Monday, June 30, 2008

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 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 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.


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.

Saturday, June 28, 2008

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.

Friday, June 27, 2008

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 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 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.


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?

Thursday, June 26, 2008

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.


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.


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%!


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.


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.


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.


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.

Wednesday, June 25, 2008


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.


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.


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.


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.


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.


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.


Tuesday, June 24, 2008

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.

Monday, June 23, 2008

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.

Friday, June 20, 2008

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.


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!