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  • Obama is shifting the entire focus off the Middle East and onto the Pacific. It is a sea change policy. The shift is also being managed in a way that the US is putting itself in a position to HELP China who has been getting into many many messes because they do not know how to interact in a global setting as their markets expand. This will be accomplished mostly cooperatively, with the new base of operations being Australia for the US.

    The US will stay out of Iraq, exit Afghanistan. Future involvement, if any, will look more like Libya. Any involvement in Syria will be conducted through the Arab League. Iran involvement will be focused on isolation, diplomacy, but not anything close to military. Iran is dependent on oil markets for cash, it is also dependent on the developed world for its finished oil products. They do not have the capacity to make their own diesel, gas, fuel oil, or jet fuel in quantities sufficient for the economy. Their cash hoards are running out.

    And then we get to the beauty part. The Obama administration has put together a singular focus on getting oil prices lower. The sweet spot would be about $70 but it could actually go to $60. This has been a multi-faceted project that is part domestic economic policy and part foreign policy. On the foreign side they call it ‘draining the swamp.’ One can see that the Middle East flairs every time the price of oil spikes. The cash fuels the unrest. By keeping prices lower, the swamp is drained. The excess money that fuels unrest goes away, and it keeps countries like Iran subdued. Domestically the benefits go without saying.

    All the groundwork is now laid.

    1) The speculative nature of the oil markets have been heavily curtailed. Regulations are being enforced, and the ability to hold derivative paper on oil contracts without delivery heavily scrutinized. This has been huge and has likely prevented some nasty spikes in 2011. Europe and the United States has been coordinating on this.

    2) Oil market transport has been getting upgraded, and routes reorganized to maintain a better global price balance. If you look at the charts you will see oil from the north sea getting delivered into the far east when needed. Never happened before. The routes were fixed, and inflexible. This created regional imbalances which would cause localized price spikes. But because of speculators the regional problems could get priced into the general market. These routes and the pacific focus is part of the refocus of the US. This also prevents price spikes.

    3) Regulatory effort at improving fuel efficiency has been seriously undertaken for the first time in the United States over the 2009 to 2011 period. The result is a declining oil demand during economic expansion for the first time ever. Gasoline demand is down something like 2 million gallons per day. Overall oil use is falling. Miles driven is down, fuel efficiency is up, and notably trucks had to become more fuel efficient as did agricultural equipment. These changes have been huge. Rail has also been electrifying, and public transport vastly expanded across the country. The result is that the US now has a surplus in finished oil products. Finished oil products will become the number one exports int he United States in 2012, and these products will be directed to areas of regional shortage.

    4) Oil production has been expanded in the US, and in Britain. The north sea and US domestic production has increased by 10% in 2011 and may increase another 10% in 2012.

    5) Iraqi oil production is ready to ramp up big time in 2012 and up to 1 million barrels of oil may be added to the market. Libya under an alternate regime will be able to have oil production increased from historic levels as well.

    All these pieces fall into place and you will have a likely gradual decline in oil price to something like $70 per barrel, a declining quantity of revenue running into the middle east. They will likely respond by cutting production to sustain price, but the new supply on the West side can hold the effects off for up to three years. Lower production and lower price in the middle east is the tacit goal.

    Real demand in the United States is positioned to continue to fall given regulatory rules in place through 2020. Weakness in the EU also provides a support to lower oil demand. So US production is higher, demand lower, something which is not fully appreciated in the media at the present time.

    The proof of this plan has been the closing of major refineries in the United States. These are closing because the oil companies can see that demand is in a secular, not cyclic, decline. Refineries close and size themselves to forecast demand that runs on 20 year time frames. I don’t believe the US will ever see 20 million barrel a day oil use and is likely headed toward 15 million barrels a day.

    So, oil will fall in 2012 to $70, possibly as low as $45 to $55 per barrel.

    The ramifications of this will be an accelerating domestic economy, lower revenues to the middle east and less support of unrest there, no US involvement in the Middle East militarily and refocus by the US away from the Middle East and toward the Pacific Rim in cooperation with China.

  • US is putting itself in a position to HELP China who has been getting into many many messes because they do not know how to interact in a global setting

    Shanghai Cooperative for example I suppose — The US was not invited.

    Otherwise a remarkably obtuse comment.

  • Cut oil prices by taking Iranian Oil off the market. Ye,s,reducing supply always cuts prices, right?

    Have you actually looked at the oil demand projections, say on the Oil Drum? They do not support your assertions, Iraqi oil or not.

    As for your comments on oil transport and sea routes they are complete bullshit. The only change is the upgrade of the Panama Canal, which benefits Venezuela in getting its crude to Chain and India.

  • Namely, the other crucial component to “draining the swamp” and getting oil prices lower is to have a strong dollar buying those oil barrels. This is the fulcrum for the leverage you need to pull these prices down (and keep them down), your currency has to be worth something to the resource producers. Clinton was able to pull this trick off in the 90s by leveraging the strong American dollar against oil in the ME, that strong dollar has been taken out to the woodshed over the past 12 years.

    But if the FED and the Euro Centrals are all pumping out liquidity as fast as they can, with a dollar worth less than half what it was in the 90s, can we reasonably expect the oil producers to accept less dollars for more oil? Especially if we cut our military, what is the threat if they want say $100 or $150 or $200 per barrel? No matter what, as long as we have zombie banks we are keeping on life support by gushing out one QE after another, the price of oil will continue to inflate or stay normal simply because we buy that oil in dollars (and dollars are worth less and less.) This situation might be fine if we were willing to let inflation raise our wages in step to consume that oil, but that sure as hell hasn’t happened in the USA.

    I’m not saying what you propose isn’t possible, I’m trying to give the counter argument to why it might not be probable. The conditions of the past that we are using to make assumptions of today are no longer in place, like assuming you can drive from the Keys to Florida in the same amount of time the day after a hurricane hit. The condition of those bridges the day after /= the condition of the bridges the day before 😉

  • And great description. Fly in the ointment indeed. I agree that is a potential weakness. I make the following observations in that regard.

    Dollar is weak from A) confidence and B) pumping out liquidity. The dollar is strong or weak only in relation to everything else.

    Remember the US had a ‘QE2’ policy that extended from 2003 to 2010, it was called the Af-Pak and Iraqi wars, which have been winding down. That was a multi-trillion dollar stimulus package with dollars air dropped directly into the middle east. I believe that was some stimulus that weakened the US dollar big time. That package will be largely over. Libya was successful and oil operations will likely double there now.

    The formal QE2 is largely over, and the stimulus period appears to have taken hold. So that kind stimulus will be largely over.

    The US is strong relative to Europe, who continues to weaken. US dollar is strong relative to Japan who is recovering from the earthquake. China doesn’t matter because they run a peg to the US.

    Dollar exiting Middle East will enhance stability further. Why do you think Iran is saber rattling NOW. I believe they can see the direction of oil prices, and are trying to jawbone prices higher, and push the direction higher.

    Here is the other elephant in the living room largely neglected:

    The war on terror is over. It will fade from US and European policy. You can say it was won, or whatever. But US policy in the Middle East will cease to be about Terror. This is because:

    Osama bin Laden was killed along with 23 of the 25 Al Qaeda leaders. Functionally, Al Qaeda is gone.

    The obvious ineffectiveness of US counterinsurgency. The Obama appointees have largely proven that counterinsurgency does not work. The Libya approach proved US direct intervention makes things worse, and involvement from a distance can be successful at a fraction of the cost. I mean Sadam Hussein was toppled at a cost of $1 trillion while Qadafi was topped at a cost under $1 billion. Which policy was better? Honestly? The Iraq exit will be largely successful. I believe you will see tremendous capital investment and growth in Iraq over the next two years, it will coincide with some incredibly large oil discoveries on the north side of the country.

    The military is utterly turning on the war on terror. Its stunning costs, degradation of capabilities, and absolutely no benefit relative to the costs. It is over at the Pentagon.

    The Arab Spring I believe has changed everything in the Middle East. Nonviolent protest. An entire generation of Jihadi views will be thrown aside. Even Hamas is reforming rapidly with the new generation of leaders. I mean, really, who wants to strap a bomb to themselves? And those that do are all blown up now. The whole model has been shown to be a failure on the Arab side as well.

    This will never be stated in any public forum by anyone in public office. But as a back room policy the war on terror is over, it was George Bush, Jr.’s wet dream and his people are gone.

    The pacific will be Washington’s new priority.

    All of these factors portend a rising dollar and lower oil price for that factor as well. If you look at recent trends the US dollar has rocketed 15% higher in the last six months. Back to levels in 2008, and I see them going to levels in 2005, and then pre-Bush 2000.

    Ultimately Obama will will take the strong dollar policy of Clinton, and the dollar could possibly get back to where it was before Bush came in with the Cheney weak dollar policy.

    I see Europe recovering on the back of the US, and we are in an awfully good position right now RELATIVE TO EVERYONE ELSE. Everything is relative in currency.

    But this would be the weak link.

  • That the Dow would hold above 12000, that unemployment would be going down and it is at 8.5% right now. Here in the Midwest I am in a state at 5.5%, which is basically full employment. In fact every state around us is under 6%. I said the US would exit Iraq, that Obama would follow through on that. That the bailout of the car industry would be successful.

    I think I am closer than DOW 3000, or folks living in bunkers on canned food. We don’t have war without end in Iraq. And we don’t have 15% unemployment. Those were the predictions I remember from two years ago here.

  • However, comparing ue in Carter days to now using the current stats, calculated much differently, is comparing apples to oranges is it not?
    So it is incorrect to say that real unemployment is less now than then. If measured in the same way as back then, it would be much higher than what the government now reports it to be.

  • real compared to what, hell Calif. rate would be around 7% if we didn’t count all that have dropped UI like me. The guys dreamin if he think the govt. gives real info in a timely matter

  • They are both “real” numbers but they are calculated in different ways. Thus, to say that by current “real” numbers that ue is not as bad now as in the Carter years as measured then is inaccurate. They are not the same “real” numbers. Unfortunately, most peopled do not recognize the game being played with the gov constantly tweaking the bad numbers so they are not so bad and the good so that they look better.

  • Employment-population ratio is relevant here: http://data.bls.gov/timeseries/LNS12300000

    Basically, its back to 1983 levels. Now, I’d guess this statistics could decrease if there was a large population boom or a large number of retirees. We’re beginning to see the latter as the Boomers retire, but that doesn’t explain the sudden “drop and hover” behavior from 2008 – present.

    As you state, the unemployment rate is improving because many people are giving up looking for work.

    Edit: Also, note that you can adjust the years displayed/reported at the link above. If you go all the way to 1948, you’ll see that this is the biggest drop in the employment-population ratio since… 1948. I’d guess you’d need to go to the Great Depression to find worse. I also wonder if we’re going to continue hovering or if there’s going to be more downward movement before we hit bottom. It’s a political choice at this moment, with Obama/Dems = hover and Republicans = plummet.

  • as long as it remains the currency in which oil is traded.

    Russia, China and Iran are working toward changing that. Others appear ready to follow suit.

    And that is probably the biggest reason Iran is on the shit list.

    I did inhale.

  • China is a consumer nation so really has no ability to determine the trade currency of oil. Producers have that power. Russia has no currency with which it can substitute dollars, and the attempt to use Euros is off the table so long as the Eruo is in such trouble. Also Europe is also a consumer nation, so from that standpoint also not a good candidate. Only Britain is a producer and they are not in the Euro.

    Iran is an OPEC member who must abide by the OPEC rules which mandates dollar denomination. Iran is also not a large enough producer to effect its change. Iran is also dependent on the West for finished oil products, so is also a consumer nation and these products must be transacted in dollars.

    The basket of currency idea would create really unstable pricing, which cannot be controlled by any central authority and would be wide open to speculation by manipulators.

    Someone needs to outline the scenario which would create a viable substitute reserve.

    So your statement that the dollar will be strong so long as it is the currency in which oil trades is true, and there is no viable change to that. What everyone needs to understand is that we never really went off the ‘gold’ standard. Oil was substituted for gold in the 1973 US-OPEC treaty. Oil backs the dollar.

    The other really nice thing about that is that is that the US is still the third largest oil producer in the world, so a good portion of the dollar denominated oil is of our own making. The US is a top producer and top consumer nation. The fact the US is now exporting oil products (it will be the largest export in the US in 2012) makes the US a major global producer nation again (first time since 1948) in a product that must be dollar denominated. This brings dollars back into the US which will make the dollar stronger.

    This too argues for a declining price in oil in 2012.

  • but Iran is not the only producing nation discontent with the arrangement. Among others trying to get away from dollar hegemony are Venezuela, Ecuador (really fucked as they use the dollar as their national currency), and Brazil, a potentially large producer if its off-shore exploits prove successful.

    Colombia seems to like the US somewhat, as does Mexico, but Mexico is up for grabs in the upcoming election, and could change course on a dime.

    The US is a huge consumer of crude, roughly 25% of the world’s supply, with about 40% and change of that coming from imports, (down from 60% at one point). The good thing is that we have lots of waste to cut but the public will not like having restraints applied to wasteful habits.

    PS. Russia and China agreed sometime last week to bypass the dollar in trade between the two nations. China has been floating similar arrangements with Venezuela and Brazil.

    And of course, China does business with Iran, which has expressed interest in bypassing the dollar, OPEC be damned.

    China also has a foot in Iraq, which is ripe for change should someone like Al-Sadr take over.

    We’ve still got a hold on most of the world, but things can change much faster than most realize.

    These people we call trading partners are not our friends. They deal with us out of fear (and loathe us all the while). One sign of weakness and they’ll pile up to kick us while we’re down.

    I did inhale.

  • Some good points in there and you could may well be correct. A couple small nit-piks though:

    All currencies do float relative to each others, but really every other currency (worth anything) is pegged to the dollar since it is the world’s reserve currency. The reason the dollar is the world’s reserve currency is because it is pegged to oil (we will not let it be traded in anything else, ask Saddam Hussain about this little fetish of ours.) So really, our dollar is pegged to the price of oil and our military muscle keeps it so (an army which exists due to debt measured in dollars.) If you let oil be sold in anything other than dollars, the entire system goes haywire in no time.

    Iran wants the bomb, but are they wanting to use it? Would they really try to put a mushroom cloud over Washington, DC or NYC? No way, they are way too smart (and moderate) for such foolishness. They want a bomb so they can be safe from being invaded by us (they definitely noticed what happened to Iraq.) Once they have the bomb, they are reasonably safe from invasion by US forces, and then they sell oil in whatever currency they prefer. Not only that, but once there is a 2nd market outlet for oil, why shouldn’t Iraq, Afghanistan, Libya, Syria, or even Russia not choose to use it? Heck, they could start their own “OPECs” to use as currency. What happens to the dollar and US hegemony in such a scenario? No more credit line from China, no way to fund our massive military, no way to pay off our debt. Not good for Uncle Sam, not good at all.

    The other part is IMHO the QEs are far from over. They shift into a new form every two years or so (TARP -> QE -> “Euro Fund” -> ???), but the liquidity deluge continues unabated. If it stopped, all the major financials would collapse. The TBTF banks are insolvent, they will remain insolvent until they fail, even if they could be made solvent somehow they’d just run the tab up again and stick their hands out once they were insolvent again. It’s moral hazard in gigantic light-up neon signs, brighter than Vegas on a hot Sat night.

    To make a small leap of faith, I’d even say the global financial elites need an invasion of Iran to keep the ponzi machine cranking another year or two (while they keep extracting wealth from every nook and cranny with any left.)

  • But China is pegged to the dollar. So no impact on the dollar. I can’t figure that one out. China is the largest investor in the dollar. Any thoughts? They should be interested in maintaining their peg. You are obviously tracking this closer than I am.

  • Gives me pause but these are longer term trends. First, the oil denomination in oil is by a longstanding treaty. Dollar is pegged to oil in exchange for the US keeping sea lanes open. We offer military protection. Been in place since 1973. This is what the Us does for the world. China is a mystery. They don’t invest because of oil but to keep the trade relationship. That is their dependency. That won’t change. Brazil would never cross the US ultimately. A lot here I have to think about, but I am talking about 2012 not 2015.

  • They want the bomb for the same reason India, Korea and Pakistan did. The US only negotiates with nuclear powers. Iran would be our new best friend with the bomb.

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