Precious metals are starting to get their shine back.

Silver is now up $10/oz from its recent low of around $70/oz. Gold is up more than $400 from its dip to $4,400/oz.

Bullion is looking good here.

Miners are clawing back gains as well. The GDX gold miner ETF is up from a low of $79 back on 3/20 to $98 today. The SILJ silver miner ETF has bounced back to $32 from $26.

However, let’s not pop the champagne on miners just yet. The situation in the Middle East remains uncertain.

The ceasefire is holding for the most part, which is encouraging. But the Strait of Hormuz is still closed. And as we’ve pointed out many times, we are still miles apart from Iran on negotiation terms.

Higher oil prices mean higher costs for miners. So for now, I think the outlook for physical metals looks more certain than miners.

The world seems to think this crisis is over, but I’m not sold on that idea yet.

However, if (when) oil prices return to the below-$70 per barrel level, it’ll be off to the races for miners again.

We just don’t know when that will be. So for now, my recommendation would be to invest new money into physical gold and silver rather than miners. That can either be in the form of coins and bars, or ETFs like Sprott’s Physical Silver Trust (PSLV) and Physical Gold Trust (PHYS).

Today we’re going to focus on silver, and explain why we should see $100+ prices again soon.

Solar Demand Surges Silver Higher

Even before the conflict with Iran, energy prices were rising around the globe thanks to a surge in data center construction.

Now the world faces additional energy inflation, with oil and gas prices up sharply.

And as we predicted a few weeks ago, this is leading to a surge in demand for solar panels.

Around 19% of total silver demand comes from solar panels. Silver is the best conductor of electricity, and resists corrosion much better than copper.

So the tiny electrical connections on solar panels use silver, as shown below:

Solar panels can function for decades thanks to silver’s unique properties. And even with the metal at around $80/oz, it’s the only good option.

We shouldn’t be surprised that in the wake of this energy crisis, solar demand is booming. Here are a few recent headlines from around the world:

• BBC: UK Sees Surge in Solar Panel Demand Amid Rising Energy Costs
• Bloomberg: Malaysia’s Biggest Solar Firm Sees Jump in Demand on Iran War
• Impakter: Suniva to Invest $350 Million in South Carolina Solar Plant

Even once this crisis is resolved, I expect the world to continue installing solar at a rapid pace. Especially in the Asia-Pacific region.

Asia has now seen how quickly oil and LNG imports can disappear, and will look to reduce their dependence on imported energy. And that means a lot more solar power.

Silver’s Shanghai Premium

As I write this, silver is trading at around $79.20 per ounce in the U.S.

In Shanghai, China, however, it’s trading at $89.50. That’s a hefty 13% premium.

Source: GoldSilver.ai

The price is significantly higher in China due to the fact that China’s silver markets are based around physical metal. Much of their silver gets used for industrial manufacturing.

Almost 90% of solar panel manufacturing takes place in the country. There’s also a robust silver investing community in China.

Meanwhile, here in the U.S. we primarily trade silver as a paper contract on the COMEX. There is a growing silver investment movement, but it still hasn’t reached its potential yet.

The Shanghai premium means that physical silver supplies remain tight. Buyers are bidding up the price locally.

Industrial demand looks strong going forward.

What About Silver as an Investment?

We had our first real outbreak of silver fever late last year into January, when prices briefly reached $120/oz.

It was a perfect storm of booming industrial demand, combined with rising investment buying.

That was the first wave. I believe we’ll see another one soon.

Silver is the precious metal for everyday people. Gold led the way during the early stages of this bull market, driven largely by central bank buying.

And I think gold will do fine going forward. But the setup for silver looks even better. When that combination of booming industrial + investment demand hits again, we’re going to see fireworks.

In the midst of this energy crisis, it’s easy to forget we’re also due for a debt/credit disaster. And whenever that one kicks off, demand for silver (poor man’s gold) is going to skyrocket.

So despite all the chaos and change in the world economy, silver remains my favorite way to play precious metals.

It’ll be volatile. But the stars are once again lining up. Over the next few years, I remain confident we’ll see $200/oz silver.

The post Silver’s Next Wave Starts Now appeared first on Daily Reckoning.

A good friend and schoolteacher posted this question on Facebook the other day:

An honest question- PLEASE don’t turn it into politics- Do we not have our own oil in this country? Why do we not drill more and supply more? If we have it and can drill, why are we not? Prices would drop, no?

I posted a short answer, but I keep hearing this question from all over. The snarky, economics answer is that markets work and oil is too useful to be cheap for long. Before we start, we need to learn a new word (for some of us):

To economists, oil is fungible. It means that a barrel of oil in Abilene is the same as a barrel of oil in Singapore. And so, if the price of a barrel in Singapore costs more than a barrel in Abilene (plus shipping costs), then we should buy the barrel in Texas.

But there’s a much more interesting and detailed answer…

Okay, buckle up. Because I want to take a deep dive. You see, I love oil. Back in the early 2000’s, I thought that was going to be my career path. I partnered with some wild-catters on oil wells in West Texas. It fascinates me, so hopefully I can share some of that with you!

Let’s start with the fact that oil is a global market. In other words, you can swap barrels from almost anywhere. There is a little more nuance that we’ll get to in a minute. But generally, you reach a price point where you can substitute crudes to save money.

That balances the price of oil, so you don’t have one region with super cheap oil and another super expensive. In other words, the market works…

But, since I love oil so much, I’m going into a little more detail on this. We’ll start with chemistry and go on from there.

You see, oil isn’t monolith…it’s not like a metal, which is made of identical atoms. Oil is like a soup. It’s made up of chains of “hydrocarbons”. They are literally hydrogen and carbon atoms linked together in different lengths with some other stuff too. If the crude has a lot of sulfur, it’s called sour. If it has a little, it’s called sweet.

We see both ends of the spectrum every day in our lives. Gasoline is another soup of chains that contain 4 to 12 carbon atoms. On average, gasoline is C₈H₁₈. That’s eight carbon atoms and 18 hydrogen atoms linked in chains.

Asphalt on our roads are hydrocarbon chains that have more than 42 carbon atoms. In general, the longer the chain, the thicker and heavier the oil. But both are hydrocarbons found in oil. Some chains, like those found in Canada’s oil sands, are so long that they need to be heated to flow.

We measure the average length of hydrocarbon chains in oil using “API Gravity”. This measures the density of the oil. The higher the gravity, the lighter the oil.

Water has an API Gravity of 10. Below that, the oil sinks in water.

As a rule of thumb, the lighter the crude oil, the higher percentage of shorter chains. That crude is easier to turn into vehicle fuels. And it gets a premium to heavier, sour crudes.

Since oil varies by region, the world has a series of “benchmark” prices. When you drill a new well, the oil gets classified against your benchmark. We use West Texas Intermediate, here in the states.

The oil coming out of the ground in the U.S. gets graded against the West Texas Intermediate benchmark. That’s how the price is set here in the U.S.

For reference, here are the main oil benchmarks around the world, with the current prices:

In general, the benchmark crude prices trade in lockstep. You can see an example of three key benchmarks’ prices here:

Quality of the crude will create a small discount or premium, but for the most part, the market moves together.

That’s why, when war closed the Strait of Hormuz, crude oil from Dubai to the U.K. to Cushing, Oklahoma all soared. It doesn’t matter who has the oil.

Markets are global, and oil is the beating heart of the economy today.

The world produces and processes around 103 million barrels of oil per day (pre-Iran). So if one country raises output, it won’t affect the local (or global) price much.

The post American Oil Won’t Save the Day appeared first on Daily Reckoning.

“We’re ahead of schedule and landing early,” said the pilot. My wife and I were on a flight from Tokyo, and the aircraft was descending towards SeaTac Airport, south of Seattle.

“There’s something else,” said the voice from the cockpit. “We have two airliners from China behind us. So, when we reach the jetway, please deplane quickly. Get yourselves to customs, or you’ll wind up in a big backlog of passengers.”

Forewarned, we made haste to International Arrivals and joined a fast-growing line. Then, from another hallway, a crowd of passengers emerged, fresh off those other two airliners from the Middle Kingdom, and this new mass of inbound humanity included a group of about 40 very pregnant Chinese women headed towards the non-citizen passport line.

To be perfectly clear: it was beyond obvious that these ladies were pregnant, although I should add that my keen powers of observation were enhanced by a sharp elbow to my ribs, as my spouse said, “What’s with those pregnant gals? They look like they’re at seven months.”

Hey everybody! Your US passport is an airline flight away. Image via ChatGPT.

Definitely, women notice these things. And then, it was our turn with U.S. Immigration and Customs, but hold that thought…

“The Same Constitution”

You may already suspect where this is going; namely, to discuss what’s euphemistically called “birthright citizenship,” although another term for the phenomenon is “passport tourism.”

That is, current U.S. law interprets the 14^th Amendment to the U.S. Constitution as conferring citizenship on any person born in the U.S. or territories, aside from limited exceptions such as children of foreign diplomats. Otherwise, it doesn’t matter who is born to whom, or under what circumstances. When a baby pops anywhere inside U.S. territory, the outcome is a brand-new U.S. citizen.

At least, that’s the conventional legal wisdom, now under review by the U.S. Supreme Court in a case called Trump vs. Barbara (S.Ct. Docket 25-365), which was argued two weeks ago on April 1, with no less than President Trump in personal attendance.

People write scholarly books and law-review articles on the 14^th Amendment and birthright citizenship. Plus, there’s a large cadre of legal pundits on the topic, who jealously mark this territory like dogs at fire hydrants. And of course, within a few months we’ll have a Supreme Court decision on the matter. Case closed? Well, we’ll see…

Meanwhile, at this point in life I’m just a humble, taxpaying Navy veteran and geologist, not a bigshot Constitutional lawyer. Still, though, I’m intrigued at this quirky feature of American law, the principle that almost anybody can walk in (or fly; see above), deliver a live birth, and presto we have a new citizen, eligible for every sort of private right and public entitlement. So, I listened to the Supreme Court oral arguments.

Frankly, one line of discussion perplexed me. In fact, it troubled me deeply; namely, an exchange between Chief Justice John Roberts – full disclosure; he’s an old Harvard classmate – and U.S. Solicitor General John Sauer.

Undergraduate John Roberts, circa 1973. Courtesy Harvard Crimson.

In opening remarks, Sauer referred to “birth tourism” and stated that “uncounted thousands of foreigners from potentially hostile nations have flocked to give birth in the United States in recent decades, creating a whole generation of American citizens abroad with no meaningful ties to the United States.”

Well, yeah… Sauer’s point rang true to me; see my anecdote above about the pregnant Chinese ladies at SeaTac. Obviously, these women were coming to the U.S. to deliver babies. And one need not be Sherlock Holmes to understand that this was not a one-off thing, because it happens across the country many times, every day. Look around. In essence, there’s an entire travel-birth-citizenship industry at work here.

Then in a follow-up question, Roberts asked Sauer: “Do you have any information about how common that is, or how significant a problem it is?”

Sauer responded that “media reports” estimate over one million people have come from China alone to give birth in the U.S. And he mentioned a Congressional report about “Russian elites” who travel to Miami to have babies, via “birth tourism companies.”

Sauer added that, “Based on Chinese media reports, there are 500 birth tourism companies in the People’s Republic of China whose business is to bring people here to give birth and return to that nation.”

Roberts replied with a rhetorical question: “Having said all that, you do agree that that has no impact on the legal analysis before us?” In other words, Roberts essentially called Sauer’s point irrelevant to the case.

Sauer replied that, “We’re in a new world now, as Justice [Samuel] Alito pointed out, to where eight billion people are one plane ride away from having a child who’s a U.S. citizen.”

And Roberts answered, “Well, it’s a new world. It’s the same Constitution.”

Huh? Hey, wait a minute. That’s a pretty glib, uncurious wave-off of an important fact-set. Indeed, it’s gratuitous, especially coming from the Chief Justice of the United States.

Suicide by Constitution

In other words, it’s not as if the Supreme Court has not interpreted and reinterpreted that so-called “same Constitution” mightily over the centuries to accommodate all manner of human advancements.

And that’s before we get to the relatively modern idea of a “living Constitution,” under which the Court has allowed the federal government to do pretty much anything that the political powers desire. Indeed, the past 90 years of Supreme Court jurisprudence speaks for itself.

The idea of the “same Constitution” should not mean that the nation’s foundational document is some sort of unchangeable fossil record of the world of 1787, from the time when the document was composed.

For example, does the First Amendment, which protects freedom of speech and press, only apply to communication technology of 1787? The question practically answers itself. American free speech is wide open, and per countless Supreme Court cases over many decades, federal, state and local governments restrict it at their legal peril.

Or does the Second Amendment only pertain to muskets of late-1780s vintage? Does it mean that you can own only a flintlock rifle, and even then, only if you are in a “well-regulated Militia?” No, of course not, and the Supreme Court has evolved its views on firearms laws to change with the times.

How about the part of the Constitution that empowers Congress to “raise an Army” and “maintain a Navy.” Does that mean the country cannot have an Air Force? Because obviously, there were no airplanes in 1787 flying over the Philadelphia Constitutional Convention. And again, it may come across as silly to argue the point, except that somehow the so-called “same Constitution” is now a barrier to progress if we follow the Roberts logic to where it seems to be headed.

Last, and not to overwhelm you, there’s Wickard vs Filburn, a 1942 case that empowered the federal government to regulate the smallest details of daily American life – in this case, farming – under the guise of “regulating interstate commerce.” Indeed, the small family farm in America traced its roots literally to Jamestown in 1620. And for over 300 years, farming was a taproot of American freedom. Yet after Wickard, the simple act of planting seeds in the ground fell under the jurisdiction of the U.S. Department of Agriculture.

Which brings up a line that popped into my head when Roberts rebuked Sauer, namely that “the Constitution is not a suicide pact.”

The exact historical record is unclear, but President Abraham Lincoln supposedly coined this phrase in response to charges that he was a tyrant for suspending the Writ of Habeas Corpus during the Civil War. Today, we have the luxury of second-guessing the man, but in his day, he had battles to fight, and keeping certain people off the streets served a purpose.

President Lincoln. Courtesy Library of Congress.

More recently, the “suicide pact” phrase was used by Justice Robert Jackson in his dissent in a 1949 case, Terminiello vs. Chicago, a free speech case then before the Supreme Court. And the phrase saw more daylight in 1963 in Kennedy vs. Mendoza-Martinez, in an opinion grounded in due process rights, authored by Justice Arthur Goldberg.

And now, here we are, dealing with new developments in a rapidly changing world, namely birth tourism. Fly in, have a baby, make a so-called “citizen,” and… then go home.

My anecdote above, about the pregnant ladies at SeaTac, is from 2015, or more than a decade ago. But it still resonates. Both the New York Times and New York Post have recently run stories about Chinese women traveling to the mainland U.S. or territories (eg., Mariana Islands) to have babies. They fly in, hang out, deliver a baby, and in due course obtain U.S. citizenship for the child, plus a social security number and passport.

Clearly, per those above-noted Supreme Court discussions, this is a new world. It’s not the olden days of the 1860s, when the 14^th Amendment was drafted in the wake of the Civil War. And obviously, coming to America no longer involves a long sea voyage on a sailing ship. Just buy an airline ticket, and voila!

Meanwhile, it’s one thing when foreign visitors come to America to see the sights, do tourist things, and then go home with, say, a T-shirt, coffee mug, or maybe some refrigerator magnets.

But now, there’s also a vast subset of the tourism industry that brings late-term pregnant women to America, to have babies and return home with a child and U.S. passport; or perhaps call it a “refrigerator magnet passport.”

To be fair, these almost-mom arrivals are not sneaking into America. They’re not “illegal,” not in the way the term is commonly used. Nor are they coming here to go to take a job away from an American worker. Although their little anchor baby now dilutes your own citizenship, in the big scheme of life.

Indeed, the pregnant ladies walk through the U.S. entry system, usually with a B-1 visitor’s visa, and get a stamp on their own passports for a six-month stay. And they go home with a nice, new, bundle-of-joy American citizen, to raise in, say, China under Communism.

A Crazy Way to Run a Country

To me, at least, this is all very odd: granting citizenship based on an airline ticket and six-month tourist visa. Is this really what the 14^th Amendment authors meant when they were working to clean up the societal mess after the Civil War?

Plus, we have the raw, blood-sport politics of the entire matter, the idea that President Trump wants to end this passport tourism business, which is enough for many people simply to dismiss the idea out of hand. Cuz… Trump, yes?

Then again, all systems have flaws, and the world is filled with people who want to take advantage. But the more curious thing – scandalous, actually – is that this matter has grown to such size that it’s actually a demographic and political issue, now sitting on the bench of the Supreme Court.

It’s in front of the Black Robes, with all of the subtle, but critical, in-group virtue signaling that they must perform to impress their Washington, D.C. career managers. And face it, there’s a certain, leftward-drifting agenda in America, with Washington as Ground Zero. And the Supreme Court is part of it.

At the end of the day, each justice has his/her own future personal and career goals, if not their income and ego. Are they there to serve the nation? Or have they gone native inside the Washington Swamp?

In general, the question is how “birthright citizenship” serves the national good? More specifically, how does “passport tourism” advance the national agenda?

Well, we’ll find out in a couple of months. And that’s all for now.

Thank you for subscribing and reading.

The post Trump Takes Aim at Passport Tourism appeared first on Daily Reckoning.

Today we’re going to take a break from the Middle East, and focus on an important shift taking place in markets.

Slowly, investors are beginning to appreciate fundamentals again.

After more than a decade of reckless speculation, meme stocks, gambling, and ultra-low interest rates, we are starting to see a return to old-school investing.

A fresh focus on dividends, earnings, and real assets.

It’s refreshing. And this new paradigm is going to last a while.

Is the Dark Age of Investing Over?

There is a classic scene in the HBO show Silicon Valley (2014-2019).

The show revolves around a tech startup named Pied Piper.

When the CEO tells their biggest investor that he wants to start generating revenue, the investor loses it.

“If you show revenue, people will ask ‘HOW MUCH?’ and it will never be enough. The company that was the 100xer, the 1,000xer is suddenly the 2x dog.

But if you have NO revenue, you can say you’re pre-revenue! You’re a potential pure play.

It’s not about how much you earn, it’s about how much you’re worth. And who is worth the most? Companies that lose money!”

For a long time, this was a real thing.

Pre-revenue startups were priced largely based on their ability to pitch investors. But once a startup began generating revenue, some investors priced them using more traditional metrics, like a revenue multiple.

So startup companies without any revenue were often valued more highly than those with it. And hot startups were expected to raise and spend vast sums of money to grow at warp speed.

This sentiment also bled over into the stock market. Investors demanded growth at all costs. And smaller tech stocks delivered plenty of growth, but plentiful losses too.

Low interest rates are partly to blame. With yields on bonds and bank accounts so low, money poured into the stock market, creating one of the wildest speculative environments in history.

It’s been a crazy time.

But I believe this era is ending. Investors are ditching software for oil and gas.

They’re ditching government bonds for gold and silver. Over the past year, U.S. bonds are basically flat, while gold is up 46% and silver is up 134%.

And they’re shifting out of overpriced U.S. stocks into emerging markets like Brazil. Over the past year, the iShares Brazil ETF (EWZ) is up 72% compared to the S&P 500’s 28%. And Brazil still looks cheap.

I believe this trend will be dominant for at least the next decade.

The Revenge of Buffett and Graham

Legendary value investor Benjamin Graham famously said, “In the short run, the market is a voting machine. In the long run, it is a weighing machine.”

In other words, manias and bubbles can push stocks to crazy levels temporarily, but over the long run, it is ultimately earnings and dividends that drive returns.

We’ve already started to see a shift away from money-losing stocks and startups. Primarily in the tech space.

For example, Snowflake (SNOW) was the hottest tech stock in the world for a brief period. Its 2020 IPO even attracted Warren Buffett’s Berkshire Hathaway.

Snowflake shares soared over $350 in 2021. But since then, like much of the software/tech space, investors have lost interest. The company is still growing fast (30% YoY), but in 2025 it generated a loss of $1.3 billion.

SNOW shares are now down 62% to $131. There are dozens of stories just like Snowflake’s. Tech firms that spent too much money, gave their employees too much stock, and lack a realistic path to profitability.

The rise of AI is also contributing to this shift. It has made the outlook for software stocks especially murky. In such an environment, companies that own hard assets like oil wells, mines, and factories are increasingly attractive.

U.S. Stocks – Still Overvalued

We’ve seen the first hints of a shift in investor psychology. A desire for profitability, dividends, and real assets.

But U.S. stocks are still quite overvalued. When Walmart is trading at a P/E of 46, you know things are out of whack. This is a stock that has historically traded in the 10-16 P/E range. And today it’s 3x that.

So just because a business owns real assets doesn’t make it a good bet for this environment. It needs to be cheap to offer real protection.

So while we’ve seen the beginning of a shift, the trend has a long way to go.

The world will soon face a financial reckoning. It will happen regardless of what occurs in the Middle East. Though if that situation escalates, it will worsen it.

So this is not a time to have a large allocation to pricey speculative stocks. During market crashes, speculative stocks are always hardest hit.

It’s a time to buckle down in hard assets and high-yield value stocks. Companies that can thrive in a chaotic environment.

Here in the U.S., stocks that are cheap, attractive, and high-yield are somewhat rare.

So I will continue to invest primarily in emerging markets for value. Emerging markets now make up about 40% of my stock portfolio, and that will likely rise over time.

Strangely, the return of fundamental investing means we need to own more non-traditional assets. More on that soon.

The post The Glorious Return of Fundamentals appeared first on Daily Reckoning.

Tomorrow, talks between the U.S. and Iran are scheduled to begin.

The discussions will take place in Islamabad, Pakistan.

President Trump appears confident going into the meetings:

Source: Truth Social

But Iranian leaders, such as Speaker of Parliament Mohammad Ghalibaf, say they are not even willing to negotiate until their money is unfrozen, and Israel’s bombing of Lebanon, and annexation of land, stops.

Source: X

As we covered earlier this week, it does not appear that Israel is about to stop bombing Lebanon. This is a major sticking point for both parties. Israel says it needs to protect itself against Hezbollah rocket attacks, and Iran says Israel is killing civilians along with militants.

Unless we get a ceasefire which includes Lebanon, it’s unlikely these negotiations will go forward.

In more disturbing news, rumors are flying that Iranian “moderates” like Ghalibaf are losing influence to Iran’s hardline Islamic Revolutionary Guard Corps (IRGC).

Source: ZeroHedge on X

Iranian “moderates” like Ghalibaf and Foreign Minister Aragachi appear to be pushing for diplomacy, while the IRGC is more interested in preparing for a resumed war. And we don’t know which side will win out, due to all the chaos with Iran’s leadership.

Meanwhile Trump is also preparing for the possibility of a resumption of fighting.

Source: Truth Social

The President continues to move American military assets into the region, and has now committed 80% of our cutting-edge long-range JASSM stealth cruise missiles to the fight, according to Bloomberg.

Lasting Agreement: Unlikely

After some initial hiccups, the fragile truce between the U.S. and Iran is holding. For now.

But the only point the sides agree on is that they’re not currently launching missiles at each other.

With negotiations scheduled to take place tomorrow, both sides are preparing for the possible (likely?) resumption of war.

Our colleague Jim Rickards did an excellent interview with Michelle Makori yesterday, in which he said, “It’s not much of a ceasefire…. the two sides don’t agree on anything.”

And he’s right. The U.S. demands include:

• Severe limits on Iran’s ballistic missile and drone programs
• An end to nuclear enrichment
• Full opening of the Strait of Hormuz
• An end to support for Iran’s proxy/allies in Yemen, Iraq, and Lebanon

These are basically all non-starters. Iran has signaled that it may be willing to give up its near-weapons-grade uranium, but that’s about it.

Meanwhile, Iran demands:

• A permanent commitment to non-aggression
• Withdrawal of all US forces from Gulf region
• Peace in Lebanon, which Israel is currently bombing back to the stone age
• Compensation for the war (possibly in the form of tolls to pass through Hormuz)
• End of all sanctions and UN resolutions

Again, I don’t see our government agreeing to any one of these, let alone all of them.

So even if the negotiations do take place, and I hope they do, it’s unlikely this first round will go anywhere.

If we’re lucky, the U.S. team will be able to convince Iran to open the Strait of Hormuz as talks proceed.

Financial Impact

Meanwhile, the Strait of Hormuz remains closed to nearly all traffic. About 20% of global oil flows. Only a few tankers bound for China and other Iranian “friendly” countries are getting through currently.

Unless the Strait opens very soon, this energy crisis will enter a new dimension. $150/barrel oil is possible near-term, and higher than that if it stays closed for a few more months. And that’s not even counting what happens if more oil and gas infrastructure gets blown up.

In his interview yesterday, Jim also warned, “the fact that you’ve got a dollar liquidity crisis, a private credit meltdown, and a war with Iran, is extremely concerning. And we could be looking – at best – a recession, and possibly something much worse.”

Regarding the Strait of Hormuz, Jim says that due to the fact that the last tankers through the Strait are just arriving at their destinations recently, “now is the time the danger truly kicks in.”

He’s right. It takes time for ships to travel, arrive, and deliver their cargo. We are just now reaching the point where the real supply disruptions kick in.

I strongly recommend watching Jim’s recent interview. He gives a great overview of the current ceasefire situation, economic challenges, and more. Here’s the Youtube link.

Best and Worst Cases

For now, the best outcome I see is a continued ceasefire and Iran agreeing to re-open the Strait of Hormuz, which would re-inject about 8 million barrels of oil per day back into global markets. That’d be an amazing outcome for this initial meeting.

The tough part will be hammering out a lasting agreement. And that’s what we need for markets to find certainty and confidence. Right now it looks like both sides are simply resting and re-arming.

The worst case, of course, is a full resumption of the war. More targeting of oil, petrochemical, and natural gas infrastructure.

Stock markets are not currently pricing in the possibility of a bad outcome. At all. They are pricing in a peachy resolution where everything turns around tomorrow.

So I will continue to hold an oversized cash position, with a few hedges, until the smoke clears. Don’t get me wrong, I haven’t sold everything. But I’m back up to around 18% cash, which is a lot for me.

If we do get another escalation, I want to have cash ready to buy select assets. Because the downside potential for stocks from here is significant.

Eventually this situation will be resolved, and oil will come back down to a more reasonable level. But my guess is it won’t be as soon as most people think. And oil could go a lot higher than most investors imagine before that happens.

A lot of economic damage can be done before this war is over. Even if the war ends tomorrow, oil won’t return to normal levels for some time. And volatility will remain high until that resolution happens.

More on Monday.

The post Intermission: The War Will Resume Shortly appeared first on Daily Reckoning.

Imagine a metal so rare that if it were an eye color, only 36 people would have them…in whole world. Now, imagine it is incredibly useful for aerospace technology.

The element is named rhenium.

Before 1905, it was merely a predicted element. They knew something should be on the periodic table there, but not what.

And then Japanese scientists discovered it in 1908 but misidentified it. Finally, it was identified in 1925. But it didn’t trade commercially until 1928.

A kilogram of the stuff cost $10,000 at the time ($190,000 today). It was so rare and so difficult to refine that it cost a whopping $5,390 per ounce in today’s dollars.

It took decades before we figured out what to do with this expensive metal. But by the 1950’s, tungsten-rhenium and molybdenum-rhenium alloys became critical for aerospace applications.

However, it really became commercially important in the 1970’s, with specialty gasoline catalysts and high-temperature nickel alloys.

The nickel alloys go into the hottest sections of jet engines, rocket engine nozzles, combustion chambers, and gas turbines. The addition of rhenium strengthens these materials used in extremely high temperatures.

Rhenium resists oxidation (rust) and high temperatures. That makes it perfect for electrical connections in high performance switches used in aerospace and defense systems.

However, it is rhenium’s membership in the 2D transition metal dichalcogenides (TMDs). TMDs appear to be the most promising functional materials for post-silicon, high-performance devices.

When combined with sulfur (rhenium disulfide) it creates a material with unique electrical properties. That opens some doors for potential use in next-generation electronic and optoelectronic devices.

According to Advanced Science News:

The unique structure of this anisotropic 2D material has endowed it with layer-independent electrical and optical properties, suitable for application in field effect transistors (FETs) and photodetectors.

That’s a complicated way to say that TMDs could replace silicon in advanced computer chips. As its utility grew, so did demand. You can see the impact on its price over the past decade:

Today, the world mines about 50 to 60 metric tons of rhenium per year. Compare that to copper, where the world produces 23 million metric tons per year.

Today, the aerospace/defense industries consume about 80% of the annual rhenium supply. As we mentioned earlier, it’s a key part of jet engines and rocket thrusters. However, it also goes into the frames of late generation fighter jets. The jets require up to 6% rhenium in their alloys. That allows them to operate at much higher temperatures than traditional metals.

The second largest demand for rhenium comes from catalysts in petroleum refining. Refineries use platinum-rhenium catalysts to make high-octane gasoline. These catalysts resist sulfur and nitrogen “poisoning”. That gives them a much longer life than catalysts made of just platinum.

But that’s looking into the past. The future is all about demand for rhenium disulfide TMDs:

• Next-Gen Semiconductors: Over 72% of semiconductor R&D groups are prioritizing 2D materials like rhenium disulfide because they maintain a stable direct bandgap regardless of layer thickness, a major advantage over other TMDs.
• Advanced Optoelectronics: there is a growth in rhenium disulfide in near-infrared (NIR) photodetectors and sensors.
• Flexible & Wearable Tech: Rhenium TMDs can be exfoliated into layers thinner than a nanometer but retain a high strain tolerance (above 10%). That makes them useful for flexible displays and wearable biosensors.
• Quantum Computing and AI: Engineers are trying rhenium thin films for superconducting quantum circuits and hardware for neural networks.

That’s why rhenium is so important for tech investors going forward. Unfortunately, there is no direct play on rhenium mining.

The bulk of this metal comes from copper mining. Chile currently produces the bulk of this material. Alloy recycling produces about 25% of total supply.

We will continue to explore the metals which will power the future. And share attractive investment ideas as we find them.

The post This “Unobtanium” Metal Powers the Future of Tech appeared first on Daily Reckoning.

My friend and editor of Paradigm Press’s Million Mission, Davis Wilson, wrote a piece on the Facebook IPO I read with a potent mix of nostalgia and alarm.

I’ll start with the nostalgia.

The Big G

In 2012, I had already moved to Singapore, but was still flying back and forth to London, my old home, to meet and greet with friends and clients. One of my friends, G, was a partner at Goldman Sachs and had lived in New York since we graduated from London Business School together. But he had returned to London to work at Goldman’s Fleet Street offices. With a mathematics professor and an engineer for parents, G was a natural at the rather mundane mathematics finance employs. He made Goldman and himself bags of cash.

I loved hanging out with G because he was smart, fun, and rich as Croesus. But more than that, if I had to teach something that was over my head, he’d meet me in the pub to show me the ropes. One time, I had to teach a Credit Derivatives class. One glass of single malt scotch and two hours in the pub was all it took for me to have a Goldman-level understanding of the big picture. Definitions, pricing, uses, and back office requirements. He gave me it all, plus a few war stories, which the class devoured. The class certainly got its money’s worth.

Oh, those were fun times.

But the reason I bring G up is because of another conversation we once had about the Facebook IPO. I’ll never forget it for as long as I live, simply because I remember feeling my brain take in the information. It was the “scales falling from the eyes” moment for me, the moment I finally understood how cutthroat the business world could be.

Before META, There Was FB

META is pretty old news now, and its Metaverse is such a failure that they’ve stopped using the term. Reality Labs, Meta’s virtual reality (VR) division, has lost $83.6 billion over the last six years.

But back in 2012, Facebook was all the rage. It’s hilarious to think its biggest problem back then was that they hadn’t yet figured out online advertising. Of course, with the Facebook Pixel, they had mastered that domain and made themselves and their investors so much money they could piss it up a wall on a botched bet on VR costing billions.

Nevertheless, their IPO was hotly anticipated for many reasons, not the least of which was finally determining the company’s worth. Older readers may remember Diane Sawyer famously trying to weasel it out of Zuckerberg in an incredibly awkward interview. Think Mrs. Robinson meets Sheldon Cooper. Ewwww…

Morgan Stanley emerged as the lead bank after doing a lot of work for Facebook at no cost in the years leading up to the IPO. JP Morgan was second, leaving Goldman Sachs embarrassed as the third bank. (Even Facebook executives, with their close government connections, had no love for the “vampire squid.”)

But, as usual, this was an enormous blessing in disguise for Goldman. Morgan Stanley would screw up the IPO so badly that it took the massive reputational hit Goldman was able to avoid. How did Morgan Stanley mess up?

The IPO Numbers

On the surface, Facebook’s IPO looked like a triumph of capitalism. The book was 5x oversubscribed, so Morgan Stanley did exactly what it was paid to do: it raised the price from $28–35 to $34–38, jacked the share count 25% to 421 million, and handed Zuckerberg a tidy $100 billion valuation.

Facebook CFO David Ebersman had been quietly gunning for that number all along. Round, iconic, and utterly meaningless as a forward-looking metric, but perfect for a Wall Street dog-and-pony show.

But here’s the rot underneath the paint job: 11 days before the IPO, Facebook quietly whispered to Morgan Stanley that it was slashing its revenue projections. Mobile was eating desktop faster than Zuck’s ad team could monetize it; fewer eyeballs on ads, fewer dollars in the door. That’s a material development.

While Morgan Stanley’s institutional clients got that little heads-up, retail investors lining up to buy the hottest IPO in a decade were left staring at a glossy prospectus built on a lie of omission. The oversubscription number that made the deal look bulletproof? Engineered on asymmetric information.

And this is where the job gets sticky for bankers. On the one hand, you’ve got your issuing client; in this case, that’s Facebook. You want to maximize their take from the IPO. But on the other hand, you’ve got your investing clients, the pension funds, insurance companies, endowment funds, hedge funds, and other long-only asset managers who depend on the 10% first day bounce from the IPO price.

Morgan Stanley had just booked themselves 18 months of ass-kissing and discounts for the IPO buyers.

Was FB’s IPO a Failure?

The honest answer is, “It depends.”

For the IPO buyers? Yes. They got hosed.

For Morgan Stanley? Yes. The equity origination team utterly embarrassed the bank.

For Mark Zuckerberg? Absolutely not. It was the greatest day of his young life.

This brings me back to my conversation with G. I vividly remember saying something to the effect of “Ha! Morgan Stanley! What a failure…”

To which he replied, “Failure? For whom?”

I looked at him quizzically. I was confused.

“Seanie, Facebook raised $16 billion. Zuck never has to go to the market again!”

If you’re a well-worn mining investor, think of how many times you’ve been diluted in the past year alone.

Now, understand that Mark Zuckerberg has never done that to his shareholders. In fact, Zuck has had only one other equity offering, in December 2013, because Zuck had a tax bill due. Here are the stats on that one:

• 27 million shares sold by Facebook itself (~$1.5B, for working capital and general corporate purposes)
• 35 million shares sold by Mark Zuckerberg personally (proceeds used to cover taxes on exercising 60 million Class B stock options)
• 6 million shares sold by Marc Andreessen

That’s it.

So from Facebook’s perspective, it was maybe the greatest IPO of all time.

But for those Day One buyers… Ouch!

Let’s look at the chart.

After debuting at $38 and briefly hitting near $45 on the first day of trading, FB was cut in half over the next 5 months, closing at $17.59. If you’re a fund sitting on those losses, you’re bitching out your idiot banker every single day.

Allegedly, it took those 3 banks 85 subsequent IPOs over 18 months to make their institutional clients whole on the expected “money on the table” they’d been denied. Some hedge funds reported that shorting FB stock was their biggest profit that year.

Of course, Facebook became a darling for investors and has made people multimillionaires since.

Elon’s SpaceX IPO

Ok, here’s the alarm, after the nostalgia.

Please understand something. I’m writing this to you via my Starlink satellite dish because Telecom Italia can’t get its act together. I think Elon is a genius and an unambiguous good for the world, and I would’ve let him finish the DOGE job by gutting government spending.

Here’s the comparison of FB’s IPO with SpaceX’s:

Elon is looking to raise $50 billion, and honestly, I hope he gets it.

But should you buy this stock?

Yes, but only after its IPO, when it falls at least 50% from these asinine, nosebleed levels the stock will get priced at.

I remind you of Scott McNealy’s reflection, years after Sun Microsystems’ stock imploded:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

At a P/S of circa 100, Elon has to give you 100% of revenues for 100 straight years as dividends… with all those other assumptions McNealy was nice enough to elucidate.

Good luck with that.

To reiterate, I think Elon is doing yeoman’s work for humanity. But I’m going to let bloated fund managers who benefited from decades of receiving Federal Reserve-induced funny money pay for it.

You should, too.

Wrap Up

Rarely has history screamed so loudly to warn us. Facebook’s IPO is our guide. SpaceX is in front of us.

While we cheer for Elon to reach for the stars… or just Mars… we mere mortals on Earth should tend to our flocks, rather than let this IPO clean our clocks.

The post Will the SpaceX IPO Zuck Early Buyers? appeared first on Daily Reckoning.

The fragile truce reached last night is already dead.

The first big strike after the ceasefire hit Iran’s Lavan Island oil refinery, which was damaged this morning.

Lavan Oil Refinery in Iran – Source: X

The U.S. has denied being involved in the strike. Two military officials told Newsmax’s Carla Babb the following:

“We have not conducted strikes against Iran since the ceasefire agreement started. If anyone is striking Iran now, it isn’t our military.”

It’s possible that Israel carried out the strike. However, the island is about 1,250 miles from Israel. There are rumors that it was carried out by the United Arab Emirates (UAE). This would mark another escalation, as the Gulf countries haven’t yet used their own weapons against Iran (so far they have only hosted U.S. forces and used air defenses).

Regardless, Iran proceeded to strike a pumping station along the critical Saudi East-West oil pipeline. This pipeline is currently Saudi Arabia’s lifeline for petroleum exports with the Strait of Hormuz closed.

The East-West pipeline allows Saudi Arabia to ship up to 7 million barrels per day from their oil fields to the Red Sea.

Source: ABC News

Without this critical pipeline, another 7 million barrels of oil will be taken off the market.

Iran also struck the UAE’s Fujairah oil export terminal, which handles about 3.2 million barrels per day (also visible on the map above, just below and outside the Strait of Hormuz).

These two strikes alone could potentially take another 10.2 million barrels per day (bpd) off the market. Combine that with the approximately 15 million bpd already removed, and you get an ugly situation. That’s up to 25% of global oil production offline or undeliverable.

Now, we don’t know how bad the damage to these facilities is yet. But Iran is certainly capable of taking both offline for an extended period of time.

Iran also struck targets in Israel.

Israel Keeps Going

Israel has made it clear they will continue to hit Lebanon, home of Hezbollah, an Iranian proxy force. Hezbollah has been launching large volumes of rockets, and even some crude missiles, at Israel during the conflict.

Source: X

Over the past month Israel has hit Lebanon extremely hard, and said it will expand its borders into parts of the neighboring country.

In a press conference today, Israel’s Prime Minister Netanyahu stated, “The temporary ceasefire with Iran will not include Hezbollah – and we will continue to strike them with all of our might.”

The original agreement appears to have included Lebanon, at least according to the White House’s chosen mediator, Pakistan’s Prime Minister. He posted on X that the ceasefire covered, “everywhere including Lebanon”.

Source: X

Lebanon is apparently off the ceasefire table now. The White House confirmed today that it is not part of the ceasefire.

Iran will almost certainly not agree to a truce while their allies in Lebanon are under attack.

But in reality, even Lebanon is a moot point.

The war rages on across Iran, Israel, Saudi Arabia, the UAE, and Iraq. Iranian ally Yemen may soon close the Bab al-Mandeb Strait, cutting off a key Red Sea chokepoint. Yemen’s Houthi forces are armed with anti-ship missiles via tech transfer Iran.

Iran allowed 2 oil tankers through the Strait of Hormuz before the ceasefire was broken, and Iranian officials say it is now closed again.

President Trump and Iran are on different planets in terms of their expectations. Israel is off on its own island, with its own objectives, steadily escalating the conflict.

That’s a very long way of saying this war isn’t over, and neither is the energy crisis.

The ceasefire was stillborn. Dead on arrival.

Markets Yawn (Again)

Despite the fact that the ceasefire crumbles, markets are giddy with optimism. As I write, the Nasdaq is up 3% and the S&P 500 up 2.5%.

Oil is down 13% to 18%, depending on type and location.

There is still some hope that the meeting between Iranian and U.S. negotiators takes place this Friday, April 10, in Pakistan.  Trump has said talks will happen “soon”.

J.D. Vance was originally scheduled to attend the meeting, but the administration has since said he may not be able to attend due to security concerns.

It is clear we need direct, preferably in-person negotiations. This game of pass-the-message is not working.

Unfortunately, it’s unlikely that in-person talks will succeed either.

As it stands, the path of least resistance is for the war to continue. Probably even escalate.

An Opportunity to Raise Cash

This crisis isn’t over. But markets are acting like it is.

This massive rebound in stock markets is an opportunity to take some profits and raise cash if you haven’t yet.

I believe downside risk is far higher than upside here. How much higher can stocks go in such an uncertain environment?

Meanwhile, if we do see 25% of global oil production disappear, that’d be a nightmare scenario. If that happens for a month oil could hit $200/barrel. If it happens for longer… a widespread financial crisis becomes increasingly probable.

Iran and the U.S. remain miles apart on expectations. Both have firm requirements the other will never accept.

Let’s hope that somehow a deal can be reached anyway. But as I’ve stated repeatedly, the situation may have to get worse before a lasting agreement is made.

For now, any ceasefire or truce will be temporary. So in my opinion, oil is going higher and stocks lower.

The post A Stillborn Ceasefire appeared first on Daily Reckoning.

President Trump’s deadline for Iran to make a deal ends tonight at 8:00 pm ET.

It’s the most tense geopolitical environment of my life. More so than the beginning of the War on Terror, even.

To find anything similar, we need to go back to the Cold War.

Specifically October 27, 1962. The height of the Cuban Missile Crisis.

Off the coast of Havana, Soviet submarine B-59 was in a rough spot. It was submerged and surrounded by a group of 14 U.S. Navy ships.

The temperature in the sub was well over a hundred degrees. Batteries were low, and the air conditioning was busted. They had no way to communicate with Moscow without surfacing.

Fuel and chemical fumes clogged the air, and some of the crew were passing out from heat stroke.

American destroyers were dropping depth charges on the sub. I’ll explain why shortly.

What the Americans didn’t know is the sub was equipped with a single nuclear torpedo.

Yes, the USSR made nuclear torpedoes even back then. The weapon was roughly as powerful as the bomb dropped on Hiroshima, 15 kilotons.

The Soviet Captain, Valentin Grigoryevich Savitsky, furiously told his men, “Maybe the war has already started … We’re going to blast them now. We will die, but we will sink them all. We will not disgrace our navy.”

Fortunately firing the nuclear torpedo required approval from the 3 highest ranking officers. The captain and one other agreed to fire, but Chief of Staff Vasily Arkhipov vetoed the decision.

Vasily Aleksandrovich Arkhipov

Arkhipov convinced the captain to surface. It was their only choice. Other than launching the nuclear torpedo, that is.

The Soviet captain exchanged tense words with a U.S. destroyer, got in touch with Moscow, and retreated home.

The world barely escaped nuclear war that day. If that nuclear torpedo had hit the group of U.S. Navy vessels, the situation would almost certainly have spiraled out of control.

Communication via Depth Charge

How did we get so close to total war with the USSR?

Well, the Soviets placement of nuclear missiles in Cuba obviously played a key role. But then again, we had nuclear missiles in Turkey, pointed at them.

And there’s much more to the story. Reckless actions were taken by both sides to get so close to nuclear war.

In the National Security Archives there is a transcript of President Kennedy’s briefing with his National Security Council on October 24, 1962.

JFK’s top military people had discovered the Soviet submarines and were determined to confront them.

But the subs were deep underwater, so we had no way to communicate with them.

Secretary of Defense McNamara and his team devised a unique method to communicate with the subs.

They would drop small “practice” depth charges directly on the vessels to encourage it to surface. These weapons have relatively small charges, but the Soviets had no idea they weren’t full depth charges.

Here is an excerpt from the transcript, via the National Security Archives:

McNamara: This is a new procedure I asked them to set up yesterday, Alex.

Alexis Johnson: It is a new procedure.

McNamara: We have depth charges that have such a small charge that they can be dropped and they actually hit the submarine without damaging the submarine.

JFK was shocked by this development. His brother RFK jotted down the President’s reaction. From the National Security Archives:

It was after McNamara made this point in the discussion, Robert Kennedy jotted down later that day, that he thought “these few minutes were the time of greatest worry by the President. His hand went up to his face & covered his mouth and he closed his fist. His eyes were tense, a/mast gray, and we just stared at each other across the table.”

McNamara’s team had apparently sent word of this new communication method to Moscow, but the submarines had been out of contact, and the captains off Cuba never got word of this new “signaling arrangement”.

Here’s a longer piece of the transcript, and you can review the entire thing here. It’s simultaneously fascinating and disturbing.

Countdown to …?

64 years after the Cuban Missile Crisis, we find ourselves in another tense geopolitical environment.

President Trump’s deadline for Iran to re-open the Strait of Hormuz ends at 8:00pm ET tonight.

You’ve all seen Trump’s latest post on the matter, but here it is just in case:

Meanwhile Iran’s Revolutionary Guard (IRGC) stated the following:

“Until today we exercised GREAT restraint in selecting retaliatory targets, but now all these considerations are REMOVED.

US & allies will be deprived of region’s oil and gas FOR YEARS”

Are both sides capable of carrying out their threats? Absolutely. With a few hundred cruise missiles, the U.S. and Israel could cripple Iran’s economy for decades. Power plants, oil facilities, natural gas plants, and bridges. Millions would likely die of hunger.

Is Iran equally capable of carrying out its threats? Yes. They could absolutely cripple Saudi Arabian and other Gulf countries’ oil production and refining. It would almost certainly cause a global financial crisis, possibly a depression. Widespread famine in 3rd world countries. An epic stock market crash.

And remember, Iran can likely keep the Strait of Hormuz closed for more than a year with their stockpiles of drones and anti-ship missiles.

Iran has also stated their Houthi allies in Yemen will close the other critical chokepoint, the Strait of Bab el-Mandeb. That would cut off another key transportation route, which is also Saudi Arabia’s last oil export path.

Both sides are capable of devastating economic and humanitarian destruction.

We’re on the brink of absolute chaos, as we were in 1962.

Mutually Assured Depression

During the Cold War, mutually-assured destruction (MAD) ruled the day.

Eventually JFK and Khrushchev both made concessions, compromised, and made a deal. We pulled our nukes out of Turkey, and the USSR pulled theirs from Cuba.

Something similar needs to happen today. But will either side bend? Doubtful, for now.

Things may need to get closer to a severe global crisis before that happens.

We’re not even speaking directly with Iranian leaders. Messages are being passed through intermediaries like Pakistan. The negotiations are not yet serious.

I still hope that a deal comes before Trump’s deadline tonight. An extension, ceasefire, anything would do.

Because if this war keeps accelerating, we are on track for an unprecedented economic disaster.

Never before has society been so dependent on oil, gas, and petrochemicals. Not to mention all the other goods which flow through these Straits.

Finding a resolution to this war will require humility from both sides. Neither appears to have much. For now, we are miles apart from the Iranians on expectations.

If we get a deal tonight, and it looks like it can hold, I’ll be surprised but thrilled.

But for now, I remain hedged with a hefty cash position. I hold puts on a number of U.S. and European stocks and indexes, and a few short ETFs. With that said, my shorts/hedges are still small compared to my long holdings.

I still love gold and silver here, and am still holding the majority of my miners. Petrobras remains a core holding, as do other Brazilian stocks. South American stocks are still a nice place to hide out from this chaos.

But if we get to the total war stage, everything will take a hit.

Tomorrow we’ll delve into whatever happens tonight, and continue to help readers navigate these chaotic times.

The post The Day the World Nearly Ended appeared first on Daily Reckoning.

I hope you had a good Easter weekend. It’s back to business now, and oil and refined fuel prices are up-up-up. There’s much to discuss because we want to stay ahead of the game.

First, though, it’s worth noting that out of eight billion people on our world, a mere four (4) spent the past few days headed to the Moon. Nice work, if you can get it.

North Africa, Europe, Eurasia and Persian Gulf (green box), plus Moon. Courtesy NASA.

I mention the Moonshot because, as you can see, we have an awesome photo of Earth and Moon together. To me at least, this image helps frame some of the issues.

Moonshots While the World Keeps Spinning

In the center of that photo above is the brown Sahara of North Africa, with the Red Sea and Arabian Plate just to the east. To the north is the Mediterranean Sea, and then Europe framed by lights that shine against a dark background. And of course, Eurasia is further east and northeast. Plus, there’s that (editorially added) green box around the Persian Gulf; aka “Arabian Gulf,” depending on who you talk to.

In the big view of things – looking down from 250,000 miles away – while we all went about our life on earth this past weekend, and even for the four souls out in space, the world kept spinning.

Certainly, the Iran war continued, complete with white-knuckle excitement over the rescue of American personnel from behind the lines (another discussion for another time). While closer to home I noticed that the price of diesel fuel rose by about 60-cents at the end of last week.

Both of these things – Iran and diesel – are connected, and that’s today’s theme. In other words, the war has driven up oil prices, which means that diesel and refined fuels are getting expensive, and absolutely it means we’ll have inflation ahead. “Dieselflation,” so to speak.

So, let’s dig into what’s going on…

Well-Traveled Barrels of Oil

There’s a lot of oil in the world; it’s all over the place. But much of that oil is in the Middle East, as you can see from this graph that ranks various nations and their estimated oil reserves (in billions of barrels).

Estimated oil reserves by nation (and Alberta). Courtesy @RazorOil.

Obviously, we see familiar Middle East names here: Saudi Arabia, Iran, Iraq, Kuwait and Abu Dhabi. All export oil, and the graph doesn’t include Qatar which is a major natural gas player.

Whether oil, liquefied natural gas (LNG) or refined products, hydrocarbons travel by tankers that require about 30 to 60 (and for some routes, even 90) days to get from the Gulf to destinations that range across the globe; that is, to Europe, Africa, South Asia, East Asia and the U.S.

Notional – very cursory – chart of global tanker routes.

Along those last lines, and contrary to myth, the U.S. actually does (well, it “did”) import oil from the Middle East. In fact, last year about 8% of U.S. imports came from the Gulf region, just shy of half a million barrels per day. Here’s a breakdown:

U.S. oil imports, especially from Gulf nations., Courtesy Dept. of Energy/EIA.

Note that much of the imported oil from the Middle East is “medium sour,” which means it contains elevated sulfur, because many American refineries are geared to process that blend. And hold that thought as we get into other details about America’s imported oil barrels.

America’s Many Imported Barrels

First, as you look at that graph above of where America’s oil comes from, you can see that most imported U.S. oil – about four million barrels per day – comes come from a distant land known as Canada, namely the province of Alberta (see Alberta oil reserves in graph above).

Now, here’s a map that shows one of America’s most important pipeline systems, namely the Enbridge Mainline out of Alberta, which moves about three million barrels per day of Canadian crude down into the U.S. Midwest. (And the overall system would be larger if President Biden had not – stupidly! – cancelled the Keystone XL line, back in 2021.)

Enbridge Mainline, moves Alberta crude oil to U.S. Courtesy @RazorOil.

Those three million Enbridge barrels per day are unmatched by any other pipeline in North America, even the Alaska Pipeline. In this sense, Canada is a critical part of making America “great,” if not an energy superpower: America’s Midwest and even Gulf coast refineries heavily rely on Canadian oil.

It’s worth pointing out that Alberta and its oil exports far outclass, say, Venezuela’s oil and that nations’ output of under one million barrels per day. If nothing else, Venezuela’s heavy, tarry, gunky oil must first be moved to the Caribbean coast and then loaded onto tankers for another sea voyage to Houston. So, on this point of logistics alone, Canadian oil is a blessing compared with other oil imports, even from relatively nearby venues like Venezuela.

Also, from that EIA graph above, note that not quite half of U.S. Middle East oil imports have been going to Gulf coast refineries, and not quite half to the West Coast, namely SoCal.

Those Gulf coast imports were mostly Saudi oil, headed to a Saudi-owned refinery near Houston. But the California oil imports? Again, much was Saudi but not all. And this highlights a serious problem in the U.S. West, namely the lack of local or even regional oil supply for California and its six remaining refineries (yes, only six left standing; it used to be over 40), as we see here:

Oil supply to California refineries. Courtesy California Energy Commission.

Okay… What’s wrong with this picture? Well, until the early 2000s California produced most of its own oil, supplemented by output from Alaska. But not anymore. And that’s what’s wrong!

Over the past quarter century, California has taxed, litigated and regulated primary oil exploration and production down to bare bones, despite significant hydrocarbon potential in the state (long story). And the same goes for California refineries, many of which have closed over the past quarter century.

In other words, California has grown in population (well… until the past couple of years, as people left due to toxic politics). And as anyone who has recently been there can tell you – just ask me! – there are way more cars, trucks, trains, airplanes and everything else out there and burning fuel, despite the state’s so-called “green” efforts.

But as noted, California has way fewer refineries that are processing less and less oil supply from local or regional sources. And as you may know, California fuel prices are the highest in the nation; over $8 per gallon for diesel, I just saw in a news article.

The takeaway here is that much of the U.S. is (sort of) okay when it comes to physical supply of barrels. That is, most mid-continent and Gulf coast U.S. refineries have access to domestic, offshore and Canadian imported oil.

But out West is a very different story for California, and by extension for Nevada and Arizona, which obtain most of their refined products from California refineries or other imports.

West Coast Will Soon Have BIG Problems

So far, we’ve covered a lot of ground in terms of oil and where it comes from, and how it gets refined.

One big takeaway is that California has an oil and refinery problem. Most oil that flows through California refineries is imported. And now, global events have disrupted that trade. But also, and because California has so few refineries, the state also imports significant amounts of refined products. From where? Oh, man…

Until recently, much of California’s diesel fuel was imported from South Korea (yes, seriously). That is, oil would go from, say, Saudi to Korea, get refined, and then move across the Pacific Ocean to California. But considering the Iran war, that’s all coming to a halt.

Another source of refined products for California is the U.S. Gulf coast, although it’s a circuitous route via Bahamas (due to the Jones Act – long story) and then a transit through the Panama Canal.

Recent refined product shipment from Houston to Bahamas to California. Courtesy Bloomberg News.

Look at it this way: California is a geographically isolated market. What makes it worse is that much of the refined products in Arizona and Nevada also originate from California. So, looking ahead, the West coast and adjacent states can expect much higher prices for gasoline and diesel fuel.

Of course, right now everybody pays more for fuel; I mentioned earlier that we had a 30-cent per gallon increase for diesel just last week, here in Pennsylvania. Clearly, diesel fuel prices are rising nationwide, but those fuel prices are way higher in California, and it’s all about to get worse.

Go back to those above-mentioned 90-day tanker runs for crude oil from the Middle East. Well, all those oil tankers that didn’t sail in early March, because of the war and blockage of Persian Gulf, are now NOT arriving at unloading piers across the world, from Pakistan to New Zealand to… yes… not to the unloading piers of California.

And without crude oil, refineries across the world lack feedstock to run through the cracking towers. Thus, in 15, 30, 45 days or so – end of April, early May – refined products will run short across many parts of the world, and likely in the U.S. West.

Already, Asia is slowing down:

• The Philippines has declared a national emergency, with fuel reserves under 5 days.
• Pakistan has declared a four-day work week; situation is desperate.
• Bangladesh has imposed curfews to stop fuel-burning activities past 6:00 pm.
• Thailand has shut down much of its fishing fleet for lack of diesel fuel.
• Even China has lines at filling stations, and has banned fuel exports, including to Australia and New Zealand which are at the far end of every sort of oil and refined product supply chain.

Is this doom and gloom? Yes; sorry. But the fact is that energy will drive inflation, or as noted above, “dieselflation.”

And there’s a lesson here for nations everywhere: don’t have dumb, kneejerk, bumper sticker energy policy; drill your own freaking oil, build your own freaking refineries, and always be nice to Alberta.

Meanwhile, looking ahead, “What’s the real price of oil going to be?” people ask…

Well, there are paper barrels that trade on the exchanges. And then there’s real crude, like what’s currently not moving in large volumes out of the Persian Gulf. Which means that across the globe – see that nice photo topside – oil refineries that want crude must pay up for petroleum.

Brent-contract barrels (one key international standard) are going for as much as $160, per data I saw the other day. And I’ve heard tales of tankers on Asian routes making three and four course changes to different destinations, as refineries bid for barrels. It’s wild out there.

Meanwhile, if you are in the U.S., be glad! At least we have barrels and fuel here. Compare with Australia, with just two refineries and not nearly enough domestic oil to keep the planes, trains and autos running. And definitely be glad you’re not in New Zealand, with zero refineries, and which must import every drop of refined fuel and lubricant.

And for investing? Keep it simple: oil companies with minimal exposure to the Middle East, like Petrobras (PBR), and U.S. domestics. Plus, oil services like Schlumberger/SLB (SLB), Halliburton (HAL), or the OIH fund. (Of course, these are not official reccos; we don’t have a Reckoning portfolio.)

That’s all for now. Thank you for subscribing and reading.

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