Petro Talk

Axis of Appeasement – The Inconvenient Truth

2006-08-24T00:15:00.000-07:00

David J. Jonsson
August 23, 2006

On January 20, 2002, President George W. Bush in his State of the Union Address stated:
States like these, and their terrorist allies, constitute an axis of evil, arming to threaten the peace of the world. By seeking weapons of mass destruction, these regimes pose a grave and growing danger. They could provide these arms to terrorists, giving them the means to match their hatred. They could attack our allies or attempt to blackmail the United States. In any of these cases, the price of indifference would be catastrophic.
Today, we are seeing the allies of the United States possible becoming the “The Axis of Appeasement.” The question remains to see if the allies joined for freedom and liberty will support a battle against the forces of evil.
In any war, the critical elements of success are:
Who is the enemy?
What are their goals?
What is the definition of success, and finally
What will the world be like if we lose?
Up to the time of the Munich Agreement in 1938, these questions were not answered. The West faces the same situation following the cease-fire in Lebanon in 2006. The West better decide on the answers to the questions or be prepared to live under Shariah Law in a totalitarian Islamic state. The question that has to be answered is: Would you choose appeasement and wind up as a lampshade in a palace or fight for Western democracy, freedom and liberty?
Funding Terror
An Inconvenient Truth
The Reality of the Inconvenient Truth
Islamists Recognize the Value of Joining with the Leftist Movement
The Cease-Fire in Lebanon is Reminisant of Munich in 1938
Founding of the Green Party
How it all Began
Fischer: A self-justification
Al Qaeda Forges the links with the Leftist/Marxist Alliance
Al-Qaeda Issues An ‘Invitation’
Complications on the Issue of Profiling
Joe Lieberman vs. Ted Lamont
August 12, 2006 Anti-War Demonstrations
The US and Israel Stand Alone
Sheikh Yusuf al-Qaradawi and Role of Hezbollah in the Middle East
Islamist Sunni-Shia Convergence
Following the Strategies Laid Out by The Muslim Brotherhood
The Project and the Protocols of Zion
Al-Qaeda Book on Managing Savagery
The Underlying Cause Driving the Axis of Appeasement

Funding Terror

I led a recent round-table on current affairs on the campus of a major university, the subject was funding terror and how to reduce the threat of terror by eliminating funding—and if that was possible. Naturally, a logical portion of the discussion dealt with the role that energy plays in providing the funding. But more important to the subject is: What other ways funding is provided?

The first question raised by one of the participants was: How do I know that the organizations that I support are not supporting terror? In my opinion, we are not just fighting a war on terror, but witnessing a war between those who wish to impose an Islamist totalitarian form of government verses Western democracy, capitalism, freedom and liberty. In many cases it may be the extension of the same battle that tore Europe apart during most of the twentieth century that has now spread to the Muslim world. The current clash also includes the added dimension of a battle for the control of oil. The West no longer has control of oil resources to provide energy security. See also my earlier article: Give Me Energy Security And I Will Give You A Foreign Policy.

The discussion evolved. Funding of terror really involves many aspects; it can take the form of direct monetary transfer to terrorist organizations, it can include providing labor in the form of organizing demonstrations which promote ideologies which are anti-American, anti-Semitic, and anti-Western democracy, and it can also take the form of supporting causes which prevent the development of energy self-sufficiency thus making the U.S. dependent for our energy supplies from countries supporting terrorism. Jihad should not be considered exclusively a terrorist action, such as blowing up planes and trains; it may take the form of economic jihad such as financing Islamist projects, white-collar jihad—influencing the media, promoting Islamist ideologies in schools and universities or just plain participating in a demonstration or peaceful march. However the goal remains the same, to bring about the Islamic kingdom of God on Earth and to impose Shariah law.

Which leads us the main question, which organizations and/or action of individuals promote anti-Americanism, anti-Semitism, etc. I believe that the well-known statement: “If it walks like a duck, talks like a duck, eats like a duck, it probably is a duck.” How would one apply this comment to the present situation? Some of the organizations mentioned in this study are leaders of protest marches preaching these ideologies. The spokespersons for the organizations have made speeches espousing the ideologies; the funding (eating) includes organizations espousing similar beliefs. I would have to add that certainly not all and possibly most of the organizations do not have all the characteristics, however they do have association through their sponsorship of the events, interlocking of funding and interlocking of boards. I might add, that just like the duck that provides excellent food and delicious pate and other useful products; terrorist organizations such as Hezbollah and Hamas also have two sides. On the one hand, they provide schools, hospitals, and support for the poor and food. Environmental organizations raise our awareness of need to protect our environment for current and future generations. The goal is therefore is sort out their multiple functions and goals. The Islamists recognized this dual role and therefore have utilized these organizations in their strategy. The strategy is laid out in the sections on “The Project” and “Managing Savagery.”

The “The Project” an ambitious strategy intended “to establish the kingdom of God over the whole world recommends “to study the local and world centers of authority, and the possibilities of placing them under influence,” “to enter in contact with all new movements engaged in the jihad wherever that it is on planet, to create cells of the jihad,” and “to nourish the feeling of rancor with regard to the Jews.” The document describes the strategy planned to ensure a growing influence of the Brotherhood on the Muslim world. It is stipulated there that the Muslim Brothers “should not act in the name of the Brotherhood, but infiltrate in the existing organizations. Their existence will not be located, and then neutralized.”

If the pattern and actions of the organizations appear to be consistent with the strategy laid out by the Islamists, then one must pay special attention.

If you spend some nights and weekends at a whorehouse, your spouse has every right to assume the reason for spending time there is not for the purpose of playing tennis.
In the document below are presented from newspaper accounts and other sources the association of organizations behind the statements, protests and actions. The Islamist strategy has recently been made public through the publication of translated documents. It is for the reader to further explore the links.

Think about it; check it out. Are you naively funding terror? Because we still have freedom and do not live under a totalitarian government we must respect the rights of others to express their opinions and enter into dialog. However just the participation in an elected form of government and/or economic development does not necessarily lead to freedom, liberty and elimination of terror. Suggested reading: Promoting Democracy and Fighting Terror by Thomas Carothers from Foreign Affairs, January/February 2003 and Development and Democracy by Bruce Bueno de Mesquita and George W. Downs From Foreign Affairs, September/October 2005.
The Islamist strategy of infiltrating in the existing organizations, NGOs and foundations, many of which perform apparently valuable services is extremely valuable to the cause of establishing a totalitarian form of government. The existence of Muslims with an Islamist agenda and supporters of their cause are not easily located and then neutralized.

An Inconvenient Truth

As Jagdish Bhagwati commented in an article on August 16 in the Financial Times Al Gore has been busy returning global warming to center stage with terrifying warnings of disaster with his best-selling book, An Inconvenient Truth, and the popular companion documentary. Tony Blair, the UK prime minister, has joined – even led – the renewed focus on global warming, charging Sir Nicholas Stern, the economist, with solving the problem. Alongside his successful initiative on Africa, this is to be his sure-fire international legacy as he ends his last term in office.
One has to ask: Which is more important in the near term the preservation of democracy, liberty and freedom or global warming?

Khamenei—the supreme religious authority to Hezbollah followers—said. “With God's help you (Hezbollah) were able to prove that military superiority is not (measured) in the number (of soldiers), planes, warships and tanks. Rather, it depends on the power of faith and holy war,”
Just as the Iranian soccer fans hold photos of Hezbollah leader Sheik Hassan Nasrallah, during the Iran and Syria Asian Cup 2007 qualifying soccer match in Tehran on Wednesday Aug. 16, 2006, anti-war demonstrators at protest marches on August 12 demonstrations in the Stop the US Israeli War rally in San Francisco, Los Angeles, Washington D.C. and worldwide held up signs in support of the Hezbollah and Hamas. The enemy within has reached America’s shores.

The Reality of the Inconvenient Truth

In reality, the Inconvenient Truth represents a much broader significance. The environmental movement represented by Al Gore plays a significant role in the “The Axis of Appeasement” and is directly linked to the formation of Leftist/Marxist – Islamist Alliance.
The Inconvenient Truth is that many of the environmental, social justice, anti-war, leftist, and Islamic groups have in common senior personnel, members of advisory and director boards and in some cases common supporters and funding including foundations and corporations. The organizations in many cases have interlinking of the boards. In many cases these organizations are the cosponsors of the rallies and protests we are seeing occur on a global scale. This is in no way to say that all supporters of some of these causes are not sincere in their desire for a better world. As a conservative environmentalist we all need to support environmental action that is also critical for your future. However, support of the organizations naively or otherwise can be contributing to support of organizations that are against liberty and freedom and seek to establish a global totalitarian government.

The war against the Islamists will not be won with military might and the war on terror; the battle must also be waged in the media, the schools, the NGOs, and the board rooms of corporations.

The Islmists are following the plan laid out by the Muslim Brotherhood as described and documented in numerous places. The West is falling into line with the plan and strategy.
Islamists Recognize the Value of Joining with the Leftist Movement
The Islmists recognized early on that alliance with these groups provided the grass root support and manpower locally in the West to impact the media, education, and ultimately political elections. Hence the Islamist slogan “from the schoolhouse to the White House.” The Islamist goal remains—world domination and the establishment of the totalitarian Islamic kingdom of God on Earth. It is this cabal, which I refer to as the Leftist/Marxist – Islamist Alliance which is making up the “The Axis of Appeasement.”

The “unholy alliance” of the leftist with the Islamists cannot last; liberalism cannot survive under the rule of a totalitarian regime imposing Shariah law. At some point one side will decide that this must end. Victor Davis Hanson in his article in National Review Online Hope Amid Despair? commented: In an amorphous war of self-induced Western restraint, like the present one, truth and moral clarity are as important as military force. This past month, the world of the fascist jihadist and those who tolerate him was once again on display for civilization to fathom. Even the most timid and prone to appeasement in the West are beginning to see that it is becoming a question of “the Islamists or us.”

The Islamist is willing to die for their cause. Many liberals may die because of the support of their cause.

The Cease-Fire in Lebanon is Reminisant of Munich in 1938

The perceived victory of the Hezbollah in Lebanon followed by the cease-fire agreement may be the pivotal moment in the creation of a new world order.

It is pivotal in the same sense that the Munich agreement between Adolf Hitler and Neville Chamberlain was pivotal in an earlier battle against the enemies of freedom. The accord in October 1938 revealed to the world that the solidarity of the Western allies was a sham, and that the balance of power had shifted to the fascist dictators.

As reported in the article Iran praises Islam ‘victory’ August 17, Iran's supreme leader Ayatollah Ali Khamenei, the supreme religious authority to Hezbollah followers, in a message to Hezbollah head Sheik Hassan Nasrallah, described the militant group's clashes with Israel as a “victory” for Islam.

“Your unprecedented holy war and steadfastness are beyond the limits of my description. It's a divine victory. It is a victory of Islam,” Khamenei said in the message read by an announcer on Hezbollah's Al-Manar television.

Hezbollah is heavily financed and backed by Iran's Shiite Muslim theocracy.
“With God's help you were able to prove that military superiority is not (measured) in the number (of soldiers), planes, warships and tanks. Rather, it depends on the power of faith and holy war,” Khamenei said.

“You have ridiculed the myth that the Zionist army is invincible,” he said.
Khamenei said Israeli attacks that killed Lebanese civilians and destroyed much of the country's infrastructure have exposed “the real face of America and some European countries, side-by-side with the hated and repugnant Zionist face.”

“They (Israeli attacks) have also uncovered the level of falsehood surrounding the hollow slogans ... about human rights and democracy,” Khamenei said.

He lashed out at President Bush for declaring that the Israeli assault in Lebanon was self-defense and had defeated the Shiite guerrillas.

Resolution 1701 shows that, for the time being at least, the balance has likewise shifted to the terrorists and their state sponsors. Like Munich, it marks the triumph of the principle of putting off until tomorrow what needs to be done today. Like Munich, it will mean not peace in our time, but a bigger war in our future.

“We have passed an awful milestone in our history,” Winston Churchill said after the Munich agreement was signed. “Do not suppose this is the end… This is only the first sip, the first foretaste, of a bitter cup that will be proffered to us year by year.” Despite the failure of appeasement, Churchill still believed the Western democracies would make the “supreme recovery” and take up the banner for freedom again.

The United States and the forces of democracy will recover from this debacle—even with a Democratic Congress in 2006 and a Democratic president in 2008. The reason will not be because Bush's opponents—“The Axis of Appeasement” have a better strategy, or a clearer vision, or even a Winston Churchill waiting in the wings. It will be because the Islamists will give us no choice.

Less than a year after Munich, Nazi panzers rolled into Poland. Instead of fighting a short, limited war over Czechoslovakia, the Western democracies ended up fighting a world war, the most destructive in history. The war with the Islamists is coming. It is only a question of whether it will be at a time or on a ground of our choosing, or theirs—and whether it is fought
within the shadow of a mushroom cloud.

Without the background of history as a guide, it is difficult to understand the present.

Founding of the Green Party

In January of 2005, Germany's Greens, now the strongest Green Party in the world turned 25. There won't be any grand parties or brouhaha. They did a bit of that in 2004 to fete the unofficial 25-year anniversary. Since then, they have strayed from their sunflower-laced ideals, which over the years included pulling Germany out of NATO and instigating super high gas prices. Still, it is worth taking a moment to raise a glass to a party that began as a scruffy band of pacifist idealists and has evolved into one of Germany’s biggest power players. Many of the Greens' early devotees were members of the famous '68 generation, a group of left-wing radicals who wanted to change the world. Others were Trotskyites and Maoists. They sailed into the German conscience on the wave of post-World War II memories and experiences. That wave remains powerful even today and continues to influence the Greens' and other parties' policies.

How it all began

The founding of the Green Party was hardly done in a flurry to civilize the nation in 1968 and the years that followed, at the height of the Cold War, Berlin and other German cities saw pitched battles against police in protest against the Vietnam War and “Nazi” influences in postwar West Germany.
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They, themselves, never thought of it that way. For them, the important thing was changing, not bettering, the system. They produced a newspaper called “APO Press” - APO standing for Extra-Parliamentary Opposition - to spread the '68ers revolutionary message: against war, against US “imperialism” and against the alleged “fascist” tendencies of West German politics, especially the police.

“People know that the Sixties changed Germany.” And the Sixties changed the world. In many cases it is the same players and political ideologies that are leading the “Axis of Appeasement.”
The '68 movement made a fatal mistake, when Ulrike Meinhof and Andreas Baader co-founded the Baader-Meinhof Gang, and sought to justify the use of terrorist methods to try to bring down the West German state.

“The resort to terrorism killed the protest movement.”

Today, it uses the media, the Internet, education and politics to change the world. The goal remains the same—political power to impose their ideology. The Islamists using the same techniques are gaining political power globally.

Success in the “War on Terror” may win a battle, but will not win the war against the Islamists. With the Leftists against the War on Terror as put forward in the Wall Street Journal article on August 16 by George Soros: A Self-Defeating War, the effort to even win the battle becomes more difficult. The article in the U.K based Socialist Worker further supports the position of George Soros: Who are the true terrorists? “The only way to stop Islamist terrorism is to end the domination of the Middle East by Western imperialism. This won’t happen overnight. But by continuing to build a united and dynamic mass movement against the “war on terrorism”, we can show that there is a better way of opposing the crimes committed by our government.” In the interview presented below of Jimmy Carter, the same theme is put forward about the crimes of the United States.

Fischer: A self-justification

Joschka Fischer attended lectures on Marxism at Frankfurt University, though he was not officially enrolled. The self-taught Marxist became a leading figure in a group called “Revolutionary Struggle”, getting a job in a car factory to stir up revolutionary ideas among the workers.

He has frankly acknowledged his mistake as a young man in succumbing then to the lure of revolutionary violence. But he firmly maintains that the '68 movement was essential to German democracy.

In a speech in London in January 2005, Fischer said the protest movement had given birth to his party, the Greens.

And that, he said, had brought about “the integration of radical left-wing groups - Leninist, Trotskykist, anarchist, feminist or whatever - into the democratic process.”

“It is very important,” he added, “to rethink the process of the '80s.” That was the decade when Fischer abandoned direct action and entered politics, and the Greens built up their support in preparation for their current role in government. His conclusion: “So it can be very productive.”
The creation of the Green Party did, however, manage to civilize one group of Germans –the scrappy band of disillusioned rebels—many of who were the children of bourgeois, the children of privilege or even Nazi families—who nonetheless gravitated to what they called “alternative scenes.” For many of these radicals, the Green Party came too late. For them, the best solution came in the form of the terrorist group the Red Army Faction, which was founded in the late 1960s and was dedicated to obliterating class differences through violence. At the height of its power in the 1970s, the RAF—founded by, among others, Ulrike Meinhof—was Europe's most feared terror organization and is responsible for the death of dozens. The RAF disbanded in 1998, the same year the Greens got their first taste of federal power. Hardly a coincidence.
Not that the Greens have similarity with the RAF. Naturally, oceans of difference separate the two and politically they have nothing in common. But many of their members began in the same idealistic place. In 1998, the split was complete: the political status of each group arrived at wholly different realities.

But will the Greens’ success continue or will they simply be a phenomenon of one generation? It's a question debated by many. No party better understands how to play the media game than the Greens. And no party leader does his job better than Joschka Fisher, the Moses of the movement. The use of the media has been key factor in promoting the agenda of both the Greens and the Islamists.

Abandoning the hard line of “boots on the ground” and combining with and the embracing of environmental movement with Leftist/Marxist ideologies and the anti-War ideologies provided a powerful base for the alliance with Islamists.

The Greens gained financial support and the willingness of a cadre of people willing to die for a cause and the Islamists gained the credibility and most important the access to the manpower and halls of power.

Al Qaeda Forges the links with the Leftist/Marxist Alliance

It was al Qaeda’s number two man—Aymen-al-Zawahiri—who first advocated a Leftist/Marxist - Islamist Alliance against Western democracies. In August 2002, he urged al Qaeda sympathizers to seek alliance with “any movement that opposes America, even atheists.” The strategy of penetrating and joining existing organizations was put forward in “The Project,” to be discussed below.

Like Joschka Fischer before them, al Qaeda recognized that they could utilize the media and political action to accomplish their goals. Hezbollah in Lebanon and Hamas in Palestine and the Muslim Brotherhood in Egypt followed the lead.

According to Susanne Koelbl writing on August 17 in Spiegel Online: Terrorists are becoming increasingly adept at producing high-quality videos. DVDs depicting bloody beheadings are now available at markets in Pakistan and Afghanistan. They're also on the Web.

That the Internet has become a communication platform for terrorists—as well as for their supporters and their adversaries—is nothing new. These days, though, a close monitoring of the Web reveals the increasing brutality of the international jihadist movement. The radicals' isolation and desperation is also on full display. The images, though, also document the vulnerability of Western armies in the remote mountainous regions of Afghanistan and Iraq, together with the challenges they face in dealing with the realities of the countries in which they operate.

Intelligence services believe that the Pakistani city of Quetta is home to what is probably the most professional media workshop of terror. The city, in the state of Beluchistan in the Pashtun border region, is considered a Taliban stronghold. And it plays host to al-Qaeda's propaganda headquarters, the “Foundation for Islamic Media Production,” or “Al-Sahab.”

The most important statements issued by the godfather of terror Osama bin Laden, his deputy Ayman al-Zawahiri and Abu Mussab al-Zarqawi, the head of al- Qaeda's Iraq division until he was killed in June, were edited and processed here. What began as an amateur operation producing poor-quality videos has since turned into a highly professional outfit.

Al-Qaeda Issues An ‘Invitation’

In February 2005, Jane's Defense Weekly wrote with concern about what it called “significant developments” in the composition of jihadist terror cells, including “an increase in the number of members who have 'joined' and were no longer 'recruited.'”

An Arabic pamphlet circulating on Islamist Web sites at about the same time, titled “How can I become a member of al- Qaeda?” seems to confirm that the path to al-Qaeda & Co. is growing ever shorter. The pamphlet's response to its own question, according to a translation provided by the Washington based institute SITE, is as follows:
Al-Qaida is no longer merely an organization fighting Jews and crusaders alone. Today the al-Qaeda issues an ‘invitation’ that asks all Muslims to rise up in support of God's religion. ... Whoever answers this call is seen as part of al-Qaeda, whether or not you wish this to happen. But if you are a true Muslim, you have no other choice but to heed this call.
With this approach, al-Qaeda is attracting instant mujahedeen who like the London bus and subway bombers, essentially recruit themselves within a breathtakingly short amount of time. As a result, they are far more unpredictable and difficult to recognize than Afghanistan veterans.
Complications on the Issue of Profiling

The debate over profiling airline passengers revived after the thwarted Islamist plot to bomb 10 airplanes in London on Aug. 10. The sad fact is, through inertia, denial, cowardice, and political correctness, Western airport security services — with the notable exception of Israel's — search primarily for the implements of terrorism, while largely ignoring passengers.
The profiling techniques such as Screening of Passengers by Observation Techniques, or SPOT, now operating in twelve U.S. airports did discover passengers with forged visas, fake IDs, stolen airline tickets, and various forms of contraband — its utility for counter-terrorism is dubious. Terrorists trained to answer questions convincingly, avoid sweating, and control stress should easily be able to evade the system.

The fact that the Muslims are recruiting themselves for al-Qaeda complicates the issue of profiling. As reported in a UPI article on August 16, a number of prominent persons such as the former Metropolitan Police Chief Lord John Stevens has lent his support to profiling at all airports, saying Islamic terrorism in the West has been 'universally carried out by young Muslim men,' usually traveling alone or in small groups.

Meanwhile Times of London columnist Martin Samuel scoffed at arguments that terrorists rarely fit a certain profile.

In the event of racial profiling, there will be no Mid-Surrey branch of al-Qaida forming on the hoof. As for cunning disguises, we know them. There are two looks: beard on and beard off,' he wrote.

Evidently neither Lord Stevens or Samuel have ever attended a meeting of the outlawed militant group al-Muhajiroun, which counts numerous young men, women and even children of white and black British descent among its members.

When this UPI journalist went undercover into a London meeting of the group last year, she was shocked to meet a significant number of white British converts to this radical interpretation of Islam, many of whom were young women from middle class families in rural counties such as Dorset, Somerset and yes, even Surrey.

Like their dark-skinned, bearded associates, they too swore allegiance to Osama bin Laden and pledged to raise their children to become suicide bombers, with no apparent concern that they did not fit the usual profile of a potential terrorist.

A similarly flagrant disregard for stereotypes was displayed by July 7 bomber Germaine Lindsay, of Jamaican origin, and the white British Muslim convert suspected in last week`s airline plot, from the genteel Buckinghamshire town of High Wycombe.

One can be sure that should Osama bin Laden get wind that airport officials are focusing their search on young men of Asian appearance, individuals like these will be the first he turns to carry out his next plot.

Likewise, the assumption that all citizens of the Arab and Muslim world are of one appearance is mistaken. Throughout the Middle East, particularly in countries such as Syria, Lebanon and Iran, there are millions of individuals with fair coloring who would be indistinguishable from their European or American counterparts.

As the Association of Chief Police Officers rightly warns, stereotyping terror suspects will 'create a gap' in policing for terrorists to exploit. Start looking for dark-haired individuals and one can be certain that Al Qaeda will put aside its contempt for western values and start reaching for the peroxide, if it furthers their cause.

Three conclusions emerge from this discussion. First, because Islamist terrorists are all Muslims, there does need to be a focus on Muslims. Second, such notions as "Muslim-only lines" at airports are infeasible; rather, intelligence must drive efforts to root out Muslims with an Islamist agenda.

Daniel pipes in his article Time to Profile Airline Passengers? in the New York Sun on August 22, commented: Noting the limited impact that losing 3,000 lives had in 2001 and building on my "education by murder" hypothesis — that people wake up to the problem of radical Islam only when blood is flowing in the streets — I predict that effective profiling will only come into effect when many more Western lives, say 100,000, have been lost.

Joe Lieberman vs. Ted Lamont

When antiwar activist and atheist Ned Lamont, the heir of the Lamont family fortune and its vast political clout announced he would seek to unseat an incumbent Democratic Senator, all of Lieberman's Democratic colleagues in the US Senate quickly distanced themselves from Joe, stating that it would not be right for them to side with either candidate during the August primary race, adding that—whichever one won—they would solidly support the winner of the August 9 primary. There was no doubt in the minds of any of them that the winner would be Ned Lamont. However, as election eve approached, Lieberman cut Lamont's double-digit lead of 13 points down to 6—51 to 46 and then, 4 points.

On the eve of the election, it was anyone's ball game. So, late in the 9th inning, Connecticut's senior Senator Christopher Dodd [D] showed up for a pre-balloting photo op with Lieberman. So did New York's Chuck Schumer [D]. So did Massachusetts' Edward Kennedy and so did Delaware's Joe Biden. None were 100% sure that Lamont would win. If Lieberman won the nomination, he would be reelected. If he was reelected, his colleagues within the Democratic Party needed to make sure Joe was not mad at the party—or those colleagues who would have to count on his vote. The night before the balloting it was clear that the election would be decided by voter turnout. But, the moment the count was tallied; all of them ran to embrace Lamont as the winner.

As the Lieberman Campaign worked to get voters to the polls, hackers stepped in. With the primary boiling down to how the candidates used the means at their disposal to provide transport for voters, or directions to polling places, the Lieberman camp discovered their website had been hacked and knocked out of cyberspace. Lieberman supporters who needed a ride to the polls could not access the Lieberman for US Senate website to contact the Campaign for ride share information. Lieberman told reporters that:

“...[s]omething outrageous happened to our website today. It's been hacked and sabotaged and knocked down. We don't know that it's my opponent's campaign—but who else would have the motivation to hack into and knock down our website on primary day?”

This showed the power of the Internet and its role in political movements. These events are not unnoticed by Al-Qaeda, as we will see below.

Lamont forces, of course, denied they had anything to do with the sabotage—and, they probably didn't. There were enough anti-war, anti-American George Soros MoveOn.org people around to do the dirty work. Asked by the media if his people sabotaged Lieberman's website, Lamont called it “just another scurrilous charge” by Lieberman as he denied tampering with the website. Lamont offered to send a technician to fix it. But having Lieberman's website down during peak voting hours may have given Lamont just the edge he needed to eek out a primary victory.
The anti-war contingent of the Axis of Appeasement plays a role in U.S. elections. Jon C. Ryter in his article When The Invisible Power Chooses To Be Seen commented: This is a significant and sad step in the Democrats’ transformation from serious political party to mouthpiece for the anti-war, anti-capitalist, “Blame America First” crowd. No longer merely the lunatic fringe, the far left—best represented by Michael Moore, Cindy Sheehan, various Hollywood half-wits, and MoveOn.org, funded by billionaires like George Soros and Peter Lewis—now openly control one of the two major political parties in America. This race has shown that there is no longer any place for moderation or alternative points of view in the party ranks. Though not all Democrat voters are left-wing radicals, not even in deep-blue Connecticut, any potential nominee for office must gain the approval of that group. Not even a long-time favorite like Joe Lieberman can represent the Democrats if he expresses a conflicting point of view on a major issue like Iraq.
This is the group the Islamists and their supporters have apparently hitched their wagon to—at least temporarily. The Internet is also the choice of the Islamists.

The Internet
Widely recognized as the indispensable tool of anti-war activists, the Internet has indeed revolutionized the organization of social movements in general. As a low cost, global tool for communicating and disseminating information, the Internet works below the radar of the mainstream media, providing a wide variety of information websites, on-line petitions, and up-to-date schedules of events.

MoveOn exemplifies the modern activist organization, skilled at Internet communication for the purposes of petition-signing, on-line fundraising, and gathering the masses for street protests. Founded to promote civic action and democracy, MoveOn has rapidly become one of the best-known Internet-based organizations involved in the Anti-War Movement. Wes Boyd, MoveOn founder, said his organization was designed to “connect with those who do not support the war but who aren’t always comfortable with showing their feelings by taking to the streets”. Following the October 2002 protests, MoveOn decided that the anti-war rally was “all over the map politically and not very appealing to a mainstream perspective”, so they discussed forming a more ‘mainstream, patriotic coalition’ that would be more “welcoming to mainstream constituencies”.

Since then, MoveOn has leveraged the Internet to create a new kind of organization with the ability to raise hundreds of thousands of dollars and move tens of thousands of people to action within hours. On March 11, 2003, MoveOn delivered a petition to the fifteen members of the United Nations Security Council with more than one million signatures collected from around the world in less than five days. In another effort, MoveOn collected more than $400 000 US to finance anti-war television advertisements. The money funded a re-made version of the “Daisy” ad, originally aired in the 1960s, which shows a girl plucking petals from a daisy, contrasted with a missile launch countdown and nuclear mushroom clouds. MoveOn’s most recent activities include the organization of a global candlelight vigil (vigils were organised in more than seven thousand communities around the world), as well as petitioning, emailing policy makers, raising and distributing money, as well as other forms of direct activism and grassroots media buying.
The organization currently has more than 750 000 members in the US alone, and is both active and supported worldwide. One of MoveOn’s organizers, Eli Pariser, suggests reasons for MoveOn’s success: “In a sense, part of MoveOn’s attraction is that it aims for normal people, not just activists, and it engages them successfully…Part of its appeal is that it serves as a ‘direct line to god’. There is no big bureaucracy. You make a contribution, you sign something, and you get immediate action.” MoveOn is also a member of the Win Without War coalition.

August 12, 2006 Anti-War Demonstrations

More then 30,000 demonstrators filled the streets around the White House chanting, “Stop the US-Israeli war against Lebanon and Palestine” in Washington, D.C. Similar demonstrations were held in other major cities across the country and worldwide. The A.N.S.W.E.R. Coalition, Muslim American Society Freedom Foundation and the National Council of Arab Americans initiated the demonstration.

As reported on the A.N.S.W.E.R website: “Speakers at the Washington D.C. demonstration included, former Attorney General Ramsey Clark; Mahdi Bray the Executive Director of the Muslim American Society Freedom Foundation; Mara Verheyden-Hilliard an attorney and co-founder of the Partnership for Civil Justice; Brian Becker the National Coordinator of the A.N.S.W.E.R. Coalition; Dr. Mounzer Sleiman of the National Council of Arab Americans; Osama Siblani Publisher at Arab American News; Peta Lindsay Howard University student and Coordinator ANSWER Student and Youth; and Dr. Clovis Maksoud the Former ambassador from the Arab League to the U.N, Arab-American Anti Discrimination Committee (ADC), and others.”

To get some image of the Stop the US Israeli War rally in San Francisco, August 12, 2006, you may view the photos of the flags of the Hezbollah and Hamas.

The article posted on the ADL website: ANSWER, Antiwar Rallies and Support for Terror Organizations provides interesting background on the organization. The ANSWER (Act Now to Stop War and End Racism) Coalition, which has organized scores of antiwar demonstrations in the U.S. since its founding by the New York-based International Action Center (IAC) in 2001, has played a key role in inserting anti-Israel sentiment into the antiwar movement.

ANSWER’s National Coordinator Brian Becker described the march as the first national protest against “the new U.S.-Israeli war” that is “killing the people of Lebanon and Palestine.” During a recent appearance on FOX News, Becker said, “The acts of the Israeli government, the Israeli Air Force, with U.S.-supplied weapons and U.S. taxpayer money are acts of terrorism against civilians.” He later added, “Do I consider Hezbollah a terrorist organization?” “The answer is no.”

Becker’s view of Hezbollah is no surprise. ANSWER, which considers Israel a capitalist outpost for Western powers, has supported anyone that counters the spread of capitalism around the world, including genocidal dictators such as Saddam Hussein and Slobodan Milosovic. This worldview has been apparent at many ANSWER rallies that have included support of Palestinian terrorist leaders over the past few years.

The August 12 march follows many rallies organized by ANSWER, IAC and other anti-Israel groups across the country since the start of the current Middle East conflict in June. These rallies have promoted a very harsh and unapologetic message denouncing Israel and U.S. foreign policy. They have also included a proliferation of anti-Semitic expression and support for the terrorist groups Hamas and Hezbollah.

March 20, 2004: ANSWER organized major antiwar demonstrations in New York City and San Francisco to coincide with antiwar rallies against the war in Iraq across the United States and the world. Other antiwar groups led by United for Peace and Justice, the other major protest organizer, initially intended to focus solely on the situation in Iraq, but ANSWER organized a coalition of anti-Israel groups who petitioned United for Peace and Justice to include an anti-Zionist message at there events. United for Peace and Justice eventually acceded and anti-Israel messages pervaded the demonstrations.

Sojourners is a member organization of the Win Without War and United for Peace and Justice anti-war coalitions. Giving voice to Sojourners' intense anti-Americanism, Jim Wallis called the U.S. “… the great power, the great seducer, the great captor and destroyer of human life, the great master of humanity and history in its totalitarian claims and designs.” Please note, as a coalition of organizations, UFPJ does not have individual members. Individuals are encouraged to join a local group in their community. For the list of national and international member groups see: United for Peace and Justice. Truly an astounding list brings together the Green Party, anti-war groups, Greenpeace, Code Pink and socialist and communist party organizations.
In New York, Al-Awda, the International Solidarity Movement (ISM) and other pro-Palestinian groups waved Palestinian flags, while some chanted “Intifada Intifada, Long Live the Intifada.” The anti-Israel presence was even more dominant at the nearly 10,000-strong rally in San Francisco. Signs and messages included “No blood for Israel,” “I want you to die for Israel. Israel Sings: Onward Christian Soldiers” and a model Israeli tank with dollars dripping blood and the sign, “Paid for with US tax dollars.” Another sign read, “I Love NYC even more without the World Trade Center.”

Many conspiracy theorists attended the New York City and San Francisco protests. A group called the 9/11 Truth Alliance [A member group of United for Peace and Justice.], which contends that the Bush administration staged the attacks, distributed signs saying “Stop the 9-11 Cover-Up” at both rallies. It also handed out “deception dollars,” large replicas of paper currency covered with links to conspiracy and also anti-Israel and anti-Semitic Web sites.
December 2003: At the Second International Cairo Conference, ANSWER representatives met with Hamas leader Osama Hamdan. Hamdan, who heads Hamas in Lebanon and openly supports suicide bombing, was invited to the conference by the event’s sponsors, the International Campaign Against U.S. and Zionist Occupations, a movement co-founded by the IAC. Former U.S. Attorney General Ramsey Clark, who heads the IAC, co-director Sara Flounders, and Elias Rashmawi of ANSWER all served as organizers for the conference. This conference is described in my article The Origins of the Next Great War are Visible.
To understand the magnitude of impact of the Anti-War Movement and the list of the organizations interlinked it is suggested that you read: THE ANTI-WAR MOVEMENT WAGING PEACE ON THE BRINK OF WAR Geneva, March 2003 –Centre for Applied Studies in International Negotiations (CASIN).

The US and Israel Stand Alone

In the Spiegel Interview with Jimmy Carter on August 12, 2006, he is quoted as follows:
SPIEGEL: You also mentioned the hatred for the United States throughout the Arab world which has ensued as a result of the invasion of Iraq. Given this circumstance, does it come as any surprise that Washington's call for democracy in the Middle East has been discredited?
Carter: No, as a matter of fact, the concerns I exposed have gotten even worse now with the United States supporting and encouraging Israel in its unjustified attack on Lebanon.
SPIEGEL: But wasn't Israel the first to get attacked?

Carter: I don't think that Israel has any legal or moral justification for their massive bombing of the entire nation of Lebanon. What happened is that Israel is holding almost 10,000 prisoners, so when the militants in Lebanon or in Gaza take one or two soldiers, Israel looks upon this as a justification for an attack on the civilian population of Lebanon and Gaza. I do not think that's justified, no.

SPIEGEL: One main points of your book is the rather strange coalition between Christian fundamentalists and the Republican Party. How can such a coalition of the pious lead to moral catastrophes like the Iraqi prison scandal in Abu Ghraib and torture in Guantanamo?
Carter: The fundamentalists believe they have a unique relationship with God, and that they and their ideas are God's ideas and God's premises on the particular issue. Therefore, by definition since they are speaking for God anyone who disagrees with them is inherently wrong. And the next step is: Those who disagree with them are inherently inferior, and in extreme cases – as is the case with some fundamentalists around the world – it makes your opponents sub-humans, so that their lives are not significant. Another thing is that a fundamentalist can't bring himself or herself to negotiate with people who disagree with them because the negotiating process itself is an indication of implied equality. And so this administration, for instance, has a policy of just refusing to talk to someone who is in strong disagreement with them – which is also a radical departure from past history. So these are the kinds of things that cause me concern. And, of course, fundamentalists don't believe they can make mistakes, so when we permit the torture of prisoners in Guantanamo or Abu Ghraib, it's just impossible for a fundamentalist to admit that a mistake was made.

Sheikh Yusuf al-Qaradawi and Role of Hezbollah in the Middle East

According to report on August 17, 2006 by the GLOBAL INTELLIGENCE BRIEF Strategic Forecasting, Inc. “Organizations like Hezbollah are needed in Egypt, Iraq and Jordan to assist Muslims in continuing their campaigns against Israel, leading Sunni religious scholar, Qatar-based Sheikh Yusuf al-Qaradawi [Spiritual leader if Muslim Brotherhood.], said during a speech at Cairo University, Egyptian daily al-Masri al-Youm reported.”

Recognize that the Muslim Brotherhood has worldwide influence through its offshoots in the U.S. and on college campuses.

As reported by the AFP on August 17, 2006 Leading Islamist calls for holy war on Israel. The prominent Islamist preacher Sheikh Youssef Al Qaradawi has called for a holy war against Israel, an Egyptian newspaper reported Wednesday. [Note the parallel call: Ayatollah Ali Khamemenei also called for ‘holy war’.]

“Muslims must carry out jihad to liberate all the land of Islam. Palestine does not belong only to the Palestinians but to all Muslims,” Qaradawi was quoted as saying by the Al-Masri Al-Yom independent daily. [This is a very significant statement, thus promoting the concept of the ummah, the Islamic kingdom of God on Earth—one world without borders.]
The Egyptian-born cleric, best known for his regular appearances on the Qatari satellite channel, Al Jazeera, said that the Islamic world “needs men like those of Hezbollah: in Egypt, Iraq, Jordan, and everywhere.” [Qaradawi is bridging the gap between the Sunni and Shia—a common enemy is Israel and the U.S.]

“There isn't even an Arab willingness to fight Israel,” he complained at a seminar at the University of Cairo, adding: “The peace that the Arab leaders are calling for is in fact a capitulation.”

Qaradawi, who now lives in Qatar and has close links to the opposition Muslim Brotherhood in Egypt, said that Islamic law, or Shariah, dictated, “if a land of Islam is occupied, the entire population must resist and start jihad.”

The 78-year-old achieved star status with his appearances on Al Jazeera's weekly religious affairs program “Al Sharia wa Al Haya” (Islamic Law and Life) and has consistently defended Palestinian suicide attacks against Israel. Qaradawi is a brilliant and very influential scholar of Islam and has a huge following not only among Muslim countries, but throughout the world.

Islamist Sunni-Shia Convergence

On Wednesday 16 August 2006 From Ikhwan’s official website we learn of the Islamist Sunni-Shia convergence occurring in Lebanon: Lebanese Ikhwan announces it will join Hezbollah in reconstruction.

On August 21, 2006, President Bush pledges the United States will increase its humanitarian and reconstruction aid to Lebanon to $230 million to help the country recover after weeks of fighting between Israel and Hezbollah.

Speaking at the White House August 21, Bush said the funds would help the Lebanese people return to their communities and rebuild their homes, restore infrastructure such as bridges and roads and rehabilitate schools in time for the beginning of the fall school year.

“Our nation is wasting no time in helping the people of Lebanon,” he said. “America is making a long-term commitment to help the people of Lebanon because we believe every person … deserves to live in a free, open society that respects the rights of all.”

Islamists have wasted no time moving in to gain support. In these critical first days after the war, Hezbollah and its financial backers in Tehran have seized the moment. They are appeasing those who might have been expected to denounce Hezbollah from the wreckage of their homes. And they are entrenching their support among a growing army of sympathizers.

Iran’s money is crucial. Estimates vary widely, but one Hezbollah source said as much as $1 billion had been made available by Mahmoud Ahmadinejad, Iran’s president; another that the Iranian leader had placed no limit on the money pouring in.

After the UN-brokered ceasefire solidified, the Lebanese Islamists announced that they will be a partner in reconstruction operations. In an exclusive statement to Ikhwanweb, Deputy Chairman of the Lebanese Jama’a Islamia (The Muslim Brotherhood offshoot in Lebanon) said that the reconstruction process requires strenuous efforts especially financial ones to restore or rebuild the war ravaged areas.” The reconstruction process requires astronomical sums of money, and of course our group cannot afford such hefty funds, so we intend to share with our utmost financial and other relief works, especially that we took part in so many relief activities during the war, opening our institutes and schools before the displaced citizens and provided them with all available accommodation”, he said, adding that it is Hezbollah which has a plan for the reconstruction of the south. He quoted Hezbollah Chairman Hassan Nasrullah in his recent address as pledging to reconstruct the south and pay one -year rent for the war-hit families pending the end of the reconstruction plan and their return to their homes, adding that Iran could provide financial aid for the Hezbollah’s reconstruction plan

Following the Strategies Laid Out by The Muslim Brotherhood

On October 28, 2005, President George W. Bush denounced IslamoFascist movements that call for a “violent and political vision: the establishment, by terrorism, subversion and insurgency, of a totalitarian empire that denies all political and religious freedom.”

The Muslim Brotherhood (Al-Ikhwan Al-Muslimun) also known as the Ikhwan is a good example of what the President described and what he must protect us against.
The Muslim Brotherhood (“MB”) organization describes itself as a political and social revolutionary movement; it was founded in March 1928 in Egypt by Hassan al-Banna, who objected to Western influence and called for return to an original Islam.

The Brotherhood is an expansive and secretive society with followers in more than 70 countries, dedicated to creating a global Islamic order that would isolate women and punish nonbelievers. Its members and supporters founded al Qaeda, as well as one “of the largest college student groups in the United States.”

Quoting from my latest book: Islamic Economics and the Final Jihad - The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance.

Al-Banna had connections to Sufism, and he used the sufi-tariqa model for organizing the Brotherhood while rejecting Sufi “superstitions.” At first, the Muslim Brotherhood concentrated mainly on moral and social reforms, establishing educational and welfare programs. Then, following its rapid growth, it became more politically active and founded a secret military arm. It developed a tightly knit organization with a network of branches, subdivided into secret cell groups, with a missionary network that spread into Syria, Palestine and the Sudan. Members were recruited from rural and lower class backgrounds, as well as from the urban middle classes, and they received intensive ideological and physical training.

Al-Banna outlined a gradualist strategy in three stages: the Propaganda (preparation) Stage, the Organization Stage (aimed at educating the people), and finally, the Action Stage. While tactics might change, the strategic objectives of the Brotherhood remain unchanged: to receive explicit political recognition so as to be able to operate freely in the social, economic and political arena, and to implement Shariah in an Islamic state.

The strategy of al-Banna has and is being implemented today in Europe and the rest of the world. We are witnessing the effect of the final stages in Europe. He could only have dreamed of the success we are seeing today.

The Project and the Protocols of Zion

According to Sylvain Besson, an investigative journalist for the daily newspaper, Time, in Geneva, in his book of “La conquete de L’Occident: Le projet secret des Islamistes“ (The conquest of the occident: The secret project of the Islamists), Swiss authorities made a worrying discovery at the time of a searching carried out in the villa of Egyptian banker Youssef Nada in Lugano in November 2001. Swiss investigators discovered “The Project,” an ambitious strategy intended “to establish the kingdom of God over the whole world.”

“The Project” is a fourteen-page leaflet, dated December 1982, calling for the Muslim Brotherhood’s conquest of the world. It is a detailed roadmap to attain this objective. The Muslim Brothers must infiltrate existing institutions, rather than create their own. It calls for a guerilla war against Israel in the Palestinian territories and support to diverse armed Muslim groups from Bosnia to the Philippines. Swiss investigators confirm that the Project is the proof of the Muslim Brotherhood’s role in supporting and inspiring the “worldwide jihad.”

Nada was the manager of the “Al-Taqwa” bank, suspected by the Americans of supporting terrorism. However, Nada, who has denied any ties with terrorism, has admitted being in the past one of the principal leaders of the international branch of the Muslim Brotherhood. Nada denied to have written “The Project,” as it was simply kept during twenty years. The Time article explained why “Islamic researchers” wrote this document, but it does not represent an official position of the Muslim Brotherhood. The identity of its author, for example, remains unknown. (al-Qaradawi was a director of Al-Taqwa bank and the intellectual guide of the European Council for Fatwa and Research.)

The document also recommends “to study the local and world centers of authority, and the possibilities of placing them under influence,” “to enter in contact with all new movements engaged in the jihad wherever that it is on planet, to create cells of the jihad in Palestine,” and “to nourish the feeling of rancor with regard to the Jews.” The document describes the strategy planned to ensure a growing influence of the Brotherhood on the Muslim world. It is stipulated there that the Muslim Brothers “should not act in the name of the Brotherhood, but infiltrate in the existing organizations. Their existence will not be located, and then neutralized.”

Accordingly, the Project could play a part in creation by the Muslim Brothers and their heirs to a network of religious, educational and charitable institutions in Europe and in the United States.
The Project indeed recommends “to build institutions—social, economic, scientific and medical, and to penetrate the field of the social services to be in liaison with the people.” Some of the most successful strategies leading to conversion and ultimate membership in jihadist organizations have been through social organizations, including daycare centers and nurseries.
The importance of the Project is due as much to its history, and that of the men who surround it, than with its contents. Its intellectual origins go back to the years 1960, when Sa’id Ramadan, the “theorist as a chief” of the Muslim Brotherhood, found refuge in Geneva. In September 1964, its newspaper, El Muslimoun, published a text inviting it to launch an “ideological war” against the Occident. It was then a question of answering the creation of the State of Israel, considered by the Islamists as an element of a vast plot against the Islamic religion and its faithful: “This is why we are convinced that this elaborate ideological plan must be countered by an ideological plan quite as elaborate, and that it is necessary to answer its ideological attacks, with its ideological war, by an ideological war.” The article explicitly refers to the “Protocol of Elders of Zion,” a document manufactured by the Tsarist police force that describes an alleged Jewish conspiracy to dominate the world. Although it is a forgery, this text’s anti-Semitism is taken seriously in the Islamist media.

In August 2004, the Wall Street Journal revealed that the “Protocol” was quoted during a recent meeting of he European Council for Fatwa and Research (CEFR). According to a participant in the meeting, the Protocol of the Elders showed the existence of a Jewish plot intended to destroy the values morals of the Muslim families. It is understood that to such ideas, the Islamists wanted to react by developing their own “Project.”

Al-Qaradawi’s ideas fall into line with some of the ideas of the Project. Thus, in a text published in 1990, the CEFR proposed to develop the presence of the Islamic Movement within the “groups of Jihad” in order “to eliminate all the foreign influences from the grounds of Islam, from Morocco to Indonesia.”

Just as a side, for most European secret services, Tariq Ramadan, the new advisor on terrorism to British Prime Minister Blair, is the unofficial head of the Muslim Brotherhood in Europe. It looks as if the infiltration is working fine! It is not every day that the U.S. Department of Homeland Security in 2004 revokes a visa issued to a Swiss-national scholar scheduled to teach at one of America’s premier universities. But this has just happened, and it is a good thing. The Swiss scholar is Tariq Ramadan. He is Islamist royalty—his maternal grandfather, Hasan al-Banna, founded the Muslim Brotherhood in 1928. Tariq is a Swiss citizen because his father, Sa‘id Ramadan, also a leading Islamist, fled from Egypt in 1954 following a crackdown on the Brotherhood. Sa‘id reached Geneva in 1958, where Tariq was born in 1962.

Thanks to his pedigree and his talents, Ramadan has emerged as a significant force in his own right. Symbolic of this, Time magazine in April 2004 named him one of the world’s top hundred scientists and thinkers. And so when Notre Dame University went looking for a Henry R. Luce professor of religion, conflict and peace-building, it unsurprisingly settled on Mr. Ramadan. As Lee Smith writes in The American Prospect, he is “a cold-blooded Islamist, whose cry of death to the West is a quieter and gentler jihad, but it’s still jihad.”

Al-Qaeda Book on Managing Savagery

Also contributing to the West’s understanding of the Islamist’s strategy for world domination is the book The Management of Savagery. Stephen Ulph describes the content of this book as the thinking of an al-Qaeda strategist on the next stages of the struggle. Posted on the al-Ikhlas jihadi forum [http://ekhlas.com/forum] the work is entitled Idarat al-Tawahhush, “The Management of Barbarism,” further defined as “the phase of transition to the Islamic state.” Due to the strategic importance of the document, Terrorism Focus of the Jamestown Foundation has undertaken an in-depth examination of the Arabic text.

Published by the Center of Islamic Studies and Research (an al-Qaeda affiliate), the 113-page work ‘Management of Barbarism’ aims to map out the progressive stages of establishing an Islamic state, from early beginnings in defined areas in the Arabian Peninsula, or Nigeria, Jordan, the Maghreb, Pakistan or Yemen, and its subsequent global expansion. The author is Abu Bakr Naji, a name familiar from his contributions to the Sawt al-Jihad online magazine (which are republished at the end of this book).

By “Management of Barbarism” the author refers to the period just after the collapse of a superpower, the period of “savage chaos”. It appears pointedly to be a method of not repeating the experience of Afghanistan prior to the rule of the Taliban, and of improving controls over the periods experienced, for instance, in Somalia after the fall of Siad Barre.

Jihadi strategy.

The ‘Path of Empowerment’ theme constitutes the strategy of the mujahideen. In this the author further sub-divides into three distinct phases:
1) The Disruption and Exhaustion phase
2) The Management of Barbarism [Savagery] phase
3) The Empowerment phase
In the first “Disruption and Exhaustion” phase, the mujahideen are to a) exhaust the enemy's forces by stretching them through dispersal of targets and b) “attract the youth through exemplary targeting such as occurred at Bali, Al-Muhayya and Djerba.”
At the “Management of Barbarism phase”, the mujahideen are to “establish internal security, ensure food and medical supplies, defend the zone from external attack, establish Shariah justice, an armed force, an intelligence service, provide economic sufficiency, defend against [public] hypocrisy and deviant opinions and ensure obedience, and the establishment of alliances with neighboring elements that are yet to give total conformity to the Management, and improve management structures.”

The “Empowerment” phase is an extension of the above. The policy is to continue Disruption and Exhaustion activities, at the same time establishing logistic links with the various Management zones. A conspicuous example of this phase is the series of events leading up to the September 11 attacks on the United States, which “destroyed the peoples' awe of America and of the lesser ranking Apostate armies.” The fall of Afghanistan, the author explains, was either planned to happen, or was due to happen even without the September 11 events, and had as the result the multiplication of jihadi groups bent on revenge.

[As shown above, the result of the Lebanon war was the destruction of awe of the Israeli military might.]
As for future targeting, this should be variegated “in all parts of the Islamic world and beyond it. For instance, in striking at tourist resorts frequented by Crusaders, all tourist resorts will have to be secured,” with all the dispersal of energy and costs [economic jihad] this involves. The same goes for Crusader banks in Turkey employing interest, or petrol installations near Aden, which will subsequently oblige security hikes for refineries, pipelines and shipping. “If two apostate authors are simultaneously liquidated in two different countries, it will require the security for thousands of writers in the Islamic world.” [The Islamist terrorist plot against the airlines in London resulting increased security and flight delays.]

An important feature of this phase is the attention to be given to media and propaganda strategy, both for winning support and recruitment, and for deterring opposition. [The extensive Iranian propaganda claiming victory for the Hezbollah in Lebanon, resulting in increased support for the Islamists throughout the region and possibly the world. Thus the events and subsequent cease-fire agreement empowered further the anti-war movement.] The media strategy should ‘target in depth middle ranking officers in the armed forces [of Muslim nations] to push them to join the jihad.’ It should ‘aim at every stage to justify operations to the populous legally and intellectually … given that, assuming that our long struggle will require half a million mujahideen, getting such a number from a nation of millions is easier than from the ranks of the Islamic movement.’ [Thus the linking with the leftist’s anti-war movement.]

Jihadi Tactic

The third theme, “The Most Important Principles and Policies,” gives details on tactics. After discussing the necessity of establishing a proper chain of command, in both the doctrinal and military fields, the author outlines important military principles (“striking with the heaviest force at the weakest point; a superior enemy is defeated by economic and military attrition”). He further suggests four major reference sources: “The Encyclopedia of Jihad (prepared by the mujahideen in Afghanistan) [The Encyclopedia of Jihad is now available on the web. See: AL-QAIDA'S ONLINE UNIVERSITY - Jihad 101 for Would-Be Terrorists], the al-Battar magazine; the writings of Abu Ubayd al-Qurashi in the al-Ansar magazine, along with other works on the al-Uswa website; general works on military science, particularly on guerrilla warfare, provided the student rectifies the errors in them respective to Islamic law.

In the sub-section “The Application of Vehemence” subtitled “The Policy of Paying the Price,” Abu Bakr Naji warns against the dangers of anything other than maximum violence as a deterrent, or as a response, even if the response should take years. The response, the author states, “is best done by other groups and in other countries than those suffering the act of enmity … to give the enemy the sense of being surrounded and his interests exposed … and to confuse him.” An example of this method would be, say, in response to the Egyptians' imprisonment of mujahideen, an attack by mujahideen upon an Egyptian embassy in the Arabian Peninsula or the Maghreb, or the kidnapping of Egyptian diplomats, who should be “liquidated horrifically” if the mujahideen's demands are not met.

Stress is then laid upon the need to understand how international politics work. In the sub-section “Understanding the Rules of the Political Game” Abu Bakr Naji highlights how mujahid groups that refused to soil their hands with profane political calculations paid the price. The difficulty of reconciling Islamic legal propriety with pragmatic military interest is resolved, in the author's eyes, by recourse to the example set by [the 14th century jurist] Ibn Qayyim, who set Prophetic precedent as a preference, but not an obligation.

An important feature of this game, Naji illustrates, is the manipulation of the international media, and ensuring that the message gets through to the target, in its widest sense, and not just to the minority elite. “We must therefore set up an association whose purpose is to ensure the communication of our demands to people, even if this should expose them to dangers akin to the perils of combat … such as the taking of a hostage. After raising the hullabaloo concerning him we demand that media correspondents publish our demands in full in return for his release … Our demand might be a statement of warning or justification for an operation.” An effective response to government media's demonization of mujahid actions is to prepare the ground by first demonizing the target as something Islamically forbidden or serving the economic interests of the enemy. Naji then gives an imaginary scenario of an attempt to adjust oil prices in favor of the people where a deadline is issued and an oil engineer or manager or journalist is kidnapped to ensure that the demand is fully publicized.

Points of weakness

The fourth major theme in the work covers “The Most Pressing Difficulties and Obstacles” that will face the mujahideen. These are listed as the diminution in the numbers of believers as casualties in war, the lack of sufficiently trained administrators (and the relative social distance many of these have from the rank and file) and the problems caused by over-enthusiasm in the behavior of some. Naji also highlights the problems that will be faced with old loyalties to other Islamist groups impeding administration in the new Management phases, or the threat of schism.

The Underlying Cause Driving the Axis of Appeasement

It appears to be lack of moral values corresponding to the Judeo-Christian ideologies and seeking economic gain at any cost further drives it. Some of the Fellows at Hoover Institute have published recent articles about the subject but do not seem to have the answer to counter the influence. The ideologies seem to go back the lack of understanding the risks dating to the 1930’s as noted by Victor Davis Hanson in his article The Brink of Madness and Thomas Sowell in his article Pacifists versus peace. It appears that this may have coalesced into the “The Axis of Appeasement.”

Man Seeking Consensus

Man by nature seeks consensus. But the means he manipulates for this end do not always serve the purpose. Human history is full of momentous events whereby certain individuals or groups have endeavored to effect an agreement but the consequences of these events have far exceeded the innocence of their initiators. Religions or belief systems have always occupied a significant place in man’s struggle for consensus. Some contemporary intellectuals have stressed the importance of inter-religious communication to the degree that without a factual understanding between the adherents of various world religions, they claim, the future of mankind will remain under threat. In seeking this consensus we are witnessing the rise of the ‘Axis of Appeasement’. The name that is commonly used for this new era is postmodernism.
Following in the footsteps of the pre-postmodern Nietzsche – God is dead, the intellectuals that were the philosophers of the Frankfurt School developed philosophies known as “Critical Theory’ or ‘Cultural Marxism’ thus promoted postmodernism to go after the hearts and minds of the population. The intellectual ‘reformers’ of Islam are utilizing these same successful tactics used to create the Postmodern Era and are now utilizing ‘Critical Islam’ as the guideline - the strategic weapon for communication with the adherents of other religions. Thus one of their slogans is ‘From The Schoolhouse To The White House’.

The uniformity of fundamental beliefs among believers of the same religion is no longer in intact, due to exposition to various propaganda influences of different cultural orientations. Easy access to the knowledge of alien cultures has caused considerable polarization among co-religionists, so much that difference of opinion between two members of a religion on essential matters may become greater than that may exist between members of two different religions. A good example of this is the discrepancy in respect of worldview between a traditional Muslim and a secular one. The former may feel that a practicing Christian is nearer to him than the secular Muslim as far as the similarity between their respective fundamental (metaphysical) beliefs is concerned. In such a situation it would be more befitting for a Muslim that is anxious to propagate his belief, to start with his coreligionist: the so-called secular-minded Muslim, rather than attempting to convert a Christian. It is also this ‘Moral Trade Deficit’ within the Christian church that provides the vacuum being filled by postmodernism and ‘Critical Islam’.
As we witnessed following the 3/11 terrorists attacks on the trains in Spain during run up to the election in 2004, the terrorists were able to control the election. The populous were more concerned with survival amidst chaos than with experiencing truth and significance. One more step toward achieving Osama bin Laden’s goal of returning Andalusia into the caliphate.

Bio: David J. Jonsson is the author of Clash of Ideologies –The Making of the Christian and Islamic Worlds, Xulon Press 2005. His new book: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance (Salem Communications (May 30, 2006). He received his undergraduate and graduate degrees in physics. He worked for major corporations in the United States and Japan and with multilateral agencies that brought him to more that fifteen countries with significant or majority populations who are Muslim. These exposures provided insight into the basic tenants of Islam as a political, economic and religious system. He became proficient in Islamic law (Shariah) through contract negotiation and personal encounter. Jonsson may be reached at: djonsson2000@yahoo.co.uk

Col. Drake and the Age of Oil

2006-08-17T18:14:00.000-07:00

by Byron King

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THERE HE WAS, as big as life and looking quite good for a man who died in 1880. I was on a visit to the Drake Well Museum, just south of Titusville, Pa. I was walking into the museum compound, and whom should I encounter but Col. Edwin Drake, dressed in the period garb one is accustomed to seeing in the grainy old photos. “Well, hello, Col. Drake.”

OK. It was not the real Col. Drake. This fellow is an actor who has been playing the role of Col. Drake for about 10 years. He gives talks to museum visitors and appears in films or news articles that call for a Drake look-alike. He has read much of the literature available on the life and times of Drake, he dresses for the part, and he is just the plain old spitting image of the famous man, down to his bushy brown beard. He is as near as one can get to being in the company of the famous man, and his life and remarkable times.

The Oil of Titusville

“Let me make something clear,” said Drake. “It was not I who found the oil of Titusville fame. The area is one of many oil seeps, from which petroleum simply flows from the ground and then runs down into the creeks and streams. The Seneca Indians had been gathering oil from the local creeks for several centuries, and there is evidence that other more ancient tribes also gathered the oil of these parts even before then.”

Drake is referring to the archaeological evidence that goes back about 1,500 years indicating that people were digging oil pits and gathering Pennsylvania rock oil since A.D. 500 or so. In all likelihood, the oil was used as a patent medicine, as a body rub, and for purposes such as caulking canoes. There is documentary evidence that white settlers were shipping small quantities of Seneca oil south for sale in Pittsburgh as early as 1790.

“Before my arrival in 1858,” said Drake, “there was an immense amount of timber in these parts. One of the largest firms in the area was a sawmill working on Oil Creek. The operators of the sawmill knew also of the oil, and gathered it up when it formed pools on top of the water. They too used the oil as patent medicine, and in the course of things noted its very good lubricating properties on the moving parts of the sawmill machinery. This had much to do with my eventually being here.”

Drake continued: “For many years, people had performed simple experiments on the oil, such as boiling it and collecting the various fractions that condensed. They noted that the different fractions had different properties. One of the owners of the sawmill, Mr. Brewer, was acquainted with certain members of the scientific faculty of Dartmouth College. Mr. Brewer sent to that school a sample of the local rock oil. One of the professors at Dartmouth forwarded the sample to the famed chemist Benjamin Silliman of Yale.

“Professor Silliman evaluated the oil and determined that it had many useful properties. It was, of course, well known as a lubricant, but it also could be used for purposes of illumination by burning it in lamps. There was at that time a growing demand for some substance to burn in lamps for the purposes of illumination. Professor Silliman prepared a report on the Seneca oil for a banker and investor from Connecticut named Mr. Townsend. It was Mr. Townsend who hired me and sent me to Titusville. My job was to determine if we could extract oil in large quantities.”

Pits and Holes

Drake went on with his discussion. “My first effort to recover oil was simply to dig a large pit into the ground in an effort to gather the oil at the bottom. But after several feet of digging, the hole started to fill with water from the very shallow water table. We were, after all, right next to a creek. So I lined the pit with wood planks, but even that did not keep out the water. We tried to drain the pit, but the water entered faster than the pumps could remove it. A pit was not going to work.

“It was then that I began to travel to other places and observe how people were mining substances and harvesting the products of the Earth. Near the town of Tarentum, on the Allegheny River, I encountered salt drillers. They would pound down an iron pipe into the salt beds and pump out brine water. After evaporating the water, they were left with salt. But some wells also produced an oily residue with the salt, so it became apparent to me that the oil might be flowing underground with other fluids. I decided to adapt the use of the iron pipe in an effort to push down a hole for oil near Oil Creek.

“Also, I heard of men working near what is now Parkersburg, W.Va. (it was Virginia back then), who were pounding down holes into the ground with iron tools. I hired a tool smith, named ‘Uncle Billy’ Smith, appropriately, to obtain or manufacture for me such similar tools.

“When I returned to Titusville, I immediately set about to drive down a hole into the ground using the digging tools. Shortly after starting the hole, I lined its walls with an iron pipe that we pushed down along with our drilling tool. This kept the walls from caving down into the hole, and also served to keep out most of the water from the adjacent soil. Once we hit bedrock, we kept on pounding down our hole.

“On Aug. 27, 1859, from a depth of 69 feet, we lifted our first quantities of oil from the hole, about 25 barrels in total.

“Thus, my achievement was not really in discovering oil, because the oil was already there for the taking. Nor was it my idea to use the oil for whatever purpose, because there were others who came before me. It was not even my role in history to extract the oil by digging downward for it, because others were already attempting the same thing. But my most notable accomplishment was in applying the concept of using a conductor pipe to protect the walls of the drill hole on the way down to the oil-bearing formation. This technique is still in use today, and is the foundation of the technology upon which is built the modern oil industry.”

Why an Oil Age?

Col. Drake brings up many good points that serve to explain the origins of the oil age, if not the origins of modern history. Why do some things happen the way that they do? What makes history?

People had known about the oil of the Titusville region for at least many centuries, certainly long before it was called Titusville. Why did the Seneca Indians, or their more ancient forebears, not usher in the Age of Petroleum? In another part of the world, by comparison, starting in the 16th century, the Spanish were importing barrels of oil from what is now Trinidad and Tobago, as well as from Venezuela. The queen of Spain, among others, used the oil to treat various family ailments. Why did this not usher in the Age of Petroleum?

And people certainly knew about digging pits, if not making holes in the ground, as well, long before Col. Drake muddied his boots along the banks of Oil Creek. Again, why does the credit for ushering in the Age of Petroleum go to Col. Drake? At about the same time that Drake was drilling his well in Titusville, other people were drilling holes in the ground in what is now West Virginia and eastern Ohio and southern Ontario near Petrolia. Within a year of Drake’s well at Titusville, other people achieved similar results in extracting oil from the rocks of New Brunswick, and there were even oil wells put down in Romania and southern Russia.

Even the initial news of Drake’s well at Titusville was overshadowed by events just two months later, when abolitionist John Brown took over the U.S. federal arsenal at Harpers Ferry, Va. (now West Virginia). Most people had other things about which to think than some oil prospector driving down a hole in the backwoods of northwest Pennsylvania.

A Confluence of Events

What created the modern petroleum industry was a confluence of circumstances, and certainly of events. Col. Drake’s innovation in driving a hole into the earth was just one of many things along a long chain of events.

The oil, of course, had to be there, and Titusville was the right place with its relatively shallow oil-bearing rock formations. And one of the principal virtues of the Seneca oil was that it was (and is) devoid of asphaltic fractions. It is light, sweet, and even smells kind of good. But science also had to advance to the point at which there was a rational, if not economic, purpose behind the demand for what Col. Drake called “large amounts” of oil. Here is where Professor Silliman’s report to Mr. Townsend comes in, a scientific basis for an economic investment.

Backed by the Connecticut investors, Col. Drake perfected a means to extract oil by drilling a hole lined with conductor pipe. But Col. Drake may not have been the first person to do this either. There were similar attempts ongoing near Parkersburg, W.Va., and Petrolia, Ontario.

But after Drake’s well came even more wells in 1860, drilled into the Devonian bedrock of northwest Pennsylvania by Drake’s imitators, albeit with great caution and trepidation, because the Drake well may have been a fluke for all anyone really knew. By late 1860, the wells were starting to come in on a regular basis and oil drilling was becoming a relatively predictable business.

And then came the U.S. Civil War. U.S. federal expenditures skyrocketed, and the central government rapidly exhausted its reserves of gold and silver. The U.S. government resorted to issuing paper currency, the well-known “greenbacks.” These fiat dollars flooded the U.S. economy, causing a general inflation in price levels. People who understood the nature of inflation were keen to find some means of protecting their purchasing power. Then as now, money flowed into hard assets, and there are fewer assets harder than bedrock sandstone filled with oil.

The World’s First Oil Boom

Much of the federal spending for the Civil War would end up in the pockets of two classes of people: New York bankers and Pittsburgh industrialists. It was this mixture of capital and industry, building upon the presence of oil, a scientific use for the substance, and a novel means for extracting it, that sparked the world’s first true oil boom.

Even in the midst of a general Civil War, the New York money flowed to the iron mills of Pittsburgh to purchase pipe and other equipment to install in the oil patches of Titusville. The foundries of Pittsburgh could just as easily roll tubular goods for the oil fields as cast cannon for the Union Army. The equipment shops of western Pennsylvania could just as easily manufacture pumps and gear drives and sucker rods as any other implement of war. And so they did.

The federal spending boom sparked the classic wartime phenomenon of currency flooding the national economy. Much of this money found its way into speculation on oil leases, and then into the capital equipment for developing those leases. Had there been no Civil War, one can only wonder if there would have been the Pennsylvania oil boom of the 1860s.

As a necessary concomitant of the oil boom, the Civil War itself created a vast underground army of laborers for the oil fields. To be sure, the development of those fields required an immense amount of backbreaking labor. This labor force included deserters from combat on both sides of the fight, draft dodgers, immigrants from foreign shores, and freed slaves who were searching for work away from the sound of the guns.

Thus did the U.S. Civil War bring together a large amount of new money, invested in leaseholds in the oil country of Titusville, plus capital equipment and a ready supply of labor. Here was the confluence of events that sparked the modern petroleum industry.

As the oil wells came in, they sparked an oil boom in the mid-1860s. Production soared and prices crashed. Investment waned, and by the late 1860s, the price of oil was drifting upward again. There was another boom and another bust in the early 1870s. The industry was irrational from an economic perspective, and something had to happen.

Something did happen, in the form of a man who desired, and eventually acted, to bring some semblance of rationality to a chaotic industry. He was a businessman from Cleveland, Ohio, named John D. Rockefeller. He conceived a method of bringing a certain sense of standardization to the oil industry, and eventually did exactly that.

So this takes us from Col. Drake to Mr. Rockefeller. We will discuss Rockefeller in my next article in Whiskey & Gunpowder . Without Rockefeller’s effort, one wonders where the oil boom would have gone. Where would we be today? We are all both products and prisoners of history.

Until we meet again…
Byron W. King

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Nothing Like Business as Usual

2006-08-12T16:48:00.000-07:00

by Byron King
for whiskey and Gunpowder
free subscription here

ALI SAMSAM BAKHTIARI is a retired “senior energy expert,” formerly employed by the National Iranian Oil Co. (NIOC) of Tehran, Iran. He has held a number of important positions with NIOC since 1971. He is currently attached to the director's office in the Corporate Planning Directorate of NIOC, and specializes in questions related to the global oil, gas and petrochemical industries. This alone ought to pique your interest because Bakhtiari has the ear of the most important decision-makers in Iran. What is he telling them?

Fortunately for us in the West, Bakhtiari is also an independent consultant who writes and speaks to a worldwide audience on the subject of oil depletion in general, and Peak Oil in particular. His tribal name, Bakhtiari, means “companions of good fortune,” and the story of his life is somewhat emblematic of that meaning. Based on what I have seen, Bakhtiari has a gift for understanding, and a unique ability to share this gift with others. There are few more qualified people in the world who can discuss Peak Oil. So when Bakhtiari talks, people ought to listen.

And as an aside, anyone within the Western diplomatic or military community who deals with Iranian issues at almost any level needs to understand what Bakhtiari has been telling the leadership of Iran. What do the mullahs know about oil that you may not know? It might just explain a few things about Iranian behavior.

Oil at $100-150 per Barrel

In a recent public address to the Senate of Australia, Bakhtiari stated that “I can see a range of $100-150 [per barrel of oil] not very far into the future.” He amplified this statement as follows:

“We are entering an era in which we know nothing much, where we have a brand-new set of rules…One of these new rules, in my opinion, is that there will be in the very near future nothing like business as usual. In my opinion, nothing is usual from now on for any of the countries involved. And the lower you are in the pile, the worse it is going to get.”

Bakhtiari believes that the world is at Peak Oil, producing about as much conventional oil on a daily basis as will ever be produced, now about 84 million barrels per day. From here on, the oil markets of the world will be dealing with the ongoing effects of oil field depletion and irreversible production decline. By 2025, Bakhtiari expects that the world’s daily production of conventional oil will fall to a level between 50-55 million barrels of oil per day. Bakhtiari counsels that the world’s governments, industries, and people accept the fact and begin to prepare. There is no time to lose.

Bakhtiari is pessimistic about the prospects for large-scale energy projects based on manufactured fuels, such as coal-to-oil and gas-to-oil projects. His reasons are many, ranging from the scale and cost of such projects to the raw environmental degradation they cause. In addition, much of the feedstock for these projects, for raw material and/or process heat, is supposed to come from natural gas. But natural gas supplies are about to “peak” worldwide and commence their own irreversible curve of decline, so this is not a long-term solution. Of the 30-million-barrel-per-day decline in conventional oil production that Bakhtiari envisions over the next 20 years, he anticipates that manufactured fuels will substitute for only about 5 million barrels per day. “This is a drop of water in the ocean,” says Bakhtiari.

In addition, Bakhtiari is pessimistic on the future of ethanol as an oil substitute, because it will pit the world’s food supply against the needs of the world’s built-up transportation system for liquid fuels. “People have to eat,” says Bakhtiari.

Four Phases of Decline

Bakhtiari views the future in terms of four phases of transition, or, as he puts it, T1, T2, T3, and T4. Fortunately for the world’s users of petroleum, the “hidden advantage” of Bakhtiari’s T1 is that worldwide oil supplies will remain almost constant during this initial phase. That is, new discoveries and production that is now coming on line will compensate for the production that is lost due to depletion. T2, T3, and T4 will be, as Bakhtiari puts it, “more turbulent phases.”

At the end of T1, Bakhtiari envisions “two major scales tilting.” There will be a supply of conventional oil, all of which will be subject to world demand. That is, there is not now, and will not be at the end of T1, any “swing” production, such as the cushion that Saudi Arabia provided during the past 40 years or so. Supply will dictate demand, and when the supply is gone, the demand will go unsatisfied. “In the end, it will be the total shift” to oil supply dictating demand. Rising prices will clear the market, and the prices will rise precipitously.

According to Bakhtiari, one of the key problems for the world in facing this ongoing T1 phase is that so-called “mega projects” for high-cost oil and other alternative fuels take 10-20 years to construct and come online. These mega projects include such things as large offshore oil developments in deep water, substitute oil industries that manufacture oil from natural gas or coal, or refineries capable of handling heavy oils or tar from tar sands. The problem is that rising oil prices, and spot shortages in the coming years, will trigger increases in prices for other commodities, like cement and steel.

Rising Costs and Risks for Capital Projects

One prominent example that illustrates Bakhtiari’s point was just announced by Shell Canada Ltd. Shell Canada recently announced that an expansion of its Athabasca oil sands project will cost as much as $12.8 billion, because relentless cost pressures are swelling its budget. This is nearly three times the cost per barrel that was originally planned, as recently as 2002. According the Shell Canada’s president, the economic environment has changed “quite substantially” in just a few years.

As recently as mid-2005, Shell Canada estimated that expanding its plant at Athabasca would cost about $200 per barrel per day of capital cost. Now the estimate is that the eventual cost will top $300 per barrel per day, and possibly approach $350 per barrel per day. That is, under these cost estimates, a facility capable of producing 10,000 barrels per day of oil equivalent product might cost as much as $3.5 billion just to build, let alone the future costs of to operating on an ongoing basis. And to construct facilities capable of producing 1 million barrels per day of oil equivalent will require a capital investment of about $350 billion.

At the same time, major companies that operate in the international environment are seeing their political risks rise along with the capital costs. Increasing exposure to large projects in problematic countries has taken much of the edge off the previous enthusiasm for expansion in such regions. For example, in Venezuela, the government of populist leader Hugo Chavez is tightening the terms of operating contracts, and imposing royalty and tax rates that are all but confiscatory.

Venezuela recently announced that it was reforming one of its production contracts with Chevron to create a “joint venture” between Chevron and Venezuela’s state-owned oil company. The net effect is to remove 90,000 barrels per day of oil production from the control of Chevron and place the oil under the control of the Venezuelan entity. In order to meet its own requirements for volumes of oil, Chevron will have to find other sources of petroleum. While Chevron has announced that it plans to remain in Venezuela, some other major Western oil firms are contemplating simply abandoning operations there.

In addition, many major capital projects are subject to damage from natural events, such as last year’s Hurricanes Katrina and Rita. Chevron, for example, recently announced a $300 million charge against earnings for uninsured damage caused last year to its Gulf of Mexico operations during Hurricane Katrina.

Five Steps of Preparation

Bakhtiari has a “to-do list” of what he considers to be the most urgent steps for governments, businesses, and private individuals. His list is worth highlighting here:

(1) Reprogram the mind. That is, just throw out any previous business-as-usual thinking and similar rosy scenarios. Nothing will remain as usual, going forward. This also means that people should engage in as much lateral thinking as possible. Do not just come up with Plan B, but come up with Plans C, D, and E as well. People should challenge themselves, and their associates, not just to expect the unexpected, but to begin thinking the unthinkable.

(2) Reduce oil consumption, mercilessly. According to Bakhtiari, the normal 30% of wasted use should be shed offhand. Governments, businesses, and individuals should also pay down debt levels as swiftly as possible, because the effects of T1 will inevitably bring higher inflation and interest rates. Minimize travel of all sorts to economize use of oil-derived fuels, because it is going to happen in any case. Reduce all types of consumption and just plain get leaner and be ready for even bigger cuts. This is as close to where you live as revising home lighting and heating systems, and also includes reducing the size and number of automobiles as soon as possible.

(3) Reuse as much as possible. Many things are easily reusable, but it will require a mental focus to accomplish the effort. Whether it is plastic bags or retreaded tires or outdated appliances, it is important to adopt a new cultural mind-set toward the scarcity of manufactured goods and products. The most important thing to care for and husband may well be fresh water, which is already in short supply and will almost certainly be a precious commodity in the future. Bakhtiari even mentions wood as a future critical commodity.

(4) Recycle as much as possible. Bakhtiari believes that tomorrow’s industrial boom will be in recycling industries on a worldwide scale. Recycling much of what is now considered garbage should be made mandatory, as in Germany or a handful of U.S. cities, such as Seattle and Pittsburgh. Industrial production should design “recycling” into products from the time they are on the drawing board, as is now the case in some sectors of the automobile and computer industries, as well as some other business sectors.

(5) Reward people for their efforts. Bakhtiari urges using market incentives to reward people for reducing, reusing, or recycling. It is far better to make use of positive subsidies, instead of negative reinforcement. The implications of Peak Oil are negative enough even without the prospect of negative reinforcement.

Addicted to Oil and Cold Soup

“Whether we like it or not,” said Bakhtiari in a recent posting, “all developed societies are addicted to crude oil and its myriad derivatives.” However, he continues, “Many decision-makers are trying to park ‘Peak Oil’ in the farthest corner of their minds (praying it will go away), and remain in denial that there is no replacement for oil.” Bakhtiari amplified this comment in another discussion:

“Nobody likes the idea of Peak Oil. Firstly, you have the politicians. Naturally, a politician will never say that there is such a thing as Peak Oil. It is suicide to give bad news, so a politician will never do that…Secondly you have the media. The media do not like Peak Oil. Why? There is no sponsorship for Peak Oil. The oil companies do not like Peak Oil because you should not say that your soup is cold; you should always say that it is very hot and very tasty, yes? So nobody wants to hear of this phenomenon of Peak Oil.”

Where Do We Go From Here?

Bakhtiari is a prolific writer and speaker, and he has much more to say on the subject of Peak Oil. We will review his work in future Whiskey & Gunpowder articles. But for now, where should leaders in the government, business, and the private sectors be focusing their attentions? Here are a few ideas.

Governments and the private sector should make every effort to come up with projections of oil production and demand at local, regional, national, and international levels. Based on these projections, the next step is to assess the implications of reduced availability and dramatically higher prices for oil and related transportation fuel.

Governments and the private sector should also, at the same time, strive to reduce in absolute terms local, regional, and national demands for oil and oil-related products. The oil supply simply will not be there a few years hence. Thus, it is imperative to make energy policy that allows classical market mechanisms to work rapidly, in order to foreclose the future political urge during the next “crisis” to come up with some sort of top-down, command economy form of coercive policy.

Related to the foregoing, governments and the private sector should work to assess the potential of new sources of liquid fuel, and alternative transportation methods, to meet (or, preferably, substitute for) a significant share of respective national fuel demands. This must take into account technological developments and both short- and long-term environmental and economic costs.

There is something ironic here. The government of Iran is making trouble for many nations and people in this world, what with its nuclear program, sponsorship of international terrorism, dealings with North Korea, and other bills too lengthy to describe just now.

But for all of the trouble that many people in the West (and elsewhere, truth be told) think is being caused by the government of Iran, here is an Iranian among the most direct and sincere in identifying and proposing the elements of a solution to a profound energy dilemma.

Until we meet again…
Byron W. King

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.
While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.
Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Iran, Lebanon, Russia, and India—It is about Power and Oil!

2006-07-30T12:23:00.000-07:00

David J. Jonsson
July 24, 2006

In a recent article – Iran Reaches the Mediterranean I indicated that for Muslims, three cities of the Christian faith have particular significance: Jerusalem, Constantinople and Rome. The fall of Constantinople is described in detail in my earlier book, The Clash of Ideologies--The Making of the Christian and Islamic Worlds. Iran with its relations and support of Hamas and Hezbollah now has access to the Mediterranean and is the neighbor of Jerusalem. Italy was the first country from which Iran withdrew is funds. In my new book, Islamic Economics and the Final Jihad – The Muslim Brotherhood to the Leftist/Marxist – Islamist Alliance I discuss how this Alliance is coalescing on a global scale through the Shanghai Cooperation Organization (SCO) and Mercosur in South America. Although, the world is focused on the potential for destruction by Weapons of Mass Destruction (WMD), the real potential for an economic holocaust exists as discussed in the book: Islamic Economics and the Final Jihad. The asymmetric War being waged is occurring simultaneously through terrorism, military action and economic means. The conflicts in the Middle East can not resolved leading to sustainable peace until the U.S. and the West develop a strategy for energy security and self-sufficiency. Implementing a strategy for self-sufficiency will needless to say be expensive and require sacrifice. Continued military action and endless conferences will not resolve the issues. The unacceptable alternate option is to accept totalitarian rule and elimination of our freedom and liberty.

Similarities to Events Leading up to WW1
The Rise of Shiite Power in the Gulf
The Three Factions in the Struggle for World Domination
The Rome Conference, the Arab Oil Embargo of 1973-4 and the Euro-Arab Dialog (EAD)
The Taef Accord of 1989
The Arc of Shiite Control vs. the Sunni Pan-Islam
The Roles of Hezbollah and Al Qaeda
Russia and the Shanghai Cooperation Organization (SCO)
Venezuela and Mecosur Flame the Fires of Conflict
Venezuela and Egypt to Gain Seats on the United Nations Security Council
Russia and Iran Challenge OPEC – Russia Leaves the West?
The Role of the Petroleum Commons
Sunni Terrorism Spreads East
The Apocalyptic Teaching of Islam
Conclusion
Similarities to Events Leading up to WW1
Recent events in Palestine, Lebanon and Egypt make it imperative that we pay heed to the apocalyptic teachings of Islam—both Shia and Sunni. Then you must also recall the events of 1914 leading up to WW1. One should also consider that following WW1 and the fall of Ottoman Empire’ the secular government of Ataturk in Turkey was formed and also that following these events the Muslim Brotherhood was formed. Today, Turkey is again an Islamic state.

The assassination of the Austrian archduke by a Serbian nationalist terrorist provided the senescent Austro-Hungarian Empire the excuse it had been looking for to wipe out the Serbian nationalists, which provoked the pan-Slavic nationalists at work for the czar to threaten the Austro-Hungarians with destruction, which led Germany's Kaiser to pledge retaliatory war against Russia, which prompted the French, who had an anti-German alliance with Russia, to begin mobilization. . . . Nobody wanted global conflagration, yet nobody knew how to stop it, and the American president (Woodrow Wilson, who was not yet a Wilsonian) did nothing to help avert the coming war. Within a month, the war came, and it took the remainder of the 20th century for the world to fully recover.

The Leftist activists of the world are decrying the “lack of proportionality” in Israel’s response to the unprovoked attack on its military personnel and civilians within the State of Israel, it would be important to recall a similar episode in United States history.

In a personal communication from Dr. Steve Carol Senior Fellow Center for Advanced Middle East Studies he recalled the situation on March 6, 1916, where a group of 360 Villistas (followers of Pancho Villa) crossed the international border between the United States and Mexico and attacked the town of Columbus, New Mexico. Their immediate goal was to obtain weapons from the nearby headquarters of the U.S. 13th Cavalry. 18 Americans were killed and additional 9 were killed in pursuit of the attackers back to the border. German agents directed by Luther Wertz, a key German operative in Mexico, led the raid. Germany wanted to keep the United States out of World War I, which was then raging, and sought to divert U.S. attention from Europe to south of the border.

The unprovoked attack on the United States triggered demands for retaliation and punishment of the raiders. There was no talk of “proportional” response.

As a result, President Woodrow Wilson ordered General John J. “Blackjack” Pershing and 6,000 American troops on a “Punitive Expedition” into Mexico. The force crossed into Mexico some two weeks after the initial attack and would penetrate some 300 miles into Mexico. During its nine-month stay in Mexico, U.S. forces would clash with Villistas as well as with Mexican Federal troops.

The Villistas again attacked the United States on May 5, 1916, raiding Glen Springs and Borquilla, Texas. This prompted President Wilson to send an additional force of 8,000 troops into Mexico. On June 18th he additionally called up the Texas, New Mexico, and Arizona National Guard and sent 150,000 men to patrol the U.S. border. Wilson also placed an arms embargo on Mexico, which included food and even horses.

On June 24th there was a clash between U.S. and Mexican forces at Carrizal, with 84 U.S. soldiers being surrounded by superior Mexican forces. Over half escaped but 14 were killed and 24 U.S. servicemen were taken prisoner.

Wilson’s reaction was immediate. The next day he demanded the released of the captured soldiers and to back up his demands he mobilized the entire U.S. National Guard and incorporated it into the regular army. He dispatched American warships to patrol and enforce a blockade on Mexican ports on both its east and west coasts. All the American prisoners were released five days later on June 30th. There was no talk of a “lack of proportionality.”

U.S. forces while in Mexico, did not catch Pancho Villa, but they crippled his ability to strike at the United States and inflicted heavy casualties on his forces.

The American force was withdrawn, unexpectedly, on January 25, 1917, not due to any Mexican or international pressure, but rather because the U.S. had obtained information that Germany intended to resume unrestricted submarine warfare, a step that would bring the U.S. into World War I. Additionally the U.S. had obtained proof, via the Zimmermann Telegram that Germany was seeking an anti-U.S. alliance with both Mexico and Japan. Thus the U.S. force was withdrawn so as not to give Mexico additional cause for considering such an alliance.

I review this familiar history for those of us (myself included) who've been wondering how the kidnapping of three Israeli soldiers (and the killing of eight others in the Hezbollah raid) has escalated in less than a week to what may be the brink of a cataclysmic regional war with ghastly global implications. The two crises and the sets of conflicting forces are by no means parallel, but in each the power of nationalism, the sense of national victimization, the need for revenge, the opportunity for miscalculation, the illusion of attainable victory, and all-around fear and rage loom large.

If you thought that the latest Middle East crisis is just another in the endless war of Arabs and Jews killing each other, you’re wrong. There is a telltale sign that there is a major new development underlying this bloodshed and mayhem.

That sign: the world's Arab powers have not launched their customary tirades against Israel. Indeed, astonishingly, the collective voice of the Arab world, the 22-nation Arab League, has criticized the Hezbollah, the Iranian Shiite Muslim sponsored terrorist group that is attacking Israel from Lebanese territory. This should not be interpreted, as some have described, as a moderation of their anti-Semitic position toward Israel. The Arab League blamed Hezbollah for “unexpected, inappropriate and irresponsible acts” in kidnapping two Israeli soldiers and launching missiles at Israel. It is the first time that the Arab League has criticized any Muslim force engaged in a war against Israel. Thus, setting the stage for the renewed conflict between Shia and Sunni on a world scale.

The Rise of Shiite Power in the Gulf
Although there is no such thing as pan-Shiism, or even a unified leadership of the community, the Shiites share a coherent religious view since splitting off from the Sunnis in the seventh century over who was the legitimate successor that was to lead the Muslims. As described in Islamic Economics and the Final Jihad, the lack of a unified leadership does not preclude their desire to form the Ummah (Islamic community) among all Shiites. The Shia have developed their own concept of jurisprudence (Shariah – Islamic Law) and practice. The separate schools of jurisprudence do in fact complicate Islamic financial transactions.

The sheer size of the Shia population today makes them a powerful constituency. Shiite population accounts for 90 percent of Iranians, the majority in Iraq, some 75 percent in Bahrain and 45 percent of Lebanon. Some 70 percent of the people living in the Gulf region are Shiites.

Why is Hezbollah making provocative attacks on Israel? Iran sees itself as the region's great power. Iran is feeling under threat, and, at the same time, feeling a surge in its own potential power. It feels under threat because the U.S. invasions of Afghanistan and Iraq have brought American forces onto its frontiers. However the Shiites seek to cooperate in a limited fashion with the U.S. in Iraq, maintaining a measured degree of instability to keep the pressure on the Sunnis until they have accomplished their goal of total control. Keeping the U.S. bogged down in Iraq, opening the new front in Lebanon reduces the pressure on Iran and their nuclear ambitions and prevents attention to potential near conflicts in Latin America as we discuss below.

This role of the U.S. in Iraq emboldened the rise of Shiism throughout the region. The Middle East that will emerge from the crucible of the Iraq War may not be more democratic, but it will be more Shiite and it will be more fractious. Such actions will lead to the desire of both Shia and Sunnis to increase armaments of WMDs including nuclear capability and likelihood of further armed conflict. It should be remembered that far more people have been killed in the conflicts between Sunni and Shiites than between the Arabs and Israel.

And it is this sense of vulnerability that is helping stir the thrill of its own potential power. Yes, the invasion of Iraq did bring the U.S. uncomfortably close to Iran, but it also removed the threat posed by Saddam Hussein, a trenchant enemy.

The invasion of Iraq also gave new urgency to the Iranian project to acquire the nuclear bomb, an act of insurance lest the U.S. decides to move against another of the “axis of evil” states. In the interim, however, the chaos in Iraq and America's apparent helplessness has tempted Iran to think of the U.S. as being weak.

And the election of Mahmoud Ahmadinejad as President has reinvigorated the revolutionary fervor and apocalyptic teaching in the Islamic Republic of Iran.

Prime Minister Nouri al-Maliki of Iraq on July 19 forcefully denounced the Israeli attacks on Lebanon, marking a sharp break with President Bush's position and highlighting the growing power of a Shiite Muslim identity across the Middle East.

The comments by al-Maliki, a Shiite Arab whose party has close ties to Iran, were noticeably stronger than those made by Sunni Arab governments in recent days. Those governments have refused to take an unequivocal stand on Lebanon, reflecting their concern about the growing influence of Iran, which has a Shiite majority and has been accused by Israel of providing weapons to Hezbollah, the Lebanese Shiite militant group.

A growing number of Iraqi officials have stepped forward in recent days to condemn Israel. Their stance also calls into question one of the rationales for the U.S. invasion of Iraq - that a U.S.-backed democratic state here would become an ally of Israel and catalyze a change of attitude across the rest of the Arab world.

Saudi Arabia is also upset by the possibility of Iran developing nuclear capability and hence will probably not standby without developing their nuclear capability, which in all likelihood is underway.

The Three Factions in the Struggle for World Domination
The recent world events lead one to the conclusion that there are three principle players in this current struggle—the Shia faction represented by Iran and their surrogate pawns represented by the Hezbollah or Hizbollah/Hizbullah or Hezb'Allah (meaning Party of God) in Lebanon and Syria, Hamas in Palestine, the Sunni faction including Saudi Arabia, Egypt and other predominant Sunni countries and the Israel aligned with the United States. However as reported by Lydia Georgi - RIYADH in Middle East Online it should be noted that Saudi Arabia, has indirectly blamed the Iranian-backed Hezbollah for Israel's onslaught against Lebanon, is wary of Tehran using Arab states to pursue its own agenda, experts said July 18, 2006. The oil-rich kingdom last week accused the Shiite militant movement, without naming it, of “adventurism” that put all Arab countries at risk by capturing two Israeli soldiers and triggering Israel's offensive.

“It is necessary to make a distinction between legitimate resistance and uncalculated adventurism by certain elements,” an official source said.

“The kingdom is not concerned by the extension of Iran's influence per se but by the fact that it uses Arab countries such as Syria, Lebanon and Iraq to pursue its political interests,” commentator Qenan al-Ghamdi a columnist for the Saudi Al-Watan daily, said.

“When these countries land in trouble, it is Saudi Arabia that bears the consequences, as happened in Lebanon in the past and will happen again now” after the devastation caused by Israel's attacks, he said.

Some will recall that back in 2000, Hezbollah was held up by fellow Shiites as well as Sunnis and some Christians as a model for resisting Israel. The division today springs from the reality that did not exist six years ago—the rise to power of the Shiites in Iraq and the recurrence of increasing tensions between the Shiites and Sunni.

The withholding of condemnation of Israel by Saudi Arabia did not last long. In a report by Aljazeera on July 25, 2006, the Saudi king Abdullah has warned that war could break out in the Middle East if attempts to broker peace in the region fail. In a statement read out on state television on Tuesday, King Abdullah said, "If the option of peace fails as a result of Israeli arrogance, then the only option remaining will be war, and God alone knows what the region would witness in a conflict that would spare no one."

His remarks were unusually forthright for the world's top oil exporter, which has called for ceasefire but blamed Lebanon's Hizbollah guerrilla group for the crisis that has so far killed at least 413 people in Lebanon and 42 Israelis.

The comments also appeared to be aimed at the United States, Israel's ally that has resisted calls for an immediate ceasefire.

Saudi Arabia pledged $500 million to rebuild Lebanon and $250 million for the Palestinians. The kingdom will also transfer $1 billion to Lebanon's central bank to help its economy.

The diplomat said the financial support was a sign of a tussle for influence once the fighting stops in Lebanon between Iran, backing Hizbollah, and Arab states, behind the government.

The Rome Conference, the Arab Oil Embargo of 1973-4 and the Euro-Arab Dialog (EAD)
The Rome Conference on Lebanon takes place on July 26. Among those expected at the Rome conference are: the United States, Russia, Britain, France, Germany, Italy, Egypt, Jordan, Saudi Arabia, the World Bank, the United Nations and the European Union.

The recent events are a reminder of the events leading to the Arab Oil Embargo of 1973-74, which then led to the Euro-Arab Dialog (EAD) that pitted European countries against the U.S. in need to gain access to oil. It was also the EAD that led to the beginning of the Islamization of Europe. The events surrounding the Embargo and the EAD are documented in Eurabia: The Euro-Arab Axis by Bat Ye’Or and Islamic Economics and the Final Jihad.

Senator Richard Lugar, a Republican from Indiana who is the chairman of the Senate Foreign Relations Committee, said in a speech this year, “No one who is honestly assessing the decline of U.S. leverage around the world due to our energy dependence can fail to see that energy is the albatross of U.S. national security.”

The Taef Accord of 1989
Saudi Arabia sponsored and hosted the Taef accord of 1989 which ended Lebanon's 15-year civil war in 1990 and has since helped fund its reconstruction. In the current crisis, it has offered 50 million dollars in immediate aid.

The Taif accords transferred power away from the Lebanese presidency, traditionally given to Maronites, and invested it in a cabinet divided equally between Muslims and Christians. The Taif accords also declared the intention of extending Lebanese government sovereignty over southern Lebanon. Though Israel eventually withdrew from southern Lebanon in 2000, armed Hizbollah militia remained in control of the area, apparently maintaining a tacit arrangement whereby Hezbollah could harass Israel within limits, but not so seriously that it would provoke a massive retaliation. The Hezbollah essentially created a separate state within Lebanon. A state that did not benefit from the economic gains in the Lebanon reconstruction after the civil war.

Even if Syria, which is an ally of Shiite Iran and likewise a supporter of Hezbollah, were attacked by Israel, Saudi Arabia would also end up footing the bill.

A member of the appointed Shura (consultative) Council, who asked not to be named, said Saudi Arabia could not sit back and watch Lebanon being used “as an arena for settling scores or waging proxy wars”.

The Arc of Shiite Control vs. the Sunni Pan-Islam
At the same time the Shia faction has built up their alliance of countries stretching from Iran to the Mediterranean—including Iraq, Syria and recently Lebanon and Palestine. It has been the long-term goal of the Sunnis to build a Pan-Arabic Ummah stretching from Indonesia to Andalusia (Spain). The only country blocking total access is Israel. A result of the Iraq war was to oust control by the Sunnis from Iraq and replace it with a Shia dominated government. In many respects this has placed the U.S. military in the crosshairs of the Sunni faction. According to report in the Financial Times on July 20, 2006, to appease the Sunnis, the U.S. yesterday said it had decided not to impose sanctions on Saudi Arabia over its policies towards religious practices and minorities following commitments by the kingdom to halt the dissemination of extremist ideology and to promote tolerance of non-Muslims.

John Hanford, ambassador-at-large for international religious freedom, was due to explain to Congress why the State Department would issue a waiver for Saudi Arabia under the Religious Freedom Act. Saudi Arabia was designated a “country of particular concern” under the act in 2004.

The Roles of Hezbollah and Al Qaeda
Hezbollah and al Qaeda are known to have cooperated in the past, but it doesn't appear they have worked together closely. The main reason for this is sectarian. Al-Qaeda is mostly made up of Sunni Muslims and Hezbollah is mostly Shiite Muslims. However, in spite of comments above, there is a recent trend for Sunnis and Shiites to cooperate against a common enemy, i.e., the United States and Israel, so don't be surprised if something more turns up. Hezbollah is trying to both destabilize Lebanon's anti-Syrian government and promote itself as a powerful, regional, revolutionary group. Hezbollah seeks influence beyond Lebanon.

According to Daniel Byman director of Georgetown University's Center for Peace and Security Studies writing in Foreign Affairs in the November/December 2003 issue: “In the U.S. demonology of terrorism, Osama bin Laden and al-Qaeda are relative newcomers. For most of the past two decades, Hezbollah has claimed pride of place as the top concern of U.S. counter terrorism officials. It was Hezbollah that pioneered the use of suicide bombing, and its record of attacks on the United States and its allies would make even bin Laden proud: the bombing of the U.S. marine barracks in Beirut in 1983 and the U.S. embassy there in 1983 and 1984; the hijacking of TWA flight 847 and murder of U.S. Navy diver Robert Stethem in 1985; a series of lethal attacks on Israeli targets in Lebanon; the bombing of the Israeli embassy in Argentina in 1992 and of a Buenos Aires Jewish community center in 1994. More recently, Hezbollah operatives have plotted to blow up the Israeli embassy in Thailand, and a Lebanese member of Hezbollah was indicted for helping to design the truck bomb that flattened the Khobar Towers U.S. military base in Saudi Arabia in 1996. As CIA director George Tenet testified earlier this year, “Hezbollah, as an organization with capability and worldwide presence, is [al Qaeda's] equal, if not a far more capable organization. I actually think they're a notch above in many respects.”“

Aside from al Qaeda, no terrorist group has killed more Americans than Hezbollah, which is bankrolled by Iran to the tune of at least $100 million a year. Hezbollah's main theaters of operation are Lebanon, its home country (where it killed hundreds of Americans during the 1980s), and the West Bank and Gaza, where it helps Palestinian rejectionists target Israel. But the group is active in the United States as well. Hezbollah is believed to have cells in at least 10 U.S. cities, according to an article in the Washington Times on May 24, 2005. It is interesting to note that Hezbollah operatives have sneeked into the U.S from Mexico. In March 2005, Mahmoud Kourani of Dearborn pleaded guilty to providing material support for Hezbollah. He will be sentenced next month. Kourani (whose brother is Hezbollah's chief of military security in southern Lebanon) is an illegal alien who sneaked into the United States from Mexico in February 2001. Federal authorities have repeatedly arrested suspected Hezbollah operatives for attempting to smuggle night-vision goggles and other military equipment to the organization. One suspect, arrested in 1998, skipped bail and fled to Lebanon before returning to the United States last year to face federal charges. In 2003, a federal court convicted a Hezbollah cell based in Charlotte, N.C., on charges of aiding Hezbollah by operating a cigarette-smuggling ring. The leader of that group, Mohammed Hammoud, received 155 years in prison.

Russia and the Shanghai Cooperation Organization (SCO)
Russia also has a stake in this conflict. Russia brought Iran into the SCO and was rewarded by being admitted as an observer into the Organization of Islamic Conference (OIC). Iran is also a major market for Russia and China—both members of the SCO. Both Russia and China are active in investment and weapon supply to Venezuela—a leading member of Mercosur. Venezuelan President Hugo Chávez said on July 14 that U.S. backing of Israel is responsible for flaming tensions in the Middle East and putting the world on course toward another “Holocaust.”

Venezuela and Mecosur Flame the Fires of Conflict
“The fundamental blame falls again on the U.S. empire. It's the empire that armed and supported the abuses of the Israeli elite, which has invaded, abused and defied the United Nations for a long time,” Chávez said in a speech during a military act in Caracas.

It should be noted that Venezuela is a major oil suppler to the U.S. and through their Citgo, which is wholly-owned by Petróleos de Venezuela. On July 12, Venezuela's state-owned oil refining subsidiary in the U.S. is to halt petrol distribution to about 1,900 filling stations in the U.S., although the company denied on Wednesday the decision was motivated by tensions between Caracas and Washington.

Latin America accounts for 8.4 per cent of daily world oil output, according to the U.S. Energy Information Administration, but energy supplies from the region make up 30 per cent of U.S. energy imports, or about 4m barrels a day.

According to an article in the Financial Times on June 25, future supplies of oil from Latin America are at risk because of the spread of resource nationalism [The doctrine of the Petroleum Commons.], a study by the U.S. military that reflects growing concerns in the U.S. administration over energy security has found.

An internal report prepared by the U.S. military’s Southern Command and obtained by the Financial Times follows a recent U.S. congressional investigation that warned of the U.S.’s vulnerability to Venezuelan President Hugo Chávez’s repeated threats to “cut off” oil shipments to the U.S.

In an article in the Financial Times on July 24, Andy Webb-Vidal in Caracas reported that: Richard Lugar, chairman of the US Senate foreign relations committee, has urged the Bush administration to adopt specific “contingency plans” for a potential disruption to oil supplies from Venezuela.

In a letter sent to Condoleezza Rice, secretary of state, last Friday, a copy of which has been obtained by the Financial Times, Mr Lugar warned the US that it needed to “abandon” reliance on a “passive approach” to energy diplomacy.

Mr Lugar's warning follows the release last month of an investigation by the Government Accountability Office (GAO) which found that the US was ill-prepared for an oil embargo by Venezuela, the world's fifth largest exporter. President Hugo Chávez, whose government has been emboldened by a torrent of oil revenues, has several times warned that he would “cut off” oil supplies to the US if Washington persisted in allegedly plotting his overthrow.

“Venezuela's leverage over global oil prices and its direct supply lines and refining capacity in the US give Venezuela undue ability to impact US security and our economy,” Mr Lugar wrote in his letter to Ms Rice.

The GAO study, commissioned by Mr Lugar, a Republican, estimated that a Venezuelan oil boycott would raise oil prices by $11 (€9, £6) per barrel over a six-month period and reduce US economic output by $23bn.

Bernardo Alvarez, Venezuela's ambassador to the US, dismissed as “absurd” the GAO study's premise that Mr Chávez would purposefully shut off oil supplies, citing the economic impact it would have on his own country. Venezuela ships two-thirds of its oil to the US, or about 1.5m b/d and oil accounts for about 80 per cent of export revenue and half of fiscal revenue.

However it should be noted that Venezuela is currently constructing super tankers to move its oil to China.

Hugo Chávez, a cast of thousands of demonstrators and a guest appearance by Cuba's Fidel Castro made the July 20, 2006 summit of Mercosur, the South American trade pact, very different from those of the past. Normally a humdrum affair, full of dull deliberations about trade technicalities and pious hopes for a brighter, more integrated future, the presence of Venezuela's always-controversial leader in particular livened up proceedings.

Having dropped the suit and tie sported at the Mercosur presidential summit earlier on Friday in favour of his customary olive-green fatigues, the Cuban leader's anti-US rhetoric was rivalled - if not in length - by a fiery warm-up address from his admirer, Hugo Chávez of Venezuela.

Following formal accession this month, Venezuela is one of five full members of Mercosur, along with Argentina, Brazil, Paraguay and Uruguay. The bloc's area of influence now stretches from the Caribbean in the north to Patagonia in the south.

Indeed, both Argentina and Brazil formally encouraged Bolivia to become the sixth full member of the group, while Mexico's foreign minister, Ernesto Derbez, said he hoped Mexico would become an associate member of the group - along with Bolivia, Chile, Colombia, Ecuador and Peru - before Vicente Fox's presidency comes to an end in December.

On paper at least, Venezuelan membership ought to be good news, but for the U.S and the West, is it?

Together, the pact's five countries constitute what should become a single market of 250m people. Intra-regional trade, already recovering strongly from the financial crises of 1999 and 2001-2002, should get a fresh boost from Venezuela's vast oil wealth - and Mr. Chávez.

Venezuela, for example with Argentina, have also unveiled plans to jointly raise money on international markets, with a bond deal that Néstor Kirchner, Argentina's president, said could be “the first step in the construction of a multinational development bank, a financial space in the South”. See: Venezuela to put pep into Mercosur summit. One target of such a bank is to attack the hegemony of the U.S. dollar.

Hugo Chávez's appearance at the Mercosur summit in the Argentine city of Córdoba will be just the first stage of his most extensive global tour to date.

Over the next two weeks, the Venezuelan president will visit at least seven countries, mostly in Asia, plus, as he put it before his departure, “perhaps some in the Middle East and a few in Africa on the way”.

Officially, the former army officer says his oil-financed mission is to deliver a “message of peace” and to “save the world”.

But his journey will also entail a serious lobbying effort to secure diplomatic support for Venezuela's bid to secure a temporary seat on the United Nations Security Council that will be available soon.

Venezuela and Egypt to Gain Seats on the United Nations Security Council
According to a report on Venezuela Analysis.com on July 19, 2006, Venezuela is being granted observer member status in the Arab League, which is also expected to support Venezuela’s bid for a UN Security Council seat. These two announcements coincide with the second Arab-South American Summit, which took place the week of July 19 in Caracas. These events of the recent weeks give further credibility of the Leftist/Marxist – Islamist Alliance and their control of world oil and other natural resources.

Under the shadow of an escalating war in the Middle East, the second Arab-South American Summit got underway in Caracas. Building on the first ever meeting a year ago in Brazil, delegations from fifteen Arab countries and twelve South American nations are gathering for two days to assess the progress of political, economics, cultural, environmental, and technological agreements reached in 2005. In addition, leaders attending the summit focused attention on the host country’s admission into the Arab league, the UN Security Council bids of Venezuela and Egypt, and the current crisis engulfing the Middle East.

In the first order of business, Venezuela was granted observer status in the Arab league. Membership will be formalized in September, when Venezuela joins its neighbor Brazil and several OPEC partners in the 22-nation group. More than 10 million people of Arab descent live in South America, most of them in Brazil.

President Chávez also secured Arab League support for Venezuela’s UN Security Council bid. “We expect 22 countries to support the (Venezuela) candidacy.” Stated Ahmed Benhelli, Secretary General of the Arab League of Nations. With Arab League assistance, Foreign Affairs Minister Alí Rodríguez Araque on Tuesday guaranteed Venezuela has obtained more than the 128 votes necessary to win a non-permanent seat at the Security Council, as a number of international organizations have already agreed to support Caracas, including the Caribbean Community and Common Market (Caricom) and the Common Market of the South (Mercosur). In return for Arab league backing, Egypt is seeking South American support in its Security Council bid.

This development comes on the heels of President Chávez’s harsh condemnation of recent Israeli attacks against Lebanon. On Sunday President Chávez bashed the “elite” in Israel, whom he accused of being aggressive at the behest of the United States. The incursions into Lebanon and Gaza were labeled “madness” by the President, as he went on to note Israel has nuclear weapons of mass destruction, “but nobody says anything because behind it is the empire” – a reference to the Bush Administration.

The official position of the Venezuelan government was released the day before when the Foreign Affairs Ministry issued a press release that stated, “The Bush Administration veto to impede the consideration of this crisis within the framework of the U.N. Security Council is unacceptable. The hegemony exercised over this body is the clearest denial of said organization as a space for reasonable settlement of conflicts. This is the reason why our country keeps firmly upholding the necessity of democratizing this body, and therefore endeavors for a seat on the Security Council.”

It should be noted that Russia as a result of control of large hydrocarbon reserves is a major economic power to contend with. Europe is beholden to gas supplies from Russia. Russia supports Iran—both in support of the Hezbollah and the nuclear program and as a weapon supplier to Latin America-Venezuela and Africa. Russia and China are the leading members of the SCO with Iran in an observer status. Russia also holds observer status in the Organization of Islamic Conference (OIC).

Russia and Iran Challenge OPEC – Russia Leaves the West?
Russia on the one hand is challenging OPEC for oil dominance and simultaneously challenging the hegemony of the U.S. dollar through the oil weapon. These actions merge in the form of Leftist/Marxist – Islamist Alliance. From the Russian perspective, the Saudi role and OPEC model have benefited the United States, which can pressure Saudi Arabia into opening the spigot to deal with supply emergencies; the U.S. also pressures other oil producers, such as Libya, Iraq, Iran, Venezuela, and Indonesia, by military methods, diplomacy, and economic sanctions. In the Russian alternative, the U.S. will be far less influential, and have fewer levers, commercial or military, to effect pressure on the energy suppliers. Russian arms and defense-industry partnerships are on offer to relatively weak, intervention-prone energy producers in Africa and Latin America to offset U.S. pressure.

A global movement toward the Russian model would greatly increase the impact of the oil weapon.

In the OPEC model, the benchmark is Brent crude, priced in U.S. dollars. In the Russian model, the discount and disadvantage between the Brent and Urals benchmarks will be reduced, and pricing will evolve toward a currency basket, including the ruble. According to the Moscow Times on May 16, a senior economic official said Monday that Russia would have a domestic petroleum exchange—an idea backed by President Vladimir Putin last week—up and running by year's end, but experts doubted whether oil would trade internationally in rubles anytime soon.

Deputy Economic Development and Trade Minister Kirill Androsov, who is also a Rosneft board director, said a domestic exchange for oil products would begin trading by the end of 2006 and an international exchange that would sell crude oil sometime in 2007, RIA-Novosti reported.

According to Iran News and Iranian Culture Journal of July 6, Iran will start the initial phase of its planned Iranian oil bourse at the end of September. An oil ministry official told that his ministry had already presented the relevant documents to the economic and finance ministry and the bourse organization. See also: Structural Changes – Destruction Of The U.S. Dollar.

In the OPEC model, suppliers hold much of their cash and government securities in U.S.-controlled institutions. In the Russian model, cash is held in the form of a currency basket; conversion from cash is sought into non-U.S. assets, particularly in the European market. In the Iran Oil Bourse oil trade would be Euro initally.

In the OPEC model, investment in new energy reserves should be open to, and may be controlled by, U.S. corporations and foreign government national oil companies. However, in most Islamic countries, private and foreign ownership is governed by Islamic Law (Shariah) laws.

According to the Topic Report: Access to Global Oil & Gas Reserves by Britt Dearman published January 23, 2006 Dearman is the originator and editor of Weekly Energy Perspective; IOC’s can participate to some extent in the upstream business in these countries, the bulk of the reserves ownership is dominated by countries with national oil companies (NOC’s). An estimated two-thirds of all global oil reserves are controlled by NOC’s. A large number of countries require that IOC’s partner with NOC’s in upstream developments or they allow IOC’s to provide only services. An internal Apache study estimates that IOC’s have full access to less than 10% of all of the world’s reserves.

IOC’s generally have strict investment guidelines. Limited access to upstream investment opportunities tends to increase competition among IOC’s, which reduces the return for the eventual winners. In addition, countries are extracting more from IOC’s and/or changing the rules. For example, Russia and Venezuela have collected back taxes from companies because of new tax law interpretations. They have also used the state’s power to acquire assets or to force more favorable terms for upstream activity.

The extraction of more money from oil companies is not limited to Russia and Venezuela. The U.K. raised the corporate tax rate on oil companies and some politicians in the U.S. are considering a windfall profits tax again. The timing for the U.K is remarkable because they became net importers of gas last year, thus making them partially dependent on Russian gas supply and are expected to become a net oil importer this year. The U.K. is taking away from oil company’s funds that could be reinvested to increase production and energy security in the country. Countries including Ecuador and Bolivia have also imposed new restrictions or nationalized the assets of the IOC’s.

Even the Democrat controlled State Legislature in California is attempting to pass laws that are hostile to the IOCs, including a plan to tax windfall profits and a proposal to regulate refineries as public utilities.

Some countries with NOC’s have different incentives than IOC’s such as security of supply. They have more at stake (e.g. - growing an entire economy) than earning a rate of return on its investment. NOC’s are also in a position to make different types of offers that IOC’s cannot match. For example, China NOC’s can work in countries that are off-limits to U.S. companies. China can also offer trade agreements and potential political support.

The Role of the Petroleum Commons
IOC’s have the technology, the capital and the expertise needed to increase global production. The political actions of countries, state legislatures and potentially the actions of the Global Compact within the framework of the United Nations have done more to limit the availability of oil than any other factor.

Demand for natural gas is rising rapidly. Russia and Iran control 50 per cent of global reserves. For a comprehensive analysis of the role of Petroleum Commons influence on the International Oil Companies (IOCs) see: Islamic Economics and the Final Jihad – The Muslim Brotherhood to the Leftist/Marxist – Islamist Alliance. In the Russian model, national companies, state-controlled champions, or joint ventures in which Russian interests are in the majority should control strategic reserves. According to MOSCOW Reuters on July 16, Russian state oil firm Rosneft, which last week raised $10.4 billion (5.7 billion pounds) in the country's largest-ever IPO, said on Monday the government would control around 85 percent of its stock after the flotation.

Rosneft said in its final IPO prospectus the share of the Russian Federation would be 85.2 percent if the IPO's global coordinators do not exercise the over-allotment option, and 84.8 percent if they exercise it in full.

According to John Helmer writing in the Asia Times on July 18, in the U.S.-backed OPEC model, national suppliers depend on U.S.-controlled market intermediaries, traders, pipeline and shipping companies, and retail distributors for access to markets and point of sale. In the Russian model, in exchange for access to Russian energy supplies, there will be Russian state-controlled champions in energy transportation. Russian state-controlled corporations will also have investments and influence over trade and market retail networks.

The Russian model also extends to energy-convertible coal, uranium, and other mineral resources. Through negotiations for Russian accession to the World Trade Organization (WTO), the U.S., Australia, Canada and other resource-exporting states have sought to gain unlimited access to search and development of Russian mineable resources. The Russian model rejects this, and instead assigns priority and equity control of domestic resources to national resource companies. The model proposes tradeoffs and partnerships in resource exploitation in third countries, especially the developing states.

The U.S.-backed OPEC model assigns international priority to the Arab states. The Russian model assigns priority to the Central Asian alliance, including China, India, and Iran—all members of the SCO; secondarily to Latin America (Venezuela, Brazil—Mercosur); and ultimately Africa.

On this fundamental choice between the Russian and OPEC models, Russia is waiting to hear where South Africa stands. One thing is clear - South Africa's dependence on OPEC for its crude-oil imports has been growing. In 1996, 75% of South Africa's oil imports came from the Persian Gulf states, led by Iran. In 2003 - the latest year for which figures are available - this had grown to 78%. Saudi Arabia has also jumped ahead of Iran as the leading supplier. Nigeria is the leading African supplier of oil to South Africa, with 16% of total in 2003. Imports from Russia are possible, but have been negligible so far.

Sunni Terrorism Spreads East
The Sunnis are active in the terrorism war with bomb attacks on transportation infrastructure in London, Spain, and India. The Bangalesh and Pakistan links are also connected to the terrorist acts in India. Since the last few years, it came to light that ISI and various militant organizations based in Pakistan are using Bangladesh as a transit point for pushing terrorists into India. Indian security agencies have flight details and details of armed training camps in the neighboring country. With the tightening of security on the Pakistan border, export of terror from Bangladesh has become a reality, and the extension of the terror network to other parts of the country is a potential threat to India’s security.

The Washington-DC based human rights group, International Christian Concern (ICC) www.persecution.org has learned that Bangladesh's ruling party (the BNP) is becoming ideologically allied with fundamentalist Islamic elements within the country and is maneuvering to steal the upcoming election. If this effort succeeds it will have disastrous results for democracy and for Christians alike.

ICC is especially concerned that the inclusion of Islamic fundamentalist parties in the government threatens to undermine this country's democratic process and commitment to human rights, especially religious freedom. It is extremely disconcerting that the current ruling party's senior joint secretary-general recently proclaimed at a Jamaat meeting that, “We are members of the same family.”

If the BNP is truly in bed with Islamic fundamentalists, it is no wonder that Islamic militants have been so successful in carrying out terrorist attacks in recent months. Within the past year more than 30 have died and 150 have been wounded in terrorist attacks by Muslim extremists, including two Christian health workers who were hacked to death on July 29, 2005.

The Apocalyptic Teaching of Islam
The totalitarian temptation remains powerfully in place. Muslims across the world are drawn by the apocalyptic teachings of Islam with its slogan “Islam is the solution.” That was the case from Iran in 1979 to Algeria in 1992 to Turkey in 2002, to the Paris riots in 2005 to the actions of the Hezbollah and Hamas in recent weeks.

Conclusion
The world stands today at the precipice dividing the eras of the post-Cold War which we have know since 1989–one of expanding democracy and free markets–and a new world order which is unknown and certainly a much less prosperous and friendly place. The Leftist/Marxist - Islamist Alliance through joining together a global cabal of nations for the control of the world’s energy infrastructure, finance, media and transportation assets present a real and current danger to the West. The cost of defending a policy of Energy Interdependence as a cornerstone of foreign policy is huge in terms of potential loss of lives and impact on our economy. The West and particularly America cannot maintain our economy by assuming that the developing world along with the “recycle” of oil wealth will continue to provide a market for debt and our energy resources without extracting the huge price of our security, freedom and liberty. Spreading democracy requires us to take responsibility for our financing and energy needs. A program leading to Energy Independence is both feasible and desirable. The risk is failing to act now to make the world a safer and environmentally sustainable place for our children to grow up. See: Give Me Energy Security And I Will Give You A Foreign Policy.

- DAVID J. JONSSON

David J. Jonsson is the author of Clash of Ideologies –The Making of the Christian and Islamic Worlds, Xulon Press 2005. His new book: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance (Salem Communications (May 30, 2006). He received his undergraduate and graduate degrees in physics. He worked for major corporations in the United States and Japan and with multilateral agencies that brought him to more that fifteen countries with significant or majority populations who are Muslim. These exposures provided insight into the basic tenants of Islam as a political, economic and religious system. He became proficient in Islamic law (Shariah) through contract negotiation and personal encounter. Jonsson may be reached at: djonsson2000@yahoo.co.uk

End of Cheap Oil!

2006-06-10T17:15:00.000-07:00

by Puru Saxena
Editor, Money Matters
June 06, 2006

The human race depends on energy, period. Our planet consumes around 84 million barrels of oil daily whilst supply is around 84.5 million barrels per day. Global demand has increased by roughly 2% per annum over the past 50 years. Most of the recent growth in oil demand has come from, you guessed it, China . At the beginning of 2000, China used to consume 4 million barrels per day and now it consumes 6.5 million barrels each day! In other words, China ’s demand has appreciated by 62.5% over the past 6 years! Despite this exceptional growth, the average Chinese still consumes only 1.82 barrels of oil in a year. Just for the record, the average American consumes 25 barrels in a year!

Across the Himalayas, India (home to 1.1 billion people) consumes 2.5 million barrels of oil per day. Accordingly, India ’s per-capita consumption comes in at a miniscule 0.83 barrels! On the other hand, per-capita oil consumption in a more advanced Asian country such as South Korea comes in at 17 barrels. Figure 1 shows that despite an enormous discrepancy in per-capita consumption levels, India is already a bigger consumer of oil.

Figure 1: India more thirsty than South Korea !

Source: www.yardeni.com

Over in North America, Mexico ’s per-capita consumption is 7.3 barrels a year. Now, let’s assume that due to economic development in a few years time, the average Indian starts consuming half the amount of oil as the average Mexican – highly likely in my opinion. When that happens, India will require 11 million barrels of oil on a daily basis! So, whenever somebody tells you that oil is in a “bubble” and ready to crash, ask them where this additional oil will come from? As far as I’m aware, not a single gigantic oil-field has been discovered anywhere in the world for the past 35 years, this, despite all the technological breakthroughs and marvels! To make matters worse, the following oil provinces are past their peak production and in decline – Alaska , Siberia , US , Kuwait , North Sea , Indonesia , Mexico and China .

Let me put it succinctly, our world faces a dire energy crisis based on supply and demand. Over the coming years, I expect the price of crude oil to ignite! How high will it go? Frankly, $200 per barrel wouldn’t surprise me. Over the past 9 months, the price of crude oil has consolidated and gone nowhere, thereby frustrating the bulls. Figure 2 shows that it may be getting ready for the next advance in its bull-market. Note that the RSI and MACD indicators at the top and bottom of the chart are now turning up as defined by the red arrows. Previously, whenever these indicators turned up, the price of crude rallied. Soon, the US will face its “Hurricane Season” and if last year’s track-record is any guide, oil may easily reach $100 per barrel on supply disruptions.

Figure 2: Crude oil ready to ignite?

Source: www.stockcharts.com

Moreover, I also anticipate natural gas, uranium, ethanol as well as other alternative energy prices to rise in the future. In summary, energy should form a core position of your investment portfolio as this is the only protection we have from the energy shortages and the huge price increases we will witness as a result of expensive oil.

Our firm has invested a large chunk of our managed accounts to the energy complex. As far as possible, we’ve bought the underlying commodities rather than owning stocks of energy-producing companies. Finally, we’ve also invested in stuff like sugar, corn and wheat, which will be in great demand for the production of ethanol and bio-diesel.

Puru Saxena Ltd.
Suite 1208, Citibank Tower
3 Garden Road, Central, Hong Kong
Phone: (852) 3589 6789 Fax: (852) 3585 5665 Email l Website

Rocks, Rock Oil and Peak Oil

2006-05-15T20:29:00.000-07:00

by Byron King

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ALMOST 2,000 YEARS AGO, a Stone Age tribe made camp under a sandstone overhang in a place south of Pittsburgh now called Meadowcroft Rock Shelter, in Washington County. Theirs was a world still in glacial throes, with the edge of a mile-thick sheet of ice not far to the north. On the edge of a frozen ice desert that covered half the continent, these ancients sought protection from the bitter elements. Today, visitors to Meadowcroft can enter an open excavation and view evidence of tools and campfires made by these wandering souls so long ago.

Not quite a century and a half ago, in 1859, a man of the Iron Age named Edwin Drake made his own mark upon human history by driving down one of the world’s first commercial oil wells on the banks of Oil Creek, in Venango County south of Titusville. Although the Drake Oil Well produced only 25 barrels of “rock oil” on its first day of production, and that from the grand depth of 69 feet, it ushered in the Age of Petroleum. Out of Drake’s well arose most of what makes up our life as we know it now.

Of course, without oil in this world something else would be here in its place. Ours might not resemble the Pleistocene existence of Meadowcroft, but neither would it be anything remotely like what we know today. Absent abundant quantities of oil cycling through the arteries of world commerce, our motorized, mechanized, industrialized world would not be here, and neither would we, I venture to guess.

The oil wells of the world produce something over 84 million barrels of petroleum every day, or about 1,000 barrels per second, and every drop is consumed in an energy-hungry world. People move about using oil, by means of train, plane, or automobile. People wear oil, in the form of synthetic fibers. People eat oil, in the form of tractor fuel, fertilizer, transport, processing, refrigeration or preservation, and cooking.

Modern medicine is premised on the use of large amounts of petroleum-based feedstock, and other forms of disposable plastic. Much, if not most, of modern commerce is based on the extensive use of oil-based plastic and chemicals, and oil-fueled transport of goods over vast distances. And since the time of Edwin Drake, oil has been relatively cheap, which is pretty much why things evolved as they did.

This is also why it is crucial that you understand the concept of “Peak Oil,” which is a shorthand way of expressing the geological concept that mankind has reached a "peak" in its ability to produce this depleting resource from the crust of the Earth. The world’s total level of production of about 84 million barrels of conventional oil per day will not last much longer. It is on the cusp of decline.

Peak Oil is not some sort of Internet conspiracy theory. Peak Oil is as much a geological fact as is anything that occurs on a geological scale. Oil production has peaked in almost every major oil-producing nation or region on the planet, starting with the United States in 1970. U.S. oil production peaked in that year along the lines predicted in 1949 by a brilliant and eccentric geologist named M. King Hubbert.

Hubbert noted the rather obvious point that you cannot produce what you have not discovered. So Hubbert graphed U.S. oil discoveries from the 1860s onward and predicted a peak for U.S. production in 1970, a peak that occurred on schedule, although it was only apparent in hindsight.

Even the massive oil discovery at Prudhoe Bay, Alaska, in 1968 barely changed the shape of the decline in the production curve that Hubbert’s theory set forth. Since 1970, U.S. oil imports have done nothing but increase, year over year, from places with surplus oil production. This is all about to change.

Ominously, during the past four decades, oil discoveries worldwide have slowed to a snail’s pace while demand for and production from earlier discoveries have soared. Similar to what occurred in America in 1970, oil production in other regions of the world has also encountered peaks.

Oil production in places as diverse as Indonesia and Mexico, Iran and the North Sea has topped out, rolled over, and is now in a state of irreversible decline. That is, oil producers in these regions have begun to encounter dramatic decreases in the volumes of oil they can find and lift from the ground, let alone sell into the world’s markets.

The list of nations in the Peak Oil Club might surprise you. Kuwait announced a peak in daily oil production in November 2005. There are good estimates that Russian oil production is peaking and will commence a decline, if not a collapse, within 3-5 years. Even Saudi Arabia is struggling to maintain its current rates of oil production.

Add to the geological nature of the decline in oil production the fact that there is a worldwide shortage of onshore and offshore drilling rigs and necessary production equipment such as tubular goods, drill bits, pumps, and valves.

And there is a severe shortage of skilled manpower in the petroleum industry, the result of the worldwide contraction of the production industry during the “cheap oil” days of the 1980s and 1990s. The bottom line is that world oil production is maxed out and will commence an irreversible long-term decline over the next few years.

With major regions of the oil-producing world entering or already in a state of irreversible decline, there is no "swing" capacity to accommodate increased oil demand. But demand for crude oil and refined product still follows its historic and increasing trend lines, particularly with the rapid economic growth in Asia in China and India. Thus, it is left to a rising price to, as the saying goes, “clear the market” for oil.

As U.S. motorists confront the long-term reality of paying $3 and more for a gallon of gasoline (and I believe that it will be much more, barring some worldwide economic collapse), they are directly experiencing an unpleasant economic and energy future in the form of Peak Oil. Hubbert predicted it many years ago, and that future is now.

The world will produce less and less conventional oil over time, and the nicest way to put it is that people will have to figure out some other way to do things besides burning oil the old-fashioned way.

Peak Oil will force people to view the world differently, to a degree almost unimaginable to those who scarcely understand the concept just now.

Mankind will reduce oil consumption because the oil will simply not be there. Being “green” and “environmentally friendly” will have next to nothing to do with it. Being “rich” might not help much either, although it probably will not hurt.

We live with the ghost of Edwin Drake, who died in 1880. Drake’s remains are interred in Titusville beneath an imposing granite memorial, and under the shadow of a handsome bronze sculpture of a muscular man pounding and dressing a drill bit with a massive hammer. It is all very neoclassical, noble, and impressive. Drake's monument reads in part:

“Col. Edwin L. Drake...Founder of the Petroleum Industry, the Friend of Man.

“Called by Circumstances to the Solution of a Great Mining Problem...He laid the Foundations of an Industry that has Enriched the State, Benefited Mankind, Stimulated the Mechanical Arts...and has Attained Worldwide Proportions.

“His highest Ambition was the Successful Accomplishment of his Task. His Noble Victory the Conquest of the Rock, Bequeathing to Posterity the Fruits of his Labor and of his Industry.”

“The Conquest of the Rock,” it claims on the tomb, with hubris similar to that of fabled Ozymandias. How fitting that Drake’s grave at Titusville is not far from the Stone Age ruins of Meadowcroft, only about 125 miles or so as the crow flies across southwest Pennsylvania.

In one ancient hollow, beneath a ledge of sandstone, people eked out their existence, burnt their charcoal, and lived whatever life they could make for themselves in the shadow of an ice sheet. In another, more modern locale, Drake conquered the rock -- for a while, perhaps -- and brought unimaginable change to the trajectory of mankind’s existence.

But in both places, Meadowcroft and Titusville, the lesson appears to be that mankind never truly conquers the rock.

Peak Oil is nature’s way of rebalancing the equation. And Peak Oil is today as much a challenge to the modern world as the Pleistocene ice sheets were to the people of Meadowcroft. Peak Oil will control your destiny. You should start learning about it, thinking about it, and planning for it.

Until we meet again…

Byron W. King

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.
While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.

Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Planning Policy Strategy and Energy, Part III

2006-04-17T22:08:00.000-07:00

by Byron King

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In Parts I and II of this article, I discussed the concepts of planning, policy, and strategy and connected them with the phenomenon of Peak Oil. My goal was and is to promote thinking about what can be called a true "energy strategy." (As opposed to the "What, me worry?" strategy that presently dominates public policy.)

In outlining my arguments, I borrowed extensively from the political, policy, and strategic ideas of Karl von Clausewitz, set out in his historical study of policy and strategy, On War, published in 1832.

Clausewitz was certainly not writing about oil, in that his book was published 27 years before Col. Edwin Drake inaugurated the Age of Oil at Titusville, Pa. Instead, Clausewitz was reviewing the Napoleonic Wars through the lens of policy and strategy.

But I believe that the ideas Clausewitz developed have much broader scope than just in the martial arena, and particular applicability to the Peak Oil world and what will follow.

More Policy, Strategy, and Energy

At the end of Part II, I was discussing the national-level U.S. warfighting policy and strategy during World War II. I described the policy and strategic context of some of the major decisions of World War II, such as the timing of the D-day invasion of France and the Navy and Marine Corps invasion and capture of Iwo Jima.

These major battle events did not happen in isolation, but were part of a strategic plan. Strategic events never happen in isolation, and that is a point well worth remembering.

In Part II of this article, I referred to the famous statement of Japan's Adm. Isoroku Yamamoto, who in 1940 told the Japanese Premier Fumimaro Konoe, "If I am told to fight the Americans, I shall run wild for the first six months. I can promise to give them hell. But I have utterly no confidence for the second or third year."

Yamamoto truly understood the policy and strategy implications of resource-poor Japan waging a major war against the United States, with its vast resources.

This was no idle comment by Yamamoto. The commander of the Imperial Japanese Navy was consistent in his beliefs, and in 1941 stated, "Anyone who has seen the auto factories of Detroit and the oil fields of Texas knows that Japan lacks the national power for a naval race with America."

(Note: I wonder if there are any modern equivalents of Adm. Yamamoto in other countries making the same observations today and coming to a different conclusion?)

But there was a curious logic of politics and policymaking at work within the highest levels of Japan's government in the late 1930s and early 1940s. It was Japan's lack of resources, its self-perception of a "lack of national power" that prompted its leadership to mobilize the military and strike out in wars of expansion and conquest.

But for now, enough discussion of warfighting in World War II and the industrial planning that supported it in the United States. And we will discuss Japan further in this article, but with reference to postwar progress, not dwelling on the failed the Japanese war effort. (But I will return to these themes in future articles.)

For now, I am deliberately going to overstate what I believe to be the case with respect to U.S. energy policy and strategy. I am going to overstate the case just to be sure I am not understating it.

More on the "Free Market" as a Strategy

What is the basic fallback principle to which Americans tend to revert when confronted with hard questions of industrial policy? It is that "free markets" are generally better at organizing economic activity for wealth and profit and promoting general progress than are government plans? The idea of "government planning" is anathema to most Americans.

It brings to mind visions of the five-year plans of the Soviet Union, or the political discomfort of allowing the government to pick winners and losers, as in modern Japan. This strikes most Americans as just plain wrong. It is far better, goes the thinking, to allow people the freedom to take risks, and one hopes to come up with better ideas, if not better mousetraps.

The idea of a free market in goods and services is, in fact, such an icon of American economic belief that federal, state, and even local governments will go to the most extreme lengths to establish and enforce policies that ensure that so-called "freedom" reigns in the marketplace.

Localities across the land will, for example, license and regulate the humble hot dog peddler, so as to preserve the "free market" in taxpaying restaurants. Oh, wait a minute. That is not such a free market after all, is it?

Still, if the market for goods and services is not free, for example due to the rise of "trust-like" behavior on the part of businesses, then, by golly, the government will regulate it some more. That way, if the market is not "free," it will at least be "fair."

So as things currently stand in the United States, the government regulates the air we breathe, the water we drink, the food we eat, the medicines we ingest, the content of the paint on the walls, the thickness of the sidewalk beneath our feet, and...you get the picture. All caricature aside, the American free market is hardly "free."

Despite this apparent dichotomy of freedom through regulation, some people still ask questions along the lines of, "Why isn't it enough to leave energy prices to market forces?" And that is a fair question. Let's take it at face value.

There is a lot of evidence that the so-called free market in energy, particularly for oil and oil products, has worked well for many decades, bringing cheap energy to many people. So why is it necessary for the government, or anyone else, to "plan" for the energy future? Does the free market not work anymore?

And if the free market in energy supplies does not work, then what is the answer? After all, there is a great deal of evidence that the long lines for gasoline in the United States in 1974 were caused by government regulation of the product distribution channels, not because of the Arab oil embargo.

And even the recent spot shortages of fuel in some places in the aftermath of Hurricane Katrina were not really failures of the free market so much as they were related to the natural-social phenomenon of mass evacuations from coastal areas that occurred at the urging of government officials.

As things worked out recently, spiking gasoline prices served as one of the clearest of market signals that there was money to be made. So high prices for gas drew supplies of fuel product back into the otherwise barren marketplace. This is Economics 101-type stuff.

Industrial Policy on a National Scale

But look at the issue from the other direction. "Turn the map around," as the Marines like to say. Look at your situation, and think about your plan, through the eyes and mind of your opponent. And consider the possibility that, from time to time, things change to the point that the old ways really no longer work, nor do the old constructs apply.

The great scholar of management Peter Drucker noted that some industries and some kinds of economic activity are clearly national in scale, and are thus the inherent province of national policy. The oil industry in general is clearly one of these types of economic activities.

For well over a century, the oil industry has been heavily scripted, regulated, and taxed, from the most remote field drilling prospect to the point where the gasoline pump nozzle enters the gas tank of the automobile at the humble point of purchase.

Moving back up the chain from the gasoline pump, the fact is that America purchases immense amounts of oil from abroad. And at the far distant end of that long chain of commerce, the United States has a global-scale military commitment to, as the saying goes, "ensure access" to these foreign oil supplies.

I am not trying to tell you something you do not already know, but instead point out the reality that the so-called free market in oil is not really free, or anything close to free. No big government, no cheap oil.

Ask yourself this question: "How much does a barrel of oil really cost?" Look beyond just the posted price on the New York Mercantile Exchange. To come up with an approximation of the true price for oil, you have to add in all of the external costs, such as the U.S. foreign military commitment that "ensures access" to the stuff. Then divide by the number of barrels produced.

Depending upon whose numbers you want to believe, the additional cost of the "security" component of a barrel of oil landed in the United States ranges from $20 per barrel to over $60 per barrel. So the true cost of oil to the U.S. economy may be close to twice the posted price.

(And the rest of the oil-using world, which does not directly pay the costs of the U.S. military commitment to "ensure access" otherwise picked up by the taxpayers of America, thanks us every day, as I am sure you, dear readers, have noticed. But I digress.)

Furthermore, an energy industry facing Peak Oil is even more so one of these types of industries of which Drucker wrote. In Part I of this article, I discussed the rather pessimistic views of James Kunstler about the U.S. energy future. And I discussed the somewhat more optimistic views of Peter Tertzakian.

No matter to which of these alternative futures you might subscribe, they both forecast that supplies of conventional crude oil will begin to tighten and then begin an irreversible decline down the Hubbert curve. In the end, things in the oil industry will become even more heavily scripted, regulated, and taxed.

The U.S. military commitment to "ensure access" to oil supplies will become even larger and more dispersed and more costly. And that is if everything holds together and follows current trends, and does not just blow up and spin out of control.

The core of the problem in all of this is that there is little or no strategic rationality to what is going on, certainly not in the United States. To the extent that there is any high-level planning in the U.S. energy arena, it is inadequate if it does not just plain stink. From an economic standpoint, Americans are using oil products not priced according to their true costs. Cheap gas and cheap money are simply incompatible over the long run. And maybe even over the short run, considering where we are now.

Tax Policy Is Energy Policy

Study after study in many different nations and economies has shown, for example, that the best way to avoid having to scramble for new supply sources of oil is to control the growth of demand, if not outright to reduce absolute demand.

In other words, it is not about "imports from the Middle East," as referenced in the president's State of the Union speech. It is all about aggregate demand for a depleting product. So is it possible to reduce aggregate demand? The short answer is yes -- and I do not mean by using a totalitarian or authoritarian approach.

Consider Japan, a postwar industrial powerhouse, and now a respected parliamentary democracy that today uses less oil than it did in 1974. That is, after 32 years of economic growth (OK, including a severe recession in the late 1980s and 1990s), Japan is using less oil now than before, in an absolute sense.

So the case of Japan demonstrates that reducing absolute oil demand is possible over time. How does Japan do it? The short answer is with high fuel taxes and an emphasis at many levels on producing energy-efficient devices, particularly fuel-efficient cars (products that Japan then exports and sells in America, among other places).

Higher taxes on fuel at the gas pump in America would begin to do some of the trick of arresting growth in oil usage. But so far, politics in the United States have ruled out higher gasoline taxes even during the "cheap oil" days of the 1980s and 1990s.

I have heard intelligent people, including not a few politicians who are in a position to know better, describe it along the lines of "cheap gas is an American birthright." (To which I have a two-word response: "Peak Oil.")

So lacking a long-term approach to conserving a depleting asset, the default energy policy of the United States seems to be that the nation will buy and import a lot of oil from other nations, rather than pay high gas taxes.

This low-tax, high-demand situation in America sharply contrasts the energy situation in most other advanced economies on the world, particularly Europe and Japan (see above), where fuel taxes are hefty to say the least.

With low fuel taxes in the United States and high fuel taxes in Europe and Japan, it follows that the average fuel efficiency in the U.S. automobile fleet is somewhat less than half that of the automobile fleet in Europe. And the U.S. fuel-efficiency average is far less than half the average fuel efficiency of the Japanese automobile fleet.

This particular statistic concerning the comparative national average for fuel efficiency matters a lot when a nation uses as much gasoline every day as does America. Current U.S. daily gasoline demand is around 9.2 million barrels per day (it varies seasonally).

If the U.S. automobile fleet were just as efficient as the European fleet (a very big "if," but work with me on this), that usage number would be about 4.6 million barrels of gasoline per day.

But still, it is possible that increased fuel-efficiency alone could "save" half of the gasoline used in the United States every day. And consider that it takes two barrels of oil, on average, to refine into one barrel of gasoline.

So "saving" 4.6 million barrels of gasoline per day is the equivalent of daily reducing crude oil usage by 9.2 million barrels, in a world that produces and consumes about 84 million barrels of oil per day. So what you might want to label as "excessive" U.S. gasoline demand alone, based simply on considerations of low mileage, accounts for as much as 11% of the total daily world oil demand, or an amount equal to the anticipated daily oil demand of China in 2010 (U.S. Department of Energy estimate).

The economic and policy arguments do not stop there, however. Low automotive fuel efficiency in America directly leads to higher levels of oil imports, higher demand, higher posted prices, and far more U.S. dollars sent overseas to pay for oil.

In the aggregate, then, the United States is spending hundreds of billions of dollars overseas, and in essence "decapitalizing" itself, so that many millions of drivers can sit in their cars and idle in traffic jams every day. Can you really say that this is the "free market" at work? What would Clausewitz say? I think he would call it bad policy and abysmal energy strategy.

This abysmal oil situation is so bad that it must be a reflection of an inherent flaw in the political and policymaking process. The current situation is so self-destructive to the nation over the long term, and such obviously bad policy, that it could not otherwise occur if the nation were, let's say, at war.

(Oh, wait a minute. We are at war. Last I heard, it was going to be a "long war," according to the Quadrennial Defense Review.) Think about it. Any general who proposed a warfighting strategy equivalent to the current so-called "energy strategy" to political leaders would lose his stars and be ushered off to retirement in the Old Soldiers' Home.

Yet the policymakers in America move ahead as if by instinct, like moths to a flame, in an attempt to perpetuate a lost past receding before our eyes. (Well, OK, I admit that you have to understand how to view depletion at a global level. This is not for amateurs.)

And people in general wonder why they are less and less in control of their energy destiny, and bellyache that the nation is more and more at the mercy of the whims of other people in faroff places. The answer is as close as the driveway of the large house in the leafy suburb, many miles from the homeowner's place of employment, which is a state of affairs due in large measure part to a legacy of low fuel prices, if not low fuel taxes.

Score this latter point for Jim Kunstler, author of The Geography of Nowhere and The Long Emergency, who has been one of the most vocal and articulate commentators on the subject: One of Kunstler's key litmus tests for whether or not any politician "gets it" on Peak Oil is if the honcho supports reconstructing some semblance of an intercity passenger rail system in the United States. It would be great industrial policy, and we are going to need it. This would probably be a winning issue for the presidential election in 2008, if anyone were listening.

The foregoing is merely one out of innumerable examples of long-term energy folly in the United States. But it illustrates that point that you have to think back "up the chain" to the bad policy and even worse state of politics. It highlights the point that the politics of energy in the United States tend to be ill informed to the point of being ignorant and self-destructive. The energy policy that flows from such bad politics is disjointed.

And how can any sort of "winning" energy strategy (let alone a survival energy strategy in a world that may already be at Peak Oil) emerge from this kind of mess? Recall what I said in Parts I and II of this discussion, referring back to Clausewitz: "While a failure of tactics or operations can doom the entire chain, a failure of policy and strategy will doom the entire chain."

The New Strategic Realities of Energy

"Strategic Realities"? Sounds like a business school case, but that is not my focus. This discussion is more a mixture of graduate work in geology, plus a tour at an advanced war college. (Hint -- like the one located at Newport, R.I.) The economics of energy have been fundamentally altered by the geological reality of Peak Oil, coupled with world demographic trends toward more people using more oil.

These key factors change the economics of energy, and hence impact the politics of energy at the very highest levels, and at the level of national policy. In this respect, America is late to the game -- or should I say to "the great game."

There has been up till now a stubborn refusal in the United States to face the facts of the Peak Oil reality. At some point, mere negligence becomes gross negligence becomes willful misconduct.

With rare exceptions like Rep. Roscoe Bartlett of Maryland (a conservative Republican, by the way), "power" is failing to speak truth to the people. It is left, then, for people somehow to speak truth to power, not unlike Adm. Yamamoto to Premier Konoe in 1940.

This is why I believe that it is important to discuss energy in terms of developing a true "energy policy and strategy" approach to an oncoming future characterized by declining supplies of crude oil, dramatically higher costs for the stuff, and immensely more political friction both home and abroad. Nothing is going to get easier. And crafting the outlines of a continuously evolving national energy strategy is not a simple matter.

A sound energy strategy will have to be adaptable to the dynamics of constant change in a competitive world. One thing for certain is that there is no one-shot, cookbook "energy strategy" that if only you follow the recipe will forever maintain some happy status quo.

Look around the world and you will see many nations that consider their energy resources, and associated production and distribution systems strategic assets, to a scale not even comprehensible to most Americans.

These overseas resources and related systems are considered, by their owners, to require management through a deliberate planning process sharply focused on national energy security and long-range, sustainable access to energy resources.

This does not necessarily mean that some government entity owns every oil well and every refinery, although in some countries, that is the case. But it does mean that the policymakers within the respective governments have decided to concern their national policy apparatuses at a strategic level with the sources and uses of energy and to focus on aspects that are deemed to be critical, particularly in the arena of sustainability.

Sweden, for example, has a national plan to become oil independent within 20 years, mostly by eliminating demand for petroleum in its industries and society. The Swedes fully intend to remain a developed nation and to provide a high-level quality of life to the population. But they will do it without relying on other people's oil. Good for them. This is Swedish national policy, and the voters are coming onboard in ways that leave U.S. policy in the dust. Wow!

The list of other nations with what can only be termed "strategic plans" for their energy resources includes places that are important to the world of energy production and full of very intelligent people, despite any caricatures or stereotypes you may carry with you.

From Russia to Venezuela, from China to Iran, these are nations that have energy plans and policies and strategies for the 21st century. Some nations and plans may be better than others, but at least they have plans.

In America, there is a rather foolish tendency to belittle some of these other nations and their energy policies, if not to fear them. (Although, in the end, America winds up reacting to them.)

This is partly due to a poverty of imagination in the collective minds of U.S. leadership, such as when one member of Congress called the Swedes and their energy goals "quaint" and "not relevant" to the U.S. situation. I wonder if another high-ranking member of the U.S. government thinks that the Swedes are fortifying their "personal virtue" by striving to become oil independent within 20 years.

Oil independence is "not relevant"? Aggressive energy conservation measures are merely "personal virtue"? Famous last words, I suppose. This kind of thinking is pre-Peak Oil and all but endorses a national policy-by-default to foreclose any sense of adaptability to changes in the world of energy.

At the lofty levels of policymaking and strategy formulation, certainly concerning the future of energy supply for the United States and its allies in the world, there is no such thing as finality. The goal has to be to create a continuous process of policy-strategy formulation in the arena of energy that influences events such that things proceed to favor the interests of one party or another, and preferably favors our "side," if any side is going to prevail.

Couple the current U.S. poverty of imagination in the arena of strategy with the evident raw suspicion and belligerent opposition on the part of U.S. leadership when some foreign nations adopt policies that are confrontational to U.S. entities and interests.

Sometimes, the United States acts surprised when other nations act in their own self-interest, when for one reason or another it is America that has made itself vulnerable to the whims and caprices of others. So what is the answer going forward? Change policy? Remake national energy strategy? Or do we really think that we can, as the saying goes, just "bomb them all back to the Stone Age?" Has that ever worked before?

For now, suffice to say that there are people in high places in other nations engaged in deliberate energy planning and formulating energy policy and strategy in their own ways. They are moving their pieces about on the chessboards of the world. And despite whatever sense of motion you may see within the U.S. leadership cadre, my opinion is that U.S. energy policy and strategy is unfocused and inferior to that of certain other nations.

Speaking of moving chess pieces about on the chessboards of the world, remember that the word "checkmate" is derived from the Farsi language of Persia, today known as Iran. In Farsi, the expression "shah mat" translates to "the king is defeated." How is that for a fundamental "strategic" concept?

Until next time,

Byron W. King

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.
While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.
Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Sanctions against Iran

2006-04-16T17:37:00.000-07:00

By
Honorable Congressman
Dr. Ron Paul

As the drumbeat for military action against Iran grows louder, some members of Congress are calling to expand the longstanding U.S. trade ban that bars American companies from investing in that nation. In fact, many war hawks in Washington are pushing for a comprehensive international embargo against Iran. The international response has been lukewarm, however, because the world needs Iranian oil. But we cannot underestimate the irrational, almost manic desire of some neoconservatives to attack Iran one way or another, even if it means crippling a major source of oil and destabilizing the worldwide economy.

Make no mistake about it: Economic sanctions are acts of aggression. Sanctions increase poverty and misery among the very poorest inhabitants of targeted nations, and they breed tremendous resentment against those imposing them. But they rarely hurt the political and economic elites responsible for angering American leaders in the first place.

In fact, few government policies are as destructive to our economy as the embargo.

While embargoes sound like strong, punitive action, in reality they represent a failed policy that four decades of experience prove doesn't work. Conversely, economic engagement is perhaps the single most effective tool in tearing down dictatorships and spreading the message of liberty.

It is important to note that economic engagement is not the same thing as foreign aid. Foreign aid, which should be abolished immediately, involves the US government spending American tax dollars to prop up other nations.

Embargoes only hurt the innocent of a targeted country. While it may be difficult for the leader of an embargoed nation to get a box of American-grown rice, he will get it one way or another. For the poor peasant in the remote section of his country, however, the food will be unavailable.

It is difficult to understand how denying access to food, medicine, and other products benefits anyone. Embargo advocates claim that denying people access to our products somehow creates opposition to the despised leader. The reality, though, is that hostilities are more firmly directed at America.

Father Robert Sirico, a Paulist priest, wrote in the Wall Street Journal that trade relations "strengthen people's loyalties to each other and weaken government power." To imagine that we somehow can spread the message of liberty to an oppressed nation by denying them access to our people and the bounty of our prosperity is contorted at best.

For more than thirty years we have embargoed Cuba in an attempt to drive Fidel Castro from power. Yet he remains in power. By contrast look at the Soviet Union, a nation we allowed our producers to engage economically. Of course the Soviet Union has collapsed.

Embargoes greatly harm our citizens. As the American agricultural industry continues to develop new technology to reduce costs and increase yields, it becomes more important for farmers and ranchers to find markets outside the United States to sell their goods so they can make ends meet. By preventing our farmers and ranchers from competing in the world market, we deny them very profitable opportunities.

Government meddling is always destructive to the free market; people inevitably will make wiser decisions about how to spend their money, with whom, and when, than politicians in Washington. Embargoes simply do not accomplish the ends advocates claim to desire, and are extremely harmful to the well-being of Americans.

Dr. Ron Paul

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

Dr. Paul is the author of several books, including Challenge to Liberty; The Case for Gold; and A Republic, If You Can Keep It. He has been a distinguished counselor to the Ludwig von Mises Institute, and is widely quoted by scholars and writers in the fields of monetary policy, banking, and political economy. He has received many awards and honors during his career in Congress, from organizations such as the National Taxpayers Union, Citizens Against Government Waste, the Council for a Competitive Economy, Young Americans for Freedom, and countless others.

Dr. Paul's consistent voting record prompted one Congressman to comment that "Ron Paul personifies the Founding Fathers' ideal of the citizen-statesman. He makes it clear that his principles will never be compromised, and they never are." Another Congresswoman added that "There are few people in public life who, through thick and thin, rain or shine, stick to their principles. Ron Paul is one of those few."

Planning, Policy, Strategy and Energy, Part II

2006-04-14T17:30:00.000-07:00

by Byron King

for Whiskey & Gunpowder
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IN PART I of this article, I discussed Karl von Clausewitz, and his important study of policy and strategy, On War, published in 1832. Clausewitz was reviewing the Napoleonic Wars through the lens of policy and strategy, but his ideas have broader scope than just the martial arena.

In his discussions of the Napoleonic Wars, Clausewitz was, of course, reviewing military history. But he was not writing simply for the sake of allowing his readers to enjoy the vicarious experience of war, the whiz and zip of flying bullets and the acrid smell of gunpowder clogging their nostrils.

Clausewitz was engaging in an exercise of high-level critical thinking. He was not just examining the conduct and methodology of waging war. Clausewitz was focusing on the complex interaction of changing variables over time.

In Part I of this article, I mentioned that according to Clausewitz, policy, strategy, operations, and tactics are a continuum. I summarized one of Clausewitz's key points as being that while a failure of tactics or operations can doom the entire chain, a failure of policy and strategy will doom the entire chain.

I advised you to keep the "failure of policy" and "failure of strategy" ideas in mind because we see these a lot, throughout history and certainly in current events.

A Few Words on Politics, Policy, Strategy, and Energy

I am discussing all of this because the United States needs to start thinking, and thinking very hard, about developing a "national energy strategy" in a pure sense. In Part I and in the preceding paragraphs here, I began to refer to policy and strategy in the context of Clausewitz and of warfighting.

I am using Clausewitz as the rhetorical guide to the concepts of policy and strategy. The only reason that I am now using Clausewitz in connection with energy strategy is that his application of policy and strategic concepts to the study of the Napoleonic Wars helps to crystallize thinking about the basic strategic terms. That is, the strategic concept is applicable to energy issues as well.

If you follow the continuum of Clausewitz, then politics and policy come before strategy. So perhaps we have to ask what is the appropriate energy policy for the United States? Or moving further up the line, what are the politics of energy?

These are loaded and emotional questions, particularly in a nation with the energy consumption history of America.

I have been discussing this back and forth over the months with my colleague at Agora Financial, Dan Denning, who made a good point. Dan noted that up until the present time, no U.S. national energy policy has had any true sense of strategic urgency, let alone any staying power.

Sure, it has always been fun and political sport to beat up on oil companies, going back to the days of Titusville. But a long-term national energy strategy? Not in America, and for a lot of reasons.

Back to the Future in the 1970s

The only time that energy became a fundamental issue of U.S. policy was back in the 1970s. That was when U.S. oil production peaked, imports started to accelerate upward, and energy prices rose dramatically after the 1973 Yom Kippur War.

Due to a nominal "embargo" against the United States, sponsored by the Arab nations of the Organization of Petroleum Exporting Countries (OPEC), the politics of energy became more than apparent in 1974, embodied in public dissatisfaction with long lines for scarce gasoline.

What passed for a U.S. energy policy followed the gasoline lines, mostly in terms of new federal laws and regulations concerning energy use and production. For example, there was bipartisan political support for energy conservation measures such as tax breaks for insulating homes and even mandating automakers to increase the fuel efficiency of their products. The United States determined to establish its Strategic Petroleum Reserve.

Also, there was federal sponsorship of research into alternative energy systems such as coal conversion and oil shale development, among many other energy options. A lot of things happened in America in the 1970s with respect to energy conservation, and a lot of those things were at what could be characterized as a "strategic" level, and basically good for the nation over the long haul.

Still, much of what occurred in the 1970s seems in retrospect to have been a response to clever lobbying at the federal political level by well-connected interest groups, and U.S. knee-jerk reactions to singular events and geopolitical machinations by other parties in other nations.

That is, what passed for U.S. energy strategy was along the lines of maintaining a happy, yet receding, status quo, not the creation of a continuous process of influencing and shaping events toward an energy future that would be marked by radical change.

The events at Three Mile Island, for example, stand alone as a sharp, high-G turning point on the U.S. collective view of nuclear power, a view that has taken almost two generations to start to change.

Meanwhile, the United States embarked on a massive program to generate electricity using natural gas, which one knowledgeable commentator likens to "turning gold into lead." And even the Iranian revolution of 1978-79 was viewed by many policymakers as a geopolitical event that was the proximate cause of oil price increases in 1979 and 1980, not as a harbinger of an energy-short future.

Looking back, it seems as though little of either the politics or policy toward energy in the United States during the 1970s was premised on a clear understanding of the underlying physical reality of the eventual impending decline in conventional oil production.

As far back as 1956, the great geologist M. King Hubbert made public his mathematically determined prediction of the "peaking" of domestic U.S. oil production, and his prediction came true for the United States in 1970 (although it only became clear in hindsight).

As the 1970s progressed, this Hubbert school of thought was distinctly a minority viewpoint, certainly much less prevalent than even the current Peak Oil school. After leaving the employ of Shell Oil, Hubbert worked for the U.S. Geological Survey, lectured at many schools, and was for a time a visiting professor at MIT.

Yes, Hubbert's argument was out there, but was a distant voice in the wilderness. Hubbert's seminar at no less an institution than Harvard University in 1977 attracted all of about a dozen people, one of whom was me.

In the 1970s, whenever some people would speak of limits to the ultimate levels of oil production, others as often as not would sneer and label the discussion derisively "Club of Rome" thinking. In all fairness, U.S. leadership and policymakers had other things to worry about, like surviving the Cold War, and losing the Vietnam War.

And it is not out of line to note that the festering cultural Marxism within much of U.S. politics in the 1970s foreclosed intelligent thinking at many levels (both then and now, I should add). but that is another discussion for another time.

It is interesting that one of the most prescient discussions of the world's energy future was presented in the 1970s not by any senior leader or policymaker of the U.S. political or business establishment, Democrat or Republican, but by the great science fiction writer Isaac Asimov.

Best known for such classic science fiction works as the Foundation series and I, Robot, Asimov gave his prophetic lecture in 1974 entitled "The Future of Humanity." Here is the link to the rather astonishing text if you are interested: http://www.asimovonline.com/oldsite/future_of_humanity.html.

Back to the Future in the 1980s and Beyond

The political and policy debate of the 1970s led in the 1980s to what passed for a national political consensus (well, what passes for "national consensus" in a vast nation like America) that no long-term national energy mobilization was necessary. Simply put, the "energy policy" was to drill for oil at home and buy more oil from abroad. (For the record, I was working for Gulf Oil Co. back then, and we drilled like gangbusters.)

When all else fails, the policy was to have a strong Navy and powerful expeditionary ground force and Air Force that could dominate events in the Persian Gulf. QED, right?

Looking back at it, the lack of any sense of urgency in crafting some sort of U.S. energy policy is not incomprehensible. By the 1980s, America had a diversified supply chain of domestic and offshore oil suppliers and the price of crude oil was serendipitously falling due to the opening up of new oil provinces like Alaska and the North Sea.

For a good many years, America had seemingly found its happy means to preserve the beloved status quo, seen in a relatively low price for gasoline at the pump. The voters were calm. The underlying politics was ill informed, if not delusional.

Despite the price spike in oil occasioned by the Gulf War of 1991, this fanciful U.S. view of its seemingly secure -- and cornucopian -- energy base lasted through the decade of the 1990s as well, during the "waking up from history" period and into the new millennium. Over time, the shale oil projects of the 1970s were shuttered.

The SUVs of the 1990s took to the roads by storm. And like the gold-laden galleons of another age, the oil tankers docked at U.S. ports with their precious cargoes of black treasure sloshing in the holds and pressing down upon the keels.

From a political and policy standpoint, it seemed that the factors behind any increase in energy prices in the 1980s, 1990s, and into the 2000s were temporary and political, not permanent and physical. Price spike?

It was the market at work. It was the manipulations of evil oil-traders, or some one-off military event like the "Tanker War" of the mid-1980s in the Persian Gulf. Give it time, and "Old Mr. Market" would get those pesky prices back down. To the extent that there was an energy strategy in all of this, it was to perpetuate the myths of the past.

And anyway, strategy or no, the traditional economic view in America is that "free markets" are better at allocating the resources of society than government regulation or planning. This despite the fact that the U.S. dollar is a "managed" currency, the price and quantity and quality of which are set by the Federal Reserve.

And this despite the fact that U.S. federal and state governments have heavily regulated most large-scale business activities for over a century, down to the former Interstate Commerce Commission setting the prices and tariffs for bus tickets.

And of course, up to 40%, by some estimates, of U.S. gross domestic product is the result of government spending at the federal, state, and local levels. So how "free" is such a free market, anyhow? To paraphrase a former U.S. president, "I guess it depends on what your definition of the word 'free' is."

Is the "Free Market" a Strategy?

Americans have a lot of confidence in the so-called "free market" as a mechanism to permit the nation to mobilize and meet challenges. But I have to wonder out loud if this is based mostly on wishful thinking and outdated nostalgia about what occurred in the run-up to and during World War II. Like dried-up has-been movie stars recalling their glory days on the silver screen of old, Americans have read too many of their own press releases about being the "arsenal of democracy."

Or is this kind of self-promotion just a reflection of a national characteristic, originating in a nation and culture that uses the mighty U.S. dollar as its currency, which currency is also fortuitously the world's "reserve currency." After all, it is easy to write checks if nobody ever comes to the teller window to cash them.

During World War II, America had tremendous wealth in both natural resources and capital stock, including being almost self-sufficient in oil production. (America was a net oil exporter until 1943.) Politically, the war allowed the central government to, in essence, hijack the national industrial base and orient it toward fighting a war on two fronts, on opposite sides of the planet. It was an immense undertaking.

From a policy standpoint, the key challenge for the American war planners was to figure out the most efficient ways to reorient national production to support the war policy and defeat the Axis powers.

Lack of resources, such as energy resources and other raw materials, labor, and especially credit, was not a significant factor in the American war effort. (And when it comes to modern military affairs, the U.S. Department of Defense still tends to get what it wants, particularly if the item is manufactured in a range of states and congressional districts. This is another topic for another time.)

I am by no means arguing that World War II was easy. The Second World War was an immense national effort, probably unique in all of human history, and certainly in U.S. history. But there were no real constraints or limitations at the level of domestic war production.

After all, there were no fleets of German bombers flattening U.S. cities, as was the case in many other countries in the world. And there was plenty of energy with which to keep the lights on and the furnaces burning down at the mills.

By 1944, the United States could summon its allies at Bretton Woods, N.H., to forge (some say, to rubber stamp) the future monetary arrangements for the world, with the U.S. dollar as the linchpin. It is not overstatement to say that by mid-1943 it was all but a foregone conclusion that U.S. warfighting policy, and its implementing strategy, would prevail.

Japan's Adm. Isoroku Yamamoto understood and believed this as far back as 1940 and in so many words famously said almost exactly that to Japan's premier that year. The bottom line was that the U.S. economy had the capacity to provide the theater commanders and generals and admirals -- not to mention the fighting elements of numerous allies, from Britain to China to the Soviet Union -- with the tools they needed to win the war. And so it happened.

The most difficult questions, certainly for the U.S. political and military leadership at senior levels, revolved around where and when to deploy the blood and treasure of the nation most effectively in a military sense. It was the hardest of calculus. For example, the invasion of Europe was delayed due to the need for landing craft in the Pacific Theater.

So hundreds of thousands of Russian troops died on their own German front, and Stalin fumed and raged while the D-day invasion of France was postponed again and again. But at the same time, the United States could send 1,000-plane air raids against German cities, tying up a million German air defense troops and tens of thousands of German guns and aircraft.

For an example from the Pacific Theater, the invasion of Iwo Jima occurred because the Army Air Corps wanted that particular island as a strategic base on which battle-damaged and fuel-short B-29s, valuable airplanes full of highly trained aircrews, could land on the way back from bombing Japan.

Thus, thousands of Marines died capturing Iwo Jima from fierce Japanese resistance. By the grim math of war, eventually, the deaths of these Marines saved the lives of more thousands of U.S. aircrew. As I said above, this was a hard sort of calculus.

At this D-day and long-range bombing level of strategic and operational planning, there were damn few clear-cut choices and no easy ones. But one of the few luxuries available to the war planners was not to have to worry much about from where the next barrels of black oil would come.

We will continue this discussion in Part III of this article. Thank you for reading Whiskey & Gunpowder.

Until we meet again...

Byron W. King

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.
While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.
Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Planning, Policy, Strategy and Energy, Part I

2006-04-11T08:40:00.000-07:00

by Byron W. King
for Whiskey & Gunpowder
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A COUPLE OF months ago, I wrote an article in Whiskey & Gunpowder entitled "Things Just Got Worse" (Jan. 25, 2006) concerning a major downward revision to the estimate of oil reserves in Kuwait. My sense of doom and gloom was prompted because if the downward revisions to the Kuwait numbers are true, the world's total proven oil reserves just decreased by around 50 billion barrels, or 5%.

But why be gloomy about losing something you do not really have? (Well, for starters, doom and gloom is stock-in-trade at Agora Financial. We have made a lot of money being gloomy and doomy in recent years.) If the oil was never there, then it was never there. These lost oil reserves were only phony baloney bookkeeping entries, and just a reflection of the exceedingly creative accounting that goes on within many of the world's oil-exporting nations. These downward revisions were not real oil in real rocks, right? How much can you miss what was never there in the first place? Is it really a crime to rob an empty bank?

And following the logic of "not missing" something that was never really there, let's ask the next question. Does it matter, over any period of time, not to have something that was never there?

Anyone who understands the nature of the oil industry can assure you that the downward revision to the Kuwaiti reserve numbers will not create a problem tomorrow or next week or next month. So don't worry. The oil that you will use tomorrow, next week, or next month has already been pumped from the ground, shipped via tanker or pipeline, refined in a refinery somewhere, and is in transit to your local gas station.

Even the oil that you will use next year is well identified and understood. That is, there is an oil field somewhere in this world, with oil wells that are lifting product out of the ground in a predictable fashion. And some of that oil has your name on it. All you have to do is let the global oil industry do its global oil-thing and then pay for it at the gas pump. Nothing short of a major war in the Middle East will interfere. OK, maybe you should worry a little bit.

But what about the longer term? Does the downward revision matter over the next five, 10, or 20 years? The short answer is yes. Now is the time to worry more, because when the equivalent of 5% of the world's oil reserves simply vanishes from the ledger books, it makes for a problem even if it was just "phantom oil." The unavailability of this oil, real or no, will have a severe impact in what are called the "out years." Why is this so? Because whatever amounts of long-term reserves we thought were down in the ground are no longer on the books, and no longer available. We thought these reserves were there, but now they are gone. Puff of smoke, stroke of a pen, presto, the reserves are gone. In so many words, this screws up the planning.

Planning for Peak Oil

Planning? What is "planning" anyhow? Like the weather, everybody talks about planning. But what does it mean to "plan" something? It makes for an interesting term, and an even more interesting concept.

On a personal level, most people have some sort of a plan for their life. (What, you don't have a plan for your life? Actually, you do, but you just don't know it yet.) The plan might be pretty basic, along the lines of go to school, learn a skill or trade, get a job, get married, have kids, whatever. Or maybe the plan is more complex. It is up to you, after all. Do you want to run for president of the United States? Or maybe just run away and join the circus? Be my guest. Things may work out one way, or they may work out another way. But you ought to do whatever you think you can do and give life a try. Good luck.

On a scale larger than just a single individual, families plan, and groups of people plan. Organizations plan. Businesses plan. Governments plan. Nations plan. But let's go beyond colloquial discussion and get into the philosophical roots of the term. When it comes to Peak Oil, the concept of planning takes on a rather overarching meaning. "In the long run, we are all dead," said Lord Keynes, speaking of government deficit spending and national debts.

When it comes to Peak Oil, however, the "long run" may arrive sooner than we think. Princeton University's most famous Peak Oil man, professor Kenneth Deffeyes (author of the highly acclaimed and readable books Hubbert's Peak: The Impending World Oil Shortage and the sequel, Beyond Oil: The View From Hubbert's Peak) recently stated that he believes that world oil production "peaked" in December 2005. Whoops.

So if you have not made your plans for life in a post-Peak Oil world, you are showing up late and the excitement has started without you. But then again, there is no time like the present, and it behooves you to be concerned about the issue now. After all, as the saying goes, "The future is now." (Although people also say things like "the good old days are today." So apparently, "The good old days are today," but so is "the future," because it is "now." So both the future and the past come together in the present. And remember, "Tomorrow is another day." It gets kind of confusing, I know.)

The Long Emergency

Speaking of the "good old days" and "the future is now," if you subscribe to James Kunstler and the viewpoint he expressed in his May 2005 book The Long Emergency, you had better start planning now for a very bleak future. Kunstler is a brilliant writer who postulates a world not too far down the path of time in which there is far less energy availability leading to profound societal changes, most of them negative compared with today. This will lead to smaller human populations living in radically different conditions than we see at present.

According to Kunstler, it is not just that people will be forced by circumstances in a post-Peak Oil world to abandon unsustainable mega-cities, especially desert enclaves like Las Vegas and Phoenix. People will also, for the most part, have to abandon the surrounding and unsustainable "asteroid belts" of mega-suburbs. These refugees from modernity will, if they are lucky, move to small towns. And no, this is not some happy vision of future life going on in endless replays of Mayberry, USA. Kunstler actually envisions human existence reverting to conditions similar to what prevailed in medieval times. Kunstler's futuristic book is rather shocking, in large part because his arguments are so factual and logical.

The Coming Break Point

If, on the other hand, you believe Peter Tertzakian and the viewpoint in his December 2005 book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World, the future will follow economic trends similar to those of the past several centuries. Tertzakian, a former geophysicist who worked for Chevron Corp., understands the thesis of Peak Oil. He has read most, if not all, of the currently available books, and cites them appropriately. He refers knowledgeably to the Hubbert school of thought and explains the basic thesis of impending irreversible decline in crude oil production with much clarity, and I would expect no less from someone with his technical background.

When it comes to Peak Oil, Tertzakian understands what is going on, and he is right upfront about predicting that there will be significant future price increases due to oil shortage and scarcity. But Tertzakian also believes in the profit motive, and in the promise of innovation via human ingenuity. He argues that these future price increases will serve as loud economic signals for mankind to find resources and technology with which to substitute for scarce and expensive liquid hydrocarbons.

Tertzakian refers frequently and cogently in his book to the historical transition from whale oil to rock oil for purposes of illumination in an industrial age, and from wood to coal for the energy to run the machines of industry. He discusses the rise of electricity as a source of energy in the late 19th and into the 20th centuries. He correctly cites a lot of the history of the growth of the oil industry, including some great tales of oil patch. He makes a lot of good points about future energy use patterns of both the developed and developing world. Central among Tertzakian's points is his take on the nature of the impending and profound change in the sources of materials that mankind will use in the future for heating, lighting, and transportation.

Tertzakian foresees the peak in the Peak Oil argument, and forecasts his version of how the future facts of life will alter peoples' energy use, if not their patterns of social behavior. To this end, Tertzakian identifies so-called historical "break points" during which mankind has in the past made a series of transitions from one kind of energy source to the next. But, and Tertzakian notes this, it is not as if one energy resource entirely replaces the other. People used to burn wood and still burn wood. Despite the rise of oil as a source for liquid fuel, the world still burns a lot of coal. We all live better with electricity, but still use a lot of oil. So, Tertzakian notes, the following energy source does not totally eclipse the previous energy source (except in the case of whale oil).

And when it comes to Peak Oil, in essence, Tertzakian predicts that high-volume usage of conventional oil will decline and rising prices will signal and usher in the next energy-usage "break point." People will adapt to the new circumstances. Economic activities will rebalance to higher prices and less availability of oil. The energy otherwise derived from today's use of oil will be replaced in the future with some other form of energy production, as well as by changes in use patterns. So sayeth Tertzakian.

Two Books, Published Between May and December

So to paraphrase the words of the old Frank Sinatra song, do you subscribe to Kunstler's book, published in May? Or to Tertzakian's book, from December? "It's a long, long while from May to December, but the days grow short when you reach September." These two highly regarded and very knowledgeable authors both acknowledge the Peak Oil thesis. Both forecast a radical decline in future availability of large volumes of today's version of conventional crude oil. Both authors see prices rising dramatically. But the two authors also offer radically divergent views of the future.

In Kunstler's view, people will be living a restrictive, and vastly local sort of existence, in many cases in small enclaves. Much of life, for most people, will be spent struggling to eke out an existence by growing food in poor soil under all but medieval circumstances.

In Tertzakian's view, on the other hand, people will pay more for energy. But the supplies will be there, courtesy of innovative technology and the utilization of other energy resources. People will certainly complain more about paying more for energy (gee, what a surprise), but most people will retain some semblance of what we consider today to be a Western standard of living.

The two forecast futures could hardly be more different. To paraphrase the old carnival saying, "You pays your money at the bookstore, and you takes your choice."

Of course, Kunstler and Tertzakian are not alone in their willingness to tackle the Peak Oil issue with their respective great insights and good writing. Lately, more and more people are writing about Peak Oil and discussing the related issues, and to varying degrees of understanding, if not misunderstanding. Not long ago (March 1, 2006, to be exact), none other than The New York Times actually endorsed the Peak Oil thesis, and hence the term has now become respectable in the mainstream media. Still, Peak Oil is far from being headlined on "American Idol" or in commercials during the Super Bowl, although the word is getting out. So onward goes the debate.

A Few Words on Politics, Policy, and Strategy

At the beginning of this article, I discussed planning in a general sense. And for my money, at the bookstore, I think that now is the time to discuss policy and strategy in general. What is policy and strategy? What do these things look like? How does one formulate policy and strategy? Is it the same process as "planning"? Is it something else entirely? My experience is that while a lot of people talk about policy and strategy, few have a real understanding of the roots of the concepts. The terms "policy" and "strategy" get confused in conversational language. People substitute strategy for what they really intend to say in a discussion of policy, which is at a higher level than strategy -- if not discussing operations or operational plans, or tactics, which are at a lower level than strategy.

In this regard, I am following the logic of the great theorist of policy and strategy, Karl von Clausewitz. Clausewitz's seminal book On War, published in the pre-oil age days of 1832, analyzed policy and strategy from a military standpoint and in the context of dissecting the Napoleonic Wars. On War has been described as "turgid" by some commentators and the many war college students across the world who have been assigned to read the book over the past century or so, but once you get used to the style, it reads like Gone With the Wind. (OK, I am kind of kidding about the Gone With the Wind thing.) And my point in bringing this up is that the essence of Clausewitz's work transcends the martial sphere.

Basically, according to Clausewitz, politics sets the tone for policy, although politics and policy are the same word in Clausewitz's original German. Policy then sets the stage for strategy, which is a key point. Speaking of war, Clausewitz said, "No one starts a war -- or rather, no one in his senses ought to do so -- without first being clear in his mind what he intends to achieve by that war and how he intends to conduct it." This is, at root, an expression of how policy must drive strategy, and how strategy must mesh with policy directives and controls. This kind of thinking applies to any great endeavor, not just to waging wars.

Strategy, in turn, governs operations. This means that there is a distinction between strategy and the substrategic, subordinate level of operational art (although Clausewitz did not say this in so many words). Policy controls strategy. Strategy drives operations. And last but not least, tactics are necessary to carry out and achieve operational goals.

Thus, policy, strategy, operations, and tactics are a continuum.

And while a failure of tactics or operations can doom the entire chain, a failure of policy and strategy will also doom the entire chain. Keep that "failure of policy" and "failure of strategy" idea in mind. You see this a lot throughout history, and certainly in current events.

We will pick up on this discussion in Part II.

Regards,

Byron

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.
While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.
Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Iran: The Next Neocon Target

2006-04-09T19:48:00.000-07:00

HON. RON PAUL OF TEXAS
Before the U.S. House of Representatives

April 5, 2006

It’s been three years since the U.S. launched its war against Saddam Hussein and his weapons of mass destruction. Of course now almost everybody knows there were no WMDs, and Saddam Hussein posed no threat to the United States. Though some of our soldiers serving in Iraq still believe they are there because Saddam Hussein was involved in 9/11, even the administration now acknowledges there was no connection. Indeed, no one can be absolutely certain why we invaded Iraq. The current excuse, also given for staying in Iraq, is to make it a democratic state, friendly to the United States. There are now fewer denials that securing oil supplies played a significant role in our decision to go into Iraq and stay there. That certainly would explain why U.S. taxpayers are paying such a price to build and maintain numerous huge, permanent military bases in Iraq. They’re also funding a new billion dollar embassy- the largest in the world.

The significant question we must ask ourselves is: What have we learned from three years in Iraq? With plans now being laid for regime change in Iran, it appears we have learned absolutely nothing. There still are plenty of administration officials who daily paint a rosy picture of the Iraq we have created. But I wonder: If the past three years were nothing more than a bad dream, and our nation suddenly awakened, how many would, for national security reasons, urge the same invasion? Would we instead give a gigantic sigh of relief that it was only a bad dream, that we need not relive the three-year nightmare of death, destruction, chaos and stupendous consumption of tax dollars. Conceivably we would still see oil prices under $30 a barrel, and most importantly, 20,000 severe U.S. causalities would not have occurred. My guess is that 99% of all Americans would be thankful it was only a bad dream, and would never support the invasion knowing what we know today.

Even with the horrible results of the past three years, Congress is abuzz with plans to change the Iranian government. There is little resistance to the rising clamor for “democratizing” Iran, even though their current president, Mahmoud Almadinejad, is an elected leader. Though Iran is hardly a perfect democracy, its system is far superior to most of our Arab allies about which we never complain. Already the coordinating propaganda has galvanized the American people against Iran for the supposed threat it poses to us with weapons of mass destruction that are no more present than those Saddam Hussein was alleged to have had. It’s amazing how soon after being thoroughly discredited over the charges levied against Saddam Hussein the Neo-cons are willing to use the same arguments against Iran. It’s frightening to see how easily Congress, the media, and the people accept many of the same arguments against Iran that were used to justify an invasion of Iraq.

Since 2001 we have spent over $300 billion, and occupied two Muslim nations--Afghanistan and Iraq. We’re poorer but certainly not safer for it. We invaded Afghanistan to get Osama bin Laden, the ring leader behind 9/11. This effort has been virtually abandoned. Even though the Taliban was removed from power in Afghanistan, most of the country is now occupied and controlled by warlords who manage a drug trade bigger than ever before. Removing the Taliban from power in Afghanistan actually served the interests of Iran, the Taliban’s arch enemy, more than our own.

The longtime Neo-con goal to remake Iraq prompted us to abandon the search for Osama bin Laden. The invasion of Iraq in 2003 was hyped as a noble mission, justified by misrepresentations of intelligence concerning Saddam Hussein and his ability to attack us and his neighbors. This failed policy has created the current chaos in Iraq-- chaos that many describe as a civil war. Saddam Hussein is out of power and most people are pleased. Yet some Iraqis, who dream of stability, long for his authoritarian rule. But once again, Saddam Hussein’s removal benefited the Iranians, who consider Saddam Hussein an arch enemy.

Our obsession with democracy-- which is clearly conditional, when one looks at our response to the recent Palestinian elections-- will allow the majority Shia to claim leadership title if Iraq’s election actually leads to an organized government. This delights the Iranians, who are close allies of the Iraqi Shia.

Talk about unintended consequences! This war has produced chaos, civil war, death and destruction, and huge financial costs. It has eliminated two of Iran’s worst enemies and placed power in Iraq with Iran’s best friends. Even this apparent failure of policy does nothing to restrain the current march toward a similar confrontation with Iran. What will it take for us to learn from our failures?

Common sense tells us the war in Iraq soon will spread to Iran. Fear of imaginary nuclear weapons or an incident involving Iran-- whether planned or accidental-- will rally the support needed for us to move on Muslim country #3. All the past failures and unintended consequences will be forgotten.

Even with deteriorating support for the Iraq war, new information, well planned propaganda, or a major incident will override the skepticism and heartache of our frustrating fight. Vocal opponents of an attack on Iran again will be labeled unpatriotic, unsupportive of the troops, and sympathetic to Iran’s radicals.

Instead of capitulating to these charges, we should point out that those who maneuver us into war do so with little concern for our young people serving in the military, and theoretically think little of their own children if they have any. It’s hard to conceive that political supporters of the war would consciously claim that a pre-emptive war for regime change, where young people are sacrificed, is only worth it if the deaths and injuries are limited to other people’s children. This, I’m sure, would be denied-- which means their own children are technically available for this sacrifice that is so often praised and glorified for the benefit of the families who have lost so much. If so, they should think more of their own children. If this is not so, and their children are not available for such sacrifice, the hypocrisy is apparent. Remember, most Neo-con planners fall into the category of chicken-hawks.

For the past 3 years it’s been inferred that if one is not in support of the current policy, one is against the troops and supports the enemy. Lack of support for the war in Iraq was said to be supportive of Saddam Hussein and his evil policies. This is an insulting and preposterous argument. Those who argued for the containment of the Soviets were never deemed sympathetic to Stalin or Khrushchev. Lack of support for the Iraq war should never be used as an argument that one was sympathetic to Saddam Hussein. Containment and diplomacy are far superior to confronting a potential enemy, and are less costly and far less dangerous-- especially when there’s no evidence that our national security is being threatened.

Although a large percentage of the public now rejects the various arguments for the Iraq war, 3 years ago they were easily persuaded by the politicians and media to fully support the invasion. Now, after 3 years of terrible pain for so many, even the troops are awakening from their slumber and sensing the fruitlessness of our failing effort. Seventy-two percent of our troops now serving in Iraq say it’s time to come home, yet the majority still cling to the propaganda that we’re there because of 9/11 attacks, something even the administration has ceased to claim. Propaganda is pushed on our troops to exploit their need to believe in a cause that’s worth the risk to life and limb.

I smell an expanded war in the Middle East, and pray that I’m wrong. I sense that circumstances will arise that demand support regardless of the danger and cost. Any lack of support, once again, will be painted as being soft on terrorism and al Qaeda. We will be told we must support Israel, support patriotism, support the troops, and defend freedom. The public too often only smells the stench of war after the killing starts. Public objection comes later on, but eventually it helps to stop the war. I worry that before we can finish the war we’re in and extricate ourselves, the patriotic fervor for expanding into Iran will drown out the cries of, “enough already!”

The agitation and congressional resolutions painting Iran as an enemy about to attack us have already begun. It’s too bad we can’t learn from our mistakes.

This time there will be a greater pretense of an international effort sanctioned by the UN before the bombs are dropped. But even without support from the international community, we should expect the plan for regime change to continue. We have been forewarned that “all options” remain on the table. And there’s little reason to expect much resistance from Congress. So far there’s less resistance expressed in Congress for taking on Iran than there was prior to going into Iraq. It’s astonishing that after three years of bad results and tremendous expense there’s little indication we will reconsider our traditional non-interventionist foreign policy. Unfortunately, regime change, nation building, policing the world, and protecting “our oil” still constitute an acceptable policy by the leaders of both major parties.

It’s already assumed by many in Washington I talk to that Iran is dead serious about obtaining a nuclear weapon, and is a much more formidable opponent than Iraq. Besides, Mahmoud Almadinjad threatened to destroy Israel and that cannot stand. Washington sees Iran as a greater threat than Iraq ever was, a threat that cannot be ignored.

Iran’s history is being ignored, just as we ignored Iraq’s history. This ignorance or deliberate misrepresentation of our recent relationship to Iraq and Iran is required to generate the fervor needed to attack once again a country that poses no threat to us. Our policies toward Iran have been more provocative than those towards Iraq. Yes, President Bush labeled Iran part of the axis of evil and unnecessarily provoked their anger at us. But our mistakes with Iran started a long time before this president took office.

In 1953 our CIA, with help of the British, participated in overthrowing the democratic elected leader, Mohamed Mossedech. We placed the Shah in power. He ruled ruthlessly but protected our oil interests, and for that we protected him-- that is until 1979. We even provided him with Iran’s first nuclear reactor. Evidently we didn’t buy the argument that his oil supplies precluded a need for civilian nuclear energy. From 1953 to 1979 his authoritarian rule served to incite a radical Muslim opposition led by the Ayatollah Khomeini, who overthrew the Shah and took our hostages in 1979. This blowback event was slow in coming, but Muslims have long memories. The hostage crisis and overthrow of the Shah by the Ayatollah was a major victory for the radical Islamists. Most Americans either never knew about or easily forgot our unwise meddling in the internal affairs of Iran in 1953.

During the 1980s we further antagonized Iran by supporting the Iraqis in their invasion of Iran. This made our relationship with Iran worse, while sending a message to Saddam Hussein that invading a neighboring country is not all that bad. When Hussein got the message from our State Department that his plan to invade Kuwait was not of much concern to the United States he immediately proceeded to do so. We in a way encouraged him to do it almost like we encouraged him to go into Iran. Of course this time our reaction was quite different, and all of a sudden our friendly ally Saddam Hussein became our arch enemy. The American people may forget this flip-flop, but those who suffered from it never forget. And the Iranians remember well our meddling in their affairs. Labeling the Iranians part of the axis of evil further alienated them and contributed to the animosity directed toward us.

For whatever reasons the Neo-conservatives might give, they are bound and determined to confront the Iranian government and demand changes in its leadership. This policy will further spread our military presence and undermine our security. The sad truth is that the supposed dangers posed by Iran are no more real than those claimed about Iraq. The charges made against Iran are unsubstantiated, and amazingly sound very similar to the false charges made against Iraq. One would think promoters of the war against Iraq would be a little bit more reluctant to use the same arguments to stir up hatred toward Iran. The American people and Congress should be more cautious in accepting these charges at face value. Yet it seems the propaganda is working, since few in Washington object as Congress passes resolutions condemning Iran and asking for UN sanctions against her.

There is no evidence of a threat to us by Iran, and no reason to plan and initiate a confrontation with her. There are many reasons not to do so, however.

Iran does not have a nuclear weapon and there’s no evidence that she is working on one--only conjecture.

If Iran had a nuclear weapon, why would this be different from Pakistan, India, and North Korea having one? Why does Iran have less right to a defensive weapon than these other countries?

If Iran had a nuclear weapon, the odds of her initiating an attack against anybody-- which would guarantee her own annihilation-- are zero. And the same goes for the possibility she would place weapons in the hands of a non-state terrorist group.

Pakistan has spread nuclear technology throughout the world, and in particular to the North Koreans. They flaunt international restrictions on nuclear weapons. But we reward them just as we reward India.

We needlessly and foolishly threaten Iran even though they have no nuclear weapons. But listen to what a leading Israeli historian, Martin Van Creveld, had to say about this: “Obviously, we don’t want Iran to have a nuclear weapon, and I don’t know if they’re developing them, but if they’re not developing them, they’re crazy.”

There’s been a lot of misinformation regarding Iran’s nuclear program. This distortion of the truth has been used to pump up emotions in Congress to pass resolutions condemning her and promoting UN sanctions.

IAEA Director General Mohamed El Baradi has never reported any evidence of “undeclared” sources or special nuclear material in Iran, or any diversion of nuclear material.

We demand that Iran prove it is not in violation of nuclear agreements, which is asking them impossibly to prove a negative. El Baradi states Iran is in compliance with the nuclear NPT required IAEA safeguard agreement.

We forget that the weapons we feared Saddam Hussein had were supplied to him by the U.S., and we refused to believe UN inspectors and the CIA that he no longer had them.

Likewise, Iran received her first nuclear reactor from us. Now we’re hysterically wondering if someday she might decide to build a bomb in self interest.

Anti-Iran voices, beating the drums of confrontation, distort the agreement made in Paris and the desire of Iran to restart the enrichment process. Their suspension of the enrichment process was voluntary, and not a legal obligation. Iran has an absolute right under the NPT to develop and use nuclear power for peaceful purposes, and this is now said to be an egregious violation of the NPT. It’s the U.S. and her allies that are distorting and violating the NPT. Likewise our provision of nuclear materials to India is a clear violation of the NPT.

The demand for UN sanctions is now being strongly encouraged by Congress. The “Iran Freedom Support Act,” HR 282, passed in the International Relations Committee; and recently the House passed H Con Res 341, which inaccurately condemned Iran for violating its international nuclear non-proliferation obligations. At present, the likelihood of reason prevailing in Congress is minimal. Let there be no doubt: The Neo-conservative warriors are still in charge, and are conditioning Congress, the media, and the American people for a pre-emptive attack on Iran. Never mind that Afghanistan has unraveled and Iraq is in civil war: serious plans are being laid for the next distraction which will further spread this war in the Middle East. The unintended consequences of this effort surely will be worse than any of the complications experienced in the three-year occupation of Iraq.

Our offer of political and financial assistance to foreign and domestic individuals who support the overthrow of the current Iranian government is fraught with danger and saturated with arrogance. Imagine how American citizens would respond if China supported similar efforts here in the United States to bring about regime change! How many of us would remain complacent if someone like Timothy McVeigh had been financed by a foreign power? Is it any wonder the Iranian people resent us and the attitude of our leaders? Even though El Baradi and his IAEA investigations have found no violations of the NPT-required IAEA safeguards agreement, the Iran Freedom Support Act still demands that Iran prove they have no nuclear weapons-- refusing to acknowledge that proving a negative is impossible.

Let there be no doubt, though the words “regime change” are not found in the bill-- that’s precisely what they are talking about. Neo-conservative Michael Ledeen, one of the architects of the Iraq fiasco, testifying before the International Relations Committee in favor of the IFSA, stated it plainly: “I know some Members would prefer to dance around the explicit declaration of regime change as the policy of this country, but anyone looking closely at the language and context of the IFSA and its close relative in the Senate, can clearly see that this is in fact the essence of the matter. You can’t have freedom in Iran without bringing down the Mullahs.”

Sanctions, along with financial and political support to persons and groups dedicated to the overthrow of the Iranian government, are acts of war. Once again we’re unilaterally declaring a pre-emptive war against a country and a people that have not harmed us and do not have the capacity to do so. And don’t expect Congress to seriously debate a declaration of war resolution. For the past 56 years Congress has transferred to the executive branch the power to go to war as it pleases, regardless of the tragic results and costs.

Secretary of State Rice recently signaled a sharp shift towards confrontation in Iran policy as she insisted on $75 million to finance propaganda, through TV and radio broadcasts into Iran. She expressed this need because of the so-called “aggressive” policies of the Iranian government. We’re seven thousand miles from home, telling the Iraqis and the Iranians what kind of government they will have, backed up by the use of our military force, and we call them the aggressors. We fail to realize the Iranian people, for whatever faults they may have, have not in modern times aggressed against any neighbor. This provocation is so unnecessary, costly, and dangerous.

Just as the invasion of Iraq inadvertently served the interests of the Iranians, military confrontation with Iran will have unintended consequences. The successful alliance engendered between the Iranians and the Iraqi majority Shia will prove a formidable opponent for us in Iraq as that civil war spreads. Shipping in the Persian Gulf through the Straits of Hormuz may well be disrupted by the Iranians in retaliation for any military confrontation. Since Iran would be incapable of defending herself by conventional means, it seems logical that some might resort to a terrorist attack on us. They will not passively lie down, nor can they be destroyed easily.

One of the reasons given for going into Iraq was to secure “our” oil supply. This backfired badly: Production in Iraq is down 50%, and world oil prices have more than doubled to $60 per barrel. Meddling with Iran could easily have a similar result. We could see oil over $120 a barrel and, and $6 gas at the pump. The obsession the Neo-cons have with remaking the Middle East is hard to understand. One thing that is easy to understand is none of those who planned these wars expect to fight in them, nor do they expect their children to die in some IED explosion.

Exactly when an attack will occur is not known, but we have been forewarned more than once that all options remain on the table. The sequence of events now occurring with regards to Iran are eerily reminiscent of the hype prior to our pre-emptive strike against Iraq. We should remember the saying: “Fool me once shame on you, fool me twice, shame on me.” It looks to me like the Congress and the country is open to being fooled once again.

Interestingly, many early supporters of the Iraq war are now highly critical of the President, having been misled as to reasons for the invasion and occupation. But these same people are only too eager to accept the same flawed arguments for our need to undermine the Iranian government.

The President’s 2006 National Security Strategy, just released, is every bit as frightening as the one released in 2002 endorsing pre-emptive war. In it he claims: “We face no greater challenge from a single country than from Iran.” He claims the Iranians have for 20 years hidden key nuclear activities-- though the IAEA makes no such assumptions nor has the Security Council in these 20 years ever sanctioned Iran. The clincher in the National Security Strategy document is if diplomatic efforts fail, confrontation will follow. The problem is the diplomatic effort-- if one wants to use that term-- is designed to fail by demanding the Iranians prove an unproveable negative. The West-- led by the U.S.-- is in greater violation by demanding Iran not pursue any nuclear technology, even peaceful, that the NPT guarantees is their right.

The President states: Iran’s “desire to have a nuclear weapon is unacceptable.” A “desire” is purely subjective, and cannot be substantiated nor disproved. Therefore all that is necessary to justify an attack is if Iran fails to prove it doesn’t have a “desire” to be like the United States, China, Russia, Britain, France, Pakistan, India, and Israel—whose nuclear missiles surround Iran. Logic like this to justify a new war, without the least consideration for a congressional declaration of war, is indeed frightening.

Common sense tells us Congress, especially given the civil war in Iraq and the mess in Afghanistan, should move with great caution in condoning a military confrontation with Iran.

Cause for Concern

Most Americans are uninterested in foreign affairs until we get mired down in a war that costs too much, last too long, and kills too many U.S. troops. Getting out of a lengthy war is difficult, as I remember all too well with Vietnam while serving in the U.S. Air Force from 1963 to 1968. Getting into war is much easier. Unfortunately the Legislative branch of our government too often defers to the Executive branch, and offers little resistance to war plans even with no significant threat to our security. The need to go to war is always couched in patriotic terms and falsehoods regarding an imaginary eminent danger. Not supporting the effort is painted as unpatriotic and wimpish against some evil that’s about to engulf us. The real reason for our militarism is rarely revealed and hidden from the public. Even Congress is deceived into supporting adventurism they would not accept if fully informed.

If we accepted the traditional American and constitutional foreign policy of non-intervention across the board, there would be no temptation to go along with these unnecessary military operations. A foreign policy of intervention invites all kinds of excuses for spreading ourselves around the world. The debate shifts from non-intervention versus interventionism, to where and for what particular reason should we involve ourselves. Most of the time it’s for less than honorable reasons. Even when cloaked in honorable slogans-- like making the world safe for democracy-- the unintended consequences and the ultimate costs cancel out the good intentions.

One of the greatest losses suffered these past 60 years from interventionism becoming an acceptable policy of both major parties is respect for the Constitution. Congress flatly has reneged on its huge responsibility to declare war. Going to war was never meant to be an Executive decision, used indiscriminately with no resistance from Congress. The strongest attempt by Congress in the past 60 years to properly exert itself over foreign policy was the passage of the Foley Amendment, demanding no assistance be given to the Nicaraguan contras. Even this explicit prohibition was flaunted by an earlier administration.

Arguing over the relative merits of each intervention is not a true debate, because it assumes that intervention per se is both moral and constitutional. Arguing for a Granada-type intervention because of its “success,” and against the Iraq war because of its failure and cost, is not enough. We must once again understand the wisdom of rejecting entangling alliances and rejecting nation building. We must stop trying to police the world and instead embrace non-interventionism as the proper, moral, and constitutional foreign policy.

The best reason to oppose interventionism is that people die, needlessly, on both sides. We have suffered over 20,000 American casualties in Iraq already, and Iraq civilian deaths probably number over 100,000 by all reasonable accounts. The next best reason is that the rule of law is undermined, especially when military interventions are carried out without a declaration of war. Whenever a war is ongoing, civil liberties are under attack at home. The current war in Iraq and the misnamed war on terror have created an environment here at home that affords little constitutional protection of our citizen’s rights. Extreme nationalism is common during wars. Signs of this are now apparent.

Prolonged wars, as this one has become, have profound consequences. No matter how much positive spin is put on it, war never makes a society wealthier. World War II was not a solution to the Depression as many claim. If a billion dollars is spent on weapons of war, the GDP records positive growth in that amount. But the expenditure is consumed by destruction of the weapons or bombs it bought, and the real economy is denied $1 billion to produce products that would have raised someone’s standard of living.

Excessive spending to finance the war causes deficits to explode. There are never enough tax dollars available to pay the bills, and since there are not enough willing lenders and dollars available, the Federal Reserve must create enough new money and credit for buying Treasury Bills to prevent interest rates from rising too rapidly. Rising rates would tip off everyone that there are not enough savings or taxes to finance the war. This willingness to print whatever amount of money the government needs to pursue the war is literally inflation. Without a fiat monetary system wars would be very difficult to finance, since the people would never tolerate the taxes required to pay for it. Inflation of the money supply delays and hides the real cost of war. The result of the excessive creation of new money leads to the higher cost of living everyone decries and the Fed denies. Since taxes are not levied, the increase in prices that results from printing too much money is technically the tax required to pay for the war.

The tragedy is that the inflation tax is borne more by the poor and the middle class than the rich. Meanwhile, the well-connected rich, the politicians, the bureaucrats, the bankers, the military industrialists, and the international corporations reap the benefits of war profits.

A sound economic process is disrupted with a war economy and monetary inflation. Strong voices emerge blaming the wrong policies for our problems, prompting an outcry for protectionist legislation. It’s always easier to blame foreign producers and savers for our inflation, lack of savings, excess debt, and loss of industrial jobs. Protectionist measures only make economic conditions worse. Inevitably these conditions, if not corrected, lead to a lower standard of living for most of our citizens.

Careless military intervention is also bad for the civil disturbance that results. The chaos in the streets of America in the 1960s while the Vietnam War raged, aggravated by the draft, was an example of domestic strife caused by an ill-advised unconstitutional war that could not be won. The early signs of civil discord are now present. Hopefully we can extricate ourselves from Iraq and avoid a conflict in Iran before our streets explode as they did in the 60s.

In a way it’s amazing there’s not a lot more outrage expressed by the American people. There’s plenty of complaining but no outrage over policies that are not part of our American tradition. War based on false pretenses, 20,000 American casualties, torture policies, thousands jailed without due process, illegal surveillance of citizens, warrantless searches, and yet no outrage. When the issues come before Congress, Executive authority is maintained or even strengthened while real oversight is ignored.

Though many Americans are starting to feel the economic pain of paying for this war through inflation, the real pain has not yet arrived. We generally remain fat and happy, with a system of money and borrowing that postpones the day of reckoning. Foreigners, in particular the Chinese and Japanese, gladly participate in the charade. We print the money and they take it, as do the OPEC nations, and provide us with consumer goods and oil. Then they loan the money back to us at low interest rates, which we use to finance the war and our housing bubble and excessive consumption. This recycling and perpetual borrowing of inflated dollars allows us to avoid the pain of high taxes to pay for our war and welfare spending. It’s fine until the music stops and the real costs are realized, with much higher interest rates and significant price inflation. That’s when outrage will be heard, and the people will realize we can’t afford the “humanitarianism” of the Neo-conservatives.

The notion that our economic problems are principally due to the Chinese is nonsense. If the protectionists were to have their way, the problem of financing the war would become readily apparent and have immediate ramifications-- none good. Today’s economic problems, caused largely by our funny money system, won’t be solved by altering exchange rates to favor us in the short run, or by imposing high tariffs. Only sound money with real value will solve the problems of competing currency devaluations and protectionist measures.

Economic interests almost always are major reasons for wars being fought. Noble and patriotic causes are easier to sell to a public who must pay and provide cannon fodder to defend the financial interests of a privileged class.

The fact that Saddam Hussein demanded Euros for oil in an attempt to undermine the U.S. dollar is believed by many to be one of the ulterior motives for our invasion and occupation of Iraq. Similarly, the Iranian oil burse now about to open may be seen as a threat to those who depend on maintaining the current monetary system with the dollar as the world’s reserve currency.

The theory and significance of “peak oil” is believed to be an additional motivating factor for the U.S. and Great Britain wanting to maintain firm control over the oil supplies in the Middle East. The two nations have been protecting “our” oil interests in the Middle East for nearly a hundred years. With diminishing supplies and expanding demands, the incentive to maintain a military presence in the Middle East is quite strong. Fear of China and Russia moving into this region to assume more control alarms those who don’t understand how a free market can develop substitutes to replace diminishing resources. Supporters of the military effort to maintain control over large regions of the world to protect oil fail to count the real costs once the DOD budget is factored in. Remember, invading Iraq was costly and oil prices doubled. Confrontation in Iran may evolve differently, but we can be sure it will be costly and oil prices will rise.

There are long-term consequences or blowback from our militant policy of intervention around the world. They are unpredictable as to time and place. 9/11 was a consequence of our military presence on Muslim holy lands; the Ayatollah Khomeini’s success in taking over the Iranian government in 1979 was a consequence of our CIA overthrowing Mossadech in 1953. These connections are rarely recognized by the American people and never acknowledged by our government. We never seem to learn how dangerous interventionism is to us and to our security.

There are some who may not agree strongly with any of my arguments, and instead believe the propaganda: Iran and her President, Mahmoud Almadinjad, are thoroughly irresponsible and have threatened to destroy Israel. So all measures must be taken to prevent Iran from getting nukes-- thus the campaign to intimidate and confront Iran.

First, Iran doesn’t have a nuke and is nowhere close to getting one, according to the CIA. If they did have one, using it would guarantee almost instantaneous annihilation by Israel and the United States. Hysterical fear of Iran is way out of proportion to reality. With a policy of containment, we stood down and won the Cold War against the Soviets and their 30,000 nuclear weapons and missiles. If you’re looking for a real kook with a bomb to worry about, North Korea would be high on the list. Yet we negotiate with Kim Jong Il. Pakistan has nukes and was a close ally of the Taliban up until 9/11. Pakistan was never inspected by the IAEA as to their military capability. Yet we not only talk to her, we provide economic assistance-- though someday Musharraf may well be overthrown and a pro-al Qaeda government put in place. We have been nearly obsessed with talking about regime change in Iran, while ignoring Pakistan and North Korea. It makes no sense and it’s a very costly and dangerous policy.

The conclusion we should derive from this is simple: It’s in our best interest to pursue a foreign policy of non-intervention. A strict interpretation of the Constitution mandates it. The moral imperative of not imposing our will on others, no matter how well intentioned, is a powerful argument for minding our own business. The principle of self-determination should be respected. Strict non-intervention removes the incentives for foreign powers and corporate interests to influence our policies overseas. We can’t afford the cost that intervention requires, whether through higher taxes or inflation. If the moral arguments against intervention don’t suffice for some, the practical arguments should.

Intervention just doesn’t work. It backfires and ultimately hurts American citizens both at home and abroad. Spreading ourselves too thin around the world actually diminishes our national security through a weakened military. As the superpower of the world, a constant interventionist policy is perceived as arrogant, and greatly undermines our ability to use diplomacy in a positive manner.

Conservatives, libertarians, constitutionalists, and many of today’s liberals have all at one time or another endorsed a less interventionist foreign policy. There’s no reason a coalition of these groups might not once again present the case for a pro-American, non-militant, non-interventionist foreign policy dealing with all nations. A policy of trade and peace, and a willingness to use diplomacy, is far superior to the foreign policy that has evolved over the past 60 years.

It’s time for a change.

Gold & Oil - 1971 Until the Future - Part I

2006-04-06T09:38:00.000-07:00

by Julian D.W. Phillips
The Gold Forecaster
March 15, 2006

Gold 1971 +

In 1971 Nixon closed the gold window on the $ and turned the European nations away from redeeming Eurodollars into gold at the price of $42.35, thus devaluing the U.S. $ by the extent the gold price rose. This was keenly felt in all the markets across the globe because it was a particularly visible blow for the $ and for the sterling as the "$ Premium" was imposed in the U.K. to prevent a wave of capital exiting the country. Shortly thereafter the oil price shot up to $35 a barrel from the $8 level it had happily sat at before. In those days, even with no gold standard, gold was considered the foundation on which paper money stood.

There being no more effective defense than discrediting your accuser, the States tried to defend the $ through the sale of 500 tonne lots of gold, but terminated these as they saw the gold gulped down by private buyers. They had hoped that gold, as money would lose its reputation as well as its position in the Monetary System. Having failed with their sales. The United States then persuaded the I.M.F. to do the same, but again demand overwhelmed supply but this time with outcries from I.M.F. members over these sales.

The U.S.$ and Oil 1971 +

At the end of the seventies the over issuance of the $ came home to roost and Volcker the Chairman of the Federal Reserve at the time found it necessary to ramp up interest rates in quick time, to the extraordinary heights of 26% to tame the inflation engulfing the U.S.A. then.

What happened then to the $? The world power could not permit the $ to lose its name, after all it was the dominant nation financially in the globe as well. A new role for paper money had to be found. It had to be able to implement the power, political and economic, by itself [as the days of colonization through war had passed into history]. It had to be money in demand beyond the value gold had traditionally attracted. What was used by all right across the globe even reaching part that U.S. ‘might’, could not even reach? One item - oil! By pricing oil in the U.S. $, U.S. power could be imposed across the globe. Even Russian oil outside Russia was priced in the U.S.$. But it was vulnerable to a different choice if selected by opposers, so the U.S. had to use heavy pressure to make this $ pricing non-negotiable. To do this the U.S. made it clear to Russia in the “cold war” that the Middle East was a critical part of its ‘vital interests’ [items over which it would go to total war over]. Whilst the U.S. itself was dependent on Middle Eastern oil for a good portion of its oil, so was the bulk of the world! Only Russia could stand separate.

The U.S. also imposed a grip on global oil producers [except Russia] ensuring that their governments were dependent on U.S. backing to stay in power. With their loss of individual power as well as possible sovereignty at stake it was not big step to comply with whatever the States required.

Thus to this day the Middle East, Indonesia and the States comprising the bulk of the globe's oil supplies are found and under U.S. governmental control. Having formalized this policy of oil priced globally in the U.S. $ it was a short road to the $ becoming the global reserve currency. Gold left the stage as money, but continued quietly in the vaults, of and in particular, the U.S.A.

Apart from the inevitable desire of every Banker to do away with cash and valuables that can trade as ‘cash’ [after all it’s out of their control and fee charging range], so many more powers and control possibilities existed with paper money. After all gold was limited as a currency, disciplining governments and politicians alike, enforcing monetary stability and beyond political control. And with the $ targeting control of the global monetary system, through a reserve currency role, what more satisfying degree of control could be achieved without an army? What better way to bring in the wealth of the globe to the U.S., than through the issuance of the $ to fund global growth, oil needs and the like. As a means of exacting tribute, never has there been a cheaper and more effective instrument!

With oil superior as a form of money, needed and imported by every nation on earth it was accepted as the most eligible commodity on which to carry the $ to dominance! Through this the concept and reality of $ hegemony [Imperialism] was then imposed. The $ then rode the back of oil and grew to be used in 86% of the globes transactions and making up 75% of the globe's reserves.

It must have taken the tacit if not the full support of Europe to support the move from gold to the $, held as they were, to ransom through U.S. power over oil supplies and its pricing as is the case today! But note well, please that the objective was not to thoroughly discredit gold, as it will always prove vital "in extremis", but was to put it in a non-monetary role, as a non-threatening or challenging reserve asset.

Discredit Gold!

Thereafter through the eighties and nineties, gold suffered under a persistent campaign to discredit/ demean it as money, but not through actual sales of gold [although these were constantly threatened], but through the accelerated production of gold into an already oversupplied market. This accelerated production of gold came about by a system whereby Central Banks lent gold to bullion banks, who then on-lent it to mining companies to finance their development.

Today this is still done, whereby the cost of financing development of a mine was raised through the immediate sale of the gold borrowed from the bullion banks, with a promise to repay the gold from future production [called "hedging"] in an operation where gold was sold forward at the forward price [in the futures market] which included the interest to be accrued over the period [the "Contango"] until future production supplied that gold. Much higher than market prices were achieved in this way, particularly as the gold price was steadily falling over the period, aided by threats of gold sales made loudly in the market by Central Banks. But the banks, Central and otherwise, together with the mines went overboard and sold the bulk of their future production forward in this manner. This looked wonderful in a falling gold price market, but became the reverse when the gold price started to rise!

Some Central Banks did sell their gold [Canada, Australia included], in particular Britain who had the dubious honor of selling the bulk of their gold at close to the bottom price of gold seen in the period from 1972 to today. In honor of the eminent Chancellor Mr. Gordon Brown, who initiated these sales, this low point of Central Bank Gold sales is to be known as the "Brown Bottom".

The Advent of the Euro and Gold

In 1999 the European Central Banks, with the impending launch of the Euro in mind, decided that the anti-gold campaign had gone too far and decided to form the Central Bank Gold Agreement, whereby they would restrict gold sales to those already announced to the public and to place a ceiling on such sales of 400 tonnes for the next 5 years. Again gold was placed in a secondary role in the European monetary system in a campaign highlighting its junior role.

But the limitation of gold sales took the fear of dumping of gold onto the open market, away. However, after a full 20 years of such threats the market was slow to fully appreciate the change in "Official" attitudes. Britain was part of this first agreement, but only until it completed its sales and walked away when the second agreement was proposed. Of course, by the time this had happened its sales were complete.

In an environment already created for it, the Euro was launched without gold as a threat to it as a paper currency anymore. A generation had passed by and the average fund manager knew nothing of the world in which gold was money. The European Central Bank could happily announce that it aimed for the Euro to be backed by its reserves of which gold would represent only 15% [a target not a rigid line]. Now gold could enter the monetary scene as a reserve asset in support of fiat currencies, not a challenge for oil was the fulcrum on which the main reserve currency, the $ was now founded. The leading Eurozone Central Banks, Italy, France and Germany held onto their gold which represented in the region of 50% of their reserves, a figure that roughly matched the U.S. level of gold in their reserves still. Thus the real place of gold in the main global reserves had not changed in 30+ years. Therefore, the story was really a continuation of the past with nothing new in the picture. Gold remained and remains a vital feature of the monetary system!

We would speculate that the founding of the Euro with its gold backing received the U.S. and Greenspan's approval, as did the "Washington Agreement" the first Central Bank Gold Agreement in 1999 September 26th. Greenspan was in on the meetings held in Washington, as were the Japanese Central Bank representatives. We repeat that the objective was never to destroy gold as a monetary asset but to reduce it to a minor one, allowing the $ and subsequently the Euro to flourish without challenge.

It would appear that the price to be paid by Europe would be to not challenge the role of the $ in the pricing of oil. History confirms this! Indeed it would appear from the performance of the Euro and the $ that there is a managed approach to the exchange rates of these currencies. Talk of the fall in the $ and rise of the Euro has not been fulfilled in a price that has barely [+5%] moved in the last year. This implies some sort of managed axis on the two sides of the Atlantic. Provided the world stayed as it was with the power distribution limited to the developed world all well and good.

© 2006 Julian D. W. Phillips

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Gold & Oil - 1971 Until the Future - Part II

2006-04-06T09:36:00.000-07:00

by Julian D.W. Phillips
The Gold Forecaster
March 30, 2006

“The times they are a-changing.”

In the first part of this article we covered the history of gold from 1971 onwards. The discrediting of gold accompanied the rise of the $ to the almost sole global reserve currency. The Central Bank sales right up to the low point of the gold price, the “Brown Bottom” was followed by the turn around until today’s storming price rise a prelude to new highs eventually. The final part of this three part series will cover the Devaluation of the $ and the future of gold. But in this second part we cover the present and the future of the $ gold and in part oil.

It seems that things change, always, continually. And today it continues with the arrival of two global commercial powers onto the global monetary scene, China and India, representing over half the globe's population. Their development is nothing short of meteoric! But neither of their currencies, the Yuan and the Rupee, have a global presence, nor do they have financial systems that could be regarded as developed, by Western standards.

But both nations have arrived with features that are challenging the present world monetary order. Their threat comes from their ability to manufacture all things, far cheaper and just as well as the West can. And one of the mainstays of a Capitalist world is competition! So we are seeing a seemingly unstoppable transfer of wealth and manufacturing power to the East.

But of far greater importance is the fact that the two huge nations are absorbing resources from oil through the commodities to an ever-growing pile of U.S. dollars. There simply are not enough resources to go around. After all, if rising prices do not result in rising supplies quickly, where will prices go? And what will nations do if they don’t get enough, particularly of oil?

China & the $!

As China arrives on the global scene, not dependent on any other nation, nor controlled by any, it has some basic decisions to make for its own future. It can bow its head and fit in or develop pragmatically in the face of a crowded globe. One of the basic decisions it has to take is, will it accept U.S.$ hegemony? After all Europe has? Will the other newcomer India accept rule by the U.S.$?

We believe India will, quite happily, because of its very nature. India’s government does not have or envisage the same sort of control over its people or geography as is needed to pose any threat to the West. It is happy to be a fellow traveler.

But China is a different kettle of fish. China, from a base of tight Central government control over the far reaches of its nation, is capable of growing to be the largest economic power on earth and is rapidly headed that way. It’s simply a matter of time before it gets there. The cohesion of government and economy is stronger than anything in the developed West, so it alone will decide for itself how to manage its currency despite angry calls for a revaluation from the U.S. More than that, it has an undeveloped currency that it intends to keep for internal use only [as far as is possible] for as long as possible. While it grows it’s gathering a commercial empire of other Eastern nations who are becoming more and more dependent on its phenomenal growth.

Any development of any system or even integration with the present developed world will have to be on its terms, in its interests and with its objectives in mind. Inevitably, at some stage this will bring it head on with the U.S.$.

The government of China does not require a U.S. style of monetary system, exercising, as it does, control through a firm political grip on all the systems in that country. That their monetary system should rely on so developed and powerful a set of banks has to be unacceptable to China as it represents a loss of Central control. Consequently the Chinese banking system is archaic and inadequate compared to Western Banking, but this is not a critical shortfall. Inherently the Chinese are thrifty as they show through their very high savings rate, enormous compared to the U.S. [and its dependence on debt - unthinkable in the East]. This alone makes for a healthy financial base. And this is not lost on the Chinese government, which will harness those savings for the benefit of the nation alone.

Confirming this, the latest announcements tell us that China is to add 650 tonnes of gold to its reserves, to permit Chinese citizens to use $ accounts to trade in gold and to permit massive direct investment overseas to use its $ surpluses more productively, whilst converting them from dollars to assets. But the gold feature of these changes is not a true liberalising of the gold market across China, but only the new rich, [close to government?] who will cooperate in supporting national interests, will benefit from these changes. These changes are designed to lower the risk of too high a level of U.S. dollars in their reserves and turn them to non-$ assets, with a far lower vulnerability to the $ and directly contributing to the sustainable financial health of China!

With growth in double-digit levels and likely to continue that way, against U.S. growth only a third of that of China, China is racing to first place on the global GDP table. India with far less governmental and banking control over its population is growing at a less dynamic rate but still more than twice the U.S. rate. Between the two of them the shifting balance of commercial and financial power is altering the global balance of power steadily already.

This will have deep consequences for the tranquility of the present system and the U.S.$! In turn it will result in a running gold price as individuals, institutions as more Central Banks keep a good grip on the gold they have with the probability of more Central Banks buying more gold.

The Chinese and Indian Gold markets.

Until now the Bank of China has a poor 600 tonnes of gold [1.74% of reserves] in its reserves.

It has been claiming that it is liberalizing the gold market in China, but we do not accept that it has done so yet. It is opening up gold to the wealthy few in the main centers but not across the breadth of China, for the premiums on the gold price rise sharply the further you move away from Shanghai or Hong Kong. We would rate it a very underdeveloped and likely to stay that way. Talk of Chinese demand growing to thousands of tonnes is unlikely, until gold prices are the same in the outer reaches of China as they are in the capital cities.

Nor does the Reserve Bank of India with gold reserves of just under 358 tonnes of gold in their reserves represent a major holder of gold but hiding the fact that India is the most mature gold market on the globe.

With an alternative gold based [together with "Black" money] banking system that Western style banking and government control finds nearly impossible to penetrate, effectively. It is estimated that Indians have up to 20,000 tonnes of gold secured in hidden places across the length and breadth of the Indian sub-continent. But this is well placed beyond the reaches of government regulators or banking control.

China is likely to increase its gold holdings at individual levels whereas in India, if prices keep running the way they are may well produce a dishoarding of gold and its export, despite the government requirement that proof of the 8% Import Duty is produced, a major obstacle to date.

© 2006 Julian D. W. Phillips

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Structural Changes–Destruction Of The U.S. Dollar

2006-03-27T18:55:00.000-08:00

In an editorial by Jennifer Hughes in the Financial Times on March 19, 2006, she commented: Is it time to dust off the dreaded “e” word—that is exuberance? The word entered the market lexicon on December 6, 1996, when Alan Greenspan asked: “How do we know when irrational exuberance has unduly escalated asset values?” The good news is cyclical and bad news is structural. Have we reached the point where the structural changes affecting the Dollar will have a long-term impact and hence the U.S. economy and the creation of a New World Order? The good news is that the cyclical upturn is continuing—at least for the time being. When they do turn and we dwell on the bad news and structural changes, they are bigger than they have ever been. Structural changes are not news and they take longer to work their way through the economy, but they are highly significant.

Contents
· Uniting of Islamic Interests for Economic Gain
· HRH Prince Alwaleed bin Talal on Economic Impact
· Structural Changes
· Factors Destabilizing the Dollar
· The Future of Oil Trading in Euro - Creation of the Iranian Oil Bourse
· Economic Indicators to Consider
· Anxieties on the Dollar - The Growing Burden of U.S. Financing
· The Role of Net Capital Inflows
· Increasing Exports and Reducing Imports The Real Estate Bubble?
· The China Impact
· Potential Conflict With Iran
· The China Issue
· Ideology Trumps Economics and Military Strength.
· Conclusion

Uniting of Islamic Interests for Economic Gain

In an article—Arab Boycott Campaign Worries US Business, appearing on the Palestine Solidarity Campaign website there are quotations of particular interest given below. The quotations are from billionaire Saudi businessman HRH Prince Alwaleed bin Talal. Prince Alwaleed is a major investor in Citigroup, TimeWarner, News Corp. etc. Prince Alwaleed is the Chairman of the Kingdom Holding Company headquartered in Saudi Arabia. At the inauguration of his new Four Seasons hotel in Damascus on March 24, 2006 he is seen on the right side of the Syrian President Bashar al-Assad. According to Bryan Whitman a senior Defense Department spokesman, "there's no doubt" that Iraq has experienced problems along its western border with Syria, where terrorist crossings into Iraq have been alleged to occur.

Next month when the State Department publishes its annual Patterns of Global Terrorism report, Libya will remain on the list, Henry Crumpton, the U.S. State Department's coordinator for counterterrorism, told Reuters while in Colombia for a regional security conference.

Crumpton said Sudan—which is also on the list along with Cuba, Syria, North Korea and Iran -- will not make it off this year either, despite some advances in counterterrorism cooperation. He said no new state sponsors would be added. Reuters also reported that “Earlier on Friday Libyan leader Muammar Gaddafi gave a lecture on democracy via video link to an unprecedented gathering of U.S. and Libyan academics in New York, and touted Libya's political system as superior to "farcical" and "fake" parliamentary and representative democracies in the West.”

As a run up to the launch of the IPO for 30% of Kingdom Holdings on the Saudi Bourse, Kingdom Holdings placed a full page color ad in the London Financial Times showing their major investments including their headquarters building in Riyadh, Citigroup, News Corp and Four Seasons Hotels in the United States. Prince Alwaleed said he was going ahead with the decision despite the collapse in Gulf stock markets in recent weeks.

HRH Prince Alwaleed bin Talal on Economic Impact

Quoting from Prince Alwaleed in the article: Arab countries can influence U.S. decision-making "If they unite through economic interests, not political," he stressed. "We have to be logical and understand that the US administration is subject to U.S. public opinion," he said.

"We (Arabs) are not so active in this sphere (public opinion).”

“And to bring the decision-maker on your side, you not only have to be active inside the U.S. Congress or the administration but also inside U.S. society."

There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose. –John Maynard Keynes

Structural Changes

The destruction of the Dollar is a complex issue. In most cases, the proponents of the destruction fall into the camps of marketers of gold and followers of Peak oil theories. In most instances the case is based on looking at one particular event and not connecting the dots among multiple simultaneous events. Any one event would not make the sky fall. I like many others discounted the theory on that basis. Unfortunately, the perfect storm of destruction the Dollar are also occurring at a time and contributing to the Perfect Storm which is ushering in the New World Order—the post post Cold War Era.

The goal of the Leftist/Marxist – Islamist Alliance is also to create a new world order. This alliance or Cabal realizes that that they may not have the military might against the greatest military power and hence plan to use economic, energy, transportation infrastructure and political action to achieve their goals. Therefore a critical element of the plan is replacing the Dollar as the world’s reserve currency. The Cabal brings together the members of Shanghai Cooperation Organization (SCO), the Organization of Islamic Conference (OIC) and its related organization the Islamic Development Bank (IDB), and Mercosur as well as other lesser participants.

The structural changes that are occurring include numerous trade agreements between members of Cabal that trade in a currency of their choice. The goal of these agreements is to develop large markets, which will ultimately equal or exceed the U.S. market thus allowing countries such as China to reduce their holding of U.S. treasuries. In many cases the market development also included arms trafficking in exchange for long-term government–to-government energy supply deals. The ultimate goal is to create the bipolar New World Order.

In a meeting at the Arab Brazilian Chamber of Commerce Jordanian Prince El Hassan Bin Talal—a Muslim and president of the Club of Rome and former Brazilian president Fernando Henrique Cardoso and with the mayor of São Paulo, José Serra on March 21, 2006, he stated that Latin America plays an important part in the strengthening of South-South cooperation. "Latin America plays an important part in bringing new dynamics to South-South dialogue. Talal believes that the countries of the so-called BRIC (Brazil, Russia, India and China) have conditions to articulate themselves to develop policies aimed at multilateralism and to influence the reform of the United Nations (UN). "The Prince was very impressed with the possibility of dialogue not only between Brazil and the Arab countries” “It is essential to fight for something,” he said, referring to a New World Order based on humanitarianism and peace.

Factors Destabilizing the Dollar

· Oil Trading in Euro and the Iran Oil Bourse
· The real-estate bubble starts collapsing
· Bank of China’s decision to allow investors to buy and sell gold using their USD
· Continued increase of U.S. public and trade deficits in 2006
· Growing doubts in the U.S. themselves on the reliability and interpretation of US economic statistics
· The Potential for Military Intervention in Iran
· Increasing risk of Conflict with China

The Future of Oil Trading in Euro - Creation of the Iranian Oil Bourse

One of the elements of the plan includes the pricing and trading of oil in Euros. For the plan to work oil producing countries and purchasers will gradually convert the oil trading to alternate currencies. The primary issue is when will the Euro be a significant currency of oil trade—not specifically on the Iran Oil Bourse. With the conflicts existing between the Shia and Sunni countries, the IOB may not have the major impact some anticipate. Iran oil production amounts to 4 percent of world oil.

Iran's opening of an Oil Bourse priced in Euros (And possibly ultimately in the Islamic Gold Dinar.) was originally planned to initiate operations at the end of March 2006. According to the Iran Ministry of Petroleum the delayed opening is a result of “technical glitches.” No new date has been set. While Pravda on January 21 indicated that the IOB opened. The opening may be the end of the monopoly of the Dollar on the global oil market and potentially impact the Dollar as the reserve currency for world trade. The longer-term result is likely to upset the international currency market, as producing countries will be able to charge their production in Euros also. In parallel, European countries in particular will be able to buy oil directly in their own currency without going though the Dollar.

Concretely speaking, in both cases this means that a lesser number of economic actors will need a lesser number of Dollars. This double development will thus head to the same direction, i.e. a very significant reduction of the importance of the Dollar as the international reserve currency, and therefore a significant and sustainable weakening of the American currency, in particular compared to the Euro. The most conservative evaluations give €1 to $1.30 US Dollar by the end of 2006. But if the crisis reaches the scope anticipated, estimates for the Euro in 2007 are even higher.

Iran’s plan is to open a new oil bourse (exchange) on which countries all over the world can buy and sell oil and gas in Euros. It also establishes a new oil “ marker “ based on Iranian crude and denominated in Euros, in open rivalry to the existing West Texas, Norway Brent and UAE Dubai markers, all of which are calculated in U.S. dollars. It should be obvious that if the bourse opens as planned that it would reduce considerably, over time, the need for dollars by all the Eurozone and as well as much of the rest of the world. Russia has already moved in this direction.

In order to contemplate the consequences of the opening of the Euro oil market in Iran, it is necessary to look at its origins. However surprising this may be, the man behind the idea is the British financier Chris Cook, former director of the International Petroleum Exchange in London. In 2001 he wrote a letter to the head of the Iranian Central Bank Mohsen Nourbakhsh.

The letter said that the structure of the international oil markets is closely linked to trade brokers, and especially to investment banks, which has a disadvantageous effect on states such as Iran, which are both producers and consumers at the same time. Chris Cook advised Iran to make a decision as soon as possible about creating a Middle East exchange for energy resources, which would set a new standard for oil prices in the Persian Gulf.

And not a word was said about “opposing the Atlanticists.” Ideas for shaking the dollar through unilateral efforts have always fallen apart – Iran, if anyone, should know about that.

We remember how at the end of the 1970s, when the OPEC countries agreed to sell oil for dollars and inflated the selling cost of a barrel, oil prices rocketed up by 400%. France, Germany and Japan suddenly decided to purchase oil in their own currencies and thus lower the pressure from the American currency.

According to the Pravda analysis: In reply the U.S. Treasury and the Pentagon did everything they could to ensure that this did not happen: secret diplomatic treaties, threats and military agreements were taken between the USA and the main OPEC oil producer, Saudi Arabia.

This is what started a new stage in the unlimited power of American financial system. Profit from the export of oil dollars by OPEC countries ended up in the hands of large banks in New York and London and resurfaced in the form of loans to countries experiencing an oil deficit. For example, to Brazil and Argentina, which would later be caught up in the quagmire of the tragic Latin American debt crisis.

On February 14, 2006 Syria switched all of the state's foreign currency transactions to Euros from dollars amid a political confrontation with the United States. The switch would mean Euro pricing for crude oil sales, a major foreign currency earner for Syria.

The latest official figures show Syria imported $6.7 billion goods in 2004 and exported $5.4 billion. Oil output is about 400,000 barrels a day.

Venezuela’s President Hugo Chavez is also trying to get away from the fiat Dollar. He had entered into trade agreements with other South American countries, such as Cuba, to barter services and goods for oil without the use of any currency. Bolivia’s new President Evo Morales has promised to nationalize the country’s oil fields, and has also shown tendencies to shy away from the Dollar. On December 30, 2005 Venezuela's central bank said it plans to approve the use of the Euro to service demand from foreign companies as well as to further distance the country from its dollar dealings.

If all oil producing countries switch to Euro the rest of the world would dump the Dollar causing it to drastically lose its value. To understand the seriousness of this let us look at China alone. China has an excess of $800 billion in its foreign exchange reserves and may increase to $1 trillion soon. China buys most of its oil from Saudi Arabia and trade between the two countries has exceeded $14 billion in late 2005. In 2006 China also entered into government-to-government deals with Saudi Arabia. Iran is also a major supplier. If China alone dumps the Dollar the American economy would suffer greatly. Now imagine what would happen if other countries, such as Japan, India, Pakistan, and Saudi Arabia and all the Organization of Islamic Conference (OIC) countries, would also dump the Dollar.

The IOB in itself cannot break the dollar. The long-term goal of the OIC is to ultimately convert the trading into the Islamic Gold Dinar. This of course would have greater implications if ultimately accomplished. Other countries including Norway are considering a new oil bourse to trade in Euro. The issue of currency selection for oil trading has been around for some years. However, when this issue is combined with the other events and the global alignment of nations, the issue must be considered as to its long-term implications. With over three-fifths of the world’s population within the SCO countries combined with the 200 million within Mercosur plus all the 57 countries of the OIC lining up to create a new nuclear-armed multi-polar world, we should take notice.

Whether the IOB will impact the dollar remains to be determined. The IOB may not open as scheduled and/or the IOB may not attract the trading as the Iranians anticipate. Certainly, the issues surrounding the potential sanctions on Iran may determine the near-term impact. However other factors such as the U.S. balance of trade will compound events on the IOB.

Economic Indicators to Consider

· The ‘monetarisation’ of the US debt
· Launch of a monetary policy to support US economic activity.
· Growth of new economic trading blocks

The first two policies may to be implemented until at least the October 2006 “mid-term” elections, in order to prevent the Republican Party from being sent in reeling. The growth of the trading blocks is ongoing.

The ‘monetarisation’ of the US debt is indeed a very technical term describing a simple reality: the United States undertakes not to refund their debt, or more exactly to refund it in "monkey currency." We also anticipate that the process may accelerate in coincidence with the increased sale of oil in Euro and the potential launching of the Iranian Oil Bourse. These events may precipitate the sales of U.S. Treasury Bonds by their non-American holders. A drastic increase in oil price may have a similar impact as it did in 1979.

In 2005, the Federal Reserve abandoned its cheap dollar policy, and tried to defend the greenback against the Euro and Yen through a series of baby-step rate hikes, without puncturing the US stock market rally or the US housing bubble. The Fed achieved its twin objectives, because Asian central banks and Arab oil kingdoms were heavy buyers of U.S. Treasury bonds, keeping U.S. mortgage rates low.

The most notorious Asian buyers of U.S. debt were China and Japan, which recycled hundreds of billions of U.S. dollars acquired through foreign currency intervention back into the U.S. debt markets. All told, Asian central banks hold a whopping $2.75 trillion of foreign exchange reserves, led by Japan’s $851.7 billion, China’s $818.9 billion, Taiwan’s $257.3 billion, and South Korea’s $217 billion.

Beijing is on course to top $1 trillion in FX reserves this year, and wants to diversify this year’s build-up of cash away from the U.S. dollar. Beijing’s satellite colony, Hong Kong, owns another $127.8 billion of foreign currency reserves. Therefore, the U.S. Treasury is afraid to identify China as a currency manipulator, even after the U.S. rang up a $202 billion trade deficit with China, due to fear that Beijing and its satellite could retaliate by selling U.S. bonds, and driving mortgage rates higher.

Compounding the problem of the current U.S. debt of $8.27 trillion are the not included unfunded liabilities of the U.S. government, such as Social Security, Medicaid and Medicare. Including unfunded liabilities, the U.S. government is approximately $46 trillion in the hole.

The fiscal deficit means the U.S. government continually has to issue more and more debt to finance its spending and the issuance of debt means an increase in the supply of U.S. bonds that will ultimately lead to lower bond prices and higher interest rates. This is where the trade deficit and the fiscal deficit meet. Just like the trade deficit implies the dollar will fall, the fiscal deficit will ultimately cause U.S. interest rates to rise.

Recall that China, Japan, and others were buying U.S. Treasury debt (bonds) with their trade dollars instead of selling those dollars into foreign exchange markets. That is what kept the dollar afloat, but it is also what kept U.S. medium to long term interest rates so low since no matter how much more debt the government issued, these nations stood ready to buy it.

On March 16, 2005, we got the biggest number of them all when Congress agreed to a $781bn increase in the debt ceiling to almost $9,000bn, a new record. It was the fourth increase under the Bush Administration and marks a 50 percent jump from the steady $5,950bn of the 1990’s.

Looking at this I realized that we are going to witness an unexpected turn of events. When China and Japan decide to stop buying U.S. Treasuries with their trade surplus dollars, the U.S. dollar exchange rate will fall simultaneous with rising U.S. interest rates.

This is not intuitive since common dogma suggests currencies rise when interest rates rise and fall when interest rates fall. Yet I believe that the U.S. dollar is going to fall while U.S. interest rates rise unless the rate increase is very large or that Cabal falls apart.

Anxieties on the Dollar - The Growing Burden of U.S. Financing

The deficit in the U.S. current account, the broadest measure of international trade, set a record $224.9 billion in the fourth quarter, meaning the U.S. needs to attract $2.5 billion daily in foreign capital to keep the dollar steady.

The U.S current account deficit suffered its fastest quarterly deterioration in the final months of last year, ballooning to a record 7 per cent of national income. The worse-than-expected deficit rekindled fears among economists that global imbalances would undermine the dollar. In the fight against terrorism the Department of Homeland Security set different colors to represent the level of the threat—green to red. One may consider applying the color to represent the risk to U.S. resulting from the magnitude of the debt.

For countries providing the status of reserve currency status, such as currently the U.S. is, a 5 percent ratio may be considered as “amber” warning and a 7 percent ratio as a flashing “red stop light.” If the world should decide that the Dollar is no longer the world reserve currency, obviously the U.S. should take heed.

Indeed it is estimated that one-third of this debt is the result of oil imports. There is little indication that this component will drop significantly in the near future and depending on the outcome of Iran nuclear issue may increase significantly. As long as the foreign policy and hence energy policy is to pursue energy interdependence rather that energy independence, the trade gap will continue to grow. See: Give Me Energy Security And I Will Give You A Foreign Policy.

The Role of Net Capital Inflows

Another marker to watch is the ratio of the net capital inflows to the U.S. vs. the trade deficit. In January the Treasury data showed that $66bn of net capital inflows to the U.S. failed to match the trade deficit of $68bn (itself a record) for the second month. Currency watchers look for inflows to more than cover trade outflows as a reassurance of ongoing demand for U.S. assets. If demand drops, the dollar will drop, perhaps sharply.

In an effort to encourage net capital inflows, the Administration is seeking to reduce barriers to foreign investment. Recent events surrounding the acquiring of U.S. ports indicate the difficulty in utilizing this approach. These actions result in the sale of basic energy and transportation infrastructure, which in turn may impact our security. The availability of the all this cash has also allowed the acquisition and control of global energy and air and sea transportation assets.

Economists believe that this deficit will become ever larger as the impact of years of net selling of U.S. assets is felt.

Utilizing ‘Open Borders’ to Reduce Trade Imbalance

The Administration is favoring ‘open borders’ supported by companies utilizing undocumented workers to reduce the costs of labor—although many deny this is the case. Business groups acknowledge that some kind of crackdown is inevitable. For years, lax federal and state enforcement of existing laws has given employers virtual carte blanche to hire illegals. This presents the classic case of trying to reduce imports and/or increase exports in a globalized world.

A voluntary program operated by the U.S. Citizenship & Immigration Services (USCIS) known as the Basic Pilot, has garnered little support from business. Only 2,900 of the nation's estimated 7 million employers participate in the program. And the government is ill-prepared to handle more. Of 73,000 employee checks referred to USCIS last year, a third required case officers to investigate further because the agency lacked sufficient data about employees' status.

Increasing Exports and Reducing Imports

Total U.S. exports are 10.5 per cent of GDP. In order to eliminate the deficit, exports would need to increase by 70 per cent. This is clearly not going to happen. Instead it will require big dollar depreciation alongside much weaker domestic demand for imports. It should also be noted that our agricultural exports also depend on importing 50% of urea fertilizer used to grow these crops. Use of ethanol derived from corn also requires the use of imported urea.

Aside from a fall in the dollar, the deficit could be narrowed if U.S. consumers cut back purchasing foreign products and reduce outsourcing to foreign nations in coming years. Another very worthwhile approach would be to promote energy independence rather than interdependence. Such a policy would increase the U.S. security and reduce imports.

The Real Estate Bubble?

Sales of new U.S. homes fell 5% in January to a 1.233 million unit pace, their slowest pace in a year while the number of homes on the market hit a record high, according to a government report on February 27th that signaled a further cooling in the housing market.

The number of new homes available for sale at the end of January rose to a record 528,000. At the current sales pace, that represented 5.2 months' supply, the largest inventory since November 1996. On March 24, 2006, it was reported that sales of new U.S. homes slumped by the most in nine years. Home purchases fell 10.5 percent to an annual rate of 1.08 million, causing prices to fall and leaving more houses on the market, the Commerce Department said in Washington.

On Tuesday, March 21, 2006 the U.S. Census Bureau reported that housing starts were down 7.9 percent from January to February and had declined 4.8 percent from February 2005, indicating less demand for new construction.

On Monday, March 20, 2006 Federal Reserve Chairman Bernanke argued that even an expected decline in the housing sector would not sufficiently hurt consumption to derail the country's solid economic growth.

However according to the BusinessWeek Business Outlook of March 27, 2006, Construction payrolls once again posted a strong gain, producing 41,000 new jobs in February. But now that the housing market has peaked, construction jobs won't be as plentiful heading into the summer building season.

Over the past year the booming housing market translated into big gains in construction payrolls. Building jobs accounted for over 17% of all new jobs in the U.S. despite accounting for only 5.4% of total payroll. But, the National Association of Realtors' March housing forecast projects a 7.7% fall in new home sales this year. Economists also expect February home sales to run below the previous-year pace for the first time in 18 months.

Construction hiring as a share of total job growth, however, varies among the states with the hottest housing markets. The biggest gains in building jobs over the 12 months through January were concentrated in the West, with increases in California, Idaho, Montana, and Nevada all above 22%. Other states that could feel the pinch of fewer jobs in the sector include New Hampshire, Massachusetts, and Missouri, which saw hiring exceed 24% despite 2005 home price gains that were below the 13% national average reported by the Office of Federal Housing Enterprise Oversight.

The Fed’s rate hike campaign failed to slow the US appetite for foreign made goods, as Americans extracted $600bn of home-owners equity to meet their expenditures. Rising interest rates will impact ability to repay loans.

The China Impact

If the wages of U.S. workers were rising at 10 percent per year, you can be sure that the economists would be sounding alarm bells.

But, what if Chinese wages are escalating at the rate of 10 percent per year. The U.S. imported $240bn from China in 2005—which exceeds the revenues of the U.S. securities industry. With that large an impact, it wouldn't be a surprise if soaring wages in China translated to higher import prices and faster inflation in the U.S. It appears that in spite the wage increases, the prices have not increased but have actually fallen. It appears that the Chinese want to maintain market share.

However there is a labor shortage in China and the impact will be felt around the world. China no longer seems to have an inexhaustible supply of cheap labor. This is like the other factors mentioned result in a slow process. Productivity gains are getting harder to find, and manufacturers who are seeing their margins hit, they can hold out for only so long before they have to try to raise prices. As the prices increase, the importers will have to adjust. The impact will ultimately influence the inflation in the West and for the U.S. further increase the trade deficit. It is unlikely that the gradual rise in prices will increase U.S. exports since so much of the basic manufacturing has been transferred offshore. China will still be the world's workshop.

Changing the exchange rate will not significantly impact the balance of trade with China. The Yuan at 8.027 to $1 is already valued at twice the purchasing-power-parity gap of 4 between it and the dollar within their respective economies. Wage disparity between China and the US ranges from 20 to 50 times in various sectors, and an exchange rate that reflected such a wide disparity would border on the ridiculous.

Potential Conflict With Iran

Iran holds some significant geo-strategic assets in the current crisis, such as its ability to intervene easily and with a major impact on the oil provisioning of Asia and Europe (by blocking the Strait of Hormuz), on the conflicts in progress in Iraq and Afghanistan, not to mention the possible recourse to international terrorism. But besides these aspects, the growing distrust towards Washington creates a particularly problematic situation. Far from calming both Asian and European fears concerning the accession of Iran to the statute of nuclear power, a military intervention against Iran would result in an quasi-immediate dissociation of the European public opinions which, in a context where Washington has lost its credibility in handling properly this type of case since the invasion of Iraq, will prevent the European governments from making any thing else than follow their public opinions. In parallel, the rising cost of oil which would follow such an intervention will lead Asian countries, China first and foremost, to oppose this option, thus forcing the United States (or Israel) to intervene on their own, without UN guarantee, therefore adding a severe military and diplomatic crisis to the economic and financial crisis. Such a conflict would increase the potential for a currency crisis.

The China Issue

As a military power, the United States of America is without peer; for a foreign government to launch an attack on the U.S. would be suicide. But war is seldom initiated by direct military conflict—especially for the Chinese. Their most famous general, Sun Tsu, wrote in The Art of War: “In antiquity, those that excelled in warfare first made themselves unconquerable in order to await the moment when the enemy could be conquered.”

In the last decade, Beijing has made a concerted effort—a highly successful one at that—to control shipping lanes around the world. A Chinese company controls the entrance and exit points of the Panama Canal. China controls the Seagate at Freeport, Bahamas. A Chinese firm is financing the building of a Pakistani port at Gwadar. From Europe to Latin America, from California to Hong Kong, the Chinese have aggressively moved to buy controlling interests in the world’s major seaport facilities.

As Sun Tsu said:

“Whoever occupies the battleground first and awaits the enemy will be at ease; whoever occupies the battleground afterward and must race to the conflict will be fatigued. Thus one who excels at warfare compels men and is not compelled by other men.”
Washington is doing little to prevent the Chinese from achieving a major, bloodless victory in this strategic arena.

On March 16, 2006, the Pentagon began moving strategic bombers to Guam and aircraft carriers and submarines to the Pacific as part of a new "hedge" strategy aimed at preparing for conflict with China.

China's arms buildup in recent years altered the U.S. "strategic calculus" for defending Taiwan from a mainland attack and shows that "a prudent hedging policy is essential."

The placement of about 700 Chinese missiles opposite Taiwan has changed the status quo between the non-communist island and the communist mainland.

Ideology Trumps Economics and Military Strength

A full challenge to the domination of the dollar as world central bank reserve currency entails a de facto declaration of war on the ‘full spectrum dominance’ of the United States today. The members of the European Central Bank Council well know this. The heads of state of every EU country know that. The Chinese leadership as well as Japanese and Indian know that. So does Vladimir Putin.
Until some combination of those powers congeals in a cohesive challenge to the unbridled domination of the U.S. as sole superpower, there will be no Euro or Yen or even Chinese Yuan challenging the role of the dollar. The issue is of enormous importance, as it is vital to understand the true dynamics bringing the world to the economic conditions of today.

In the world today, we are not facing a clash of civilizations or a clash of cultures but we are facing a clash of ideologies. Islam is more than just another religion—it is a way of life. Muhammad set out to establish the Islamic kingdom of God on earth. This sets the stage for the clash of ideologies. Islam is therefore, like no other religion a political religion vs. an apolitical religion. The riots following the ‘cartoon’ events have established the willingness of Muslims of multiple sects coming together against a common cause. The Islamist goal is world domination and the desire to bring all non-believers into submission and hence to become dhimmi.

The goal of a nuclear-armed Cabal is just such a grouping, bringing together the Islamic countries with the Leftist/Marxist countries to reestablish a bipolar world. The Islamists bring the passion and ideology they are willing to die for and Leftists/Marxists bring the manpower, market, political and public opinion access in the Western countries. Jointly they bring control of the world energy, financial and transportation infrastructure. The U.S. and Western European foreign, domestic and energy policies have allowed the massive accumulation of the foreign debt and funds that allowed the Cabal to pay for and hence acquire the control of global the energy, transportation and manufacturing infrastructure. The control of the infrastructure is necessary to ultimately defend the security of the West.

The SCO brings together China, Russia, Kazakhstan, Tajikistan and Kyrgyzstan along with Iran, India and Pakistan as observers. The SCO is essentially a ‘Warsaw Pact’ grouping with the goal of building military strength capable of countering NATO. Combining the other members of the Cabal, the OIC and Mercosur, they have jointly initiated a de facto declaration of war on the ‘full spectrum dominance’ of the United States today.

This is not to say that the Cabal will succeed to accomplishing their goal. The issue at hand is whether the U.S. is willing to accept the economic sacrifices and to defend the hegemony of the U.S. with war if necessary. Many will say it is not worth fighting for and some will initiate demonstrations and marches in the Western world capitals.

On an optimistic note, the Cabal is indeed an alliance of unusual participants. The Leftists and liberals may realize that they are not willing to live as dhimmi and to submit to the restrictions of Shariah law. Similarly the Islamist may realize that they cannot tolerate the liberal life style. Dubai is a case in point. The UAE is a member of the OIC and the Arab League. On March 1, 2006 the Bush administration said it is pressing the United Arab Emirates to drop its economic boycott of Israel. Can Dubai continue indefinitely to serve two masters—subservient to Shariah law on the one hand and mammon on the other? Can an Islamic country have tolerance of drinking, prostitution and bare midriffs in a region otherwise more obedient to Islam’s strictures and not ultimately succumb.
This reveals a certain schizophrenic character to Dubai as a microcosm of the Cabal. But in Dubai the cracks are beginning to appear. But the concerns of the local Emirati population have remained barely audible. Many of the well-to-do are happy to wander among the many worlds on their doorstep. But others worry that their privileged place in a Dubai society that provides jobs, homes and welfare for life will eventually dissolve in the melting pot around them.

This is the country that the U.S. is selling 80 F16 e/f combat aircrafts from the United States at a cost of some $6.4 billion. One has to ask is this part of the plan to ‘outsource’ America’s security as a part of the Bush Administration plan to create a New World Order? Emirates Airlines, one of UAE`s national carriers, has placed an order with Boeing for $20 billion. It should be noted that the airliner purchases are utilizing Sukuk (Shariah compliant financing) bonds. Is the U.S. looking at the Dollar rather than potential for the UAE to eventually succumb to Islamist dogmas? America’s Homeland Security Director, Michael Chertoff said, “We have to balance the paramount urgency of security against the fact that we still want to have a robust global trading system.” Chertoff defended the security review of Dubai Ports World of the United Arab Emirates in granting them permission to take over the port operations.
When addressing a clientele outside the region, the Dubai’s image launderers like to promote the idea that it has outgrown its turbulent neighborhood and now lies somewhere beyond. Thus Dubai has doubled up as a Costa del Sol for the British package holidaymaker, a seven-star destination for the super-rich global jet set and a parachute for Iranians and Saudis hedging against future turmoil in their own countries.

On a pessimistic note. A country does not maintain reserve currency status by the democratic vote of the world central banks, they fight wars for it as the British Empire did in the 19th century and in some cases endure financial sacrifices as occurred in 1979 following the rise to power in 1979 of Ayatollah Khomeini in Iran when the rise in oil prices again in 6 years shot through the roof. In October 1979 Paul Volcker gave the dollar another turbo-charge by allowing interest rates in the U.S. to rise some 300% in weeks, to well over 20%. That in turn forced global interest rates through the roof, triggered a global recession, mass unemployment and misery. It also ‘saved’ the dollar as sole reserve currency.

Conclusion

The long-term goal of the Leftist/Marxist – Islamist Alliance is world domination. The control of the economic, political, energy and transportation infrastructure is a key element in accomplishing this goal. The replacement of the Dollar as the reserve currency is a critical element.

Economics and energy policy must be a part of the U.S. foreign policy going forward. Military strength is necessary and will contribute to but will not be sufficient for the future security of the U.S. and the West. Domestic policy is linked to our security. Fighting terrorism, spreading democracy and attention to the Middle East are important but the economic and energy issues must be addressed domestically and worldwide and this also means in Latin America. Europe recognized the importance of energy security and is doing something about it. The U.S. needs to do likewise.

Recognizing the importance of energy to security, on Tuesday, on March 21, 2006 European Union president challenged the 25-nation bloc's leaders to lay the foundations for a new era of cooperation on energy policy at an economic summit this week. Austrian Chancellor Wolfgang Schuessel urged the bloc to develop a policy, which ensured security of supply, environmental sustainability and the conditions for a competitive energy market. Energy security has shot up the list of world leaders' priorities following the gas disruptions in Europe, soaring oil prices, attacks on oil installations in Nigeria and tensions over Iran's nuclear ambitions.

The European Commission proposed this month that the bloc should adopt a common external energy policy, new rules for storing gas and oil and action to boost energy efficiency.

David J. Jonsson is the author of Clash of Ideologies —The Making of the Christian and Islamic Worlds, Xulon Press 2005. His next book: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance will we released in spring 2006. He received his undergraduate and graduate degrees in physics. He worked for major corporations in the United States and Japan and with multilateral agencies that brought him to more that fifteen countries with significant or majority populations who are Muslim. These exposures provided insight into the basic tenants of Islam as a political, economic and religious system. He became proficient in Islamic law (Shariah) through contract negotiation and personal encounter.

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Tactical Oil-Stock Trends

2006-03-25T11:55:00.000-08:00

by Adam Hamilton

Out of all the major commodities-stocks sectors that are thriving in today's commodities bull, oil stocks are probably the surest thing. While their ultimate returns won't be as high as smaller high-flying sectors like precious-metals stocks, oil stocks have a vastly superior ratio of potential returns to risk.

In other words, oil stocks are almost certainly the least risky commodities-stock sector in which to deploy capital today. This unique attribute of oil stocks is a product of several factors including the global importance and fundamentals of oil, the massive size and scale of the oil companies, and their unbelievably low valuations.

Oil is the lifeblood of modern civilization, and despite countless attempts to render it less important no suitable energy substitute is anywhere close to being found. All over the world people, companies, and nations will not hesitate to buy oil products regardless of their price. Global demand growth is outstripping global supply growth as the world becomes more explored and fewer giant oilfields remain to be discovered.

Since the world oil markets are so big and essential, the companies taking the immense risks necessary to pump and transport this crucial commodity have also grown very large. The raw size and scale of the oil companies, on average, utterly dwarfs those in every other commodities sector. The bigger companies are, the less they are buffeted about my shifting tides of capital flows and the less prone they are to sudden movements up or down.

But as tech investors learned in 2000, even big companies are not immune from major stock declines. When companies get too pricey relative to their earnings power an adjustment lower is all but inevitable. The most important attribute of the oil stocks is not their size, but their valuations. Today oil stocks are dirt cheap in fundamental terms, the biggest bargains relative to their earnings streams in the entire stock market.

Earlier this week in our Zeal Speculator alert service I compared the valuations of the six biggest oil stocks with the six largest NASDAQ stocks. The six biggest oil majors commanded a staggering $1146b in market capitalization. The six biggest NASDAQ 100 stocks were a bit smaller with a combined market cap of $802b. To gain a sense of scale on how big these numbers truly are, the total NASDAQ 100 market cap is about $2050b.

These giant tech stocks had an average P/E ratio of 31.9x earnings, which is still above the 28x level that has marked major stock-market bubbles in history. Meanwhile the six elite oil majors had an average P/E ratio of only 9.6x! This is just slightly above the 7x levels that flag multi-decade market lows in history, the only times when long-term investors are virtually guaranteed big wins by buying blue-chip companies at fire-sale prices.

Thus, earlier this week a single dollar of elite oil-company earnings only cost 30% as much as an identical dollar of elite tech-company earnings. At their current low valuations probabilities overwhelmingly favor oil stocks moving much higher just to reach normal fair-value levels at 14x earnings. These low valuations have created a stunning intersection where commodities investors' interests are overlapping with those of value investors. The combined capital of both these groups should continue flooding into oil stocks.

Given their unparalleled importance in the global economy and cheap valuations, the risks in oil stocks are very low today despite their awesome run higher last year. But even with these overwhelmingly bullish fundamentals, oil-stock investors and speculators remain quite skittish. Oil stocks are the best buy in the commodities-st ock world as well as the greatest value-investment opportunity today, yet they are being largely shunned. Why?

I suspect the answer to this crucial question is two-pronged. While Wall Street is slowly making the adjustment to realize that $60+ oil is not an anomaly but a new base, this truth hasn't yet fully dawned on all funds and advisors. Many still think oil prices are going lower and don't want to buy into oil companies if their profits will be falling. But if oil stays near $60 or above as fundamentals suggest it should, then oil companies are way too cheap today.

The second factor is the oil-stock technicals. Since oil stocks retreated sharply in early February and have been rather choppy since, perceptions of them are tainted at the moment among technically oriented speculators. But in their proper perspective, the tactical oil-stock trends actually look really bullish today. I am penning this essay in the hopes of illuminating these promising oil-stock technicals.

As always, the best proxy for analyzing oil stocks as a sector is still the Amex Oil Index, better known by its symbol XOI. Our first chart examines this index over the last 15 months or so, continuing a line of research from last November. The XOI and its technicals are graphed in blue on the right axis. Underneath the XOI is the Relative XOI, or the XOI divided by its key 200-day moving average. This rXOI forms a horizontal trading range where Relativity-based long and short trading signals are defined.

While this chart looks busy, it is really pretty easy to understand. We'll start with the blue XOI line that represents the progress of oil stocks as a sector. Note that the oil stocks surged a couple times in 2005 in major uplegs to reach new interim highs. But after these highs were reached, as in all bull markets, sentiment was waxing too ecstatic so a consolidation sideways or a correction downwards was necessary to rebalance sentiment and lay the foundation for the next major upleg.

In order to gain perspective on and better understand what is going on in oil stocks today, we need to start back in August. On August 11th the XOI managed to close over 1000 for the first time in history. The next day it crawled a little higher and reached its apex, but after all this excitement a correction was necessary to restore sentiment balance. The XOI fell sharply in the next few days which left what looked like a natural interim high in the index.

Over the following couple weeks the index consolidated just as it had done between March and May after its previous upleg. But this normal and healthy consolidation was interrupted by an extraordinary event, hurricane Katrina slamming into the Gulf Coast. In the weeks after that disaster as the markets tried to determine how much damage was done to critical oil infrastructure, oil stocks were bid up sharply.

But by the end of September, oil prices had stabilized and it had become readily apparent that the worst-case infrastructure-damage scenarios had thankfully not come to pass. In early October the XOI responded to this and plummeted in a brutally sharp correction. This correction was exacerbated by a couple factors. First it was overdue since August and second it happened from an unnaturally high level driven by the hurricane hysteria.

After a gut-wrenching plunge in early October, the XOI bounced. Oil-stock investors realized that oil near $60 was still an incredibly profitable level for established oil companies so they started buying back in. The XOI then meandered higher and started carving a new uptrend for the next couple months. Then it surged mightily in January as some of the annual flood of year-end pension capital that deluges into the markets sought a home in oil stocks. The XOI was once again overbought by early February and corrected hard yet again to rebalance sentiment.

Since this sharp February correction, which blasted many oil-stock positions back down to their trailing stops, oil-stock investors and speculators have been overly pessimistic on the oil stocks. Despite their amazingly low valuations, the wall of worries that confronts every bull is still looming large in the minds of oil-stock traders. But while oil stocks may feel weak compared to their late January levels, in reality their overall technical uptrend remains quite strong.

The latest XOI tactical uptrend channel is rendered on the upper right side of this chart. With the exception of the mighty January surge and its aftermath, the XOI has been nicely meandering higher within this uptrend. It has tested its support no fewer than four times in four different months since its latest interim bottom and every support test has passed with flying colors. The support underlying this latest XOI uptrend remains rock solid.

Since its October interim bottom, the XOI has been carving a series of higher lows and higher highs. Even after its sharp February correction the XOI is still grinding higher within its uptrend. Technically this is very bullish behavior and is nothing to be concerned about. The important comparison for oil-stock traders to make is not from late January to today, but from the October lows to today. The XOI is now in a textbook-perfect bull-market uptrend!

Next I'd like to direct your attention to the red Relative XOI line, slaved to the left axis. Like all bull markets, the XOI bull flows and ebbs. It surges higher in magnificent uplegs and then periodically retreats in healthy corrections. This natural rhythm can be quantified by measuring the distance between the XOI and its 200-day moving average, which is rendered in black above. When the XOI is close to its 200dma a new upleg is probable and when it is stretched far above its 200dma a correction is highly likely.

The rXOI expresses this key relationship as a constant multiple which forms a horizontal trading band. As I showed in November, the XOI tends to oscillate between 1.05x its 200dma on the low side to 1.20x+ its 200dma on the high side. The highest-probability-for-success time to add new long positions in oil stocks is when the XOI is within 5% of its 200dma. Interestingly the XOI's recent behavior that is irritating investors has also created a dazzling opportunity to load up on elite oil-stock positions.

From mid-2003 to late 2005, rXOI long signals were fairly rare. There were only five of them over this entire time frame and they were very short-lived, so investors and speculators did not have many ideal chances to deploy capital in oil stocks. But since last October, there have been no fewer than six more rXOI long signals! There have been more awesome relative opportunities to buy oil stocks in the past six months than in the preceding two years combined!

Thus at Zeal we have been looking at the XOI's lethargic meanderings near its 200dma as a huge opportunity. Since November we have been heavily researching and continually adding new oil and gas trades to our portfolios in both of our newsletters. Rather than considering the XOI's long convergence with its 200dma as a burden, I think it provides an exceptional opportunity to throw long before Wall Street and value investors realize what a great deal oil companies are and flood in with a vengeance driving their prices much higher.

Today many oil-stock investors are also concerned that oil stocks will follow the general stock markets, so if a selloff in the markets ignites it could drag the oil stocks down with it. But in reality the primary driver of oil stocks by a huge margin is the price of crude oil. The biggest technical risk the oil investors face is not a general market selloff, but a decline in the oil price. Oil stocks are only a wonderful bargain if oil prices remain near $60 or higher. Check out the XOI's stellar correlation with crude oil.

Over the past 15 months the XOI's daily price correlation with crude oil has run 0.915. This translates into a high 84% r-square value, which suggests that 84% of the daily price action in the XOI over this period of time was directly explainable by the daily price action in oil. Although there are times above like in October where the XOI briefly diverged with oil, for the most part the blue XOI line fits in with the red oil line like a lock and key. Oil is indeed the key to unlocking oil-stock performance.

Over this same period of time the XOI's correlation with the S&P 500 was much lower at 0.784. Thus the XOI only followed the S&P 500 61% of the time. And a lot of this correlation exists simply because both oil and the general stock markets happened to have strong years in 2005. The levels that oil stocks ultimately achieve depend on their profits, and their profits depend solely on the fortunes of oil prices and have nothing to do with the general stock markets.

Since this chart is less busy than the first one, I used it to illustrate a couple more points about the XOI technicals. First, note that the XOI is also in a much larger uptrend as well. This strategic trend channel is well-defined with multiple support and resistance intercepts. Today this flagship oil-stock index remains near its lower support, a great time to buy. And the XOI's latest pullback in early March bounced right at this long-term support line. This shows that no strategic technical damage has been done to the XOI's uptrend at all.

In addition, the late January highs in the XOI turned south right at its resistance. This is what probabilities favor and what traders should have expected. The endless bouncing between support and resistance creates a sawtooth pattern in bull markets, as the stylized drawing on the bottom of this chart shows. The best times to buy oil stocks is near the bottoms of these XOI sawteeth when it is near its 200dma. Longer duration 200dma approaches, even though they distort this sawtooth pattern, are far more advantageous to investors since they leave more time to buy oil stocks at relatively low prices.

As is also readily apparent above, the XOI tends to top with crude oil and bottom with crude oil. Oil drives the oil stocks since it alone determines their ultimate profits. Thus the best time to buy oil stocks is when crude oil is technically low near an interim bottom. Not surprisingly, as our final chart illustrates, this is the case once again today. Oil's loitering of late near its 200dma has created a rare extended opportunity for investors and speculators to buy the elite leveraged oil stocks.

Oil's chart is not surprisingly much like that of the XOI that so diligently mirrors it. Since November the oil prices have been grinding relentlessly higher within a new well-defined uptrend. The support under this new uptrend is rock solid. It has already been tested a half-dozen times yet the oil price just refuses to decisively break under it. And within this uptrend oil is carving higher lows and higher highs, the definition of a bull market.

While oil's tactical technicals look great and suggest it is heading higher which will drive up the XOI along with it, its longer-term strategic technicals look wonderful as well. Oil has created a nice major uptrend over the past 15 months that has only been briefly violated for a couple months late last summer. And that was an upside breakout, which investors never complain about. Today oil is looking beautiful technically at both scales and is likely to continue powering higher in its secular bull.

Now if oil is heading higher as fundamentals and technicals suggest, then the profits of the oil stocks are going to continue climbing as well. In Q4 the oil price averaged $60, which drove all-time record profits. So far this quarter, oil prices are averaging over $63, or 5.4% higher! Thus as the Q1 profits are reported by oil companies in the coming weeks they should once again reach new all-time record highs. This will drive their already low valuations even lower!

Ultimately a stock is nothing more than the fractional ownership of the future profits stream of a business. The higher the profits that any particular company earns, the higher its stock price will be bid as investors compete for these profits. Higher oil prices will lead to higher oil-stock profits which will guarantee higher oil-stock prices in the months and years ahead. Both commodities investors and value investors will be scrambling to own these incredible oil companies.

At Zeal we have been thrilled by and very grateful for the XOI's long visit near its 200dma since late last year. Before that in the preceding couple years neither oil nor the XOI have loitered around their 200dmas for very long during their periodic convergences. But in the last six months we have had a half-dozen awesome opportunities to deploy capital into elite leveraged oil-stock speculations and investments. We will continue to research and layer in oil-stock trades and recommend them in our newsletters as long as this anomaly persists.

I don't think this rare opportunity will last for long though. The moment Wall Street and the value investors finally decide that $60+ oil is here to stay, they will stampede into the ridiculously underpriced oil stocks. Oil stocks are now priced for an oil environment far lower than $60 so they will have to adjust soon to reflect the new global fundamental oil realities. If you want to deploy into the elite oil stocks before this happens, please subscribe today!

The bottom line is today's tactical oil-stock trends look very bullish, despite all the grumbling due to their early February correction and its aftermath. Oil stocks remain in a strong new uptrend, their primary driver crude oil remains in a similar powerful uptrend of its own, and on top of all this oil stocks are probably the most undervalued sector in not just commodities stocks but the entire stock markets.

Even if oil goes no higher than $60, which is very unlikely, many big and small oil stocks alike will have to double from here just to hit fair value. And if oil goes higher as its fundamentals suggest it should, the stocks will have to adjust even higher. Investors and speculators who deploy capital to ride these trends will probably earn fortunes.

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! &www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at & zelotes@zealllc.com Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

CanRoys - Canadian Royalty Trusts

2006-03-18T20:09:00.000-08:00

Most Canadian royalty trusts are listed only on the Toronto stock exchange. However, the following trusts are traded on either the NYSE or AMEX.

Advantage Energy Income Fund (AAV)

Enerplus Resources Fund (ERF)

Pengrowth Energy Trust (PGH)

Petrofund Energy Trust (PTF)

PrimeWest Energy Trust (PWI)

Provident Energy Trust (PVX)

Royalty Trusts Listed on the Toronto Stock Exchange

Here are the major oil and gas royalty trusts listed on the Toronto exchange.

Acclaim Energy Trust (AE.UN)

Advantage Energy Income Fund (AVN.UN)

APF Energy Trust (AY.UN)

ARC Energy Trust (AET.UN)

Baytex Energy Trust (BTE.UN)

Bonavista Energy Trust (BNP.UN)

Canadian Oil Sands (COS.UN)

Crescent Point Energy Trust (CPG.UN)

Daylight Energy (DAY.UN)

Enerplus Resources Fund (ERF.UN)

Enterra Energy (ENT.UN)

Focus Energy Trust (FET.UN)

Freehold Royalty (FRU.UN)

Harvest Energy Trust (HTE.UN)

Ketch Resources (KER.UN)

NAL Oil & Gas Trust (NAE.UN)

NAV Energy (NVG.UN)

Paramount Energy Trust (PMT.UN)

Pengrowth Energy Trust (PGF.UN)

Petrofund Energy Trust (PTF.UN)

Peyto Energy Trust (PEY.UN)

PrimeWest Energy Trust (PWL.UN)

Progress Energy (PGX.UN)

Provident Energy Trust (PVE.UN)

Shiningbank Energy Income Fund (SHN.UN)

StarPoint Energy (SPN.UN)

TKE Energy (TKE.UN)

Vermilion Energy Trust (VET.UN)

Viking Energy Royalty Trust (VKR.UN)

Zargon Energy (ZAR.UN)

The Global Monetary System, Gold and Oil -1971 until the future

2006-03-16T23:26:00.000-08:00

Part 1 - The rise of the Dollar - The fall of Gold

Gold 1971 +

In 1971 Nixon closed the gold window on the $ and turned the European nations away from redeeming Eurodollars into gold at the price of $42.35, thus devaluing the U.S. $ by the extent the gold price rose. This was keenly felt in all the markets across the globe because it was a particularly visible blow for the $ and for the sterling as the "$ Premium" was imposed in the U.K. to prevent a wave of capital exiting the country. Shortly thereafter the oil price shot up to $35 a barrel from the $8 level it had happily sat at before. In those days, even with no gold standard, gold was considered the foundation on which paper money stood.

There being no more effective defense than discrediting your accuser, the States tried to defend the $ through the sale of 500 tonne lots of gold, but terminated these as they saw the gold gulped down by private buyers. They had hoped that gold, as money would lose its reputation as well as its position in the Monetary System. Having failed with their sales, the United States then persuaded the I.M.F. to do the same, but again demand overwhelmed supply but this time with outcries from I.M.F. members over these sales.

The U.S.$ and Oil 1971 +

At the end of the seventies the over issuance of the $ came home to roost and Volcker the Chairman of the Federal Reserve at the time found it necessary to ramp up interest rates in quick time, to the extraordinary heights of 26% to tame the inflation engulfing the U.S.A. then.

What happened then to the $? The world power could not permit the $ to lose its name, after all it was the dominant nation financially in the globe as well. A new role for paper money had to be found. It had to be able to implement the power, political and economic, by itself [as the days of colonization through war had passed into history]. It had to be money in demand beyond the value gold had traditionally attracted. What was used by all right across the globe even reaching part that U.S. 'might', could not even reach? One item - oil! By pricing oil in the U.S. $, U.S. power could be imposed across the globe. Even Russian oil outside Russia was priced in the U.S.$. But it was vulnerable to a different choice if selected by opposers, so the U.S. had to use heavy pressure to make this $ pricing non-negotiable. To do this the U.S. made it clear to Russia in the "cold war" that the Middle East was a critical part of its 'vital interests' [items over which it would go to total war over]. Whilst the U.S. itself was dependent on Middle Eastern oil for a good portion of its oil, so was the bulk of the world! Only Russia could stand separate.

The U.S. also imposed a grip on global oil producers [except Russia] ensuring that their governments were dependent on U.S. backing to stay in power. With their loss of individual power as well as possible sovereignty at stake it was not big step to comply with whatever the States required.

Thus to this day the Middle East, Indonesia and the States comprising the bulk of the globe's oil supplies are found and under U.S. governmental control. Having formalized this policy of oil priced globally in the U.S. $ it was a short road to the $ becoming the global reserve currency. Gold left the stage as money, but continued quietly in the vaults, of and in particular, the U.S.A.

Apart from the inevitable desire of every Banker to do away with cash and valuables that can trade as 'cash' [after all it's out of their control and fee charging range], so many more powers and control possibilities existed with paper money. After all gold was limited as a currency, disciplining governments and politicians alike, enforcing monetary stability and beyond political control. And with the $ targeting control of the global monetary system, through a reserve currency role, what more satisfying degree of control could be achieved without an army? What better way to bring in the wealth of the globe to the U.S,, than through the issuance of the $ to fund global growth, oil needs and the like. As a means of exacting tribute, never has there been a cheaper and more effective instrument!

With oil superior as a form of money, needed and imported by every nation on earth it was accepted as the most eligible commodity on which to carry the $ to dominance! Through this the concept and reality of $ hegemony [Imperialism] was then imposed. The $ then rode the back of oil and grew to be used in 86% of the globes transactions and making up 75% of the globe's reserves.

It must have taken the tacit if not the full support of Europe to support the move from gold to the $, held as they were, to ransom through U.S. power over oil supplies and its pricing as is the case today! But note well, please that the objective was not to thoroughly discredit gold, as it will always prove vital "in extremis", but was to put it in a non-monetary role, as a non-threatening or challenging reserve asset.

Discredit Gold!

Thereafter through the eighties and nineties, gold suffered under a persistent campaign to discredit/ demean it as money, but not through actual sales of gold [although these were constantly threatened], but through the accelerated production of gold into an already oversupplied market. This accelerated production of gold came about by a system whereby Central Banks lent gold to bullion banks, who then on-lent it to mining companies to finance their development.

Today this is still done, whereby the cost of financing development of a mine was raised through the immediate sale of the gold borrowed from the bullion banks, with a promise to repay the gold from future production [called "hedging"] in an operation where gold was sold forward at the forward price [in the futures market] which included the interest to be accrued over the period [the "Contango"] until future production supplied that gold. Much higher than market prices were achieved in this way, particularly as the gold price was steadily falling over the period, aided by threats of gold sales made loudly in the market by Central Banks. But the banks, Central and otherwise, together with the mines went overboard and sold the bulk of their future production forward in this manner. This looked wonderful in a falling gold price market, but became the reverse when the gold price started to rise!

Some Central Banks did sell their gold [ Canada, Australia included], in particular Britain who had the dubious honor of selling the bulk of their gold at close to the bottom price of gold seen in the period from 1972 to today. In honor of the eminent Chancellor Mr Gordon Brown, who initiated these sales, this low point of Central Bank Gold sales is to be known as the "Brown Bottom".

The Advent of the Euro and Gold

In 1999 the European Central Banks, with the impending launch of the Euro in mind, decided that the anti-gold campaign had gone too far and decided to form the Central Bank Gold Agreement, whereby they would restrict gold sales to those already announced to the public and to place a ceiling on such sales of 400 tonnes for the next 5 years. Again gold was placed in a secondary role in the European monetary system in a campaign highlighting its junior role.

But the limitation of gold sales took the fear of dumping of gold onto the open market, away. However, after a full 20 years of such threats the market was slow to fully appreciate the change in "Official" attitudes. Britain was part of this first agreement, but only until it completed its sales and walked away when the second agreement was proposed. Of course, by the time this had happened its sales were complete.

In an environment already created for it, the Euro was launched without gold as a threat to it as a paper currency anymore. A generation had passed by and the average fund manager knew nothing of the world in which gold was money. The European Central Bank could happily announce that it aimed for the Euro to be backed by its reserves of which gold would represent only 15% [a target not a rigid line]. Now gold could enter the monetary scene as a reserve asset in support of fiat currencies, not a challenge for oil was the fulcrum on which the main reserve currency, the $ was now founded. The leading Eurozone Central Banks, Italy, France and Germany held onto their gold which represented in the region of 50% of their reserves, a figure that roughly matched the U.S. level of gold in their reserves still. Thus the real place of gold in the main global reserves had not changed in 30+ years. Therefore, the story was really a continuation of the past with nothing new in the picture. Gold remained and remains a vital feature of the monetary system!

We would speculate that the founding of the Euro with its gold backing received the U.S. and Greenspan's approval, as did the "Washington Agreement" the first Central Bank Gold Agreement in 1999 September 26th. Greenspan was in on the meetings held in Washington, as were the Japanese Central Bank representatives. We repeat that the objective was never to destroy gold as a monetary asset but to reduce it to a minor one, allowing the $ and subsequently the Euro to flourish without challenge.

It would appear that the price to be paid by Europe would be to not challenge the role of the $ in the pricing of oil. History confirms this! Indeed it would appear from the performance of the Euro and the $ that there is a managed approach to the exchange rates of these currencies. Talk of the fall in the $ and rise of the Euro has not been fulfilled in a price that has barely [ +5%] moved in the last year. This implies some sort of managed axis on the two sides of the Atlantic. Provided the world stayed as it was with the power distribution limited to the developed world all well and good.

Part 2 [to be published shortly] - The rise of Gold [and China] - The fall of the Dollar!

To Subscribe to "Global Watch - The Gold Forecaster", please go to: www.goldforecaster.com.

Julian D. W. Phillips
Gold-Authentic Money

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price. FIND OUT MORE

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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Will Gold's Climb Up the Wall of Worry Come Crumpling Down?

2006-03-15T23:05:00.000-08:00

By Peter Grandich
13 Mar 2006 at 01:08 PM EST

“Once a man worries, he clings to anything out of desperation; and once he clings he is bound to get exhausted or to exhaust whomever or whatever he is clinging to. A warrior-hunter, on the other hand, knows he will lure game into his traps over and over again, so he doesn’t worry.” ~ Carlos Castaneda, 20th century mystic and Toltec warrior

PERRINEVILLE, NJ (Grandich Publications) -- Ever since bottoming in 2001, gold has managed to climb the proverbial “wall of worry.” Along the way, there were several consolidation and corrective phases just like the one we’ve been experiencing lately. They’re never much fun but are a necessary evil en-route to new, all-time highs in gold, IMHO.

If you found yourself to be among the “nervous-nellies” of late, let me take you back through time via this chart and remind you what happen to previous worry-warts and especially those who said the end was near.

Gold rallied to the $375 area in early 2003. It then proceeded to decline all the way back to $325. I remember novice trend-watchers all noting how the uptrend was “broken.” Gold then climbed a wall of worry by busting through a double top around $375 and ran to about $425 in early 2004. It then tried more than once to get through that level only to fall below $400 and “all the way down” to $375. Once again, were told well now be little more than a snack for the gold bears.

Gold slowly creeps back to the $425 area and as 2004 winds down, it busted through to $450. However, that level is short-lived and we spend the first half of 2005 in a tight trading range of $425 to $450. (If I had a dollar for each “major top forming” comment or Larry Kudlow “gold is dead” comment.) Surprise, surprise, gold breaks above $450 in the second half of 2005 and rallies right up to multi-decade resistance of $500-$510. Once again, normal consolidation is seen by some as yet another top. The top soon becomes a bottom as gold begins 2006 in a full sprint to the $570 area.

On the way there, numerous former luke-warm and bearish forecasters begin to knock themselves over in a rush to issue new “bullish” forecasts. Suddenly, the wall all but disappears and the media is caught up in reporting the latest “multi-thousand dollar gold forecast.” Surprise, surprise, the gold price corrects from $570 twice, all the way down, down, down to the unbelievable low, low, low, low price of $540 (read my sarcasm…).

Come Friday afternoon, March 10th, I’ve spent the majority of the day hearing from mostly individual investors in semi or full-fledged hysteria that the gold run is over and they feel they’ve been left holding the bag. They were not alone. Here are just a few headlines regarding gold late Friday:

"Sell-off could mean end of bull run" - Financial Times

"Gold Watch: A bear camp lurking?" - Resource Investor

"Gold Moves further south" - The Economic Times

However, before you fall prey to “the party is over crowd,” please note that since 2001, the score is about Gold Bulls 10, Gold bears 0. But hey, who’s keeping score?

While I’m about to begin my 23rd year in the financial advisory world, I’ve learned a long time ago two key factors about my profession:

You’re only as good as your last call.
What have you done for me lately (which for some investors is just a matter of hours)?

With this in mind, and knowing there are far too many readers of mine going into trading this week on pins and needles, I will attempt to take a rationale look at where all the markets covered by “The Grandich Letter” may be heading.

Overall Assessment

Like many other things in life, is the cup half-full or half-empty? Larry Kudlow and the Talking Heads at Tout-TV (CNBC-TV- and I call it Tout-TV because I challenge anyone to show me anything close to equal representation of both bearish and bullish viewpoints from the so-called experts allowed on) see the cup half-full (and it seems to be a permanent position).

I believe Americans have been robbing Peter to pay Paul and Peter is tapped out. An all-out debt binge by government and its citizens has allowed many to live way beyond their real means. It’s not a question of if, but when it all comes home to roost. While this in itself is cause for alarm, the following factors combined have placed America on a slippery slope towards what is surely going to be its darkest times:

The “Aging of America” (and the social, political, economical and religious ramifications of it) towers over the problems of terrorism and a budding energy crisis. Go and read former Federal Reserve Chairman Allen Greenspan's comments in his last six months or so on the job. I believe if you do and remove his name from the quotes and show it to members of the ““Don’t Worry, Be Happy”” crowd on Wall Street (Larry Kudlow is their five-star general), they would swear some gold bug said them.
America, once a truly beloved group of people to most of the world, is quickly becoming the “black sheep” of the family. Canada, once the closest thing to being home, is no longer your long-lost brother. Not too long ago, the deepest that heated discussions with Canadians would go was about how American hockey teams were really made up of Canadians and therefore not “American” at all. Now, on the other hand, it’s best to wear an “I voted for Kerry button” while you walk the streets of Canada. It’s much easier to highlight our true allies on a world map now and takes less than half the time it did decades ago. Most Americans don’t realize what effect this is having on us in the global economy of the 21st century.
Geopolitical problems around the world are bad enough, but in a few months, most Americans should come to realize that our national political process has not only nearly grinded to a halt, but an undeclared “war” has started between the Democrats and Republicans. It will make the Hatfields and the McCoys look like a love fest.

Gold

Back in 2001, gold found itself on life support systems near $250. Those left in the mining and exploration industry felt anything north of $300 would be Nirvana. Tell those folks back then that you foresaw the March 13, 2006 gold price of $540 and the ones who didn’t die from fainting and falling on their heads would have screamed, “Were going to be rich!” The long period of sub-economic prices led to a mass exodus of professionals, laborers and most importantly, lack of any significant exploration and discoveries. This would help lead to the resurrection of the gold price and the industry that surrounds it.

The first phase of the rally (2002-2004) was helped along by weakness in the U.S. dollar and the credence that the Euro was the new “King.” However, when the Emperor was shown not to have any clothes, gold began to climb against most major currencies, proving it was not a one-act wonder. This is phase two. When will we know for certain were in the final phase? When TOUT-TV moves the young lady from the NYMEX to the Comex on a daily basis and my neighbors stopped telling me about Google, Microsoft and Intel and instead ask me if I heard of this mining and/or exploration company.

Factors Influencing Gold

Supply versus Demand. As previously noted, the mining and exploration industry had several years of very limited exploration. You can count on your hands the current mega discoveries of 3, 5 or 10 million ounces that are available for production the next few years. Mine supply remains in a downtrend while demand continues to rise. In addition, the bad times have led to a real labor shortage in the mining industry. For every mining professional I met at the recent PDAC convention looking for interesting projects, another one was seeking to find a geologist, mining engineer, etc. Costs associated with building and running a mine also skyrocketed and has affected the supply side. None of these factors can change overnight so the supply side of the equation remains very favorable.

Physical Demand. While the jewelry industry accounts for over 75% of the annual gold usage, most individual investors pay the least amount of heed to it versus other factors. I caution them that this “physical demand” is the single most influential factor no matter what any gold bug tells them otherwise. There’s a well-documented seasonal cycle to physical demand. The period of September through January is usually stronger than from February through August. Keep this in the back of your mind. Much of the increased physical demand continues to come from Asia and especially China. While sharp rises in prices usually lead many in the jewelry industry to pull back from the table and await a price correction, the constant demand for jewelry wins out over time and I see no reason to think this time will be any different.

Investment Demand. While some jewelry is actually purchased for investment opportunities, most others buying gold are doing so not because it looks good on them but for a profit and/or to hedge other investments. Here we’ve seen demand steadily rise, especially after the introduction of gold ETFs (Exchange-Traded-Funds). Some hardened gold bugs argue that ETFs don’t offer real ownership of bullion but just a proxy. Whether that’s true or not, the fact is, the introduction of them has been the single largest positive impact to the supply vs. demand scenario. Not even the widest dreams foresaw the actual amount of buying. The question really is why?

When I started in the business 22 years ago, the saying “owning mining stocks is like owning gold” was common. Unfortunately, that proved to be more of a myth (October 20, 1987 is the ultimate proof). While bullion itself is the most direct way to own gold, silver, etc, most individuals and especially institutional investors, avoid it in lieu of buying, storing and maintaining ownership. However, when the ETFs were introduced and buying and selling was perceived as being as easy as buying common stock, a fire was lit. I know several institutional players who in the past either avoided bullion all together or bought major mining company stocks once in a blue moon, and are now placing significant funds into the ETFs. Say what you want about their true status of ownership but the fact is the gold ETFs have been a key factor in the gold secular bull market.

U.S. Dollar. As noted earlier, the first phase of the gold secular bull market was driven by the inverse relationship of gold vs. the U.S. dollar. About 85% of the time, gold moves in the opposite direction of the dollar. However, I believe gold has demonstrated how strong its internals actually are by rising throughout 2005 and into 2006 in the face of a rising dollar. Now of course, the correction in gold is being blamed in part on the expectation that U.S. interest rates will rise, which will cause the dollar to rise, and thus put pressure on gold.

You’re likely to hear this a lot over the near term so let me put one extremely important piece of history front and center that should at least make you seriously question this lame excuse: Throughout the second half of the 1970s and into 1980-81, interest rates rose to over 20% while the dollar rose as well. Yet, gold managed to increase 400% during that period. Why? Because the world was on shaky ground at the time. People were becoming more and more concerned about a deteriorating geopolitical and economic environment worldwide. Sound familiar?

The U.S. dollar, along with the United States of America in general, are the Roman Empire of the 21st century (don’t ask me if George Bush is Caesar-but I think Cheney is a distant relative). My daughter came home recently and told me she plans to take Italian when she enters High School next year. I told her if she really wants to better herself and her future children, to see if the school teaches Chinese. She asked why? I told her if she doesn’t, she might be one of the Americans doing their laundry 20 years from now.

Despite what you’re certainly going to hear in the next weeks and months, the U.S. dollar is toast over the long-term. While the ““Don’t Worry, Be Happy”” crowd rules the airwaves on Tout-TV and elsewhere, rest assured that the beginning of the end has already taken place. I could write a thousand pages why and not cover it all, but let me briefly go over some key factors I believe support my belief:

The world is awash in dollars. Some think this very fact is actually a positive since those holding so much of them won’t want to see it come apart. But the evidence is very strong that this very event is already unfolding. Nowhere is it more crucial than China. More than 70% of their reserves are invested in U.S. dollar assets. This fact has clearly helped the U.S. sustain itself despite ever-increasing large budget and trade deficits. Several times now, different people and groups directly or indirectly associated with the Chinese government have indicated the government is going to begin diversifying itself more within its rapidly growing foreign exchange reserves. A few months ago, Chinas foreign exchange regulator made a brief statement on their website. It said one of its targets for 2006 was to improve the operation and management of foreign exchange and to expand the investment area of reserves. Stephen Green, economist for Standard Chartered in Shanghai said of this news, “…this statement was the first time the Chinese Regulator publicly indicated a shift away from dollar assets. It’s a subtle but clear signal that they are interested in moving away from the U.S. dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities.”

Iranian Oil Bourse - Energybulletin.net wrote a superb piece about the new Iranian Oil Bourse. While you will hear more and more about the nuclear threat, I believe the oil bourse will have a far bigger negative impact (but then again, a nuclear bomb has a pretty good wallop itself, no?)

“The Iranian government has finally developed the ultimate ‘nuclear’ weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam's, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system.

“The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.

“The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold on to; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.

“The Russians have inherent economic interest in adopting the euro the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.

“The Arab oil-exporting countries will eagerly adopt the euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.

“Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to euros, thus mortally wounding the dollar and their strategic partner.

“At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter those of Europeans, Chinese, Japanese, Russians, and Arabs will eagerly adopt the euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operations exchange.”
Japanese Carry-Trade - After going from being an economic powerhouse in the 1970s and 80s, Japan was in a depression-like state for several years. This caused interest rates to go to zero (hard to comprehend but actually was briefly below zero!) However, thanks to money becoming so cheap to borrow for so long in Japan, the ultimate carry trade was created. Investors were borrowing in yen and investing in higher yielding markets like the Australian dollar, Brazilian real and U.S. treasuries. This should all but now come to an end with the Bank of Japan (BOJ) announcing an end to their dramatic easing stance. So why is this important? For starters, many experts have suggested this super-easy monetary stance has greatly aided the sales of U.S. treasuries and helped prevent our deficits from severely impacting us. The yen vs. U.S. dollar has been a one-way street. Now with two-way traffic returning, the U.S. dollar has to lose some benefit that existed while the carry-trade blossom.
Euro - I don’t know whose reign as heavyweight champion was shorter, Leon Spinks or the euro? Billed as the economic powerhouse to challenge the USA in the 21st century, the “Single European Act of 1986” that paved the way to the EU, is still weighted down by political and cultural differences among its members, along with selective acts of protectionism by individual members. Never-the-less, lending to euro zone consumers and to businesses is growing at the fastest rate since the start of the decade. This has played a role in the European Central Bank (ECB) raising interest rates recently. Mr. Jean-Claude Trichet, president of the ECB strongly hinted of more raises to come.

Up until now, the Euro has primarily acted as the “un-dollar,” rising when the dollar fell out of favor and falling when the greenback was back in demand. While I don’t expect it to become the “one and only” sought after currency, it’s important to comprehend that the euro and yen have to be more competition now than they were just a few weeks ago. I remind you again that you need to question those who are saying the U.S. dollar is going much higher simply because our interest rates are heading higher.

Debt and Deficits. ROB-TV recently had a gold debate (it was more like a discussion. Put Brian Acker or Larry Kudlow on versus Bill Murphy and turn the air-conditioning up full-blast because it would be heated). One of the guests, Mr. Dennis Gartman, made several comments I would take issue with but none more than his belief that budget and trade deficits never impacted interest rates in the past and this time they won’t either. I believe Mr. Gartman, who may not be a full-time member of the “Don’t Worry, Be Happy” crowd but clearly would rather reside there than in the gold bug camp, is missing one critical fact: we were not the world’s largest debtor nation during those past periods.

The U.S. trade deficit hit another record in January amid increasing political jitters in Congress over rising imports from China and Americas increasing reliance on foreign capital.

America has been robbing Peter to pay Paul and Peter is tapped out. Our savings rate for 2005 was negative 0.5%, the lowest since the Great Depression. I laughed aloud but cried internally watching Kudlow and the Talking Heads on TOUT-TV drool while speaking about the employment report and especially wages increasing.

Because Mr. Kudlow and most of the gang of merry men are in the 10%-20% highest earners in America, they are clearly unaware (or don’t care) that 80%-plus of all Americans have seen no real economic benefit from the “goldilocks” economy. They don’t grasp the fact that the ratio of debt to assets (this ratio measures the amount of debt Americans have, relative to the market value of all their assets) hit an all-time record high. Nor do they seem to care much about the fact that the debt service ratio- the percentage of after-tax household income that goes to cover required principal and interest on debt- hit a record 13.75% in the third quarter of 2005.

The most recent Federal Reserves quarterly flow of funds report showed the real explosion of debt. For the first time ever, net savings in the economy fell below 1% of gross domestic product. But Kudlow and his pied pipers remain aloof to what is happening to Middle America.

Inflation. From the lows in 2001 of $250 all the way up to most recently, the “Don’t Worry, Be Happy” crowd “panned” gold because they said you buy it only when inflation is rising and it wasn’t according to U.S. government statistics. Call me a kook, but the inflation the government says exists, and the price increases I see in my daily life, doesn’t seem to be remotely close. In his last meeting as Fed Chairman, minutes of the session showed Allen Greenspan said more rate increases may be needed because inflation has been “somewhat higher than acceptable.” Hopefully by the time the real inflation rate is realized by the typical Joe, the “Don’t Worry, Be Happy” crowd will be suggesting gold as an inflation hedge. Remember, you’re going to need to sell your $1,000 gold to someone. Who better to give it to? LOL!!!

Geopolitical Concerns. There may be no I in team but the letter I helps spell trouble for the U.S.- Iraq and Iran. Hard to imagine but Iraq may just have been the “opening act.” While I truly prayed the people of Iraq could be free to live from under Saddam the tyrant, what’s unfolding there now may end up making him the lesser of two evils (hard to have imagined). More and more Americans are feeling it wasn’t worth the loss of life and financial costs and that should only increase. Then there’s Iraq’s neighbor, Iran. You know the drill by now- nuclear weapons, oil, a man leading the country who says the Holocaust never took place and Israel should be “moved” a few thousands miles. Iran is going to be more and more in the news as the U.N. (you know, that place that loves America) is about to take up the issue of nuclear weapons.

It may be a good or bad thing, but a senior Israel Defense Ministry official told The Jerusalem Post on Friday that the U.S. has until now not done enough to prevent Iran from obtaining nuclear weapons. “America needs to get its act together,” the official said. This official said only tough economic sanctions and things like not refining Iranian oil will cause the Iranian people to rise up and make a “change” in government leaders. He said it was “pointless” to expect talks to stop Iran from enriching uranium. He claimed they’re just trying to get more time and will continue lying and deceiving the international community while simultaneously trying to obtain nuclear power. Israel’s Defense Minister Shaul Mofaz told reporters in Germany last Wednesday that Israel had all it needed to defend itself against Iran.

Asked by reporters if Israel had a military plan handy in a desk drawer to strike Iran, Nofaz said: “Israel has many drawers containing everything it needs to defend its citizens.” Israel, Mofaz told senior German officials, would not stand by idly while its very existence was at risk. “We do not plan to turn a blind eye to these threats and we will do everything possible to make sure they don’t materialize.”

The Middle East may be grabbing many of the geopolitical headlines at the moment, but I believe by this fall most Americans will have seen the 21st century version of the Hatfields vs. the McCoys here in the U.S. between the Democrats and Republicans. The word dirty will be a weak adjective in describing what the race for Congress will be like. And it will be just the warm-up for the next Presidential race, which if you can get long odds on, take two woman presidential candidates Ms. Clinton vs. Ms. Rice. Washington insiders can attest to the virtual halt in progress in Congress and the Senate on numerous fronts, but especially the one area Greenspan and the President made a big case of in 2005- entitlements.

Gold’s Technical Picture

There’s no denying it, gold now has some important resistance around $570. Even more crucial at the moment is its sitting just above some key support in the $535 area and below its 50-Day M.A. It not only needs to hold $535, but really needs to reverse up and back above $550 ASAP or is in danger of having to test more important support down in the $500-$510 area.

This will definitely cause some readers to gasp, but gold can decline all the way back to its 200-day M.A. at $480, while not violating its long-term uptrend - but it will likely cause a big bump up on calls to suicide hotlines. The fundamentals look far better at the moment so a break down technically should not be cause for changes in long-term strategies.

And Finally on Gold - What Are the Potential Negatives for Gold?

Physical and investment demand decline sharply even if prices decline.
A marked increased in Central Bank Selling (I believe they would’ve done so already if they could, especially at the $500 level).
The ending of the carry-trade greatly lessens purchases of gold (I think it will for commodities in general but gold is the only monetary play among commodities).
The U.S. dollar rises above 95 basis the U.S. Dollar Index.
The manipulation argument was all hogwash (yeah and the NY Jets and Vancouver Canucks win the Super Bowl and Stanley Cup, respectively).

Peter Grandich is Editor of “The Grandich Letter,” published by Grandich Publications, LLC, which provides research, analysis, and investor relation services.

Count-down to War with Iran? Mixed Signals from Crude Oil, Gold, and Tel Aviv

2006-03-15T16:08:00.000-08:00

by Gary Dorsch

It seems like déjà vu all over again. This time, the Bush administration has its sights on the most dangerous member of the "Axis of Evil", with time running out before the Ayatollah of Iran acquires the technology to build nuclear weapons. But while the saber rattling between the US and Iran ratcheted to new heights last week, the price of crude oil and gold were plummeting on world markets. In Tel Aviv, a likely target for dozens of Iranian Shahab missiles, equities are buoyant.

The war of words between the Bush administration and Ayatollah Ali Khamenei of Iran and his surrogates escalated to new heights on March 9th, when US Secretary of State Condoleezza Rice told lawmakers on Capitol Hill, that "We may face no greater challenge from a single country than from Iran, whose policies are directed at developing a Middle East that would be 180 degrees different than the Middle East we would like to see developed," she said.

"If you can take that and multiply it by several hundred, you can imagine Iran with a nuclear weapon and the threat they would then pose to that region." Ms Rice said Iran seemed determined "to develop a nuclear weapon in defiance of the international community. Iranian support for terrorism is retarding, and in some cases, helping to arrest the growth of democratic and stable governments in the Middle East," she added.

The previous day, on March 8th, US defense secretary Donald Rumsfeld told a news conference, " Iran is currently putting people into Iraq to do things that are harmful to the future of Iraq. We know it, and it is something that they will look back on as having been an error in judgment," he added.

And on February 7th, Vice President Dick Cheney declared that Iran will not be allowed to have a nuclear weapon, "the United States is keeping all options on the table in addressing the irresponsible conduct of the Iranian regime, which continues to defy the world with its nuclear ambitions. The Iranian regime needs to know that if it stays on its present course, the international community is prepared to impose meaningful consequences," Cheney told an AIPAC conference.

But Iran's supreme leader Ayatollah Khamenei declared on March 9th, the "Islamic republic of Iran will continue its drive towards mastering nuclear technology. The Iranian people and the officials of the Islamic republic of Iran are more powerful than before and like steel, will stand against any pressure or conspiracy," he said. On March 20th, the Ayatollah will be demanding Euros instead of US dollars for Iranian oil exports, following the strategy of Iraq's former strongman Saddam Hussein.

Iranian president Mahmoud Ahmadinejad added on March 9th, "The Western countries know that they are not capable of inflicting the slightest blow on the Iranian nation because they need the Iranian nation. They will suffer more and they are vulnerable. Our enemies will never succeed in forcing the Iranian nation to step back on its rights over peaceful nuclear technology because it never accepts humiliation. This nation will not allow others to treat it with a bullying attitude, even if those who treat it with a bullying attitude are international bullies," he declared.

Senior Iranian national security official Javad Vaeedi said Tehran would inflict "harm and pain" to match whatever punishment Washington persuaded the UN Security Council to dole out for Tehran's refusal to give up atomic research. "So if the United States wishes to choose that path, let the ball roll. The US may have the power to cause harm and pain but it is also susceptible to harm and pain," Vaeedi said.

On March 10th, Iran's interior minister Mostafa Pourmohammadi threatened to use Iran's own oil and gas supplies and its position on a vital Persian Gulf oil route as weapons in the international standoff. "If the UN tries to politicize our nuclear case, we will use any means. We are rich in energy resources. We have control over the biggest and the most sensitive energy route of the world."

"An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and, in a word, the entire Middle East oil," said Iranian Expediency Council secretary Mohsen Rezai. Iran already has complete control over 10% of the world's oil reserves and 25% of its natural gas, and has partial control over the narrow Strait of Hormuz, the only waterway in and out of the Persian Gulf. Between 16.5 million and 17 million barrels of oil per day move through the Strait of Hormuz. That's about a fifth of the world's oil, including supplies from Saudi Arabia, Kuwait, Iran and Iraq.

And on February 22nd, Israeli interim Prime Minister Ehud Olmert responded to Iran's Ahmadinejad's questioning of the Nazi Holocaust and calls for the Jewish state to be "wiped off the map". "The president of Iran, with all of his statements, is a heinous anti-Semitic phenomenon. He is an Israel-hater," and he said Iran is just months away from acquiring the know-how to make nuclear weapons. "We must prevent Iran from reaching a technological know-how, with everything that entails, and the international community has the tools to deal with this," he said.

Russian kingpin Vladimir Putin and Egypt's Mohammed ElBaradei, chief of the IAEA, devised a flawed proposal to allow Iran to gain the technology to build a nuclear weapon, but US State Department spokesman Tom Casey quickly shot down the idea on March 6 th. "You can't be just a little pregnant. You can't have the Iranian regime pursuing enrichment on any scale, because pursuing enrichment on any scale allows them to master the technology, complete the fuel cycle, and then that technology can easily be applied to a clandestine program for making nuclear weapons."

Yet, although the drumbeat of war in the Persian Gulf is getting louder, the price of US light crude oil formed a "double-top" pattern at just below $70 per barrel in late January, and then crashed to as low as $57.50 per barrel in mid-February. For the first time in 3-years, OPEC appears to have regained some of its old magic over the crude oil market, and has deflated the Iranian "War Premium" by vowing to maintain full oil production at 28.0 million barrels per day (bpd) throughout 2006.

Global demand for crude oil normally declines by about 2 million bpd in the second quarter, so without a timely cut in OPEC output, a mini glut of oil could develop in the months ahead. The OPEC cartel is taking a calculated risk that prices will stay high despite the oversupply. On March 8th, Saudi Oil Minister Ali al-Naimi said concerns about supply disruptions in Nigeria, Iran and Iraq were buoying prices.

"OPEC should not take any decision to decrease production because any such decision would be the main reason for price hikes," Naimi told the Al Hayat newspaper on March 6th. "We know the reason for the current increase in prices and it is the fear about anything that would cut supplies," al-Naimi said.

"We expect the geopolitical problems to persist so the risk that prices go up still exists," said Algerian oil minister Chakib Khelil, adding "the market is well supplied and I do not think we are taking a big risk." OPEC president, the Nigerian Edmund Daukoru said that global economic growth in 2006 would be 4.3% "which shows the world economy has until now resisted the hike in prices."

Until recently, increases in OPEC oil output from 23.5 million bpd to a record 28 million bpd had failed to stop US crude prices from climbing by $45 per barrel to as high as $70 per barrel. But for now, it looks as if Riyadh has capped oil prices at $70 /barrel. But the slide in crude oil prices is also linked to expectations of a coordinated round of tightening by the Bank of Japan, the Fed, and the European Central bank, making hedge funds jittery. Still, buoyant Asian and European equity markets signal that liquidity in Euros and Japanese yen still remains abundant and cheap.

But Israel is not the only country in the region that fears the possibility of a nuclear armed Iran. If the Ayatollah gains nuclear invincibility, he could terrorize the entire Persian Gulf region, including the Arab oil kingdoms and gain total control over the world's oil jugular in the Strait of Hormuz. Therefore, Saudi Arabia, Kuwait, and the UAE might like to see oil prices fall into the $50 to $55 per barrel range to help reduce the potency of Iran's "Oil Weapon" in the months ahead.

And if war does comes to the Persian Gulf this year, it is better that prices should start to shoot higher from a lower level than a higher level. The International Energy Agency says it would be able to plug the supply gap for a number of months were Iran to stop its oil exports. "The IEA would be capable of compensating for a number of months" said President Claude Mandil on March 9th. "According to my knowledge, OPEC would not be able to compensate in totality."

With OPEC pumping oil at full throttle, US crude-oil inventories have climbed to 335.1 million, their highest level since May 1999. The latest weekly gain was the biggest since Oct. 29, 2004, and left supplies 14% above the five-year average. The last time crude oil stocks were this high was in May 2005, when spot crude oil prices hovered around $48 per barrel. The $12 per barrel difference might represent what's left of the Iranian "War Premium" plus instability in Iraq and Nigeria.

US crude oil and gasoline inventories might be high because market participants can't rely on global spare oil production capacity, of which there is very little, to deal with any future disruptions in petroleum supplies, the US Energy Information Administration said on February 23rd. "Market participants are concerned about being able to get needed supplies, should something cause a drop in supply."

"As a result, many of them may be storing up additional inventories as a buffer should there be a supply problem at some point in the future. Thus, until either spare capacity increases significantly across the entire supply chain, or many of the perceived uncertainties in the market are removed, oil markets could see high inventories coexist with high prices for the foreseeable future," the US EIA said. The US Strategic Petroleum Reserve located in Louisiana and Texas, has been filled up to capacity at 700 millions barrels, as a buffer in case of a national emergency.

Also keeping oil prices high is China's oil demand, which is forecast to grow by 500,000 barrels per day to 7.2 million barrels per day in the first-quarter of 2006, the EIA said on March 7th. China is the world's second-largest oil consumer behind the United States, which consumes about 20.8 million bpd. Japan is the third largest consumer at 5.41 million bpd. Beijing is also interested in filling up its strategic oil reserves of up to 30 million barrels.

Saudi Arabia's oil minister Ali al-Naimi has complained that oil prices are artificially high due to excessive speculation by hedge funds. "Oil is attracting vast sums of money from hedge funds and institutional investors seeking to maximize returns and diversify their portfolios. The price today is not only influenced by fundamentals. The fundamentals of supply and demand for oil today are very sound, but the market is dancing to a different tune. Recent information indicates that even banks are jumping on the bandwagon," he said on April 21, 2005.

Financial markets have become so technologically sophisticated and global in nature that traders can borrow cheap money in Europe and Japan as much as they can in the US, to leverage their purchases of natural resource stocks, oil stocks, gold, or even Brazilian and Russian bonds, all benefiting from soaring commodity prices. To the extent there is a collective desire of the Group of Seven to contain inflation, it would require tightening by each of the big three central banks.

And for the first time in five years, the big-3 central banks, have telegraphed a coordinated round of monetary tightening in the months ahead, that would raise the cost of leveraging commodities such as crude oil and gold. Most importantly, the Bank of Japan has decided to scrap its five year old policy of "quantitative easing," and will gradually reduce excess liquidity in the Tokyo money markets by about 26 trillion yen ($220 billion) in the next 3-months. The BOJ is expected to sell short term bills to drain Japanese yen floating around the global markets, and buy fewer government bonds per month, and that could exert upward pressure on bond yields across the globe. The sharp decline of crude oil prices in February was partially linked to sliding prices for Euro-yen contracts in Singapore, signaling the end of ultra-easy money in Tokyo by the summer.

But there is still a glut of Euros floating in the Euro zone economy, interest rates are still very low, and providing fertile ground for takeover artists in European equities. "There is a considerable excess of liquidity, growth in M3 money supply and in credit were very dynamic. We see risks to price developments in the medium to long term. The trend is expansive," said Bundesbank chief Axel Weber on March 7th.

Austrian central banker Klaus Liebscher said the ECB's second quarter-point rate hike to 2.50% had done little to alter the generous monetary conditions in the Euro zone. "This increase was necessary in order to somewhat take back the accommodative monetary policy in the face of the risks to price stability. The interest rate level, nominal as well as real, is still very low," he said. Still, the ECB has jawboned a lot, but has done very little in draining Euros out of the money markets.

In Frankfurt, Euro Libor futures for December delivery have declined to the 96.65 level, for an implied yield of 3.35%, pricing in three additional quarter-point ECB rate hikes by year's end, and discouraging hedge fund dabbling in crude oil. For the first time in 5-years, the ECB is talking about tightening liquidity in the Euro zone, to help tackle energy prices, which were 20% higher year-over-year in January, and leading Euro zone producer prices 5.3% higher in January from a year earlier.

In the US, the influential New York Fed chief Timothy Geither said the central bank needs to tighten its monetary policy further to lift longer-term US bond yields, which have been kept artificially low, by up to 150 basis points, by irrational Asian central bank purchases. "Policy would have to act to offset these effects in order to achieve the same impact on the future path of demand and inflation. To do otherwise, would run the risk that monetary policy would be too accommodative."

Sliding US dollar Libor (Eurodollar) futures are taking some of the steam out of the high flying crude oil market. Chicago futures traders are betting the Fed will raise rates by a quarter-point to 4.75% on March 28th, and see good odds it will reach 5% by May. St Louis Fed chief Poole agrees. "We've got our best guess where we need to go. I think it is pretty well aligned with where markets think we need to go." Expectations of higher interest rates and weaker oil prices finally took their toll on the gold market last week, which fell $25 per ounce to $541.50 /oz in New York on March 10th. Sliding interest rate futures in yen, Euros and US dollars panicked hedge funds into unwinding long positions in key commodities. But eventually, the big-3 must back up their jawboning with action to keep gold and oil under wraps.

Central bankers are not happy to see gold prices move swiftly higher, because it's a clear signal in the marketplace, that they have abused and violated the public trust over the purchasing power of their currency. Higher gold prices put pressure on central bankers to restrict their money supply and raise short term interest rates, which runs counter to their primary mission of pumping up equity markets.

Still, gold has fared much better than crude oil in recent weeks, improving the gold- to-crude oil ratio to 9 barrels of oil from a low of 8.1 barrels in late January. The wave of mergers in the gold industry is putting more of the yellow metal into fewer hands, and helping miners to limit price declines and combat selling forays by European central bankers. South Africa's gold output fell 13.5% in January from a year earlier, helping to keep supply tight. And while Riyadh is aiming to drive oil prices lower to weaken the Ayatollah of Iran, the Saudi kingdom boosted its gold purchases by 10% to 160 tons in 2005, and the Emir of the United Arab Emirates bought 13% more gold or 106 tons last year, perhaps anticipating a flare-up of instability in the Persian Gulf region.

So far, global equity markets have reacted calmly to the certainty of future rate hikes by the big-3 central banks, and are enjoying the recent slide in crude oil prices to about $60 per barrel. There is a widespread sense of disbelief in the global equity markets that the Ayatollah's quest for nuclear weapons would result in military warfare, and instead, there is increasing confidence that oil prices have topped out.

Perhaps, global equity traders are betting that Moscow or Beijing can persuade the Ayatollah to give up his ambition of nuclear invincibility, as US Senator Joseph Biden suggested on March 12th, "I think we can stop them from having a nuclear weapon short of war." German Foreign Minister Frank-Walter Steinmeier warned against getting dragged into "sabre rattling" by antagonistic comments from Iranian officials. "This is the hour of diplomacy," he told the Bild am Sonntag weekly. Asked on BBC radio whether a military strike against Iran was conceivable, British foreign minister Jack Straw said on March 13th, "No American president is ever going to theoretically rule out any option, in practice military action is not on the Americans' agenda. This is an issue which has to be resolved, yes by pressure, but by peaceful and democratic means." For the UK's Straw and Germany's Steinmeier, a nuclear armed Iran is already a fait accompli, (ie long-term, bullish for oil and gold).

But the Ayatollah had already bought the Chinese veto at the UN, by dangling a $100 billion dollar contract before Beijing, which would allow China Petrochemical or Sinopec to develop the 26 billion barrel Yadavaran oil field. The deal would complete a memorandum of understanding signed in 2004. In exchange for developing Yadavaran, one China would buy 10 million tons of liquefied natural gas per year for 25 years beginning in 2009.

Vladimir Putin, the kingpin of Russia is the top weapons supplier to Iran and Syria, the arch foes of the US-Israeli alliance, and has $10 billion of contracts with the Ayatollah to build nuclear reactors in Iran. Russia's energy resources are now completely under the control of the state, after confiscating Yukos, and provide the Kremlin with a new weapon, Petro-Power. Putin is mostly interested in maintaining the balance of tension and terror in the Middle East to support high global oil prices, which are enriching Moscow's coffers and its foreign exchange and gold reserves to a record $197.9 billion as of March 3rd.

With a likely Chinese and Russian veto of any tough UN sanctions bill on the horizon, the Bush administration might play its best card short of military action to stop the Ayatollah from acquiring nuclear weapons - an embargo of refined gasoline sales to Iran. G asoline consumption is estimated at 64.5 million liters per day in Iran, while refining capacity is just 40 million liters per day, thus forcing Iran to import 24.5 million liters daily.

And Iran could face major shortage of refined gasoline by 2020, when consumption is forecast to stand at 308 million liters. Right now, the Ayatollah's regime spends $4.5 billion per year buying refined gasoline from abroad, mainly from Europe and India. Making matters worse, gasoline is subsidized in Iran at one-tenth of the cost in neighboring countries, so nearly 20% of Iran's gasoline supplies are smuggled outside of the country for a handsome profit.

The Bush administration might ask Europe, India, Japan and South Korea to join an embargo of refined gasoline exports to Iran. However, the Ayatollah has already sewn an intricate web of commercial oil relations with America's allies that could prove very difficult for Washington to untangle.

Japan currently buys 550,000 bpd of oil from Iran, and Japan's biggest oil developer, Inpex, is planning to develop the southern part of Iran's Azadegan, estimated to hold 26 billion barrels of oil. Japan is aiming to pump 150,000 barrels per day by mid-2008 and reach 260,000 bpd by early 2012, from southern Azadegan.

And India imports at least 150,000 barrels a day of Iranian crude. Tehran is offering to supply India with liquefied natural gas (LNG) in a deal valued at $22 billion. LNG exports would run for 25 years, starting from late 2009. India is also angling for stake in Iran's Yadavaran oilfield. New Delhi is planning to build a $7 billion gas pipeline from Iran through Pakistan to India. South Korea refines about 100,000 barrels a day of Iranian crude, and is involved in giant South Pars gas field, an investment worth about $1.6 billion. Turkey consumes about 140,000 barrels a day of Iranian crude. Royal Dutch Shell buys about 200,000 barrels a day of Iranian crude, and developed the Soroush - Nowruz oilfields, which required an investment of nearly $1 billion.

The European Union is already backing away from tough sanctions against Iran to protect its economic interests. Germany exported around 4 billion Euros' worth of goods to Iran last year, followed by France with $2.6 Euros, and Italy's 2.4 billion Euros. French oil company ToTal has invested heavily in Iran's oil and gas sector, in the development of the Sirri, Doroud and Balal oilfields, and South Pars gas field with Russia's Gazprom. And the Ayatollah has threatened to pull tens of billions of Euros from European banks if sanctions are enacted.

On March 10th, EU foreign policy chief Javier Solana sounded wobbly, "I do not rule out sanctions, but it depends on what kind of sanctions they are. We certainly do not want to hurt the Iranian people, (i.e. a gasoline embargo). It won't be easy for the Security Council." EU External Relations Commissioner Benita Ferrero-Waldner cautioned, "We have to think very carefully in order to maintain the consensus of groups and in particular of the Permament Five," including China and Russia.

It's unlikely that the UN diplomatic circus could adopt a gasoline embargo on Iran, but the Ayatollah has already made plans for rationing. Iran has some 2,000 filling stations that would be equipped with electronic payment systems using smart cards by October, the largest information technology project in the country, to be used at times fuel is to be rationed. Oil Minister Bijan Namdar Zanganeh had said earlier this year that gasoline coupons have been printed and would be distributed.

Iran is also implementing projects to build more refineries to boost gasoline output by seven to eight million liters a day within the next two years. Anglo-Dutch conglomerate Royal Dutch/Shell is the advisory partner with Iran in the project for Iranian refineries in terms of production, productivity, and number of workforce.

So that leaves Israel at risk of a nuclear holocaust. "If the UN Security Council is incapable of taking action to stop Iran from acquiring nuclear weapons, Israel will have no choice but to defend itself. We have the right to give all the security that is needed to the people in Israel. The Israeli approach is the US and the European countries should lead the issue of the Iranian nuclear program to the table of the UN Security Council, asking for sanctions," said Israeli defense minister Shaul Mofaz.

The Israeli Mossad and Western intelligence agencies believe that Iran would have the technology to build a nuclear bomb within three to six months, and could build the bomb in three to five years. So while the UN dithers away for a few more months, parading ineffective sanctions, either Israel or the US might be forced to mount a military strike on Iran's nuclear reactors in 2006.

Former Israel Defense Forces chief of staff Moshe Ya'alon said on March 9th that Israel has a military option to counter the Iranian nuclear threat, and that a strike on Iran could delay its nuclear program by several years. The intervening years, until Tehran got its program back on track, could see a regime change in Iran. He said that such a strike would be difficult to carry out from a military perspective as Iran's nuclear facilities are spread out, but he believed it was nonetheless feasible.

Israeli Defense Minister Shaul Mofaz told reporters in Germany on March 8th, that Israel had all it needed to defend itself against Iran. Asked if Israel had a military plan handy in a desk drawer to strike Iran, Mofaz said, "Israel has many drawers containing everything it needs to defend its citizens. Israel will not stand by idly while its very existence is at risk. We do not plan to turn a blind eye to these threats and we will do everything possible to make sure they do not materialize."

Yet despite the escalating war of words with Iran, the Tel Aviv-25 stock index is immunized, and trading near record highs, at almost triple its value from three years ago, following the overthrow of arch enemy Saddam Hussein. The TA-25 received an extra boost following the death of Yasser Arafat, which marked the beginning of a major reduction of terror attacks in Israel over the past 15-months.

Israel emerged from its worst economic slump ever in 2003, after former finance minister Benjamin Netanyahu, in April 2004, announced a reduction in Israeli corporate income taxes to 30% from 36% over four years. A sharp decline in the inflation rate allowed the Bank of Israel to lower 3-month shekel deposit rates to a record low of 3.50% in 2005, providing additional fuel for the TA-25.

The Israeli defense ministry says its Arrow 2 anti-ballistic missile system is capable of intercepting and destroying any Iranian missiles, even were they to carry nuclear warheads. Moshe Ya'alon did add that any Israeli strike against Iran would lead to a harsh retaliation against Israel. He said Iran might try launching missiles from its own territory towards Israel or to use the Hizbullah in Lebanon and the Hamas in Gaza in order to fire rockets into Israel. But Ya'alon said Israel can withstand such an attack, thanks to its effective anti-missile systems. Apparently, Israeli traders agree.

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Gary Dorsch

http://www.sirchartsalot.com/

Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.

As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.

He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.

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