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Back on air

August 31st, 2005

I’m back on air now, after my longest time in some years out of Internet contact, in upstate New York, where I’ve been visiting my friend and colleague Bob Chambers by the shores of beautiful Lake Skaneateles. We spent a few days tossing ideas for new papers around, and generally getting away from day-to-day pressures. I’m now back in DC (Maryland actually) and glad to be turning homeward, though, as usual, I’ve had a very pleasant stay here.

I can see that I’ve missed more news than usual over such a period, and it will take me a bit of time to absorb it all. I’ll start by expressing my best wishes to the people of New Orleans and other areas affected by Hurricane Katrina. I lived in cyclone-prone areas for quite a few years, but never experienced anything worse than a category 3, which was scary enough for me.

I’ll try to post soon on the economic consequences of all this. Most notable is the fact that a local disruption like this could push the price of oil over $US70/barrel. The guys who predicted $100/barrel not long ago must be feeling pleased with themselves.

As for the Australian political news, it’s startling, but I’ll wait until I’m better-informed before I say anything about it. Feel free to jump in with your own interpretations.

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  1. Matt Canavan
    August 31st, 2005 at 12:39 | #1

    Have others seen Steve Forbes comments on oil prices overnight? He said:

    ” I’ll be blunt, there’s hardly a hedge fund in North America that hasn’t speculated in oil futures.
    So I’ll make a bold prediction, and hopefully if I’m wrong you won’t remember it, but I think in 12 months you’re going to see oil down to $US 35, $US 40 dollars a barrel. I don’t think it’s going to go to $US 100, and if it does this crash is going to even be more spectacular; it’ll make the high-tech bubble look like a picnic.”

    (I can’t find the whole speech but these comments are from http://www.abc.net.au/pm/content/2005/s1449508.htm)

    I know he has fairly forthright views on US monetary policies and I am not sure how much this influences his views on the oil market. My theory is that loose monetary policies are overheating world markets which is leading to speculative demand for oil, housing, US T-bills etc. However, monetary induced booms cannot last and eventually the steam will go out of the economy and thus see demand driven oil prices fall.

  2. harry clarke
    August 31st, 2005 at 14:33 | #2

    Matt, I cannot help thinking that the demand for oil will fall dramatically in China and other developing countries that are currently creating the demands driving high oil prices. We know from the oil price hikes of the 1970s and early 1980s, that oil demands have low price elasticities in the short-term but much higher elasticities with a lag. Oil use in countries like China is very inefficient so there is a considerable potential for conservation there. The West will have less capacity to pursue liquid fuel efficiency so my guess is demands will drop off less there.

    I don’t have the machinery to assess the accuracy of Steve Forbes’ forecasts but I think trends could be in that direction.

    This might not be a pure blessing. A period of sustained high oil prices might motivate governments to pursue nuclear and other options that would facilitate use of electric power driven vehicles and so on. Periods of high followed by periods of low prices tend almost to provide a market failure. The private sector won’t invest enough in alternative technologies since they fear the high fixed costs should oil prices drop.

    My sympathies are clear. We need huge public sector investments in low pollution alternative electricity sources that are not coal-based. We should not grizzle unduely should oil prices drift down in the medium term.

  3. August 31st, 2005 at 15:34 | #3

    Great to have you back Prof!
    And great to be back myself.
    (After suffering a long forced stay in hospital and away from the web, I can say my own time away was well used recovering and reading the old-fashion way, with surprinsingly very little withdrawal symptoms from not being online. Except, emails have accumulated to 2345… and still bouncing…)

    Amazing the amount of local and international news, events and changes that happenned in these last 3-4 weeks. I’m still digesting everything.

    Unsurprinsingly, the media has not shined in their coverage of anything. Mostly pathetic. Absolute crap everywhere, very little actual analysis or insight whatsoever! The signal to noise ratio is getting lower and lower. Any wonder so many of us are simply switching off from tv and newspapers!

    Examples of pathetic media coverage:
    - Locally, ongoing lame talk about tax, and leadership infighting… mostly fanned by the media itself, and simply not that newsworthy. To most people it’s even more of a turnoff!

    - in the USA, Peace protesters outside bush’s ranch plus turn around in support for war. Even Dubya reacted earlier than the media did!

    - The local and USA media sounding almost dissapointed that the the hurricane in Florida was downgraded to a “tropical storm”… instead of their predicted carnage.

    - Continuously trying to hype up the violence and protests at the Forbes conference at Sydney’s Opera House… Again, Media disappointment as there were only 4 arrests (the most used shot was a bearded guy in a pink flowered dress taken from the fence! Pleeeeaase!) No insight, no talk of who the war-profiteers are, the security costs, terrorism risks elsewhere while thousand of cops are so distracted in a small area, etc.

    - But the absolute worse, incredibly even lower professionalism, was shown by the local media’s coverage of the NSW Liberals infighting and Brogden’s mea culpa and resignation. Not only was the media actively involved in the party, but it helped suppress the bad behaviour for over 3 weeks!. But they then let themselves be used and abused for internal infighting and attacks through leaks, etc. by the fanatical extremists in the Young Libs. Completely shameful!

    Incredibly, even worse than their pathethic behaviour towards Latham. And neither oppossition leader deserved such crap. Give us some proper analysis and decent criticism, but not these shameful personal attacks!

    Is it any wonder that jounos are considered worse scum than politicians and used-car-salemen? A lot of these so called “professionals” have no dignity, ethics or honour, and have definitely given all their colleagues a bad name! Have they no professional ethics or pride?

    Yes, they are only doing their job, washing their hands and only doing as they are told: just like the nazis did!

    In my book (and for most people) the whole media is definitely lower than a snake’s belly!

  4. August 31st, 2005 at 16:01 | #4

    Harry – “Matt, I cannot help thinking that the demand for oil will fall dramatically in China and other developing countries that are currently creating the demands driving high oil prices. We know from the oil price hikes of the 1970s and early 1980s, that oil demands have low price elasticities in the short-term but much higher elasticities with a lag.”
    How can this happen if there are millions of people that are getting into car ownership like us. Also the affluance of the Indian people is growing and car ownership is increasing.

    Matt – “So I’ll make a bold prediction, and hopefully if I’m wrong you won’t remember it, but I think in 12 months you’re going to see oil down to $US 35, $US 40 dollars a barrel.”

    That is assuming that there is the supply. Are you not concerned with the idea that the oil supply is not infinite?

  5. ab
    August 31st, 2005 at 16:19 | #5

    There is no problem with reserves of oil in the medium term, let alone in the next 12 months.

  6. August 31st, 2005 at 16:31 | #6

    Matt, as for Steve Forbes’s comments, interesting but they’re no more than off-the-cuff guesswork from an insider and war-profiteer, while he’s probably hedged his own bets both ways… judge what they do, not what they say!

    For the record I guess the price will stay quite high. That and the geo-political stuff have always been key considerations for all the military interventions in the Middle-East: from the Saudi and Turkish bases of the USA, to Afganistan, to Iraq and the brewing trouble in Syria and Iran.

    Much, much more interesting, instead, for the insight and detailed scenarios, is the following article in the Australian: Dumping of US dollar could trigger “economic Sept 11″ as they include some ideas discussed here before, about the actual value of the US dollar and the potential behaviour by China, Japan and many other small countries that could have a huge effect.

    Nowadays, this is argued more and more often, by all kind of economists and serious market players, all well summed up in the article: Clyde Prestowitz, Warren Buffet, George Soros, even former head of the Federal Reserve (before Greenspan) Paul Volcker:

    “So picture this: you have a quiet day in the market and maybe some smart MBA at the central bank of Chile or someplace looks at his portfolio and says, ‘ I got too many dollars here. I’m gonna dump $10 Billion’. So he dumps his dollars and suddenly the market thinks, ‘My god, this is it!’ Of course the first guy ou tis OK, but you sure as hell can’t afford to be the last guy out.

    “You would then see an immediate cascade effect – a world financial panic on a scale that would dwarf the Great Depresion of the 1930s.”

    Their major concern is the extreme …“market fundamentalist view that prevails in Washingtong and parts of Wall Street.

    “This is the belief that markerts are self correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasises, markets tend to excess. They overshoot. Anyone with any experience of markets knows this.

    “When markets are going down, all the weaknesses get concentrated, and you need intervention at the right time to stop things from getting out of control. If the dollar started to melt down the results could be really nasty. A 1930s-style global depression is not out of the question.”

    Now, that’s something they should be discussing at the Forbes conference! Whatdayareckon?

  7. joe2
    August 31st, 2005 at 19:58 | #7

    John Howards legacy as Prime Minister, will be , that he has driven his party so far to the right that ,in the long term, they will end up like the D.L.P.

    Steve Forbes is allowed to make predictions and so can I.

  8. At the Beach
    September 1st, 2005 at 08:53 | #8

    Following on from Forbes, Stiglitz has now commented on the global economy. It’s doom, nothing but doom…

    http://www.smh.com.au/news/national/rough-ride-ahead-leading-economist-warns/2005/08/31/1125302628734.html

  9. September 1st, 2005 at 09:55 | #9

    ab – “There is no problem with reserves of oil in the medium term, let alone in the next 12 months.”

    Oh well thats OK then.

    Have you never heard of Peak Oil?

  10. paul
    September 1st, 2005 at 10:36 | #10

    Central NY is quite pretty, but 1 question: Did you see the sun much? I grew up in Syracuse, and spent a few weeks on Skaneateles with my parents in my 20s. When I was a kid, the line on the Syracuse was that it was the 2nd rainiest metro area in the US (after Seattle – this was back when Syracuse was still large enough to be considered a major metro area) and the cloudiest. When I moved to Chicago for college I couldn’t understand why other kids complained about how grey it was in the winter. That was normal as far as I knew. Summers were pretty grey as well.

  11. Paul Watson
    September 1st, 2005 at 11:15 | #11

    As Carlos says, the Steve Forbes comments may well be made solely to serve his own (undisclosed) financial stake in the issue.

    Quite apart from this, though, is the objective ludicrousness of this stated comparison:

    ‘He dismissed speculation that oil would rise to $US100 a barrel, saying: “If it does, the crash is going to be even more spectacular and will make the tech bubble look like a picnic’.
    http://www.theaustralian.news.com.au/common/story_page/0,5744,16442408%255E2702,00.html

    From memory, the NASDAQ (surely a fair proxy for “the tech bubble”) is still down at least 75% from its all time peak in 2000. For the dotcom crash to be considered light (a “picnic”), in comparison to Forbes’s anticipated crash in the oil price, the latter would have to fall 90% or more. Even Forbes’s anticipated ‘normal’ prices, of US35 – $US40 a barrel, entail no such thing, of course, being a 50% fall, at most, from current levels.

    This laziness in media-hyping a mere prediction *matters* because Steve Forbes imagines himself to be a figure of some intellectual seriousness. More particularly, the $2m or so of Australia taxpayer money just spent in bringing the Steve Forbes circus to town suggests that Australian leaders enthusiastically concur in such a view.

    Well, I think Australia’s taxpayers are entitled to now ask Forbes for a refund. If he is publicly espousing facts and figure that would see a first-year uni student fail, then he has no business being subsidised by this country. More than that, his abject lack of smarts should see him properly declared an immigration-overstay risk the next time he may choose to grace our borders. After all, he perfectly fits the profile of a shady pseudo-businessman, whose real purpose in entering Australia is to sponge off its generous welfare system.

  12. September 1st, 2005 at 12:05 | #12

    If you want to read someone who disagrees with Steve Forbes then have a look here
    http://www.dailyreckoning.com/RudeAwake/Articles/RA083105.html

    If you want to really see what Katrina has done to the Gulf of Mexico read this
    http://www.theoildrum.com/story/2005/8/31/83553/8973#more

    Quotes:
    “There are MANY production platforms missing (as in not visible from the air). This means they have been totally lost. I am talking about 10′s of platforms, not single digit numbers. Each platform can have from 4 to 100+ wells on it. Most larger ones have 20-30 wells in this area, with numerous caisson wells. They are on their sides, on the bottom of the gulf – they will likely be left as reef material, provided we can get permission. MMS regulations require us to plug each of the wells that were on these platforms – HUGE cost now, as the platforms are gone… Hopefully, MMS will grant `abandon in place’ status for these wiped out structures.”

    “Thus we have to reset each of the drilling rigs, which requires getting OUT of the well, tugboats and a move, then getting back into the well. The open hole we have drilled (what is not enclosed in cemented casing) is likely to be lost, and if the wellhead or the casing is bent, then the well will have to be redrilled. This is an exploration setback of at least a month, but we don’t yet know the boat situation.

    Boats are usually brought into harbor to weather storms. We do not have a boat count yet, but from the initial reports, we may have lost or grounded 30% of the Gulf of Mexico fleet. This means everything will cost more, take longer – repairs, repositioning, everything.

    and

    “In short, the Gulf area hit by the storm is basically in about the same shape as Biloxi. The damage numbers you have gotten from the government and analysts are, in my opinion, much too low. We are looking at YEARS to return to the production levels we had prior to the storm. The eastern Gulf of Mexico is primarily oil production…

    Loss of the MARS platform alone cost us 95,000 barrels a day for a year or maybe more.

    YEARS, people. I know what this means – hope everyone else gets it too…”

  13. Paul Watson
    September 1st, 2005 at 12:58 | #13

    Steve Forbes made his oil price predictions well before the extent of Katrina became clear. But even at that time, the made them it was clear he was taking a contrarian stance.

    Ordinarily, I see little point in going Nelson Muntz “ha ha” at people who make contrarian predictions, when such predictions first start to look seriously pear-shaped. Contrarians do perform a valuable service, and so deserve some dignity, despite necessarily being proved wrong in the end (or sooner!), more often than not.

    Where Steve Forbes has forfeited any right to a contrarian’s dignity is in his “2+2=5� dotcom comparison.

  14. jquiggin
    September 1st, 2005 at 22:53 | #14

    Paul, we had a couple of lovely sunny days, then it got cloudy.

  15. Harry Clarke
    September 3rd, 2005 at 13:54 | #15

    On the oil demand issue in China, Ender asks why will the demand for oil fall in China when incomes are growing there so strongly and people are demanding cars in greater numbers. To an approximation China’s growth rate in energy demands equals its income elasticity of demand for energy* growth rate in incomes less the price-elasticity of demand for fuel* rate of oil price growth. My guess is that the income elasticity in China is quite high at say around 1.2 and China’s annual income growth is around 9 per cent. If oil prices double then the demand for fuels in China will fall if 1.2*0.09-demand elasticity*1

  16. Harry Clarke
    September 3rd, 2005 at 14:19 | #16

    The last messagee got cut off inexplicably.

    It should continue….. is negative which will certainly be true for any plausible price elasticity. Thus I think that demands in China will certainly fall in the short-term.

  17. David Lewis
    September 5th, 2005 at 06:15 | #17

    For all those who mistakenly trust Steve Forbes comment. Read Kerry Nettle’s press release. The private advice of his firm directly contradicts what he said based on material in Kerry’s press release.

    His firm advises peak oil and the great money making opportunity it is for those wishing to speculate on the oil price in its investor bulletin. For more see

    http://www.kerrynettle.org.au/600_media_sub.php?deptItemID=433

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