Strategic Poppycock

Addison Wiggin – July 6, 2011

  • Like the proverbial dog that catches the car, Somali pirates nip at an oil tanker
  • Little-known facts about the release of the Strategic Petroleum Reserve — like how much Big Oil paid for those barrels
  • Eric Sprott on how gold could go “supernova”
  • World’s second-most competitive economy aims to teach Mandarin in every classroom
  • “Do not count on restraint”: Military insider takes on “military exceptionalism”… a few readers noodle the irony of “Beck sycophants”… and more…

   The Somali pirates are nothing if not ambitious.

Today, they went after an oil tanker off the coast of Yemen, firing a rocket-propelled grenade.

The Brillante Virtuoso, in better times…

But instead of intimidating the crew into surrendering, the RPG set off a fire. So the pirates skedaddled.

The crew was unhurt. The fire is out and the tanker has been towed to port in Aden. The million-barrel cargo, which was on its way from Ukraine to China, will arrive a few days late.

Heh… It was our own Byron King who pointed out that the passage between Yemen and Somalia is one of the world’s “chokepoints” for international shipping. It’s not for nothing that it’s called the “Gate of Tears.”

If you haven’t seen Byron’s full explanation of this region’s significance, click on the map above.

   Little doubt the price of oil would have shot past $100 a barrel this morning if the attack had been successful. But as it is, it still edged past $97 early this morning.

Thus has the market wiped out any gains from the release of developed nations’ strategic reserves.

“Then again,” comments Byron King, “the oil price control effort is many months in the making. I’ve heard from several contacts in Europe that the Obama administration has been badgering the International Energy Agency (IEA) since about March.”

   But a lower oil price wasn’t the only objective in Washington. “Another (unstated) political goal,” says Byron, “was/is to sell 30 million barrels of oil from the SPR and raise a quick $3 billion for the U.S. Treasury in July and August.”

That could stave off the messy debt ceiling issue for, well, a few more hours anyway. “These funds won’t balance the national budget by any means,” Byron continues, “but may come in handy in the face of the borrowing and budgeting problems that will likely hit the U.S. by early August. It’s sort of a petro-slush fund.”

   The real story lies within who bid for that oil from the Strategic Petroleum Reserve, and how much they paid. Unlike many things done in Washington, this is a matter of public record:

We draw your attention to the column on the right, and how it bears little resemblance to any recent price shown on the oil price graph above.

“Clearly,” explains Byron, “the bidders wanted to make sure they got their hands on that SPR oil. Thus, they bid high, by U.S. benchmarks. The surprise SPR sale is lifting U.S. pricing, not holding it down. Very strange, no?”

Bottom line: Surprise announcements like this will do nothing to encourage oil production — not as long as oil executives are trying to second-guess whatever the IEA will do next. Thus, when a real supply shock comes, the impact will be that much worse.

“SPR release or no,” Byron concludes, “oil demand will soon clear the market.

By the end of 2011, we should expect oil prices to solidify in the low triple digits, which could certainly cause a return to recession.”

In the meantime, Byron has been busy exploring a true wild card in the energy space. It might prove a fatal blow to OPEC. We encourage you to check out this presentation before it’s removed from the Internet in five more days.

   Let’s see… Moody’s downgraded Portuguese government debt to junk status; China raised interest rates for the third time this year, to try to contain inflation; the ISM services index slipped from 54.6 in May to 53.3 in June.

Alas, none of these picayune items seemed to matter much. Like yesterday, the major stock indexes are flat.

   The Portugal downgrade is scaring traders out of the euro, at least for the moment — it’s down to $1.431. The dollar index has powered back above 75.

   Along with the greenback, gold is proving a beneficiary of the new euro-scare. At last check, the spot price is up to $1,530 — a $40 improvement over last Friday.

“We have gone up 11 years in a row,” says Canadian hedge fund legend Eric Sprott of the yellow metal. “This year, it looks like it will be no exception.

“Next year will be no exception,” he goes on to tell our friend Chris Martenson. “If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here.”

Without QE3, Sprott anticipates a crisis of the sort we’ve been anticipating ourselves.

“Economic crises are not good for banks,” says Sprott. “My ultimate view of what happens to gold and silver is that people decide to take their money out of the banks.

“We have already seen this happen in various countries that run into trouble. We hear about money flowing out of Greek banks, and why wouldn’t it? And the next one was the money will be flowing out of Portuguese banks.

“Sooner or later, instead of just moving from bank A to bank B, people might start moving it from bank A, B and C to precious metals. Which I think is what ultimately will happen here and provide this huge supernova for gold and silver.”

[Ed note. Mr. Sprott’s right-hand man John Embry will be joining us in Vancouver in a few weeks thanks to Sprott’s new partnership with our longtime friend Rick Rule.

Every one of our speakers will be miked up and recorded on flawless digital audio files for the benefit of anyone who couldn’t join us in person. Last year, the MP3s of the Vancouver sessions were emailed to interested readers only seven days after the conference’s close. Sign up for this year’s recordings right now to assure you’ll get the best price.]

   “It is everywhere,” The Economist bragged about the English language a decade ago.

“380 million people speak English as their first language and perhaps two-thirds as many again as their second. A billion are learning it, about a third of the world’s population are in some sense exposed to it and by 2050, it is predicted, half the world will be more or less proficient in it.”

Oh, how quickly things change: Sweden this week announced they will begin teaching Mandarin in every elementary school.

“Not everyone in the business world speaks English,” says education minister Jan Bjoerklund. “Very highly qualified activities are leaving Europe to move to China. Chinese will be much more important from an economic point of view than French or Spanish.”

It’s a small detail, we know. But then the World Economic Forum already considers Sweden a better place to do business than the United States.

Just sayin’…

   “I travel to Asia a couple times a year and there is no problem with flash mobs. Reason being there are guards at all entrances and exits of the malls and stores.

“Labor is so cheap there, and there are so many unemployed people begging for a job (since there are no welfare checks), the guards and salesclerks could overpower any size gang! Also, there are guards armed with shotguns — to discourage the ever-present beggars from storming into McDonald’s or Pizza Hut.

“A sign of things to come here? Frankly, I am glad they are there to keep law and order in place. I feel much safer overseas.”

The 5: Hmmmn…

   “I was in the U.S. Army Reserve (military intelligence) from the late ’80s to early ’90s,” writes a reader with his own perspective. “The armed forces are like any other multimillion-member organization, and subject to the same sort of organizational dysfunction and decay. At any given moment, some parts of this great agglomeration are highly functional; others are ‘zombies’ in your parlance, dead but continuing to exist through organizational inertia.

“I used to think that the troops won’t turn against their own people, and maybe turn against the command structure instead, but the wars of the last two decades will have made many of them accustomed to violence as an accepted state of affairs. The U.S. didn’t seem to have much social cohesion to begin with… that situation that has only gotten worse.

“My take is do NOT count on restraint from this group. Rioters beware. “Maybe the Millennials will pull together a new society once this one collapses, but they won’t have their chance for another 10 years, at least. The boomers will now have to delay retirement, and they are still in the highest echelons of most everything. “Keep up the good work.”

The 5: “The armed forces are no longer representative of the people they serve,” we note Retired Adm. Stanley Arthur told Andrew Bacevich for his book The New American Militarism. “More and more, enlisted (as well as officers) are beginning to feel they are special, better than the society they serve.”

Arthur concludes this is “not healthy in an armed force serving a democracy.”

As if on cue, The Fiscal Times points out this morning that despite whatever caterwauling you hear about the debt ceiling, the House is about to approve a 3.4% increase in Pentagon spending for next year — not including the costs of the actual wars in Iraq and Afghanistan.

“The Pentagon budget is still continuing to go up while every other agency of the federal government is going down,” says Laura Peterson of Taxpayers for Common Sense. “National security exceptionalism is still at work.”



Addison Wiggin
The 5 Min. Forecast

P.S. “Here’s a toast and a cheer to you for stating your position,” writes another reader, “or lack thereof, on Glenn Beck. I, for one, enjoy and value your crew at Agora for many reasons, not the least of which is that you don’t pander to the likes of the Beck sycophants that seem to comprise a fair number of your audience. Your crew would not be the first media enterprise to succumb to the temptation to boost readership among that demographic.

“I have only seen him twice, just to find out what the fuss was about. Although I felt he had some reasoned and reasonable insights about the virtues of less government, protection of personal freedoms, etc., I found him to be equally pompous, bombastic, dogmatic, alarmist and self-righteous — remarkably, all at the same time — or, basically, an unbearable ass. So I never felt the need to watch him again.

“Instead, I spend my time reading the fine work that you offer at Agora. Here’s to the rational fringe, not the righteous right. See you later this month for my third year at the Agora Symposium in Vancouver!”

“The only thing I find surprising about you reader recap of the Beck irony,” writes our last reader on the subject, “is that you haven’t seen the program. Somewhere out there in Beck’s writersphere, in their process of collecting blog input, they either collect bits of 5 wisdom (and research on the cheap) or uncannily track where you are going without either of you knowing that the other exists.

“Hmm. If you knew that there was this strange parallel (albeit without the Soros, NWO paranoia), wouldn’t you at least fire up the DVR and have a staffer zip through the similar bits? Or are you 5ers preserving your purity out of principle and purpose?

“Either way, your medium is entertaining, thought provoking, appreciated and successful in gathering the occasional click-through toward the purpose of selling additional Agora publications.”

The 5: “Preserving our purity out of principle and purpose…” has a nice ring to it. But the reality is more mundane. When we’re not working on The 5, working and or traveling, we’ve got kids, soccer games… movies. We’ve never had much interest in TV news programs.


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