Saturday, December 25, 2010

Politics and the Environment

Whatever happened to global warming?

It seems that the political caravan has moved on. Climate change is yesterday's story.....

The politicians and lawyers in the US now believe that today's big threat to the globe comes not from burning too much oil, but from BP. They are looking to litigate and legislate the company and others out of existence.

The Deepwater Horizon crisis was a reminder that politicians can handle only one challenge at a time. Instead of a challenge, it should have been an opportunity for President Obama to draw a clear picture for the American public.

He should have drawn the straightforward conclusion between the inevitable environmental hazards of drilling for hydrocarbons miles below the ocean floor and America's insatiable appetite for oil.

The reason the Deepwater Horizon was there is because the United States consumes a quarter of world oil production even though it has only one-twentieth of the world's population.

These same factors come into play in global warming. Whether you believe the science behind the global warming debate or not, there is one definite fact.

That fact is that if the world's richest nation and biggest oil consumer is not ready to curb greenhouse emissions, no other nation will make the switch to a low carbon economy either.

President Obama said that the United States must exercise leadership by example. Well, reducing US oil consumption would mean less deep-sea drilling and less risk of another blow-out. It may encourage other governments to follow a similar path of conservation.

But such a path, with a sizable drop in US oil consumption, is extremely unlikely.

Of course, the United States is not the only country to back away from actions to tackle global warming.

The Pain in Spain

Leaders around the world, already preoccupied by the aftermath of the financial crisis and recession, are in some cases having to impose painful public spending cuts.

In Europe for example, keeping the euro intact and shoring up Greece and other wobbly economies has left little time or money for green policies.

And in Europe, Spain may be the poster child for wanting it both ways on energy and climate.....

Spain is the biggest per-capita global producer of wind energy and home to the world's biggest wind power operator. It is also a very significant player in the global solar power market.

But now Spain wants to double its subsidies for domestic coal-fired power plants. The Spanish plan centers on giving preferential access to the wholesale electricity market for power plants that run on domestic coal.

At the same time, the Spanish government wants to retroactively cut previously agreed tariffs for its 20 billion euro photovoltaic solar energy sector by 30 per cent. Such a move will be devastating for investors in leveraged solar photovoltaic projects.

The Spanish electric utility sector isn't thrilled about the move either. It will force utilities to switch from cheaper imported coal to more expensive domestic supplies.

It is worth noting that Spain's economy is in awful condition. Unemployment is running at 20 per cent and austerity measures imposed include a cut in public sector wages and a rise in the sales tax. So it's not surprising that the government wants to stop electricity bills from rising and create domestic coal jobs too.

These measures are expected to involve about 2 billion euros of government aid over a four-year period. The measures are fully supported by Spain's prime minister – Jose Luis Rodriguez Zapatero – who just happens to come from the Spanish coal-mining region of Leon.

Spain Is Not Alone

Spain is not alone in wanting it both ways.....

In May, intense lobbying by the UK coal power industry won a four-year reprieve for its old coal-fired plants, These plants were due to close in 2014.

This is despite the country having committed to an EU target of 15 per cent renewable power by 2020 and reducing carbon emissions by 34 per cent by 2020. Targets which it now will miss.

And then there is China, which is rapidly building its renewables capacity. Also increasing furiously is its coal burning, buying up of fossil fuel assets and overall energy consumption.

Which brings us back to the United States...where the “clean tech race” won't hamper the growing consumption of highly polluting unconventional oils, such as from the tar sands of Canada.

The conclusion drawn from all of this should comes as no surprise to anyone.....

Governments everywhere, it seems, will go to great lengths to ignore long-term problems and just 'kick the can' down the road. As long as it means not upsetting their constituencies in the short-term.

Saturday, December 18, 2010

New Inflationary Era for Consumers

Many people have failed to take note of the quiet warnings from consumer products companies. These companies are saying that most food and clothing items are going to cost, give or take, 5-8 per cent more next year.

It seems that long forgotten food and clothing inflation is back with a vengeance due to rising input costs. Input costs such as wheat and cotton, which have risen by nearly two-thirds and three-quarters respectively in the past six months.

Some executives in the consumer goods industry are even warning that a major change is occurring. They say that a generation that has grown up with food and clothing deflation – courtesy of China's arrival as a manufacturing powerhouse – must now get used to the opposite.

They must get used to paying more for the clothes they wear and the food they eat. Why? Because of the emergence of billions of consumers in nations such as China.

The chief supply officer for Unilever, Pier Luigi Sigismondi, said “Current agrocommodity market inflation is a consequence of lower production yields and unprecedented increases in demand from Asia.”

There are also other reasons for rising agricultural prices as Mr. Sigismondi pointed out, “Additionally, the world is losing arable land at a rate of about 40,000 square miles a year. That is land being used for biofuel production, while climate change is eroding away topsoil. Farmers will need to produce more food with less land.”

Agricultural Commodities Inflation

A closer look at agricultural commodity prices shows that they have surged in the past months to peaks last seen at the height of the 2007-08 global food crisis.

The rise comes on the back of a string of drought-induced crop failures in major cereal exporters such as Russia. Other nations, from the United States to Indonesia, are reaping smaller than expected harvests of crops including corn, wheat and palm oil.

With demand booming as developing nations such as China and India emerge from the global economic crisis, the shortfall is denting reserves.

The price spikes mean that this year the total amount that countries pay for imported food will exceed $1 trillion for only the second time ever, according to the United Nations. The 2010 bill is up nearly 15 per cent from last year. And it is within a whisker of an all-time high of $1.038 trillion set during the global food crisis in 2008.

The UN Food and Agriculture Organization's benchmark food price index tracks the wholesale cost of wheat, corn, rice, sugar, oilseeds, dairy products and meats. Last month it stood at more than 20 per cent higher than a year ago. The index has only been higher during a brief period in mid-2008.

The organization paints a worrying outlook for 2011. It warns that unless farmers “expand substantially” their planted acreage and weather is favorable, the world should “be prepared” for even higher prices.

Most in the agricultural industry agree with that assessment. The belief in the industry is that even bumper crops will not cut prices a lot because global inventories of most agricultural commodities are so low.

The Effects on Manufacturers and Consumers

Rising agricultural commodity prices have a definite effect on consumer products companies. They face a dilemma. They must deal with higher input prices while seeking to protect their profit margins and without scaring off consumers with large price rises.

Diversified food producers spend about one-third of their sales on raw materials, including packaging. That means they face higher costs of around 5-6 per cent. This is broadly in line with guidance for cost inflation of 4-5 per cent from General Mills.

However, some companies are pushing through even larger price rises. Three months ago, Kraft Foods responded to higher coffee bean prices with an 11 per cent increase in the cost to retailers of its Maxwell House brand. Many retailers passed this price increase directly on to consumers.

Other consumer goods companies are trying to avoid passing on higher input prices by employing various methods. These methods include hedging commodity prices, paring costs, substituting lower-priced commodities, and reformulating their products.

Of course, substitution doesn't always work. Take clothing, for example. Many manufacturers are substituting synthetic fibers for cotton. But that has now pushed up the price of many synthetics, with polyester estimated to be up by a double-digit percentage.

No wonder then that many clothing companies are warning that the price of clothes is expected to rise by a figure approaching double digits early next year.

Then we have some manufacturers reformulating their packaging to give the appearance of no increase in price to consumers. So your cereal box may look the same and your cereal may taste the same, but for the same money you bought only 8 ounces of cereal instead of the 12 ounces you bought last year.

Consumer products manufacturers are nervously watching how consumers react to all of this. After all, most of the extra costs due to higher agricultural commodities will eventually get passed on to consumers.

Inflation in agricultural commodities looks set to continue for the foreseeable future. So this generation of consumers will just have to get used to the higher prices.

Saturday, December 11, 2010

The Federal Reserve's Mission

Most Americans have very little understanding of the Federal Reserve. At most, some may know that a guy (Ben Bernanke) who looks a little like Lenin controls US interest rates.

But there is a lot more to the Federal Reserve. It is also the creator of US money and the prime decider of who gets bailout money.

Thanks to independent (some say socialist) Senator from Vermont, Bernie Sanders, we got to see what the Fed is up to. He insisted on learning where the Fed's bailout money went. How un-American!

It turns out that tens of billions of dollars went to firms in the US that pretended they needed no help.

Goldman Sachs, for example. Goldman went to the Federal Reserve 212 times between March 2008 and March 2009, according to Fed documents. The company collected nearly $600 billion!

Citigroup...Morgan Stanley...General Electric. They were all in on the Fed's gravy train.

In total, the Federal Reserve put out $3.3 trillion worth of credit, buying up speculators' bad bets.

Not surprisingly, the price of bad credits rose in price due to the Fed's buying spree. So the Federal Reserve can now say that it hasn't lost a penny.

That Ben Bernanke sure has a sense of humor! The Fed neglects to mention that it can never sell all of this bad debt which would collapse in price.

Naive people think that the Fed is supposed to pursue corrupt operators. But now the Fed is at the center of the racket, handing out money to its powerful Wall Street cronies.

But this should come as no surprise. Most people don't know - the Federal Reserve is a private bank, even though it serves what is supposedly a public interest.

But it is neither owned or controlled by the federal government. The Fed is controlled by the banking industry, which are its main shareholders.

The Federal Reserve's stated mission is to give the US a trustworthy currency and to promote full employment. There's that sense of humor again...since its inception in 1913, the US Dollar has lost about 95% of its value.

The Fed's real mission is to make sure the banks stay in business and make a profit. It does this simply by transferring money to the banks.

How does it get the money? It just prints it up! Who pays the bill? Eventually, taxpayers and citizens do when the newly printed money reduces the value of their old money.

Oh, to be a banker in the United States instead of a common peon.....

Saturday, December 4, 2010

The US-China Green War

A recent report from Ernst & Young showed that America has lost its spot at the top of the renewable energy ladder to China. So it comes as no great shock that the US government has picked the clean energy industry as the latest battleground in its cold war with China over currencies and trade.

The Obama Administration recently announced that it would proceed with an investigation into China's support for its renewable energy industry. The results of the investigation could eventually lead to litigation at the World Trade Organization.

What's at issue is Chinese government support for its 'green' industries such as wind turbines, solar energy products, energy-efficient vehicles and technologically advanced batteries.

China Going Green

Basically, the American government is trying to punish China for putting an emphasis on developing green industries. Something Washington has talked about for decades, but did little about it.

In contrast, the Chinese government has put its money where its mouth is. Even recently, officials have spoken of lavishing more investment on both better grid infrastructure and clean-tech industries. The investment figures being bandied about are comparable to the country's $600 billion stimulus after the global financial crisis.

The Chinese government has made the move toward a greener future the core of much of its policy-making. China's leaders see greener energy as a huge opportunity to push forward their economic restructuring agenda.

China has pushed hard to closing older industrial facilities and building bigger, more efficient ones. But, in addition, the Chinese government's aim is that green industries will spring up to provide fresh sources of economic growth.

In fact, of the nine key emerging industries ordained by Chinese policymakers, six are green technology-related.

One of those key industries where China has already had success is wind power equipment. China's appetite for such equipment has more than doubled in each of the past four years. And it is on course to beat its official target of 30 gigawatts of installed wind power by 2020. The country also looks likely to surpass the US as having the most wind power capacity.

It is a similar story in the solar power industry. The Chinese have proved adept at mastering new techniques and producing on a large scale. The result is that they have driven costs down fast and grabbed a large share of the market away from their American competitors.

The US Slips to Second

So why has the United States fallen behind in the green technology war? One major reason is the Silicon Valley approach to developing new energy technologies.

One prime example is the solar power industry where Silicon Valley promised to create a new, world-beating industry. But the shine has come off that promise.

Several years ago, venture capitalists were throwing money at new solar start-ups. Most of the start-ups were trying to apply a new technology based on printing thin layers of exotic new materials onto cheap substrates. The resulting panels are less efficient than silicon at converting sunlight to power. But they were expected to be far cheaper to produce and install.

However, many of the ideas backed by venture capitalists were nothing more than expensive and time-consuming “science projects”. As a result, many thin-film solar companies are finding it hard to reach the mass production levels needed to achieve the economies of scale necessary to compete.

The result of all this venture capital investment? A bunch of “me-too” companies that can't compete globally.

In addition, Silicon Valley vastly underestimated the adaptability of its competitor – China. China was using older technology based on making solar panels using silicon cells. Silicon Valley confidently thought its push into solar using thin-film technology would leave its Chinese competitors in the dust.

But that really hasn't worked out. First Solar is the acknowledged world leader in thin-film solar technology thanks to its mastery of a material known as cadmium telluride. Yet even it is starting to feel the competitive strain from China.

The US Government Blows Hot Air

The other main reason the US has fallen behind China in renewable energy is lack of government action. In the United States, there has been much talk about green energy industries. But little real concrete government action to support the industry.

Many in the American renewable energy industry are actually angry at the US government. They are angered by what they see as the administration's belated recognition that the US industry's competitive position has been eroded, after years of relative neglect.

Mike Eckhart, president of the American Council on Renewable Energy, spoke about the Obama Administration's investigation. He said “The Chinese did what they said they were going to do, and the US didn't. The fact that the US didn't support its renewable energy industry in the same way that other countries did is no grounds for complaining now.”

And while the US points to “unfair” Chinese is interesting to note that in the US, Chinese companies can make no headway. For instance, just three Chinese wind turbines in total have been sold in the United States. And the towers and blades for those were US-made. I guess it all depends on what your perspective is to determine the definition of “unfair”.