Trends I'm Watching

Is a Showdown with Iran Looming?

Trend: The tension between the United States and Iran is increasing as deadlines draw near.

If war breaks out:

• Oil prices will double or triple.
• The stock market will drop.
• Gold prices will rise (Iran and the Bomb: Gold’s Blast-off?).

Link: The Iranian Incursion in Context | STRATFOR

The Iranian government is aware that Washington has said the end of 2009 was to be the deadline for taking action against Iran over its nuclear program — and that according to a White House source, the United States could extend that deadline to Jan. 15, 2010.

That postponement makes an important point. The United States has treated the Iran crisis as something that will be handled on an American timeline. The way that the Obama administration handled the Afghanistan strategy review suggests it assumes that Washington controls the tempo of events sufficiently that it can make decisions carefully, deliberately and with due reflection. If true, that would mean that adversaries like Iran are purely on the defensive, and either have no counter to American moves or cannot counter the United States until after Washington makes its next move.

Six market waves

Trends: Alternative energy, Mine Resistant Ambush Protected (MRAP) vehicles, clean water, biotech, 'Chindia' middle class, and jetliners could be fertile ground for investing in the near future.

Tobin Smith describes six major waves that ChangeWave Investing has identified for investers looking for market gains. Excerpts below.

Link: Tobin Smith Journal

1. Alternative energy wave

2. Mine Resistant Ambush Protected (MRAP) vehicles wave

3. Clean water wave

4. Biotech wave

5. 'Chindia' middle class wave

6. Jetliner wave

These markets don't come all the time. It's certainly here for the next two to three years, but beyond that I couldn't tell you.

We are guided by our ChangeWave Alliance research as we continue to expand our horizons -- meaning we're on the lookout for the niche companies and sectors in which we can double our money every two to three years.

I've got to be a stock market cheerleader because you're going to hear all sorts of bad news this summer about subprime loans. You know we're going to get a pullback, but it's that pullback that gives you the next great buying opportunity.

The way you make market-doubling and market-tripling returns every year is to be ahead of the crowd.  You've got to be in the right places at the right time at the right price.

Russia, Iran, and Saudi Arabia

Trend: Russia is aligning with Iran to counter the US military and Saudi Arabia energy policies.

Stratfor President George Friedman discusses the long-term strategy that Russian President Vladimir Putin is setting in place in John Mauldin's Outside the Box at InvestorsInsight. Excerpts below.

Link: InvestorsInsight : John Mauldin's Outside the Box

The two main Islamic powers between the Levant and the Hindu Kush are Saudi Arabia and Iran. The Russians have things they want from each, but the Saudis and Iranians have dramatically different interests. Saudi Arabia -- an Arab and primarily Sunni kingdom -- is rich but militarily weak. The government's reliance on outside help for national defense generates intense opposition within the kingdom. Desert Storm, which established a basing arrangement for Western troops within Saudi Arabia, was one of the driving forces behind the creation of al Qaeda. Iran -- a predominantly Persian and Shiite power -- is not nearly as rich as Saudi Arabia but militarily much more powerful. Iran seeks to become the dominant power in the Persian Gulf -- out of both its need to defend itself against aggression, and for controlling and exploiting the oil wealth of the region.

Putting the split between Sunni and Shiite aside for the moment, there is tremendous geopolitical asymmetry between Saudi Arabia and Iran. Saudi Arabia wants to limit Iranian power, while keeping its own dependence on foreign powers at a minimum. That means that, though keeping energy prices high might make financial sense for the kingdom, the fact that high energy prices also strengthen the Iranians actually can be a more important consideration, depending on circumstances. There is some evidence that recent declines in oil prices are linked to decisions in Riyadh that are aimed at increasing production, reducing prices and hurting the Iranians.

This creates a problem for Russia. While Moscow has substantial room for maneuver, the fact is that lowered oil prices impact energy prices overall, and therefore hurt the Russians. The Saudis, moreover, need the Iranians blocked -- but without going so far as to permit foreign troops to be based in Saudi Arabia itself. In other words, they want to see the United States remain in Iraq, since the Americans serve as the perfect shield against the Iranians so long as they remain there. Putin's criticisms of the United States, as delivered in Munich, would have been applauded by Saudi Arabia prior to the 2003 invasion of Iraq. But in 2007, the results of that invasion are exactly what the Saudis feared -- a collapsed Iraq and a relatively powerful Iran. The Saudis now need the Americans to stay put in the region.

MIT’s smart flying drones

Trend: The market for unmanned aerial vehicles (UAVs), which can reduce casualties and costs in many martial environments, may see significant growth in the next few years.

Emerging Technology Trends at ZDNet.com describes unmanned aerial vehicles (UAVs) being developed at MIT. Excerpts below.

Link: » MIT’s smart flying drones | Emerging Technology Trends | ZDNet.com

MIT researchers have developed a multiple-UAV test platform which can be operated by anyone with a high-speed Internet connection. And these small and inexpensive helicopters could soon stay in the air for a week, automatically coming back to their base and landing to recharge their batteries.

Here are additional details provided by Lauren Clark, who wrote an article about MIT's intelligent aircraft for MIT News (September 26, 2006).

The test platform consists of five miniature "quadrotor" aircraft — helicopters with four whirling blades instead of one — each a little smaller than a seagull. It also includes an indoor positioning system, as well as several miniature autonomous ground vehicles that the UAVs can track from the air.

Each UAV [, costing only about $700,] is networked with a PC. The setup allows a single operator to command the entire system, flying multiple UAVs simultaneously. Moreover, it requires no piloting skills; software flies the vehicles from takeoff to landing.

If you think that the UAV business is small, you're wrong. According to the Boston Globe, it "will represent a $55 billion worldwide market over the next 10 years. Annual spending on flying drone systems could triple, to $8.3 billion in 2016 from $2.7 billion now."

Iran's Strategy in the Persian Gulf

Trend: Iran is expanding its power and gaining credibility with Muslims in the Middle East.

In John Mauldin's InvestorsInsight - Outside the Box, George Friedman, the President of Stratfor.com, has posted a reality based in-depth and logical analysis of the dilemma facing the U.S. on the situation in Iraq.

Link: InvestorsInsight : John Mauldin's Outside the Box

The Iranians had always wanted an Iraqi satellite state, as protection against another Iraq-Iran war. That was a basic national security concept for them. In order to have this, the Iranians needed an overwhelmingly Shiite-dominated government in Baghdad, and to have overwhelming control of the Shia. It seemed to us that there could be a Shiite-dominated government but not an overwhelmingly Shiite government. In other words, Iraq could be neutral toward, but not a satellite of, Iran. In our view, Iraq's leading Shia -- fearing a civil war and also being wary of domination by Iran -- would accept this settlement.

We may have been correct on the sentiment of leading Shia, but we were wrong about Iran's intentions. Tehran did not see a neutral Iraq as being either in Iran's interests or necessary. Clearly, the Iranians did not trust a neutral Iraq still under American occupation to remain neutral. Second -- and this is the most important -- they saw the Americans as militarily weak and incapable of either containing a civil war in Iraq or of taking significant military action against Iran. In other words, the Iranians didn't like the deal they had been offered, they felt that they could do better, and they felt that the time had come to strike.

A Two-Pronged Offensive

When we look back through Iranian eyes, we can now see what they saw: a golden opportunity to deal the United States a blow, redefine the geopolitics of the Persian Gulf and reposition the Shia in the Muslim world. Iran had, for example, been revivifying Hezbollah in Lebanon for several months. We had seen this as a routine response to the withdrawal of Syrian troops from Lebanon. It is now apparent, however, that it was part of a two-pronged offensive.

First, in Iraq, the Iranians encouraged a variety of factions to both resist the newly formed government and to strike out against the Sunnis. This created an uncontainable cycle of violence that rendered the Iraqi government impotent and the Americans irrelevant. The tempo of operations was now in the hands of those Shiite groups among which the Iranians had extensive influence -- and this included some of the leading Shiite parties, such as SCIRI.

Second, in Lebanon, Iran encouraged Hezbollah to launch an offensive. There is debate over whether the Israelis or Hezbollah ignited the conflict in Lebanon. Part of this is ideological gibberish, but part of it concerns intention. It is clear that Hezbollah was fully deployed for combat. Its positions were manned in the south, and its rockets were ready. The capture of two Israeli soldiers was intended to trigger Israeli airstrikes, which were as predictable as sunrise, and Hezbollah was ready to fire on Haifa. Once Haifa was hit, Israel floundered in trying to deploy troops (the Golani and Givati brigades were in the south, near Gaza). This would not have been the case if the Israelis had planned for war with Hezbollah. Now, this discussion has nothing to do with who to blame for what. It has everything to do with the fact that Hezbollah was ready to fight, triggered the fight, and came out ahead because it wasn't defeated.

The end result is that, suddenly, the Iranians held the whip hand in Iraq, had dealt Israel a psychological blow, had repositioned themselves in the Muslim world and had generally redefined the dynamics of the region. Moreover, they had moved to the threshold of redefining the geopolitics to the Persian Gulf.

This was by far their most important achievement.

The Hidden Cost of Imported Oil

Trend: The real cost of a gallon of gasoline is $10.86 in the United States when oil is $60 per barrel. In 2003, it was $5.20 per gallon.

Gas in oil-producing Venezuela sells for 14 cents a gallon, due to government subsidies by the Chavez administration. Many Americans think $3 a gallon gasoline is overpriced, but that is only about 30 percent of the real cost, according to the research of Milton Copulos.

Milton Copulos is president of the National Defense Council Foundation. He has researched energy issues extensively. Below are excepts from his presentation to the US Senate Foreign Relations Committee on March 30, 2006.

Link: Averting Disaster of Our Own Design

America is rushing headlong into disaster. What is worse, however, is that it is a disaster of our own design.

More than three decades have passed since the 1973 Arab Oil Embargo first alerted the nation to its growing oil import vulnerability. Yet, despite this warning, we are now importing more than twice as much oil in absolute terms than we did in 1973, and the proportion of our oil supplies accounted for by imports is nearly double what is was then. What makes this dependence even more dangerous than it was three decades ago is the fact that the global market has become a far more competitive place with the emerging economies of China, India and Eastern Europe creating burgeoning demand for increasingly scarce resources.

While it is broadly acknowledged that our undue dependence on imported oil would pose a threat to the nation’s economic and military security in the event of a supply disruption, less well understood is the enormous economic toll that dependence takes on a daily basis.

The principal reason why we are not fully aware of the true economic cost of our import dependence is that it largely takes the form of what economists call "externalities," that is, costs or benefits caused by production or consumption of a specific item, but not reflected in its pricing. It is important to understand that even though external costs or benefits may not be reflected in the price of an item, they nonetheless are real.

Today, crude oil prices are hovering around $60 per barrel and could easily increase significantly. Indeed, whereas in 2003 we spent around $99 billion to purchase foreign crude oil and refined petroleum products, in 2005 we spent more than $251 billion, and this year we will spend at least $320 billion.

But skyrocketing crude oil prices were not the only factor affecting oil-related externalities. Defense expenditures also changed.

In 2003, our armed forces allocated $49.1 billion annually to maintaining the capability to assure the flow of oil from the Persian Gulf.

I should note that expenditures for this purpose are not new. Indeed, last year marked the 60th anniversary of the historic meeting between Saudi monarch King Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our nation to assuring the flow of Persian Gulf oil – a promise that has been reaffirmed by every succeeding President, without regard to party.

Because the price of crude oil is expected to remain the $60 range this year, expenditures for imports are expected to be at least $320 billion this year. That amounts to an increase of $70 billion in spending for foreign oil in just one year. That increase would raise the total import premium or "hidden cost" to $825.1 billion, or almost twice the President’s $419.3 billion defense budget request for fiscal year 2006. If all costs are amortized over the total volume of imports, that would be equivalent to adding $5.04 to the price of a gallon of gasoline. For Persian Gulf imports, the premium would be $8.35. This would bring the "real" price of a gallon of gasoline refined from Persian Gulf oil to $10.86. At these prices the "real" cost of filling up a family sedan is $217.20, and filling up a large SUV $325.80.

War and Peak Oil in the Middle East

Trend: The rising demand for energy underlies the escalating conflicts in oil-producing regions.

Below are excerpts from an article Middle East at a Crossroads by Richard Heinberg from EnergyBulletin.net | Peak Oil News Clearinghouse. We only pulled the peak oil material; the article also contains an eye-opening summary of Middle East political history.

Link: Middle East at a crossroads | EnergyBulletin.net | Peak Oil News Clearinghouse.

There is considerable danger that the smoke and fire from these three geographic flashpoints—Iraq, Iran, and Lebanon—could converge in a larger regional conflagration. In light of all this potential for apocalyptic mayhem, a discussion of the oil business may seem almost frivolous. But it is important to remember that, historically, the drawing of borders in the Middle East; the establishment of British, French, and later US-backed puppet governments in these faux nations; and the rise of a radical Islamic fundamentalist movement to challenge the Western-backed regimes, have all been fueled by the wealth produced by oil, and by the need for oil on the part of importing countries.

For decades there was a petroleum status quo of sorts in the Middle East: the capacity for production exceeded demand, and OPEC worked to restrain exports in order to keep prices from collapsing; meanwhile big producers like Saudi Arabia served as the world’s petroleum bankers, maintaining the solvency of the system. On only one occasion—the embargo of 1973-74—did the swing producers withhold needed oil flows for political reasons, or cause prices to reach levels unacceptable to consumers (the other major post-1970 oil shocks, due to wars or revolutions, were beyond OPEC’s control).

Now the status quo is crumbling—not so much for political reasons (though those are certainly imaginable, given the situations outlined above), but for reasons of geology.

Questions about the real size of Kuwait’s oil reserves have emerged in the Kuwaiti National Assembly, leading the opposition party to call for production cuts. Remarkably, Kuwait appears to be groping toward implementation of the Oil Depletion Protocol, without ever having heard of it. However, from the standpoint of nations that want to keep the oil flowing so the global industrial party can continue, this is bad news.

Even worse news, potentially, comes from Saudi Arabia, where oil flows have shrunk by some 400,000 barrels per day over the past few months, despite astronomic prices. No one knows for sure what is going on. The Saudis themselves say the production cuts are due to lack of demand, but this hardly seems plausible, unless the kingdom is only able to deliver unwanted heavy, sour crude to market—but even in that case, one would expect flows to increase, with a price discount factored in for resource quality.

At the same time, the Saudis are hiring just about every spare drilling rig in the world, resulting in a dramatically falling rig count in the Gulf of Mexico—a place that would otherwise be seeing an increasing count, given the fact that Mexico’s giant Cantarell field is in now in steep decline, with dire implications for the nation’s economy.

Matthew Simmons (Twilight in the Desert) has been insisting for the past few years that Saudi production is close to peak and that Ghawar, the world’s biggest field, may be in decline. Now many others are speculating that this is the real reason for the falling production figures.

What happens next? It depends on the real condition of Ghawar. Perhaps a heroic drilling campaign could result in a temporary bloom in production, lasting perhaps three years, followed by a swift, terminal collapse. On the other hand, it is possible that the field has been so thoroughly exploited already that we are seeing the irreversible, rapid decline. At the ASPO conference a well-connected industry insider who wishes not to be directly quoted told me that his own sources inside Saudi Arabia insist that production from Ghawar is now down to less than three million barrels per day, and that the Saudis are maintaining total production at only slowly dwindling levels by producing other fields at maximum rates. This, if true, would be a bombshell: most estimates give production from Ghawar at 5.5 Mb/d.

While these events in Kuwait and Saudi Arabia are not front-page news, they are in their way every bit as significant as the ongoing violence in Iraq and Lebanon, and the ritualistic war dance of the American and Iranian leaders. The Israel and Lebanon situation seems to be about religion, terrorism, and land; the US-Iran situation seems to be about nuclear proliferation. But if one looks beneath the surface, nearly everything of significance that happens in the Middle East is at least partly about oil.

It may be pure coincidence that, just as the world’s biggest oil producers are reaching a historic turning point signaling the end of the energy regime that has held since the end of US production dominance in 1970, a war has erupted between Israel and a militant organization supported by a nation the US plans to attack anyway in order to maintain dominance of world oil supplies going forward. History is full of such coincidences. But coincidence or not, it will be difficult to keep these unfolding realities from rebounding off one another, undermining attempts at a peaceful resolution.

via Investing the Middle Way

4GW in Lebanon

Trend: Traditional military power is not dominating battles and wars against small groups of well-trained and well-armed guerrillas in the Middle East.

Fourth generation warfare (4GW) is a concept defined in 1989 by a team of American analysts, including William S. Lind, used to describe warfare's return to a decentralized form. In terms of generational modern warfare, the fourth generation signifies the nation states' loss of their monopoly on combat forces, returning in a sense to the uncontrolled combat of pre-modern times. The simplest definition includes any war in which one of the major participants is not a state but rather a violent ideological network. Fourth Generation wars are characterized by a blurring of the lines between war and politics, soldier and civilian, peace and conflict, battlefield and safety. Source: Fourth generation warfare - Wikipedia, the free encyclopedia

Jobb Robb at Global Guerrillas decribes why Hezbollah has not been decimated by the Israeli military. Will the US be sucked into another no-win situation?

Source: Global Guerrillas

Hezbollah's performance in a set-piece battle with the Israeli military (arguably once, a top notch conventional military) is an excellent example of how non-state groups have radically improved their ability to conduct tactical and strategic operations. To wit, the continued success of its efforts has put the Israelis on the horns of a dilemma: either request a ceasefire that locks in military defeat - or - push for a full invasion of southern Lebanon (each are fraught with disastrous consequences).

Organizational Improvements

The central secret to Hezbollah's success is that it trained its (global) guerrillas to make decisions autonomously (classic 4GW), at the small group level. In every area -- from firing rockets to defending prepared positions to media routing around jamming/disruption -- we have examples of Hezbollah teams deciding, adapting, innovating, and collaborating without reference to any central authority. The result of this decentralization is that Hezbollah's aggregate decision cycles are faster and qualitatively better than those of their Israeli counterparts.

Leveraging force protection and an aversion to casualties

A second strategic method is to trade territory (something a non-state organization is easily able to ante up) for the blood of professional soldiers and delay. The intent is demonstrated by Hezbollah's dispersal of units across a wide geographic area in small autonomous units (defense in depth, rather than concentrating its defenses along the border). This deployment clearly shows Hezbollah's willingness to trade ground for the lives of Israeli soldiers and time.... Time is a factor that clearly works particularly in the favor of Hezbollah (due to the potential of a widening conflict) and more generally in favor of any non-state group fighting a state.

Israel and Iran: Is War Inevitable?

Trend: Escalating tensions in the Mid-East instigated by Russia's sale of missiles to Iran could start a war that would involve the US and increase the value of oil reserves that exist outside the Middle East. If you think gas prices are high now...

Rosa Brooks' column in the LA Times describes possible implications of Russia's sale of missiles to Iran and how it may force Israel to strike first.

Link: War clouds - Los Angeles Times

LET ME TELL YOU about the next war.

It will start sooner than you think — sometime between now and September. And it will be precipitated by the $700-million Russian deal this week to sell Tor air defense missile systems to Iran.

When the war begins, it will be between Iran and Israel. Before it ends, though, it may set the whole of the Middle East on fire, pulling in the United States, leaving a legacy of instability that will last for generations and permanently ending a century of American supremacy.

Despite the high stakes, the Bush administration seems barely to have noticed the danger posed by the Russian missile sale. But the signs are there, for those inclined to read them.

Russian leaders continue to mouth the usual diplomatic platitudes about democracy and global cooperation, but Russia is actually playing a complex double game. On Tuesday, Russia launched a spy satellite for Israel, which the Israelis can use to monitor Iran's nuclear facilities. On the same day, Russian leaders confirmed their opposition to any U.N. Security Council effort to impose sanctions against Iran, and their intention to go through with the lucrative sale of 29 Tor M1 air defense missile systems to Iran.

"There are no circumstances which would get in the way of us carrying out our commitments in the field of military cooperation with Iran," declared Nikolai Spassky, deputy head of Russia's National Security Council.

The upcoming deployment of Tor missiles around Iranian nuclear sites dramatically changes the calculus in the Middle East, and it significantly increases the risk of a regional war. Once the missile systems are deployed, Iran's air defenses will become far more sophisticated, and Israel will likely lose whatever ability it now has to unilaterally destroy Iran's nuclear facilities.

The clock is ticking for Israel. To have a hope of succeeding, any unilateral Israeli strike against Iran must take place before September, when the Tor missile deployment is set to be completed.

At best, a conflict between Israel and Iran (with resulting civilian casualties) would further inflame anti-Israel sentiment in the Islamic world, with a consequent increase in terrorism, both against Israel and against the U.S., Israel's main foreign backer. At worst — if the U.S. gets drawn into the conflict directly — the entire Middle East could implode, terrorist attacks worldwide would increase, the already overstretched U.S. military would be badly damaged and U.S. global influence would wane — perhaps forever.

So what is Russia up to? Andrei Piontkovsky, a Russian political analyst, suggests that Russia's oil and gas oligarchs wouldn't shed any tears over a war in the Middle East, especially if it's a war that ensnares the U.S. and keeps oil prices high.

Even so, it may not be too late to avert a new war in the Middle East. A quiet but firm U.S. threat to boycott the G-8 summit in July in St. Petersburg might inspire Russian President Vladimir V. Putin to freeze the missile transfer. And a promise to facilitate Russian entry into the World Trade Organization might even get Russia's oil and gas oligarchs on board. Freezing the missile sale would buy crucial time to find a diplomatic solution to the stalemate over Iran's nuclear program.

Unfortunately, the Bush administration appears to be asleep at the wheel, too distracted by Iraq, skyrocketing gas prices and plummeting approval ratings to devote any attention to Russia's potentially catastrophic mischief.

Meanwhile, the clock is ticking.

Who Really Controls Energy Production?

Trend: Continuous disruption of energy production is difficult to prevent and effectively creates fear and uncertainty among the consumers of energy.

John Robb at the Global Guerrillas blog writes about how sustainable systems disruption targeting energy production is being used by small groups of global guerrillas to undermine the supremacy of powerful nations in a global economy.

Source: Global Guerrillas

The control over the price of oil is in now in the hands of global guerrillas -- the open source, system disrupting, transnational crime fueled, sons of global fragmentation....These actors can now, at will, curtail the supply of oil through low tech attacks on facilities in Iraq, Nigeria, central Asia, and India. The amount of oil effectively under their control exceeds five million barrels a day, more than Saudi Arabia's two million barrels a day of swing production.

Means and Motives

It's important to note that this capacity to disrupt production is substantially different than any terrorist threat we have faced in the past. With terrorism, the potential of damage has always been from single large attack on a major facility or node (extremely difficult to accomplish and relatively easy to recover from). Today's threat is based on sustainable disruption -- ongoing, easy, low-tech attacks that are nearly impossible to defend against (everything from pipeline destruction to employee kidnapping). The goals of these attackers can be divided into three complimentary categories:

• Delegitimization of the target state. Attacks meant to "hollow out" the state, through an inability to deliver critical services or a denial of income/investment, to create zones of local control.
• Coercion of the core Western states. Either to damage the US or a target state through economic means.
• Criminal profit. By increasing the prices of oil and its refined products, the profits generated by criminal enterprise (bunkering of oil, smuggling, etc.) are radically improved.