Barack Obama is running a good campaign. His staff understands the power of images and there have been no shortage of positive images for the Obama campaign during his trip to the Middle East.
Senator Obama has benefited from an adoring media who have not pressed him on the tough issues. But on his recent trip to the Middle East, he has been asked several times about his lack of support for the surge. An ABC correspondent posed to Senator Obama whether he would support the surge, knowing what he knew now? Katie Couric attempted three times to get a straight answer from Obama on this subject, without success.
Obama has begun to fully acknowledge that the surge and accompaigning change in strategy has transformed the security situation in Iraq. But Obama answered ABC that he would not support the surge knowing what he knows now. He went on to say that "these types of hypotheticals are difficult". He looked uncomfortable during the exchange and appeared weak in his response to a question he is bound to be asked.
To acknowledge the success of the surge but then to say he still would not support it in hindsight is illogical, and he knows it. It is hardly a difficult hypothetical to understand that if you knew the surge would work that it follows you would support it.
This is not the first time Obama has looked uncomfortable and unprepared when confronted with the rare tough question. When during the ABC debate George Stephanopolis asked him about his long term association with American terrorist Bill Ayers, he was similarly befuddled. Senator Obama is an accomplished and powerful speaker when aided by a teleprompter. Without a teleprompter and written script, he can be an indifferent speaker.
Perhaps chagrined about their lack of objectivity up to this point, hopefully the media will begin to ask the tough questions.
Tuesday, July 22, 2008
Monday, July 21, 2008
How Congress' Hybrid Subsidy Misses The Mark
Congress has a troubling tendency to dictate the means rather than the goal to be achieved. In doing so, Congress believes that it knows best to accomplish a desired outcome. This arrogance almost always results in sub-optimization. Instead of allowing the creativity of the marketplace to figure out the best way to achieve the ultimate goal, Congress prescribes the means.
The tax credit for hybrid vehicles is a great example. Congress offers a tax credit of up to $3,150 for hybrid vehicles. Hybrids combine an electric motor along with a scaled down combustion engine to achieve greater gas mileage.
But is promoting hybrid vehicles the right goal? Of course not. The ultimate goal is to reduce the amount of transportation fuel that the country uses, both to reduce our dependence on foreign oil and to reduce C02 emissions.
Since hybrids use less fuel, how does subsidizing this particular technology sub-optimize the results? Because selling more hybrids does not necessarily reduce the countries fleet mileage. A Chevy Tahoe hybrid gets 22 MPG. Why should a buyer of such a vehicle get a credit when a person who buys a conventionally powered Toyota Corolla which gets far higher gas mileage (27/35) does not?
If the goal truly is to reduce gasoline usage, why does Congress not have a rebate based on the best MPG instead of a particular technology? Why not have a tiered subsidy with the most rewards for people that buy the highest MPG vehicles, regardless of technology?
Compounding the problems with Congress' central planning model is that subsidies for hybrids increases demand, which elevates the price the price in the market. Manufacturers also build at least part of the subsidies into the prices of the vehicles. Just try to get a hybrid at list price. Congress also saw fit to put a cap on how many of each make and model hybrid can receive a credit. For example, the Toyota Prius is currently "capped out".
The kicker is that many of the people that will buy a hybrid, costing more than a traditionally powered vehicle, will be caught buy the Alternative Minimum Tax (AMT). For those swept up in the AMT dragnet, the hybrid tax credit is disallowed.
The tax credit for hybrid vehicles is a great example. Congress offers a tax credit of up to $3,150 for hybrid vehicles. Hybrids combine an electric motor along with a scaled down combustion engine to achieve greater gas mileage.
But is promoting hybrid vehicles the right goal? Of course not. The ultimate goal is to reduce the amount of transportation fuel that the country uses, both to reduce our dependence on foreign oil and to reduce C02 emissions.
Since hybrids use less fuel, how does subsidizing this particular technology sub-optimize the results? Because selling more hybrids does not necessarily reduce the countries fleet mileage. A Chevy Tahoe hybrid gets 22 MPG. Why should a buyer of such a vehicle get a credit when a person who buys a conventionally powered Toyota Corolla which gets far higher gas mileage (27/35) does not?
If the goal truly is to reduce gasoline usage, why does Congress not have a rebate based on the best MPG instead of a particular technology? Why not have a tiered subsidy with the most rewards for people that buy the highest MPG vehicles, regardless of technology?
Compounding the problems with Congress' central planning model is that subsidies for hybrids increases demand, which elevates the price the price in the market. Manufacturers also build at least part of the subsidies into the prices of the vehicles. Just try to get a hybrid at list price. Congress also saw fit to put a cap on how many of each make and model hybrid can receive a credit. For example, the Toyota Prius is currently "capped out".
The kicker is that many of the people that will buy a hybrid, costing more than a traditionally powered vehicle, will be caught buy the Alternative Minimum Tax (AMT). For those swept up in the AMT dragnet, the hybrid tax credit is disallowed.
Sunday, July 20, 2008
Should We Take Iran's Threats Seriously? The Left Wing Loons Respond
There was an op-ed in the NYT’s Friday by an Israeli historian Ben Morris regarding Iran's threat to Israel's survival. The gist was that Israel will have no choice but to preemptively strike Iran if progress to end their nuclear capabilities isn’t made on other fronts. A writer on The Huffington Post, the far left blog/smear site, posted a detailed response to the NYT’s piece. I didn’t agree with everything he said but it was a decent enough effort and he had some good points.
But when you read the comment section following his critique the far left loons come out. At the bottom of this post are a couple of the more coherent comments. Typos, grammatical errors and rampant conspiracy theories are theirs – I’ve simply cut and paste them as is. The amount of blind hatred and just plain ignorance about the world is stunning. Unfortunately, because they are on a site like The Huffington Post, they probably vote.
Israel was chartered as a country on a tiny sliver of land by the U.N. in 1948. At its narrowest, you can drive from the ocean to the eastern border in about an hour. The Arabs immediately attacked to drive the small Israeli force into the sea. They barely survived. The Arabs massed what should have been overwhelming forces over and over again with the purpose of destroying the Jewish state including 1967 and 1973. Desperate, pitched battles all. No Arab country has ever acknowledged Israel’s right to exist.
Is it unfortunate and unfair that the Palestinians have lost the right to a 300 by 60 mile stretch of land in recognition of the historical Jewish homeland? Yes. But when you compare the almost incomprehensible vastness of Arab lands in the Middle East, is this so much to concede? The displaced Palestinians have chosen to live in what amount to refugee camps for 60 years, encouraged to do so and left in poverty by their wealthy Arab brethren. Meanwhile, Israel with a population about the size of New York City has become an extraordinary economic and technological powerhouse – also by choice.
Israel has agreed to land concessions and has even recognized that Jerusalem will ultimately have to be divided. But when you are negotiating with a party that believes in their core that the only acceptable solution is your destruction, it is a pretty one sided conversation.
I love some of the comments below that say if only Israel was not a belligerent power intent on expansion everything would be peaceful. If Israel would just choose to live in peace Hezbollah would simply melt away. The view from the left seems to always be that Israel is the aggressor. Israel has never attacked, or even responded militarily, without extreme provocation.
I cannot imagine any other sovereign state on the planet being as hesitant to strike back as Israel is in the face of constant deadly attacks. In something like the last 8 months 4,000 Iranian supplied rockets have been fired into Israel from the Gaza Strip. Israel responds as best it can, but the casualty statistics show that they are rarely willing to risk killing non-militants. Since the rockets are most often fired from civilian areas their response options are limited. Iran sponsored Hezbollah has no such restrictions.
With apologies to the commenter below that Akmadinajad has simply been “mistranslated”, Iran’s leaders regularly and emphatically say that Israel will be destroyed. Iran is continuing and expanding its nuclear enrichment efforts. Those that say that Iran has halted its nuclear weapons program don’t understand what it takes to make a nuclear bomb in the 21st century. Enrichment is the hard part. The rest can be completed relatively quickly.
So given the history of Arabs fulfilling their threats against Israel, Iran’s threats must be taken at face value. Much of the human experience is about surviving. What is Israel supposed to do, passively accept a nuclear holocaust and the destruction of its entire population?
Comments on The Huffington Post:
But when you read the comment section following his critique the far left loons come out. At the bottom of this post are a couple of the more coherent comments. Typos, grammatical errors and rampant conspiracy theories are theirs – I’ve simply cut and paste them as is. The amount of blind hatred and just plain ignorance about the world is stunning. Unfortunately, because they are on a site like The Huffington Post, they probably vote.
Israel was chartered as a country on a tiny sliver of land by the U.N. in 1948. At its narrowest, you can drive from the ocean to the eastern border in about an hour. The Arabs immediately attacked to drive the small Israeli force into the sea. They barely survived. The Arabs massed what should have been overwhelming forces over and over again with the purpose of destroying the Jewish state including 1967 and 1973. Desperate, pitched battles all. No Arab country has ever acknowledged Israel’s right to exist.
Is it unfortunate and unfair that the Palestinians have lost the right to a 300 by 60 mile stretch of land in recognition of the historical Jewish homeland? Yes. But when you compare the almost incomprehensible vastness of Arab lands in the Middle East, is this so much to concede? The displaced Palestinians have chosen to live in what amount to refugee camps for 60 years, encouraged to do so and left in poverty by their wealthy Arab brethren. Meanwhile, Israel with a population about the size of New York City has become an extraordinary economic and technological powerhouse – also by choice.
Israel has agreed to land concessions and has even recognized that Jerusalem will ultimately have to be divided. But when you are negotiating with a party that believes in their core that the only acceptable solution is your destruction, it is a pretty one sided conversation.
I love some of the comments below that say if only Israel was not a belligerent power intent on expansion everything would be peaceful. If Israel would just choose to live in peace Hezbollah would simply melt away. The view from the left seems to always be that Israel is the aggressor. Israel has never attacked, or even responded militarily, without extreme provocation.
I cannot imagine any other sovereign state on the planet being as hesitant to strike back as Israel is in the face of constant deadly attacks. In something like the last 8 months 4,000 Iranian supplied rockets have been fired into Israel from the Gaza Strip. Israel responds as best it can, but the casualty statistics show that they are rarely willing to risk killing non-militants. Since the rockets are most often fired from civilian areas their response options are limited. Iran sponsored Hezbollah has no such restrictions.
With apologies to the commenter below that Akmadinajad has simply been “mistranslated”, Iran’s leaders regularly and emphatically say that Israel will be destroyed. Iran is continuing and expanding its nuclear enrichment efforts. Those that say that Iran has halted its nuclear weapons program don’t understand what it takes to make a nuclear bomb in the 21st century. Enrichment is the hard part. The rest can be completed relatively quickly.
So given the history of Arabs fulfilling their threats against Israel, Iran’s threats must be taken at face value. Much of the human experience is about surviving. What is Israel supposed to do, passively accept a nuclear holocaust and the destruction of its entire population?
Comments on The Huffington Post:
- "The US is under the body-snatchers-like control of the multinational corporations led by teh oil companies. Israel is suffering from a group insanity which believes that ethnic cleansing and atomic war are preferable to accepting the fact that Israel, in order to survive, must live within its own borders and at peace with its neighbors."
- "Doesn't he realize how much his words about the Palestinians parallel the speeches of Hitler prior to Crystal-Nacht? The parts about Iran sound EXACTLY like how Hitler described the USSR in 1940 (Hitler thought the western powers would "assist" him in the invasion of the USSR too.) I guess what goes around comes around."
- "If Mr. Morris advocates and justifies a preemptive attack on Iran they and those who support those views should be branded as international criminals and terrorists."
- "Problem is, as I see it, that the Israelis seem to have taken the Holocaust out on the Palestinians who had nothing to do with it."
- "As Dr. Goebbels proved, by defining your [Israel’s] enemies as sub human you can push the limits of National morality to any level."
- "Iran is a rational country and has demonstrated it in many occasions."
- "One good thing: If Iran is attacked, then industrial society will collapse, and at least we won't have to worry about global warming any more..."
- "Isn't the root problem the fact that Israel already has nuclear weapons and has refused to sign the Nuclear Nonproliferation Treaty? Isn't that what has destabilized the region and caused Iraq and Iran to pursue development of their own WMDs?"
- "Actually, the root problem is that BushCo wants higher oil prices, and the Iranians want higher oil prices, and so neither of them has any interest in reducing tension in the Gulf. In my view, nukes are just an excuse. Why some Israelis are getting mixed up in this cynical and dangerous game beats me. Probably for internal political reasons - the Palestinian bogeyman isn't as scary as he once was, and the far right needs a new enemy to justify its bigotry."
- "Zionist ideology scares me to death. It is illogical, bigotted, fear-based, and for some reason not allowed to be discussed publicly in America."
- "Please do not feed us the drivel about Iran waging a proxy war by supporting terrorists like Hizbollah and Hamas. One man's terrorist is another's freedom fighter. The day a lasting peace can be negotiated between Israel and her neighbors, these organizations will cease to exist as a threat to anyone."
- "And the idea that Iranians want to destroy Israel is so ridiculous. It's all based on a mistranslation of one single sentence of Ahmadinejad, where he in fact said that the Israeli apartheid regime should disappear - not Israel as a country."
Friday, July 18, 2008
Has The U.S. Invasion of Iraq Destabilized The Middle East And Contributed To Higher Oil Prices?
In the face of surging oil prices Democrats have attacked President Bush and the U.S. invasion of Iraq as destabilizing the Middle East and greatly contributing to high oil prices. Also, the left claims that Bush's policies in the Middle East have elevated Iran as the main player in the region which has made the world less safe and has also added to a risk premium for oil. Are these assertions true? An analysis can be framed in 4 sections along with conclusions and implications.
Although Iran is rhetorically provocative, it is rotting from the inside out. There is a high level of dissatisfaction among younger, progressive Iranians that take offense to being beaten for leaving the house without a burka. Iran has under invested in its energy infrastructure (sans nuclear) and must import most of its refined distillate transportation fuel. As a result they are highly vulnerable to sanctions, if the U.N. was a responsible and proactive organization.
The biggest threat to the region minus Saddam is Iran gaining access to nuclear weapons. Given their progress to date, this effort was well underway before 2003. The invasion of Iraq was not a trigger for initiating a nuclear program. Iran’s stated goal is not to invade Iraq or any other Arab state, but to destroy Israel. Certainly the U.S. action in Iraq is neither here nor there when it comes to this obsession. Iran’s continued push to produce weapons grade nuclear material is not about the U.S. and Iraq.
The Iranian Islamic Caliphate has been in place for 30 years, dating back to the Carter Administration. Iraq’s place in the region is not one of being the main power, but one of several powers. It is no more or less radical today than before the invasion.
Has Iraq’s current and future oil production been diminished by U.S. actions?
Iraqi oil production peaked in the 1980’s at about 3.5M barrels per day. Prior to the U.S. invasion of Iraq in 2003, production had dropped to 2.5M barrels a day. The primary cause of the reduced production was a lack of investment and lack of technology. Had the U.S. not invaded Iraq, oil production would have continued to fall.
Iraq’s oil production today is 2.5M barrels a day, identical to the pre-invasion volume. With the situation stabilizing, the Iraqi government is now bidding out contracts to oil companies to greatly improve the technology, investment, and production of Iraqi oil. The U.S. Energy Information Administration (EIA) estimates the long term sustainable production of oil in Iraq to be between 2.8 and 2.9 million barrels a day.
Has the U.S. action in Iraq reduced oil production in the Middle East outside of Iraq?
The U.S. invasion of Iraq has not reduced production elsewhere in the Middle East. Rather the Saudis have increased production. It should be noted that the two largest sources of oil consumed in the U.S. are Canada and Mexico. Canadian production is increasing due to investment in oil sands. Mexican production is falling due to aging fields that have suffered through underinvestment, mismanagement and corruption since the oil industry was nationalized. Another major source of oil consumed in the U.S. is from Venezuela. Venezuelan oil is heavy, high sulfur stuff that is difficult to refine. Oil production is falling in Venezuela since the industry was nationalized by El Presidente Chavez. Venezuela fields are suffering from underinvestment and desperately need advanced production technology that is now not available to them.Is Iran now the main player in the Middle East, and if so, what are the root causes?
Now that both the political and security situation in Iraq has improved dramatically, it is a good time to consider this question. I think most will agree that Israel is the strongest military force in the Middle East. The United Arab Emigrants has the most dynamic, fastest growing, and diverse economy of all the Arab countries and has become the financial center of the region. The Saudis have a stable, albeit corrupt and bloated monarchy, and the most wealth from oil revenues. Arab-Persian tensions at least partly counters the fact that both Iran and the majority of Iraqis are of the Shiite branch of Islam. So you have a troika of Sunni Saudi Arabia, Shiite/Arab Iraq, and Shiite/Persian Iran along with Jewish Israel. This appears to be a fairly balanced situation – or at least no less stable than 10 years ago. Clearly, if radical Shiites had won the civil war in Iraq it would be another matter altogether. But a sovereign and democratic Iraq is a clear counterbalance to the radical theocracy in Iran.Although Iran is rhetorically provocative, it is rotting from the inside out. There is a high level of dissatisfaction among younger, progressive Iranians that take offense to being beaten for leaving the house without a burka. Iran has under invested in its energy infrastructure (sans nuclear) and must import most of its refined distillate transportation fuel. As a result they are highly vulnerable to sanctions, if the U.N. was a responsible and proactive organization.
The biggest threat to the region minus Saddam is Iran gaining access to nuclear weapons. Given their progress to date, this effort was well underway before 2003. The invasion of Iraq was not a trigger for initiating a nuclear program. Iran’s stated goal is not to invade Iraq or any other Arab state, but to destroy Israel. Certainly the U.S. action in Iraq is neither here nor there when it comes to this obsession. Iran’s continued push to produce weapons grade nuclear material is not about the U.S. and Iraq.
The Iranian Islamic Caliphate has been in place for 30 years, dating back to the Carter Administration. Iraq’s place in the region is not one of being the main power, but one of several powers. It is no more or less radical today than before the invasion.
Irrespective of production, is there a greater risk premium in the price of oil today than before the Iraq invasion? If so, is the root cause the U.S. involvement in Iraq?
It is broadly agreed that there is a significant risk premium in the price of oil. The U.S. invasion was destabilizing until the surge and change of strategy worked. But in the last 18 months the progress in Iraq’s security and political situation has been transformed. Sectarian violence for the last 6 months has been zero. After a one year boycott, Sunnis are returning to the government. 15 of the 18 legislative benchmarks have been met. The last big hurtle is the sharing of oil revenues between the provinces. But the al Maliki government has been distributing the revenues in an equitable fashion to Sunni and Shiite alike while the legislation continues to be negotiated.
The fact that the price of oil has doubled in the last year, even as violence was rapidly diminishing in Iraq, leads one to conclude that the U.S.’s Iraqi involvement is not contributing to the risk premium. You can draw a line on a chart from the upper left to the lower right indicating the reduction in sectarian violence in Iraq. Then you can draw a line on the same chart from the lower left to the upper right indicating the increase in the price of oil.
What has changed in the last year that could cause an increase in the risk premium for oil? The most likely culprit is Iran’s nuclear ambitions combined with ever more apocalyptic language about the inevitable destruction of Israel. For its part, Israel will have no choice but to strike preemptively if the choice is that or the end of its existence and the death of all of its people. Israel has destroyed nuclear facilities in Iraq and Syria over the last decades, and they will have no option but to attack Iran if the international community does not act responsibly. In response, Iran has promised to block the Strait of Hormuz if attacked. This increasing tension is the biggest single cause of the risk premium for the price of oil.
Conclusions and Implications
Consider this – most of the world’s oil is controlled by sovereign governments hostile to the U.S. (Saudi Arabia, Russia, Venezuela), or chronically unstable (Nigeria). The best short to intermediate term answer to reducing the risk premium for oil is to develop a Western hemisphere energy strategy that will more broadly diversify the sources of oil into less risky regions.
Canada is expanding production in its extensive oil sands. Brazil is in the first stages of developing deep-water fields in its outer continental shelf (OCS) that are the largest reserves discovered in decades. We can work constructively with Mexico to improve its oil production technology. We can eliminate the import duty on Brazil’s sugar cane based ethanol while eliminating our corn based ethanol mandate. We can dramatically expand domestic production in our vast oil shale deposits (potentially more oil than Saudi Arabia – but higher production costs), the OCS, and that tiny corner of ANWR that has proven reserves of 13B barrels.
Longer term we need to be aggressively developing alternative energy technologies, understanding that broadly viable alternative solutions may take a long time. But greatly diversifying oil production in North and South America is the best way to reduce the risk premium, and increase supply overall, in the foreseeable future.
The Obama/Pelosi/Reid answer: nationalize the U.S. oil and refining industry, divert oil company profits from further oil exploration to fund alternative fuel research that may not help for decades, continue protectionist policies to prop up corn-based ethanol (30% of our corn used to produce 3% of our transportation fuel), release oil from the strategic oil reserve, and continue to prohibit new domestic production. None of these Democratic proposals will lower the price of oil - rather, quite the opposite.
Thursday, July 17, 2008
Is Barack Obama The Heir To JFK's Legacy?
Barack Obama has none too subtle about wanting us to believe he is the heir to John F. Kennedy's legacy. The Obama campaign's latest maneuver to promote this linkage has surfaced in the planning for the senator's upcoming trip to Europe and the Middle East. The campaign has made a request of the German government for Obama to speak in front of the Brandenburg Gate, the site of JFK's famous "Ich bin ein Berliner" speech, and Ronald Reagan's powerful and prescient "Mr. Gorbachev, tear down this wall." speech.
German Chancellor Merkel has made known her reluctance to grant Barack Obama's request. Kennedy and Reagan were both statesman when they made their seminal speeches. Barack Obama is a tourist by comparison.
Is Barack Obama the heir to the Kennedy legacy? Like Kennedy, Barack Obama is a young and charismatic politician with a gift for oratory. Both are Democrats. Unfortunately for Barack Obama, the comparison ends there.
Kennedy served full terms in both the House of Representatives and the Senate before launching his candidacy for President. Barack Obama has served only a partial term in the U.S. Senate. His legislative record is so scant that his TV commercials cite legislation he voted for as an Illinois state senator.
As President, John F. Kennedy was a pro-growth Democrat who cut taxes, creating a surge in the economy and greatly increasing tax revenues to the federal government as a result. Barack Obama is against policies that promote economic growth and instead supports protectionism, exclusionary union agendas and austerity.
President Kennedy experienced the horrors of war in WWII and was a strong advocate for national defense. Obama has piled up a number of unfortunate statements that highlight his naivety when it comes to global matters and national defense.
Standing in front of the Brandenburg Gate will not change the fact that Barack Obama and John F. Kennedy could not be more different in terms of experience and policies. Today, Kennedy's pro-growth and strong defense policies would make him a Republican.
The candidate for this year's presidential campaign that would govern the most like John F. Kennedy: John McCain.
German Chancellor Merkel has made known her reluctance to grant Barack Obama's request. Kennedy and Reagan were both statesman when they made their seminal speeches. Barack Obama is a tourist by comparison.
Is Barack Obama the heir to the Kennedy legacy? Like Kennedy, Barack Obama is a young and charismatic politician with a gift for oratory. Both are Democrats. Unfortunately for Barack Obama, the comparison ends there.
Kennedy served full terms in both the House of Representatives and the Senate before launching his candidacy for President. Barack Obama has served only a partial term in the U.S. Senate. His legislative record is so scant that his TV commercials cite legislation he voted for as an Illinois state senator.
As President, John F. Kennedy was a pro-growth Democrat who cut taxes, creating a surge in the economy and greatly increasing tax revenues to the federal government as a result. Barack Obama is against policies that promote economic growth and instead supports protectionism, exclusionary union agendas and austerity.
President Kennedy experienced the horrors of war in WWII and was a strong advocate for national defense. Obama has piled up a number of unfortunate statements that highlight his naivety when it comes to global matters and national defense.
Standing in front of the Brandenburg Gate will not change the fact that Barack Obama and John F. Kennedy could not be more different in terms of experience and policies. Today, Kennedy's pro-growth and strong defense policies would make him a Republican.
The candidate for this year's presidential campaign that would govern the most like John F. Kennedy: John McCain.
Opponents To Off-Shore Drilling Are Still Living In 1969
Speaker of the House Nancy Pelosi has stated unequivocally that she will not support drilling on the outer continental shelf (OCS). Senate Majority Leader Harry Reid appears ready to tow the no drill line as well. For politicians like Ms. Pelosi, the 1969 oil spill off of the coast of Santa Barbara, California was fundamental to shaping their view that drilling for oil on the OCS was too risky.
1969 was a long time ago. The advances in drilling technology since 1969 have been nothing sort of extraordinary. Companies like Smith International, Hydril, Amcol International, National Oilwell Varco and Oceaneering have transformed the process. In the western Gulf of Mexico, the only off-shore area where drilling is permitted in the lower 48 states, there has not been a major or even minor incident. Even in the tempest of Katrina, not a single drop of oil was spilled in the gulf.
Today, the technology exists to drill deeper and less invasively than ever before. What is most frustrating about this, is that these predominately American technologies are being used everywhere else in the world but America. Brazil's Petrobras has discovered enormous oil reserves off their continental shelf that are only now recoverable due to the advances in deep water drilling and production technology.
Think about how long ago 1969 was in terms of technology. In 1969 the IBM PC was still 11 years from being invented. The F-4 Phantom was the front-line fighter for the U.S. military. Most family TV's were black and white. Cars regulated gas flow using carburetors. The Arpanet, the Defense Department's distant predecessor to the Internet, was just in the planning stage. Music would still be sold on pressed vinyl albums for years to come.
Politicians and advocates that oppose drilling in the OCS are still living in 1969. Time for a time warp to the present.
1969 was a long time ago. The advances in drilling technology since 1969 have been nothing sort of extraordinary. Companies like Smith International, Hydril, Amcol International, National Oilwell Varco and Oceaneering have transformed the process. In the western Gulf of Mexico, the only off-shore area where drilling is permitted in the lower 48 states, there has not been a major or even minor incident. Even in the tempest of Katrina, not a single drop of oil was spilled in the gulf.
Today, the technology exists to drill deeper and less invasively than ever before. What is most frustrating about this, is that these predominately American technologies are being used everywhere else in the world but America. Brazil's Petrobras has discovered enormous oil reserves off their continental shelf that are only now recoverable due to the advances in deep water drilling and production technology.
Think about how long ago 1969 was in terms of technology. In 1969 the IBM PC was still 11 years from being invented. The F-4 Phantom was the front-line fighter for the U.S. military. Most family TV's were black and white. Cars regulated gas flow using carburetors. The Arpanet, the Defense Department's distant predecessor to the Internet, was just in the planning stage. Music would still be sold on pressed vinyl albums for years to come.
Politicians and advocates that oppose drilling in the OCS are still living in 1969. Time for a time warp to the present.
Confusion Reins At The SEC
SEC Chairman Christopher Cox announced before the Senate Banking Committee on Tuesday that he was invoking emergency powers to ban naked shorting of Freddie Mac and Fannie May, along with a number of other primary broker banks.
When a stock is sold short, the seller borrows the shares from his broker and then immediately sells them, hoping to buy them back later at a lower price and return them to his broker. At a minimum, the broker of a short seller has to at least locate the shares to be borrowed. Naked short selling means that shares are sold without borrowing or even locating the shares. This allows large traders such as hedge funds to lean into stocks and push them down by selling lots and lots of shares they don't have.
So it naked short selling illegal or not? On CNBC yesterday afternoon Commissioner Cox told Erin Burnett that naked short selling was not illegal. This answer clearly surprised the seasoned CNBC journalist. But in today's New York Times, Cox is quoted as saying on a conference call with reporters, “A run on the bank that can take hold quickly would likely be turbocharged by illegal naked short selling.”
Market maven and CNBC personality Jim Cramer appeared just after Commissioner Cox and actually read from the SEC's own regulations spelling out that naked shorting is clearly banned. Mr. Cramer was incredulous that Commissioner Cox would think he needed to take emergency action for something he could, and should have been doing, all along.
There are a few exceptions regarding market makers, but for the broad trading community, naked shorting is prohibited. In fact, Mr. Cramer, who ran a successful hedge fund for years, said that if a short seller does not deliver the shares for settlement, he risks having his broker unwinds the trade with the short seller taking a big hit.
Why all the confusion? Let's face it, the SEC has never been an organization that inspires confidence with their vigilance and competence. They have been asleep at the wheel again and again, most recently during the collapse of Bear Sterns. Perhaps the invocation of "emergency powers" is an attempt to divert attention from the fact that the SEC's lax attitude toward oversight has once again caused damage. The bottom line is that Commissioner Cox's lack of clarity and lack of understanding of his own organization's regulations does not inspire confidence.
When a stock is sold short, the seller borrows the shares from his broker and then immediately sells them, hoping to buy them back later at a lower price and return them to his broker. At a minimum, the broker of a short seller has to at least locate the shares to be borrowed. Naked short selling means that shares are sold without borrowing or even locating the shares. This allows large traders such as hedge funds to lean into stocks and push them down by selling lots and lots of shares they don't have.
So it naked short selling illegal or not? On CNBC yesterday afternoon Commissioner Cox told Erin Burnett that naked short selling was not illegal. This answer clearly surprised the seasoned CNBC journalist. But in today's New York Times, Cox is quoted as saying on a conference call with reporters, “A run on the bank that can take hold quickly would likely be turbocharged by illegal naked short selling.”
Market maven and CNBC personality Jim Cramer appeared just after Commissioner Cox and actually read from the SEC's own regulations spelling out that naked shorting is clearly banned. Mr. Cramer was incredulous that Commissioner Cox would think he needed to take emergency action for something he could, and should have been doing, all along.
There are a few exceptions regarding market makers, but for the broad trading community, naked shorting is prohibited. In fact, Mr. Cramer, who ran a successful hedge fund for years, said that if a short seller does not deliver the shares for settlement, he risks having his broker unwinds the trade with the short seller taking a big hit.
Why all the confusion? Let's face it, the SEC has never been an organization that inspires confidence with their vigilance and competence. They have been asleep at the wheel again and again, most recently during the collapse of Bear Sterns. Perhaps the invocation of "emergency powers" is an attempt to divert attention from the fact that the SEC's lax attitude toward oversight has once again caused damage. The bottom line is that Commissioner Cox's lack of clarity and lack of understanding of his own organization's regulations does not inspire confidence.
Tuesday, July 15, 2008
Obama Eases Toward The Mother Of All Flip-Flops
Barack Obama wildly careening to the right for the general election has been well publicised. The last big flip-flop to come is on Iraq.
The anti-war segment of the Democratic party is so invested in immediate withdraw, Obama needs to be particularly careful that this latest maneuver will not upset his liberal base even further. But there is no question that the Senator has begun the process of shifting his long held view that the surge would never work, and that a troop withdraw on a rigid and predetermined timetable would be immediate and nonnegotiable when he took office.
Tuesday reiterated his position for the base that he strongly stands by his plan to end the war. Part of his rationale is that the Iraqis have not made political progress, which is demonstrably untrue. Great progress has been made in the political reconciliation of Iraq.
During the original Senate hearing where General Petreaus reported the first successes of the troop surge, Senator Obama was critical and dismissive. Hillary Clinton essentially called General Petreaus a liar. Barack Obama was not willing to criticize MoveOn.org's deplorable "General Betrayus" add in the New York Times. Now, just last week, Barack Obama made comments that were critical of the ad.
Now if you go to Obama's web site, the shift is taking place in real time. The New York Daily News reported that Obama's campaign has removed a statement criticising the surge from the section discussion his solution for Iraq. Obama campaign aid Wendy Morigi explained that the change was made to better reflect current conditions.
But the changes do not stop there. Whereas Obama's web site previously stated tersely that, "Obama will immediately begin to remove our troops from Iraq.", it now has more nuanced language that Obama will pursue "a responsible, phased withdrawal" that will be directed by military commanders and done in consultation with the Iraqis. In addition, the web site includes a new statement that Obama "would reserve the right to intervene militarily, with our international partners, to suppress potential genocidal violence within Iraq."
Senator Obama departs shortly for the Middle East with stops in Israel and Iraq. On his return, be prepared for his consultations with military commanders and Iraqi leaders to continue to soften his position on Iraq.
The anti-war segment of the Democratic party is so invested in immediate withdraw, Obama needs to be particularly careful that this latest maneuver will not upset his liberal base even further. But there is no question that the Senator has begun the process of shifting his long held view that the surge would never work, and that a troop withdraw on a rigid and predetermined timetable would be immediate and nonnegotiable when he took office.
Tuesday reiterated his position for the base that he strongly stands by his plan to end the war. Part of his rationale is that the Iraqis have not made political progress, which is demonstrably untrue. Great progress has been made in the political reconciliation of Iraq.
During the original Senate hearing where General Petreaus reported the first successes of the troop surge, Senator Obama was critical and dismissive. Hillary Clinton essentially called General Petreaus a liar. Barack Obama was not willing to criticize MoveOn.org's deplorable "General Betrayus" add in the New York Times. Now, just last week, Barack Obama made comments that were critical of the ad.
Now if you go to Obama's web site, the shift is taking place in real time. The New York Daily News reported that Obama's campaign has removed a statement criticising the surge from the section discussion his solution for Iraq. Obama campaign aid Wendy Morigi explained that the change was made to better reflect current conditions.
But the changes do not stop there. Whereas Obama's web site previously stated tersely that, "Obama will immediately begin to remove our troops from Iraq.", it now has more nuanced language that Obama will pursue "a responsible, phased withdrawal" that will be directed by military commanders and done in consultation with the Iraqis. In addition, the web site includes a new statement that Obama "would reserve the right to intervene militarily, with our international partners, to suppress potential genocidal violence within Iraq."
Senator Obama departs shortly for the Middle East with stops in Israel and Iraq. On his return, be prepared for his consultations with military commanders and Iraqi leaders to continue to soften his position on Iraq.
Today's Senate Banking Committee Testimony
Federal Reserve Chairman Bernake appeared before the Senate Banking Committee as part of is semi-annual testimony on the state of the economy. Afterward, Treasury Secretary Paulson and Securities and Exchange Commission Cox joined to further examine the plan for backstopping Freddie Mac and Fannie Mae.
The Democrats who make up the majority of the committee went after Bernake with all of their pet economic theories, which usually have no basis in economics. Chairman Bernake very patiently explained basic economics to each of them. Secretary Paulson did the same regarding capital markets.
A couple of the Democrat's favorite themes today included:
- The deficit (which in the Democrats view of reality is entirely the fault of President Bush, although only Congress can authorize spending) is the cause of the weak dollar. Chairman Bernake explained that the current deficit had a minimal effect on the dollar.
- Speculators are the reason oil prices keep going up. Bernake’s explained that this was not true - oil “speculators” provide stable price discovery and liquidity. The fundamentals of supply and demand are the biggest reason oil prices are going up. Demand is increasing in a world of inelastic supply. The weaker dollar is a contributory factor, but not the main factor.
- Why didn’t we see this problem coming with Fannie and Freddie? On this one both Mr. Bernake and Mr. Paulson were completely exasperated. Paulson went through a litany of all the efforts of Treasury to get Congress to reform the GSE’s – with zero results. You can go back 10 years or more and look at Greenspan’s testimony to this very body practically begging Congress to reform the GSE’s. Instead Congress pressed the GSE’s over the last decade to increase their leverage and expand lending to facilitate mortgages to low-income borrowers. Now they have also approved Fannie and Freddie to increase their exposure to more expensive mortgages as well.
One spirited exchange had a Democratic Senator insinuating that Paulson did not understand capital markets! Whatever you think of Hank Paulson, former CEO of Goldman Sachs, the world’s most successful and highly regarded investment bank, he certainly understands markets.
The most embarrassing episode was SEC chairman Cox stating that he had issued instructions for “emergency powers” to be invoked to prevent naked short selling. Since naked shorting is already illegal, this was simply an admission that the SEC has been asleep at the wheel as usual and has not be enforcing their own regulations.
It also highlighted perhaps one of the stupidest decisions in SEC history, eliminating the uptick rule last year. Eliminating the uptick rule, combined with zero enforcement of naked shorting, has made it easier for hedge funds to lean into individual stocks and conduct “bear raids”.
This Time We Really, Really Mean It!
The three wise men of the U.S. economy, Treasury Secretary Paulson, Federal Reserve Chairman Bernake, and Securities and Exchange Commission Cox testified before the Senate Banking Committee.
One of the measures that was announced by the SEC was that they were invoking "emergency powers" to prevent short selling of Freddie Mac and Fannie Mae, along with all other broker-dealers, without verification of borrowed stock. Most of us can only short sell a stock if we first borrow it from a broker. But some hedge funds and big traders short sell stock they have not borrowed first. This is called naked shorting. When it comes time for settlement, these traders simply don't deliver the shares.
Here is the ridiculous part - it is already illegal. Mr. Cox actually when on national TV today to invoke "emergency powers" for something they are already supposed to be prosecuting! This lack of enforcement against naked short sellers along with the SEC suspending the uptick rule last year have greatly contributed to hedge funds being able to conduct concentrated "bear raids" on stocks, driving them down and creating fear.
The SEC has a well earned reputation for being asleep at the wheel and only getting involved after it is too late. Emergency powers or no, the SEC needs to do its job and prevent and prosecute illegal naked shorting.
One of the measures that was announced by the SEC was that they were invoking "emergency powers" to prevent short selling of Freddie Mac and Fannie Mae, along with all other broker-dealers, without verification of borrowed stock. Most of us can only short sell a stock if we first borrow it from a broker. But some hedge funds and big traders short sell stock they have not borrowed first. This is called naked shorting. When it comes time for settlement, these traders simply don't deliver the shares.
Here is the ridiculous part - it is already illegal. Mr. Cox actually when on national TV today to invoke "emergency powers" for something they are already supposed to be prosecuting! This lack of enforcement against naked short sellers along with the SEC suspending the uptick rule last year have greatly contributed to hedge funds being able to conduct concentrated "bear raids" on stocks, driving them down and creating fear.
The SEC has a well earned reputation for being asleep at the wheel and only getting involved after it is too late. Emergency powers or no, the SEC needs to do its job and prevent and prosecute illegal naked shorting.
Sunday, July 13, 2008
Real Heros Don't Have To Embellish
The U.S. aircraft carrier USS Forrestal was involved in the worst carrier accident since WWII. Operating in the Gulf of Tonkin during the Vietnam war in 1969, the USS Forrestal was engaged in bombing sorties over North Vietnam.
While switching from external to internal power, an electrical surge caused a Zuni rocket to fire from the under wing rocket launcher of an F-4 Phantom that was being prepared to take off. The rocket hit a nearby A-4, also being prepared to take off, rupturing its fuel tank and causing an instant conflagration. The A-4's two 1,000 pound bombs were dislodged and dropped into the flaming jet fuel on the flight deck.
Before it was all over, nine 1,000 pound bombs "cooked off", as more planes full of fuel were caught up in the disaster. Huge holes were blown in the armored flight deck, spreading the fire to the decks below. 131 servicemen were killed that day, and 161 were injured. Most of the fire crew was instantly killed when the first bomb went off about 1 1/2 minutes after the first fire was triggered.
Surrounded by flames, the pilot of the F-4 Phantom escaped death by walking out on the nose of his plane and leaping from the refueling nozzle. The name of that pilot? Lt. Commander John McCain - future POW, U.S. Senator, and candidate for President of the United States.
As a student of history, and a keen observer of politics, I was surprised I had never heard of McCain’s central involvement in this harrowing and deadly event until just recently. McCain makes no secret of his military service, and is rightly using it to his advantage in the campaign. But when pressed, he is quite reticent about his own experiences - instead commending all the brave men and women with whom he served.
Quite a contrast to John Kerry, who made up stories about his courage under fire in episodes his commanding officer and fellow officers say never happened and in places they say Kerry never was. Quite a contrast to John Kerry testifying before Congress about all sorts of “Winter Soldier” atrocities by American troops in Vietnam – atrocities that were later shown to almost all be fabrications.
Quite a contrast to Gore claiming to have invented the Internet and being the model for the protagonist in the novel “Love Story”. Quite a contrast to Hillary’s stories of daring landings under sniper fire and claiming credit for much of her husband’s presidency.
Quite a contrast to Obama claiming credit in his new TV commercial for a bill in the U.S. Senate that he never even voted on. Quite a contrast to Obama who maintained close, long term relationships with radical and unrepentant America haters and then claimed he didn’t know they were radical.
I guess when you've actually done it, you don’t have to brag about it.
While switching from external to internal power, an electrical surge caused a Zuni rocket to fire from the under wing rocket launcher of an F-4 Phantom that was being prepared to take off. The rocket hit a nearby A-4, also being prepared to take off, rupturing its fuel tank and causing an instant conflagration. The A-4's two 1,000 pound bombs were dislodged and dropped into the flaming jet fuel on the flight deck.
Before it was all over, nine 1,000 pound bombs "cooked off", as more planes full of fuel were caught up in the disaster. Huge holes were blown in the armored flight deck, spreading the fire to the decks below. 131 servicemen were killed that day, and 161 were injured. Most of the fire crew was instantly killed when the first bomb went off about 1 1/2 minutes after the first fire was triggered.
Surrounded by flames, the pilot of the F-4 Phantom escaped death by walking out on the nose of his plane and leaping from the refueling nozzle. The name of that pilot? Lt. Commander John McCain - future POW, U.S. Senator, and candidate for President of the United States.
As a student of history, and a keen observer of politics, I was surprised I had never heard of McCain’s central involvement in this harrowing and deadly event until just recently. McCain makes no secret of his military service, and is rightly using it to his advantage in the campaign. But when pressed, he is quite reticent about his own experiences - instead commending all the brave men and women with whom he served.
Quite a contrast to John Kerry, who made up stories about his courage under fire in episodes his commanding officer and fellow officers say never happened and in places they say Kerry never was. Quite a contrast to John Kerry testifying before Congress about all sorts of “Winter Soldier” atrocities by American troops in Vietnam – atrocities that were later shown to almost all be fabrications.
Quite a contrast to Gore claiming to have invented the Internet and being the model for the protagonist in the novel “Love Story”. Quite a contrast to Hillary’s stories of daring landings under sniper fire and claiming credit for much of her husband’s presidency.
Quite a contrast to Obama claiming credit in his new TV commercial for a bill in the U.S. Senate that he never even voted on. Quite a contrast to Obama who maintained close, long term relationships with radical and unrepentant America haters and then claimed he didn’t know they were radical.
I guess when you've actually done it, you don’t have to brag about it.
Saturday, July 12, 2008
Another Misguided Quick Fix Idea From Nancy Pelosi
Speaker Pelosi has now called on President Bush to release oil from the Strategic Petroleum Reserve (SPR). This is the latest Democrat's frantic search for political cover to "fix" a problem they have helped create.
Releasing oil from the SPR because gas costs $4 a gallon is a terrible idea. The SPR was created to avert a catastrophic economic collapse in the event of a major supply disruption. This week gasoline inventories in the U.S. rose by 1M barrels. Oil prices are going up because increases in demand, particularly in the emerging economies of China and India. gasoline consumption has actually dropped (demand destruction & substitution behavior) in the U.S. for the first time as a result of higher gas prices.
The Democrats have been arguing passionately against increasing domestic oil production. One of their arguments has been that this eventual production would have a negligible effect on gas prices at the pump. Whether this is true or not, releasing oil from the SPR would have a very small impact on gas prices, if at all. The price of gasoline has not risen nearly as much as oil input costs to the refiners. Releasing some oil from the SPR might lower the price of oil a bit, for a very short period of time, but would have a minimal effect on the price of gas. And oil released from the SPR now will not be available when we have a major supply disruption.
This blog supported suspending additional purchases to the SPR, which Congress enacted about 2 months ago. The SPR is over 95 percent full. Continuing to buy oil for the SPR at record high prices when the reserve is almost full doesn't make sense from a cost-benefit standpoint.
But we live in a world where the chance of a major supply disruption is real. As Iran presses forward with nuclear weapons and missile technology, Israel may have no choice at some point but to attack Iran. Iran has promised to shut down the Strait of Hormuz if they are attacked. If this happened, oil would go to at least $200/barrel and the economic shock to our country would make 1973 look like a holiday.
This is the reason for the SPR. Not political pandering in an election year.
Releasing oil from the SPR because gas costs $4 a gallon is a terrible idea. The SPR was created to avert a catastrophic economic collapse in the event of a major supply disruption. This week gasoline inventories in the U.S. rose by 1M barrels. Oil prices are going up because increases in demand, particularly in the emerging economies of China and India. gasoline consumption has actually dropped (demand destruction & substitution behavior) in the U.S. for the first time as a result of higher gas prices.
The Democrats have been arguing passionately against increasing domestic oil production. One of their arguments has been that this eventual production would have a negligible effect on gas prices at the pump. Whether this is true or not, releasing oil from the SPR would have a very small impact on gas prices, if at all. The price of gasoline has not risen nearly as much as oil input costs to the refiners. Releasing some oil from the SPR might lower the price of oil a bit, for a very short period of time, but would have a minimal effect on the price of gas. And oil released from the SPR now will not be available when we have a major supply disruption.
This blog supported suspending additional purchases to the SPR, which Congress enacted about 2 months ago. The SPR is over 95 percent full. Continuing to buy oil for the SPR at record high prices when the reserve is almost full doesn't make sense from a cost-benefit standpoint.
But we live in a world where the chance of a major supply disruption is real. As Iran presses forward with nuclear weapons and missile technology, Israel may have no choice at some point but to attack Iran. Iran has promised to shut down the Strait of Hormuz if they are attacked. If this happened, oil would go to at least $200/barrel and the economic shock to our country would make 1973 look like a holiday.
This is the reason for the SPR. Not political pandering in an election year.
Friday, July 11, 2008
Poole Can't Keep His Mouth Shut
Recently retired ex-St. Louis Federal Reserve President William Poole said yesterday that Freddie Mac and Fannie Mae, the two U.S. mortgage government sponsored entities (GSE's)were "insolvent" and raised the prospect of a government bailout. Mr. Poole has a history of getting it wrong and opening his mouth at the worst possible times, and this statement was the height of irresponsibility.
The stock prices of both Freddie and Fannie had already been severely punished. Mr. Poole's irresponsible comments pushed the shares even further. Worse, it took away any chance of the two firms being able to raise private capital by issuing new common stock. The stock price is simply too low at this point to make this a viable alternative.
Fannie and Freddie, their regulator, and Treasury Secretary Paulson have all said over the last two days that the GSE's are adequately capitalized. But in this cynical market, where Bear Stearns CEO claims adequate capital 2 days before collapsing, these statements are viewed with suspicion. Who knows what the truth is.
This is not a question of whether Fannie and Freddie will cease to exist. In the end, the government can nationalize them, and longer term they will be fine. They are in a profitable business that in normal times generates strong cash flow. But the vintage 2005 to 2007 loans have a much higher level of toxicity than normal times and could quickly consume the GSE's capital.
The best alternative is for private capital to find its way to the GSE's. The next best solution would be for the government to provide capital in exchange for warrants. This is what happened during the bailout of Chrysler. The Chrysler turned out to be a very profitable transaction for the government. The least desirable solution is for the GSE's to be nationalized.
Maybe we can ring up the Saudis and say, "You know all those gizillions of dollars we've paid you for oil, and will continue to pay you? Could you take just $75B of the gizillions and recapitalize Freddie and Fannie for us?"
Again, Freddie and Fannie, or some recapitalized government agency, will continue to perform the function of providing liquidity to the mortgage industry. There was a brief rally this afternoon in the market when Reuters reported that Federal Reserve Chairman Bernake had told the GSE's that they could access the discount window. But this information has yet to be confirmed by the FMOC.
There is almost no scenario at this point that will save the holders of the common stock. Like a bankruptcy, the bondholders of the secured debt end up owning the assets - the shareholders of common stock get zero.
The stock prices of both Freddie and Fannie had already been severely punished. Mr. Poole's irresponsible comments pushed the shares even further. Worse, it took away any chance of the two firms being able to raise private capital by issuing new common stock. The stock price is simply too low at this point to make this a viable alternative.
Fannie and Freddie, their regulator, and Treasury Secretary Paulson have all said over the last two days that the GSE's are adequately capitalized. But in this cynical market, where Bear Stearns CEO claims adequate capital 2 days before collapsing, these statements are viewed with suspicion. Who knows what the truth is.
This is not a question of whether Fannie and Freddie will cease to exist. In the end, the government can nationalize them, and longer term they will be fine. They are in a profitable business that in normal times generates strong cash flow. But the vintage 2005 to 2007 loans have a much higher level of toxicity than normal times and could quickly consume the GSE's capital.
The best alternative is for private capital to find its way to the GSE's. The next best solution would be for the government to provide capital in exchange for warrants. This is what happened during the bailout of Chrysler. The Chrysler turned out to be a very profitable transaction for the government. The least desirable solution is for the GSE's to be nationalized.
Maybe we can ring up the Saudis and say, "You know all those gizillions of dollars we've paid you for oil, and will continue to pay you? Could you take just $75B of the gizillions and recapitalize Freddie and Fannie for us?"
Again, Freddie and Fannie, or some recapitalized government agency, will continue to perform the function of providing liquidity to the mortgage industry. There was a brief rally this afternoon in the market when Reuters reported that Federal Reserve Chairman Bernake had told the GSE's that they could access the discount window. But this information has yet to be confirmed by the FMOC.
There is almost no scenario at this point that will save the holders of the common stock. Like a bankruptcy, the bondholders of the secured debt end up owning the assets - the shareholders of common stock get zero.
Monday, July 7, 2008
Nitrogen Fertilizer Comes Full Circle
Sharp increases in prices typically result in substitution behavior or demand destruction. Prices for a ton of fertilizer, whether it be phosphate, potash or nitrogen have tripled or quadrupled over the last 18 months with no let-up in sight. Demand destruction has not occurred to date.
Prices for crops including wheat, corn, cotton and soybeans continue to be at all time highs due to global demand. Farmers are not happy about the price of fertilizer, but they can afford the higher prices. Plus, the alternative is much smaller yields for their efforts. This is one of the reasons that fertilizer stocks have been one of the safe havens of this difficult stock market.
But substitution behavior is another matter. Suddenly farmers are willing to consider alternatives to synthetic nitrogen. Here on the north side of Atlanta a new company, Organic Growing Systems, is producing nitrogen rich fertilizer from chicken manure. Disposing of manure from livestock, whether it be chickens, hogs or cows is a real problem. Turning this waste from a problem into a resource makes a lot of sense.
It was not too long ago when sustainable farming was the only option. Synthetic fertilizers had not been invented. Livestock produced manure which was composted and used to fertilize the crops and build up the soil. For hundreds of generations people practiced this type of low input, sustainable farming.
The addition of large amounts of synthetic fertilizers, much made from natural gas and petroleum, is a "high-input" model. Nutrients constantly has to be brought in to continue producing high yields. High input farming treats the soil as a sterile medium that must have artificial nutrients added for every crop for every year. Organic fertilizers feed the plants but also improve the soil.
Eliot Coleman is an icon in the field of modern organic farming. Back in the 1960's when he began growing crops for the commercial market, he didn't have enough money for synthetic fertilizers. Synthetic fertilizers were being touted as nutritionally identical to the traditional organic types. Since he could get organic nutrients on the cheap, he was happy to buy into the "nutritionally identical" story - although not in the way the fertilizer companies desired.
Today there is a growing realization that organics offer a viable substitute - while solving the waste problem at the same time. Nitrogen intensive crops such as corn and sod offer the chance for farmers to save money and not rely on fertizlers that use fossil fuel as feedstock.
Organic Growing Systems can currently produce 30 tons of nitrogen rich chicken fertilizer a day. They are expanding to produce 200 tons a day. It is an idea that is coming full circle.
Prices for crops including wheat, corn, cotton and soybeans continue to be at all time highs due to global demand. Farmers are not happy about the price of fertilizer, but they can afford the higher prices. Plus, the alternative is much smaller yields for their efforts. This is one of the reasons that fertilizer stocks have been one of the safe havens of this difficult stock market.
But substitution behavior is another matter. Suddenly farmers are willing to consider alternatives to synthetic nitrogen. Here on the north side of Atlanta a new company, Organic Growing Systems, is producing nitrogen rich fertilizer from chicken manure. Disposing of manure from livestock, whether it be chickens, hogs or cows is a real problem. Turning this waste from a problem into a resource makes a lot of sense.
It was not too long ago when sustainable farming was the only option. Synthetic fertilizers had not been invented. Livestock produced manure which was composted and used to fertilize the crops and build up the soil. For hundreds of generations people practiced this type of low input, sustainable farming.
The addition of large amounts of synthetic fertilizers, much made from natural gas and petroleum, is a "high-input" model. Nutrients constantly has to be brought in to continue producing high yields. High input farming treats the soil as a sterile medium that must have artificial nutrients added for every crop for every year. Organic fertilizers feed the plants but also improve the soil.
Eliot Coleman is an icon in the field of modern organic farming. Back in the 1960's when he began growing crops for the commercial market, he didn't have enough money for synthetic fertilizers. Synthetic fertilizers were being touted as nutritionally identical to the traditional organic types. Since he could get organic nutrients on the cheap, he was happy to buy into the "nutritionally identical" story - although not in the way the fertilizer companies desired.
Today there is a growing realization that organics offer a viable substitute - while solving the waste problem at the same time. Nitrogen intensive crops such as corn and sod offer the chance for farmers to save money and not rely on fertizlers that use fossil fuel as feedstock.
Organic Growing Systems can currently produce 30 tons of nitrogen rich chicken fertilizer a day. They are expanding to produce 200 tons a day. It is an idea that is coming full circle.
Sunday, July 6, 2008
Robert F. Kennedy, Jr.'s Energy Manifesto - A Critique
http://www.vanityfair.com/politics/features/2008/05/rfk_manifesto200805?currentPage=1
In this recent op-ed in Vanity Fair, Robert F. Kennedy, Jr. has some interesting ideas, but his "manifesto" also has much that is dubious. In addition, the concluding paragraph is not supported by the balance of the article.
His opening analysis that England banning slavery launched the industrial revolution seems unlikely to me. It assumes that there would be no disruptive technological innovation while slavery existed in England. But in America, where slavery was entrenched more than anywhere in the world, the cotton gin was invented, negating much of the economic argument for slavery in the agrarian south. Would the steam engine, which was the driving force of the industrial revolution, not have been invented, or been significantly delayed? Doubtful.
His statement of causation that California’s status as the “most energy efficient state” has resulted in it having the largest economy is disingenuous. In truth, California only has enough electricity because it outsources the generation to other western states that produce it using coal. Their claim of being a green state is a sham. The Wall Street Journal called it energy colonialism.
California, a state with barely enough baseline electricity, shut down a 650 MW nuclear plant due to protests and replaced it with a 3 MW solar facility. Companies will not locate in California because the electricity is not reliable. California based and very environmentally attuned Google, which is building out vast data centers, has cited this a principle reason for not locating them in California. Green mandates that cannot be justified economically drive up California’s taxes, also causing business to leave or not locate there. There are lots of reasons that California has the largest economy, but energy efficiently is not one of them.
Cap and trade is a very bad idea when it comes to the economy. It would be less harmful to just put a straight carbon tax on everything to offset the real or imagined externalized cost (still a large tax on the economy, but perhaps not as catastrophic). Creating a cap and trade system where the government controls both the supply and demand can only end badly, and could very likely result in a deep and prolonged recession.
His assertion that the power grid system is hopelessly Balkanized is almost certainly true. I’m all for eliminating barriers to connect and transmit electricity, and empower new sources to connect to the grid. I wish the Democrats would do the same for health care, which is the most Balkanized industry in the country - through government mismanagement.
His example of Iceland is interesting, but not particularly relevant to the needs of the United States. Iceland is a small country with a small population that sits atop one of the most active volcanic regions on the planet. Heating the homes in this cold country with geothermal energy is a natural practice. But Iceland cannot be extrapolated to the United States, with it's diverse climate, and more diverse energy needs. Geothermal efforts in the U.S. have had mixed results.
A direct current backbone to move wind and solar generated power to where it is needed seems like a smart and necessary proposal. It is essential that we can bring this power on-line in a manner that can be broadly distributed.
The following idea is similar to proposals I’ve seen advocated on some of the liberal blogs like the Daily Kos and the Huffington Post:
“Businesses and homes will become power plants as individuals cash in by installing solar panels and wind turbines on their buildings, and by selling the stored energy in their plug-in hybrids back to the grid at peak hours.”
I hear about these types of "solutions" all the time. But the people advocating them are looking at the energy problem with rose colored glasses. Battery technology to make plug-in hybrids broadly viable is not within sight. If it takes 6 hours to charge my plug-in car, which gives it a range of 40 miles, then how am I going to have enough “juice” to sell back to the grid? Maybe these folks are big Keanu Reeves biggest fan and have watched “The Matrix” a few too many times.
Neither do I see anyone but the idle rich being able to afford to install solar panels on their home and sell surplus electricity to the grid. I recently researched what it would cost to install a home solar panel system. The cost was about $20,000, plus installation, for a 2,000 watt system. That is enough power to light 20 100 watt light bulbs at the same time. A vacuum cleaner uses almost that much power. No surplus here, and the capital investment makes no economic sense. $20,000 to light a couple of rooms? Forget air conditioning or an oven. But the greenies stubbornly cling to this as the answer.
It is telling that 10% of all venture capital dollars are already flowing into alternative energy. This is consistent with my belief that with oil over $100/barrel, and coal at a similarly priced on a relative basis , private capital will go “all in” to solve the problem – without government bungling.
The last paragraph is not supported by the rest of the article.
“We will cut annual trade and budget deficits by hundreds of billions, improve public health and farm production, diminish global warming, and create millions of good jobs. And for the first time in half a century we will live free from Middle Eastern wars and entanglements with petty tyrants who despise democracy and are hated by their own people.”
The entire article centers on the generation of electricity by non-fossil fuel means. That is a result that is achievable, probably only the addition of nuclear to his proposals, but achievable nevertheless. But for his conclusion to be true, electricity will have to become the primary fuel for transportation. This seems to be an underlying hopeful hypothesis with many on the left. But the facts say that it is not in the foreseeable future.
A recent Politics & Prosperity article separated the current and future uses of various sources of fuel. The discussion is usually a confusing mish-mash that does not differentiate between electricity generation and transportation. There is currently no technology to economically and practically eliminate oil distillates as the primary fuel for transportation. We need to aggressively pursue realistic solutions, like using the “Prius model”, verses the “pure plug-in model” for much higher MPG to make a real difference in the near term.
In this recent op-ed in Vanity Fair, Robert F. Kennedy, Jr. has some interesting ideas, but his "manifesto" also has much that is dubious. In addition, the concluding paragraph is not supported by the balance of the article.
His opening analysis that England banning slavery launched the industrial revolution seems unlikely to me. It assumes that there would be no disruptive technological innovation while slavery existed in England. But in America, where slavery was entrenched more than anywhere in the world, the cotton gin was invented, negating much of the economic argument for slavery in the agrarian south. Would the steam engine, which was the driving force of the industrial revolution, not have been invented, or been significantly delayed? Doubtful.
His statement of causation that California’s status as the “most energy efficient state” has resulted in it having the largest economy is disingenuous. In truth, California only has enough electricity because it outsources the generation to other western states that produce it using coal. Their claim of being a green state is a sham. The Wall Street Journal called it energy colonialism.
California, a state with barely enough baseline electricity, shut down a 650 MW nuclear plant due to protests and replaced it with a 3 MW solar facility. Companies will not locate in California because the electricity is not reliable. California based and very environmentally attuned Google, which is building out vast data centers, has cited this a principle reason for not locating them in California. Green mandates that cannot be justified economically drive up California’s taxes, also causing business to leave or not locate there. There are lots of reasons that California has the largest economy, but energy efficiently is not one of them.
Cap and trade is a very bad idea when it comes to the economy. It would be less harmful to just put a straight carbon tax on everything to offset the real or imagined externalized cost (still a large tax on the economy, but perhaps not as catastrophic). Creating a cap and trade system where the government controls both the supply and demand can only end badly, and could very likely result in a deep and prolonged recession.
His assertion that the power grid system is hopelessly Balkanized is almost certainly true. I’m all for eliminating barriers to connect and transmit electricity, and empower new sources to connect to the grid. I wish the Democrats would do the same for health care, which is the most Balkanized industry in the country - through government mismanagement.
His example of Iceland is interesting, but not particularly relevant to the needs of the United States. Iceland is a small country with a small population that sits atop one of the most active volcanic regions on the planet. Heating the homes in this cold country with geothermal energy is a natural practice. But Iceland cannot be extrapolated to the United States, with it's diverse climate, and more diverse energy needs. Geothermal efforts in the U.S. have had mixed results.
A direct current backbone to move wind and solar generated power to where it is needed seems like a smart and necessary proposal. It is essential that we can bring this power on-line in a manner that can be broadly distributed.
The following idea is similar to proposals I’ve seen advocated on some of the liberal blogs like the Daily Kos and the Huffington Post:
“Businesses and homes will become power plants as individuals cash in by installing solar panels and wind turbines on their buildings, and by selling the stored energy in their plug-in hybrids back to the grid at peak hours.”
I hear about these types of "solutions" all the time. But the people advocating them are looking at the energy problem with rose colored glasses. Battery technology to make plug-in hybrids broadly viable is not within sight. If it takes 6 hours to charge my plug-in car, which gives it a range of 40 miles, then how am I going to have enough “juice” to sell back to the grid? Maybe these folks are big Keanu Reeves biggest fan and have watched “The Matrix” a few too many times.
Neither do I see anyone but the idle rich being able to afford to install solar panels on their home and sell surplus electricity to the grid. I recently researched what it would cost to install a home solar panel system. The cost was about $20,000, plus installation, for a 2,000 watt system. That is enough power to light 20 100 watt light bulbs at the same time. A vacuum cleaner uses almost that much power. No surplus here, and the capital investment makes no economic sense. $20,000 to light a couple of rooms? Forget air conditioning or an oven. But the greenies stubbornly cling to this as the answer.
It is telling that 10% of all venture capital dollars are already flowing into alternative energy. This is consistent with my belief that with oil over $100/barrel, and coal at a similarly priced on a relative basis , private capital will go “all in” to solve the problem – without government bungling.
The last paragraph is not supported by the rest of the article.
“We will cut annual trade and budget deficits by hundreds of billions, improve public health and farm production, diminish global warming, and create millions of good jobs. And for the first time in half a century we will live free from Middle Eastern wars and entanglements with petty tyrants who despise democracy and are hated by their own people.”
The entire article centers on the generation of electricity by non-fossil fuel means. That is a result that is achievable, probably only the addition of nuclear to his proposals, but achievable nevertheless. But for his conclusion to be true, electricity will have to become the primary fuel for transportation. This seems to be an underlying hopeful hypothesis with many on the left. But the facts say that it is not in the foreseeable future.
A recent Politics & Prosperity article separated the current and future uses of various sources of fuel. The discussion is usually a confusing mish-mash that does not differentiate between electricity generation and transportation. There is currently no technology to economically and practically eliminate oil distillates as the primary fuel for transportation. We need to aggressively pursue realistic solutions, like using the “Prius model”, verses the “pure plug-in model” for much higher MPG to make a real difference in the near term.
Thursday, July 3, 2008
Are Plug-in Electric Cars the Answer?
With gas prices surging, and global demand unlikely to abate, GM is pushing hard to get it's Volt plug-in out the door. Still several years away, there are R&D challenges to overcome, like the fact that traditional headlights and taillights draw too much power.
The Volt will be able to travel 40 miles after a 6 hour charge. That means it can only be used by a homeowner with access to electricity where the car is parked overnight. If you have an apartment or park in a city deck it will not be an option. In Atlanta, where I live, the distances are sprawling, and the traffic an abomination. Drivers are careful not to let their gas tanks get very low as a lengthy traffic delay is always possible. After the Volt battery system is exhausted, a small gasoline engine engages to run the car and recharge the batteries.
The rumored price of the Volt has risen to $45,000 - and GM will probably still lose money with every unit. There is already an all electric plug-in car available on a limited basis in California. It has greater range than the Volt but costs more than $100,000.
Are electric plug-in cars green? It all depends on where you get the electricity. 51% of the electricity in this country comes from coal-fired plants. These plants are being retrofitted to be cleaner, but there currently is no available technology to reduce carbon emissions.
With today's highly advanced automotive emission systems cars are amazingly clean. It is difficult, perhaps impossible, to argue that running cars on coal generated electricity is cleaner than running cars on gasoline given the state of technology for both fuels. There is a technology with the ability to provide baseline electric power to the grid with zero emissions: nuclear. If we aggressively build out our nuclear power capabilities we can dramatically lower greenhouse gas emissions.
What we need, for now, is not the Volt. We need the next generation of Prius. Toyota has it right. Combine a much smaller gasoline engine with supplemental electric power for much greater gas mileage, range, and no coal (instead of an all electric car with a small backup gasoline engine). This is technology that can be maximized for today with great effect. The Prius gets ~48 MPG highway and a little less, but not dramatically less, for city driving. In contrast a BMW 530, with a 3.0 liter engine, gets about 29 MPG highway.
There have been a flurry of recent announcements about companies gearing up to use lithium-ion batteries for electric plug-in cars. These batteries get quite hot. They sometimes catch on fire. In my Dell PC, the battery no longer holds a useful charge after about 1 year. The replacement cost to power my small laptop: $110 (plus shipping). Now scale that up for an automobile.
We are a long way from a pure plug-in. But if we follow Toyota’s example we can make real measurable progress right now.
The Volt will be able to travel 40 miles after a 6 hour charge. That means it can only be used by a homeowner with access to electricity where the car is parked overnight. If you have an apartment or park in a city deck it will not be an option. In Atlanta, where I live, the distances are sprawling, and the traffic an abomination. Drivers are careful not to let their gas tanks get very low as a lengthy traffic delay is always possible. After the Volt battery system is exhausted, a small gasoline engine engages to run the car and recharge the batteries.
The rumored price of the Volt has risen to $45,000 - and GM will probably still lose money with every unit. There is already an all electric plug-in car available on a limited basis in California. It has greater range than the Volt but costs more than $100,000.
Are electric plug-in cars green? It all depends on where you get the electricity. 51% of the electricity in this country comes from coal-fired plants. These plants are being retrofitted to be cleaner, but there currently is no available technology to reduce carbon emissions.
With today's highly advanced automotive emission systems cars are amazingly clean. It is difficult, perhaps impossible, to argue that running cars on coal generated electricity is cleaner than running cars on gasoline given the state of technology for both fuels. There is a technology with the ability to provide baseline electric power to the grid with zero emissions: nuclear. If we aggressively build out our nuclear power capabilities we can dramatically lower greenhouse gas emissions.
What we need, for now, is not the Volt. We need the next generation of Prius. Toyota has it right. Combine a much smaller gasoline engine with supplemental electric power for much greater gas mileage, range, and no coal (instead of an all electric car with a small backup gasoline engine). This is technology that can be maximized for today with great effect. The Prius gets ~48 MPG highway and a little less, but not dramatically less, for city driving. In contrast a BMW 530, with a 3.0 liter engine, gets about 29 MPG highway.
There have been a flurry of recent announcements about companies gearing up to use lithium-ion batteries for electric plug-in cars. These batteries get quite hot. They sometimes catch on fire. In my Dell PC, the battery no longer holds a useful charge after about 1 year. The replacement cost to power my small laptop: $110 (plus shipping). Now scale that up for an automobile.
We are a long way from a pure plug-in. But if we follow Toyota’s example we can make real measurable progress right now.
Wednesday, July 2, 2008
Do GM Stockholders Actually Own Anything?
GM, which I can’t believe could on anyone’s buy list, was down hard again today after Merrill Lynch issued a note that bankruptcy is not out of the question. I would be very nervous holding GM common stock.
The situation has gotten so serious there that it is questionable whether holders of the common stock really even own something. At some point the holders of the senior debt will effectively control the company. If you want to be “in” GM, I would strongly recommend selling the common and buying senior preferred instead.
Bethlehem Steel used to be one of the largest and most admired companies in the world. But they ended up like GM in a declining market where they had the wrong products and very high fixed costs. One day, Bethlehem Steel just canceled the common stock and the bondholders owned the company.
I hear chatter about how at some point GM will be a great trade. Thanks, but no thanks. I don't need that kind of risk in my book.
The situation has gotten so serious there that it is questionable whether holders of the common stock really even own something. At some point the holders of the senior debt will effectively control the company. If you want to be “in” GM, I would strongly recommend selling the common and buying senior preferred instead.
Bethlehem Steel used to be one of the largest and most admired companies in the world. But they ended up like GM in a declining market where they had the wrong products and very high fixed costs. One day, Bethlehem Steel just canceled the common stock and the bondholders owned the company.
I hear chatter about how at some point GM will be a great trade. Thanks, but no thanks. I don't need that kind of risk in my book.
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