The first thing that I don’t think many people appreciate is how big the country is. The population of Iran is 66 million. That makes it the 19th most populous country on the planet — more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth.

Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Take a look the next chart, which shows the sharp growth in trade:

Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. As Ilan Berman notes in a recent issue of the Far Eastern Economic Review: “Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing’s energy plans.”

No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field. I am sure the Chinese are watching what happens in Iran with great interest. It makes for a complicated political situation.

Source: Investing in the Iranian Crisis

Detailed military plans to bomb Iran’s nuclear infrastructure have long been on the table in Tel Aviv.

Israeli daily Ha’aretz reported that Dennis Blair, the newly-appointed head of US intelligence, said Tel Aviv will eventually declare war on Tehran as a last-ditch effort to curb Iran’s enrichment capabilities.

And, former Israeli UN ambassador Dan Gillerman revealed that Tel Aviv is preparing a military offensive against the country.

War could be avoided if the Persian people elect the moderate political leader Mir Hossein Mousavi in tomorrow’s election.

Moderate ex-premier Mir Hossein Mousavi has emerged as Ahmadinejad’s main rival.  Mousavi believes Iran’s policy regarding its nuclear program is for peaceful purposes.   And, he has stressed that Tehran is ready for talks on the country’s nuclear program.  Plus, Mousavi seems open to beginning a dialogue with America.

Also, Mousavi has vowed to reduce heavy inflation through monetary policies, and has stressed the need for boosting the private sector.

A vote for Mousavi is a vote for peace.

The Iranians will make a statement tomorrow:  Do they want war or do they want peace.

Expect a record number of voters to cast their ballots in the Iranian presidential election being held on June 12.  If a clear winner does not emerge on June 12, the election will go to a second-round runoff on June 19.

If the Iranians re-elect Ahmadinejad be prepared.  Israel could hit them hard.

Then, Iran will unleash Hezbollah on Israel.  Israel could be attacked by a Hezbollah’s massive number of rockets and missiles from Lebanon.

The whole situation could escalate onto a huge regional war bringing in other Arab countries and even the U.S.

War with Iran could easily spin out of control and if Israel really feels that their existence is in jeopardy–they may even use their nuclear weapons.

If that happens, Iran will be destroyed and gold will be over $5,000 per ounce!

Protect yourself against geopolitical turmoil:  Buy Gold

PowerShares DB Gold Double Long ETN (NYSE: DGP) is quick and easy way to leverage gold’s price movements.  DGP tracks an index of gold futures and is designed to return twice the change in the index.

ProShares Ultra Gold (NYSE:UGL) also moves two times the daily price change of gold bullion.

DGP and UGL are both good ways to speculate in gold short-term, but they have added risks. But if you want more of a long-term core position in gold, (NYSE:GLD) is a better choice.

Best Wishes,

Ted Peroulakis

Source: Tomorrow’s Iranian Election Could Lead to Nuclear War

No matter where you’re looking at putting your money today, the impact of energy prices simply can’t be overstated. The commodities trade, US and foreign equities, debt and interest rates, everything is being driven by energy prices right now. Whether you’re trying to factor energy as a direct input into the price and consumption of manufactured goods or dealing with monetary policy’s impact on the dollar and debt markets, you’re implicitly making an energy trade.

I’ve said it before and I’ll say it again, if you’re trying to trade today’s markets without geopolitical intelligence, it’s like trying to trade the juice futures market without a weather forecast. You can do it, but good luck to you.

George has kindly passed me the article that was the basis of the Barron’s story. You’ll notice right away that unlike many of the so-called experts out there, Stratfor doesn’t airily dismiss underlying logistics in favor of handwaving. But better than taking my word for it, click here to get your own Stratfor Membership at the discounted rate for my readers. Every day you’ll receive the same forecasts and intelligence guidance that I use to shape my thinking on where the world is going – and especially on energy prices.

John Mauldin, Editor
Outside the Box

On June 20, The New York Times published a report saying that more than 100 Israeli aircraft carried out an exercise in early June over the eastern Mediterranean Sea and Greece. The article pointed out that the distances covered were roughly the distances from Israel to Iranian nuclear sites and that the exercise was a trial run for a large-scale air strike against Iran. On June 21, the British newspaper The Times quoted Israeli military sources as saying that the exercise was a dress rehearsal for an attack on Iran. The Jerusalem Post, in covering these events, pointedly referred to an article it had published in May saying that Israeli intelligence had changed its forecast for Iran passing a nuclear threshold — whether this was simply the ability to cause an explosion under controlled conditions or the ability to produce an actual weapon was unclear — to 2008 rather than 2009.The New York Times article, positioned on the front page, captured the attention of everyone from oil traders to Iran, which claimed that this was entirely psychological warfare on the part of the Israelis and that Israel could not carry out such an attack. It was not clear why the Iranians thought an attack was impossible, but they were surely right in saying that the exercise was psychological warfare. The Israelis did everything they could to publicize the exercise, and American officials, who obviously knew about the exercise but had not publicized it, backed them up. What is important to note is that the fact that this was psychological warfare — and fairly effective, given the Iranian response — does not mean that Israel is not going to attack. One has nothing to do with the other. So the question of whether there is going to be an attack must be analyzed carefully.

The first issue, of course, is what might be called the “red line.” It has always been expected that once the Iranians came close to a line at which they would become a capable nuclear power, the Americans or the Israelis would act to stop them, neither being prepared to tolerate a nuclear Iran. What has never been clear is what constitutes that red line. It could simply be having produced sufficient fissionable material to build a bomb, having achieved a nuclear explosion under test conditions in Iran or having approached the point of producing a deliverable nuclear weapon.

Early this month, reports circulated that A.Q. Khan, the former head of Pakistan’s nuclear program who is accused of selling nuclear technology to such countries as Libya, North Korea and Iran, had also possessed detailed design specifications and blueprints for constructing a nuclear weapon small enough to be mounted on missiles available to North Korea and Iran. The blueprints were found on a computer owned by a Swiss businessman, but the reports pointedly said that it was not known whether these documents had been transferred to Iran or any other country. It was interesting that the existence of the blueprints in Switzerland was known to the United States — and, we assume, Israel — in 2006 but that, at this point, there was no claim that they had been transferred.

Clearly, the existence of these documents — if Iran had a copy of them — would have helped the Iranians clear some hurdles. However, as we have pointed out, there is a huge gap between having enriched uranium and having a deliverable weapon, the creation of which requires technologies totally unrelated to each other. Ruggedizing and miniaturizing a nuclear device requires specializations from materials science to advanced electronics. Therefore, having enriched uranium or even triggering an underground nuclear device still leaves you a long way from having a weapon.

That’s why the leak on the nuclear blueprints is so important. From the Israeli and American point of view, those blueprints give the Iranians the knowledge of precisely how to ruggedize and miniaturize a nuclear device. But there are two problems here. First, if we were given blueprints for building a bridge, they would bring us no closer to building one. We would need experts in multiple disciplines just to understand the blueprints and thousands of trained engineers and workers to actually build the bridge. Second, the Israelis and Americans have known about the blueprints for two years. Even if they were certain that they had gotten to the Iranians — which the Israelis or Americans would certainly have announced in order to show the increased pressure at least one of them would be under to justify an attack — it is unclear how much help the blueprints would have been to the Iranians. The Jerusalem Post story implied that the Iranians were supposed to be crossing an undefined line in 2009. It is hard to imagine that they were speeded up to 2008 by a document delivered in 2006, and that the Israelis only just noticed.

In the end, the Israelis may have intelligence indicating that the blueprints did speed things up, and that the Iranians might acquire nuclear weapons in 2008. We doubt that. But given the statements Iranian President Mahmoud Ahmadinejad has made over the years, the Israelis have to be planning based on worst-case scenarios. What the sum total of their leaks adds up to is an attempt to communicate widely that there is an increased urgency in dealing with Iran, based on intelligence that the Iranian program is farther along than previously thought.

The problem is the fact that the Israelis are communicating. In fact, they are going out of their way to communicate. That is extremely odd. If the Israelis were intending to strike Iran’s nuclear facilities, they would want to be absolutely certain that as much of the equipment in the facilities was destroyed as possible. But the hard truth is that the heart of Iran’s capability, such as it is, does not reside in its facilities but in its scientists, engineers and technicians who collectively constitute the knowledge base of Iran’s nuclear program. Facilities can be replaced. It would take at least a generation to replace what we already regard as an insufficient cadre of expertise.

Therefore, if Israel wanted not simply to take out current facilities but to take Iran out of the nuclear game for a very long time, killing these people would have to be a major strategic goal. The Israelis would want to strike in the middle of the workday, without any warning whatever. If they strike Iran, they will be condemned widely for their actions. The additional criticism that would come from killing the workforce would not be a large price to pay for really destroying the Iranian capabilities. Unlike the Iraqi reactor strike in 1981, when the Israelis struck at night to minimize casualties, this strike against a more sophisticated program could not afford to be squeamish.

There are obviously parts of Iran’s nuclear capability that cannot be moved. There is other equipment that can be, with enough warning and with more or less difficulty, moved to unknown locations. But nothing would be easier to disperse than the heart of the program — the people. They could be moved out of harm’s way with only an hour’s notice. Therefore, providing warning that an attack was coming makes very little sense. It runs counter to basic principles of warfare. The Israelis struck the Osirak reactor in Iraq in 1981 with not the slightest hint of the attack’s imminence. That was one of the reasons it was successful. Telegraphing your punch is not very smart in these circumstances.

The Israelis have done more than raise the possibility that an attack might be launched in 2008. They have publicized how they plan to do it. Based on the number and type of aircraft involved in the exercise — more than 100 F-15 and F-16 fighter jets — one Israeli attack scenario could involve a third of Israel’s inventory of fourth-generation strike aircraft, including most of its latest-model F-15I Ra’am and F-16I Sufa fighter bombers. If Greece were the target in this exercise, then the equivalent distance would mean that the Israelis are planning to cross Jordanian airspace, transit through Iraq and strike Iran from that direction. A strike through Turkey — and there is no indication that the Turks would permit it — would take much longer.

The most complex part of the operation’s logistics would be the refueling of aircraft. They would have to be orbiting in Iraqi airspace. One of the points discussed about the Mediterranean exercise was the role of Israeli helicopters in rescuing downed flyers. Rescue helicopters would be involved, but we doubt very much they would be entering Iranian airspace from Israel. They are a lot slower than the jets, and they would have to be moving hours ahead of time. The Iranians might not spot them but the Russians would, and there is no guarantee that they wouldn’t pass it on to the Iranians. That means that the Israeli helicopters would have to move quietly into Iraq and be based there.

And that means that this would have to be a joint American-Israeli operation. The United States controls Iraqi airspace, meaning that the Americans would have to permit Israeli tankers to orbit in Iraqi airspace. The search-and-rescue helicopters would have to be based there. And we strongly suspect that rescued pilots would not be ferried back to Israel by helicopter but would either be sent to U.S. hospitals in Iraq or transferred to Israeli aircraft in Iraq.

The point here is that, given the exercise the Israelis carried out and the distances involved, there is no way Israel could do this without the direct cooperation of the United States. From a political standpoint in the region, it is actually easier for the United States to take out Iran’s facilities than for it to help the Israelis do so. There are many Sunni states that might formally protest but be quite pleased to see the United States do the job. But if the Israelis were to do it, Sunni states would have to be much more serious in their protestations. In having the United States play the role of handmaiden in the Israeli operation, it would appear that the basic charge against the United States — that it is the handmaiden of the Israelis — is quite true. If the Americans are going to be involved in a strike against Iran’s nuclear program, they are far better off doing it themselves than playing a supporting role to Israel.

There is something not quite right in this whole story. The sudden urgency — replete with tales of complete blueprints that might be in Iranian hands — doesn’t make sense. We may be wrong, but we have no indication that Iran is that close to producing nuclear weapons. Second, the extreme publicity given the exercise in the Mediterranean, coming from both Israel and the United States, runs counter to the logic of the mission. Third, an attack on Iran through Iraqi airspace would create a political nightmare for the United States. If this is the Israeli attack plan, the Americans would appear to be far better off doing it themselves.

There are a number of possible explanations. On the question of urgency, the Israelis might have two things in mind. One is the rumored transfer of S-300 surface-to-air missiles from Russia to Iran. This transfer has been rumored for quite a while, but by all accounts has yet to happen. The S-300 is a very capable system, depending on the variety (and it is unclear which variety is being transferred), and it would increase the cost and complexity of any airstrike against Iran. Israel may have heard that the Russians are planning to begin transferring the missiles sometime in 2008.

Second, there is obviously the U.S. presidential election. George W. Bush will be out of office in early 2009, and it is possible that Barack Obama will be replacing him. The Israelis have made no secret of their discomfort with an Obama presidency. Obviously, Israel cannot attack Iran without U.S. cooperation. The Israelis’ timetable may be moved up because they are not certain that Obama will permit an attack later on.

There are also explanations for the extreme publicity surrounding the exercise. The first might be that the Israelis have absolutely no intention of trying to stage long-range attacks but are planning some other type of attack altogether. The possibilities range from commando raids to cruise missiles fired from Israeli submarines in the Arabian Sea — or something else entirely. The Mediterranean exercise might have been designed to divert attention.

Alternatively, the Israelis could be engaged in exhausting Iranian defenders. During the first Gulf War, U.S. aircraft rushed toward the Iraqi border night after night for weeks, pulling away and landing each time. The purpose was to get the Iraqis to see these feints as routine and slow down their reactions when U.S. aircraft finally attacked. The Israelis could be engaged in a version of this, tiring out the Iranians with a series of “emergencies” so they are less responsive in the event of a real strike.

Finally, the Israelis and Americans might not be intending an attack at all. Rather, they are — as the Iranians have said — engaged in psychological warfare for political reasons. The Iranians appear to be split now between those who think that Ahmadinejad has led Iran into an extremely dangerous situation and those who think Ahmadinejad has done a fine job. The prospect of an imminent and massive attack on Iran could give his opponents ammunition against him. This would explain the Iranian government response to the reports of a possible attack — which was that such an attack was just psychological warfare and could not happen. That clearly was directed more for internal consumption than it was for the Israelis or Americans.

We tend toward this latter theory. Frankly, the Bush administration has been talking about an attack on Iran for years. It is hard for us to see that the situation has changed materially over the past months. But if it has, then either Israel or the United States would have attacked — and not with front-page spreads in The New York Times before the attack was launched. In the end, we tend toward the view that this is psychological warfare for the simple reason that you don’t launch a surprise attack of the kind necessary to take out Iran’s nuclear program with a media blitz beforehand. It just doesn’t work that way.

By George Friedman

Source: Mediterranean Flyover: Telegraphing an Israeli Punch?

Traders were clearly in a profit-taking mood yesterday, after crude soared by nearly 5% last week.

Oil is “getting heavy after last week,” said John Kilduff, of MF Global. “We saw parabolic action [last week] and signs that we may have made a top.”

The market shrugged off supply concerns. In early Tuesday in electronic trading, oil topped $133 a barrel after Royal Dutch Shell confirmed an attack on one of its pipelines claimed by a separatist group in the key Niger Delta. Shell said some production had been stopped to contain an oil spill.

Also ignored was a report that Iran’s exports fell by about 200,000 barrels per day, through the period ended May 20, with the National Iranian Oil company saying the phenomenon was seasonal and was to be made up later.

Source: Crude Retreats

The move would play further havoc with oil prices, and could send the price of oil spiraling to $200 and beyond.

Iran claims to have the world’s third largest reserves of oil at approximately 136 billion barrels as of 2007. The country ranks second if Canadian reserves of non-conventional oil are excluded.

This from The Jeruslam Post:

[A senior Israeli] official claimed that a senior member of the president’s entourage, which concluded a trip to Israel last week, said during a closed meeting that Bush and Vice President Dick Cheney were of the opinion that military action was called for.

However, the official continued, “the hesitancy of Defense Secretary Robert Gates and Secretary of State Condoleezza Rice” was preventing the administration from deciding to launch such an attack on the Islamic Republic, for the time being.

The report stated that according to assessments in Israel, recent turmoil in Lebanon, where Hizbullah de facto established control of the country, was advancing an American attack.

Of course, there a reasons other than national security for Bush to launch an attack on Iran.

First, there’s the upcoming US presidential election. An attack on Iran would force the Democratic candidate to go toe to toe with war veteran John McCain while the US was at war on three fronts.

Secondly, it would neutralize Iran’s attempts to have oil priced in non-dollar denominated currencies.

Profit Watch editor Manraaj Singh points out that at a summit in Saudi Arabia last year, Iranian President Mahmoud Ahmadinejad dismissed the falling dollar as a “worthless piece of paper.” Iran actually ditched the U.S. dollar for international oil transactions last December. They’re selling in euro and yen these days.

You only have to look at Iraq to see what happens when an uppity Middle-Eastern oil producer targets ditching the dollar for oil trades.

“Investing in oil isn’t the best way to play this boom, however,” says Manraaj.

“We expect the price of oil to keep rising. But as I have pointed out before, we don’t think the best profit opportunities from this trend come from investing directly in oil. There’s too much volatility in the price.

“The REAL money is going to be made by putting your money into the fast growing companies operating in the regions that are profiting from the petrodollar boom.”

Read on here to find out how to profit from the rising tide of petrodollars.

The case for the target-price increase of 20% was very clear.

“The math is really simple here,” Fitz-Gerald said in an e-mail interview from China, where he was heading an investment-research tour. “We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises] … perhaps a terrorist event …and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices. That’s already in the oven.”

Crude-oil futures jumped up over the $123 a barrel level yesterday (Wednesday) – closing at an all time record – as worries about worldwide oil supplies continued to sweep away any good news in the energy sector. In fact, prices have soared more than $11 a barrel – or 9.8 % – over the past four days alone, reaching back to last Thursday, MarketWatch.com reported.

But it wasn’t the price increases that prompted Fitz-Gerald to boost his oil-price target. In fact, he did that last week. In addition to the proprietary strategy he uses to project market prices, Fitz-Gerald said he relied on some of the observations he’s been making as part of the investor trip he’s leading through China.

In that country, all it takes is a stroll down the street to see that the demand for oil and gasoline is going to increase far faster than most analysts would ever believe.

“Nowhere is that more evident than China where I’m traveling now,” Fitz-Gerald said last week in an e-mail from Mainland China’s capital. “Beijing alone is adding 14,000 cars a day. Across China, the number is obviously higher. [The] same [is true] in India, but I don’t have the figures at my fingertips. Then there’s the other side … evidence suggests that OPEC reserve figures may be artificially high. Imagine what’s going to happen when people figure out that there really isn’t as much oil as everybody thinks. $225.21 is not out of the question … after we get to $187.”

Alternative energy is the only answer, Fitz-Gerald says. But some of that is years from being commercially viable – cheap and reliable enough to be affordable to, and used by, mainstream consumers.

“Barring the introduction of a truly [alternative] and inexpensive technology, this is going to get ugly … and very pricy before it gets better,” Fitz-Gerald wrote. Investors need to be “long energy, long commodities” for right now, and for the foreseeable future.

China is doing all it can to overcome the massive energy deficits that it faces. One such project is the massive Three Gorges Dam, which Fitz-Gerald had visited the day of his interview with Money Morning.

“It’s surreal how big this project really is,” he noted.

Fitz-Gerald sees oil-and-gasoline prices going higher – much higher. And four factors will be the key catalysts. They are:

• Obfuscation by OPEC: Members of the Organization of the Petroleum Exporting Countries have been misrepresenting their reserve capabilities for years. The key players have reported no new discoveries for decades.

• Terrorism Threats: The odds that a terrorist act will interrupt oil supplies – in the near term or the long term – are higher than most security experts would ever publicly confirm, Fitz-Gerald says. And this is especially problematic because of the double-whammy effect: Damage to a major pipeline or a strategic refinery could crimp supplies just as demand is continuing to escalate.

• The Dollar Doldrums: Oil is priced in dollars. And the dollar is in the dumper. Indeed, rising inflation and falling interest rates have put the greenback into a steep downward spiral. And if prices keep rising, and if Federal Reserve policymakers keep cutting short-term interest rates, the dollar will continue to lose altitude against other key global currencies. OPEC members will counter the greenback decline by marking up the price of crude, causing prices to increase still more in dollar-denominated terms.

• Cruising Goes Global: As an increasing number of households in China, India and other advancing overseas economies join the world’s middle class, they’ll start making such basic purchases as electronic goods, houses – and automobiles. The fact that China’s oil imports jumped 18% in one month is evidence enough that this is happening. And the fact that leading India automaker Tata Motors Ltd. (TTM) has unveiled a $2,500 car, the Nano, underscores that international carmakers are looking to recruit a whole new group of motorists. The fallout: For U.S. refiners, oil will first get lots more expensive, and then supplies will start to dry up as countries opt to halt exports and keep the precious black gold for themselves.

Oil Becomes a Strategic Asset

Oil prices have made a major move in the past five years – just as the emergence of China, Russia and several other key economies transformed crude-oil pricing into much more of a global game. High prices have sent cash pouring into the coffers of oil-producers in Asia and the Middle East. Many countries have used that capital to finance global investment initiatives, creating government-controlled “sovereign wealth funds” to do their bidding.

Little wonder crude oil has become a strategic asset – as well as an energy source.

“As oil and other fuels become a more and more precious resource, OPEC countries, China, Russia and others will begin holding back oil, instead of putting it into the market,” Fitz-Gerald says. “That’s going to be devastating in the short-run.”

Some big oil consumers such as the United States have lobbied OPEC to boost production in order to bring market prices down. But it’s done no good: Members of OPEC have said over and over that market supplies are adequate and that the surging prices are not something that they can control.

China – a growing consumer of oil – has embraced a different strategy: To create captive supplies of crude, China has demonstrated that it’s more than willing to endure controversy and cut deals with countries U.S. refiners either can’t or won’t deal with. China Petroleum & Chemical Corp. (SNP), and PetroChina Company Ltd. (PTR) – two of China’s biggest oil companies – have invested in such political hot spots as Africa and Iran.

The Chinese government, desperate to lock down supplies of such crucial natural resources as metal ores and crude oil, has sealed deals with Sudan, Chad and the Congo. African Business reports that trade between Africa and China has advanced at a rate of 40% a year since 2001. In 2006, bilateral trade between the two was $50 billion.

Already, 14% of China’s oil imports come from Angola. About 60% of Sudan’s oil goes to China.

To understand why you should heed Fitz-Gerald’s observations, it’s important to understand just how far ahead of the pack he’s been – and how far ahead he remains – when it comes to predicting long-term energy trends and investment opportunities.

The Jobs Jamboree… Can you believe that so much attention and drive to the markets is tied to this?

The dollar is a bit softer this morning going into the Jobs Jamboree, and rightly so, given the forecast. However, the dollar is still swinging a mighty hammer and I’m a bit perplexed by this. Last night I was up late (for me) and decided to put down some thoughts that were bouncing around in my head.

Well… How about that U.S. dollar? That’s some currency, Rudy! Why, look at it rallying against the euro (EUR) and other currencies as if it’s on a mission from God! It looks as if the United States has turned things around. The deficit no longer needs to be financed with over $2 billion a day in foreign investment… Interest rates are where they need to be to fight this soaring inflation… The government has stopped spending wildly, and the budget is balanced… The mortgage lenders have recovered all of their losses… There is no longer a credit crunch… And finally, the war is the Middle East is over.

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that… These things haven’t happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

You’ve got me on this one. Folks, for once, I’ll admit that I have no idea what the heck is going on here… Serenity Now! Is this the pullback in the euro that I said we should look for in January, but never saw? If so… When will the tourniquet be applied to this gushing wound? Hmmmm… Good question! And I don’t have an answer to that either! I thought back in January when the euro was around 1.45, that we could see it fall back to 1.40, before moving ahead again… But that never happened. Instead we saw the euro climb to 1.50, then 1.55, then 1.60 in a little over three months time. Was it too quick? Is that what we’re seeing, merely a technical correction? Or is there something else in the works here?

Again… I don’t know the answer… But I’m hoping that in the days to come, it becomes apparent, and when it does, I’ll be Johnny on the Spot in reporting it to you! (Notice I said, “I’ll be Johnny on the Spot”, and not I’ll be “A” Johnny on the Spot! HAAHAHAHAHA)

This dollar rally has got the “naysayers” coming out of the woodwork too. Oh, the whole lot of them are pointing fingers and claiming they knew the dollar was undervalued, and blah, blah, blah… Where were these guys when the euro hit 1.60 about 10 days ago? They were hiding under the sheets!

Forgive me for this but this reminds me of when I coached my darling daughter Dawn’s girls softball team. The girls would do these chants on the bench that drove me nuts! But there was one that would just make me want to scream! We would be getting beat unmercifully, and the girls would be chanting something that ended with, “We can beat your team any old time.” UGH! But that’s what the naysayers are reminding me of right now. They are chanting about the dollar, when it has gotten beaten unmercifully for six years.

OK… Onto other things… The U.S. ISM Manufacturing Index remained well below the 50 level for the third consecutive month. I saw a news story yesterday where the writer was seriously talking about how Manufacturing will pick up due to the stimulus checks, as the receivers of those checks go out and spend them. Folks… The writer was serious…

I’ve told you over and over again that these stimulus checks might get spent by some… But I don’t see the checks getting spent by most. Instead, I see them using the money to pay down a credit card, or some form of debt, as the past couple of months has been quite sobering to the U.S. consumer.

Hey! You’ve got to feel good this Fantastico Friday, as U.S. Treasury Secretary Paulson is telling anyone that will listen, that we are “closer to the end” of the credit crisis. Oh, now that gives me a warm and fuzzy, given his track record of spouting off stuff like that in the last year!

I’ll bet him a shiny quarter that we’re only halfway through the credit crisis! The Bank of England (BOE) said yesterday that they feel as though the “worst is over” . Hmmm… Maybe these guys know something I don’t!

Down Under in Australia, retail sales surprised on the upside, printing at +0.5% versus the +0.3% that was forecast. Retail sales account for 40% of private consumption, which in turn accounts for around 60% of GDP… So this is important data for the Reserve Bank of Australia (RBA). The RBA will not need any excuses to keep rates at current levels given the strength of this data… And that thought should be a good underpinning for the Aussie dollar (AUD).

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday. All this euphoria in stocks has the carry trade going great guns once again… This is being reflected in the price of yen (JPY) and Swiss francs (CHF)… I just don’t see how this can continue to go on and on and on. The carry trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards… At least that’s my opinion.

There was another story yesterday about the Gulf States ending their dollar peg. This is getting out of control! About every three months these guys get together and make big plans to drop their dollar peg, and the media goes hog wild over the story. Shoot Rudy, I used to get all caught up in it too until I realized they were just being the boy who cried wolf.

According to the press, the world’s prettiest face, Gisele Bundchen, wants to be paid in euros for U.S. modeling gigs, and in his new video, the rapper Jay-Z triumphantly holds euros – not dollars – in his upraised fist. The day after Thanksgiving 2007, anxious retailers started opening their doors before dawn to draw shoppers. Overseas visitors, meanwhile, are packing the streets of New York City, scooping up bargains. “I just saved $2,000 on this Rolex,” said one shopper from Great Britain, waving her new watch at a reporter’s camera. And no one’s laughing now at the Canadian loonie, which reached parity with the U.S. dollar in September 2007 – for the first time since 1976.

Pretty faces, angry rappers, desperate U.S. retailers, happy shopaholic tourists, and Canadians who have finally turned the tables on us…we wondered what on earth is happening, as 2007 drew to a close and this new edition of The Demise of the Dollar goes to press.

Although Gisele has denied making any such claim about her payment currency of preference (and has stated that she is happy to earn salaries in a variety of currencies), the fact that this story spread like wildfire through media outlets from Bloomberg and CNBC to E! News and People speaks volumes. The dollar has little credibility on the streets of New York – or pretty much on any street around the world. The twilight of the Great Dollar Standard Era is upon us. The euro is now worth almost 50 percent more than the U.S. dollar, and in Great Britain, you can get two U.S. dollars for every British pound.

In 2007, the famous refrain in the poem by Emma Lazarus describing the flood of foreigners streaming to U.S. shores needs to be updated to “Give me your tired, your rich, your huddled masses yearning to shop free.” Seven out of every $10 that fuels our gross domestic product (GDP), the measure of a nation’s productivity and hence security, comes – not from goods and services that we produce and sell – but from shopping. We’re addicted to cheap credit.

American consumers face the spectre of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation. These changes are unavoidable. Today, the problem is compounded because the U.S. dollar’s value is falling. It all involves productivity changes in the United States. We have not competed with the manufacturing economies in other countries, and that is why our credit (i.e., our dollar) is suffering.

Any number of things could create a sudden, wrenching drop in the dollar’s value. Consider the following three possibilities:

1. Foreign countries drop their U.S. dollar reserves. We depend on foreign investment in our currency to bolster its value or, at least, to slow down its fall. When that thinly held balance changes, our dollar loses its spending power.

At a November 2007 meeting of the Organization of Petroleum Exporting Countries (OPEC)’s 13-member cartel, Iranian President Mahmoud Ahmadinejad, whose country already receives payment for 85 percent of its oil exports in nondollar currencies, urged other countries to follow suit and “designate a single hard currency aside from the U.S. dollar…to form the basis of our oil trade.” “The empire of the dollar has to end,” chimed in Venezuela’s Hugo Chavez; his state oil company changed its dollar investments to euros at his order – er, request.

Rumors are circulating that the Bank of Korea, after selling off $ 100 million worth of U.S. bonds in August 2007, is getting ready to sell $1 billion more, and if Washington forces trade sanctions, China, which threatened recently to cash in $900 billion of U.S. bonds, will probably follow suit.

In Russia, Vladimir Putin’s dream of a stock market to trade the country’s natural resources in rubles is not so far-fetched; in 2005, Russia, the world’s second-largest exporter of oil, followed South Korea’s lead and ended the dollar peg. And once again, Sudan is hinting that it will impose trade or financial sanctions against companies that do business with the United States – only this time, the words just might have teeth. As other countries follow suit, the dollar – and your spending power – drops. What does this mean? You will need more dollars to buy things than it takes today.

2. Oil prices increase catastrophically. We – and our real inflation rate – are at the mercy of Middle East oil. In 2005, we couldn’t imagine what would happen if the price of oil were to double – or triple; but that’s exactly what has happened in 2007 as oil kept flirting with $100-a-barrel prices. Our vulnerability is not imaginary. For example, if terrorists were to contaminate large reserves with nuclear radiation, the supply of oil would drop and prices would rise. We are all aware of our vulnerability and dependence on oil, but we don’t like to think about it. Rising oil prices affect not only what you pay at the pump, but many other prices as well: nonautomotive modes of travel, the cost of utilities, and local tax rates, for example. It all adds up to unquestioned “pain at the pump” for American consumers. By September 2007, gasoline averaged $ 2.78 a gallon – double 2002’s price. “Pain at the pump” leads to “pain in the pocketbook,” as consumers know. You’re not seeing double in the checkout line at the grocery store – costs really are double. There was a 5.6 percent increase in 2007, compared with 2.1 percent for all of 2006.

3. The double whammy of trade and budget deficits. We’re living beyond our means. It’s as simple as that, and something is going to give. The federal budget deficit – annual government spending that is higher than tax revenues – adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit – bringing more things in from foreign countries than we sell to the same countries – has turned us into a nation of spendaholics.

We’ve given up making things to sell elsewhere, closed the store, and gone shopping. But we’re not spending money we have; we’re borrowing money to spend it. In 2006, the trade and budget deficits doubled the deficits of 2001. Any head of a family knows that this cannot go on forever without the whole thing falling apart – and yet, that is precisely what we are doing on a national scale.

Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable…if only it were true.

Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn’t accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.

Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the complete truth is not as reassuring. We are losing high-paying jobs in manufacturing and replacing them with low – paying jobs in health care, retail, and other menial job markets. Our mantra of “Yankee ingenuity can accomplish anything” is gradually being replaced with a new mantra: “Would you like fries with that?”

Regards,

Addison Wiggin
The Daily Reckoning Australia

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[Perhaps President Chavez could be tempted out of his chaos-causing rule in Caracas with the offer of a rich and perk-filled oil-analyst’s job at Goldman Sachs Group Inc. (GS)].

My colleague – Money Morning Investment Director Keith Fitzgerald – agrees with Chavez that oil prices are headed much higher: In fact, since back in December, when crude oil was trading at $90, Fitz-Gerald has been predicting that petroleum prices would reach $187 a barrel. And there’s growing support for his view: In mid-March, Goldman Sachs forecast oil prices of $175 within two years while just yesterday (Tuesday), noted MSNMoneycentral columnist James Jubak predicted that oil would reach $180 a barrel in the next few years.

What’s “Fueling” the Oil Price Rocket?

Crude oil rose to a record $119.90 a barrel on the New York Mercantile Exchange yesterday, as the greenback dropped to an all-time low against the European euro. Crude oil is up 24% so far this year, and 88% from this time last year, Bloomberg News reported.
With this unrelenting march, it’s no wonder that industry observers continue to roll out ever-higher target prices for the “black gold.”
If we’re only considering economic factors, the steep crude prices now being predicted would be unlikely to stick for any protracted period; there are huge new oil sources of oil that become economically profitable once oil rises above $100 per barrel. The Orinoco tar sands in Venezuela and the Athabasca tar sands in Canada – each of which contains larger oil reserves than the entire Middle East are viable even at $50 per barrel (Orinoco holds an estimated 1.8 trillion barrels and Athabasca 1.7 trillion barrels, versus a current Middle East estimate of 1.6 trillion barrels).

Then there’s Colorado oil shale – also containing at least 1.5 trillion barrels of reserves – that becomes economically viable at about $100.

The bottom line: If oil prices stayed at $180 to $200 per barrel for more than a year or two, huge new oil supplies would come on line, causing crude prices to plummet and tipping the market decisively back towards consumers. The environmental cost of getting really large quantities of oil out of Athabasca and Colorado would be immense, particularly if we attempted to supply the needs of the entire U.S. market from these sources, but at $180 per barrel, I’m confident that the economic necessity would probably trump the environmental problems.

As we said, however, these scenarios consider only economic factors. And as we’ll see, there are two additional factors that make this a much-less-straightforward analysis, meaning oil prices could linger at significantly higher prices for a much-longer period than economics alone would justify.

I’ve labeled these two “wild card” factors as “politics and a paradigm shift.” Let’s look at each one.

First, political factors are increasingly restricting the areas that can be explored for oil. In fact, there are a number of places on earth where large reserves are known to exist, but political obstacles make it impossible to drill for—and remove—the crude.

So there it stays, heavily dampening an increase in production that would otherwise be taking place.

Second, world economic growth has been exceptionally rapid, and two huge population centers, India and China, have simultaneously been introduced to the joys of the automobile culture. And that’s created a major global paradigm shift that promises to shift the auto center of the world from Detroit to Shanghai, while simultaneously causing worldwide oil consumption to soar.

Now that we understand the demand side of the equation, let’s consider the outlook for supply.

Foreign Intervention

Countries that allow foreign oil-sector participation and avoid punitive taxation can reap two distinct benefits. First, production from existing fields is increased by greater efficiency. Second, modern exploration techniques are brought to bear, often resulting in new reserve finds in areas that have been closed to international exploration for decades.

For instance, it is especially noteworthy that Saudi production peaked in 2004, and that Saudi oil reserve figures are in doubt; indeed, most Saudi oil reserves derive from fields that were discovered in the 1970s, if not before.

To see how production may stagnate without the benefit of such outside participation, just take a look at Russia.

After 2000, Russia was the principal source of new oil outside the Middle East. Since 2003, however, the most efficient Russian oil company – Yukos NK OAO – has been dismembered, contracts with foreign oil companies such as Royal Dutch Shell PLC (RDS.A and RDS.B) and BP PLC (BP) have been forcibly renegotiated, and Russia has imposed an 80% tax on oil revenue above $27 per barrel.

The result of these heavy-handed machinations has been pretty much what you’d expect: We recently learned that Russian oil production declined by 1% in the first quarter of 2008, following several years of rapid growth. An oil industry with capitalism, foreign partners and modern technology has given way to autarky and state control.

When it comes to foreign oil companies, other companies are adopting a game plan that’s very similar to that of Russia. Mexico bars foreign participation in oil exploration, and expropriates almost all the net revenue of its oil monopoly Petroleos Mexicanos, more commonly referred to as Pemex. Consequently, Mexican oil production is undergoing a steep decline: It is currently about 12% below its 2006 average, according to the International Energy Agency.

Mexican President Felipe Calderon is attempting to change that, by allowing Mexico to sign joint-venture agreements with foreign energy companies (the first such agreement under discussion is not with a hated “Yanqui,” but is instead with Brazil’s Petroleo Brasilero SA (PBR), usually referred to as Petrobras – itself a state-controlled enterprise, albeit one that’s much-more open to modern exploration techniques). However, even without proposing the politically impossible privatization of Pemex, Calderon’s attempted legislation is running into huge political opposition. 

Other examples abound. Venezuela recently seized majority control of foreign owned oil concessions, so even with the world’s largest oil reserves in the Orinoco tar sands its production has declined by about 6% since 2006. Nigeria taxes foreign oil companies at 98%, so its production has declined 10% since 2006.

There are a few counterexamples. Where the oil industry is open, new reserves are found and production increases. Brazil’s Petrobras participates freely with foreign companies, and has discovered several large offshore fields recently. Iraq’s oilfields were opened to foreign participation after 2003, and Iraq’s estimated oil reserves have since doubled to 200 billion barrels, ranking it second behind only Saudi Arabia as having the largest crude-oil reserves in the entire Middle East.

Globally, oil production from existing fields has declined 7.7% annually since 2000, with British and Norwegian offshore fields showing a particularly sharp decline. That means that large new oil discoveries are required simply to keep pace with demand and to halt oil prices from spiraling up toward infinity. Allowing international participation in oil exploration and production is essential to this process, but the list of countries in which such participation is allowed has declined and appears to be diminishing further.

The WSJ reports that the “normally bearish” US Energy Information Administration forecasts that crude oil prices will remain above $100 this year.

Soaring demand in China, India, and Russia will continue to keep prices high. Lack of spare capacity worldwide will also continue to push up prices, according to the report.

Also driving up the oil prices are spiraling consumer prices in oil-producing nations, according to the Mogambo Guru.

“Currently, consumer prices in Venezuela are rising at 25% a year, Iran about 8% and Nigeria probably 15%.

“In short, apparently these countries need the price of oil to stay high to pay for their welfare expenses … which means that they will necessarily be raising oil prices again pretty soon, as inflation in prices is making these government welfare costs go up, which means that oil will be going up in price!”