Previous Columns
8:30 AM EST, Tuesday, July 3: What is "Country Club Casual?" That's today's intellectual question. It's how Regent describes dress code on its July 4 Seven Seas Mariner Alaska cruise, which we start tomorrow.

Commodity prices do look very "toppy." This chart is from the Reserve Bank of Australia

which commented:

"Preliminary estimates for June indicate that the Index fell by 1.7 per cent in SDR terms, following a rise of 0.5 per cent (revised) in May. The largest contributors to the fall in June were declines in the prices of nickel, aluminium and zinc. Wheat and lead prices rose. In Australian dollar terms, the Index fell by 4.1 per cent in June following a rise of 0.4 per cent in May."

Meanwhile my commodities fund reports it's up 7.90% (after fees) for the first six months of 2007. Not brilliant, but possibly a sign it's time to cut some of my investment there back.

The big exception to "toppy" commodities is oil, which is clearly going higher -- much higher. See below.

I love West Side Story. My daughter, Claire, calls excited, "NPR says the Barrington Stage Company's performance is great. They play in Pittsfield, MA, near our upstate home. Get you and Mom tickets." I book two tickets. They're playing until July 14.



If you're in Western Mass or midstate New York on July 13, come to the show. I'll see you there.

Great anals of entrepreneurship: By February 17, 2009 all U.S. TV stations will be required to switch to digital broadcasts. That's the FCC's rule. In case you don't have a digital TV set by then, RCA is developing a little black box called by the catchy name of DTA800, which will receive digital TV signals and convert them so you can watch on your old analog TVs, like the ones we have. About $60.

Analysis for Financial Management by Robert Higgins is the best book on the subject.



Harvard Business School assigned this book as summer reading for its incoming students. I've been perusing my son's copy. It's very good, also very pricey -- $79 at Amazon. Not easy going, but very rewarding. Comes with an S&P subscription that lets you study public companies' finances.

Getting SMTP addresses stinks. You connect by WiFi. You and your laptop are on the Internet, but your Outlook is not sending emails. You need an SMTP address. You need to ask. Most likely the hotel and the airline club won't know. You need to contact the Internet service provider. Getting an SMTP is awful. To show you the complexity, here are two I scrounged on last week's Croatia trip:

mailrelay.hospitality.swisscom.com
mail.t-com.hr

Oil will touch $80, $90 and perhaps $100 a barrel within a very few years -- unless there is a global recession. And that's unlikely. Today's discussion of oil is not self-inflicted, idiocy-based, e.g. Venezuela, Nigeria and Iraq. Today's discussion focuses on "peak oil" and internal consumption. My oil guru, Jim Kingsdale writes a new (and highly-recommended) web site called Energy Investment Strategies. I sent him a piece on Iran (see below) and he wrote back:

It's not clear to me whether Iran's fields are actually in irreversible decline - along with about 57 other countries - or whether Iran's fields could be extended with substantial investment as they claim. But in either case, it is clearly true that the internal usage of oil by oil exporting countries from Russia to Saudi Arabia means that they will have less and less available to export. Mexico is the paradigm example. They could be out of the export business in as few as five years. Iran is a separate issue because of their truly screwed-up government which is well described in this piece.

Now to the highlight of today's column, a fascinating piece on Iran by John Mauldin:

Iran Out of Gas

But before we touch on the credit world, I want to briefly look at a development in the oil markets which I find intriguing. Dr. Woody Brock, in a recent paper on oil prices, wrote a rather interesting sentence, to wit, that Iran would not have net oil to export in 2014. I found that rather remarkable. Woody is very serious and sober-minded even for an economist, not given to rash analysis, but this was certainly a new idea to me. I knew they were importing most of their gasoline, as they do not have a great deal of refining capacity. As it turns out, there is much more to the story.

I have said for years that I expect Iran to be the new friend of the US sometime next decade, as the regime is not popular and the country is growing younger. (Think China, once an implacable enemy.) I thought that the impetus would be the lack of freedom and knowledge of how the world is better off coming from the Internet, but it turns out that it may be a desire for more freedom combined with economic problems which help bring about regime change, much as in Russia last century.

How could a country with the third (or second, depending on which source you quote) largest oil reserves in the world not be churning out ever more black gold? The answer, as it almost always is for such problems, turns out to be governmental and not economic in nature. Let's start out with a few facts.

Oil provides more than 70% of the revenues of the government of Iran. The rise in oil prices has been a bonanza for the regime, allowing them to subsidize all sorts of welfare programs at home and mischief abroad. And one of the chief subsidies is gasoline prices.

Gasoline costs about $.34 cents a gallon in Iran, or 9 cents a liter. You can fill up your Honda Civic for $4.49. In the US it costs almost $40 (The price has risen since the chart below was made). In neighboring Turkey it costs almost $95. Look at the two charts below from the recent Foreign Policy Magazine. Notice that Iran is spending 38% of its national budget (almost 15% of GDP!) on gasoline subsidies!

And this situation is likely to get worse. Let's look at a rather remarkable peer-reviewed study done for the National Academy of Sciences by Roger Stern of Johns Hopkins University late last year. Stern's analysis is somewhat political, in that he is critical of current US Iranian policy, but this is just one of several studies which show the same thing (www.pnas.org/cgi/reprint/0603903104v1):

"A more probable scenario is that, absent some change in Irani policy ... [we will see] exports declining to zero by 2014-2015. Energy subsidies, hostility to foreign investment, and inefficiencies of its state-planned economy underlie Iran's problem, which has no relation to 'peak oil.' "

Iran earns about $50 billion a year in oil exports. The decline is estimated at 10-12% annually. In less than five years, exports could be halved and then disappear by 2015, predicted Stern.

Of course, you can go to a dozen web sites, mostly Iranian, which demonstrate that Iranian production will be double (or pick a number) by that time. The problem is, they all assume rather large sums of investment in the Iranian oil fields. Two projects which are "counted on" to be producing oil in 2008 have yet to be funded or started, as negotiations have broken down. Iran seems incapable of getting a deal actually done with a willing partner.

Part of this is a caused by the Iranian constitution, which does not allow for foreign ownership of oil reserves or fields. Instead, they try to negotiate to pay for investing in oil production. Called a buyback, any investment in an oil field is turned into sovereign Iranian government debt with a return of 15-17%. This is a very unpopular program at home, coming under much criticism from local government officials. Any deal that gets close to getting done comes under attack from lawmakers as being too good for foreign investors, so nothing is getting done.

Why not just fund the development themselves? They could, but the mullahs have elected to spend the money now rather than make investments which will not produce revenues for 4-6 years or more. They are investing around half the money needed just to maintain production, around $3 billion a year.

Let's look at a quote from Mohammed Hadi Nejad-Hosseinian, Iran's deputy oil minister for international affairs: "If the government does not control the consumption of oil products in Iran ... and at the same time, if the projects for increasing the capacity of the oil and protection of the oil wells will not happen, within 10 years, there will not be any oil for export." That's from their guy, not a Western academic.

When an Enemy is Self-Destructing, Stand Aside

Iran produced over 6 billion barrels of oil a year before the revolution in 1979. They now produce around 4 billion barrels a year. They are currently producing about 5% below their quota, which shows they are at their limits under current capacity. And production at their old fields is waning. The world recovery rate is about 35% from oil fields. Iran's is an abnormally low 24-27%. Normally, you pump natural gas back into an aging field (called reinjection) in order to get higher yields. Iran has enormous reserves of natural gas. Seems like there should be a solution.

However, if the National Iranian Oil Company (NOIC) sells it natural gas outside of Iran, it turns a profit. If it sells it in the country, then it can only get the lower, dramatically subsidized price. Guess which it chooses. Even so, internal natural gas demand is growing by 9% a year.

Not surprisingly, at 34 cents a gallon gasoline demand is rising 10% a year. This week, the government moved to ration supplies to about 22 gallons a month, which does not go far in the large cars preferred by younger Iranians. There have been riots, with people chanting "Death to Ahmadinejad." They take their right to plenty of cheap gas seriously. There is also widespread smuggling. Ten barrels of gasoline (easily hauled in a pickup) taken into Turkey yields about $3,000 in profit in a country with about that much GDP per person. Let's end with this section from Stern:

"Our survey suggests that Iran's petroleum sector is unlikely to attract investment sufficient to maintain oil exports. Maintaining exports would require foreign investment to increase when it appears to be declining. Other factors contributing to export decline are also intensifying. Demand growth for subsidized petroleum compounds from an ever-larger base. Growth rates for gasoline (11-12%), gas (9%), and electric power (7-8%) are especially problematic. Oil recovery rates have declined, and, with no remedy in sight for the gas reinjection shortage, this decline may accelerate.

"Depletion rates have increased, and, if investment does not increase, depletion will accelerate. If the regime actually proceeds with LNG exports, oil export decline will accelerate for lack of reinjection gas. In summary, the regime has been incapable of maximizing profit, minimizing cost, or constraining explosive demand for subsidized petroleum products. These failures have very substantial economic consequences.

"Despite mismanagement, the Islamic Republic's real oil revenues are nearly their highest ever as rising price compensates for stagnant energy production and declining oil exports. Despite high price, however, population growth has resulted in a 44% decline of real oil revenue per capita since the 1980 price peak. Moreover, virtually all revenue growth has been applied to pet projects, loss-making industries, etc. If price were to decline, political power sustained by the quadrupling of government spending since 1999 may not be sustainable. Yet we found no evidence that Iran plans fiscal retrenchment or any scheme to sustain oil investment.

"Rather, the government promises 'to put oil revenues on every table,' as if monopoly rents were not already the entree. Backing this promise is a welfare state built on the Soviet model widely understood as a formula for long-run economic suicide. This includes the 5-year plans, misallocation of resources, loss-making state enterprises, subsidized consumption, corruption, and oil export dependence that doomed the Soviet experiment. Therefore, the regime's ability to contend with the export decline we project seems limited."

Couldn't happen to a nicer bunch of mullahs. If gasoline subsidies are 40% of the national budget now, what will they be in 7 years at a growth of 10% a year? Can rationing work? No, but it can slow the economy.

Stern concludes that Iran may need nuclear power as their energy supply is dwindling. I find this conclusion rather preposterous, since if they wanted more energy, all they would have to do is allow foreign investment or invest more of their own money in their own fields. If the developed world will simply apply firm sanctions, Iran will have to reconsider its nuclear program, as their ability to finance mischief will erode as the mullahs divert their resources to domestic needs in order to maintain their dwindling popularity.

The cost of their current policies cannot be lost on the youth and educated people of the country. There is almost 14% unemployment among college graduates. Iran looks to me like Russia did in 1988. They were in the process of self-destruction, although few recognized it at the time. Iran is a matter of time.

Investment performance, continued: Dril-quip is coming back. Bucyrus International looks strong. But the BIG news is that my Vanguard funds, VTRIX, VGTSX, VPADX, VEMAX and VIMAX continue to do handsomely. Seems ironic that with all the work, the least work (i.e. Vanguard) performs so well.

Verizon's new global BlackBerry 8830 phone worked perfectly in Europe:



But, before you leave the U.S. you must get Verizon to set it up for global roaming. That includes updating your account and getting a special Verizon GSM SIM card. The phone is locked and won't take just any SIM card you buy at a local tobacconist. That makes its voice calls expensive, but convenient. Best thing about the 8830:

+ You can answer your U.S. phone number in Europe.
+ You can receive and transmit as many emails as you want. The service is flat rate.
+ You can surf the net. It's not picture-perfect. But it works and you can find and read what you want.
+ I love the feel and look of this new BlackBerry. It's Research in Motion's best ever -- and a lot cheaper than Apple's iPhone, which is pretty but works on a yuchy network, AT&T.

Newspapers and who reads them.
1. The Wall Street Journal is read by the people who run the country.

2. The Washington Post is read by people who think they run the country.

3. The New York Times is read by people who think they should run the country and who are very good at crossword puzzles.

4. USA Today is read by people who think they ought to run the country but don't really understand The New York Times. They do, however, like their statistics shown in pie charts.

5. The Los Angeles Times is read by people who wouldn't mind running the country -- if they could find the time -- and if they didn't have to leave
Southern California to do it.

6. The Boston Globe is read by people whose parents used to run the country and did a far superior job of it, thank you very much.

7. The New York Daily News is read by people who aren't too sure who's running the country and don't really care as long as they can get a seat
on the train.

8. The New York Post is read by people who don't care who's running the country as long as they do something really scandalous, preferably while
intoxicated.

9. The Miami Herald is read by people who are running another country but need the baseball scores.

10. The San Francisco Chronicle is read by people who aren't sure there is a country . . or that anyone is running it; but if so, they oppose all that
they stand for. There are occasional exceptions if the leaders are handicapped, minority, feminist, atheist, dwarfs, who also happen to be illegal
aliens from any other country or galaxy, provided of course, that they are not Republicans.

11. The National Enquirer is read by people trapped in line at the grocery store.

12. The Seattle Times is read by people who have recently caught a fish and need something in which to wrap it.

This is the Mendenhall Glacier near Juneau. Someone called Sonia took this photo while on a cruise.

I hope our weather is as good. Have a great July 4. See you next -- on Monday, July 16 morning.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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