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ENERGY ALLIANCE & US ISOLATION

The world of energy has many faces in the past two years. As the Middle East and Caspian Region encounter growing US Military presence, alliances have formed and are solidifying along the periphery. The battle is for the untapped oil in the Caspian Region in the former Soviet Republic territories. The trends regarding the politics of energy have become intertwined with military weapon supply, military troop commitment, and nuclear technology. The danger comes from the nuclear component, since it can operate under the guise of peaceful electrical power generation. With only slight diversions from the centrifuge refinement process, and with mere rerouting of spent fuel processing, a nuclear weapons capability is born. Delivery becomes the key question, as in missiles. As a result of exerting its own dominance, the United States is working its way into a corner on the world arena, too large to control anymore. A formidable alliance has been in the formative stages among China, Iran, and Russia. It will change the world of commodity commerce. The Iranian oil bourse will directly challenge the Petro-Dollar system, as they will sell oil and natural gas in euro terms. Expect the USA to challenge and undermine their attempts.

ALIENATION & SLUMBER

Alienation is new with Europe, the traditional ally whose feathers are continually ruffled. Tested by the questioned support for the Iraqi War, the NATO alliance is shaky and might be reliable only if push comes to shove. Alienation with the Islamic world is longstanding even among supposed allies, as partners hold their noses when they shake our hands. Alienation with China and Russia is growing, much the downwind effect from trade battles and grappling squabbles over the former Soviet Republics over oil & gas deposits. Conflicts have arisen over pipeline construction and more dangerously, over military base construction. The USA might continue to dominate the core, with finance and Middle East petro and Iraqi military entrenched positions. However, the United States in NO WAY controls the periphery, where new alliances have begun to form, solidify, and broaden. The bulk of the periphery includes China, Russia, India, Iran, and splinter nations such as Venezuela. Hugo Chavez has emerged as the modern-day Qaddafi in South America, a veritable thorn in the side of American leaders. He has the potential to disrupt not only oil supply to the US but refined gasoline as well. US Troops are actively defending the oil pipeline in Colombia against local terrorist groups, a little known fact.

The American public is fast asleep, transfixed on very silly and trivial human interest and court stories. Laci Peterson, Michael Jackson, Shiavo, Chili fingers, Robert Blake, missing children, escaped convicts, reality shows, the list is endless of distractions from real stories which will shape our future lives and those of our children. Be certain of additional stories of no importance but transfixed interest in the near future. The dumbing down of America is a process well underway. Media explosion in the number of channels has been squandered. Few people care about the news or relevant stories. Worse still, few would understand what is happening in what has become a grand chess game. The level of public awareness on matters highly critical to the future of our nation is diminishing at an alarming rate, enough to embarrass me.

THE GREAT PAN-ASIAN ENERGY ALLIANCE

The new major alliance is China & Iran & Russia of truly monstrous proportions. Its contractual basis is coming together like a concrete foundation. No name of “Shanghai Coop Group” has yet to be bandied about, which might be intended. Its reality is in form and essence, not yet title, kept in low profile. Its reality will be so powerful as to change the geopolitical balance of power, if not already. The thwarted Unocal deal is sure to motivate further movement toward the building of alliances outside the US sphere of influence.

Strong ties are growing, from early vines to massive conduits, between Moscow and Beijing, between Teheran and Beijing, and between Moscow and Teheran. The balance of world power is changing, with hardly a word reported in the highly distracted media. In fact, since the March 2005 trip by Bush to visit with Putin in Moscow, Iran has strangely NOT been in the news. Here are developments in the powerful triangle of new commercial ties, mostly pertaining to energy. Sino-Russian relations have reached in their words “unparalleled heights” with arms sales and energy deals. Last year a $2 billion arms deal was signed for Russia to deliver ships, submarines, missiles, and aircraft to China. Joint military exercises are even planned. A 20% annual growth rate is seen in non-military trade, worth $20 billion in 2004 and expected to hit $60 by 2010, mostly in energy supply export to China. Russia pledged to double electricity exports to China, to 800 million kilowatt hours by 2006. Two Russian energy giants, Unified Energy Systems and Gazprom, are courting Chinese invested ownership. Russia had committed in 2002 to spend $2 billion on an oil pipeline from Siberia to Daqing in northeastern China. In 2004, Japan entered the picture with a huge $10 billion infusion to redirect the same pipeline to terminate at the Russian Pacific port of Nakhodka. A Russian port is more accessible to Japan than a Chinese inland city. Beijing might not feel slighted at all, since Japan footed the bill, and a pipeline leg can be built to direct oil flow to a Chinese city.

China was quietly involved in the high jinks “acquisition” of the Yukos production subsidiary named Yuganskneftegaz (easy for you to say) with a $6 billion financing. The money seals a deal for supply to China National Petroleum Corp (CNPC), but retains the former Yukos unit as a separate state-owned company. Its purpose is to supply China with energy supplies. CNPC is also directly linked to Gazprom in joint ventures to develop energy reserves inside Iran. A firm three-way fabric is being woven.

In March 2004, another Chinese state-owned oil giant Zhuhai Zhenrong Corp signed a long-term agreement with Iran for liquefied natural gas (LNG). In October 2004 a larger long-term $100 billion deal with yet another Chinese state-owned oil giant Sinopec was cut for delivery of LNG from Iran and its Yadavaran oilfield, which will provide 150 thousand barrels of oil per day. One can easily conclude that China is integrally invested in Iranian energy exploration, drilling, and production, in addition to petrochemical and natural gas infrastructure. China is now the #1 destination for Iranian oil export. We have clear defiance of the USA here. China has invested over $20 billion in Iran, in clear violation of the US Iran-Libya Sanctions Act. Violations began long ago, with Chinese provision of Silkworm missiles to Teheran.

Russia is in defiant violation also, with missile delivery systems to Teheran, but of the US Iran non-Proliferation Act. Russia is actively supplying nuclear fuel to Iran’s Bushehr plant. Spent nuclear fuel is Washington’s main stated concern. Moscow defused the issue, so it seems, as it promised to accept all spent fuel for reprocessing. Concern mounts that weapons grade plutonium could be manufactured, and that Iran is developing a nuclear weapons program with Russian technical aid.

THE GEOPOLITICAL ANGLE

The geopolitical impact comes with compatible harmonious foreign policies regarding Taiwan and Chechnya, and in steadfast obstruction by Russia and China in any United Nations initiative to condemn Iran. Their seats on the UN Security Council permits a quick veto. One can safely conclude that the China-Russia-Iran axis is working to counter the unilateralist stance put forth and global dominance exerted by the United States. They wish to limit the US influence in Asia, the Caspian region, and the Persian Gulf. The power of the pen is seen with multi-billion$ energy and military contractual agreements. The position can be observed by China’s foreign minister Qian Qichen, a distinguished diplomat. He said “The United States has tightened its control of the Middle East, Central Asia, Southeast Asia, and Northeast Asia. [This control] testifies that Washington’s anti-terror campaign has already gone beyond the scope of self-defense… The US case in Iraq has caused the Muslim world and Arab countries to believe that the superpower already regards them as targets [for] its democratic reform program.” Iran lies at the focal point for Persian Gulf expansion of thinly disguised democratic reform which would provide cover for any attempt to tighten control of this critical energy producing region. Russia and China offer clear deep military support for Iran. THAT IN MY OPINION IS PRECISELY WHY THE USA HAS BACKED OFF WITH IRAN. We live in dangerous times. The wild card in the Iran situation is Israel. Unofficial reports claim the largest Iranian oilfield was taken offline recently after a small scale bombing (whose coverage curiously eluded the press). Black bag covert operations might have begun. This is beyond the scope of my expertise or interest.

Lastly, a friend recently visited Toronto. He returned with news circulated around the city in their press that numerous Chinese officials were attempting to secure long-term uranium supply contracts with Canadian mining firms. It was described as a bilateral blitz effort with promised funds for development costs.

A new operational practice might be underway among the China Russia Iran alliance. These three nations form the cornerstone of large energy and military trade with enormous contracts. What is new might be their secretive development, so as not to stir the great US power, its military apparatus, and its Congressional body. To counter the US-centric world, the new axis might choose to rely on secrecy as it evolves, develops, and solidifies. It represents a magnificent challenge to US dominance, which some label as hegemony.

Already, insurance rates are skyrocketing for coverage on the Malacca Strait in Southeast Asia. The Joint War Committee of Lloyds of London has been given a risk assessment regarding these straits, where 50,000 vessels pass annually. Singapore, Malaysia, and Indonesia have all objected to the claim that a tanker could be hijacked and turned into a massive floating bomb. The retort calls it a “fundamental misunderstanding” of piracy and terrorism threats in the Malacca Strait. Insurance premiums are expected to jump $50 million per year, compounded by paperwork requirements. Other high risk areas were identified as coastal waters off Iraq, Qatar, Somalia, India, and Bangladesh. These areas are “choke points” and thus laden with risk. A managing director at the global insurance broker Marsh said “It is rare for a waterway, particularly one as busy as the Malacca Strait, to be put on the list.” The world is changing, as it is slowly becoming a more dangerous place even to conduct shipping. Pirates, prevalent in the 18-th century, might return to the high seas. Risk models are adapting.

FROM DOMINATION TO ISOLATION

The Iraqi War had a great many motivations. The surface justifications are hardly defensible, but well traveled. If not for soldier deaths, they would be amusing. The other several reasons stand the test of time. Stem the sale of oil for euros, establishment of military bases, securing oil supplies, and locking down all multi-billion energy contracts, these reasons are anything but secondary advantages for the United States. They are primary. The world response, sure to be accelerated by the failed attempts by China to acquire Noranda (copper) then Unocal (oil & gas), is to develop alliances outside the US sphere of influence.

An enormous test comes over the horizon with the Iranian Oil Bourse. The sale of oil & natural gas is without question to be conducted in a currency besides the USDollar, namely the euro. That will surely tweak the US leadership noses. Upcoming competition is heralded between this new bourse and the International Petroleum Exchange in London, and the New York Mercantile Exchange. The world’s Petro-Dollar system will soon be directly challenged. Anyone who thinks the Chinese yuan currency basket announcement is not somehow centrally important to the Iranian oil bourse creation, is sadly clueless. The Chinese currency delink to the USDollar next will undermine the Petro-Dollar system itself.

The building of an extra-US alliance is really an anti-US alliance, motivated by frustration over 10 to 15 years of dominance which shows little evidence of consensus building. The US officials have taken the position that the world’s lone superpower DOES NOT NEED approval by other nations. Well, guess what! The world response is to attempt to gradually isolate the United States and to operate on vital strategically important matters independently, with no consultation or cooperation. The most dangerous development is the nuclear card being dealt to Iran by Russia and China. The Shanghai Coop Group is gradually taking shape, in substance but not name. That might be their intention, to lie low, get it done, and sneak up on a superpower whose population is fat, slow, poorly read, indulgent, sleepy, distracted, and increasingly compromised. A sense of entitlement is pervasive and disturbing.

These and other topics with bearing on energy and financial world can be covered and analyzed in greater depth. The Petro-Dollar system is under siege, quietly but effectively. Implications to interest rates and sovereign power are big. Extension to threats of wider military conflict in the Middle East is very real. Watch for nonsensical stories about Iran in the near future.

NEWS TIDBITS

US producer prices rose twice as fast as expected last month on soaring energy costs, while prices excluding food and energy also topped forecasts in a sign of building inflation pressures. The Labor Department said the July producer price index rose 1.0%. Prices for finished energy goods jumped 4.4%, the biggest rise since October 2004, while finished consumer food prices fell 0.3%. Excluding those volatile areas, so-called core producer prices climbed 0.4%. The PPI index, a gauge of prices received by farms, factories and refineries, followed a steady reading in June. Over the past 12 months, producer prices have climbed 4.6% overall and 2.8% stripping out food and energy. This was the fastest rise in core prices since a matching 2.8% increase over the 12 months ending November 1995.

Oil dropped more than 3% to below $64 a barrel on softer gasoline demand and after economic data showed record prices were stoking US inflation. Unleaded gasoline suffered a key reversal in price, after making new highs. Signs that record prices were beginning to crimp economic growth threatened to slow a rally that has catapulted oil toward an $82 price, on an inflation adjusted basis comparable to 1980, the year after the Iranian revolution. If you believe the CPI is running twice what is reported, the current oil price is far below an inflation adjusted $125 oil price seen in 1980. Unexpected refinery shutdowns in the United States have strained gasoline supplies and helped fire a rally that has lifted oil prices by more than 50% this year. The EIA announced gasoline inventories had fallen by 5.0 million barrels last week. “The prices are now clearly at the level where we have to start thinking about the effect on demand,” said a manager at the Mitsubishi petroleum business division. But US gasoline demand over the last four weeks was only 1.5% above last year, far below the 2.7% rise in demand seen in June, according to the EIA. Wal-Mart Stores, the world’s biggest retailer, claims rising oil prices would cut into expected earnings this year as retail gasoline prices eat into incomes.

Applications for US home mortgages rose for the first time in a month last week as borrowers took advantage of lower interest rates to refinance home loans. The Mortgage Bankers Association seasonally adjusted index of mortgage application activity rose 2.2% to 761.3 in the week to Aug 12, snapping three straight weeks of declines, as loan rates fell for the first time since June. Refinancings led the climb. The MBA seasonally adjusted index of such applications rose for the first time in a month, climbing 5.0% to 2285.5 after falling 3.3% the prior week. Economists scan mortgage activity and other key housing data as the sector is a major driver of the US economy.

Wal-Mart announced intentions to sell liquor at their North American chain of stores. Interest in vice stocks has been prompted, as the world’s largest retailer has brought a whiff of legitimacy to the vice group.

TODAY’S MARKET

Today the Dow Jones Industrials wrapped up at 10,551 (+37), S&P at 1220 (+1), Nasdaq at 2145 (+8), TENS yield 4.273% (+4.6 bpt). Currencies closed with Euro at 122.77 (-0.97), JYen at 91.24 (-0.35), Can$ at 82.53 (-0.93). Metals finished with spot gold at 439.7 (-5.6), spot silver at 697.0 (-5.0), copper at 165.70 (-5.75). Energy ended with crude oil at 63.30 (-2.78), natural gas at 939.0 (-36.2), unleaded at 189.0 (-9.36). Prices are at major futures contracts.

Jim Willie CB

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