Monday, June 30, 2008

How do we change the behavior of the speculative markets?


So it goes. Today, oil fever spiked again, to $143, and then dropped back to “only” $140, as its stepwise march continues. The Bank for International Settlements in Switzerland issues an Annual Report that suggests the global economy may be near a tipping point, where real slowdown in consumption brings prices down somewhat. The link is here.

Yesterday, I got into a discussion with some conservative men in dark "EDS-like" suits (at a personal event) about where all this is headed. There’s pretty much an under the table consensus about a few points:

(1) The oil price spike is a call for Congress to accept the necessity for greatly increased offshore drilling and Alaska drilling. By and large the drilling can be done safely, and modern technology can recover much more oil. (Much of the disputed Alaska area is flat and relatively easy to work safely.) But it must happen. If investors become convinced it will happen, there will be downward pressure on the price of oil.

There is some concern in land areas (like West Texas) that newer techniques push more carbon into the ground, increasing safety issues for people living near the wells (carbon monoxide incidents). The oil companies need to address these.

There are other areas, like off the coast of Brazil, which may be promising, and they must be explored. As sources, they are still preferable to the Middle East or Africa or even Russia.

Nevertheless, a commitment to increased drilling in the United States and Canada (the oil sands in the prairie provinces) and perhaps Brazil will change OPEC’s behavior, and will change speculator behavior, resulting in a leveling off of prices and eventually a substantial drop.

Barack Obama doesn’t get it, they tell me, and John McCain is somewhat underwhelming as to any real leadership in making the domestic economy more productive. (The whole Republican Party is underwhelming. Even The Washington Times admits it. This stagflation, as the BIS report indicates, points at Americans as living beyond their means. Quite bluntly.

(2) The domestic auto industry needs to get serious about making the plug-in hybrids, and they need to be made here. They need to make them affordable. That probably means offering cars for lease more than for sale. But that’s going to be a real challenge with so many people having blown their credit in the subprime mess. But, then again, there are plenty of people with good credit.

The infrastructure to support the plug-ins needs to be built. It will keep a lot of electricians employed.

Airlines need to start thinking about other sources of jet fuel. The military has done work on jet fuel from coal; why not commercial aviation? This seems like a case of transferring knowledge from space and military applications to commercial and consumer needs.

(3) Utility production of electricity should be more decentralized. There should be incentives to homeowners, condo developments and apartment buildings to invest in solar, with savings or excess electricity passed on to consumers or residents or homeowners. Communities exposed to fronts and thunderstorms (most of the country) should invest in wind farms.

Although Wall Street is driven by short-term thinking, a perception of sustainability really matters. Here, it is complicated. If world markets get the idea that Americans are willing to live within their means, the dollar strengthens and oil and commodity prices moderate. More drilling, and more renewable energy production will give the impression of sustainability.

Of course, what’s more complicated now is how the global warming concerns will play out. More oil production might mean more carbon emissions, or it might not. Biofuels don’t necessarily reduce carbon emissions (they may increase it) unless their production becomes efficient. Sugar cane (Brazil) is probably provides a more efficient paradigm, with sawgrass, requiring more research, still more efficient. The prospect of having to deal with escalating climate change or with the political and social consequences of a global “tipping point” in climate change does not yield a model in predicting the reaction of markets.

Then, we come down to what inevitably will come up as a moral discussion, sustainability as a “personal virtue,” already covered on some of the other blogs. Investors don’t respond to personal morals the way religion presents it, not even in the Middle East. They respond to what they can model with numbers, and lot of what is going on is not really numbers-driven.

Also:

USA Today, on p B1, the Money Section, on June 30, ran a story by Chris Woodyard explaining that the major manufacturers are working quickly to make hybrid cars cheaper (not necessarily plug-ins) and it could pay to wait to buy them. The link is here.

USA Today also ran opposing editorials on p 10A on whether speculators unfairly influence the market. The opposing view criticized the low margin requirements. The paper seemed to believe that this was a genuine market supply-and-demand problem (I agree). It criticized proposals to segment traders into "legitimate" and "non-legitimate," but accepted the idea that limiting trading to more regulated markets (mercantile exchanges) could be helpful.

Update: July 2

On July 2, Yahoo! ran an AP story about a sudden oil boom in western North Dakota (which should expand to Montana and Canada) from new drilling techniques, story by James MacPherson, here.

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