The Oil Plans of Iran

The Daily Reckoning PRESENTS: Looks like we have even more oil worries ahead, with all the noise that has been coming from Iran lately. The Mogambo Guru explores the reasons why oil is going to be more expensive…


If you want to talk about oil, then Toni Straka, of the Prudent Investor newsletter, notes that the world uses oil so fast that the globe has “a daily bill of roughly $5.5 billion for crude oil” at current prices.

Perhaps this huge use of dollars is what has everyone worried about the new Iran oil bourse (trading center) that is scheduled to crank up in March, and probably rightfully so. Instead of an American-controlled oil market and American friends and insiders getting rich making their slimy little backroom deals, now it will be an Iran-controlled oil market and Iranian friends and Iranian insiders making their little deals.

It’s all mox nix to me, as oil is going to rise mightily in price anyway, but all of those American oil-business scumbags have families to care for, bills to pay and these big, fancy cars that speed by me as I sit with my “Will work for food” sign around my neck. So, you can bet that they are all crapping in their pants at the thought of the end of a very long, very cozy and very profitable deal. Ergo, you can certainly make a case that George W. Bush and the U.S. Congress will OK a plan to invade Iran and take over the place, because that is the kind of treacherous, thieving, murdering scumbag that my beloved America has become in its increasing desperation.

Muckraker Report, which is from the Libertarian Party in Berkeley goes further than merely hypothesizing, and predicts how it will actually play out. Firstly, the government “must portray the Iranian President, Mahmoud Ahmadinejad, as a threat to the region and the world. Finally, once naive American people are convinced the ‘weapons of mass destruction’ that were to be found in Iraq are actually in Iran, coupled with the almost daily media coverage of Iran’s nuclear power / weapons program aspirations, and what we will soon have on our hands is another fabricated war that will result in tens of thousands of civilian lives being lost, all because the political elected pawns in Washington, DC, lack the discipline to return our currency to a gold or silver standard, end the relationship with the foreign banking cartel called the Federal Reserve, and limit the activities of the U.S. government to those articulated in Article I Section 8 of the Constitution for the United States of America.”

Wow! Nice going! I am impressed that they understand how money becomes money because of bank-created credit, so that someone could borrow some money, and then someone borrows the money from a bank, which turned the credit into money, and thus money equals debt. But they get zero points when they say, “If all debt were to be paid, there would be exactly zero U.S. dollars in circulation because it will have all been returned to the vaults of the Federal Reserve. This might seem hard to fathom, but it is the gospel of fiat money.”

Wrong-o. Actual cash can come into existence and not be part of any debt. All the government has to do is print up actual cash, and then use it to pay somebody for some goods or services. For example, if I finally get my dream job cleaning the toilets of the U.S. Treasury building (which is a much better job than the one I have now) and they pay me in cash, then money can come into existence without a corresponding debt. It’s not much, but some!

Richard Maybury, in his newsletter Early Warning Report, notes that “81% of all the world’s oil deposits” are in areas (which he calls “Chaostan”) that are always kicking up sand with each other, and that his best guess is that “the Third World War and the war economy will last at least two more decades.” He recommends that you load up on oil, gold, silver, platinum, defense industries, commodities and U.S. rural real estate.

John Chalcraft, of ProActive Communications, reminds us, “Investors are well aware of the soaring price of commodities such as gold and oil, but a fact going largely unnoticed in the investment community is that over the past three years the price of molybdenum has risen over 1000%.”

Along the same lines, Gary North, published in The DailyReckoning, writes, “Six months ago, an analyst group made up of former top-level U.S. government officials calculated a global oil scenario. In this extremely likely scenario, just three minor disruptions in the already-strained world oil supply chain cause $150-a-barrel crude prices, a $5.32 pump price for gas, more than two million jobs lost, and a 28% drop in the S&P 500.”

Well, if oil is going to get more expensive, what about natural gas? Les H. writes that a guy named Dr. Jean LaHerrere has models that “suggest that in about four years the supply of natural gas will be about 1/3 to 1/4 of today’s supply.” Another guy named Matt Simmons “has done extensive analysis of similar data and expects a severe drop in natural gas supply soon.” As an aside, we learn that “The Peak Oilers refer to this coming crisis as the ‘natural gas cliff event.’ “

Speaking of oil, Les H writes to say, “Dr. Colin Campbell, who has a Ph.D. in geology from Cambridge University, points out that we now know the origin of oil. It isn’t from dead dinosaurs. There were two very warm periods in the planet’s history, one 140 million years ago and one 90 million years ago in which ‘huge marine algal mats grew and settled to the bottom of the ocean. Now, to make oil from dead algae, the algae must spend some time at least 7500 ft below sea level, but no more than 15,000 feet below sea level, to turn the residue into oil. Too deep, and it becomes natural gas. Two shallow, and it is only oil shale.'”

Les steps in and extrapolates by saying, “But one thingee is for darn sure: one has to discover a natural gas field before it can be produced, and the rate of discovery is falling rapidly. We now are fully utilizing every rotary rig in the United States to try to find more fields. And for the last two years running, U.S. natural gas production has fallen about 4% per year. Dr. LaHerrere’s analysis suggests that soon we will see a much more rapid decline.”

The problem isn’t going get solved by more exploration and drilling, as Dr. Ken Deffeyes, professor emeritus of sedimentary geology at Princeton University, writes, “We have now found 94% of all the oil fields that have ever existed on the planet.” This is rather disconcerting news! Ugh.


The Mogambo Guru
for The Daily Reckoning
January 16, 2006

Mogambo Sez: Nothing has changed, except that I am bored, as making money by buying and holding gold, silver and oil is so unexciting. And it will be continue to be both profitable and boring for a long, long time, too. So shut up and deal. And send the kid out for another six-pack…and some potato chips.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, and a vocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Today is a holiday in the United States. But here at the mobile headquarters of The Daily Reckoning we reckon anyway.

What we are reckoning with today is the price of gold, which shot up again at the end of last week. It doesn’t seem to want to go down. Maybe it knows something. Or it is just toying with us.

That gold has a sense of humor is beyond question. We hear it laughing every time Alan Greenspan opens his mouth. You’ll recall that Mr. Greenspan was once a close friend of gold. The two were practically bosom buddies. Greenspan wrote that gold was indispensable to an honest money system. Of course, that was before he came to head up the largest and most cocksure central bank in history. Since then, he’s hardly had time for his old pal. He has new friends in very high places.

A cynic would scowl and say that Greenspan merely did what he had to do; running a central bank is a government job. The idea is to keep the economy as stable as possible, while you debase the currency; that way, the voters never catch on or complain. Greenspan only did what his employers asked.

But a poet or an artist might smile. He could draw out a deeper meaning from Mr. Greenspan’s career, and see in it an almost divine elegance – like the ceiling of the Sistene Chapel or Shakespeare’s sonnets. Or, more modestly, he might see it as a short story with a twist at the end.

In the latest reported week, more than $25 billion was added to the nation’s money supply. If this were to continue, it would add more new money in 18 months than the present value of all the gold ever mined. Of course, that is only a small part of the picture. While Mr. Greenspan has been on watch, the amount of money, credit, and debts have soared. By almost every measure, more purchasing power has been added since he has held his post at the Fed than under all the U.S. Treasury secretaries, Fed chiefs, and presidents that preceded him combined.

Gold chuckles.

What gold knows is that it is one thing to create money and credit; it is quite another to create real wealth. The first is as easy as running a printing press; the second is hard. You can inspire people to consume wealth by spreading around some spending money. You can even inspire people to make more of the things they consume. Before you know it, you’ll have what looks like a boom. But if you could get rich by printing up extra currency, or by borrowing and spending…everybody would do it.

What gold also knows is that the more money and credit you make available, the less each unit of it is really worth. And if you order up enough of it, you can destroy the currency itself.

Gold chuckles knowingly, again.

“The Greenspan era will not end on January 31st,” says this week’s Economist magazine, “Instead, his legacy will linger in the shape of the biggest economic imbalances in American history; a negative household saving rate and a record current-account deficit…Until these imbalances unwind – a process that could prove painful – it is too soon to applaud Mr. Greenspan’s record.”

Oh no, it’s not. We applaud him right now. He is doing for central banking what the Titanic did for ocean cruises and George Armstrong Custer did for the cavalry. With a little luck, soon people won’t want anything to do with it. For the first part of his career, he argued that paper money, un-backed by gold, was doomed to failure. For the last 18 years, he has worked to prove it. Not by logic or argument, but by demonstration. He has blown up the biggest bubble in money and credit the world has ever seen. When it pops, Americans will turn to gold. Gold will sell for thousands of dollars an ounce, before the dollar is replaced. And Americans will trust neither “paper” money, nor central bankers for at least the next three generations. We just hope Alan Greenspan lives long enough to see it.

More news from Aussie Joel and The Rude Awakening…Bill Bonner, back in Paris with more thoughts…


*** “You’re right,” reader Jim Jenness writes. “We should abolish the IRS.”

The note comes in response to Addison’s trip last week to meet Steve Forbes. (Details forthcoming…)

“If we make the income tax flat, how long will it stay flat? It can come back to bite us again and again and again. Will enactment of a flat income tax make pimps, pornographers, drug dealers, and all the others in the trillion dollar underground economy come out and declare their cash income?”

“Instead of Steve Forbes, you should consult Neal Boortz.”

Maybe we’ll do both.

*** Here’s an interesting note from the Economist. Measured in the usual way – inflation plus unemployment – the misery index in the United States has gone down. Both numbers are low…making the country less miserable than its rivals in Europe, for example.

But the numbers are misleading, say analysts at Merrill Lynch. A proper look at misery should include GDP growth rates, interest rates, budget and trade balances, they say. When they use these additional numbers they get a different result completely: the United States “is the most wretched economy among the big G7 countries.”

Who you gonna believe?

By the way, the Merrill Lynch numbers show that our neighbors to the north should be happier than we are. Canada has only half as much misery as the United States, according to the new index.

*** Last night, we spent the night at our country house alone. The rest of the family took an airplane back to London in the afternoon. We stayed overnight to tie up some loose ends. This left us time to think…

What a lovely place, but a lonely one. The moon was full…and ice cold. A desolate wind blew from the northwest, rustling the leaves. Inside, the house was quiet, except for an occasional creak or clang.

We took refuge in our library, which we had built in an octagonal pavilion out in the yard. Turning up the heat and putting on some music, we looked at our watch. It was only 8:30. What would we do for the next two or three hours? We are not used to being on our own and don’t care for it. When we have only ourselves for company, we feel almost desperate. We don’t even like to get up early or stay up late – not enough people around. It’s not that we regard ourselves as bad company. Nor do we consider ourselves boring. Even after so many years, we are still full of surprises; we never know what we will say or think. It’s just that…well, we don’t care.

We turned to e-mail and found a long letter from an old friend. He explained how he had run through quite a bit of money; he seemed to have none left. He asked for a loan. What could we do? What are old friends for, if not to lend money when you need it? But the amount he requested was no trifle. At an early stage of life, we both would have considered it a fortune.

It is amazing how fast you adjust to circumstances. What seemed like a huge sum two decades ago now seems like not so much. Besides, it has become more abstract. We already have a house and a car. We don’t need anything. We’re not saving for anything in particular. So any money we have is merely placed somewhere – usually a place we will never actually see it. It is an abstraction. Arabic numbers arranged on a piece of paper or a computer screen. It has no real meaning to us. If there are five digits or six, what’s the difference? How do we know there’s really anything there?

Last week, we noticed that things have a way of losing their appeal over time. When we were in our 20s, there were things we wanted – desperately. Now, we can have them. But they don’t mean anything. For the most part, they are just more junk we will have to take care of and eventually get rid of.

But we wondered where this trend leads. Does the day come when you wake up and realize that nothing matters to you anymore? Then, what do you do with your money?

When we have the time and courage to look at ourselves, we notice that while “things” seem to matter less and less…people matter more and more. We are losing old friends – to accidents and diseases. We hate to see them go; they can’t be replaced. Maybe old friends, like currencies, become more important as they grow fewer in number. Or maybe, as you grow older, your interests naturally shift. When we were younger, we were so busy trying to make our way in the world, that we had no time for friends or family. Now, we look around and wonder where we were and what we were doing when the children grew up; we don’t remember it. And now that we have more time for the children, they have less time for us! They’re developing careers of their own. They have their own schedules…their own interests… their own lives to live.

If you have money, you tend to part with it readily. Each additional dollar has less “marginal utility,” say economists. The more you have of them, the less each one is worth to you. Before you know it, you’re spending like a Congressional committee. If you don’t have much money, on the other hand, each dollar is precious. You look over at the right hand side of the menu before ordering. You ask about senior discounts. In the end, whether you have money or not, doesn’t seem to make much difference one way or another. But transitions are hard. Not the transition from not having to having, but going in the other direction can hurt. Rather than make the transition, our old friend has asked for some money so that he may continue living in the style to which he has become accustomed. He is an optimist, he tells us, and believes his investments will eventually put him back on his feet. In the meantime, he lives far beyond his actual means.

If he were one of our children we would tell him “no.” Using capital to pay living expenses is a classic way to ruin yourself. We feel very lucky to be alive and healthy…with happy children and a pretty wife. Hoping for an investment success might be pushing it.

Not that we think there is a limit to the amount of luck a man can enjoy, but we note from observation that luck, like capital, has a way of running out just when you need it the most. Then, you need to make that disagreeable transition…

We’d like to leave a little in the vault just in case.

The Daily Reckoning