Tuesday, July 29, 2008

A Respite Not A Reprieve

Is the price of oil today too high given the fundamentals? Could be. Is it
too low? Could be. But one thing I'm sure that's too high is the confidence
on the part of those who insist they know the answer.

James Hamilton

Particularly dramatic in this growth has been China, whose petroleum
consumption between 1990 and 2006 increased at a 7.2% annual compound rate. It's always amusing to project these impressive exponential growth rates. If that rate of growth were to continue, China would be using 20 million barrels a day by 2020, about as much as the U.S. is today. By 2030, China would be up to 40 mb/d, twice the current U.S. consumption.


To summarize, I think we will see some net production gains this year, and
expect this to bring some relief for oil prices. But I cannot imagine that the
projected path for China above will ever become a reality. Oil prices have
to rise to whatever value it takes to prevent that from happening.

James Hamilton

Over the last couple of weeks, oil has gone from grasping for $150/bbl to sitting just over $120/bbl. So if oil continues to decline another couple of dollars (and I have no reason to think it won't), then strange as it seems oil will have dropped 20% from its high and we can officially declare a bear market for oil.

At the risk of stating the obvious, we don't know how long this will last. But now that the sheer shock of oil prices has abated a little bit, we have the opportunity to look at the bigger picture. We've all heard the story about how industrialization in China and India is going to drive the price of oil up, but the story doesn't end there. In the short term we can maximize oil production and in the long term we will be able to use electric power for transport.

The oil crisis has been brewing for a long time, and it will take a long time to unwind. By all means we need to drill for oil in ANWR or whereever we can find it, but even if we do, and even if the price of oil goes down to $70 or so, the oil crisis won't be over until we have a sustainable, reliable, and affordable source of energy for transport, and after that for energy in general.

Thursday, July 10, 2008

Presidential Pincer Revisited

Six weeks ago, I was a little more bullish for McCain than I am now.

McCain's campaign seems to me to be floundering. I was optimistic that he could establish some critical distance from the Bush Administration, and I think he has. But, we've seen too much of the crotchety old guy persona, a la Bob Dole, and it's not wearing well. We're in a different spot than 1996 and there is no general desire for a changing of the generational guard like there was then.

But, we are in a difficult situation with real problems that have to be addressed. So far, McCain's energy policy is to support offshore drilling but oppose ANWR development. What is the rationale for this? If anything it makes more sense the other way, to get some more energy resources to the market without spoiling the view for some coast-dwelling Floridians. The whole thing smacks of a baby-splitting exercise from a pol who thinks the political process controls a lot bigger fraction of reality than it actually does.

If he can show that he can see outside the Beltway cocoon and really gets it wrt the scope of today's particular issues, he'll probably become President. As it happens I suspect this will be a matter of teaching old dogs new tricks.

Update: one more thing. As I mentioned before, I think I overestimated McCain's ability to swim against the tide as an independent in a Democratic year. I do think that he's established that he's not George W Bush, but that's not enough. Because the underlying environment is unhospitable for Republicans, he has to define very concretely the rationale for his candidacy, and frankly I don't know what it is.

If I were directing his campaign, I would have the candidate assert that he, John McCain appreciates the depth of our problems, and is uniquely prepared to get us through the tough times that lie ahead. It's credible (to me at least), and it ties in all the big-ticket items in this election cycle: Iraq, housing, debt, energy, inflation, etc. It also of necessity distances him from the Bush Administration, and differentiates him from Obama, who seems prepared to read from a Teleprompter and nothing else.

If he were to come up Boone Pickens-like energy plan, people will listen. If he just says, "Get off my lawn!", he'll be ignored.