Friday, May 30, 2008

Wishful Thinking, Speculation and Oil

Everyone and their sister seems to have jumped on the "oil prices are being driven by speculation" bandwagon, but perhaps that is nothing but wishful thinking. From the very beginning of futures trading--back in the 1600s when traders in Antwerp would buy and sell contracts on the cargo coming from the East Indies--the easiest game in town has been to blame speculators for price movements.

If the price of a commodity is rising, then the villains are speculators. If the price is dropping, it's the short sellers' fault.

Speculators are active wherever and whenever speculation is allowed. It's wishful thinking to expect oil will fall from $130/barrel back to $70/barrel if only those darned speculators would leave the market alone.

Note to hand-wringing, finger-pointing pundits: those darned speculators are the market.

Please go to to view the important charts.

As Harun points out in the chart below, Large Trader Open Interest (in futures contracts) is not out of line with the recent past. We also have to keep in mind that commercial traders play both long and short to hedge their gains. If you're long oil, then you also buy short positions to lock in your gains on the long side. That is, your short positions will gain in value if oil drops, offsetting your losses on the long side. That's the basic idea of hedging, and the major players have to hedge to protect themselves from huge losses on either side of the trade.

Thus it is tricky to draw hard-and-fast conclusions from open interest. Yes, momentum traders will jump on a trend up or down; that's the nature of markets and trading.

But the key metric is always supply and demand. The evidence is rather clear: demand is not being destroyed as oil climbs in price, and supplies are dwindling as major oil fields slip into the depletion phase of Hubbert's Peak.

What many of the "it's all speculators' fault" commentators seem not to understand is that hundreds of millions of consumers are still paying low prices for gasoline. Many governments subsidize the cost of fuels, artificially suppressing prices to consumers, who then respond like all consumers do when a commodity is inexpensive: they use it profligately.
Let's turn to frequent contributors Harun I. and U. Doran for more:

Harun made these points:

"Shedding some perspective on the speculation debate.

Is there speculation? Of course, that is how the futures markets are designed.
Does this mean that speculators are driving price up or down. This argument has been around for centuries, it was inane then, it is just as inane today.

Is there a bubble? The change in trajectory of price indicates a change in psychology. Trend-following funds are are going to increase positions as their models dictate. When we see the smartest guys in the room (commercials) become buyers (relatively) then we will probably see a shift in price activity. Spot market and futures as of today are equivalent and the market is no longer inverted, this also is a change. Technical indicators on the charts indicate subtle changes.
Anything that goes straight up is unsustainable. The percent increases price are clearly unsustainable. People will change their behavior.

High prices are the answer to high prices and low prices are the answer to low prices."

The problem is that many nations are subsidizing their citizens' oil prices, so hundreds of millions of consumers are not paying higher prices. U. Doran submitted a telling article by "Sir Charts Alot" Gary Dorsch, who made these key points about supply and demand: (Is Crude Oil a "Bubble" Ready to Burst?)

"China, India, Russia and the Middle East combined are now consuming more crude oil than the US, burning 20.7 million barrels a day, up 4% from a year ago according to the IEA. The emerging economies are picking-up the slack in the oil market, more than offsetting a -1.3% contraction in US oil demand to 20.3 million barrels this year. Thus, a mild recession in the Western economies and Japan might not weaken global demand for oil.

Economies of big oil-exporters in Russia, Mexico, and OPEC itself are growing so fast that their need for energy within their own borders will limit how much they can sell abroad. Internal oil demand in Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates grew 6% last year, and their exports declined 3 percent. Mexico’s oil output fell -9% in the first four months of 2008, from the same period a year earlier.

If these trends continue, global crude exports could fall by 2.5 million barrels a day by the end of 2010, adding new strains to the global oil market.

Oil production is shrinking in 54 of the world’s top-60 oil producing nations, including Britain’s North Sea, where output peaked in 1999 and has already plunged by half. The UK began importing liquid gas for the first time in history in July 2005, and its North Sea oil reserve is dwindling at an -8.5% annual rate. The curtain might fall on North Sea Brent by 2012 if enough isn’t done to maintain development and exploration, according to the UK Offshore Oil Industry.

The basic laws of supply-and-demand don’t work in an economy where the government intervenes with price controls. In China, gasoline prices haven’t gone up since last November, even though crude oil prices have gone up 35% since then. Beijing controls gasoline prices to limit their effect on inflation and prevents refiners from passing on higher oil import costs to consumers. Without the price controls on energy distillates, Chinese inflation would already be in the double-digits.

India is Asia’s third-biggest oil consumer, and imports 70% of its petroleum needs. Although crude oil has doubled from a year ago, and the Indian rupee has lost 5.5% against the dollar this year, New Delhi has only permitted just one increase in retail fuel prices in 20-months."

The list of oil-producing nations with extremely cheap fuel (in some cases under $1/gallon) includes major exporters Iran, Venezuela, Indonesia and Nigeria. Toss in China and India, and you have hundreds of millions of consumers who are being protected from the true cost of fuels by their governments' massive subsidies.

Traffic jams in Lagos are legendary, as fuel is cheap and the infrastructure hasn't kept pace with the population growth. The same is true in oil-producing nations' cities around the globe. Bottom line: fuel subsidies in oil-producing nations is driving demand up so rapidly that these nations will soon be unable to export any oil at all.

Like all subsidies, the unintended consequence is tremendous inefficiency, economic distortion and waste. Efficiency and conservation don't pay when fuel is subsidized, just as nobody in the U.S. with gold-plated medical insurance thinks twice about going to the doctor--hey, it's "free," why not?

What are the chances these governments will eliminate their fuel subsidies? Zero, zip, nada. Yes, they will inch them up, and suffer the riots and protests of their poorer citizenry; but to eliminate all price controls and expose their populace to market rate fuels would be political suicide for the oligarchs and elites holding power in these nations. So they will "suck it up" and keep prices low, regardless of how high oil climbs in price.

If speculation is at such fever pitch, why is the volume of contract trading slowing down? As Harun notes on this chart, "The velocity at which contracts are trading hands has decelerated significantly during rapid price appreciation."

It seems the trading was fast and furious as the price formed a bottom and began its steady rise from $55/barrel.

Blaming the growing imbalance of oil supply and demand on speculation is a canard. My prediction for oil prices is a continuation of base trends, i.e. modest demand destruction and continuing declines in production/supply.

As for the "solutions" to supply:

1. The Iranians have 20 supertankers filled with oil floating around somewhere. Nice, but it's heavy crude, and the few refineries able to process it are already running flat out. Also, 20 supertankers is a drop in the bucket of global demand.

2. Deep abiotic oil is abundant. The Russian have the technology. If the Russians have the technology, why is their production declining so rapidly? Where are the pipelines from their deep wells?

3. It's all the weak dollar. Once the dollar starts rising, the bubble in oil prices will pop. Then how come oil is rising in all currencies and even when priced in gold?

4. Canada and the U.S. have nearly unlimited supplies of shale oil and tar sands. Great, but real-world production will top out at 2.5 million barrels a day, about 10% of North America's consumption, and the process uses vast quantities of natural gas.

5. If only the tree-huggers would let us drill in the Alaska Wilderness. The U.S. consumes 22 million barrels a day or 8 billion barrels a year. The Alaskan North Slope everyone talks about contains about a billion barrels--a whopping 45 days' supply for the U.S. Whoopie.

In other words--it's all wishful thinking, folks: that it's all the speculators' fault, that new supplies will magically come on line and save us--there is simply no credible evidence for either supposition. It's supply and demand. Prices are set on the margin, and as a result a shortfall of a few percent has an amazing leverage on price.

Go ahead and ban speculation, and see what happens then. Prices will not drop, they will simply become more disorderly/chaotic.

As for demand destruction--let me know when China, India, Indonesia, Iran, Venezuela, Nigeria, Mexico et al. stop subsidizing the price of fossil fuels for their hundreds of millions of consumers.

And as for supply, let me know when global production of oil from any source exceeds 90 million barrels and day and keeps climbing as producers take advantage of the high prices.

Check out these provocative Readers Journal Essays:
While Your Were Out... (Harun I.)
How Will Gas Prices affect the Blue Collar/Poor? (Noah Cicero)

Thank you, Steven H. ($13.13), for your numerologically significant generous donation to this site. I am greatly honored by your support and readership.


Thursday, May 29, 2008

The VERY DANGEROUS Book You Must Not Read

The VERY DANGEROUS book you must not read is Before You Take that Pill: Why the Drug Industry May Be Bad for Your Health by Dr. J. Douglas Bremner, M.D.

The reason it's so very, very dangerous is that it seeks to give you, the consumer and patient, unbiased research on the possible side effects of 300 commonly prescribed drugs.

Doctor Bremner isn't recommending that you not take any pharmaceuticals, but he is suggesting you educate yourself on the balance of risks and benefits before taking these drugs.

Why does this make the book so very dangerous? Because it directly threatens the foundation of American medicine, to wit: that you will follow your doctor's orders unquestioningly, and that drugs "are good for you, otherwise we wouldn't prescribe them."

Look, pal, we're the experts here, just do what you're told and don't ask questions. Unless you don't have any medical insurance, in which case we're not wasting any time with you unless you're bleeding. And if you're bleeding, the end of line is back there, buddy; we get a lot of gunshot victims here in the emergency room and you can wait a couple hours like everyone else.
Another doctor--a dermatologist--wrote that this book was VERY DANGEROUS on's review/comment page. Here is the review comment from Dr. Aragon (typos left intact):

"Do you really think that exercise and diet can cure depression? Yes, I saw the citations at your website, but there are only a few compared with the millions of studies showing the high benefits psychotropic medications have (includying several from you, ironically !!!)
Again, if this was the case, pharmaceutical companies would be in bankruptcy as I stated in my first post.
I really think that this is a VERY DANGEROUS book. Did you know that there is a lot of ignorance regarding diseases and its treatments not only in third world countries but in the USA as well?
If someone for example is taking an SSRI for a mental disorder and reads this book, he/she will think that diet and exercise will cure him/her, and could get off his/her meidcations without consulting their physician because this book was supposedly written by an MD, and not by an anti-pharmaceutical company guy (like most naturopaths are).
You are really jeopardizing a lot of lifes by writing this dangerous book.
You asked me if I meant knowledge is dangerous?
Yeah, knowledge is power, but too much of it can be very dangerous, specially when you talk about diseases and medications."

And here is Dr. Bremner's response:

"You mean knowledge is dangerous? I agree that in some cases not taking a pill can be dangerous, but in other cases taking a pill can be dangerous. But I disagree with the implication that people should not know anything about their own prescription medications. If people read this book and it opens a dialogue with their physicians, so much the better.

I guess the bottom line here is that we are going to ignore the fact that people have killed themselves after taking Accutane because they didn't know it could be a possible side effects, because their dermatologists didn't warn them or their families about depression as a possible side effect because they were convinced by the manufacturers arguments that this wasn't a real side effect or they felt uncomfortable about talking about it or both. Now this issue has been so publicized it is no longer an issue. But it illustrates the fact that health consumers need to educate themselves.

As for the book being dangerous, you mean we should accept pharma marketing's appraisal of the risk/benefit ratios of medications at face value? without questioning or reading the literature? If someone disagrees with how the literature is presented I am happy to discuss it with them, but so far no one has made a specific critique based on the actual studies."

The history of their debate runs rather deeper than this exchange suggests, as Dr. Bremner reports on his blog:

He may have gotten upset with me because he has been obsessively emailing me every week for the past two years asking me about my research and I finally stopped responding. My conclusion is that since he is a dermatologist he either had a bad outcome giving a patient Accutane or he is working for Roche. Anyway his conclusion that tylenol could kill you or you could die from slipping on a bar of soap is hardly reassuring.

What really rankles here is the assumption that we regular "little people" can't possibly make our own assessment if a powerful drug's side effects outweigh its benefits. If we experience a miraculous lifting of deep depression with some medication, then we can figure out for ourselves the benefits outweigh the risks.

But if the medication makes us feel worse, then our own experience is telling us to stop taking it, regardless of the studies or what our doctor is telling us.

For instance: if one acne medication out of several possible treatments has been shown to cause suicidal depression in teenagers, shouldn't the parents and the teenager be aware of this risk before deciding to take this drug? Being aware of the potential side effect is hugely important because then the patient and his/her family can at least monitor their mood and behavior for signs of depression and/or suicidal thoughts.

This is not dangerous to the patient--it's dangerous to a medical establishment based on "doctor (and drug company) know best," especially when drug company profits are at stake.
As Doctor Bremner points out in his book, there are thousands of medical journals and no doctor can keep up on the tens of thousands of research papers being published annually. As a result, the drug companies (Big Pharma) have tremendous leverage over physicians because they can "package" the positive research while ignoring any negative research, i.e. omitting it or downplaying it in their marketing material.

The truth is anyone with a 9th grade education can read a stripped-down drug trial result and figure out the drug isn't that effective. You don't need a medical degree or a degree in statistics to figure out that if 5 out of 21 patients showed "statistically relevant results" from a drug and 4 people on the placebo also reported benefits, while 3 people on the drug reported negative side effects, well, this drug just isn't that great.

As an investor, I have plowed through many such drug trials (Phase 1,2 and 3 trials) and these are typical results of a small initial trial of a new drug.

Our "cure me now" culture puts tremendous pressure on doctors to prescribe something, anything, other than a healthy diet, exercise and cognitive therapy. Take the case of insomnia. As Dr. Bremner reports on his blog, drugs don't work as well as cognitive therapy (basically a structured meditation) but they do come with major negative side effects.

Cognitive Therapy for Sleep Problems Works Better than Drugs
"We're getting pounded with ads for sleep meds like Ambien and Lunesta, but before you take a drug that will decrease your time to fall asleep by only 10 or 15 minutes, and that could increase your risk of car accidents or sleep walking, consider an alternative.

The most effective therapy for the treatment of insomnia has been shown in studies to be cognitive behavioral therapy. It is much better than medication to treat sleeplessness, and results in a significant improvement in sleep duration and quality without side effects. "

But nobody makes billions of dollars off cognitive therapy, so to heck with that. The relentless marketing of drugs directly to consumers--marketing which was banned in the U.S., and remains banned in most other countries--brainwashes a receptive "don't make me do anything difficult or disciplined for my own health, Doc!" culture into actually demanding drugs which can be dangerous. Talk about a perfect setup for profits-- until the patent runs out, of course, in which case you chemically manipulate a natural compound like niacin (a cheap vitamin) into something slightly different, and market it for hundreds of dollars a year as a heart medication (true story, look it up).

It's easy to blame physicians for over-prescribing drugs and not informing patients of potential side effects, just as it's easy to blame profit-driven pharmaceutical companies for pushing their often-useless/often-dangerous drugs as "the newest, latest cure for whatever ails you" (or we'll invent a new disease for you if you think you're healthy).

But we as consumers need to take some responsibility, too. Reading this book, which informs you about the potential side effects of 300 commonly prescribed drugs, is a good first step to becoming a more informed consumer of drugs. If you don't want to read it for yourself, read it for the family member who is wolfing down prescription drugs by the handful and not getting better. Maybe there's a reason he/she isn't feeling better and perhaps feeling worse. Maybe we should all know more before we take that pill.

Thank you, Sharon C. ($10), for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.


Wednesday, May 28, 2008

The Housing Capital Trap Snaps Shut

Astute reader Jim S. suggested examining how the capital trap snapping shut in housing will affect the middle class, which relies so heavily on home equity for its wealth--and for the past six years, for its spending.

Excellent idea, Jim, so let's dig into how the Trap was formed and how it's snapping shut with such pernicious force.

To view the many charts, please go to

1. We used to save money from earnings, now we don't. In the high-inflation 70s, savings actually spiked up. In the dot-com mania, savings plummeted into negative as everyone felt so wealthy from their stock gains they spent more than they earned. The housing bubble created the same "spend more than we make, withdraw savings" mentality.

2. We're spending money we didn't earn.

3. Housing assets have become a dominant part of household wealth and the U.S. economy.

4. We're spending an ever greater share of our income servicing the debt we took on during the equity-extraction mania. Refinancing, second mortgages and home equity lines of credit (HELOCs) enabled us to extract all that wonderful "free" unearned equity created in the housing bubble. Alas, the monthly interest remains even though the bubble has popped.

5. This decades' "Wealth Effect" was entirely the result of the housing bubble.

6. Real estate and housing have grown their share of banking assets. So not only has housing grown into the dominant asset of the U.S. middle class, it's also become a greater percentage of the banking industry's asset base. As the bubble pops, it diminishes the wealth not just of homeowners but also of lenders and everyone who owns mortgages or derivatives based on mortgages.

Back in the good old days, house prices rose about 1% above inflation, and people paid off their 30-year fixed-rate mortgages as they retired in order to leave their children an asset. A house was widely seen as a brick-and-mortar savings account, and for decades a house cost about 3 or 4 times annual income. The idea that you'd refinance your mortgage in order to extract equity to spend right now was anathema for a variety of cultural and financial reasons.

In the good old days, if you bought a house for $30,000 and had to move in a few years, if you sold it for $32,000 you'd have been tickled pink. You took whatever equity you had from the sale and bought another house with it. HELOCs, like $100,000 hospital bills for a few days' stay, did not exist. If you maintained your house, you could sell it into a stable market; people bought and sold when they moved, and speculation was of the "buy, fix it up and rent it out for longterm appreciation" mindset.

People saved up money from earnings in order to buy a new car or take a vacation. If you needed a new washing machine, you might put it on a Sears credit card. No one borrowed a year's pay off their house to buy stuff; that equity was untouchable.

From one point of view, the equity in one's house was a capital trap. It just sat there, untouchable, growing by a mere 1% per annum above inflation. But since interest rates were stable and the interest earned from savings or dividends was also low/stable, just like inflation, that return on investment wasn't considered too out of line with that earned by other assets. After all, other than brief recessions, housing rose at a slow rate similar to a savings account.
But in one important sense, it wasn't trapped; except for brief recessions, there was always a market for your house. If you had to sell, worst-case scenario was a modest loss in equity due to the transaction costs (realtor commission, etc.)

Fast-forward to the present: everyone expects a 20% annual return on their leveraged "hot money," inflation is rising and house values are plummeting--by 14% in just Q1 of 2008. This is quite a different story. Even as income remained stagnant, Americans borrowed ever-larger sums off their bubble-inflated housing equity. Now that the bubble has popped, the interest on all that new debt (and rising food-energy inflation) is squeezing incomes even as "paper wealth" in home equity vanishes like a puddle of water in Death Valley.

House have become a massive Capital Trap. Why? Let's look:

When an asset starts depreciating rapidly, the smart investment decision is to sell it quickly and conserve whatever capital you still have--unless it's illiquid, in which case your capital is trapped. Is real estate still liquid? In some parts of the country, yes. There is a "false bottom" buying binge underway in some areas, where speculators/owners are so anxious about missing the "great bottom in housing" that they're jumping in five or six years too early.

Once those bubble-echo sales dry up, then the Capital Trap snaps shut. Homeowners who were "waiting for prices to go back up" will be unable to sell, even as their capital declines every month. That is the very definition of a capital trap.

Cash and cash instruments are much better investments; even if they're not quite keeping up with inflation, they're not dropping by 15% a year, either. And they can be moved into precious metals or other investments for very low transaction fees, too.

When will the capital trap open? As I have covered here before, housing is entirely, totally, completely dependent on readily available, cheap money. Once money becomes dear to borrow or can't be borrowed readily, housing dries up and blows away.

So when is money going to become cheap and readily available? As speculators flee the extreme risks of mortgages and as interest rates inexorably rise, that day recedes ever farther into the future.

We all know many millions of homeowners are now "under water," i.e. they owe more on their mortgages, second mortgages and HELOCs than their homes are worth. They represent an enormous pool of ready sellers once prices edge up. How many would be glad just to get out from under their mortgage? And what does that overhang of ready sellers do to prices? It undercuts any sustained price rise. Every time prices rise, another wave of sellers emerges to get out, driving prices right back down.

So what does this capital trap mean for the middle-class, whose household wealth is largely measured in home equity? Rather obviously, the "house ATM machine" has been carted off; but it also means household wealth will plummet along with housing values.

Jim S. offered this thought-provoking commentary on the political consequences of this gigantic Capital Trap:

Historically, ALL major bubbles have retraced to their origins, and, as Soros noted within the last week, overshoot for a while below the starting point and then recover to the starting point. Until proved otherwise, buyers not forced to buy for some reason should wait for that confirmed uptick of home appreciation that history says is necessary for any possibility of reasonable appreciation. The 'falling knife' of home depreciation has a long way to go, and should be viewed as a great risk.
At a time when policy makers propose that Fannie Mae/Freddie Mac proceed with 3-5% down to facilitate home sales, which only continues 'subprime' results as it is occurring during a falling market with no bottom in sight, a serious homebuyer should recognize that, with further home equity declines of just up to 10-15%, they will have long been permanently buried and possibly financially destroyed. It just seems screaming common sense to consider new home ownership as a non-starter as it seems to be a sure thing capital and financial trap.
With the value of all middle class homes being quoted as about $20 trillion, a mere 5% drop across the nation reduces middle class wealth by $1 trillion...e.g. a drop of 15% erases $3 trillion. Some analysts have projected $8 trillion in losses before bottom is could be more, it could be less. Considering that some analysts say a bottom will not be reached until 40-50% loss, the future is daunting.
In any event, this thing is so massive that the middle class may never recover in our lifetimes the home equity values they are going to lose in this evolving 'L' shaped recession. It is not possible to generate an economy that will provide real wage increases that result in recovered wealth or productivity for large numbers of people.
As money is necessary these days for any entity to achieve political effectiveness with our political parties, the middle class is going to lose such a mass of wealth as to significantly impair its representative powers on behalf of its own and the nation's interest.
This aspect of the debacle has not been addressed yet by commentators, but it will in just a few years be a significant loss for the middle class and a relative empowerment of special interests. This wealth loss of the middle class should be detectable from the election of 2012 and onward.
In short, the housing debacle is going to be a prolonged one, a deep one, and one that threatens the ability of the middle class to represent itself financially in the maintenence of its own perceived freedoms.

Well said, Jim, and thank you for extending the Capital Trap's effects into the political sphere.

Please read these two new provocative Readers Journal Essays:

While Your Were Out... (Harun I.)

Thank you, J. Dorsey ($25), for your extremely generous donation to this site. I am greatly honored by your support and readership.


Monday, May 26, 2008


If push comes to shove, which do you reckon you'd manage better: a 50% reduction in food or a 50% reduction in petroleum? For most people on the planet, going hungry is far and away more unpalatable than a 50% reduction in their oil consumption.

After all, you can switch to city buses, mopeds, quit the job that's far away, etc., but if hunger is gnawing your guts, there aren't a lot of ways to convince your body it can do just fine on 50% less calories.

And which shortage is more likely to end the reign of incumbent plutocrats? Again, the answer is food. Riots over petroleum shortages might be nasty, but when children are crying in hunger, even an Army will be unable to stem the tide of citizen rage.

Which brings up an interesting question: if food gets even scarcer than petroleum, then who's got the more powerful leverage: Oil exporters or food exporters?

Food is of course renewable--it can be grown again next season. But the constituents of food--arable land, water, fertilizer, access to market, etc.--are limited and cannot be created "on demand." Each element requires immense investment to "bring online."

Petroleum is non-renewable, but at least one alternative--conservation--is essentially free. Alternative sources of energy require large capital investments, but they are varied and widely available: geothermal, hydroelectric, wind, solar, tidal, nuclear, etc.

The 1970s saw the emergence of a new global power center: the Organization of Oil Exporting Countries--OPEC. By banding together, countries which controlled about 40% of the global market for oil essentially seized control of that market--not by cornering 100% of production, but by setting limits on exports. With that power, they then wielded oil as a political weapon--the 1973 oil imbargo OPEC placed on the U.S. being a powerful example.

OPEC's history is also full of other lessons. OPEC's production is dominated by one country: Saudi Arabia. During much of OPEC's history, the Saudis "controled the spigot," meaning that they could raise or lower the production of oil so significantly that they could, on their own, move global prices.

As we have seen elsewhere, the Pareto Principle (80/20 rule) is a useful tool. Though OPEC controls about 40% of global production and Saudi Arabia produces about 30% of OPEC's production, that was enough to leverage global prices up or down.

If grain/food become permanently scarce (demand exceeds supply), could grain exporting countries band together to control prices--or their access to petroleum?

Let's say that the "market price" of oil is $300/barrel and that of wheat is $20/bushel at some future date. (Wheat recently hit $14/bushel and oil is around $135/barrel now). What if the top grain exporting nations--a mere handful produces 80% of all wheat exports-- announce that they're ready to trade three bushels of wheat for a barrel of oil--regardless of the current market prices for each commodity. The "currency" for food would thus be oil-- but the exchange rate would be determined by the three or four dominant grain exporters.

If you're a major grain importer like Iran or Saudi Arabia, and your population has exploded along with your citizen's expectations for the good life, exactly where are you going to turn to to buy your grain if you refuse the grain exporters' offer?

Yes, there are minor exporters you might be able to strong-arm, but just like small oil exporters who are not part of OPEC, they want to sell at the price set by the cartel: the Organization of Grain-Exporting Countries (OGEC). The global price of the barrel of oil is now three bushels of wheat or equivalent rice/corn--regardless of the grain's source.

Let's start with how little food is available for export worldwide. Global rice production is about 418 million tons, but the global marketplace trades less than 30 million tons. The reason is that large producers like China and India consume the vast majority of their own output.

Thus the largest exporter of rice is Thailand, which exports about 8-9 million tons annually. So the price of rice is being set by about 7% of the global crop which is traded. (Source: High Global Demand, Tight Supply To Boost Rice Prices.)

The same holds true for wheat and other grains/agricultural commmodities: World and U.S. wheat production, exports, and ending stocks (USDA)

total world wheat production 2007: 22 billion bushels
U.S. production: 2 billion bushels
world exports: 4 billion bushels U.S. exports: 1.3 billion bushels

Here are some data drawn from the excellent website of the FAO, Food and Agricultural Organization of the United Nations:
Top wheat exporters:
United States … 31.6 million tonnes (29.9% of wheat exports from top 10 exporting countries)Australia … 18.5 million (17.5%)
Canada … 15.1 million (14.3%)
France … 14.9 million (14.1%)
Argentina … 10 million (9.5%)

United States

United States

Rice (broken)
United States

Rice (husked)
United States

United States

United States

Certain patterns emerge as we scan these lists of top food exporters. China and India are agricultural powerhouses, but they consume most of what they grow. Certain European nations are big agricultural producers--France, Ukraine, et al.--as are Brazil and Argentina and Thailand. The nation which is on practically every list is the United States, which exports grain to over 100 nations:

USA Grain Exports - Where to, how much? (The Oil Drum/Europe)
How farfetched is a scenario in which global grain exporters band together and announce that in order to give away grain to starving people in poor countries, grain to wealthy countries will be priced in oil/BTUs? Either pump the oil and trade it for food, or get the oil (or equivalent transferable energy BTUs) from somewhere, and then we'll ship you the food.

If we consider the overlap of energy resources and grain-exporting, we can forsee how regional alliances might be established. Brazil is a prodigious producer of sugarcane-based and soy-based biofuels; certainly these could be channeled into powering farm equipment in both Brazil and its neighbor Argentina.

Energy-rich Canada, like its neighbor to the south, is an energy and agricultural powerhouse.

Thailand might form a trading alliance with its neighbor Vietnam, also a rice exporter, as Vietnam has offshore oil. Even pariah-state Burma could join this southeast Asian exporting group once it throws off its cruel dictatorship.

And speaking of the Burmese dictatorship: as China suffers desertification in the north and paves over much of its arable land every year in new highrises and malls, that nation is forced to import ever more grain. (See FAO site for data.) What if the grain exporting nations demanded that China cease its massive support of the Burmese junta?

As long as the demand was made privately so China wouldn't lose any face, it wouldn't take much for China's leaders to weigh the relative value of millions of tons of grain for their hungry millions and the suddenly modest geopolitical gains of supporting a brutal dictatorship.

Since we're considering trends, how about the effects of global warming on global food production?
Global Warming: Who Loses—and Who Wins? (The Atlantic)

Nobody knows, of course, but it certainly seems plausible that the upper Midwest and Canada might extend their growing season, while other regions of the planet might suffer further desertification (northern China, etc.) and semi-permanent drought which could further reduce global production of basic foodstuffs (grain, soy, etc.)

Agriculture requires a lot of oil currently, but that could change. France could divert enough of its nuclear-generated electricity to charge electric tractors, and those nations with some oil (Indonesia, the U.S. etc.) could divert remaining petroleum to get/produce potash and other fertilizer. If push came to shove, oil could be reserved for agriculture, and the 2/3 consumed by transportation could be prioritized globally to serve the production and shipment of grain.

Will "the market" create such a cartel of grain exporters? Of course not, any more than "the market" created OPEC. Cartels are not supposed to exist in classic market-based theory; some new producer is supposed to arise to reduce the power of the cartel.

But you can't grow millions of tons of grain just anywhere, nor ship it without an infrastructure. So the idea that the world could suddenly produce millions of tons of surplus grain to "break" a cartel of the current top grain exporters is essentially absurd. All the best arable land is already in production, and the "Green Revolution" has already snagged all the low-hanging fruit.

Yes, poor nations could increase their yields, but that requires capital and energy-- lots of it when you consider fertilizer and pumping water. And even if you grow immense quantities of grain, you then have to protect it from rats and rot and transport it hundreds of miles to a port or railhead for shipment.

The production of grain is just as capital-intensive and complex as energy production.
This speculation raises this central question: what could cause the grain exporters to band together in what is essentially a political cartel? What events or trends could awaken an understanding of their power and leverage?

How about an oil shortage? How about a sudden realization that we're shipping grain to countries which have oil but aren't selling it to the right consumers, i.e. us, at a reasonable price, i.e. priced in grain?

And as I have already mentioned, the political cover is ready-made: in order to feed the starving poor of the world, we need oil. You wouldn't be so hard-hearted as to refuse us in our noble pursuit, would you? Actually, we don't care what you think: it's a barrel of oil or equivalent BTUs for three bushels of wheat, or your people starve. It's your choice.

For a ruling elite looking down on a seething hungry mob and an Army who is refusing to shoot their own parents, brothers, sisters and children, that will be an easy decision to make. Oh, and by the way, we really think it would be better if you stop doing this or supporting that government; we might decide the bushels won't go your way at any price. How long will you stay in power if you refuse our suggestions?

Thank you, Eugenio M. ($10), for your third generous donation and your longstanding support of this site.


Saturday, May 24, 2008

Saturday Quiz: Energy Lost on Electronics Standby

Q.:What percentage of household electricity in the U.S. is lost to appliances that are turned off?



Thank you, Tom S. ($50), for your unstintingly generous, indeed, outrageously generous, support of this site. I am greatly honored by your support and readership.


Friday, May 23, 2008

The Haves and the Have-Nots: of Time

Is it just me, or does it seem people with more responsibilities have less and less time, while tens of millions of those with fewer responsibilities have ever more leisure time to spend on entertainment?

Many managerial/entrepreneural types report that they barely have time for a quick lunch, or time to breathe after "regular work" (before their second shift as parent/accountant/manager starts that evening), yet according to the research firm Nielsen, American households are watching 8 hours and 14 minutes of television a day while individual viewers watched TV 4 hours and 35 minutes per day: Nielsen Media Research Reports Television's Popularity Is Still Growing

Does anyone else detect a wee disconnect here? If you're actually busy, who the heck has time to watch television 8 hours a day?

I was worried that 4.5 hours of TV per person wouldn't leave everyone with the hours required for talking and text-messaging on cellphones, the hours needed for videogaming, and the all-important hours spent emailing, websurfing and clicking through YouTube. So imagine my relief to find that all those additional hours of New Media haven't impinged on television's premier status:

"These results demonstrate that television still holds its position as the most popular entertainment platform," noted Patricia McDonough, Senior Vice President of Planning Policy & Analysis at Nielsen Media Research. "At this point, consumption of emerging forms of entertainment, including Internet television and video on personal devices seem not to be making an impact on traditional television viewing. This is especially true among teenage girls, who have shown significant increases in viewing during the past year."

Whew. For a minute there I was afraid teenage girls might be too busy learning math, science, Mandarin, guitar, etc. or playing field hockey or water polo or volleyball or working on their 4-H project or helping Mom and Dad with the family business to get in their 5 hours of TV a day.

Meanwhile, back in the world of responsibility and productive labor, academic departments and corporate offices have been stripped of admininstrative support; professors and senior managers are supposed to process their own paperwork, attend umpteen meetings, answer a couple hundred emails a week--and of course, do their "real" job, too.

And to reach these heights of responsibility and reward, go-getters are getting more extreme, too, as frequent contributor Albert T. notes regarding this BusinessWeek article: Meet Your New Recruits: They Want to Eat Your Lunch:

This is basically a story about how kids are huddled into striving for perfection, ergo conditioned for maximum profit potential with all else falling away. The gist of the story is freshmen in ivy league schools are competing so fiercely for internships, etc., setting up clubs of exclusivity where the reward is working for free in order to boost your resume. Upsetting. Why can't any of these seemingly "excellent" people understand that it is always the outsider whom succeeds? There are a million names out there, Steve Jobs, Mark Cuban, etc. all of them started by doing what they liked.

Excerpt from the article:

"Completing what Stanford students call a rare "triple crown," Yu also gained admission to Stanford Consulting. That group rejects four out of five applicants with a notorious entrance interview. Yu's included a business-school-style question about how a deodorant company ought to reverse its declining market share. "It's so competitive to get into Stanford, and then it's kind of a shock you still have to apply for the student groups," says Yu, clutching her personalized Stanford Consulting tote bag to her chest.

The reward for getting into 20-member Stanford Consulting is the chance to do volunteer work 15 hours a week for a real consumer-products company, which Yu declines to name because she signed a nondisclosure agreement."

So am I wrong in discerning a two-tiered society in which one slice of citizenry carries more and more of the responsibility and workload and pays more and more of the taxes, while the other 80% (assuming the Pareto Principle holds more or less true) are spending increasing amounts of time in idle pursuit of "entertainment"? (a.k.a. killing time).

There's only three possible explanations: either Nielsen managed to select the only 10,000 households watching staggering amounts of TV; all 10,000 selected households fiendishly left their TVs on 8.25 hours a day but went off to play in a band, tend the garden, etc., fooling those poor devils at Nielsen; or millions of Americans are watching stupendous amounts of TV.

So what's the correct answer? Ding! You win! It's number three.

And who's complaining about being too busy? Everyone, it seems; those in the top rank are working longer hours, paying more taxes and receiving less admin assistance every year, while those in the lower ranks are complaining about paltry/non-existent raises, less benefits, more demands at work and increasing insecurity every year.

But if life is so darned busy every day from dawn til dusk, who the heck is watching 8 hours of mind-numbing TV a day? Is anyone cooking a real meal at home, or are they watching TV while they cook? Are they cleaning house, or are they able to watch TV while they scrub the bathroom floor? Are they making jam for the church fundraiser while they watch TV? Are they practicing martial arts or riding a bicycle to the farmer's market, or can they do that while watching TV, too? Or are they foregoing sleep, and then relying on powerful, crazy-making drugs to finally pass out after 8 hours of electronic distraction?

Can we be frank and suggest that if someone is watching 4.5 hours of TV a day plus another 4.5 hours spent fooling around with other media and devices, either they're unemployed and not in school, or they're spending every waking minute not spent at work or school being "entertained" by the mass media? And if that's the case, then how can they possibly have time to exercise, cook, clean, read a book, walk the dog, learn something useful, go to night school, sew a new outfit, volunteer at the church, mentor a kid, coach Little League, i.e. live a full active life engaged with family, friends and community, while having some time for their own hobbies/interests?

Can we assume the people working in demanding roles or striving to get a top-notch education simply don't have enough time to kill on 8+ hours of "entertainment" every day?

And can we further assume that the people who are spending half of their waking life seeking distraction/entertainment could be doing a wee bit more on their own behalf if they cut back on passively watching TV or playing some moronic videogame? You like football? Then rip that stupid little controller out of the box and go outside and toss a real football around. Maybe even fall down and scratch a knee as you dive for the "long bomb" catch of a lifetime. Exactly what adventure is there in canned "entertainment"?

Of course nobody with a college degree ever watches TV--or at least, not much. It's a guilty pleasure for those who "know better," while those who don't feel a shred of guilt leave the TV on all day, as if life isn't real unless the TV is droning somewhere in the background.

Memo to America: life isn't real when the TV is on. Maybe we should be demanding a bit more of ourselves instead of whining about how "busy" we are or what a rotten deal we got. Because you can't have it both ways; if you're truly busy, you're lucky to find the time and energy to watch 4.5 hours of TV a week, not a day. Ditto for YouTube, Grand Theft Auto, etc. If you're truly busy, you're busy with active pursuits like playing an instrument or getting into shape or tinkering with an old pickup truck or repainting a set of chairs or, well, anything active which actually engages real people and real goals and real interests. Your interest in TV is nil because you don't have time for all that you want to do.

Yes, I know how it is to be shattered, and too tired to play an instrument or do anything remotely useful; you just want to watch something unchallenging. OK, fine, we all know the feeling. I too watch TV or a movie occasionally. That's why I keep a list of worthy films on the site; a movie is entertainment, to be sure, but it can also be much more than a TV show; it can be a window on another culture, for instance. In any event, let's say you watch a few movies a week or the Food Channel, etc. for relaxation; wouldn't that total 6-8 hours a week, not 32 hours?

And if we're not busy, then what do we expect? Lifelong security, better pay, a trim physique, glowing health and a life of meaning? From what inputs/effort? Yes, ambition can be misdirected, as Albert T. pointed out; but Mark Cuban, Steve Jobs, Larry Ellison, et al. did not storm the gates of the Establishment by sitting around playing videogames and watching TV.

Frequent contributor Harun I. sent in this quote which seems highly relevant to the revelation that the average U.S. household passively watches 60 hours of TV a week, and many more on the spirit-crushing distractions of one "entertainment platform" or another:

Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it.Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing.To keep our faces toward change and behave like free spirits in the presence of fate is strength undefeatable. Helen Keller

I know many of you agree because you're written me that your household doesn't have a TV or video game console. To you I say: Bravo. It's amazing what people can find to do when there's no TV or console or device to snap on and zone out.

Thank you, Joseph B. ($25), for your very generous contribution to this site. I am greatly honored by your support and readership.


Wednesday, May 21, 2008

How Low Interest Rates Fueled the Housing Bubble But Can't Stop the Bust

The standard propaganda is that low interest rates are wonderful because business can expand cheaply, hiring more well-paid workers, Mom can bake more apple pies and it's Morning in America, blah blah blah.

The truth is low interest rates have had a horrendously pernicious effect on the finances of the U.S., as illustrated in this chart:

Please go to to view the chart.

To cut to the chase:
1. negative interest rates (lower than inflation) inflated the housing bubble.

2. insanely low rates of return on savings drove money managers into high-risk investments like CDOs, credit swaps and mortgage backed securities.

3. insanely low rates of return on savings created a disincentive to save even as insanely low mortgage rates created powerful incentives to borrow freely and often.

If you want to jump ahead a few years, just go talk to small businesses in Japan, where interest rates have been locked down at 1% or less for over a decade. How are those super-low rates working for Japan? Have they reflated the 1989 bubble in stocks and real estate?

No, they have not, because low interest rates do not make risk go away.

If we glance at the handy chart above, we see that low interest rates push prices, borrowing, saving, investing and risk appetite to extremes.

super-low rates, especially when combined with innovations like adjustable-rates, interest-only payments and and "teaser rates" lower mortgage payments to "nearly free." In response, demand for housing explodes and prices rise. As prices rise, speculation gather steam, further feeding the frenzy.

* super-low rates of return (2% on T-bills and cash, for instance) mean that money managers whose long-term models require returns of 5-6% to survive (pension funds, insurance, etc.) are then forced to seek higher returns wherever they can find them, which meant piling into the trillion-dollar housing bubble market of mortgage-backed securities and its galaxy of derivatives (CDOs, credit swaps, etc.) all of which were sold as "low-risk" AAA-rated securities.

* with rates of return on savings accounts and low-risk investments dropped to near-zero (actually below zero once "real inflation" is taken into account), the incentives to "save up for a down payment" are reduced to zero even as the incentives to borrow vast sums of money right now (no down loans, liar loans, get in now before prices go any higher, etc.) dramatically increase.
* there is something worse than a meager 2% return on investment: a 50% loss on a risky housing-based derivative. Now that the true risks have been exposed, the appetite for risk that was once insatiable has fallen back to Earth. "Repricing of risk" means nobody is dumb enough to buy any housing-based debt or derivatives except at stupendous discounts.

No matter how low the Fed keeps interest rates, it cannot reflate the housing bubble because risk has irrevocably been repriced to reality.

This is in essence what happened in Japan. The same banks which were shoving $100,000 loans at low interest rates onto every business with a pulse in 1989 have pulled back from lending as the borrowers stop making payments and their losses mount. The real risks of making loans which cannot be repaid is now visible and cannot be cloaked, masked or made to vanish.

History is a vector. You cannot turn it around and return to 1989 or 2002. Now we have the pathetic spectacle of the U.S. Congress attempting to reflate the bubble by raising the Federally insured mortgage limits to an astronomical $729,000, in the hope that borrowers and lenders can be convinced to return to that happy place where house prices always rise and there's no risk in lending $729,000 to people with minimal down payments and poor credit histories.

The Federal government agencies and the Federal Reserve have been trying to counter this very rational aversion to risk by buying up billions of garbage/risk-laden loans, hoping that banks and lenders will replace all the garbage they just dumped onto Fannie Mae et al. with billions in new garbage loans which magically won't go bad like the last batch.

Bottom line: you can't force buyers to risk buying a house which is at high risk of falling in value (a capital trap they can never escape) or lenders to make loans which carry a high risk of default, or investors to buy high-risk loans for a pathetically low rate of return.

This is why all the machinations and gambits to "make houses affordable again" via the masking of risk and the lowering of borrowing costs will fail.

The way for housing to become affordable again is for prices to drop in half or more. What could power such a decline? How about mortgage rates rising as global risk repricing shuns real estate-based debt? As that tide rolls in, the sand castles being thrown up by the Fed and Congress to maintain housing values (reflate the bubble) will be washed away by the tide of reality.

New Readers Journal commentaries on MAIN CORE and more

20 diverse, thought-provoking comments on an amazing array of topics! New (in-depth) Readers Journal Essays:

Two Reader Commentaries on Iraq

The Rise in Oil: Speculation or Uncertainty? Harun I.

The Third Worldization of the United States Is In Process Robert Roth

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Tuesday, May 20, 2008

Energy Independence Is National Security

I know this sounds like a bumper sticker, but it is nonetheless true that energy independence is National Security. We all know this intuitively, but we as a nation quail at the prospect of any sacrifice, however modest, except when it's someone else's children doing the sacrificing.

Before you protest that we're up to the task, please read my list of minimal recommendations below. I personally don't consider any of these suggestions a sacrifice, I consider them all improvements I would barely notice, but then that's because I live like a poverty-stricken college student.

(I am still learning but pay tuition only in the School of Hard Knocks.)

To achieve energy independence, the U.S. needs to cut consumption of petroleum from 21 million barrels a day down to 10-11 million barrels a day (MBD), and quickly. The ignorant cheerleaders (many of whom seem to have gained elected office) are always yammering about "endless new sources of energy" but under close examination with basic high-school science, every single "miracle source" turns out to have real-world limitations.

I have covered some of these limitations in the past few months, and will mention just two (again) of the most popular "miracle cures to our need for more energy:" shale oil and coal gasification. Canada and the U.S. have hundreds of years of shale oil, tar-sand oil and King Coal, we are constantly told, yet in a peculiar oversight, nobody seems to mention that turning these hydrocarbons into liquid fuels is horrendously energy-intensive, complex and limited by physical constraints.

The best estimates by those who actually know about moving entire mountains of shale and tar sand, heating it up with vast quantities of natural gas, etc., is that total top production will reach about 2 million barrels a day--about 10% of the oil the U.S. consumes (not to mention Canada's consumption).

Gasifying coal sounds like a neato-peachy-keen "solution to our energy shortage" until you go to a vast Western strip mine and take a look at the infrastructure needed to make a paltry 2 million barrels a day. The notion that we can turn billions of tons of coal (yes, we already burn a billion tons of coal a year, and China burns 2 billion tons) into 20 million barrels of liquid fuels is simply absurd.

Like many of you, I think nuclear power technology has advanced (like all other technologies) since the 1960s designs which are in operation today; to dismiss nuclear power out of hand is another form of ignorance, especially when you consider the alternatives, like $300/barrel oil going to $1,000/barrel. (Yes, it could.)

But it will take years to build 100 more nuclear power plants, and they do, after all, only generate electricity, not liquid fuels. And yes, we can move to hybrid vehicles and electric tractors but those lithium-ion batteries are costly to make and replace; as the saying goes, there is no free lunch.

So the only practical solution is to aim for heretofore "impossible" (in the minds of politicos and pundits) efficiencies and conservation techniques. Yes, do with less. My goodness, how un-American that sounds, eh?

Meanwhile, back in the real world, America's decline can be laid squarely on our lack of a coherent energy policy and our bloated, undisciplined spending.

I strongly recommend reading the current issue of Foreign Affairs Magazine which addresses this question: Is the American Era Over?

This is an Establishment journal, to be sure, (IMO the best) and it is extremely telling that the lead articles clearly articulate that energy and political stalemate are the two key causes of U.S. decline.

Let's start with
The Age of Nonpolarity: What Will Follow U.S. Dominance (by Richard N. Haass)

By both what it has done and what it has failed to do, the United States has accelerated the emergence of alternative power centers in the world and has weakened its own position relative to them. U.S. energy policy (or the lack thereof) is a driving force behind the end of unipolarity. Since the first oil shocks of the 1970s, U.S. consumption of oil has grown by approximately 20 percent, and, more important, U.S. imports of petroleum products have more than doubled in volume and nearly doubled as a percentage of consumption.

This growth in demand for foreign oil has helped drive up the world price of oil from just over $20 a barrel to over $100 a barrel in less than a decade. The result is an enormous transfer of wealth and leverage to those states with energy reserves. In short, U.S. energy policy has helped bring about the emergence of oil and gas producers as major power centers.

President Bush has fought costly wars in Afghanistan and Iraq, allowed discretionary spending to increase by an annual rate of eight percent, and cut taxes. As a result, the United States' fiscal position declined from a surplus of over $100 billion in 2001 to an estimated deficit of approximately $250 billion in 2007.

Perhaps more relevant is the ballooning current account deficit, which is now more than six percent of GDP. This places downward pressure on the dollar, stimulates inflation, and contributes to the accumulation of wealth and power elsewhere in the world. Poor regulation of the U.S. mortgage market and and the credit crisis it has spawned have exacerbated these problems.

All our natural advantages are being squandered by our painfully visible political dysfunction:

The Future of American Power: How America Can Survive the Rise of the Rest (by Fareed Zakaria)

The problem today is that the U.S. political system seems to have lost its ability to fix its ailments. The economic problems in the United States today are real, but by and large they are not the product of deep inefficiencies within the U.S. economy, nor are they reflections of cultural decay. They are the consequences of specific government policies. Different policies could quickly and relatively easily move the United States onto a far more stable footing. A set of sensible reforms could be enacted tomorrow to trim wasteful spending and subsidies, increase savings, expand training in science and technology, secure pensions, create a workable immigration process, and achieve significant efficiencies in the use of energy.

Policy experts do not have wide disagreements on most of these issues, and none of the proposed measures would require sacrifices reminiscent of wartime hardship, only modest adjustments of existing arrangements. And yet, because of politics, they appear impossible. The U.S. political system has lost the ability to accept some pain now for great gain later on.

As it enters the twenty-first century, the United States is not fundamentally a weak economy or a decadent society. But it has developed a highly dysfunctional politics. What was an antiquated and overly rigid political system to begin with (now about 225 years old) has been captured by money, special interests, a sensationalist media, and ideological attack groups. The result is ceaseless, virulent debate about trivia -- politics as theater -- and very little substance, compromise, or action. A can-do country is now saddled with a do-nothing political process, designed for partisan battle rather than problem solving. (emphasis added-CHS)

And just to remind us how effectively oil fuels conflict:

Blood Barrels: Why Oil Wealth Fuels Conflict (by Michael Ross)

Drum roll please: here are a few obvious ways to encourage conservation and making the U.S. far more energy-efficient. I know, I know, none of these are politically viable; we'll just have to watch oil go to $300/barrel before Americans will get off their duffs and start dealing with reality. But hey, it's fun to dream:

1. start supporting basic research on efficiency and alternative energy on a much larger scale. Take a look at this chart of Federally-funded research:

Here is the source article in the San Francisco Chronicle: Dan Kammen: Clean energy and America's future.

Yes, the "marketplace" is responding with its own investments but the "low cost" of oil is driving pernicious "incentives" to rely on "cheap" coal and oil. The problem is that when these "cheap" sources of energy become expensive, they will do so very quickly, and the vaunted "marketplace" won't have time to catch up.

Let's also not forget that the vast majority of technological advances can be traced back to government-funded research, work often done in University settings (like, say, nuclear technologies, the Internet, etc.), not "market-based" investment. Even most of the miracle drugs can be traced back to government research, not the pharmaceutical industry.

2. require all electronic/electrical devices to shut off rather than remain in power wasting "standby mode." Something like 5% of the entire U.S. electrical consumption is wasted by millions of transformers and inefficient circuitry in tens of millions of TVs, stereos, computers, etc.

3. mandate another round of serious efficiency improvements in all appliances. The supposedly efficient "market" did absolutely nothing about energy efficiency until the government (yes, the "evil, can't do anything right" government) imposed efficiency standards in the wake of the 1973 and 1979 oil shocks.

4. raise the mileage standards of all vehicles to 40 miles per gallon effective next year. Please don't tell me it's impossible unless you're an engineer with Honda Motor Company, in which case I would ask you to look at your own company's vehicles from 1972.

The ICE (internal combustion engine) I know best, the basic Honda CVCC, has risen from about 85 horsepower to about 120 HP in the past two decades, with a comcomitant decline in mileage (yes, some of that increase in HP is due to technology, but there are still trade-offs) . The current crop of Honda 1800CC engines could be scaled back to 1300CC with a reduction in unnecessary horsepower and a substantial increase in mileage.

And for everyone who whines that their SUV or truck needs 200 HP, recall that a Volkswagen bus (the original hippie SUV, van and truck combined) operated quite well (albeit slowly when ascending steep grades) with a 45 HP engine that was terribly inefficient.

A standard Honda-type engine of 1300CC would very easily generate enough horsepower (when properly geared) to power non-bloated pickups. Larger vehicles would work just fine with "larger" 1800CC engines producing 125+ HP.

The only real trade-off is a loss of acceleration. Autos and trucks have gotten bigger, heavier and faster, all at the expense of efficiency and mileage. Reverse those trends and you will see immediate reductions in transportation consumption, which accounts for 2/3 of U.S. oil consumption.

Smaller autos could be powered, as was the original Honda auto, with a modified motorcycle engine. As I noted in last Saturday's Quiz, a small 600CC engine now produces prodigious horsepower. Here is a video clip of a 1960s-era British car, courtesy of frequent contributor Michael Goodfellow, which operated with a 4.5 HP moped engine:

world's smallest production care (YouTube video)

I don't see much point in arguing the merits of "the marketplace" and the "invisible hand," etc. because I think it is painfully obvious that most truly important innovations flow from three sources: 1) basic scientific research funded without a specific market in mind; 2) research prompted by government mandates/regulations (see 1970s for case histories) and 3) non-industry fringe crazies/tinkerers who are pursuing "insanely great" (Steve Jobs' famous phrase) ideas with no support from either the government or existing dinosaur industries.

The tinkerers/crazies will always be around, but the dinosaurs need a sharp stick in the rear end to get moving.

One other "issue" drives me crazy: the "safety" of smaller vehicles. Look, 68% of all teenagers killed in auto crashes are killed because they weren't wearing seatbelts. (You can look it up.) Over 15,000 Americans are killed every year by drunk drivers in all sorts of vehicles, and yet there's hardly a peep about the "safety" of letting habitual drunks get back behind the wheel again until they finally kill some poor innocent. Other countries (like the European nations) aren't so blind and heedless to this known "safety risk": in many other countries, one drunk driving arrest means the end of your driving days, period. It's over pal, no "traffic school" for you. You're on the bus or train for more years than you can count on your fingers.

So please don't wring your hands about the "safety of smaller cars" when most people killed in vehicular accidents are killed regardless of the size of their vehicles: by falling asleep at the wheel, by drunk drivers, or by not wearing seatbelts. And when there's not enough gasoline to go around, then that big safe vehicle sitting in your driveway will be very safe because it's immobile.
Worrying about small car safety when 15,000 people are needlessly slaughtered every year by drunk drivers is like worrying about rattlesnakes when a tornado is bearing down on you.

5. lower speed limits to 65 MPH and enforce the limit. This is the easiest, most obvious way to boost mileage by 10-20%--lower speeds from 75+ MPH to 65 MPH. We'll all still get there, believe me. Just as an experiment, the last time I drove home from Los Angeles (380 miles) I drove about 65-67 MPH most of the way. I wasn't in a big hurry, thiugh it certainly seemed like everyone else was; most of the vehicles whizzing past were traveling in excess of 80 MPH. (This was at night, by the way.)

The slower pace added about 20 miutes to a 7-hour drive, but is this really the end of the world? Meanwhile, because we keep our 1998 Honda Civic properly tuned and the tires properly inflated--not exactly brain surgery--I got about 42 miles per gallon in a standard ICE production engine with 10-year old technology--more than most hybrid cars which cost much more and require hideously costly batteries.

If Honda cut the engine size and HP down a bit, I could probably get 50 MPG without any reduction in driving pleasure or convenience. And so could everyone else. And I'm 6 foot 2 inches tall, so please don't tell me you need a huge vehicle. (The guy in the video link above is 6 foot 5 inches tall.)

6. close entire streets to vehicles, creating safe, convenient bikelanes. My brother-in-law and I took a pleasant bike ride recently, in honor of his visiting us, and our 40-mile roundtrip (70 KM) ride on marked bike lanes eventually took us onto the shoulder of I-580--a freeway. I am not kidding--the bike lane merged onto the shoulder of a freeway for quite some distance. A single sign marked "share the road" with a bike logo on it denoted that the drivers whizzing past should not think the two bicyclists were insane and should be arrested. Was that part of the ride enjoyable? Do you reckon?

This is in "astoundingly environmental" California.

We all know Americans are too fat for their own good, and riding a bike is, for at least much of the year in most of the country, a convenient way to get about. (You can always put on a rain slicker like people do in other countries.) But it's only pleasant and convenient if roads are closed to cars and trucks. Yes, such closures would impose a burden on vehicles, but the time for wimpy half-measures like bike lanes on freeways and busy 4-lane roads is long past.

7. subsidize bus, train ans subway rides with a $1/gallon tax on gasoline, diesel and jet fuel. To repeat: the time for wimpy half-measures like subways and trains which cost a bloody fortune to ride is long past. If we want to modify behavior to conserve energy, then we have to make it nearly free to ride a bus, train or subway and very dear to drive a car.

Yes, you can argue about commutes and how big the West is and fairness and exurbs and all the rest, but it's really very simple: if it's nearly free to take public transport or carpool, people will do so and find some way to get to the station or pickup point. Ditto for carpools and other huge, practical, behavioral (not technological) efficiency-boosts. Even a 15 MPG SUV becomes efficient when there's six people being transported in it.

8. make building in the distant suburbs/exurbs either impossible or extremely expensive, and make building more low-rise housing in the city and inner ring essentially quick and cost-free to developers, non-profit and for-profit alike. I happen to live in a college town with population densities rivaling Hong Kong (in the south of campus area), yet there are very few buildings over three stories in height. You don't need highrises to increase density, you simply need mid-height buildings (see Paris or equivalent European cities for examples; six-story buildings create a very liveable scale.)

It's a simple idea, encouraging people to live closer to their jobs, and yet we as a nation have created all the wrong incentives: it's been dirt-cheap to build 50 miles from the city but costly and tiresome to obtain permission to tear down an obsolete structure and build a liveable moderate-density building in or near the city.

You can probably add another 8 or 16 or 24 other obvious, non-fancy ideas which would require little real sacrifice. You want sacrifice? How about no light at night? How about cold water baths? How about walking 10 miles to and from school/water/work/market? This is normal life in much of the world; just how awful will it be to have a street without cars? Is that really so unbearable? How about a car which doesn't accelerate like a race car? Is that really such an immense burden that we can't bear to give it up?

Funny, nobody thought life was miserable and awful and wretched and they had to cry themselves to sleep in 1957; have you ever driven an old American pickup truck from that era, a truck with a simple engine and wood slats in the bed? They didn't exactly accelerate like greased lightning, yet somehow (breathlessly, we ask, how? How? It's impossible!) the farmwork and building got done despite a horrible, soul-draining lack of horsepower and acceleration.

Then fine, the world will take it away from us in it's own time--which will be sooner than most of us can possibly imagine.

Extra-special bonus idea: convert all large U.S. Navy ships to nuclear power plants. The U.S. Military uses as much oil as the entire nation of Sweden; surely there are some efficiencies which could lower this stupendous consumption (along with curtailing U.S. involvement in Iraq.)

New Readers Journal commentaries:


The Rise in Oil: Speculation or Uncertainty?
Harun I.
PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION (Financial Sense): The author wages a largely rhetorical argument. I won't argue that there may be a bubble building in energy futures but the causes he presents is suspect.

The Third Worldization of the United States Is In Process
Robert Roth

The U.S. and its economy may be said to have been in a process of "Third Worldization" for some time, from a variety of perspectives. One of the more striking, to me, is the fact that recently an authoritative source suggested the U.S. may (in ten years) lose the AAA rating its debt has enjoyed since ratings began.

Thank you, Ana S. ($50), for your wondrously generous contribution to this site. I am greatly honored by your support and readership.


Monday, May 19, 2008

The Fulcrum of the Mideast?

Readers have asked me to address the war in Iraq. Here goes--again. I have long questioned the entire "war on the cheap while the homefront goes shopping" basis of the war, as reflected in these essays from 2004, 2005 and 2006:
Katrina, Vietnam, Iraq: National Purpose, National Sacrifice
American Chickenhawks: Your Congress
Is This a Nation at War?
A Nation in Denial
Hawaii National Guard: An Unfair Deployment
This is not Vietnam

First, let's start with a map of the mideast:

Please go to to view the map.

Here are my semi-random observations. These are offered not with any claim of expertise but as a fellow citizen deeply perplexed by the immense lack of information and the immense complexity of the situation in Iraq and Afghanistan.



* you sit astride two great rivers in a parched landscape.
* you sandwich Iran between Afghanistan and Iraq.
* Afghanistan is central to "the Stans" and shares a small border with China.



If Bernard Lewis is basically correct ( What Went Wrong?: The Clash Between Islam and Modernity in the Middle East ) and that Islam in the mideast is fundamentally struggling to accommodate/make peace with modernity via its proxy, the West, then influencing events in the mideast is more than just influencing what happens to the oil under the sand.

This is the "war" as framed by Osama bin Ladin and others, and it can be argued that even if the U.S. didn't need a single drop of mideast oil it still has a strategic interest in aiding the mideast's accommodation of modernism, if for no other reason than to avoid the consequences of an attempt to re-live the 14th century (just ask the young people of Iran how that's working out for them) and the fantasies of a global Caliphate astride the entire planet.

3. The cultures of Iraq and Afghanistan are very different from ours. What the civilian war planners needed was not military planners but anthropologists who were deeply knowledgeable about the cultures, history and mindsets of those peoples who find themeselves within arbitrary national borders imposed by the British (and before them, by the Ottoman Empire).
Tribal loyalties, so central to both those cultures, have no analog in our society. So how could we possibly expect to understand how those societies work?

Since these peoples had rebelled against the Ottomans and the British, what did we expect? When various groups are shoved into a politically expedient amalgam not of their own choosing, the sorting out of borders, loyalties, shared resources, etc. will take a great deal of time and negotiation.

4. Iraq was ruled for decades by a brutal dictatorship, and Afghanistan has been in semi-permanent war/chaos for decades. It's difficult for us to grasp the psychological damage done to people living in such dysfunctional, terrorized insecurity. In Iraq, tens of thousands of the best and brightest were taken out and murdered by Saddam's ruling elite; tens of thousands of young men were killed in a long, senseless war with Iran, and then thousands more were offered up as cannon-fodder when Saddam dared the U.S. to re-take Kuwait.

The humiliations, indignities, losses, resentments and injustices endured by the Kurds and Shi'ites at the hands of Saddam's ruling Sunni elites is beyond our understanding, as is the Sunnis' desire not to suffer the same fate, i.e. be under the thumb of the Shi'ites.

The damage done to people who survived dictatorships, war and chaos cannot be undone in a few years. Rebuilding a civil society will take decades, and that's with the best of intentions and global support being made available.

5. The information we have access to is partial, incomplete and biased by ignorance. Personally, the only information I trust is that provided by the U.S. Army and Marine officers tasked with actual combat and "civilian relations" on the ground-- lieutenants and captains--and the rare independent journalists who are reporting from largely forgotten provinces in the north (Kurd-controlled) and the Shi'ite-controlled south.

Having read as widely as I can--and again, I am just another concerned citizen, not an expert--I think the most accurate way to understand the U.S. Military in Iraq is to see the forces on the ground as the Iraqis see them: as another tribe you have to deal with, a tribe that is blundering at times, extremely lethal and therefore useful to have as an ally at times.

If there are any successes in the war--and to be fair, there are some--they come when a boots-on-the-ground U.S. commander (say, a captain) establishes a personal connection with a local tribal leader or council of leaders. Is this the path to Iraq-wide peace? Nobody would claim that, but if a town or city or neighborhood gets more secure, then that's progress.

Would things get worse for these towns and neighborhoods if the U.S. forces pulled out? It is highly likely that the answer is, whether we like it or not, yes in many cases. Who is qualified to make that assessment? Obviously, it's the tribal leaders and the U.S. captains. Nobody else's opinions are worth much, in my view, because they're not based on actual experience.

Is the U.S. destroying Sadr City, or establishing security in the vast slum? Who knows? Let's be clear that we can't know the answer from afar, and the "answer" depends on who you're speaking to--not just a Shi'ite, but of which tribe and of what affiliations. Should the U.S. pack up and leave tomorrow? You'll get one answer in Sadr City, another in the Kurdish north; which one should you heed? You can't agree with both at the same time, or can you?

6. Recall that U.S. civilians sent our Armed Forces to war, not the Pentagon. Army leaders like General Eric Shinseki who warned that 150,000 troops were totally insufficient for postwar occupation/security were summarily fired/forced from office by Bush, Rumsfield & Co.

The reading list below spreads the blame for incompetence, poor planning and stupidity around to everyone involved, but we must keep in mind every critical decision was made by civilians, and therefore we the American people/voters/taxpayers are ultimately responsible. The Military is just following civilian orders.

And since "it's the only war we got," the professional military journals focus on what's been learned about counter-insurgence and the progress that's been made in local Iraqi communities. They're making the best of their task, and the career officers are careful not to counter what their civilian no-nothing "leaders" are saying. But maybe we should ask the guys on the ground before we decide complex matters.

7. Ethnic cleansing and a host of other horrendous tragedies are already done deals because security has been non-existent. The only way to build any security is within the tribe or equivalent, so non-tribal neighbors are forced out at gunpoint. Iraq is undoubtedly one of the most heavily armed societies on Earth. Without a functioning police or Army, it's up to groups to create local security--even if the group is essentially thugs.

The Iraqi Army and police are supposed to step in and provide basic security, but it seems that a "national" anything is either not national or riven with the same tribal/religious regional complexities as Iraqi politics.

8. Foreign insurgents have a different agenda than Iraqi insurgents. Foreigners favor suicide bombs in crowded market places and weddings; these tactics aren't endearing them to the Iraqis. To foreign Sunnis, the Shi'ites are as worthy of killing as the Americans. To ignore the foreign/Al Qaeda agenda is to ignore a reality that we have introduced. Whether we leave or not, these agendas will play out.

Is the central government a facade? Is the Iraqi Army hopeless? Is the police force a Shit'ite cover for death squads? My conclusion is these generalized questions are impossible to answer in a generalized way. All answers in Iraq are local: this town, this unit, this police station, this tribe, this neighborhood. Generalized answers are either inherently inaccurate or mere conjecture/bias.

9. Political reconciliation of Kurds, Shi'ites and Sunnis is essential, regardless of whether Iraq remains a nation-state, a coalition of independent substates or three new nations. Ethnic cleansing seems to be partitioning the "old Iraq" into three distinct regions (with Baghdad being a special case), but regardless of the final settling of borders, accounts and power-sharing, the oil will have to be shared and open conflict resolved with a negotiated settlement.

Lasers, more guns or more technology isn't going to bring this settlement about; the Iraqis will have to do it themselves, with support from the U.S., regional players and the U.N. Everyone has to see the conflict as impossible to win (otherwise, they'll try to win) but possible to lose, and therefore settlement is their best option.

10. Paraphrasing Bismarck, Iraq is not worth the bones of a single additional American soldier. As I have noted here before, I think of the career Marine officer we know who served his time in Iraq and made it home in one piece; would I risk leaving his two young children without a father and his wife without a husband for the sake of some future strategic security? Personally, I would not.

My wife's cousin's family has already lost one young member to the war, as have 4,200+ other families. (Don't forget the quasi-civilian Americans who have been killed and wounded while serving in Blackwater and other "private" (i.e. mercenary) armed forces in Iraq.)

But what of Colin Powell's warning at the beginning of the war: "You break it, you own it"? What is our responsibility to the Iraqi civilians? We're awfully good at blowing up and defoliating entire nations, and then leaving in a huff when things don't pan out quickly enough for our short-term, "we like to win" mindset.

So let's be honest: we broke it, we own some part of it. So what can we do from here?
Here are the thoughts of one concerned citizen:

a. leave the Green Zone and the new U.S. Embassy/fortress to the Iraqi government immediately. They both scream "occupation" and "empire." Let's stop raising our voice on all the wrong messages. Talk national and regional reconciliation, not endless occupation.

b. the decision to pull troops immediately or on a schedule should be made by the tribal leaders and U.S. captain-rank officers, on a locale-by-locale basis. If some presence is requested, deploy advisors who already know the tribes and their leaders.

c. pull all remaining U.S. troops to bases in the remote desert (Iranian and Syrian borders) where they remain potent but out of sight and to some degree, out of mind except to Iran and Syria. Casualties will drop to near-zero and security will be much, much easier.

d. open "regional security" talks with everyone at the table--Iran, Syria, Turkey, Saudi Arabia, Kuwait, Jordan, Iraq's three groups (Kurds, Sunnis and Shi'ites), the U.S. and the U.N. Even if absolutely nothing gets accomplished, at least everyone has an open stake and a forum. Acting like one tribe (the U.S. Military) controls the game is ludicrous; the players are there whether we like them or not. It's reality, let's deal with it.

e. institute a military draft for all Americans up to the age of the oldest Reservist serving in theatre (Iraq and Afghanistan). If he or she is 55, then go ahead and draft me (I'm only 54). And draft everyone randomly, regardless of age, gender, religion, politics, previous service, etc. Make every American responsible for their chosen leaders' decisions. You're not going to the mall, you're going to Iraq. If you can drive to the mall, you can drive a Humvee. If you're in poor health, we'll get you into shape; there's laundry to be done on the fleet's 11 aircraft carriers and you don't need a lot of skills to do it. You'll be perfectly fit to serve your country after a few months of training.

If you really don't want to go, maybe you'll take a little more care with who you elect to lead the nation. Oh, and it's a 5-year stay in the Federal pen if you fail to report for induction.

f. Launch a "patriotic" reduction of U.S. oil consumption from 21 million barrels a day (MBD) down to 11 MBD. (More on that tomorrow.)

g. amend the Constitution to require a Congressional Act of War for any deployment of U.S. Military forces in combat/harm's way which lasts longer than seven days or involves more than 5,000 soldiers/sailors/Marines.

I am sick and tired of these mushy congressional "permissions" to engage in decade-long wars with tens of thousands of casualties, all without a formal declaration of war and a real mobilization of the populace. I'm tired of wars with no civilian participation or stake, wars where the sons and daughters of other people join and serve while the rest of us sit around playing military-style video games and shopping at the mall while our "leaders" brazenly borrow billions from the Saudis and Chinese to pay the cost of our own war. Inflict the slightest sacrifices on the "what war?" American public? No way. They might actually get off their duffs and demand an accounting of what's being done in their name.

If you'd like to know more, I can recommend these titles as a start:


Among the Believers: An Islamic Journey by V.S. Naipaul











New Readers Journal commentaries:
18 diverse, thought-provoking comments on an amazing array of topics!

New (in-depth) Readers Journal Essays:
The Rise in Oil: Speculation or Uncertainty?
Harun I.

The Third Worldization of the United States Is In Process
Robert Roth
Doug Noland’s Credit Bubble Bulletin.

Thank you, H. Doug M. ($25), for your exceedingly generous contribution to this site. I am greatly honored by your support and readership.


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