Oil Wars

News reports pouring in from Europe and the Middle East indicate that the seeds of the revolt now erupting throughout the Muslim world did not come from the streets.

They were originally planted by clerics and government officials at the highest levels.

These officials may not have anticipated the widespread upheavals that are now careening beyond their control. But their actions underscore the depth of the conflict … and the validity of the scenario we have been so persistently warning you about:

New revolts against the established order in the Arab world.
A diplomatic, economic or even military conflict with Iran.
Disruptions to oil supplies, driving the price to $100 per barrel and beyond. Plus …
Parallel surges in precious metals and other natural resources.

But anyone who thinks this crisis just popped out of nowhere should take a good, hard look at recent history:

Last May, anti-American demonstrations spread throughout the Muslim world like wildfire. In Afghanistan alone, 15 people died. Everywhere, from the Western Sahara to Eastern Indonesia, the anger was evident.

Six months later, a new wave of violence erupted this time in France, and this time raising far broader questions about the East-West conflict.

And now, just four months have gone by, and, already, a new, even more frightening tsunami of uprisings has swept across the Muslim world.

Thousands of European and American flags have been burned. Several embassies and consulates have been torched. Hundreds of people have been killed or injured.

With each of these episodes, observers identified a single event that triggered the unrest an offensive article in Newsweek about the Koran … the accidental deaths of two young teenagers fleeing the police in Paris … twelve unfortunate cartoons published in a small Danish newspaper.

But by now, it is widely recognized that the true cause of the revolts lies far deeper: A cultural, political, and, most important, economic schism between:

Most of the worlds largest consumers of oil
(the U.S. and Europe)

and …
Most of the worlds largest producers of oil
(the Middle East and Persian Gulf).

This is serious. Its so serious, in fact, that earlier this year, we began writing to you about a topic that weve never written about before: War.

Our reasoning: Oil markets are already a pressure cooker, ready to burst. With the added heat from these worldwide tensions, the surge in oil prices and oil conflicts could be explosive. Indeed …

The Bitter Battle with the Muslim World Is Not
Mostly about Religion. Its Primarily about Oil.

Many people think that religion plays the dominant role in this conflict. Not true.

The current chain of events in the East-West conflict can be traced back to 1990, when Iraq invaded Kuwait.

That invasion had nothing to do with religion. It was almost entirely motivated by economics for hegemony over oil reserves, control over Kuwaits ports to the Persian Gulf, and better access to vital transportation routes to major world markets.

Americas long-term response to Iraqs invasion of Kuwait to establish a permanent military presence on the Arabian Peninsula was also mostly for economic reasons: To help guarantee access to the peninsulas vast oil reserves.

What about the terrorist attacks in New York, Washington, Madrid and London? Werent they driven primarily by religious zeal? Not necessarily.

The original raison dtre of al Qaeda was to eject the U.S. military from the Arabian Peninsula … gain control over the regions oil reserves … and place them under the auspices of a broad Islamic empire.

Yes, al Qaeda is a rogue, terrorist organization with a pseudo-religious mission. But its primary goal is to bring about revolutionary economic change. Whether they succeed or not, the mere threat of this revolution spreading throughout the Muslim world is creating a new, hotter cold war.

A New, Old Battleground
In the War for Oil: Iran

The control over oil and energy is also whats behind the looming confrontation with Iran over its nuclear facilities. This is a new battleground. But its also an old one, with many lessons from recent history that we must not forget:

The Iranian revolution which drove oil prices up to the equivalent of $96 per barrel in todays dollars …
The Iran-Iraq war … the longest major war of the 20th century … lasting eight full years … taking an estimated one million lives … costing as much as two trillion dollars … and demonstrating the stubbornly bellicose tendencies of both countries leaders …
The latest Iraqi elections, in which the outstanding winner was precisely the party most directly allied to Iran, and now …
Irans nuclear program.

Why is Iran so steadfastly committed to nuclear energy, despite all the carrots and sticks waved at Iran by the U.S. and Europe?

Simple: Iran wants to develop nuclear energy to reduce its own dependence on its decaying oil infrastructure. Iran wants a nuclear bomb to defend its oil reserves against perceived threats by oil-hungry world powers China, the United States, Russia and others. And Iran is especially intimidated by the presence of large American and European armies in neighboring Iraq.

In recent days, Iran has ended all international inspections of its nuclear facilities. It has begun full-scale production of enriched uranium that can be used for nuclear bombs. And it has set off a chain reaction of events that could easily escalate into a new war over oil. The reasons for this impasse are both clear and fundamental:

The United States and Europe will not allow the worlds premier supporter of terrorist organizations including Hamas, Hezbollah and Islamic Jihad to develop the worlds supreme weapon of mass destruction.

Yes, there may have been a relatively lax attitude toward nuclear proliferation in the past. But no more!

No one needs to tell the United States and Europe how to connect the dots from Iran to terror … from terror to al Qaeda … and from al Qaeda to nuclear attacks on major cities of the Western world.

Nor do our leaders need any help asking the obvious questions: If terrorists had primitive nuclear devices, what would have happened in the World Trade Center bombing of February 26, 1993? What would have happened on 9/11? What about Madrid on March 11, 2004? Or London on July 7, 2005?

This is the last straw. Clearly, with Iran, the West must draw and already has drawn an immutable line in the sand. There will be no compromise that results in a nuclear Iran.

The probable result: The United Nations will stop Iran from building a bomb. Iran will retaliate by stopping its oil exports to the West. And we will see a repeat of the oil-price explosion we saw during the Iranian revolution a quarter-century ago.

Why Oil and Gold Are
Joined at the Hip
by Sean Brodrick

Gold and oil are like Siamese twins. They may sometimes twist and turn in different directions, but for the most part, they move in unison.

Why? Because:

1. Rising oil prices will drive up inflation, which, in turn, will drive up gold.

2. Many of the same supply-demand pressures that impact oil also impact gold and other commodities.

3. Many of the same countries that are big consumers of oil, including China, India and Japan, are also big investors in gold.

4. The same worldwide political instability that prompts investors to invest in energy also sends investors scurrying into gold.

5. Most important, petrodollars are pouring into gold billions of dollars in crude oil revenues in the Middle East.

Indeed, among the worlds top 10 oil-exporting nations alone, the revenues are approaching $700 billion. Just a small fraction of those funds rushing into gold markets are enough to keep the golds express train running at a high speed.

Wait for the Corrections! But
Dont Believe the Naysayers!

This week, we had a long-awaited and most-welcome correction in oil and gold. And early yesterday morning, Larry told you, in no uncertain terms, that it was great buying opportunity.

Sure enough, gold has snapped right back, surging $14.30 just in yesterdays trading alone, closing at $568.10 in the most active futures market the April contract. Thats just $8.70 away from the 25-year high we saw last week.

Whether you jump on it or not is up to you. But whatever you do, dont fall for the naysayers who always come out in droves after a correction like this.

Theyre going to try to convince you that this temporary pullback is really a fundamental change. Theyll dredge up all the reasons why they think oil, gold and natural resources are really not in short supply.

Case in point: The so-called silver bullet to solve the worlds big energy shortages. Im talking about the oil sands of Alberta. Some people think that will be the ultimate solution to our energy problems. I wish it were true!

Canadas oil sands used to be known as tar sands. Now theyre called oil sands. The not-so-subtle change is that technology advanced enough that engineers and scientists realized we could recover perhaps 175 billion barrels worth of oil in Alberta alone.

The problem: Getting oil out from the tar sands is very expensive. On a per-barrel recovered basis, it costs twice as much to get oil from the tar sands as it does to get oil from deepwater wells in the North Sea or the Gulf of Mexico.

A big part of the cost is all the energy needed to boil the sands and unlock the crude oil. And the most commonly used energy source to help unlock the oil from the sand is none other than natural gas.

So although all this makes me skeptical of the opportunity in oil sands, it makes me even more bullish about your chances with natural gas.

According to the National Energy Board of Canada, depending on the process you use, it takes from half a million to 1 million cubic feet of natural gas to produce a barrel of oil from the oil sands.

Meanwhile …

Production from Existing Natural Gas
Wells Is Falling by 15-30% per Year!

Last year, ExxonMobils chief executive, Lee Raymond, told a Reuters Energy Summit that “natural gas production has peaked in North America.” Other experts say well reach the peak in 2007/2008.

Either way, the underlying problem is the same: Natural gas wells deplete very quickly. And most existing natural gas wells in North America are seeing production declines of 15% to 30% per year.

That fact may come as a surprise to anyone who saw natural gas prices tank this winter. But right now, the main reason natural gas prices are falling in North America is because its been a very mild winter on this side of the Atlantic.

So, yes, weve dodged one bullet. But what if an extremely warm winter is followed by an equally warm summer? Natural gas is used to produce 17% of Americas electricity. As air conditioners crank higher, so will natural gas use. And never forget hurricane season, just a few months away.

It gives me no pleasure to say well likely see more monster hurricanes this year. I live in Florida! But I invest for the factual conditions as they are, not the conditions as I want them to be. And the facts are clear: The natural hurricane cycle is in an upswing, aggravated by global warming.

Americas natural gas production is still 3% below last years levels, due mainly to the damage caused by last years storms. If severe hurricanes cause more damage in the Gulf of Mexico, we could see the natural gas supply impacted sharply this summer. And that, in turn, will increase the demand for petroleum.

Why the Cycle
of War Is
Reaching
a Crescendo
by Larry Edelson

Sean has told you about the declining hopes for new oil supplies in the near future; Martin, about the rising threats to existing oil supplies stemming from the recent past.

I go back much further through 2,600 years of recorded history. And the pattern I see is clear: An 18-year cycle of war that has continued to prevail through modern times.

Im not the first person to study this. Back in the 1930s, President Roosevelt asked a professor by the name of Edward R. Dewey to study the Great Depression.

Later, in 1942, as the United States was plunging full force into World War II, Dewey began the Foundation for the Study of Cycles, with a focus not only on economic ups and downs but also on the cycles tied to domestic and international armed conflicts.

Needless to say, no historian can follow human events with anywhere near the precision of an astronomer tracking celestial bodies or an ecologist measuring biorhythms.

But on average, we found the length of the cycle of war is 17.71 years. And given the vagaries of history, its remarkably regular.

If the cycle holds, it means Irans and Venezuelas latest moves could be just the initial stages of an accelerated ramp-up to the war cycles peak, coming about two to four years from now.

It will be called the oil war. And it could last for a long time.

If Youre Not Yet in
The Gold Market …

First, make sure you own some gold bullion for the long-term.

One of the best vehicles, in my opinion: The StreetTracks Gold Trust Fund (GLD), an exchange-traded fund or ETF that holds the physical gold for you, hence eliminating storage and insurance costs. (Each share represents 1/10th of an ounce of gold.)

Second, consider putting some of your money into a mix of my favorite mining shares and precious metals mutual funds. For starters, I like the Tocqueville Gold Fund (TGLDX).

And for the complete recommendations in the gold market, see my latest Real Wealth Report.

Plus, I highly recommend Seans hot, recently-published report: The Gold Rush of 2006.

If youve been looking for an inexpensive way to get started, his report is it. And if youve been waiting for a temporary gold pullback before you invest, youve got it now. To order Seans report, call 800-400-6916.

If Youre Not Yet in
The Oil Market …

Start with the Oil Service HOLDRs Trust (OIH), an exchange-traded fund that gives you a diversified stake in some of the best oil companies, with a concentration in oil services such as drilling and exploration.

Plus, get my latest alternative energy recommendations, also in the current issue of my Real Wealth Report.

And never forget: Always be sure to keep a big chunk of your money in Treasury bills or equivalent money funds. Theyre yielding over 4% right now. Thats not huge. But in these turbulent times, Id even pay interest for the 100% protection of principal they give you.

The Oil War is approaching and more quickly than wed like to believe.

Best wishes,

Larry

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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