Chinese stocks: When mispricing becomes more important than pricing

Defenders of the free market faith tell us that price conveys a great deal of information, enough that you can base an entire economic system on it without any central planning or coordination whatsoever. Whether extreme devotion to this principle is wise may not be so important to determine this week as whether free market prices are actually available in many markets. Recent events surrounding the precipitous decline of the Chinese stock market are illustrative of this problem, but I'll come back to this a little later.

Years of suppressing the cost of credit through central-bank imposed near zero interest rates has led to the mispricing of anything that depends on credit. The list is long and includes real estate because mortgages are central to its purchase; oil because cheap bank loans and low bond rates financed otherwise uneconomic deposits of tight oil from deep shale deposits in the United States; natural gas in the United States for similar reasons; stocks and bonds because large investors often borrow to buy them; and cheap Chinese consumer goods made more and more available by cheap finance to build the factories that produce them.

The effect is not uniform, that is, cheap credit tends to make some things go up by stimulating demand for them such as real estate, stocks and bonds--while making some things go down such as the price of oil and natural gas because U.S. drillers got cheap financing which encouraged overproduction.

Lab rats and the corruption of how we count

There's an old joke about lab rats in which the teller says he or she secretly suspects that all lab rats are prone to cancer and so all research about the risk of cancer in humans based on tests in rats is likely useless.

The Committee for Independent Research and Information on Genetic Engineering, a European-based research group, thought it would look into such a possibility.

Last week the group released its findings and that joke became a reality. The diet fed to most lab rats is so laced with pesticides, heavy metals, genetically engineered feed and other man-made contaminants that lab rats worldwide are indeed at much higher risk of developing cancer and other diseases and disabilities just from the food they are reared on.

Taking a short break--no post this week

I'm taking a short break and expect to post again on Sunday, July 5.

Radio Interview: Nuclear and other alternative energy sources

In lieu of my weekly post, I'm posting a link to a radio interview I did recently. Doug Goldstein, host of the personal finance show "Goldstein on Gelt," brought me back for a return engagement to discuss the future of alternative energy including molten salt reactors. The show was broadcast on Israel's English-language radio network, Israeli National Radio. Click here to go to the page containing the podcast.

To hear my previous interview on the swoon in oil prices, click here.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

No, BP, the U. S. did NOT surpass Saudi Arabia in oil production

Even the paper of record for the oil industry, Oil & Gas Journal, got it wrong. With the release of the latest BP Statistical Review of World Energy, media outlets appeared to be taking dictation rather than asking questions about which countries produced the most oil in 2014.

If they had asked questions, they would have ended up with a ho-hum headline announcing that last year Russia at 10.1 million barrels per day (mbpd) and Saudi Arabia at 9.7 mbpd were once again the number one and number two producers of crude oil including lease condensate (which is the definition of oil). The United States at 8.7 mbpd remained in third place.

The most important question they could have asked is this: How is BP defining oil? It turns out that oil according to the BP definition includes something called natural gas liquids which includes lease condensate--very light hydrocarbons that come from actual oil wells and are included in the oil refinery stream--and natural gas plant liquids which come from natural gas wells and include such things as ethane, propane, butane and pentanes. Only a small portion of natural gas plant liquids are suitable substitutes for oil.

Delayed gratification for OPEC, more pain for investors

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits--production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC's market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

The energy revolution will not be televised

Three recent news items remind us that energy transitions take time, a lot of time--far too much time to be shrunk down into a television special, a few talking points, or the next big energy idea.

For example, the complex management task of putting together the international fusion research project called the International Thermonuclear Experimental Reactor (ITER) has resulted in estimated final costs that have tripled since the 2006 launch. Fusion could theoretically offer clean and abundant energy almost indefinitely because it uses ubiquitous hydrogen* as fuel and creates helium in the process. (Water you'll recall is two hydrogen atoms and one oxygen atom and is therefore the most abundant source of hydrogen.)

Despite nine years of effort, ITER has yet to carry out a single experiment; and, the project is not expected to do so for another four years. The idea for such an international project was hatched in 1985 during a summit between U.S. President Ronald Reagan and Mikhail Gorbachev, the leader of what was then still called the Soviet Union. Thirty years later fusion is still receding into the horizon of our energy future.

Is the slowdown in productivity growth a result of energy costs?

Slowing productivity growth in the United States has been in the news in recent months. It has become a concern to policymakers because they believe it is one of the primary contributors to a middle-class economic squeeze according to the annual report of the White House Council of Economic Advisors.

Simply put, productivity growth refers to the growth in economic output per worker or more precisely, per hour of work. When this growth slows, the potential for real wage increases diminishes since the growth in wages typically reflects the ability of workers to create more output per unit of time.

To the obstensibly naive observer the following idea may seem a plausible explanation: Higher-cost energy inputs into the production of goods and services reduce productivity growth because the economic output per dollar of energy consumed declines. And, though energy inputs aren't the only thing to consider, they are important. The high energy prices of the last decade or so may be, in part, responsible for low productivity growth. (Conversely, low energy costs would imply more output per dollar of energy consumed.)

Stephen Toulmin welcomes you to the end of modernity

Historian and philosopher of science Stephen Toulmin welcomes you to the end of modernity, at least modernity as we've imagined it. By modernity, he does not mean modern gadgets. By end he does not mean an end to progress in the natural sciences, nor in human affairs in general. Instead, he is talking about a way of thinking which has held us in thrall since the 17th century, for good and for ill, and is now giving way fitfully to a new (he would say "old"), more flexible worldview.

Toulmin's book Cosmopolis: The Hidden Agenda of Modernity is not new. It was published in 1990. Its argument will be of interest to anyone concerned with issues of sustainability including climate change and resource depletion.

Toulmin offers an historical account of how this view we call modern arose, and he catalogues its tenets. The ones that are of particular interest to me are as follows:

• Nature is governed by fixed laws set up at the Creation.
• The material substance of physical nature is essentially inert.
• Physical objects and processes cannot think.
• At the Creation, God combined natural objects into stable systems.
• The essence of humanity is rational thought and action.

Terms of debate: Destroying vs altering nature, the fragile vs the resilient Earth

Last week's piece drew responses that throw into relief how much the language we use depends on our most basic assumptions about how the world works. If left unexamined, that language leads to further conclusions that go unchallenged because the underlying assumptions are never scrutinized.

I challenged the Breakthrough Institute's notion that humans are in one category and nature in another. If one views humans as merely a part of nature or the universe or the web of existence--however one chooses to name that which includes everything--then our role becomes distinctly different.

Under my assumption humans are embedded in the natural world. They are not the sole actors or agents in it, only one of countless actors, most of which we probably know nothing about. We cannot get one up on nature. We can only cooperate with its workings.