Good morning! I hope you’re ready for what’s coming next. Because it won’t be pretty.
Most investors seem to think they’re going to get some relief from the daily bombardment of bad news from abroad.
But join me on a quick tour of current world events, explore with me what’s really happening on the ground, and you’ll see, with your own eyes, why that’s wishful thinking.
Arak, Central Iran
We begin Saturday, August 26 (just 48 hours ago).
Our first stop: Arak, an industrial town of about a half million people in central Iran. It was built on the ruins of another town of another era — Daskerah, destroyed centuries ago in the Mongol invasion of Persia.
But we have no time for ancient history or the distant past. Iranian President Mahmoud Ahmadinejad is about to make a not-so-symbolic gesture that could alter our present — and our future for generations to come.
He walks with white-haired Vice-President Gholamreza Aghazadeh, who also heads the Atomic Energy Organization of Iran. Behind them are the towers of Iran’s new heavy-water production plant.
The dignitaries watch with glee as the president cuts an inaugural ribbon and as the plant goes into operation — to produce plutonium, which, in turn, could be used to build nuclear warheads.
He says that his nation’s controversial nuclear program poses no threat to any other country, even Israel “which is a definite enemy.â€
Ironically, though, this Thursday, August 31, is the United Nation’s deadline for Iran to freeze all its nuclear activities. Yet, here we are, just days away from that deadline, witnessing a deliberate act of provocation against the United Nations and the entire world.
The mood in nearby Tehran is equally defiant.
Iran’s chief nuclear negotiator, Ali Larijani, is talking to the press. He tells them that Iran will never — I repeat never — end its nuclear development. “But don’t worry,†he says. “It’s all for peaceful purposes.â€
Really? Then why is it that, just down the street, in Tehran’s Parliament building, deputy speaker Mohammad Reza Bahonar is warning that nuclear weapons are indeed an option?
“Our country is confronted with illogical countries who have nuclear weapons,†he declares. “If they put too much pressure, our people might ask the government to produce nuclear weapons as a deterrent instrument.â€
These are not exactly constructive gestures and statements. Quite to the contrary, they leave Western nations with no choice but to punish Iran with sanctions. And yet, despite all this, Wall Street remains complacent, hoping against hope that somehow the crisis will fade away.
If the U.S., Britain, France and Germany were not united, yes, sanctions might be less likely. But …
Right now, all four countries are pushing — unanimously and forcefully — for U.N. sanctions. Even if the U.N. waffles, there’s nothing to stop the U.S. and Europe from imposing the sanctions on their own.
If this looming conflict were with almost any other nation, yes, there might be less cause for alarm. But …
Iran has the second largest petroleum reserves in the world. It has drawn a line in the sand. And it has vowed to retaliate with an oil embargo against any nation that imposes sanctions.
Or, if the looming threats were limited exclusively to Iran, we might be able to overcome them. But alas, as you’ll now see, that’s also not the case.
Third Largest Oil Reserves on
The Planet Also in Danger
While still in Tehran, we learn that the new British ambassador to Iraq, Dominic Asquith, is holding a news conference in Baghdad on Sunday, August 27.
And we learn that also attending the conference are two oil-industry officials, one Iraqi and one American. They’ve agreed to talk to us about the oil situation off the record. So we decide to go.
Our nonstop flight from Tehran is quick and easy. It’s our hair-raising ride down Airport Road to the fortified Green Zone that seems to take forever.
But during the trip, we contemplate the big picture: Iraq has the third largest petroleum reserves on the planet, rivaling Iran’s. If the U.S. and its allies could only restore oil production to historic levels, might that not help offset the shortages caused by an Iranian oil embargo?
When we arrive, the news conference is just getting under way. But the new British ambassador says nothing that might throw light on the subject. Instead, he focuses on his view that Iraq is not in a civil war, contradicting what his predecessor wrote in a scathing memo earlier this month.
As soon as the conference is over, we meet with the oil experts. They go through the motions of giving us some glowing facts and figures. But then, over endless cups of sweet Iraqi coffee, they tell us what they really think, point by point:
– There’s no chance Iraq is going to help replace Iranian oil.
– Nearly all of the country’s best oil engineers have been killed or have left the country.
– Even if Iraq could substantially boost production, Iran could block the shipments by threatening the Strait of Hormuz through which most Iraqi oil must pass.
– Besides, it’s all an exercise in futility. Most of the country is already in the hands of Iran: Basra, the largest source of Iraqi oil and the only outlet to the Persian Gulf, is overrun by Iranians and their allies. Iraq’s government in Baghdad is controlled by Shiites who have been — and will continue to be — allied to Iran.
– Even that government is crumbling, just like the entire country is crumbling. If that trend continues, they say, the moderate Shiites will be replaced by radical Shiites. And the radical Shiites aren’t just allied with Iran. They’re allied with Iran PLUS they’re lined up against the United States and Britain.
End result: Directly or indirectly, Iran would control the second and the third largest oil reserves in the world. Saudi Arabia would effectively drop to second place in terms of reserves. And most of Saudi Arabia’s power to stabilize world oil prices would vanish.
Chad Expels Foreign Oil Majors!
An Accelerating Trend With Big
Consequences for U.S. Investors!
Our next destination is N’Djamena, the capital city of Chad in north-central Africa.
Few people ever come to visit this country. It’s landlocked with no sea and no ports. Even most of the countries that surround it — Lybia, Sudan, Niger and the Central African Republic — are off the beaten track.
The signs of lagging development and poverty are everywhere. Cattle herders compete with run-down taxis and trucks in the main roadways.
Slavery is said to still exist, even in major markets and urban centers.
But the country is huge — almost as big as Alaska. And its oil production, although small compared to that of leading exporters, could be pivotal in an already drum-tight market.
Just a few weeks ago, President Idriss Derby was sworn in for his third five-year term. Now, flush with the confidence of a de-facto dictator that’s firmly in power, he’s taking new steps. Like Iran, Chad is deliberately seeking to confront the West.
This weekend, for example, he abruptly orders foreign oil companies to get out. He says that U.S. energy giant Chevron and Malaysia’s Petronas must leave the country immediately, catching Western diplomats and oil executives totally by surprise.
One diplomat rushes to the presidential palace. She warns Chad’s government officials: “This is going to hurt you a lot more than it hurts us.†But she hasn’t seen what we’ve just seen in Iran and Iraq. So she doesn’t connect the dots: The growing defiance of the West is not an isolated phenomenon. It’s international. And it’s spreading.
We move on to our next destination …
Niger Delta, Nigeria
Anti-oil rebellions in this oil-rich region of West Africa have been raging since the 1990s, and they’re getting progressively violent with each passing year.
In one village we pass, near Port Harcourt, a militant stands guard with an AK-47 rifle in hand and charms to protect him around his neck.
Further up the river, two Nigerian army soldiers stand guard.
Militants clashing with Nigerian security forces have just left as many as 11 people dead, they say.
Also this month, six oil company workers were kidnapped by guerrilla units.
In a knee-jerk reaction last week, government soldiers on a rampage torched and destroyed several villages in the area, killing or dispersing much of their population.
And just this weekend, as the kidnapped soldiers were finally released, another was abducted.
The prognosis: They describe an escalating war of insurgency and sabotage in Nigeria that seems to have many of the same elements we saw in Iraq: Ethnic violence between groups with a long history of hatred … a corrupt government … and oil.
More Threats
If we had the time and the energy, we could travel further.
We could go to Ecuador, the fifth largest oil producer in South America, which has recently issued a new law forcing foreign companies to hand over at least half of the oil revenues they earn in excess of a benchmark.
Indeed, just this week, Ecuador’s highest court affirmed the new law, ruling against legal challenges that had been made by the foreign oil giants.
It’s just one more piece of evidence that oil producing nations — small and large — are losing their fear to defy the West.
Or we could visit Venezuela, the primary source of American oil and gas imports, where an even more alarming drama is unfolding this week.
Venezuelan customs officials have seized baggage belonging to U.S. diplomats, and for the past few days, the two countries have been unable to stop an escalating verbal war.
If this continues, don’t be surprised if Venezuela and the U.S. move to break off diplomatic relations — the first such event since the U.S. severed its ties with Cuba over 45 years ago.
Problem: That, in turn, could be the prelude to disruptive stoppages in the flow of oil and gas to U.S. ports.
We’ve Been Warning You
About This. Now It’s Up to You.
In recent weeks, we have given you the information you need to protect yourself and take affirmative action. The rest is up to you.
For example, Larry Edelson tells you about how these conflicts relate to the U.S. dollar, now within a hair of its decade lows. Sean Brodrick shows you how these conflicts feed into the worldwide competition for natural resources. And John Burke ties it all back to opportunities in the defense industry.
My recommendation: Learn everything you can about exchange-traded funds. They are among the most liquid and flexible vehicles in the world today — for stock sectors, for commodities, even for entire countries.
Then use them wisely — for both defense and offense.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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