sanjuanislander.com Posted 06/04/03

The Strategic News Service®, headquartered in Friday Harbor, held a party for world leaders in technology and finance last week, and everybody came.

The first annual SNS Future In Review Conference was held in San Diego last week, at the Hotel del Coronado, with an international gathering of 200 top executives in computing, communications and finance. Participants and attendees on the technology front included Dell Computer Chairman and CEO Michael Dell, Microsoft CTO and SVP Craig Mundie, Intel CTO Pat Gelsinger, Hewlett-Packard Chief Scientist Greg Astfalk, and Cisco GM and VP (and Sun co-founder) Andy Bechtolsheim.

Finance speakers and attendees included Vice Chair of Warburg Pincus Bill Janeway; NEA partner (and Fortune columnist) Stewart Alsop, London School of Economics R and D head Neil Gregory; Christof Ruehl, Chief Economist, Russia Country Department, The World Bank; and Steve Smith, past Managing Director of GE Equity.

The intent of the meeting was to look forward five years in describing technology markets worldwide. Highlights of the meeting included: Michael Dell's hourlong conversation with SNS CEO Mark Anderson on his view of world markets and competition; author Sidney Rittenberg's personal evaluation of China Premier Hu Jintao's background and personality; and past Vice Chair of the Joint Chiefs Admiral William Owens' comments on the future role of the American military in world affairs.

The FIRe conference examined the future of markets in chips, software, hardware, and general computing, and included context discussions on the world economy and global investing, with particular emphasis on China, Russia, Japan, and Venezuela.

Final predictions, made by the participants themselves, will be published by SNS in book form later this month.

» Want a Reprint? » Printable Version June 4, 2003 East Bay Business TimesAlan Doyle

Intense daylong negotiations brokered by Benicia Mayor Steve Messina yielded an agreement Wednesday between Valero Energy Corp. and environmentalists that saves the company's $140 million refinery upgrade.

In a written settlement, a coalition of the Benicia-based Good Neighbor Steering Committee, the Solano County Green Party and Solano's Sierra Club chapter withdrew its appeal of the Planning Commission's decision to issue permits for the Benicia refinery's upgrade. The group dropped its opposition, which could have killed the project, in exchange for Valero's commitment to install anti-pollution equipment sooner than previously planned.

The agreement lays out a set sequence for installation of a wet scrubber to remove air pollutants and a water treatment plant. Valero also obtained what is known as an SB 25 air monitor for free through the Bay Area Air Quality Management District and the California Air Resources Board. Valero also agreed to a second, high-tech monitor that will track a wide range of pollutants.

The Valero Improvement Project, as the company has dubbed the upgrade, encompasses a cluster of renovations and expansions that Valero says it needs to complete over the next six years to remain competitive by processing a higher percentage of "sour" or more pollutant-laden crudes.

The Benicia refinery, with a throughput capacity of 165,000 barrels per day, provides about 25 percent of the Bay Area's gasoline and jet fuel. Valero says it must be able to switch to a greater percentage of Latin American crudes as cleaner Alaska North Slope supplies dwindle and become more expensive.

Valero says it can complete many of the individual components of upgrade without overall approval from the city, but it would not be able to install the wet scrubber that it needs to switch to the less costly crudes.

Valero says the project will generate hundreds of jobs and millions of dollars for local government and schools, as well as reducing air emissions.

Opponents claimed the environmental impact report approved April 28 by the Benicia Planning Commission was so flawed that it needed to be redone, which would take months and cost thousands of dollars.

Valero and environmentalists had been meeting for the past week to avert a showdown before the City Council. Dana Dean, a leader of the environmental coalition, and refinery General Manager Bill Buckalew credited Messina and his staff with brokering the deal, which was sealed minutes before the City Council was scheduled to consider the appeal.

If the City Council had overturned the Planning Commission's approval or opponents had sued to block Valero from proceeding, company officials had planned to abandon the project.

The refinery upgrade must still be approved by Valero's corporate headquarters in San Antonio, Texas. The project reportedly is competing against several projects for funding, including the possible purchase of a 280,000-barrel per day refinery on the island of Aruba near Venezuela.

Reach Doyle at adoyle@bizjournals.com or 925-598-1404.

<a href=www.ndtv.com>ndtv.com

Thursday, June 5, 2003 (New York): Oil prices have dipped after data showed a rise in US crude oil and gasoline inventories, easing fears about tight supplies ahead of the US vacation season.

New York's light sweet crude July contract was down 62 cents to $30.05 in out-of-hours electronic trading yesterday.

The price of benchmark Brent North Sea crude oil for July delivery in London trade dipped 48 cents to $26.80 per barrel.

"The major factor today was the jump in crude oil (inventories) and imports," said Marshall Steeves at Refco. "Saudi Arabia provided a lot of oil as well as Venezuela," in shipments made ahead of the Iraq war that were starting to arrive now.

The US Department of Energy said crude oil inventories for the week to May 30 were up 2.8 million barrels to 289 million barrels.

A separate report by the American Petroleum Institute showed a rise of two million barrels to 288.37 million barrels.

Gasoline stocks rose 2.3 million barrels to 207.3 million barrels, according to DoE, after slippage the prior week. According to the API, the supplies increased 3.05 million barrels to 209.67 million barrels.

Some analysts had been concerned about declining gasoline stocks at the start of the US summer vacation season. (PTI)

By Christopher Toothaker <a href=www.sun-sentinel.com>SunSentinel.com-The Associated Press Posted June 5 2003

CARACAS· President Hugo Chávez couldn't persuade city folks to move to the sparsely populated interior to help Venezuela feed itself. So he's bringing farming to the city.

With help from the United Nations Food and Agriculture Organization, the populist ex-paratrooper who sold mangoes as a child hopes to give Caracas residents a green thumb -- as a way to fight poverty and malnutrition.

Despite the country's oil riches, more than half of its 24 million people live in poverty. According to the latest statistics available from the U.N. Department of Economic and Social Affairs, at least 5 percent of Venezuelan children under 5 years old were undernourished in 2000.

Most Venezuelans make the minimum wage of $120 a month. Even if two parents work, it's not enough for the $585 the average family of five needs for just a basic living.

Chávez is urging shantytown residents to plant rooftop gardens. He has the army helping in a campaign to turn abandoned land into community gardens.

At one lot in downtown Caracas recently, soldiers hauled wheelbarrows of dark soil while Cuban agriculture experts from the FAO reviewed plans, and volunteers -- many of whom had never seen a farm -- planted vegetables.

"We are using intensive farming with high rotation [of crops] all year long," said a Cuban adviser, Mirium Carrion.

Flowers, green peppers, beets and even medicinal plants such as aloe have been planted on a 1.3-acre plot next to a Hilton hotel.

"Everything that is planted and harvested here will be sold to the public," said Amado Perdigon, an agronomic engineer. "Volunteers will share in the profits and a portion will be put back into the program to keep it going."

Chávez says his government aims to get vegetables planted on more than 2,470 acres in Caracas and surrounding areas, including city slums, this year. The city farm project comes as Venezuela suffers one of its worst recessions in decades.

Besides encouraging city farming, the government plans to sell 112,000 tons of food each month to the poor at bargain prices. The Special Food Security Plan, with soldiers distributing and selling the food, will cost the government $70 million a month, Chávez said.

Michael Shifter, an analyst at the Inter-American Dialogue in Washington, said the project is well-intentioned but based on failed models in Cuba and other communist countries.

lewrockwell.com, by Gary North

The trouble with OPEC is revealed by its name: The Organization of Petroleum Exporting Countries. Why countries? Why not companies?

If OPEC's members were companies, it would be either a trade association or a state-licensed cartel. What is the difference? Political power. The state does not grant to a trade association the right to exclude non-member competitors from a market. A cartel does receive this authority from the state.

OPEC is a multinational cartel. Ever since the price hike of 1973, OPEC has been the Mother of All Cartels. But it is not a group of companies that organize to keep up prices, and then seek the support of a civil government to keep out competitors. OPEC is not a group of profit-seeking private capitalists seeking to overcome competition. OPEC is an organization of civil governments that seeks to keep out competitors. Then it seeks to impose production quotas on its members and avoid "cheating," i.e., secret price cutting by members in order to sell more oil than their respective quotas allow. OPEC is run by a group of profit-seeking government-employed socialists seeking to overcome competition.

OPEC was modeled after America's most powerful state regulatory agency, the Texas Railroad Commission, which was set up in 1891 by Governor James Hogg. (Hogg is fondly remembered in Texas for having named his daughter Ima. It is not true, as many Texans believe, that he had a second daughter named Ura.) The Texas Railroad Commission regulates a lot more than railroads, including energy. It lost much of its power over oil prices when OPEC replaced it.

OPEC was formed in 1960. According to OPEC's Web site,

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. . . . OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

Here are the standard goals of every government and every cartel: "fair" prices, "stable" prices, "efficiency," and a "regular supply." Above all, it seeks "a fair return on capital." Undergirding every cartel and every government system of controls is this idea: the free market and open competition cannot attain these objectives. This is because the free market expands through price competition. And we all know what established producers think of price competition! The free market begins with the private ownership of the means of production, including the legal right to make voluntary agreements. This is what all bureaucrats hate. So do all cartel members.

WHO OWNS THE OIL?

OPEC is a cartel that puts pressure on members not to expand production through price competition. The question nobody ever asks is this: Where did these countries get their oil? The reason why is that everyone knows the answer: they stole most of it from private citizens. This practice is universally accepted in the closely related worlds of government public policy, academia, and financial journalism as "business as usual" in the energy markets.

Oil is a natural resource. It lies beneath the land or the sea bed. Whoever owns the land or the sea bed should own the oil. But there is no private ownership of oil in the oil-exporting cartel. Only in the sense that a nation is in fact an extension of a feudal family can it be said to have been privately owned. But now that family uses the monopoly of state violence to control access to the oil.

OPEC was born in acts of state expropriation. OPEC is the Organization of Petroleum Expropriating Countries. Its members use the income from the sale of the oil to fund the favorite projects of the bureaucrats who control both the oil and the weaponry of the state, which includes the educational system.

The finance ministers invest the money. In the bonanza that began in 1973, they turned most of the money over to large, multinational banks. Thus was born the "petrodollar," the word coined by Prof. Ibrahim Oweiss. The large banks decided that they could not maximize their return by recycling the inflow of petrodollars by making small, high transction-cost loans to individual firms. So, they made large loans to governments, especially Third World governments, that agreed to take all of the money and use it for socially beneficially projects. It was so easy to loan the money. It has not been easy to get repaid.

Wealth generated by oil-consuming Western capitalism flowed into government coffers in the Middle East, Venezuela, Mexico, and Nigeria. It did not accrue to private individuals. It was then sent briefly to privately owned, government-guaranteed banks – another cartel – and was then handed over to Third World politicians to fund projects that would enhance their power, they hoped.

The result in OPEC's nations and the national recipients of petrodollars was a vast expansion of state bureaucracy and the creation of a series of welfare states. Saudi Arabia is the model. In 1973, there were 6.7 million Saudis. Today, there are 22 million. The fertility rate is 6.3 children per woman.

Oil revenues have allowed the Saudi government to create a massive welfare state. Per capita income in 1973 was about $2,500. It grew to about $19,000 in 1981. Today, it is in the range of $7,000. (See the chart, The Demographic Squeeze in the report, Key Trends in Saudi Arabia [2001].)

Want a revolution? First, create tax-funded, universal education. Next, replace jobs in the free market with jobs in government. Then add Wahabbism's version of Islam. Send tens of thousands of young men to Islamic training schools at government expense. Then send them into the world, untrained in anything except the Koran. Unemployment in Saudi Arabia approaches 40%. Similar percentages are found in Yemen, United Arab Emirates, Kuwait, and Iran (45%). (Ibid, Over-dependence on Non-Productive Government Jobs Has a Cost.)

THE BLIND LEADING THE BLIND

None of this was foreseen by academic economists and establishment oil experts as late as 1972. One of the most respected experts in 1972 was economist M. A. Adelman of the Massachusetts Institute of Technology. In 1972, Johns Hopkins University Press published Adelman's large book, The World Petroleum Market, in which he made a famous predictions about the price of oil. He predicted a long-term secular decline in the price of oil. Within a year, the OPEC embargo began, and oil went overnight from $1 a barrel at the wellhead ($3 in Rotterdam) to $12 a barrel.

This book has become legendary as perhaps the most rapidly outmoded monograph in the history of academic economic forecasting. Here are selected insights from the book:

The governments are less able to operate a successful cartel than the companies. Not only do they lack the companies' experience, but they also lack the intercompany contacts at two levels: crude production and sales (the joint ventures) and the refined product markets. . . . Thus the increasing role of the governments in the market will tend to increase competition and reduce prices (p. 224).

We can therefore expect the following pattern during the early 1970s. From time to time, either in pursuance or in violation of the Tehran-Tripoli agreements [1971], the tax is increased, whereupon prices increase as much or more, but then tend to erode as the companies compete very slowly at the crude level and less slowly at the products level. Thus over the near term prices increase, in steps, yet at any given moment there is a buyers' market – i.e., more is available than is demanded at that price (p. 252).

As will be seen later, theory and experience both suggest that if and when the United States becomes a larger importer, the effect will be to lower prices (p. 253).

Unless the producing nations can set production quotas and, what is more important, obey them, they will inevitably chisel and bring prices down by selling incremental amounts at discount prices. . . The world oil cartel of the 1930s was eroded by this kind of competition, and so will be the new one in the 1970s (p. 258).

Adelman underestimated both the growing demand for oil and the power of OPEC's robber states to police their ranks. His 1972 forecasts remain the most stupendously inaccurate in recent academic history.

What may seem astounding to those outside the academic community is this: Adelman is still taken seriously as an expert in the economics of the oil market. Johns Hopkins still keeps in print his books, Genie Out of the Bottle: World Oil Since 1970 (1995; $60) and The Economics of Petroleum Supply: Papers by M. A. Adelman (1993; $85). Johns Hopkins has targeted the ultimate sellers' market in the book industry: university libraries, which will pay this kind of money for the opinions of the most legendary academic mis-forecaster of our era.

More recently, Adelman joined with M. C. Lynch to write "Fixed View of Resources Creates Undue Pessimism" for The Oil and Gas Journal in 1997. What creates legitimate pessimism regarding the future availability of oil is that Adelman is on the side of the debate over oil that says there will be no problem with oil supplies. "There's always more where that came from!" In the world of the economist, the crucial question, "At what price?", is always asked selectively.

The power of governments to disrupt markets is not taken seriously by some free market economists. They assume that the market will always get around a problem created by government. But the answer to the question, "At what price?", may be far higher and more painful than academic economists forecast. The modern mixed economy is all too often on the side of government, or, as Ludwig von Mises once titled a book, planned chaos.

CONCLUSION

OPEC is the world's richest cartel. Its goal is to use the threat of violence to maintain high net revenues for member governments that have stolen land and the reserves of oil and natural gas that are under this land. The result has been the rising price of oil, the extension of the welfare state, the creation of massive dependence on the state by rapidly growing populations, and severe unemployment for formally educated graduates of tax-funded university systems.

Into this witch's brew of misallocated scarce economic resources come Osama bin Laden and radical Islam on one side and United States troops on the other.

OPEC's member nations began by denying the right of peaceful exchange to private land owners. It may end when others in the Middle East, far more skilled at inflaming the passions of violence, follow OPEC's example. By centralizing wealth, OPEC's member nations have created highly visible targets, either for theft (jealousy) or destruction (envy).

And to think that it all began in Texas with a politician named Hogg.

June 5, 2003

Gary North is the author of Mises on Money. Visit www.freebooks.com. For a free subscription to Gary North's newsletter on gold, click here.