Editor’s note: The week of February 20 may have been a landmark period of time. Three key developments occurred, as an attack on a Shiite mosque in Baghdad, an attempt to attack a major refinery in Saudi Arabia, and the biggest push for alternative energy from President Bush all took place, within days of each other, and the repercussions for the markets and the geopolitical situation were immediately felt.

The mainstream media began to call the Iraqi conflict a civil war, and oil prices rose after a steady decline during the prior weeks.

This combination of events, and those that are likely to come, perhaps in the near future, are likely to change the financial markets, and to lead to uncertainty.

In this installment of the Peak Oil series, Dr. Duarte brings together the situation in Iraq, the President’s new interest in alternative energy, and looks at the geopolitical consequences of the current environment, with special emphasis on the financial markets.

This analysis appeared on February 21, 2006 at www.joe-duarte.com, before the mosque attack, before the Saudi refinery attack, and before the mainstream press picked up the “civil war” in Iraq buzz.

To read Dr. Duarte’s previous peak oil installments visit:

• http://www.financialsense.com/editorials/duarte/2006/0218.html

• http://www.financialsense.com/editorials/duarte/2006/0211.html

• http://www.financialsense.com/editorials/duarte/2006/0120.html

• http://www.financialsense.com/editorials/duarte/2006/0131.html

Bush Turns To Green And Yellow Pastures For Energy Alternatives

President Bush has raised the bar on alternative energy sources as corruption and sectarianism rise in Iraq, attacks against oil installations rage in Nigeria, and Iran continues to develop its controversial nuclear program.

According to AP: "Saying the nation is on the verge of technological breakthroughs that would "startle" most Americans, President Bush on Monday outlined his energy proposals to help wean the country off foreign oil."

Calling the global energy situation "a national security issue," President Bush described the current situation as one in which the U.S. is "held hostage for energy by foreign nations that may not like us."

Without providing any mass production examples, Bush, nevertheless made the following statement: "Our nation is on the threshold of new energy technology that I think will startle the American people. We're on the edge of some amazing breakthroughs - breakthroughs all aimed at enhancing our national security and our economic security and the quality of life of the folks who live here in the United States."

Difficulties In Iraq

Aside from the Nigerian rebel attacks on foreign oil installations, there are major problems in Iraq, as sectarian politics have cut into that country's oil exports.

According to the Wall Street Journal: "Iraqi oil production has fallen sharply in recent months amid a series of bureaucratic and political tussles in Baghdad, raising questions about the country's ability to keep its petroleum industry from spiraling further into disrepair."

The report comes on the heels of disclosures made earlier this month, of corruption in the Iraqi oil ministry leading to the diversion of oil revenues to fund the insurgency [READ].

The Journal, on 2-21, reported: "Iraqi oil officials are now complaining about new problems, including political infighting at the oil ministry and escalating conflicts between officials in Baghdad and those in Iraq's main oil-producing regions. Essential equipment has been held up as Iraqi and U.S. officials butt heads over whether it can be safely brought into the country."

Iraqi oil production is down significantly. "In the last three months of 2005, Iraq produced 1.66 million barrels a day, down from 1.96 million a day in the previous quarter, according to the International Energy Agency, the Paris energy watchdog. In January, production sank to 1.5 million barrels a day."

Infighting, The Big Threat

The inability to rise above age long sectarian differences has led to a warning by the U.S. of the removal of support for the current Iraqi government.

According to the Wall Street Journal: "Rifts have opened up among several political factions vying for control of the Ministry of Oil, slowing strategic planning and freezing progress on new drilling and repair projects. Former Iraq Oil Minister Ibrahim Bahr al-Uloum resigned last month amid a dispute with political opponents in the government who reduced fuel subsidies long used to keep Iraqi gasoline cheap. The portfolio is up for grabs as politicians in Baghdad negotiate over the formation of a government."

Money earmarked for improvements and upgrades of infrastructure is not being spent, while the infighting rages. Some $1.4 billion has been slated for these projects by the U.S., but according to reports half of it has yet to be spent, as it is caught in the bureaucratic snafu.

As we reported on 2-6, the contribution to the current situation by internal corruption is quite high, estimated by Iraqi officials to be costing the Iraqi government as much as 40-50% of all oil revenues.

Conclusion

One Democratic source told us that Bush's turn toward alternative energy is "political misdirection."

And only someone extremely naive would argue that Mr. Bush's turnabout is not at least slightly politically motivated.

But, the fact remains that, politically motivated or otherwise, the U.S. finds itself in a difficult position.

It took Brazil twenty years to develop a viable ethanol program. It is taking decades to produce longer lasting, easy to charge, and easy to mass market batteries.

And we don't see any SUV's on the road that get 100 miles per gallon.

In other words, unless Mr. Bush knows something that we don't, and he may, the "verge of technological breakthroughs" touted by the President, is not likely to be revealed tomorrow.

Still, we are watching a startling and likely irreversible new set of terms being injected into the political mainstream by Mr. Bush.

That means that as the mid-term election approaches, and the 2008 presidential election, alternative energy sources will likely be a major campaign issue.

And that, in and of itself is likely to be a source of volatility for the markets.

No matter what, though, as the chart below clearly shows, the Wilderhill Clean Energy Index ($ECO), is near a break out. That means that money is flowing into alternative energy stocks.

The Wilderhill Clean Energy Index is near a break out.

© 2006 Joe Duarte, M.D.
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