Bernanke gave a speech for the second time in two days yesterday, this time comparing the present situation with the 1970s, another time of rapidly escalating oil prices and inflation in food and other commodities.

Nonetheless, “We see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward,” Bernanke said.

Perhaps what he meant to say was that prices are chasing themselves higher while real wages are actually falling.

“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,” Bernanke said. “We will need to monitor that situation closely.”

Matthew Strauss, senior currency strategist at RBC Capital Markets, analyzed Bernake’s words thusly: “His comments are consistent with [the previous day’s] speech and it seems the Fed is starting to close the door on further rate cuts. However, given the downside risks to growth, we believe it would be premature to price in rate hikes in 2008.”

Well, maybe. But it’s not likely to be too premature, given that the effects of the current oil shock are only beginning to be priced into other markets.

Source: Dollar Stable as Bernanke Speaks Again

This from Mike Burnick:

Brazil is far and away the global leader in ethanol production technology. In fact, the country began large-scale development of ethanol as an alternative fuel source amid the oil shock of the late 1970’s and early 80’s.

Today, ethanol accounts for 50% of Brazil’s total annual automotive fuel consumption. More than 70% of new cars sold in the country are flex-fuel capable. That means they’re able to run either on gasoline, ethanol, or some combination of the two.

Currently, Brazil is the world’s second-largest ethanol producer, and largest exporter, with total output of about six billion gallons a year.

The country has its sights set on becoming the dominant global exporter of ethanol by 2020. Brazil’s global ethanol exports could total as much as 200 billion gallons a year within that time – that’s over 30-times today’s ethanol production. Talk about a growing industry!

U.S. and Europe Just Can’t Compete with Brazilian Ethanol

Brazil enjoys a big advantage over other nations – as the world’s lowest cost ethanol producer. As shown in the graph above, Brazil can distill bio-fuels from sugar cane at a significant cost advantage to other nations.

Neither U.S. corn-based ethanol, nor wheat-based ethanol from Europe, can come close to matching the Brazilians on a production cost basis.

The sugarcane plant, which flourishes in Brazil’s tropical climate, produces a “yield” of 6,000 liters of ethanol per hectare of land. That’s about twice the yield of corn-based ethanol!

In fact, Brazilian ethanol is about 40% cheaper to make than in the U.S. – and costs less than half the price of European ethanol.

When Trade Tariffs Fall, Brazilian Ethanol Will Flow

Of course Washington, in their infinite wisdom, maintains silly trade tariffs equal to 54-cents a gallon on imported ethanol. This ridiculous trade barrier benefits a relatively small number of U.S. corn farmers at the expense of millions of American drivers.

In spite of this, Brazil’s largest ethanol export market remains the United States. In fact, Brazil shipped us more than 430 million gallons of ethanol last year – up fourfold from 2004! Wholesale gasoline prices in the U.S. are leaping above US$4 a gallon, and will keep spiraling higher as crude oil goes through the roof during what’s shaping up to be a long, hot summer.

Naturally, pressure is mounting for Congress to eliminate this silly, protectionist ethanol tariff. When that happens, the floodgates will open wide for much-cheaper Brazilian ethanol to flow freely into U.S. markets.

By leveraging the strength of its vast sugarcane growing region, and building on its already well-established ethanol producing technology, Brazil is perfectly positioned to benefit.

In fact, this emerging market tiger could easily become the Saudi Arabia of ethanol within the next decade. You heard it here first!

Hopefully, American protectionist trade tariffs are lifted soon… and when they are, Brazil’s ethanol expansion would quickly follow.

There’s also another crisis brewing at the moment – that’s becoming more painfully obvious with each passing day: A global energy crisis! In many ways, the two are closely connected…

U.S. corn-based ethanol production is a big reason why corn prices surged 56% higher in the past 12 months alone. About one-third of the entire U.S. corn crop is being diverted from kitchen tables to gas tanks.

As a result, people are rioting in poor countries around the world. They’re taking to the streets in protest over U.S. corn-based ethanol. They complain bitterly that we are trading THEIR food for OUR fuel. But there is a better way…

In fact, there is an “emerging” alternative bio-fuel source that is a lot more efficient than corn-based ethanol, and doesn’t require the same food vs. fuel trade-off.

In fact, Brazil is leading the great fuel revolution – with sugar cane-based ethanol…

Brazil’s Big Ethanol Advantage

Brazil is far and away the global leader in ethanol production technology. In fact, the country began large-scale development of ethanol as an alternative fuel source amid the oil shock of the late 1970’s and early 80’s.

Today, ethanol accounts for 50% of Brazil’s total annual automotive fuel consumption. More than 70% of new cars sold in the country are flex-fuel capable. That means they’re able to run either on gasoline, ethanol, or some combination of the two.

Currently, Brazil is the world’s second-largest ethanol producer, and largest exporter, with total output of about six billion gallons a year.

The country has its sights set on becoming the dominant global exporter of ethanol by 2020. Brazil’s global ethanol exports could total as much as 200 billion gallons a year within that time – that’s over 30-times today’s ethanol production. Talk about a growing industry!

U.S. and Europe Just Can’t Compete with Brazilian Ethanol

Brazil enjoys a big advantage over other nations – as the world’s lowest cost ethanol producer. As shown in the graph above, Brazil can distill bio-fuels from sugar cane at a significant cost advantage to other nations.

Neither U.S. corn-based ethanol, nor wheat-based ethanol from Europe, can come close to matching the Brazilians on a production cost basis.

The sugarcane plant, which flourishes in Brazil’s tropical climate, produces a “yield” of 6,000 liters of ethanol per hectare of land. That’s about twice the yield of corn-based ethanol!

In fact, Brazilian ethanol is about 40% cheaper to make than in the U.S. – and costs less than half the price of European ethanol.

When Trade Tariffs Fall, Brazilian Ethanol Will Flow

Of course Washington, in their infinite wisdom, maintains silly trade tariffs equal to 54-cents a gallon on imported ethanol. This ridiculous trade barrier benefits a relatively small number of U.S. corn farmers at the expense of millions of American drivers.

In spite of this, Brazil’s largest ethanol export market remains the United States. In fact, Brazil shipped us more than 430 million gallons of ethanol last year – up fourfold from 2004! Wholesale gasoline prices in the U.S. are leaping above US$4 a gallon, and will keep spiraling higher as crude oil goes through the roof during what’s shaping up to be a long, hot summer.

Naturally, pressure is mounting for Congress to eliminate this silly, protectionist ethanol tariff. When that happens, the floodgates will open wide for much-cheaper Brazilian ethanol to flow freely into U.S. markets.

By leveraging the strength of its vast sugarcane growing region, and building on its already well-established ethanol producing technology, Brazil is perfectly positioned to benefit.

In fact, this emerging market tiger could easily become the Saudi Arabia of ethanol within the next decade. You heard it here first!

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. Want to know more about the great fuel revolution – including the alternatives that may be running your car within the next 10 years? Click here to read my FREE special report to get all the details.

Source: Put This Emerging Market Tiger in Your Tank!

Regular readers will recall that a couple of weeks ago I proclaimed Trichet the Hardest Man in Central Banking. And yesterday, JCT served up another feast of hard-nosed common sense.

It reminded me of my formative years, when I took my first faltering steps into the bewildering maze that is the study of economics. I was 14 when I first learned about the 1970s oil price shocks, and how they had caused stagflation (unemployment and inflation rising at the same time) in Britain.

In a nutshell, here’s what I was taught: the higher cost of oil meant Britain had to pay more for its fuel. This represented a transfer of wealth from oil importers like the UK to oil exporters like the OPEC nations.

Unfortunately it took time for people to cotton onto this. They saw their cost of living rising, and wanted to be paid more. Unions threatened to strike if they didn’t get their way. The government tried to stimulate growth in the economy, hoping this would make the problems simply go away. But they didn’t.

All that happened is we got inflation — nature’s way of forcing us to buy less when we refuse to accept that we’re poorer.

Britain entered a wage-price spiral, which fuelled higher inflation. Eventually we had to be bailed out by the International Monetary Fund.

By the end of the decade, Britain had both high inflation and high unemployment (usually the two are inversely related).

I realise this is a somewhat simplistic précis. Economic history is far more nuanced than this. Nevertheless, the broad strokes of this story made sense to me as a 14-year-old.

And they still do. Which is why it was heartening to hear that JCT seems to share my view of what went wrong in the 1970s:

“In the first oil shock, we took wrong decisions and embarked on second round effects and tried a high level of inflation for a long period of time,” he said.

“We created by our own absence of lucidity mass unemployment in Europe when before 1974 we had no mass unemployment. Price stability, and credibility in price stability, in the medium term, is the best way to have a high level of sustainable growth and sustainable job creation.”

Indeed, it was the lure of sustainable growth and sustainable job creation that led Gordon Brown to grant operational independence to the Bank of England in 1997, his very first act as Chancellor.

But there’s evidence that the Bank is losing the “credibility in price stability” battle. Inflation expectations are on the rise; the FT today writes that investors are more sceptical of the Bank’s ability to tackle inflation than at any time since it gained independence.

The Bank only has itself to blame. It has cut interest rates this year despite the fact that inflationary pressures are rising. Its reasons for doing so are understandable — Britain’s economy is on the rocks.

But that doesn’t change the fact that fighting inflation should be the Bank’s number one priority.

The Bank isn’t helped by the fact that its inflation target is measured by the Consumer Price Index (CPI). CPI annual inflation was at 3.0% last month, right at the upper limit of the Bank’s target zone.

But we in Britain know full well that the prices of what we buy are going up more than that. Small wonder the Bank is losing the battle for hearts and minds.

If the Bank went all out and targeted inflation properly, we’d quickly feel poorer. But that’s the point — we are poorer.

Prices of commodities we buy are going up around the world. As both Trichet and my economic teacher would gladly tell you, this represents a transfer of wealth away from Britain to those countries exporting the stuff the world needs.

So what to do? That’s where my good friend Manraaj Singh can help you.

As Britain’s wealth (together with that of most western countries) flows abroad, it’s ending up in places that are rich in commodities like food and energy.

And Manraaj has found one forgotten corner of Africa that’s sitting on the biggest coal reserves in the southern hemisphere!

As my old man used to say, “There’s more than one way to cut grass” (he was a groundsman at the local playing fields, with a knack for getting those horizontal lines across the football pitches).

Yesterday, our commodities expert Garry White explained how ‘King Coal’ is making a comeback. Now is the time to invest in coal.

Today, Manraaj offers up another opportunity you should really take a look at. Here are the details:

Another great way to play coal!

“Mozambique has been completely overlooked,” said Manraaj at this morning’s meeting. “Completely overlooked! And it’s sitting on the largest coal reserves in the southern hemisphere!”

Manraaj reckons that this once-sleepy little corner of Africa is waking up — and is about to become the latest beneficiary of the ongoing global energy boom.

In today’s free issue of Profit Hunter, Manraaj gives you the full lowdown on the Mozambique investment story, together with the unique profit opportunity it offers you

Are pets the latest victims of the credit crunch?

Following on from my piece yesterday, in which I argued that the credit crunch has become a handy blame sponge for anything bad that happens, The Independent has a curious headline on its front page today:

ABANDONED! ARE BRITAIN’S PETS THE LATEST VICTIMS OF THE CREDIT CRUNCH?

I’m not going to argue the logic. It makes sense that people who feel poorer are dumping their pets.

But this sad phenomenon has a number of root causes, which can’t just be summed up by a handy two-word buzz phrase.

However, during a visit with Saudi Arabia’s King Abdullah U.S. President George W. Bush was able to convince the world’s leading oil exporter to increase its output.

Light sweet crude for June delivery jumped $3.31 a barrel, or 2.7%, to reach $127.43 in electronic trading on the New York Mercantile Exchange. Oil prices have now soared 103% in the past 12 months.

The jump was largely attributable to a new prediction from investment-banking giant Goldman Sachs, which raised its price forecast for the second half of the year to $141 a barrel. Goldman Sachs analysts had previously quoted a price of $107 a barrel.

“Supply constraints continue to push crude prices higher,” Goldman analysts wrote in a research note Friday. “The dire macroeconomic impact from the current oil shock has yet to materialize.”

This is the second time in as many weeks that a Goldman Sachs oil-price prediction has ignited a trading tempest in the crude-oil markets. Goldman Sachs, JP Morgan Chase & Co. (JPM) and CIBC World Markets Inc. each recently put forth scenarios that have oil surging over $200 a barrel in the next two years, as soaring gas prices and wary U.S. consumers have failed to put a significant dent in oil demand.

In their report, CIBC analysts actually predicted that gasoline would reach $7 a gallon within four years as oil prices surged to $200 a barrel.

However, Money Morning Investment Director Keith Fitz-Gerald – a longtime energy bull – has actually gone a step further suggesting prices will spike as high as $225 a barrel.

That projection represents a revision from a market call he made in December, when crude prices were in the $90-a-barrel range: At that time, Fitz-Gerald caused a stir when he predicted that oil prices were headed for $187 a barrel. He reiterated that prediction back in early March – just before the investment-banking crowd started making their hefty forecasts for oil and gasoline.

“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.”

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.

After all, with all the bustle and development taking place in that country, all it takes is for one to 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 vehicles a day (1,500 of which are just cars). 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.”

Famed investor Jim Rogers shares Fitz-Gerald’s belief that the Organization of Petroleum Exporting Countries (OPEC) may be guilty of some subterfuge in reporting its reserves.
“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers recently told Money Morning during an exclusive interview in Singapore, where he now makes his home. “It’s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.
“If you go to Saudi Arabia you have to wonder: ‘How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?’ The Saudis say: ‘You either believe us or you don’t.”And that’s the end of the conversation.”

Saudi Arabia Changes Its Tune

OPEC nations have routinely resisted calls to increase output, insisting that investor speculation has hijacked the market and high oil prices have nothing to do with demand, which they see declining as the U.S. economy continues to slow. OPEC, which pumps more than 40% of the world’s oil, has kept output targets unchanged during its past three meetings, on March 5, Feb. 1, and Dec. 5.

In fact, in its Monthly Oil Market Report for May, the cartel said global demand for oil would grow at a significantly slower rate than previously forecast. World oil demand will rise by 1.16 million barrels per day (bpd) – 40,000 barrels per day less than previously predicted.

However, OPEC analysts also acknowledged that non-member nations would produce less oil than originally thought, and after President Bush met with King Abdullah Friday, there was a sudden reversal of fortune.

Late Friday, Saudi Oil Minister Ali al- Naimi said the country would raise output by 300,000 barrels a day to 9.45 million barrels a day in June, Bloomberg Newsreported.

“On May 10 we increased our response to our customers by 300,000 barrels because they asked for it,” al-Naimi said. “So our production for June will be 9.45 million barrels per day. This is the request of about 50 customers worldwide.”

In its monthly report, OPEC said its production fell by about 390,000 barrels a day in April, mostly due to violence in Nigeria. The same report said Saudi Arabia’s April production was 9.02 million barrels a day, down 37,000 barrels a day from a month earlier.

The increase comes as gas prices climbed to historic highs, drawing the ire of many U.S. politicians. It so happens that Saudi Arabia has a number of deals on the docket with the United States that risk interference should high oil prices persist.