Friday, January 27, 2006

Keep an Eye on Khuzestan

Keep an eye on Khuzestan. That's the South-Western Iranian province, bordering Iraq and the Persian Gulf, that currently has a modest but growing independence movement. It was also the site of the recent bombings that Iran is blaming on UK influence. Within the US intelligence community, at least, it is widely believed that the best option for dealing with Iran is through fomenting internal unrest of some sort. The classic formula for this (see "Coup D'Etat: A Practical Handbook" by Luttwak) is to leverage existing internal devisions--and that is exactly what is happening here. The US is actively supporting this Khuzestan independence movement, and the various "Free Iran Movements" that are being supported by right-wing think tanks in D.C. have many ties to this region. Not surprisingly, Khuzestan is the major oil producing region in Iran, but the revenues don't provide much benefit to the local and ethnically distinct Arab population. You may also recall the Iranian Embassy siege in London in 1980--also the work of the a group from Khuzestan agitating for autonomy from Tehran. So there are definitely some genuine tensions here for US exploitation. This is, of course, highly speculative, but I think it is still worth considering: the US may not need to invade all of Iran to influence their choices--they may just need to help the people of Khuzestan break away, and "help" a pro-US government set up shop. The mere threat of this--if the ground work is put in place to make it very credible--may be enough of a negotiating piece to force Ahmedinijad to give in to US pressure on a wide variety of issues.

Do a search on google with any of these terms and you'll see how this little-publicized issue is quickly catching on with many Washington think tanks and other "tree-top" policy projects... take a look, for example, at the Ahwaz Studies Center in Lorton, Virginia... smacks of Ahmed Chalabi in 2002??

Saturday, January 21, 2006

Iranian Nuclear Test?

UPI is reporting that the Foundation for Democracy in Iran (FDI) claims that Iran will test a nuclear device this Spring, before the Iranian New Year (March 20th). FDI is, of course, a US-funded resistance group inside Iran. This means that they may realistically have access to this kind of information, and that their motive for such a statement (and its veracity) is highly suspect. It reminds me very much of the kind of "intelligence" that the US got from Ahmed Chalabi about Iraq's "Weapons of Mass Destruction." Never the less, it's a scenario that is worth thinking about.

I think it's doubtful that Iran has managed to produce an atomic bomb domestically. However: we do know that Iran has a long-standing and clandestine arms-trading relationship with North Korea. We do know that Iranian ballistic missile technology has been aided by North Korean expertise from their No-Dong and Taepo-Dong programs. We do know that there have been several Iranian IL-76 flights in the past two years that have delivered and received unknown but mysterious cargo. We do know that China has on more than one instance refused overflight because of the nature of that cargo, without stating what the cargo actually was. We do know that North Korea has, most likely, several small atomic bombs. We do know that North Korea is led by a rather unstable individual. We do know that Iran has many things that North Korea wants--hard currency not being the least of these.

Is it really much of a leap from there to suggest that Iran has purchased one or more atomic weapons from North Korea? I certainly haven't heard any direct evidence to this effect, but it doesn't seem that unreasonable.

Of note: US Air Force WC-135 aircraft would be deployed to the region immediately after the detection of any Iranian test, and they are able to capture quite small quantities of nuclear radiation from such a test--even from a well planned underground test. Since isotope breakdown forms something akin to a fingerprint, it should be possible to definitively say that any Iranian bomb test used nuclear material from a North Korean reactor--if that is the case. We have samples for comparison from when the IAEA was operating in North Korea.

Friday, January 20, 2006

More big Peak Oil news that isn't being reported

I'll just go ahead and answer the rhetorical question that was the title to my last post, Speculation or Supply?? It's supply. Petroleum Intelligence Weekly is reporting that internal doccuments show Kuwait's oil reserves to be only half that of the public number. This story is not being carried by CNN, Fox, ABC, CBS, or NBC. Hmmm.... Only Reuters has it burried away.

Not that this is much of a surprise. Shortly after OPEC began linking production quotas to reserve levels, all the major players miraculously doubled their oil reserves. PIW's report is the smoking gun that finally shows what has been widely understood all along: that OPEC reserves are really only about half what is claimed.

So what does this mean for our ability to produce oil? Well, the classical Hubbert peak takes place when half the oil in the ground has been produced. However, if you discount OPEC reserves by 50%, it becomes clear that we are WELL past that half-way point. So production should have already begun to decline. This suggests that, as widely feared, only the use of water injection and water flood tecniques to keep reservoir pressure artificially high have kept production rates up for the past several years. The problem with this is that when a field who's production rate has been artificially sustained beyond the half-way point finally does begin to decline, its rate of decline tends to be very, very high. 10-18% has been suggested (by Simmons and others) as the decline rate for fields that have been pressed to the limits with injection technologies. This is critical, because while Peak Oil may be a quite manageable problem at 2% depletion, 10%+ depletion means that world production will fall by half in less than 7 years. That would be absolutely catastrophic. No wonder this story isn't available on CNN.

Maybe those Mayans were on to something with their "2012" prediction?

Speculation or Supply??

Oil is on a tear. Another attack on a Shell platform in Nigeria yesterday. Fears over sanctions taking Iran’s 2.4 million barrels per day of oil exports off the market. Bin Laden releases a tape threatening more attacks on the US, scaring traders. NYMEX crude just passed $68/barrel. When will it end?

It’s easy to make excuses for why oil is going higher. The problem is, they’re largely just that: excuses. To the extend that they are actually impacting supply (as with Nigeria), there is a real impact on oil price. Unfortunately, it’s often difficult to differentiate between real supply issues and speculative concerns over geopolitical events. But not today. Today is the expiration day for the February NYMEX future contract, and it’s already up $1.46/barrel. Is there speculative pressure affecting the price of crude oil? Sure, the December ’06 contract is trading at roughly $2 more than the February ’06, and some of that is the so-called “risk-premium.” I just don’t buy the statement by many that there is a $10-$15 risk premium on a barrel of oil, because that would quickly disappear as derivative traders arbitraged from crude to delivery on refined products (I don’t think that many finance reporters actually understand the multitude of arbitrage options available…). But when the front contract expires in under an hour, the last-minute surge just can’t be credibly attributed to “speculation.” The only speculation that you can do with a thousand barrels of delivered crude oil sitting on your front porch is to arbitrage it with the new front-month contract (March), and that same speculation could be done with far less risk by simply purchasing March options. No, the price is surging to create an appropriate equilibrium between supply and demand.

Which brings up one of my favorite topics, demand destruction. The common wisdom is that, above a certain price, people increasingly conserve or shift to alternatives to oil, and this destroys demand. This is the cornerstone of most arguments that oil prices will never get to $100/barrel (a few years ago they used “demand destruction” to argue that prices would never reach $60/barrel…), and that if prices get too high they will destroy so much demand that prices will plummet, maybe back to $40/barrel. This argument is simply bad economics. “Demand destruction” doesn’t decrease marginal demand. At $60/barrel people have reached a collective equilibrium about how much oil they will use. If prices rise, demand may be destroyed, but not marginal demand. Essentially, at $5/gallon gasoline, people might drive less, but the most that can do is to create friction on prices rising further. Should gasoline drop back to under $3/gallon (i.e. current US prices), then they’ll drive just as much as they did before the price spike—but not less. So demand destruction acts as a brake on price increases, but it won’t cause prices to drop to lower than they are now. The caveat to this argument is that, over longer time periods, it is possible that high prices cause investment choices that, when prices then fall back to lower levels, have affected the underlying marginal demand. For example, most people buy a car with plans to use it for several years. If prices stay high enough for long enough to cause them to buy a more fuel efficient car AND to drive less, then potentially if prices return to present levels and they stop driving less, they are still using less oil because they have a more fuel efficient car. This process will require high prices over at least several years before it begins to take effect—and is largely cancelled by efforts to maintain “economic growth” (read: oil usage) by programs such as car-maker’s SUV incentive programs and low interest rates. Demand destruction is a very real phenomena. But if you’re waiting for it to bring oil prices back down to $20/barrel, I’ve got bad news for you. . .

And as I end my rambling, NYMEX crude is nearing very close to $69/barrel. Certainly makes me happy about my call options.

Monday, January 09, 2006

Future Jihad

A quick recommendation and a few thoughts on jihad. Walid Phares has just set the bar for analysis of the jihadi mindset with his new book "Future Jihad: Terrorist Strategies Against America." It is an outstanding read, with especially sharp analysis about what jihad is, why understanding its historical development is critical to understanding modern jihadis, and what the modern jihadists want to accomplish.

In the past I have commented on what the jihadis want, stating that "Bin Laden wants to establish an Islamic Caliphate throughout the Arabic Middle East. To do that, he needs to remove the secular regimes that are currently in power." Phares confirms this analysis, but elaborates a great deal. His explanations are enlightening, especially given the mixed messages about the nature of Islam and the role of jihad in that religion as portrayed by Western media. It is common to hear, at least in the West, an "Islamic Scholar" telling us that Islam is a religion of peace, and that jihadis are distorting the true message of Islam. Phares explains that the actual situation is far more complicated than such simple notions. Jihad is not one of the 5 pillars of Islam (which are witness, prayer, pilgrimage, alms, and fasting). It is, however, considered an unofficial 6th pillar of Islam--and understanding what that means requires delving into a bit of history.

Immediately following the death of Mohammed, the council of elders of Islam--the de-facto ruling body--set up a a system where a single ruler would be selected--the Caliph--and he would lead the Caliphate. Because Islam requires that the umma, or Islamic community, be expanded, the initial Caliphate had to grapple with the fundamental problem of how to do that--by military conquest, or by more peaceful means. For a variety of reasons, well articulated by Phares, Islam made the watershed decision to embrace the doctrine of "Fatah" or conquest, whereby they would spread Islam through a continual war against the infidel. Islamic historians perceive that Allah blessed this decision, because within the next 100 years the Caliphate rushed forth and conquered territory at a rate unprecedented in history. Particularly impressive was how this backward and barefoot mix of Arabian tribes roundly defeated both the Byzantine and Persian empires--the world's two super powers of the day--at the same time. This initial rush of conquest initially petered out--and this led to perhaps the key feature of the Jihadi mindset: there is a strong correlation between the decadence, corruption, and drift from the fundamentals of Islam in the ruling Caliphate, and the fortunes of this Islamic empire. The initial Caliphate quickly conquered most of the known world, but then as they began to enjoy their riches and drift from the teachings of Muhammad, they were beset by defeats by the Christian crusaders and the Mongols. The Mamelukes then arose out of Egypt, a fundamentalist militant sect that carefully followed the "salaf" or early ways of the founding fathers of Islam (hence the jihadi word "salafi" or "salafist"). The Mamelukes defeated the once invincible Mongols, and expelled the crusaders from the Levant. This correlation between the following of the fundamentalist "salaf" ways and military victory was seen as again a blessing by Allah, and the Mamelukes took over the Caliphate. This is critical: military victory, especially in the form of a reversal of fortune, was the road to legitimacy of rule by the Mamelukes. But, as history goes, the Mamelukes soon became decadent and corrup themselves. Enter the Ottomans--another fringe group that followed the fundamentalist Islamic ways, and swept into the Islamic world with a wave of military victories in the Balkans, all the way to the gates of Vienna. This was again seen as a blessing by Allah, and led to the Ottoman Sultan taking over the reigns of the Caliphate. Until, not unexpectedly, they became decadent and corrupt, and the Caliphate was officially dissolved by Kemal Attaturk in 1923.

Each of these resurgent, fundamentalist groups that breathed new life into the Islamic world came onto the stage waging Jihad agaist the Infidel, and were awarded legitimacy based on the perception that their military victory in jihad was due to the blessing of Allah. And in each case, these jihads did in fact lead to a resurgence and blossoming of Islamic culture. It is through this lens that we must understand the modern Jihadi mindset: There is no legitimate Caliphate. The rulers of Islam have become decadent and corrupt. As a result, the former power and glory of Islam has been lost. It is their job--that of the Salafi Jihadist--to bring fundamentalism and military greatness back to the Islamic world. This theory is at least partially vindicated by the view that the Taliban victory in Afghanistan--first over the Infidel Soviet Union, and later against the corrupt Islamic warlords--is a sign of the renewed blessing of Allah upon this endeavor. And despite the opinions of geopolitical analysts and military strategists, backward and badly outgunned Islamic armies have in the past demolished the worlds superpowers. So given this insight, it is possible to better understand what Bin Laden, what Hamas, and others are thinking. They do not need to be endorsed by the all the people of Islam--they feel confident in acting in the name of Islam because they see their victories as the blessing of Allah upon their actions. In the eyes of the jihadi--as well as the eyes of the average middle eastern Muslim who was raised with the very history lessons recounted above--the events of 9/11 were a de-facto sanction on the actions of al-Qa'ida by the hand of Allah. Secular Islamic scholars disagree with this, but for those who were raised and taught the classical history of Islam mentioned above--which is standard curriculum in most Madrasas and elsewhere in the Islamic world--that is the meaning that they took away, whether consciously or unconsciously.

Ultimately, Walid Phares provides an insight into the cultural ethos of the Islamic world--particularly the ethos of the culture that is inaccessible to the average American, that of the rural schools and smoky teahouses that line the (literally and figuratively) impenetrable warren of Islamic society. It is the kind of insight that someone like myself, who has studied Islam (through Western sources), who has traveled to multiple Islamic countries for numerous reasons (military deployment to Qatar, plain tourism in Morocco) just cannot pick up.