The Legacy Of The Oil Barons

On February 29th 2011, the Brent price of crude oil soared past $100 per barrel as a wave of political strife swept through Tunisia, Egypt and then Libya. This rise marked the highest level for crude prices ever, barring the recent 2008 oil rush. A reason widely cited by newswires for the swift rise was that a healthy chunk of widely sought high-quality light sweet crude is concentrated in the MENA region (Middle East North Africa). Political and economic gridlock following the conflicts in that region had slowed production.

With the MENA dynasties now beginning to topple, one would expect lower oil prices as these economies stabilize. Interestingly enough, oil prices moved slightly higher on the day Colonel Muammar Gaddafi was announced dead.

Such price action paints a dire scenario given high gasoline prices are already hitting many consumers through rising inflation. But it clearly illustrates that beyond near-term economic weakness, we face continually rising crude prices unless there is a tectonic shift in consumer attitudes.

There are two major reasons why a betting on a sustainable oil price drop might be futile. First, there has been lagging investment in the key MENA region and spare production capacity has shrunk to near record lows. This is a key difference between now and the 1970s/1980s oil spike during the Yom Kippur war and Iranian revolution, which eventually spurred massive production increases. Second, emerging markets (EM) are becoming a much bigger force to the oil story as automobile adoption rises. Chinese car ownership per capita is only 6% of U.S. levels, and this is bound to explode upwards in the coming years. Unless electric or natural gas vehicles take off, EM consumers will have to compete with the developed world for the earth’s finite oil reserves.

Quotables

The wall street protests have reminded me of a quote from the book Jitterbug Perfume by the great Tom Robbins:

“The rich are the most discriminated-against minority in the world. Openly or covertly, everybody hates the rich because, openly or covertly, everybody envies the rich. Me, I love the rich. Somebody has to love them. Sure, a lot o’ rich people are assholes, but believe me, a lot o’ poor people are assholes, too, and an asshole with money can at least pay for his own drinks.”

NPR Segment and Writing

During our segment on NPR yesterday, they were very curious about 2 songs on our album Qe2 and Main Street venting blues. This is funny because when Kyle and I recorded the album in Montreal, those were the 2 songs that we were considering cutting but ultimately decided otherwise. I think this is an experience that many artists go through which is that you do your best with your work but ultimately we don´t know what people will find interesting.

I am reminded of this quote by Melanie:

“My idea about songs is that once you write them, you have very little say in their life afterward. It’s a lot like having a baby. You conceive a song, deliver it, and then give it as good a start as you can. After that, it’s on its own. People will take it any way they want to take it.”

Bernanke Speaks On The Protests

The wall street protestors are having some success at gaining recognition from key policy makers like Ben Bernanke who responded to a question yesterday about the protests to the joint economic committee . He claimed to sympathize with the protests by saying that, “Like everyone else I am dissatisfied with what the economy is doing right now. Certainly 9% unemployment and a very slow growth rate is not a very good situation – which is what they are protesting.” However, while I am sure that no one is celebrating the sluggish growth of the US economy, I really don’t think that is precisely what is driving the protests.

I think people are more likely protesting excessive profits on wall street. They are appalled by bonuses distributed to executives of insolvent institutions and there is general feeling that wall street has profited at the expense of the broader population. People though seem to have differing opinions as to the exact message behind the protests. Bernanke´s past solutions to what he interprets to be the cause of the protests (high unemployment and weak growth) has been to increase monetary stimulus and quantitative easing. Unfortunately for the protestors, these policies tend to be ones that might stimulate growth but mainly through the financial sector at the expense of the middle class. Instead of persuading the Fed to temper monetary stimulus, the protests might inadvertenly influence him to step on the accelerator.

A friend of mine suggested on a current events forum that the protests, even without a clear message would, “capture the world’s attention and allow for the change-agents, policy guys, the lobbyists and lawyers to step in and use the moment to direct peoples’ attention towards legitimate structural, legal, economic change.” Unfortunately, as I pointed out to him, policy makers are already aware of the huge economic problems and that just reinforcing this awareness wouldn’t add anything useful to the general discourse. This seems to be what is happening as Bernanke believes that the protests are reflecting his own positions when I imagine they were intended to change them.

Barack Obama, who should be pretty influential in setting policy in the United States, wasn’t even able to push through small revenue increases as part of the budget plan necessary to raise the debt ceiling a couple months ago. If Obama can´t pass such a reasonable and simple request through Congress, it seems unlikely to imagine that the protestors will make any progress with a message that seems convuluted to many people. I think for the protests to be successful, they are going to need a clear and unified economic message that someone like Bernanke won’t be able to mistake. He is obviously not going to spend a lot of time listening to the protestors to formulate his understanding of the economy, so the message that trickles through needs to be consistent and unmistakable.