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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 This page, while atrociously designed and in places slightly out-of-date (but only in places), has fascinating statistics on prices and proven reserves.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

Mon Mar 31 23:00:00 2008 Carpe Seize! More talk of markets seizing up.
Wall Street Image courtesy of Eugene Zelenko (wiki) See my below. Basically, I'm seeing more references to markets "seizing up." I don't think most people know what this phrase means, particularly the people using it. For instance, this article says "everyone is affected when the financial markets seize up." He refers to the Savings and Loan bailouts and Long Term Capital Management, both collapses that, while painful, were not catastrophic to the nation's economy and cleaned out industries that had been poorly managed for a long time. In other words, they had it coming. The same article also mentions the Great Depression and Panic of 1907, but those aren't relevant since, again, they were before the FDIC. (Did you listen to FDR's speech on that page? Still relevant today.) Then this article gives a more accurate definition of a seize-up: "loans [are] costlier and harder to come by." That's right: once a bank realizes it has screwed up and made a bunch of bad loans, it has to start being more careful. I recently got another mortgage: it was harder than it was 3-5 years ago. No surprise. And this doesn't qualify as a meltdown, nor are Great Depression analogies appropriate. The bottom line? The big market seize up is apparently just the realization that it is harder to get loans. The Federal Reserve's action to reduce rates is a fine way to tackle this for now. I still think bailing out the investment firms that made bad mistakes is not justified. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

Wed Mar 26 23:00:00 2008 The Great Stagflation of 2008 Get ready for the next few years.
Well, the bad news keeps coming in. Nationwide housing prices continue to fall, with a staggering 11% drop in January alone. Oil prices keep going up, and aren't likely to stop going up for another year or two at least. OPEC can't raise production much since producing countries are running out of oil, and it will take a while for Americans to replace their existing cars and power plants with more efficient models. Gas prices are around $3.30 locally, and I predict we'll see over $4.50 for a gallon of regular gas before 2010. $4.50 is a big jump in gas prices. How can I be so sure? I'm sure because inflation is also about to make some dramatic jumps. Latest inflation rates are high, but they will probably get much worse. Multiple companies are reporting that they have to raise prices due to transportation and food costs. (And often food costs rise because of transportation costs--the nation's corn crop is at a high price because of increased ethanol production). This is the classic setting for stagflation, where growth is low, and moving interest rates doesn't help. If you lower interest rates you just stoke inflation, and raising interest rates just slows growth. Many people assume that monetary policy (the Federal Reserve's base interest rate, for instance) is the only economic lever. However, there are multiple other levers. Another good tool is fiscal policy. There is a classic way out of this situation: keep interest rates up (avoid inflation) and stimulate growth via public spending. However, we can't do that now because the government is already at historic debt levels. The government can't really spend anything more because like American consumers, the government owes too much. So we are pretty screwed. Even gold is a dubious investment, given its recent price rise. So my recommendation is to keep your money in somewhat inflation-free investments such as real estate or stock indices. A savings account is likely to lose value, and even bonds may not keep up with inflation. Comments	Related: > economics < predictions Unrelated: books energy environment geopolitics lists mathematics science

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