The Oil Bet update: $100 or bust

Here are a few miscellaneous observations on my bet with Oroborous that crude oil (Light, Sweet) will reach a price of $100/barrel on or before December 31, 2006.

Last week, the Kuwait national oil company announced that the Burgan oil field, the world's second largest, has reached the peak of its production.

The peak output of the Burgan oil field will now be around 1.7 million barrels per day, and not the two million barrels per day forecast for the rest of the field's 30 to 40 years of life, Chairman Farouk Al Zanki told Bloomberg.

He said that engineers had tried to maintain 1.9 million barrels per day but that 1.7 million is the optimum rate. Kuwait will now spend some $3 million a year for the next year to boost output and exports from other fields.

However, it is surely a landmark moment when the world's second largest oil field begins to run dry. For Burgan has been pumping oil for almost 60 years and accounts for more than half of Kuwait's proven oil reserves. This is also not what forecasters are currently assuming.

Forecasts wrong

Last week the International Energy Agency's report said output from the Greater Burgan area will be 1.64 million barrels a day in 2020 and 1.53 million barrels per day in 2030. Is this now a realistic scenario?

The news about the Burgan oil field also lends credence to the controversial opinions of investment banker and geologist Matthew Simmons. His book 'Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy' claims that the ageing Saudi oil filed also face serious production falls.

You may also have heard optimistic news stories about the dropping oil price since a record price of $70/barrel was acheived in late August in response to hurricane Katrina. Some commentators see that the short term trend should bring the price to $50 or below. But if you go by the opinion of the large commercial traders in the crude futures market, you would think otherwise. The commercial traders, aka the "smart money", have built a net long position in oil that is their largest long position in two years. Commercial traders are those businesses that buy or sell oil as a part of their business, aka producers, refiners and distributors. They use the futures market to hedge their risks, and are generally net short as it is their business to sell oil. When the commercials go significantly long, it usually signals that a major upleg in prices will ensue in the very near term. Here is a link to a very informative audio interview with Larry Williams, an accomplished commodities trader, on the use of the Commitment of Trader's Report to forecast commodity prices.

Look for crude oil prices, as well as gasoline and home heating oil, to begin an upward trend within the next two weeks. If it is an unusually cold winter in the Northeast, as has been forecast, oil could take out it's $70 high by the end of January.

$100 Oil Bet Update

The "perfect storm" season has passed without $100 oil, so while I work on my concession speech, here are some optimistic observations about oil from Max Singer:

IN 1980 MOST EXPERTS agreed that oil prices could only go up. Following the panic of the Iranian revolution, the price spiked to more than $80 a barrel adjusted for inflation. I gained some notoriety at the time by publishing an article with William Brown, a Hudson Institute colleague, in the Wall Street Journal predicting that oil prices would fall in 1980 and that the 1980s would be a decade of decreasing, not increasing, oil prices. Indeed, the price fell sharply in 1980 and by the late 1980s the price had fallen to around $30 a barrel, and it dipped to around $20 in the late 90s.

Today there is a great chorus, in which New York Times columnist Thomas Friedman's voice stands out, calling upon the United States and other nations to radically reduce their oil consumption because, as Friedman and others contend, the world will soon run out. In the mean time, they say, our continued dependence on (or "addiction to") oil means a continued dependence on oil exporting countries--so many of which are run by less than democratic governments--and high energy prices of $70 a barrel, or more.

But a deeper understanding of the supply side and a longer term perspective of demand produces a different view. Between now and the middle of the century $30 is likely to be more typical of the price of a barrel of oil than $60. Most of the time sellers will be competing for buyers, not pushing them around. And the Arabs are
likely to have a smaller share of the market in the future, not a larger one. Before long the fear of Arab oil power is likely to seem unimaginably dated.

Two factors influence oil prices. First is the amount of oil in the ground. Second is the capacity of oil production and transportation facilities. Too few wells and pipelines create oil shortages, and therefore high prices, regardless of how much oil there is in the ground. For our purposes, "oil in the ground" refers to oil that investors think they can bring to market for less than $20 a barrel if things go near enough to plan. Capacity, on the other hand, refers to every element of the process from extraction to delivery, including the production of equipment associated with each element of that process.

So how much oil is out there waiting to be discovered? Chevron Corporation has been buying advertisements claiming that, "The world consumes two barrels of oil for every barrel discovered." Fortunately Chevron is only speaking the truth if you use an artificial definition of how much oil is being discovered. For example, Canada is now estimated to have 150 billion barrels of recoverable oil in their tarsands. Twenty years ago we couldn't produce that oil at competitive costs. Now we are producing a million barrels/day at a cost of about $15 each. In effect we have "discovered" 150 billion barrels of oil in Canada--more than the entire world used in the last five years--which Chevron doesn't count.

I'm still not as optimistic as Singer, and one reason is the bolded statement above. 150 billion barrels seems enormous, but it is only a 5 year supply for the world. Five years is not a long time.

$100 Oil Bet Update: the Concession Speech

In order to save the blogosphere from a lengthy, drawn out controversy I hereby concede this bet to my worthy opponent, Michael Herdegen, aka Oroborous. The vote count just isn't trending my way:

Oil's price collapse, more or less
Are we heading back to $40 a barrel, and is talk of $100 crude now silly?
By Steve Hargreaves, CNNMoney.com staff writer
November 17 2006: 6:38 PM EST

NEW YORK (CNNMoney.com) -- Oil inventories are practically overflowing. No one believes OPEC. People are going jacketless in New York and it's nearly December.

It's no wonder crude prices tumbled five percent over the last two days, setting a new low for the year.

But does this mean we're headed back to the glory days of $20 a barrel oil, tossing predictions of $100 crude into the the same bin as Pets.com or Dow 36,000? Or is this a spot dip in prices caused by temporary conditions?

Most analysts think it's a temporary dip.

"I'm not ready to say there's a break down in oil prices," said Jan Stuart, an energy analyst at Fimat. "As yet, there's no real conviction behind it."
Dems versus oil, part 2

Stuart, like most experts, noted that for the last several months oil prices have been selling off when the front month contract comes due. The current front month contract for crude is December, which expires at the end of trading Friday.

When the contract comes due, investors either have to take delivery of their oil - 10,000 barrels of light, sweet crude - or sell it.

Traders Thursday said rising inventories had led storage facilities, mostly located in Cushing Okla., to fill up.

That leaves few options for speculators with limited storage facilities of their own - like investment banks.

Stuart said the January contract for crude is still trading in the $58 range, while London's Brent has similarly held up.

He didn't think oil would go much below $55. On the up side, Stuart said it's hard to see $100 oil, but added "the fact that we can still discuss it and not get thrown into the loony bin is an indication that not much has changed."

Game, set, match.

Apocalypse Nope

The Population Bomb and The Limits to Growth: both lurid tales of onrushing, inevitable apocalypses Real Soon Now that have been conspicuous only in their complete absence.

Oddly, such epic prophetic failures leave scarcely a mark upon either the gurus or their believers. So it should come as no surprise that apocalyptics continue to make disastrous bets about disaster:

Five years ago, Matthew R. Simmons and I [New York Times journalist John Tierney], bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011.

The motivation for this bet was Simmons' 2005 New Yorker article proclaiming the onset Real Soon Now of skyrocketing oil prices.

[Tierney then] called Mr. Simmons to discuss a bet. To [Simmons'] credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars.

I took him up on it, not because I knew much about Saudi oil production or the other “peak oil” arguments that global production was headed downward. I was just following a rule learned from a mentor and a friend, the economist Julian L. Simon.

As the leader of the Cornucopians, the optimists who believed there would always be abundant supplies of energy and other resources, Julian figured that betting was the best way to make his argument. Optimism, he found, didn’t make for cover stories and front-page headlines.

This being the Julian Simon who bet the population bomber that the price of any natural resource that the New Malthusians cared to name would not rise between 1980 and 1990.

Ehrlich lost.

Oddly, Erhlich subsequently got a MacArthur Genius award; Simon did not.

Standing perhaps as proof that history repeats itself as a form of ground hog day for the ineducable, Simmons lost his bet, too.

A fact that did not make the cover of the New Yorker.

---

The New Malthusians, in all their progressiveness, insisted that Society needed to take draconian steps to prevent imminent disaster. From the Wikipedia link above about detonating demographics:

[Ehrlich proposed] a powerful Department of Population and Environment which "should be set up with the power to take whatever steps are necessary to establish a reasonable population size in the United States and to put an end to the steady deterioration of our environment." The department should support research into population control, such as better contraceptives, mass sterilizing agents, and sex determination (because families often continue to have children until a male is born. Ehrlich suggested that if they could choose a male child this would reduce the birthrate).

Anyone care to hazard a guess as to how well that would have turned out?

Changing only the syllables, but not the script, Warmenists insist that draconian cuts are necessary to avoid the Real Soon Now apocalypse, and that they are just the ones to do the cutting.

The New Malthusian claims were specific enough to be comprehensively refuted by that thing progressives always appeal to, but are never chastened by: facts.

What possible facts could there be to get the Warmenists off our backs?

One Trumps the Other

Exxon Mobil and ConocoPhillips [are] giving up their projects in Venezuela, rather than put up with any more guff from President Hugo Chavez — [reflecting] the troubles international oil companies are having as more and more governments around the world nationalize their oil and gas reserves. [...]

[The Wall Street Journal writes]: “One response is to move aggressively to find opportunities in politically stable nations. The wave of nationalization that swept the Middle East in the 1970s led to the development of the giant fields in Alaska and Europe's North Sea. Conoco pursued a similar path by creating a joint venture to tap Canada's heavy-oil deposits, which hold enormous reserves of oil, but are expensive to produce.”

The subtext here is subtle, but unmistakable: “Don’t worry about the stability of the world oil supply. And don’t worry about Peak Oil. Even if Chavez and Russia’s Vladimir Putin make it hard on the Western oil majors, they’ll rescue us with new finds in “politically stable nations.”

Readers given to paranoia might think this is part of some diabolical conspiracy to suppress awareness of Peak Oil. But that’s giving the financial media too much credit for ingenuity. After all, Peak Oil is already out of the bag — as I explained last month. It’s being debated openly on CNBC. BusinessWeek is giving space to guest columnists who take Peak Oil seriously. But among those in the media who’ve been familiar with Peak Oil for a while, the comfortable mind-set still prevails that further exploration, or new technology, or some other panacea will assure the continued steady supply of oil for the foreseeable future — because that’s how it’s always worked in the past...

~ Dave Gonigam


[The] world is full of X-factors, the unarticulated and unrealized knowledge that can be elicited only by experience and experiment. [...]

In his bet with Paul Ehrlich ... Julian Simon was able to predict confidently that the prices of five metals would decline from 1980 to 1990, [instead of there being catastrophic shortages, as Ehrlich maintained]. His prediction was based on a dynamic understanding of resource use; his mental model assumed increasing knowledge about alternative sources and applications, feedback from prices, and competitive pressures to do more with less. [...]

"Most experts believe that without deep changes in both industry behavior and government policy, U.S. microelectronics will be reduced to permanent, decisive inferiority within ten years," wrote MIT's Charles Ferguson in a famous 1988 Harvard Business Review article. He called for a government-directed policy to help U.S. chip companies threatened by foreign competition and denounced the "fragmented, 'chronically entrepreneurial' industry" of Silicon Valley.

Ferguson and his mandarin contacts just Couldn't envision an industry driven by microprocessors, software, and networks rather than memory-chip manufacturing. Instead, they assumed an essentially static world, anticipated disaster, and demanded industrial policy.

"Economists moved by the invisible hand," who understood the dynamic patterns of the industry but did not try to predict its exact evolution, knew more than Ferguson's "experts"-for the very reason that they recognized the limits of their knowledge.

Technocratic plans assume the very things they try to enforce: that the world is simple and easily controlled, that it changes only in predictable ways, that it can be mastered.

Predictions go wrong because there are many possible sources of error: environmental shocks, bad or incomplete models, bad or incomplete data, sensitivity to initial conditions, the ever-branching results of action and reaction...

~ Virginia Postrel, via Great Guys weblog

#####

"Peak Oil" alarmists' worldviews seem curiously static, as if Americans won't drive smaller cars and burn more coal when oil prices rise enough to put a real hurt on, and as if there were no more oil to be discovered, a patent absurdity.

$100 Oil Bet Update

Things aren't looking good for the Duck:

The Energy Department just announced that crude oil supplies rose 1.4 million barrels to 347.1 million for the week ended June 16. Analysts had been expecting a drawdown, so this news caught them by surprise. More, crude oil supplies in the U.S. are now at their highest levels since May 1998, when oil was trading around $15 a barrel. Add in the fact that Canadian oil inventories are fully stocked, and the more imminent reality is of a sizable oil-price decrease — not a huge increase.

Recently I interviewed four oil-tanker executives who control a combined 85 percent of the oil coming into the United States. They confirmed market rumors that the amount of oil being stored on large carriers on the high seas is abnormally high. One of the CEOs even predicted the possibility of $40 to $50 oil in the next 6 to 12 months. In another interview, Chevron CEO David O’Reilly suggested that gasoline and energy demands have flattened in the U.S., and may be showing signs of decline.

Prince Turki can threaten $200 oil all he wants, but we may instead be looking at a downward correction that will have oil prices dropping more than anyone imagines possible. Supplies are at their highest levels in eight years, while demand appears to be falling, or at least leveling off. Should a significant price correction be in the offing, stock markets and the economy will cheer.

The economic principles at work here are very simple: Markets work. Supply and demand works. Higher prices are gradually slowing consumption. At the same time, those high prices continue to stimulate outsized profits and investment returns. So capital is pouring into all the energy sectors, providing a strong foundation for new energy production. Chevron, for example, is reinvesting virtually all its profits in new oil-and-gas exploration and drilling. The drilling industry, meanwhile, has recovered from last year’s Hurricane Katrina shock and is once again producing near peak capacity.

We still have the worst of the hurricane season ahead of us, but Oroborous' chances for a new book for Christmas are looking better.

NYMEX light, sweet crude is at $72.18, up .38.

Oil Bet Update

We are inclined to stay clear of the oil market for a while.

Crude oil has become one very hot commodity - enticingly hot.
U.S. crude oil inventories are a hefty 11% above the five-year average for this time of year. Natural gas inventories are also ample. Nevertheless, the price of crude continues to soar and the bullish speculators continue to pile into the market.

According to the CFTC's Commitment of Traders report, the so-called "large speculators" hold a record-high long position in crude oil.
The commercial traders hold a record-high net short position in crude oil.

As we have noted in several prior columns, the "Commercials" are considered "the smart money," based on their tendency to position themselves correctly at important inflexion points. The Commercials' massive short position, therefore, bodes ill for the price of crude, and for all those speculators who are betting on it to go higher still.

The Marketvane survey of commodity futures advisors validates the bearish implications of the Commitment of Traders report. According to the Marketvane, 76% of futures advisors are bullish on crude oil. This extreme reading is very close to the two-year high reading of 84%, and raises the likelihood that the overly popular crude oil market will become somewhat less popular very soon. All of these warning signs inspire us to turn our back on this red-hot commodity - and we'd suggest that you do the same for a short while.

~ Eric J. Fry

"Turn your back" to going long, at least.

Oil Bet Update: the storm clouds gather

Storm clouds on the political and meteorological front are starting to spook the markets, says the Observer:

The growing international crisis over Iran's nuclear programme could trigger a catastrophic oil price spike, sending crude prices over $100 a barrel, senior Wall Street analysts are warning.

With prices already at around $72 a barrel, such an increase could mean drivers facing prices of 110p a litre on forecourts, according the the Petrol Retailers Association. Last week Lord Browne, chief executive of BP, warned that prices could rise to £1 as he unveiled bumper $5.27bn profits for the first quarter.

Shell is also expected to announce close to record numbers next week, with analysts expecting profits around $5.57bn, driven largely by the oil price.

A single political shock could be enough to send oil markets into panic, said Adam Sieminski, senior energy economist at Deutsche Bank in New York. 'If we have one more big problem we are going to have triple-digit oil prices.' Sieminski points to confrontation with Iran, a worsening of the situation in Iraq or a recurrence of devastating hurricanes in the Gulf of Mexico as potential catalysts for a major rise.

When supplies are plentiful, such politial mischief-making by oil producers will only hurt themselves. But when they are tight, every oil state dictator with an axe to grind can command the attention of the world. In such times the fear multiplier will go off the charts. Never underestimate the fear factor.

Right Bet, Wrong Year

It appears that my bet with Oroborous that oil would hit $100/barrel by December of 2006 was a year too soon:

NEW YORK (AP) -- The prospect of a stronger economy and word of possible new U.N. sanctions against Iran sent crude oil futures back above $96 a barrel Friday, while retail gasoline prices extended their own march higher.

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The Labor Department reported that employers boosted payrolls by 166,000 jobs in October, the biggest increase in months and double what economists had forecast. Meanwhile, October's unemployment rate held steady at 4.7 percent. Separately, the Commerce Department said factory orders rose 0.2 percent in September, better than the 0.4 percent decline analysts were expecting.

"It suggests that concerns about the economy ... are overblown a little bit," said Michael Lynch, president of Strategic Energy and Economic Research Inc., in Winchester, Mass.

Oil futures added to their gains late Friday when the British Foreign Office said the U.N. Security Council has agreed to draft a new sanctions resolution that could be passed in November if Iranian cooperation with the International Atomic Energy Agency does not improve. Investors worry that any conflict between the West and Iran would disrupt oil supplies from the Middle East.

Light, sweet crude for December delivery rose $2.44 to settle at a record $95.93 a barrel on the New York Mercantile Exchange after rising as high as $96.05 earlier, short of a trading record of $96.24 set Thursday. On Thursday, oil prices retreated from that early record to close down more than $1, in part because of dismal reports on consumer spending and industrial activity that also factored into the Dow Industrial's 362-point decline.

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

As they say, timing is everything.

$100 Oil Bet Update

Summer driving season has yet to commence, but oil is already threatening to surpass its all time high price on the NYMEX:

Light sweet crude for May delivery was trading up 15 cents at $70.50 a barrel on the New York Mercantile Exchange. The contract rose as high as $70.88 a barrel in electronic trading overnight, surpassing the previous record of $70.85 reached August 30, in the midst of a record hurricane season in the U.S.
"Iran is still the main driver," said Tobias Merath, an analyst for Credit Suisse in Zurich, which is forecasting oil prices between $65 and $72 in three months, with a level of $75 a barrel seen as the top.
The oil market is worried about the increasing tensions between Iran and Western governments seeking to pressure Tehran into halting its nuclear program.

The Iranian situation will not resolve itself very quickly. Look for escalating rhetoric on both sides to keep the market jittery for the rest of the year. Add to that the normal summer demand spike, and memories of Hurricane Katrina as hurricane season cranks up, and we could see $100 before Labor day.

Bad News for Duck's Side of the Oil Wager

NEW YORK (Sept. 23) - [All emph. add.] Crude oil prices dropped sharply Friday, the second straight day of declines, as traders welcomed news [...] that damage to refinery capacity in the Gulf could be less severe than originally feared. [...]

Saudi Arabia's foreign minister said in an interview [...] that he would like to see the price of crude fall by about $20 a barrel below what it is now.
Prince Saud al-Faisal said there is no shortage of oil, and that prices should stabilize at $40 to $45 a barrel.

Saud said a big problem with energy markets is a lack of refineries in the United States and elsewhere. He noted that Saudi Arabia had sought to help build a refinery in the United States with no takers. It is building two refineries in Saudi Arabia, he said.

"We are adding barrels of oil on the market," Saud said. "It has no place to go."

- By MICHAEL J. MARTINEZ, The Associated Press

While Arabia has a lot less spare capacity than it likes to portray to the world, they're still the 800 lb. gorilla of oil production, (although not for much longer), and if they're committed to lowering prices, it's a long-shot to bet against them.

As a sidenote, it's a very smart move for Arabia to shift away from merely selling raw materials, and move into value-added products, i.e., exporting gasoline and other fuels instead of just crude oil.

Daily Duck welcomes Oroborous, aka Michael Herdegen

Regular readers of the DD and the BrothersJudd blog will recognize Michael's prolific and insightful commentary on a wide variety of topics. I am pleased that Michael has accepted my invitation to join our editorial staff at the Daily Duck, and hope that you enjoy his wit and prodigious knowledge of technology as much as I have.

Michael and I have an open bet on the price of oil. I have bet him that oil will hit $100/barrel by the end of 2006. Stay tuned for our debates on oil and other economic trends.

Are China's U.S. Debt Holdings a Trump Card ?

Brad Setser | Sep 13, 2007, on his blog

[All emphasis added; RMB = renminbi, Chinese currency]
China indicated back in 2004 that it wanted to rebalance its economy, and shift away from export and investment-led growth, [but] it is increasingly clear that the policies China has adopted to try to rebalance its economy have not worked.

The World Bank’s most recent quarterly update on China’s economy report notes that net exports will contribute as much to China’s growth in the first half of 2007 as in the last half of 2006. [...]

China’s current account surplus is projected to rise to $380b (12% of China’s GDP) – even with very high oil prices. That is an increase of $300b (and 8-9% of China’s GDP) since 2004. [...]

But China’s huge external surplus isn’t just an issue for China. China’s policy choices are shaping how the global economy adjusts to the US slump. That slump – and the associated weakness in the dollar -- has already pulled down the US non-oil trade deficit a bit. But the main impact of dollar (and RMB) weakness has been an increase in China’s trade surplus. [...]

The result: China increasingly is using lending the surplus it earns selling goods to Europe to the US, not just lending the money it earns selling to the US back to the US.

On current trends, China will run a $260b or so bilateral trade surplus with the US, and a $380b global surplus. It also will likely lend the US $350b or more of its $500b in reserve growth.

China will be lending the US significantly more than it makes selling to the US for the first time.

That, I suspect, is something that is likely to continue in the future. It has a corollary as well: The gains to China from financing the US are falling, while the costs China has to bear to support the US are rising.

The standard argument that China would shoot itself in the foot, financially speaking, if it stopped lending to the US is wrong. China would certainly shoot its export sector in the foot if it stopped lending to the US. And it is true that if China stopped lending to the US, the value of the RMB would rise relative to the dollar and the value of China’s existing US assets would fall. But China would still be better off, in the purely financial sense, if it took its lumps now.

Remember, China has to buy an awful lot of dollars to keep from taking losses now. It is has to do more than hold its existing position. It has to add to its position.

And the more dollars China holds, the larger its ultimate losses.

Every time China’s government borrows in RMB to buy another dollar – a dollar that is almost sure not to hold its value relative to the RMB – it shoots another hole in its balance sheet.

No doubt, those betting that China would be willing to pay an ever-growing price to maintain stability in the US bond market have made the right call over the past few years. But those making the bet are betting that China will continue to prioritize the interests of its export sector over its own long-term financial health, and perhaps domestic macroeconomic stability as well...

Them Businesspeople is Crazy, I Tells Ya, Crazy !!

This is from Share The Worlds Resources.

George Soros, irrationality and contrarian activism
By Max Keiser

The typical activist approach of trying to get rich countries and companies to 'share the world's resources' fails to take into consideration how the individuals in these countries and companies got rich to begin with. What activists don't understand is that the process of accumulating wealth is rarely a rational, direct path. Trying to appeal to the rich to act rationally is therefore, in most cases, folly. [...]

Financiers and speculators call this form of antagonism-for-profit 'contrarianism' and it forms the basis of an entire school of finance that attempts to figure out where the 'crowd' is heading, and then do the opposite. Some quick examples of how this works:
1) the put-call ratio in the options markets. What this number tells contrarians is where most of the speculators are making bets in the markets, and as most speculation ends up in losses it makes sense, according to the contrarian doctrine, to bet the other way.
2) Another contrarian speculating strategy is to look at where professional money managers are placing their bets with their professionally managed funds. Again, since most professional money managers fail to 'beat the market,' it makes sense to do the opposite of whatever they're doing.

Probably the king of contrarianism is the most successful investor in the history of Wall Street: George Soros.
He's taken the contrarian concept and developed it even further into what he calls his theory of 'reflexivity' or the 'human uncertainty principle'. What Soros has observed about markets is that contrarianism itself can breed second and third generations of contrarianism that is self referential or 'reflexive' that, instead of doubling back and ending up where it started, has the power to change the underlying market fundamentals in ways that make the contrarian assumption the de factor market norm. When such situations develop, it's only a matter of time before [...] we get what Soros calls a 'return to equilibrium', i.e., a crash. [...]

[I]dentifying these inflection points, where the market suddenly realizes that its assumptions are worth zero, [can lead to] great fortunes [being] made [by] betting the other way. Soros caught the crash in the English pound back in 1992 using this technique and pocketed over 1 billion dollars in one day.

The point I'm making here for activists is that [the] activists' approach to changing the way business treats the environment relies almost entirely on trying to get business people to act more rationally. And yet, to get to where they [are], these business leaders have relied mostly on obeying the voices in their head that the status quo claims are irrational. [...]

So does this mean that NGO's should give up?
No. What it does mean, however, is that NGO's should consider adopting new strategies that will tap into businessmen's love of the irrational.
For environmentalists, I think carbon trading offers a huge opportunity to turn the tables on business and use the power of irrationality for a positive change. Take a group like Greenpeace for example. They have over 100 million dollars sitting in the bank collecting money market interest. For all intents and purposes, this money is what Wall Street would call, 'dead money.' I propose the following. Greenpeace should start organizing a banking crusade with their money and other NGO money (NGO's combined operating budgets are worth 1 trillion dollars) and start buying Carbon Credits in the open market for the current price of approximately 8 dollars a ton. (The EU has started a program of capping carbon emissions for corporations; but giving them the opportunity to go over their cap by buying 'credits' from companies whose carbon output is below the cap).

This would set up an irrational [i.e., contraintuitive to Leftists] chain reaction, each part of which represents a net positive for the environment.
First, the price of carbon credits will be pressured upward thanks to the speculative buying [...]. Corporations who are banking on the price of carbon credits to remain in a certain range will [...] in many cases be forced to buy more credits than they had planned to in the short term to give themselves the kind of hedging protection these carbon credits offer for their carbon abuse. [!!!] This will drive the price even higher. [...]

[H]igher carbon prices will incentivize companies across the business spectrum to put forward various carbon-efficiency schemes as a way to make money with their excess credits. The money a company makes chasing carbon efficiencies could equal if not eclipse the profits made burning carbon. The government in turn, has the ability to lower the carbon caps greasing this contrarian cycle even more by making carbon more expensive, thus providing more incentive to produce greater efficiencies.

On paper, activists will look at this and balk. They don't like the idea of commoditizing nature. They don't understand why a company would engage in such a scheme. They don't like the fact that the whole thing seems irrational, but that's the point. Business today runs on irrationality and until NGO's adapt, they'll always be behind the curve.

You would think NGO's would have already figured this out. They know for example that ExxonMobil's business model is irrational to the bone. ExxonMobil extract irreplaceable natural resources for virtually nothing, sell them for a fraction of their replacement costs and then we burn them without ever having to pay the environmental costs; all this resulting in parts of CO2 per million in the atmosphere breaching the 'can't go back' levels where the species (ours) is put on the extinction watch list.

ExxonMobil's business model is irrational and suicidal. NGO's know this, so why do they insist in trying to get Exxon to act rationally when nothing in Exxon corporate DNA suggests they even understand what that word means.
Exxon is not rational, but they are profitable. For NGO's to attack their rationale is a non-starter because the company knows it's irrational and doesn't care. Environmentalists, to win against this insanity, must tear a page out of the irrational's handbook in order to effectively combat the current trends blighting our futures. The carbon trading scheme mentioned above is a step in that direction. As distasteful as it must seem for NGO's to drink the 'Koolaide' that runs business, not to do so at this point is completely irrational.

###

Well. Where to begin.

Soros is clearly not "the king of contrarianism", nor "the most successful investor in the history of Wall Street", but those are quibbles. He's good at both, even if not the best ever. (Or even of his generation).

I left in the parts about "drinking the business Kool-Aid", ExxonMobil "extracting irreplaceable natural resources" for "virtually nothing" and "selling them for a fraction of their replacement costs", and "parts of CO2 per million in the atmosphere breaching the 'can't go back' levels where the species (ours) is put on the extinction watch list" for their amusement value.

The "GlobalWarming™ leading to human extinction" nonsense is as nutty as it is ignorant; even the global warmers' own models show only a slight increase in temperatures.
If their clearly flawed models were correct, then billions of humans would die, but the species would be in no danger, and we wouldn't end up living only at the planetary poles, or whatever other nonsensical SciFi fantasy is in vogue right now.

The thought that the oil industry expends no money or effort to find and produce crude oil is a likewise puzzlingly ignorant fantasy, one that would take only thirty minutes or less of research to dispel - if one had any interest in being well-informed on the subjects that one writes about.
Sadly, many people find it agreeable to hold strong opinions on subjects about which they know absolutely nothing, even when knowing the basics would take very little time or effort, the recent/ongoing UAE ports deal dust-up being a perfect example.

Also, why would we want to replace crude oil, or refrain from using it, except to avoid air pollution ?
It's not like it's doing anything but sitting there. Trees, for instance, dynamically interact with the environment and with humans, and so it's problematic to use too many of them at one time, but in situ crude is passive.

All that aside, the reason that I posted this is because Mr. Keiser, loon though he may be, is absolutely correct. This is the best approach for NGOs that wish to lower carbon emissions: Get everyone to agree to establishing a market in carbon emissions, and then corner it.

What Goes Up... (Eventually, Usually)

BETTING ON THE "ALMOST INEVITABLE"

Let me state categorically that [this] sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - a "slam-dunk." -- Bill Gross, The Bond King, October 3, 2005

A half-trillion dollars...That's what Bill Gross is responsible for.

Why is he entrusted with managing a half-trillion dollars?
It's simple... Bill Gross has delivered double-digit annual returns in bonds for over three decades. He's the best bond manager in the world. That's why they call him The Bond King. [...]

So when Bill Gross comes out with a call that is "almost inevitable" and "99% unavoidable," as he did in his latest Investment Outlook, we have to take notice. [...]
Bill Gross is confident that a major change in the U.S. economy is just around the corner. What's "almost inevitable?" According to Bill Gross, it's 1) a housing bust followed by 2) a weakening U.S. economy. In his own words, he says:

"Make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable."

Bill outlines the sequence he sees. And then he backs it up with facts. It goes something like this:

1) FIRST, HOUSING PRICES FALL.

Home prices will fall because Alan Greenspan has been raising rates, specifically to cool the housing market.
It's just now starting to work, as holders of ARMs (adjustable-rate mortgages) have been painfully discovering. [...]

According to Bill Gross, home prices will stop their rise when Greenspan's higher interest rates start to be a burden on first-time home buyers. Gross then expects banks to tighten their lending standards. At this point, speculators will finally "sniff the beginning of the end" of the housing boom, as Gross says, and that'll be it.

2) AFTER THE BOOM ENDS, PEOPLE WILL STOP TAKING EQUITY OUT OF THEIR HOMES, WHICH WILL CAUSE THE ECONOMY TO HEAD TOWARD A RECESSION.

Bill Gross calls it the "house ATM." As the values of people's homes have risen, people have refinanced or cashed out some of that home value in the form of home-equity loans. [...]

All that ends when the home-price boom ends. The "house ATM" runs dry. And that means no more big trips to Home Depot or Lowe's. No more new cars. And no more second home buying. Our "paper prosperity" - the increase in our wealth on paper - is gone. [...]

How can Bill call the top with such certainty? It isn't just a feeling... It's based on facts. One source of facts for Bill is a new 71-page study by the Federal Reserve. The Fed looked at real estate markets in 18 major countries over the last 35 years. The results were amazing...
Most people believe that "you can't go wrong in real estate." And that "real estate doesn't go down over long periods." [...]
While real estate rises over the long run, there are distinct periods where it falls. In short, based on the Fed study, right now we are right at the point where home prices should turn over and head downward again.

The Fed found that housing booms peak, on average, four-to-six quarters after that country's Federal Reserve first starts to raise interest rates. Here in the States, the Fed has raised rates for five quarters now.
Based on history, we should be extremely close to the top.

What happens after the peak in real estate prices? The Fed then hits us with a whopper:

"Subsequently [after the peak], real house prices fall for about five years, on average, and their previous run-up is largely reversed.

Wow.
Want another 'wow?' Across the 18 major countries... and across the 35 years of the study... the median real price fell over the five-year period after the peak was about 15%.

Now that's nationwide... of course, some areas will fall much more than others. Again, keep in mind that, on
average, the "previous run-up is largely reversed." Ouch!
(If you'd like to see the study, you can here):

www.federalreserve.gov/pubs/ifdp/2005/841/ifdp841.pdf PDF [...]

With the exception of the blip of a recession in 2001, we've had relatively good economic times for nearly 15 years now. But rainy days do come. We're making a bet that the rain will come some day. We can even see the storm clouds...

~ By Steve Sjuggerud (October 20, 2005) [All emph. add.]

During the Southern California real estate downturn of the 80s, after factoring in inflation, it took between 10 - 12 years for prices to rebound to pre-slump levels, depending on location.

However, I don't believe that mildly falling home prices will, by themselves, bring on an American recession, although they will cut a percentage point or two from nominal GNP growth.
But even there there's a silver lining: The current rate of economic growth has already absorbed the drag from high oil prices.
If the economy does slow a bit, oil prices should fall even further than they have over the past month, which will act as a mild stimulant, helping to bring about a "soft landing".

Plus, if the economy starts to slow markedly, the Fed will start cutting rates again, which they have leeway to do by virtue of the rate hikes that they've been making.

Really, this is a "Goldilocks" situation, by historic and global standards.

This is the Book

Which will settle the bet on '06 oil prices. Note that Duck isn't wrong, he was just early.



Founders at Work: Stories of Startups' Early Days, by Jessica Livingston

A list of those interviewed for the book can be found here, and here is an extremely interesting and lengthy interview of Apple co-founder Steve Wozniak - among other things, he says that he was completely uninterested in making a ton of money, he just wanted to show off his computer-design skills. As a result, his Apple II design was widely admired, and he made almost nothing compared to Steve Jobs.

Here is an interview with Joel Spolsky, a co-founder of Fog Creek Software, who writes the very informative Joel on Software blog, which is where I found mention of the book.

Nothing was not an Option

[This should have been entitled "18 Months Later, Tomorrow Comes". I don't know why this took so long to get to — for me, time is no excuse — particularly because this is a subject with which I have some first hand experience]

For those who opposed the war all along, first 9/11/11, then 3/20/13 were causes for fresh waves of nearly onanistic condemnations and toldjasos. Even initially hawkish editorialists, chastened by a decade of bleak experience, have engaged in hand-wringing attempts to explain their misjudgment. NYT Op-Ed page writer and executive editor Bill Keller epitomizes the latter group, and ultimately encompasses the former. Here are some representative (and highly edited for length) pull quotes from his mea culpa:

The question is really two questions: Knowing what we know now, with the glorious advantage of hindsight, was it a mistake to invade and occupy Iraq? And knowing what we knew then, were we wrong to support the war?

Broadly speaking, there were three arguments for invading Iraq: … humanitarian; … [promoting] democracy …; … and [WMD/regional security/explicit and implicit support of terrorism].

For many of us, the monster argument was potent, even if it was not sufficient. … We were, as Andrew Sullivan put it, “enamored of [our] own morality.”

But there are plenty of monstrous regimes that we do not go to the trouble of overthrowing. It should perhaps have caught our attention that Samantha Power, who literally wrote the book on humanitarian intervention (the Pulitzer-winning “A Problem From Hell: America and the Age of Genocide”) and who had endorsed armed intervention in Bosnia and Rwanda, and at an earlier time in Iraq, did not support the invasion of Iraq in 2003.

“My criterion for military intervention — with a strong preference for multilateral intervention — is an immediate threat of large-scale loss of life,” explained Power, who now advises President Obama on multilateral affairs and human rights. “That’s a standard that would have been met in Iraq in 1988 but wasn’t in 2003.”

The idea that America could install democracy in Iraq always seemed to me the most wishful of the rationales for war, although some people who knew the region far better than I made that case. … The exiled Iraqi academic Kanan Makiya — a proponent of invasion who later repented — observed that Iraq’s population was so traumatized by decades of abuse that they were unwilling to take initiative or responsibility …

…

The main selling point for war in Iraq, at least for the American public, was that Hussein represented a threat to American security. But what kind of threat, exactly?

The following couple paras contain, more begged questions than there are sentences.

Iraq was not, as Afghanistan had been, the host country and operational base of the new strain of Islamic fascism represented by Al Qaeda. It is true that Hussein hosted some nasty characters, but so did many other dictators hostile to America. At the time, Iraq was one of seven countries designated as sponsors of terrorism by the State Department, and in the other six cases we settled for sanctions as recourse enough. And his conventional military — what was left of it after it was laid waste in the deserts of Kuwait and Iraq in 1991 — was under close supervision.

That leaves the elusive [WMD]. We forget how broad the consensus was that Hussein was hiding the kind of weapons that could rain holocaust on a neighbor or be delivered to America by proxy. He had recently possessed chemical weapons (he used them against the Kurds), and it was only a few years since we had discovered he had an active ambition to acquire nuclear weapons. Inspectors who combed the country after the first gulf war discovered a nuclear program far more advanced than our intelligence agencies had believed; so it is understandable that the next time around the analysts erred on the side of believing the worst.

We now know that the consensus was wrong, and that it was built in part on intelligence that our analysts had good reason to believe was cooked. … A few journalists — notably Jonathan Landay and Warren Strobel of Knight Ridder newspapers — emphasized conflicting intelligence that questioned Hussein’s capabilities. But assuming we couldn’t know for sure, what would have been acceptable odds? If there was only a 50-50 chance that Hussein was close to possessing a nuclear weapon, could we live with that? One in five? One in 10?

...

In 1992, after driving the Iraqi army out of Kuwait, Defense Secretary Dick Cheney mused on the calculus of war. Why, he asked an audience in Seattle, had the United States not pursued Hussein’s forces all the way to Baghdad and removed him from power? Because, Cheney said, that would have committed the U.S. to an unacceptable long-term occupation, and it would have meant more American casualties. “The question in my mind is, how many additional American casualties is Saddam worth?” Cheney asked at the time. “And the answer is, not that damned many.”

Of course, Cheney wasn’t so cautious the second time around. Along with the arguments that he and many others made after 9/11 came some insufficiently considered assumptions: that we were competent to invade and occupy Iraq without making an awful mess of it and that we could do it at a cost — in lives and money — that we could live with. In the end, the costs were greater than anyone anticipated because of calamitous mistakes in execution.

Just consider the numbers. In the short-lived first gulf war, 148 Americans died in battle. In the current war, the toll so far is nearly 4,500 American dead and 32,000 wounded. At least 100,000 Iraqis, most of them noncombatants, have been killed. A war and occupation estimated to cost $100 billion over two years has already cost eight times that amount.

...

Our occupation of Iraq has also distracted us from Afghanistan, furnished a propaganda point for Al Qaeda recruiters and limited the credibility of our support for independence movements elsewhere. It is worth mentioning, too, that our moral standing as champions of civil society has been compromised by the abuses of Abu Ghraib and rendition and torture, byproducts of the war that will long remain a blot on our reputation.
Where does this leave me? The world is well rid of Saddam Hussein. But knowing as we now do the exaggeration of Hussein’s threat, the cost in Iraqi and American lives and the fact that none of this great splurge has bought us confidence in Iraq’s future or advanced the cause of freedom elsewhere — I think Operation Iraqi Freedom was a monumental blunder.

Clearly, then an open and shut case that Iraqi Freedom was not only a mistake in hindsight, but in foresight, as well.

Right?

Not so fast. Despite the length of this exercise in self-flagellation, Mr. Keller, who I am using as a proxy for essentially the entire anti-war left, either is incapable of comprehending, or elides, the central, inescapable problem: nothing was not an option.

It was not a matter of Operation Iraqi Freedom or [crickets]. Yet that is precisely the notion Mr. Keller portrays. Despite his seeming expertise, he scarcely spent a moment on the status quo ante, or the various actors involved in it. The decision to depose Saddam did not have a nullity as its alternative.

My goal here is to lay out briefly, yet in sufficient detail, the status quo ante in the hope of demonstrating that, like in so many aspects of international relations, there were no good options. The choice wasn't between deposing Saddam and crickets, but more like having to pick either the devil or the deep blue sea.

The Status Quo Ante

Contra Mr. Keller, there were several reasons the US didn't extend Desert Storm to a full scale invasion of Iraq. Most obvious should be that we could do only what was politically possible, and, given the nature of the coalition, continuing the march to Baghdad probably wasn't. Beyond that, Keller failed to consider the obvious influence on decision makers at the time: it is generally pointless to kill someone who is in the process of committing suicide. Between the considerable political risks and the seeming likelihood that Saddam wouldn't long survive the Kuwaiti debacle, it seemed a fair bet to be satisfied with limited, rather than absolute, objectives.

Unfortunately, Saddam's hold on power was firmer than we imagined. Which left us with:

• Southern Watch, the long term, large scale air operation based primarily in Saudi Arabia to stop Saddam's bombing attacks on Shia in Southern Iraq.
• Northern Watch, a similar operation to protect the Kurds in Northern Iraq.
• Ongoing futile attempts to ensure Saddam's compliance with WMD inspections, which led to a series of UN Security Council resolutions promising severe consequences in the event of continued defiance.
• The Oil for Food program (OFF), which was established to stop Saddam from re-establishing his military, while not causing additional suffering among the Iraqis themselves.
• The French, Chinese and Russians were actively using OFF to undermine the sanctions.
• Massive UN corruption related to OFF was causing what had previously been thought unimaginable: further besmirching the UN's reputation.
• Saddam was actively funding Palestinian suicide bombers
• Saddam was also routinely shooting at coalition aircraft enforcing the southern and northern no-fly zones.

This list could go on, but it should be sufficient to support this conclusion: the sanctions regime and aerial occupation of the northern and southern thirds of Iraq, which had gone on for a decade, had reached a dead end — something was going to replace it. This is the critical issue that Keller (et al) never grasped: it wasn't a matter of invasion or nothing. Hand wringing over the human and financial costs of deposing Saddam is an empty exercise. Of course it cost more than nothing. Of course the knock-on effects were worse than nothing. But nothing was not an option. Some course of action had to replace the no-fly zones and the sanctions regime. It is against the other possible courses of action that the costs of invading Iraq need to be compared. The choice was binary: either invade, or quit the field. It is against the latter option, and its likely consequences, that we need to weigh Operation Iraqi Freedom. Obviously, there is no rewinding the tape and trying that alternative on for size. But when assessing almost any decision, whether a foreign policy decision or driving to the movies, we have to weigh the pros and cons of what we did against the foreseeable pros and cons of what we didn't. Fully caveated, here are some of the consequences of the only alternative on offer:

• Islamist Psychology.
  • Shortly after 9/11, bin Laden asserted to his Muslim audience that the West in general, and the U.S. in particular, had a rotten and degenerate culture that no longer had the will to fight for its own survival.
  • Similarly, (I can't recall his exact words) he also proclaimed that the Muslim world would follow the strong horse.
  • Therefore, we should expect that quitting the field would have had a profound effect on the entire Muslim world. Not only could the US and the West be defeated, the fact of its defeat meant it was ripe for further attack. "Angering the Arab Street" was practically a cliché a decade ago, but, thankfully, is scarcely heard anymore. That, supposedly, recruited terrorists. Possibly, but nothing like our defeat would have done. Also, a reasonable conjecture as to why we no longer hear the "Arab Street" cliche is that the predictions the term entailed never came to pass.

• Countries in the region.
  • Saddam would have been free to fully reconstitute his military.
  • Saudi Arabia would have been further radicalized, and we might very well have had to abandon our bases there.
  • All the countries in the region would have had to make some accommodation to the new "correlation of forces" (a term not much heard since the 1970s with respect to communism, but appropriate here). None of those accommodations would have been in our interest, because they would have meant allying themselves with either Iran or Iraq.
  • Saddam's Iraq was Iran's mortal enemy. A resurgent Iraq would have guaranteed Iran pursuing a nuclear weapons program as energetically as it possibly could, because Iraq would have been doing so itself.

The only alternative on offer to invading Iraq was bound to carry significant "correlation of forces" costs — the entire region would find itself concluding that Islamism was the strong horse. All the countries around Iraq and Iran would find themselves forced to accommodate one or the other, which would have meant turning their backs on us.

The parade of horribles gets worse. The inevitable military competition between Iran and Iraq, which must be expected to include nuclear weapons, must also have been expected to lead to yet another war. Why do I say inevitable? Because, with the inescapable shift in the correlation of forces, the US's ability to step in would have been severely eroded, if not destroyed altogether. The consequence should be obvious to anyone with the temerity to look: a Hobbesian security dilemma.

It is here where the downside risks really start mounting. Imagine a conflict that closes the Straits of Hormuz for, say, three months. The economic and human costs are almost incalculable. It is that possibility against which Keller et al need to judge whether Operation Iraqi Freedom was worth all its consequences.

Now, it is entirely possible to disagree with elements of the preceding précis, or specifics of the results, or weigh the possible outcomes differently. However, it is an illuminating exercise in journalistic incompetence and analytical malfeasance to engage in post-hoc hand wringing without once taking on board the strategic situation and the limited options it presented. Moreover, Keller et al never seem to discuss several (albeit almost certainly unintended) positive outcomes of invading Iraq, beyond Saddam's elimination:

• Until the surge, Islamists had their run of post-invasion Iraq. Their fundamentalist certainty led them to an orgy of murder that has gone some way to weakening Islamism everywhere.
• The internecine warfare between Sunni and Shia (which Saddam's rule had baked in, and would have happened eventually, regardless of our invasion) has had the consequence of reducing the extent of Muslim religious certainty. Considering what the aftermath of 9/11 was supposed to look like, it should be amazing how few, and small, attacks against the West have been. It is too early to declare victory, but there can be no doubting that violent Islamism is on the wane.
• The Islamist notion that the US is too decadent to fight is dead, and its passing must have had an impact on Islamist decisions to conduct further attacks against the West.
• Gaddafi's ceding Libya's nuclear weapons program

Strikingly, no one (well, excluding the Galloways among us), no matter how fervently they opposed Operation Iraqi Freedom, wishes Saddam still in power.

You would think they might explain in some depth why that is.