the dark brown river

Friday, May 27, 2005

oil and the conundrum.

imagine the interest rate as a tide. the recent 1% rate
was the high tide of liquidity, and the tide is now going
out again bit by bit as greenspan raises the rates.

now imagine smaller fluctuations in day to day shares
and other investments as waves, over and above the
underlying ebb or flow of interest rates.

now imagine the hedge funds, offshore investment, oil
money and foreign central bank purchases as a huge
tsunami on top of both, which when moving in one
direction can go against the tide or even appear to
reverse it.

that is the conundrum.

the tsunami is no longer responding to alan greenspan.

it responds to the fed interest rate only in relation to
what is happening elsewhere. it lives in an ocean of
globalised investment opportunity, and massive liquidity.
most of all it responds to what it, itself, is doing. this is
not the world of waves and tides - but tsunami and bubbles.
the computers that help to drive it have neither allegiance
nor conscience.

if this analysis is correct, what will be the impact of the
tsunami ? the loose or hot money that flowed in so freely
can flow out again. the second toll of devastation is as
the tsunami rolls out. this time it may be running with the
tide - but again, the tide is temporarily drowned out into

so the end of the conundrum can be tsunami and tide now
moving together - rapidly rising real interest rates to stop
money leaving, but collapsing bond prices in step with this.

cash deposits and the dollar are strong, but all sectors that
rely upon borrowing, particularly the two thirds of money
creation related to mortgage lending, are weakened.

with the dollar strong, and a threatened global slump, the
oil price which is denominated in dollars, falls.

sea calm. tide out. mud flats reappear.

Sunday, May 22, 2005

the oil plateau does not mean peak food.

the oil plateau doesn't mean peak food. let me explain.

putting aside massive global disasters - asteroid impacts and all out nuclear war - oil production has reached a plateau from which it can only decline gradually, perhaps at 2 or 3 per cent per year. we don't know. oil supplies a portion of global energy use but a much higher proportion of transport fuel.

the ordinary person imagining a future short of oil pictures queuing at the pumps for highly priced petrol or diesel. this may not necessarily be so. what they are picturing is a sharp oil crisis, brought on by a war or an embargo. oil pervades many industrial and economic processes directly, but it also enters most activities indirectly, as a transport component. have you ever thought how much petrol is consumed by one irish hurling match held at a neutral venue ? so the consumer not only faces a rise in the price of oil, but a rise in the price of all of the other things which have an oil component. thus income is attacked at both ends. less disposable income with which to chase higher priced oil.

a generally depressed global economy would not be a surprising result. so the price of oil might then decline again, as commodities tend to do - in depressions. the average citizen might experience the oil plateau not as a high price for oil at all, but as a reduced price for oil which he, or she, nevertheless could no longer easily afford.

oil will be cheap - but you won't be able to afford it.

oil is also a component of food production. but so is labour. as convenience food prices rose as a result of the oil component of packaging, processing and distributing, - the relative price of locally produced food would look more attractive. moreover, in a depressed or at least contracting economy, many would be unemployed or underemployed. the labour component would become cheaper and more available. this might also be in the form of family labour, as in the past.

so food production might shift its ground, rather than decline. quality might rise. obesity and food related ill health might decline. price, not principle, might shift meat eaters towards bread and cereals. the scattered suburbs might suffer horrendous hikes in commuting costs, but suppose that out of four families, three or four wage earners shared a car, while a fifth and sixth, underemployed and home bound, took to part time basic horticulture. those in city flats might suffer more.

and those unemployed ? they will come from the airlines, tourism, car salesmen, restauranteurs - but in particular those who, or whose employers, have borrowed heavily in anticipation of future growth that we may not see again in our lifetimes.

Thursday, May 19, 2005

taxing scarcity

one of the favourite dodges of ministers of finance, when the newly married are complaining of the cost of buying a house - is to make a grant for first time buyers.

when the property market is roaring ahead, this is the equivalent of putting petrol in the fire extinguisher. the supply of houses remains the same, the desire of the first timers to own one is not in the slightest diminished, and they each have x thousand more to spend. the boom roars on. the estate agents quietly rub their hands and buy dinner for their political friends . . .

so the paradoxical way to help the first time buyers would be by a stiff tax on house purchase. they and their mortgage lenders would have to do new calculations on the maximum that they could afford to bid, and the price of houses would fall, probably by more than the tax take.

scarcity is experienced in the oil market, as in the housing market, as a price rise at local level. the average citizen does not bid for barrels of crude, but for litres of petrol or diesel at the pumps. taxing the supply of fossil fuels would first be experienced by the consumer as a price hike at the garage or for the central heating oil delivery. such a tax would drive the consumer in the direction of personal choices and household economies that the contracting global supply of oil would drive him or her in due course, anyway. it would do the same for businesses and public utilities.

such a tax would also reduce the demand for oil upon o p e c and oil producing countries, and thus the price. one effect of the tax, if generally adopted, would be to transfer revenue from o p e c to consuming countries.

a tax on fossil fuels would act as a subsidy to alternative energy, but unlike the subsidies, it would allow the market itself to decide what alternative directions to take, or whether simply to make do without.

in the event of a price spike in oil or gas, the economy of the country that taxed fossil fuels would already be part of the way towards a lean energy configuration. there would also be the option of suspending the tax for the duration of the crisis, to alleviate the worst of the damage.

countries that choose to tax oil and gas, will force their economy to face the conditions of the future, while those which subsidise them, will only allow their economy to languish in the habits of the past.

Wednesday, May 18, 2005

peak oil is history.

peak oil is badly named.

there is a levelling off in total oil production - plateau oil.
- and there have been price spikes in the market for oil - oil price spikes.

we, the end consumers of the oil, do not buy what is buried in the ground off the north coast of alaska.
- nor do we buy the oil in production in oil fields or refineries.
- nor do we buy oil in transit in pipelines or tankers at sea.
- we buy petrol and diesel at the pump.

the end consumer does not experience the availability of oil as global oil produced - but as local oil bought after political manipulation, taxation, commercial competition, and futures market speculation. we experience only the retail price at the pump.

'twenty euros diesel,please.'

the underlying global production is not at a peak - but a plateau. if it has begun a gradual decline, it is still too early to know that yet. if global production is on a gradual, if uneven, sloping plateau - something else is the cause of sharp spikes or dips in the price of crude. for economists 'peak oil' - if we are to use that term - is already history. it occurred 25 years ago in the second oil shock, in 1979, when the real price of oil peaked at what would be $100 dollars / barrel in today's money (2005). peak oil is history.

but will there be future price spikes ? the manipulations, negotiations, wars, and speculations underlying spikes in the real price are hard to quantify and almost impossible to predict. anyone who knows what is going to happen, has more to learn - and by the time everyone is agreed where the market is going to go - the market has already completed its move. so the best that anyone can say now is that the global economy must and will enter a period of sustained long term contraction, in step with the contraction of the more convenient forms of fossil fuel energy. radical steps towards fuel economy and personal austerity will only serve to hasten this slowdown. the same fuel energy sources that inflated global growth over the last 150 years will deflate it.

if you do not buy in to this paradigm of economic contraction, or evade the prospect with some notional 'sustainable growth' projection, then you are still, sadly, living in the 'growth illusion.'

long term economic contraction is sustainable. once this is accepted (whatever way the politicians 'spin' the scenario) we may still see a series of 'spikes' in the oil price, but each one, in real terms, lower than the last.

so what causes oil price surges ? the oil price, like a tsunami running into shallow water, grows taller, peaks, then crashes. the bigger the wave peaks are, the harder they fall. the o p e c nations know from experience that when the oil price squeezes the global economy too hard, it chokes off economic activity, which chokes off demand, and once more deflates the price of oil. so that is why a spike is formed. it is the growth momentum built up by cheap oil ( it still costs less than bottled spring water ) that causes a surge when the global economy runs into a bottleneck.

this is a paradox of natural balance - very cheap oil causes sudden rises, and very dear oil causes sudden falls. we will learn to avoid both.

yes, peak oil is history.