141 comments on Holding Daniel Yergin and CERA Accountable
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People, especially smart and successful people, focus on the patterns that led to their success. Peak Oil, whether its here in full force yet or not, will change the 'rules' by which traditional analysts will view oil markets. I have been writing here for over 2 years on 3 topics that to my knowledge, CERA doesn't address:
1)the difference between actual production and productive capacity. Actual production is what moves the supply side half of the market price equation, and will always be less than productive capacity.
2)the difference between net and gross. The easy oil has largely been found, though we are still pumping it. The new oil costs much more to procure, in both energy and dollar terms. So over time, as depletion rates increase in the 'found oil', this production is being replaced by expensive oil, which takes more of a (consuming) countries oil and gas to devote to its delivery, freeing up much less than 86mbpd than it would have when all the oil was 'easy'. Also, things like ethanol, tar sands and Natural Gas Liquids are being included in the headline oil production numbers of CERA - these have smaller kilojoules per unit than regular oil (NGLs and ethanol 60-70% of oil). It also requires much more energy to create these alternative liquid fuels, energy that has to be drawn from the total pie. So what was worth a million barrels under the 'old rules' doesn't have the same dampening impact on prices, nor productive society under the 'new rules'.
3)Oil optimists neglect human social behaviour. Once the perception of scarcity arises, whether its justified by Peak Oil or something else, peoples behaviour will change to be more consistent with Hotelling theory - where they attempt to maximize rents by 'hoarding', keeping energy in the ground for higher prices in the future etc. Also, many of the exporting nations will need more energy themselves, so less will be available for importers. And finally, energy is finite, dollars are not. We cannot look at a Gaussian distribution of oil and expect that the second half will just look like a mirror image of the first. Energy is worth orders of magnitude more than its dollar price. Conservatively if its 15,000 hours of human labor - thats $350,000 a barrel at $20 an hour. Since the market has always been adequately supplied or had substitutes, crude has traded at the marginal barrel, going up on short term supply disruption news etc, but always falling back. Now there is an underlying recognition growing in the markets of 'systematic bias' as Gail wrote about yesterday, and that cheap oil is the commodity that largely is responsible for this bias. Once this is recognized, and it clearly already has been, geopolitics changes the situation from one of simply quantifying oil resevoir capacity, to something much more complex.
I expect oil prices will go down again, especially if the credit crisis unfolds for the worse, but where they stop will be a 'higher low' in what will be a long term moon shot for this precious resource. (that is until the 15% or so that is not nationalized, will be)
Venezuela's "capacity" to the rescue:
Things just get stranger and stranger with Venezuela. First they do their best to keep other OPEC countries from producing more, then they boast about a production increase when they are apparently 760,000 mbpd off their stated production figures! Is it possible that amount of oil just fell off the shipping lists?
The price of oil isn't necessarily going to go down with the unfolding of the credit crisis if the Plunge Prevention Team succeeds in injecting enough "liquidity" to inflate out of the crisis. Seems pretty hard to me to predict anything, given that as usual, we can only guess at what cards the really powerful players actually have
Then the dollar tanks on forex and global wage arbitration prevents any real increases in wages.
You can't have traditional inflation without wage increases. Sorry no way out of this one.
Also I don't quite understand why people think that the TPTB are going to suddenly take the side of Joe6pack and try and bolster the middle class that have worked 100 years to destroy.
Not to be cruel but the next big boom would be the flow of manufacturing back to the US once salaries take a dive to Chinese levels. This is of course assuming we have enough oil etc to boom.
Most of the money not going to the wealthy would be spent for resources with very little going out as salaries. And of course the focus would be on high priced basic necessities not consumer goods.
Wage arbitrage will continue to force prices down as we can now compete with China. As far as who the actual consumer is well its the line manager and above not the workers so your looking at a 10-100:1 reduction on the size of the consumer pool.
And not surprisingly this is the level of economic activity that could be supported with our dwindling oil supplies. Also look for recycling to become huge under these conditions with cheap labor.
I assure their is a lot more blood to squeeze out of the turnip just I don't think it will happen the way your saying the powerful are not done yet with raping the masses.
Don't forget that shipping costs will also favor localized production. There's also the question of experience; a friend of mine who did contract work for NASA told me that as of the mid-1990s (20 years later) we already forgot the technology used to get us to the Moon. So will we remember all the tricks that we need to manufacture paper clips, or will we need to relearn in addition to learning how to do with less energy?
A rather simple observation in this respect. I have two potato/carrot peelers. One is new (made in China), one is old (made in US). The new one is crap.
Ah, The vitamins are in the peel. I never peel. Maybe it is all for the best.... ;-)
prairiedog -
Ain't that the truth!
My late mother complained that her toaster was junk when it finally gave up the ghost after well over 25 years of hard service. In that same time span I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
When I was in high school and college, on weekends I'd sometimes work with my uncle, who was a plumber. We'd often remove pipes from old houses, and I can tell you that it was not uncommon to encounter an original 80-year-old brass sink trap that was heavy enough to run your car over it without deforming it. Today, a sink trap is a chrome-plated piece of paper-thin metal that you can almost crush in your hand like a beer can. They usually last about 6 to 8 years or so in my house before they corrode through.
The problem is that we've gotten conditioned to this sort of impermanence and shodiness and have unconsciously grown to accept it. It's a good reminder that there was a time when you bought an appliance or tool and had the expectation that it would last a real long time.
Of course, back then appliances were more expensive in terms of inflation-adjusted dollars, so I guess there is some compensation. Still, I think it's a trend in the wrong direction.
I've probably gone through at least four toasters, each one progressively crappier than the last one. Ditto for refrigerators and washing machines.
Now I can't help ya much on toast, as I make mine on the gas stove. Nor can I help much on the stove (but Sunfrost is a common brand on the energy conservation circuit.)
But I *CAN* help on the washing machine question.
http://www.staber.com/
You can run 'em off a bicycle frame - for that "I'm a doomer but I'm CLEAN!" look
Here's a tip for anyone w/ a sunfrost. If you add latches (like the kind on ski boots) it will work much better because the seals aren't great. Maybe it would help with normal friges too. I got the idea from the old ones that closed w/ that kind of mechanism.
It's called "planned obsolesance" (?spelling?). In order to keep the economy going things are designed for a limited service life so that customers need to come back for more.
People think I'm overly pessimistic as to the aftermath of peak oil; but 20 years after the factories shut down due to insufficient energy all our water heaters, kitchen appliances, outdoor plastic pails, and other everyday items will no longer be of use. We'll be closer to Stone Age technology than most people will be prepared to deal with.
These thoughts used to cause me feelings of anxiety. Now, it's all become a weird perverted hilarious comedy. I just have to laugh... heck, might as well get some enjoyment out of it.
joule - Right there with ya. About 10 years ago I declared a moratorium on buying cheap Chinese kitchen utensils and never looked back! Give me heavy gauge stainless steel, or nothin'! (Which has turned out to be a good thing in terms of post-peak preparation as well.)
So now I regularly go off on LONG hunts for things that are well made. And in terms of toasters, I found it: the Dualit! They're hand made in Britain with stainless steel components, and made for commercial duty. Should last you a lifetime, and if one ever needs repairing:
Plus it has a number of smart design advantages. Check it out! They're quite expensive at new retail prices (over $300), as anything good is, but you can find sort-of reasonably priced ones (with a few distress marks, or refurbished) on eBay.
You can't have traditional inflation without wage increases, but you can still have a big increase in commodity prices (which is a different thing from traditional inflation).
Oil is not a luxury like furs or fancy cars. It's a wealth-producing asset, even for low-income people. Remember all the TOD articles on how much human labor energy a barrel of oil represents. People will use oil more efficiently, but they will continue to use it, because wise use of it generates wealth.
Also, Bernanke is playing it tight, but not that tight. Didn't you catch his speech today? Bernanke understands, correctly, that he has to keep inflation coming to keep capital in the game.
I don't disagree and thats why I think problems will be bad.
Most people think of this price inflation as a issue for consumers but the bigger issue is it puts a squeeze on manufactures retailers etc etc. This will force them to lower wages to compete.
So the consumer gets squeezed on both sides falling wages and rising prices driven by expensive commodities. This commodity price pressure on business virtually assures that wage increase are not going to happen. Now of course this feeds back to the producer as the consumer ( his employees ) lose purchasing power he will be forced to lower prices to try and retain business. A lot of our business's today have low margin and high volume requirements. In a sense we are hedged to the hilt on large scale manufacturing. Whole swaths of business become unprofitable below certain volume levels. Generally the easiest way to deal with this is to close factories and aggressively downsize the business. Thus demand destruction is simply the name for Depression driven by resource depletion.
Also note that this process makes it painfully clear they we have never had a true fiat currency the real currency of the world has always been oil. Central banks can change the peg of a monetary unit to a barrel of oil but what really happened as we left the gold standard was we moved to a oil standard.
I think this is why a lot of people try to prove that the dollar and other currencies are not tied directly to oil and resulting industrial production because as with gold the owners of the gold mines rule the world. And this is why its impossible to inflate our currencies we can't since we don't own the real money that drives the world.
If indeed globalization is steadily driving us towards a 'perfect market' regarding labor, then the logical extension is that eventually there will develop a universal global wage scale. Thus, if you're a working person, it won't matter whether you're in Gary, Indiana or Bangledesh, you will have the same wage status and won't have much say in the matter. And once that condition is in place, we will then have a truely global proletariat .... with all the sinister connotations that very loaded word evokes.
It's not going to happen, because something big and unpleasant will happen first. Where, when, and who ... I don't know, but something is going to give way before we reach that point. I think this is a major blind spot in the thinking of the powers that be.
Well you needs a universal currency also for this to happen. Central Banks can and will manipulate their currencies vs other currencies. This has the effect of keeping wages or better buying power in certain countries low.
This is why inflows of petrodollars ( Not US dollars ) are vital to china and for that matter the worst offender Japan and even worse OPEC. The breaking of the peg of oil to the dollar recently is probably the biggest shift on the planet since it will eventually blow up all dollar pegs include the peg of the US dollar to the petrodollar.
As long as the US had wealth to drain from the middle class this game worked. Now that the US middle class has finally run out of money and has been shown to not have the military might it claimed a new game is afoot.
I do think that if it can be done globalization will continue but now I think the goal is to break the control of governments over money so that the global companies can control wages not governments. Thus real wage arbitrage with money accumulating with the global companies not Central Banks. They want to take the trillions of dollars that have accumulated in China, Japan in the ME from the robbing of the worker/consumer.
With oil now scarce the current fiat currencies are not needed and oil itself like gold in the past can be used directly and wealth.
I don't think that peak oil really changes the game a lot except to unmask it and make it more ruthless since the rich are now eating a slowly shrinking pie.
Think about it anyone who can do simple math can figure out that China and India would never be able to create a western style living standard for a two billion people. This was always going to fail way to many resources are depleting. So I don't think the real game has changed with peak oil all thats happened is we have named one of the critical declining resources for the second half of the great globalization game. We all knew in our hearts it would end this way.
Memmel, I cannot thank you enough. In some of the comments in some other key posts, everybody’s been so horrible about inflation. It’s this, it’s that, it’s not this or that, and here, at last, we know what it is. Memmel, how do you do it? Damn, I think I got ahead of myself here. Sorry Memmel. What I meant to say was at last we know there’s traditional inflation and all those other, evil and nasty probably, kinds of inflation. That’s okay Memmel, nobody else has even gotten us this close. I know you can point the way. I know you can bring light to the darkness. I just know it.
Memmel, I know with such surety it’s rude to ask without offering to pay, but there we are, just how do I know traditional inflation from all the other nasty and brutish kinds? Not to mention all the impostors and impersonators and, well, you get the picture? I mean, I could just wake up one sunny Sunday, pop down to the newsagents to pick up the Times on Sunday and The Observer (what can I say, I’m a tortured soul) and, bam, be confronted with at least two versions of inflation. Talking about the very same subject! How do I recognise traditional inflation? What if some non-traditional inflation is masquerading as traditional inflation (just to get in my good books or maybe, even, to deceive me!), how do I recognise it for what it is and banish it to deflation (or wherever non-traditional inflation should be banished to)?
I know I shouldn’t ask, but I’m at a loss. And there’s nobody else, well, maybe a good few actually, that can waffle as long about something in a single comment, let alone a thread, as you can. So I know if I ask you that after some arbitrarily high number of comments at some point you may actually say something that will help me to really, and I mean really, identify what “traditional” inflation is. That way, when I see it, I’ll be able to say to it, get thee to the deflation (or hell, or wherever). Or something like that. Can inflation be made to spin its head round on its shoulders and puke green all over the local padre?
Please help me. I feel like that poor witch that was so brutally treated at Dorothy’s hands with that bucket full of traditional inflation (I know, it was water, but with Hollywood’s writers out on strike I’m stuck doing Leno’s DIY material) and just find myself melting, melting, melting.
Sorry to be “doing a Memmel” as it were, but sometimes waffle’s are just better than pancakes.
So, to bring this bollocks to an end, what is “traditional” inflation. Is it different from “inflation.” Does this imply there are forms of non-traditional inflation. If so, what does non-traditional inflation look like and what does it imply. Does this mean there are an infinite number of forms of non-traditional inflation? Does this mean, on balance, non-traditional inflation is more likely to appear than traditional inflation? Are some forms of non-traditional inflation more likely to lead to traditional inflation than others? Can traditional inflation metastasise into non-traditional inflation? If so, what are the precursors? Thanks in advance for your kind consideration.
I know you're being a bit of a troll and that I should let memmel respond or not as he will, but here goes:
Traditional inflation (that is inflation as traditionally defined) is an increase in the supply of money relative to a standard measure. In a gold backed currency that would be an increase in the supply of money relative to the owned quantity of gold. In a fiat currency it is something like an increase in the supply of money relative to the GDP. This increase in the money supply can (and should) cause prices to rise, but the price rise is a result of inflation. Not all price increases are a result of inflation.
This is at odds with inflation as commonly reported which considers any price increase to be inflation (or an indication of inflation).
If the price of oil goes up for fundamental market reasons (lack of supply, increase in demand, etc.) then that is not traditional inflation. If the price of oil goes up because the Federal Reserve is issuing 0% short-term loans that is inflation.
Our current reporting of inflation numbers based on the cost of a basket of goods works acceptable most of the time but falls apart drastically if there is a fundamental change in the market such as that which would be caused by resource depletion.
--
JimFive
Troll or no, the notion that “traditional” inflation requires rising wages demands clarification.
For the record, at least you have provided a reasonable definition of inflation with which to work. Thanks for that.
There's only one thing missing, the assertion that "traditional" inflation requires rising wages. Are rising wages an essential component of “traditional” inflation? In essence, are they a traditional component of “traditional” inflation?
Possibly he was referring to the constant comments on TOD that we are "going back to the 70s". The 70s exhibited strong wage rate growth in the USA, partially offsetting the negative effects of inflation for the median worker. Those days are gone, which means that money dropped from helicopters by Bernanke will be reluctant to find its way into the pocket of the average homeowner. A high historical rate of inflation combined with falling wages would be considered "non-traditional" in the USA, it is more in the South American/Mexican tradition.
I think I would disagree with that assertion as well. I would think that wages rising due to inflation is a common result, just as price rises are. I wouldn't think that either result is REQUIRED by inflation.
--
JimFive
Correct its not required and thus my term traditional inflation ala 1970's US as other mentioned.
I'd say that in general in inflationary environments wages tend to increase it takes a pretty strong
force to prevent it. Today global wage arbitrage is such a force. I don't know the in and outs
of the various South American monetary schemes and collapses but the US is so much larger that I'm not
sure how relevant the situations are. However the outcome which is a large class of desperately poor people
which both foment revolution and provide a ready source of cheap labor is probably the same.
I tend to not like the concept that prices get tied to inflation since this screws up the real problem
which is a mismatch between the economy and the supply of money. In a perfect world the right amount
of money should be created to match the economy and better business practices should always lower
the price of a good or service while increases in quality or ability should initially get a premium.
In short in a perfect world prices should be trending downwards and the goods and services should
get better and better and the value of a dollar only increases in time.
Interest as we know it probably would not exist but would be tied directly to a real equity stake
in the borrower. So lets say I borrow money to buy a house the loan would be for say 70% of the value
of the house. They would give me 70% of the current value but the loan amount itself is based on the
homes current value in time. If it goes down in value then the amount owed decreases. A transfer of
ownership back to the creditor could easily triggered based on any number of covenants.
I think that such and approach would ensure that creditors would work hard to ensure that properties
do not decrease in value and borrowers that allowed the property to decay would be shunned.
Also you would have a lot of pressure to ensure that anything purchased with borrowed money was built to last.
Also all resources are renewable etc etc. Utopia or as close as we could get.
I bring this up because I find it helpful to think about whats happening now vs this perfect world scenario.
1970's inflation which I call traditional differs quite differently from this perfect world vs whats happening
today. This is not clear if you try to directly compare today's events with past events.
The importance of global wage arbitrage which actually would be true in a perfect world becomes clear.
In our imperfect world with a gamed financial system the introduction of global wage arbitrage is
a hydrogen bomb. Couple this with resource depletion and we are in for a ride.
In retrospect we should have solved a lot of other problems before trying to globalize.
Wages monetary system resources etc etc.
Instead we took a powerful tool and misused it to our detriment and probably the worlds.
"We cannot look at a Gaussian distribution of oil and expect that the second half will just look like a mirror image of the first. Energy is worth orders of magnitude more than its dollar price. Conservatively if its 15,000 hours of human labor - thats $350,000 a barrel at $20 an hour."
Arggh! This is even worse than the cup of water comparison. Maybe in the Stone age is the energy in a barrel of oil worth $350,000. Of course, if energy costs as much as its comparative value in human labor, we'll be back in the stone age pretty quick. In any case, if oil costs that much the alternatives would speed along pretty quickly.
Take a look at this:
http://www.energycurrent.com/index.php?id=3&storyid=8040
A 30 million gallon biodiesel plant built this year by an oil drilling company. Now that's what I like to see in recapitalization. Hopefully more traditional oil companies will invest along similar lines. In any case, I don't think biodiesel prices will be anywhere near $9,000 per gallon ;).