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Thu Apr 24 22:06:59 2008 High Oil and Gas Prices More dubious questions about high oil prices.
In my April 1 post I talked about how the US Congress was grilling oil executives about their profits. Now it's local! Historic supply and demand. Image courtesy of User: Noroton (wiki) Two Washington congresspeople, Senator Cantwell and Representative Inslee, have asked President Bush to set up a special task force to investigate the high prices. They claim "the price of oil and gas can no longer be explained or predicted by normal market dynamics or their historic understanding of supply and demand fundamentals." Oh really? I've given links (April 1, April 15, March 26) to multiple indications that world oil demand is climbing while supply (oil production) is staying flat or falling. On top of that, the US dollar is very weak, which doesn't help us in the global market for oil. High demand + falling supply + weak dollar = high prices. I'm guessing Cantwell and Inslee are frustrated because the price of oil is unrelated to the cost to produce it. But that's not unusual either: any time that you have high demand and limited supply, the price (value) of an item is only slightly related to the cost to produce it. One recent example (for water prices, not oil) was when China poisoned the Songhua river and the spill was carried by the river through multiple large cities and into Russia. Almost 4 million citizens of the provincial capital Harbin had their water supplies shut off when the authorities realized that the 100 tons of leukemia-causing benzene might be dangerous. Without water supplies, people started buying bottled water, which led prices to skyrocket. Obviously, bottled water isn't very expensive to produce, so the fact that prices shot up led to charges of "overpricing" and "price gouging." (See the USA Today story and the IHT story.) Also see this link for many on-the-ground anecdotes of people that went through it. The idea is that greedy store owners started charging more for bottled water when it was announced that tap water was poisonous. Therefore, they were profiteers and price-gougers. I only have one problem with that: the value of their water did go up! How much would you pay for a bottle of water right now? Probably not much if, like me, you are sitting only steps away from a perfectly good water tap. Suppose you were told that the tap was shut off or poisoned, and the entire city's water supply would be shut down for a week. Now how much would you pay for that bottle of water? I'm guessing you'd pay more. You'd probably pay a lot more. Suppose a citizen of Harbin wanted to celebrate someone's birthday with a monster slip-n-slide like these guys. Before the disaster, great. But after it was announced that the city's water supply had been poisoned, wouldn't it be irresponsible to hoard hundreds of gallons of water for your slide? I think it would be irresponsible. And isn't that an indication that water is worth more? [Scary aside: the government knew about the crisis for days before it told anyone! At first, it shut off the water supply without telling people why. Government officials also apparently told local bottled water producers to prepare days ahead of any official announcements while the benzene was drifting downstream. So the "price gouging" could have been far worse if the government hadn't acted--somewhat immorally--to jack up supply ahead of time.] Anytime there is a scarcity of a needed item (water during a drought, food during starvation), the value of the item--and therefore its price--goes up. And the effect can be nonlinear! Just slight imbalances in supply and demand can result in large price changes (especially for inelastic supply such as oil). So I have to believe that the current high prices are explained pretty well by classic supply and demand curves. And the prices will just get worse as demand increases (or stays high) while supply continues to fall. Senator Cantwell and Representative Inslee will remain confused and frustrated for many years to come. Hopefully other members of Congress will do something productive to reduce the demand side of the equation. Comments	Related: > economics < energy Unrelated: books environment geopolitics lists mathematics predictions science

Sun Apr 20 21:49:45 2008 Best Books - Economics and Finance I list my favorite books on economics and finance.
What are my current favorite books on economics and finance? Money. Image courtesy of User: Although (wiki) To make the list, a book had to meet these criteria: Be interesting to read. This is hard for this subject! I just wanted books that had an engaging style and narrative thread. Give a solid big picture. Many books in this area are just one recent author's attempt to sell the public on their latest "winning" strategy. (Isn't it funny how for most of these authors the best way to make money is often just to sell books about making money?) I wanted books that would give a coherent overview of how markets worked, so an intelligent reader could figure out strategies on their own. Be reasonably objective. I wanted books where the author realized that although they were experts, they didn't know everything. Usually good authors compensate by presenting different viewpoints, and clearly separating personal feelings and anecodtes from facts. So, flipping through my small library, here are my top picks (no particular order): Personal Finance: Easy, this has to be A Random Walk Down Wall Street by Burton Malkiel. Debunks a lot of the investment myths you hear about. His simple (and very practical) advice on dollar-cost-averaging has gotten me through two boom-bust cycles. Economics: A favorite is The Worldly Philosophers by Robert Heilbroner. It is a combination of a History of Economics and a primer all in one. Macroeconomics: I'd pick The World Economy Since the Wars by John Kenneth Galbraith. Maybe an odd choice, since I don't see many other references to it! But I trust very few textbooks on macroeconomics since I don't believe anyone really knows how it works. What I like about Galbraith's book is that it is just him rambling about his experiences and observations during the 20th century. He was not just an observer: he was a participant, and held key posts in the US Government throughout World War II and after. Great book. And speaking of Galbraith, that reminds me of Busts: One of the most important things you can do, either as an individual investor or the leader of a country or company, is to recognize (and if possible ameliorate) boom/bust cycles. Unfortunately, most of those in charge don't seem to be able to recognize busts until after they've happened. If those in charge can't prevent them, at least a savvy investor can take precautions to limit their exposure. And I know of no better way to recognize these cycles than to study previous ones. The Great Crash, again by Galbraith, is probably the best such book. It meets all of the criteria, especially readability. Although Galbraith was better known for other books such as The Affluent Society and The New Industrial State, I would not be surprised if The Great Crash became his biggest legacy, if only because it remains timeless, whereas some of his other works were hugely relevant in the 1950s but are less so now. The other boom/bust book to read is of course Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, first published in 1841. Not all of it is excellent, but the chapters on The Mississippi Scheme, The South-Sea Bubble, and Tulipomania are stunning. Even in 1841, he was writing about historical events, but those chapters could be from the from the headlines of today. Later chapters on Alchemy, Fortune Tellers, Magnetisers, and so on, just add to the point. The bottom line: the clever have taken advantage of the foolish for all of recorded history. Hopefully you can avoid being foolish by reading these, and hopefully you have the integrity not to take advantage of those who have not read them. Comments	Related: > economics < lists books Unrelated: energy environment geopolitics mathematics predictions science

Tue Apr 1 20:00:00 2008 Profits Questioned An accusatory focus on energy company profits hurts the Green cause.
Today Congress went through the familiar ritual of questioning energy companies about their high profits (stories here and here for instance). If there was serious suspicion of collusion or other tactics to defraud customers of money, then a Congressional grilling is warranted, as well as legal charges! Gulf rig Image courtesy of Chad Teer (flickr) However, it is very clear what is happening: oil is a scarce commodity. The massive drop in the dollar's worth, our high energy consumption, and dwindling supply mean that gas is more expensive to produce and harder to come by. It's a triple-whammy: production costs go up along with demand, while supply goes down. Any economist will tell you that prices go up. And when prices and demand go up, so do profits. You aren't running the business correctly if that's not true. All of these companies are facing the usual questions of "do I cut prices to beat my competitors and steal more market share, or will I lose more money that way?" And the equations get harder if you have less control over supply (they can't lower prices and increase supply, since supply is restricted). Incidentally, there are some amazing resources for examining how much oil we use. Check out this site for graphs of per-capita energy consumption. Very small states with lots of oil have crazy consumption ratios. If you disregard them, the US and Canada are clearly far above standard industrialized countries in terms of consumption, running 25-50% higher or more than most of Europe! This page, while atrociously designed and in places slightly out-of-date (but only in places), has fascinating statistics on prices and proven reserves. Also see the author's statement (halfway down, titled "Personal note about bias"), he gives an interesting account of his own shift in thinking. And he links to this interview which is one of the scarier interviews I've read in a while. For examples of how much the dollar has declined, check out the value of the Euro over the past 5 years, which has climbed as the dollar has weakened. Or look at the value of the dollar vs. the Canadian dollar, which shows how the Canadian dollar is now worth more than the US dollar. Remember, exchange rates are fundamentally a measure of foreign confidence in our economy. Given our trade deficits, inability to control spending, and absurdly low interest rates, most of the world thinks we are a dubious investment. So, due to poor management of the economy (devaluing the dollar) and poor management of energy consumption (we keep consuming more oil), gasoline prices and therefore profits have gone up. What good does it do to grill the energy company execs? It is purely political staging. People are annoyed about high oil prices, and members of congress know it is easier to harangue the energy company CEOs than actually fix the real problems (limited supply and increasing consumption). This is too bad, because it deflects attention from the real problems and their fixes. The problem of high oil prices can be fixed! The solution is to consume less oil (duh). Oddly, Congress seems to not be talking about that. This page, from the Natural Resources Defense Council, is old but nonetheless has a straightforward solution. Bump up the required mileage! That is, force an increase in fuel efficiency. This worked well in the 70s, and can work again now. Curiously, the energy corporation CEO-bashing continues. Get used to it, because as oil supplies dwindle and our consumption increases, gas prices will continue to skyrocket. Hopefully a few members of Congress will decide to fix the problem rather than grandstand. Comments	Related: > economics < environment Unrelated: books energy geopolitics lists mathematics predictions science

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