U.S. Plans to Sell Down Strategic Oil Reserve to Raise Cash

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties.

The proposed sale, included in a bill posted on the White House website, equates to more than 8 percent of the 695 million barrels of reserves, held in four sites along the Gulf of Mexico coast. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period. The proceeds will be “deposited into the general fund of the Treasury,” according to the bill.

The sale is the second time the U.S. has raised cash from the reserve, created as a counter-balance to the power of Arab producers after the first oil crisis of 1973-74. The U.S. may sell also additional barrels to cover a $2 billion program from 2017 to 2020 to modernize the strategic reserve, including building new pipelines.

I am not a big fan of the US government stockpiling any resources, but this sale is a sign of desperation.

-RW

The Beginning of the End of Dominance for the U.S. Dollar

By Andrew Topf

Recent trade deals and high-level cooperation between Russia and China have set off alarm bells in the West as policymakers and oil and gas executives watch the balance of power in global energy markets shift to the East.

The reasons for the cozier relationship between the two giant powers are, of course, rooted in the Ukraine crisis and subsequent Western sanctions against Russia, combined with China's need to secure long-term energy supplies. However, a consequence of closer economic ties between Russia and China could also mean the beginning of the end of dominance for the U.S. dollar, and that could

Will the US Oil Boom Survive Even with Falling Oil Prices?

Joe Nocera at NYT:

Since 2008, says Bernard Weinstein, an energy expert at Southern Methodist University, oil production in the United States is up 60 percent. That’s an additional three million barrels a day. Within a few years, predicts Morse, America will overtake Russia and Saudi Arabia and become the world’s largest oil producer.

What’s more, according to another article Morse wrote, this one for Foreign Affairs magazine, “the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come.” In other words, the American energy industry might well be able to withstand further price drops easier than OPEC members.

This is What the Oil Boom is Doing to Wages in North Dakota

The oil boom in North Dakota is the result of the discovery of the Bakken formation in the state that followed the discovery of Parshall Oil Field in 2006. New technology, including methods of extracting oil from shale and fracking have contributed to the boom.

The boom in means that Walmart must compete aggressively for employees, in the region.

The below pic shows what WalMart has to pay for various jobs in Williston, North Dakota.

Note well: All these wages are far above the current minimum wage. When market conditions warrant wages above the minimum wage, there is nothing that businesses, including large corporations like WalMart, can do about it other than pay the prevailing market wages, if the want to employ the workers. No unions needed, no government regulations required.

North Dakota oil production:

(ht Jeff Jacoby)

FORECAST: If oil prices stay below $90 for a while, we will witness fiscal squeezes and regime changes in production countries

Steve Hanke writes:

If oil prices stay below $90 per barrel for any length of time, we will witness massive fiscal squeezes and regime changes in one or more of the following countries: Iran, Bahrain, Ecuador, Venezuela, Algeria, Nigeria, Iraq, or Libya. 

AMAZING: US Oil Production is at a 30 Year High

Advances in technology are the main drivers behind the current decline in oil prices. And itis a great thing, not to be feared.

Only the Paul Krugman and Tyler Cowen types fear this great decline in prices. In their bizarre world, cheaper prices are a great deflationary threat. Apparently, in their world, things were much better better when oil was over $100 barrel and desktop computers  cost $5,000 plus.

BUT, enjoy the price decline while you can, the Fed is on a long-term money printing scheme that will counter the short term decline in oil prices.

(chart via Mark Perry)

U.S. Sends Top Iranian Leader a Warning on Strait Threat

NYT reports:

 The Obama administration is relying on a secret channel of communication to warn Iran’s supreme leader, Ayatollah Ali Khamenei, that closing the Strait of Hormuz is a “red line” that would provoke an American response, according to United States government officials. 

he officials declined to describe the unusual contact between the two governments, and whether there had been an Iranian reply. Senior Obama administration officials have said publicly that Iran would cross a “red line” if it made good on recent threats to close the strait, a strategically crucial waterway connecting the Persian Gulf to the Gulf of Oman, where 16 million barrels of oil — about a fifth of the world’s daily oil trade — flow through every day.

Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, said this past weekend that the United States would “take action and reopen the strait,” which could be accomplished only by military means, including minesweepers, warship escorts and potentially airstrikes. 

This is completely amazing. At the same time that the U.S. is warning Iran, the U.S. is doing everything in its power to prevent anyone from buying oil from Iran. It's a damn financial block of the strait by the U.S, that is really pushing Iran into a corner,

The U.S. Pushing Iran Further into a Corner

Will they eventually decide that blocking the Strait of Hormuz is a sane response. The latest release from the Treasury (my bold):

On Sunday, Secretary Geithner will depart for Beijing, China and Tokyo, Japan for meetings with senior government officials next week to discuss the state of the global economy, policies to strengthen global growth and other economic issues of mutual importance. Secretary Geithner will also discuss our continued coordination with international partners in the region to increase pressure on the Government of Iran, including financial measures targeting the Central Bank of Iran. He will arrive in Beijing, his first stop, on Tuesday.

Oil Above $103 per Barrel

Oil is a very important factor when it comes to real core price inflation.

As I have stated many times, oil is a key factor for consumers and also in the capital goods sector. This is important to understand in terms of Austrian business cycle theory, since ABCT teaches that central bank money printing directs money to the capital goods sector.

When the money falls into the hands of the capital goods sector, those operators then start bidding oil (and gasoline) away from consumer uses. It's a real bidding war. An operator in the capital goods sector is not going to be bidding directly from consumers for, say, cement, but he is going to be doing so for oil. That's why oil tends to lead price inflation.

In the EPJ Daily Alert, I have been warning about an upward spike in oil prices, Bernanke has been printing too much money for it not to happen, especially since the eurozone has somewhat stabilized and thus, the demand to hold cash (especially dollars) will shrink.

The cover story may be heated words between the U.S. and Iran, but the money has to be there to bid up the prices, and Bernanke is sure printing that.

Eventually, with capital goods operators bidding oil away from the consumer sector, it will mean much higher gasoline prices.

The Appearance of Golden Crosses in 2012 and What It Means

There is something very fascinating occurring in the markets, golden cross formations are in various states of development in the U.S. stock market and oil market. I don't pay attention to most technical signals, other than things like head and shoulders formations, which can be explained in terms of human action. However, golden cross formations developing in key markets are quite intriguing.

A golden cross formation occurs when a 50-day moving average of price activity crosses over a 200-day moving average. This indicates that upside price activity over the recent 50 days is more intense to the upside than it was over the last 200 days ago.

If this occurs in one commodity, it is an interesting thing to watch relative to that commodity, but when it is occurring relative to oil and the US stock market, it is suggesting an across the board increase in upside price pressure.

Even more fascinating is that these golden cross movements don't occur that often. In oil, these crosses have only occurred seven times since 1984.

In the case of the Dow, according to the Bespoke research,  in the last 50 years, the golden cross on the Dow has only occurred about 20 times.

I don't view these golden cross formations as necessarily predicting strong markets ahead, by themselves,, BUT it is telling me that upward price activity is intensifying in these two key markets. If I couple this with the fact that Ben Bernanke has been printing money aggressively in recent months, it suggests to me that Bernanke's money printing is indeed making it into the markets. I believe the money in the system is strong enough to keep markets strong for some time, and if Bernanke keeps up the money printing, price activity to the upside for the stock market, oil and most other commodities will be very strong at least for the first part of 2012.

Will the Strait of Hormuz Turn Into the Next Pearl Harbor?

Many revisionist historians believe that the United States goaded Japan into attacking Pearl Harbor.

The historian Percy Greaves believed that the attack on December 7, 1941 was neither unexpected nor unprovoked. As his wife, Betina Bien Greaves explained:

[Greaves] was the main counsel for the Republican minority on the Joint Congressional Committee that investigated Pearl Harbor from 1945 to 1946.He attended all its hearings, interviewed many Army, Navy, and Washington principals involved in the attack and in the investigations. He researched diplomatic documents, studied reports and accounts of the event published during the years that followed. He researched diplomatic documents, studied reports and accounts of the event published during the years that followed. This book [Pearl Harbor: The Seeds and Fruits of Infamy] is not about the attack itself. It is about never before presented pre-attack and post-attack events, from the Washington point of view. Without name-calling, innuendo, or slander, Greaves simply presents the pertinent, significant and relevant facts which led the Japanese to attack and the political administration to want to cover-up its involvement.

.Burton Folsom Jr and Anita Folsom write in their new book, FDR Goes to War:

Roosevelt...employed the devious strategy of hindering all oil exports to Japan by adding layers of red tape and freezing Japan's financial assets in what has been called "a silent embargo"...The effect, by late 1941, was a trickle of oil actually going to Japan from the United States.

Bottom line, the U.S. backed Japan into a corner. It was very unwise for the Japanese to attack Pearl Harbor, but the irritation that caused the attack can be clearly seen.

What does this have to do with Iran? Well, we have already frozen some of their assets. On June 29, 2011, the U.S. Department of the Treasury announced the designation of Iran’s national police for providing support to the Syrian regime. The chief and deputy chief of Iran’s national police was also sanctioned.. As a result of the action, U.S. persons are generally prohibited from engaging in transactions with the designees and any assets they may have subject to U.S. jurisdiction are frozen.

On December 20, 2011 U.S. Treasury announced the designation of 10 shipping and other companies and one individual based in Malta affiliated with the Islamic Republic of Iran Shipping Lines (IRISL), as entities facing international sanctions for involvement in" Iran’s efforts to advance its missile programs and transport military cargoes."

“As IRISL and its subsidiaries continue their deceptive efforts to escape the grasp of U.S. and international sanctions, we will continue to take action—as we are today—to expose the front companies, agents and managers working with IRISL and work to stop this illicit business,” said Under Secretary for Terrorism and Financial Intelligence David S. Cohen.

On December 1, 2011 Cohen told the Senate Committee on Foreign Relations:

The Treasury Department’s increasingly powerful and disruptive sanctions are embedded in the dual-track strategy that the United States and our allies are pursuing to address Iran’s continued failure to meet its international obligations regarding its nuclear program. As Under Secretary Sherman describes in her testimony, the Obama Administration has presented Iran with a genuine opportunity for dialogue, creating a clear choice for Tehran. Iran’s leadership can choose to meet Iran’s international obligations, allowing Iran to deepen its economic and political integration with the world and achieve greater security and prosperity for the Iranian people. Or, Tehran can continue to flout its responsibilities and face even greater pressure and isolation...

Our broad-based pressure strategy is aimed at persuading Iran to change its course and to make clear to Iran the consequences of its continued intransigent behavior. Among the most important elements of this strategy are targeted financial measures designed to disrupt Iran’s illicit activity and to protect the international financial system from Iran’s abuse. We have focused our efforts on exposing Iranian entities’ illicit and deceptive activities, an approach that has garnered support among foreign governments and led them to take similar actions, enhancing substantially the impact of our actions. Because these actions have highlighted the pervasive nature of Iran’s illicit and deceptive conduct and the reputational risks associated with Iran-related business, the private sector around the world has taken notice and has often taken voluntary steps beyond their strict legal obligations, further amplifying government actions.

So what is the big deal? The United States is about to  up the ante and  dramatically financially isolate Iran. I am talking about the U.S. significantly cutting off Iran's access to oil revenues.

The U.S. Congress just passed a bill that President Obama appears ready to sign that, if fully implemented, could substantially reduce Iran’s oil revenue.

In other words, the U.S. is backing Iran into a corner. The bill could impose penalties on foreign firms that do business with Iran's central bank. Since those that import Iranian oil use the Iranian central bank for the transactions, it would likely cut off that method of Iran selling oil.

Iran is reacting as you would expect most cornered governments would act. Iran’s first vice president Mohammad Reza Rahimid said that Iran could shut down the critical shipping lanes through the Strait of Hormuz in the Gulf, if foreign sanctions are imposed on its oil exports.

The Strait of Hormuz is very important. About 33% of seaborne oil shipments (17% of world oil) go through the Strait of Hormuz. A blocked Strait would force tankers to take longer, more expensive routes that would most assuredly drive oil prices higher.

The thinking has always been that Iran wouldn't shut down the Strait of Hormuz because they use it for their own export of oil. Indeed, in an EPJ Daily Alert in November 2010, I reported:

This afternoon I attended a meeting where the speaker was Capitan Jeffrey Kline. Kline is the Program Director, Maritime Defense and Security Research Programs, Naval Postgraduate School. He is an Adjunct Professor at the Naval War College where he teaches, "Joint Analysis for the Warfare Commander"...Kline...pointed out that it might not be in Iran's interest to close the strait since Iran ships its oil through the Strait.

But, if the United States makes it impossible for Iran to sell its oil, then a key factor that would stop Iran from blocking the strait would be removed.

Does Iran have the capability to block the Strait of Hormuz? I also put that question to Captain Kline. Here's how I reported it in the EPJ Daily Alert:

I thought I would ask Kline, who might have a pretty damn good idea,if the Strait could be closed by Iran. His answer was it could. When I asked him how long it would take, he said 3 or 4 days for Iran to position ships and lay mines. He did say that the blockade could eventually be broken, but it would depend upon international co-operation and that it would take "some time". He said that Iran has missiles onshore aimed at the strait that would have to be taken out,and that Iran had other sophisticated equipment in the area including drones that could listen in on ship communications. He said ship mine sweeping can also get "very tricky".

According to AP:

The [Iranian] navy is in the midst of a 10-day drill in international waters near the strategic oil route. The exercises began Saturday and involve submarines, missile drills, torpedoes and drones. The war games cover a 1,250-mile (2,000-kilometer) stretch of sea off the Strait of Hormuz, northern parts of the Indian Ocean and into the Gulf of Aden near the entrance to the Red Sea as a show of strength and could bring Iranian ships into proximity with U.S. Navy vessels in the area.

Bizarrely, the U.S. has warned Iran that it will not tolerate any disruption of naval traffic through the Strait of Hormuz, that's like stealing a bully's wallet and telling him to shut up and deal with it.

It may not have made any strategic sense for Japan to attack Pearl Harbor, but sometimes you push and push and you get a reaction. The U.S. got a reaction out of Japan. It was Pearl Harbor. The legislation that President Obama is about to sign is a spit in the face of Iran, if it is used to shutdown Iran's ability to sell oil. It may get a reaction out of Iran: The blocking of the Strait of Hormuz.

This is a very high stakes game. No one knows how it will play out. Governments are generally run by mad men, and it is mad men that will decide the next move here.

Bernanke Christmas Gift to Obama: Surging Poll Numbers

According to the latest Gallup tracking poll, more Americans approve of the job that President Obama is doing than disapprove for the first time since this summer, reports Politico.

The latest Gallup survey shows that 47 percent of Americans now say they approve of the way that President Obama is handling his job. This is a 5 percent improvement since the Dec. 16-18 Gallup survey and marks the first time the President's numbers have been in positive territory since July.

With economic numbers beginning to trend higher because of Bernanke money printing, more are becoming satisfied with the way the President is "running" the country. BUT, price inflation will not be far behind. Indeed, the price for a barrel of West Texas Intermediate oil is likely only a day or so away from breaking above $100 per barrel.

Will voters have improving Fed manipulated economic data or rising gasoline prices on their mind when they vote in November 2012? Will Obama impose some kind of price controls on the country in the late summer of 2012 to show he is "battling" inflation?

Pools of Oil and Money: An Object Lesson for Barack Obama

The recently released book Backstabbing for Beginners: My Crash Course in International Diplomacy by Michael Soussan is receiving little coverage by mainstream media. Could it be because the book provides an insiders look at the UN run Iraq oil-for-food operation and pulls no punches? The Paul Volcker lead investigation of the scandal found a scapegoat in Benon Sevon, and never went much further, despite indications that many others knew or benefited from the scam, including those close to the Bush Administration, then-UN Secretary General Kofi Annan and Condoleezza Rice.

Volcker, like Colin Powell, has what I call delusional integrity. You can always count on men like them to put on a good show about integrity. They both come across as straight shooting men of integrity, most likely because they are delusional and believe they are men of integrity. Yet, at the end of the day, the real insiders know that the Volcker types and the Powell types will deliver what the insiders want. Powell will deliver a bogus speech about Iraqi WMDs and Volcker will know when to stop his oil-for-food investigation. One of Volcker's top investigators resigned because he felt Volcker was protecting Annan in the oil-for-food investigation.

Soussan suffers no such delusions. It is clear from his book that he is a straight shooter and tells it like it is. He was literally at the center of the scandal and gives us a play-by-play of what went on, like few others could. In short, bureaucratic in-fighting put lives of UN workers at risk for no good reason and created huge opportunities for bribery and theft to the tune of billions of dollars. Saddam skimmed cash everywhere, had UN workers on the payroll and co-opted many countries including France and Russia through bribe after bribe. In this book, you learn the details of how he did it and how he got away with it. And you learn about the other players, across the spectrum, that pocketed skimmed cash.

Soussan does not take the lessons of the oil-for-food scandal beyond the scandal itself , and this is a good thing. But there is a lesson here far larger than just the oil-for-food scandal that the reader can extrapolate from the book. It is about bureaucracy and money. Fredrich Hayek in The Road To Serfdom titled a chapter Why the worst get on top. In the chapter, Hayek's basic conclusion is that the worst get on top because the ruthless will do anything it takes to gain power. A corollary could very well explain why the worst circled the oil-for-food scam, and likely will circle any huge bureaucratically created pool of money. The most evil will do what it takes to get at the money. The oil-for-food scandal, as detailed, is an object lesson in how that happens.

Given that President-elect Obama is about to create a huge new pool of "rescue the economy" bureaucratic money when he takes office, it would not be a bad idea for him to read this book to get a sense for how a bureaucracy can get away from its goals. "The rescue the economy" pool has some characterstics that are different from the oil-for-food scam, but it has the one key ingredient, the creation of a huge pool of bureaucratic of money. The vultures are most certainly already circling the pool.

Soussan is not John Le Carre nor Frederick Forsyth when it comes to weaving a tale, but he doesn't have to be. He has fact not fiction to guide him. His sense of humor, ability to create suspense and paint a picture are all more than passable. His powers of observation are superior. Only a great observer could write these words, for example:

Freedom may be a political concept, but it is first and foremost a feeling. A breath of fresh air. A smile on people's faces. The absence of fear in their eyes. The difference between the north and the south [of Iraq] was palpable.

I visited Germany a year before the wall came down, and spent time in both West Berlin and East Berlin. The difference between the two was striking. The difference between what I saw in East and West Berlin is exactly what Soussan observed in the difference between North and South Iraq and, in his writing, he was able to turn this observation into what I consider a great universal truth about freedom. Freedom is more than just a political concept, it becomes who people are and what happens to their lives

There's a lot of curious things that go on in this world, one of them is why this book is not getting more coverage. If you want a real life play-by-play explanation of how a bureaucracy can get out of control and lead to mass scamming, this book is must reading.

Super-Contango in the Oil Markets

The oil market is currently in super-contango (forward prices are much higher than current prices). February crude oil is trading at $37.12 per barrel, while May crude is trading at $49.26 per barrel. This is an opportunity for instant profit. Buy current oil, sell it in the futures market and lock in the difference (less storages charges) as profit.

Indeed, shipping prices, which collapsed as trade slowed last year, are now rising sharply as oil traders fill oil tankers and moor them off Scotland, according to WSJ . They hold the oil in the tankers and deliver them against the futures contracts they have sold.

However, even these arbitrage activities have not been enough to reverse the contango.

Why aren't oil producers, themselves, also holding oil off the market to sell in future months at higher prices?

Most likely it is that the international demand for cash that has crashed the oil price, has put oil producers in a desperate situation to maintain their own cash flow at pre-crash levels, to support the oil bull market life styles they are accustomed to. Thus, the oil they are extracting, they are selling at current rates, because like General Motors and the real estate industry, they are suffering from cash flow problems.

Once Bernanke's huge money injection works its way into the economy, the contago will disappear by current prices moving higher, and eventually moving above future market prices.

Obama Ditches Oil Company Tax

President-elect Barack Obama is not planning to implement a windfall profit tax on oil companies because prices have dropped below $80 a barrel.

"President-elect Obama announced the policy during the campaign because oil prices were above $80 per barrel," an aide on Obama's transition team said according to Reuters. "They are currently below that now and expected to stay below that."

The big question now is what other taxes will Obama raise to replace the revenue not generated from the windfall tax? Don't think for a minute this is an overall tax cut.

Obama Redistribution Step #1: A Windfall Profits Tax on "Excessive" Oil Profits

From the official Obama-Biden Office of the President-elect web site:

Barack Obama and Joe Biden will enact a windfall profits tax on excessive oil company profits to give American families an immediate $1,000 emergency energy rebate to help families pay rising bills. This relief would be a down payment on the Obama-Biden long-term plan to provide middle-class families with at least $1,000 per year in permanent tax relief.

Ike Forces Shutdown of 19% of U.S. Refining Capacity

At least 13 refineries in Texas including plants operated by Exxon Mobil Corp., Valero Energy Corp. and Royal Dutch Shell Plc shut 3.64 million barrels a day of refining capacity as Ike approached Texas. Exxon and Shell said today they would begin assessing damage of Gulf facilities as soon as weather permitted.

``If these refinery outages go three weeks or more, most of the nation could see $4 gasoline again,'' Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas, said in an telephone interview with Bloomberg. ``If they are back up in a week, it may be a 15- or 20-cent-a-gallon increase.''

-EPJ Newsdesk

On Wads of Cash and An 80% Approval Rating

Mudflats reports on Sarah Palins return to Alaska, and her speech upon landing at the airport:

Palin also made reference to the $1200 energy rebate that’s about to land in the bank account of every Alaskan man, woman and child. This amount is in addition to the $2069 permanent fund dividend check from oil profits in the state that also goes in to the bank account of every man woman and child. As you can imagine, handing out wads of cash to people doesn’t hurt your approval ratings. The Permanent Fund Dividend (pfd) is something Alaskans have gotten every year since 1980, and has ranged from a few hundred dollars to this years biggest check ever. The energy rebate, though, is something new....

She talked about how this type of energy rebate is “unheard of in other states”. That one had to be for the national media, because, of course it’s unheard of in other states… the only reason we’re getting it is because the price of oil is so high, and as the oil companies make more money, so does our permanent fund, and so do we. We all know that. It got applause anyway - it’s cash. She went on to say:

“But we believed that you believed you could spend that money better than government could spend it for you.”

Also a bit strange, because Palin’s original idea was to give Alaskans an energy debit card that would have a certain amount each month and had to be used for energy expenses. Eventually, she was talked out of it, and just decided to stick with cold hard cash… which means many Alaskans are probably going to be getting big screen TVs and freezing their butts off this winter. But that’s another story.

OPEC Cuts Output

OPEC members said the group will cut crude-oil output by 520,000 barrels a day under a plan to roll back production to quotas set in September 2007. The cutbacks will be phased in over the next 40 days.

-EPJ Newsdesk

Major Earthquake in Iran

A major earthquake has hit Iran. The U.S. Geological Service said the quake's magitude was 6.1.

Bandar Abbas is a major Iranian port city with oil installations including a major refinery.

Iran is the world's fourth largest oil exporter.
-EPJ Newsdesk