Why the U.S.-Iran MOU (probably) won't prevent the approaching energy cliff

The outline of conditions and topics for a negotiated settlement of the U.S.-Iran conflict called a Memorandum of Understanding (MOU) and signed by both sides last week in all probability won't prevent the approaching energy cliff. That cliff will be the result of fast-depleting commercial and strategic inventories of oil and oil products around the world that have acted as buffers in the wake of the suspension of almost all tanker traffic through the Strait of Hormuz during the conflict—tankers believed to carry about 20 percent of the world's daily needs of oil.

As I explained in a previous piece, the world is fast approaching "tank bottoms," that is, the depletion of usable oil and oil products inventory. When that inventory effectively runs out, there will be a bidding war for oil and oil products to replace the millions of barrels per day that will still be needed but unavailable from inventories as the drama in the Persian Gulf continues.

As of this writing, the Strait of Hormuz has been closed by Iran in response to continuing attacks by Israeli armed forces in Lebanon. The first provision of the MOU is that hostilities are to cease immediately everywhere including Lebanon as a pre-condition to further negotiations. Just as important as whether the strait is open are what each side means by the word "open" and how shipping companies and the insurance firms who insure their tankers understand the risk of transiting the strait.

Here's comes the AI bailout: Why government stakes in AI companies are a sucker's bet

When Bernie Sanders and Donald Trump agree on something, that agreement deserves examination. Both are touting the idea that the federal government should have an ownership stake in major artificial intelligence (AI) companies. For Sanders this would be a way for the American people to share in the wealth generated by AI companies that those companies accumulated through the theft of other people's writing, art works, photos, videos and recordings. And it would give government a seat at the table as a representative of the public in deciding how AI companies will operate in the future. Just how Trump views the purpose of government ownership of a share of AI companies is not yet clear.

Problem is, AI companies are not really generating any wealth. Right now they are simply burning through billions of investor dollars that are heavily subsidizing users with no clear path to profitability. And no, the AI industry is not following the path of previous technologies such as the internet and the smartphone in which costs will rapidly fall as the technology matures and greater numbers of people adopt AI. Years into the AI boom the cost of providing its promised outputs is going up, again with no clear path to bringing the cost down. Adding users does not bring down unit costs because more users require more resources. It's the opposite of the software model where the cost of distributing a piece of already written software to the next customer is close to zero.

I warned last November that artificial intelligence (AI) companies were setting the stage for a bailout, one that will be the result of their deeply flawed AI models that won't remotely deliver what they are promising. AI critic Ed Zitron said in a recent interview that when he asks AI industry boosters to tell him what AI can actually do without using the word "will," they have little to offer. Zitron agreed that while search engines are using AI to provide more sophisticated outputs, those outputs have become more unreliable. "You have to check every single bloody thing. You can't rely on anything," he said.

Our oil "savings account" is dwindling rapidly, more oil price spikes likely

In the coming weeks readers will increasingly see two rarely used phrases in stories covering our dwindling worldwide oil inventories: "operational minimum" and "tank bottoms." The phrases more or less signify the same thing, though the former is more abstract and precise, while the latter is more visual. They signify rapid depletion of existing oil inventories and presage price spikes to come due to the loss of oil supplies from the Persian Gulf because of Iran's closure of the Strait of Hormuz, the maritime artery through which 20 percent of the world's oil previously flowed.

Think of it this way: Let's say you are currently spending your entire weekly salary for living expenses. Then, you suddenly have your salary cut by 20 percent. Believing that the cut is temporary, you dip into your savings account to make up for the loss of income. At the current rate of withdrawal, your savings will last four months. As the weeks go by, your savings account balance dwindles as you continue to live in the style to which you were accustomed before the salary cut. Your boss tells you (frequently!) that your full salary will soon be restored. So rather than cut back on your expenses, you keep spending down your savings believing that all will return to normal before you exhaust your bank account.

That's what is happening in the global economy which had about four months of buffer stocks—essentially, an "oil savings account"—to draw from at the beginning of March. We are getting closer and closer to using up those savings which are in the form of commercial inventories. We are rapidly drawing down those inventories to make up for the loss of oil and oil products from the Persian Gulf.

In fact, a recent analysis suggests that the world oil system will start to experience "operational stress" sometime in June. Operational stress "is the point at which the system begins to experience significant functional strain: price volatility becomes extreme, rationing of refined products begins in the most exposed markets, and the margin for error in supply chain management drops to near zero." This analysis takes into account ongoing strategic petroleum reserve releases around the globe and states that "[e]ven full deployment of strategic reserves buys weeks, not months, at current drawdown rates."