Saudi Arabia, the world’s biggest oil exporter, is planning to increase its output next month by about a half-million barrels a day, according to analysts and oil traders who have been briefed by Saudi officials.
"Everyone is looking for someone to blame for high prices of oil and other mineral and agricultural commodities. Speculators (among others) are high on the list, followed by the Federal Reserve. While I don’t think blame is necessarily the right concept here, I have been arguing that low real interest rates have worked to raise real commodity prices through a number of channels. Each of these channels could be called “speculation,” if speculation is defined as behavior based on expectations of future prices.
A number of commentators, including Don Kohn and Paul Krugman, have argued that low interest rates and speculation cannot be the sources of the problem, because oil inventories are low. It is true that low interest rates, other things equal, should in theory increase firms’ desire to hold inventories..."
Source: Extract from analysis linked to above
"Speculators, people willing to risk their capital in search of high profits, are so central to healthy commodity markets, they say, that the broad-brush restrictions now being considered could inadvertently damage a market that is already under pressure from rising global demand for food and fuel.
Even in Washington, there is widespread agreement that no single factor is responsible for rising food and energy prices. The hungry, high-growth economies of India and China are fundamentally affecting worldwide demand, while uncooperative weather, and government policies on trade and ethanol, are among the many factors affecting supply."
Source: Extract from article linked to above
Abstract from paper:
"The high cost of power from solar photovoltaic (PV) panels has been a major deterrent to the technology’s market penetration. Proponents have argued, however, that typical analyses overlook many of the benefits of solar PV. Some of those benefits are in the realm of environmental and security externalities, but others occur within the electricity markets. In this paper, I attempt to do a more complete market valuation of solar PV. I incorporate the fact that power from solar PV panels is generated disproportionately at times when electricity is most valuable due to high demand and increased line losses. I find that the degree to which the timing of solar PV production enhances its value depends very much on the extent to which wholesale prices peak with demand, which in turn depends on the proportion of reserve capacity held in the system. In a typical US system with substantial excess capacity, I find that the favorable timing of solar PV production increases its value by 0%-20%, but if the system were run with more reliance on price-responsive demand and peaking prices, the premium value of solar PV would be in the 30%-50% range. Solar PV is also argued to have enhanced value within an electrical grid, because the power is produced at the location of the end-user and therefore can reduce the costs of transmission and distribution investments. My analysis, however, suggests that actual installation of solar PV systems in California has not significantly reduced the cost of transmission and distribution infrastructure, and is unlikely to do so in other regions. I then bring together these adjustments to the valuation of solar PV power with calculations of its cost to analyze the market value of solar PV. The market benefits of installing the current solar PV technology, even after adjusting for its timing and transmission advantages, are calculated to be much smaller than the costs. The difference is so large that including current plausible estimates of the value of reducing greenhouse gases still does not come close to making the net social return on installing solar PV today positive."
"You know, we don’t mind it when speculators drive up the price of our stock portfolios. And we didn’t complain when speculators made our house values rise.
However, now that (arguably) speculators are said to be driving up the price of oil, we hear the outcries of outrage and the call for more regulation on energy trading. “Speculator” becomes a bad word all of a sudden and said speculators are evil and must be stopped. So many are saying at least.
But let’s take a deep breath. What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted.
If a price movement is purely driven by speculators, at some point the market will do what the market does and the aberrant price will normalize. If on the other hand the reasons for the movement of a market are fundamentally rather than speculatively based, then all of the grumbling and grousing about speculators is shown to be irrelevant.
If skyrocketing oil is the fault of speculators time will work it out, and some of the speculators will be burned. The risk we run is that in pointing fingers at market participants and blaming them for energy prices, we end up having our attention diverted from the fundamental issues that need to be addressed – energy exploration, governmental policy, energy conservation, improving energy efficiency and most importantly the need to develop energy technology and alternative energy sources to ultimately make oil a much less critical commodity."
Source: Rob Fraim in The Big Picture
Cascade Investment LLC, the fund managed by Microsoft chairman Bill Gates, has made good on its November promise to exit from its investment in Pacific Ethanol. What's surprising? He's doing it at a loss, converting his preferred shares to common shares worth $8 apiece and selling them for less than $4 apiece. With 1.4 million shares sold in three days, that's a loss of over $5 million. Pocket change for Gates, certainly, but in almost halving his original 20 percent stake it's a strong vote of no confidence in the ethanol business. While Accel Partners Joe Schoendorf has said that "a good way to lose money is to bet against Vinod [Khosla]" who's been bullish on ethanol, I'm going to side with Gates on this one.
Econbrowser: The oil shock of 2008, June 5, 2008: "Time to reassess the potential for recent oil price increases to contribute to an economic downturn. The sharp spikes in oil prices associated with the 1973-74 oil embargo, the 1978 Iranian Revolution, the Iran-Iraq War in 1980, and the first Persian Gulf War in 1990 were each followed by an economic recession. However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true..."
Extract from report summary
"When Ban Ki-moon, the UN secretary-general, was asked to ponder the future of the world before an audience of powerful businessmen and politicians, at a meeting in Switzerland earlier this year, he could have chosen any topic he liked. What he focused on was both a hoary old favourite, and a newly popular preoccupation, of debates on world affairs: the rising risk of wars over fresh water, as populations increase and the world gets drier.
“As the global economy grows, so will its thirst...many more conflicts lie over the horizon,” he said, after deploring the fact that “too often, where we need water, we find guns.” Mr Ban wasn't the first to sound the alarm."
Extract from article linked to above
Knowledge Wharton: Cleaning up Its Act: How China Can Convert to More Environmentally Friendly Energy, May 2008: "If China doesn't take steps to prevent it, a big black cloud may soon engulf its economic boom. The country is growing at a torrid rate, but pollution from its hard-chugging industrial engine is expanding even faster, according to energy experts at the recent 2008 Wharton China Business Conference..."
Voluntary Corporate Environmental Initiatives and Shareholder Wealth, Karn Fisher-Vanden, Dartmouth College, Karin S. Thorburn, Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR), April 1, 2008
Abstract of the paper:
"Researchers debate whether environmental investments reduce firm value or can actually improve financial performance. We provide some first evidence on shareholder wealth effects of voluntary corporate environmental initiatives. Companies announcing membership in Climate Leaders and Ceres - two voluntary environmental programs related to climate change - experience significantly negative abnormal stock returns. The price decline is smaller in carbon-intensive industries, where regulatory actions are more likely, and for high book-to-market firms, suggesting that green expenditures crowd out growth-related investments. We also document insignificant announcement returns for portfolios of industry rivals. Overall, the environmental investments appear to conflict with shareholder value-maximization. This has far reaching implications since the U.S. government relies on voluntary initiatives to reduce the emissions of greenhouse gases."
"I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight. If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices."
Extract from D. Rodrik post linked to above
They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it...
...So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.
Source: Extract from post linked to above
"The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future. Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future. The price of oil in "real" terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption. I try to explain why in the following..."
Source: Contribution of Prof. Becker in The Becker Posner Blog (see link above)
"...The gap between the incomes of rural and urban families is much smaller in developed countries that subsidize rather than tax farmers. Indeed, with the high prices for cereals and other foods during the past couple of years, average farm incomes are often above those of city residents.
I believe that the explanation for the very opposite treatment of farmers in developing and developed countries is interest group competition (see my "A Theory of Competition Among Pressure Groups for Political Influence", The Quarterly Journal of Economics (Aug., 1983), pp. 371-400. This analysis shows that small groups, like farmers in rich countries, often have much greater political clout than large groups, like farmers in poorer countries. The reason is that even large per capita subsidies to small groups, such as farmers in the US, impose rather little cost (i.e., taxes) on each member of the large groups, like urban and suburban residents of the US. As a result, these large groups do not fight very hard politically against the small per capita taxes used to subsidize farmers..."
Source: Extract from Becker contribution
"In fact, gold has not been a good long-term investment. The previous peak was about $850 an ounce in 1980. Anyone who had squirreled some gold coins or jewelry away in a safety deposit box back then would have made next to nothing over 28 years. Indeed, with inflation factored in, gold has lost value over that period. Meanwhile, an investment in the Standard & Poor's 500 index of stocks would have grown at more than 12% a year in that time -- $100 would have grown to more than $1,800."
Extract from article linked to above
"...Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies..."
Extract from a Paul Colliers comment on Martin Wolf's FT forum
Population growth is not a major cause of the current dramatic rise in food prices. Even though population is growing since a long time food prices have been drifting gradually downward sind the early seventies of the last century.
It is a combination of factors which is currently driving food prices up:
World Bank slide presentation about food prices:
Das Magazin, Wie man in den Wald ruft, 3. Mai, 2008: ... so tönt es nicht immer zurück. Ein Gespräch mit dem grossen Forscher Josef H. Reichholf über die Natur und den Menschen in Zeiten der Klimahysterie.
"Das ist nicht die Frage. Das Problem liegt anderswo. Leider wurden aus der Klimahysterie heraus die falschen Massnahmen ergriffen, was uns in die jetzige Getreide- und Nahrungsmittelkrise geführt hat. Im Sinn des Klimaschutzes haben die Politiker vorgeschlagen, so viel erneuerbare Energien wie möglich zu produzieren, und sie haben das steuerlich begünstigt. Wenn man die Landschaft mit Windanlagen überzieht, kann man sich darüber ärgern oder nicht. Die Folgen sind jedenfalls unbedeutend im Vergleich zu dem, was der Anbau von Biomasse für Treibstoffe anrichtet. Wenn wir unser gutes Ackerland mit Biomasse zubauen, damit wir Biotreibstoffe erzeugen können, muss das Futter für die Abermillionen Stück Vieh in noch grösserem Umfang importiert werden. In den Tropen wird so intensiv weitergerodet. Wenn wir dann so tun, als wären wir die ganz Braven, weil wir unseren CO2-Ausstoss um zwanzig oder mehr Prozent gesenkt haben, ist das heuchlerisch. Wir haben das Problem nur verlagert und vergrössert."
Extract from interview
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