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FORCES ARGUE FOR LOWER DOLLAR AND HIGHER OIL

FORCES ARGUE FOR LOWER DOLLAR AND HIGHER OIL

U.S. CONFRONTS CHINA OVER TRADE FOR THE THIRD TIME IN 2007
May I draw your attention to a NY Times front page headline today "U.S. Toughens China Position".  The gist of the article is that this is the third tough action against China in the last few weeks.  The Bush administration is responding to political pressures to do something about China’s trade surplus with the U.S.  Unfortunately, the actions they are taking, if continued and expanded, endanger the trade structure between the two countries and perhaps much of the world.

It is hard to find a quality economist who believes that free trade is a bad thing.  Although I know it is unrealistic to think of politicians as statesmen, I make this appeal to all national politicians in the U.S (and I know some of you read these pages).  Let us continue down the road of free trade, which has been responsible for much of today’s global prosperity, and let us not cave into shortsighted and extremely dangerous punitive tariffs and trade battles.  Tariffs and trade exclusions may buy votes in the short run, but they will surely destroy jobs in the long run.

VENEZUELA USING OIL AS A WEAPON IS POSSIBLY WOUNDING ITSELF

Venezuela is trying to force the major oil companies to give up their ownership of Venezuela’s oil fields, and is threatening to sell the heavy oil refineries in the U.S. that it owns.  Venezuela produces heavy oil, which sells for less than the light sweet crude (such as is produced by Saudi Arabia) due to its high processing and refining costs.

Venezuela’s President, Hugo Chavez, argues that they will sell to China instead.  However, this presents a problem for Venezuela.  The transportation costs of shipping oil from Venezuela to China are formidable.  Thus, sales to China are much less profitable. Additionally, it will take more than five years for China’s refineries to be able to handle Venezuela’s harder to refine heavy crude oil in quantity.

Like a lot of dictators before him, Chavez thinks he has it figured out.  He may find out like others have, that the oil world is a hard place to dominate.  The side effect of all of this may well be higher oil prices.  Venezuela is not making the capital investments to keep their production flowing.  Venezuela’s oil production decreased when Chavez purged the Venezuelan national oil company after a strike by white collar engineers, geologists and administrators.  Production has yet to return to pre strike levels.
OIL IS GOING TO HIGHER PRICES
We believe oil prices will be above $70 per barrel by the end of 2007.  If wars expand in the oil producing regions, the price could be way above that level.  This is negative for the U.S. dollar and positive for base metals and gold.