Sunday, May 15, 2022

Just a hint from the mainstream that limits precipitate rising oil prices

Last week a Bloomberg writer at the very end of an article explained that the "only solution" to high gasoline and diesel prices is recession. While I would not accuse the writer of advocating degrowth—this would be too radical for a mainstream business publication—his analysis points to a key and obvious cause of today's high prices for oil and other commodities: There isn't enough of them to go around.

There's an old saying in the oil industry that the solution to high prices is high prices. The logic is that high prices will do two things: 1) Reduce demand as those who cannot afford oil products at high prices will cut back and 2) incentivize more exploration and production as companies seek to increase production to take advantage of high prices.

The big question today is whether the second mechanism can actually ramp up oil production enough to bring down prices. In a recent survey a large number of oil executives said their production plans do not depend on current prices. Many cited the desire of investors in publicly traded companies to receive larger dividends and benefit from the corporate buyback of shares (which tends to increase the stock prices as fewer shares are available for trading).

Sunday, May 08, 2022

Decentralization, abortion and the choice of where to live

The world is becoming less connected. And, it is becoming less centralized. This has both political and social implications and relates to the newly erupting fight over abortion in the United States which I will come back to later. In short, in a decentralizing world, where you live will matter more, a lot more.

Overarching supranational institutions such as the World Trade Organization, the World Bank, and the International Monetary Fund—long focused on integrating the world into one large economy and increasingly one common commercial culture—are now seemingly less relevant than choosing sides in the Russia/Ukraine conflict or choosing no side at all (which is just a third grouping).

Many countries are now frantically trying to make themselves more self-sufficient in food and energy, the supply of which have been seriously disrupted and curtailed because of the war between Russia and Ukraine and the far-reaching economic sanctions which followed. (See my previous pieces here and here.)

Sunday, May 01, 2022

Meanwhile elsewhere on planet Earth...drought and heat get a lot worse

You can be forgiven for thinking that the most important thing happening now is the war between Ukraine and Russia. After all, the Russian government through its foreign minister and its mouthpieces in the media has threatened to use nuclear weapons to win the war in Ukraine. Whether you think Russia is bluffing or not, it's all very scary.

Meanwhile, elsewhere on planet Earth our perilous ecological situation is spiraling from bad to worse. That this is the big story and has been for many decades has escaped the media but does occasionally get their attention when the perilous consequences cannot be ignored. Climate change and the resulting drought and heat that are now our constant companions are currently showing up in the news cycle. To wit:

  1. The water level in Lake Mead (formed by Hoover Dam to provide water to Arizona, California and Nevada) has declined to historic lows. The original intake valves that used to supply water to Las Vegas and environs are now exposed for the first time ever. (Other deeper ones were built in anticipation of this day. See my coverage of the now 23-year-old drought when it was only 10 years old.)

  2. The Metropolitan Water District of Southern California for the first time is limiting water use for outdoor watering. The order affects about 6 million residents. The District is also calling on users in the entire district of 19 million people to lower water use by 30 percent.

Sunday, April 24, 2022

Sunday, April 17, 2022

Resource limits and our strange game of musical chairs

With a wide range of commodities in limited supply, various regions of the world are now  behaving as if they are engaged in simultaneous games of musical chairs when it comes to commodity shortages.

The games differ by commodity and by region, but they all share one characteristic: As in a game of musical chairs, someone will have to go without. And, as in a game of musical chairs, available supplies are shrinking (as represented by the removal of chairs).

An interesting twist on this game is that now some chairs are being transferred from one game to another. For example, the Biden administration has declared that U.S. liquefied natural gas (LNG) exports to Europe will be stepped up in order to displace natural gas from Russia—which has become a suspect source due to the conflict between Russia and Ukraine and the broad economic sanctions against Russia. The gas still flows for now. But will Russia use a gas cutoff as a weapon? That is a question agitating all of Europe.

Sunday, April 10, 2022

Sunday, April 03, 2022

Easier said than done: National self-sufficiency in a changed world

In the wake of a rapidly evolving realignment of the world trading system resulting from the economic equivalent of World War III, President Joe Biden last week took the first of what are likely to be many steps toward building greater self-sufficiency for the United States.

Biden called for increasing U.S. production of key minerals used in the manufacture of electric vehicle batteries. He invoked the Defense Production Act which allows the government to support production of certain materials and goods deemed essential for national defense and even to order industry to mine minerals and make machinery including vehicles such as tanks and bombs.

For the Biden administration its first small step toward U.S. self-sufficiency consists of making companies which mine minerals key to electric vehicle batteries such as lithium, nickel, graphite, cobalt and manganese eligible for direct subsidies or purchase commitments to incentivize increased production. The applicable program (called Title III) has about $750 million to spend, not that much to rectify what is a huge deficit.

Sunday, March 27, 2022

Hoarding is suddenly in, "lean" operations are out as shortages ripple across the globe

Ukraine, a major exporter of grains and other food crops, announced soon after the Russian invasion of the country that it would ban exports of many food crops to ensure that Ukraine has enough to feed its population.

Russia, another major exporter of grain, especially wheat, curtailed its exports of wheat, rye, barley, and corn. It also curtailed sugar exports.

The list of countries banning or reducing exports of foodstuffs is now increasing so quickly that it is starting to look like a pile-up on the freeway:

  1. Argentina, a major soy exporter, has halted exports of soy oil and soy meal.
  2. Hungary has banned grain exports.
  3. Moldova has halted exports of wheat, corn and sugar.
  4. India, the world's second largest sugar producer, is contemplating capping sugar exports through the end of September. The 8-million-ton cap would effectively cut off sugar exports after May.
  5. Indonesia, the world's largest exporter of palm oil, has curtailed exports to keep local prices in check as they have risen 50 percent so far this year.
  6. Serbia will stop exporting wheat, corn, flour and cooking oil.
  7. Turkey has halted the re-export of grains, oilseeds, cooking oil and other agricultural commodities sourced from other countries that are now sitting in warehouses and were bound for other countries until the ban.
  8. Jordan has banned export or re-export of rice, sugar, powder milk, dried legumes, fodders, wheat and wheat products, flour, yellow corn, ghee and all types of vegetable oil.

Sunday, March 20, 2022

World War III is here, but it's not what we expected

Movies and books have often portrayed World War III as either the final chapter of the human epoch or as a new but primitive restart for those who survive the nuclear conflagration. We cannot know if such prophesies will ultimately come true. For now World War III appears to have started with Russia's attack on Ukraine, but without nuclear missiles so far.

Make no mistake. The battlefield for this war is worldwide; it's just that it is primarily an economic battlefield. When Russia attacked Ukraine, the other great powers did not send soldiers and tanks. Instead, they orchestrated one of the most comprehensive economic warfare schemes ever devised.

Measures included cutting Russia out of the international payments system called SWIFT, blocking Russian exports (except most commodities) and discouraging commerce of many kinds with Russia. Many countries froze accounts owned by Russia's central bank and also accounts owned by prominent wealthy Russians. Wealthy Russians targeted by sanctions also saw yachts moored outside Russian territory seized. The value of the yachts runs into the billions of dollars.

In the wake of these unprecedented sanctions, many non-Russian companies have reduced, suspended or eliminated operations in Russia. Here is a list of over 400. Not all were forced to take action because of the sanctions. But companies expected that doing business inside Russia would become extraordinarily difficult and also did not want to get on the bad side of governments around the world participating in the sanctions.

Sunday, March 13, 2022

'Rogue states' and the necessity of oil

There is nothing like a sudden decline in available oil supplies to bring out forgiveness in what is dubbed in and around Washington, D.C. as "The Blob." This term refers to an amorphous, but powerful group of think-alike U.S. foreign policy actors both inside and outside of government who have influenced every U.S. administration since the end of World War II. The main tenet of The Blob is that America knows best how to lead the world and it must do so.

The Blob seriously penalizes those whom it regards as a threat to American power and security. The Blob likes to use words such as "rogue" and "pariah" to describe those countries which get on its wrong side. (Many are admittedly run by truly odious regimes.) To get a sense of who has violated The Blob's sensibilities, one needs only to glance at the U.S. Department of Treasury website page entitled "Sanctions Programs and Country Information." On it you will find The Blob's who's who of rogue and pariah states.

With the abrupt drop in oil supplies from Russia in the wake of the Ukraine/Russia conflict, the list of rogue and pariah states is about to get shorter as the necessity of obtaining ready oil supplies trumps any concern about previous challenges to The Blob's narrative.