One of the urban legends that many Americans believe is that high oil prices are caused by a vast conspiracy of oil companies and speculators.
And, of course, there is some Wall Street manipulation of oil prices. That is a given - it's like saying the sun rises in the east and sets in the west. But oil and commodities are just a sideline business for Wall Street. The manipulation in these markets pales in comparison to what goes on in the US stock and bond markets.
The point I'm trying to make is that most of the rise in oil prices is caused not by speculators, but by basic economics - rising demand and falling supply.
In fact, earlier this month the US military sounded the alarm about future oil production. The US military cautioned that excess oil production capacity could disappear within two years, with major shortages possible by 2015.
The Department of Defense report stated: "By the 2030s, demand is estimated to be nearly 50% greater than today. To meet that demand...the world would need to add roughly the equivalent of Saudi Arabia's current energy production every seven years."
The report went on: "The central problem for the coming decade will not be a lack of petroleum reserves, but rather a shortage of drilling platforms, engineers and refining capacity. Even were a concerted effort begun today to repair the shortage, it would be ten years before production could catch up with expected demand."
And I believe the military's view is rather optimistic. There is the additional problem of getting to the newly discovered oil fields, most of which are miles beneath the ocean surface. To drill one hole in these harsh conditions costs billions of dollars. That's why many oil companies have given up looking for oil and have concentrated on onshore natural gas.
The military also took the optimistic view that the world will be able to produce 118 million of barrels of oil a day. That is a pipe dream.
Currently the world produces oil at a rate somewhere in the mid-80s million barrels a day. Many industry experts, not affiliated with the oil companies, believe that oil production will peak somewhere between 90-100 million barrels a day of oil.
And don't look for the world's major oil producers to help the United States out. OPEC's focus has already shifted eastward to Asia.
Saudi Arabia already exports more oil to China that it does to the United States. And that relationship is growing daily. In addition, Saudi oil exports to India has grown sevenfold over the past decade.
And the big new oil producer on the block - Brazil - is still steaming at how the US snubbed their requests for aid in developing their oil fields and how we still block their ethanol exports with high tariffs. So Brazil has turned to China and other fellow emerging countries for oil production expertise in exchange for some of the oil produced.
This is going to leave the United States chronically short of oil and paying through the nose for the oil they do get.
And sadly, many renewable energy projects have yet to get off the ground in the United States. Read any financial publication and you will see that the leaders in renewable energy efforts are China, India, Brazil and some European nations with the US far behind.
Saturday, April 24, 2010
Saturday, April 17, 2010
The Wall Street Journal's Bailout Math
On Monday, the Wall Street Journal ran an article that was one of the biggest pieces of BS and propaganda that it has ever run. It is no wonder that I read the Financial Times for my financial news and not the Wall Street Journal. The WSJ has turned into a mere mouthpiece for Wall Street.
The article declared that all of the corporate bailouts by Uncle Sam will cost less than initially feared. The article was notable not for what it included, but for what it managed to completely ignore.
There is NO mention of the trillions of dollars the Federal Reserve printed up out of thin air to buy bad assets from the banks and which are still on the Fed's books.
The ongoing costs of the the government rescue of Fannie Mae and Freddie Mac and indeed, the complete takeover of the $5 trillion in mortgages by the federal government is glossed over.
The article also somehow forgot about the cost of bailing out General Motors and Chrysler. And here are a few other items:
Depleted FDIC reserves? Not Mentioned! The tens of billions of dollars of bad loans on bank balance sheets? Ignored! The new accounting rules (FASB 157) which allowed "fantasy" bank accounting? Not a peep! The newly concentrated "to-big-to-fail" big banks with NO competition? Never Mind!
Time Magazine's Andrew Ross Sorkin did a better job in his recent article at bringing to light some items which the Wall Street Journal chose to ignore. His article did mention the following points:
Losses (so far) from Fannie and Freddie are about $320 billion; losses from insurance giant AIG (so far) are about $48 billion; and the Federal Reserve's virtually interest free "loans" to Wall Street are about $1 trillion.
That's right $1 trillion! Any wonder the stock market is up? Give me a trillion dollars and I'll show everybody a good time! What a party we'll have!
What we can honestly say about the bailouts is that we don't know what the final costs will be. Much will depend on how quickly and strongly the US economy recovers.
One thing for certain is that we have created a less competitive banking system and have allowed banks to fabricate their balance sheets.
We also no idea what the long-term repercussions and moral hazard will be in the future because of the bailouts. The best guess is that the bailouts will cause a declining dollar and higher inflation in the years ahead.
The article declared that all of the corporate bailouts by Uncle Sam will cost less than initially feared. The article was notable not for what it included, but for what it managed to completely ignore.
There is NO mention of the trillions of dollars the Federal Reserve printed up out of thin air to buy bad assets from the banks and which are still on the Fed's books.
The ongoing costs of the the government rescue of Fannie Mae and Freddie Mac and indeed, the complete takeover of the $5 trillion in mortgages by the federal government is glossed over.
The article also somehow forgot about the cost of bailing out General Motors and Chrysler. And here are a few other items:
Depleted FDIC reserves? Not Mentioned! The tens of billions of dollars of bad loans on bank balance sheets? Ignored! The new accounting rules (FASB 157) which allowed "fantasy" bank accounting? Not a peep! The newly concentrated "to-big-to-fail" big banks with NO competition? Never Mind!
Time Magazine's Andrew Ross Sorkin did a better job in his recent article at bringing to light some items which the Wall Street Journal chose to ignore. His article did mention the following points:
Losses (so far) from Fannie and Freddie are about $320 billion; losses from insurance giant AIG (so far) are about $48 billion; and the Federal Reserve's virtually interest free "loans" to Wall Street are about $1 trillion.
That's right $1 trillion! Any wonder the stock market is up? Give me a trillion dollars and I'll show everybody a good time! What a party we'll have!
What we can honestly say about the bailouts is that we don't know what the final costs will be. Much will depend on how quickly and strongly the US economy recovers.
One thing for certain is that we have created a less competitive banking system and have allowed banks to fabricate their balance sheets.
We also no idea what the long-term repercussions and moral hazard will be in the future because of the bailouts. The best guess is that the bailouts will cause a declining dollar and higher inflation in the years ahead.
Saturday, April 10, 2010
China as Scapegoat
It looks like it's not only baseball season, but the season that politicans look for scapegoats. Many politicans and so-called economists like Paul Krugman claim they have have found the cause of America's economic woes.
After more than a decade of stagnant real wages, a stagnant stock market and now rising levels of unemployment, Americans want answers. It's too bad they are not getting the right answers.
They are being told that it's all because of the trade deficit, particularly with China. It's not politicians' borrowing and spending money they don't have, debt that the next several generations of Americans will be paying for. Nor is it greed gone wild on Wall Street.
Nope, it's those "crafty" Chinese. Those "sly" Chinese are manipulating their currency - the yuan - to take advantage of the United States. The United States is, of course, without sin and pure.
However appealing this argument is to politicans, it is based on faulty economics...something rather common in the halls of Congress.
In 2008-09, the United States had trade deficits with more than 90 countries! It is a multilateral trade deficit, not just one with China. Yet, the United States is demanding that China sharply revalue its currency upwards or the US will put tariffs on Chinese products.
Ignoring the possibility of an ensuing trade war, this will only have the effect of raising the prices of the many Chinese goods imported into the US. This will only hurt the already struggling lower and middle classes.
And what do you think the multinational companies which manufacture goods in China will do? They will simply move their production facilities to lower cost countries like Vietnam or India.
China will let its currency move upward, but only gradually. The Chinese saw how a quick, sharp revaluation of the yen (under pressure from the United States) nearly destroyed the Japanese economy.
And by the way, the US "solution" did little to to stop Japanese imports into the country. US consumers simply wanted Japanese products.
Economist Stephen Roach said it best "The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America's core economic problem is saving, not China."
The net national savings rate fell to a MINUS 2.5 per cent of national income in 2009. That means America must import capital from abroad to fund its future growth - and run current account and trade deficits to attract the necessary foreign capital.
In simple terms, America has been living beyond its means. America needs to make cuts in government spending. But politicans don't want to face up to this reality - they are expanding entitlements at the same time they are blaming China for America's woes.
Stephen Roach had a warning, "It would not be the first time that political denial was premised on bad economics. But the consequences of such a blunder - trade frictions and protectionism - would make the crisis of 2008-09 look like child's play"
After more than a decade of stagnant real wages, a stagnant stock market and now rising levels of unemployment, Americans want answers. It's too bad they are not getting the right answers.
They are being told that it's all because of the trade deficit, particularly with China. It's not politicians' borrowing and spending money they don't have, debt that the next several generations of Americans will be paying for. Nor is it greed gone wild on Wall Street.
Nope, it's those "crafty" Chinese. Those "sly" Chinese are manipulating their currency - the yuan - to take advantage of the United States. The United States is, of course, without sin and pure.
However appealing this argument is to politicans, it is based on faulty economics...something rather common in the halls of Congress.
In 2008-09, the United States had trade deficits with more than 90 countries! It is a multilateral trade deficit, not just one with China. Yet, the United States is demanding that China sharply revalue its currency upwards or the US will put tariffs on Chinese products.
Ignoring the possibility of an ensuing trade war, this will only have the effect of raising the prices of the many Chinese goods imported into the US. This will only hurt the already struggling lower and middle classes.
And what do you think the multinational companies which manufacture goods in China will do? They will simply move their production facilities to lower cost countries like Vietnam or India.
China will let its currency move upward, but only gradually. The Chinese saw how a quick, sharp revaluation of the yen (under pressure from the United States) nearly destroyed the Japanese economy.
And by the way, the US "solution" did little to to stop Japanese imports into the country. US consumers simply wanted Japanese products.
Economist Stephen Roach said it best "The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America's core economic problem is saving, not China."
The net national savings rate fell to a MINUS 2.5 per cent of national income in 2009. That means America must import capital from abroad to fund its future growth - and run current account and trade deficits to attract the necessary foreign capital.
In simple terms, America has been living beyond its means. America needs to make cuts in government spending. But politicans don't want to face up to this reality - they are expanding entitlements at the same time they are blaming China for America's woes.
Stephen Roach had a warning, "It would not be the first time that political denial was premised on bad economics. But the consequences of such a blunder - trade frictions and protectionism - would make the crisis of 2008-09 look like child's play"
Saturday, April 3, 2010
Owe Say Can You See
Spring is here! Baseball is just around the corner and everyone still believes that their baseball team can win the World Series.
Americans are an optimistic bunch. For evidence of that look at how people still believe that the Federal government's "baseball team" can still win the "big one" and turn the economy around.
People believe that the same feds who couldn't see the subprime fastball coming...
And who struck out completely when they started to get overleveraged curve balls coming their way from Wall Street (they actually thought derivatives made the financial system more stable - ha!)...
Have now hit a home run with the bases loaded.
Yes,people actually believe that the bumbling "Bad News Bears" - Bernanke, Geithner, Summers et al - have now won the "World Series" by not only preventing a depression...but putting the economy back on track for growth and prosperity.
Let's look at the latest uneployment numbers which many were celebrating, ignoring the fact that the headline numbers were skewed by the hiring of temporary census workers.
Underlying the headline numbers was more bad news: Long-term unemployed (more than 27 weeks) increased by 414,000 to 6.5 million; 44.1% of unemployed persons were unemployed more than 27 weeks; involuntary part-time workers increased to 9.1 million in March.
And importantly, U6 unemployment - the broadest measure of unemployment - rose to 16.9%. This is off the Decemeber 2009 peak of 17.3%, but higher than January (16.5%) and February (16.8%) of 2010.
All that the "Bad News Bears" did was to kick the can down the road. The same people who warned about the financial crisis of 2008 (and were ignored) are now warning of an even bigger crisis (and are again being ignored).
Neither Wall Street behavior nor behavior in Washington has changed one bit. Both continue to follow reckless policies. The people running the country will find out that there is no such thing as a "free lunch".
Even a casual look at the fiscal position of the federal government (not to mention the states) makes nonsense of the phrase Wall Street loves to use - the US is a "safe haven".
US government debt is a safe haven the same way Pearl Harbor was a safe haven in 1941.
Even according to the White House's new budget projections, the gross federal debt in public hands will exceed 100 per cent of the nation's economic output (GDP) in just two years' time.
The long-run projection of the Congressional Budget Office suggests that the US will NEVER again run a balanced budget. That's right, NEVER.
The International Monetary Fund recently published estimates of the fiscal adjustments countries would need to make to restore fiscal stability in the decade ahead.
The US came in a poor sixth, with the sixth largest budget cuts needed...the US needs to tighten fiscal policy by 8.8% of GDP...which will NEVER happen.
So take a moment to think about the REAL numbers before celebrating a victory by the team of Bernanke and Geithner et al.
Americans are an optimistic bunch. For evidence of that look at how people still believe that the Federal government's "baseball team" can still win the "big one" and turn the economy around.
People believe that the same feds who couldn't see the subprime fastball coming...
And who struck out completely when they started to get overleveraged curve balls coming their way from Wall Street (they actually thought derivatives made the financial system more stable - ha!)...
Have now hit a home run with the bases loaded.
Yes,people actually believe that the bumbling "Bad News Bears" - Bernanke, Geithner, Summers et al - have now won the "World Series" by not only preventing a depression...but putting the economy back on track for growth and prosperity.
Let's look at the latest uneployment numbers which many were celebrating, ignoring the fact that the headline numbers were skewed by the hiring of temporary census workers.
Underlying the headline numbers was more bad news: Long-term unemployed (more than 27 weeks) increased by 414,000 to 6.5 million; 44.1% of unemployed persons were unemployed more than 27 weeks; involuntary part-time workers increased to 9.1 million in March.
And importantly, U6 unemployment - the broadest measure of unemployment - rose to 16.9%. This is off the Decemeber 2009 peak of 17.3%, but higher than January (16.5%) and February (16.8%) of 2010.
All that the "Bad News Bears" did was to kick the can down the road. The same people who warned about the financial crisis of 2008 (and were ignored) are now warning of an even bigger crisis (and are again being ignored).
Neither Wall Street behavior nor behavior in Washington has changed one bit. Both continue to follow reckless policies. The people running the country will find out that there is no such thing as a "free lunch".
Even a casual look at the fiscal position of the federal government (not to mention the states) makes nonsense of the phrase Wall Street loves to use - the US is a "safe haven".
US government debt is a safe haven the same way Pearl Harbor was a safe haven in 1941.
Even according to the White House's new budget projections, the gross federal debt in public hands will exceed 100 per cent of the nation's economic output (GDP) in just two years' time.
The long-run projection of the Congressional Budget Office suggests that the US will NEVER again run a balanced budget. That's right, NEVER.
The International Monetary Fund recently published estimates of the fiscal adjustments countries would need to make to restore fiscal stability in the decade ahead.
The US came in a poor sixth, with the sixth largest budget cuts needed...the US needs to tighten fiscal policy by 8.8% of GDP...which will NEVER happen.
So take a moment to think about the REAL numbers before celebrating a victory by the team of Bernanke and Geithner et al.
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