by Alex Evans | May 28, 2008 | Climate and resource scarcity, Global system, Influence and networks, UK
No sooner do I finish my post this morning on high oil prices than I discover Gordon Brown in the Guardian, sharing our pain on energy prices (“…and I know that families up and down the country…” [cont. page 94]).
But his article is worth a read, for two reasons. First, while it doesn’t actually use the words “oil” and “peak”, it goes pretty close. Here’s a sample:
The cause of rising prices is clear: growing demand and too little supply to meet it both now and – perhaps of even greater significance – in the future…
Overall, by 2020, global demand for energy will rise by 50% [actually the IEA’s projection is a 50 per cent rise by 2030, not 2020, as Brown knows; but let’s not quibble]. It is the market’s belief that ever-growing demand will continue to outstrip supply that has pushed up the oil price.
And we are becoming increasingly aware of the technical, financial and political barriers to the production of more oil. Every country must find ways of being more efficient and diversifying supply. And as continuing high oil prices present us all with an immense challenge, the way we confront these issues will define our era.
Second, the article’s interesting because of the way it falls into a classic trap: confusing “oil” with “energy”. The article’s problem definition is about oil; the very first sentence says that “the global economy is facing the third great oil shock of recent decades”. So what needs to be done?
…we need to accelerate the development and deployment of alternative sources of energy, reducing global dependence on oil. Britain will increase its investment in renewables, including decentralised generation. We will build one of the world’s first commercial-scale carbon capture and storage coal plants and we have committed to a nuclear building programme to ensure that the UK’s emissions and dependence on fossil fuels do not rise as existing nuclear stations close.
So although the crisis is in oil – a liquid fuel for transport, in other words – the answer, we are told, lies with renewables, decentralised generation, carbon capture and storage and nuclear new build: with the power generation sector, in short.
This shows a pretty big lack of energy literacy. The only way these changes in the power sector will help British voters out on high oil prices would be if there was a massive roll-out of electric cars that could be recharged from the mains; or using electric power to electrolyse hydrogen on a massive scale to power cars. Not only is neither of these technologies anywhere close to commercial deployment in the UK, they’re also not even mentioned in the article.
Update: see also this post on electric cars.
by David Steven | May 21, 2008 | Influence and networks
Yesterday’s Brooking’s event on the US and Europe (see this post) included three panels – one on the Presidential election; one on the French EU presidency; and one on Russia.
The Presidential panel combined general rejoicing at the imminent (243 days and counting) departure of George Bush (“somewhat less popular in Europe than Satan”) with caution that expectations may be too high at what will follow.
Gary Schmitt, from the American Enterprise Institute, who advises McCain, thought that Republicans had become much more realistic about the need for transatlantic ties. McCain’s speech at the Munich Conference on Security Policy got a plug (and not just from Gary, but from other speakers too):
The debate in the transatlantic relationship – over who is to lead and who to follow, whether to act in concert or unilaterally, or if the bonds that unite us are stronger than interests that divide us – that debate is over. Our interests, though not always perfectly congruent, are rarely diverging.
The Obama narrative, meanwhile, is ‘deeply attractive’ to Europeans, according to Laurence Freedman, currently promoting his new book, on American and the Middle East – A Choice of Enemies. The Bush administration was forever tarnished in European eyes by Guantanamo Bay, Iraq Abu Ghraib, he said. At a time when Europe is populated by a cast of ‘weak leaders’, a new President will have the opportunity to make a clean break from the past (close Guantanamo) and generate real leadership for the US. (more…)
by Richard Gowan | May 11, 2008 | Climate and resource scarcity, Conflict and security, Global system
From a piece on the credit crunch in the current London Review of Books, the sort of opening that you find yourself reading more than once…
Last November, I spent several days in the skyscrapers of Canary Wharf, in banks’ headquarters in the City and in the pale wood and glass of a hedge fund’s St James’s office trying to understand the credit crisis that had erupted over the previous four months. I became intrigued by an oddity that I came to think of as the end-of-the-world trade. The trade is the purchase of insurance against what would in effect be the failure of the modern capitalist system. It would take a cataclysm – around a third of the leading investment-grade corporations in Europe or half those in North America going bankrupt and defaulting on their debt – for the insurance to be paid out.
I asked one investment banker what might cause half of North America’s top corporations to default. No ordinary economic recession or natural disaster short of an asteroid strike could do it: no hurricane, for example, and not even ‘the big one’, a catastrophic earthquake devastating California. All he could think of was ‘a revolutionary Marxist government in Washington’. That’s not a likely scenario, yet the cost of insuring against it had shot up ten-fold. Normally one can buy $10 million of end-of-the-world insurance for between two and three thousand dollars a year. By early last November, the prices quoted were between twenty and thirty thousand, and even then it was difficult to buy in quantity – at least, said the banker, ‘not from anyone you trusted’.
by Jules Evans | Apr 15, 2008 | Global system
We’re now in the point-the-finger phase of the present financial crisis. The G7 says its all the banks’ faults, and wants to increase their capital adequacy requirements. The banks say its nobody’s fault, and want governments to bail them out. Many economists say its Alan Greenspan’s fault for cutting rates so low and for so long in 2001-2006. Alan Greenspan says its risk managers’ fault.
Here’s my two-pence-worth, from an amateur market-observer with no economic qualifications: beware new markets.
When you look at the great speculative bubbles of the last 20 years, they almost always occur in new and untested markets, markets that have never gone through a downturn, so there is no investor knowledge of their upper limit, and little regulator awareness of the frauds or legal loopholes that investors can exploit.
Thus the Russian financial crisis of 1998 was, among other things, a new market, in which investors had no experience of a crash. That helped drive the euphoria and risk-appetite of local and foreign investors.
The dotcom bubble in the same period was also a new market, based on ‘new economy’ stocks, which seemed so new that analysts and investors threw away their scepticism and convinced themselves these stocks would only go up and up.
The California power crisis of 2001 was also a new market, created by the deregulation of the power sector in that county. The newness of the market meant regulators had not fully got to grips with how the market worked or how unscrupulous investors could exploit the system. Enron, masters of financial innovation and wizardry, were quick to find the loopholes in the untested regulation, and they made a killing at the expense of California, which faced rolling blackouts as greedy traders took electricity out of the county, then brought it back in at double the price.
And the CDO boom of the last six years is another new and untested market, which neither regulators nor banks’ senior management fully understood. Regulators didn’t understand the risks involved. Bank senior management didn’t want to understand, as long as the traders putting together these deals kept bringing in the money.
The moral is that risk managers, and regulators especially, should be wary of new markets that start to grow exponentially quickly. It probably means that investors have found some way of making money which they think is full-proof, and they’re taking dangerous risks.
by Jules Evans | Apr 10, 2008 | Middle East and North Africa
I’ve started writing about Islamic finance as of a few months ago. It’s a fascinating, bizarre market, fusing as it does the world of ancient religious law with the world of international finance. And it’s an increasingly important market, because the Middle East is suddenly where all the capital is, so companies, banks, funds and even governments are scrambling for their Koran to work out how to attract this capital.
Particularly interesting to me is the world of Islamic debt. The market for Islamic bonds, or sukuks, has grown from almost nothing in 2000, to $60 billion last year, and is forecast to pass the $100 billion mark in the next few years. The UK is expected to issue its first sovereign sukuk later this year.
Each deal that gets arranged has to get a fatwa approving it from an Islamic scholar. In practice, bankers say that there are only 10 or so Islamic scholars who are well-known and credible enough for their ruling to have weight. So you have this handful of elderly scholars in Dubai, Bahrain and Riyadh giving their scholarly okay to tens of billions of dollars worth of deals.
Their rulings are very important because the whole idea of Islamic debt is a bit shaky. Islam forbids usury, or the earning of interest on loans. Investors have to be equal partners in economic projects, sharing in profits and losses, with aligned incentives. Otherwise lenders might have an incentive to profit from a borrower’s misery, like UK banks profit from credit card borrowers’ misery.
So the structure that has been invented in the last few years backs the sukuk with assets, which the investor ‘buys’ from the borrower, and then the borrower ‘buys’ them back at face value when the bond matures. It’s a bit of a fiddle, in effect.
Now, however, just as the sukuk market is getting really big, one of the leading scholars who cover the market has ruled that 85% of sukuk are haraam, or non-compliant with Shariah. (more…)
