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Papa,

Your assessment echos that of a west-coast hedge fund manager I’ve long respected: Mark Boucher.

Here’s his take on energy for 2008 (written in January).

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The world needs a Manhattan Project for alternative energy. Whereas in past conflicts historically, the U.S. has had capitalism on its side and its opponents have not, this situation is different. Islamic Fundamentalists benefit from providing oil as the lifeblood of global capitalism to a growing world. Until clean coal or some other fuel becomes competitive with oil and the U.S. develops more self-sufficiency in energy, the free-world is captive to its enemies in a way it has never been before.

Major suppliers of oil include unstable countries such as Nigeria, Venezuela, Iran, and Saudi Arabia. Clearly Nigeria could blow at any time, and is threatening to do so now with increasingly sophisticated military action being taken against the Abuja and oil facilities in Port Harcourt early this year - and threats of more. As we’ve discussed in the past, the oil in Nigeria falls under land of tribes that are not in power. They are receiving almost nothing from the government who takes oil from them and they have little to lose in formenting violence and oil disruptions.

Nigeria is one of the top ten suppliers of oil to the U.S. and is a top supplier of Chinese oil as well. Venezuela is ruled by a Marxist madman, who is intent upon opposing the U.S. at every possible turn although the U.S. is one of Venezuela’s largest export markets.

Iran is still attempting to become the hegemonic power in the Middle East and the Levant, and many intelligence services still believe it is pursuing nuclear weapons in a way that could require further military action in the next few years, and could even lead to global war.

The war on Islamic Fanaticism in Iraq and Afghanistan have deteriorated in 2007. Although the surge has had some success at slowing insurgency, without an agreement with Iran the war effort is likely to once again have to shift objectives towards keeping a force in Iraq that is there mainly to oppose aggression by Iran. Sunni versus Shiite tensions could still flare, and the U.S. would likely step aside if they did. Look for President Bush to focus heavily on garnering an agreement with Iran to try and save a legacy for his administration this year.

While al Qaida have been marginalized in the developed world somewhat, they appear to be focusing their efforts more on maintaining strongholds in Afghanistan and Pakistan. The killing of Bhutto likely marks a shift in strategy for al Qaida of striving to influence these regimes more overtly. These are tinderboxes therefore.

Meanwhile, Israel and Hezbollah are digging in for their next round of war sometime in the years ahead. The Middle East geopolitical risk premium therefore obtains for oil prices, and though it may lessen if President Bush gets an agreement with Iran later in 2008, a political risk premium is likely to be embedded in oil prices for many years to come.

As we emphasized in last year, oil and natural gas giant Russia is consistently playing the oil card politically to push its will upon Europe and former CIS nations. Gazprom, the state-run energy giant that Putin “took” from Khodorkovsky, is essentially a Kremlin run operation and tool of power, and Norilsk Nickel is likely being accumulated by Putin, who will remain the background power in Russia despite his handpicked successor being President. It remains quite possible that the Kremlin views the Western-sponsored multi-colored revolutions as a non-military attack upon Russia itself, and that it plans to use oil as the new nuclear weapon of an energy Cold War of sorts against the West. If Gazprom were a country its gas reserves combined would rank third in the world, as it controls 20% of the world’s natural gas production and 16% of world natural gas reserves. It is not impossible that further “nationalizations” or “purchases” of Russian oil into Gazprom will make it an even larger oil force in the world. Gazprom also owns media and has been described by some analysts as an octopus with tentacles made of pipelines with the Kremlin as its brain.

Russian political uses of its natural gas and oil card have prompted the EU to move towards a fast utilization of biofuel, but even if the lofty objectives of these programs are met in the years ahead, Europe will still be dependent upon Russia for energy.

While Russia and China are trying to consolidate as much oil power as possible in the world, the U.S. and the West still appear to be mostly sleeping - unaware or in denial over the potential consequences.

Oil is a REAL wild card and major risk to any macro-economic scenarios.