Category: Economics

This one has been sitting around waiting to be blogged for a while now. Steve A. Yetiv, professor of political science at Old Dominion University in Norfolk, Virginia, and author of the forthcoming book “Crude Awakenings: Global Oil Security and American Foreign Policy”, writes about the price of oil.

He points out:

All this brings us to market psychology, which is affected by supply and demand but is its own animal as well. Unlike in the past, oil is now traded like other commodities. When traders believe that the price of oil will rise, they go “long the market” or buy into oil, thus pushing the price higher. The more buyers, as with any traded good, the higher the price.

Part of their action is driven by the fundamentals of supply and demand, and part of it is speculation. Speculation can vary in rationality. The stock market bubble that sent U.S. Nasdaq index above 5000 was driven by irrational speculation, not real fundamentals.

Speculation is affected by many things, including fears about oil-supply disruptions in the Middle East, Russia, Venezuela and Nigeria. Today, these fears may well add 20 percent to the price of oil.

Just grin and bear it:

Such fears have always been around, but today they seem to represent a perfect storm of angst. This is despite the fact that there may well be enough supply out there to meet demand and that the Saudis could add about 1.4 million barrels per day if need be, albeit not of the most desired low-sulfur crude.

So there we have it. Yes, things look a bit grim today. But the global oil market can change quickly. In the short run, at least, we may well have to hold onto our hats, grin and bear it.

Randall Stross in the New York Times [Reg reqd] tells of the other IPOs this year that went unnoticed. He points out that it is only the trendy tech industry gets all the press comment while other bigger IPO’s receive scant attention.

Some readers may have missed the news. Genworth’s was only the biggest initial public offering so far this year, raising $2.8 billion in May. It and the second biggest – Assurant, which went public in February – did not draw nearly as much attention as A Certain Other Company’s $1.67 billion offering for a simple reason: boring ZIP codes.

Companies in financial and insurance services, however well they perform, lack the cachet of the most-envied corner of the economy: tech land. No other sector, year in and year out, receives such disproportionate attention from prospective investors and the news media alike. The computer industry is good. Software is even better. A company name already familiar to nontechnical computer users is best of all. This has been the case ever since the initial public offering of Microsoft nearly two decades ago.

He asks and answers appropriately in relation to market hype:

Will Google have a halo like Microsoft’s, benefiting the many other hopefuls in tech? This is a question of pure psychology, nothing more. Experience suggests that “halo” is a euphemism for “investors turning bullish en masse for no substantive reason.”

Will Europe’s economy stand up to its old population and spiraling pensions costs? It might, or at least according to this article. Also mentioned is Chirac’s likely successor, Nicolas Sarkozy.

In office, Sarkozy has steered a complicated course of talking of reform, including efforts to increase working hours in France, while also pushing through a state bailout of Alstom, the large engineering firm, and blasting German companies that have threatened to move operations out of Europe if workers did not agree to longer hours.

His popularity does not appear to have fallen, and Chirac now seems to be trying to force Sarkozy to leave the government.

The writer is optimistic about Europes looming worker deficit:

European economies are on track to grow reasonably well this year, even if they are trailing the United States and much of Asia. European productivity growth has trailed that of the United States, but the gap narrows substantially when expressed in terms of hours worked. It can be argued that the difference reflects a quite reasonable preference for leisure over additional income. No doubt that is true for some, but many of the persistently unemployed in Europe would no doubt prefer less leisure and more income.

The demographic horror story – in which the structure crumbles because there are too few workers being forced to pay taxes to support too many retirees – may be oversold. There is an ample supply of extra workers available via immigration, and while there is great reluctance to let them in, and more than a little discrimination against hiring those that are already in Europe, that can be seen as an untapped resource.

He continues:

And while it is true that European growth has lagged in recent years, in one important measure it has done reasonably well. Paul Krikorian of Bridgewater Associates, an American investment firm, calculates that since 1999 the United States’ market share of world exports has fallen by 4.4 percentage points.

Most of that went to China, but some of those lost exports were replaced by exports from European countries, whose share fell in 2000 but has since rebounded. Europe is running current account surpluses even as the United States runs record deficits.

So maybe we should look on the bright side:

It is true that Western European countries have huge debts looming over them in the form of promised but unfunded pension benefits for aging populations, and it is not at all clear how that issue will be resolved. But owing a lot to one’s own citizens – under laws that the government can change – may not be worse than owing real money to foreigners who have a right to repayment, the position the United States Treasury finds itself in.

Philip Bowring in the IHT asks us to keep an eye on it. A warning, and something to note. I may as well quote the whole thing:

The world may soon pay a high price for years of low global food prices resulting in large part from European and U.S. farm subsidies. The winners could include China’s long-exploited farmers.

We should remember that food shortages were second only to oil prices in causing the huge global inflation of 1973 to 1975, which resulted in a collapse of financial asset prices and pushed the global economy into deep recession. Then, as now, the surge in commodity prices followed a period of easy money and rapidly rising financial markets.

History is threatening to repeat itself. Despite a hoped-for small rise this year, China’s grain output is still some 12 percent below its peak, and the country is experiencing another large grain deficit. Most of India is still anxiously awaiting a belated monsoon. Unless it comes soon, India’s ability to export food will be in jeopardy. Australia, too, has another drought.

While both India and China have huge grain stocks, the interlinkage of poor local harvests and tight international supplies is clear enough. The revival of inflation in China is due more to food prices – up 30 percent over a year ago – than to oil and other minerals.

That may not seem important for rich nations, for whom raw food prices are a tiny part of the price index. However, in an interdependent world, and especially one in which China plays a major role as supplier of manufactures, food prices are the beginning of an inflation chain.

The 30 percent rise in grain prices in China is spurring 4 to 5 percent or more consumer price inflation, which thus requires wage increases well ahead of productivity growth. Those additional wage costs are on top of higher prices for oil, steel, copper, plastics, etc.

Sooner or later these will be reflected in export prices and hence in a significant portion of retail sales in the United States. Inflation could again become embedded.

Given China’s extremely competitive position in labor-intensive manufacturing, it is unlikely to suffer significant loss of market share by raising prices. Alternative suppliers are facing many of the same cost pressures or have currencies that have appreciated against the dollar.

The good news is that in the short run farmers in China and elsewhere will see their incomes rise, slightly redressing China’s immense urban-rural income gap. The longer-term opportunity is that it will lead to investment in China to boost rural labor productivity, create off-farm employment, and promote the pricing of China’s scarcest resource – water.

Whatever the long term outcome, today’s reality is that real food and commodity shortages exist side-by-side with excess global liquidity and low interest rates.

It is not a comfortable combination, and it could well get worse if the weather compounds man’s self-created problems.

Michael Lind writes a piece in Prospect concerning how the earth will cope with the projected peak population of 9 billion people. This somewhat relates to recent debate on the amount of oil left on the planet. Lind gives some interesting stats including:

As the economist Paul Romer pointed out in the magazine Reason (December 2001) US per capita income in 2000 was around $36,000. If real income per American grew by 1.8 per cent per year, by 2050 it would increase to $88,000 (in purchasing power of 2000 dollars), while 2.3 per cent annual growth would increase the average American’s income to roughly $113,000 per year. Romer observed that in the second scenario, “in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.”

And…

As machines get ever cheaper, more people will be able to afford more of them. Today the combined mass of all machines, at more than a gigaton (Gt), exceeds the combined mass of human beings, about 1 megaton. The total amount of carbon, 5Gt, required to power and construct machines and electric utilities greatly exceeds the 1.3Gt global consumption of carbon by human beings, mostly in the form of food. As affluence grows, the amount of energy and raw materials “consumed” by machinery will escalate even more rapidly than human consumption. But this need not mean an end to the machine age. If manufacturing processes were to imitate the recycling that takes place in the biosphere, then most machine materials might be recycled to make new machines, rather than thrown away. And long before all fossil fuels were exhausted, their rising prices would compel industrial society not only to become more energy efficient but also to find alternative energy sources sufficient for the demands of an advanced technological civilisation – nuclear fission, nuclear fusion, solar energy, chemical photosynthesis, geothermal, biomass or some yet unknown source of energy.

He concludes:

Providing stuff, space and speed to 9bn people without putting serious strains on the global environment is possible, but not inevitable. A planet of crowded slums, extreme inequality, devastated ecosystems and rising atmospheric temperatures is a frightening possibility. To avert such a future, campaigns for political and behavioural reform, at both the national and international level, will be necessary to supplement the development of new technology – no argument there. But political and moral campaigns should take the preferences of people into account and they should be based on sound reasoning. It makes no sense to counsel individuals and nations to adopt austerity in cases in which there are technological solutions to problems created by technology. Sometimes there really are technical fixes.

Oh and by the way, Lind is the Whitehead senior fellow at the New America Foundation in Washington, DC