[Rhodes22-list] Reply to Bob, Brad, Wally (political, terrorism, etc.)

[Brad Haslett]

Wally,

I'm a bit short on time for a full response tonight.  The Long War will have
many fronts and many battles.  There is no single, simple solution.  Here is
something interesting I ran across tonight about Iran.  What is happening
there, the failure of socialism, is similar to what happened in Saudi
Arabia.  When there wasn't enough oil revenue to put "a chicken in every
pot" the Saudi's gave them religion instead.  This bears watching.

Brad

----------------------

*Mullahs Gone Wild*
John Mauldin, Millennium Wave Advisors 07.05.07, 12:44 PM ET

I want to briefly look at a development in the oil markets, which I find
intriguing. Dr. Woody Brock, in a recent paper on oil prices, wrote a rather
interesting sentence, to wit, that Iran would not have net oil to export in
2014.

I found that rather remarkable. Woody is very serious and sober-minded even
for an economist, not given to rash analysis, but this was certainly a new
idea to me. I knew they were importing most of their gasoline, as they do
not have a great deal of refining capacity. As it turns out, there is much
more to the story.

I have said for years that I expect Iran to be the new friend of the U.S.
sometime next decade, as the regime is not popular and the country is
growing younger. (Think China, once an implacable enemy.) I thought that the
impetus would be the lack of freedom and knowledge of how the world is
better off coming from the Internet, but it turns out that it may be a
desire for more freedom combined with economic problems, which help bring
about regime change, much as in Russia last century.

How could a country with the third (or second, depending on which source you
quote) largest oil reserves in the world not be churning out ever more black
gold? The answer, as it almost always is for such problems, turns out to be
governmental and not economic in nature. Let's start out with a few facts.

<http://www.newsletters.forbes.com/servlet/ControllerServlet?Action=DisplayPage&Locale=en_US&id=ProductDetailsPage&SiteID=es_764&productID=10292500&pgm=205400>

Oil provides more than 70% of the revenues of the government of Iran. The
rise in oil prices has been a bonanza for the regime, allowing them to
subsidize all sorts of welfare programs at home and mischief abroad. And one
of the chief subsidies is gasoline prices.

Gasoline costs about $.34 cents a gallon in Iran, or 9 cents a liter. You
can fill up your Honda Civic for $4.49. In the U.S. it costs almost $40. In
neighboring Turkey it costs almost $95. Iran is spending 38% of its national
budget (almost 15% of gross domestic product) on gasoline subsidies!

And this situation is likely to get worse. Let's look at a rather remarkable
peer-reviewed study done for the National Academy of Sciences by Roger Stern
of Johns Hopkins University
<http://www.pnas.org/cgi/reprint/0603903104v1>late last year. Stern's
analysis is somewhat political, in that he is
critical of current U.S. Iranian policy, but this is just one of several
studies that show the same thing:

"A more probable scenario is that, absent some change in Irani policy ...
[we will see] exports declining to zero by 2014 to 2015. Energy subsidies,
hostility to foreign investment and inefficiencies of its state-planned
economy underlie Iran's problem, which has no relation to 'peak oil.' "

Iran earns about $50 billion a year in oil exports. The decline is estimated
at 10% to 12% annually. In less than five years, exports could be halved and
then disappear by 2015, predicted Stern.

<http://www.newsletters.forbes.com/servlet/ControllerServlet?Action=DisplayPage&Locale=en_US&id=ProductDetailsPage&SiteID=es_764&productID=36044900&pgm=372600>

Of course, you can go to a dozen Web sites, mostly Iranian, which
demonstrate that Iranian production will be double (or pick a number) by
that time. The problem is, they all assume rather large sums of investment
in the Iranian oil fields. Two projects which are "counted on" to be
producing oil in 2008 have yet to be funded or started, as negotiations have
broken down. Iran seems incapable of getting a deal actually done with a
willing partner.

Part of this is caused by the Iranian constitution, which does not allow for
foreign ownership of oil reserves or fields. Instead, they try to negotiate
to pay for investing in oil production. Called a buyback, any investment in
an oil field is turned into sovereign Iranian government debt with a return
of 15% to 17%. This is a very unpopular program at home, coming under much
criticism from local government officials. Any deal that gets close to
getting done comes under attack from lawmakers as being too good for foreign
investors, so nothing is getting done.

Why not just fund the development themselves? They could, but the mullahs
have elected to spend the money now rather than make investments that will
not produce revenues for four to six years or more. They are investing
around half the money needed just to maintain production, around $3 billion
a year.

Let's look at a quote from Mohammed Hadi Nejad-Hosseinian, Iran's deputy oil
minister for international affairs: "If the government does not control the
consumption of oil products in Iran ... and at the same time, if the
projects for increasing the capacity of the oil and protection of the oil
wells will not happen, within 10 years, there will not be any oil for
export." That's from their guy, not a Western academic.

<http://www.newsletters.forbes.com/servlet/ControllerServlet?Action=DisplayPage&Locale=en_US&id=ProductDetailsPage&SiteID=es_764&productID=10290300&pgm=202500>

*When An Enemy Is Self-Destructing, Stand Aside
*Iran produced over 6 billion barrels of oil before the revolution in 1979.
They now produce around 4 billion barrels a year. They are currently
producing about 5% below their quota, which shows they are at their limits
under current capacity. And production at their old fields is waning. The
world recovery rate is about 35% from oil fields.

Iran's is an abnormally low 24% to 27%. Normally, you pump natural gas back
into an aging field (called reinjection) in order to get higher yields. Iran
has enormous reserves of natural gas. Seems like there should be a solution.


However, if the National Iranian Oil Company (NOIC) sells it natural gas
outside of Iran, it turns a profit. If it sells it in the country, then it
can only get the lower, dramatically subsidized price. Guess which it
chooses. Even so, internal natural gas demand is growing by 9% a year.

Not surprisingly, at 34 cents a gallon, gasoline demand is rising 10% a
year. This week, the government moved to ration supplies to about 22 gallons
a month, which does not go far in the large cars preferred by younger
Iranians. There have been riots, with people chanting "Death to
Ahmadinejad." They take their right to plenty of cheap gas seriously.

There is also widespread smuggling. Ten barrels of gasoline (easily hauled
in a pickup) taken into Turkey yields about $3,000 in profit in a country
with about that much GDP per person. Let's end with this section from Stern:


"Our survey suggests that Iran's petroleum sector is unlikely to attract
investment sufficient to maintain oil exports. Maintaining exports would
require foreign investment to increase when it appears to be declining.
Other factors contributing to export decline are also intensifying. Demand
growth for subsidized petroleum compounds from an ever-larger base. Growth
rates for gasoline (11% to 12%), gas (9%) and electric power (7% to 8%) are
especially problematic. Oil recovery rates have declined, and, with no
remedy in sight for the gas reinjection shortage, this decline may
accelerate.

"Depletion rates have increased, and, if investment does not increase,
depletion will accelerate. If the regime actually proceeds with LNG exports,
oil export decline will accelerate for lack of reinjection gas. In summary,
the regime has been incapable of maximizing profit, minimizing cost or
constraining explosive demand for subsidized petroleum products. These
failures have very substantial economic consequences.

"Despite mismanagement, the Islamic Republic's real oil revenues are nearly
their highest ever as rising price compensates for stagnant energy
production and declining oil exports. Despite high price, however,
population growth has resulted in a 44% decline of real oil revenue per
capita since the 1980 price peak. Moreover, virtually all revenue growth has
been applied to pet projects, loss-making industries, etc.

If price were to decline, political power sustained by the quadrupling of
government spending since 1999 may not be sustainable. Yet we found no
evidence that Iran plans fiscal retrenchment or any scheme to sustain oil
investment.

"Rather, the government promises 'to put oil revenues on every table,' as if
monopoly rents were not already the entree. Backing this promise is a
welfare state built on the Soviet model widely understood as a formula for
long-run economic suicide.

This includes the five-year plans, misallocation of resources, loss-making
state enterprises, subsidized consumption, corruption and oil export
dependence that doomed the Soviet experiment. Therefore, the regime's
ability to contend with the export decline we project seems limited."

Couldn't happen to a nicer bunch of mullahs. If gasoline subsidies are 40%
of the national budget now, what will they be in seven years at a growth of
10% a year? Can rationing work? No, but it can slow the economy.

Stern concludes that Iran may need nuclear power as their energy supply is
dwindling. I find this conclusion rather preposterous, since if they wanted
more energy, all they would have to do is allow foreign investment or invest
more of their own money in their own fields. If the developed world will
simply apply firm sanctions, Iran will have to reconsider its nuclear
program, as their ability to finance mischief will erode as the mullahs
divert their resources to domestic needs in order to maintain their
dwindling popularity.

The cost of their current policies cannot be lost on the youth and educated
people of the country. There is almost 14% unemployment among college
graduates. Iran looks to me like Russia did in 1988. They were in the
process of self-destruction, although few recognized it at the time. Iran is
a matter of time.

*John Mauldin is president of investment advisory firm Millennium Wave
Advisors, LLC. He may be reached by e-mail: John at FrontLineThoughts.com.*

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On 7/7/07, TN Rhodey <tnrhodey at gmail.com> wrote:
>
> Brad,
>
> Nope....I am not stuck on anything I think you lost track of the thread. .
> I
> asked what conclusions could be drawn from Ed's post....I posted my
> conclusions and asked Ed for his. The article made no mention of Iraq and
> the thread was not about an Iraq solution. The whole point of the article
> was Afghanistan. I was surprised Ed posted because it seemed to support my
> position. I think his intent was to show the terrorists are still strong.
> I
> totally agree as our tactics have been a disaster. I realize you and Ed
> still think this war was the right thing to do. I have felt it was the
> wrong
> thing from the start. I guess if anything I am just as much stuck on being
> right as you are stuck on being wrong.
>
> Now if you are asking me how to exit Iraq......well cleaning up a (our)
> mess
> is not easy but we need to make some hard decisions. We already set up
> elections.....how about having their leaders (or a public vote) vote to
> decide if they want us to stay and draw up some conditions and/or plan. If
> we are agreeable we stay....if not we leave. I realize help has been
> requested but a public vote from the Sunnis, Shias, and Kurds is
> needed.Wemake it clear that any single attack on what ever force we
> leave behind
> results in immediate exit and cut off all aid. The first attack should
> take
> only a couple of hours and then we pull out. We can blame the whole thing
> on
> Iraq. Mission accomplished.
>
> We then keep a force handy in Saudi, Kuwait, or Turkey (will anyone have
> us?) standing ready to address Iran. Before we do anything stupid like
> attack Iran we need to exhaust every diplomatic means possible. It
> surprises
> me how little time our key leaders actually spend seeking a diplomatic
> solution. You would think Rice would be working around the clock trying to
> use diplomacy.
>
> I know my plan is full of holes but we got to do something. More of the
> same
> isn't going to cut it.
>
> Wally
>
>
>
>
> On 7/7/07, Brad Haslett <flybrad at gmail.com> wrote:
> >
> > Wally,
> >
> > You're right, it isn't rocket science.  Iran is the real enemy and isn't
> > going away.  Iran is sandwiched between Iraq and Afghanastan  If we pull
> > out
> > of Iraq now (despite our recent gains) Iran will fill the
> vacuum.  You're
> > stuck on "who shot John?"  It doesn't matter if Bush was right to go
> into
> > Iraq, that is where we are now.  We have to ask ourselves, what will
> > happen
> > if we leave prematurely?  I could never figure out in business school
> why
> > the concept of "sunk costs" was so difficult for some students to grasp.
> > This is no different.  Get your emotions and politics out of the
> reasoning
> > process and look at the current situation for what it is, not what could
> > have been or what you would have liked it to have been.  If the election
> > were today and Billary or that Irish guy O'bama took office tomorrow,
> > they'd
> > probably decide to stick around the Middle East a bit longer after the
> > first
> > security briefing, given the alternatives.
> >
> > Solve the world's problems for awhile. This morning, I've got to train
> an
> > over 60 S/O on international flight operations who just left the MD-11
> as
> > a
> > Captain flying all over the world.  This should be fun!
> >
> > Brad
> >
> > On 7/7/07, TN Rhodey <tnrhodey at gmail.com> wrote:
> > >
> > > You mention the last attack killed over 3,000. Please note that none
> of
> > > the
> > > attackers were from Iraq. Your post makes very little sense to me. It
> is
> > > really quite simple. The Taliban supported Bin laden and allowed him
> to
> > > hide
> > > out in Afghanastan. Bin Laden and other Saudis attacked us. We were
> > right
> > > to
> > > attack Afghanastan and go after Bin laden. Iraq was contained and not
> > > posing
> > > a threat to anyone other than themselves. Alas our Commander in Chief
> > was
> > > dead set on going to war in Iraq so we lost focus in Afghanastan and
> > > attack
> > > Iraq. As your post pointed out the terrorists are now taking advantage
> > of
> > > this and are trying to re-establish the Taliban.  This isn't rocket
> > > science.
> > >
> > > Wally
> > >
> > >
> > >
> > > On 7/7/07, Tootle <ekroposki at charter.net> wrote:
> > > >
> > > >
> > > > Guys:
> > > >
> > > > Mike Abdullah said, "The problems today are caused not by true Islam
> > but
> > > > by
> > > > the wacko Saudi Wahabi sect/cult of death."
> > > >
> > > > What goes for education today in Pakistan and that entire area is
> > > > indoctrination into that cult controlled by 'Mullahs'.  They have
> and
> > > are
> > > > continuing to create zombies that they send out to kill infidels
> > > > (westerners).
> > > >
> > > > In support of Bob's and Wally's position that Bush screwed up, is
> the
> > > fact
> > > > that the general population's education level is estimated at less
> > than
> > > > our
> > > > 4th grade level.  This yields large numbers who have difficulty with
> > > > higher
> > > > level reasoning, problem analysis, and recognizing the best
> solution.
> > > (MBA
> > > > type skills)
> > > >
> > > > What is interesting in this problem of lack of civilized reasoning
> > > extends
> > > > to those with what westerners call higher education.  This was
> > > illustrated
> > > > recently with medical doctors carrying out car bombings in England.
> > > >
> > > > It should be noted that you both fall back on the ability of U. S.
> > > marines
> > > > or military.  However, where are all such marines or military
> supposed
> > > to
> > > > come from?  Do you think that the influx of immigrants will be of
> the
> > > same
> > > > caliber and mind set as you know?  A few yes, but I question that
> the
> > > > number
> > > > needed is available.  While in the mountains in that part of the
> world
> > > > some
> > > > over 50 still participate in military activity, how many of you are
> > able
> > > > to
> > > > do so.
> > > >
> > > > The argument was put forth that we will be attacked again, and that
> > > > outrage
> > > > will conquer our attackers.  I think that Bush's unpopular approach
> of
> > > > going
> > > > after potential attackers now is a better way.  First, out military
> > gets
> > > a
> > > > real feel for the adversary today.  Second, we have a military with
> > > > current
> > > > skills.  Third, there is the legitimate possibility that such action
> > > might
> > > > prevent the upcoming attack that you would allow.
> > > >
> > > > The Iraq war was necessary because Saddam bin Hussein at-Takriti
> paid
> > > > suicide bombers.  While at the time they were directed toward
> Israel,
> > > > there
> > > > was a potential they could be sent elsewhere.   Saddam used poison
> > > gases.
> > > > What was going to stop him from supplying suicide bombers with such
> > > > weapons?
> > > >
> > > > We are using the current war to learn, train and keep the wolves at
> > bay.
> > > > Peacenik and appeasement arguments fail to appreciate the
> islamofasist
> > > and
> > > > their 'cult of death'.  The last attack killed over 3,000.  How many
> > of
> > > > your
> > > > neighbors are you willing to allow to be killed in the next attack?
> > > >
> > > > Ed K
> > > > Greenville, SC, USA
> > > >
> > > >
> > > >
> > > >
> > > >
> > > > --
> > > > View this message in context:
> > > >
> > >
> >
> http://www.nabble.com/Reply-to-Bob%2C-Brad%2C-Wally-%28political%2C-terrorism%2C-etc.%29-tf4040147.html#a11477851
> > > > Sent from the Rhodes 22 mailing list archive at Nabble.com.
> > > >
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