War, Energy, Banks & USDollar

By Jim Willie CB       March 23, 2007 www.GoldenJackass.com

On the eve of the next war front to explode in the Persian Gulf region, some thoughts on the energy sector seem appropriate which attempt to tie some factors together. In the last two to three years, the biggest challenge to analysts is not so much identification of certain relevant effects, as it is integration of analysis on a several simultaneous patently clear crucial factors for correlation. To friends an assessment has been often used by me, “This is five dimensional chess, and at any one time, three dimensions are dominant. All are linked increasingly and with more complexity. The challenge is to finger the most important pairs of factors.” That covers it in my opinion.

The tight relationship between the crude oil price and the USDollar valuation is historically well known, firmly in place for over three decades. While the United States owns control of the world reserve currency, a delicate PetroDollar linkage factor remains in force. Since large oil purchases are conducted in US$-based transactions, entire banking systems are designed accordingly so as to handle those transactions. Some Persian Gulf nations like the United Arab Emirates and Qatar have diversified more of their reserve assets away from the USDollar and its related (in)securities. Instability in the region is very likely to deliver some additional instability to the USDollar itself. What the current overly aggressive political leaders seem to ignore is the potential for continued and amplified economic and financial retribution and vengeance on the most vulnerable façade to the United States monolith, its faulty financial flank.

The risks to the USDollar are rising from both liberal monetary forces and desperate energy forces, not to mention geopolitical backlash forces. The US has isolated itself irresponsibly. Prudent leadership seems to have taken a back seat to private profiteering. Maybe Harry Schultz is right. Descriptions nowadays of certain figures seem to fit some of the biggest tyrants of the 20th century than to the biggest heroes, in my book.

An aside, when crude oil contract rollovers occur, the publicity is loud and shrill of a 57 handle on the oil price on CNBC and other networks & publications. But when the rollover is complete, the new month contract takes root, the talk is minimal of the new 60 handle. With a little push up in the oil price today, the handle is 61. My gut tells me that oil is rising with the euro exchange rate and even the Canadian Dollar, in response to the more obvious next US Federal Reserve move being a rate cut, not a rate hike. But again, this is just language, mere words. Expect the USFed to lie through its teeth in the next couple months in defense of the USDollar. Lies cost nothing but credibility, an empty bag for most matters pertaining to the US financial system. Given the financial conditions measured by current account deficit, trade gaps, foreign dependence on USTBond purchases, foreign dependence for commodity & energy supply, credit growth, derivative mushrooms, absent manufacturing base, one must conclude the USGovt is in worse shape than the highly publicized cancer-ridden subprime mortgage lenders. As cited recently in the alternative news sources, the USGovt is the ultimate quintessential subprime borrower!

WAR MOTIVE

Most wars in the past have been started to gain control over trade routes, to gain control over known mineral or energy supply, to gain colonial control over untapped continents related to both, or to gain trade routes via ocean ports. In other words, economic motives are often similar but more subtle than those driving the Golden Horde of Tartars rampage across the Russian Steppes to steal autumn harvest bounty. This Global Energy War seems no different, only the prevalent seeming distractions. Look closer to home for serious threats. The most dangerous weapons of mass destruction are phony money, bad economic policy, lost industrial base, coerced emphasis away from future technology, consumption over investment, and corruption waste & fraud. The United States Govt has all these. The war finally was revealed from official sources within the current Administration last autumn as being about control of oil, which is vital to our economy.

The United States needs the war to secure supplies, dominate in the supply line, and to put in a proximal presence for the Persian Gulf. Doing so establishes the US as the first customer for oil delivery and helps to ensure the USDollar as the preferred transaction currency. If things go boom on the eastern shores of the Persian Gulf before income taxes are due this April in the deteriorating homeland, once more, the war will be about oil in the end. Investment implications run thick. Closer to home, an impact is real and notable. The drain of US Army soldiers has affected WalMart, UPS, FedEx, Home Depot, American Airlines, and more to the point of rendering them short of skilled staff.

In my simplest view, energy remains a key investment asset when an entire military, its media focus, its cloud of terrorism, its usage of private sector oil services contract workers, its extended soldier tours of service, are devoted to secure its valuable supply. Follow the crowd, the tumult, and the money, which all point to the energy world. When Putin from the Kremlin orders usage of oil and natural gas pipelines to be used as weapons, then again one must conclude energy is a key investment. When the Shanghai Coop Org creates an alliance originally for security and cultural reasons, but then morphs into a powerful phalanx to wall off East from West on “new” energy supply, then again one must conclude energy is a key investment. The risks to the USDollar are rising from both liberal monetary forces and desperate energy forces, not to mention geopolitical backlash forces. Let that be the chorus refrain.

My steadfast claim all along, for the last 18 months, ever since Iran showed up on the radar, is that Iran is more a story about a wall to cut the West from new energy supply, and associated banking of oil money. Nuclear proliferation is the proffered argument for attacking Iran. Sure, they might be on a slow track for nuclear refinement, but oil pipelines and a major Russian alliance and Chinese mega energy contractsand befriending former Soviet Republics in “Chaostan” and selling oil in euro transactions and integrated regional energy & military weapons contracts and monumental accumulation of wealth (Western debt) in the East and power shift from West to East, reaction to these powerful forces is the real true valid unmistakable motives for war. The American public is a bit too asleep at the wheel to properly grasp the issue.

As for the fallout of interrupted oil supply, some believe Japan is vulnerable. My information points to Japan and South Korea as having curtailed significantly their Iranian oil supply. The slack has been taken up by China, which has little in the way of moral fiber in business deals, to be sure. See Nigeria, Angola, Iran, and elsewhere, like crushed internal dissent. No, the risk of interruption lies in China, which might actually motivate action by the US Military.

ENERGY PRODUCTION

Halfway around the globe, the dirty little secret is that Saudi Arabia is in an accelerating decline in oil production output. Extend that to Kuwait and other neighbors. Closer to home, the dirty little secret is that Mexico is in an accelerating decline in oil production output. On home ground, the US Congress cannot shake the pristine environment as more important than economic survival and job preservation. In the middle ground, the dirty little secret is that the North Sea, Gulf of Mexico, Alaskan slope, Australia, Indonesia, and even mature pockets of Russia (see Samatlor) are in accelerating decline in oil production output.

On the lunatic fringe, hardly a secret, is that the Nigerian oil business is in a state of chaos as its indescribably corrupt regime might come to an end, even a possible Muslim new regime to take its place. On the lunatic fringe, little Angola has shifted to neutral on energy deals and progress on production, as observers stand aside and await a possible return of their bloody civil war. On that same lunatic fringe, the Venezuelan oil business is on a steady slide from inefficiency, cronyism, and corruption, whose failure is so blatant and at the same time popular that the northern rim of South America wishes to embrace its business model. See Bolivia and Ecuador.

The biggest untold story in the energy world in my opinion is the rapid decline in Mexico at their Cantarell elephant oil field. My February and March Hat Trick Letter reports cover the story, with full details, facts & figures. Cantarell oil production declined by 13.5% in 2006, and on track to decline by 15% additionally this year? Will the Mexican Govt suffer massive deficits soon? Will their Parliament and PEMEX labor unions obstruct ALL possible reforms and construction actions? My conclusion is that political instability is soon to come to the southern border of the United States!!! All $97 billion in PEMEX oil sales in 2006 went to the Mexican Govt to account for 40% of its budget. The absurdly incompetent Mexican Govt has seen fit to commandeer almost every penny of PEMEX oil income, denying much needed funds for investment in new exploration, new capacity, even crimping basic maintenance. The press is on the story in Mexico City, but not so much in the sleepy US, where a bizarre array of shows dominates. PEMEX is the second biggest supplier of oil to the USEconomy. Experts now forecast that by 2010, Mexico will be on the verge of becoming an oil importer. Unlike the Saudi story, shrouded in state secrecy, the Mexican disaster is in plain view, with no debate. In fact, there has been no recognition even though the facts are laid bare for all to see.

Then comes Saudi output. Talk about putting into service excess capacity, expanding output, cutting output, agreeing on quotas, agreeing on output cuts, taking action against violator nations, bringing Angola into the OPEC fold, all this is well and good for distraction. The story to focus upon out of OPEC headquarters is the sharp decline in Saudi oil production since 2005, as shown by the graphic below, taken from The Oil Drum. This aint output cutbacks to support price. This is depletion evidence taken in four views from four sources, with four parallel trendlines. The time span shown overlaps with the push in the oil price up to the Lebanon War last July. This Saudi oil output decline all occurred, despite a 150% rampup in oil rigs in Saudi oil fields from January 2005 onward, as reported by Baker Hughes. The Saudi decline is the biggest unreported energy story, with Cantarell the second. Huge implications come to the USEconomy as a direct domino from higher oil prices. Talk on Wall Street of downward oil price trends is self-serving promotional chatter, as the major firms like Goldman Sachs are loading up on their energy investment positions. The risks to the USDollar are rising from both liberal monetary forces and desperate energy forces, not to mention geopolitical backlash forces.

Add to the mix that the US & Western European major oil companies invested in 2006 more in stock buybacks than in actual exploration and production (see March Hat Trick Letter report for corroborative data). One can confidently conclude the energy business is the worst managed in the world. That spells out a recipe for shortage and higher prices, along with great investment opportunities.

BANKS WITH DIRECT & INDIRECT DEPOSITS

Five major factors influence the USDollar and gold today. The seas shift on such factors. They are listed from my personal viewpoint. The only common thread is banks, with a constant extension to gold. Anyone who thinks the broad war (staged for now in Iraq & Afghanistan) is not about banks, think again. Oil is tied like through an umbilical cord to banks. Purchase of oil in large national contracts is executed via banks, payments lifted off the bank structure. Military budgets aid not only the incestuous defense contractors, but also tangentially big banks with close associations through equity positions and loans. Weapon sales are logged in banks, which are increasingly seamless with business ventures. The entire USEconomic so-called recovery in 2002 was done on the back of the war stimulus, more indirect bank benefit.

The most critical USDollar and gold factors today are:

1. The War for Oil in the Mideast  (nix mention of politics & religion)
2. The Bank of Japan  (gradual interest rate hikes, we must hope)
3. The Mortgage cancer in United States  (surely more than subprimes)
4. The management of Chinese foreign reserves (new $300 billion kitty)
5. The exploding credit derivatives  (compound annual 80% growth rate)

It bears repeating. The risks to the USDollar are rising from both liberal monetary forces and desperate energy forces, not to mention geopolitical backlash forces. They all have major banking origins and implications, which extend immediately to the gold price.

WIND SHIFT

Isn’t it curious that banking regulators sit on their hands during a monumental mortgage finance centrifuge over a four year time span, politicians cheer on the housing boom (just a bubble destined to bust), and now politicians are asking tough questions when the cancerous horses are running rampant in the farming field of crops ???  The housing bubble is a good thing when it rescues the system from a 2000 stock bust, but it is a problem when it busts? What an utter travesty and tragedy that has become the USEconomic system !!!

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

Jim Willie CB is the editor of the “HAT TRICK LETTER”
Hat Trick Letter

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com . For personal questions about subscriptions, contact him at  JimWillieCB@aol.com