Monday, June 16, 2008

The Saudis

Will the Saudis increase oil production?

Frankly, I'd be happy just to know they could if they wanted.

Sunday, June 15, 2008

The oil picture

In the current oil market it doesn't make very much difference whether the price of oil is driven by speculation or by fundamentals, as this slightly geeky article points out. The quasi-circuit flow diagram about halfway down is especially useful. In any case,

The equilibrium expression is AI = DI, and when this situation prevails, s = h, and price is constant (i.e. Δp = 0)! Put another way, a stock equilibrium implies a flow equilibrium, while a flow equilibrium does not imply a stock equilibrium. In this type of model expectations are very important because of their influence on desired stocks, and in the real world expected prices are undoubtedly more difficult to describe than via the simple implicit expression shown in the figure – i.e. pe = f(p) – but right or wrong it is these expectations that are and have always been a key element in determining the oil price, however it was only when the oil price moved past $100/b that they were given their true weight in the scheme of things.
In other words, because of demand from China, India and the usual suspects, the current expectation is that the price of oil will be dramatically higher in the future than it is now. Therefore, the market adapts by trying to build inventory. The price of oil goes up, because whatever isn't consumed goes to the inventory stock. The increase in the price ought to cause inventory to build but it hasn't. So the bullish price pressure remains.

Among other things, selling off the Strategic Petroleum Reserve doesn't fix the problem, and in an odd way represents the opposite of the solution. The price of oil will go down when people see that there's lots of oil around that nobody knows what to do with.

Wednesday, June 11, 2008

Dude, where's my recession?

This is the meme for those who have noticed that the American economy isn't as bad as people think. And for now, the truth is the American economy is in decent shape. The current data wrt employment and growth are ok if not especially great.

Nonetheless we should not break any arms patting ourselves on the back. The real problem with the economy is the widespread anxiety that things will get substantially worse starting from now. This anxiety is not at all irrational in my view. The credit crisis has more or less been weathered, but we are 50-50 at best to escape the weak dollar, and at the moment there is no answer at all for high oil prices or inflation.

Ever since the Great Depression, American economic downcycles have been milder and milder according to typical common measures. This one might be an exception.

Monday, June 02, 2008


I'm with David Frum and Peggy Noonan on this. The public pile-on of Scott McClellan isn't worth it.

It's the chickens coming home to roost for President Bush. President Bush got put a premium on loyalty, and sacrificed competence to do it. Well, the jobs in the White House are big jobs, and as a rule when people are situated in over their heads, they crack. In McClellan's case, W didn't even get loyalty. Though by now, it doesn't make much difference.

The only thing I'll add is if people like McClellan want to write books like this, I just wish they'd stick to White House dirt. I don't care very much about what Scott McClellan thinks about Iraq. Colin Powell or Chuck Hagel has the right to an independent opinion. Scott McClellan doesn't.

Presidential Pincer

Or, why I'd be bullish on John McCain. So far, we've seen that Barack Obama has a big problem with downscale white voters. "Clinging" to guns and religion, Mrs. Obama's lack of pride in America, etc., have rubbed them the wrong way. Unless Obama can pull a rabbit out of the hat with his choice of veep, I suspect that he will never be in play for states like Tennessee, West Virginia, or Kentucky. That's not good news for the Obama campaign, but when push comes to shove Mr. Obama can afford to lose them. It will also hurt in Michigan, Ohio, and Pennsylvania, which are a lot more important in the grand scheme of things. But even though this is somewhat old news, it's only half the story.

What we haven't seen yet, however, is the other half of the pincer. It has flown almost completely under radar so far, but the prospect of Barack Obama as POTUS pushes the stock market down. Expect to see a lot more of this before the election. The stock market probably prefers Republicans to Democrats in the abstract, but I expect it to be especially sensitive to the Presidential race because of the likelihood that the Dems will sweep all the elected arms of the federal government. The investor class is much bigger now than it was, say, 25 years ago. Many upscale voters would otherwise vote for Barack Obama might think again when the stock market gives a sneak preview of what the Obama Presidency might be like.

It's important to emphasize however, that this silver lining for the GOP is only good at the Presidential level, and only works there to the extent that it offsets somewhat, the huge advantage the Democrats currently enjoy. Independently of John McCain, the GOP has to figure out what it stands for and act on it, to be a credible party after this November.