Three Flashpoints for $220 Oil

by Addison Wiggin & Ian Mathias

  • A run-of-the-mill attack in Iraq… or an alarm bell warning of triple-digit oil?

  • Two more Middle East flash points: How the United States and Iran are already waging a proxy war

  • One year later: Hey Ben, how’s that “sustained economic recovery” working out for you?

  • Judge’s ruling creates “a little bit of a conundrum”… and a new bull market

  • “Enormous ignoramus”: Reader unloads on Alan Simpson… Others weigh in on where new jobs will come from


  With oil sitting comfortably at $73 a barrel this morning, we cast a nervous eye toward the Middle East… where some little-noted developments are setting the stage for a return to triple-digit prices. Maybe very soon.

  On the surface, this looks like a pretty routine Iraq story: An ambush there yesterday killed six members of a Sunni militia known as the “Awakening Councils.”

But the background the media didn’t supply makes this much more interesting — and ominous. See, the Awakening Councils are Sunni Muslims the U.S. government paid off in 2007 so they’d stop shooting at U.S. troops.

This was part of Gen. David Petraeus’ “surge” strategy: He promised the militiamen that in return, they’d get a seat at the table in Iraq’s new government, dominated by Shia Muslims. Problem is, Petraeus never got the Shia to buy into this.

What’s more, Iraq’s new Shia leaders have close ties to Shia-dominated Iran; in fact, several of them lived there in exile during Saddam Hussein’s rule. Our eyes perked up a bit at the location of the attack yesterday — within spitting distance of the border.

We don’t want to jump to conclusions about who’s to blame for this attack. Still, we take note because Iraq is the first of three flashpoints Byron King has identified in what he sees as a “New War” shaping up between Sunnis and Shia in the Middle East.

We might be willing to chalk this up to coincidence, except that…

  It’s looking more and more as if the United States and Iran are waging a proxy war in Yemen. Again, this is something the mainstream media  ignores: The news we get from Yemen is all about al-Qaida sympathizers like the guy who tried to blow up the jet flying into Detroit last Christmas.

But Yemen’s Sunni-led government is also waging war against Shia rebels in the north, who say they’re victims of discrimination. The fighting has displaced 350,000 people in the last six years.

There’s word this morning of a truce, but truces have broken down before. That may be because, according to hawks in both Israel and the United States, Iran gives aid to its fellow Shia in Yemen. Iran “controls bodies that function as a state within a state, in Lebanon, Yemen, the Palestinian Authority, and other places,” according to Israel’s deputy foreign minister Danny Ayalon.

Get the picture? The United States is backing the Sunni government in Yemen, and Iran may be backing the Shia rebels. That’s why it looks like a proxy war. And it just so happens Yemen is the second of those three flash points Byron King is alerting us to. Should it blow up, he sees this Sunni-Shia war sending oil well past the record $147 set in July 2008.

  We’re a bit late on this news, but we see President Obama has just sweetened an arms deal his predecessor cut with Saudi Arabia… throwing in 130 attack helicopters, to bring the total value of the package to $60 billion over 10 years. That’s the biggest U.S. arms sale overseas ever.

The Pentagon makes it pretty plain: Part of the rationale for this deal is to “deter Iran.” Why? Because Sunni-ruled Saudi Arabia is home to restive Shia who happen to live on top of the country’s most productive oil fields.

Thus, the White house seeks “to beef up the militaries of Arab allies as a counterweight to Iran,” explains The Wall Street Journal. “Saudi Arabia, home to the birthplace of Islam, claims leadership of the Sunni world, making it a rival of Iran, which is predominantly Shia.”

And Saudi Arabia is the third and final flash point Byron identifies in the “New War” between Sunnis and Shia. Or rather, a new phase to a very old war that’s been raging 1,300 years.

  In this context, Iran’s nuclear program is something of a sideshow. “Even if the go-ahead to build a nuke never comes from Iran's top cleric” says Byron, “the more immediate danger is a wildfire of Shia-Sunni unrest… starting in Iran's new hotbeds of Shia support… and spreading across the rest of the Sunni-run oil states… with the richest oil fields in the world's richest oil nation as the final battleground.”

Byron’s worst-case scenario: Oil at $220 a barrel, and gasoline close to $8 a gallon.

We realize you can’t tell all the players without a program… much less figure out on your own how to protect your portfolio if the worst case comes about (or even some fragment of the worst case).

That’s why Byron’s put together a raft of maps and data in a new presentation that makes sense of a wickedly complex situation… and then shows you how to guide your finances to a safe harbor. We urge you to check it out here.

  The Kansas City Federal Reserve convenes its annual retreat in Jackson Hole, Wyo., today. At this event one year ago, Fed chief Ben Bernanke proclaimed, “Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery… and prevent a recurrence of the events of the past two years.

“I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress.”

  Right on cue this morning, the Commerce Department issued, well, a progress report — its first revision of second-quarter GDP. It came in at an annualized 1.6%, a far cry from the initial guess of 2.4%. But it beat the Street’s expectations of 1.3%.

  Hence, the Dow shot up 56 points in the first five minutes of trading. Like a climber hanging to a cliff side by the fingernails, the Dow has yet again recovered from the precipice of 10,000.

Now traders turn their nervous eyes to Jackson Hole for Bernanke’s dramatic (yawn) announcement later today. Will our anti-hero boldly order another helicopter drop of quantitative easing? Or must he hold his fire, as the bond vigilantes lurk in the background? Tune in Monday for the thrilling (yawn again, stretch) conclusion.

  Bearing in mind a Bloomberg story this week that said, “Housing led the U.S. out of seven of the last eight recessions,” we take note of the following: One in 10 U.S. homeowners with a mortgage has missed a payment as of June 30, according to the Mortgage Bankers Association.

The number is pretty much unchanged from three months earlier. The trend remains up… after having moved down much of last year.

The percentage of borrowers getting foreclosure notices last quarter was 4.57%, the first drop in four years. A good sign? No, that just reflects what we’ve noted before: Lenders are finally working through their massive backlog of “shadow inventory” that wasn’t on the market till now.

Which brings us to a chart that accompanied the news this week about existing home sales hitting a 10-year low: Inventory spiked to a 10-year high…

It would take over a year to clear all the inventory that’s finally made it to the MLS.

  Don’t look now, but we could be in for a sugar squeeze come 2011. In fact, close to half the nation’s supply may be at risk.

“When you take beets out of the equation, then we start running into shortages,” says Jake Putnam of the Idaho Farm Bureau, whose state ranks No. 2 in sugar beet production. “We'll start running into problems. And I think we'll start to see food prices increase."

That’s because a federal judge ruled a few days ago that farmers can no longer plant genetically modified sugar beet seeds — reason being windblown pollen from the seeds could contaminate crops in nearby fields.

Here’s the problem: Genetically modified seeds now make up 95% of sugar beet planting… and half our sugar supply comes from beets. (The other half comes from cane grown in more tropical climes like Florida.)

"We are in a little bit of a conundrum,” says Duane Grant, chairman of Snake River Sugar Co. “We don't have enough seed to plant a full crop with conventional seeds next year,"

“The price of sugar is a global affair,” according to our resource man Alan Knuckman, “but rulings like this add onto the already prevalent bullish market action.”

Bullish, indeed. Alan’s readers closed out a sugar position for 187% gains just a month ago… and they’re sitting on another position that earlier this week was up 311%. It’s too late to get in on that play, but you can be on board for the next one with a discounted membership to Resource Trader Alert — still available for the next four days.

  Seeing our item yesterday on Alan Simpson’s remark that Social Security is “a milk cow with 310 million tits,” a reader writes: “I would like to tell the enormous ignoramus Alan Simpson a few things:

1. Social Security IS NOT a social welfare program. It is an annuity that I paid for.

2. The government that he was kinda in charge of for oh-so-many years took this money from me at the point of a gun — more than $250,000 in today's money, and I will gladly stop sucking on the Social Security TIT just as soon as I am restored my f'n $250K, plus interest.

3. You know when that is? When I am 95 years old!

4. I think he (Mr. Simpson) should be hung by the b**** until dead.

“Kindly withhold my name as I do not wish to have to defend my First Amendment rights with the paltry Social Security income that I receive.”

  In response to our question yesterday, “What's going to replace the credit-based financial industry and housing market with all the jobs, etc., dependent with those two industries?” a reader writes, “Nothing.

“However, four areas that have growth potential in my estimation are: agriculture; medical; in particular, stem cell or related regenerate companies; and, of course, energy of all types.”

  “Raw materials, land, minerals and revalued labor,” another responds elliptically. “We will be taking steps backward to grow the future economy from an old seed. It’s back to basics.”

  Yet another reader weighs in…

1. “Alternative energy. In all its forms, solar, wind, ocean, geothermal, bio, fuel cell, battery tech, etc. We are not even scratching the surface, and what is needed is an alt-energy Marshall Plan. That's where the stimulus should have gone.

2. Infrastructure. Nearly all roads, bridges, tunnels and especially water mains and pipes, etc., are 50-80 years old. Much ignored, but this is a tidal wave coming down the pike!

3. Environmental technologies. True solutions to carbon emissions, not the stupid sequestering, but recycle/reuse. Clean water, desalination on a massive scale to solve the coming water shortages, truly beneficial pesticides and fertilizers.

4. Health care. Innovative administrative solutions, medical biotechnologies, better, low-cost drugs and alternative medicine.

“I can think of more, but these are the biggies which would provide a range of both manual, skilled labor and cerebral employment opportunities.”

  “The ideal industry,” our final reader suggests, “is one that:

1. We are very good at winning and have experience with.

2. We are capitalized in the equipment required to win.

3. Our industry is geared up to support it.

4. We know the conditions for and have in-place assets to monitor the playing field.

5. Will require the services of the currently unemployed — great savings there.

“The obvious answer is war. We do it very well, especially where there are no significant rules of engagement. So as a mercenary force, we simply work for hire. Our payment can be cash or resources (that we can develop or market for cash). Can you think of another American industry so poised for success and profit? If this puts you off, then tell me what was so good for us with the last few 'wars' we have entered into?”

The 5: What’s with all the numbered lists in today’s mail? Anyway, you’re onto something.

We see news this morning that the promises about winding down the war in Afghanistan starting next year and pulling out of Iraq completely by next year are both falling by the wayside. And on top of that, we have a brewing proxy war between the United States and Iran, as we detailed above. War is undoubtedly one of the major stories that will shape our economic future in the next decade. You’d best prepare accordingly. Here’s a good way to begin.


Dave Gonigam

The 5 Min. Forecast

P.S. “It was just a great idea to print Andrew Lahde's farewell note!” one more reader says. ”He was very lucky that some residual sane part of his brain bootstrapped him out of his grey life, and we are lucky that he choose to let us know what moved him to do it — worth pondering about by all his colleagues, and by those of us who believe that decent governance may still be within reach.”

If you missed it, it’s at the conclusion of yesterday’s edition.



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