. Americans who spend 16% can live with $4 gasoline for a while, a tough price to pay but doable. Three dollar gasoline in China is a more serious blow to the family budget. Officials need to end wasteful use of fuel by raising the price to the market price but they must take the price up in steps in order to avoid the kind of shock that could cause armed protest.

The 18% increase in the price was a blessing to Chinese oil companies. They were being squeezed by high wholesale but restricted retail prices. The Goldman logic is that because fuel will become more available in China, now that the price is higher, the total usage will go up. This is another one of those short-run versus long-run issues. Give China another 30 years of rapid growth and the country will use as much oil per capita as the USA (except that they are into battery powered vehicles). Give them an immediate 18% increase in price and the fear of additional increases and they will find ways to cut back in the near term.

UN negotiators have reportedly offered Iran the option to begin talks without suspending production of uranium. The UN will accept a freeze at current levels of production as a way to get the next step of the negotiations moving. Iran needs to take the deal because its oil market is drying up and it could miss the chance to join a nuclear consortium that will refine fuel.

If you take a few steps back, the view is interesting. After three mile Island, it appeared that nuclear power was dead. Since that time, tens of thousands of coal miners have died and millions of pounds of toxic fumes have poured out of coal fired power plants. Hundreds of thousands of people have died early deaths due to air pollution.

Today, there is a world wide scramble to build nuclear power plants. Over the past 30 years, many billions of dollars of subsidies have been dolled out in support of windmills. The facts are that wind power cost about 3 times as much as nuclear power and that all these subsides have gotten us to only about one half of one percent wind power. It took a lot of time, a lot of waste and a lot of deaths, but the majority now supports drilling for oil and building nuclear power plants. Grandpa told me to stay on the road because it is really hard to get back on after you run into a ditch. Nuclear power ran into a ditch 30 years ago but it is finally back on the road. Is it ironic that Saudi Arabia is a major player in getting nuclear power back on the road?


The War Between Saudi Arabia and Iran

This "cold war" is actually between Iran and most of the rest of the world. A friend says he wants the USA to reach total independence from foreign oil. I asked him about bananas. He said he has a choice to buy bananas or not. Yes, he does. He has a choice to buy gasoline or not. We choose to buy bananas from the tropics because they are cheap. We choose to buy oil from Saudi Arabia because it is cheap.

The Saudis own a lot of oil and India owns a lot of bananas, does it not make sense that they remain dependent on one another? Why should the Saudis even consider trying to raise bananas in their deserts. My friend seems to think that one can get along without bananas much easier than without fuel, but how about corn, wheat and barley? Which is strategically more important, food or oil?

The tricky thing is that governments must create a false crisis in order to "move the agenda". "Peak Oil Theory" gets a lot of press because drilling for oil in the USA was purposely restricted. To get "permission" to build nuclear power plants, required an energy crisis.

After the "war to end all wars", America withdrew from international affairs. The results were horrible and the next war cost about 80 million lives, included more than 500,000 US servicemen. To reach the promised land of peace and security, nations must build strong international relationships. In the grand scheme of things, it is pretty amazing that millenniums of war in Western Europe have ended. It is pretty amazing that Saudi Arabia, Israel, Western Europe, Australia, Canada, China and Russia are all cooperating in trying to reach a peaceful settlement with Iran. I am thankful that all these countries and many others are "on our side". We do not desire to take anything from Iran. We only want to abide in peace. The odds of peace in the Middle East are as high as they have ever been.

A Quick Turn

Just a few weeks ago, a number of broker dealers suggested that most of the big airlines were flying toward bankruptcy. Last week, a deal was made for these same brokers to help CAL sell 11 million shares of stock. Today, brokers are calling their clients telling them that they have a good CAL deal available. Part of their spiel is that CAL will pay the sales commissions. For CAL holders, the additional shares are dilutive. My favorite comparison is to the Oakwood Homes dilution some 20 plus years ago. A lot of investors took the dilution as extremely bad news but the extra cash was used to build additional capacity right at the start of a "jump phase" in the business.

CAL is prepared to maintain the most efficient major carrier fleet in the USA. Midwest Air just announced that it will park all 12 of its MD-80s. The company will furlough 25% of its pilots and restructure its remaining routes to fit its remaining fleet of Boeing 717's. The "old SUV s" and the "super sports cars" of the airline business are being parked. The newer and more efficient "buses" are flying full and the ticket prices are going up. Higher fares on the most fuel efficient planes will lead to higher profits.

CAL has made a major deal with UAUA. The deal will not close for many months, but the direction has been set. Governments are allowing major carriers to "merge without merging". The integration of airlines has proven to be difficult. Agreeing to cooperate in markets has proven to be the way to cut costs and to increase revenues while avoiding the process of integrating operations. The process could easily ultimately lead to a merger of CAL and UAUA. It will also make a deal between AMR and BAY all the more likely. Trust busters will view a deal between British Airways and American as necessary to fair competition, rather than a monopolistic move by the "big boys".

The first quarter profit of Exxon was enough to buy all the shares of AMR, UAL, DAL, NWA, CAL, Alaska Air, JBLU, LCC and AirTran, with a billion dollars left over. Airline stocks are cheap.

Reader Comment -- $1,000 for Some Kids, Not for Others.

A regular reader teased me Saturday. He said, "you really do not like government subsides do you?" NO!

Government "incentives and disincentives" have unintended consequences that only government can "fix". When the government fixes one problem, it creates three more.

The $1,000 tax credit for children is an example of the crazy results promoted by the government. Some of you will laugh and say that a $1,000 annual tax credit is not enough to cause you to have a child. That might be true but the laws of economics are clear. Taxes and anti-taxes do effect behavior. Some Americans have at least one extra child today because the government pays.

But wait, who receives the $1,000 "bonus"? Not the poor, they are paid more than $1,000 per child in other subsides. Not the rich, they do not qualify. The $1,000 is a tax credit but the poor pay no income taxes and the "rich" are subject to the AMT and thus do not get the credit. So, a small percentage of the middle class are being paid $1,000 per year to have children and, due to many other subsides (details at another time), the poor are being paid many times $1,000 to have children.

Once again, the laws of economics are clear, pay for poor and middle class kids and you will have more; charge extra for rich kids and you will have less. The beauty for the politician is that the increase in the number of poor kids becomes the rational for having more government programs to help poor kids. The next thing you know, mothers are being paid to leave their husbands. While many a single mother does a great job of raising kids, the chances of a child from a single home making it though high school in 4 years is relatively slim. The odds of years in prison are relatively high.

Iran is subsidizing the bombing of innocent men, women and children. It is my hope and belief that the actions of Saudi Arabia to help cut off the income of Iran, will help end the practice of governments paying for terror.

The Chicken or the Egg: Strong Dollar or Weak Oil: High Investment or High Return

Markets put things in the right order. Market mavens often put things upside down, backwards or both.

Which comes first, a strong dollar or weak oil prices? My favorite market TV show is Kudlow and Company. Larry Kudlow does a good job of applying economic principles to money and politics. Larry is a smart man but he sometimes joins the crowd in getting things backward. In recent weeks, he has been on a "strong dollar kick". He has wanted the Secretary of the Treasury, the FOMC chairman and the President to "talk up the dollar" and to thus bring the price of oil down.


The dollar will strengthen if the US adopts the right policies. All the talk in the world will not rescue the dollar. To his credit, Kudlow has more recently pushed "drill, drill, drill" for US oil reserves. The US dollar will strengthen when oil prices come down, not the other way around.

Oil prices are acting like a tax. High oil prices are depressing economic growth. To offset this tax, the FOMC has lowered short term interest rates. In the short run, the FOMC has been caught in a negative feedback loop; every time the FOMC lowered rates, the price of oil went higher which meant that even lower rates were needed to offset the tax. Now that the forces of supply are weighing hard on the price of oil, the tax is going to go away. Lower taxes will mean stronger growth and stronger growth will lead to both a stronger dollar and ultimately higher interest rates.

Even here, the TV talking heads often get the chicken before the egg when they suggest that it is higher interest rates that lead to a stronger dollar. Keeping in mind that inflation is the result of excessive money, the answer to what interest rate policies do depends on ones time frame. An increase in short rates will actually cause long rates to come down after given time to work. It is a stronger economy that pushes up the dollar but it is a strong economy that pushes up the demand for oil. When capacity is restrained, a stronger economy is not possible without a spike in oil prices; once capacity or economic efficiency has been increased, the economy can grow without putting the same amount of pressure on oil prices. In the short run, a decline in oil prices is a lowering of perceived inflation, but will this lead to lower interest rates? Brian Wesbury is one Chief Economist who believes lower oil will lead to higher rates. We must remember that interest rates are composed of two parts; growth and inflation. The good news is that the growth component of interest rates is about to increase relative to the inflation component! High growth and profit by US businesses should cause a flood of investment into the US (especially if the McCain - Rangle corporate tax rate cut comes through).

The Chicken or The Egg: Inflation or the "news"?

As I have mentioned many times, inflation is a lagging indicator. Inflation actually goes up in the short run as a result of a slow down in the economy. The example I have used is the airline business. In a slower economy, airlines cut back on capacity which allows them to raise the price. The result is a lot of very negative talk near the end of an economic slowdown when the slowdown is suddenly accompanied by reports of extra high inflation. It should be no surprise that the "news" about inflation is even more of a lagging indicator. High inflation hits but the financial figures do not show up until a month or two later and the "news media" is like a flock of chickens that eventually discovers the source of food. The chickens do the most squawking when they see the food arriving and after the food is gone, they are relatively quiet while eating. Right now there is a lot of squawking about inflation but the worst is already over.

The Iraqi Oil Law or Increased Iraqi Oil Production?

Iraq has struggle to reach an oil law agreement. The Kurds want to control the northern supplies, the Shiites want to control the southern supplies and the Sunni's don't want to be caught in the middle without revenues. The Maliki coalition must have the support of some Kurds and some Sunni to function. Isn't democracy grand? We all hate having to deal with the dumb lumbering giant called democracy but it is far better to battle at the voting box than with knives, bullets and bombs.

Since the government has not been able to pass a nationwide oil revenue sharing law, the decision has been made to bring on new production first. Exxon, Shell, Total, BP and Chevron are in final negotiations to provide technical assistance to increase production over the next two years. It is anticipated that 4 to 500,000 barrels of daily new production will be online by year end. This new production will give the people hope, revenue, and confidence. The democratic government will be strengthened. The opponents to an oil sharing law will be tempted by the presence of an increasing flow of revenues that need to be split.

The Oil Law or the Security Agreement?

The Iraqi foreign minister says that the July 31 deadline for a security agreement between Iraq and the USA will be met. The agreement will cover: 1) the number of troops and bases, 2) the lack of commitment to defend Iraq (this agreement cannot include the promise to defend Iraq against outside forces or it would become a treaty subject to the disapproval of congress), 3) the immunity of US troops from Iraqi courts, and 4) the power of US troops to arrest and hold Iraqi citizens.

Secretary Rice has made it clear that US security negotiators are not involved in the negotiations between the oil companies and Iraq. Several of these oil companies had major investments in Iraq some 36 years ago. The plan is for them to be paid a portion of the oil they produce. Back in the early days of Texas, the common split was for the oil producers to get one barrel out of every eight, a 12.5% share. Based on the history of nations which have nationalized fields, the one out of eight is a very good deal. Mexico, for example, kicked out the major oil companies years ago and is now close to having to import oil. To solve this problem, Mexico is considering allowing these "pros" to produce the oil, in exchange for a share. I am sure the split for very expensive deep water oil is much higher than one of eight. The telling story is that the estimated reserves in Iraq have been increased by about 200 billion barrels because these major producers have the know how.

The details of the SOFA (Status of Forces Agreement) are best left to the "pros" as well. What is going to be interesting is the agreed upon troop levels. We might see a major withdrawal if the two parties agree that 140,000 US troops are not needed, now that Iraqi forces are functioning well. The proper sequence here is victory and then withdrawal not withdrawal and defeat.

The Democrats Have Done It Again

A deal was just made between Bush and the democrats. Additional war funding of $162 billion was just passed. Triangulation politics required the dems to get this issue out of the way well before the elections. Pelosi was once again caught in a no win position. Democrats cannot admit the war is going well nor can they vote to withdraw. Using the football analogy, it would be silly to quit the game with the ball sitting on the 1 yard line, first and goal.

Nancy had to swallow twice. She swallowed the $162 billion in funding and she swallowed her pay-go rules again. You may recall that the democrats took the house in 2006 by promising to end the war and to not borrow any new money. They said they would practice "pay-go". The irony is that they added other bells and whistles without funding these items either. The extended unemployment benefits added is one of the typical democratic response to an economic slowdown. This is not a which is first, the chicken or the egg question. In this case, the democrats decided it is better to kill the chicken, eat it this summer, and not worry about the coming shortage of eggs this winter. Once again, the policy is to pay someone not to work, rather than to give a tax break to someone who is willing to work more.

The other addition to the bill was to increase GI college benefits from $40,000 to $90,000. As one whose college tuition was paid for by the GI bill, I certainly support GI benefits. I drew $242 per month from Uncle Sam for 4 years after Vietnam. Hanging $90,000 in front of a five year vet is a very different proposition. Our all volunteer army requires different strategies. The left should not try to bribe a professional soldier to leave the service. We need the best and the brightest to receive the best military education available.

One of my favorite movie scenes is that of Mel Gibson playing William Wallace in Braveheart. When Wallace was being tortured to death, he used his last breath to scream "Freedom". Some years after his death, at the Fields of Bannockburn, Scotland won its independence. Throughout the centuries, many people have died in defense of freedom. Wars should be avoided if possible but they should be fought to win. After voting to enter the war, it is the responsibility of the congress to fund the troops.

Natural Gas Prices Up or Gasoline Prices Down?

The great run up in the price of oil has not been accompanied by the price of natural gas. Based on the BTU value, either natural gas is very cheap or oil is very dear. Now that Qatar is shipping billions of cubic meters of LNG, its seems more likely that the price of oil will move toward the price of gas.

Over the longer term, the environmentalist must appreciate the chicken or the egg power question. Many environmentalist hope to replace gasoline engines with electric engines. The Plug-in hybrid is the rage but it is being charged by coal fired power plants. Hundreds of thousands of people die each year as a direct result of coal mining and coal power. We have trillions of metric feet of clean burning gas available. The north slope of Alaska can fill our needs for many years.

McCain has caught up with the 123 Agreement reached between the USA and Russia. McCain proposes that 45 nuclear power plants be built in the USA between now and 2030. He proposes that the permitting process be reduced to 2.5 years or better. You cannot replace gasoline cars with electric cars unless you have the electricity to spare. You do not help the environment by converting from oil burning cars to electric cars fueled by standard coal burning power plants. The reason a tax on carbon with offsetting payroll or income tax breaks is better than a cap and trade tax is because the carbon tax is applied to all sources of carbon prorata. The market then determines which fuel is used after taking the carbon costs into account. The correct sequence is to get the permitting of the nuclear power plants underway so that improved batteries can be charged 7 or 8 years from now.

Sanctions or Bombs?

The lefties have posted, all over the Internet, their belief that Bush is preparing to bomb Iran. Bush could have started with that strategy in 2002, but he didn't. He has followed strategic military advice and taken out the easy targets that surrounded Iran. He has gotten the world to mobilize around sanctions as a method of avoiding war.

Condoleezza Rice is every where, she's every where. She just made her 20th visit to Jerusalem. She just spoke at a Heritage Foundation Meeting where she talked about Pakistan, China, India, Iran and North Korea. She just met with Ban Ki-Moon and encouraged him to "get involved" with the Shebaa Farms negotiations. She is prepared to let many others share the credit for achieving peace agreements. She is on the way to China to visit earthquake victims and she will visit South Korea afterward. She has pressed the UN to act on Zimbabwe violence. She is keeping a high profile. Once again, she has presented the Iranians with the powerful argument that the US does not make permanent enemies but we do make permanent friends. We prefer no sanctions and no bombs but sanctions are our choice between the two.

Prime Minister Brown, Energy Secretary Bodman, Vice-President Xi Jinpiing and many others will parley with the Saudis this weekend. The Iranian oil minister will be present when the leaders at this conference make it clear that there is going to be increased supply and reduced demand until the price comes down. It should become clear to Iran that Iran's oil is not necessary to the rest of the world.

China just made a substantial contribution to this effort, more so than the announcement of 200,000 more barrels of production from the Saudis. The Chinese just raised the domestic price of oil by 18%. This is probably the first of several moves to take the price to the market price. Can you imagine the shock. What if you lived off of $4,000 per year and suddenly saw the price of gasoline jump 18%? Would you drive less or eat less?

Peak Oil or Peak Gasoline Demand?

Many environmentalist believe we are near "peak oil", the maximum level of production before world wide production declines set-in. Dan Yergen says we might be at Peak Demand, the point at which we find substitutes for gasoline. If Russia, China and the USA each build 45 nuclear power plants, plug-in hybrids might be well on the way to replacing the internal combustion engine.

It is believed that the latest bombing in Iran was placed by Shiites to kill Shiites with blame pointing at Sunnis. The purpose was to restarte the secular war between Sunnis and Shiites. The start of WWI was an assassination. Ahmadinejhad claims to have thwarted an assassination attempt by leaving Baghdad earlier than scheduled. Desperate measures for desperate times.

If Iran and the US Congress will get out of the way, private enterprise will find the energy we need at the lowest cost possible. Yesterday, a democrat proposed that the US Government take over the US refining business. The government just had to privatize the senate food service due to massive losses. If the government cannot run a restaurant, how can we expect it to run a very tough and complicated business. How would you like to take the chemistry classes required to be an oil refinery engineer? How would you like to be in charge of a plant where volatile liquids are heated to high temperatures in order to separate them into more volatile liquids?

Dumb and Dumber!

Over the past several weeks, McCain and Obama seem to have been playing a game to see who is dumb and who is dumber. While their success at gaining their parties nomination for president shows political skill, neither has demonstrated an understanding of basic economic laws, until recently.

Last week, Obama said, "Globalization and technology and automation all weaken the position of workers". Can you picture the daily life of a factory worker 100 years ago and compare that image to today's reality? Obama must have smoked a little weed with his leftist friends.

McCain is famous for his support for campaign finance reform. Obama has announced that he will forgo the $83 million dollar government grant (and the restrictions tied to it) and raise as much as he can to run his campaign. So far, he has raised $262 million dollars. If the result would not be so tragic, it would be sweet revenge for McCain to lose this election as a result of his attempts to have government rules and regulations replace the free market of words and ideas.

FREEDOM

You would think that McCain, a war hero, would relish the last word of William Wallace. To McCain's credit, he is listening to the advice of others. His anti drill attitude was wrong but it has been replaced. Doris Kerns Goodwin, who wrote a biography of Abe Lincoln, likes to note that Lincoln was willing to say that times have changed and so have I. When McCain voted to not drill in ANWR, the price of gasoline was $1.63 per gallon. Obama would vote today not to drill in ANWR or on the OCS. McCain has changed his position on the OCS and is studying his position on ANWR. Sometimes, we have to put the chicken first and at other times we must understand that without eggs there will be no more chickens.

As conservation steps take hold, the money not spent on oil will be spent on something else. BUY, BUY, BUY! Something else!

Snowballs Keep on Rolling

When McCain did his 180 on OCS drilling, I wrote about how the pipeline from Alaska is already built and thus the environmentally correct thing to do is to drill in ANWR first. Today, McCain is reviewing his ANWR policy.

Opinions are changing fast. Snowballs are rolling in June. There is about to be a huge shift in momentum! A regular reader says that McCain will win the Presidency if he selects Condi as his VP.

CAL up on global cooperation with UAL.

Snowballs Are Starting to Roll -- BUY, BUY, BUY

Another strong buy signal plus the following.

July 13, Olmert will meet al-Assad in Paris. The deal between Syria and Israel is essentially ready to sign.

Condi Rice reports that North Korea is ready to declare the details of its nuclear bomb program and thus Bush is prepared to remove North Korea from the terrorist state category. Sanctions will be removed and trade deals will flourish.


The Saudi Summit this weekend will discuss ways to lower the oil price. The price is down $3 today and the airlines are cutting out their non profitable routes.

The EU will hold a summit Tuesday at which Brown of England will push for additional sanctions against Iran.

Iran has declared that they are ready to discuss the UN package of incentives.

Condi Rice chaired a conference today where the use of rape as a weapon of war was discussed.

Russia has tested the depths by drilling a 40,000 feet oil well. Mother Russia struck massive quantities of oil.

After Condi Rice visited Lebanon, she said that the new government is good for the people of Lebanon and thus good for the USA.

Patterns that are developing include:

1) High level negotiations are taking place.

2) Leaders from France, Egypt, Turkey, UAE, Oman and others are working hard as mediators.

3) Condi Rice is "in the news".

4) There is steady movement toward drilling for oil in the USA. (A democrat just came out in support of nationalizing the US refining business but common sense is starting to flare up in other minds.)

5) There is a definite push to get nuclear power deals in place quickly.

The info about the 40,000 foot well in Russia came from a Youtube sent to me by a regular reader. Lindsay Williams, the author of "the Energy Non Crisis", says that there is 200 years worth of oil on the Alaskan North Slope. His estimates sound overly enthusiastic to me. One of the factors he does not mention is the cost. I have forgotten the details but Exxon spent something like 200 billion dollars on one very deep well in the Gulf of Mexico. I am fairly sure it was not nearly 40,000 feet deep. Who is going to routinely spend several hundred billion dollars in search of crude that is very expensive to lift?

I happen to believe that oil is renewable. I believe it is being manufactured all the time. I believe only a small portion has been discovered. Still, it is not realistic to expect drillers to spend 200 billion on a well immediately after a big run up in the price. If the price were to remain above $130 per barrel, I would expect super deed drilling to become routine. The huge quantities discovered in Brazil are at about half the depth of the Russian well. Drillers are leasing drill ships for as much as $600,000 per day. The congressman who want to nationalize US refineries is the type of guy that would look at Tiger Woods playing golf and decide that the game is easy.

Iraqi troops just waltzed right into another militia strong hold. Peace is breaking out in Iraq and Iran is ready to talk. Snowballs are gathering momentum. Rice is in the news. I hear a draft Rice for VP chant in the distance.

BUY, BUY, BUY SIGNAL

On top of many other buy signals, check out the following.

Thompson DataStream has produced a chart showing the amount of money on the sidelines is at breakout levels. At the 1981market bottom, the peak in money relative to corporate stocks reached 21%. It hit 18% at the market bottom in 1990. It reached a low of only 7% near the market peak in 1999. It reached 20 at the bottom in 2002 and it is at 23 today!

Fast and Furious Progress and Booming Growth

A Sunni group has taken credit for the bombing of a Mosque in Iran and the government of Iraq, at the request of Iran, has banned all dealings with "MEK" a Sunni terrorist group that was used by Saddam to attack Iranian targets. The MEK is not happy about being "cut off" by the Iraqi government and they have appealed to the UN Security Council for relief; they should not hold their breath. Terrorist who were once routinely supported by governments from Libya to Yemen are being shunned. This great news is not being widely reported but it is great news. An important part of this story is that objections to the deal to permit peace keeping troops in Iraq are being removed one after another. Once this deal is in place, one of the big piece remaining pieces to this puzzle will be the pending deal with Iran.

Over in Lebanon, Condi Rice just met with President Suleiman. The US cut a back door deal just a few weeks ago that allowed his ascendancy to the Presidency despite the political power granted to Hizbollah in the process. It is OK for Hizbollah to have political power but not OK for them to commit acts of terror. The support of the US and Syria for an agreement between Lebanon and Israel is certainly an important piece of this peace puzzle. Olmert and Suleiman are ready for direct talks. This means the deal is basically done. The hang up over the farms of Shaba, which Israel has agreed to return are claimed by both Syria and Lebanon. The French were instrumental in mediating an agreement between Syria and Israel. The implication has been made that the UN will recommend some kind of a split or other settlement offer between Syria and Lebanon.


On the other side of Israel, a cease fire between Israel and Hamas has been mediated by Egypt. Every nation in the region is involved in the peace negotiations in one way or another and politicians in every nation are prepared to take their proper share of the credit. Of course, cease fire agreements are frequently broken but the bigger deal is the negotiations with Lebanon, Syria, Afghanistan, Pakistan and Iran. The direct talks between Lebanon and Syria should pave the way for direct talks between Syria and Israel.

Booming Growth

The current boom is in resource rich countries such as Russia. Russia is currently in the midst of a real estate bubble. Prices in Moscow have jumped at the annual rate of 40% and laws concerning the private ownership of real estate are having to be adjusted to protect those who have been paying "socialist rental rates" (sounds like New York city doesn't it).

The boom in the US continues to be confined to certain areas. Examples include US export growth of 19.2%, business construction up 15.4% and core consumer spending up at the annual rate of 10.2% over the last 3 months. Earlier I mentioned the boom in high tech equipment and the boom is sales of super computers. There is another hot, hot, hot sector of the US economy.

Incredible Spending on Research and Development

There are so many hot research projects to be mind boggling. Some are huge and others are relatively small with huge potential. An example of a small project is the work being done on "Black Light Power". A start up has acquired $60 million in funding to develop this source of energy. This is one of those too good to be true stories in which some very smart people have great enthusiasm and faith. If the concept works out, the cost of generating power will be reduced by 70 to 90% in a few years. For umpteen years, we have been teased by the promise of hydrogen power. These guys think they have figured out a few things that Eisenstein might have learned if he had worked 40 more years or so. Their program converts hydrogen and a solid fuel catalyst into hydrio while releasing heat and energy and while breaking down water into its components of hydrogen and oxygen. The hydrogen from the water can be feed back into the loop to keep the process going. This is not one of those impossible perpetual motion machines. This is a bit like finding the way to increase the efficiency of nuclear fuel from 5% to 10% (other scientist are coming close to accomplishing this feat).

Folks, it is time to be optimistic. Our energy problems are going to be solved one way or another. Today, Charlie Crist, governor of Florida, came out in favor of drilling off the Florida coasts. With Cuba granting China and many others the licenses to drill within 60 miles of Florida, it would be silly to allow Cuba to "drink our milkshake". The law of oil, which developed around the "western law of capture", is that the man who has the longest straw gets to drink all he wants (provided he does not drill sideways into the other mans territory). It is absolutely silly for the US to buy foreign oil while not allowing US reserves to be tapped. It is great that politicians are seeing the need.

The momentum for drilling in America has turned. Since a couple of weeks ago, when the Senate pounded to the death an attempt to impose cap and trade taxes on oil, coal and gas, there has been a growing sense that the environmental gestapo has finally met its match, $4 gasoline. Senators are scrambling to make it look like they are doing something. If nothing else, they are trying to squeeze a little more pork out of the situation. Eleven Senators have asked the Bush administration to file trade complaints against 8 OPEC countries. Yeah, they want to sue OPEC for price collusion; good luck with that. All the while, Brownback, a republican from Kansas, has submitted a bill to mandate that half the cars in America built in 2012 be flex fuel equipped. When are politicians going to learn that we do not want corn alcohol rusting our cars from the inside out?

In another interesting development, the Senate just blocked a 17.7 billion dollar boondoggle to give consumers money to build private windmills and roof top solar panels. Can you imagine the joy on the faces of ranchers and farmers 80 or more years ago when they received access to electricity? Do you suppose they regretted depending on wind mills to pump water? It made no sense to keep on using windmills back then and it makes no sense now. They appeal to our sense of getting something for nothing but there is no free lunch. Of course, GE, a major seller of wind turbines just put out a study saying that governments tax revenues will fully repay windmill subsides. In case you didn't know, the government cannot operate on an eventual break even basis. The way the government works is the taxpayers put in a dollar and hope to get back 80 cents worth of services. When windmills are subsidized, for the government to pay out a dollar, it has to take in at least a dollar twenty from somewhere else. Who should be forced to waste the extra 20 cents? The democrat response is to take twenty cents from the investments of the rich. They do not appreciate that they take the money most productively deployed. The government had better be thankful for the oil business. The government makes more money off the oil business than does the oil companies. The problem with government has always been how to generate the governments slice of the pie.

450 for 1

Israel is prepared to release 450 prisoners in exchange for the 1 kidnapped Israeli soldier. It sounds like a good trade to me. One honorable soldier is worth at least 450 terrorist.

Is it not unreal that the mind set of Islam is that it is better to die by homicide--suicide bomb than to spend time in jail? The Taliban just took extreme measures to do a prison break out in Afghanistan. The good news about this kind of break out is that the rats can be followed back to the nest. Since the breakout at least three-dozen Taliban have been killed. When the negotiations with Iraq allow us to keep only 50,000 or so troops in Iraq, it will be time to send the other 90,000 to Afghanistan to finish the job there. We do not celebrate the deaths of the terrorist but the lives saved by the death of the terrorist!

From the Iranian Point of View

The Iranian View starts with their correct statement that refining ore to LEU power grade is different than refining it to HEU weapons grade. Of course, the fact that they have been working on missiles designed to carry nuclear bombs and the fact that they have in the past tried to acquire weapons grade technology all makes the current program the precursor to a weapons program. Iran points out that Brazil and other nations that are quietly working on nuclear power are not under sanctions. The new 123 agreements require all nations to acquire their nuclear fuel from IAEA supervised centers. I have not heard the government of Brazil propose that Israel or the USA be wiped off the map or that they have paid people to blow themselves up in the middle of crowded markets.

Other Iranian arguments look back a very long time. Going back just 60 years or so, British Petroleum (BP), is seen as the devil. For Iran, BP is like Exxon to the lefties of the USA. It is seen as a greedy profit machine that does not share fairly with oil owners. In case after case, when countries nationalize oil fields, they learn that the oil companies produced profitable results for all parties. BP and Exxon are like the Tiger Woods of golf, he sure makes the game look easy. He can play better than the rest of us even when he has one broken leg bone and another torn-up knee. Nations like Iran and Venezuela would give Tiger's golf clubs the credit for his success and confiscate them from him.

The support given to various Iranian regimes by the British and the USA over the years is seen as the manipulation of a sovereign nation for the purpose of stealing Iran's oil wealth. Based on history from many more years back, Iran believes it should own the land all the way through Spain. We cannot correct the mistakes of history but we can move forward in peace.

Iran sees itself as a progressive country in areas where outsiders view it as reactionary. Iran believes it treats women well. Seventy percent of university graduates are women and a large number of Iranian women hold professional jobs, doctors, lawyers and professors. Some are members of parliament. The strictly enforced "special rules for women", such as the rules about dress, are considered laws of protection. A small percentage of Iranians are Christian, Jew or Sunni. The leadership "demonstrates tolerance" by showing minorities respect.

Iranians see Iran as a modern country. Major cities are filled with skyscrapers, there are modern roads and foreign cars of all makes and sizes. There are even car races. Before the recent troubles, the people lived relatively well. The average GDP per person was about $12,000 compared to about $50,000 in the USA.

The country is also a place of beautiful architecture, culture and antiquities. The age of enlightenment in Persia long preceded the European Renaissance. Sitting at an important crossroads and owning great natural resources, the country is ambitious. Since the 20th century was not kind to the country and the 21st century has been worse, the people are looking forward to the good times.

The Intrade Betting Site has Obama as a 65% probability to win the Presidency. The Iranians have their fingers crossed. They know if they hang on until Obama is president, he has pledged to pull troops out of Iraq (he has backtracked on this pledge but Obama would likely go along with the desires of the expected democratic congress). The absence of US forces would significantly boost the influence and power of Iran. However, drilling for oil is going to be a central issue in the upcoming elections and it could dramatically change the outcome. Some polls show that 70% of Americans believe it is time to drill in the USA. McCain continues to show his zebra strips. He announced today a proposal to spend billions of government dollars developing clean coal. Still, it is the democrats who are out of step in regard to energy. The market fears the tax increases promised by Obama. A lot of things will change if Bush is able to successfully conclude the mission he began in October of 2001.

The End is Near: A Gross Simplification

The movement of Iraqi and US forces into Maysan and Amarah is another demonstration that the end of major conflict in Iraq is at hand. Iranian forces are scattering but a few are sticking around for the fight. Key arms smuggling areas are coming under the control of Iraq. Iraqi forces are functioning well. To some extent, there is still a game of "whack-a-mole" being played, for example, 150,000 Taliban are grouped in the mountains of Pakistan, ready to do battle in Afghanistan, but Iraq is close to being free of insurgents. Yesterday, the bomb in Baghdad that killed 45 people in a public market reminded us that suicide bombers will be around for a long while but, again, the sweep into Maysan and Amarah shows that insurgents are quickly running out of places to hide.

A Complicated Negotiation

So, if the war is essentially over, why does Iraq need US peace keeping forces? Maybe this seems like a tough question and maybe not. After all, the battles between the Mesopotamians and the Persians go back a few years. Can we foolishly assume a lasting peace is at hand? Yes and no! It is my belief that the long negotiations with Iran are almost at their conclusion, both sides are ready to "make a deal". A simple cost benefit analysis clearly supports the common sense of signing off on several long term trillion dollar commercial deals that will enrich the Iranians and provide lower cost fuel to the world. Doing so requires and attitude modification. How difficult is that? There is nothing simple or easy about these negotiations.


The push of the US political left to withdraw from Iraq now is absolutely silly. It would be absolutely silly to come this close to ending the support of terrorism by Afghanistan, Iraq and Iran only to withdraw just before succeeding. Iran needs to know that US forces are not going to go away for as long as there is a need for them. As a sovereign nation, it is up to Iraq to negotiate the terms of the US deployment of troops in Iraq.

After WWII, many in the USA were opposed to the Marshall Plan. At the time, who would have believed that today Germany would not only be reunited but would be a member of a 27 nation European Union with one currency, a central bank and a rotating presidency. Who would have thought it possible that the French would take the presidency of this European Union this year? But the European Union continues to struggle and just this past week Ireland voted down the new "constitution".

The political struggle in Iraq is no different than the political struggles of the US and of Europe. There are many factions with many agenda and with many ideas and attitudes about the deployment, but the Iraqi people generally recognize that US bases are important. The stationing of troops in Europe has been a good thing. Centuries of war in Western Europe have ended. It is possible to end centuries of war in the Middle East.

Ending the Energy Crunch

It is interesting that the NPRA (the National Petroleum Reserve - Alaska that is bigger than ANWR) is seldom a part of the drilling debate. The Bureau of Land Management occasionally leases part of the NPRA for drilling but it also throws a bone to environmentalist along the way and declares a little bit more of this 23 million acre petroleum reserve to be a nature reserve.

The NPRA was originally created by Harding as a Naval Petroleum Strategic Reserve. This was back in the days when ships were being converted from coal power to oil power. Nuclear powered vessels show that the times have changed much more than our attitudes. I mention the NPRA to ease the anxiety of the "peak oil" alarmist who believe we are about to suffer greatly when we run out of oil, soon. The point is that there are still trillions of barrels of oil in the ground, enough supplies to last a very long time. The question remains, are we going to produce our oil or are we going to pay out the nose for foreign oil?

This week, McCain did a partial 180. In 2000, when he was running as the "maverick" opponent to George Bush, he became a zebra republican. Like Obama and Hillary, McCain has been willing to go with the politically expedient answer rather than with what makes economic sense (it is sometimes unclear if Obama or McCain understands the economics of a situation but they both seem to understand the politics). The result has been his opposition to drilling off the coast of America. His 180 was partial because he did not include ANWR in his "conversion experience". McCain now supports drilling of the Atlantic and Pacific Coasts with the stipulations that the states should decide and that the states should share in the massive revenues.

McCain, like the rest of the "falsie environmentalist" totally ignores the TAPS. TAPS is the Trans-Alaska Pipeline System. It cost billions of dollars to build this system and, yes, building it was harmful to the environment in many ways. Interstate 40 from Wilmington, NC to Las Angeles, CA was in harmful to the environment in many ways. The cutting down of trees to build your house was harmful to the environment in many ways. Air conditioning your home is harmful to the environment in many ways. Drilling for oil off the coast and building the pipeline system to transport the goods will be harmful to the environment, but the TAPS is already built!

At the peak, about 2 million barrels of oil per day flowed through the TAPS. Today, about 700,000 barrels flow through. This number is about to go back up a few notches as other projects are brought on line but why not drill on a small part of ANWR instead of on the Atlantic coast? Better still, why not auction some leases in ANWR and some along the coast so that the market price will tell us what to do next. You see, no one really knows just how much oil and gas there is in either of these areas. The geological information leads us to believe the coast is very rich in gas and a little bit rich in oil and that ANWR is very rich in oil and only a little bit rich in gas but a little exploration would tell us a lot.

Four Hundred Trillion Metric Cubes of Gas

In recent weeks, interested parties have become well aware of the 26 Trillion Meters of Gas in Iran. It is easy to make fun of a people who sit on the second highest reserves of gas while freezing in the winter time. It is estimated that there are more than 400 Trillion Meters of Gas along the coast of the USA and we do not laugh about paying $4 for gasoline.

Many an Iranian has converted his car to run on natural gas because there is rationing of gasoline, but a free people understand the laws of supply and demand. We understand that the price will allocate supplies to where they are needed the most. We understand that supply will meet demand at the market price and that the way to keep price down is to increase supplies as much as possible while using those supplies as efficiently as possible. Iran's failure to allow the market to price supplies has resulted in great waste of supplies in past years. The market still works, even after the government artificially sets price. The extra low price in Iran has resulted in massive waste and forced rationing.

Where is Obama's 180

So far, Obama has struggled to move toward the middle. He is no longer calling for an immediate pull out of troops in Iraq and he is no longer ready to meet with terrorist leaders without preconditions. The question for Obama is, How fast can he move toward the middle without making his lefty supporters really mad?

He just did another partial 180 in regard to his social security plan. During the primaries, he was ready to raise the payroll tax on everyone making more than $90,000 per year. This week he moved the increase way up. He now says only those making $250,000 or more will see the increase. The good news for those who want to privatize the system is that his proposal breaks the social security concept into pieces.

His plan converts social security from a retirement plan to a welfare plan. Those paying the extra get no additional benefits. In the end, it will be the middle class who will suffer, when SSN becomes the minimum welfare benefit. In effect he is going back to the democratic play book. He is pulling the AMT trick again. The AMT was passed as a tax only on the rich. Today, millions of Americans pay higher taxes due to the AMT. $250,000 is high enough to make us all think this is a rich mans tax, but is it indexed for inflation? What an upside down world? It was once a single dictator who won control of a government and then confiscated the property of the people. Now it is a tyranny of the majority. So many people are feeding off government grants that they are willing to convert a supplemental retirement plan into a tax and spend plan. The revenues that Obama will raise with this plan will be added to the general fund spending until the year 2017.

Great Opposition and Great Freedom

Senator Baukus is trying to tie Bush's hands in Iran and Iraq. The conference of Mayors, the new experts on foreign policy, have voted to tie Bush's hands in regard to Iraq and Iran. The situation is that it take a gross simplification to say that the end is near.

In the mean time, the heavy tax of high oil prices is causing a slowdown in the world economies. It is also causing a boom in high tech spending. US production of high tech equipment soared 25% this past year! The US economy, in particular, will benefit from the resolution of the conflict with Iran. 80 nude cyclist in England got very cold last week as they rode around in protest of global warming. Like Ron Weasly said, "She needs to get her priorities in order!"

Time are good. We simply do not believe it!

1 + 1 = 3, The Concept is Called Synergy

In recent years, well meaning people, politicians and environmentalist, have pushed antagonistic policies. Policies that result in 1 + 1 = 1.5. On the other hand, Google is making a big 1 + 1 = 3 push. Google appreciates the benefits of synergy.

The Google Android development kit has been downloaded in record numbers. The kit is free and the software will be distributed free. This means the new Android based phones, coming to market in a few weeks, will sell for less than iPhones which are sold with built-in software license fees. Google has also made its Google Apps software open and free. This software includes all sorts of free services including email, instant messaging, photo albums, and office productivity programs such as spread sheets, word processing and presentation programs. The free package is certainly a lot more than free web pages and email with 6 gigabytes of free storage, but 6 gigabytes of free web space and off site, backed up, storage is nothing to sneeze at. Enterprises, everything from schools, to businesses, to churches, should consider getting rid of in-house servers and using the free hosting provided by Google. The savings are substantial. The Google deal this week that will connect Google Talk with the Yahoo Instant Messaging program will dramatically expand the usefulness of yet another free service.


On another front, it appears that the market is going to move toward free wireless Internet connections and free basic service but metered cost for heavy users. It is becoming clear that those who constantly consume huge quantities of bandwidth in activities such as transmitting videos, should pay a higher price than someone who surfs the net a little and sends a few emails. Google is an advocate of totally free basic connections.

The Mobility Factor

The big leap forward is the mobility of a slew of free services. The cell phone company practice of finding the way to sneak in an extra charge has always been frustrating. Companies that charge extra for text messaging is a prime example. Text messages cost less than phone calls to deliver but consumers are often stuck with an add on rate or with per message charges. Mobil WiFi devices can access the Internet and be used for unlimited phone calls, unlimited browsing and unlimited instant messages, for un-metered service and very low fees for metered service.

Produce a letter or spread sheet or presentation on Google and share it with whom ever you want. Edit the document from any computer, allow others to edit or have an online jam session about what the document should say. Who needs a desk top computer or a server? Put the whole enterprise online and do your work with a laptop on the beach.

Our politicians are in antagonistic mode. They are looking for ways to take money away from the most efficient and most productive ventures in order to subsidize their pet but unproductive ventures. Politicians are often willing to shrink the economic pie if they or their friends can be given a larger piece. The Google program is designed to grow the pie greatly but to get a very small piece of this very large pie.

International Shrinking Pie

High energy prices are acting like a tax increase on the economy. The difference in the US economy and other economies is that our interest rates have come down (while the recent trend is back up). In the USA lower interest rates are the antagonist to higher energy prices, 1.5 -1 = .5, the result has been slow growth but no recession. Higher interest rates in emerging economies are working in synergy with higher food and energy prices. The combination is striking a blow to these economies. Several of the formerly fastest growing economies are slowing down rapidly. The result is demand destruction. The pressure on commodity prices is subsiding. The reduced pressure on commodity prices has given the "5+1" support for tighter sanctions against Iran. Iran is no longer holding all the aces. The "news" has made it to prime time. This morning a guest on CNBC talked about the oil backing up in in storage tankers. Just yesterday, European leaders joined Bush in saying sanctions against oil and gas production will follow the financial sanctions that have been in effect. The pressure on Iran has been increased by making the announcement after the program has already produced results. When questions are asked, the answers are already available.

Not Effected

Lots of businesses are either not effected by higher fuel prices or even supported by higher fuel prices. An example of a non effected business is the research lab that just came up with a method for regrowing bones. While it will take years to bring this to market, it will ultimately make a dramatic difference in heath and health care. Many older women are very healthy with the exception of weakened bones. Take a pill, regrow bones and live a better life! It makes sense to fund this research no matter what happens to the price of oil. It makes sense for the government not to subsidize the project. The constant mistake made by politicians is for them to assume they can pick which project by which researcher should be funded. The result is that the politically connected research gets priority over what will prove to be the best research.

The research going into new sources of energy or reduced consumption has been encouraged by higher fuel prices. The money being spent is incredible. We already have a lot more than the "Manhattan Project" proposed by politicians. Take the break trough in brewing beer as an example. Researchers have developed a process that will cut a half hour off the time required to brew beer and it will cut the energy consumption by 10%! Many an industrial process is worth retooling for a 1% reduction in costs; new construction will automatically include the new process. Another interesting example is the power plant to be buried in a remote village in Alaska. Toshiba has developed a sodium bromide cooled nuclear "battery". Toshiba will dig a hole in Alaska, deposit the battery and leave it to produce electricity for the next 30 years. The cost of electricity in the village will be cut by more than half!

Small no maintenance nuclear "batteries" will ultimately be used to power commercial ships and "unique" situations. The heat generated by nuclear plants will help liquefy tar sands and shale oil.

The Bakken Formation is progressing well. In February, North Dakota reported production at the annual rate of 50 million barrels. By May, the annual rate had increased to 54 million barrels. Over on the Canadian side, producers are gearing up to develop Bakken. Iraq appears to be headed for a 400,000 barrel per day increase by year end. The IEA reports that total liquid production has increased from the average rate of 85.4 million barrels per day in 2007 to 86.8 million barrels per day in 2008. Demand is down in the USA by more than the increase in world wide production. When demand goes down and supply goes up, the price is likely to fall. My friend keeps telling me that Goldman says that oil is going to $200 per barrel but he has not been able to answer my question, "Is Goldman buying or selling"?

Airline Capacity Cuts

LCC made additional capacity cuts this week and the prospects for major carrier profits increased, again. Airline stocks are benefiting from the capacity cuts in that the demand for jet fuel has been cut at the same time that demand for the remaining seats has been increased. Higher seat prices and lower cost will lead to major profits. I am waiting for someone to give me another example of companies with positive cash flow which shares are selling for less than their "cash on the books value".

News From the Middle East

Jack,

I am curious as to how you know more about the situation in Iran than the great majority. Is it your research, connections, unique sources. I would like to believe that an agreement is at hand, but I am very doubtful.

Thanks,

My sources are not so unique but make me a list of how many mentions you have seen about the numerous multi-billion dollar pipelines being built around Iran or any commentary outside of mine about the strategic importance of these pipelines. Or, make me a list of how many times you have seen information about the major new 123 Agreements that have been signed or the magnitude of the deal with Russia or any commentary about the importance of the spent fuel deal with Russia. Reading about these pipelines and the 123 Agreements should have given you a sense of what is going on in the Middle East that you would not have gotten from the mainstream media. Make your list from what is on your TV news and in your regular newspapers and then make it again after doing some searching on the Internet and then compare to what I have written.


I have had a bit of inside information about the Soroush and Nowrouz oil fields and the "blockade" of oil in Iran but most of what I have written has been freely available on the Internet. The exception is my subscription to Stratfor.com. George Friedman often includes some coverage that is either difficult or impossible to find in the public media.

Most of what I do is tie the pieces of information together to make common sense out of them. For example, it has been more and more widely reported that Bush has proposed that the USA be allowed to keep 52 bases in Iraq after the UN authorization expires. The back and forth on this item in the main media has been primarily stories saying that McCain wants to keep troops in Iraq for 100 years, stories about how Bush is thirsting for a spot from which to attack Iran, or stories about how Obama would go ahead and talk directly to the Iranians. The implication has been that the USA is blood thirsty and unwilling to negotiate with Iran but those who read can easily discover that there have been negotiations going on between the "allies" and Iran for 30 years, very intense negotiations for the past couple of years. For example, the Bush administration has had numerous meetings with Iran and Iraq about "security in Iraq". Bush has said repeatedly that US channels are open and will remain open for continued discussions. Maliki went to Iran weekend before last to try to work out a compromise. This was covered but the coverage did not put these negotiations into context nor did they tie these negotiations to the set of negotiations being advanced by Javier Solana. Ahmadinejad has stated that the biggest impediment to a deal is the continued presence of the US in Iraq. The public announcements are about refining uranium but both sides are ready to allow uranium to be enriched on Iranian soil under the supervision of the IAEA. Of course, the US does not go splashing around telling the widely known "secret" that predominately Sunni nations such as Saudi Arabia desire the continued presence of the US in the Middle East. Leaders in Saudi Arabia and in Iraq have to be political cautious about supporting the presence of troops, but they do. Most articles give the impression that the US is not wanted in the theater. Many partisan democrats will not admit that there has been progress in Iraq, they will not admit that there is a need for peace keeping troops and they will not admit that we need more domestic oil drilling. The democratic focus is on $600 vote buying checks for the average man while ignoring the threat of Iran.

As I said this morning, part of the problem is a problem with simple addition. Those who never liked math, do not bother to add up the numbers before taking a position. Congress has spent billions to subsidize windmills and billions more to subsidize solar panels but we produce less than one half of one percent of our electricity with windmills and solar panels. Had the same subsidies been spent on building clean coal plants or on drilling for oil (not that I would recommend such subsidies), huge amounts of energy would have been produced and gasoline would not be at $4. Any company that entered a side business like windmills and lost money year after year for 30 years would shut down the business. The company that invents the cost effective solar panel will make billions of dollars, we do not need to build scores of demonstration plants at a loss in order to encourage research. It is only government subsidies that keep the wind mill business in the forefront of the news. I am not saying that there is no place for windmills but that mathematically it is not practical to expect windmills to provide a major portion of our power needs. In a few years, the left will be able to attack T-Boone Pickens for making millions of profits off the great windmill farms of Texas but the government dollars given to him will be long gone. The good news for Exxon is that it is coming off the top of the list of villains because the pork spending freely given to ethanol and windmill farmers is so wasteful.

It is now public knowledge that Iran has had plans to "suit case sized" nuclear bombs for 10 years. How much money should we spend to keep suit case sized bombs out of the hands of terrorist? If it was your decision to make, would you spend a trillion dollars of tax payer money to keep nuclear bombs out of the hands of terrorist or would you spend that trillion dollars subsidizing wind mills? Understanding what is news is understanding what is important. A few days ago, there was a major push by the left suggesting that it is time to talk directly with the sponsors of terror. They do not appreciate the risk of letting nuclear bomb making skills spread to the hither lands. This is a fundamental misunderstanding of what we need to do to protect our "environment".

The fact is that countries from every continent are working together to encourage Iran to lay down its arms and to participate in trillions of dollars worth of commercial deals. After 30 years of sanctions, Iran, the second richest oil and gas nation on earth is rationing gasoline and suffering from hyper inflation. The leadership is considering increasing its expenditures on imported gasoline from 7 Billion Dollars per year to 9 Billion Dollars. It is not clear that this gasoline will be available at any price. Living in Iran right now is not a lot of fun. Theoretically the leadership could hold out for many more years but if they want to participate in the "new nuclear power age" they need to sign on within a couple of months.

The sanctions on Iraq lasted about 10 or 12 years. They worked only to an extent. They ended with regime change. The latest sanctions against Iran include the participation of Russia and China. Many a mainstream news article or editorial mentions Russia and China as being on Iran's side. One Senator on the committee that is reviewing the 123 Agreement with Russia, made statements a couple of weeks ago revealing that he was not aware that Russia has assisted with enforcement of Iranian sanctions. The nuclear power plant built by Russia would be operating by now if Russia were cooperating with Iran. Not only is the public ill informed but members of the US Senate committees choose to read the fluff and not the news!

Are Iranian Leaders Crazy or Crazy Like a Fox?

Some folk say that Ahmadinejhad is a crazy man. The cleric who leads the country is "crazy like a fox". Last week, when a University Professor was charged with sexual discrimination, the clerics clamped down on the lose dress habits of the female students. This male dominated society knows how to twist the news and how to apply pressure. The twist that oil is being put in tankers in order to block the Straight of Hormuz is a convenient story. This super tanker storage began right at the deadline for trading out of dollar deposits. Oil bulls and leftist politicians have been quick to declare that oil will go to $200 and that Iran is in control. The facts do not support their case. The building of billion dollar pipelines around the Straight has been in progress for years and the pace is picking up. The rapid pace of exploration and developing around the world will soon make Iran's oil of little importance in the short run. Iran still has levers, but it is not in control. The oil being exported from Iran has been reduced because the world has decided not to buy it. Iran does not have the refineries to produce enough gasoline for its own people because the world will not supply the equipment and knowledge necessary. Iran, has over 26 Trillion Metric Cubic Feet of natural gas and cannot supply its own needs even though its 16 billion dollar deal with China to develop a major gas field has been on hold since February. If Iran does not make a deal with Bush, will Obama desire to reverse the three unanimous votes by the UN Security Counsel to sanction Iran? Would Obama make a deal to allow Iran or any other Middle Eastern country to refine uranium? If so, what would be the circumstances, $10 per gallon gasoline?

The story of Bush's just completed tour of Europe is that in every case he won support for additional sanctions. France and Italy have given enthusiastic support and the UK will keep troops in Iran and add troops in Afghanistan. Another major offensive is ready to start in southern Afghanistan. France has even helped negotiate the early give up of Israeli lands to Syria in order to encourage Syria's split with Iran. Have you read about this deal elsewhere? It is not secret but I doubt if it will be widely reported. The loss of Syria's support would be a major blow to Amadinejad.

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 BIG SURPRISE

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.

MILITARY STANDOFF

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?

ATTITUDES ARE CHANGING -- DESPITE THE MATH PROBLEM

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.

A Game of Chicken: Cutting It Close

No doubt that Bush and Ahmadinejad are "cutting it close". They are playing a game of chicken and the stakes are much higher than the "pinks" to a couple of '57 Chevy's.

Bush has submitted a massive 123 Agreement between Russia and the USA to congress. So far, there has been a lot of grumbling but no action. The congress must vote to cancel the agreement, a simple majority will do, or it becomes law within 90 days of submission. There is a worldwide scramble in progress to get other 123 Agreements to the Congress at least 90 days prior to the November elections. Technically there is a little more time but what nation wants to depend on a lame duck congress for anything? The consensus opinion is that there will be little chance of passage once more tree huggers elected. Tree huggers do not mind wrecking the economy even if it means we all go back to 15 hour work days while living on the farm.


Ahmadinejad is apparently willing to push right to the last moment. It has been reported that he desires to reach a nuclear accord by September. Again, the proposed nuclear power treaty will need to be ratified by congress.

Bush has said he expects to reach agreement with Iraq on a security agreement by July. The Iraq agreement is being structured as a "non-treaty". Lawyers, bankers and consumers do this kind of structuring all the time. For the past several years, investment bears have talked about the amount of home equity being withdrawn. Many if not the majority of these transactions were nothing more than car loans structured as home loans. Current US law allows income tax deductions for home loan interest but not for car loan interest. In the case of Iraq, the agreement will not include the pledge of the USA to defend Iraq against foreign invasion. A technicality that would make the agreement a treaty to be ratified by congress.

Iran and the UN negotiators have by all accounts have reached a general agreement as to how to handle nuclear fuel refinement. The current hang up to the negotiations is the security agreement between Iraq and the USA. This agreement must he in hand before the rest of the matter can be settled. It is doubtful that negotiations can go much further without direct talks which means Iran needs to temporarily suspend uranium enrichment or some compromise must be reached that gives the IAEA more direct supervision while the talks proceed. Hopefully Javier Solana will meet with success this week end. Market seems to be discounting a chance of success gold down, oil down, stocks up dollar up!

Tough Times or No? Who to believe?

We have always known that there are two sides to every story. Even so, we often forget that the 'news' is just another story with two sides.

The 'news' is that import prices are killing the US economy. The 'other side of the news' is US exports are expanding more rapidly than imports. Part of the underlying story is that export prices are saving the US economy and slowing the 'other economies'.


Take soybeans and corn as examples. The USA exports billions of dollars of these commodities each year. During the first three months of 2008, we exported 89% more dollars worth of Soybeans and 52% more dollars worth of corn; about 5 billion dollars worth of each. The real volume probably did not change very much, indeed it probably went down. The sharp increase in prices caused the sharp increase in exports. As common sense and the basic laws of economics tell us, since the total revenue of a product is equal to the quantity sold times the price and since the higher the price the lower the demand, the total quantity sold probably went down.

The revenue increases are in US dollar terms. The US dollar price is very low, making our exports all the more attractive. This week, the US dollar is on track to have its biggest weekly gain in over three years but the price of food in dollar terms went up before the bounce back in the dollar. The bounce in the dollar is only a couple of percent. Nothing compared to the doubling in the price of corn.

A Hungry World

Data from a hungry world takes time to gather but data from the USA can be used as a proxy to demonstrate what is happening today. The poor people of the world are getting slammed by high food and energy prices.

In the USA millions of people from Montana to New Mexico and from New Mexico to Georgia are now paying from 10 to 16% of their income for gasoline. The people in the big cities of the Northeast and on the West Coast are not getting slammed so hard; spending less than 2% of their income on gasoline. Even so, the poorest of US citizens, are in great shape compared to the majority of the worlds citizens. As Walt Williams likes to say, if you are poor, you want to be poor in America. The people who earn minimum wage in America earn more than 87% of all the people in the world.

The Insult to the Injury

It is no sin to be poor. It is no fun either. The insult to the injury is committed by the US Congress, time and time again. This week, the congress has voted overwhelmingly to subsidize Amtrak to the tune of 15 Billion Dollars. Like rich Iowa corn farmers, the rich city dweller is being subsidized by the poor. Why should a family in Mississippi pay 16% of its income to buy gas and then pay taxes so a Wall Street Banker can travel to work for half price?

There is a bit of hyperbole in the above because the poorest of folk in America pay no income tax. The real result is that the poor pay 10 to 16% of income for gas and the the middle class pay 6 to 10% of their income for gas and they subsidizes the politically powerful Amtrak and subway systems.

Who to Believe?

George Bush has been demonized by left wing politicians and press. By repeating the statement that he lied about weapons of mass destruction in Iraq, the 'story' has become the 'truth'. After spending years analyzing the data, democrats on the Senate Intelligence Committee keep trying to have it both ways. The Senators voted for the invasion of Iraq based on the intelligence available but George Bush lied when he used the same data. The 'rest of the story' is that the Bush side of the story keeps turning out to be the closest to the truth.

The trail of weapons from Iraq to Syria has led the Israelis and the US to find nuclear facilities in Syria. A captured notebook computer has shown us that Iran was working on nuclear missiles right up to the day the US invaded Iraq. A war with Iraq or with Iran was necessary and Bush chose the least costly war. North Korea, Syria nor Iran have been willing to fess up clean but there has been progress in eliminating the nuclear threat from all three countries. The willingness of each to provide arms to others is well documented.

This Weekend

This weekend, Javier Solana, the chief negotiator for the '5+1', will take another offer to Iran. The offer will once again offer Iran incentives to join the rest of the world in peace or to be isolated from the rest of the world in defiance. The Iranians have made strong arguments that have caused many observers to conclude that bombing Iran will be necessary to stop their progress toward acquiring nuclear weapons.

Iran is putting on a big show by flying fighter planes near tankers loaded with oil. As of June 8, Iran still had 30 million barrels of sour crude loaded aboard oil tanker ships but going nowhere. The new oil minister, Khatibi, says the sour oil from the Soroush and Nowrouz fields has always been stored on ships prior to delivery. He says that Iran is not willing to deeply discount the price of this oil to move it because it is pledged under long term contracts. His reason for the back up is because refineries have been closed for seasonal maintenance.

Ahmadinejad goes one better than Khatibi buy implying that these oil tankers will be only the first to be sunk in the Straight of Hormuz should Iran be attacked. In other words, the talk of a surgical strike against the nuclear facilities of Iran could be countered with a surgical strike against a portion of the 17 million barrels per day that comes out of the Straight of Hormuz and immediate area. When analyst suggest that oil is going to $200, $250 or $300 per barrel, they in effect state their belief that this conflict will not be resolved without a war with Iran. I disagree.

Another argument made by Iran is that the country did well a few years ago when its oil revenue was $15 billion so, it can certainly survive sanctions when its oil revenues are over $100 billion per year. The big difference today is that Iran's cash is starting to look like the gold of King Midas. After moving the cash out of US dollar denominated deposits, Iran has since had to move it out of Euro Dollar deposits. Iran's new Secretary of Finance is at logger heads with Ahmadinejad over what to do with the cash. Having all the oil and cash in the world does one no good if there is no market for it. After all the talk about the weak dollar, would you be willing to trade any of your dollars for Iranian currency? The official inflation rate last year was around 25%. The CIA suggests that the official rate is understated by at least half. If the rate was 50% last year, what do you suppose it is now? Major Iranian projects that are currently suspended include projects with Japan, France, Russia, China, India, Pakistan and with major oil companies such as Shell. Iran's money is of no value if no one will accept it.

Stories From the Left and Right

One common story is that Bush is itching to attack Iran. Clearly the strategy, for 30 years, including the 8 Clinton years, has been to ask Iran to agree to peace or to face isolation. Another common story is that Bush wants to bind the next president to a long term commitment to Iraq, in order to provide bases for a latter invasion into Iran. Clearly the US has maintained bases at strategic locations such as Germany and Korea in order to maintain peace. Does the US want to be in position to influence policy in this volatile part of the world? Certainly! Do we want war? Absolutely not!

Which is more likely? More wars if US forces are there or if not? The history of Germany and the Soviet states for the past 60 years shows what could happen. East Germany and West Germany were reunited without a true war. The 'Cold War' was the peaceful resolution to a huge international dispute. Hundreds of Millions of people in dozens of countries were granted economic and political freedom without having to fight a 'Civil War'. Does the term Civil War not make your skin crawl? The War Between the States in the USA cost us half a million lives and it was not civil! The most important difference between the Cold War stand off and the Middle East is that Cold War combatants were generally not sneaking across borders to blow up innocent men, women and children. The 'right side of the story' is that it was the action of the terrorist who forced arm conflict not the actions of the USA.

Reality

The reality is that Iraq, Saudi Arabia and other nations in the Middle East need the US to stick around. The Middle East needs an era of stability in which to build the commercial connections that will provide long term incentives for peace. Bush has left the door open to additional talks between Iran, Iraq and the US in regard to the Iraq-US security agreement. Too much has been invested and success is too close to give up now. Now that the democratic primary is over, Obama is moving quickly from left to right but he is going to have to wiggle hard to make it close to the middle.

In the past few years, Europe has moved from left to right as evidenced by the leadership change in Germany and France. Italy is suddenly on board with support for sanctions against Iran and the development of nuclear power in Italy. Countries around the world, with the exception of India, are in a scramble to sign 'civil nuclear power agreements'. Contrary to what is being repeated daily by the left, the USA is winning back its prestige in the rest of the world.

Economic Collapse or Revival?

The combination of bursting the housing bubble and the run up in food and fuel prices has hit the world hard. At the same time, information age productivity, rapid technological innovation and expanded world trade have produced world wide economic strengths never seen before. Innovation (change) is coming hard and fast. The irony alluded to by Brian Wesbury in a Wall Street Journal article is that Obama's call for change is really a cry out for the 'good old days' when change did not come at us so fast. Obama wants to go backwards to more 'simple times'. Thomas Wolf correctly said we can't go 'back home". Every generation pines for the 'good old days'. We naturally remember the good times or romanticize the tough times as if we were heroes for having survived them.

Cell phones, at once a great convenience and a pain in the butt, are here to stay. Life expectancy in the USA just hit 78 years. Those who have made it through to adulthood should expect to live much longer. Healthy 55 year old women should plan to live 40 more years, at least. We do not want to put the 'health genie' back in the bottle, but we certainly cannot let the budget for health care run wild. When millions of 90 year old people are consuming massive quantities of health care, who wants the government to decide who will receive funding and who will not? Europeans who receive 'free heath care' are currently stopping cars and trucks in the middle of streets to protest $10 per gallon fuel costs.

The good news is that the cycle for food and fuel prices is run up and collapse. Once there is one extra bushel of corn or one extra barrel of oil, the auction price of all corn and oil will fall rapidly. What we have been experiencing is an economic slow down in a number of sectors. Slowdowns are accompanied by inflation. When the slowdown is over, the inflation miraculously goes away. Some argue that inflation did not go away so easily in the 1970's but there were a lot of contributing factors present back then that we should be able to avoid this time around. For example, we added pollution control costs and a wind fall profits tax at just the wrong time in the 70's. This time democrats talk about pollution controls (they now call it global warming) and wind fall profits taxes but the congress just showed it has no stomach for adding to the pain at the pump. Any new pollution controls should be staged in and CO2 is not a pollutant.

Art Laffer has written a book in which the last chapter talks about the demise of prosperity. The premise of the chapter is that taxes will go up in 2010 because a vote is not even required by congress. I maintain that the congress will have to do something about the AMT. The American public will not permit the congress to raise taxes by such massive amounts. There will be compromise. The nature of this new competitive world requires US tax decreases. McCain and Charlie Wrangle, democrat leader of the powerful House Ways and Means committee, agree that US corporate tax rates need to go down. The adoption of the flat tax is causing a boom in many countries. The US needs to join the boom. The time is ripe for US technology to be exported around the world.

Strongest of Buy Signals

The cumulative sum of buy signals is as strong as it gets. Public sentiment is about as negative as it gets, monetary policy is about as stimulative as it gets and US stocks are about as cheap as they get. You will never see a time when all three are at the highest extremes at the same time but, again, the sum of the three is currently screaming buy. A bursting of the oil bubble will set the market on fire. The market has been waiting for an oil price break for a long time. OPEC just lowered its demand forecast for 2008 for the third time in recent months. Oil is down $3 this morning. The estimates for new reserves in Brazil have reached 100 billion barrels! Enough said!

STRATFOR REPORT ON PAKISTAN BOMBINGS

Incident Foreshadows Future Attacks in Pakistan
June 11, 2008 | 0114 GMT

By Fred Burton and Scott Stewart

Editor's Note: Due to technical difficulties, the conclusion of this week's Terrorism Weekly was inadvertently omitted. This version contains the final paragraphs.

In a June 10 press conference, Rehman Malik, the internal affairs advisor to Pakistan's prime minister, reported that a suicide bombing plot had been thwarted when Pakistani authorities arrested nine individuals and seized four apparent vehicle-borne improvised explosives devices (VBIEDs) containing a total of over 1,100 kilograms of explosives.


Three of the VBIEDs were recovered by authorities on June 6. Of those, two vehicles contained 400 kilograms of explosives, while the third carried a 200-kilogram load, Malik said. On the same day, authorities advised that they were searching for a fourth VBIED, which appears to be the one they recovered June 9. According to Malik, it contained 180 kilograms of explosives.

The VBIED seizures follow the June 2 bombing of the Danish Embassy in Islamabad, which left eight people dead and many more wounded. In his press conference, Malik noted that three would-be suicide bombers were among those arrested. He also noted that the militants' attack plans were "fully mature" and that the group was close to launching attacks with the VBIEDs at the time they were arrested.

Tactically, Malik's assessment rings true, because militant groups do not make VBIEDs unless they intend to use them. Not only is the process expensive and labor-intensive, but it is far easier to cache and conceal bulk explosives than a fully assembled VBIED. Because VBIEDs are so easily discovered, one does not leave them sitting around; they are constructed and then quickly employed. Additionally, if an improvised explosive mixture is to be used as the main explosive charge in the device, many of these mixtures are unstable and tend to degrade over time. They are best used fresh.
With these facts in mind, it is understandable that the U.S. Embassy in Islamabad issued a Warden message after the June 6 seizure alerting U.S. citizens and advising them to maintain a low profile. The fact that the fourth device was seized on June 9 shows that the U.S. concern was justified.

There are several militant actors in Pakistan, ranging from foreign groups like al Qaeda, which claimed credit for the Danish Embassy attack, to domestic actors such as Baitullah Mehsud's militant jihadist group, Tehrik-i-Taliban Pakistan (TTP).

It is not yet clear whether the seizure of the four VBIEDs resulted from the investigation into the Danish Embassy bombing (and is therefore tied to the perpetrators of that attack), or whether the devices belonged to another actor. There is, however, some indication of their provenance based on their size. There are also several other interesting points that can be gleaned by turning a protective intelligence lens on the facts at hand.

Prior Warning

Like many other attacks, the strike against the Danish Embassy did not occur out of the blue. In early 2006, following the September 2005 publication of a series of cartoons satirizing the Prophet Mohammed, protests erupted in many parts of the Islamic world. While many Muslims protested the cartoons by boycotting Danish goods, others displayed their displeasure with violence. The Danish embassies in Beirut and Damascus were set on fire, and threats to Danes abounded in many countries. In August 2007, this outrage was inflamed again when a Swedish newspaper printed a controversial cartoon of the Prophet.

Things came to a boil again in early 2008 when Dutch parliamentarian Geert Wilders released a controversial film called Fitna, which harshly criticized Islam and used images of the Danish cartoons from 2005. Many Muslims were outraged by the film. Among those who reacted was Osama bin Laden, who in a March 19 statement threatened attacks against European countries. In fact, bin Laden even said the images were more provocative than killing Muslim civilians.

In the wake of these most recent threats, the Danes drew down their embassy staff in Islamabad. Recognizing that their embassy was not very secure, the Danes had many of their remaining Danish staff in Islamabad work out of hotels, which they believed were safer.
The Dutch reacted similarly and actually moved their embassy to an Islamabad hotel in mid-April. In response to the threat, security was also ramped up around European embassies, including Denmark's, which continued to conduct many of its consular functions in its embassy building.

The Target

The Danish Embassy was located in an upscale residential neighborhood outside of Islamabad's protected diplomatic enclave. In fact, the embassy is located not far from Luna Caprese, a restaurant that was bombed on March 15, or the Marriott hotel, which was targeted by a suicide bombing in January 2007. While its location outside the diplomatic enclave made the facility more vulnerable to attack, perhaps the most critical factors in the embassy's vulnerability were its location in relation to the street and its construction.

The Danish Embassy is not only in a residential neighborhood — it also is a converted residence. As such, it was built accordingly and therefore not constructed of materials meant to withstand the force of an explosive attack. The vulnerability presented by this type of construction was compounded by the fact that the building was situated very close to the street. In a bombing attack, construction is important, but the only thing that truly provides protection from the effects of a very large VBIED is standoff — keeping the bomb away from the protected building. With newer U.S. Embassy buildings (such as the one in Islamabad), the structures are not only built to withstand a blast or rocket attack, but also located a significant distance from the embassy compound perimeter. This positioning is intended to ensure protection from any blast.
In contrast, the Danish Embassy in Islamabad only had a few feet separating the perimeter wall from the building itself. Due to the building's construction and location, very little could have been done for its protection other than to close the street in front of it or at the very least attempt to control traffic. Many older embassies and consulates are situated in former residences or commercial buildings. As a result, in the realm of embassy security there is often tension between security officers, who want to shut down streets and provide standoff protection for their facilities, and the host government, which does not want further congestion in the typically crowded cities in which they are often located. In the case of the Danish Embassy in Islamabad, which was not located on a main thoroughfare, it appears that the Pakistanis did establish roadblocks to control access to the area, which contained many other potential terrorist targets.

The Attack

The vehicle used in the attack was a small, white Toyota or Suzuki. According to several media reports, the vehicle bore counterfeit Danish diplomatic license plates. The attack was caught on the Embassy's CCTV system which, according to the Danish Security and Intelligence Service, reportedly shows the vehicle passing by the embassy, stopping and then reversing toward the building's vehicle gate before detonating.

The location of the seat of the blast (which marks where the vehicle was when it exploded) in relation to the embassy building and gate appears to confirm this report. In fact, the brunt of the force of the explosion missed the embassy building and instead destroyed a section of the embassy's perimeter wall adjacent to a parking lot. However, a U.N. building located across the street was not as lucky and experienced heavy damage from the explosion.
The fact that the bomber drove past his target would seem to indicate that he was poorly prepared for his mission — much to the good fortune of the Danes. Had he been able to detonate the device while on the street parallel to the embassy building, or had he been able to jump the curb and position the device directly against the perimeter wall, the damage to the embassy building would have been far worse, and the casualty count might have been higher.
The reports of the counterfeit Danish diplomatic license plates are also intriguing. While such plates likely helped the bomber get past the police checkpoints and onto the street where the embassy was located, the Danish Embassy is very small, and the guards there were undoubtedly familiar with all of the vehicles bearing Danish diplomatic tags. Therefore, it is highly unlikely that they would have allowed the vehicle to enter the embassy's perimeter, enabling the bomber to detonate the device in very close proximity to the building.

The timing of the attack is also very interesting. That it was conducted at 1 p.m. on a business day clearly indicates that the attackers intended to cause maximum casualties. Their efforts were not intended as a symbolic gesture, as might be suggested by, for example, an attack undertaken on a Saturday or at 3 a.m. While these particular aggressors were obviously after blood, their brutal intentions may have had limits. The embassy's visa section closes at noon, and it would appear that the attackers may have purposefully scheduled a later attack to minimize the casualties to Pakistani visa applicants. They also did not schedule the attack during the morning or afternoon rush, when there would be more people on the street.

While al Qaeda claimed the attack as a success, it killed mostly Pakistani Muslims and clearly did not create the type of "infidel" body count the planners would have hoped for — the only Danish citizen killed was born in Pakistan and held dual citizenship; the rest of the victims were also Pakistanis.

Recovered VBIEDs

Whoever assembled the four recently seized VBIEDs devoted a significant amount of resources to their creation. From the sheer size of the devices alone, it can be clearly extrapolated that they were intended to create significant carnage and damage. One simply does not make a 400-kilogram VBIED for symbolism. A 5-kilogram device can be used to make a symbolic point — a 400-kilogram device is immensely destructive. The simultaneous employment of two such devices detonated in one city in conjunction with two other 200-kilogram devices could create a terrorist spectacular.
The size of the devices also speaks to the intended targets. A would-be terrorist does not need a 400-kilogram device to go after a soft target. While a 5-kilogram IED can easily take out a U.S. fast-food franchise, a larger VBIED is needed to damage hardened targets with robust construction. A 400-kilogram device detonated at the same spot as the June 2 attack would likely have leveled the Danish Embassy. By way of reference, such a device would be larger than those used by Hezbollah in Argentina to bomb the Israeli Embassy in 1992 or the Asociacion Mutual Israelita Argentina in 1994.

Some may contend that the Pakistani government has fabricated this threat and staged these arrests to create public reassurance while demonstrating its competence following the Danish Embassy bombing. Such a publicity stunt is unlikely in our opinion, especially considering the extensive amount of explosives uncovered. In fact, by making this information public and showcasing the large amount of explosives that the attackers were able to obtain, the Pakistani government is illustrating just the opposite point.

In effect, the Pakistanis have confirmed that an at-large organization inside their country possesses the ability to amass and employ nearly 1,200 kilograms of explosives. This news is not reassuring by any stretch of the imagination.

The recovered VBIEDs are evidence of both a serious and a costly effort. Even in Pakistan, 1,200 kilograms of explosives does not grow on trees. An organization willing to expend such effort, resources and time will not typically stop until they are destroyed or otherwise neutralized. They might make tactical changes based on lessons learned from failed operations, but they will continue to attack.

Pakistani militant groups are not shy about using explosives, but the majority of their devices — even suicide devices — are smaller. The size of the device and the fact that there were multiple devices involved would tend to point toward al Qaeda, which has a penchant for thinking big and has an operational history of conducting multiple, simultaneous attacks. In other words, these attacks appear to indicate that Pakistan's jihadist chickens are coming home to roost.

The bombing of the Danish Embassy and the recovery of the four large VBIEDs demonstrate that al Qaeda has the capability to mount serious attacks in Pakistan. The fact that the last four devices were discovered before they could be employed illustrates that the Pakistani government has some intelligence coverage regarding those capabilities.

At this point, however, it appear that al Qaeda, the TTP and other militants can operate with a large degree of freedom and that the Pakistani government does not have the ability to consistently prevent them from planning and launching attacks. From the intent and effort displayed by al Qaeda in the last several days, we anticipate more attempted attacks in Islamabad — including attacks on hard targets — in the foreseeable future.

This means that foreigners with interests in Pakistan would be well advised to heed the June 6 Warden message, in spite of the recovery of the fourth VBIED. With militants' targeting plans likely to continue, it would also be prudent to ratchet up surveillance detection efforts at potential target sites.

Tell Stratfor What You Think

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TURN FROM EMERGING MARKETS

Over the past 18 months, a recurring theme offered here is that emerging markets will suffer and the money will flow into US stocks. In some ways, it has been a slow turn but in others it has been very fast.

The Shanghai Stock Market illustrates how much of a bubble developed in emerging markets. The index has hit the following points along the way:

June 2005, 1,000

June 2006, 1,700

June 2007, 4,000

Oct. 2007, 6,300

June 2008, 2,950



Which way do you want to look at this? Has the market fallen 50% in 9 months or has it risen 295% in three years? Both are true. The turn is pretty obvious.

The turn is less obvious in US markets but still there. US markets made an intra-day low in January, tested the low in March and are coming close to retesting the lows in June. The US dollar turned versus various currencies as far back as last October and against others between January and March of 2008. Kudlow and Company has obsessed about talking the US dollar up but the reality is that the dollar will seek its correct level and that intervention will only cause short term but unsustainable swings. The Kudlow sentiment is correct that a strong dollar will lead to strong profits and strong stock market rallies.

After a very long time of import growth and a weaker dollar, the decline is finally having an effect. The turn in the dollar has been giving foreign investors in US assets a boost in their profits. Large businesses do not move a factory to America on a whim. They have to see that there will be sustainable profits to justify the investment. Over the last 18 months or so, exports from the USA have been growing at a dramatic pace as US companies are producing products that are not made anywhere else. The easy example is the Petra Flop Computer that IBM just manufactured. Only a few years ago, when the fastest computer could perform 200 trillion transactions in a cycle, it was thought that at least a temporary plateau had been reached. The machine now being installed does 1,000 trillion transactions per cycle!

Productivity continues to soar. Somewhere, yesterday, I saw a chart, perhaps it was on the Carpe Diem web site, that showed an increase in industrial production of 600% over a number of years and during that same time the number of workers engaged in manufacturing dropped by almost as much. It is hard for many to see productivity as a good thing because it eliminates the need for workers. The good news is that when more goods are made with fewer workers, consumers can buy goods for lower prices and then afford other services with their savings. Thus, millions of people are working in jobs that never existed before. My daughter is a professional counselor at an elementary school. When I was in elementary school, I had one teacher each year and the school staff was composed of the principal, the janitor and a few ladies who ran the cafeteria. I am thankful that my daughter helps kids. I am also thankful that she does not hold a rivet gun 8 hours a day on a factory line. All work is honorable but smart people learn how to do things the easy way.

GUIDED MISSILES

Over the past few months, Defense Secretary Gates has put a lot of pressure on Air Force Commanders. Gates has needed more UAVs, drones, in the Middle Eastern theater. What is not to like about these drones? Many can be operated by specialist trained in only a few months. They can be operated from an air base located in the US or anywhere else. They can stay aloft for hours with no pilot fatigue, when one guys shift is over, he passes control to the next in line and he goes to his home in a US city.

How did the USA and Israel know that Syria had three nuclear sites? One theory that fits a number of facts is that drones "followed the trail from Iraq" and have been collecting more info ever since. The US Senate Intelligence Committee has confirmed once again that Saddam Hussein had weapons of mass destruction. It is known that he destroyed some of these weapons under UN supervision but that he refused to give a full accounting to the UN for other weapons. It has long been suspected that some of these weapons were moved to Syria. Israel bombed one of the locations and UN inspectors have asked to visit another two suspected locations. An amateur detective acts as soon as he discovers a lead, the professional takes the time to build his case before he makes his arrest.

North Korea and Iran have each worked on guided missile programs and each have tried to build nuclear warheads. The USA has obviously been following these developments closely. These programs put the world at risk of nuclear war. They need to be monitored closely and drones have played an important role in the process.

The good folk at Stratfor.com have noted that if the time comes when nuclear facilities need to be attacked, cruise missiles and other non manned air craft should be the weapons of choice. There is no need to put pilots at risk when a drone aircraft can do the job. The combination of missiles, surveillance drones and unmanned aircraft that can deliver ordinance and return to base is a powerful combination. The evasive action available by the drone aircraft is superior to that of a manned aircraft as a man cannot survive the G forces that machines can.

Knowing that nations such as Iran are working on guided missiles is fuel for "an arms race". Rational people who love peace know that the route to peace is paved by military strength. A bully will not attack you if he suspects you have a close friend who has a black belt in Karate. Iran will not attack Israel if it suspects that Israel and the US have the capability of putting a cruise missile in Ahmadinejad's bedroom. The risk is that Ahmadinejad will acquire the expertise to put a cruise missile into George Bush's bedroom. I am sure there are terrorist who dream of steering a cruise missile into the Freedom Tower being built at the World Trade Center.

US companies benefit from their advanced electronic skills. Drones must be able to electronically listen and see through fog and "noise". It takes very powerful computers to monitor chatter. The reason there has not been another 9/11 style attack on the US is largely because communications from terrorist have been well monitored. Week after week, leaders of terrorist cells have been captured or killed. Last month, 500 terrorist turned themselves in to US forces in Iraq.

Insurance costs on everything from oil ships, to New York buildings to elementary schools are going to come down over the next several years. As insurance and other costs come down, the US market is going to do extremely well. The US is set up a bit like California during the gold rush days, one did not have to own a gold mine to make money in those fun times.

The second half of the business cycle is upon us. Big computers and expensive US provided services will be purchased. World commerce will flourish. After a small cap surge coming off the slowdown, the market will move more toward the "big business good times". IBM and GE will likely be among the big winners. The emerging markets have collected piles of US dollars, now they will buy software from MSFT, turbines from GE and computers from IBM.

CHANGE IS COMING FAST

A good article about change is posted at

http://www.ftportfolios.com/Commentary/EconomicResearch/2008/6/11/wesbury_wsj:_change_we_can_believe_in_is_all_around_us

WOLF

No matter how many times I cry Wolf, I see what I see, nothing more, nothing less.

For the week of May 30, gasoline consumption in the US was down 3.9% compared to last year. Jet fuel consumption was down 2%. Crude oil imports were down 4.4%, gasoline imports were down 13% and jet fuel imports were down 31.%.


When the price spiked in the 1970's, it took 20 years for consumption to return to the old highs. US total consumption dropped about 3 million barrels per day out of 18. Today, consumption is back at 2004 levels. The demand out of developing nations will be the next to crack.

The price does not have to fall a lot for the "turn" to be here. Steady consumption would mean that economic growth goes to other sectors.

Ahmadinejad is hanging tough. He is like a trapped animal so it has been wise to only gradually close off his escape options. US officials say with confidence that an agreement will be signed with Iraq, permitting a continued presence in Iraq, by July. Some say there is no way that the Maliki government can win approval by July. There is too much at stake to not leave peace keeping troops in the area. Scores of multi-billion dollar development deals depend on a package deal. Iraq and Iran will have signed off on a package by August, most likely sooner. Bush will spend 10 days or so in China during the Olympics. There is a good possibility this will be part of his victory celebration.

The Wolf seems to be at the stock market door but the turn does not depend on the signatures hitting the paper first. The protests around the world are significant. They show that sentiment has reached extreme levels. Actions are being taken. Results will be achieved.

Re: JOB LOSS IN ENGLAND

The shut downs in Europe have made the news. There are protest around the world in regard to high food and high energy prices. It is still true that when wealthy Americans catch cold, Europeans catch the flue and Asians and Africans die.

The nations that provide "free health care" typically offer gasoline at $8 to $10 per gallon. Uncle Milton was right that there is no free lunch.


I don't remember who but I recall that a republican introduces a bill year after year that would open up ANWAR and our coast for drilling. Apply our current oil policy to agriculture and we would outlaw the use of bottom land and only farm steep hill sides and deserts.

The key point of noting the protest around the world is to note that consumers are ready to do what it takes to reduce consumption. My 28 year old daughter, a professional counselor, is driving a scooter to and from work! The price of oil is set up for a big fall.


On Wed, Jun 11, 2008 at 8:59 AM, Lamar wrote:

My niece is attempting to leave Spain from a two week school trip. I say attempting due to the fact that the truck unions in Spain are striking due to high oil prices and therefore shutting down the highway system. Their complaint- the $10 per gallon price of fuel. As you might guess, about 75% of the price is tax ( my guess). The Europeans are also complaining about some gov't's push to increase the work week ie France. While my niece was over there, she was telling my sister about their healthcare system. Basically it is only anecdotal evidence but she says the health care product is below average with long waits. Has anyone seen any of this in the news. Seems to me when strikers shut down highways in a so-called modern country, the national news would at least publish the story.

Bottom line the Europeans are struggling with a lethargic economy, high taxes ( oil is not the only source of taxes ) and poor services.

Our country's dems have been bragging about the better way as evidenced by the european model for decades now. They have slowly been instituting more European style programs to corral the American people. If this is what we want, so be it. It just seems to me that we Americans should know what exactly the Dems are offering.


One final comment- when was the last time any politician, regardless of party, demanded, introduced or publicly discussed drilling for oil in the to-date off-limit areas eg Anwar.


Random thoughts from an angry American.

MORE CARROTS AND MORE STICKS

The Bush administration continues to win support for more sanctions against Iran should they fail to cease the production of nuclear materials. At the same time, the administration is leaving open its negotiating channel in regard to the security of Iran. In other words, the Bush administration wants to leave a peace keeping force in Iraq.

After 26 million Russians were killed during WWII, Germany was split in parts and Russian troops were stationed in the East and US troops were stationed in the West. The US did not interfere in the German economy and West Germany prospered. It is understandable that the Russians were bitter. They extracted reparations from the former Germanic states. The US, German and other Eastern Europe citizens ultimately won the cold war because the West allowed our new friends to prosper. There were tense times along the way and the US did have to perform an airlift of goods to Berlin during one stretch. The US needed to be there to allow the war torn nation to heal.


The left paints George Bush as an evil man but George wants peace. His execution of this war was designed to have as few deaths as possible. After about 3,000 US citizens were killed on 9/11, the war in Iraq was begun with a shock and awe campaign in which the might of the US military was displayed by taking out infrastructure. Few people were killed. Only when insurgents came in from Iran, Afghanistan, Pakistan, etc were there significant numbers of lives lost. The invasion of Iran would have been far more costly in lives and treasure.

There is an excellent chance that war with Iran will be avoided. Yet there is an excellent chance that Iran will agree to suspend its support for terrorist. There is an excellent chance that Iran will cease the production of nuclear fuel but there is an excellent chance that Iran will receive abundant supplies of enriched uranium for power generation purposes.

It remains to be seen if Amadinejhad will be "thrown under the bus". He or his successor needs to do a deal and get on with the many commercial deals that have been negotiated. The most recent commercial negotiations have included Russia's readiness to develop one of the northern fields.

The left leaning press continues to talk about Bush going up against Iran which is supported by Russia and China. The fact of the matter is that Russia and China are on our side. Americans tend to forget that it was Russia and China who lost the most during WWII. We forget the role they played in defeating Russia and Japan. Iran is the loose cannon here, not George Bush. George is busy working out carrot and stick deals. Iran is busy trying to figure out how to build a nuclear bomb (oh sure, the people are suffering greatly in order to build a nuclear power facility that has been offered free of charge).

JOB LOSS IN ENGLAND

The FTSE100 made the same bottoms as were made in US markets, in January and March. England is gradually catching up to the US economic slowdown. Job losses have been reported four months in a row.

The world wide slowdown will ultimately hit the developing nations, like China, harder than the developed nations. Developed nations are not as cyclical because we are no longer dependent on the manufacturing of goods for our economic health. Countries like China thrive off of the production of low priced goods. When the consumer reduces consumption just a little bit, it is a blow to China.


The slowdown will reduce the demand for oil. The EIA has once again lowered its estimate for demand and of course for production for this year. US gasoline consumption is estimated to be down only 440,000 barrels for the year but the down turn is the new trend. The person who buys a 40 MPG car and parks his truck except for secondary use, is not going to trade back if the price per gallon falls even $1 or $2. The July buyer who reduces his consumption in 2008 by 10% compared with 2007 will reduce his 2009 consumption by 20% compared with 2007.

What will the consumer do with the 20% savings? What will he do with the savings when his actions combine with the actions of others to bring the price down? History shows strong stock markets in 82, 86, 91, and 2002 after significant drops in the price of oil. History shows the consumer will find other ways to spend his disposable income. Over the past 5 years, a significant portion of ones increases in income have been eaten up by additional fuel costs. When the cycle turns, consumers will continue to see increases in earnings but they will also see a reduction in the cost of commodity based goods. The timing is just right for all sorts of powerful new phones and gadgets and even second homes.

Job loss and high inflation are two lagging economic indicators. Job loss and inflation always make it seem that the wheels are falling off the economic buss at the end of a down turn. The coming CPI report is likely to be a doozy given the spike in gasoline prices but the slowdown that already happened is the cause of the job loss and the inflation in non commodity prices. After business has hit bottom, it turns up. The upturn means an increase production, an increase in the supply of goods and a decrease in price. The increase in production gradually means an increase in hiring. Thus, inflation rates slow and unemployment rates fall, long after the stock market turn has hit second, third and forth gears. The current cycle stock market bottom was in January and it was successfully tested in March. The next up leg should be very strong.

A Goldman analyst is getting a lot of TV time this morning. He is discussing at great length about how weak the economy is and how bad the inflation rate. In other words, it is as bad as it gets. Investors should constantly remind themselves that Goldman and other investment banks make huge profits buying when the average person is selling and selling when the average person is buying. Investors should follow the advice of Grandma and "follow what Goldman does, not what it says". When you hear about job losses, you should remember that they come at the end of an economic slowdown. England just announced the 4th month in a row of job losses. The upturn in the market will lead the upturn in the economy.

AMADENIJHAD FANTASIES

Last month, German investigators raided the Bank of Melli in Hamburg and put a freeze on Iranian assets. Today, newspapers from London to Moscow have reported that Iran is quickly withdrawing funds from European banks. The Telegraph.co.uk reports that "front companies" headquartered in Dubai are withdrawing huge sums via transactions between Dubai and Dutch Banks. The funds are then forwarded to Tehran where Amadenijhad has entered dream land.

Five days ago, Amadenijhad followed up his threat to make Israel disappear by telling the Japanese that the US would soon disappear from this earth. Today, he is quoted in Iranian newspapers saying that the way can be found to spend Iranian oil money on the Iranian people causing inflation. When Amadenijhad came to power three years ago, he promised the people that they would enjoy the wealth and prosperity created by their oil wealth. Today, when the people have been forced to convert cars from gasoline power to natural gas power, his words have little credibility.


When the Minister of Finance resigned in April, Amadenijhad's economic management competence was questioned. Since then, the reported inflation numbers in the country have reached 25%. The CIA has stated that the countries inflation rate has been under reported by half for the past year. Other reporters say that the political and religious elite of the country have been alienated.

THE EASY WAY OUT

The UN negotiators have provided an easy way out. Accepting the terms offered would not represent a hardship for Iran. The damage done to Iranian pride can be restored by kicking Amadenijhad out of office and letting a new leader "make the deal". It is time for the second largest reserves of oil and natural gas to be developed. There are willing buyers and Iran should be a willing seller. It is time to complete the Iranian nuclear power plant and Russia is prepared to honor its commitments.

The rest of the world is ready for lower energy prices and the end to terrorist bombings. Conditions are ripe for peace and the cumulative total of stock market buy signals is about as strong as you will ever see it.

THE SAUDI OFFER

Yes, the offer of Saudi Arabia to increase supplies to meet the needs of the market is the offer to replace Iranian supplies if needed. The timing of the Saudi offer and the timing of the additional EU banking sanctions was no likely a coincidence.

OPPORTUNITY KNOCKS, RINGS AND SCREAMS

Is anybody home? Opportunity has been knocking at the door, ringing the bell and screaming the question, "is anybody home"?

Jason Goepfert operates a subscription only web site (www.sentimenttrader.com) that tracks the history of sentiment for as far back as the records go. In a recent study, he found that over the past 58 years there have been 20 large jumps in the unemployment rate. The average market return has been about 25% in the year following these jumps, like the jump we saw last week.


Today, Bush won the assurance from Jose Barroso, President of the EU Commission, that the 27 nations of the EU will go along with additional sanctions against Iran. The 27 EU nations are working with the rest of the world to freeze Iranian bank deposits. The UN agrees that Iran has provided financial support to a number of terrorist organizations. The world wide support for sanctions against Iran is close to being unanimous.

Many of my readers do not believe enforceable peace agreements will be signed in the Middle East any time soon. This is a fair position to take because history is on that side of the issue. On the other hand, there has never been a time when leaders of so many nations were active in the peace process. There have never been so many commercial deals at stake.

The fear that keeps pushing crude oil to new highs is a fear of war. The truth of the matter is that Iran needs the world and the world needs Iran. While we in the process of demonstrating that we can get along without Iranian oil (at least without the sulfur heavy half), we would all be better off if a peace agreement can be reached. No one is trying to take over Iranian oil fields. No one is trying to prevent Iran from using nuclear fuel to make electricity. The Iranian position is untenable. Buy stocks now. You will be rewarded when the market gets around the "Iranian oil embargo" one way or the other.

THE GALES OF CREATIVE DESTRUCTION

Joseph Schumpeter promoted the notion that capitalism results in the destruction of "old businesses" by providing the incentives necessary for innovation. Mankind has greatly benefited by this "dog eat dog" system, in the long run. In the old days, the "cycles of the progress" took many years. The grandfather, father and grandson all earned a good living as steel mill workers before mini mills changed the business. On the other hand, AOL cornered the Internet market in just a few years only to lose out to a "new and improved" broad band system.

Bjorn Lomborg runs the Copenhagen Consensus Center. The center repeatedly asks the question, "if society had x dollars to spend, how should it spend those dollars". The market place of Schumpeter automatically repeatedly asks this question. In the realm of governments, trillions of dollars are spent without first discovering the relative merit of the projects funded; once funded, wasteful projects get new funding time and time again. Governments tend to choose projects by the "seniority system". The pet project of a senior legislator is funded because he has the power to help a less senior legislator with his pet project.


This year, the Bjorn list includes Global Warming as the 30th best use of public funds. This is up from prior years but, even so, the consensus of many learned persons is that there are at least 29 other better uses for public money. Second on the list was the successful conclusion of the Doha Free Trade Agreement. The estimates are that this agreement would produce 113 Trillion Dollars worth of benefits during the remainder of the 21st century. The estimated cost in destruction of "old business" is $420 Billion Dollars. If you were given the opportunity to invest $4.20 to earn $1,130, ($1 for $269), you should give the investment serious consideration! It is debatable if a dollar spent to curb CO2 would produce even a pennies worth of benefit. Indeed, it could do harm!

Contrast the Doha Trade investment to the one our "conservative Senator from NC", Liddy Dole just supported. In the farm bill, Liddy voted to require our government to buy sugar produced by US farmers and to sell it to US ethanol companies. The government will pay the phony US wholesale market rate which is about 20 cents per pound and resell it at the international wholesale market price of 10 cents per pound. Our government will purposefully buy sugar at 20 cents per pound to resell it for 10 cents per pound! Where has sanity gone? American farmers could produce much more sugar at a much lower price but sugar regulations, like oil regulations, have taken away freedom.

Like it or not, we are all conformist. Liddy simply joined a long line of Lemmings. She and 80 others voted for this travesty and only 15 voted against. The American people tend to assume our government puts our interest first. We only get excited when the government runs our economy into a ditch. The current state of the energy markets has driven our economy into a deep ditch.

Americans have allowed our legislators to have too much control over our resources. The contradictory statements and actions coming out of Washington today are mind boggling. The result is imported $4 per gallon gasoline, deadly pollutants from coal all while the legislators prohibit the exploration of US resources. The good news is that the public is finally awake. Kudlow and Company posted a Gallup poll last night showing public support for US drilling. The public is not willing to absorb trillions of dollars in costs in order to avoid drilling on a very small section of ANWAR. ANWAR will be a beautiful nature reserve long after the oil drills leave.

Yesterday, Obama blamed Exxon for high gasoline prices. His "solution" is to add a wind fall profits tax. It is only common sense that the addition of such a tax would do the same thing it did last time. During Carters term, a wind fall profits tax on US oil companies meant that the USA became all the more dependent on foreign oil. Common sense and economic law dictates that the more you tax something the higher the total price.

On TV, John McCain sometimes looks like death warmed over. Furthermore, he has been known to slaughtered a good speech. And finally, his support for the Cap and Trade corporate welfare Boondoggle is as strong as Obama's. He is certainly not the ideal presidential candidate but he is not naive in international affairs and he does not support tax and spend and spend.

Obama likes to suggest that a vote for McCain is a vote for a "third Bush term". Yesterday, after Obama's "tax the oil companies speech", McCain got in a great line when he said that Obama is running for the second Carter term. Carter's policies ranged from cutting up our credit cards for us, to wind fall taxes on oil companies, to encouraging us to wear sweaters to keep warm. During the Carter term, many a family, including mine, slept under three blankets with the heat turned down to 50. Those who could get credit paid 21% or more. Carter also demonstrated the futility of talking to terrorist versus real diplomacy. During his term, for recreation, people chopped wood. Burning wood in wood stoves and fireplaces is not environmentally friendly but restrictive policies will not prevent people from staying warm or from getting to where they want to go.

A major disaster could result from Obama's proposal to renegotiate NAFTA. His union employee supporters continue to spend billions to force prices up so that they can win back union jobs. If the Doha Free Trade Agreement mentioned above is successfully concluded, it is the consumer who would get 80% of the $113 Trillion of benefits. There are many more consumers than there are over paid union workers. The sad thing is that the pass through of the union dues has fallen the hardest on the poorest of consumers. The poor have paid a disproportionate share of the fees that have been paid to lobbyist to win restrictions to trade.

THE GALES OF CREATIVE DESTRUCTION ARE BLOWING AROUND THE GLOBE

The politician who pretends that prosperity will be achieved by over taxing oil company profits puts Americans at risk. The USA cannot expect to over pay for foreign oil and still produce competitively priced products. We must lower the price of fuel to increase wages, profits and tax revenues. We will lower the price by using less and by increasing supply. We are in the process of doing both.

Last month, the ratio of total vehicle sales to car sales dropped. In 2005, this ratio stood at 2.5 to 1 and last month it was at 1.7 to 1. Big trucks are no longer the fad. As a result there will be a dramatic decline in gasoline consumption. In Vietnam, short term interest rates have been raised to 14.5% in an attempt to reduce prices. In China, bank reserve requirements are being raised 1 full percent to 17.5%! The situation for prices has become that of an unstoppable force running into a permanent object. The size and weight of the permanent object is growing daily. It will soon be proven that the unstoppable force can be stopped.

Supply is increasing. The vote to build a new refinery in South Dakota has encouraged Canadian producers to forge ahead with production. Yesterdays announcement of a pipeline from Kazakhstan to Turkey will bring large (formerly Soviet Union) reserves to the western world. The success of horizontal drilling in Montana, North Dakota, Texas, Pennsylvania and in other states is bringing new US supplies online. One hundred to two hundred million dollar wells are being drilled in the deep waters of the Gulf while Cuba and China are drilling 10 million dollar wells in the shallow Gulf coast waters 70 miles from Florida. The US consumer ultimately pays the extra 90 to 190 million dollars plus the extra development and lifting costs.

US producers are being treated like sharecroppers in Tennessee were treated 100 years ago. In Tennessee (and other states), wealthy farmers were known to use hired hands to farm the fertile "bottom lands" and to sharecrop the low yielding marginal hillsides. If the sharecropper worked all year to produce very little, the wealth farmer still got half. The big difference is that the environmental gestapo of today says that we cannot drill in the "rich bottom lands" at any price.

The market will find its way around the sequestered fields. Brazil will spend 100s of billions of dollars developing rich fields. The US consumer will pay dearly but he will buy oil. Some Americans will ride the bus to avoid paying so much but most of us will pay the price required. Eventually innovation, or Shumpeter Gales, will produce who knows what innovative solution. In the short run, it is time for the congress to release the supplies that have been held hostage.

Re: THE PUZZLE IS ALMOST COMPLETE

There is nothing evil in the least about petitioning the government to do what is right. Doing so is one of the very basic freedoms offered to us by our constitution. Day after day pollution continues to kill. Something should be done. The problem is that politicians fall in love with power. They seek to tailor regulations in a way that will "earn" campaign contributions from the "winners". Politicians convert the goal of protecting the environment into the goal of producing campaign contributions. Politicians on the other side also win by not solving problems but by preventing solutions from being implemented.

We have made an awful lot of bad choices. Much of the damage from past bad choices can never be fixed. We can do better.


By mandating the use of ethanol and then subsidizing some of the richest people in the world to produce the stuff, we waste our time effort and energy and we create frustration, distrust, high prices for food and even starvation of poor people. Seventy percent of the farmers in Iowa and 78% of the farmers in North Dakota receive subsidies while the average Joe pays through the nose for fuel and food. US farmers are the richest farmers in the world. Some are New York City farmers who collect the subsidies without ever setting foot on the land. It is one thing to support a crop stabilization co-op and quite another to pay massive subsidies at the height of the agricultural profit cycle. The Cap and Trade system has been designed to split the difference. It will give existing businesses oligopoly power and campaign contributions to incumbent politicians. Big business and big government win but the consumer pays through the nose.

Government has gotten too big and the profit from lobbying has gotten out of hand. We can set up appropriate regulations without constantly robbing from Peter, enriching Paul and paying off politicians in the process.

Nuclear power gave us all a scare. It took about 25 years, but the fear has largely subsided. As a result, there are nuclear power deals being made daily. The big one was the agreement between Russia and the USA. Russia will build 45 nuclear plants over the next 22 years, producing a very large amount of low cost electricity. I believe the total built by Russia will be several times the 45 called for in the agreement. Once the process gets started, who can guess the total number? In the USA, we would need to go from 104 plants to about 700 plants to reach the market share that exists in France today.

The total number of plants that will be built in the rest of the world will be greater than the number built in Russia and the USA combined. In the past few days, Jordon has executed 123 agreements with France and the USA. Japan just renewed its agreement with the USA. India is in a battle royal over its prime ministers agreement with Bush. Around the globe, and particularly in the Middle East, it is like a nuclear power race is on. The backlog for nuclear power components is great. The major components are sold out for several years to come. The doubling of the price of oil in the past year has made nuclear and many other methods of producing energy very profitable.

Over the past 25 years, trillions of tones of coal have been burned because we have not been willing to drill for cleaner burning oil and because we have not been willing to build nuclear power. Billions of barrels of oil have been consumed because we have not drilled for cleaner burning natural gas. We could put every acre of land into production of ethanol and still not hardly make a dent in our energy needs. The amount of resources needed to build enough wind mills would be incredible.

Drilling does much less environmental damage as other methods. With trillions of cubic meters of gas just a short distance off our coast lines, it makes no sense to damage the environment by tilling vast tracks of fertile land or dotting the countryside with noisy windmills made of steel and concrete.

The country has gotten into a group think mode that has resulted in the suspension of belief in the basic laws of supply and demand. Supposedly knowledgeable people are constantly saying things like the corn used in cars does not drive up the price of food because it is a different kind of corn than we eat. They say putting corn in cars does not effect the price of rice because most rice is grown in other countries. They say subsidies do not distort markets but makes them better. They even say that using double the amount of steel and concrete in a wind farm is not a consideration in comparing wind energy to nuclear energy.

Your point about the scaring of land and the damage to water resources is a good one. Yes, the total costs of mining and burning coal have not been factored into the cost of the energy produced. Determining the exact cost is impossible. A commission needs to be established to estimate externalities to the best of their ability with the support of the scientific community and the congress should only vote up or down. The externalities should be taxed and the revenues should go to eliminate taxes on earnings. We need incentives to produce less pollution and incentives to produce more work and investment.

Again, we do not want to take away our right to petition the government, but we want to reduce the necessity for it. Decade after decade the congress was unable to close extra military bases because representatives fought for local pork. Most everyone agreed there were too many bases but no one was willing to volunteer to have their base closed. A commission established which bases should be closed they were.

Right now, we use energy as a political football. Everyone has their own ideas about how to "fix the problem". The incentives to come up with good solutions are huge. If the externalities created by mining and burning coal were included in the price, we would burn less coal. However, I believe it will not be long before someone comes up with the best method for microbes to digest the coal and burp out clean burning methane gas. Thirty years ago, we grew 16 bushels of corn per acre. Today, we grow as much as 250 bushels of corn per acre; Monsanto projects that we will double yields in 5-7 years; 30 times the yield in 40 years! "Bugs" are already eating coal and oil and producing methane. A number of scientist have given us good reason to believe the natural process can be sped up many times, perhaps 10,000 times.

Once people realize that the natural process of producing energy is a renewable process, they will stop wasting so much time and effort on weak substitutes. Of course, improvements in batteries could change the dynamics of wind, solar, nuclear and other power solutions. The Chinese will buy upwards of 14 million electric scooters this year not to protect the environment but because the electric scooters cost less to make than the gasoline powered scooters. With about 30 nuclear power plants coming on line over the next 12 years, China will be able to charge as many scooters as the public will buy.

Governments and capitalist are willing to gamble. There will be winners and losers but the consumer will ultimately win. History has shown that free markets generally make fewer mistakes when allocating resources than do governments. Free markets drive down prices, whereas governments frequently drive up prices. Government is needed to set up the least amount of rules as are necessary. We should trust the people to do the rest.

On Sun, Jun 8, 2008 at 10:30 PM, Al wrote:

I live in eastern Pennsylvania, about 30 miles from the deep mine anthracite coal belt.The destruction of human lives and the environment through a hundred years of unregulated mining still scare the land, Coal banks, the residue from deep mining still pollute our water 40 years after major deep mining became too costly. Only five miles from my home is a Zink smelting plant which has left the Blue Mountain totally denude of any vegetation and polluted ground water for most of my 64 years. It has taken most of my life for the Lehigh River to regain its ability to support aquatic life. Deep Zink mining 15 miles south of me had caused stream flow reductions and even a lake to run dry. I firmly believe we need to developed our natural resources, BUT in a responsible manor! Mining, drilling wells and nuclear power can be done in environmentally safe ways. This can only be accomplished when government is no longer swayed by the lobbyists with the biggest bundles of money.

Al

This is not an endorsement of Obama, as his campaign takes money from state lobbyists, but not federal lobbyists and I fail to see why state lobbyists are less "evil" than their federal cousins.

Re: THE PUZZLE IS ALMOST COMPLETE

There is nothing evil in the least about petitioning the government to do what is right. Doing so is one of the very basic freedoms offered to us by our constitution. Day after day pollution continues to kill. Something should be done. The problem is that politicians fall in love with power. They seek to tailor regulations in a way that will "earn" campaign contributions from the "winners". Politicians convert the goal of protecting the environment into the goal of producing campaign contributions. Politicians on the other side also win by not solving problems but by preventing solutions from being implemented.

We have made an awful lot of bad choices. Much of the damage from past bad choices can never be fixed. We can do better.


By mandating the use of ethanol and then subsidizing some of the richest people in the world to produce the stuff, we waste our time effort and energy and we create frustration, distrust, high prices for food and even starvation of poor people. Seventy percent of the farmers in Iowa and 78% of the farmers in North Dakota receive subsidies while the average Joe pays through the nose for fuel and food. US farmers are the richest farmers in the world. Some are New York City farmers who collect the subsidies without ever setting foot on the land. It is one thing to support a crop stabilization co-op and quite another to pay massive subsidies at the height of the agricultural profit cycle. The Cap and Trade system has been designed to split the difference. It will give existing businesses oligopoly power and campaign contributions to incumbent politicians. Big business and big government win but the consumer pays through the nose.

Government has gotten too big and the profit from lobbying has gotten out of hand. We can set up appropriate regulations without constantly robbing from Peter, enriching Paul and paying off politicians in the process.

Nuclear power gave us all a scare. It took about 25 years, but the fear has largely subsided. As a result, there are nuclear power deals being made daily. The big one was the agreement between Russia and the USA. Russia will build 45 nuclear plants over the next 22 years, producing a very large amount of low cost electricity. I believe the total built by Russia will be several times the 45 called for in the agreement. Once the process gets started, who can guess the total number? In the USA, we would need to go from 104 plants to about 700 plants to reach the market share that exists in France today.

The total number of plants that will be built in the rest of the world will be greater than the number built in Russia and the USA combined. In the past few days, Jordon has executed 123 agreements with France and the USA. Japan just renewed its agreement with the USA. India is in a battle royal over its prime ministers agreement with Bush. Around the globe, and particularly in the Middle East, it is like a nuclear power race is on. The backlog for nuclear power components is great. The major components are sold out for several years to come. The doubling of the price of oil in the past year has made nuclear and many other methods of producing energy very profitable.

Over the past 25 years, trillions of tones of coal have been burned because we have not been willing to drill for cleaner burning oil and because we have not been willing to build nuclear power. Billions of barrels of oil have been consumed because we have not drilled for cleaner burning natural gas. We could put every acre of land into production of ethanol and still not hardly make a dent in our energy needs. The amount of resources needed to build enough wind mills would be incredible.

Drilling does much less environmental damage as other methods. With trillions of cubic meters of gas just a short distance off our coast lines, it makes no sense to damage the environment by tilling vast tracks of fertile land or dotting the countryside with noisy windmills made of steel and concrete.

The country has gotten into a group think mode that has resulted in the suspension of belief in the basic laws of supply and demand. Supposedly knowledgeable people are constantly saying things like the corn used in cars does not drive up the price of food because it is a different kind of corn than we eat. They say putting corn in cars does not effect the price of rice because most rice is grown in other countries. They say subsidies do not distort markets but makes them better. They even say that using double the amount of steel and concrete in a wind farm is not a consideration in comparing wind energy to nuclear energy.

Your point about the scaring of land and the damage to water resources is a good one. Yes, the total costs of mining and burning coal have not been factored into the cost of the energy produced. Determining the exact cost is impossible. A commission needs to be established to estimate externalities to the best of their ability with the support of the scientific community and the congress should only vote up or down. The externalities should be taxed and the revenues should go to eliminate taxes on earnings. We need incentives to produce less pollution and incentives to produce more work and investment.

Again, we do not want to take away our right to petition the government, but we want to reduce the necessity for it. Decade after decade the congress was unable to close extra military bases because representatives fought for local pork. Most everyone agreed there were too many bases but no one was willing to volunteer to have their base closed. A commission established which bases should be closed they were.

Right now, we use energy as a political football. Everyone has their own ideas about how to "fix the problem". The incentives to come up with good solutions are huge. If the externalities created by mining and burning coal were included in the price, we would burn less coal. However, I believe it will not be long before someone comes up with the best method for microbes to digest the coal and burp out clean burning methane gas. Thirty years ago, we grew 16 bushels of corn per acre. Today, we grow as much as 250 bushels of corn per acre; Monsanto projects that we will double yields in 5-7 years; 30 times the yield in 40 years! "Bugs" are already eating coal and oil and producing methane. A number of scientist have given us good reason to believe the natural process can be sped up many times, perhaps 10,000 times.

Once people realize that the natural process of producing energy is a renewable process, they will stop wasting so much time and effort on weak substitutes. Of course, improvements in batteries could change the dynamics of wind, solar, nuclear and other power solutions. The Chinese will buy upwards of 14 million electric scooters this year not to protect the environment but because the electric scooters cost less to make than the gasoline powered scooters. With about 30 nuclear power plants coming on line over the next 12 years, China will be able to charge as many scooters as the public will buy.

Governments and capitalist are willing to gamble. There will be winners and losers but the consumer will ultimately win. History has shown that free markets generally make fewer mistakes when allocating resources than do governments. Free markets drive down prices, whereas governments frequently drive up prices. Government is needed to set up the least amount of rules as are necessary. We should trust the people to do the rest.


On Sun, Jun 8, 2008 at 10:30 PM, Al Miles wrote:

I live in eastern Pennsylvania, about 30 miles from the deep mine anthracite coal belt.The destruction of human lives and the environment through a hundred years of unregulated mining still scare the land, Coal banks, the residue from deep mining still pollute our water 40 years after major deep mining became too costly. Only five miles from my home is a Zink smelting plant which has left the Blue Mountain totally denude of any vegetation and polluted ground water for most of my 64 years. It has taken most of my life for the Lehigh River to regain its ability to support aquatic life. Deep Zink mining 15 miles south of me had caused stream flow reductions and even a lake to run dry. I firmly believe we need to developed our natural resources, BUT in a responsible manor! Mining, drilling wells and nuclear power can be done in environmentally safe ways. This can only be accomplished when government is no longer swayed by the lobbyists with the biggest bundles of money.

Al Miles

This is not an endorsement of Obama, as his campaign takes money from state lobbyists, but not federal lobbyists and I fail to see why state lobbyists are less "evil" than their federal cousins.

THREE GOOD THINGS

Over the weekend, at least three good things happened.

1) The Israelis backed off on their threat to start bombing Iran now.

2) Saudi Arabian officials stated that the oil markets had over reacted to the threat of war.

3) Maliki went to Iran and gave his assurance that the continued presence of US forces in Iraq should not be perceived as an offensive posture against Iran.


The threat of war will only push oil prices so far. The continuation of slack demand will push the price back down. The slowdown of imports into the USA and into Europe will put increasing pressure on China and other manufacturers to cut costs. Soon the slow down in consumption will be virtually world wide. The world can get along fine without Iranian oil.

A card playing buddy thinks I am off my rocker. He notes that Goldman Sachs forecasts $200 oil, he did not know by when. Investors should always avoid making their bids at an auction based on the values stated by the auctioneer, especially at an auction where the auctioneer is an active buyer and seller. Goldman has probably made more money than any other derivatives trader. Goldman has not made its huge trading profits by directing other participants to profitable trades. In my opinion, buying based on information provided by any broker dealer is like buying a used car based on the prices suggested by the dealer.

According to thereligionofpeace.com web site, there have been 11,226 deadly acts of terror performed by Islamic Terrorist since 9/11. When the brother of an unmarried pregnant women shot her in the head last week, this action was added to this terrorist list. When four Afghanistan soldiers sitting in a car smoking cigarettes were shot, this action went on the list. When al-Qaeda treated women in Iraq like animals and when they set bombs in Amman Jordon to kill women and children refugees from Iraq, public opinion turned. Al-Qaeda is now being fought by both Shiite and Sunni forces. When the fanatic regime of Hitler was not stopped early, the result was the death of 24 million people from the Soviet Union, 20 million people from China, 8 million people from Germany, 5 million people from Poland, 3 million people from Japan and 450,000 people from the USA. The US attempts to stay out of WWII cost a lot of lives and treasure. The radical brand of the Islam religion condones actions I do not even want to discuss.

Both Sunni and Shiite Islamic people desire hostilities to cease. The leadership of several Middle Eastern nations are actively at work mediating disputes. Rich oil countries are funding deals in order to provide incentives for peace.

This morning oil futures are trading down $1.88 per barrel. Short term predictions are tough and I have been wrong about how quickly new supply will over take demand, but it will happen. The total sum of investments being made to reduce demand and to increase supply is an unknown but incredible sum. The big problem is in how long it takes for investments to bear fruit. IBM, for example, continues to invest billions into techniques to reduce the power consumption of computer chips. One major effort is to cool chips with water rather than with air conditioning. One server farm has taken a page from co-generation power plants to produce electricity with the heat produced by the computers. IBM expects to offer water cooled computers within 5 years which will make co-generation practical.

Day by day, projects are being completed. Thousands increase the supply but trillions of actions decrease consumption. One company says that it can show measurable demand destruction at the point when gas went over $3.20 per gallon. The company suggests that demand destruction has surely increased after the subsequent increases in price. I read the suggestion without noting the source but it is nothing but basic knowledge and common sense. Demand curves slope down and supply curves slope up.

My Sunday School class has been reviewing Black Liberation Theology. One of the reasons I hope for peace in the Middle East is because Condi Rice might then be drafted as a Vice-Presidential nominee and she might be elected based on merit. It is my opinion that many of the votes for Obama are because he is black. Race relations will be improved greatly when a black person of achievement is rewarded by gaining a majority of white votes. The election of a black man, of little accomplishment, by gaining 90% of the black vote would only highlight how far race relations still have to go.

GOOD THINGS ARE HAPPENING.

It took years of diplomacy and a cost of treasure and blood to reach the current situation in the Middle East. There are a number of reasons to hope that peace agreements will be concluded.

Negotiations between parties who trust one another can go extremely fast. Negotiations between those who distrust one another are very tough to conclude. The good news is that friends and neighbors are engaged as mediators. The economic "win" of success will be huge. Believe it or not, conditions for comprehensive deals have never been better!

NO OIL BLOCKADE

A regular reader and astute market observer wrote the following:

Jack,

one other reason Iran may be storing the thick, heavy crude in all those tankers in the Straights, is as a weapon. massive oil slick, and damaged tankers sealing off of the Straights in one move.


could they be remotely charged, ready to go off when the order comes down?


Iran has threatened to do just this in the past.

I send my thanks and the following response:


Iran is storing oil because it has no market for it. There are only a few refineries set up to handle this sulfur heavy oil. Those are "shut down for maintenance" according to Iranian officials but India just completed a huge new refinery that was built for the expressed purpose of refining heavy crude for export purposes. Iran did not expect to use any of the crude because the market price is higher than the price allowed in Iran. At the last minute, Saudi Arabia agreed to sell another 300,000 barrels per day to India to compensate them for the oil they had expected to get from Iran and Russia agreed to supply them with a certain amount of uranium for their under-fueled power plants.

Iran is in no position to start a conflict. US aircraft carriers have cruise missiles and fighter jets ready to take on any challenge. The US can withdraw 4 million gallons per day from its SPR and it has the support of other oil producing nations. It would not be fun but Iran would be under total blockade as soon as any battle starts. Saudi Arabia has built a pipeline across to the Red Sea. It has other pipelines that reach beyond the Straight of Hormuz. It would not be fun but the rest of the world could out last Iran if there is a blockade of oil.

Iran rattles just as a negotiating ploy. About 10 days ago, Iranian negotiators conceded a major point when they offered to get their enriched uranium from an international consortium, provided the UN supervised refining takes place in Iran. The latest hang-up is in regard to the agreement to allow US troops to stay in Iraq. The US wants a lot of flexibility but Maliki in negotiations with Iran today assured Iran that US troops will not be allowed to use Iraq as a base from which to attack Iran. Huge deal after huge deal has the potential of slipping away from Iran. Iran would very much like to complete the IPI pipeline but the one that has been funded is the TAPI pipeline. We are talking about access to trillions of cubic feet of natural gas. Another bypass being developed is a pipeline from the Caspian Sea to the Mediterranean Sea via Turkey. The shortest route is directly through Iran. The Iranians have proposed such a route but have no chance for as long as they are refining nuclear fuel.

Timing is always tricky but I am willing to bet that Iran will have suspended uranium refinement or have agreed to a package deal within 2 weeks of tomorrow. During WWII, even with Russia on the same side as the US and most of Western Europe, Germany was in a powerful position when it was close to taking over Russia and close to taking over England. Japan was a powerful ally and Italy was no cream puff. Iran can count on Cuba and Venezuela for support. Even Syria is close to a final agreement with Israel that will weaken its support for Iran.

This is the opportunity of a lifetime for an astute investor!

THE PUZZLE IS ALMOST COMPLETE

April 30 was the day that Iran stopped selling oil in US dollars. April 30 was the cut off date offered by the USA in regard to Iranian US dollar denominated assets. Seizure of Iranian assets was threatened under the terms of UN sanctions. In early May, Russia executed an agreement to assist the USA in enforcing the third and most stringent round of UN sanctions. During the first week of May, Iran started renting VLCC oil tankers for oil storage. Within two weeks, Iran had 28 million barrels in floating storage (12 days of production from its two large heavy oil fields). Iran apparently tried to corner the market and to restrict international shipping by trying to lease several more tankers. Of course, a number of tankers were already under lease by others. At least one US licensed tanker refused to accept the exorbitant rate offered. VLCC rates went from about $40,000 per day in early May to $140,000 per day by mid may. Iran was ultimately able to lease one more Suez Max tanker (VLCCs hold two or even three million barrels but ships of more than 1.5 million barrels cannot make it through the Suez canal). On May 6, Putin's last day in office, he and Bush signed the nuclear 123 agreement to beat all other 123 agreements. One of the sections of the 123 agreement called for Russia and the USA to assist each other in helping to stop nuclear proliferation and there is at least the indication that Iran's program was specifically mentioned in the agreement. A week or so after this agreement, European members of the UN negotiating team suggested that Iranian Euro denominated deposits were also subject to seizure. Iran is like the hockey player who has angered his team and the opponents by unsportsmanlike like play, Iran has been placed in the penalty box and it will be mugged by players from both teams if it does not give up the puck.


It has taken a lot of reading to assemble the thoughts contained in this report. The is mis-information and red herrings all over the place. Of course the billionaire market players have purchase info or sent spies to gather it. An international reporter who has written some of the details mentioned above tells me that additional reporting is being strongly discouraged and he is getting a cold shoulder from prior good sources. The indications are that Iran cannot sell its heaviest crudes at any price. The talk of additional sanctions implies that another tightening of the oil spigot could follow.

By late May, the slow down in fuel deliveries showed up in lower US inventories and the price of futures contracts shot up to $135 per barrel. During the week that followed, both Syria and Iran made negotiating concessions and it appeared that peace deals were getting close. About that time, a dramatic slow down in consumption showed that the world could get along fine without a couple of million barrels per day from Iran and the futures fell to $122 in just a few days. A week later, the negotiations jammed up again. One new sticking point is that the US wants to sign a deal with Iraq that will allow the USA to maintain bases like those in Germany and Korea. The US wants the agreement to include the right of the US to use these bases to attack other countries, to have the right to the airspace over Iraq and to be able to continue to kill or detain enemy combatants in Iraq. Of course, Iran wants the USA to leave. Since Iran is a Shiite nation and since the new central government of Iraq is dominated by Shiite Muslims, Middle Eastern Sunni nations, such as Saudi Arabia quietly want the USA to remain in country. Iraqi government officials want the US to stay but for political reasons they must take a cautious attitude.

After the negotiations stopped dead, Ehud Olmert visited Bush in the White House. Over the next couple of days, an Israeli official in the Olmert administration said that the sanctions were not working and the time has come for Israel to attack Iran. Israeli officials believe Iran is very close to gaining the knowledge, fuel and rocket technology to build a nuclear missile. Once learned, how can they forget? From the Israeli point of view, the options available are to drop a few bombs on the Iranian nuclear facilities or risk the total annihilation of Israel. While Bush haters believe he is preparing to strike Iran, if it comes to that, Israel will probably strike a couple of key installations while the USA stands ready to defend Israel if necessary.

TOO MANY DEAD MUSLIMS

The Economist has posted an informative article about the status of al Qaeda. This terrorist organization has lost much support among Arabian nations because too many Muslims have been killed. In Iraq, there have been about 4,100 American deaths and almost 100,000 Iraqi deaths. The number of deaths in Afghanistan over the past 20 years must be a sizable percentage of the whole population. In addition, there have been 10's of thousands of other Muslim deaths in Lebanon, Pakistan, many other predominantly Islamic nations plus many more in the Gaza Strip and the West Bank.

The Islamic nations are ready for peace. Syria has signed a joint military pact with Iran but when asked what Syria would do if Iran is attacked, Assad said that Syria has no interest in going to war. In the mean time, oil rich nations, that have a lot to lose, including Qatar, UAE and Saudi Arabia are actively engaged in peace negotiations. These nations have joined Turkey in serving as mediators whenever they have the opportunity. Qatar, UAE and Turkey have each moved negotiations forward and Saudi Arabia has provided funds and offered pipeline and other deals to help grease the wheels of progress. Should the deal between Israel and Syria become reality (there are great financial and security incentives for both countries to go along), all of Israels borders will be with Arabian countries that have signed peace agreements with Israel. Egypt is actually the largest supplier of natural gas to Israel and a pipeline from Iraq to Jordon could easily be extended through Israel to the Mediterranean Sea, the "rent" on this pipeline could provide funding for the new Palestinian State.

The moderate leadership of the West Bank and Israel are close to agreement. Condi Rice is on yet another trip to discuss the "two state solution" which includes joint occupancy of Jerusalem (Last week, Obama went from the leftest dove of the democratic primary to the centrist hawk of the general election but then had to back track when he went too far to the hawkish side. He nor his advisers seemed to realize that Israel is willing to give up partial control of Jerusalem in order to have peace.)

How badly does Iran want to take out Israel? No one can know for sure but Israel is a tiny natural resource poor country that should mean nothing to Iran. On the other hand, Gaza was the location of one of the most famous and most well fought battles in the history of the world. It is where hundreds of Persian soldiers laid down their lives in a suicidal counter offensive that turned the tide against Israel. The first 6 day war, was fought at the Golan Heights something like 1,400 years ago. Sometimes, it might be better if history were forgotten. In any event, it is clear that Iran has used its "hate Israel" rhetoric as a rallying cry and a negotiating tactic. The verbiage reminds one of Chavez in Venezuela and Castro in Cuba and the fanaticism of government leaders reminds one of leaders who ultimately ordered mass killings in Russia, China and a host of Asian and African countries. The great irony is that while the world with few exceptions is moving toward greater individual economic and political freedom, the USA has joined Iran and Venezuela in moving toward less. The big difference is that Iran and Venezuela have gone so far as to lose some of the checks and balances against corrupted power. The US federal government has gotten to be so big and so liberal with its spending that almost every one is "on the take" in multiple ways.

Chavez is taking over one industry after another and severely punishing all who oppose him. Iran is supposedly an Islamic Republic but only the selected are allowed to run for office and the media is controlled by the state. Voters are allowed to vote for selected candidates with only limited information available (sounds a lot like the current US system). The citizens of Venezuela, Iran and Cuba have suffered greatly but Cubans may be at the start of a long road to economic and political freedom. It is most remarkable that Iran sits on the second largest oil and gas reserves but has failed to develop enough of these reserves since becoming an Islamic Republic in 1979 to avoid heat and air conditioning shortages. Here again, the USA sits on massive deposits of energy but, in our case, it is the environmental gestapo that prevents development.

THE MOTHER OF ALL 123 AGREEMENTS

The USA has signed 22 agreements for the "civil and prosperous use of nuclear energy". One of these agreements is with Euratom which is the umbrella for 27 European nations. The premier of India and the President of the USA signed a 123 agreement about a year ago. An agreement was signed with Saudi Arabia on the famous trip by Bush last month where he failed to get more than 300,000 in new barrels of production from Saudi Arabia. The World Politics Review has posted a nice article about the 123 agreement signed by Bush and Putin on May 6. None of these last three agreements have been ratified by congress.

The agreement with Russia allows enriched uranium to be sent directly from Russia to nuclear power plants in the USA. The general wording is that the agreement facilitates the transfer of technology, materials and equipment between the parties. Right now, 80% of the worlds uranium is refined in the USA. The USA and countries such as South Korea which get uranium from the USA have a problem, what to do with the nuclear waste? Before the agreement, Russia sat on rich deposits of uranium with few markets available. Russia also sits on many tons of super enriched uranium in thousands of "spare" nuclear bombs.

Treaties are usually just like free trade agreements in that they are win-win. Treaties must be very well thought out and very well negotiated, because mistakes can be extremely costly in both lives and treasure and treaties can be win-lose agreements. This is the reason that Obama's willingness to just go sit down with any old dictator to talk is outright dangerous. It is good news that Obama has backed away from his early foolish position. I dare say that few of the people who have voted for Obama know what the word appeasement means. What it means is that 400,000 plus Americans and millions of others died in WWII because we were happy to just sit down and talk to any old dictator.

From what we know so far, the 123 treaty with Russia appears to be a great win-win. Of course, all who oppose nuclear power, no matter what, will think differently, but the treaty solves a number of problems and makes the world a safer place.

One of the problems solved is to patch loop holes in prior Nuclear Proliferation Treaties. Another is what to do with spent fuel.

One of the technologies, apparently being transferred, is the US ability to mix super rich uranium from bombs in with other power plant fuel. As a result of this treaty, the number of bombs in storage will go down while the enriched uranium will produce abundant supplies of very low cost electricity. Again, Russia has a lot of spare bombs on its hands and the USA has previously agreed to reduce its number of bombs after Russia gets to the same ball park with the number of US bombs.

A deal a few years ago provided for bomb fuel to be shipped to the USA for use in our power plants but that program was most likely halted in response to constant legal pressure from environmentalist. Under this new deal, Russia will build 42 nuclear power plants between now and 2030 with financing and technical knowledge provided by the USA. The big win for the USA will be the agreement of Russia to take back spent fuel from power plants around the world. It is my understanding that the USA and Russia will still provide nuclear fuel to nations that have signed 123 agreements which include UN supervision of the use of this fuel. The USA will no longer have to fight to put the waste in storage. By the way, one gets more radiation in about 5 minutes on the beach than from all the waste fuel in a thousand years or so. If you want to reduce the death from cancer, stay out of the sun.

It seems that the technical knowledge to be transferred to the USA will include how to reuse the spent fuel again and again until there is virtually nothing left. It is not clear if Russia will take all spent fuel or just spent fuel provided by Russia but, in any event, countries such as Iran will have no need to learn how to further refine fuel in order to get rid of the stuff. This is an important point as bomb making knowledge is gained as part of the process of refining fuel beyond the need for nuclear power fuel.

Russia will earn a "reasonable storage or reprocessing fee" for taking back spent fuel. Russia will make 10 to 20 billion dollars per year providing enriched fuel to other countries (which could include the USA). One source has said that the incentive package being offered to Iran includes free enriched uranium and free storage and reprocessing of fuel waste.

IT IS NOT ALL ABOUT NUCLEAR FUEL

In earlier postings, I have written about the enormous oil and gas deals that are in progress or ready to go as soon as a deal is made with Iran and Syria. I will not review those now but will simply say that these deals do not add up to millions or billions of dollars but over the next 30 years to trillions of dollars. Provided Iran does not have a nuclear bomb, the rest of the world can do trillions of dollars worth of business while bypassing Iran or by cooperating with Iran, their choice. It would be better for Iran and for the rest of the world for the peaceful development of Iran's abundant resources. No matter who is elected president, it is highly unlikely that the UN sanctions will be withdrawn. Iran is not likely to "win" by holding out past our elections. If the oil spigot is totally turned off, Amadenijhad will not remain in power for long.

A number of nations realize how great the risk of failure to achieve nuclear power if a deal is not concluded during the Bush term. The 123 treaties negotiated by the executive branch can only be voted up or down by the congress. The failure of the congress to vote up or down is the same as an affirmative vote to pass. This part of the equation could be very different after the November elections as the executive branch must initiate the process. It is time to stick in the last several pieces of this puzzle!

WHY DID EVERYTHING BUT THE PRICE OF OIL AND GOLD GO DOWN?

Lots of questions and answers are being given in regard to the run up in the price of oil and the stock market slump on Friday. A question infrequently asked is why did everything but the price of oil and gold go down? (Of course, the "other side" of a number of trades were up, the dollar-euro cross being a prime example.)

A lot of things happened in the past couple of days and many of them were related to other important things.


The US Senate voted 48 to 36 to proceed with discussions on Cap and Trade legislation. Six Senators, who were absent, said they would have voted yes if they had been there. Not enough. It requires 60 votes in the Senate to break a filibuster. After the vote, a democratic spokesperson enjoyed making the announcement that a bipartisan majority voted to fix Global Warming but that republicans blocked the vote. The spokesman went on to say that the next president would Shepard this legislation through congress.

This mornings job loss information was "too hot". This is one of those upside down stories. The average person heard about the 49,000 lost jobs and the jump in the unemployment rate from 5% to 5.5% and assume this was "bad news". The reality was it was "news too good". The consensus expectation for job loss was 60,000. The big jump in the unemployment rate was a surge in the willingness of people to work. Thus the normal pattern at the "end of a recession" is progressing. In the 80's and early 90's, I routinely presented an investment talk titled "Recession: Crisis or Opportunity". One of the charts I presented was of the unemployment rate. I noted that the US stock market is primed for a big move up as soon as the unemployment rate jumps 1.2 points above the previous bottom. Early last year, the unemployment rate was 4.3% and it hit 5.5% last month.

It so happens that the move announced today is the biggest move since the mid cycle bottom in November of 1986 and it just barely surpasses the mid cycle bottom in 1995. In each of these cases the market was ready to soar. Of course, the head fake is to have a big down day when the news hits. Of concern is the fact that the market upturn in 2002 was delayed. The move up in unemployment rate occurred months before the market finally moved.

After Thursday's meeting of Ehud Olmert, the headlines suggested that Olmert won little in his talks with Bush. Today, an Israeli member of the Olmert administration said that Mahmoud Ahmadinijhad "would disappear before Israel does". The official went on to say that "If Iran continues with its program for developing nuclear weapons, we will attack it. The sanctions are ineffective".

It is known that oil tankers continue to sit idle off the coast of Iran. These tankers hold 12 days of production from Iran's two "heavy oil fields". I have found no information on what is happening now that these tankers are full. It seems safe to assume that at least this "half" of Iranian production is shut down. If it is, the most severe of the sanctions have only be in effect for about a month.

The statements of Jean-Claude Trichet, the head of the ECB, were touted on CNBC as the cause of the big jump in oil. The talking heads stick by the common upside down belief that higher rates in Europe lead to a higher Euro currency, a weaker dollar and stronger oil prices. These are all true but only in the short run. Higher inflation rates are also the very short term effect of higher interest rates. Speculators have once again jumped all over the long oil -- short dollar trade after hearing the words of Trichet. Given a little time, the higher rates will slow the European economy, lower the demand for oil, weaken the currency and ultimately weaken the inflation rate.

The congress has been busy blaming speculators for high oil prices while continuing to resist allowing drilling in the USA. It is possible that the negotiations with Iran and Syria are purposely being timed such as to force congress to vote on drilling in the USA before the deal is announced. This may be giving the Bush administration far too much credit but the fact of the matter is that the pressure on congress to do something to boost US production is growing.

The market will find the way to get the energy demanded by the market. The entire worlds air supply is dirtier today because environmentalist have been successful in blocking the construction of nuclear power plants. The entire worlds air supply is dirtier today because environmentalist have been successful in blocking the drilling of rich natural gas reserves off our coasts. The environmentalist had less success in blocking the construction of coal fired power plants. The irony is that these plants have produced many times the pollution that would have been produced by the nuclear and natural gas power.

The worm has turned. The people of South Dakota have voted to build a new refinery and the national, state and local government support the construction. The environmentalist have sued but the odds of construction are good. Will the congress vote to allow other oil development in the USA?

THE SPLASHING BUCKET

Bill Lienbach, a Merrill Lynch stock broker as far back as the early 1960's, like to compare the recent action to carrying a bucket of water. He said the water can splash from side to side to no effect if it does not spill out. In just a few days, a lot of excitement was caused when the price of oil fell from $135 to $122 and then rose back again. You sometimes get a lot of splashing in the short run that means nothing in the long run.

A couple of days ago, I mentioned Express Jet as one of the smaller airlines on the edge of bankruptcy. Yesterday, Express Jet signed a new 7 year contract with Continental. Express Jet had to cut their margins to the bone but they also won a path to survival. The firm will fly to and from Continental hubs on just the right schedule to connect passengers with long haul flights but it is free to make similar deals with other major carriers.

The majors have been using the above method to compete toe to toe with low cost carriers. Passengers get the best deal through these contract carriers. The low cost business model is being hammered by the majors. One irony here is that low cost carriers are more effected by high fuel costs than are major airlines. The seat miles per gallon of fuel on large jets can be 30% higher than on a smaller plane. Of course, the key to high seat-miles per gallon for the majors is to fly full planes. The planned cutbacks to capacity will help them do just that.

Today, the former Chairman of Continental, Bethune, said there will be more airline bankruptcies. He is right but he did not say that major airlines will go out. Just a few days ago, UAUA and LCC were considered the most probable of the majors. Since then, UAUA announced that it will close its low cost carrier, TED, and that it will reduce other capacity and costs. Again, it is the small, local and low cost airlines that are in trouble. The majors must cut back capacity, reduce cost and raise fares to survive. They will do all three. Each time capacity cuts are made, the ability to raise fares is increased. It is very normal for air fares to be very high during the second half of the business cycle. Businesses will pay the price. Profits will soar.

WHY DID EVERYTHING BUT THE PRICE OF OIL AND GOLD GO DOWN?

The perceived risk of an attack on Iran went up. The bold talk of war between Iran and Israel is not easy to discount. One sometimes gets the feeling that Amadenijhad would like to goad Israel into an attack and one sometime gets the feeling that Olmert would love to attack Iran. Olmert is in a pickle similar to the trouble Bill Clinton had. When Bill was close to impeachment, he blew up a factory in Northern Africa. It has been reported that the factory produced aspirins. It may have been a chemical weapons plant. Whatever the case, Olmert could in a fight for his political life push for violent action. It is frequently asserted that Bush and Chaney desire to attack Iran. Today, the response of the market was consistent with an increase in the possibility for war.

My belief is that war with Iran will be avoided because of the world is united. It sounds denigrating to the Chinese to say it but who is not surprised for a $16 billion gas deal between China and Iran to be on hold while the Chinese wait for a negotiated settlement. Should progress be made toward a settlement, the $10 plus jump in the price of oil could be reversed in an hour. The fact is that the fear of war did not cause the final demand for oil to go up but down!

IS EUROPE SLOWING DOWN OR SPEEDING UP?

Everything in this economic cycle seems to go forward a couple of meters before backing up 1 or 2 or 5 meters. Just over a day ago, it looked like Euroland was following the USA into an economic slowdown. A slowdown that would cause a reduction in the purchase of goods from exporters such as China and Japan and thus a slowdown in the demand for oil. Yesterday, the lead banker in Europe said he sees a rise in interest rates ahead. The reason given was to fight inflation but the implication is that Euroland demand continues to grow.

One must remember that the "big boys" play a constant game of "hide the info". Since long before the days when Rothschild gained economic advantage by gathering advanced news of the outcome of war by carrier pigeon, wealthy and sophisticated investors have enjoyed hiding the important news or by confusing the public by assigning great importance to relatively unimportant matters or by diverting attention from important matters. Right now, when little information is available about what is essentially an oil embargo in Iran, the "news" that the central bank in Europe may or may not raise or lower short term banking rates has caused a multi-trillion dollar move in the markets! Please forgive me if I am wrong, but I do not believe oil is up more than $10 per barrel in two days because of a mixed message by one central banker; there is more to it than that.


US and UN negotiators have implied that the deal with Iran will not be finished during the Bush term of office. They have also implied that the terms acceptable to the next US President will be no better for Iran or Syria. Iran and Syria, after making concessions have once again drawn unacceptable lines in the sand. The deals will not be made unless the IAEA inspectors are granted full access in Syria and Iran. The prospects of a quick resolution have declined.

My belief is that the world is as united on this matter as it has been ever before on any matter. I do not recall a situation where there has been as much cooperation between parties from all continents as this one. As such, it is a matter of time before a deal is made. Until a deal is made, economic pressure is going to be intense. Europe will keep interest rates up and world growth rates will slow such that the world can do without all oil from Iran if need be. The world will suffer but, Iran will suffer greatly.

The historical average has been for a strong stock market from June through December of an election year. The seasonal pattern has supported the "sell in may and go away" adage. I believe the political pattern will ultimately trump the seasonal pattern because I believe a deal is in Iran's best interest. It took just a few days for oil to drop from $132 to $122 and only two days for it to jump back from $122 to $132. The next big move will be down.

CONDI RICE AND THE MARSHALL PLAN

After WWII, the USA engaged in the European Recovery Plan, also know as the Marshall Plan, named after Secretary of State George Marshall. Under this plan, Western Europe received 13 billion dollars of aid, assistance and "loans" from the US. The word loan was put in quotes because Finland was the only country to ever fully pay off the notes.

The plan lasted from 1947 to 1951 and, with the exception of Germany, in just four years, the nations assisted saw a complete recovery to economic levels reached prior to the devastation of war. Russia chose not to participate in the US largess but instead extracted reparations from East Germany, Finland, Hungary and Romania. Russia saw the largess of the US as an attempt by the USA to become a dominate force in Europe and thus fanned the flames of the Cold War. Today, historians argue about the effectiveness of the plan.


Condi Rice has made the point to Iran that the US does not have permanent enemies. No matter what you think about the effectiveness of the Marshall Plan, it and many other programs and actions by the USA proves Condi's point. The USA just gave many tons of food to North Korea. The US is engaged in trade with Vietnam. The US and Russia just executed a major civilian nuclear power agreement.

A key lesson that has been learned is that out right gifts of humanitarian aid are appropriate and helpful for hungry people but they do not produce economic revival. Trade agreements, which benefit both sides, are the stuff that makes for economic prosperity. Bush and Rice are trying to move negotiations forward with these facts in mind.

World maps are constantly being redrawn. Iraq, for example, has been ruled by Ottomans, Persians and Englishmen. After WWI the league of nations redrew the map of this area in 1921 and again in 1925. The Soviet Union was split into many pieces about 20 years ago. However, as nations become economically strong, they become less interested in taking over their neighbors territory. The more countries trade with one another, the more likely they support the status quo of borders.

The USA is not attempting to put Iran out of business. Indeed, the list of economic deals that are in the works is a long list. The USA has no interest in making Iran a permanent enemy. We have no desire to stay in Iraq for 100 years. What the USA wants is to establish business relations between Iran and the rest of the world, to make it in Iran's best interest to cease support of terrorist and to reduce the threat of nuclear war.

A RARE SITUATION

The current international situation is as rare as they come. It is not often that the UN security council votes 15 to 0 or 14-0-1 on anything of importance. Russia, France, Germany, UK, USA, China, India, Pakistan, Israel and Saudi Arabia are all of one mind in regard to Iran's nuclear weapons.

Iran is a resource rich nation and its location is of strategic importance. The world does not want to isolate this nation. The world wants to buy natural gas and oil from it. In dollar terms, Iran can easily sell 4 times as much oil and gas as it currently sells and it wants to do so. The leaders need to give up on their dreams of dominating the region. The people of Iran should live a good and prosperous life. Israel does not need to be wiped off the map in order to elevate the status of Iranians.

PROGRESS AND THEN NO PROGRESS

Just a few days ago, the prospects for a deal looked good. When Iranian officials proposed that nuclear fuel be produced on Iranian soil by a consortium of nations and under the supervision of the IAEA, it appeared that a major break through had been reached. There are still major sticking points. The Saudis, the USA and others want to know that Iran will not try to take over Iraq. The insurance policy wanted is for the USA to execute a deal that allows US troops to stay in Iraq, similar to the way they have stayed in Germany and Korea. As our actions in these nations demonstrate, the desire is not to have a base from which to attack but a base from which to protect.

Iraq is a "demonstration project". The success of the Iraqi government will show that various ethnic groups can form and operate democratic governments in the Middle East. The pending oil deal in Iraq is important. Kurdistan, the northern region of Iraq, appears ready to concede Kirkuk to the joint control with the central government in exchange for regional control of oil fields.

The story here is that diplomacy is, was and will always be complicated. While it sounds crass and greedy, what we have learned is that economics is the key to diplomacy. One leader will turn his back on the other if there is a profit in it. Iran was upset when it realized that the pending peace deal between Syria and Israel was designed to limit the ability to Syria and Iran to meddle in the affairs of Lebanon and Palestine. Iran is like a cornered animal. It can find no way out but it can bear its teeth and make a lot of scary noises.

Again, the diplomatic purpose is not to trap the animal. The USA really would like to make new friends. The USA has no permanent enemies.

THROW IN THE LEATHER SEATS AND ITS A DEAL

The haggling between Israel and Syria is down to the options. The USA and Israel want the deal to include restrictions to the relationship between Syria and Iran. Syria has countered with the demand that Syria be given a small strip of coastline in the Sea of Galilee. The last time the Syrians controlled the Golan Heights they frequently shot missiles onto this stretch of coastline. Go back to the right point in the past 4,000 years and Syria can claim ownership of most of Israel. The above information came from the DEBKAfile. I have found the site to be reliable.

Syria has said it will refuse to allow the UN to inspect other possible nuclear sites. Iran has said the discussion over inspections is over. These hard lines are negotiating hooks. The world has agreed and signers to the NPT have agreed to allow UN inspections. It is a matter of time before some more leather seat type options are requested in exchange for full compliance with international rules. US negotiators have suggested that the next president will have to deal with these matters. Make no mistake that US negotiators very much want to conclude a deal, but they also must poster that they will not give away the store just to make a deal.


The 9 billion dollar investment Kuwait has made over the past several years is beginning to bear fruit. It's newest field will crank up this month with production of 50,000 barrels per day. Production is expected to rise as development continues over the next 8 years. At that point, this field will produce about a on million barrels per day. A million here and there adds up. Stratfor notes that Russia is trying to corner the European gas market by buying up the production of former Soviet States. It is amazing that natural gas was a nuisance during the first 70 or so years of oil production. Now, with pipelines being completed from here to there and back, it is expected that natural gas production is going to be a significant portion of the "energy solution". An American Gasoline Association estimates that the US has adequate natural gas supplies for the next 2,500 years. As soon as Iran makes its main deal, other deals will follow that will result in the transport of trillions of cubic meters of natural gas. At some point, someone will offer to split the difference. Leather seats should not be a deal breaker.

THE TAX CUT BOOM

The amount of money that will be withdrawn from 401-K and similar plans between now and 2010 is going to be huge. The Bush tax cuts are set to expire in 2010. Over the next two years, huge amounts will be withdrawn and taxes paid at current maximum rates. The result will be a short-term windfall to the government and a lot of cash in the hands of individuals. Insurance companies are in a scramble to get a piece as are brokerage firms but a lot of this money will go into the purchase of second homes. The real estate market is primed for a major bounce. The fall in oil prices will be concurrent with a decline in already low mortgage rates. The false reports of a housing market collapse will be seen as false in more and more localities in the months ahead.

The stock market made an intra-day bottom back in January. It successfully tested the bottom around March 10. Stocks are headed higher. Bad news or good news is turning into good news for stocks. Major buy outs are still in the works. Verizon is bidding for Alltel, Yahoo is still toast. Shares are being removed from the market. Supply and demand forces are ready to push up prices hard!

BAD GUYS ON THE RUN!

As we have come to expect, a single bomb blowing up next to a Danish Embassy has gotten a lot of ink. Such an attack is worthy of making the news but an even more important event has gotten little coverage. Iran and Turkey are sharing intelligence and jointly going after Kurdish rebels in the high country of Iraq. This is happening with the tacit approval of Iraq and the USA.

An al-Qaeda spokesman from Afghanistan took credit for the bombing in Islamabad. His days are numbered. While the mountains of Afghanistan and Pakistan are great places to hide, the public support for terrorist tactics has fallen sharply. The good guys are increasingly being tipped off when the bad guys come to town.


The terrorist situation is a little bit like prohibition. It was basically impossible to enforce prohibition in the USA because the people were not in agreement with the law. Lots of people continued to drink and a whole network of criminal activity sprung up to supply the drinks. Once the law was changed, the criminal activity was reduced. The recent offers of the Pakistani government to give amnesty to Taliban soldiers sounded goofy at first blush but we do not want or need to kill every "soldier" in the war. It is acceptable for the remaining "soldiers" to go home and to live in peace.

The talk of Euro central bankers about raising interest rates to fight inflation will hurt the dollar in the short term only. The cumulative effect of tight money by central bankers is going to bring commodity prices down. CAL just opened up 3%.

CAL UP 4% IN PREMARKET TRADING

CAL is up 4% in premarket trading. Many of its fares are up much more. The following list shows the price of flights last year and this year from Houston.

Memphis $198 to $663
Charleston $138 to $412
Detroit $188 to $476
Las Vegas $298 to $410


It should be noted that routes that compete directly with low cost carriers have not increased nearly as much. That of course is the reason several of the low cost carriers have gone out of business. In total, there have been 13 increases so far this year with a maximum increase of $340.

Obama has adjusted his foreign policy again. He has made it clear that he would not take the military option off the table and his talks with Iran would only be for the purpose of explaining the US position. The Iranians know that the USA is more than ready to met to fully explain our position as soon as Iran suspends development of nuclear fuel. They do not have to commit to stopping forever but long enough for each side to present their sides. Each side has already presented complete offers. The US in conjunction with the permanent UN security council members and Germany have delivered complete offers and amended offers over the past couple of years. There is no room for compromise on the development of nuclear bombs by a nation that has expressed its desire to wipe Israel off the map.

STRONG NUMBERS

The job market numbers this morning were strong. There is no recession in the USA, however, the cutback of imports by the USA and Australia are hitting the emerging growth countries hard. Vietnam is just one of the emerging growth countries that are being pounded by higher fuel and food prices. Like Lamar noted some months ago, it appears that we will have a rotating slow down in which the slow down in the USA will be over by the time other economies slow. It is part of the natural cycle for emerging growth countries to get hammered during the second half of the business cycle.

AIRLINE PROFITS ASSURED

CAL has announced capacity cuts of 16% by the fourth quarter. In the old days, airlines stuck themselves in the eye time and time again. Today's managers manage for profits, not greatest market share. The labor, fuel and other cost will go down when the planes are grounded on the least profitable routes. Fares will be raised on the remaining routes. CAL has joined the chorus of major carriers that will reduce capacity during the slow season. However, many of these decisions can be easily reversed. As the economy strengthens, these carriers will be able to recall furloughed employees and in many cases lease more fuel efficient aircraft than the ones grounded. Yesterday, UAUA shares went up 9% after the announced cut back. CAL could do just as well today.

BIG MONEY CHANGES ARE IN PROGRESS

One of the most important differences in the Google, Android, phone software is in its cost. Google offers the software to the manufacturers for zero dollars. What is new? Google continues to play by its own rules. It gives away its software in exchange for future advertising space. In the case of Android, you might guess that the home page is the Google search page. The neat thing is that manufacturers have been given the freedom to come up with the best designs. The beta models include neat stuff. For example, click on the map link and the display shows your exact location in map view or street view, click on the compass button and you can easily orient the map. High speed mobile Internet access will change the way we live and it is coming soon. Yesterday, the energy sector was down 1.89% while NASDAQ was up .91%.

BIG MONEY CHANGES ARE IN PROGRESS

A sea change is underway. Tuesday, the citizens of South Dakota voted yes to the construction of the first oil refinery to be built in the USA in 30 years. This refinery will cost $10 billion, it will process heavy tar sand crude from Canada and it will process 400,000 barrels per day. The attitude of the public is becoming drill or build now and pay less at the pump.


A sea change is underway. Last week, when Obama was running for the democratic nomination, he spoke in favor of sitting down to talk with Iranian leaders. After becoming the presumptive nominee, he has talked about how he will not let Iran build a nuclear bomb, no matter what. As expected, Obama is moving toward the center. He still has a long way to go, especially in regard to his tax and spend ideas.

A sea change is underway. About 59 trading days ago the stock market made a significant bottom. Since then, the S&P 500 Index is up better than 5%, the S&P Small Cap Index is up 11% and the S&P Mid Cap Index is up 14%. The US dollar bottomed a couple of days after the stock market bottom and is up 2% (a big number on trillions of dollars). The foreign investor has made 7%, 13% and 16% respectively. Over the same period, the commodity index is up 0% and the 10-year bond is down 5%, another turn of the worm? One of the obvious see-saws has moved; gold and silver stocks went down 12% and semi-conductor stocks went up 19%. The flip-flop for tech and energy was delayed a little but, over the past 10 trading days, the energy sector went down 4.3% while technology stocks went up 2.6%.

Yes, I am the boy who cried wolf the last time this flip-flop was under way. The last time, we did not have a massive demand destruction event underway.

The best news is that this flip-flop is not dependent on the new refinery or the congress. The Citizens Against Air Pollution Organization has taken out a law suit to try to prevent the refinery from being built. What a joke? The citizens voted 58% to 42% in favor and the government is behind the project. The US congress has told an even bigger joke. The house voted to sue OPEC! The congress is sitting on more oil in the USA than is in Saudi Arabia but we are going to sue them? For what? What do we want to do? Make them mad? The Saudi response was to reduce their discount to West Texas by a couple of bucks per barrel. So far this law suit against OPEC is working out really well!

We sometimes forget that the USA is the third largest oil producer in the world even with 85% of our potential reserves off limits. The congress wants to limit supply, add taxes onto the price of oil and reduce the price all at the same time! Oil is already taxed at every turn. In addition, the congress is debating massive tax increases and massive tax credits to "friendly businesses" (read as campaign contributors) in the form of "Cap and Trade" legislation. Should the bill before congress pass, the average family will pay about $6,000 more in taxes every year. There is no way that 61 senators will go along with this travesty now. After a democratic sweep maybe, but even then doubtful.

Don't let the weight of this foolishness get you down. The whole world is going to look very different when Iran is forced to come to terms. The list of deals that are being discussed is very long. For example, few Americans know or care that the UAE has asked Russia to mediate its dispute with Iran over ownership of three islands in the Straight of Hormuz. When the British pulled out in 1971, Iran seized control of these islands. The strategic value of these islands has fallen each time another pipeline around Iran is announced. The resolution of this dispute is minor relative to others. The IPI or IPIC "peace pipeline" is a big deal. The settlement of the Golan Heights is a big deal. The refinery in Syria is a big deal. Each of the pipelines to be built by Saudi Arabia is a big deal. The access to nuclear fuel by all willing to abide by the rules is a big deal. A year ago, when I wrote about the potential for a deal with Iran, I had no idea that the USA would be so successful in getting the rest of the world to put forth so much effort. Countries all around the globe will benefit when a deal is done. Russia, Australia, Canada and others will sell billions of dollars worth of uranium ore. The price of stocks will go up very much before the average person even knows there is a good chance of a deal.

I am confident in saying that the majority of my readers are skeptical at best. Peace in the Middle East seems impossible to most people. There were fewer US deaths in Iraq in May than in any other month of the war. What if there are fewer still in June (there were 19 in May and 3 so far in June). We all know that 3 are far too many but I believe those 3 will save thousands of others. What if there are fewer still in July? At what point in time will the AP, CNN, ABC, CBS, NBC, etc report that the war is being won? What if the price of gasoline falls to $2.90 in August while the number of US deaths fall to 2? What if Thunder Horse, an oil field in the Gulf of Mexico, produces 300,000 barrels in September? What if Iraq increases production by 400,000 barrels per day by year end, as has been projected? What if Brazil keeps on discovering multi-billion barrel fields? What if the 473 billion barrels in the Bakken formation of North Dakota and Montana proves to be recoverable? What if the Canadian side of this formation turns out to be as big?

BIG MONEY CHANGES ARE IN PROGRESS FOR THOSE WHO WILL GO AFTER THE DOLLARS!

TIME TO EAT; THE GOOSE IS COOKED

Time and again the "little UN countries" have voted against the USA . This week, the 35 member governing board of the IAEA voted to support continued sanctions against Iran. Iran has no friends. The goose is cooked.

One can find information on the Internet that makes it look like the sanctions against Iran are failing. For example, Coke and Pepsi products are all over the country. Coke and Pepsi won exemptions to the Iranian sanctions because the corn syrup they sell to local bottlers was ruled an agricultural product. The irony is that this corn syrup has gone up rapidly in price because we are using our corn as fuel.


In addition to exempted products, there are smuggled products in Iran. Dell computers, Apple phones and many other US products are available. The central bank of Iran reports inflation rates of 20% but they do not capture the black market prices of these smuggled goods, unless they are stolen, black market goods tend to be very expensive. The 70 million people in Iran learned to enjoy a "western life style" prior to the 1979 over throw of the Shah. By last winter, shortages were common, but sanctions really got tough around May 5, 2008. It took a lot of diplomacy to get India, China and Russia to lend their support, but the oil spigot has been partially closed for a month.

A lot can happen, but the goose is cooked. It is just a matter of time. US and Israel are rattling sabers again and negotiations seem to have stalled, but the oil market is telling an important story. After prices jumped to $135 when the embargo started, they have since fallen to $122 while oil sits in VLCC's parked off the coast of Iran. No one is willing to buy a good portion of Iran's oil and the world is getting along fine without it. The wholesale price of gasoline dropped 11 cents today after US inventories rose by 2.9 million barrels.

Israeli leaders say it is time to use military force to prevent the building of nuclear bombs. US leaders seem comfortable with the power of the sanctions. It seems safe to assume that if Iran cannot ship its oil that it cannot receive shipments of gasoline. The news, here and there, is limited. Even though Iran has shut down its FARS news agency, it seems that at least a portion of this this story will reach the Iranian public soon. Protest for the removal of Amadenijhad will result.

The west wants to give Iran a chance to save face and make a deal before it is common knowledge that they have little other choice. The information published by FARS before the shut down implied that the oil was parked off the coast because Iran has been holding out for a better price. Yeah, right!

TIME TO EAT

Big investors, such as Bill Gates, who has announced the sell of 300,000 shares, are selling out of ethanol companies. Oil futures have dropped from $135 to $122 in 10 days or so. The turn in auto sales has been remarkable.

In 1981 80% of vehicles sold in America were cars and 20% were light trucks. In 1996, 56% of vehicles sold were cars and 44% were light trucks. In 2001, sales were 50/50. In 2004, cars bottomed at 44% and trucks peaked at 56%. Last month, we fell all the way back to 1995 levels. (Data from Wards Transportation Data Book.) Last month, 57% of all vehicles sold were cars and only 43% were trucks. For the first time since 1992, Camry and Corolla sales exceeded Ford F series sales. Two other models exceeded F series sales for the first time ever, the Honda Accord and the Honda Civic. GM announced another 40 plus mpg car and Ford announced a new Fiesta plant. Guess what? The Fiesta plant will not be in the USA, but in Mexico city. Ford's most automated plant is in Brazil and Ford and GM rank number 1 and number 2 in car sales in Russia. The big story is that fuel efficient cars are reducing the projected demand for more oil. A mile driven in a Corolla instead of in a Ford SUV is a reduction of gasoline demand in the neighborhood of 60%! (My guesstimates, 38 mpg for the Corolla and 15 mpg for the truck.)

Today, UAUA announced a reduction of no less than 21% of its capacity. This is the kind of cut that upsets the apple cart. It is the kind of cut that has a big impact on the price of fuel and the price of fares. A Credit Suisse analyst immediately changed his negative tune. He says this cut is a major step toward profitability and it means that airlines will have pricing power well into 2009. Also today, privately held Spirit Airlines announced a closure at one airport and substantial reductions at others for a total reduction in the range of 40 to 60%.

Also, India and Malaysia just gave a couple of billion people bad news. Fuel subsides were cut; prices are headed up; demand is headed down. China appears to be preparing another 1.5 billion people for equally bad news. Oil bulls have enjoyed saying the demand growth is coming from China and India, what will they say now?

When the oil price broke in 1985, it dropped 60% in 3 months!

When the oil price broke in 1980, it dropped 40% in 22 months.

When the oil price broke in 1991, it dropped 50% in 6 months.

When the oil price broke in 2000, it dropped 46% in 12 months.

I doubt that the break will be as large this time but you never know. The price break at the end of 1985 and the beginning of 1986 was during a mid cycle slow down and there was not a recession. The other three drops were during recessions.

Stratfor reports that inflation in Vietnam has reached 25%! This is the kind of number that hits right at the tail end of an economic slowdown. The above story of the airlines is available to clear up the inflation misinformation provided by TV pundits. The cut back of 21% of UAUA's capacity means that airlines can continue to dramatically raise prices as they have done for the past several months. The route cutting by Spirit Airlines will give the surviving companies on these routes the ability to raise fares by substantial amounts. It is the cut back of capacity during a slow down that allows the remaining products to be priced up so high. Businesses are forced to raise prices as much as they can on sales in order to keep total revenues up.

THE BEST OF TIMES

The best of times have arrived for the strong airlines. As they watch the weakest routes or companies being cut, they are facing falling fuel costs and pricing power at the same time. With the possible exception of Frontier (which is still operating under Chapter 11), the airlines that have gone busted in the past few months will not restart. Funding for new entrants should be scarce for years to come. Oil prices are not likely to go so low as to make $6,000 an hour small jets affordable again. The business has changed.

Wall Street will focus on the possibility of world wide recession as news such as the Vietnam news comes. Vietnam and others might have to use draconian money management to get inflation under control. This is going to keep a wall of worry in front of the market. The airline stocks will ultimately climb that wall of worry. The Credit Suisse analyst will not be the only one to revise his estimates.

DAL does not appear to be going along with the $15 first bag fee. This is no big deal as the cost to benefit ratio is marginal. Who wants every passenger to be stuffing the overheads to the brim? On the other hand, the most recent BA fare increases, including $218 on long haul flights, is huge. It remains to be seen if such a big jump will hold on the first attempt, but, in any event, fares are going up and profits will be restored.

IT IS TIME TO EAT; THE GOOSE IS COOKED!

UAUA SHUTS DOWN TED!

Wow! I heard the headline without reading the story. The full story is that UAUA is shutting down its low cost carrier. This is what I have been talking about. The big hub carriers are not the ones taking the bulk of the pounding. Some fliers do not like hubs but the fact remains that they increase connections of city pairs dramatically while cutting operating costs by 20%. The old story is often true that "you cannot get there from here". It does not matter if you prefer a small direct flight if there is not one available.

AIRLINE PROFITS

Do you think airlines will eventually be able to make money if oil stays near current levels? The analysts I've read say it will be the demise of a lot of them. The hope for them is for oil to come down, not stay where it is.

The airlines will make profits no matter what happens to the cost of fuel.


Mesa and Express Jet are on the edge of bankruptcy, hundreds of small jets are being grounded and even hundreds of older large jets are being grounded. If the above question had been "Do you think all airlines will make money?" then the answer would be no.

CNN and Mark Perry have each reported sales of GEO Metros on Ebay. 1995 and 1996 models of these pitiful cars are selling for 5 to 7 thousand dollars even when they have about 100,000 miles on them, the sticker price in 1996 was about $9,000. In just a few months, the cost of driving one of these vehicles 100 miles has doubled. During the same amount of time, the cost of driving an SUV 100 miles has also doubled. People are scrambling to buy Metros at double last years price and scrambling to sell SUVs at half of last year's price. Many a company is scrambling to sell its Gulf Stream Jet while it scrambles to get the best deal on commercial flights.

Analyst have fallen into the trap of believing what the majority believes, but, as Keynes told us, in economic matters, the majority is always wrong. Once everyone believes oil prices are going higher, everyone acts in ways to prevent the prices from going higher. The majority believes that we must rapidly move to alternative fuels because we are quickly running out of oil. The reality is that we have used one trillion out of more than 13 trillion barrels of oil. The majority listens to the news that major airlines will spend billions more on fuel without considering that they will only spend these billions because there is demand for high priced tickets or that companies that own small jets are in the same boat as owners of SUVs.

It is likely that GEO Metros will burn more fuel this year than ever before, because they will be purchased by drivers who travel a lot, and it is likely that the amount of fuel burned by SUVs this year will be dramatically lower than the amount of fuel burned by SUV's last year. It is also likely that small jets will see a similar huge drop in the amount of fuel burned.

As usual, the big mistake is in thinking short term. The decision of GM to close down 4 truck factories is not one that will be reversed any time soon. Big monster trucks are on the way out. Fuel is not going to be wasted. More people will ride the bus and more people will fly together.

A day or so ago, Ryan Air announced surprisingly good results. Other airlines that own fuel efficient planes have announced good results. UAUA grounded 100 fuel hogs this morning and the price of the shares are up 8%. British Airways just increased long haul flight fares by 109 pounds or about $218! Even an airline like AMR that operates 400 MD-80's is running close to break even this quarter and it will ground a number of planes. At $6,000 in fuel per hour, private long haul flights are only for the very rich.

The people staying home are mostly the leisure travelers; the ones who shop for the extra low price. The business traveler is flying long haul at prices that are approaching the prices reached in 2000. Capacity cuts are pushing up the price on many routes. Capacity cuts have been a close match to demand reductions on other routes. In April, CAL enjoyed a small increase in international load factors and a small decrease in its mainline load factors (domestic flight demand fell a little while international demand continued to grow), but the real story was a 6 to 7% increase in yield! Any business that is able to increase its top line by 6 or 7% during the worst of times should do quite well when times get better.

"The turn is here" means that fuel prices will go back down some, but the turn works, even if prices just level off. Pension funds which boosted their investments in commodity contracts from $16 Billion to $250 Billion in three or four years, make money only if the price of fuel goes up. If the price levels off, there will be more than $250 Billion coming out of commodity funds and into other investments. Another 3.1 Trillion "investment" Dollars sits in money market accounts. Give the American people a shot of confidence and not millions or billions but trillions of dollars will flow into stock investments. Throw in the turn in the US dollar and we will see a flood of US share investments from over seas.

Everyone knows about the airline problems. As the problems subside, the story will be told time and time again by virtually every media outlet. It will not take much of an upturn in profits to send airline shares soaring.

CAN YOU SEE IT NOW?

This turn has peaked out of the bushes a few times only to hide again. Gold peaked at $1,030 some months ago. Wheat peaked some weeks ago. Oil peaked a couple of weeks ago.

This week, GM announced the closure of 4 truck factories and for the first time since 1992 Camry's and Corolla's out sold the Ford F Series. This week, several cities began offering lower priced bus tickets for early or late trips. San Francisco took seats out of buses to give more standing room. A Gulf Stream Jet that consumed $2,000 per hour in fuel 3 years ago, consumes $6,000 per hour today. Even corporate executives are starting to park the Gulf Streams. The fact that commercial fares have gone is like reporting that the cost of subway tokens has gone up. Subway fares have risen but the increase is nowhere near the increase the total fuel expense of an SUV.


It took a long time to make the turn. The turn does not mean that the price of fuel has to drop by some huge percentage, but it could.

The key point is that the savings from taking the bus or the commercial plane are substantial. At least the froth is coming off the price of oil. We should all expect for mass transit to do well for the next several years.

In regard to the banks; they will do well when it is clear that the inflation bug has been squashed. If oil prices stay flat, the inflation rate on oil will be zero. Since inflation is the caboose of the economic train, it will be the last to go down the hill.

PRICE OF OIL

The price of oil closed down $3.31 today to around $124.50. The decline from the $135 peak is significant because it is occurring while two of the big fields in Iran are out of commission. It is fine with me if the tanker ships sit in Iran's harbor for a year or two. The world does not have to buy oil from Iran ever again. It would be good for Iran and the rest of the world to trade but the world should try to prevent letting fanatics have control of nuclear bombs. After noting that Amadenijhad recently said that Israel will be disappearing from the earth soon and that the USA may not be far behind, Phil Flynn said, "this guy must be a magician, it sounds like all we need to do is sit down to talk to him to make all the words problems disappear".

The talk of war from Iran is just before the big peace pow wow in Saudi Arabia. On June 4, the Saudis will host an interfaith counsel to discuss peace in the Middle East. The Saudis have offered a pipeline to Syria and Lebanon and other financial incentives. The Saudis have even offered to finance a pipeline to connect Basra to Iran and the Saudi oil terminal. It is good for the Saudis to call for peace. We should not have great expectations from this meeting but it is encouraging.


The high price of jet fuel is about to bankrupt Mesa Airlines, Express Jet or other small carriers. UAUA and US Airways are the two most vulnerable major carriers but chances are that the turn in fuel prices hits before even these weaker majors must file. The dramatic increase in fares is being well received. Even the $15 charge for the first bag is being accepted as part of the new reality. AMR needs to cut its work force a little and ground a few gas guzzlers to turn a profit. DAL will go through with its merger with NWA even though NWA will need to ground some old DC-10's. CAL can turn a nice profit with just a minor decline in fuel costs, as a result of increased fares and profitable international routes.

Oil down with Iran under embargo? How low will the price go if a deal is made with Iran?

STRONG BUY SIGNALS

Over the past 6 months, long term buy signals have stayed strong. Short term buy signals were extremely strong back in January and again in March and are back at strong levels again today.

One anecdotal buy signal that has worked very well in the past is the capitulation of a couple of account holders. This market is just too tough. It is hard to hang on when the markets do not make sense. I have tried very hard to make my readers aware of the international and political currents that are pushing this big battleship around. It takes a lot of power to list a battleship. The good news is that the risks have been reduced and the markets are gradually becoming aware. The market feared the potential of dramatic tax increases in the USA (change) as a result of a three house sweep. The market feared the potential for a long drawn out slug fest in the Middle East or even an all out war with Iran. US elections, events in the Middle East and markets are closely connected.


So far, many on the left are not willing to acknowledge that the war against terror is being won. Last night a democratic strategist went unchallenged when he said that the war in Iraq is going badly. The ability to deny the positive results will go away as the fighting subsides and the price of oil falls.

Polls show as much as a 15 point lead for McCain in several key states. I disagree with McCain on Cap and Trade and other issues but he is correctly calling for even more sanctions against Iran while Obama is calling for negotiations. Obama is either misrepresenting what he knows about negotiations, on-going for about 30 years, or he is a very naive person. Thirty years is a long time to negotiate. Iran is very stubborn. Still, Iran has not gained power and influence as is being portrayed by democrats. Instead, Iran has lost its strangle hold on billions of barrels of oil and gas. Its economy is in shambles. Its ability to subsidize terror is being diminished. It is even running out of terrorist to support.

WHEN?

It is not for us to known when. We know that Syria has agreed to let the IAEA inspect its bombed out nuclear site by the middle of this month. It is know that the IAEA has requested to visit two other Syrian sites. It is known that Syria has indicated some willingness to compromise on a couple of points in regard to the Golan Heights in the preliminary peace agreement with Israel. On the other hand, we know that Amadenijhad is unwilling to fess up to IAEA inspectors. He is still unwilling to suspend production of nuclear fuel. The USA has called the bluff again. The USA is willing to wait a few more weeks while the spigots to Iranian oil are tightened a little more.

A couple of days ago, the decision was made by China to support a new dry weight port in Pakistan rather than in Iran. With so much drilling activity in the Caspian Sea, there is need for all sorts of goods to flow. The new port in Pakistan is destined to become a major trading center and it represents a great blow to Iran. Pakistan is just one of many nations that is being rewarded by cooperating in the war on terror while Iran is being bypassed by oil pipelines, gas pipelines, by ports and by production contracts. China's 16 billion dollar investment in the North Pars gas field has been on hold since February. Shell and Respo pulled out of the South Pars field last week. Qatar is sending gas from its South Pars Field all the way to America. This gas is coming from the field adjacent to Iran's North Pars field in the waters of the Persian Gulf between the two countries.

If you or I were citizens of Iran, with our fuel being rationed and inflation running at 40%, we would be upset. We would especially be upset if the neighboring country was selling our gas to our sworn enemy. Iranians have a lot of friends and foes to be upset with. Oops, I forgot! One does not complain about what one does not know. Iran has shut down several news agencies. The latest is just a three day suspension of the FARS agency. This agency has been the propaganda machine of Amadenijhad for the past three years. Closing it down for three days is an order to remove even more truth from the news or be put out of business.

I suppose the US is more like Iran than I want to believe. Cuba and China are producing oil and gas in waters within 100 miles of Florida. The reporting of this drilling has been scant. The average American assumes that the congress is working for the general welfare of the people. The average American does not realize how much he is paying in higher taxes and higher energy costs in order to supply the congress with campaign funds and in order to make the environmentalist feel like they have achieved something. Yesterday, a comment was written that 15% of the people will be against drilling for oil no matter what and that 15% are for drilling everywhere. The other 70% have not been engaged in this question until recently. The commenter believes that the word is getting through to the people and to the congress that action needs to be taken.

Yesterday, The Hays Advisory Group put its remaining loose cash to work. This group has its growth accounts 100% invested in stocks. This decision was made because the bulk of both short and long term buying indicators are at very positive levels.

FUEL CONSUMPTION AND COST DOWN BUT AIRLINE FARES UP

A classic turn is here. Around the world, fuel usage is being cut by significant amounts by the adoption of mass transit in record numbers. Subways, buses, trains and yes, even large airlines in many markets are enjoying surges in ridership. In the USA, auto miles driven and jet fuel consumed have each fallen by 4+%. The reduction in miles driven and in jet fuel consumed does not necessarily mean that people are siting at home. Any temporary decline in travel will be an adjustment in method more than a decrease. People will still travel but they will gradually get out of the big SUV and off of the small passenger jet.

With 28 million barrels of oil sitting in super tankers off the coast of Iran, and with Iran's heavy oil fields jammed up, the world is still well supplied with oil. The big fear of an oil embargo in Iran is starting to fade because a partial embargo is having no effect on supply. When this embargo is over, countries such as Saudi Arabia will have to make voluntary cut backs to keep the price from free falling. When this embargo is over, the rich fields of Iran will be prime for rapid development.


Today, there are shortages being reported in various countries. Ironically, these shortages are the result of low prices. Stratfor reports that gas stations in China are routinely closing early. China is one of many countries where the price of gas is held artificially low. In effect, the government in these countries pay consumers to use gas. The costs of these subsidies have become too great. Supplies are being cut back, shortages are developing. The markets are being prepared for significant price increases. Government officials do not want riots to break out when fuel prices jump toward market prices. By cutting back supplies, the public outrage can be focused on curing the shortage; big jumps in prices will not be so painful to those who are happy to get fuel at any price.

Once again, we have been shown that market prices should prevail. Fuel wasted, due to subsidized prices in oil producing states and in developing countries is of the same real value as any other fuel. Should Wisconsin price milk to locals at 10 cents per gallon, a lot of kids might feed pets in Wisconsin while a poor child half way around the world might go without.

WOW!

This morning, British Airways raised fares on long haul flights by about $218 each! Talk about supply and demand all you want, but, if a firm can raise prices so dramatically, its services are in demand. An increase in cost is not a problem for a business that can pass the cost along to its customers.

This morning, my wife told me about three things that happened yesterday. It was all the sensational news. My wife is no different from anyone else. The analysts who get their name in print right now are the ones who report that airlines might lose 6 billion dollars this year. The analyst who notes that seat revenues, while behind, are now moving up as fast or faster than seat costs gets little attention.

PASSING IT ALONG TO THE CONSUMER

Yesterday, a news reporter said with a note of surprise that big businesses are supportive of cap and trade regulations. How dumb! Of course, big businesses are supportive of a program to give existing businesses tax credits while forcing new market entrants to pay out the nose. Regulated monopolies make money more easily than normal businesses. Talk about passing cost along to the consumer, a republican senator posted a chart showing 6 trillion dollars in cost that would ultimately be passed on to the American tax payer.

AN OPPORTUNITY IS HERE

If the congress really wants to limit the use of "dirty" fuels, an opportunity is here. The dramatic decline in consumption is ready to send prices lower, the congress could pass a variable tax to be assessed as the price of fuel goes down. The revenues could be offset with income tax reductions. The US economy would boom because the wasteful consumption of fuel would be cut back at the same time that making money would be encouraged. There would be no need for bureaucratic and wasteful cap and trade regulations.

WAL-MART BITES INFLATION AGAIN

Wal-Mart, Kroger, CVS, Wal-Greens and others have been taking a bit out of inflation by providing space for health clinics. Nurse Practitioners are doing a great job of taking care of blood pressure checks and runny noses for a tiny fraction of the costs charged at doctors offices. Last week a women reported that when she faced a 10 week wait to renew a prescription, she decided to check out the Wal-Mart clinic. She was seen as a walk in in about 15 minutes and had her prescription in hand in 20 minutes. Needless to say, she canceled her doctors appointment and she pocketed almost $100 in lower fees.

My wife and daughters enjoy searching Craig's lists to find used goods at low prices. They have another option, Wal-Mart's free classified listings. Here again, we have a free service that 10 times as good. When people fuss about inflation today, it means they have not stopped to smell the roses. Yes, gasoline prices are temporarily sky high, but classified ad rates have fallen to zero. Better still, one can do so much more with on-line classifieds. One can sort by zip code, by category or by zip code and category. One can click on a "notify-me button" and receive and email when a desired item is posted. I have known people who are willing to drive 10 miles and back to recycle a garbage bag of aluminum cans. Think of the relative savings when someone buys a used swing set for half the retail price and that swing set is saved from the landfill. If the cost of recycling is more than the value of the recycled, don't do it!

TIME TO TURN

With 78% of the farmers in North Dakota and 70% of all farmers in Iowa being subsidized by the average taxpayer, it is time for a turn. Alfred, one of my regular readers, sent me a quote from the President of Czechoslovakia which I saw repeated in an editorial by Charles Krauthammer yesterday. He said, "The largest threat to freedom, democracy, the market economy and prosperity....is ambitious, arrogant, unscrupulous, ideology of environmentalism." The farm lobby says that the corn subsidies are about a lot more than the environment. Of course they do, why should a multi-millionaire farmer turn down a subsidy to help the poor?!

The senate is currently debating a cap and trade bill, just after one of the coldest of winters. Iran, which sits on 15% (26 trillion cubic metric feet) of all the known natural gas in the world, suffered enough to cut supplies to its neighbors. The world has proven reserves of 172 trillion cubic metric feet of natural gas! Let me say that again, the world has proven reserves or 172 trillion cubic metric feet of natural gas. The USA has proven reserves of 5.5 trillion metric cubic feet of natural gas. Yes, enough to say it again, the USA has proven reserves of 5.5 trillion metric cubic feet of natural gas. This 5.5 trillion does not count any of the natural gas off the coast of North Carolina, Virginia, and other states from Maine to Florida.

We have 5.5 trillion metric cubic feet of know reserves of this clean burning fuel even though the congress of the USA will not allow drilling on 85% of our territory. If politicians goal was to save the environment, this gas would be used in preference to coal. Politicians are standing in the way of drilling because they want to give cap and trade tax credits to their "buddies". Just the threat of cap and trade is an arm twisting game to get campaign contributions.

In response to a letter from me, Elizabeth Dole wrote to me a letter about the farm bill. She noted that the bill passed 81-15. She said that the bill "is very important to ...and consumers." I say baloney. This bill increased the net cost of food and fuel to consumers. She said that the bill "is good for (NC) farmers" and "it will provide the safety net they need to provide all Americans with a safe and affordable food supply". This bill diverts good food crop land into ethanol land and provides a safety net to lawyers and representatives. She says, the bill includes a "provision establishing the Southeast Crescent Regional Commission, which will spur economic and infrastructure development in distressed areas in North Carolina and six other Southeastern states." She notes that she introduced this legislation and that it authorizes $150 million over five years. She mentioned several other government programs that were expanded by this legislation. It is pretty amazing how quickly "conservatives" begin to feed at the public trough. The worst of the worst is that the bill included textile payment provisions which defeat free trade policies and drives up clothing costs to consumers.

GUILTY AS CHARGED

I plead guilty of lambasting a "do nothing congress". The old saw that a politician who complains about the media is like an old sea captain who complains about the waves contains truth. We are all interested in sharp points of view. For the record, I would rather have a "do nothing congress" than one that spends all its time and all of our money subsidizing rich farmers and political campaigns. On the other hand, it is sad to see a do nothing congress when the price of oil has moved from $10 per barrel to $125 per barrel and while we sit on tremendous reserves.

CHANGE CONGRESS OR MAKE MONEY?

My chances of changing congress are pretty slim but the opportunity to make money is real. Despite the restrictions of congress, oil and gas are being found. Qatar sits on about as much natural gas as does Iran (part of the current frustration of Iran is that Qatar is pumping gas from fields that might be pulling from Iranian fields). In Boston, Qatar just unloaded the first delivery from a monster LNG tanker. America lets trillions of metric feet of gas sit underground while ships from the Middle East cross over the top to deliver high dollar supplies. Supplies are going up. Demand is being destructed.

Demand to ride the "big airline bus" is rising, fares have probably gone up in percentage terms more in the past 6 months than at any other time in history. Fares will go up enough to "save" the most efficient of the airlines. Air travel is expected to grow at 4.5% compounded for the next 20 years. This turn has been a tough one but it is here.

WEB TRAFFIC UP, AUTO TRAFFIC DOWN, OIL DOWN, CREDIT IRAQ?

The market see-saw is moving. The demand for web traffic is growing and share prices in effected companies are moving. Corning Glass and Level 3, which are both influenced by web traffic are in the early rounds of significant moves. LVLT, which is the "pure play" was down below $2 per share about 3 months ago and is selling for $3.43 today. How big will this growth ultimately be?

An article on the Gigaom site suggest that Google should build its own nuclear power plant. The company currently owns as many as 1 million servers (my guesstimate is higher). These servers use about 500 watts of electricity per hour. Google has often successfully negotiated unusually low electricity but 500 times a million per hour adds up. At the current rate of exponential growth in functions performed and in data stored, Google will use the output of a nuclear power plant in a year or two. Oh! how wasteful?


An announcer at a liberal media outlet repeated one of my pet peeves yesterday. She said energy use is soaring because even the poorest of people are now buying appliances. I wonder if this announcer has the energy to wash and dry a load of clothes with a washboard, tub and clothes line. I wonder, given a full day, if she could chop the wood to build a fire in a wood stove to cook a meal. I wonder what relative percentage of energy is consumed when she heats the same meal in a microwave oven? Sure, the purchase of a microwave or washing machine may (or maybe not) result in a small increase in the amount of electricity used but not in the amount of energy used. Indeed, including the heating of the water, the energy consumed when washing a load of clothes by hand would be several times the energy consumed by a modern machine.

Google is the washing machine of the world wide web. People push a few buttons and wash a load of clothes with minimum energy usage. Google and other web based companies allow people to "visit" around the world with minimum energy usage. The use of huge quantities of electricity used by Google represents even larger quantities of energy saved.

Google is adding features that consume huge amounts of computing and storage space, as is Apple, Amazon, Bee-Hive, Comcast ... A recent development is that social networking sites such as MySpace are reducing the amount of servers they need by making social networking email features searchable by Google. In other words, Google is becoming the big cloud computer for businesses as well as for consumers. The Bee-Hive, an Israeli start-up recently purchased by VMWare, is all about making cloud computers all the more efficient. Apple has an installed base of 5.4 million iPhones but it is adding service to country after country quickly. Apple has been proven to be correct about video pricing. Consumers are buying the under $2 shows. The delivery costs of these shows is minor. The profit margins are great. No more driving to rent a DVD. Google Android is set to launch soon.

The value of all "data" will be enhanced when it can be accessed rapidly. Cisco and others are helping crank up broadband speeds. Another report at Gigaom is about broadband speeds. Around the globe, only 16% of Internet users access the web at speeds greater than 75 mbps. In the USA, 20% of users enjoy these speeds. The numbers respectively from South Korea, Japan and Hong-Kong are 64%, 48% and 35%. The correlation to lower energy use per dollar of GDP is interesting. These economies have all increased their GDP per barrel of oil consumed for 15 years or more. Japan has recently become a petroleum products exporter! Japan has not built refineries beyond their needs, instead, they have reduced their needs below the capacity of their refineries. The USA is certainly not the only country to see a decline in auto traffic. The USA is late to the party. Our congress is too busy winning pork to do the businesses of the country.

The world wide scramble to build nuclear power plants is a result of the developing Internet economy. The delay in the 123 nuclear power agreement between the USA and India keeps making the news but the scores of other agreements hardly get a mention. Agreements between China and Russia and the USA and Russia are important but Pakistan has contracted to build 6 nuclear power plants, Turkey 3, Egypt 3 .... No less than 49 developing nations, including oil rich nations such as Saudi Arabia and UAE have signed agreements. Developed countries such as France (a country opposed to the invasion of Iraq and a country that produces 80% of its electricity by nuclear power) are jumping on the chance to do business in the Middle East. Jordan has contracted with AREVA for nuclear plants. Why the Middle East? The Willie Sutton rule applies. The oil rich Middle East has the money to buy the nuclear plants. China, which gets its money by exporting goods, is importing oil and nuclear power. China will build more plants over then next 12 years than any other nation.

LONG RUN -- SHORT RUN

Nuclear plants will be a major portion of the intermediate solution to the worlds energy supply. The 123 agreement between Russia and the USA is an historic agreement, still, we must have a short run solution. While the congress leaves about 85% of US oil reserves off limits to drilling, the rest of the world is cranking up exploration. Brazil is on its way to potentially becoming the Saudi Arabia of Latin America. Even here, most of these discoveries are intermediate term solutions. In the mean time, many countries are contributing to an immediate increase in production. Iraq is the one most notable. Iraq is currently producing at the rate of 2.5 million barrels per day. It is projected to be pumping at the rate of 2.9 million barrels per day by year end and by 6 million barrels per day in 3 to 5 years.

THE UPSIDE DOWN AP

The AP news syndicate continues to report a lot of stuff upside down and backwards. May was the month of the fewest US casualties during the war in Iraq; the AP put its ink on the number of suicides committed. Iran is being isolated in a number of powerful ways while the AP reports that Iran's influence is growing in Gaza. Gaza is the tiny little piece of land between Egypt and Israel that the Israelis gave to the Palestinians. It is a historically significant location but a nat on Iran's behind.

The Iran story is intriguing. There have been a very long list of under-reported or misreported significant developments in the isolation of Iran. Google BTC Pipeline and you will find the story of the longest pipeline in the world. It took a year for oil pumped into one end to come out the other. Every day, it carries a million barrels of oil out of the Caspian Sea oil fields to a port on the Mediterranean Sea, bypassing Iran. The port of Ceyhan, on the coast of Turkey, is the same terminus as a pipeline from Iraq. When the Basra to Persian Gulf pipeline is competed, it will be the same port that is connected to the majority of all exported oil.

The BTC pipeline was not even started until after the invasion of Iraq; construction on the TAPI pipeline on the other side of Iran will start soon. The strategic importance of the Straight of Hormuz is dropping like a stone. The pipeline network being built all around Iran makes Iran a nat on the rear of the world. The new oil coming out of Iraq is money coming out of Iran's pocket. Iran, a country sitting on massive reserves of oil, a country with the expressed intent to use military force to take over neighboring countries, a country that has supplied numerous terrorist organization with funds and weapons, a country where in the second year of requiring its citizens to stand in line to buy rationed fuel, a country where inflation is upwards or 30 or 40% is a country that needs to sign a peace treaty.

HANGING TOUGH

Amadenijhad and Hillary are to be admired for hanging tough when holding a losing hand. Hillary is trying to gain an office and Amadenijhad is trying to hold an office. The EU foreign policy chief, Javier Solana plans to deliver a package of incentives to Iran as soon as Iran agrees to suspend the production of nuclear fuel. Amadenijhad says he will not suspend.

As a result, the odds of a military attack on Iran has increased, not as much as indicated by the press but enough to cause saber rattling. The AP is correct in one aspect of Iran's growing influence; the political left in America is beating the drum for talks between the USA and Iran. On June 10th the left will hold a "congressional call-in". Their advertisements encourage US citizens to lobby congress in support of talks with Amadenijhad. For the purpose of winning an election, the left ignores the diplomacy conducted between the USA and Iran over the past 30 years, including the talks and actions of the Clinton administration. The winning of an election seems to be more important than the security of the country. The left is exploiting the kind of US citizen who pays the full retail sticker price and buys the extended warranty on the purchase of an SUV. If you buy a car without eventually negotiating with the sales manager, you have paid too much, but you should not insist that your first offer be discussed directly with the sales manager. If Amadenijhad or his successor cannot be influenced to suspend nuclear bomb making by any other means, then as a last resort, the nuclear facilities must be bombed. The cooperation of Russia, China, Europe and the USA is the reason the bombing will not be needed.

THE ROAD TO SERFDOM

"The Road to Serfdom" was written by Friedrich Hayek in 1944. Friedrich's premise, that socialism tends toward totalitarianism, has been proven time and time again. Today, we wonder what happened to the inalienable rights of Thomas Jefferson. Today, the word liberal is the word used to describe supporters of big government programs. Programs that take away individual freedom and civil rights.

At a conference in Rome, food shortages have been reported in scores of countries. The USA has been accused of contributing to these shortages by consuming corn in car engines. The response of the US participants is a "cherry picked study" that argues that only 2-3% of the global increase in food prices are the result of ethanol programs. Even if these estimates were accurate, the two billion people who spend all or almost all of their income on food have reason to be upset with the callus actions of the USA.

The environmentalist have become social engineering totalitarians. The results of trying to dictate what others should do is hunger, starvation and the loss of individual freedom. Mandatory consumption of food in car engines is the height of arrogance.

FREE THE WHITE SPACE

It is my hope that the FCC will "free-up" the white space between TV channels for Internet traffic. The Internet represents individual freedom. We are living in an age of increasing web traffic, decreasing auto traffic and the disbursement of knowledge. A time when more people live well than ever before. A time when living well does not depend on capturing wealth from others. A time when the public is pessimistic. A time when opportunity is great. I hope you make the most of these wonderful days!